Citigroup Expected to Settle Suit
Ending a battle with America’s biggest bank, the Federal Trade Commission today is expected to announce a settlement of its lawsuit alleging that a Citigroup Inc. lending unit misled and cheated customers, sources said Wednesday.
Although admitting no wrongdoing, sources said, Citigroup will pay more than $200 million to settle the FTC suit. The New York-based financial services company, which says it has cleaned up the unit’s lending practices, earlier this week promised to cut some loan fees and give customers better information about credit insurance.
The settlement could have an immediate effect in California by helping Citigroup win approval for its planned acquisition of Golden State Bancorp, parent of California Federal Bank and a key part of its expansion plans. The Federal Reserve has yet to approve the deal, and in four rounds of written questions has grilled Citigroup about its sub-prime lending, which focuses on extending credit to customers with poor credit.
FTC Chairman Timothy J. Muris scheduled a news conference this morning in Washington to announce the settlement. The FTC and the bank declined to discuss details of the deal. But Citigroup spokeswoman Maria Mendler said settling the FTC suit would help keep the Golden State deal on track to close by the end of this month as planned.
“I would hope all our constituencies would regard [a settlement] as a highly positive step,” she said.
The suit is the biggest of 17 cases the FTC has filed against allegedly predatory sub-prime lenders. The largest previous settlement among those cases, for about $75 million, was finalized last week with First Alliance Corp., a defunct Irvine home equity lender.
Alleging violations of truth-in-lending and fair-credit laws, the FTC suit against Citigroup targeted practices at Associates First Capital, the former consumer finance arm of Ford Motor Co. and the nation’s largest sub-prime lender when Citigroup acquired it in November 1990 for $27 billion.
Associates charged borrowers fees as high as 8% of the loan amount and, while pressuring borrowers to refinance their debts, misrepresented the savings that would result, according to the suit. The FTC also alleged that the company improperly pushed borrowers to buy a controversial form of mortgage insurance.
Citigroup has stopped selling the single-premium insurance, which typically expired in five years even though borrowers continued to pay for it over the life of the loan.
Federal officials said they hope the case will send a message: Although customers with less-than-perfect credit may have to pay higher interest and fees to make up for the extra risk, the lenders must clearly explain the costs and consequences of the loans.
“Let’s hope that maybe we can wake up the sub-prime lenders,” said one FTC official, speaking on condition of anonymity.
Community groups that have opposed Citigroup’s acquisition of San Francisco-based Golden State said the FTC settlement didn’t go far enough. Robert Gnaizda, general counsel of the Greenlining Coalition in San Francisco, repeated demands that the Fed hold public hearings in Los Angeles on Citigroup’s lending practices.
The FTC deal “may be the largest settlement yet, but it’s still inadequate,” Gnaizda said after meeting with regulators and bank executives in Washington.
He said the FTC was never given access to the volumes of data on Citigroup’s lending practices that the Fed obtained during its review of the proposed merger, and didn’t have a complete picture of the extent of lending violations.
“The [expected settlement] is, in effect, a slap on the wrist for a company the size of Citigroup, which does $18 billion a year in sub-prime lending,” Gnaizda said.
Proceeds from the settlement are expected to be distributed to First Associates customers.
