Updated from 11:02 a.m. EDT
, the nation's second-biggest consumer lender, put a big regulatory headache behind it Friday by agreeing to pay $484 million to settle a predatory lending investigation.
The deal between Household and attorneys general for 20 states will create a restitution fund to compensate the thousands of Household borrowers who say they were deceived by the finance company into accepting unfair loan terms. The deal won't take effect until several more states sign onto the plan.
The settlement is one of the biggest ever in a predatory lending case. It's twice the amount of money
is paying to settle a similar one with the Federal Trade Commission.
The multi-state investigation into Household's lending practices, particularly to individuals with poor credit histories, had weighed heavily on the company's stock this year. At one point, the shares had lost 64% of their value.
Uncertainty caused by the regulatory inquiry also unnerved investors in Household bonds, who were concerned about the impact the investigation would have on the company's ability to tap the credit markets for new financing.
But Moody's Investors Service said Friday that the settlement "should enable the company to take the issue of the table," even though Household will take a pretax charge in the third quarter for the deal. The credit-rating agency also said the financial cost of the settlement, which will be recognized in the company's third quarter, "is well within Household's current earnings generation."
However, Fitch Ratings said it was considering downgrading Household because the "sizable" pretax charge it will take to resolve the predatory lending investigation. Household is expected to report earnings next week.
Standard & Poor's, meanwhile, was the lone credit-rating agency to actually cuts its rating on some of Household's debt, following the settlement announcement. The move could make it more costly for Household to borrow money.
News of the potential deal was first reported Friday in
The Wall Street Journal
. But there had been speculation about a deal for more than week, after Howard Mason, an analyst at Sanford Bernstein, commented on the potential in a research note to the firm's clients.
On Thursday, in advance of the deal, Household's shares soared 25%. In early afternoon trading Friday, the stock again rose, adding $2.19, or 8%, to $28.50 a share. The stock, however, fell a bit after details of the settlement and how Household intended to pay for it for released. The company also announced that 2003 earnings would be below the consensus estimate of Wall Street analysts.
Now that a settlement has been reached, Mason and other industry analysts expect Household to move quickly to settle a class-action lawsuit filed that raises similar predatory lending claims. That suit was brought by Acorn, an organization that lobbies on behalf of low- and moderate-income families.
Predatory lending is practice in which finance companies use aggressive sales techniques and sometimes deceptive advertising to market loans to consumers with poor credit histories.
Household, based in Prospect Heights, Ill., is one of the nation's biggest players in the so-called subprime lending market, which caters to high-risk borrowers. Regulators have alleged that Household uses deceptive loan agreements to manipulate borrowers into agreeing to pay higher than normal interest rates.
The deal between Household and the attorneys general comes just a month after Citigroup agreed to pay $240 million to resolve a predatory lending lawsuit filed by the Federal Trade Commission and a group of private plaintiffs. That settlement was the largest consumer protection deal ever negotiated by the FTC.