Citigroup Inc.

Consumer Mortgage Representations and WarrantiesThe majority of Citi’s exposure to representation and warranty claims relatesto its U.S. Consumer mortgage business.When selling a loan, Citi (through its CitiMortgage business) makesvarious representations and warranties relating to, among other things,the following:• Citi’s ownership of the loan;• the validity of the lien securing the loan;• the absence of delinquent taxes or liens against the property securingthe loan;• the effectiveness of title insurance on the property securing the loan;• the process used in selecting the loans for inclusion in a transaction;• the loan’s compliance with any applicable loan criteria established by thebuyer; and• the loan’s compliance with applicable local, state and federal laws.The specific representations and warranties made by Citi dependon the nature of the transaction and the requirements of the buyer.Market conditions and credit rating agency requirements may also affectrepresentations and warranties and the other provisions to which Citi mayagree in loan sales.Repurchases or “Make-Whole” PaymentsIn the event of a breach of these representations and warranties, Citimay be required to either repurchase the mortgage loans (generallyat unpaid principal balance plus accrued interest) with the identifieddefects or indemnify (“make-whole”) the investors for their losses. Citi’srepresentations and warranties are generally not subject to stated limits inamount or time of coverage. However, contractual liability arises only whenthe representations and warranties are breached and generally only when aloss results from the breach.In the case of a repurchase, Citi will bear any subsequent credit loss onthe mortgage loan and the loan is typically considered a credit-impairedloan and accounted for under SOP 03-3, “Accounting for Certain Loans andDebt Securities Acquired in a Transfer” (now incorporated into ASC 310-30,Receivables—Loans and Debt Securities Acquired with DeterioratedCredit Quality) (SOP 03-3). These repurchases have not had a materialimpact on Citi’s non-performing loan statistics because credit-impairedpurchased SOP 03-3 loans are not included in non-accrual loans, since theygenerally continue to accrue interest until write-off.Citi’s repurchases have primarily been from the U.S. governmentsponsored entities (GSEs).Citi has recorded a reserve for its exposure to losses from the obligationto repurchase previously sold loans (referred to as the repurchase reserve)that is included in Other liabilities in the Consolidated Balance Sheet. Inestimating the repurchase reserve, Citi considers reimbursements estimatedto be received from third-party correspondent lenders and indemnificationagreements relating to previous acquisitions of mortgage servicing rights. Citiaggressively pursues collection from any correspondent lender that it believeshas the financial ability to pay. The estimated reimbursements are based onCiti’s analysis of its most recent collection trends and the financial solvencyof the correspondents.In the case of a repurchase of a credit-impaired SOP 03-3 loan, thedifference between the loan’s fair value and the repurchase amount isrecorded as a utilization of the repurchase reserve. Make-whole payments tothe investor are also treated as utilizations and charged directly against thereserve. The repurchase reserve is estimated when Citi sells loans (recorded asan adjustment to the gain on sale, which is included in Other revenue in theConsolidated Statement of Income) and is updated quarterly. Any change inestimate is recorded in Other revenue.The repurchase reserve is calculated by individual sales vintage (i.e.,the year the loans were sold) and is based on various assumptions. Whilesubstantially all of Citi’s current loan sales are with GSEs, with which Citihas considerable historical experience, these assumptions contain a levelof uncertainty and risk that, if different from actual results, could have amaterial impact on the reserve amounts. The most significant assumptionsused to calculate the reserve levels are as follows:• Loan documentation requests;• Repurchase claims as a percentage of loan documentation requests;• Claims appeal success rate;• Estimated loss given repurchase or make-whole.The repurchase reserve estimation process is subject to numerousestimates and judgments. The assumptions used to calculate the repurchasereserve contain a level of uncertainty and risk that, if different from actualresults, could have a material impact on the reserve amounts.Securities and Banking-Sponsored Private LabelResidential Mortgage Securitizations—Representationsand WarrantiesMortgage securitizations sponsored by Citi’s S&B business represent a muchsmaller portion of Citi’s mortgage business.The mortgages included in these securitizations were purchased fromparties outside of S&B. Representations and warranties (representations)relating to the mortgage loans included in each trust issuing the securitieswere made either by (1) Citi, or (2) in a relatively small number of cases,third-party sellers (Selling Entities, which were also often the originatorsof the loans). These representations were generally made or assigned to theissuing trust.The representations in these securitization transactions generally relatedto, among other things, the following:• the absence of fraud on the part of the mortgage loan borrower, the selleror any appraiser, broker or other party involved in the origination of themortgage loan (which was sometimes wholly or partially limited to theknowledge of the representation provider);• whether the mortgage property was occupied by the borrower as his or herprincipal residence;165