Household Settles Major Litigation

Household International has reached a settlement with about a dozen states to settle charges of "predatory lending." The payments, totaling $484 million, would be paid into restitution funds in each state. According to the article in the Wall Street Journal by Paul Becket and Joseph T. Hallinn, the settlement "would be the largest settlement ever over consumer-lending practices." Among other provisions, the final agreement requires that Household limit the number of points that could be charged on a mortgage loan. In a sense, points are prepaid interest, and their payment serves to reduce the disclosed interest rate on a mortgage loan. Data from Washington State indicate that points charged borrowers averaged 7.25 percent, and interest rates on the mortgages averaged about 12 percent. (While these rates were above the average mortgage rates at the time, the credit reports of the borrowers were evidently below average.) The agreement limits points and origination fees to five percent of the loan. The settlement relieved the market of the uncertainties about the outcome of the litigation. When the news reached the market, the relief was expressed in a gain of 7.2 percent in the price of Household's common stock.