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Household International, Inc. is the oldest, as well as the second largest, consumer finance company in the United States. Founded in Minneapolis in 1878 by Frank Mackey, the company has grown almost continuously since its inception and has at the same time led the way in educating consumers about an industry that has frequently been misunderstood and mistrusted. In addition to still offering consumer loans--the business upon which the company was founded--Household International also specializes in credit cards (including co-branded and private-label cards); credit life, accident, disability, and unemployment insurance; student loans; and auto loans. The company is most active in its home market but also does considerable business in Canada and the United Kingdom.
Founded on Small Personal Loans
Frank Mackey was a man with ambitious business interests in several fields, from selling safes to investing in the mining industry. He moved to Minneapolis in 1878, a time when the town was expanding from a large farming village into a hub for distant logging and farming territories. Its booming population was fertile ground for Mackey's small personal loan venture. He made small loans of $10 to $200 to families for the purchase of household items, farming equipment, emergency medical fees, or anything else that they were temporarily unable to pay for. Mackey's father died in 1879, leaving him a substantial amount of money. This, along with loans from several uncles, enabled Mackey to keep up with the blossoming demand for his company's loans.
In 1883 Mackey constructed a building in Minneapolis to house his prospering business and opened his first branch office, in St. Paul. He also hired a manager named Thomas Hulbert. An aggressive salesman, Hulbert oversaw the company's expansion, largely through advertising. This was one of the first methods the loan company used to set itself apart from its competitors.
As the company rapidly expanded, Mackey assumed decreasing responsibility for daily operations. He provided capital for expansion, but spent his time overseeing his other businesses, such as precious metals mines and real estate ventures. Despite limited personal contact with his high-level managers, Mackey kept their loyalty through their participation in a profit-sharing plan.
Mackey soon appointed Hulbert general manager. Hulbert's first major responsibility was to move the company's headquarters to Chicago. He moved in September 1885 and from there directed the rapid opening of more branch offices. By 1890 he had opened 13 branches in the Midwest and the East, and additional offices had sprouted in Chicago.
The loan business, neither a bank nor a savings and loan, was one of a handful of such firms in the country during the late 19th century. Loans were approved on a case-by-case basis, and were payable in full after three months. For a fee, Mackey offered extensions to those he believed were in genuine need. One of Mackey's first employees, R. L. Read, proposed an "Extension Plan" whereby loans were made for one month only and renewed at the same extension rates that the three month loans had been. Under this plan, fees were collected after the principle had been paid off, and actual fees paid often accumulated beyond a borrower's original understanding, to the distress of many customers. Nonetheless, demand for loans was so high that the company was able to operate in this way past the turn of the century.
Although Hulbert was a strong proponent of this existing monthly extension plan, some branch managers argued in favor of an installment plan. Michael Drennen, manager of the Pittsburgh office, quietly initiated such a plan without Hulbert's consent. His plan included a rebate bonus for early repayment of the loan, correctly anticipating a positive response to such a public relations move. Hulbert was gradually convinced of the merits of the installment system, and all branches were using it by 1905.
In 1896 a second Pittsburgh branch began another significant innovation--soliciting customers for new loans by mail. Solicitation letters were an instant success, and other Mackey branches quickly adopted the approach.
By the turn of the century the demand for nonbank loans had created a burgeoning national industry. As public awareness of the industry grew, so did the number of reports of exorbitant interest rates and heavy-handed collection methods by some less scrupulous lenders. Government efforts to control loan sharks often did more harm than good by making it impossible for legitimate lenders to stay in business. Indeed, in observing the events from 1900 to 1910--the company's loan account decreased between 1900 and 1907; Hulbert retired in 1907, as did his successor a year later; and a number of branches were forced to close--Mackey himself was ready to retire from the field. It took convincing from a handful of his managers that the business could survive, and more importantly, arguments from his attorney that the industry was no less than vital to the economy, to keep Mackey from closing shop.
Led Industry Cleanup in the Early 20th Century
Mackey agreed to stay in business, but provided little more than emotional support during the crucial phase that followed. The key players were Frank Hubachek, Mackey's counsel; Leslie Harbison, district manager of western branches; and Fred Huettmann, a manager who had opened many new branches in the East. These men recognized both the need for the industry and the reality that without cooperation between it, the government, and the public, the industry would quickly disintegrate. They decided it would be a public relations boost for Mackey's company to lead the way in cleaning up the loan business.
Arthur Ham, a Columbia University graduate student, was given a grant by the Russell Sage Foundation in 1907 to research the small-loan industry. Ham found that there was an enormous demand for small loans; that existing companies could not supply this demand; and that most families who needed loans had no way of meeting credit demands for bank loans. He also suggested that while legitimate loan businesses could operate profitably at lower rates than they currently charged, excessive restrictions could put them out of business. By 1913, 25 states had adopted loan legislation limiting interest rates to 6 percent.
When Pennsylvania passed such an act in 1913, Hubachek challenged the legislation, which failed to say exactly which loans were subject to it, as unconstitutional and won. A similar law that he wrote, void of the questionable sections of Ham's law, was upheld by the Pennsylvania Supreme Court. Thereafter Harbison, Hubachek, and Huettmann worked with Ham directly, along with a handful of others, under the name of the American Association of Small Loan Brokers, to agree upon a set of industry regulations.
The Uniform Small Loan Law was passed in 1916. This law allowed lenders to charge an interest rate of no more than 3.5 percent per month. The law enhanced the public image of the industry and helped the growth of legitimate loan businesses through World War I. For their part, Harbison and Hubachek began to develop reputations as champions of consumers' concerns.
In 1918 several branches of the Mackey system were banded into Peoples Finance Company, which incorporated as Household Finance Corporation (HFC) in September 1925. By this time Mackey spent his time almost exclusively in Europe, so Leslie Harbison was the logical choice to become president, a post he held until he died in 1933.
Thomas Hulbert had been an aggressive, expansion-minded manager who at times was blinded to the future by short-term goals. Harbison was equally interested in the growth of Household, but he envisioned this expansion as the natural byproduct of customers' satisfaction with the company's activities and style of operation. His eight-year term began a long-running growth trend for Household. In 1925 HFC paid a quarterly dividend on its common stock, and it has paid dividends every quarter since. On Harbison's recommendation, Household was the first loan company to offer an interest rate below the legal limit, dropping its monthly rate to 2.5 percent in 1928. Harbison decided that the increased volume of business would offset decreased revenue per loan and that decreasing the charge would help the industry by staving off more repressive legislation. To capitalize such a substantial reduction in rates, HFC offered 140,000 shares of preferred stock, making it the first loan company to be publicly held. Competitors were not happy with this HFC initiative, but the public expressed its confidence in the company by buying up the entire stock offer almost immediately. The company's preferred stock was granted listing on the New York Stock Exchange in 1928, and its common stock was listed in New York in 1936. In 1929 Household acquired its first subsidiaries, absorbing three smaller lending firms, and with the 1933 acquisition of Central Finance Corporation of Canada--the first chartered loan company in that country--Household entered the international business arena.
The late 1920s was a time of growth for HFC: its loan account was about $6 million in 1925, and $15 million in 1928, then more than doubled to $33 million in 1929. Net earnings rose nearly 50 percent in 1929 alone. But from 1930 through World War II, HFC toiled to sustain its reputation as sensitive to customers' interests. A handful of lawsuits and government threats to reduce the legal lending rates even further than HFC had done on its own made this a difficult task.
Harbison started a public relations department in 1930, and in 1932 established a separate Department of Consumer Education, which published several pamphlets for customers. The first was "Money Management for Households," in April 1931. The booklet outlined sample budgets, and presented well-known but not always well-understood information in a clearly written and organized form. Not only was consumer response positive, but the government praised Household for its initiative. The New York Times even ran an editorial applauding the booklet.
Business Suffered During the Great Depression and World War II
Despite all of Household's goodwill work, the Great Depression had predictably negative effects on the company and the loan industry in general. HFC's loan account dropped 22 percent between 1931 and 1933, losses and delinquencies ballooned, and the ratio of people who qualified for loans dropped from 70 out of a hundred to 30. The company narrowly averted disaster in 1931 when the banks that had regularly extended credit to HFC became wary of economic conditions and skeptical about the future of the loan business, and froze HFC's credit. Household had to stop making loans for four months during the busiest season of the year--Christmas--so that cash receipts could accumulate sufficiently to pay back the banks. The credit freeze was lifted by June 1932, and HFC quickly returned to its pattern of growth despite lingering questions about the health of the economy.
Byrd Henderson became president upon Harbison's death in December 1933. Harbison's stamp on the company had been to educate consumers; Henderson vigorously continued this practice, but he saw it purely as a method to increase business. He directed a period of phenomenal growth for HFC that continued after his retirement in 1951. Despite stringent credit controls and economic rationing by President Franklin Roosevelt, HFC's loan account grew steadily during World War II, then exploded at its end.
Henderson's tactics were aggressive and straightforward. He encouraged many more consumer education publications; he held frequent manager-level meetings to discuss company operations openly; and he instituted an aggressive advertising campaign that included dramatized radio spots, increased direct mailings, and as many solicitations of employers as of consumers.
Many commercial banks entered the personal loan business in 1934. Even though they frequently charged higher rates than HFC and other loan companies, banks had the vital trust of the public. Consequently, loan accounts for banks were 40 percent higher than that of loan companies by 1946. Nonetheless, Henderson recognized that the increased competition was healthy for the industry, as it created more borrowers.
The war years were difficult ones for the company, primarily because of government regulations restricting consumer credit in order to direct money toward the war effort. Household made the best of the situation, and benefited in the end from the innovations that wartime shortages made necessary: offices learned to run with fewer people and developed more efficient ways to investigate loan prospects.
It was a difficult time for other reasons, too, though. In 1943 several borrowers in New York, claiming ambiguities in loan contracts such that borrowers were not fully aware of their obligations, sued Household and won. But when one couple expanded the scope of this decision and sued Household for all loan payments received in New York during the previous three years, the judge summarily dismissed the case, although he did warn HFC and other loan companies to show restraint in their collection of laggard loan payments, as some companies had begun to practice strong-arm collection tactics.
Henderson's successor, Harold MacDonald, was hired as executive vice president in 1948. The first outsider to be hired to direct Household, MacDonald offered experience in standardized chain store methods. Under Henderson, HFC had grown at breakneck speed; under MacDonald, the goal was to centralize control to ensure uniformity of operations and increase efficiency.
MacDonald began the practice of annual meetings at which branch managers were encouraged to suggest changes in operations. At the first conference in 1951, he held daily meetings for a month, tirelessly asking managers from across the country what they saw as company strengths and weaknesses. The result was the "Uniform Operations Manual," which was distributed to all 573 offices. It provided concise directions on all manner of relations with customers and employees and even set guidelines for office layout and organization. He also instituted an employee-training program.
Diversified Broadly in the Late 1950s and 1960s
A second long-lasting company trend MacDonald initiated was diversifying into businesses outside the loan industry. In 1958 HFC began offering credit life insurance to customers, and also created Household Flight Credit Corporation in conjunction with United Airlines. Education Funds, Inc. was created in 1960 to offer help in paying college tuitions.
Household's first major acquisition, in 1961, was Coast-to-Coast Stores, a company that supplied professional services to franchises nationwide. Many other companies were added, eventually becoming the merchandising group: Badger Paint and Hardware Stores, of Milwaukee, was incorporated into Coast-to-Coast in 1963; City Products Corporation, a merchandising conglomerate comprised of furniture and department store chains, in 1965; White Stores, a hard-goods store chain in the southwestern states, in 1966; and Von's Grocery Company, a supermarket chain in southern California, in 1969. With the acquisition of Von's, the merchandising division's net sales exceeded $1 billion for the first time in 1969.
Under Arthur Rasmussen, who became president in 1967, HFC entered the manufacturing field in 1968 with the acquisition of King-Seeley Thermos, a producer of camping and outdoor recreation equipment. In 1969 Household added National Car Rental, the third largest automobile rental company in the United States, to its purchases.
In 1970 a data-processing system called Orbit was installed at all U.S. branch offices. This network, attached to a main computer at HFC headquarters, saved the corporation money by reducing clerical and related tasks that previously had been done separately at each branch. Orbit became a profitable venture for Household when the company signed a five-year contract in May 1981 to provide services to the General Finance Corporation. Orbit computer services were tailored and marketed to other consumer finance companies throughout the 1970s; again, innovation at HFC led to an industry trend.
Gilbert Ellis became HFC's fifth president in 1972, and he promptly signed a joint venture agreement with J.P. Morgan & Company, a finance company that had long served wealthy individuals and large corporations. The companies formed a jointly owned bank to provide retail banking as well as consumer finance services. This was HFC's first office in England.
In March 1972 HFC signed a consent agreement with the Justice Department in answer to the agency's charges of employment and lending discrimination. Though HFC never admitted to the accusations of bias, the agreement set guidelines for equal opportunity lending to African Americans, Hispanics, and Native Americans, and for equal opportunity hiring and promoting of women and nonwhite employees. A Household spokesmen told the Wall Street Journal that the order was a "... continued implementation of longstanding company policy." But the Justice Department's charges, which included the first by the government to charge lending discrimination and the first to win back pay in a case of sex discrimination, blemished HFC's public image.
Nonlending Operations Led the Way in the 1970s
During the mid-1970s it became clear that HFC's diversification outside the loan business had been a strong move. Unforeseen rises in interest rates and the expanding involvement of banks and credit unions in the personal loan industry restricted opportunity for growth in the finance division. HFC's average interest costs rose more than 30 percent between 1972 and 1974, and this growth in rates was necessarily passed on to borrowers. With widespread uncertainty about whether federal interest rates would ever return to their previous position, and with HFC's large surplus of capital on hand, the challenge of CEO Ellis was to find profitable nonlending financial services while continuing to expand in manufacturing and merchandising.
Ellis's solution was to expand the company's offerings to include personal and commercial banking services. In 1976 HFC acquired Keystone Savings and Loan in California and several commercial banks in Colorado. HFC also began to offer real estate-secured loans.
In 1977 Donald Clark became president. Clark continued to concentrate on HFC's finance operations. He created HFC Leasing, a subsidiary that offered leveraged leasing services, and consolidated all insurance services under the Alexander Hamilton Life Insurance Company, which had been acquired in 1977. Clark also expanded international operations, increasing HFC's Canadian portfolio and opening lending offices in Japan in 1978 and in Australia in 1979. He then restructured the loan business, focusing in areas that were less directly affected by fluctuating interest rates. HFC pursued loans of larger average sizes and in more deregulated areas, and also made a substantial cutback in operating expenses.
In 1977 a New York Supreme Court judge charged that Household unethically solicited former, unpaid borrowers who had since been declared bankrupt. As with the discrimination lawsuit in 1972. HFC denied that it had broken any laws, but agreed to a consent order to restrict its contact with bankrupt former customers. The order stated that if a borrower was given a new loan with a proviso that he must first pay off the unpaid amount of his old loan, HFC had to provide the customer with a statement of his legal rights and a 10-day grace period during which he could cancel the new loan.
In 1979 Household purchased $600 million of accounts receivable from the ailing Chrysler Financial Corporation. It was the largest single transaction HFC had ever made, and although the company had never entered a similar agreement, Household's size and surplus capital made it an attractive deal to both sides. HFC also purchased a 56 percent share in Wien Air Alaska in 1979; the airline became a wholly owned subsidiary in 1980.
Refocused on Core Finance Operations in the 1980s
HFC's operations were restructured in 1981 under a holding company named Household International. The merchandising division's sales had topped $4 billion in 1980, and finance's receivables exceeded $4 billion in 1981. Manufacturing operations were nearly tripled in 1981 with the acquisition of Wallace Murray Corporation, a Fortune 500 maker of truck engine parts, metal-cutting tools, and plumbing fixtures.
Household continued to expand, acquiring Valley National Bank, of Salinas, California, in 1981, Fidelity Federal Savings and Loan, of Baltimore, Maryland, in 1984, and American Heritage Savings, of Bloomingdale, Illinois, in 1984. Meanwhile, however, the company sold several unprofitable merchandising units--White Stores was sold in 1981, and the furniture operations were sold as a unit in 1984.
The latter transactions marked the beginning of an almost drastic turnaround for Household. Its 25-year trend of diversification into other businesses became a new pattern of large-scale divestiture in 1985, when all remaining merchandising units were sold.
Household International also restructured its finance businesses in 1985 by forming Household Commercial Financial Services, consisting of four divisions: capital equipment and property financing; specialty products and services; real estate services; and business equipment financing and services. Household was further trimmed with the 1986 sale of National Car Rental.
The capital raised from these large divestitures was used to strengthen Household's foothold in its two remaining divisions. Between 1985 and 1988 manufacturing acquired the following companies: J.P. Heilwell Industries, of Philadelphia, producer of food service equipment; Lern, Inc., of Schiller Park, Illinois, a producer of commercial refrigeration products; 45 percent of Booth, Inc., of Dallas, a manufacturer of soft drink dispensers; GlasTec, a producer of bathroom showers and other water equipment, located in Middlebury, Indiana; and Omni Products International, of Fairfield, New Jersey, a producer of leisure furniture. During the same period the Finance division made even more purchases: BGC Finance, a consumer finance company in Australia; Fidelity Savings and Loan Company, of Martins Ferry, Ohio; Brighton Federal Savings and Loan Association in Brighton, Colorado; Century Savings Association of Kansas, in Roeland Park, Kansas; Avco National Bank, a subsidiary of Textron; TSO Financial Corporation, of Horsham, Pennsylvania; the credit card portfolios of Beverly Hills Savings, of Mission Viejo, California, and Great American First Savings Bank of San Diego; and 13 branches of Diamond Savings & Loan, in Columbus, Ohio.
In early 1988 Edwin P. Hoffman, a 19-year veteran of New York-based banking giant Citicorp, became president and chief operating officer at Household; Clark remained the company's chairman. The following January, in a move Clark had engineered before hiring Hoffman, Household culminated a return to its core finance business with the announcement that it would sell or spin off all units in its manufacturing division. Eventually three spinoffs were created as independent companies in which Household International shareholders received common stock. These companies were Eljer Industries, a producer of building products; Schwitzer, a manufacturer of diesel and gasoline performance-enhancing components; and Scotsman Industries, a producer of commercial refrigeration machines and equipment.
Restructuring Continued in the 1990s
Household International had started in 1987 to build up a portfolio of credit card operations, mainly through the aforementioned acquisitions from banks, until by mid-1990 the company was already the 10th largest issuer of VISA and MasterCard credit cards in the United States. It was during the 1990s, however, that Household became a major player in this field, primarily through alliances. In 1991 an alliance with Ameritech Corp. created the Ameritech Complete Card, a combination credit and calling card; by the end of the year Household was the eighth largest card issuer in the country. The next year saw the company strike a deal with General Motors Corp. (GM) to manage the operations of the GM credit card, which boasted no annual fee, low interest rates, and rebates on GM cars. The GM card proved to be an immense success, and by mid-1996 was the country's largest so-called affinity card with 12 million cardholders. In the interim, Household added two more telephone company affinity cards to its stable, through alliances with Pacific Bell and US West. Then in 1996 Household took over the management of the Union Privilege program, a $3.4 billion, 2.2 million cardholder affinity credit-card portfolio aligned with the AFL-CIO. The company paid previous manager Bank of New York Co. $575 million to take over management of the program eight months ahead of the original schedule. The addition of Union Privilege moved Household into the number six position among U.S. credit card issuers.
In January 1993, Hoffman was named Household chief executive and was in line to become chairman as well in 1996, when Clark planned to retire. Then Hoffman died suddenly of a heart attack in April 1993. After a transition period, during which the heads of Household's three main units comprised an office of the president, Clark in late 1994 selected as chief executive an outsider, William F. Aldinger, who had been with Wells Fargo & Co. Aldinger became chairman as well, when Clark retired in May 1996.
From 1994 through 1996, essentially the transition years from the leadership of Clark to that of Aldinger, Household restructured once again, this time emphasizing the nonbank consumer finance activities upon which the company was founded along with the burgeoning credit card operations. In late 1994 and 1995 Household divested its brokerage operation, its mortgage origination business, its thrifts in five states--leaving only 57 branches in the Chicago area--and its individual life and annuity businesses while retaining its credit life insurance operation. In the second quarter of 1996 the company completed its exit from consumer banking with the sale of its branches in metropolitan Chicago.
The much more focused operations of Household International now included consumer financing products, principally consisting of home equity loans and unsecured personal loans; VISA and MasterCard credit card services; private-label credit card services; a British operation specializing in consumer loans, affinity credit cards, credit insurance, and retail finance loans; a Canadian business dealing in home equity and unsecured personal loans and private-label credit cards; a life insurance business offering credit life, accident, disability, and unemployment insurance; Household Bank, which provided consumer and student loans through direct mail and telemarketing; and HFC Auto Credit, which was launched in late 1995 to provide vehicle financing through automobile dealerships.
The newly streamlined company made two major acquisitions in 1997 to bolster its core businesses. In June Household paid $1.1 billion for the consumer-finance unit of Transamerica Corp. The deal garnered Household about $3.6 billion in loans, most of which were home equity loans, plus $100 million in other assets. The Transamerica unit had 420 branch offices in 44 states, with much overlap with Household's offices, making for the possibility of large savings from consolidating the operations.
Later in 1997 Household quickly tripled the size of its nascent auto loan operation when it acquired San Diego-based ACC Consumer Finance Corp. for about $200 million. ACC, a so-called sub-prime auto lender, brought with it about $400 million in car loans, bringing Household's total to $600 million. Following the acquisition, Rocco Fabiano, the chairman and chief executive of ACC, became president of HFC Auto Credit.
Consumer lending companies were increasingly suffering from rising loan delinquencies as the 1990s continued, leading to an industry consolidation. From its number two position, Household International had the strength to be one of the few companies to survive this consolidation and was likely to continue to grow through acquisitions into the next century. Household had wisely jettisoned noncore operations earlier in the decade in order to take advantage of this major industry trend.
Principal Subsidiaries: Hamilton Investments, Inc.; Household Bank, f.s.b.; Household Capital Corporation; Household Finance Corporation; Household Capital Markets, Inc.; Household Financial Group, Ltd.; Household Global Funding, Inc.; Household Reinsurance Ltd. (Bermuda); Household Commercial Canada Inc.; HFC Bank plc (U.K.).
Principal Operating Units: Household Finance Corporation; Household Credit Services; Household Retail Services; HFC Bank plc (U.K.); Household Financial Corporation Limited (Canada); Household Life Insurance; Household Bank; HFC Auto Credit.
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