Responding to criticism of its deal to buy Associates First Capital Corp., the subprime specialist that has been assailed for its lending practices in some communities, Citigroup Inc. has unveiled initiatives to combat predatory lending.

The announcement, which came Tuesday in the form of a letter to the New York State banking department, the Comptroller of the Currency, and the Federal Deposit Insurance Corp., came just three days before a scheduled public hearing in New York on Citi's deal for Irving, Tex.-based Associates First.

The initiatives include new loan and credit insurance products, updated prepayment policies, revised sales and compliance guidelines, and foreclosure review. They were drawn up over the last few weeks and reflect input from more than 50 community activist groups and information obtained in the company's review of Associates' offices.

Citigroup executives admit that these proposals would not have come about without the deal for Associates, which would make Citi the nation's largest consumer finance company. "We have a special responsibility within our industry to set an example," Robert A. Willumstad, head of consumer finance at Citi, said in a memorandum to employees Tuesday.

While the proposals address some of the community groups' concerns - they prohibit balloon payments and lower the fees paid by borrowers on loans from brokers, for example - Citi is not eliminating some of the most controversial subprime lending practices, including the sale of single-premium credit insurance and mandatory arbitration to resolve disputes.

Representatives of various community groups said Citi's plan merely flicks at the surface of the issues. Associates First, these community activists say, has been among the worst offenders in subprime lending.

"If they were truly committed to cleaning up the record, they would agree to strict anti-predatory policies," said Sarah Ludwig, head of the Neighborhood Economic Development Advocacy Project in New York. "This falls short. And they know that, or they wouldn't have released this on Election Day."

Robert Gnaizda, director of the Greenlining Institute in San Francisco, said: "Community groups would have more confidence giving leeway and discretion to an institution that was committed to being a leader. This is grossly inadequate."

A number of the proposals outlined by Citi regard its relationship with the real estate mortgage broker industry, of which Associates plays a far bigger role. This segment of the industry has drawn most of the attention that has been paid to subprime lenders. "Many of the most egregious examples of inappropriate behavior can be traced to brokers who take advantage of unsuspecting consumers," Citi said.

Citi said it will test a program in Illinois and Maryland - where its consumer finance unit, CitiFinancial, is based - to limit broker fees paid by borrowers to 3% and eliminate back-end broker fees and prepayment fees. Brokers in these states will have to adhere to codes of conduct and monitoring. Elsewhere, Citi said it is limiting broker fees to 8% (down from 10%), including a maximum back-end commission of 2%.

Citi also said it will:

  • Adopt a product from Associates, the Freedom Loan, that rewards borrowers for paying on time. Citi would also add a product that would allow Freedom Loan holders to graduate up to a standard prime loan because they have improved their credit records.
  • Test a referral program in Maryland, Missouri, New York, and Virginia that would attempt to identify CitiFinancial prospects who might actually qualify for a prime loan product and refer them to a Citibank branch instead.
  • Offer an alternative to the controversial single-premium credit insurance that is standard issue with the loans offered through CitiFinancial. Such policies are controversial because they charge big up-front premiums for coverage that usually expires before the term of the actual loan. Another policy, monthly premium credit insurance, will be offered as a choice. Citi, which underwrites both policies through its insurance affiliates, said it will file for approval of the monthly premium policy immediately.
  • Offer a choice of loans with no prepayment fees (but higher interest rates) and lower to three years, from five, the period in which prepayment fees are charged.
  • Strengthen safeguards against "flipping," a practice in which loans are refinanced often, racking up big fees for brokers but leaving borrowers with less-favorable terms.
  • Institute stricter review policies for loans that are about to enter foreclosure.
  • Examine all foreclosed loans for the last year to make sure none have predatory characteristics.

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