Citibank 2011 Annual Report Download - page 291

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Citigroup’s involvement with CDOs, MBS and structured investment vehicles,
Citigroup’s underwriting activity for mortgage lenders, and Citigroup’s more
general mortgage- and credit-related activities.
Regulatory Actions: On October 19, 2011, in connection with its industry-
wide investigation concerning CDO-related business activities, the SEC filed
a complaint in the United States District Court for the Southern District of
New York regarding Citigroup’s structuring and sale of the Class V Funding
III CDO transaction (Class V). On the same day, the SEC and Citigroup
announced a settlement of the SEC’s claims, subject to judicial approval,
and the SEC filed a proposed final judgment pursuant to which Citigroup’s
U.S. broker-dealer Citigroup Global Markets Inc. (CGMI) agreed to disgorge
$160 million, and pay $30 million in prejudgment interest and a $95 million
penalty. On November 28, 2011, the district court issued an order refusing to
approve the proposed settlement and ordering trial to begin on July 16, 2012.
On December 15 and 19, 2011, respectively, the SEC and CGMI filed notices
of appeal from the district court’s November 28 order. On December 27, 2011,
the United States Court of Appeals for the Second Circuit granted an
emergency stay of further proceedings in the district court, pending the
Second Circuit’s ruling on the SEC’s motion to stay the district court
proceedings during the pendency of the appeals. Additional information
relating to this matter is publicly available in court filings under the docket
numbers 11 Civ. 7387 (S.D.N.Y.) (Rakoff, J.) and 11-5227 (2d Cir.).
On February 9, 2012, Citigroup announced that CitiMortgage, along with
other major mortgage servicers, had reached an agreement in principle with
the United States and with the Attorneys General for 49 states (Oklahoma did
not participate) and the District of Columbia to settle a number of related
investigations into residential loan servicing and origination practices (the
National Mortgage Settlement). The agreement is subject to the satisfaction
of certain conditions, including final court approval.
Under the National Mortgage Settlement, Citigroup commits to make
payments and provide financial relief to homeowners in three categories:
(1) cash payments payable to the states and federal agencies in the aggregate
amount of $415 million, a portion of which will be used by the states for
payments to homeowners affected by foreclosure practices; (2) customer
relief in the form of loan modifications for delinquent borrowers, including
principal reductions, to be completed over three years, with a total value of
$1,411 million; and (3) refinancing concessions to enable current borrowers
whose properties are worth less than the value of their loans to reduce
their interest rates, to be completed over three years, with a total value of
$378 million. The total amount of the financial consideration to be paid
by Citigroup is $2.2 billion. As of December 31, 2011, Citigroup had fully
provided for the cash payments called for under the National Mortgage
Settlement (see Note 30 to the Consolidated Financial Statements). Citigroup
expects that its loan loss reserves as of December 31, 2011 will be sufficient
to cover the customer relief payments to delinquent borrowers. The impact of
the refinancing concessions will be recognized over a period of years in the
form of lower interest income. What impact, if any, the National Mortgage
Settlement will have on the behavior of borrowers in general, however,
whether or not their loans are within the scope of the settlement, is uncertain
and difficult to predict.
The National Mortgage Settlement also provides for mortgage servicing
standards in addition to those previously agreed in Consent Orders dated
April 13, 2011 with the Federal Reserve Board and the Office of Comptroller of
the Currency. While Citigroup expects to incur additional operating expenses
in implementing these standards, it does not currently expect that the impact
of these expenses will be material.
Citigroup is receiving legal releases in connection with the National
Mortgage Settlement. These releases will address a broad range of, but not
all, potential claims related to mortgage servicing and origination. Citigroup
will not receive releases related to securitizations or whole loan sales, nor
will it receive releases from criminal, tax, environmental, and certain other
categories of liability.
In conjunction with the National Mortgage Settlement, Citigroup and
Related Parties also entered into a settlement with the United States Attorney’s
Office for the Southern District of New York of a “qui tam” action. This action
alleged that, as a participant in the Direct Endorsement Lender program,
CitiMortgage had certified to the United States Department of Housing and
Urban Development (HUD) and the Federal Housing Administration (FHA)
that certain loans were eligible for FHA insurance when in fact they were
not. The settlement releases Citigroup from claims arising out of its acts or
omissions relating to the origination, underwriting, or endorsement of all
FHA-insured loans prior to the effective date of the settlement. Under the
settlement, Citigroup will pay the United States $158.3 million, for which
Citigroup had fully provided as of December 31, 2011 (see Note 30 to the
Consolidated Financial Statements). CitiMortgage will continue to participate
in the Direct Endorsement Lender program. Additional information relating
to this action is publicly available in court filings under the docket number
11 Civ. 5423 (S.D.N.Y.) (Marrero, J.).
Federal and state regulators have served subpoenas or otherwise requested
information concerning a variety of aspects of Citigroup’s mortgage
origination and mortgage servicing practices, including with respect to
ancillary insurance products or practices. The subjects of such inquiries have
included, among other things, Citigroup’s compliance with the SCRA and
analogous state statutes. Many, but not all, of these inquiries are within the
scope of the claims released in the National Mortgage Settlement. In some
instances, Citigroup is also a defendant in purported class actions, “qui tam”
actions, or other actions addressing the same or similar subject matters,
including the SCRA. Such actions by private litigants or counties and
municipalities are not released in the National Mortgage Settlement.
Federal and state regulators, including the SEC, also have served
subpoenas or otherwise requested information related to Citigroup’s issuing,
sponsoring, or underwriting of MBS. These inquiries include a subpoena
from the Civil Division of the Department of Justice that Citigroup received on
January 27, 2012.