Citigroup has agreed to pay up to US$20 million to North Carolina customers of the Associates First Capital Corp to settle allegations that Associates illegally tricked them into buying expensive and unneeded credit insurance as part of their mortgage loans, a practice at the center of a Federal Trade Commission lawsuit against Associates.
Associates, one of the nation's largest consumer lenders, has long been a target of consumer advocates who describe the company as the worst "predatory lender" in the nation.
Predatory lending refers to the practice of deceptively packing high fees, credit insurance and other charges into home loans to unsophisticated borrowers while inducing them to repeatedly "flip" their loans through refinancings that only serve to generate big fees for lenders.
Citigroup acquired Associates last year and has been trying to settle regulatory investigations and hundreds of private lawsuits. The agreement Thursday ends the North Carolina attorney general's investigation of Associates, which was initiated in 1999, the same year the state became the first to pass anti-predatory lending laws. Citigroup also agreed to pay US$300,000 to the state.
In a statement Thursday, the attorney general, Roy Cooper, said: "The investigation revealed that the Associates pressured its employees to sell credit insurance on all mortgage loans. It used deceptive tactics to add expensive prepaid credit insurance premiums to the loans, and then finance those premiums at high interest rates over the life of the loan."
Citigroup, in the settlement, denied allegations of wrongdoing, but in the past company officials have said they are working to improve lending practices at former Associates' branches. Last month, Citigroup also said it had suspended more than 1,200 pending foreclosures involving Associates customers after an internal review found "serious enough problem in the way the loan was originated."
Under pressure from consumer activists and some lawmakers and regulators, Citigroup also recently said it would stop selling single-premium credit insurance. The insurance, which is generally intended to pay off the loan should the borrower become disabled or dies, is paid in one lump sum and is typically rolled into the loan balance.
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