Citigroup Whistle-Blower Says Bank’s ‘Brute Force’ Hid Bad Loans From U.S

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Citigroup Whistle-Blower Says Banks Brute Force Hid

Bad Loans From U.S.By Bob Ivry, Donal Griffin and Andrew Harris - Feb 16, 2012

Four years after rotten mortgages helped trigger a global financial crisis, Sherry Hunt said her Citigroup

Inc. quality-control team was still finding flaws in new loans that included altered tax forms, straw buyers

and borrowers who listed fictitious employers.

Instead of reporting the defects to the Federal Housing Administration, the bank saddled the agency with

losses by falsely declaring the loans fit for its federal insurance program, according to a complaint filed

yesterday by the U.S. Attorneys Office in Manhattan. Citigroup agreed to pay $158.3 million to settle the

claims, and admitted that it certified loans for FHA backing that didnt qualify.

Hunt, who filed a sealed lawsuit against New York-based Citigroup in August that the government joined,

will collect $31 million of that sum -- before taxes and attorneys fees -- as a whistle-blower, she said in an

interview yesterday. The settlement, which encompassed misconduct spanning 2004 to the present,

indicates Citigroup has lingering problems in its OFallon, Missouri-based CitiMortgage unit.

Citigroup in particular received government funding, taxpayer dollars, because of its risky operations,

said Peter Henning, a law professor atWayne State Universityin Detroit. It shows that they hadnt really

learned much of a lesson from the financial crisis.

Inspector General

The inspector general for the U.S. Department of Housing and Urban Development faulted Citigroups

quality-control program during a 2008 audit, according to the complaint. Taxpayers rescued the bank

with a $45 billion bailout that same year and guaranteed more than $300 billion of its risky assets after

the lenders stability was threatened by mounting costs on soured loans. The bank lost a total of $29.3

billion in 2008 and 2009.

Hunts co-workers, instead of checking for fraud or making reports about underwriting defects to the FHA

as required, argued with her over the soundness of the loans, she said. Employees who acted as

gatekeepers applied what they describe as brute force to pressure Citis quality control managers into

downplaying defects, according to the governments complaint.

Some colleagues had pay incentives tied to reducing the number of reported problems, and they spent

hours trying to get her to relax her warnings, including those about the most basic deficiencies, Hunt said.

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Many of the quality-assurance underwriters who sat in those meetings were humiliated in front of

everyone, Hunt said.

Her supervisor, Michael Watts, said in a May 21, 2010, e- mail that the challenges were aimed at

improving numbers tied to compensation, not fixing the underlying problems.

Instead of reviewing and analyzing results and then teaching their channels what is needed to improve,

theyre being encouraged to rebut legitimate variances in an effort to drive down the rate. It appears that is

how their worth is being measured, Watts wrote, according to the governments complaint.

Watts, reached at his home in Michigan, said he hadnt seen the complaint and declined to comment

further.

Records Erased

The complaint describes a broken mortgage-processing system. In one instance, employees erased records

of about 1,000 loans that Hunts quality-control team identified as possibly fraudulent, according to the

complaint. Defects identified by the quality-control team didnt make it into reports, a violation of HUD

requirements, it said.

A substantial percentage of those claims resulted from loans that were ineligible for FHA insurance and

never should have been insured, the government said in the complaint.

The FHA insures qualified loans, relying on what it calls Direct Endorsement lenders such as Citigroup to

make sure the mortgages adhere to its guidelines. Lenders are required to notify the FHA when they find

underwriting flaws.

Hunt, who lives in Silex, Missouri, said she started in the mortgage business as a loan processor for a

small Fairbanks,Alaska, lender in 1975. She was hired by Citigroup in 2004 and is now a vice president of

quality assurance. She sued the bank, the third-largest in the U.S. by assets, under the False Claims Act,

charging that the company defrauded the government.

The Little Guys

When this process began, Sherry had no idea there was a monetary award and what she could get, said

her attorney, Finley D. Gibbs of Rotts & Gibbs LLC in Columbia, Missouri. She risked everything. We

were the little guys standing up to the big guys.

The $158.3 million that the bank is paying is the second- biggest ever in a mortgage-fraud case, said Jerika

Richardson, a spokeswoman for the U.S. Attorneys Office in the Southern District ofNew York. The

largest was the $1 billion agreement on Feb. 9 between the U.S. and Bank of America Corp. and its

Countrywide mortgage unit.


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I had to do something to stop them, Hunt said. I felt that if I were brave enough to come forward and

take a stand, then maybe others would, too.

U.S. District JudgeVictor Marrero in New York approved the accord and unsealed Hunts lawsuit

yesterday. CitiMortgage must pay the agreed-on amount within 30 days, said Manhattan U.S. Attorney

Preet Bharara.

Fourth-Quarter Charge

Citigroup will record a $125 million after-tax charge to fourth-quarter results in connection with the

resolution of related mortgage litigation, according to a Feb. 9 statement.

The FHA, whose cash has been depleted amid increasing insurance payouts to cover rising defaults among

borrowers, announced on Jan. 20 steps to limit risk and strengthen finances. They include holding

lenders accountable for fraud and misrepresentation such that the mortgage never should have been

endorsed by the lender.

Under the settlement, the government reserved the right to pursue criminal charges. Citigroups mortgage

unit will work with HUD to maintain business practices that comply with the departments requirements,

according to the settlement.

What its going to require in Citigroup, that unit, is a real change in their culture, Henning said. It will

be interesting to see if Citigroup can pull it off.

Accused in Testimony

Citigroup was accused of spotty underwriting in testimony in April 2010 before a committee created by

Congress to investigate the financial crisis.

The bank bought at least $70 billion of mortgages from outside originators in 2006 and 2007 that didnt

meet Citigroup guidelines, according to Richard M. Bowen III, who supervised more than 200

underwriters for the bank from 2006 to 2008.

Bowen told the Financial Crisis Inquiry Commission, or FCIC, that he began warning supervisors in June

2006 about the defective loans and continued through 2007 as the defect rate climbed to 80 percent.

Citigroup began an investigation and the head of the group responsible for the poor underwriting was

fired, according to a Nov. 1, 2010, letter to the FCIC from Brad S. Karp, chairman of Paul Weiss Rifkind

Wharton & Garrison LLP law firm in New York.

In the second half of 2009 and the first half of 2010, 15 percent of the performing loans Citigroup sold to

Freddie Mac had such flaws as incomplete appraisals, missing insurance documents or miscalculations of

income, according to an internal Freddie Mac review of 375 mortgages obtained last year by Bloomberg


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News.

The upper limit for defects should be about 5 percent, Hunt said.

Other Litigation

Citigroup faces other litigation over mortgage-related securities, including a suit filed by the U.S Federal

Housing Finance Agency, which oversees Fannie Mae and Freddie Mac, the government-controlled

mortgage buyers.

Citigroup seems willing to work with HUD to resolve these isssues, Hunt said. I take that as a positive

sign.

The case is U.S. ex rel. Hunt v. Citigroup Inc. (C), 11-cv- 005473, U.S. District Court, Southern District of

New York (Manhattan).

To contact the reporters on this story: Bob Ivry in New York [email protected]; Donal Griffin inNew York at [email protected]; Andrew Harris in Chicago at [email protected]

To contact the editors responsible for this story: Gary Putka at [email protected]; Michael Hytha at

[email protected]; David Scheer at +1-212-617-2358 or [email protected].

2013 BLOOMBERG L.P. ALL RIGHTS RESERVED.


Citigroup Whistle-Blower Says Bank’s ‘Brute Force’ Hid Bad Loans From U.S

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