Moving fast to quell legal problems inherited with its purchase of Associates First Capital Corp., Citigroup Inc. this week settled a class action against the subprime lender by agreeing to pay borrowers up to $9 million.
Citigroup will refund roughly 2,000 borrowers in Georgia who were sold single-premium credit life insurance with a loan from an Associates subsidiary, said Howard D. Rothbloom, the plaintiffs lawyer. The settlement is Citis second announced in less than a week involving Associates First. The U.S. Justice Department said on Monday that Citis Associates National Bank in Wilmington, Del., had agreed to pay $1.5 million to settle a fair-lending suit.
The Georgia lawsuit charged that Associates Financial Life Insurance Co. failed to get approval from state regulators to sell single-premium credit life insurance to borrowers between 1996 and 1999.
Mr. Rothbloom noted that the Georgia Office of Insurance and Safety Fire Commissioner fined Associates Financial $147,000 last January and ordered it to comply with Georgia law, which prohibits the sale of credit life insurance on loans with terms exceeding 10 years. In addition to selling a prohibited form of the product, Associates could not prove that it sold the insurance through licensed agents, the Georgia Insurance Department found.
Citi has agreed to return the entire premium plus $300 to plaintiffs whose coverage is still in force, if they want to cancel their policy, Mr. Rothbloom said. Those borrowers would also get a 0.5% rate reduction on the outstanding balances of loans associated with the credit life insurance.
Plaintiffs who have already terminated their coverage and had their unearned premium refunded will be refunded 30% of the earned premium.
Citigroup executives did not return calls from American Banker.
The other suit, filed in 1999 by the Justice Departments civil rights division, charged that Associates used stricter underwriting standards in evaluating credit card applicants who used a Spanish-language form. While Mr. Rothblooms lawsuit had a narrower focus whether Associates had permission to sell a particular credit life policy it illustrates a broader conflict between subprime mortgage lenders and advocates for subprime, lower-income, and minority borrowers.
Community organizations and other advocates have questioned many subprime lenders practices into question and called the sale of single-premium credit life especially objectionable.
Credit life insurance is not typically offered to prime borrowers, Mr. Rothbloom said, and subprime borrowers usually buy it simply because they are unsophisticated in financial matters and have few lenders to choose from. The sale of credit life appeared to be a hugely profitable business, he said.
Members of Mr. Rothblooms class paid $5,000 to $7,500 to insure loans of between $30,000 and $35,000, and financed their premiums at an average rate of 15% for 15 years. Mr. Rothbloom said that just 14 claims had been made on 1,938 policies issued to his clients.
Though the settlement still requires court approval, it appears to spare Citi a much costlier conclusion. The suit, which was set to go to trial later this month, would have been tried under Georgias Racketeer Influenced and Corrupt Organizations Act, which allows plaintiffs to seek triple damages.
Citigroup became a lightning rod for predatory lending allegations almost as soon as it announced in September its plan to buy Irving, Tex.-based Associates.
Activists attempts to get regulators to block the deal failed, but Citi executives listened to many of the advocates complaints before the banking company won regulatory approval for the acquisition, and said they would change some of Associates lending practices.
Mr. Rothbloom said the only thing his clients did not get in the Georgia agreement was a refund of interest they paid to finance their credit insurance.
I think the settlement reflected a sincere desire to put this problem behind them, he said of Citigroup.