First published April 5, 2002:
BLAINE - Joe and Jeanie Luna of Blaine thought they could improve Joe's prospects for an early retirement by refinancing their home through Household Finance Corp.
Instead, the Lunas say they found themselves saddled with two high-interest mortgages that have all but crushed their retirement hopes.
Based on what they say were false assertions about the interest rate that would be in effect, the Lunas gave up a mortgage with another lender that carried a 7.5 percent rate for a Household first mortgage that charged them 12.69 percent, plus a second mortgage with a rate of 24.9 percent. When they realized what the actual interest rates were, Joe Luna said he borrowed from his 401(k) retirement plan to pay off the second mortgage early.
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"We've used a lot of savings," Jeanie Luna said. "It's set us back tremendously from what our original goal was."
Now the Lunas and three other Whatcom County couples have filed a lawsuit against Household alleging fraud and misrepresentation, and asking the court to modify or invalidate their loan contracts. They also seek cash damages for emotional distress and an injunction against what they say are Household's misrepresentations to customers.
They also want the court to declare the suit a class action. If that happens, the company would be required to disclose the names of all its customers in the state who might be entitled to any court-approved compensation.
Jeanie Luna said her main motive in pursuing the lawsuit is to warn other people to be careful when they make arrangements to refinance their homes.
"If we get nothing, I don't want anyone else to get stuck like we did," she said.
Household International, the parent company of Household Financial, is a 124-year-old nationwide firm with $1.9 billion in net income last year.
Megan Hayden, corporate spokeswoman for Household International in Prospect Heights, Ill., said she couldn't comment directly on the lawsuit. But she said the company has worked hard to make sure that those who borrow money from the company get a fair deal at terms they understand.
"You do not stay in business for 124 years by taking advantage of consumers," Hayden said. "You do not make any money trying to take advantage of consumers. You lose money."
Chuck Cross, supervisor of the investigation and enforcement section of the consumer services division of Washington state's Department of Financial Institutions, said Household Financial's Washington customers filed more than 80 complaints against the firm between 1995 and 2001. A similar number have been filed against a sister company, Beneficial Finance, which also is owned by Household International, Cross said.
"That's a lot," Cross said of the volume of complaints. "It's way above the norm."
Cross said some of the complaints have been investigated and found to be without merit, but in other cases his department has found evidence of violations of state consumer protection laws. He did not have an exact tally of outcomes of the complaints.
Cross said that when his department receives an unusually large number of complaints, a more extensive investigation is conducted, but said the department's policy would not allow him to confirm whether an investigation of Household was under way.
The company has already tangled with regulators in California. Last November, that state's Department of Corporations filed a lawsuit alleging that Household had charged excessive fees to its consumer loan customers in violation of state law. In February, Household agreed to pay about $3 million in refunds to settle the case, according to a state press release.
Also in California in February, a community group called Association of Community Organizations for Reform Now, or ACORN, filed a lawsuit against Household alleging deception of the company's borrowers by encouraging them to refinance with loans that carried higher interest rates than previous loans.
The Lunas said their problems began in summer 2000 when they went to Household's Bellingham office at 1115 E. Sunset Drive in response to an advertising brochure. They hoped to get a second mortgage to pay off high-interest credit card debts. They also wanted to consider refinancing a 7.5 percent, 30-year mortgage loan from Chase Manhattan Mortgage Corp.
The Lunas, who are Mormons, say they wanted to comply with their religion's doctrines about reducing personal debt as much as possible. Joe Luna also hoped to retire from his job as a maintenance supervisor at the Phillips 66 refinery within six years. The couple said they planned then to sell their home and live on some of the proceeds during an 18-month stint as missionaries.
The Lunas said Household representative Melissa Rutland Drury promised them a new first mortgage with a 6.99 percent rate that would drop by a quarter percent each year for three years if they made payments on time every two weeks. For a second mortgage to pay off the credit cards, the promised interest rate was 12.45 percent, according to the couples' lawsuit.
Those rates would have reduced the Lunas' credit burden, and they agreed. But when it came time to close the deal, they quickly noticed that the loan documents specified interest rates that were double what they had been promised.
Joe Luna said he was ready to back out of the deal at that point. But Drury insisted that they would get the promised low rates as long as they made their payments on time, and the higher rates on the loan documents reflected the "default" interest rate, according to their lawsuit. Jeanie Luna convinced her husband that they should proceed.
"We truly believed her, that she was helping us," Jeanie Luna said. "It all sounded good."
Then the statements began to arrive. They indicated that for every $923 payment due every two weeks, less than $100 was going to pay the principal. The Lunas called Drury to express their alarm.
"She just kept reiterating, 'This is a real good program, You can get farther ahead faster,'" Joe Luna said.
At that point the Lunas no longer believed. They said they went to the Industrial Credit Union in Bellingham hoping to refinance. But they were told that the amount of the Household loan was in excess of the value of their home, and the credit union could not provide them with a loan of that size.
The credit union's loan officers also confirmed the Lunas' suspicions that their actual annual interest rate was double what they had been promised, the couple said. The credit union people also expressed amazement at the 7.25 percent loan fee that had been tacked on to the Household deal, according to the lawsuit.
The Household loan also contained a prepayment penalty, the Lunas said, providing that if they refinanced with another lender within five years, they would owe an additional six months' interest on the first mortgage.
They did manage to pay off the second mortgage with Joe's 401(k) money - but that didn't exactly help him achieve his retirement objectives.
At one point, Jeanie Luna said she went to Bellingham to confront Drury.
"I went in and said, 'You've stolen our money, you've stolen our future.' She said, 'No, no, you're right on track,'" Jeanie Luna said.
When they inquired with attorneys about legal action, the attorneys put them in contact with the three other couples who reported near-identical experiences in the Bellingham office of Household.
All four couples then hired Wenatchee attorney Robert Parlette to handle their case. The other plaintiffs are David and Genevieve Murphy of Ferndale, Neil and Elsie Nelson of the North Bellingham area, and Brenda and Carl Bennett of Birch Bay.
"We felt really stupid initially until we realized we weren't the only ones," Jeanie Luna said.
Hayden, the Household spokeswoman, said company policy requires full and honest disclosure of all loan terms to customers. Before a loan is closed, customers are supposed to watch a five-minute video that encourages them to ask more questions to make sure they understand the interest rate, the amount of payments, the fees, and other loan terms.
"The loan closing process is not an easy process for consumers," Hayden said.
Jeanie Luna said she and her husband never saw the video.
Asked about the more than 80 complaints filed with state regulators, Hayden replied, "That's a big number to me because it's more than zero."
She said the company takes complaints seriously and tries to do right by unhappy customers.
"With 45 million customers and 8,000 branch employees, mistakes do get made," Hayden said. "What matters is what you do with that mistake."
Drury, the Bellingham representative for Household, declined to answer questions.
The Lunas say they have learned some painful truths.
"We've learned to not put so much trust in the people who present to be professionals," Jeanie Luna said.
"And not to blindly believe that they are trying to help you," Joe Luna added.