Six months following Citigroup's $7 billion landmark settlement with the government to resolve a federal investigation into the sale of subprime mortgages, the first report on the bank's progress has arrived.
In July, Citi acknowledged that, over the course of numerous transactions, the bank put together billions of dollars of mortgage-bond deals with loans it knew were defective, and then misrepresented the quality of those mortgage-bond deals to investors who purchased them. Under terms of the settlement, Citigroup agreed to pay $4 billion in civil monetary penalties to the Justice Department, $500 million in compensatory damages to state attorneys’ general and the FDIC, and the remaining $2.5 billion in the form of relief to aid consumers harmed by its conduct.
Thomas Perrelli, a partner with the law firm Jenner & Block who was appointed as independent monitor, released the first report on Jan. 21, assessing Citi’s progress toward meeting its obligations by the end of 2018, as the settlement agreement requires.
Citi performed the consumer relief activities for which it is seeking credit and reported on them to an Internal Review Group (IRG) made up of Citi employees and vendors who, at all times, is required to be fully independent of Citi’s mortgage loan servicing operations.
The IRG tested and confirmed the eligibility of Citi’s consumer relief activities and the amount of credited relief through an independent review (satisfaction review). The IRG then reported the results of its review through a certification to the monitor, indicating that the IRG reviewed Citi’s claimed credit, and determined that it complied with the settlement agreement’s requirements.
Perrelli and BDO Consulting then reviewed the IRG’s findings to determine whether Citi satisfied its obligations and the amount of credit to be received. The result of this determination is set forth below.
Outreach Requirements. The settlement agreement contains various requirements for Citi to conduct outreach, including a requirement that Citi prepare a short, plain-language document, available online, and translated into multiple languages, that explains to customers the forms of relief available under this agreement. According to the report, Citi has fulfilled this requirement, and that report may be found here.
In addition, Citi has set tentative dates for eight “Road to Recovery” events, to be held from April 2015 through September 2015, currently planned for Los Angeles, Dallas, Miami, Atlanta, Chicago, Philadelphia, Detroit, and New York City. Perrelli said he will evaluate these events for compliance with the settlement agreement in a future report.
Tax Disclosure Requirements. Citi is obligated to “clearly disclose to borrowers [the] tax consequences of any relief offered, and recommend that borrowers seek appropriate counsel as needed.” In response, Citi informed borrowers that they were receiving relief in connection with the settlement agreement through letters mailed in the fall of 2014.
After reviewing the text of the letters prior to their release, Perrelli concluded that it satisfies the requirements of the settlement agreement.
Consumer Relief Credit. Citi determined that its initial consumer relief efforts would focus on Menu Item 4A of Annex 2 (forgiveness of principal associated with a property where foreclosure is not pursued and liens are released). As represented to the monitor, Citi identified a population of loans for which foreclosure would not have made economic sense (i.e., the cost of foreclosure would have exceeded the value of the property). With respect to this population, Citi forgave the entire loan and released the lien.
On Dec. 5, 2014, after completing a review, the IRG submitted to Perrelli an IRG Assertion regarding the amount of consumer relief credit that Citi claimed to have earned as of Nov. 21, 2014, on 100 loans. Citi further informed the monitor that it had provided additional, creditable relief to borrowers on loans not included in the group of 100 loans tested by the IRG.
For the initial reporting period, however, Citi determined to submit the first 100 loans to test its, and the monitor’s, processes. “As Citi submits additional loans for credit, the monitor intends to complete a more thorough analysis of these issues and to evaluate compliance based on a more extensive record,” the report stated.
Based on the information above, the monitor reported that Citi has earned $14 million in consumer relief credit under Menu Item 4A of Annex 2 for the period from April 30, 2014 through Nov. 21, 2014.
Perrelli’s review also included interviews and meetings with Citi to gain an understanding of its mortgage banking operations, system of records, and IRG program. Roughly 15 Citi employees from business, compliance, and legal, attended this meeting, representing both CitiMortgage and CitiFinancial Servicing—the two primary entities that Citi expects will engage in consumer relief activities. IRG employees and information technology specialists also attended.
In December, members of the monitor’s team conducted follow-up interviews of IRG employees. The primary purpose of these interviews was to evaluate the IRG’s independence from Citi’s business units that will be providing the consumer relief, as well as to understand better the IRG’s capacity, structure, procedures, and governance.
“The interviews did not raise any concerns about the IRG’s independence from Citi’s business units. A future report will contain a more robust discussion of these interviews as part of the monitor’s full evaluation of the independence of the IRG.”
Perrelli’s next report on Citi’s consumer relief activity will be issued in the spring of this year.