Two years ago, Citigroup Inc. embarked on one of those feel-good corporate-image campaigns, aimed at showing a skeptical public that it could be trusted again. Citigroup was a “fundamentally different” company from what it had been during the financial crisis, it promised, a mantra its executives have repeated ever since.

“The new Citi has a clear strategy,” Chief Executive Officer Vikram Pandit said in a February 2010 video on the company’s website. “We’re going to stand for the financial-services company that practices responsible finance. Making sure we’re transparent. Making sure we’re honest.”

Oh, well. Last week, Citigroup agreed to pay $158.3 million to settle a civil complaint by the U.S. Attorney’s Office in Manhattan, accusing the company and its CitiMortgage home-loan unit of defrauding the U.S. Department of Housing and Urban Development. By itself, that wouldn’t be big news. The payment is small for a company with $1.9 trillion of assets. And the government has accused Citigroup of fraud many times before.

What makes this case different -- and so galling -- is that some of the alleged misconduct was ongoing as recently as last year, well after the company’s 2008 taxpayer bailouts. All this might have stayed under wraps, too, were it not for a CitiMortgage employee, Sherry Hunt, who filed a federal whistle-blower complaint against the company last year. Hunt was awarded $31.7 million, or 20 percent of the settlement proceeds agreed to last week, after the government intervened in her lawsuit and resolved the case.

Ripping Off

The government accused Citigroup of ripping off the U.S. Federal Housing Administration, a division of HUD that insures lenders against losses on certain types of home loans. FHA loans are backed by the full faith and credit of the U.S. government. The purpose of FHA insurance is to reduce the mortgage costs for creditworthy borrowers who nonetheless might not meet conventional underwriting requirements.

Since 2004, Citigroup approved for FHA insurance almost 30,000 loans, totaling more than $4.8 billion. More than 30 percent defaulted, and the default rate among loans originated in 2006 and 2007 was 47 percent, according to the government’s complaint.

The default rates were so high partly because Citigroup routinely certified that loans qualified for FHA insurance when they didn’t. Citigroup’s quality-control program was “systematically defective,” the government said. HUD has paid about $200 million in insurance claims on loans that Citigroup originated or underwrote since 2004. More claims are expected.

As part of the settlement, CitiMortgage admitted that it failed to review certain loans it approved for FHA insurance. It also admitted certifying certain loans as FHA-eligible when they weren’t, and failing to comply with other HUD requirements. The company didn’t admit to fraud, however.

Acknowledgements aside, the settlement reeks of unaccountability. The government will continue to let the company make FHA loans. No individuals were named as defendants in the case, as if all those false certifications were signed without any human involvement. And the head of CitiMortgage, Sanjiv Das, still has his job. (Das was hired by Pandit, a fellow Morgan Stanley alumnus, in July 2008.)

HUD had warned Citigroup after a 2008 audit to bring its quality-control program into compliance. Instead, Citigroup responded “by undermining the independence of its quality control department and manipulating the results of its quality control reviews,” the government said in its complaint.

Fraudulent Loans

By the end of 2009, Citigroup had accumulated almost 1,000 internal reports of fraudulent loans that it had never investigated. Unable to process the backlog, it erased them instead, according to the government, which alleged that the policy continued into 2011. In January 2011, the company even held a “Star Players Award” ceremony, where a team of employees was honored for its efforts to “drive variance rates down by challenging quality control to remove or reduce variances.”

One example cited in last week’s complaint involved an FHA loan of $114,000, originated in 2010, on which the borrower missed the first payment. Citigroup’s fraud unit “confirmed fabricated bank statements in the loan file and the existence of a straw buyer” -- a buyer who purchases a home but does not occupy it. “Nevertheless, Citi failed to report the loan to HUD.”

In fact, from 2005 through mid-2011, Citigroup didn’t notify HUD about a single fraudulent loan it had originated or underwritten. It wasn’t until after the company received a subpoena from the U.S. Attorney’s Office in July 2011 that it began self-reporting any such loans, the government said.

So how does Citigroup square its statements about honesty, responsible finance and being “fundamentally different” with the allegations in last week’s complaint? Here’s what a Citigroup spokeswoman, Shannon Bell, said: “Focusing on one set of unproven allegations and ignoring the substantial progress Citi has made since the crisis is a gross distortion of the record.”

“It is hard to dispute that we are a fundamentally different company than when the crisis began in 2007,” she said. “Specifically, we have divested over half a trillion dollars of businesses and assets which are not core to our strategy, overhauled risk management while investing in compliance and control functions, and continued to change the culture of a large organization by going back to the basics of banking.”

Now back to the real story here: Responsible lenders don’t do what Citigroup did. And for the record, it’s more than a stretch for the company to call the government’s allegations “unproven.” Citigroup admitted some of them were true.

Looks like Citigroup still has a lot of work to do.

(Jonathan Weil is a Bloomberg View columnist. The opinions expressed are his own.)

Read more opinion online from Bloomberg View.

To contact the writer of this article: Jonathan Weil in New York at jweil6@bloomberg.net

To contact the editor responsible for this article: Mark Whitehouse at mwhitehouse1@bloomberg.net