Are you a New Jersey consumer with a mortgage on your home from Household International, Inc.? (Household also owns Household Finance Corporation, HFC, and Beneficial Finance Corporation. All of these are referred to here as “Household.”) Did you lose your home in foreclosure after a Household loan? If you answered yes to either of these questions, you may be entitled to money damages, changes in your loan terms, financial assistance with your current mortgage, or help obtaining a new mortgage.
What is predatory lending?
Dishonest lenders advertise their services to people with low incomes (or none at all). They take advantage of consumers by offering them loans at very high interest rates with unfair fees and repayment terms. Examples of predatory lending practices include:
- Using “bait and switch” tactics (when a lender advertises a good deal on a loan but then tries to get you to take a deal that is not as good);
- Misleading consumers about the cost of their loans;
- Charging very high fees;
- Providing borrowers with two loans instead of one;
- Providing unwanted credit insurance that then becomes part of the loan; and
- Charging excessive prepayment penalties.
Household was the defendant in an earlier class action lawsuit brought by New Jersey’s Attorney General. The lawsuit alleged that Household was involved in predatory lending abuses. The details of that settlement were reported in this article. At that time, many consumers were given a significant change in their mortgage terms or were awarded money damages. Now, Household is getting ready to settle a second class action lawsuit that benefits New Jersey consumers, but which may also limit the possibility of further legal claims against Household.
Household’s New Settlement
Under the proposed settlement of this lawsuit, In re: Household Lending Litigation, New Jersey consumers with a mortgage on their home, originated or processed by Household in the U.S. from January 1, 1999, to December 24, 2003, or originated or processed by Household from January 1, 1998, to December 31, 1998, in certain states including New Jersey, and those who did not take part in the prior settlement, may be entitled to monetary awards of $500 per loan, the cancellation of credit insurance, interest rate reductions, and financial assistance with their mortgages.
All consumers may benefit from Household’s reformed business practices, which will lower the risk of a consumer losing his or her home to foreclosure or losing home value. These changes, with a few exceptions, will last for three years. If you are thinking about taking out a mortgage with Household or any other lender, you should carefully consider the lending practices mentioned here so that you can avoid becoming a predatory lending victim.
Under the “Fresh Start” program, prior Household mortgagors who have lost their homes to foreclosure and who do not have current lenders may be eligible for new loans. These new loans are expected to have favorable eligibility and consumer-friendly loan terms, because they will be developed by a Settlement Task Force that includes ACORN, the Association of Community Organizations for Reform Now.
The settlement also provides a “Foreclosure Avoidance Program,” or FAP. Under this program, borrowers in default on their loans may receive temporary or permanent financial assistance according to rules that the Settlement Task Force will develop. Consumers may take advantage of the FAP program even if they have also taken part in the earlier settlement.
Household also has agreed to reduce interest rates for class members with a good payment history. Under the “Good Payment Rewards” program, a borrower will receive an interest rate reduction of up to 300 basis points over the term of the loan if the following conditions are met. (A basis point is one-hundredth of a percentage point, so 300 basis points is 3%.)
- The borrower with a mortgage must have made 12 consecutive, “on-time” payments (that is, the borrower has made 12 payments within 30 days of the payment due date), and
- The borrower does not already participate in Household’s “Pay Right Rewards” program.
Under the new settlement, Household has also agreed to a set of business practices for mortgages secured by primary residences either made or processed by the lender. With some exceptions, the business practices must be put into place within 45 days of the settlement and last for three years. The practices are summarized here.
Household agrees to avoid certain loans that are of no benefit to the consumer. Household will not refinance a subsidized, below-market interest rate loan with a loan at a higher annual percentage rate (APR). For instance, Household will not refinance a VA loan with a 4.5% interest rate to a conventional mortgage with an interest rate of 7%.
Household agrees to limit prepayment penalties. Prepayment penalties are fees a lender charges if a borrower pays off a loan before its due date. Prepayment penalties are common in sub-prime loans. Usually, sub-prime loans have unfavorable terms and are given to people who have a bad credit history. According to the settlement, Household will not charge prepayment penalties for a period longer than two years from the date of the mortgage.
Household agrees that balloon loans may be canceled within 10 days. Balloon loans provide for regular monthly loan payments, but the payments do not cover the accruing interest and principal. The result is that the borrower must make a very large final payment on the loan. Balloon loans usually require the borrower to refinance the mortgage at the end of the loan if the borrower wants to keep the home. In the settlement, Household agrees not to give consumers balloon loans, except in limited circumstances. Specifically, Household will only give balloon loans if they are for a line of credit with at least a 15-year term, provided that the consumer has the right to cancel any such loan, without penalty, within 10 days from the date of its origination.
Household agrees not to charge points and fees on quick refinances. When a property is refinanced again and again, the owner loses equity in the home because closing costs and fees become part of the loan balance. This means that, if property is sold after several quick refinances, there may not be any property value left to take away after the sale.
In the settlement, Household has agreed not to charge any points and fees when it refinances a loan within 12 months after the loan is made. If a mortgage is refinanced after 12 months and the interest rate is reduced by 50 basis points (half a percent) or more, then Household may charge points and fees of up to 5% of the mortgage amount.
Household agrees to consider the borrower’s ability to repay the loan. When lenders consider the value of the home instead of the borrower’s ability to repay the loan, foreclosure often results. Household agrees to verify income when giving a mortgage. This will help to avoid many foreclosures.
Household agrees to correct the damage done to certain consumers’ credit ratings. Household agrees to report all Foreclosure Assistance Program participants to the credit reporting agencies as being current in their mortgage obligations. As to other borrowers, Household agrees to provide the credit reporting agencies with a particular statement to be developed by the Settlement Task Force. This statement should be beneficial for all past or present Household borrowers, since it will be developed in part by ACORN.
Household agrees to disclose loan terms as required by federal and state law. Borrowers are often misled by lenders or confused by loan terms. Household agrees to provide in its oral and written loan application materials statements that are “clear, accurate, and complete” descriptions of the terms of a proposed loan. Household will not give misleading estimates of closing costs. Household agrees to train its employees to carry out these procedures.
The law also requires lenders to provide a written statement of the estimated costs and expenses of a proposed mortgage. This statement is called a “Good Faith Estimate.” The settlement requires that the Good Faith Estimate be a reasonable estimate of the actual costs of the mortgage and that, if there is a change of 10% or more in the amount of fees to be paid by the borrower as indicated in a prior Good Faith Estimate, then the lender must give the consumer a new Good Faith Estimate showing the corrected fees and costs.
Household agrees to improve its customer service. Household agrees to respond to payoff requests in writing within three business days and at no charge to the consumer, unless state law specifically allows a charge. Also, Household agrees to warn all consumers in their monthly billing statements that, although a late charge will not be applied if a borrower pays before 10 days from the payment due date, interest continues to apply to all unpaid balances. Therefore, the statement should make it clear that making payments by the due date or in advance always saves money.
Household will not increase mortgage balances by including unwanted products or credit card debt. Household agrees that their employees will not be paid according to how much credit insurance or home or auto warranties they sell to borrowers. Household also agrees not to encourage or advise borrowers not to pay their debts or obligations in connection with a loan. Although Household does not have to tell borrowers about the benefits of leaving credit card debt out of their mortgages, borrowers may at least have the opportunity to consider the advantages of keeping unsecured debt, such as credit card debt, out of the mortgage loan. If credit card debt is minor and can be managed outside of the mortgage, it is better kept outside so that a homeowner can retain the equity or value of the home.
Household will limit its use of “live checks.” Live checks are unsolicited checks sent to a consumer by a lender, without a loan application. When the consumer cashes such a check, he or she can be unaware that loan terms such as interest and fees apply. Household will not mail out live checks that create loan obligations secured by homes. Also, it will only send live checks from a centralized location other than its branches. The changes in Household’s live check practices will be completed within 24 months of the effective date and they will continue for three years.
Class members may seek exclusion from the settlement. Borrowers with Household loans who have been victimized by Household’s alleged lending abuses, or any other abuses not specifically addressed by the settlement, may be able to recover more from suing on their own than they would be able to recover as class members. Individual borrowers wishing to sue Household may choose to remain in the class, or they may choose to litigate their claims individually. Either way, they should talk to a lawyer.
How do I find out more about the settlement?
The Notice of Proposed Class Action should have been mailed to all consumers who are members of the class action. If you believe you may be a class member, but you did not receive a notice, you should talk to a lawyer. Additional information is available at the Household Settlement Web site. Low-income borrowers who believe they may qualify for relief under the Household settlement are also encouraged to call LSNJ-LAW™, Legal Services of New Jersey’s statewide, toll-free legal hotline, at 1-888-LSNJ-LAW or 1-888-576-5529; LSNJ’s Anti-Predatory Lending Project; or their local Legal Services office for additional information and assistance.
This article originally appeared in the March 2004 edition of Looking Out for Your Legal Rights®.