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From Banking and Finance Law Daily, July 14, 2014

Citigroup to pay $7 billion to settle federal, state claims

By Colleen M. Svelnis, J.D.

Citigroup has agreed to pay a total of $4.5 billion in cash and provide $2.5 billion in consumer relief under the terms of its settlement with the U.S. Department of Justice, along with federal and state partners. As part of the settlement, Citigroup acknowledged that it made serious misrepresentations to the public arising out of the packaging, marketing, sale and issuance of residential mortgage-backed securities (RMBS).

The DOJ announced that Citigroup will pay the $4 billion as a civil penalty (the largest payment of its kind) to settle the JOD’s claims under the Financial Institutions Reform, Recovery and Enforcement Act (FIRREA), $208.25 million to settle federal and state securities claims by the Federal Deposit Insurance Corporation, $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. $2.5 billion has been earmarked in order to aid struggling consumers and 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.

Joint federal, state effort. The DOJ, several state attorneys general, and the FDIC had ongoing investigations relating to RMBS and collateralized debt obligations (CDOs) issued, structured, or underwritten by Citigroup between 2003 and 2008. Attorney General Eric Holder commented “this historic penalty is appropriate given the strength of the evidence of the wrongdoing committed by Citi.” Holder continued, saying “[t]he bank's activities contributed mightily to the financial crisis that devastated our economy in 2008. Taken together, we believe the size and scope of this resolution goes beyond what could be considered the mere cost of doing business. Citi is not the first financial institution to be held accountable by this Justice Department, and it will certainly not be the last.”

Michael Corbat, Chief Executive Officer of Citigroup, released the following statement: “The comprehensive settlement announced today with the U.S. Department of Justice, state attorneys general, and the FDIC resolves all pending civil investigations related to our legacy RMBS and CDO underwriting, structuring and issuance activities. We also have now resolved substantially all of our legacy RMBS and CDO litigation. We believe that this settlement is in the best interests of our shareholders, and allows us to move forward and to focus on the future, not the past.”

Ongoing task force. The settlement was negotiated through the Residential Mortgage-Backed Securities Working Group, part of the Financial Fraud Enforcement Task Force, a joint state and federal working group formed in 2012 to share resources and continue investigating wrongdoing in the mortgage-backed securities market prior to the financial crisis. The working group has recovered $20 billion to date for American consumers and investors. New York Attorney General Eric T. Schneiderman, chairman of the group, said of the settlement, “Since my first day in office, I have insisted that there must be accountability for the misconduct that led to the crash of the housing market and the collapse of the American economy,” He concluded that “today's result is a major victory in the fight to hold those who caused the financial crisis accountable.”

An agreed upon Statement of Facts included in the settlement describes how:

  • Citigroup securitized and sold RMBS with underlying mortgage loans that it knew had material defects in contradiction to the representations it made to RMBS investors about the quality of the mortgage loans it securitized and sold to investors;

  • on a number of occasions, Citigroup employees learned that significant percentages of the mortgage loans reviewed in due diligence had material defects; and

  • Citigroup securitized the loan pools containing defective loans and sold the resulting RMBS to investors for billions of dollars.

Companies: Citigroup

MainStory: TopStory CrimesOffenses EnforcementActions FinancialStability Mortgages SecuritiesDerivatives

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