Citigroup will pay $4 billion as a civil penalty to the Justice Department, $300 million more to state attorneys general and $200 million to the Federal Deposit Insurance Corp.
In addition, it must distribute another $2.5 billion to consumers.
"This settlement is in the best interests of our shareholders, and allows us to move forward and to focus on the future, not the past," Citigroup CEO Michael Corbat said in a statement.
The bank already took a $3.8 billion charge in its second quarter accounts to deal with the payment.
"The bank's misconduct was egregious," U.S. Attorney General Eric Holder said Monday at a press conference in Washington to discuss the settlement.
"This historic penalty is appropriate given the strength of the evidence of the wrongdoing committed by Citi. The bank's activities contributed mightily to the financial crisis that devastated our economy in 2008," Holder said.
Last November, JP Morgan Chase agreed to pay $13 billion for its responsibility in the sale of high-risk mortgage-backed financial instruments before the 2008 financial crisis.
Bank of America has a similar case pending and it is expected to reach an agreement with regulators in the coming months.