The high-profile federal lawsuit against Associates First Capital for its subprime lending practices may be a near-term public relations nightmare, but many outsiders say that, if handled properly, it actually could end up boosting the powerful Citigroup brand.

Whether that possibility explains Citi’s willingness to try its luck in court is anybody’s guess. The company won’t discuss what was and wasn’t on the table during settlement talks, including the price tag that might have been attached to a deal.

But competitors, whose own business practices could wind up being shaped by the outcome, see a potential boon for Citi.

“They will come out of this in a positive manner, because they’re genuinely committed to eliminating whatever past abuses Associates committed, and working for a marketplace that is free of predatory lenders,” said J. Denis O’Toole, vice president of federal government relations at Household International.

“They can say, ‘We cleaned up Associates’ practices, and in fact we’re acting as a good corporate citizen for doing so,’ ” said Howard Glaser, head of government affairs at the Mortgage Bankers Association.

Image consultants agreed.

“Once you’ve gone through and cleaned out the old drawers, you’ve got a new desk,” said Levi Rabinowitz, a Baltimore consultant.

A Citigroup spokeswoman declined to comment except to say that the company has a history of successfully integrating companies with different cultures and bringing their businesses to its standards quickly.

To be sure, the Federal Trade Commission could still broaden its suit to challenge lending done after Citigroup acquired Associates in November or to include lending done by Citigroup’s subprime unit, CitiFinancial.

An FTC spokeswoman left the door open, saying that just because the complaint focuses on Associates’ past lending “doesn’t mean in discovery we won’t seek information on present practices.” The 26-page complaint alleges that Associates committed systematic and widespread predatory lending in violation of four federal laws, including the Equal Credit Opportunity and the Truth in Lending Act.

Before the government sued, the FTC and Citigroup tried for several months to negotiate a settlement.

The FTC spokeswoman denied that the agency asked Citigroup for a specific dollar figure. “We believe the injury will be substantial,” she said. “It could be in the hundreds of millions of dollars.”

Asked whether a settlement is still possible, the FTC spokeswoman put the ball in Citigroup’s court: “Sure it’s a possibility. It’s up to them, and I don’t know whether they are going to be willing to settle on terms that will be acceptable to the commission. That hasn’t happened so far.”

Another source close to the negotiations called a $1 billion price tag being projected by observers “very inaccurate” and suggested that the FTC would get much less. This source also said the agency was “delighted that going forward Associates would be run” according to Citigroup’s business practices. “There’s a good prospect that Citi will just simply win the case,” this source said.

If the FTC was not seeking a huge dollar settlement, then Citigroup must have concluded in deciding to fight rather than settle that a trial would do little, if any, damage to the financial services giant’s reputation. That may be because Citigroup has taken a number of steps to reach out to Associates’ customers and improve its operations. For example, it contacted every Associates home loan customer by mail and gave them a toll-free number to call with concerns about their loans. In addition, Citigroup units no longer offer subprime loans with balloon payments or negative amortization.

But critics of the company say they are not satisfied.

“To date we have been extremely disappointed in Citi’s response,” said Martin Eakes, chief executive officer of Self Help Credit Union in Durham, N.C., and a vocal opponent of the Citigroup-Associates merger. “They have listed a number of changes, but they are almost all cosmetic. The central” predatory lending problems “are still in place: single-premium credit insurance, excessive prepayment penalties, large up-front fees on home loans, kickbacks paid to brokers, mandatory arbitration clauses, and no effective restrictions against repeated refinances on loans.”

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