Citigroup Protest Reflects Pitfalls Of Building a Loan Supermarket

Last Thursday's fair-lending protests at Citigroup offices were hardly the first against a megabank, but they may have been the first in which a company was taken to task for failing to be competitive with itself.

The protestors besieged the offices of several subprime-mortgage companies owned by or affiliated with Citigroup Inc., contrasting their high interest rates with those offered at the flagship Citibank. With Halloween a few days away, some were dressed as vampires and sharks. They accused the lenders of discrimination and predatory lending to minority and low-income consumers, and demanded a meeting with Citigroup's top executives, Sanford Weill, John Reed, and Robert Rubin.

The protestors, members of the Association of Community Organizations for Reform Now, demanded that the Citigroup affiliates Citi- Financial and IMC Mortgage, which target borrowers with poor credit, declare a moratorium on foreclosures until the proposed meeting is held.

Whatever the merit of their accusations, Acorn's campaign underscored the challenge faced by banking companies as they coordinate different lending businesses they have acquired in hopes of creating a financial supermarket.

In an industry as new to banks as subprime lending, "it takes some time to get all the parts working together," said Jeffrey L. Zeltzer, executive director of the National Home Equity Mortgage Association.

"The trend in the industry is toward parity pricing," he said. "Lenders are beginning to provide uniform pricing or underwriting guidelines in all the communities where they do business."

For example, First Union Corp., which bought the subprime giant Money Store Inc. last year, has started to standardize pricing across its various lending units, a spokesman said. "We're about 85% complete" with that project, he said.

Responding to questions about the protests, a Citigroup spokeswoman said the company "has a wide range of flexible products and services available for customers at all income levels in many communities across the country. We're always looking at innovative ways to reach out to consumers and provide them with financial service products that meet their needs."

But Citigroup's detractors said the disparity in the units' lending practices suggests that the mantra of cross-selling is not being pursued at all levels. While Citibank sends loan applicants who are rejected because of bad credit to CitiFinancial, borrowers with good credit who come to one of those units are not "referred up," the critics say.

"It's simply a one-way street, and those traveling on that street are disproportionately minorities," said Matthew Lee, executive director of Inner City Press/Community on the Move, another activist group. Mr. Lee said he supports Acorn's new campaign.

Lisa Donner, campaign directorat Acorn's Brooklyn, N.Y., office, said Citibank and Citicorp Mortgage make loans at "fair rates," but concentrate their activities in upper-income white neighborhoods and disproportionately reject applications from blacks and Hispanics.

Meanwhile, she said, Citigroup is expanding its lending in minority neighborhoods through CitiFinancial and IMC, which charge higher rates, even to borrowers with good credit.

In mortgage lending, Citigroup is tilting its business to the higher-yielding subprime market.

CitiFinancial contributed $135 million to Citigroup's $2.45 billion of profits in the third quarter, or 5.5% of its bottom line. Though that figure was slightly inflated by nonrecurring items, said Deutsche Banc Alex. Brown analyst George Bicher, he forecast that in the fourth quarter CitiFinancial would account for 4.3% of the parent company's estimated $2.4 billion of profits.

"It's not the largest earnings contributor, but it's important," Mr. Bicher said. CitiFinancial, formerly Commercial Credit, was a unit of Travelers Group, which merged with Citicorp to form Citigroup last year.

By comparison, mortgage banking -- which includes Citigroup's prime home lending operations and its student loan unit -- contributed $61 million, or 2.5% of third-quarter earnings.

Acorn bases its charges on Home Mortgage Disclosure Act data from 1998 and a "mystery shopper" survey of rates at Citigroup's various units, which the group conducted last week.

Acorn said Citibank quoted its researcher an 8.625% rate on a 30-year fixed-rate mortgage -- in line with prevailing market rates for conventional loans. When the caller said she was worried about her credit standing, Acorn said, she was told not to worry, her husband's credit might compensate, and she should come in to see what could be worked out.

But IMC quoted 9.8% for borrowers with good credit, said Valerie Coffin, a researcher based in Acorn's Washington office.

On another call, Ms. Coffin said, IMC said a refinance loan would cost 13.25%. Granted, she said, the caller was inquiring about a loan that would have had a very high loan-to-value ratio, above 85%. But IMC specified that rate applied to someone with a Fair, Isaac & Co. credit score of 650 or more, a strong score.

Acorn said CitiFinancial told the activist group that its rates for refinance loans ranged from 9% to 23%. (It does not originate first mortgages.)

Laura Borrelli, president of the National Home Equity Mortgage Association, took issue with Acorn's analysis.

"It's hard to take generic HMDA data and mystery shop 18 months later and extrapolate and say, 'These are the facts,' " Ms. Borrelli said.

For example, Acorn conflated the HMDA data of Commercial Credit with that of IMC. But IMC had "nothing to do" with Citigroup for most of 1998, Ms. Borrelli said. (A fund controlled by Citigroup took a majority equity stake in the Tampa-based company late last year. IMC is getting shareholder approval to sell itself to CitiFinancial Mortgage Co.)

IMC only made nonconforming loans before it became affiliated with Citigroup, Ms. Borrelli said, so it is unfair to lump it in with Commercial Credit.

Ms. Borrelli added that Acorn's mystery-shopper survey, based simply on a phone call to each lender, misses a lot of the nuances of loan pricing. For example, a bank might offer a consumer a lower rate than a subprime company, but require the borrower to pay for private mortgage insurance, making the deal a wash.

Ms. Donner said Acorn is still studying Source One, a St. Louis-based company that Citigroup bought in May, which does both prime and subprime lending.

Acorn has yet to hear back from Citigroup's top brass about its demands, though activists in its Chicago office did meet with local company officials there Monday. Acorn officials said the group will continue to pressure Citigroup publicly and will lobby state legislatures for greater regulation. Ms. Coffin said she "wouldn't rule out" litigation.

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