October 11, 2002

In a landmark settlement that will set new standards for the lending industry, mortgage lender Household Finance has agreed with government regulators from Michigan and 19 other states to change its lending practices. Household also agreed to pay up to $484 million to consumers nationally – approximately $14 million total to 10,000 Michigan consumers – for alleged unfair and deceptive lending practices in the “subprime” lending market over the past four years. The pending national restitution amount is believed to be the largest ever in a state or federal consumer case.

“This settlement will provide relief to Michigan consumers and addresses practices in the lending industry that have been and will continue to be a priority effort for OFIS and state regulators nationwide,” said Michigan Office of Financial and Insurance Services (OFIS) Commissioner Frank M. Fitzgerald. “This agreement sets new standards for the mortgage lending industry and will guide OFIS in its review of other lenders.”

OFIS is the state government agency that has negotiated the settlement on behalf of Michigan as part of the multi-state effort.

The multi-state investigation alleged that Household violated state laws by misrepresenting loan terms and failing to disclose material information to borrowers, such as failing to properly inform consumers of loan costs and insurance premiums that were included in their loans. Consumers complained that Household charged far higher interest rates than promised – in some cases, borrowers were led to believe they were receiving interest rates of about seven or eight percent and were actually charged nearly twice that much. Some consumers were trapped in costly loans or charged costly prepayment penalties that were not clearly disclosed.

The multi state investigation alleged that Household violated numerous provisions of Michigan’s Consumer Financial Services Act by misrepresenting loan terms and failing to disclose material information to borrowers.

State officials from across the country said Household cooperated in the case when the states presented their concerns. The company worked quickly with the multi-state group – over a period of about four months – to develop and negotiate solutions.

The settlement includes Household International, Inc. (the parent company), Household Finance Corp., Household Realty Corp., and Beneficial Finance Corp. Household is based in Prospect Heights, Illinois.

“The written settlement announced today between Household and the states will be handled on a state by state basis,” added Fitzgerald. “In Michigan, OFIS will prepare an enforcement order to detail the terms of the settlement. Over the coming weeks, we will determine how restitution will occur to the Michigan residents who took out a real estate loan with Household during the period of January 1, 1999 - September 30, 2002.”

The details of the settlement and the process by which consumers can apply for restitution are being finalized and will be announced at a later date. Each state will design its own restitution plan, since lending practices by Household varied significantly from state to state. For the settlement to be finalized, state participation must total 80% of Household’s loan volume affected by the settlement.

Under the settlement, Michigan consumers could receive up to $14 million in total restitution. Approximately 10,000 Michigan consumers took out real estate loans with Household since 1999, the year the states allege the problem practices began. As part of the settlement, Household also agreed to:

• Pay up to $484 million in restitution to consumers nationwide, depending on how many states participate.
• Limit prepayment penalties on current and future loans to only the first two years of a loan.
• Ensure that new loans actually provide a benefit to consumers prior to making the loans.
• Limit up-front points and origination fees to 5%.
• Reform and improve disclosures to consumers.
• Reimburse states to cover the costs of the investigations into Household’s practices.
• Eliminate “piggyback” second mortgages.

Michigan is the eighth largest state involved in the multi-state investigation and is 3.4 percent of Household dollar volume. Each state’s share of the restitution fund will be proportional to the state’s percentage share of Household’s total real estate loan secured dollar volume. The settlement specifies that the national restitution fund could range from $387.5 million up to $484 million, depending on participation by states. All states are eligible to participate. Almost all states are expected to participate and the restitution total is expected to be at or close to the $484 million level.

“OFIS examined Household early this year,” said Fitzgerald. “Our exam found that Household was violating Michigan’s consumer finance laws. Rather than launching an independent investigation that would have been extremely costly and lengthy, OFIS joined the multi-state investigation in its early stages and was part of the core negotiating team for the states.”

Financial regulators and state attorney general offices from 19 states and the District of Columbia began coordinating their efforts last spring after identifying a pattern of complaints from borrowers who said they had been misled into agreeing to home loans with far different and much more expensive terms than had been promised. In Michigan, OFIS Deputy Commissioner Ann Gaultney was responsible for identifying the violations of Michigan law and she received legal representation from Assistant Attorney Generals Larry Brya and Mike Fraleigh. The states involved in the investigation are AZ, CA, CT, FL, ID, IL, IA, MA, MI, MN, NY, OH, TX, VT, WA, WI, and the District of Columbia.

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The Michigan Office of Financial and Insurance Services (OFIS) is responsible for the regulation of Blue Cross Blue Shield, 28 HMOs, 138 banks, 282 credit unions, almost 1,500 insurance companies, 1,583 investment advisers, 2,164 securities broker-dealers, 6,000 consumer finance lenders, 89,000 insurance agents, and 120,715 securities agents. OFIS is part of the Department of Consumer and Industry Services and is primarily fee-funded, requiring minimal public tax dollars for its regulatory and consumer assistance activities. OFIS has insurance, financial institutions and securities information available online at the OFIS web site, www.michigan.gov/ofis, or at the Michigan government home page, www.michigan.gov. All information is also available through the OFIS toll free number, (877) 999-6442. If you would like to receive OFIS press releases electronically, please email ofis-info@michigan.gov.

PLEASE NOTE:

OFIS has established a toll free number to provide the most current Household mortgage settlement information to Michigan consumers. The number is 877-598-0010.
This number will be active by Monday, October 14th, with expected activation later today.