Pain remains for borrowers

First published Oct. 12, 2002:

Whatcom County residents struggling to pay off high-interest mortgages from Household Finance Co. weren't ready to jump for joy Friday after state Attorney General Christine Gregoire announced a $484 million nationwide settlement with the company.

Jeanie Luna of Blaine played a lead role in pressing for state action against Household Finance and its parent company, Household International. She and her husband, Joe, have no plans to drop her class action lawsuit against the company, and said the settlement money wouldn't be nearly enough to punish Household or to compensate the many borrowers who lost thousands of dollars in their dealings with the company.

"If that's it, I'm not happy," she said. "There's too many laws that have been broken. ¼ I think more people in that company need to be held accountable. There's people who broke the law. It has to be more than just paying out money."

At the same time, Luna called the settlement "a huge, huge wonderful admission" that the company did wrong, although company officials did not officially acknowledge guilt as part of the deal.

"I think it's a great start," she said of the settlement, but added, "There's so many people out there far worse off than us."

Also less than pleased were Julian and Terry Johnston, now living in a rental home in Sudden Valley while they await a pending foreclosure on the Ferndale home they lived in for 18 years.

"What time frame are we looking at?" Terry Johnston asked Gregoire at Friday's Bellingham news conference to announce the settlement. "We were kicked out of our house."

Gregoire told Johnston that she hoped some settlement money could get to consumers by early next year.

Julian Johnston said that might not be soon enough. Household apparently sold his mortgage to a second firm in Texas that has been sending the foreclosure notices.

"We're still deep in debt and we've had to file bankruptcy, and we're renting a house we can't even afford," he said.

There is nothing in the deal to prevent Household or the companies who purchased Household loans from pursuing foreclosures.

Both the Johnstons and the Lunas say they were misled into believing they were getting Household mortgages with lower interest rates and lower payments than they had been making, but both payments and rates ultimately turned out to be higher than before.

The settlement also does nothing to reduce the interest rates on those existing loans, although Luna said the company agreed to lower her rate after it began to feel the heat of consumer complaints, news reports and state investigations.

Gregoire said she hoped borrowers could refinance their way out of trouble, now that Household has agreed to limit its hefty prepayment penalties to the first two years of its loans.

But Mark Cross, owner and president of Security First Mortgage & Escrow in Bellingham, said refinancing may not be available to many Household borrowers because the size of their loans often exceeds the value of their homes.

"If you don't have any equity, it's hard to refinance," he said.

Bob Parlette, the Wenatchee attorney who is representing Luna and other Household borrowers, had both praise and misgivings about the settlement.

Parlette said the conditions for future business practices imposed by the settlement were "excellent" and "very thorough."

But he estimated that he has spoken to about 120 people suffering under the burden of abusive Household loans they were deceived into accepting. He said the restitution likely to be available through the settlement would likely fall far short of compensating many people whose finances and personal lives were shredded by ruinous loans, especially those who have already lost their homes to foreclosure.

"It's going to be very difficult to adequately compensate anybody who built their house with their own hands and raised their kids there," he said. "Those are the ones I really feel for. ¼ The point of the story that I want people to understand is how grievous the harm was to these victims."

Parlette said the settlement won't stop the class action lawsuit he has filed on behalf of the Lunas and a number of other plaintiffs. That case is now pending in U.S. District Court in Seattle.

The Association of Community Organizations for Reform Now, or ACORN, also plans to push ahead with its class action lawsuits in California and Illinois, said Lisa Donner, director of ACORN's financial justice center in New York.

Dawson said ACORN has been pressing for action against Household for more than two years. She called the settlement amount "tiny, compared to the damage that was done."

In Illinois, she said, officials are saying they expect aggrieved borrowers to get about $1,600 apiece.

Chuck Cross, enforcement director for the state Department of Financial Institutions, acknowledged that victims of Household's abusive practices are not going to get all their money back.

But he said the states got the company to agree to a stiff, enforceable set of conditions for its future lending operations.

"No lender has ever agreed to these kinds of things," Cross said. "We think it's very comprehensive."

Cross conducted an investigation that documented extensive abuses by Household's loan officers, providing the state's ammunition in legal negotiations with the company. Gregoire called Cross "my personal hero."

Chuck Cross is Mark Cross' brother.

State Sen. Georgia Gardner, D-Blaine, who has pushed predatory lending reform legislation in recent years, acknowledged that the settlement isn't perfect. But she said she thought it was important to end the legal wrangling, get some money to consumers and reform Household's future conduct, without putting stressed-out people through any more agony.

"This whole process has taken a terrible emotional toll," Gardner said. "It has been extremely damaging to families and to marriages. ¼ We think it's a pretty good settlement."

She said she wants to push more reform bills in the next session, and wants to get more money for the investigative agencies that protect consumers.

In financial markets, reaction to the deal was mixed. Household International stock closed Friday at $28.20 per share, up $1.90 for the day. That came on top of a 25 percent boost in the stock price on Thursday, triggered when news of the settlement leaked out. Despite the settlement's size, the reaction from investors was positive because the deal seemed to end the company's financial uncertainty, analysts said.

But Fitch Ratings, a major bond ratings company, said it was putting Household's commercial paper and some other debt on "rating watch negative," meaning there is a chance that Fitch would downgrade its rating of the company's debt in the future if the company's profit performance does not improve.

In a news release, Fitch said Household could face additional legal actions, and might have trouble matching its past profitability now that it has agreed to reform its behavior.

"In Fitch's view, the bigger challenge for Household will be replenishing lost revenue resulting from the implementation of 'best practices,'" the news release said.

Household International must:

- Compensate consumers up to $484 million, including up to about $20.6 million to Washington residents.

- Limit prepayment penalties on current and future mortgages to the first two years of the loan. In the past, high penalties trapped some borrowers in mortgages with onerous terms.

- Make sure new loans provide some benefit to the borrower. In the past, some borrowers found themselves unknowingly saddled with higher payments and higher interest rates after refinancing with Household.

- Limit loan fees to 5 percent. In the past, fees of 7.5 percent were common.

- Improve disclosures to consumers.

- Retain a state-approved independent monitor to keep an eye on the company's practices.