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U.S. official warns banks of lawsuits over mortgage misconduct

By Aruna Viswanatha

WASHINGTON, July 16 (Reuters) - A U.S. Department of Justice official on Wednesday told banks under investigation in connection with mortgage securities sold before the financial crisis to admit to misconduct and pay substantial penalties or face lawsuits from the agency.

The warning from No. 3 Justice official Tony West comes after a $7 billion settlement with Citigroup Inc and amid talks with Bank of America Corp over similar claims.

"If an institution is unwilling to admit its wrongful conduct in a statement of facts; or balks at paying a substantial penalty that reflects that conduct; or refuses to do right by those affected, then we will not shrink from litigating as long as we must to fulfill our law enforcement mandate," West said, according to the text of remarks he gave before the Exchequer Club, a financial policy group in Washington.

The speech comes one day after Justice Department lawyers met with Bank of America representatives about a potential settlement, at which negotiators made little progress towards a deal, according to a person familiar with the talks.

"Let me be clear: We do not investigate these matters intending to settle them," West said in the speech, without naming specific institutions. "I would not be surprised if we were to see additional RMBS lawsuits in the future."

The Justice Department-led residential mortgage-backed securities (RMBS) working group is leading multiple investigations.

(Reporting by Aruna Viswanatha; Editing by Cynthia Osterman)