Separate and Unequal: The Effects of Overcharging by Citigroup

Citigroup uses a red umbrella as its logo to symbolize that its services cover the financial spectrum. However, not all parts of the umbrella offer the same protection or the same products. Citigroup does not have standardized credit underwriting throughout its affiliates and therefore does not ensure equal access to prime loan products. Through its separate subprime and prime subsidiaries, Citigroup has developed a nationwide pattern and practice of separate and unequal credit markets related to its prime and subprime lending practices. These separate and unequal credit markets have a disparate effect on protected classes.

The separate and unequal credit markets as practiced by Citigroup result in discrimination and market inefficiency. The Community Reinvestment Association of North Carolina (CRA-NC) estimates that Citigroup’s pricing of “A” credit borrowers, who qualify for prime interest rates, at subprime interest rates costs borrowers $191 million a year or $5.7 billion over 30 years – just for loans originated in 2000.

Citigroup has created separate delivery channels for loans: one is fair, priced correctly, and regulated, while the other is predatory, priced arbitrarily, and not regulated to the same extent. Citigroup’s subsidiary Citibank offers a variety of prime loan products, including affordable loan program products with low downpayments, while its subprime subsidiaries, CitiFinancial Services (“CitiFinancial”), CitiFinancial Mortgage, Associates Financial Services and Associates Home Equity Service (collectively “the Associates” and now part of CitiFinancial), offer only subprime loans. In these separate delivery channels, Citigroup has developed different standards of credit underwriting for products offered and the referral process, regardless of the creditworthiness of the consumer.

Although both prime and subprime subsidiaries use the red umbrella logo, which may lead a borrower to conclude that they are essentially the same, the underwriting varies depending on whether the consumer enters the prime channel or the subprime channel. A borrower who walks into a Citibank or CitiMortgage will have access to different products than a borrower who walks into a CitiFinancial, even if the borrowers are identical. Citigroup offers different terms and conditions for obtaining an “A” product loan through its subprime channels. As a result, borrowers with similar credit profiles are being denied similar loan terms, resulting in separate and unequal practices.

In response to pressure from advocacy groups, Citigroup has attempted to address the issue by referring customers to prime loan channels. However, Citigroup’s qualifications for its affordable loan programs offered by Citibank differ from the qualifications required to participate in the Referral Up Program through CitiFinancial. The Referral Up Program, which Citigroup implemented as an attempt to offer prime loans to credit-worthy customers in their subprime subsidiaries, has more stringent requirements. The Referral Up Program requires 70 to 75 percent loan-to-value ratios for borrowers with 660+ credit scores. However, Citibank offers affordable loan products with lower standards for credit scores (580-620 scores), higher loan-to-value ratios (97%), and lower downpayment requirements ($500 or 3%). Those affordable loan products are not available to CitiFinancial customers who would have been eligible if they had gone to Citibank.

The separate and unequal loan delivery channels have a disparate impact on minorities. Historically, during segregation, traditional banks did not lend to African Americans. Partly as a result of their historical relationship with banks, African Americans are more likely to go to a subprime lender than whites. A study by the Department of Housing and Urban Development showed that subprime loans are five times more likely in predominately African American neighborhoods than comparable white neighborhoods. Upper-income African Americans are twice as likely as low-income white Americans to have a subprime loan.[1]

Citigroup’s separate and unequal credit markets are a problem throughout the United States. Nationally, Citigroup’s prime lenders made nearly 58% of their HMDA reported loans to white borrowers, but CitiFinancial made 35.6% of its loans to white borrowers and the Associates made 20.2% of its loans to white borrowers. However, Citigroup’s prime lenders made 8.7% of their loans to African American borrowers, while CitiFinancial and the Associates combined made 11.5% of their loans to African Americans.[2] Similarly, Citigroup’s prime lenders nationwide made 30.4% of their loans to low- and moderate-income individuals, while their subprime lenders, CitiFinancial and the Associates, made 57.7% of their loans to low- and moderate-income individuals.

Citigroup has no Citibank branches in North Carolina, but over 100 CitiFinancial offices. In 2000, Citigroup’s subprime subsidiaries, CitiFinancial and the Associates, were the fourth largest mortgage lender in North Carolina, and the leading lender to African Americans and low-income borrowers. They had a 4% share of all loans, but a 6% share of all loans to African Americans and a 7.9% share of the loans to low-income borrowers. Citibank was not in the top 50 lenders, and had only 0.1% of the loans to African Americans and none of the loans to low-income borrowers (see attached Exhibit A). In North Carolina in 2000, Citigroup’s prime loan channels made 66 (representing 10.6% of the total amount of 630) single-family home loans to minorities and 453 (72.1%) to whites. In contrast, Citigroup’s subprime channels made 2,191 (or 21.9% of the total) single-family home loans to minorities (33.1% of all subprime loans went to whites).

As shown in Exhibit B, in 2000, the Associates had a much higher percentage of its home mortgage loan portfolio dedicated to African American borrowers than average. The differences in certain MSAs are startling. In Jacksonville, NC, where 18.5% of the population is African American, number of black applicants was over 23 percentage points higher than average. The Associates had 42% of their portfolio dedicated to African American borrowers in Jacksonville – 33 percentage points higher than average for all lenders in that MSA. In Raleigh-Durham, where African Americans make up 22% of the population, 31% of the Associates’ portfolio was dedicated to African Americans – over 20 percentage points higher than average for all lenders in that MSA.

In 2000, Citigroup’s subprime subsidiaries made 53.4% of their mortgage loans to low- and moderate-income borrowers. In fact, in all but two MSAs in North Carolina, the Associates dedicated between 51.6% and 78.7% of their portfolio to low- to moderate-income borrowers. In the Greensboro MSA, the Associates dedicated 78.8% of their portfolio to low- and moderate-income borrowers – more than 54 percentage points higher than the average for that area. Given the dearth of prime loans available to African Americans and low-income borrowers from Citigroup in North Carolina, these populations are disproportionately affected by Citigroup’s subprime lenders.

The separate and unequal credit markets result in market inefficiency. The U.S. Department of Justice has reported that an estimated 20% of subprime borrowers actually qualify for prime products.[3] Nationwide in 2000, the Associates and CitiFinancial together made 437,805 loans totaling almost $28 billion. The average loan amount was $63,774. Using the risk premiums on first mortgages from the study of seven commercial subprime lenders by Michael Staten at the McDonough School of Business at Georgetown University (Exhibit C), CRA-NC has calculated the amount paid by mispriced individuals over 30 years and on a monthly basis. The results, shown in Exhibit D, illustrate the inefficiencies. Individual borrowers can pay $110,000 more than they should over the life of a 30-year loan. Each month, these individuals pay $327 more than they would if they had received a prime rate loan.

If 20% of the borrowers in 2000 actually qualify for prime loans, it means that 87,561 loans were mispriced, totaling almost $5.6 billion. As shown in Exhibit E, in aggregate, subprime borrowers with credit scores that qualify for prime loans will pay a total of $5.7 billion more over the life of the loan than would if they had received a prime rate loan. That $5.7 billion over 30 years, which is being spent inefficiently, represents only one year’s worth of loans originated and is not accounted for by credit risk. It represents nearly $16 million per month that is being wasted.[4] Not only are Citigroup’s separate and inefficient credit markets hurting individuals and communities, they are hurting the nation’s economy.

Since subprime borrowers are generally paying above and beyond what they should, even with additional risk factors, they are unable to build wealth. Since subprime lending disproportionately affects minority and low-income borrowers, so does the market inefficiency. The Department of Justice found that 98% of those subprime borrowers who qualify for prime products are African Americans.[5] This shocking statistic means that the market inefficiency is disproportionately affecting African Americans, who are paying more than $188 million each year in excess of what they should. The money being wasted is coming from the pockets of those who can least afford it.

[1] HUD report, “Unequal Burden: Income and Racial Disparities in Subprime Lending in America”, April 2000.

[2] A large portion of CitiFinancial (68%) and the Associates (42.6%) loans do not specify race. In contrast, only 14.8% of Citigroup’s prime loans do not specify race. We speculate that the disparity between the two channels would increase if race were identified for all borrowers.

[3] Speech given by Ralph F. Boyd, Jr., Assistant Attorney General, Civil Rights Division, U.S. Department of Justice, October 9, 2001. The twenty percent had credit scores of 700 or above. Fannie Mae and Freddie Mac put the estimate much higher – between 35 and 50%. We chose the more conservative number for our calculations.

[4] These are conservative calculations and use the lowest interest rate in each category. The market for second mortgages is even more extreme – some subprime borrowers with credit scores over 650 are paying more than 1200 basis points higher than the treasury rate.

[5] Jon Seward, attorney in the Department of Justice’s Civil Rights Division, in a speech to the Mortgage Bankers Association. This involved the examination of one subprime lender’s portfolio.