Citigroup Inc., Thursday agreed to pay $215 million to settle Federal Trade Commission charges of deceptive and abusive lending practices.
The agency called it the “largest consumer protection settlement in FTC history.”
From the deal, as many as two million consumers stand to collect “significant monetary relief” in cash refunds or reduced loan balances, FTC Chairman Timothy Muris said.
The settlement hinges on approval from a federal court in Atlanta as well as approval of a related settlement in a class-action lawsuit pending in California.
The FTC had charged that Associates First Capital Corp. engaged in systematic and widespread deceptive and abusive lending practices prior to its acquisition by Citigroup. The financial-services giant acquired the Dallas-based subprime lender in 2000 for $27 billion.
Subprime lending refers to loans to people who are considered “higher-risk borrowers.” Associates was one of the nation’s largest subprime lenders.
In March 2001, the FTC sued Associates in a U.S. district court. The agency alleged deceptive marketing practices that induced consumers to refinance existing debts into home loans with high interest rates and fees, and to purchase high-cost credit insurance. The complaint also named as defendants Citigroup and CitiFinancial.
The settlement will provide $215 million to consumers who bought credit insurance in connection with loans made by Associates between Dec. 1, 1995, and Nov. 30, 2000, the FTC said. It added that the class-action settlement will provide an additional $25 million to consumers whose Associates mortgage loans were refinanced by that firm in the same five-year period. “Together, these settlements will provide $240 million in consumer redress for Associates borrowers,” the FTC said.
The president of Citigroup, Robert B. Willumstad, said in a statement the company is pleased to resolve the lawsuit.
“When we bought Associates, we found certain unacceptable practices that needed to be changed,” he said. “We are confident that today’s settlement provides redress to those former Associates customers who were harmed. We’re gratified this matter is behind us.”
The FTC complaint charged Associates engaged in deceptive practices designed to induce borrowers unknowingly to purchase optional credit insurance products. That practice is known as “packing.” The insurance products were intended to cover the borrower’s loan payments in circumstances such as death or illness. The premiums were added to the principal amount of the loan.
The FTC alleged that if a consumer noticed the credit insurance was being added to the loan, Associates employees used “various tactics” to discourage them from removing the insurance.