WASHINGTON - Little more than a year after the Federal Reserve Board grilled Citigroup Inc. over a subsidiary's lending practices, the nation's largest financial services firm is back in the hot seat.
In connection with the company's proposed acquisition of the San Francisco-based Golden State Bancorp, Fed officials last week sent Citigroup lawyers a list of 34 detailed questions about its subprime lending unit, CitiFinancial.
The renewal of the inquiry is embarrassing to the company, which has been promising to clean up dubious practices at its subprime lending arm since Citi acquired the troubled Associates First Capital Corp. in 2000.
Among the questions the Fed has asked are whether CitiFinancial loan officers and management earn bonuses for persuading customers not to cancel credit insurance and other policies, and whether employees filed false or inaccurate information about borrowers to help them qualify for certain insurance products.
Additionally, the Fed appears to have some doubt that CitiFinancial actually stopped selling single-premium life insurance - a product long associated with predatory lending - with its real estate-secured loans. The company had promised to do so in June 2001. The letter asks CitiFinancial to document the number of loans made under its EquityPlus program, which are secured by a mortgage, and how many were made with single-premium credit insurance.
Furthermore, the Fed wants to know whether CitiFinancial officials informed branches in advance when they were scheduled for "mystery shopper" examinations to test for fair-lending compliance. It also seeks information about various loan pricing, foreclosure, and refinancing policies at CitiFinancial.
Other questions deal with the unit's "Rocopoly" program, under which employees can earn bonuses by making more and larger loans, and by selling more insurance products in combination with loans.
The Fed's letter, dated July 3, was addressed to Citigroup's outside counsel, William J. Sweet Jr., an attorney with Skadden, Arps, Slate, Meagher & Flom in Washington. The company has until Wednesday to reply.
Steve Silverman, a spokesman for Citigroup, did not address the Fed's specific requests, but said: "As part of the routine review process in a proposed significant acquisition, the Federal Reserve has asked these questions, which we are responding to in a timely manner."
A spokesman for the Fed would not comment for this story.
This is not the first time the central bank has used a proposed acquisition as an excuse to ask probing questions about lending practices at CitiFinancial. In March 2001 the Fed used the otherwise uncontroversial acquisition of European American Bank of Uniondale, N.Y., as the springboard for an investigation of Citi's subprime lending arm.
Though the Fed eventually approved the EAB deal, the inquiries were time-consuming and uncomfortable for Citigroup.
As was the case with the EAB application, many of the Fed's questions about Citi's deal for Golden State, the parent of California Federal Bank, appear to have been prompted by protests filed by community groups opposed to the deal. In both cases, the Bronx-based Inner City Press/Community on the Move filed detailed allegations of wrongdoing at individual CitiFinancial branches.
In its protest of the Golden State deal, Inner City Press alleges, among other things, that CitiFinancial employees filed false information on credit insurance applications and that branches received advance information about mystery shoppers.
"They have predatory lending down to a science," said Matthew Lee, the group's executive director, who supplied a copy of the Fed letter to American Banker on Thursday. "They have created an incentive structure that ensures that customers are gouged to maximum capacity."
Other observers said that the central bank probably has several reasons for taking a second look at CitiFinancial.
Oliver Ireland, a former Fed associate general counsel now with the firm Morrison & Foerster, said the Fed's questions may also be a simple case of following up on an earlier set of inquiries.
"If you thought it was an issue a year ago and you looked at it hard, unless you were extremely happy with what you saw, you might want to get a time series," he said. "You may want to know, 'Did it get better, or did it get worse?'"
