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Power and prestige ooze from the corporate pores of Citigroup. Its board
of directors resembles a “who’s who” of U.S. business executives.
A former Secretary of the U. S. Department of Treasury — Robert Rubin
— is a director and chair of Citigroup’s Executive Committee.
Former President Gerald Ford lends his name as an honorary director. And
Citigroup is probably the only financial services holding company that
can claim a British knight among its top executives. Citigroup’s
Vice Chair Deryck Maughan was awarded a knighthood by the Queen of England
earlier this year in recognition of his contribution to British and U.S.
business.
But don’t let this star-studded collection of corporate executives,
high-level politicians and knights suggest that Citigroup doesn’t
focus on citizens on lower rungs of the economic and social ladders. In
fact, Citigroup has invested tens of billions of dollars in schemes to
peddle various financial products to low and moderate income families
and persons with blemished credit histories.
Just good corporate citizenship and a commendable effort to reach out
to the poor? That’s what Citigroup says. As part of its effort to
garner support for the Citibank-Travelers Group merger that gave birth
to the present corporate giant, Citigroup promised in 1998 to lend and
invest $115 billion to low- and moderate-income households over a 10-year
period.
“Since making the commitment,” brags Pamela Flaherty, senior
vice president for global community relations at Citigroup, “our
community lending and investing has grown by more than 140 percent, increasing
from $8.5 billion in 1997 to $21 billion in 2001. In the fields of mortgages,
small business and community development, we grew from $3.4 billion in
1997 to $12 billion in 2001 — a figure that represents an increase
over five years in lending activity of 250 percent. In addition, we leveraged
our partnerships to further extend our reach to thousands of low- and
middle-income and minority families, new immigrants, underserved households
and other emerging markets across the country.”
Matters look quite different, however, in the eyes of federal and state
law enforcement agencies and grassroots community organizations which
charge that consumers are being ripped off through deceptive predatory
lending tactics employed by Citigroup subsidiaries.
Watch Your Associates
Citigroup became the nation’s largest predatory lender when it acquired
Associates First Capital Corporation in September 2000 and merged it with
another of its subsidiaries, CitiFinancial Credit.
At the time of the merger with Citigroup, Associates was one of the largest
“subprime” lenders in the United States. It had outstanding
consumer loans of nearly $30 billion, according to 1999 corporate records.
Included were 480,000 home equity loans and more than three million personal
loans.
Subprime borrowers with blemished credit histories are considered high
risk. “Predatory” lenders take advantage of the subprime borrowers’
vulnerability and weak bargaining position, charging them inflated interest
rates, attaching costly “add-ons” like credit insurance and
luring them into unaffordable repayment plans.
Even when they scrape up every possible penny, the combined weight of
the high interest charges, fees and add-ons become too much for many working
families and particularly for senior citizens on fixed incomes. This is
particularly true when the charges grow astronomically; lenders “flip”
loans in a series of refinancing transactions, all carrying a new round
of fees and other charges. The end result, too often, is foreclosure and
the loss of the home.
Associates First Capital is proving to be much more costly than just
the $31 billion that Citigroup plunked down for its acquisition. The spotlight
on Associates First Capital’s predatory practices has also shed light
on Citigroup’s overall performance in low- and moderate-income neighborhoods
throughout the nation in recent years.
The result has been a public relations and legal nightmare for the Nation’s
premier financial services holding company. The biggest blow came from
the Federal Trade Commission, which filed a lawsuit last year against
Associates First Capital, Citigroup and CitiFinancial Credit Company,
charging widespread abusive lending practices and violations of the Truth
in Lending Act, Fair Credit Reporting Act and the Equal Credit Opportunity
Act.
Jodie Bernstein, director of FTC’s Bureau of Consumer Protection,
said Associates engaged in a variety of deceptive practices.
“They hid essential information from consumers, misrepresented loan
terms, flipped loans and packed optional fees to raise the costs of the
loans,” Bernstein charged. “What had made the alleged practices
more egregious is that 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.”
Citigroup has tried desperately to deflect the legal and public relations
problems by suggesting that all the really bad practices had been the
work of Associates First Capital before it became a member of the Citi
family. The corporation feigned “shock and dismay” that such
practices had been going on and urged the Federal District Court in Atlanta
to dismiss Citigroup and its consumer finance unit, CitiFinance, from
the FTC lawsuit.
Instead of extricating Citigroup and its affiliates from the lawsuit,
the dismissal motion dug the hole deeper for the corporation. FTC produced
affidavits from a former employee charging that the corporation’s
consumer lending affiliate CitiFinancial had engaged in unethical lending
practices long before Associates First Capital had been acquired. The
court refused to sever Citigroup and its consumer credit affiliate, CitiFinancial
from the suit.
According to the FTC complaint, the Associates charged its customers
prices that were substantially higher than those available to borrowers
in the prime market. The FTC said Associates charged as many as eight
points on mortgage loans — each point equaling 1 percent the amount
financed — on top of inflated fees.
The FTC said that Associates obtained customers through a wide range
of schemes. Among these were the mailing of “live checks” (which
automatically triggered a high interest loan when endorsed) and the purchase
of retail installment contracts from sellers of consumer goods.
Once ensnared in the Associates network, customers were aggressively
solicited to take out new loans and to refinance existing debts by flipping
them into a single debt consolidation loan, according to the FTC. The
FTC complaint charges that customers were duped in many cases by false
statements that debt consolidation loans would lower their monthly payments
and save them money. FTC said that Associates trained employees to tell
customers there would be no out-of-pocket-fees or up-front out-of-pocket
costs when, in fact, the loans came with high points, closing costs and
in many cases with costly credit insurance premiums.
Mounting Pressure
The Federal Trade Commission is not the only consumer cop chasing Citigroup’s
lending practices. Last year Citigroup paid $20 million to North Carolina
customers of Associates and $300,000 to the state to settle allegations
that consumers had been tricked into buying expensive and unneeded credit
insurance as part of their mortgage loans. The North Carolina Attorney
General launched an investigation of the practices after the state became
the first to pass laws against predatory lending.
The New York Times reported last fall that Citigroup had settled 200
lawsuits pertaining to practices of Associates First Capital with at least
twice that number still pending in the courts.
Meanwhile, community groups have developed more and more detailed information
upon which to indict Citigroup’s lending practices. The National
Training and Information Center in Chicago (NTIC) studied 1999 data collected
under the Home Mortgage Disclosure Act in nine cities and concluded that
Citigroup operated a two-tier loan system — an affordable prime loan
system for more affluent communities and a high-interest subprime scheme
available through its consumer loan affiliate — CitiFinancial —
for working class and poor communities.
The California Reinvestment Committee charged in testimony before the
New York Banking Commission that Citibank has ignored California’s
low-income communities and communities of color in providing affordable
non-predatory financial products.
Citibank “targets its products to upper-income customers, thereby
abandoning the financial opportunities of the entire market and a full
range of range of products,” Alan Fisher, the Committee’s executive
director, told the New York Commission. “The bank has systematically
eliminated low-cost products that are specifically designed to meet the
needs of low-income consumers.”
As evidence of Citi’s misdeeds grows, organizations such as the
Association of Community Organizations for Action Now (ACORN), the Center
for Community Change, the National Community Reinvestment Coalition and
other community groups — which have long fought abusive lending practices
— are finding new non-profit organizations allies.
Social Investment Forum Foundation and Co-op America launched a web site
(www.tellcitibank.org) early in 2001 called “Tell Citibank”
which has kept up a steady drum beat about Citigroup and predatory lending.
The site gives concerned citizens an opportunity to speak out about abusive
lending practices.
Included on the site are summaries of victims of predatory lending practices
from around the nation. One profiles Beatrice Smith, a 68-year old African-American
from Atlanta who took out a $20,334 mortgage on her home in 1987. Her
loan was flipped (refinanced) six times in as many years, bringing the
final loan amount to $35,000. She paid for credit life insurance all six
times with each premium exceeding $2,300.
The web site also tells the story of a couple that missed a monthly payment
on their sub prime loan, causing the mortgage interest rate to jump from
14 to 24 percent. And a Brooklyn woman was given a loan even after she
lost her home-health-aide job. The lender falsely listed her income as
$50,000.
About the stories on tellcitibank.org, Citibank spokesperson Christina
Pretto says, “A lot of their stuff is out of date,” and has
been addressed in Citigroup reports on its reforms.
Responsible Wealth, a project of United for a Fair Economy, has urged
a shareholder resolution that would link a portion of executive compensation
at Citigroup to addressing predatory lending practices. Among the factors
to be considered would be implementation of policies to prevent predatory
lending; constructive meetings with concerned community groups; and reductions
in predatory lending complaints filed with government bodies.
In January, National People’s Action (NPA) organized a protest in
front of the home of the president and CEO of the Central Region of Citibank
in Chicago demanding, among other things, a meeting with Robert Rubin,
chairman of Citigroup’s Executive Committee about predatory lending
— a meeting yet to take place.
Inner City Press, a leading community group in New York City, maintains
a web site entitled The Citigroup Watch (www.innercitypress.org/citi.html)
which tracks the corporation’s lending practices around the nation.
The lengthy reports are spiced with internal memorandums and comments
leaked from inside Citigroup.
Citi Responds
The lawsuits, the action by FTC and the pressure from community groups
is having an effect. Citigroup has taken some moves to clean up its act
and to settle the rash of lawsuits which have been filed against Associates
First Capital.
For example, the company has suspended the highly controversial practice
of requiring consumers to swallow single premium credit insurance with
every loan. The corporation has also modified its prepayment penalties.
Customers are now given the choice of a “standard” interest
rate with a prepayment penalty or an interest rate 50 basis points higher
without a prepayment penalty. Prepayment penalties are often extremely
costly to borrowers stuck with a high interest loan. With high prepayment
penalties, these borrowers cannot refinance if interest rates go down
or if they find institutions to refinance at lower rates and fewer fees.
Last October, Citigroup released the third in a series of “Real
Estate Lending Initiatives Reports.” The report says “initiatives”
are “ongoing” in addressing sales practices, compliance procedures,
broker standards, and foreclosure policies.
The report says “concern exists that lenders do not effectively
monitor brokers, who may be charging high fees, using fraudulent and abusive
sales tactics, targeting unsophisticated customers, packing loans with
needless additional, costly products and flipping existing customers into
higher cost loans.” The report says that CitiFinancial has initiated
an aggressive process to ensure that the brokers and correspondents with
whom it does business meet what it describes as “CitiFinancial’s
high ethical standards.”
Says Pretto, “The effort to shift from offering single-premium to
offering monthly pay insurance products is well underway.”
And, she adds, “a lot of Associates’ business was broker-based.
We have severed relationships with more than 3600 brokers who did business
with Associates for a variety of reasons. One of the most common reasons
was because they declined to conform to our code of conduct. By severing
our relationship with those brokers we’ve in effect foregone hundreds
of millions of dollars in business.”
For fair-lending advocates, the reforms at Citi are not proof that the
financial goliath is finally intent on ending predatory practices and
fulfilling its obligations to make credit available in low- and moderate-income
communities, but they do show that pressure works. Even Citigroup, despite
its interlinkage with government officials and financial might, can be
forced to respond to sustained, energetic, savvy and multi-pronged citizen
campaigns.
Jake Lewis is a banking specialist at the Center
for the Study of Responsive Law.
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