FTC Accuses Citigroup Unit of Questionable Loan Practices

Citigroup Inc.’s consumer-credit unit used extensive deceptive lending practices to manipulate people into buying overpriced mortgages and credit insurance, the Federal Trade Commission charged Tuesday.

Government officials said they were seeking hundreds of millions of dollars for victimized consumers in what is the largest predatory lending case ever brought by the consumer protection agency.

Associates First Capital Corp., bought in November by Citigroup, got consumers to consolidate their debts into a single loan--usually a home-equity loan--with the promise of lower monthly interest payments, according to a lawsuit filed against Citigroup in the U.S. District Court for the Northern District of Georgia.

The new loans, however, often came with substantial fees that made it even more expensive than the original debt.

“They primarily victimized consumers who were the most vulnerable--hard-working homeowners who had to borrow to meet emergency needs and often had no other access to capital,” Jodie Bernstein, director of the FTC’s Bureau of Consumer Protection, said in a statement.

The New York-based Citigroup said it already has established ways for customers to get “any issues addressed.”

“We have reached out to nearly a half-million customers including every Associates home-loan customer, and we will continue these outreach efforts,” the company said in a statement. “We are hopeful that the FTC will come to recognize that its decision to pursue this case is counterproductive to our shared objective of ensuring the availability of attractive loan products to all borrowers.”

The FTC said it was widely known that Associates was under investigation when Citigroup bought the lender. Investors said Citigroup probably has set aside reserves to cover whatever it will have to pay to settle the litigation.

Citigroup shares rose 38 cents to $48.63 in New York Stock Exchange trading Tuesday.

While the government lawsuit doesn’t seek any specific damages, the complaint asks the court to reimburse consumers and to stop the company from making further violations.

At the time Associates was acquired by Citigroup, it was one of the nation’s largest lenders to high-risk borrowers--a market segment known as subprime lending, the FTC said. Like other similar lenders, Associates charged interest rates much higher than those available to lower-risk consumers.

The FTC also charged that Associates made borrowers unknowingly purchase credit insurance products by automatically including them in monthly loan payments.

The government complaint said that at loan closings, the company rushed consumers through the process and discouraged them from removing the additional credit insurance, which in some cases added thousands of dollars to loan costs.

The FTC, citing Associates’ public records, said the company earned more than $500 million from 1995 through 1999 on their credit insurance sales.

The complaint also charges that Associates used abusive tactics to collect their loans, such as making harassing telephone calls. The company also violated federal regulations by failing to keep proper records and improperly using consumers’ credit reports to do such things as solicit new customers, the complaint alleges.

The FTC filed a similar lawsuit in October against First Alliance Corp. of Irvine, six months after the company filed for bankruptcy protection and ceased operations. Consumer groups criticized the suit as coming too late, but the agency said it wanted to send a message to subprime lenders that they can’t escape responsibility for bad lending practices.

The FTC accused First Alliance of misleading customers about the terms and fees of their loans. The suit is still pending.

Associates, based in suburban Dallas, was acquired a decade ago by Ford Motor Co. The auto maker sold 19% of the company to the public in 1996 and spun off the remaining 81% in 1998.

Consumers with questions about the Citigroup lawsuit can call the FTC toll-free at (877) 382-4357.

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Times staff writer Liz Pulliam Weston contributed to this report.