It appears the new year will bring Citigroup Inc.'s deal to buy Associates First Capital more attention that the companies would rather not have.
In a class action set to go to trial in state court in late January, about 2,000 Georgians are seeking refunds of premiums and interest paid on single-premium credit life insurance included in loans they received from Associates Financial Services of America Inc., an Atlanta subsidiary of Irving, Tex.-based Associates First. The suit is to be tried under Georgia's Racketeer Influenced and Corrupt Organizations Act, which means the plaintiffs are seeking triple damages.
Activists' protests have made the Citi-Associates deal, which was announced Sept. 6, practically synonymous with "predatory lending." And the watchdogs find single-premium credit life insurance especially offensive. Sold to cover a loan in the event the borrower dies, it is characteristic of subprime loans and is often slipped in unbeknownst to the borrower, financed at high rates, and not written to cover the entire life of the loan, they say.
"This insurance is predatory across the board," said Sarah Ludwig, executive director of the Neighborhood Economic Development Advocacy Project, New York. "It's used to pad the principle, and the borrower pays interest on a premium for a product that she probably doesn't need or understand."
The lead plaintiff in the class action, Winfred L. Wood, says he paid $5,062 for an insurance premium that was financed over 15 years at 16.5%. The insurance pushed the loan - one of two he has with Associates - from just over $30,000 to about $36,400 and would have cost him more than $13,000 over the life of the loan, said Howard D. Rothbloom, the attorney representing the class members. The insurance was provided by Associates Financial Life Insurance Co., another Associates First subsidiary.
Mr. Rothbloom said that in addition to its high cost Mr. Wood's insurance gave erratic and illogical coverage. For the first 10 years coverage was excessive - about $75,000 - and for the last five years it was inadequate to pay off the loan, he said.
"This product is defective; it does not do what Mr. Wood was told it would do," Mr. Rothbloom said. "If this product were tires, it would have been recalled a long time ago."
To bolster his case, which has been in preparation for three years, Mr. Rothbloom pointed to an action by the Georgia Office of Insurance and Safety Fire Commissioner in January. The agency fined Associates Financial Life $147,000 and ordered it to comply with state law prohibiting 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 had sold the insurance through licensed agents, the agency found.
Further, in an order entered Jan. 31, John W. Oxendine, Georgia's commissioner of insurance, stated that Associates First had been told specifically by his agency in 1993 and again in 1997 that the product was prohibited in loans with terms of more than 10 years.
Despite these admonitions, Associates "sold thousands of Georgians the insurance and collected millions in premiums," Mr. Rothbloom wrote to the Office of the Comptroller of the Currency and the Federal Deposit Insurance Corp. in an Oct. 3 letter requesting public hearings on the Citi-Associates deal.
The agencies last week extended their deadline for deciding whether to object to the $31 billion deal, saying the flood of public comments it has stimulated need more review. Activists have been clamoring for the two federal regulators to schedule public hearings on the deal ever since it was announced, and though no hearings have been held, the outcry appears to have made regulators hesitant to approve the purchase.
The OCC and FDIC said they would use the extra 30 days they have given themselves to clarify several issues. These include Citigroup's limitations on points and fees for refinanced and broker-sourced loans and how the company, through its marketing and branch offices, offers prime as well as subprime products to low- and moderate-income and minority communities. Moreover, the two agencies have asked for descriptions of Citigroup's disclosures for selling and financing single-premium credit life insurance.
Final pretrial motions in the class action are to be considered at a Dec. 5 hearing. One issue to be settled, Mr. Rothbloom said, concerns a move he said Associates First made the day after the class certification order was granted: It tried to refinance the class members and required them to sign a mandatory binding arbitration agreement.
The agreement, a copy of which was obtained by American Banker, prohibits borrowers from participating in current lawsuits and any claim or dispute arising from any previous loan, document, or insurance that the borrower received from Associates.
"If arbitration is demanded," the agreement reads, "you and we agree that the entire dispute must be arbitrated in accordance with this agreement and that any lawsuit, counterclaim, or other action must be discontinued."
Yet the class certification order itself prohibits the plaintiffs and defendants from contacting class members to encourage them to participate or not participate in the lawsuit. Said Mr. Rothbloom: "Besides the fact that there are serious problems with contacting class members and getting them to agree not to participate in the case, it is contrary to the class-certification order. And they didn't go through me; I'm the counsel for these people. So basically what they were seeking to do is to ask these people to settle their case without conferring with counsel."
At the Dec. 5 hearing, Associates will seek to have all class members who signed the mandatory binding arbitration agreements removed from the case, Mr. Rothbloom said.
Asked whether its Atlanta subsidiary practices predatory lending, a spokesman for Associates said the Georgia case stems from a technical legal issue, not one of predatory lending. All other questions were referred to Citigroup, which did not return calls from American Banker.
Though it is not clear whether Associates Financial Life is still selling single-premium credit life insurance, Citigroup clearly is. Its American Health and Life Insurance Co. subsidiary has sold it, and it is standard with loans offered through CitiFinancial. In a proposal released Nov. 7, Citigroup offered to change how the insurance is paid for - it proposed giving borrowers a choice - but did not say it would stop selling the product.
Citigroup, which underwrites the policies through its insurance units, said at the time that it would file for approval of a monthly-premium product immediately.