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November 30, 2000
Shareholder Resolution Follows Associates First Capital to Citigroup
by Mark Thomsen
Groups of investors led by the Presbyterian Church (USA) file a resolution calling for Citigroup to
implement policies that ensure employees and brokers do not engage in predatory lending practices.
SocialFunds.com --
Citigroup Inc. is already feeling repercussions from its September 2000 purchase of Associates
First Capital Corp. In a shareholder resolution filed last week, investors are requesting that the
company take action to prevent unscrupulous lending practices by employees and affiliates.
 Associates First Capital, formerly the largest
publicly traded finance company in the U.S., gained notoriety when its broker-partners in the
Detroit area were alleged to be charging African-American loan applicants more than white
borrowers. That prompted the presentation of a shareholder resolution at its annual meeting last
May. At that meeting, nine percent voted in favor of asking the company to develop and enforce
policies to end predatory lending.
"While Ethical Funds recognizes Citigroup's
contributions to communities through its Banking on Enterprise initiative and (various)
donations...we are concerned about alleged predatory lending practices at the Associates," said
Robert Walker, Ethical Funds' Vice President of SRI Policy Research. Ethical Funds, Inc., a
co-filer of the resolution, manages a family of 12 socially responsible mutual funds with $2.3
billion in assets. The Vancouver, Canada-based firm is the first mutual fund company in Canada to
file a shareholder resolution.
The issues at hand are sub-prime lending and predatory
lending. Sub-prime lending refers to lending to borrowers who do not qualify for "prime" rates.
Prime rates are usually available only to borrowers with excellent credit histories. In mortgage
lending, for example, a poor credit history may result in increases above the prime rate, called
premiums. These premiums can range from an extra one to six points (1-6 percent).
Predatory lending generally refers to unethical lending practices in the sub-prime market,
which typically has disproportionate percentages of low-income, elderly and minority borrowers.
Excessively high interest rates, extra fees, hidden costs and unnecessary insurance are a few of
the tactics that characterize predatory lenders. The worst cases involve fraud, falsifications, and
even forgery.
Predatory lenders take advantage of two oft-common weaknesses of sub-prime
borrowers: the desire for cash up front, and little knowledge about complex credit terms. Sub-prime
borrowers who fall victim to predatory lending usually have low incomes, and want cash up front for
things like badly needed home repairs. Unfortunately, they sometimes do not correctly assess the
impact of the terms of the loan.
The strong economy has led to a boom in sub-prime
lending. HUD estimates that sub-prime loan volume has grown from $20 billion in 1993 to more than
$150 billion in 1998.
The growth of the sub-prime market and predatory lending is
beginning to spur the federal government into action. The Department of Housing and Urban
Development (HUD) has established a national task force on predatory lending, and Fannie Mae
announced recently it was partnering with organizations in New York to start The New York Predatory
Lending Pilot. The program will enable lenders to refinance mortgages to lower interest rates,
thereby allowing homeowners to remain in their homes.
Citibank is not ignoring the
allegations made against Associates First Capital. Earlier this month, the financial services giant
announced policy changes in its real-estate secured lending area. In a letter to employees, Robert
Willumstad, Vice Chairman of Lending for Citigroup's Global Consumer Group, said the changes will
include "enhanced employee training and compliance practices, stronger broker compliance and
controls, and new prepayment penalty policies."
Predatory lending is not a new phenomenon,
and the local loan shark will not become extinct soon. But a vulnerable sector of society being
preyed upon by established financial institutions is a travesty. Shareholder resolutions such as
the one filed with Citigroup will let the industry know that such behavior will indeed generate
negative returns.
www.citibank.com
www.theassociates.com
©
SRI World Group, Inc. All Rights Reserved.
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