First published Aug. 27, 2002:
A state investigative report on Household Finance Corp., suppressed by court order for more than three months, contains a blistering assessment of the nationwide lending giant's mortgage loan practices in Whatcom County and elsewhere in the state.
Among other things, the report accuses the company of a pattern of:
- "Misrepresentations" and "dishonest statements" about interest rates, monthly payments, loan fees, prepayment penalties, and insurance.
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- Failing to provide its customers with the loan term disclosures required by state and federal consumer protection laws.
- Coaxing borrowers into signing documents without reading them.
- Talking borrowers into refinancing first mortgages at disadvantageous rates, based on misleading interest information, when borrowers originally sought only small consumer loans.
- Adding costly insurance premiums to loan amounts either without the borrower's knowledge, or by wrongly leading borrowers to believe they had to buy the insurance to get the loan.
HFC's attorneys went to Thurston County Superior Court in May and obtained a judge's restraining order blocking public release of the report. But in recent weeks, copies of the report have been leaked to every news organization that has been following the HFC story - including The New York Times, Forbes Magazine, American Banker magazine and The Bellingham Herald.
The state's report found evidence of "a pattern of intentional deception" of homeowners who obtained mortgages from HFC. In three cases, investigators said they found reason to believe that HFC employees forged borrowers' signatures to documents agreeing to pay thousands of additional dollars for credit insurance policies that Washington Insurance Commissioner Mike Kreidler has labeled "inherently predatory."
Summing up, the report says that all these activities are "part of HFC's practice of obtaining maximum revenue from consumers regardless of any actual benefit to the consumer."
The company pays its representatives "significant monthly incentives" for that kind of behavior, according to the report.
The report also characterizes HFC as being slow to respond to state requests for information - when the company responds at all.
The investigating agency - the Washington Department of Financial Institutions - was so concerned about widespread reports of predatory lending practices at HFC that it sent its examiners to three of the company's loan offices, in Bellingham, Lakewood and Olympia, to pose as would-be borrowers.
"In all three tests the department found that the HFC representatives misrepresented or withheld information, failed to comply with state and federal law and regulations, and did not follow the policy and practice that HFC corporate claimed," the report states.
Megan Hayden, spokeswoman for parent company Household International, said she could not comment on the report because it is still under a court restraining order.
But she said the company now admits that "there clearly were issues in the state of Washington." The company is working with state agencies to resolve matters, and is also trying to set things right with its customers here, she added.
Chuck Cross, enforcement chief at the state Department of Financial Institutions and the report's author, said he too was barred from discussing the report because of the court's restraining order. But he said he was sure that the report had not been leaked by anyone in his department.
Both the company and the state agree that some of the worst abuses occurred in the Bellingham office. But the state report also says that the kinds of abuses practiced in Bellingham were also reported at other HFC offices inside and outside Washington.
Six of the 19 consumer complaints cited in the report originated in the Bellingham office of HFC, but the others were from offices elsewhere in the state. The report was completed in mid-May, and was based on complaints received by the Washington Department of Financial Institutions up to April 30 - before news reports about Household's lending practices triggered a new flood of complaints from Whatcom County and elsewhere.
The report rejects any notion that the abuses are due to renegade local representatives who are violating corporate policies. As of April, the report states that corporate representatives were attempting to defend the practices uncovered in the state investigation by arguing that the letter of applicable laws had been observed.
"HFC has created a situation in which they can completely mislead and confuse the borrower, while later providing a plausible explanation of their actions to the Department or other regulatory agencies," the report states. "HFC practices reflect a pattern of intentional deception while laying the foundation for a later defense."
The report also notes that a similar number of complaints has been filed against Beneficial Finance Corp., a similar loan company that is owned by HFC's parent company, Household International. And both HFC and Beneficial have been slow to respond to the state's request for information on consumer complaints - so slow, in fact, that the state "found it necessary to serve HFC with a subpoena commanding production on 14 outstanding complaint responses," the report says.
As of mid-May, when the report was issued, HFC had yet to provide some of the documents the state had subpoenaed, the report said.
Perhaps the most serious abuse cited in the report was the use of a misleading schedule of interest payments showing an attractive "equivalent rate" of interest, to deceive borrowers into thinking they were refinancing their first mortgages with new loans bearing interest rates in the 7 percent range.
"The department believes the sole purpose of this schedule was for simple deception of the consumer," the report says.
In numerous cases reported to the state and to The Bellingham Herald, homeowners agreed to refinance their mortgages with Household in the belief that they were getting the lower "equivalent" interest rate shown on this schedule, when the actual annual rate was between 11 and 14 percent - much higher than the rate they had been paying before the refinance.
"The Department believes that the 'equivalent rate' sham proffered by HFC representatives is known and likely fostered by the corporation itself or at the least, by corporate officers overseeing large segments of the country," the state report says.
In support of that belief, the report says that HFC corporate officials at company headquarters seemed to be quite familiar with the "equivalent rate" sales technique when state investigators questioned it.
The report also observes that when state regulators questioned the technique, HFC officials attempted to defend the company by arguing that the customers were "confused."
"What is incredible to assume, or propose, is that so many unrelated consumers have been confused by their own doing," the report says.
Jeanie Luna of Blaine, who was among the first to join Wenatchee attorney Bob Parlette's class action lawsuit against HFC, said she hopes that the state report is just the beginning.
"I think the state needs to prosecute them as having broken the law, and their licenses need to be pulled, to no longer do business in our state," Luna said.