Citigroup and the Justice Department have agreed to a $7 billion deal that will settle a federal investigation into the mortgage securities the bank sold in the run-up to the financial crisis.
The settlement, announced Monday, includes a $4 billion cash penalty to the Justice Department — the largest payment of its kind — as well as $2.5 billion in so-called soft dollars earmarked for aiding struggling consumers and $500 million to state attorneys general and the Federal Deposit Insurance Corp.
The deal, after months of contentious negotiations, averts a lawsuit that would have proved costly for both sides and resolves a civil investigation into Citigroup’s packaging and selling of mortgage securities that soured during the financial crisis, causing large losses to investors.
“The bank’s misconduct was egregious,’’ Attorney General Eric H. Holder Jr. said in a statement. “As a result of their assurances that toxic financial products were sound, Citigroup was able to expand its market share and increase profits.’’
The consumer relief will involve financing for the construction and preservation of affordable multifamily rental housing, principal reduction and forbearance for residential mortgages and other direct consumer benefits from various relief programs, the bank said.
“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,’’ Citigroup’s chief executive, Michael L. Corbat, said in a statement.
The bank said the settlement would result in a charge of about $3.8 billion before taxes in the second quarter.
At the outset, the bank expected to pay a fraction of that $7 billion. Citigroup’s first offer to settle the case was $363 million back in April, revealing a wide disparity between what prosecutors and bank officials thought was an appropriate penalty.
That disparity stemmed largely from a disagreement over how to calculate the suspected harm that Citigroup’s mortgage securities caused investors. Citigroup linked its initial offer to the bank’s relatively small share of the market for mortgage securities, people briefed on the talks said. The Justice Department, however, rejected that argument, emphasizing instead what it saw as Citigroup’s level of culpability based on emails and other evidence it had uncovered.
“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,’’ Holder said.
He said the settlement Monday did not absolve “Citigroup or its individual employees’’ from facing future criminal charges.
The deal also sets the stage for negotiations between the Justice Department and Bank of America, which had essentially been on hold while Citigroup worked out an agreement. In recent months, talks between Bank of America and prosecutors had stalled over a disagreement about whether the bank should be held liable for mortgage problems by its Merrill Lynch unit. The bank had argued that it did not want to go through with its purchase of Merrill in the depths of the financial crisis, but was pressured by regulators to complete the acquisition.
The Citigroup deal was also intended to send a message to other banks like Bank of America that future penalties would be determined largely by the evidence.
At one point last month, the Justice Department delayed a plan to sue Citigroup, fearing that the arrest of a lead suspect in the 2012 attacks on the U.S. Consulate in Benghazi, Libya would overshadow their case against the bank.