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Sunday, October 23, 2016

by Cora Currier, ProPublica

Citigroup agreed yesterday to pay $158 million to settle a lawsuit over bad loans that the bank passed on to the Federal Housing Administration to insure. The whistle-blower who originally brought the case, Sherry Hunt, an employee of Citi’s mortgage department, said the company actively undermined the process that was supposed to check for fraud in order to push through reckless loans and get higher profits.

The suit itself makes for good reading. We’ve pulled out the juiciest bits, and explain just what Citi appears to have been doing.

Some background: The FHA insures one-third of the mortgages loans in the country, taking on the risk of homeowners’ default from lenders like Citi. The government requires lenders to certify that insured loans meet FHA standards.

Citi appears to have flouted those standards. According to the lawsuit, the bank passed along subpar loans to the FHA until very recently, making “substantial profits through the sale and/or securitization of FHA-backed insured mortgages” while “it wrongfully endorsed mortgages that were not eligible.”

In the settlement, Citi, which was bailed out by taxpayers in 2008 to the tune of $45 billion, “admits, acknowledges, and accepts responsibility” for passing on bad loans.

The suit’s allegations

Citi was passing on mortgages with particularly high rates of default to the FHA, costing taxpayers millions in insurance claims:

6. Since 2004, Citi has endorsed nearly 30,00 mortages for FHA insurance, totaling more than $4.8 billion in underlying principal obligations. Of those loans, 9,636 (or more than 30%) have defaulted. Citi’s default rate soared to more than 47% for loans originated in 2006 and 2007. In other words, nearly every other loan Citi endorsed for FHA insurance in the critical years leading up to the financial crisis defaulted, resulting in foreclosures and evictions and ultimately depressed real estate values, all to the detriment of the national housing market and the national economy. Moreover, of the lonas Citi originated in 207, over 10.5% went into early payment default. HUD has already paid nearly $200 million in insurance claims on loans that Citi originated or underwrote since 2004.

The quality control unit in charge of reviewing the mortgages had “marching orders” to pass questionable loans by “brute force”:

40. By November of 2010, the business channels had set a goal of reducing their Tier 1 defect rate to 5%. Thereafter, a business channel manager informed the quality control managers, “Our marching orders are to fight tiering on everything we get from QC.” That same month, Ross Leckie, senior director of Citi’s retail bank mortgage operations, provided comments on quality control variance findings, stating: please take [these] in the spirit they are offered, which is to drive this [variance] rate down by brute force…

The company started basing compensation for some employees on how many loans got through quality control, intensifying the pressure:

Around the same time, Citi based the compensation of its business operations employees on their “tier 1 variance rates,” rewarding employees with higher salaries for lower variance rates. According to Watts, this compensation structure prompted “the ferocity of demands from Operations to have tier 1 variances downgraded to lower tiers.”

In January 2011, Citi gave awards to employees who had successfully challenged quality control ratings. In a detailed Bloomberg News story, the whistle-blower, Hunt, said that at the awards ceremony, quality control workers “were humiliated in front of everyone“:

Far from heeding Watts’s warnings, Citi blamed the quality control employees for finding material variances in Citi’s loans and rewarded business personnel for fighting quality control. In January of 2011, Citi held a quarterly “Star Players Award” ceremony, in which a business operations unit team was given an award for its efforts to “drive variance rates down by challenging Quality Control to remove or reduce variances.” Watts complained to Polkinghorne and McIlhaney that “[w]hen something like this is celebrated at the leadership level it can be quite demoralizing[,] making it appear like a lack of support from the leadership team for the QC work effort.”

Lenders are supposed to self-report to the government when they discover fraudulent or shoddy loans. But Citi almost never did:

Beginning in 2005, Repurchase failed to report a single loan that was originated or underwritten by Citi to HUD, until July 2011, after Citi had received a subpoena from the United States Attorney’s Office concerning the facts giving rise to this lawsuit.

At one point, Citi erased the records of nearly 1,000 potentially fraudulent loans:

Unable to process the massive backlog of potentially fraudulent loans, Citi instead erased — without any self reporting — the nearly 1,000 fraudulent loan referrals it had accumulated but never investigated between 2006 and the end of 2009.

Citi’s settlement

The company admits to passing on loans that were “not eligible” for government guarantees:

As a result, CitiMortgage submitted to HUD-FHA certifications stating that certain loans were eligible for FHA mortgage insurance when in fact they were not; FHA insured certain loans endorsed by CitiMortgage that were not eligible for FHA mortgage insurance and that FHA would not otherwise have insured; and HUD consequently incurred losses when those CitiMortgage-endorsed loans defaulted.

Citi has to pay $158.3 million within 30 days. Of that sum, $30 million will go to the whistle-blower. The suit was filed under the False Claims Act, which rewards whistle-blowers who bring cases resulting in settlements in which it was alleged that the government was defrauded:

Defendants shall pay to the Government $158.3 million within thirty days of the Effective Date (defined in Paragraph 27 below)(the “Settlement Amount.”)

The government has reserved the right to pursue criminal charges:

Notwithstanding the release given in paragraphs 6 and 7 above, or any other term of this Stipulation, the following claims of the Government are specifically reserved and are not released by this Stipulation:

a. Any liability arising under Title 26 of the United States Code (Internal Revenue Code):

b. Any criminal liability

A spokesman for Citigroup said in an emailed statement: “We take our quality assurance processes seriously and have pro-actively undertaken process improvements to ensure that they are as robust as possible. 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.”

Citi isn’t the only bank facing these kinds of allegations 2014 as part of last week’s mortgage settlement, Bank of America will pay the FHA up to $1 billion for fraud and abusive foreclosure practices.

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  • G

    Based on this article, I am breaking any financial connections I happen to have with Bank of America and Citibank. They have lost my respect entirely.

  • Common Sense Patriot

    Citi Group passes $4.8 billion in bad loans to the government? And so far 30% have defaulted. And HUD has ALREADY paid $200 million for defaults? What about the defaults yet to come? And for this open admission of criminal and civl fraud, Citibank pays a fine of a mere $158.3 million? What a bargain? Can I rob Citibank of $200 million and go to civil court where I plead guilty and agree to give the back just $158.3 million? I’ve pocketed a neat $41.7 million bucks and I don’t even go to jail? Oh, they MIGHT prosecute me? What a deal!!!! It’s nice to know the idiots in the FHA/HUD are as stupid as the Congress that repealed Glass-Steagall and pushed the Banks to make sub-par loans! Not to mention the mentally decrepit or just plain lazy or corrupt regulators who didn’t make so much as a peep about what they had to have seen when the Banks and loan portfolio were examined? This apparently absolves Citibank of all further reponsibility on a civil basis. Not a bad profit for breaking the law and soaking taxpayers while their CEOs and other execs collected huge bonuses and inflated salaries!!!! Who says crime doesn’t pay? It obviously does, if you steal big enough. But don’t stick up a 7-11 for $50, or you’ll go to jail for years, probably never be able to get a decent job again, and end up living in squalor for the rest of your life. Now that’s justice!!!

  • Undca

    I want to see some of these banking officials in high places serve jail time for these fraudulent behaviors. When will Obama’s justice department take action and give the citizens of the US a perp walk signaling to bankers that these devastating banking behaviors will not be tolerated.

  • G

    you do have to recognize that Citibank and B of A didn’t earn $50 billion for writing $50 billion in mortgages. I do think their profit margin might have been a bit more than $158 million.

    If they caused a loss to the public of $50 billion, criminal charges need to be filed.

  • thecat

    it time we the people get your money back. i paid more money in tax that why i going b/k/ and the IRS want more ?? and this people get away with your money and paid back a small fine ??? and livewith know there toke all of us and made this county poor and the work class poor all for money did you know that all the big bank do not paid any tax at all the gov give them a money every years for the tax there get back. that not fair . it time we the people get some in there that care for this county and it people and the work class

  • jmody

    For those who have been following the news on the fraudulant behavior of the big banks, it has been obvious that they have broken the law. So it is no surprise that they are admitting fault and paying fines.
    However what is shocking and a complete miscarriage of justice is that so far they have only been fined and small fines at that considering their bottom line and their bonuses, where is the justice in that? The culprits for the fraud need to stand trial now.
    Those officials who allowed their companies to defraud the public and many others, have to be publically exposed, publically prosecuted, and serve a heavy jail sentence. We are a country of laws where the man on the street is held accountable for his actions and goes to jail, often for petty crimes.For the banks to get away with a fine is simply a smack on the hand and an outrage and insult to law abiding citizens. I want to see real justice meted out and that means heavy jail time for the culprits.

  • bamboosero

    We the people were told that the banks are “too big to fail”, so they got Billion$ and paid Billion$ in Bonu$e$, for putting the economy in a depression that will take the best years of many lives to resolve; while the Billionaire$ party in “off shore tax havens” and do most of their “busine$$” in Shanghai…Wake up and join Occupy Wall Street.

  • FrancisEgan

    Does FHA or the government remember 1970 in Chicago when the same scam was down. The government should deal with this the same as as scam , so what if the big shots go to jail and the bank goes into reciever ship. When the broke the law and cause us the tax payer to swindle out of our money,lets just hang them out to dry.

  • pluna09

    The banks defraud the people out of billions of dollars. Our government bails out the banks because the banks are to big to fail. The banks pay their CEO’s billions of dollars in bonus payments. And then this bank pays $158 million in fines? How does this make sense to any one except the corrupt politicians in Washington? Sign the petitions demanding that the Senate and House of Representatives sign the “No Insider Trading Bill” and the “No Budget, No Pay Bill”. And vote at every election forcing these corrupt and immoral politicains to do the right thing. Becasue they do not know how to do the right thing.

  • Bruce_S78

    Citibank should have to repay the the Federal treasury every dime of the funds they got for these loans and then charge them triple damages. A fine of $10 Billion would stop this bank crap once and for all and that would be justice. This settlement is nothing but tokenism.

  • ron merrill

    Several years ago I helped my girl friend with her PHD thesis on Corporate illegalties and the effect in stock valuations and was presented in an excel chart with company, stock price prior to allegations and after and the allegations.
    The time period was for 14 years.
    The most obvious information that jumped was that the big banks were illegal every year. The same ones Citi, Chase, Bank of America, Lehman Brothers and others.
    In the entire period only 2 bankers went to prison. And the charges would have put any of us in prison. Fraud, collusion etc.
    In the early 2000’s 5 banks were fined $2 billion for collusion and they were the same names as always.
    At the end of they day the fat cats are protected and the fat cat party protects them. I have wondered how many Senators and House members are on bank boards.
    And the results of the allegations on stock valuation?
    Stick prices ncreased every time. Showing that although investors talk an ethical line their money means more and the bankers may have been bad boys but they were doing it for their stick holders.
    No wonder that the bankers are immune….their own stock holders turn heads away from the truth.

  • got2watch4

    My Dear fellow Americans,power corrupts,absolute power corrupts absolutely,since there is no longer a middle class in America,we “the poor” must stick together and MAKE the governmet take action against banks that swindle our tax dollars from us. we might have come over in different ships,but we’re in the same boat now,with this in mind remember: “one snowflake a storm does not make” so let us pull together regardless of race, creed or color and put up a fight to stop these Fatcats from getting fatter….at our expense!

  • ajaxgeneral

    I can hear’um!.. Their STILL laughing at us as we’ve been the ‘butt end’ of their joke since the beginning of this fiasco. Wish I could do that.. Convince some political goat pill that I’m too big to fail, collect Billions (that I don’t pay back) then when they FINALLY catch up to me, fine me $158 Million to clean some other goat pill’s hands from the blatant fraud (and STILL not demand I pay back the Billions). This would make such a great mini-series if it wasn’t so damn pathetic. In all realities in the universe, criminals like these would be put behind bars with hardly any due process.. What type of reality are WE living in I wonder…

  • ajaxgeneral

    “Based on this article, I am breaking any financial connections I happen to have with Bank of America and Citibank. They have lost my respect entirely”.. (token P)..

    That is so heroic of you Token Punishment.. We need more Americans like you to band together and show the political and big business criminal element that WE determine their success or failure.. NOT their ill-earned graft. I would join you if I was playing with the sharks, but I wouldn’t take for my Credit Union.

  • terango.lf

    All of these criminals pay most of their gains as capital gains and on what salary they do collect lobby Congress to extend the Bush Wealth Gains (I wont call it a Tax cut just as the republicans call a closure of loop-holes are tax increases) Why they cry about a lousy 4% income tax, I will never know! In the 1960’s taxes were as hi as 91%!! And we were the Badest M.Fo’s on the planet, We were so tramendous, that we went to the MOON. Now we have to hitch-hike into orbit!! Almost all other nations seemed like they were 3rd world nations compare to the Wealth we could muster.

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