As Citigroup Inc. and the federal government head to court over charges of abusive lending practices at Associates First Capital Corp., rival lenders expressed skepticism about the government's case and a measure of optimism that the proceedings could help settle legal questions surrounding the business.
The Federal Trade Commission filed a 10-count, 26-page suit in federal district court Tuesday, claiming that Citigroup unit Associates First Capital Corp. violated four federal laws, including the Equal Credit Opportunity and Truth in Lending acts.
"I think Citi will win more than they will lose," said J. Denis O'Toole, vice president of federal government relations at Household International. "Predatory lending is not subject to easy definition. So there is a large degree of subjectivity, and that will complicate the FTC's case."
The Rev. Jesse Jackson, speaking at a conference in Washington, also defended Citigroup.
"They have some history of cleaning these situations up," Mr. Jackson said in an interview after the speech. "Why would a group of Citigroup's size risk its credibility and future on trying to carry the baggage of Associates' reputation? I think it will change. We're certainly going to monitor it."
Mr. Jackson has worked alongside Citi chief Sanford Weill on the former's Wall Street Project.
The FTC investigated Associates' business practices for two years and spent several months trying to broker a settlement with Citigroup, which spent $31 billion to purchase the subprime lender in October.
Citi is liable for any misdeeds Associates may have committed, but the FTC drew fire for suing even though Citigroup has improved its lending practices.
"My impression is that Citigroup has been working overtime trying to ensure that all of their business units, including Associates, operate in an appropriate manner," said Wright Andrews, Washington counsel for the National Home Equity Mortgage Association. "The FTC's action here may undercut Citi's good-faith efforts."
Mr. O'Toole of Household International concurred. "There is ample evidence around the country that Citi has been trying to get things addressed," he said. "After all that time and effort, the government wants to get some return on its investment. Citigroup just happened to be the wrong acquirer at the wrong time."
One benefit that could emerge is a better definition of what is and what is not abusive lending.
"If there is a silver lining here for the industry, it could be that the result of this case would better define the standard of what are abusive and deceptive practices, as opposed to the patchwork of state and municipal laws and regulations that our industry contends with today," said Jerri Franz, a spokesman for Bank of America Consumer Finance Group, which oversees Bank of America's subprime lending unit.
While most observers were supportive of Citigroup, some were quick to caution that it is not in the company's best interest to have the suit hanging over its head too long.
"Oftentimes, from a practical business perspective, a corporation has little choice - irrespective of the merits of the case - but to reach some sort of settlement" to prevent the matter from lingering, Mr. Andrews said.
In fact, an official with a competing lender, who requested anonymity, said the threat to Citigroup's brand name could be a major bargaining tool for the FTC that leads to a settlement. News of the suit made page 1 of Wednesday's New York Times.
"Citi has an enormous amount of money invested in its brand," said the anonymous official. "When you have a brand with that kind of prestige and prominence, you want stories like this to be one-day stories."
The FTC has brought 15 predatory lending cases in the past few years, but Richard Ritter, a fair lending consultant and co-counsel with the Washington Lawyers Committee for Civil Rights and Urban Affairs, said the suit against Associates stands out.
"This is the most significant and largest predatory lending lawsuit that the FTC has brought, because Associates is such a large, widespread subprime lender that has been accused" of committing abuses across the nation, he said.
The government's lawsuit had quick ripple effects. The same day the FTC filed the suit in Atlanta, the Georgia General Assembly was voting on a bill to curb predatory lending. "Some people are very cynical about this lawsuit," Mr. O'Toole said. "Many wonder if there is a relationship between the filing of this lawsuit and the attempt to pass legislation in Georgia."
And in Washington Wednesday, Sen. Charles Schumer said that he plans to introduce legislation next week to ban prepayment penalties, mandatory credit insurance, and the financing of points and fees.
"We know that not all subprime lending is predatory, but all predatory lending is subprime," the New York Democrat said in a speech at the annual National Community Reinvestment Coalition conference, the same meeting at which Mr. Jackson spoke. "What we need is comprehensive legislation to stop predatory lending once and for all."
Modeled after a tough anti-predatory-lending law North Carolina enacted in 1999, Sen. Schumer's bill would change the thresholds of the Home Ownership Equity and Protection Act, which uses rates and fees to define high-cost loans. Under the act, high-cost loans are those that have an annual percentage rate that is 10 points higher than Treasury securities with comparable maturities or customer-paid points and fees that exceed 8% of the loan amount.
With his legislation, Sen. Schumer would change the threshold to interest rates 8% higher than the one-year Treasury bond rate and would lower the customer-paid points and fees threshold to 4%.
Sen. Schumer introduced the same bill last year, but it stalled without even a hearing. He said Wednesday that he plans to push Senate Banking Committee Chairman Phil Gramm to hold hearings on the measure, the Predatory Lending Deterrence Act.
However, the Texas Republican has said the term "predatory lending" must be defined before he will consider moving legislation through his committee.
Michele Heller contributed to this story.