Consumer-Finance Giant Gains a New Kind of Notoriety
During congressional hearings held July 26 and 27 by Senate Banking Committee chairperson Paul Sarbanes (D-Md.), Household was singled out in testimony by victims of so-called predatory-lending practices. Locally, disgruntled customers and community activists have rallied outside Household's Baltimore-area offices and have chastised businesses and government bodies that have financial relationships with the consumer conglomerate.
Predatory lending--the targeting of low-income borrowers who have little financial experience with high-cost, high-interest "subprime" loans--has boomed in Baltimore in the last decade, and regulators, victims, and advocates have been trying for years to stop it. But only in recent months has the spotlight settled on the ubiquitous Household. The Illinois-based company is one of the largest consumer finance companies in the country, and if you buy a stereo, computer, furniture, or even frozen food, you're likely to enter into a relationship with Household--and, critics claim, risk getting socked with outlandish interest and fees.
East Baltimore residents Horace and Barbara Price bought cookware and meat from a door-to-door salesperson in a deal financed by Household; within the year they were pressured into refinancing a new loan with a much higher interest rate secured by their house. No sooner did Edward and Brenda Watters of West Baltimore get an unsolicited check for $2,500 from Household in the mail than, like the Prices, they were urged to refinance with a high-interest loan secured by their home. Valerie Coffin, a researcher with the national activist group ACORN (Association of Community Organizations for Reform Now), says such cases are a "good example of how [Household] originally gets people in with these consumer loans that are unsecured, then they end up flipping you into a loan that is secured by your house."
Household strongly denies the allegations of improper tactics. "We think this thing out there called predatory lending is important. It's bad for our company, it's bad for our employees, and it's bad for our customers," company spokesperson Megan Hayden says. "I take exception to any characterization of our company as a predatory lender. Our customer is Middle America, people who run into bumps in the road and for a variety of reasons may not qualify for credit but are still creditworthy. Getting a customer to refinance their [loan] is not what we do, because it's purely the customer's choice."
The firm makes huge profits on interest rates and fees, and you don't have to be on the borrower's end of a Household transaction to contribute. In order to finance consumer purchases, Household sells its debt in the form of bonds to investors--$6.1 million worth of which have been sold in the past three years to the city's pension funds for its employees.
Household has underwriting relationships with such national retailers as Gateway and Best Buy. Its name and logo appear atop standard installment-sale contracts in Maryland. It extends credit cards to companies and unions for use by employees; some 3 million union members nationwide carry Household plastic, including several hundred Baltimore members of the American Federation of State, County, and Municipal Employees.
Previous efforts to fight predatory lending have focused on real-estate transactions, such as mortgages and home refinancings. The kind of predatory lending Household is accused of often starts with a seemingly benign consumer transaction.
The Prices, for example, ended up on the hook to Household after meeting a salesperson from New Jersey-based Arctic Foods in March 1999. The couple, who had cared for dozens of foster children and their own grandchildren over the years, were used to buying food in bulk and invited the man to stop by. They ordered thousands of dollars worth of frozen meat, as well as china, silverware, pots, and pans, and agreed to make monthly payments to Beneficial Credit Services, the Household subsidiary that financed the purchase, at an interest rate of 19.75 percent over three years.
The following fall, Horace Price was laid off from his construction job and fell ill with pneumonia, and Barbara's asthma and bad heart conspired to keep her from her job as a driver for temp agencies for several weeks. For two months the couple missed their loan payments, spurring daily phone calls from a woman at Beneficial. "She was telling me, 'if you don't try and consolidate,' that we probably would end up losing our home," Barbara Price says. Major renovations to their rowhouse, which they bought in 1987, had doubled its value, and they didn't want to lose that investment.
What the Prices didn't understand was that the Beneficial loan was in no way tied to their house and that they were at no risk of losing it. Under the pressure from Beneficial, Barbara Price says, they refinanced, but the fine points of the transaction eluded them. "They did say that my monthly payments would be lower, but they never said how much interest we would have to pay," she says. "They just pushed all these papers in front of me and said, 'Sign this, sign this.'" They ended up with a new loan--one including expensive credit insurance--at 24 percent interest, with their home as security. It was the third of four mortgages they have on the house.
Both currently working, Horace and Barbara Price are making good on their Beneficial loan--for now. But as they write that monthly check, they still wonder how an $8,435 purchase of meat and cookware has come to cost nearly $18,000--the amount the Prices will have shelled out once their loan is finally paid, according to Beneficial loan documents.
Household officials would not comment on the Prices' specific case without permission from the Prices, which was not attainable by press time.
Because Household is a consumer lender, it isn't required to report loan data to federal regulators as extensively as financial institutions that sell mortgages are, making its activities in particular geographic areas and demographic brackets difficult to quantify. Coffin says ACORN has identified 20-some cases like the Prices' in Baltimore to date, but the activist group suspects there are many more.
Household came under local scrutiny this past spring, when it was assailed by several elected officials and community groups for selling credit insurance in a lump sum up front to unwitting consumers. The practice--costly to borrowers because they pay interest on the insurance as well as the loan--has long been popular with finance companies but has been largely discontinued in recent years. Household stopped doing it in June, becoming the last major lender to scrap the tactic. In May, the company's own shareholders pressured executives to address concerns about lending practices.
However, Household has continued to aggressively oppose attempts by state and local governments across the country to tighten regulations that would curb predatory-lending practices. These actions, and the financial harm critics contend Household loans have inflicted on low-income and working-class families, prompted ACORN to launch a campaign against the company last year. Since then, more than a dozen community and civil-rights organizations have signed on, including the National Consumer Law Center and the Metropolitan Council of the New York State Conference of the NAACP.
In addition to protests at Household offices, the local ACORN chapter filed complaints with Maryland's attorney general and banking commissioner in June, requesting probes of Household's practices. Now it is pursuing secondary targets--entities that do business with Household. The group is slated to meet on Aug. 9 with Baltimore City Comptroller Joan Pratt to discuss the city's pension investments. Pratt says she is concerned about the funds' investment in Household and plans to contact "all the [pension-fund] money managers who have funded Household to ask them what their plan of action is."
In addition, ACORN organizer Mitchell Klein says the group will push for a City Council resolution to divest of Household investments. Two other cities have passed such resolutions, and at least a half-dozen more have similar measures in the works. ACORN has also recruited local labor leaders into its movement.
Household's Hayden says company officials don't "believe there's a justification for" the city's divestment. It would not affect the company materially, she says, but "we care quite a bit from just a substance standpoint that they would be considering this."
But mention of ACORN's actions riles Hayden. "I certainly respect and appreciate their concerns and their desire to help working people," she says. "I do question, though, their seeming desire to bring out customer situations that, once we investigate them, are 99 percent incorrect." And Household has accused ACORN of inflating or even inventing instances of predatory lending. In a July 10 letter to Sarbanes, a company executive asserted that the activist group's "statements and accusations have either been false, or a complete misrepresentation of the facts."
Nonetheless, Household appears to be feeling the heat. On July 23, a few days before Sarbanes' hearings, the company unveiled a plan for improving its subprime-lending practices, promising to lower interest rates for low-income families. But for the Prices, the pledge will change little. They've heard promises of low interest rates before. All they want to do is put their relationship with the company behind them. Once they pay off Household subsidiary Beneficial, Barbara Price says, they'll get to work on the three other notes on their home. "We will be working probably until we die," she says.
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