Are you a New Jersey consumer with a mortgage or a loan from Household International, Inc.? (Household also owns Household Finance Corporation, HFC, and Beneficial Finance Corporation. All of these are referred to here as “Household.”) If you are, you may be entitled to consumer-friendly changes in your loan terms, or even money damages.
What is predatory lending?
All lenders try to get the best return on the money they loan. Predatory lenders go too far by targeting low-income and unsophisticated borrowers for loans with unfavorable terms. Predatory lenders offer high interest rates and high-cost loans to borrowers who should qualify for loans with better 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.
The Household lawsuit settlement
In October 2002, Household settled a lawsuit with at least 44 states, including New Jersey. The settlement resolved claims that Household had violated state consumer protection laws. Household was accused of many predatory lending practices, including those in the examples above.
Under New Jersey’s settlement, consumers with Household loans that were made between January 1999 and September 30, 2002, may be entitled to improved loan terms and possibly money damages. The settlement requires Household to change the terms of certain loans while reforming their lending practices for all future loans. The settlement places many restrictions on Household’s lending. Some of the key consumer protections are mentioned here.
Household cannot charge borrowers high costs and fees for loans
The costs of any loan must be reasonable and cannot exceed 5% of the loan amount. Also, the lender must carefully disclose the terms of the loan and make sure that any comparisons between proposed loans and existing loans are accurate and non-deceptive. For example, if the current mortgage loan includes monthly taxes and insurance, and the proposed loan does not, then the taxes and insurance must be removed from the current loan payment and clearly disclosed before any comparison can be made.
Household cannot impose prepayment penalties
When a consumer pays off a loan before the term of the loan has expired, some lenders impose prepayment penalties that require the borrower to pay a large additional payment above the remaining loan amount. Household is not allowed to charge such fees. If Household charged a prepayment penalty on a loan that has been paid off but that was closed during the period from January 1999 through September 2002, then Household must refund the prepayment penalty to the consumer. Household must notify consumers who may be entitled to this refund.
Household cannot provide two mortgage loans when the consumer is looking for a single loan
Another predatory lending practice is providing two mortgage loans when a consumer is looking for a single mortgage loan. The lender may close two loans at one closing, so that the borrower signs all of the documents at one time and is unaware that the closing involved two loans. If there are two loans instead of one, the lender increases its profits by double charging for the closing costs and increasing the loan amount. Household is now prohibited from providing a second loan secured by real estate to the same borrower within 90 days of the first loan. Household may still provide non-mortgage loans to the same borrower within the 90-day period, as long as the loan is not for the purpose of paying the costs and fees for the first mortgage loan. Consumers who fell victim to this practice may be entitled to have their second mortgages paid off by the New Jersey settlement fund.
Household must clearly disclose balloon payments
Lenders sometimes offer mortgage loans that have monthly payments that do not cover the cost of the monthly principal and interest on the loan. If this happens, the borrower will reach the end of the loan term and the loan will not be paid off. Instead, the borrower will have to make a large single payment at the end, called a “balloon payment.” Loans with balloon payments usually force the borrower to refinance at the end of the loan. These loans can create major problems for borrowers with uncertain employment or bad credit. They are also predatory loans if the borrowers do not understand that they are entering a mortgage with a balloon payment. Now, Household must provide clear disclosures. It must provide a written disclosure statement that shows how much will be due in a balloon payment at the end of the loan term if the minimum loan payments are made. The disclosure must also show how much would have to be paid on a monthly basis in order for the borrower to fully pay off the loan at the end of the term and avoid the balloon payment.
Household can no longer provide loans with single premium credit insurance
The lawsuit against Household claimed that the company provided insurance to consumers who really did not want insurance. The insurance drives up the amount of the borrower’s monthly loan payment and the loan amount. Now, Household is prohibited from providing single premium credit insurance, and it must clearly indicate to the borrower that any other type of credit insurance is optional. The borrower has no obligation to buy any form of credit, credit life, disability, employment, or life insurance with a loan.
Household cannot provide misleading estimates of closing costs
The law requires lenders to provide a written statement of the estimated costs and expenses of a proposed mortgage loan. This statement is called a “Good Faith Estimate” and it must be given to the consumer no later than three days from the date that a consumer makes the loan application. The settlement requires that the Good Faith Estimate be a reasonable estimate of the actual costs 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, the lender must provide a new Good Faith Estimate with the corrected fees and costs.
Household cannot provide checks in the mail without clear warning language
Sometimes lenders send a check in the mail despite the fact that the consumer did not request the check. The checks are used to increase the lender’s loan business. This practice leads some consumers to be misled. They do not realize that as soon as they cash the check, they have taken out a loan. These checks also lead consumers to enter loans with terrible terms because the consumer is unaware of the interest rate and the costs of the loan, which will apply as soon as the check is cashed. To protect consumers, Household must now state on such checks:
SIGNING THIS CHECK WILL RESULT IN A LOAN TO YOU THAT MUST BE REPAID WITH INTEREST AND FEES.
Household must provide improved assistance to Spanish-speaking loan applicants
Often, predatory lenders target the elderly, minorities, and non-English speakers for loans with terrible terms. In order to avoid this, Household must have “Spanish-certified” branches and Spanish loan documents. They must direct Spanish-speaking loan applicants to the appropriate locations. Also, Household must make sure that only “Spanish-certified” employees participate in loan transactions with Spanish-speaking loan applicants.
Who is entitled to relief under the settlement?
All New Jersey consumers should review their loan or mortgage documents to determine who their lender is and whether the loan is subject to this settlement. If it is, the loan terms may have changed, or the consumer may be entitled to receive money from New Jersey’s settlement fund. If a consumer is considering a loan with Household or one of its related companies, the consumer should become familiar with the settlement to make sure that the proposed loan meets the settlement requirements. Also, if a consumer is thinking about refinancing or paying off a loan that is subject to this settlement, the consumer must be sure that he or she is not overcharged for the loan payoff.
How do I find out more about the settlement?
The New Jersey Division of Consumer Affairs (DCA) will be in charge of New Jersey’s settlement fund. Consumers should watch for mail from DCA or from their lender. DCA has not yet prepared a procedure for processing consumer claims for those who qualify for relief under the settlement. They will provide information about the claims process as soon as it is developed. Consumers who want more information should contact DCA’s public information line at 973-504-6200 for updates.
Contact LSNJ-LAW or Your Local Legal Services Office
If you are a low-income borrower and you believe you may qualify for relief under the Household settlement, contact LSNJ-LAW™, the Legal Services of New Jersey statewide toll-free legal hotline, at 1-888-LSNJ-LAW (1-888-576-5529) or your local Legal Services office for additional information.
This article originally appeared in the May 2003 edition of Looking Out for Your Legal Rights®.
This information last reviewed 10/25/11.