Citigroup Inc. agreed to pay $215 million to settle federal charges that one of its subsidiaries practiced deceptive marketing via direct mail, telemarketing and other channels to “subprime” or high-risk borrowers, the Federal Trade Commission said yesterday.
According to the FTC, Associates First Capital and Associates Corp. of North America, collectively known as The Associates, engaged in deceptive efforts to upsell customers into refinancing existing loans with higher-interest home loans. The Associates also engaged in “packing,” the practice of deceiving loan customers into buying optional credit insurance products.
Citigroup, which bought The Associates in November 2000 and renamed it CitiFinancial, is to pay $215 million to the FTC, the largest consumer protection settlement in agency history. This money, along with another $25 million from separate class-action settlements, will be used to issue refunds to Associates customers.
The FTC sued The Associates in March 2001 in U.S. District Court in Atlanta. The suit alleged that The Associates obtained customers through “live checks,” or checks that could be cashed for instant cash advances, and through the purchase of debt from installment contracts on retail goods or from home improvement dealers and mortgage brokers.
Having obtained the customer, The Associates would offer to refinance or consolidate existing debts with a single loan, typically a home equity loan, according to the suit. Though The Associates claimed in marketing solicitations that refinancing would help consumers save money by lowering their interest and monthly payments, these claims frequently were false, the FTC said.
In one marketing campaign, dubbed the “What If?” program, an Associates employee would call a customer asking, “What if I could show you a way to” save a certain number of dollars in interest charges. The employee later would meet the customer in person with a worksheet that specified how much money the customer could expect to save.
The FTC alleged that the “What If?” program used incorrect calculations in determining how much customers stood to save. Often, interest payments on the consolidated loan were higher than the original loans.
As part of the settlement, CitiFinancial, as The Associates is presently known, agreed to provide the FTC with annual reports detailing its sales and marketing practices. CitiFinancial must maintain documents detailing its loan, credit and credit insurance sales activity for the next three years.