First published April 11, 2003:
Employees of Household International shredded large quantities of customer loan documents and sales materials in Bellingham and elsewhere in Washington, according to a sworn declaration by the former Bellingham branch manager filed in U.S. District Court in Seattle.
According to the declaration by Melissa Rutland Drury, who was Household's Bellingham branch manager until April, 2002, ranking company executives ordered the shredding as state investigators were pressing Household for documents in connection with an investigation of widespread consumer fraud complaints.
Chuck Cross, enforcement chief with the Washington Department of Financial Institutions, issued his report on that investigation in April, 2002. Cross reported that Household, one of the nation's largest loan companies, had failed to produce many documents that the state had sought under subpoena.
The investigation in Washington and other states eventually led to a record-setting settlement in which Household agreed to pay $484 million nationwide to consumers who were misled about interest rates, loan fees and other charges. State officials have admitted that the settlement, large as it is, won't be enough to compensate many Household borrowers for their losses.
Some of those borrowers are pursuing their own lawsuit in federal court in hopes of getting a better deal.
Drury's declaration detailing the document shredding was filed in February as part of a civil lawsuit against the company, in which plaintiffs in Whatcom County and elsewhere have accused the lending company of fraud. Drury's declaration was kept from public view until this week at the request of Household attorneys, who contended it contained "proprietary information."
But on Tuesday, in response to a plaintiff's motion, U.S. District Court Judge Robert Lasnikordered that the declaration be made public.
In June or July 2001, Drury said, a district sales manager held a conference call with Drury and other branch managers. During that call, Drury said, the district manager ordered them to destroy all copies of sales forms and marketing materials that they had previously been using - at company direction - to convince potential borrowers to refinance their home mortgages with Household.
Both the lawsuit and the state investigation report allege that up to that time, the company had been promoting a bi-weekly mortgage payment system by using sales and marketing techniques that left many customers believing they were refinancing at a lower rate, when in fact their new interest rates were much higher.
Drury confirms those allegations.
"Under the bi-weekly program, almost every first mortgage loan booked in the Bellingham branch carried a rate that was higher than the existing first mortgage the customer had carried," Drury said in her declaration.
Also in the summer of 2001, Drury said she and her employees shredded personal customer files at the direction of the district manager.
"My entire staff gathered and shredded information consistent with upper management's direction, including entire customer files," Drury said. "Some offices, such as the Everett HFC branch, had a shredding company pick up boxes because there was so much information to be destroyed."
Drury added that her own employees complained about the shredding workload, and were irritated because Drury declined to pay a shredding company to do the job.
After that, Drury said she and other branch managers got a memo from the district manager ordering them to clear their computers of all letters they had written to customers. Still later, in April, 2002, Drury said two other Household middle managers visited her office to personally delete still more files on employees' personal computers, and to watch Drury herself as she deleted files on her own computer. Some of those files contained employee responses to customer complaints, Drury said.
Cross, the state investigator, said the destruction of documents and computer files described by Drury was "potentially" a criminal act. To obtain a conviction, Cross said a prosecutor would have to prove that company officials knowingly ordered the destruction of records in an attempt to thwart the state probe.
In any event, Cross said the document destruction did not affect the outcome of his investigation and the multimillion-dollar settlement that resulted, because there was plenty of other damaging material available to investigators.
"We had more than enough evidence to do the case we did," Cross said. "I think it's incredibly unlikely that 100 pounds more of evidence would have changed anything."
But Cross said he would be willing to discuss possible prosecution of a criminal case in connection with the document destruction, if the Whatcom County Prosecuting Attorney's Office was interested in pursuing the matter.
No one at the prosecutor's office was available for comment Thursday.
Drury also was unavailable for additional comment.
Jeanie Luna of Blaine, who started the lawsuit against the company, said she was outraged to learn of the shredding.
In the original consumer fraud lawsuit, Luna and other plaintiffs place much of the blame on Drury for deceiving them about the interest rates they were paying on their Household home mortgages. But after reading Drury's declaration, Luna said her opinion of Drury had shifted somewhat.
"At least she's coming forward and doing the proper thing for the people who got loans through her office," Luna said.
Luna's attorney, Bob Parlette of Wenatchee, said he would not comment. Attorneys representing Household have asked Judge Lasnik to issue a gag order keeping Parlette from talking to reporters, and Parlette said he thought it best to keep silent until Lasnik rules on the matter.
Daniel Dunne, the Seattle attorney representing Household, said he could not comment on a pending case. Officials at company headquarters in Prospect Heights, Ill. did not return calls seeking comment.
On March 28, Household became a subsidiary of international banking giant HSBC in a $13 billion takeover.
In her declaration, Drury said her trainers and supervisors at the district and regional level had succeeded in convincing her that the bi-weekly program really did save borrowers money. Once she realized that the program was confusing customers and leading to complaints, Drury said she recommended that the program be changed or abandoned. She said she also urged her superiors to redo the mortgages of all the borrowers who had taken out loans under the program to give them the interest rates they had been led to expect.
But she said her superiors rejected her urging, preferring instead to redo loans only when borrowers complained to state regulators or hired attorneys.
Drury said her complaints about company practices got her in trouble with her superiors, who had praised her sales prowess in her regular employee evaluations up to that point.
Drury said company officials tried to make her the scapegoat as the state investigation of company practices intensified. She said a district sales manager told her that her branch's performance was being rated unsatisfactory "to satisfy the state." She said superiors also accused her of inventing the misleading sales techniques that she and other Household employees nationwide had been instructed to use.
In her declaration, Drury said the incident caused her such stress that she took a mental disability leave in late April, 2002, not long after the first articles about Household's lending practices appeared in The Bellingham Herald. The following month, she said, the company sent her a dismissal letter.
"I sympathize with the distress this has caused," Drury said in her declaration. "I personally have been affected by every single complaint because I value my customers."