Lender to Refund Up to $484 Million in Settlement

Seeking to end charges of pervasive predatory lending, the parent company of Household Finance and Beneficial Finance said Friday that it will refund up to $484 million to customers--$87 million of it to Californians--in a tentative settlement with state regulators.

Household International Inc. also agreed to cap home-loan fees at 5%, disclose loan terms more fully, let borrowers pay off loans without penalties after two years instead of three and hire “secret shoppers” to police itself.

Regulators from 19 states and the District of Columbia had accused the Household units of pressuring borrowers into refinancing home loans while the lender concealed heavy fees, high interest rates and exorbitant prepayment penalties. Consumers often were trapped in costly loans because of these practices, the states alleged.

“Our compliance procedures and policies were not as good as we thought,” Household Chairman William F. Aldinger III said. “We could have litigated, but the headline risk and the reputation risk would have been worse.”

He said the Prospect Heights, Ill., company now hopes to be regarded as a leader in best practices by lenders.

Even as the settlement was announced, however, the California Department of Corporations questioned whether Household is fully complying with a settlement of an earlier lawsuit accusing it of overcharging customers on small loans.

Household agreed in January to pay $8.9 million in penalties and refund $3 million to California consumers. But Corporations Commissioner Demetrios Boutris said Friday that regulators “are not satisfied” the refunds have been made in full, suggesting he might pursue another enforcement action.

“Today’s settlement does not mean that [California] gives up any rights to ensure the refunds are paid,” Boutris said.

Household spokeswoman Megan Hayden said the company will honor its pledge to refund the overcharges, which she said were inadvertent.

The Household deal has a downside for the estimated 300,000 customers who may get refunds: To be paid, they must opt out of private class-action lawsuits brought by consumer groups such as AARP and the Assn. of Community Organizations for Reform Now, also known as ACORN. Aldinger said he believes that those suits now can be settled quickly and at little additional cost.

ACORN spokeswoman Lisa Donner said her group is “very glad the state attorneys general acted, and we see this as a very important step. But it would take more work for Household to become a leader in best practices.”

Donner noted that Citigroup had capped its loan fees at 3%.

Officials in several states, including Oklahoma, Washington and New York, took lead roles in pressuring Household into a settlement, government officials said.

The $484 million will be divided proportionately to each state’s share of Household real estate loans. California Atty. Gen. Bill Lockyer said more than 35 states have agreed to the settlement.

Each state will determine how to distribute its funds from Household. In California, the company agreed to deposit money in a restitution fund to be distributed by the state Justice Department to borrowers who can prove they were overcharged on home equity and similar loans.

The agreement announced Friday, which must be approved by the individual states, is the largest settlement in a series of cases involving allegations of hidden fees, high-pressure sales of costly credit insurance and other abuses at lenders such as Household that specialize in customers with poor or limited credit histories.

Last month, New York’s Citigroup Inc. agreed to pay $240 million to end a Federal Trade Commission case involving a subprime lending unit, while Irvine-based First Alliance Corp. finalized a $75-million settlement with the FTC.

Household executives said the fine will result in a $330-million after-tax charge in the third quarter, and the policy changes will slice $45 million from 2003 earnings, $90 million in 2004, and $135 million in 2005. The company reported a profit of $1.9 billion last year.

Household shares Friday rose $1.90 to $28.20 on the New York Stock Exchange.