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Associates Legacy Put To Rest

$215 million Citigroup settlement largest ever with FTC

September 20, 2002


Citigroup has settled charges of abusive lending at its finance unit with the Federal Trade Commission (FTC), resulting in one of the largest consumer protection settlements in history.

According to an announcement from the FTC, Citigroup Inc. will pay $215 million to resolve charges that Associates -- a subprime finance company acquired in 2000 and integrated into CitiFinancial -- engaged in systematic and widespread deceptive and abusive lending practices. The settlement, which is contingent on approval of the federal district court in Atlanta and approval of a related settlement in a class action lawsuit currently pending in California, would be the largest consumer protection settlement in FTC history, the FTC said.

Earlier this month, Citigroup was rumored to be close to a deal with the FTC.

"The Commission will not tolerate the fleecing of subprime borrowers through deceptive lending practices such as the packing of unwanted credit insurance on consumers' loans," said FTC Chairman Timothy J. Muris. "As a result of this settlement, as many as two million consumers will receive significant monetary relief in the form of cash refunds or reduced loan balances."

The FTC originally filed the suit in March 2001. In its complaint, the FTC charged The Associates with "packing" insurance -- or using deceptive practices designed to induce borrowers unknowingly to purchase optional credit insurance products.

"We are pleased to resolve the FTC's lawsuit regarding past lending practices of the Associates and appreciate its recognition of our efforts to raise consumer lending standards," said Citigroup president Robert B. Willumstad. "When we bought Associates we found certain unacceptable practices that needed to be changed."

If approved, the settlement proceeds will be used to provide $215 million in redress to consumers who bought credit insurance in connection with loans made by The Associates between December 1, 1995 and November 30, 2000. An additional $25 million in proceeds for the California class action settlement will be paid to consumers whose Associates mortgage loans were refinanced, or "flipped," during the same time period.

"This is totally inadequate," said Maude Hurd, president of the Association of Community Organizations for Reform Now -- or ACORN. The nonprofit consumer group has drawn attention to the lending practices used by finance companies such as Household and The Associates. "It's too little to make whole the people who lost money to predatory loans, and too little to make a serious impact on the world's largest banking group."

Hurd noted that Citigroup's CEO, Sandy Weill, could have easily paid the settlement himself from the $523 million he was paid over the past 3 years.

Another consumer group, the California Reinvestment Committee, said that the settlement does not protect California's homeowners from ongoing Citigroup abuses such as charging high points and fees, imposing pre-payment penalties and using mandatory arbitration provisions.

This week, the Dallas Morning News reported that Citigroup announced it would make changes to its lending practices. Among the changes mentioned were providing more credit insurance information to borrowers and reducing maximum points charged on loans from five to three.

Citigroup has previously taken steps to clean up the Associates, including suspending a number of mortgage brokers and abandoning single premium life insurance sales.

Citigroup announced in May that it will purchase Golden State Bancorp. That transaction, which would give the company a much needed west coast presence, has yet to be finalized.

In a settlement with the North Carolina Attorney General last year, Citigroup agreed to pay as much as $20 million in refunds to around 9,000 borrowers to settle allegations of deceptive practices at Associates.

Sam Garcia was previously employed by the CitiFinancial unit discussed in this article.

He has been in mortgage lending since 1980, and is publisher of MortgageDaily.com. He also owns and operates CloseNow.com, a real estate portal site.

email: [email protected]

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