Citigroup Executives Depart After Mortgage-Fraud Case

Citigroup Executives Depart Bank After Mortgage-Fraud Settlement
The U.S. Attorney’s Office in Manhattan alleged that Citigroup appointed internal “gatekeepers” to urge loan-quality employees to change reports to reduce the number of defective mortgages Citigroup was buying and selling without improving their quality. Photographer: Jin Lee/Bloomberg

Two Citigroup Inc. executives are departing after federal prosecutors named them earlier this year in a mortgage-insurance fraud case that resulted in a $158.3 million settlement and an admission of wrongdoing by the bank.

Jeffery Polkinghorne, a senior risk manager at the CitiMortgage division, is leaving after 16 years of “dedicated service,” according to an internal memo obtained by Bloomberg News and confirmed by Mark Rodgers, a spokesman for the New York-based bank. Donald Houghtalin, a compliance officer at the unit, has already left, he said in a phone interview. Neither man was sued by the government.

Both were among CitiMortgage executives named in a suit against Citigroup filed by the U.S. Justice Department earlier this year which claimed the lender saddled taxpayers with losses after falsely declaring defective home loans fit for a federal insurance program. The government alleged that some bank officials pressured other employees to change reports on faulty loans. Citigroup paid to settle the claims in February.

“Jeff spent many years in various roles within risk, where he worked tirelessly as a business partner with others in the mortgage business,” CitiMortgage Chief Risk Officer Rajinder Singh said in the memo. “Jeff has been a valued member of the global consumer-mortgage team and is a friend to many here at CitiMortgage.”

Polkinghorne, who was in charge of loan quality, will continue to work for Citigroup until the end of September, according to the memo. He declined to comment.

Government Standards

The U.S. accused Citigroup of violating requirements of a Federal Housing Administration program that allowed the bank to decide which home loans would be federally insured against loss. The lender, the third-biggest in the U.S., admitted to falsely stating that some loans met FHA and U.S. Department of Housing and Urban Development standards.

The U.S. joined a false-claims lawsuit filed by Sherry Hunt, a whistle-blower and CitiMortgage quality-control vice president. She said that executives buried her findings on defective loans into 2012.

Polkinghorne asked Hunt and a colleague to stay in a conference room after a meeting in March 2011, she said in a May article in Bloomberg Markets magazine. He told them that the number of loans classified as defective would have to fall or it would be “your asses on the line,” Hunt said.

“All a dishonest person had to do was change the reports to make things look better than they were,” Hunt said. “I wouldn’t play along.”

Citigroup Gatekeepers

The U.S. Attorney’s Office in Manhattan alleged that Citigroup appointed internal “gatekeepers” to urge loan-quality employees to change reports to reduce the number of defective mortgages Citigroup was buying and selling without improving their quality. Another employee e-mailed Polkinghorne about the gatekeepers in 2010, claiming that this pressure was ‘increasing in intensity,” according to the complaint.

“Citi took no action to address this problem and the intrusion of business interests into quality control only grew worse,” according to the complaint.

Polkinghorne fielded objections from a subordinate about a quarterly award ceremony for a team that had successfully challenged negative loan reviews, the government complaint said.

Responsible Finance

Some CitiMortgage employees had pay incentives tied to reducing the number of defective loans, part of a bank-wide effort to practice what Citigroup Chief Executive Officer Vikram S. Pandit calls “responsible finance,” Sanjiv Das, CitiMortgage’s CEO, said in a March 30 interview.

“We pay our people based on defect quality. We are very proud of that,” Das said. “I get compensated based on manufacturing quality. It all comes down to how you make responsible finance effective throughout the company.”

Das declined to comment today.

Houghtalin was in charge of making sure CitiMortgage followed government guidelines so it could continue issuing U.S.-insured home loans. He knew that CitiMortgage had broken the rules when he certified -- or caused Polkinghorne to certify -- in documents that the opposite was true, according to Hunt’s false-claims suit.

In November 2009, Hunt said she found about 1,000 loans a quality-control team had flagged for issues such as altered tax forms, straw buyers and borrowers listing fictitious employers. Some of the loans had been left in the queue for more than two years without being checked for fraud, she said.

‘A Battleground’

“What they told me was they’re doing some restructuring and relocated my position to another location,” Houghtalin said of his leaving Citigroup. He declined to comment further.

Scott McIlhaney, the unit’s director of operational risk who was also named in the government’s complaint, referred questions to the bank’s communications department. Rodgers, the Citigroup spokesman, declined to comment.

Disagreement over quality-control reports remained “a battleground” within CitiMortgage into 2012, with Citigroup employees using “brute force” to pressure Hunt’s team to alter their findings, the complaint said.

“Citi’s quality-control program lacks the basic independence from business unit control that is required,” according to the complaint.

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