Citigroup will pay $7 billion to resolve claims it misled investors who purchased shoddy mortgage-backed securities that helped lead to the financial crisis six years ago, Reuters reported July 14. The deal includes the largest civil fraud penalty ever levied by the U.S. Department of Justice.
The multibillion-dollar settlement is more than twice what many analysts expected but less than the $12 billion the government sought in negotiations with Citigroup.
Many of the MBS were marketed as safe, even though the bank knew they were likely to collapse, and that widespread failure helped fuel the 2007-09 financial crisis, Reuters reported.
“We're not letting up, and we're not going away,” Tony West, a Justice Department lawyer and lead negotiator, said when announcing the Citigroup deal, Reuters reported. “We will continue to pursue these cases.”
As part of the deal, Citigroup acknowledged it was aware that “significant percentages” of sample loans did not comply with underwriting guidelines but were pooled into securities anyway. Many of the loans listed unreasonable borrower incomes or home values below the original appraisals.
“The penalty is appropriate, given the strength of the evidence of the wrongdoing committed by Citi,” U.S. Attorney General Eric Holder said in a statement on Monday, Reuters reported. “Despite the fact that Citigroup learned of serious and widespread defects among the increasingly risky loans they were securitizing, the bank and its employees concealed these defects.”
The settlement, which resolves claims over both mortgage securities and collateralized debt obligations the bank structured or underwrote from 2003-08, calls for Citi to pay $4.5 billion in cash and provide $2.5 billion in aid to low-income tenants and struggling homeowners.
The consumer portion of the deal will include financing for construction of affordable multifamily rental housing and principal reduction and forbearance for residential loans, Reuters reported.