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Citi to pay $7B to settle U.S. mortgage securities probe

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(Reuters) — Citigroup Inc. has agreed to pay $7 billion to settle a U.S. investigation into shoddy mortgage-backed securities the bank sold in the runup to the financial crisis, including the largest civil fraud penalty ever levied by the U.S. Justice Department.

The settlement is more than twice what many analysts had expected but less than the $12 billion the government sought in negotiations with Citi, the third largest U.S. bank.

Citi said it took a related pretax charge of about $3.8 billion in the second quarter, which led the bank to report a 96% drop in earnings on Monday.

Citi shares rose 3.2% at $48.52.

The settlement, signed over the weekend, capped months of negotiations, during which the government threatened to sue the bank, sources said.

"The penalty is appropriate, given the strength of the evidence of the wrongdoing committed by Citi," U.S. Attorney General Eric Holder said in a statement on Monday.

"Despite the fact that Citigroup learned of serious and widespread defects among the increasingly risky loans they were securitizing, the bank and its employees concealed these defects," Mr. Holder added.

Citi said it will pay $4.5 billion in cash and provide $2.5 billion in aid to low-income tenants and struggling homeowners.

The cash portion consists of a $4 billion civil payment to the Justice Department, double a similar penalty levied on rival JPMorgan Chase & Co. in November, and $500 million in compensatory payments to state attorneys general and the Federal Deposit Insurance Corp.

In exchange, the Citi deal resolves claims over both mortgage securities and more complicated securities known as collateralized debt obligations that the bank structured or underwrote between 2003 and 2008.

The consumer portion of the deal will include financing for the construction of affordable multifamily rental housing and principal reduction and forbearance for residential loans, the bank said.

Citi said it will provide the assistance by the end of 2018.

Citi is the second major bank to settle with authorities since U.S. President Barack Obama ordered the formation of a task force to investigate the sale and packaging of toxic home loans that were at the center of the 2008 financial crisis.

No. 1 U.S. bank JPMorgan last year agreed to pay $13 billion to settle government probes over the packaging of toxic mortgages, including both Justice Department claims, a $4 billion deal with the Federal Housing Finance Agency, and other regulators.

Last year Citi settled with the FHFA for $250 million. The FHFA, which regulates Fannie Mae and Freddie Mac, had sued the bank over soured mortgage securities sold to the taxpayer-owned entities,

Bank of America Corp has also been negotiating with the Justice Department over similar claims.

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