Citigroup Inc. and its Baltimore consumer lending arm, CitiFinancial Credit Co., were fined $70 million yesterday by the Federal Reserve for an array of violations of fair-lending practice laws.
They were sanctioned for steering customers into high-cost, risky mortgage loans, misleading federal bank examiners and forcing some credit-insurance applicants to have a co-signer so the company could boost joint insurance sales.
The cease-and-desist order requires the companies to pay restitution to borrowers who purchased the credit insurance and whose personal loans were refinanced by CitiFinancial into higher-cost loans secured by real estate.
The fine could be reduced by up to $20 million, depending on whether restitution payments are made.
Citigroup and CitiFinancial officials consented to the order but did not admit wrongdoing.
"If this is not predatory lending, I don't know what is," said Matthew Lee, executive director of Inner City Press/Fair Finance Watch, a New York consumer advocacy group. "I think it is good that the Fed has cracked down on them on this, but this is really the tip of the iceberg."
CitiFinancial, previously known as Commercial Credit Co., is Citicorp's consumer credit division that employs 1,100 people in Baltimore. Citicorp is the largest banking company in the world, with $1.3 trillion in assets.
The Fed's order stems from a 2001 examination of CitiFinancial's branch network by the Federal Reserve Bank of New York into "certain lending initiatives."
Charles O. Prince III, Citigroup's chief executive, said in a statement that the order provides "closure" to the Fed's examination.
Harry D. Goff, president and chief executive of CitiFinancial, said in a statement that the company has taken steps to address its problems.
"Not only am I confident that the matters raised by the Federal Reserve have been properly addressed, I also believe that CitiFinancial today has the best consumer protection programs and policies in the entire consumer finance industry," Goff said.
The Fed's action comes as concerns about sub-prime lending abuses have been the subject of considerable debate in Congress.
The House Financial Services Committee held hearings in March on a proposal to establish a tough federal standard that would trump state and local rules on abusive lending practices.
The effort was joined by eight mortgage lending trade groups, which called on Congress to establish a national standard in an effort to head off predatory lending.
Industry experts downplayed the Fed's action against CitiFinancial.
"Stuff like this is going to happen," said Bert Ely, a financial consultant in Alexandria, Va. "The important thing is that they don't do it again. Citi will survive this just fine."
Richard X. Bove, an analyst with Hoefer & Arnett, said regulatory actions and fines have become a cost of doing business in the sub-prime lending market.
The higher rates companies must charge on such loans combined with a tendency for low-income customers to sign contracts they don't fully understand sets the stage for conflict, Bove said.
"I don't see how the business is ever going to stop getting these fines," he said. "You have to begin to believe that there's something in the nature of this business that causes that to happen."
Bove said the $70 million penalty won't have much impact on Citigroup and will quickly be forgotten by investors and consumers.
"If you consider the fact that they just set up $6 billion in reserves against WorldCom and Enron [Corp.], $70 million just doesn't seem like a real amount of money," he said.
The Fed's order requires CitiFinancial to take a number of steps to stop violating banking regulations designed to protect consumers.
It must designate a senior CitiFinancial officer to supervise and monitor remedial measures, submit to the Fed a written program that details remedial actions that have been taken to ensure compliance, improve audits and install new employee training programs.
Written progress reports also must be sent to the Federal Reserve on a regular basis.
The company said that it is complying with the order. Employees, for example, have received "corrective training and information" on the proper procedures for determining whether a co-applicant is required for a loan application, the company said.
Last year, it stopped making high-cost and riskier real estate loans. The company also said it is making sure bank examiners receive complete and accurate information.
This is not the first time that Citigroup has had problems in the sub-prime lending market.
The company agreed in 2002 to repay $215 million to settle federal charges that a company it had acquired gouged customers by selling them overpriced mortgages and credit insurance.