Household International

Link Executive Pay to Predatory Lending Performance

WHEREAS, the sub-prime lending industry has come under increasing public scrutiny for predatory lending directed at low-income people, elderly homeowners, neighborhoods of recent immigrants, and communities of color. Eight states, including New York, California, Illinois and North Carolina have adopted laws aimed at curbing predatory lending abuses. Federal regulators and legislators are also considering measures to protect sub-prime borrowers.

WHEREAS, Household’s executive officers have made public statements committing to business practices free of predatory lending. We believe our corporate leaders should be evaluated based on their success in meeting these commitments.

WHEREAS, predatory lending behavior is expensive for borrowers. According to the North Carolina-based Coalition for Responsible Lending, predatory practices cost borrowers more than $9 billion annually. Controversial practices such as the inclusion of pre-payment penalties, which is a provision of 80% of sub-prime loans, mean that economically vulnerable borrowers often cannot afford to take advantage of falling interest rates by refinancing their loans. Conventional borrowers refinance with ease. Only 2% of conventional loans carry prepayment penalties. (Source: Standard & Poors)

WHEREAS, predatory lending practices are also expensive for financial institutions. A class-action suit alleging predatory lending and defrauding of borrowers has been filed in New York against Household’s Beneficial Finance subsidiary. This suit has been joined by the American Association of Retired Persons, a powerful advocacy group with more than 35 million members over the age of 50. Many of these individuals are potential Household customers. California regulators ordered Household to refund to customers more than $1.5 million in excessive administrative fees, late charges, and prepayment penalties. Lawsuits, and the adverse publicity that attends them, threaten the company’s good reputation and divert management attention from other matters.

WHEREAS, bowing to enormous public pressure and following the industry leadership of Citigroup and BankAmerica, Household International announced in July 2001 that starting in January 2002 it would no longer sell single-premium credit insurance, a widely criticized predatory lending practice.

WHEREAS, Household has publicly stated its desire to end predatory lending practices in the sub-prime lending industry, yet our company has also lobbied against adoption of strict predatory lending legislation at the state and local levels.

WHEREAS, Household continues to be the subject of predatory lending protests. Grassroots community and fair housing activists have called upon Household to end prepayment penalties; eliminate mandatory arbitration provisions from sub-prime loans (which limit the legal recourse of borrowers who believe they have been subject to predatory practices); and cap up-front fees, which many times exceed 7% of the amount financed.

RESOLVED, the Board shall conduct a special executive compensation review to study ways of linking a portion of executive compensation to successfully addressing predatory lending practices. Among the factors to be considered in this review: implementation of policies to prevent predatory lending; constructive meetings with concerned community groups; and reductions in predatory lending complaints filed with government bodies. A summary of this review will be published in the Compensation Committee’s report to shareholders.

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