Underwater homeowners, homebuyers and distressed borrowers are expected to share in a little more than one-third of a reported $7 billion settlement that Citibank has agreed to pay to resolve claims regarding defective mortgages it sold to investors in the years prior to the recession.

Citi will pay $2.5 billion in various forms of relief intended to benefit consumers who were harmed by its actions, according to the Department of Justice, which announced the settlement today. Those measures will include down payment and closing cost assistance for homebuyers, loan modifications for underwater borrowers and refinance assistance for distressed borrowers, as well as donations to organizations providing housing assistance for low-income families.

The settlement also includes a $4 billion penalty to be paid to the Justice Department (DOJ) to settle civil claims under the Financial Institutions Reform, Recovery and Enforcement Act (FIRREA), the largest settlement under that act to date. The other half billion will go toward settling other federal and state claims.

Largest civic penalty in history

"This historic penalty is appropriate given the strength of the evidence of the wrongdoing committed by Citi," said U.S. Attorney General Eric Holder. "The bank's activities contributed mightily to the financial crisis that devastated our economy in 2008. Taken together, we believe the size and scope of this resolution goes beyond what could be considered the mere cost of doing business."

Associate Attorney General Tony West described the settlement as the largest civic penalty in history and said it holds the bank accountable for its contributing role in creating the 2008 financial crisis.

To include principal reductions, forbearances

In acknowledging the settlement, Citibank specifically mentioned principal reduction and loan forbearance on residential mortgages, as well as financing for the construction and preservation of multifamily residential units as two elements of the consumer relief that will be provided. It's not clear what criteria will be used in determining exactly who will qualify to receive relief assistance.

Under the settlement, Citi acknowledged that it knew it was selling defective mortgages to investors and that it misled investors as to the quality of those loans. A statement of facts agreed upon as part of the settlement notes that on several occasions Citi employees discovered that a substantial percentage of the mortgage loans they reviewed had significant defects.

Other lenders may yet be targeted

Michael Corbat, Chief Executive Officer of Citigroup, said the settlement resolves all of the civil litigation involving the company's legacy residential mortgage-backed securities and collateralized debt obligations.

The settlement does not resolve any possible criminal charges that might still be pursued against Citi or its employees, according to the DOJ. The DOJ indicated that further settlements with other financial institutions implicated in the financial crisis may still be forthcoming.