CitiMortgage will pay $158.3 million as part of a settlement with the government over mortgages backed by the Federal Housing Administration.
Government officials said the Citigroup (C) unit acknowledged that it failed to comply with FHA requirements and submitted certain loans that were not eligible.
The settlement amount will help cover a $688 million budget deficit in the FHA insurance fund.
The U.S. Attorney's Office in Manhattan said the goverment filed and settled the lawsuit against CitiMortgage Wednesday.
"For far too long, lenders treated HUD's insurance of their mortgages like they were playing with house money," U.S. Attorney Preet Bharara said. "We are pleased that, with today's settlement, CitiMortgage has accepted responsibility for its conduct."
More than 30% of CitiMortgage's 30,000 FHA-backed mortgages since 2004 have gone into default, including 47% of loans originated in 2006 and 2007, according to Bharara's office.
The CitiMortgage settlement comes days after Shaun Donovan, secretary of the Department of Housing and Urban Development, said the agency would announce smaller settlements with mortgage servicers, with proceeds and increased insurance premiums resolving budget problems at the FHA.
The settlement does not forfeit prosecution of any criminal liability stemming from the loans, according to court documents.
Bharara's office has filed two other suits in connection with the FHA insurance program, regarding $834 million in insurance claims against Allied Home Mortgage and $386 million against Deutsche Bank (DB) and MortgageIT.