Citigroup and Subprime Lending

Abstract

Citigroup’s intention to acquire Associates Corporation is questionable. This is because CitiFinancial, Citigroup’s unit, and the Associate’s Corporation earn massive profits from subprime lending. As from the reports, subprime lending is associated with various accusations that portray it as a predatory lending group. Subprime is accused of various moral concerns that reveal some injustice practices to uninformed individuals. Subprime is also accused of issuing single premium life insurances at very high-interest rates. Other accusations of subprime are the unjustified high-interest rates and the harassment and intimidation of clients. However, Citigroup does not flinch with the negative perceptions of its acquisition as it intends to improve and streamline all the lending activities of its acquired company.

Introduction

Whenever a company acquires or merges with another, several critics arise about the acquisition (Parnes, 2009). Citigroup, Inc. intends to acquire Associates Corporation to expand its operations and reap more profits than before. However, Citigroup’s acquisition of the Associates is questionable since the Associates has had several legal accusations regarding its operations. The justice department has records of at least 700 lawsuits that accused Associates of violating the lending laws. Moreover, Citigroup also intends to work together with subprime lending. Subprime lending happens to be a credit organization that lends money to people who do not qualify for bank loans. Just like the Associates, subprime lending has a series of accusations. ACORN, which is an association that advocates for reformation, describes subprime lenders as a set of legalized robbers. This paper will give a stringent analysis of the moral concerns associated with subprime lending, a critical assessment of CitiFinancial’s abuse allegations, and the policies that Citigroup should adopt to reform the negative reputation.

Moral concerns associated with subprime lending

From a literal point of view, one can regard subprime lending as a guiltless company that lends money to people who do not qualify to secure loans from banks. Subprime lends money to the poor, the elderly, and the minority people in the society, who can never access funds from other credit organizations. However, the biggest mistake that subprime lending makes is failing to enlighten the uninformed group of people of their terms and conditions. Subprime lending has an aggressive marketing strategy that draws the attention of those in need of home equity loans to settle their bills. However, the payment terms are not clearly stated, and the ignorant groups of individuals rush to apply for subprime loans without knowing the trouble that follows. According to ACORN, subprime lending charges high-interest rates, which are associated with harsh prepayment penalties. The subprime strategy targets vulnerable borrowers who are intimidated and harassed to repay the loans. Essentially, the moral concerns associated with subprime are based on justice considerations. Subprime marketing strategies sways people to apply for their loans, but they treat them unfairly because of their ignorance and lack of knowledge.

CitiFinancial and single-premium life insurance

People always find it worthwhile to pay some amount of money that would protect them against some risks. Therefore, some people opt to register for single-premium life insurance that would compensate them in case a specific loss occurs. CitiFinancial has complicated its terms and conditions regarding single premium life insurance. Subprime lending sells its insurance cover along with the loan principal, interest on the loans, and insurance premiums. Moreover, subprime lenders pack the premiums into the loan principal; therefore, a high-interest rate finances the insurance. All factors considered subprime lenders end up having costly single-premium life insurance, and borrowers do not understand the logic behind it (Adams, Einav, & Levin, 2009). Therefore, CitiFinancial should find ways of separating the loan principal and its interest from the insurance premiums. Moreover, CitiFinancial should employ strategies of ensuring that the insurance covers the entire period of the loan. Most importantly, the company should employ strategies that would enable the borrowers to understand how the company handles single-premium life insurance covers.

CitiFinancial and other abuse allegations

CitiFinancial is faced with several other allegations of abusing low-income families and the elderly. The company is accused of charging unjustified high-interest rates. CitiFinancial should take time to assess all their activities and determine the policies that need some change. They should find ways of justifying their interests, fines, and fees. The company should find ways of presenting its terms and conditions to its clients. Essentially, by the time clients agree to sign deals with CitiFinancial, they should be informed of the repayment terms and conditions. Finally, CitiFinancial should find admirable ways of collecting their monies without necessarily harassing or intimidating their clients.

ACORN and AARP’s efforts to weed out unscrupulous practices

ACORN and AARP are indeed doing some good work in trying to streamline and weed out unscrupulous practices in the credit market. ACORN requires credit companies to stop charging high upfront fees and high prepayment fees. AARP is an association that protects retired people, and it has advocated for a campaign to educate and enlighten the elderly. Since Citigroup intends to streamline and improve the credit institution, it should support ACORN and AARP’s efforts. Citigroup should support tight regulatory supervision of the subprime lending market to streamline its operations. The tightened regulations will be difficult to embrace, especially during the initial stages, but they are the only remedies to streamline all the lending activities of credit institutions (Johnston, 2009).

Policies that Citigroup should adopt for subprime lending

As discussed, many allegations question the credibility of subprime lending. Therefore, Citigroup will have to enforce the following policies to ensure that there is a reformation of the activities in subprime lending.

1. All types of loans must have a clear definition of the limits, terms, and conditions (Gertler & Gilchrist, 2003). The proven ability to pay the loan and the financial soundness of the borrower will determine the credit limit.
2. The borrowers and the lenders are obligated to have signed documentation of all the procedures and payments made concerning the loan.
3. In the case of credit unions, the number of secured loans to individual members must not exceed the capital amount that is already saved by the credit union (Mateut, Bougheas, & Mizen, 2006).
4. All loans must have clearly defined maturity periods.
5. The credit officers must update, analyze, and monitor all the issued loans.

Conclusion

Credit institutions aim at making profits like other businesses. Therefore, individuals who intend to borrow monies must take their time to shop around for a credit institution that has the best offer (O’Dviscoll, 2009). Moreover, people are cautioned to ensure that they read and understand every detail of a loan agreement form before signing. On the other hand, credit institutions are urged to have some moral considerations in all their activities. As much as they aim at generating maximum profits, they should be considerate of their borrowers, and they should employ strategies that portray their competency.

References

Adams, W., Einav, L., & Levin, J. (2009). Liquidity constraints and imperfect information in subprime lending. American Economic Review, 99(1), 49-84.

Gertler, M., & Gilchrist, S. (2003). The cyclical behavior of short-term business lending. European Economic Review, 37(23), 623-631.

Johnston, T. C. (2009). Mortgage marketing practices and the U.S. credit crisis. Academy of Marketing Studies Journal, 13(2), 11-23.

Mateut, S., Bougheas, S., & Mizen, P. (2006). Trade credit, bank lending and monetary policy transmission. European Economic Review, 50(3), 603-629.

O’Dviscoll, J. P. (2009). Money and the present crisis. CATO Journal, 29(1), 167-186.

Parnes, D. (2009). The corporate acquisition policy of financially distressed firms. Financial Review, 44(4), 603-623.