Citigroup Inc.

is largely uncertain. However, any new regulatory requirements, or modifiedinterpretations of existing regulations, will affect Citi’s U.S. Consumerpractices and operations, potentially resulting in increased compliance costs.Moreover, the Financial Reform Act also provides authority to the SEC todetermine fiduciary duty standards applicable to brokers of retail customers.Any new such standards could also affect Citigroup’s business practices withretail investment customers and could have indirect additional effects onstandards applicable to business with certain institutional customers.In addition, the Financial Reform Act fundamentally altered the currentbalance between state and federal regulation of consumer financial law.The provisions of the Financial Reform Act relating to the doctrine of“federal preemption” may allow a broader application of state consumerfinancial laws to federally chartered institutions such as Citibank, N.A.and Citibank (South Dakota), N.A. In addition, the Financial Reform Acteliminated federal preemption protection for operating subsidiaries such asCitiMortgage, Inc. The Financial Reform Act also allows state authoritiesto bring certain types of enforcement actions against national banksunder applicable law and granted states the ability to bring enforcementactions and to secure remedies against national banks for violation ofCFPB regulations as well. This additional exposure to state lawsuits andenforcement actions, which could be extensive, could subject Citi to increasedlitigation and regulatory enforcement actions, further increasing costs.Recent legislative and regulatory changes have imposedsubstantial changes and restrictions on Citi’s U.S. creditcard businesses, leading to adverse financial impactand uncertainty regarding the nature of the credit cardbusiness model going forward.In May 2009, the U.S. Congress enacted the Credit Card AccountabilityResponsibility and Disclosure Act (CARD Act) which, among other things,restricts certain credit card practices, requires expanded disclosures toconsumers and provides consumers with the right to opt out of certaininterest rate increases. Complying with these changes, as well as therequirements of the amendments to Regulation Z adopted by the FederalReserve Board to implement them, required Citigroup to invest significantmanagement attention and resources to make the necessary disclosure,system and practices changes in its U.S. card businesses, and has negativelyimpacted Citi’s credit card revenues.While Citi has fully implemented all of the provisions of the CARD Act thathave taken effect, the so-called “look-back” rules, requiring a re-evaluationof rate increases since January 2009, remain to be implemented during 2011,and could further adversely impact Citi’s credit card revenues.In addition to any potential ongoing financial impact, the CARD Act hasraised uncertainties regarding the nature of the credit card business modelgoing forward. These uncertainties include, among others, potential changesto revenue streams, reduction in the availability of credit to higher riskpopulations, and reduction in the amount of credit to eligible populations,all of which may impact the traditional credit card business model,including Citi’s.There has been increased attention relating to mortgagerepresentation and warranty claims, foreclosure processissues and the legitimacy of mortgage securitizationsand transfers, which has increased, and may continue toincrease, Citi’s potential liability with respect to mortgagerepurchases or indemnification claims and its foreclosuresin process.Citigroup is exposed to representation and warranty claims relating to its U.S.Consumer mortgage businesses and, to a lesser extent, through private-labelresidential mortgage securitizations sponsored by Citi’s S&B business. Withregard to the U.S. Consumer mortgage businesses, as of December 31, 2010,Citi services approximately $456 billion of loans previously sold. During2010, Citi increased its repurchase reserve from approximately $482 millionto $969 million at December 31, 2010. See “Managing Global Risk—CreditRisk—Consumer Mortgage Representations and Warranties” below.Pursuant to U.S. GAAP, Citigroup is required to use certain assumptionsand estimates in calculating repurchase reserves. If these assumptions orestimates prove to be incorrect, the liabilities incurred in connection withsuccessful repurchase or indemnification claims may be substantially higheror lower than the amounts reserved.With regard to S&B private-label mortgage securitizations, S&B has todate received only a small number of claims for breaches of representationsand warranties. Particularly in light of the increased attention to these andrelated matters, the number of such claims and Citi’s potential liability couldincrease. Citigroup is also exposed to potential underwriting liability relatingto S&B mortgage securitizations as well as underwritings of other residentialmortgage-backed securities sponsored and issued by third parties. See Note 29to the Consolidated Financial Statements.In addition, allegations of irregularities in foreclosure processes acrossthe industry, including so-called “robo-signing” by mortgage loan servicers,and questions relating to the legitimacy of the securitization of mortgageloans and the Mortgage Electronic Registration System’s role in trackingmortgages, holding title and participating in the mortgage foreclosureprocess, have gained the attention of the U.S. Congress, Department ofJustice, regulatory agencies, state attorneys general and the media, amongother parties. Numerous governmental entities, including a number offederal agencies and all 50 state attorneys general, have commencedproceedings or otherwise sought information from various financialinstitutions, including Citigroup, relating to these issues. Governmental orregulatory investigations of alleged irregularities in the industry’s foreclosureprocesses, or any governmental or regulatory scrutiny of Citigroup’sforeclosure processes, has resulted in, and may continue to result in, thediversion of management’s attention and increased expense, and could resultin fines, penalties, other equitable remedies, such as principal reductionprograms, and significant legal, negative reputational and other costs.75