WASHINGTON (Reuters) - Giant financial services firm Citigroup Inc. (NYSE:C - News) will pay a record penalty as part of a $240 million settlement of predatory lending charges, the U.S. Federal Trade Commission said on Thursday.
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Citigroup agreed to pay $215 million in consumer redress to the agency and will also hand over $25 million in connection with a class action settlement, resolving allegations that its Associates First Capital Corp. subsidiary gouged the poor and those with spotty credit records.

The FTC said the $215 million was the largest consumer protection settlement in the agency's history.

The agreement eclipses a $60 million settlement that the FTC reached in March with California mortgage lender First Alliance, which regulators believed to be the largest-ever accord over abusive lending at the time.

"The Commission will not tolerate the fleecing of subprime borrowers through deceptive lending practices," FTC Chairman Timothy Muris said in a statement.

An FTC lawsuit filed in March 2001 alleged Associates used deceptive marketing practices to induce consumers to refinance existing debts into home loans with high interest rates, costs and fees.

The $215 million payment will go to consumers who bought credit insurance in connection with loans made by The Associates between Dec. 1, 1995 and Nov. 30, 2000. The $25 million will go to consumers whose Associates mortgage loans were refinanced, or 'flipped,' during the same time period.

At a news conference, FTC officials estimated the average Associates victim would get about $1,000 -- representing roughly 60 percent of the excessive charges.

"This settlement will go far in assisting those who have been harmed," said FTC Commissioner Mozelle Thompson.

Citigroup stock closed down $1.46, or about 5 percent, at $27.65 a share on the New York Stock Exchange.

UNIT BOUGHT FROM FORD

Citigroup bought Associates in November of 2000 from Ford Motor Co. (NYSE:F - News) for about $27 billion.

"We're gratified this matter is behind us," said Citigroup President Robert Willumstad in a statement. "When we bought Associates, we found certain unacceptable practices that needed to be changed."

Citigroup says it has put in place a program to address the practices of Associates and the operation has merged with its CitiFinancial consumer lending unit.

In Aug. 2001, Citigroup stopped doing business with more than 3,600 consumer finance brokers and also dropped 300 banks which sold loans to Associates.

Citigroup's Willumstad said CitiFinancial branches had recently cut the fees known as "points" on real estate loans to 3 from 5 percentage points. "This reduction sets us apart from our competitors in the industry," he said.

National Association of Consumer Advocates Executive Director Ira Rheingold said he hoped the penalty would serve as a warning to other financial institutions. "I'm glad to see Citigroup being punished," he said. "Everyone knew what a terrible unit Associates was before they bought it."

The settlement is contingent on approval of the federal court in Atlanta and approval of a related settlement in a class action lawsuit currently pending in California.

The FTC's lawsuit charged that The Associates engaged in deceptive practices designed to induce borrowers unknowingly to purchase optional credit insurance products, a practice known as "packing."

The settlement requires CitiFinancial to provide annual reports to the commission detailing its practices on the sale and marketing of credit insurance and other add-on products, and the progress and status of steps taken to improve its practices.

Consumers will get a notice about the settlement in the mail that will explain how they can participate in the redress program, the FTC said.

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