Citigroup has suffered its second setback in two weeks, with the news that the bank will have to pay out $158.3 million in settlement fees, coming hot on the heels of last week’s $25 billion foreclosure settlement that was agreed between states and America’s five largest banks.
This week’s penalty comes after Citigroup owned up to claims that it had cost the government millions of dollars in losses after misleading it into insuring dozens of high-risk mortgage loans over a period of six years.
The $158 million tab will be added to Citigroup’s estimated $2.2 billion share of the foreclosure settlement, which was agreed following allegations of foreclosure abuses by the major banks.
Citigroup’s latest bill stems from different allegations however – the bank was accused by the government of misleading it about the level of risk involved with around 30,000 mortgages that were covered by the US Department of Housing and Urban Development’s federal insurance program, reported the LA Times. Around 40% of those mortgages ended with the homeowner’s defaulting on payments, meaning the government suffered enormous losses from them.
Preet Bharara of the Manhattan US Attorney’s office, said that there had been a clear violation of the rules of the HUD insurance program:
“For far too long, lenders treated HUD’s insurance of their mortgages like they were playing with house money."
According to the complaint against Citigroup, having the loans insured by the government enabled the bank to offer cheaper loans to borrowers with a less-than-creditworthy status, before selling those loans on to investors.
Citigroup was in a program that enabled banks to secure automatic approval for HUD insurance for their mortgages. Under the deal, banks had a duty to carry out aggressive pre-screening of mortgage applicants, to ensure that the level of risk was not too high. In addition, Citigroup were also compelled to report any signs of borrowers having difficulties with payments.
The bank totally ignored these requirements and submitted documentation to the HUD that suggested thousands of loans were eligible for mortgage insurance, when in fact they failed to meet the standards, according to the government’s complaint. This resulted in the government insuring thousands of high-risk loans which were later claimed upon by borrowers.
Even worse, several Citigroup employees were accused of co-opting other members of staff to ignore the government’s requirements and not report any problems to them:
"Citi’s quality-control reports became — and remain — a battleground within Citi, with those in Citi’s business production units applying what they describe as 'brute force' to pressure Citi’s quality- control managers to downgrade their findings.”
Citigroup owned up to the allegations, admitting that it had failed to comply with federal requirements surrounding the HUD’s mortgage insurance.
The bank has been hit by a high number of defaults on its mortgages since the housing crisis hit home. According to the Associated Press, over 30% of Citigroup loans have ended up with the borrowers defaulting, with that rate swelling to 47% in the years 2006 and 2007.