A North Carolina judge struck down a mandatory arbitration clause, which had been placed in consumer contracts by CitiFinancial Services, a division of Citigroup, Inc. Judge Ronald Stephens ruled that two North Carolina women have the right to bring a lawsuit against CitiFinancial for predatory lending practices in state civil court and will not be forced into arbitration as requested by CitiFinancial.

The lawsuit was filed as a class action, so the ruling affects thousands of consumers across North Carolina.

In June 2002, Raleigh attorneys John Alan Jones and G. Christopher Olson filed a class action on behalf of Fannie Lee Tillman and Shirley Richardson. Tillman and Richardson contended that they were victims of predatory lending practices by CitiFinancial. Their lawsuit sought compensation for thousands of North Carolina borrowers who were sold a now-outlawed type of credit insurance known as single-premium credit insurance (SPCI).

Consumer groups have complained about SPCI for years.

The beneficiary of the insurance policy is the bank, not the borrower. Jones explained. With SPCI, the entire insurance premium is paid in a lump sum when the loan is made. SPCI is an extremely expensive type of insurance. The bank pressured customers to buy the insurance and then financed the premium and added it to their loan."

"Folks like Ms. Richardson and Ms. Tillman ended up borrowing more money than they needed or wanted and were then forced to pay interest on the premium over the life of the loan," Jones said. "This lending practice also led to an increase in closing costs such as points and origination fees. So the bank is the beneficiary of the insurance. The bank gets to loan more money. The bank earns more on closing costs. And by the way, usually the bank also earned a big commission on the insurance premium, sometimes approaching 50 percent.

The suit, which was filed in Superior Court in Henderson, North Carolina, alleges that Tillman and Richardson were never told that the SPCI had been added to their loans or that they could be forced into arbitration. Both women testified that they were rushed through their loan closings and simply told where to sign their names or place their initials on the loan documents.

After Tillman and Richardson filed their lawsuit in civil court against CitiFinancial, the bank, which had included an arbitration clause in their closing documents, tried to force Tillman and Richardson into arbitration. Judge Stephens held that the CitiFinancial arbitration clause should be struck down because it was so one-sided and unfair to CitiFinancial borrowers.

In theory, arbitration clauses are intended to provide an efficient and inexpensive way to resolve disputes, without going into the courts, explained Jones. Unfortunately, CitiFinancials arbitration clause was so one-sided and expensive that few, if any, North Carolina consumers could afford it. CitiFinancial drafted an arbitration clause which essentially immunized it from the victims of its predatory lending practices. Thanks to Judge Stephens, North Carolina borrowers victimized by CitiFinancials predatory lending practices will have their day in court.

CitiFinancial, formerly known as Commercial Credit Loans, Inc., began including the mandatory arbitration clause in its loan agreements in 1996. CitiFinancials customers were in the subprime lending market, meaning that their credit ratings were below average and the interest rates charged were very high. Both Tillman and Richardson were charged rates of 15-20 percent by CitiFinancial.

CitiFinancials arbitration clause prevented them from bringing a lawsuit in civil court, but included exceptions which allowed CitiFinancial to continue to sue borrowers in civil court. To illustrate how one-sided CitiFinancials arbitration clause was, Olson cited evidence indicating that CitiFinancial had brought 3,700 lawsuits against North Carolina borrowers in civil court since the arbitration clause was adopted in 1996, but no borrower had gone into arbitration.

Jones and Olson told the Court that the arbitration clause was so expensive it would prevent Richardson, Tillman, or any other CitiFinancial borrower from going into arbitration. In his ruling, Judge Ronald L. Stephens cited evidence that CitiFinancial arbitration process could cost the borrower more than $10,000 if they lost, plus costs and attorneys fees.

Jones emphasized, This is not some coupon class action. We believe that as many as 25,000 North Carolina borrowers are entitled to a refund of their insurance premiums, as well as the closing costs and interests caused by those premiums. If we prevail, CitiFinancial will be required to pay back many North Carolinians the thousands of dollars which was wrongly taken from them.

CitiFinancial is appealing the ruling.