EXHIBIT 1 

Case 1:02-cv-05893 Document 1657-2 Filed 09/03/2009 Page 1 of 16
Cross, Charles (Confidential) 4/9/2008 9:02:00 AM

 1 UNITED STATES DISTRICT COURT

 2 NORTHERN DISTRICT OF ILLINOIS, EASTERN DIVISION

 3 _________________________________________________________

 4 LAWRENCE E. JAFFE PENSION )

 PLAN, on Behalf of Itself and )

 5 All Others Similarly Situated,)

 )

 6 Plaintiffs, )

 )

 7 vs. ) Lead Case No. 02-C-5893

 )

 8 HOUSEHOLD INTERNATIONAL, )

 INC., et al., )

 9 )

 Defendants. )

10 _________________________________________________________

11 VIDEOTAPED DEPOSITION UPON ORAL EXAMINATION

12 OF

13 CHARLES CROSS

14 CONFIDENTIAL

15 _________________________________________________________

16 9:02 A.M.

17 APRIL 9, 2008

18 1515 COMMERCE STREET

19 TACOMA, WASHINGTON

20

21

22

23

24 REPORTED BY: JULIE R. HEAD, CRR, RPR, CCR No. 3119

25

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 1 

Cross, Charles (Confidential) 4/9/2008 9:02:00 AM

 1 A P P E A R A N C E S

 2

 3 FOR THE PLAINTIFFS:

 4 CAMERON BAKER, ESQ.

 5 LUKE O. BROOKS, ESQ.

 6 Coughlin Stoia Geller Rudman Robbins LLP

 7 100 Pine Street, Suite 2600

 8 San Francisco, California 94111

 9 Phone: 415.288.4545 Fax: 415.288.4534

10 E-mail: cbaker@csgrr.com

11 E-mail: LukeB@csgrr.com

12

13 FOR THE DEFENDANTS:

14 HOWARD (PETER) G. SLOANE, ESQ.

15 LAUREN PERLGUT, ESQ.

16 JASON M. HALL, ESQ.

17 LARA R. CORCHADO, ESQ.

18 Cahill Gordon & Reindel LLP

19 80 Pine Street

20 New York, New York 10005

21 Phone: 212.701.3000 Fax: 212.269.5420

22 E-mail: psloane@cahill.com

23 E-mail: lperlgut@cahill.com

24 E-mail: jhall@cahill.com

25 E-mail: lcorchado@cahill.com

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 2 

Cross, Charles (Confidential) 4/9/2008 9:02:00 AM

 1 FOR THE WITNESS:

 2 ELIZABETH P. MARTIN, ESQ.

 3 Gordon Thomas Honeywell Malanca Peterson &

 4 Daheim LLP

 5 Wells Fargo Plaza

 6 1201 Pacific Avenue, Suite 2100

 7 Tacoma, Washington 98402

 8 Phone: 253.620.6500

 9 Fax: 253.620.6565

10 E-mail: emartin@gth-law.com

11

12

13 ALSO PRESENT:

14 JOHN L. BLEY, ESQ.

15 Foster Pepper PLLC

16 1111 Third Avenue, Suite 3400

17 Seattle, Washington 98101

18 Phone: 206.447.4400

19 Fax: 206.447.9700

20 E-mail: bleyj@foster.com

21

22

23 TANIA GRANT, Videographer

24

25

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Cross, Charles (Confidential) 4/9/2008 9:02:00 AM

 1 I N D E X

 2

 3 EXAMINATION BY: PAGE

 4 MR. SLOANE 9, 190

 5 MR. BAKER 105, 198

 6

 7 EXHIBITS FOR IDENTIFICATION PAGE

 8 Exhibit 1 Transcript of 12/19/02 Volume I 19

 9 Deposition of Charles L. Cross III, HHS

10 02498419 - 02498474

11 Exhibit 2 Transcript of 2/4/03 Volume II 19

12 Deposition of Charles L. Cross III, HHS

13 02498501 - 02498569

14 Exhibit 3 Washington Department of Financial 23

15 Institutions Expanded Report of

16 Examination for Household Finance

17 Corporation III as of April 30, 2002,

18 HHS 02498625 - 02498697

19 Exhibit 4 7/1/02 Letter to Chuck Cross, Re: 33

20 Expanded Report of Financial

21 Examination for Household Finance

22 Corporation III - Confidential

23 Response, Plus Attachment, HHS 02484858

24 - 02484940

25

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Cross, Charles (Confidential) 4/9/2008 9:02:00 AM

 1 with the banking department --

 2 Q. Okay.

 3 A. -- which was then merged with other agencies

 4 or subagencies to form DFI in 1993.

 5 Q. Now, I'm -- I really want to understand the

 6 structure of the DFI for purposes of -- of setting the

 7 scene, here. You correct me if I'm wrong.

 8 At -- At some point prior to, say, 2000, or

 9 1999, there was a -- a person who headed the DFI who was

10 Mr. Bley, who is sitting here today; is that correct?

11 A. Correct.

12 Q. And, below Mr. Bley, there were something like

13 four divisions of DFI?

14 A. Yes.

15 Q. And one of the divisions was consumer

16 something -- consumer services?

17 A. And I -- I want to say, at some point in time,

18 I think it became five divisions. The admin division,

19 which is accounting and personnel, so forth, moved up

20 and became a division on its own.

21 Q. He told me that, but I forgot.

22 A. Okay.

23 Q. Okay. So, there was, at some point, five

24 divisions, but one of the divisions, for my purposes,

25 today, was the Consumer Services Division; is that

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Cross, Charles (Confidential) 4/9/2008 9:02:00 AM

 1 right?

 2 A. I assume so, yes.

 3 Q. When you say you assume so --

 4 A. You said for your purposes, but --

 5 Q. Yeah, you really are good.

 6 For purposes of my examination today, am I

 7 correct in calling it the Consumer Services Division?

 8 A. Or the Division of Consumer Services.

 9 Q. Okay. If I screw up and call it consumer

10 services, you'll understand.

11 A. Yes.

12 Q. And that was headed by someone named Mark

13 Thompson during the period, say, '99 through 2003; is

14 that correct?

15 A. Yes. I'm trying to think if -- Towards the

16 end, Mark became the acting director, but he was still

17 over -- he was still at consumer services at that time,

18 so, yes, that would be accurate from -- I believe Mark

19 became division director in 2004. Originally, it was

20 somebody named Anne Pulitano in -- I'm sorry, 1994 --

21 1993 was somebody else. Mark came in about 1994 and

22 stayed division director until June of 2003.

23 Q. Okay. For purposes of the court reporter,

24 since I don't know the spelling of Pulitano, could you

25 spell that for her?

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Cross, Charles (Confidential) 4/9/2008 9:02:00 AM

 1 A. P-U-L-I-T-A-N-O. I'm not sure. John probably

 2 knows the spelling.

 3 Q. I should have thought of that.

 4 John will get the spelling for you on the

 5 break.

 6 Now, am I correct that the -- the Consumer

 7 Services Division was headed by Mr. Thompson and his --

 8 he was essentially an assistant director of DFI, but

 9 they called him a director for -- for purposes of

10 simplicity; is that right?

11 A. Yeah.

12 Q. And, under Mr. Thompson, there was, as I

13 understand it -- correct me if I'm wrong -- there were a

14 number of people who reported to him, one of which was

15 yourself as the enforcement chief?

16 A. Correct.

17 Q. And were there two or three other program

18 people who reported to -- directly to Mr. Thompson, on

19 your level, if you will?

20 A. Yeah. And it depends on what periods of time

21 you're talking about. The -- The division grew almost

22 exponentially over time, so -- but I think, during the

23 periods of time of which you're concerned with, there

24 were essentially two program managers -- one over

25 licensing and then I was the other program manager with

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Cross, Charles (Confidential) 4/9/2008 9:02:00 AM

 1 the title of enforcement chief.

 2 Q. Okay. Now, how many people reported to you?

 3 How many -- I don't know what you call them --

 4 investigators, auditors, whatever they were.

 5 A. Again, it depends on which periods of time

 6 you're talking about, but --

 7 Q. Let's say '99 to 2002 -- through 2002.

 8 A. Well, that would have been a period of time in

 9 which things were changing. But anywhere from 15 to 30,

10 depending on, you know, what point -- I took on greater

11 roles over time.

12 Q. Let me be specific. At the time that you were

13 doing the investigation of Household, how many

14 investigators reported to you?

15 A. Again, that was a fairly long case and spans a

16 period of time in which I -- I got more jurisdiction on

17 more people, but -- let's just say 15 for --

18 Q. Okay.

19 A. -- or so.

20 Q. That's -- That's helpful.

21 Now, there was also, as I understand it, an

22 elected attorney general named Christine -- Christine

23 Regoire?

24 A. Gregoire.

25 Q. Is that right? Gregoire. It's

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Case 1:02-cv-05893 Document 1657-2 Filed 09/03/2009 Page 3 of 16
Cross, Charles (Confidential) 4/9/2008 9:02:00 AM

 1 think, at this point in time, he reported to me and not

 2 the other way around.

 3 Q. (BY MR. BAKER:) Okay. And did you consider

 4 the findings made in Mr. -- sorry, in the 2001 report of

 5 examination as part of the background for the findings

 6 that -- and conclusions you reached in your own expand

 7 report, Exhibit 3?

 8 A. I believe some of this was used in that

 9 examination report. How much it formed a foundation for

10 my findings, hum, I'm not -- not quite as sure about

11 this. This is -- Obviously, you look at the difference,

12 one's pretty thin, the other's pretty thick, so -- But

13 there was some of this that was relevant to that

14 expanded examination report.

15 Q. And Household provided a response to this

16 report, and I can give it to you. It's March 31, 2002

17 response.

18 Did you have that information as background

19 when you were preparing the expand report, Exhibit 3?

20 A. I had all of -- everything that had -- had

21 gone before was at my disposal, so, yes.

22 Q. And, in preparing Exhibit 3, you testified

23 that you interviewed some of the consumers; is that

24 correct?

25 A. That's correct.

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Cross, Charles (Confidential) 4/9/2008 9:02:00 AM

 1 Q. Did you --

 2 MR. SLOANE: Object to the form of the

 3 question. The word was a few.

 4 Q. (BY MR. BAKER:) Did you also -- you and some

 5 of your colleagues -- engage in what I understand to be

 6 called mystery shopping?

 7 A. Yeah, we applied for loans at Household, yes.

 8 Q. Okay. And did your experience help you reach

 9 any -- any of the conclusions that are set forth in

10 Exhibit 3?

11 A. Yes. There were -- There was -- Yes.

12 Q. Okay. Did you also subpoena documents from

13 Household in February of 2002?

14 A. I don't know the date, but I know that we --

15 we subpoenaed them.

16 Q. Okay.

17 A. Sounds about right.

18 Q. Yeah. And did you consider those documents

19 that were received in response to the subpoena in

20 reaching the conclusions that are set forth in

21 Exhibit 3?

22 MR. SLOANE: Object to the form of the

23 question.

24 A. I think the -- I'm sorry, could you ask me the

25 question again?

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Cross, Charles (Confidential) 4/9/2008 9:02:00 AM

 1 Q. (BY MR. BAKER:) Okay. And did you consider

 2 any documents received from Household in response to the

 3 subpoena in reaching the conclusions that are set forth

 4 in Exhibit 3?

 5 MR. SLOANE: Object to the form of the

 6 question.

 7 A. Yes.

 8 Q. (BY MR. BAKER:) Okay. And can you tell me

 9 what you recall of the conclusions that are set forth in

10 Exhibit 3? Giving you a broad, open-ended question

11 Mr. Sloane wanted me to.

12 MR. SLOANE: I object to that. I -- First of

13 all, I don't -- I think it's well beyond the scope of my

14 examination. Second of all, the report is the report.

15 Is there some purpose in having him try to remember, off

16 the top of his head, what the conclusions were? What's

17 the purpose of this?

18 Q. (BY MR. BAKER:) You can answer the question.

19 A. What's the question?

20 Q. What were the conclusions that you reached in

21 that report?

22 A. In very brief summary or you want me to go

23 through and find the conclusions and --

24 Q. Can -- Can you give me a brief summary or --

25 or is it -- Are they -- Well --

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Cross, Charles (Confidential) 4/9/2008 9:02:00 AM

 1 A. Sure.

 2 Q. Let's -- Let's put it -- Take it step by step.

 3 Are all the conclusions set forth in that

 4 report?

 5 A. No.

 6 Q. Okay.

 7 A. But -- But all the conclusions relevant to

 8 this report are set --

 9 Q. Okay.

10 A. -- forth in this report.

11 Q. Okay.

12 Let me ask you some different questions, then.

13 You're familiar that -- with the fact that

14 subsequent to -- or about the time of the issuance of

15 this report, the Washington State Attorney General was

16 conducting her own investigation into Household?

17 MR. SLOANE: I object to this question. I

18 object to any questions that go beyond the scope of my

19 direct examination. I asked no questions about that.

20 It's not remotely cross examination in the sense that

21 anyone understands it to be.

22 Q. (BY MR. BAKER:) You can answer the question.

23 A. I was involved in their investigation, so,

24 yes, I was aware of it.

25 Q. Okay. And, in the course of that

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Case 1:02-cv-05893 Document 1657-2 Filed 09/03/2009 Page 4 of 16
Cross, Charles (Confidential) 4/9/2008 9:02:00 AM

 1 investigation, did you learn additional information

 2 about Household's practices within the state of

 3 Washington?

 4 A. Yes.

 5 MR. SLOANE: Object to -- Object, again.

 6 We're way beyond the scope of my examination.

 7 MR. BAKER: We can have -- We can have a

 8 running objection.

 9 MR. SLOANE: No, I'll make the objection each

10 time.

11 MR. BAKER: Okay.

12 MR. SLOANE: I won't -- I won't make speaking

13 objections, but I will make objections each time to make

14 sure the court is aware that the objections were made.

15 MR. BAKER: Okay.

16 Q. (BY MR. BAKER:) And did the information that

17 you learned as a result of participating in the AG

18 investigation reinforce the conclusions that you reached

19 as a result of your own investigation reflected in

20 Exhibit 3?

21 MR. SLOANE: Object. Way beyond the scope of

22 my examination.

23 A. Yes.

24 Q. (BY MR. BAKER:) And did the attorney general

25 conduct interviews of former employees of Household, to

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Cross, Charles (Confidential) 4/9/2008 9:02:00 AM

 1 your knowledge?

 2 MR. SLOANE: Objection. Beyond the scope.

 3 A. Yes.

 4 Q. (BY MR. BAKER:) Okay. Did you participate in

 5 any of those discussions?

 6 A. Quite possible. They primarily used Jan

 7 Simonds, who is an investigator working for Dave Huey,

 8 to interview consumers, but I think it's quite possible

 9 that, at times, Dave and I were both present when a

10 consumer was being interviewed.

11 MR. SLOANE: Same objection.

12 A. I don't have a clear recollection of that.

13 MS. MARTIN: I'm not -- I'm also not clear

14 that you answered the question that he asked. I think

15 that --

16 MR. SLOANE: That's okay. It's the same

17 objection.

18 MS. MARTIN: All right.

19 MR. SLOANE: Beyond the scope of my

20 examination.

21 Q. (BY MR. BAKER:) Okay. You testified that --

22 during this time period, that you were in discussions

23 with other state examiners -- and I mean examiners from

24 other states; is that correct?

25 A. Yes, I believe so, yes.

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Cross, Charles (Confidential) 4/9/2008 9:02:00 AM

 1 Q. Okay. One of the ones, according to your

 2 deposition -- and I think if I could -- it's on

 3 Exhibit 1. Take you to Exhibit 1, page 33 to 34.

 4 Towards the bottom. Mr. Parlette asks you: "What other

 5 states were you in contact with?"

 6 Answer: "Minnesota, Georgia, Idaho, Oregon.

 7 Those were the main ones. There was some infrequent

 8 contact with Michigan, California, Illinois."

 9 Do you see that?

10 A. Yes.

11 Q. Who were you in contact with from the state of

12 Illinois, if you can recall?

13 A. Boy, they -- Everybody switched out their -- I

14 want to say Dea Brennan. They had an entire turnover in

15 that -- in that agency. I don't know the people there

16 any longer. I think -- I think Dea would have still

17 been around in those days.

18 Q. Was it -- Was it counterpart from what was

19 then known as Illinois Department of Financial

20 Institutions?

21 A. I think I would have talked to some of

22 those -- to either Dea or some of her staff, but I spent

23 a lot of time with Tom James from the Illinois Attorney

24 General office.

25 Q. Are you familiar with a man named Phil Stein?

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Cross, Charles (Confidential) 4/9/2008 9:02:00 AM

 1 Does that name ring a bell?

 2 A. Yeah.

 3 Q. From Illinois DFI?

 4 A. Yeah, I know the name.

 5 Sorry.

 6 Q. Okay.

 7 Why don't we take a lunch break now.

 8 MS. MARTIN: Okay.

 9 THE VIDEOGRAPHER: We are now going off the

10 record in the continuing deposition of Charles Cross.

11 The time is now 12:20 p.m.

12 (Deposition recessed at 12:20 p.m. to be

13 reconvened at 1:30 p.m.)

14

15

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19

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21

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25

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Cross, Charles (Confidential) 4/9/2008 9:02:00 AM

 1 THE VIDEOGRAPHER: We are now back on the

 2 record in the continuing deposition of Charles Cross.

 3 The time is now 1:27 p.m.

 4 AFTERNOON SESSION

 5 1:27 P.M.

 6 --oOo--

 7 EXAMINATION RESUMED

 8 BY MR. BAKER:

 9 Q. Okay. Mr. Cross, I just want to ask you some

10 more questions about your report.

11 Now, in the preparation of your report, did

12 you approach the issue with a neutral view as to the

13 merits of these complaints?

14 A. In the preparation of the report?

15 Q. No, just -- Sorry, in evaluating these

16 complaints, did you take, initially, a neutral view?

17 A. Yes. The -- The reason I was qualifying is by

18 the time I was actually writing this report, it was no

19 longer a neutral position.

20 Q. Okay. And, earlier, I had asked you what was

21 the purpose of the report. If I could direct your

22 attention to page 28 of Exhibit 1, which is your

23 deposition, lines 17 through 23. And the question on

24 line 17 was: "When did you decide to do this expanded

25 report of examination?" The answer is: "I believe it

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Cross, Charles (Confidential) 4/9/2008 9:02:00 AM

 1 was in, I want to say, December of 2001 is when the

 2 director and myself agreed that we needed to further

 3 document our findings." Okay.

 4 And, by document the findings, you mean the

 5 findings that you were having with individual

 6 complaints?

 7 A. Yes. And, also, I believe the complaints were

 8 the driver, but, beyond that, we were starting to

 9 develop -- for lack of a better words -- theories about

10 the business practices of Household that were -- that

11 didn't comport with what we would expect from our

12 licensee, so the complaints were the driver, but it was

13 beyond the complaints.

14 Q. Okay. And as you further investigated and

15 looked at, for instance, Household's internal documents,

16 do those corroborate your theories?

17 A. Yes.

18 Q. Okay. And what specific theories were you

19 operating under at this point in time?

20 MR. SLOANE: What point in time?

21 MR. BAKER: In December of 2001.

22 A. I have to say, from -- would be the general --

23 generally, the theories that ended up in the report,

24 which were deception, misrepresentation, confusion,

25 up-selling borrowers unnecessarily. Those types of

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Cross, Charles (Confidential) 4/9/2008 9:02:00 AM

 1 things. But -- As a move towards, you know, producing

 2 the actual report, those became more -- more defined --

 3 became clearer and -- and more -- more precise, I guess,

 4 in the report.

 5 Q. (BY MR. BAKER:) What types of deception did

 6 you find that were being engaged in by Household?

 7 MR. SLOANE: Object to the form. Object to

 8 the form of the question, and, also, I think it goes

 9 beyond the scope of my examination, but -- Are you

10 asking him beyond the report or just the report?

11 MR. BAKER: Just in general. Just a general

12 question.

13 MR. SLOANE: Well, I object to that as beyond

14 the scope. If you're asking about the report, then

15 that's within the scope of my examination.

16 A. I can do this one or of two ways. I can give

17 a very incomplete recollection or I can flip through the

18 report and tell you what the report says.

19 Q. (BY MR. BAKER:) All right. Well, the

20 report -- the report, on page 43, starts talking about

21 some of the things that you found, so, if you want to

22 look at that and that will help you identify some of the

23 issues.

24 MR. SLOANE: I want to just caution the

25 witness, if what he's doing is reading from the report,

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Cross, Charles (Confidential) 4/9/2008 9:02:00 AM

 1 we all know what it says. If you're asking him does it

 2 refresh his recollection, that's another question. If

 3 you're asking him just to read it, I think that's a

 4 complete waste of all of our time.

 5 A. There -- There are these identified patterns

 6 of practice that are sort of fleshed out by the

 7 complaint history, starting, here, on page 43. One of

 8 them is misrepresentations of failed promises, next one

 9 is confusion over rates, points, and fees. So, that's

10 pretty consistent with what I said, generally, about the

11 sort of deception, misrepresentation, confusion kind of

12 thing.

13 These were all -- I -- I did a -- a bunch of

14 cases during my time with DFI and, just because of the

15 timing of things, not -- not really necessarily because

16 of anything else, but just because I happened to work

17 for an agency that -- that pushed the envelope on some

18 things -- we were out in front of a lot of people and --

19 on some of this kind of stuff, and I was becoming very

20 immersed in it, even ahead of a bunch of -- of other

21 states, and these are all -- These are what I would

22 identify as predatory practices that, at times, similar

23 to things I would see in other cases and -- and it

24 revolves around this general idea that -- that people

25 are being sold something that isn't what they think that

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Cross, Charles (Confidential) 4/9/2008 9:02:00 AM

 1 they're getting and -- and it very likely may not be in

 2 their best interest to get that product, but it's very

 3 much in the company's best interests to sell that

 4 product. That's sort of the big picture of it.

 5 Specifically, you get down to things like the

 6 prepayment penalties, the way the payments were sold,

 7 the amount of loans being sold. This case had a -- had

 8 a specific area of insurance packing that concerned us,

 9 which I don't remember finding insurance packing in any

10 company subsequent to this, but -- but, leading up to

11 this time, there were companies that -- that have been

12 doing some insurance packing, but I -- I think the

13 associates case that predated this one sort of scared

14 most people out of the business of insurance packing.

15 But, during this period of time, that was

16 still an area going on that -- that we had concerns

17 with, so -- You know, without reading the report, like

18 he said, those are the sort of general -- general areas.

19 Q. (BY MR. BAKER:) In -- In making a

20 determination that Household was engaged in insurance

21 packing, did you consider the insurance penetration

22 rates?

23 A. Yes. That was a -- That was a -- That was a

24 common thing that we did. In fact, that's -- I'm pretty

25 sure that's an area that -- that I had the other

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Cross, Charles (Confidential) 4/9/2008 9:02:00 AM

 1 examiners develop for me, because they were the experts

 2 in identifying insurance penetration for the office,

 3 and -- and I think I had some of them prepare the

 4 insurance penetration data for me that I used.

 5 Q. There's a section on page 48, Section 6.

 6 A. Oh, okay. Give me just a moment. I'll try to

 7 refresh myself with this.

 8 I remember some of this. There -- The

 9 insurance penetration was something that -- that was

10 done -- An analysis of insurance penetration was

11 something that was done with -- with most, if not all,

12 of the consumer loan company exams. And I don't want to

13 confuse you by consumer loans. That's the type of

14 license Household held even though what we were looking

15 at was primarily mortgage activity, it was a -- what was

16 called a consumer loan license, and companies that were

17 examined under that statute, it was pretty routine to

18 look at -- at insurance penetration to determine if --

19 if -- if we believed that the company was packing or

20 getting insurance into the transaction, either through

21 an overly convincing sales pitch or out-and-out

22 misrepresentation or deception to the consumer.

23 And this, I'm looking here, it was -- I

24 remember it being very high in some of the branches. It

25 says 92 to a hundred percent here. I mean, that's --

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Cross, Charles (Confidential) 4/9/2008 9:02:00 AM

 1 that's incredible. I mean, any time that we drift

 2 above, maybe, like 60 percent, we would -- I mean,

 3 alarms with red flags would start going off -- you know,

 4 we need to really look at this area -- where, here,

 5 we're -- you know, some cases almost every loan had --

 6 had -- had insurance. That's just extremely uncommon.

 7 When you talk to consumers about this

 8 insurance, it's very seldom that a consumer ever sits

 9 down and says, yeah, I -- I really wanted that and I

10 took it for a specific reason. Every now and then. In

11 this -- I have a recollection of a consumer, in this

12 case, that I believe did tell me he wanted the

13 insurance, but when I got into it further, I found out

14 he was too old to actually even use the insurance that

15 was sold to him. I think he could only be 65 or 70 and

16 he was already 72, yet, he had been sold this very

17 costly insurance that he thought he had that he could

18 never even actually use. So, we had a bunch of concerns

19 about this.

20 Q. One of the things that's noted, here, is the

21 second-to-last sentence says, "the department believes

22 that some of this penetration may have been achieved

23 through actual forgery of borrower signatures on

24 insurance acceptance documents." Do you see this

25 sentence?

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Cross, Charles (Confidential) 4/9/2008 9:02:00 AM

 1 A. Yes.

 2 Q. Why did the department have that belief?

 3 A. There was at least one consumer --

 4 MR. SLOANE: Object to the form of the

 5 question. You said the department had that belief.

 6 MR. BAKER: Yeah, that's what it says.

 7 MR. SLOANE: Object to the characterization of

 8 the department having any belief.

 9 A. When -- Although it's -- may not be the best

10 use of grammar, but -- and the agency examiners didn't

11 take ownership of the report, if you will. We didn't

12 say, "I believe this." It was the -- We spoke for the

13 department beliefs, and that's why it says, "department

14 believes," but if -- if you -- you know, if you drilled

15 back down, it would be me making these findings and

16 believing -- in conjunction with my -- my associates

17 there that are looking at this data with me, and so

18 forth.

19 But I remember there being a -- at least one

20 consumer, and could have been more, who claimed that in

21 no way was that their signature on the -- on the

22 documents, so -- That's where this came from.

23 Q. (BY MR. BAKER:) Okay. One of the factors

24 that you discussed -- discussed in this report, if I

25 could direct your attention to page 46, the prior page.

Household Page 129 - 132

 132 

Case 1:02-cv-05893 Document 1657-2 Filed 09/03/2009 Page 7 of 16
Cross, Charles (Confidential) 4/9/2008 9:02:00 AM

 1 And you're discussing concerns resulting from borrower

 2 confusion over biweekly and bimonthly programs. You see

 3 that in sort of the second full paragraph there?

 4 A. Yeah.

 5 Q. Are you familiar with the term effective rate

 6 or equivalent rate as used with respect to a biweekly

 7 payment program?

 8 A. Yes.

 9 Q. And did you identify a pattern of deceptive

10 practices at Household that used those terms?

11 A. I -- I believe so, yes.

12 Q. Okay.

13 And could you explain to -- to me what that

14 process was or what the deceptive practice was?

15 MR. SLOANE: Object to the form of the

16 question. You said a pattern at Household.

17 MR. BAKER: I did.

18 A. I was afraid you were going to ask me that,

19 because, as I remember, this is a fairly complex area of

20 the exam. But I will try to the best of my

21 recollection.

22 Q. (BY MR. BAKER:) Actually, you know what,

23 maybe I'll just see if I can help you out, here. You --

24 Let's see.

25 Here, let's mark this next in order.

Household Page 133 - 136

 133 

Cross, Charles (Confidential) 4/9/2008 9:02:00 AM

 1 (Cross Exhibit 10 was marked for

 2 identification.)

 3 (A discussion was held off the record.)

 4 MR. SLOANE: Is this about a specific customer

 5 that was referenced in the report, Cam?

 6 MR. BAKER: I believe they are in this report,

 7 actually --

 8 THE REPORTER: I'm sorry?

 9 MR. BAKER: I believe they are. I believe

10 they are.

11 MR. SLOANE: On that basis, go ahead.

12 Q. (BY MR. BAKER:) And, Mr. Cross, you see this

13 is a letter to you from Household?

14 A. Yes.

15 Q. Okay. And it relates to a specific complaint

16 from the -- the Johnstons. Do you see that?

17 A. Yes.

18 Q. Okay. And you would have reviewed this and

19 considered this in evaluating the complaint -- the

20 merits of the claim; is that right?

21 A. In relation to this -- yeah, Julian and Terry

22 Johnston complaint, yes.

23 Q. And is it fair to say it was part of your

24 regular business practices, during the time period we're

25 talking about, to evaluate complaints received from

Household Page 133 - 136

 134 

Cross, Charles (Confidential) 4/9/2008 9:02:00 AM

 1 borrowers?

 2 MR. SLOANE: Object to the question. Way

 3 beyond the scope of the exam -- direct examination.

 4 A. I think the answer is yes.

 5 Q. (BY MR. BAKER:) Okay.

 6 A. It -- I supervised this area and I had people

 7 handling -- We received about a thousand complaints a

 8 year, so, did I look at every complaint? At one time, I

 9 was the only guy looking at complaints, but you get into

10 this period of time and it took bigger cases like FAMCO

11 and Household for me to become involved in the

12 complaints.

13 Q. Okay.

14 A. But I approved every -- Every complaint

15 finding that ever went out went out under my approval,

16 but a lot of it was under sort of policy and procedure:

17 You do this in this situation.

18 Q. Okay. And if I direct your attention to the

19 second page of this document. There's a paragraph

20 starting, "Third". If you could read that to yourself.

21 A. Um-hum.

22 I've read it.

23 Q. Okay. And does that refresh your recollection

24 as to what the -- the biweekly effective rate deceptive

25 practice was?

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 135 

Cross, Charles (Confidential) 4/9/2008 9:02:00 AM

 1 A. A little bit. He -- Schneider, here, is

 2 referring to the equivalent rate. I think we talked a

 3 lot about the effective rate -- I can't remember, now,

 4 whether those terms are interchangeable or had some

 5 subtle nuances that were different among them.

 6 And, in general -- And there were a couple of

 7 variations or maybe more variations than the whole

 8 biweekly or bimonthly program. In general, what -- what

 9 we found was that when borrowers had a biweekly or

10 bimonthly payment plan, they would communicate to us

11 that -- that their rate was approximately half of what

12 we could see on the note was showing as their rate, and,

13 as we discussed this with them -- and, then, also would

14 look at the materials and the responses from the

15 company -- it became apparent to us that -- that this

16 whole -- there was a sales pitch that went with getting

17 the biweekly program, and that sales pitch was clearly

18 leading borrowers to believe that their rate was half of

19 what it really was.

20 Now, there's -- there's a whole ton of

21 discussion that ensued, that I'm sure went on for months

22 and months, about the meaning of effective, meaning of

23 equivalent, who meant what by what.

24 In the end, our finding was that this is what

25 borrowers carried away from -- from -- from the sales

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Case 1:02-cv-05893 Document 1657-2 Filed 09/03/2009 Page 8 of 16
Cross, Charles (Confidential) 4/9/2008 9:02:00 AM

 1 pitch. These guys were the professionals selling this

 2 loan program and -- in our -- In our regulatory world,

 3 under the concept by which we issued the company a

 4 license, they have an obligation not to mislead people,

 5 and we found that borrowers were entering the

 6 transaction believing that their rate was half of what

 7 it really was.

 8 Q. Okay. And did you determine that that was a

 9 deceptive practice?

10 A. Absolutely.

11 Q. Okay. In the report, here, it says -- I'm

12 reading from the -- looks like the second-to-last line

13 of this paragraph. It says, "The department has

14 identified the practice in other branches in Washington

15 and has even received reports from regulators in other

16 states concerning the practice." Do you see that?

17 A. What document are you on?

18 Q. I'm sorry, I'm on your Exhibit 3.

19 A. Okay. Page 46, still.

20 Q. Page 46. Yeah. The paragraph we're looking

21 at, this kind of inset.

22 A. That begins with --

23 Q. The Department.

24 A. The prime -- or --

25 Q. Yeah, borrowers have been informed.

Household Page 137 - 140

 137 

Cross, Charles (Confidential) 4/9/2008 9:02:00 AM

 1 A. Okay.

 2 Q. Okay.

 3 A. And then what -- You're looking at the last

 4 sentence that begins with department?

 5 Q. Yeah. Well, no, the second-to-last

 6 sentence --

 7 A. Got it.

 8 Q. -- that says, "However the department has

 9 identified"?

10 A. Yes, okay.

11 Q. Okay.

12 A. Okay.

13 Q. And other practices -- sorry, "the practice to

14 other branches in Washington and has even received

15 reports from regulators in other states concerning the

16 practice." Do you see that?

17 A. I do, yes.

18 Q. Okay. Do you recall how many other states

19 reported this practice? And if I could direct you to

20 page 89 of your deposition --

21 A. Okay.

22 Q. -- and your answer there.

23 A. I'm going to say, off the top of my head,

24 probable Minnesota and Georgia, but -- Okay. I'm on

25 page 89.

Household Page 137 - 140

 138 

Cross, Charles (Confidential) 4/9/2008 9:02:00 AM

 1 Q. Page 89, and question From Mr. Parlette:

 2 "Let's put back together. I believe you said the

 3 effective or equivalent interest rates sales program was

 4 found in several other states?"

 5 Answer: "I was told that."

 6 Question from Mr. Parlette: "Okay." Do you

 7 know how many other states" -- sorry, "Do you know how

 8 many states?"

 9 Objection from Mr. Dunne.

10 Answer: "No, I don't know how many, but I

11 know that I was told that by at least 15 to 20 states."

12 A. And I don't know how far back we have to go to

13 get this into appropriate context, but, first, this was

14 contemporaneous in time with -- with the events, so, I

15 stand by what was said there.

16 What I'm wondering, now, if we went back and

17 looked at the earlier context, if the 15 and -- 15 to 20

18 was not relevant to the multistate, then -- in other

19 words, not -- the 15 -- 15 to 20 may not have been

20 before this report was drafted.

21 Q. Okay.

22 A. Yet, the report was drafted, and -- and a lot

23 of discussions ensued after the report was drafted, and

24 that's when the 15 to 20 may have said, "Hey, us, too."

25 But -- I'd have to read a bunch of this to figure that

Household Page 137 - 140

 139 

Cross, Charles (Confidential) 4/9/2008 9:02:00 AM

 1 out, I think.

 2 Q. Okay. So, you're not sure when you -- when

 3 the timing of these 15 to 20 other states telling you

 4 when that occurred?

 5 A. Right.

 6 Q. It could have occurred before this report or

 7 could have occurred subsequent?

 8 A. Right.

 9 Q. Okay. But you're saying, to your knowledge,

10 this practice occurred between 15 and 20 other states?

11 MR. SLOANE: Objection to form of the

12 question.

13 Q. (BY MR. BAKER:) In addition to Washington?

14 MR. SLOANE: That's not what he said. He said

15 he had been told something. He didn't know whether it

16 occurred. How would he know?

17 Q. (BY MR. BAKER:) You can answer the question.

18 A. I would say I was told. I did not -- I don't

19 know that I -- that I personally investigated materials

20 from other states; although, it's quite possible that --

21 We came together on several occasions and discussed

22 things and -- and looked at stuff, so, but -- but it is

23 most accurate to say that I was told that by 15 to 20

24 states.

25 Q. Okay. Earlier in this deposition, you

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 140 

Case 1:02-cv-05893 Document 1657-2 Filed 09/03/2009 Page 9 of 16
Cross, Charles (Confidential) 4/9/2008 9:02:00 AM

 1 referred to some meetings that were held with other

 2 state regulatory agencies in Washington in January and

 3 February of 2002. Maybe January, March of 2002. Do you

 4 recall those meetings?

 5 A. Vaguely.

 6 Q. Okay. And were the findings that are -- that

 7 you were looking at at the complaints discussed with

 8 other regulatory agencies at that time?

 9 MR. SLOANE: Object to the question. Way

10 beyond the scope of my direct examination.

11 A. Yes.

12 Q. (BY MR. BAKER:) Okay. And were those other

13 regulatory agencies finding similar patterns of

14 misconduct by Household?

15 MR. SLOANE: Object to the form of the

16 question. Well beyond the scope of my examination or

17 the proper scope of -- of a fact witness.

18 A. I don't know if all of them were, but some of

19 them were finding this. And their -- In the earlier

20 periods of time, some states were very interested and

21 began to look more completely later, so, Washington did

22 some triggering of other states to look into things that

23 maybe they hadn't looked into before. So, I can't tell

24 you exactly at what moment in time they would have

25 necessarily seen certain things.

Household Page 141 - 144

 141 

Cross, Charles (Confidential) 4/9/2008 9:02:00 AM

 1 Q. (BY MR. BAKER:) Are you familiar with a man

 2 named Dan Gallatin?

 3 A. Yes.

 4 Q. Okay. And did Mr. Gallatin work at the

 5 Minnesota Department of Commerce?

 6 A. He did.

 7 Q. And did he exchange information with you about

 8 what he was finding in the state of Minnesota?

 9 MR. SLOANE: Object to the question, again.

10 Well beyond the scope of the direct examination.

11 A. There were three examiners -- me, Dan

12 Gallatin, Tony Polidori -- representing three different

13 states who provided all of the technical support to what

14 became the big multistate case. So, Dan and -- and Tony

15 and -- and me, we all -- we all worked together very

16 closely. We analyzed a lot of documentation from -- We

17 were the guys that were charged with analyzing all the

18 documentation that was coming in from all of the states

19 into this multistate. So, yeah, we spent a lot of time

20 exchanging information, exchanging documents, looking at

21 spreadsheets, that kind of thing.

22 Q. (BY MR. BAKER:) And where is Mr. Polidori

23 from?

24 A. Idaho.

25 Q. Idaho, okay.

Household Page 141 - 144

 142 

Cross, Charles (Confidential) 4/9/2008 9:02:00 AM

 1 In your deposition, you referenced a Ben Bruce

 2 from New York.

 3 A. Yes, he would be with -- with New York

 4 Attorney General. He was an assistant attorney general.

 5 Q. I see.

 6 And there was an Ann Gaultney referenced from

 7 Michigan.

 8 A. She was Mark Thompson's equivalent in the

 9 State of Michigan. She would be the equivalent -- I

10 don't know if the title is the same, but basically an

11 assistant commissioner, I think, in Michigan. We call

12 them directors here, but --

13 Q. Was she also involved in the technical side of

14 evaluating the scope of misconduct by Household?

15 A. A little bit. She was a little bit above that

16 level. I think she might have loaned some of her people

17 to us, some point in time. She definitely -- And

18 definitely had the ability to discuss at those levels.

19 I can't remember her necessarily getting her hands so

20 dirty with the numbers.

21 Q. Okay. Was Michigan one of the states that was

22 reporting finding effective rate presentations in their

23 state?

24 MR. SLOANE: Objection. Way beyond the scope

25 of the direct examination.

Household Page 141 - 144

 143 

Cross, Charles (Confidential) 4/9/2008 9:02:00 AM

 1 A. I can't remember.

 2 Q. (BY MR. BAKER:) Okay. If your prior

 3 deposition said that she was, would that be consistent?

 4 A. Then I would say she was.

 5 Q. She was, okay.

 6 A. Or they were, sorry.

 7 Q. All right. And the same thing would be true

 8 with Mr. Bruce?

 9 A. Yes. Keeping in mind that -- that Ben was not

10 a regulator. He was an assistant attorney general.

11 Q. Okay. Okay.

12 You testified earlier about deceptive

13 practices with respect to prepayment penalty by

14 Household. There's a reference in this report. Can you

15 tell me what you recall about the -- the prepayment

16 penalty deceptions?

17 A. Some of it.

18 Q. Yes.

19 A. Okay. As I would interview borrowers, they

20 would tell me they didn't know that they had a

21 prepayment penalty and they were, at times, confused

22 about the fact that they had a prepayment penalty.

23 And -- And that was definitely a discussion among the

24 different states.

25 In fact, I'm pretty confident, here, now,

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Case 1:02-cv-05893 Document 1657-2 Filed 09/03/2009 Page 10 of 16
Cross, Charles (Confidential) 4/9/2008 9:02:00 AM

 1 years later, that New York was the only state that did

 2 not have that issue. And this actually came to light

 3 during the case. And the reason was New York had a

 4 specific law saying you could not have prepayment

 5 penalties, so, New York came into the case saying,

 6 "Well, we don't see that in our state." It's because

 7 prepayment penalties were completely disallowed, so

 8 there's no reason to try to deceive somebody or

 9 misrepresent that a prepayment penalty existed.

10 But all the other states, that was a very big

11 point that was discussed over and over and over.

12 Q. And was there consensus within the group that

13 Household was engaged in deceptive practices with

14 respect to their prepayment penalties?

15 MR. SLOANE: Objection to the form of

16 question. What do you mean by the group?

17 MR. BAKER: The group that you're talking

18 about now.

19 MR. SLOANE: I'm lost on what group.

20 MR. BAKER: He's talking --

21 Q. (BY MR. BAKER:) You're talking about, if I

22 understand, there's a group of you -- some are attorneys

23 general, some are -- you are regulators -- who are

24 talking about these practices, and I'm wondering if you

25 reached a consensus that Household is engaged in

Household Page 145 - 148

 145 

Cross, Charles (Confidential) 4/9/2008 9:02:00 AM

 1 deceptive practices with respect to prepayment penalties

 2 in all the states that you are representing.

 3 MR. SLOANE: Objection. Mischaracterizes his

 4 testimony, but it's way beyond the scope of the direct

 5 examination.

 6 A. The group grew to about 40 states, I believe,

 7 with time, and, yes, we had -- I remember two physical

 8 meetings we were all in the same room. The first

 9 meeting, I think there were about 25 states, and then

10 the next meeting grew to about 40 states, and we very

11 much -- with the exception of New York, who wanted to

12 stay away from the prepayment penalty issue, because

13 they didn't have prepayment penalties in their state,

14 every other state was saying, "This is a major issue in

15 our state and it's an issue we have to have resolution

16 of in this case."

17 Q. (BY MR. BAKER:) One of the other things that

18 you talk about in your report that we haven't touched

19 upon has to do with the GFEs in the -- quote, unquote --

20 buydown or discount points. Do you recall that?

21 A. Yes.

22 Q. Okay. What can you tell me about that

23 particular practice?

24 A. There were -- There were two -- I believe

25 there were two deceptions that I cited revolving around

Household Page 145 - 148

 146 

Cross, Charles (Confidential) 4/9/2008 9:02:00 AM

 1 the discount points, in this case. One was whether the

 2 discount points were what I would call bona fide -- did

 3 they actually have an effect of buying the rate down --

 4 and the second was the disclosure on the Good Faith

 5 Estimate of a range of discount points, which typically

 6 began at zero and went up somewhere -- anywhere from

 7 maybe six, seven thousand up to maybe, like, ten or 11

 8 thousand. It was -- It would just be showing, in the

 9 Good Faith Estimate, zero to this larger number.

10 But, in the cases I reviewed, consistently,

11 the borrowers paid at the very top of that number. Yet,

12 the borrowers were telling us that the loan originator

13 said they would be at the bottom. They would get

14 essentially a -- a very low-cost or no-cost loan. So --

15 Deception -- To reverse those, deception, first, around

16 what was disclosed to the borrower, making the borrower

17 believe that it could be as low as zero, and it

18 virtually never was, in -- in our investigation, and

19 then, once discount points were actually paid, they

20 didn't seem to have any affect in moving the rate down

21 any, which would be your natural assumption, is that --

22 and based on some documentation produced by Household,

23 some tables that showed that there was an inverse

24 relationship between points and rate. You would assume

25 that, but that was not what we found.

Household Page 145 - 148

 147 

Cross, Charles (Confidential) 4/9/2008 9:02:00 AM

 1 Q. Okay. Was that also the subject of

 2 discussions within the -- you mind if I call it the AG

 3 group?

 4 A. That's fine. Yes.

 5 Q. Yeah, was it?

 6 MR. SLOANE: Objection. Well, beyond the

 7 scope of my examination.

 8 Q. (BY MR. BAKER:) And was there a consensus

 9 reached within that group that Household was engaged in

10 deceptive practices throughout those states?

11 MR. SLOANE: Objection.

12 Q. (BY MR. BAKER:) With respect to the discount

13 points and the GFE disclosures?

14 MR. SLOANE: Cam, you keep spending time on

15 this. It's well beyond the scope of my examination.

16 It's not even close. What is --

17 MR. BAKER: Peter, you know that's the most

18 ridiculous objection. Why don't you read the rule, the

19 Federal Rules of Civil Procedure. And I'm entitled to

20 ask any question. There's no limitation on the scope of

21 an examination at the deposition. Not only that --

22 MR. SLOANE: Excuse me. Fact discovery is

23 over. It's been over for months. Has nothing to do

24 with the Federal Rules of -- of --

25 MR. BAKER: Civil Procedure.

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Case 1:02-cv-05893 Document 1657-2 Filed 09/03/2009 Page 11 of 16
Cross, Charles (Confidential) 4/9/2008 9:02:00 AM

 1 MR. SLOANE: -- Civil Procedure. Has to do

 2 with the rules set forth by the magistrate judge in this

 3 case. This is not your fact deposition.

 4 MR. BAKER: We've noticed the deposition.

 5 Q. (BY MR. BAKER:) But, anyway, do you recall

 6 the question?

 7 MR. SLOANE: Is that -- Is that pursuant --

 8 Just so I understand your position, your questions are

 9 now being asked pursuant to your noticed deposition?

10 MR. BAKER: They could be or they could be

11 asked in response.

12 MR. SLOANE: I want a position on it.

13 MR. BAKER: I'm both. I'm taking both.

14 MR. SLOANE: You're saying it's proper, A,

15 and, B, it's within the scope of your notice; is that

16 what you're saying?

17 MR. BAKER: I'm saying both.

18 MR. SLOANE: Okay.

19 MR. BAKER: And I don't want to waste any more

20 time on this.

21 MR. SLOANE: Excuse me, I -- I made my point.

22 I just want to know what yours was.

23 A. I think my answer's yes.

24 MR. BAKER: Okay.

25 A. But you might want to be precise in the

Household Page 149 - 152

 149 

Cross, Charles (Confidential) 4/9/2008 9:02:00 AM

 1 question.

 2 MR. SLOANE: He doesn't want to be precise.

 3 MR. BAKER: I do.

 4 Q. (BY MR. BAKER:) I want to make sure -- The

 5 question I want to know is: Was there a consensus

 6 reached, within the AG group, that Household was engaged

 7 in deceptive practices with respect to the disclosures

 8 of -- on GFEs and the -- quote, unquote -- buydown

 9 discount points that you discussed?

10 MR. SLOANE: Same -- Sorry, same objection.

11 A. My recollection is that it was 100 percent,

12 so, we -- Yes, a consensus.

13 Q. (BY MR. BAKER:) Okay. Now, in your

14 deposition, on page 132, which is Cross Exhibit 1,

15 there's a reference -- if you go to page, again, 132.

16 A. I'll have to catch up with you here.

17 Q. That's okay.

18 A. I'm sorry --

19 Q. Page 132.

20 A. Got the wrong -- Got the wrong exhibit, sorry.

21 132. Okay. What line?

22 Q. So, on page 132, if I could direct your

23 attention to the question and answer starting on lines

24 13. And there's a -- The answer was: "Household

25 maintained for, I don't know, two, two and a half years,

Household Page 149 - 152

 150 

Cross, Charles (Confidential) 4/9/2008 9:02:00 AM

 1 that they had a safe harbor under RESPA that allowed

 2 them to disclose the range of discount points in the

 3 Good Faith Estimate in the fashion in which they

 4 disclosed those points," period. You see that?

 5 A. Um-hum.

 6 Q. And it says that this issue has kind of been

 7 going back and forth with them since late 1999.

 8 A. Yes.

 9 Q. Okay. Who, at Household, was maintaining

10 that? Who told you that they had a safe harbor?

11 A. I don't remember. I -- It would be --

12 Q. Mr. Schneider?

13 A. Mr. Schneider.

14 We had a lot of correspondence revolving

15 around the complaints where I think we were raising this

16 concern, but -- there -- there's a -- there was a woman

17 with Household who was something like assistant general

18 counsel, and I can't remember her name, now, and I think

19 we had a lot of arguments with her about this topic.

20 Q. Okay.

21 And according to your -- It goes on. You said

22 that you asked HUD for an opinion letter?

23 A. Yes.

24 Q. Okay. And let me just show you a document.

25 (A discussion was held off the record.)

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Cross, Charles (Confidential) 4/9/2008 9:02:00 AM

 1 MR. SLOANE: Would you give us the date of the

 2 document?

 3 MR. BAKER: It looks like it's -- it doesn't

 4 actually have a -- it's like July 5th, 2002.

 5 MR. SLOANE: That's the date.

 6 Q. (BY MR. BAKER:) And I just want to know, is

 7 this a copy of the letter that you received back from

 8 HUD?

 9 MS. MARTIN: I need one.

10 A. Yes.

11 MS. MARTIN: Sorry, thank you.

12 MR. BAKER: Okay. And this is Cross

13 Exhibit 11?

14 (Cross Exhibit 11 was marked for

15 identification.)

16 Q. (BY MR. BAKER:) Did you ever show this

17 letter -- Sorry, did you ever show this letter to

18 Household?

19 A. Yes.

20 MR. SLOANE: Objection. Beyond the scope.

21 A. Yes, I did.

22 Q. (BY MR. BAKER:) And what was their response?

23 A. It's one of my favorite points in history. I

24 remember handing this in -- it was in our first -- first

25 large meeting of -- of negotiated settlements and we

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Case 1:02-cv-05893 Document 1657-2 Filed 09/03/2009 Page 12 of 16
Cross, Charles (Confidential) 4/9/2008 9:02:00 AM

 1 MR. SLOANE: Objection. Way beyond the scope.

 2 A. Most of it was -- was information we extracted

 3 from Household, their own data.

 4 Q. (BY MR. BAKER:) Okay. And, to the best of

 5 your knowledge, were your ac -- were your statements of

 6 the harms caused by the specific practices reasonable?

 7 MR. SLOANE: Objection. Way beyond the scope.

 8 A. As I remember it, our estimates were generally

 9 higher than the assistant AGs would pull us down to.

10 Q. (BY MR. BAKER:) Okay. So, the numbers that

11 we'll see reflected in this particular document -- for

12 example, point you to page four. On the top of it, it

13 says, "The states" proposed that -- "proposed that the

14 remedy for loan splitting is to refund or credit fees

15 and points on the second loan. From the information

16 supplied, the aggregate value of that is estimated to

17 be" -- looks like $27,652,547.

18 MR. SLOANE: Objection. Beyond the scope.

19 Q. (BY MR. BAKER:) Do you see that?

20 A. Yes.

21 Q. So, you're saying that your estimate, in all

22 likelihood, to the best of your recollection, would have

23 been higher than this amount here?

24 A. I can't say on this specific one. This is the

25 piggy-backs, I think.

Household Page 157 - 160

 157 

Cross, Charles (Confidential) 4/9/2008 9:02:00 AM

 1 Q. Yeah.

 2 A. I can't say on -- on this specific one that

 3 that's -- The one that really stands out in my mind is

 4 we felt that the discount points amounted to as much as

 5 $1.2 million -- $1.2 billion in -- at harm to consumers,

 6 yet the AGs consistently argued with us, you know, we

 7 got to move down -- we can't -- we can't use that

 8 number. We got to move down from that number. I think,

 9 at one point, we were -- were saying 800 million to

10 1.2 billion. So, that was the number I really remember.

11 It's the largest dollar amount in the case that -- that

12 we were trying to hold -- the regulators were trying to

13 hold the upper end on.

14 Q. Do you know if that $1.2 billion discount

15 points was ever communicated to Household?

16 MR. SLOANE: Objection. Beyond the scope.

17 A. Yeah, it was discussed.

18 Q. (BY MR. BAKER:) Okay. Approximately what

19 date?

20 A. July to August of -- probably July of 2002.

21 Q. Do you want to add some more?

22 A. Communicated, there was a lot of screaming

23 going on. You know, at times, as we discussed numbers,

24 you know, very forcefully, you know, dollar amounts

25 would be yelled back and forth across the table. So, I

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Cross, Charles (Confidential) 4/9/2008 9:02:00 AM

 1 don't know if we ever drafted a document that contained

 2 1.2 billion, but I know that, on more than one occasion,

 3 I -- I would become flabbergasted at the amounts that we

 4 were arguing over, and then I would point out, very

 5 strongly, we're talking about much bigger dollar

 6 amounts, here, than, you know, what you're willing to

 7 talk about.

 8 Q. Okay. Did you find any practice or pattern

 9 where Household would maximize the amount of a loan that

10 was given to the -- Sorry. See if I could do this --

11 that would maximize the loan amount that was given to

12 the borrower?

13 MR. SLOANE: Are you talking about in

14 connection with his preparation of his report?

15 MR. BAKER: I'm going back -- I'm going back

16 to your report.

17 MR. SLOANE: Okay.

18 A. I believe I referred to that as up-selling.

19 Q. (BY MR. BAKER:) Okay.

20 A. And, yeah, it was one of the -- one of the

21 practices that caused us concern.

22 Q. Okay. Just one other question, going back to

23 Exhibit 12. Were the numbers that you were talking

24 about -- were those discussed prior to the submission of

25 this document to Household?

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 1 A. Yes.

 2 MR. SLOANE: Objection. Again, beyond the

 3 scope.

 4 Q. (BY MR. BAKER:) All right. As part of your

 5 preparation of this report, did you consider the impacts

 6 of Household's branch compensation record?

 7 MS. MARTIN: I'm sorry, when you mean -- when

 8 you say this report, do you mean --

 9 MR. BAKER: I'm sorry, Exhibit 3.

10 MS. MARTIN: Okay. Thank you.

11 A. I know that we gave a lot of attention to

12 branch -- or employee compensation. The timing of that

13 I'm not absolutely certain on, whether I was aware of

14 compensation or specific compensation plans prior to

15 drafting the report or if it was subsequent to drafting

16 the report.

17 Q. (BY MR. BAKER:) Okay. Well, if I could

18 direct your attention to page 111 of your report.

19 A. My report or the deposition?

20 Q. Sorry, the deposition. Getting me confused.

21 MS. MARTIN: Sorry, it's all my fault, here.

22 MR. BAKER: I don't think so.

23 Yeah, Cross Exhibit 1.

24 Q. (BY MR. BAKER:) Question is on line five and

25 the answer starts on line nine.

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Cross, Charles (Confidential) 4/9/2008 9:02:00 AM

 1 And your answer was: "Well, I know that the

 2 compensation for originating or closing loans with

 3 insurance was a significant amount to the loan officer's

 4 commission, so it would just have to be my opinion that

 5 heavy compensation claims can lead towards the" -- dash

 6 -- "obviously it would be an incentive for" any --

 7 "somebody" -- dash -- "could be an incentive for

 8 somebody to do something they wouldn't do if that

 9 incentive wasn't there." Is that your testimony?

10 A. That's a statement I made at that time.

11 Q. And, to the best of your knowledge, it's an

12 accurate statement?

13 A. Yep.

14 MR. SLOANE: You didn't read the whole answer,

15 of course, which says, "Whether I can say" that -- "that

16 some loan officer, you know, followed the incentive,"

17 but I am sure the witness can read the whole sentence.

18 Q. (BY MR. BAKER:) Did you find, based on your

19 review of complaints in the state of Washington, that

20 Household was engaging in a practice of equity

21 stripping?

22 A. Yes. Although equity stripping wasn't --

23 wasn't --

24 Q. Wasn't a term you used?

25 A. That's more of an AG term than a -- than a

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Cross, Charles (Confidential) 4/9/2008 9:02:00 AM

 1 regulator term. But -- But, yeah, definitely eating up

 2 the borrower's equity, the equity in their property,

 3 through up-selling loan and layering on fees,

 4 definitely. That eats up equity. Equity stripping as a

 5 specific legal -- that's -- There's a legal definition

 6 of that in the state of Washington and there's a whole

 7 law revolving around that that wasn't under our

 8 jurisdiction. It was under the AG's jurisdiction. So,

 9 I had tendency, I think, to stay away from that specific

10 term, equity stripping, but the AGs talked about it a

11 lot.

12 MR. BAKER: Let's mark one more document,

13 here.

14 (Cross Exhibit 13 was marked for

15 identification.)

16 (A discussion was held off the record.)

17 Q. (BY MR. BAKER:) We're going to have to work

18 our way around it. This document has a lot of

19 handwriting on it, but I'm not going to represent it's

20 yours. But if you turn in a couple pages, you'll see

21 there's a memo to you from Patrick Hardman.

22 A. Yes.

23 Q. And it's dated May 17th, 2001.

24 A. Yes.

25 Q. And, thereafter, there is various pages of

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 1 this, and it appears that Mr. Hardman has summarized

 2 complaints that are -- that were then pending relating

 3 to Household. Do you see that?

 4 A. Yes.

 5 Q. Okay. And was it part of Mr. Hardman's

 6 responsibilities, as a financial examiner, to prepare

 7 memorandums like this for you?

 8 A. Yes, we hold -- we held weekly meetings of

 9 the -- of the enforcement staff and -- and I remember

10 assigning to Patrick the job of starting to report to me

11 on -- on -- on the complaint volume and activity with

12 Household and Beneficial, so that I could start to get

13 my mind around what was going on with the company.

14 My -- My staff had -- My staff had been

15 complaining for quite some time that not only had the

16 complaints been increasing, but their interaction with

17 the company had -- had become more and more adversarial.

18 So, we -- So, I can remember asking Patrick, you know,

19 Start -- "start monitoring this for me," and this would

20 be one of the reports that we would have done that.

21 Q. Do you know why this particular document was

22 shared with Household?

23 A. I didn't -- I don't know that I knew that it

24 was.

25 Q. Okay.

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 1 A. They -- Maybe it was through -- I can't

 2 remember if there was discovery in this case or not. I

 3 don't know if I shared -- I don't think I shared it with

 4 them.

 5 Q. This one has some -- some fax lines -- it

 6 looks like it was shared, faxed back and forth in May of

 7 2001, which is near the date of this document.

 8 A. Let me just kind of look at these fax headers

 9 for a second.

10 Hum. I can sort of see a number that -- that

11 could have been a DFI fax number: 360-705, maybe 4154.

12 Q. Right.

13 A. I don't know that that was a DFI fax number.

14 Could have been an AG's fax number. I don't know.

15 Q. It's sent to Tom Echols.

16 A. Wow, you know what? Yeah, I bet you --

17 hypothesizing, here -- that Mark Thompson sent this to

18 Tom Echols. Tom and Mark had a very close relationship.

19 Q. Okay.

20 A. And, I don't know, some of this is starting to

21 gel for me a little bit. Mark and Tom were talking a

22 whole lot. This is back in 2001 still.

23 Q. Um-hum.

24 A. And Tom was the -- the representative for

25 Household in Washington State. We had an excellent

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Cross, Charles (Confidential) 4/9/2008 9:02:00 AM

 1 Q. We're here on -- We're here on -- on May 23rd,

 2 2002. There's a discussion. Someone from your side

 3 mentions, "By the way, there's a multistate interest."

 4 Was there any discussion between you and Household about

 5 the next step to resolve the multistate interest in this

 6 issue?

 7 A. I believe -- I believe we --

 8 MR. SLOANE: Objection. Same objection.

 9 Sorry, Chuck.

10 A. I believe we hypothesized about that, but we,

11 of course, could not make any statements for what other

12 states would do. But I -- But we hy -- we hypothesized

13 about the potential outcome if -- if things had to go,

14 you know, to a more aggressive level.

15 Q. (BY MR. BAKER:) Was there any discussion at

16 this meeting, to your knowledge, about a potential

17 settlement between AGs and the multistate group and

18 Household?

19 A. I don't remember.

20 Q. Okay.

21 Why don't we take a short break.

22 MR. SLOANE: Yeah.

23 THE VIDEOGRAPHER: We are now going off the

24 record in the continuing deposition of Charles Cross.

25 This is the end of tape two. Time is now 2:28 p.m.

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 1 (Off the record at 2:28 p.m.)

 2 (Back on the record at 2:41 p.m.)

 3 THE VIDEOGRAPHER: We are now back on the

 4 record in the continuing deposition of Charles Cross.

 5 This is the beginning of disk three. The time is now

 6 2:41 p.m.

 7 Q. (BY MR. BAKER:) Earlier, you testified that

 8 you, Mr. Gallatin, Mr. Polidori were reviewing documents

 9 in the context of the AG settlement discussions -- I

10 believe that's correct; is that right?

11 A. Yes.

12 MR. SLOANE: Objection. Objection. Well,

13 beyond the scope.

14 A. Yes, and even more data than documents.

15 Q. (BY MR. BAKER:) Okay.

16 A. The AGs began to spend a lot of time with

17 documents. We spent a lot of time with data.

18 Q. Did you ever personally review any complaints

19 received from consumers in other states about

20 Household's practices?

21 MR. SLOANE: Objection. Well beyond the

22 scope.

23 A. I don't remember.

24 Q. (BY MR. BAKER:) Okay. Were the documents and

25 materials you received with respect to Household's

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Cross, Charles (Confidential) 4/9/2008 9:02:00 AM

 1 practice in other states consistent with what -- with

 2 the findings that you made in Exhibit 3?

 3 MR. SLOANE: Same objection.

 4 A. Much -- Much of what the other states found

 5 and produced in our, you know, exchange of materials,

 6 and so forth, was consistent with what we found in

 7 Washington.

 8 Q. (BY MR. BAKER:) Okay.

 9 And, in terms of the AG, you're familiar with

10 the fact that there was actually a settlement between

11 Household and the multistate group; is that right?

12 MR. SLOANE: Same objection: Well beyond the

13 scope.

14 A. Yes.

15 Q. (BY MR. BAKER:) Okay. When, to your

16 knowledge, did that agreement come into fruition?

17 MR. SLOANE: Same objection. Also object to

18 the form of the question.

19 A. On my birthday, October 2nd, 2002.

20 Q. (BY MR. BAKER:) Okay. Why didn't DFI get to

21 the point of filing charges based on the apparent

22 violations found in your DFI report that's Exhibit 3?

23 A. Two reasons. The -- Well, maybe three

24 reasons.

25 When we started down the multistate path, we

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Cross, Charles (Confidential) 4/9/2008 9:02:00 AM

 1 were at least committing ourselves, in intent and

 2 theory, to try to -- to try to stick with that, being in

 3 solidarity with other states and bring a large

 4 resolution for the entire country.

 5 You have to remember, there were only --

 6 There -- There weren't 50 states that were -- that were

 7 carrying this thing. There were a handful of states

 8 carrying the 50 states -- and that's how the multistates

 9 work. You sort of take turns carrying the load. So --

10 And there were a lot of states that ended up in the

11 settlement and they just sort of signed on at the end

12 and they just rode on our coattails right on out through

13 the settlement, and said, "Whatever they say, we --

14 that's good for us."

15 So, we had this -- this allegiance to other

16 states holding that -- that together. Although,

17 Washington was always extremely aggressive, so was

18 Minnesota, New York, some other states, extremely

19 aggressive in saying -- threatening, at various points

20 in time, to pull out and actually file charges. So, we

21 always retained that right and authority to file

22 charges, but we had a commitment to the multistate. We

23 thought we had a good chance of getting as much for

24 Washington consumers out of the multistate as we could

25 if we went on our own.

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Cross, Charles (Confidential) 4/9/2008 9:02:00 AM

 1 So, there was incentive. So, we could get

 2 something for everybody plus us, equivalent to what we

 3 probably could get if we went on our own. And then

 4 there's the whole resource issue -- I mean, in reality,

 5 it would have been five years of -- of our agency's

 6 life, very ugly -- you know, this stuff would have gone

 7 on for -- for five years and it would have been a huge

 8 resource drain and that's -- that's much of the reason

 9 why you settle.

10 Q. Okay. A lot of -- of -- Household produced a

11 lot of documents to show that they were in compliance

12 with the various federal and state laws, including loan

13 documents signed by borrowers.

14 MR. SLOANE: You talking about in connection

15 with his report?

16 MR. BAKER: Yeah.

17 MR. SLOANE: In other words --

18 MR. BAKER: He considered that.

19 Q. (BY MR. BAKER:) You considered that as part

20 of -- and -- and found that, despite that, that there

21 was deceptive practices taking place; is that right?

22 A. Yes.

23 Q. Okay. Why didn't you find -- Why didn't you

24 rely upon the loan documents that Household was

25 producing to determine that there was, in fact,

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 1 compliance?

 2 A. In the early days, I think we did. In the

 3 very early days of complaints coming in -- and if I

 4 could roll the clock back, I would -- but, in the early

 5 days, the company's arguments had been somewhat

 6 convincing for us, and I think that we -- we had a

 7 little bit of trouble coming to grips with what the

 8 consumers were telling us. It didn't -- It didn't make

 9 sense, early on, that this would be happening, that --

10 that a -- such a big company, such a well-structured,

11 well-organized, well-funded company, would be doing

12 these things to consumers. It didn't -- didn't make a

13 lot of sense. But, over a period of time, we -- we --

14 we changed our belief on that.

15 So, in the early days, there were documents

16 that were coming in. Company would -- would send us the

17 disclosures from their files, or whatever, and we'd look

18 at them and say, "Ah, well, consumer must have," you

19 know, "ignored them," or, "Maybe a consumer isn't

20 telling the full story," or whatever, and we would -- we

21 would largely discount the consumer and -- and close out

22 the complaint.

23 We reached a tipping point where we just, for

24 lack of a better description, sort of stood around,

25 looking at each other, saying, you know, at some point,

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Cross, Charles (Confidential) 4/9/2008 9:02:00 AM

 1 you know, we're having trouble believing this any

 2 longer, the answers we were getting. And, so, there

 3 became -- There was a point in time -- late 2001, early

 4 2002 -- where we felt we were getting a lot of

 5 disinformation from the company, a lot of -- We were --

 6 We were extremely unhappy with the response we were

 7 getting from the company. We stopped trusting the

 8 response. And we started more and more believing what

 9 we saw from the consumers, what the consumers were

10 telling us.

11 Documentation is one part of a case, and

12 regulators do have a tendency to sort of get blinders

13 on, saying, "Well, it's in the file. It must be true.

14 Hey, it came out of a computer. It's there. Somebody

15 must have gotten it." But you hear enough stories about

16 consumers saying, "I never saw it," or, "That's not how

17 it was explained to me," and so forth, and you start to

18 change your mind over time.

19 That's how all these predatory lending cases

20 come about. If you -- you take almost any predatory

21 lending case, that I can think of, and you go back to

22 the start of time, the regulators were not saying, you

23 know, consumers were harmed, here. It always kind of

24 starts off with not really believing that what people

25 are saying is it, and then you -- it grabs traction with

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Cross, Charles (Confidential) 4/9/2008 9:02:00 AM

 1 time and your -- your mind has changed.

 2 And it was no different with this case, so --

 3 So, we reached a point where -- where the

 4 relationship seemed to be so disingenuous that -- it was

 5 almost like stuff was being fabricated to convince us,

 6 and we didn't believe it any longer.

 7 Q. Did your experience with FAMCO have anything

 8 to do with it? In other words where -- where the paper

 9 files looked clean, but, in fact, there were deceptive

10 practices taking place?

11 A. FAMCO had nothing to do with our impression of

12 Household. Household was completely responsible for our

13 impression of Household. FAMCO educated us to learn how

14 to look beyond what was being said and FAMCO -- The

15 earlier complaints I was talking about where we didn't

16 maybe believe the consumers as much as we should have,

17 that was -- that was -- those complaints go back to the

18 early days of FAMCO, before we started to learn more

19 about how deception could take place, misrepresentation

20 could take place, how people could be trained to lie

21 with the truth, and all of these -- these sales

22 practices that we hadn't -- I came out of the banking

23 world. That kind of stuff didn't really take place in

24 the banking world. And, so, I had to be educated.

25 So, FAMCO educated me, educated the

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