Citigroup Inc.’s mortgage subsidiary has agreed to settle a government lawsuit for more than $150 million. The unit is accused of falsely certifying federally insured mortgages, not reporting mortgage fraud and pressuring quality control employees to ignore loan defects.
CitiMortgage Inc. settled a civil fraud lawsuit filed Monday by the Department of Justice, according to an announcement Wednesday. The government joined a whistleblower lawsuit filed in August 2011 against Citi under the False Claims Act.
U.S. District Judge Victor Marrero approved the settlement today.
The settlement will cost Citi $158.3 million in damages and civil penalties under the False Claims Act and the Financial Institutions Reform, Recovery, and Enforcement Act of 1989. The payment needs to be made within 30 days.
The St. Louis-based lender, which has closed nearly 30,000 mortgages insured by the Federal Housing Administration since it first became an approved direct-endorsed lender in 1981, is accused of misconduct on loans during a six-year period. It allegedly failed to maintain a quality-control program independent of business operations and didn’t review all loans that defaulted on any of the first six payments.
“CitiMortgage failed to perform basic due diligence, failed to verify information in the loan file that bore directly on the borrower’s ability to make payments on the mortgage, and repeatedly endorsed mortgage loans that contained serious defects and departures from HUD’s underwriting standards and thus were not eligible for FHA insurance,” the statement said.
The deficiencies ultimately resulted in the default of more than 30 percent of Citi’s FHA loans since 2004. On just loans originated in 2006 and 2007, the default rate is 47 percent.
The government also said that the Department of Housing and Urban Development wasn’t notified within 60 days when mortgage fraud or other serious underwriting problems were discovered. While approximately a thousand cases of potential fraud were referred to the quality control unit, no reports of mortgage fraud were made to HUD until July 2011, after the company was subpoenaed by the Justice Department.
Quality control employees at the mortgage firm were allegedly pressured to suppress the severity of loan defects. Business units were reportedly instructed to use “brute force” in applying pressure and were told to challenge all adverse findings — a move that drove down defect rates.
Citi is also accused of certifying that loans were eligible for FHA insurance even though “it repeatedly submitted certifications that were knowingly or recklessly false.”
“In the settlement, CitiMortgage ‘admits, acknowledges, and accepts responsibility’ for certain conduct alleged in the complaint including, ‘[failing] to comply fully with all HUD-FHA requirements with respect to certain loans,’ and ‘[submitting] to HUD-FHA certifications stating that certain loans were eligible for FHA mortgage insurance when in fact they were not,'” according to the statement from Preet Bharara, U.S. Attorney for the Southern District of New York. “CitiMortgage also admitted that, as a result of its conduct, HUD incurred losses when certain loans that should never have been endorsed defaulted.”
Bharara claims that lenders have been abusing the FHAÂ program for “far too long” and treated the program like it was “house money.”
“We are pleased that, with today’s settlement, CitiMortgage has accepted responsibility for its conduct and agreed to pay damages in an amount that will significantly compensate HUD in this case for losses to the FHA insurance fund,” the announcement said.
Citi noted in its own statement that the agreement was reached in conjunction with last week’s settlement between the nation’s five biggest mortgage servicers, including Citi, and state attorneys general.
“We take our quality assurance processes seriously and have pro-actively undertaken process improvements to ensure that they are as robust as possible,” Citi’s statement said. “Our government-related business is very important to us and we will continue as a participant in the FHA’s Direct Endorsement Lender Program with the full support of HUD.”
The company said it set aside reserves in the fourth quarter that will cover the settlement.
The complaint filed against Citi was the third civil fraud lawsuit filed by the government during the past nine months.
Deutsche Bank AG and subsidiary MortgageIT Inc. were sued for $386 million on May 3, 2011, and Allied Home Mortgage Corp. faced an $834 million lawsuit on Nov. 1, 2011.
