Citigroup, the nation’s third largest bank, has agreed to pay $7 billion to settle a federal investigation into whether it misled investors about the quality of mortgage-related financial products that it sold in the run-up to the 2008 credit crisis.

The settlement, which was announced Monday by Attorney General Eric Holder, includes a record $4 billion cash penalty to the Justice Department, as well $2.5 billion in relief for struggling homeowners. The bank will also pay $500 million to several state attorneys general and the Federal Deposit Insurance Corporation.

Citigroup was accused of covering up problems with home loans that it was packaging into securities and then selling to investors. The bank was reported to have opened negotiations with an offer of $363 million, but in agreeing to pay $7 billion, it won release from potential liability for all mortgage-backed securities and collateralized debt obligations issued from 2003 to 2008.

“The bank’s misconduct was egregious,” Holder said in prepared remarks. “And under the terms of this settlement, the bank has admitted to its misdeeds in great detail.”

The agreement represents an important victory for the Justice Department, which for the past six years has been battling to reverse the reputation that it is too soft on banks. In May, the department won a guilty plea against the Swiss banking giant Credit Suisse, which had been accused of helping wealthy Americans evade paying taxes. It was the first such plea against a major financial institution in 20 years. Six weeks later, it secured a second guilty plea from France’s biggest bank, BNP Paribas, which was accused of violating U.S. sanctions against Iran, Sudan and Cuba.

The Citigroup agreement is likely to factor into ongoing talks in a separate mortgage-related investigation by the Justice Department into Bank of America. The government is said to be seeking $17 billion in that case, a figure that would top the landmark $13 billion agreement it reached in November with JPMorgan Chase.

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