Citigroup Inc. (C - Analyst Report) seems to be keen on resolving issues emanating from its alleged faulty practices associated with the housing and financial crisis. The company, which recently settled a lawsuit by agreeing to paying $590 million, after it was accused of hiding its dealings in toxic assets, has again resolved a lawsuit involving home equity credit line, according to a Bloomberg report.
The suit alleged that Citi was inappropriately suspending or slashing the home equity lines of credit for thousands of customers based on their property values. According to the settlement terms, Citi has agreed to allow its customers, who suffered credit lines suspension or cut, to confront its practice or recoup fees. Borrowers who had to incur fees for account closures resulting from such practices on part of Citi are entitled to receive $120 each.
Further, Citi would change its practices, improve its notices and make adequate disclosures relating to suspension. Borrowers whose accounts were suspended or cut would also be given an option to access their accounts through account restoration. Citi would further pay $1.2 million to the lawyers who represented the customers.
The settlement, however, needs the court’s approval. It involves borrowers whose accounts were either suspended or reduced by Citi between January 1, 2008 and January 31, 2012. Citi did not accept any wrongdoing on its part.
In an effort to reach a settlement with investors who bought its shares between February 2007 and April 2008, last week Citi agreed to shell out $590 million. The settlement, one of the largest of its kind, has accused Citi of misleading its investors by withholding information regarding its toxic asset transactions during that period.
According to Citi, despite denying the allegations, it opted for the settlement to do away with the uncertainties and costs involved in the litigation. The settlement received preliminary approval and now awaits the next hearing on January 15, 2013.
However, Citi is not the only one to settle such charges. A number of the Wall Street big shots have been chased over such issues and their conduct that led to the financial crisis. Companies such as Bank of America Corp. (BAC - Analyst Report) and Wells Fargo & Co. (WFC - Analyst Report) struck a similar cord with the suitors and agreed to pay millions for settling such litigations in the past.
We believe that the suit settlement would lessen Citi’s litigation overhang to an extent. However, the company stands to lose its hard earned money which could have been otherwise used for growth purposes. Yet this particular settlement involving home equity credit lines brings relief to the borrowers and adoption of improved practices would be welcome and help win back customers’ confidence, which would aid the company over the long term.
Citi otherwise boasts an impressive global footprint and attractive core business. The company has restructured its business and overhauled its risk management. It is reducing its risky exposures by trimming its problem assets, which in turn frees up capital to be invested in its core business. A low interest rate environment, regulatory headwinds and litigation risks remain our concerns.
Citi currently retains its Zacks #3 Rank, which translates into a short-term Hold rating. Considering its fundamentals, we have a long-term Neutral recommendation on the stock.