The Multinational Monitor

April 2002 - VOLUME 23 - NUMBER 4

C i t i g r o u p :  B a n k r u p t i n g   D e m o c r a c y

Predatory Associates
Citigroup, Predatory Lending and the
Credit Crunch for the Poor and Working Class

By Jake Lewis

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 ( 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, 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 ( 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.


The Federal Trade Commission v. Citigroup/The Associates ...

Excerpts from the Federal Trade Commission complaint against The Associates First Capital, now owned by Citigroup:

The Associates emphasized “upselling” homeowners to home equity loans. Through marketing and solicitation tools used to convince customers of the benefits of refinancing, The Associates induced customers to refinance their existing consumer credit debts into a single debt consolidation loan, typically a home equity loan, a practice known as “flipping.” These marketing and solicitation tools repeatedly stressed that a debt consolidation loan would benefit customers, for example by lowering their monthly payments, requiring them to pay less interest, allowing them to own their homes sooner, and saving them money. These claims were often false. To dissuade customers from shopping around for a more affordable loan, The Associates trained its employees to “take [customers] out of the market” by assuring customers they will be approved for the proposed loan.

The Associates created and trained its employees to use the What If? and Equity Advantage Plan (“EAP”) programs, and similar solicitation tools, to compare the customer’s current debts with one or more Associates loan proposals and to demonstrate the “benefits” of consolidating the consumer’s debts with an Associates loan, typically a home equity loan. In many instances, The Associates used the consumer report in the customer’s current loan file for this purpose. The What If? program was most often initiated with a telephone call from an Associates employee, asking the customer, for example, “what if I could show you a way to … Save $XXX each month? … Save $XXXX in the total interest charges on your current debts? … Establish a savings account in the amount of $XXX….” If the customer showed interest, the employee typically met with the customer in person to present the EAP, a pre-printed worksheet comparing the customer’s current debts with The Associates’ proposed loan, and indicating the “Money Saved” with The Associates’ loan.

The What If? EAP, and similar solicitation tools, did not accurately compare a customer’s current debt load with The Associates’ debt consolidation home equity loan, and therefore the purported savings and other benefits were misleading. For example, in comparing the customer’s total monthly payments on his current debts with the monthly payment on the proposed loan, these solicitation tools assumed the same monthly savings over the full loan term, typically 15-20 years, even though customers’ current debts often included short term debts (e.g., personal installment loans, automobile loans, and credit card debts) that likely would be paid off within five years. These solicitation tools sometimes purported to show savings even where the consumer’s current debts had lower interest rates than the proposed loan. In addition, in representing the monthly savings from consolidating a customer’s first mortgage and other debts, the What If? and EAP programs failed to account for property taxes and homeowner’s insurance that The Associates’ customers were required to pay out of pocket. Most mortgage lenders include in a customer’s monthly payment an escrow amount for property taxes and homeowner’s insurance, but The Associates did not. The What If? And EAP programs calculated monthly savings from The Associates’ debt consolidation home equity loan without factoring in this out-of-pocket cost to consumers.

Source: Federal Trade Commission v. Citigroup Inc. et. al., Complaint for Permanent Injunction and Other Equitable Relief, filed in the U.S. District Court for the Northern District of Georgia, March 6, 2001.

... And Citigroup’s Response

After Citigroup failed to convince the Federal Trade Commission to drop its suit against its newly acquired subsidiary the Associates, it released this statement:

We regret that we have been unable to resolve the FTC claims regarding past practices of the Associates without litigation.

From the time we announced our intent to acquire Associates, we indicated our full commitment to resolve concerns that had been raised about their business. We have fulfilled that commitment by implementing CitiFinancial operations and compliance systems throughout the former Associates’ branches and establishing processes by which customers of the former Associates can have any issues addressed. To date, we have reached out to nearly a half million customers, including every Associates home loan customer, and we will continue these outreach efforts.

Further, we dedicated ourselves to implementing enhanced practices, procedures and compliance not only within former Associates operations but throughout our entire consumer finance business. We are proud of the progress we have made on these initiatives, which establish us as the best practices leader in the industry.

Consistent with this commitment we also have tried to resolve the FTC’s concerns about The Associates' past practices. 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 access to credit for those who need it most according to consumer protection standards that lead the industry.