Then-Attorney General Mike Fisher, who piggybacked Pennsylvania into the multi-state action, said the settlement was a "tremendous victory for Pennsylvania consumers by not only putting money back into their pockets, but also by raising the bar for fair lending practices." Since then, Illinois-based Household has cut a deal with the national Association of Community Organizations for Reform Now, and worked with the local ACORN chapter and the Pittsburgh Community Reinvestment Group to fix burdensome mortgages.
Household's was the largest unfair lending settlement ever, and raised hopes that an industry long likened to loan sharks might clean up its act. Since then, the subprime lending industry as a whole has launched a push to improve its image and cut its liabilities.
But on Oct. 7, 2003, just shy of the first anniversary of Fisher's "tremendous victory," Household filed for foreclosure on widow Marlene Valente's home. Hers was one of 109 Allegheny County properties Household and Beneficial initiated foreclosure proceedings against in 2003 -- up from 60 in 2002. (See chart, "In Good Times and Bad.") Valente's story and Household's foreclosure numbers suggest that the company -- like its industry -- may be acting like Flipper for the public and the politicians, but behaving like Jaws toward some borrowers.
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Marlene Valente, 70, sits in one of two worn chairs in the living room of her new apartment. A two-bedroom unit above a beer distributor in Penn Hills, it isn't a bad place, she says. "It's private, there's no one to bother me." She'd planned to spend her golden years, though, in her modest Wilkinsburg home of 29 years. "I would have liked to stay there," she says, starting to sob. "Now, I'm walking away without a dime."
Marlene and Rudolph Valente never lived large. He was a Westinghouse Corp. lab technician, she a payroll clerk in the accounting department of Axiom Real Estate Management. They never had kids, and he didn't drive, so they didn't need a second car. There were no lavish vacations, just Rudy's collection of more than 1,000 books, and the endless stream of invoices that is life. "We paid our bills every month," says Marlene. "I was taught that if you have bills, you pay them."
In 1974, they bought a modest three-bedroom home in Wilkinsburg for $22,000. The mortgage payment was $169.17. They got a second mortgage from First Seneca Bank in 1987, and paid that off in 1994. It wasn't until 1999 that the promise of lower monthly payments through debt consolidation brought them to Alta Mortgage, where a sales rep convinced them to consolidate their remaining mortgage balance and some credit card bills into a $50,000 mortgage at 11.1 percent interest -- roughly 3.5 percentage points above then-prevailing rates. Their monthly payment jumped to $571, including taxes and insurance.
Subprime lenders ostensibly lend to those with irregular incomes or poor credit ratings. They justify high fees and interest rates by arguing that their borrowers are at a higher risk of default than bank borrowers. But as the Valentes' story suggests, and as Household financial documents confirm, subprime lenders have convinced many borrowers who might qualify for bank loans to instead take on high-cost loans that are more likely to end in foreclosure. And so-called predatory practices like lending more than a home is worth or charging unjustifiably high rates of interest are still very much part of Household's business.
In the Valentes' case, Alta quickly transferred that mortgage to another company, which then passed it on to a division of Household. Within months, says Marlene, Household "called Rudy or sent him a letter. And I guess they promised him the moon, and he wanted to consolidate some bills."
A Household rep came to their home on Jan. 25, 2000, and presented them with a $77,184 mortgage. It would replace their seven-month-old mortgage and some credit card balances, plus give them $2,666 in spending money. The monthly payment of $734 didn't include insurance and taxes, but seemed manageable on their $3,200 in pension and Social Security income. The loan included an "application fee" of $5,215, payable to Household -- 7.25 percent of the amount financed, compared to the 1 percent most banks charge. And the interest rate was 10.99 percent -- 2.8 percent above then-prevailing rates. "When I saw that 10.99 percent, I almost hit the ceiling!" Marlene says. "I said, 'This is highway robbery! Everything else is 7 or 8 percent.'" Rudy wanted to go through with it, though, so they signed.
In May 2002, Rudy died of an embolism. Marlene lost $900 a month in Social Security. Once Rudy's modest life insurance payout ran out, Marlene found herself struggling. "I wasn't sleeping at night worrying about the bills," she says. She approached Household about refinancing at a lower interest rate. Reading notes taken at the time, she says a sales rep told her that they could get her payment down around $540 a month, but then reneged.
Marlene approached another lender in an effort to refinance, and learned that her loan was both expensive and virtually inescapable. The $77,184 mortgage was far in excess of the $43,400 the county's recent reassessment says her house is worth. Worse, if she wanted to pay off the loan within the first five years, she'd owe Household a prepayment penalty of as much as $4,200. So to escape the loan in its early years, she'd have to find a lender or a buyer willing to fork over nearly double the assessed value of the house -- not likely for a home in Wilkinsburg. And since mortgages, unlike credit card debt, can't be cancelled in a typical consumer bankruptcy, she and Rudy had traded debt they could squirm out of for debt chained to their home.
Marlene started missing payments, and Household began tacking on late charges. By the time it filed for foreclosure in October, Household said Marlene owed $84,647, including late fees, interest and attorney fees.
Household won't comment on individual cases, even with the borrower's permission. Nor will Household International spokesman Mark Friedlander discuss lending or foreclosure policies, comment on the spike in foreclosure filings by the company in Allegheny County, or reveal national foreclosure numbers. He says foreclosures represent less than 1 percent of Household's total loan volume -- much lower than industry estimates of the overall number of subprime loans in the foreclosure process, which hovers around 7 percent. "Our goal is to keep people in their homes," Friedlander says. "Our goal is not to obtain and sell real estate." He says Household even has a new program that offers financial-literacy workshops to would-be borrowers, in an effort to keep foreclosures low.
None of that was offered to Marlene. Her attorney told her there was nothing to do but file for bankruptcy. "I struggled with this bankruptcy thing," she says, noting that it went against everything she'd learned in a career in the accounting department. But she finally filed the papers in November. "The attorney said the best thing I could do was give up the house," she says. So on Dec. 12, in advance of the as-yet-unscheduled sheriff's sale, she moved above the beer distributor.
In August, Marlene got a letter from the attorney general's office telling her she
was due a tiny sliver of that $484 million settlement. "I signed the papers for the $700, but it's small compensation. And it means I can't sue [Household]," she says. She tears up again. "This whole thing upsets me."
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One hundred twenty-five years before it foreclosed on the Valente home, Household pioneered subprime lending. In 1878, according to the company's Web site, "[Founder] Frank J. Mackey makes his first personal cash loans from a small room in a Minneapolis jewelry store. He initiates what was then an innovation in lending by providing unsecured personal loans to people of average means. He starts a business that would become Household Finance Corporation and helps to shape the consumer finance industry."
In 1898, the Web site boasts, Household became "the first consumer finance company to offer loans to former customers through mail solicitation." During the Great Depression, the Web site claims, Household refinanced the bank loans of unemployed people facing foreclosure, and allowed them to defer payments until they found work. In 1956, the company adopted the advertising slogan, "Never borrow money needlessly." It expanded into car loans and credit cards. In 1998, it bought competitor Beneficial, creating a subprime giant rivaled only by superbank CitiGroup's high-interest units.
Household's online history doesn't mention the $484 million settlement. Attorneys general nationwide had fielded complaints about Household's practices. Fisher, for instance, said in a post-settlement press release that he'd received 200 complaints about Household. Fisher said borrowers reported being offered one interest rate and given another; watching Household reps falsify their earnings on loan applications; being asked to sign blank loan documents; and taking loans with payments they thought were monthly, but which turned out to be due every two weeks.
The nationwide settlement covered some 310,000 loans, for an average of $1,561 per wronged borrower. Each state was given the task of crafting a formula for distributing its share. In Pennsylvania, where $30 million was slated for 49,000 borrowers, Fisher's staff "set up a point system based on the egregiousness of the violations," says Barb Petito, a spokesperson for the Attorney General's Office.
Pat Shaughnessy of the North Side is getting about $1,600 in relation to two Beneficial loans -- a $76,610 first mortgage and an $8,000 line of credit he and his wife got on the same September 2001 day. The first carried an interest rate of 10.9 percent, and the second topped 15 percent. Those rates reflected a bankruptcy the Shaughnessys went through in the early 1990s, and their modest incomes from disability payments and part-time jobs at McCartan Hardware on Perrysville Avenue. It culminated a four-year period during which they refinanced repeatedly in vain attempts to get by on just $1,800 a month. The combined $847 in payments on the two new loans didn't make things much easier. "If we pushed ourselves, cut back on expenditures, lived a very frugal life, being very careful on gas and light and utilities, we could keep it together," says Shaughnessy.
Then McCartan's closed. The Shaughnessys missed a few payments. Beneficial started hounding them. Before things got to the point of foreclosure, Shaughnessy called the Pittsburgh Community Reinvestment Group's anti-predatory lending program. PCRG Program Manager Greg Simmons used high-level contacts at Household (see sidebar, "Hit 'Em High and Low") to get the Shaughnessys' interest rates on the loans down to 3.8 percent and zero percent, respectively. The changes cut the monthly payments almost in half. The new rates apply for six months, says Shaughnessy, and then can be renewed if he makes his payments and his income doesn't change dramatically. What if Household doesn't renew the low rates? "If that hammer drops, I'm in trouble again," Shaughnessy says.
Household's Friedlander will only say that decisions on cutting interest rates are made "on a case-by-case basis."
It's a big number, $484 million. But Household's financial statements reveal that the company wrote off the settlement, thereby shaving $192 million off its tax bill, and made $1.6 billion in profits in 2002. And just a month after the settlement announcement, Household announced its impending purchase by London-based HSBC Holdings, the second largest financial conglomerate in the world, for $14.6 billion.
In Good Times and Bad- Click Here
The attorneys general "got played," says Matthew Lee, a Bronx-based public-interest lawyer who runs the watchdog group Fair Finance Watch and recently wrote and published a novel, Predatory Bender: A Story of Subprime Finance. Lee has used the Freedom of Information Act and state laws to obtain documents related to the settlement negotiations. The AGs "were told by a financial adviser that [$484 million] was the most [Household] could afford to pay," he says. In light of the subsequent merger, which had apparently been on the drawing board for months, that just wasn't true, Lee says.
Friedlander will say only that reaching a settlement was "a very complex task. ... Everyone involved in the settlement was happy with the result."
Household certainly has reason to be happy, says Lee. By signing for their settlement checks, as many as 310,000 borrowers will agree not to sue the company, and not to assert fraud as a defense against foreclosure. "It creates a company that is almost inoculated" against charges of predation, Lee says. "They can say, 'Hey, it's settled.'"
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Just as important as the money was Household's agreement to change its lending practices, according to the attorneys general. (The reforms apply only to mortgages made through Household and Beneficial offices, and not to personal loans or any loans set up by mortgage brokers.) The company would cap its loan origination fees or "points" at 5 percent. It would limit prepayment penalties to the first two years of a mortgage's life, and would no longer allow borrowers to refinance loans fewer than 90 days old. It wouldn't offer credit insurance with a single premium, paid up front and rolled into the loan, on which the borrower would pay interest for the life of the mortgage. It wouldn't urge customers to take out a mortgage and a separate, higher-interest loan to cover closing costs.
That last was the trap Sean Ennis of Latrobe fell into. "They called me, I didn't call them," Ennis says. "They said they had the deal of the century. I should've known." When Ennis arrived at Household's Greensburg office in July 2002, he found that the deal of the century involved replacing his bank loan -- with its 5.75 percent interest -- plus about $24,000 in other debts, with a mortgage at 10.5 percent and a line of credit at more than 20 percent. "I looked at my wife and she said, 'Let's just do it and get the hell out of here.'"
An area sales manager for Kaufmann's, Ennis isn't poor or unsophisticated. But it wasn't until he showed the papers to his accountant that he realized he'd been taken. "He said, 'How about I just put my foot up your ass?'" Ennis recalls. "I felt molested." He tried to refinance, but an $8,500 prepayment penalty torpedoed that effort. Financial strains from the more than $1,500 in monthly payments helped drive him and his wife to separation, he says.
On a tip, Ennis contacted the Pittsburgh office of ACORN. Household agreed in November to dedicate as much as $72 million to lowering the interest rates of borrowers who might otherwise face foreclosure, and who come through ACORN offices. ACORN Housing coordinator Wade Burtch helped Ennis cancel unnecessary insurance Household sold him that added $150 a month to his payment, and then to negotiate down his interest rates. When the new rates are finalized, Ennis' payments will drop by $500, says Burtch.
Nothing in Household's settlement agreements curb what some borrowers' advocates view as subprime lending's worst excesses: lending more than a property is worth, and charging unjustifiably high interest rates. Household filings with the federal Securities and Exchange Commission documenting the terms of nearly 30,000 recent mortgages indicate that these practices are integral to Household's diet of profit.
The SEC filings reveal that 16 percent of the loans are for more than the appraised value of the property -- the practice that trapped Marlene Valente by making it impossible for her to sell her property or refinance her loan. Friedlander won't discuss Household's policy on lending more than the value of a property.
Fully 42 percent of the 30,000 borrowers had credit scores that could have qualified them for bank loans at or near prevailing interest rates. But just 18 percent were given interest rates below 8 percent, at a time when average interest rates have hovered between 6 and 7 percent. The majority of the loans had interest rates of between 8 and 12 percent, and a few were above 16 percent.
Credit ratings are "just one component" of Household's decision on what rate to charge, Friedlander says. He won't elaborate. Though Household's new parent company offers prime-rate mortgages, there is as yet no program for referring qualified borrowers to the bank side of the business, Friedlander says. "That's something that's in our future plans."
Even a single percentage point in higher interest can make a big difference over the life of a loan. If someone borrowing $50,000 could qualify for a 7 percent interest mortgage, but is instead given a loan at 8 percent, he or she will pay $34 per month more, for a total of $12,240 more over a 30-year term. If that same borrower is suckered into a 10 percent interest loan, they'll pay $106 more per month than necessary -- or $38,160 in unnecessary payments over 30 years.
"The average person that's getting screwed is getting screwed because they're paying too much," says Fair Finance Watch's Matthew Lee. Subprime lenders' rates, he says, aren't reflective of their borrowers' credit histories. "They charge more simply because they can."
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ACORN's arrangement with Household came after the national group spent years protesting the lender's practices. As part of the deal, ACORN dropped a pending lawsuit against Household and agreed to stop calling the company a "predatory lender".
Image is apparently critical to the subprime lending industry. In January 2003, a coalition of subprime lenders including Household created the Coalition for Fair and Affordable Lending to shore up their image and lobbying might. Its executive director is Wright H. Andrews Jr., a former two-term president of the American League of Lobbyists and one-time Senate aide. And CFAL's budget is in the millions of dollars.
The pitch: "Consumer groups, quite legitimately, have raised concerns over practices. The industry, in my judgment, took too long to get to legitimate concerns," Andrews says. High-cost loans, he adds, are necessary because people with credit blemishes or irregular incomes can't get bank loans. "Overreactions could make these loans too costly, or make them unavailable." Those overreactions, in CFAL's view, include anti-predatory-lending laws like the ones passed in California, Georgia, North Carolina, New York, New Jersey, New Mexico and Arkansas.
A PowerPoint presentation delivered by Andrews at an April lending industry conference provides a glimpse into how the industry seeks to influence politicians and the public. It calls for "constructive and relentless engagement" by lenders, including the hiring of eight lobbying firms and a public relations firm, media outreach, and "grassroots [activity] in targeted states and congressional districts." The PowerPoint says CFAL is asking companies to pony up anywhere from $1,000 for a "general membership" to "$250,000 and up" for key sponsors. As the PowerPoint notes, "Good Government is Expensive."
The coalition has praised proposed legislation by Congressman Robert Ney, an Ohio Republican, that would wipe out state and local lending laws, and replace them with national regulations that would limit refinancing, prohibit lending more than a borrower can repay, and ban certain kinds of mortgage insurance. But borrowers' advocates say the legislation backed by CFAL would also make it virtually impossible for bilked borrowers to successfully sue unfair lenders, and put federal lending policy in the hands of a board stacked with mortgage industry interests. The Ney bill would also shield from legal liability a group of interests that are critical to subprime lending's success: the financial institutions that underwrite the industry's loans.
Most subprime lenders aren't content to wait for the interest on their loans to roll in. Instead, they gather thousands of loans into billion-dollar bundles called asset-backed securities, and sell shares in those bundles. The shares can cost $1,000 a piece, are safer than stocks, pay higher interest than most bonds, and are snapped up by the biggest banks, mutual funds and insurance companies in the country.
Among major buyers of Household's securities are household names such as conglomerates CitiGroup and General Electric; insurers Aetna, Allstate, American General, Nationwide, Prudential and Travelers; and investment houses Fidelity and Merrill Lynch. Pittsburgh-based mutual fund company Federated Investors owns shares in some Household mortgage pools, as do PNC's BlackRock Financial Management unit and Mellon's Dreyfus Corp. Cleveland-based National City Bank, with major operations in Pittsburgh, is another Household investor.
Ironically, PNC, Mellon and National City are partners of PCRG, and have helped fund and design its anti-predatory lending initiative. Presented with evidence of the investments in Household, PNC, Mellon, National City and Federated all declined comment. PCRG's Simmons says his organization is "reviewing the situation" regarding partner banks' investments in subprime lending.
Predatory-lending watchdog Lee says big institutional investors and their hunger for the high rates of return associated with subprime loans are driving the market for high-cost loans. "It's their willingness to buy, and the regulators' unwillingness to hold them liable," he says, "that finances this industry, and legitimizes it."
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Jeff Mills and his wife built their dream home in 1997, shelling out $180,715 for a four-bedroom, two-garage house in Moon, big enough for the couple and their three daughters. In 1998, Mills was looking for a way to get the equipment necessary to expand his computer consulting business, when help arrived in the form of a mailer from Beneficial. "I had received a number of advertisements from them in the mail -- 'You've been pre-approved for such and such amount,'" he says. The offer that really got Mills' attention advertised interest rates of less than 8 percent.
When he got to Beneficial's office, Mills says, the loan offered "was not like the correspondence I received in the mail from them. ... It was close to 16 percent." The Beneficial rep "said it was due to a last-minute review, and it being for a business," he says. "I needed the money to continue the business." So he signed on to a second mortgage.
Hit 'Em High and Low- Click Here
Things hummed along, until Mills started having back problems, and three surgeries slowed him down and crimped his earnings. He started missing payments. His first mortgage holder, Northwest Savings, filed for foreclosure in September 2002, but then negotiated a new repayment schedule and withdrew the litigation.
Beneficial wasn't so understanding. "I got a little bit behind. They got belligerent and aggressive," Mills says. "There were days when they called five or six times a day. Seven days a week." Beneficial filed for foreclosure on June 11, and Northwest, apparently to protect its interest in the property, followed suit five days later. The two lenders wanted a combined $247,000 on a house the county says is worth $209,000.
"I just was not healing enough to get out there and work the way I had been, so I went with the bankruptcy," Mills says. "We surrendered the house." Maybe he borrowed more than he should have, he says. And no one could have anticipated his back problems. But he's not ready to forgive that last-minute interest rate switcheroo, and the $500 he's getting out of the attorneys general settlement doesn't make up for it.
Mills and his family are now living in an apartment in Moon, and he thinks that some day his back and his credit record might be healed enough to permit another run at the American dream. "It was fun working with the builder and getting the house you want," he says. "And then having it all collapse was terrible."