Banking on Poverty

The world's largest financial institution has a new market: high-interest loans to low-income customers.

Maria Flores was frightened. She was behind on repaying a personal loan, she says, and her finance company in Atlanta was threatening to have her arrested. Flores agreed to take out another loan, which turned out to be a second mortgage on her home. When she couldn't keep up with the new debt on her yearly take-home pay of $22,000, the loan company had another solution: yet another mortgage. She wound up paying an annual percentage rate of 17.99 -- three times the market rate for home loans -- and nearly $700 for life, disability, and unemployment insurance that was written into the contract. It's a familiar story: a consumer with modest income or bad credit being charged astronomical interest rates by a predatory lending outfit. But Flores was not the victim of some shady storefront operation. She got her loans from a division of Citigroup, the world's largest financial institution. In recent years, the bank has aggressively swallowed up so-called subprime lenders, establishing itself as a leader in high-interest loans marketed to low-income, blue-collar, and minority customers.

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CitiFinancial, the bank's principal subprime unit, charges many of its 4.3 million customers double or triple the prices paid by consumers with Citi credit cards and conventional mortgages -- annual interest rates as high as 22 percent on mortgages and 40 percent on personal loans. In addition, a host of lawsuits accuse CitiFinancial of packing loans with hidden fees and overpriced insurance that help shove unsuspecting borrowers into foreclosure or bankruptcy.

"Citigroup is the leader when it comes to predatory lending," says Matt Lee, executive director of Fair Finance Watch, a New York-based consumer group. "They've got it down to a science."

Citi denies that it engages in predatory lending, insisting that high rates are reserved for high-risk customers who might not otherwise qualify for a loan. CitiFinancial helps "working people like teachers, firemen, nurses, and secretaries," says spokeswoman Maria Mendler. "Our customers come back to us time and again because they like our service, our people, and our product."

The high-interest loans have certainly bolstered Citi's bottom line. CitiFinancial posted earnings of more than $1.3 billion last year -- nearly one-tenth of Citigroup's total income. But the bank's subprime business has also sparked federal scrutiny and class-action lawsuits. In Pennsylvania, borrowers have accused CitiFinancial of using early-payment penalties to trap them into costly loans. A state appeals judge called the case "yet another vignette in the timeless and constant effort by the haves to squeeze from the have-nots even the last drop." Last fall, Citigroup agreed to pay $240 million to settle Federal Trade Commission charges and a class-action lawsuit alleging that Associates First Capital, a finance company purchased by Citigroup in 2000, had manipulated 2 million customers into buying overpriced mortgages and credit insurance. It was the largest settlement in FTC history.

Citi insists that the predatory practices ended when it acquired Associates. over the past two years, the bank has introduced a host of reforms, pledging to offer lower-cost loans to customers who have good credit but are paying prices far above the prime rate. So far, though, Citi has yet to make good on its promise. The lender has identified more than 25,000 customers being charged high interest who qualify for prime-rate mortgages. By the end of last year, however, just 110 had been moved into lower-rate loans.

Former CitiFinancial employees report that the company has done little to change its ways. Kelly Raleigh, a former branch manager for CitiFinancial in Jefferson City, Tennessee, says Citi continues to pressure loan officers to ratchet up interest rates and sell more insurance. The message from above, she says, is clear: "Don't get in trouble. But you still have to do this. If you don't hit your quota, you're not gonna have a job."

In addition, borrowers say they are still being saddled with hidden costs. Gaylon Barnes, a heating and air-conditioning repairman in Atlanta, says CitiFinancial stuck him with more than $800 in unwanted insurance on a home loan in November. If Citi has reformed, he says, "I can't tell."

In April, Barnes was one of 50 borrowers from the South and Midwest who traveled to New York to stage a protest at Citi's annual shareholders meeting. Organized by an advocacy group called the Neighborhood Assistance Corp. of America, the demonstrators drove through the night from Atlanta, arriving in a convoy of eight passenger vans after 17 hours on the road. Just before the meeting, however, officials from Citigroup headed off a high-profile protest by agreeing to consider reworking the loans of thousands of borrowers who have lodged complaints.

Those who made the trip say they are pleased that Citi agreed to concessions -- but some remain skeptical that the financial giant will voluntarily end its abuses. "They're trying to pacify the activists," says Maria Flores, who joined the convoy. "I think they'll take their sweet time responding -- until they're really forced to."

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