WASHINGTON — CitiFinancial Inc., a subprime lending affiliate of Citigroup Inc., will stop offering single-premium credit insurance on mortgage loans by yearend, according to a memo circulated to company employees on Thursday.

Robert B. Willumstad, chairman and chief executive officer of Citigroup’s consumer operations, told employees that the company is developing mortgage credit insurance products with monthly premiums as an alternative. As individual state insurance commissioners approve the products, they will replace the single-premium products, he wrote.

“We are working with regulators to see that approvals are granted as quickly as possible,” Mr. Willumstad wrote in the memo, which the company released to the news media. “We hope to make the transition to monthly pay credit insurance on new mortgage loans in virtually all states later this year.”

Single-premium credit insurance, which is designed to pay off a loan if the borrower dies, has been criticized as a tell-tale sign of predatory lending. Fair-lending activists claim that the premium is frequently lumped into the loan’s principal, sometimes without the borrower’s knowledge, and adds thousands of dollars to the amount being financed.

In addition to the way such insurance is sold, critics complain that in many cases single-premium insurance offers far more coverage than borrowers need at the beginning of the loan term but tapers off so quickly that by the end of the loan the coverage is insufficient.

Citigroup’s monthly coverage products, which have been filed for approval with insurance commissioners in the 49 states where CitiFinancial does business, track the loan balance to offer the precise amount of coverage needed each month.

A Citigroup spokeswoman said 11 states have approved the products: North Carolina, South Carolina, New Mexico, Delaware, Wyoming, Vermont, Georgia, North Dakota, Arizona, Illinois, and Minnesota.

In his memo to employees, Mr. Willumstad acknowledged that single-premium credit insurance, though legal, has come under fire from activists, and he said that the company had decided to stop selling after consulting with Sen. Charles E. Schumer, D-N.Y., and John Taylor, president of the National Community Reinvestment Coalition.

In a press statement Thursday, Sen. Schumer said: “When the largest bank in America voluntarily decides to stop a practice that is generally recognized as an unfair lending practice, it raises the bar for the rest of the mortgage lending industry to follow suit.”

Rep. John J. LaFalce, D-N.Y., agreed with Sen. Schumer’s comments. “This is an extremely positive step for Citigroup and a change that could have a very positive effect on the broader subprime market.”

New York Superintendent of Banks Elizabeth McCaul said Citigroup’s move should “lead to a proper balance between offering access to credit for those who need it most, while eliminating the potential for abuse.”

Citigroup has been under increasing pressure from regulators and community groups, which have criticized the lending practices of CitiFinancial and Associates First Capital Corp., which Citigroup acquired last year. In January, Citigroup settled a class action by agreeing to pay $9 million to borrowers in Georgia who claimed that they had been sold single-premium policies in violation of state law.

“Associates sold massive amounts of single-premium credit insurance in the state of Georgia, most of which is in the process of being refunded,” said Howard D. Rothbloom, the attorney who represented the class. “In a decade of looking at predatory and abusive loans, I never saw any lender that sold more single-premium credit insurance than Associates did.”

Mr. Rothbloom said Citigroup deserves credit for the improvements it has made. “Since they came under attack, they have promised to work to clean up Associates. They are making a significant effort to fulfill the promises they made.”

Other critics offered their praise more grudgingly.

“This by no means resolves the credible allegations and evidence of predatory practices at CitiFinancial, but it is one step,” said Matthew Lee, executive director of Inner City Press/Community on the Move. “If they comply with it, it takes one product off the table.”

And Citigroup’s subprime woes are far from over. In April the Federal Trade Commission sued Citigroup, alleging predatory lending by Associates before the acquisition, and the Federal Reserve Board has peppered the company with questions about its subprime operations.

In an interview Thursday, Mr. Willumstad said that, though Citigroup is obviously sensitive to the criticisms of activists and regulators, its decision to stop selling single-premium insurance had been under consideration for some time.

“If you recall in November, when we were going through the acquisition, we promised to change Associates’ practices,” he said. “One commitment was to test monthly pay insurance in a number of states. We concluded that now is the time to make a decision. Rather than go through a test of monthly pay and single-premium, we decided that we would take the step and provide the leadership and make the decision now.”

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