NEW YORK — Citigroup agreed to pay $7 billion to settle charges that it packaged bad mortgages during the run-up to the financial crisis.
It includes $4 billion in penalties, $2.5 billion in mortgage modifications and other relief to homeowners, and $500 million going to a number of states and the Federal Deposit Insurance Corp.
The settlement means Citi will be able to avoid a civil suit by the Justice Department and mirrors similar agreements with JPMorgan Chase and other lenders in recent years.
While Citi will take a $3.8 billion hit because of the deal, it can afford it. Last year, the bank earned $14 billion and had $34 billion of cash on its balance sheet as of March 31.
Citi is due to report second-quarter earnings before the market opens Monday.
What it means for homeowners
Some homeowners with Citi mortgages could see the amount of their loans reduced, or could have their interest rates reduced.
There will also be financing provided for affordable apartments, which could help to keep rents low. But details of that assistance is not yet known.
Citi only agreed to provide that help by the end of 2018.
Why Citi agreed to the deal.
The bank has been under increasing pressure from regulators. The Federal Reserve gave Citigroup a poor grade in its stress test in March and blocked its plans to return money to shareholders through buying back shares and increasing the dividend.
Citi is also under investigation for possible fraud and money laundering in its Mexican unit. All of that has been a drag on its stock.
“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,” said Citi CEO Michael Corbat.
The amount is far more than the $363 million initial offer from Citi but less than the $12 billion initially sought by Justice, according to a source familiar with the deal. The breakthrough in the talks occurred after Justice Department lawyers notified the bank that they were prepared to file a lawsuit against the bank.
Other bank settlements
Citi’s agreement is about half the $13 billion JPMorgan Chase agreed to pay last November, and is also smaller than a $9.5 billion settlement that Bank of America reached in March with the regulator of government-controlled mortgage lenders Fannie Mae and Freddie Mac.
Bank of America remains in talks with the Justice Department on a separate mortgage settlement with that agency, but government lawyers and the bank remain billions of dollars apart.