Link Executive Compensation to Predatory Lending

WHEREAS, the sub-prime lending industry has come under increasing public scrutiny for predatory lending directed at low-income people. Eight states, including New York and California have adopted rules to curb predatory lending abuses. Federal regulators and legislators are also considering measures to protect sub-prime borrowers.

Citigroup's executive officers have made public statements committing to business practices free of predatory lending. We believe our corporate leaders should be evaluated on their success in meeting these commitments.

Predatory lending behavior is expensive for borrowers. According to the North Carolina-based Coalition for Responsible Lending, predatory practices cost borrowers more than $9 billion annually. Controversial practices such as the inclusion of prepayment penalties on sub-prime loans, a provision found in 80% of sub-prime loans, mean that economically vulnerable borrowers often cannot afford to take advantage of falling interest rates by refinancing their loans. Conventional borrowers refinance with ease, since only 2% of conventional loans carry pre-payment penalties.

Predatory lending practices are also expensive for financial institutions. The United States Federal Trade Commission has filed a $500 million suit against Citigroup alleging widespread abuses in sub-prime lending practices. In 2001, Citigroup agreed to a $20 million settlement of deceptive marketing claims brought by the state of North Carolina against Associates First Capital, which Citigroup acquired in 2000. The New York Times reported on September 7, 2001 that Citigroup had settled 200 lawsuits pertaining to Associates' lending practices, with another 400 suits remaining. These suits, and the publicity that attends them, damage the company's good reputation and divert management attention from other matters.

Citigroup has slowly made progress in areas deemed by critics to be predatory practices. In June, 2001 Citigroup demonstrated industry leadership by suspending the highly controversial sale of single premium credit insurance policies. In addition, Citigroup now limits prepayment penalties to a maximum of three years and offers a no prepayment penalty option at a higher interest rate. Thirty-five states have laws either prohibiting or limiting prepayment penalties, but Citigroup and other sub-prime lenders have skirted these local laws by invoking a federal law that transfers regulatory authority for "alternative mortgages" to the Office of Thrift Supervision, which has no standards concerning prepayment penalties.

Citigroup continues to be a prime focus of predatory lending protests. Grassroots community and fair housing activists have called upon Citigroup to end prepayment penalties on sub-prime loans and to eliminate mandatory arbitration provisions from sub-prime loans, which limit the legal recourse of borrowers who believe they have been subject to predatory practices.

RESOLVED, the Board shall conduct a special executive compensation review to study linking a portion of executive compensation to addressing predatory lending practices. Among the factors to be considered in this review: implementation of policies to prevent predatory lending; constructive meetings with concerned community groups; and reductions in predatory lending complaints filed with government bodies. A summary of this review will be published in the Compensation Committee's report to shareholders.

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