Finance company accused by FTC

Lawsuit alleges predatory lending by The Associates

March 07, 2001|By Meredith Cohn | Meredith Cohn,SUN STAFF

The Federal Trade Commission filed a lawsuit in federal court yesterday accusing a finance company that is now part of Baltimore-based CitiFinancial Corp. of widespread predatory lending practices and seeking hundreds of millions of dollars in refunds.

The FTC named The Associates First Capital Corp., along with Citigroup Inc., which bought the company last year for $31.1 billion and folded it into CitiFinancial, its consumer lending arm. CitiFinancial also was named in the suit.

Just last month, Baltimore pledged about $12 million in incentives for CitiFinancial to expand its headquarters at 300 St. Paul Place. CitiFinancial said it planned to nearly double its work force to more than 1,000, largely because of the merger.

The FTC suit, filed in U.S. District Court in Atlanta, alleges that The Associates violated federal law with "deceptive marketing practices that induced consumers to refinance existing debts into home loans with high interest rates, costs and fees and to purchase high-cost credit insurance."

In the civil suit, the FTC is seeking refunds that could amount to hundreds of millions of dollars for consumers victimized by the practices, which the agency said occurred before the merger. An FTC spokeswoman, however, said the agency is likely to investigate Citigroup and CitiFinancial's methods since it took over The Associates.

"The core charges are that The Associates deceived consumers," said Peggy Twohig, the FTC's assistant director for financial practices.

In a statement yesterday, Citigroup acknowledged concerns about The Associates' past practices. But the company said it has made progress in resolving them by directly contacting nearly a half-million customers, including all with Associates' home loans.

"From the time we announced our intent to acquire Associates, we indicated our full commitment to resolve concerns that had been raised about their business," the statement said.

The statement called the FTC lawsuit "counterproductive to our shared objective of ensuring the availability of attractive loan products to all borrowers."

The suit is the 15th case - and the largest - brought by the FTC since 1998 involving the subprime lending industry, which targets borrowers who lack good credit and are considered higher risks. Most cases have been settled, Twohig said.

The FTC says The Associates was one of the nation's largest subprime lenders, with $29.7 billion in outstanding consumer loans in 1999. In that year, the company serviced 480,000 home equity loans.

Specifically, the suit alleges that The Associates aggressively pushed consumers to take out new loans or refinance existing ones and that consumers were told they would save money "in many cases, falsely," by consolidating their debts. The company often did not disclose fees, costs and optional insurance included in the loans, the suit alleges.

The suit says the insurance, which was added automatically, often did not provide the coverage promised and payments were not always refunded in full when consumers requested it.

The suit further accuses The Associates of unfair debt-collection methods, including "making repeated and continuous telephone calls to consumer with intent to annoy, abuse or harass."

The FTC said The Associates violated the Federal Trade Commission Act and other federal laws, including the Truth in Lending Act, the Fair Credit Reporting Act and the Equal Credit Opportunity Act.

The Associates has been the target of consumer activists for years, including the Association of Community Organizations for Reform Now, or ACORN.

The local chapter has been seeking to block the incentives package offered by the city unless CitiFinancial agrees to certain changes in lending practices. ACORN has accused The Associates of being involved in questionable loans to homeowners in Baltimore's low-income neighborhoods.

The FTC could not link The Associates to specific properties in Baltimore. But Twohig said, "These were companywide practices, so I think it's fair to say that includes Maryland."

Mayor Martin O'Malley's office is standing by the CitiFinancial incentives because the complaints are directed exclusively at The Associates. CitiFinancial also has agreed to make specific policy changes that afford vulnerable customers with clear information and the best rates, according to Tony White, the mayor's spokesman.

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