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Justice Department Secures Record $7 Billion Global Settlement with Citigroup for Misleading Investors About Securities Containing Toxic Mortgages

by | Jul 18, 2014 | Firm News

The Justice Department, along with federal and state partners, today announced a $7 billion settlement with Citigroup Inc. to resolve federal and state civil claims related to Citigroup’s conduct in the packaging, securitization, marketing, sale and issuance of residential mortgage-backed securities (RMBS) prior to Jan. 1, 2009.  The resolution includes a $4 billion civil penalty – the largest penalty to date under the Financial Institutions Reform, Recovery and Enforcement Act (FIRREA).  As part of the settlement, Citigroup acknowledged it made serious misrepresentations to the public – including the investing public – about the mortgage loans it securitized in RMBS.  The resolution also requires Citigroup to provide relief to underwater homeowners, distressed borrowers and affected communities through a variety of means including financing affordable rental housing developments for low-income families in high-cost areas.  The settlement does not absolve Citigroup or its employees from facing any possible criminal charges.

The settlement includes an agreed upon statement of facts that describes how Citigroup made representations to RMBS investors about the quality of the mortgage loans it securitized and sold to investors.  Contrary to those representations, Citigroup securitized and sold RMBS with underlying mortgage loans that it knew had material defects.  As the statement of facts explains, on a number of occasions, Citigroup employees learned that significant percentages of the mortgage loans reviewed in due diligence had material defects.  In one instance, a Citigroup trader stated in an internal email that he “went through the Diligence Reports and think[s] [they] should start praying . . . [he] would not be surprised if half of these loans went down. . . It’s amazing that some of these loans were closed at all.”  Citigroup nevertheless securitized the loan pools containing defective loans and sold the resulting RMBS to investors for billions of dollars.  This conduct, along with similar conduct by other banks that bundled defective and toxic loans into securities and misled investors who purchased those securities, contributed to the financial crisis.

“Today, we hold Citi accountable for its contributing role in creating the financial crisis, not only by demanding the largest civil penalty in history, but also by requiring innovative consumer relief that will help rectify the harm caused by Citi’s conduct,” said Associate Attorney General Tony West.  “In addition to the principal reductions and loan modifications we’ve built into previous resolutions, this consumer relief menu includes new measures such as $200 million in typically hard-to-obtain financing that will facilitate the construction of affordable rental housing, bringing relief to families pushed into the rental market in the wake of the financial crisis.”

Of the $7 billion resolution, $4.5 billion will be paid to settle federal and state civil claims by various entities related to RMBS: Citigroup will pay $4 billion as a civil penalty to settle the Justice Department claims under FIRREA, $208.25 million to settle federal and state securities claims by the Federal Deposit Insurance Corporation (FDIC), $102.7 million to settle claims by the state of California, $92 million to settle claims by the state of New York, $44 million to settle claims by the state of Illinois, $45.7  million to settle claims by the Commonwealth of Massachusetts, and $7.35 to settle claims by the state of Delaware.

Citigroup will pay out the remaining $2.5 billion in the form of relief to aid consumers harmed by the unlawful conduct of Citigroup.  That relief will take various forms, including loan modification for underwater homeowners, refinancing for distressed borrowers, down payment and closing cost assistance to homebuyers, donations to organizations assisting communities in redevelopment and affordable rental housing for low-income families in high-cost areas.  An independent monitor will be appointed to determine whether Citigroup is satisfying its obligations.  If Citigroup fails to live up to its agreement by the end of 2018,  it must pay liquidated damages in the amount of the shortfall to NeighborWorks America, a non-profit organization and leader in providing affordable housing and facilitating community development.

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