The US banking giant Citigroup has agreed to pay a record penalty to settle charges that it engaged in abusive lending practices.

The commission will not tolerate the fleecing of... borrowers

Timothy Muric FTC Chairman

It will pay $215m (£138m) to customers as part of an agreement reached with the US Federal Trade Commission (FTC).

And Citigroup will hand over a further $25m in connection with a separate legal case.

The cases both related to Citigroup's subsidiary - Associates First Capital Corp.

It was charged with using deceptive marketing practices to induce customers to refinance existing debts into home loans with high interest rates, costs and fees.

Lending to the poor

The $215m payment will go to customers who bought credit insurance in connection with loans made between 1 December 1995 and 30 November 2000.

We're gratified this matter is behind us

Robert Willumstad Citigroup

And the $25m payment will go to people whose mortgage loans were refinanced by Associates during the same period.

The company is a major player in sub-prime lending - that is lending to the poor or those with bad credit ratings.

"The commission will not tolerate the fleecing of sub-prime borrowers through deceptive lending practices," said Timothy Muric the FTC chairman.

Settlement needs approval

Citigroup bought Associates in November 2000 from Ford Motors for about $27bn.

"We're gratified this matter is behind us," said Citigroup president Robert Willumstad in a statement.

The settlement must now be approved by the federal district court in Atlanta.

And a related settlement in a class action lawsuit in California must also be approved.