oversight

Portnoy & Greene Closing Agent Contract, Boston, Massachusetts

Published by the Department of Housing and Urban Development, Office of Inspector General on 2000-08-16.

Below is a raw (and likely hideous) rendition of the original report. (PDF)

     AUDIT REPORT




   PORTNOY & GREENE, P.C.
  CLOSING AGENT CONTRACT

   BOSTON, MASSACHUSETTS


         00-FW-222-1005

        AUGUST 16, 2000

OFFICE OF AUDIT, SOUTHWEST DISTRICT
        FORT WORTH, TEXAS
                                                                      Issue Date
                                                                              August 16, 2000

                                                                      Audit Case Number
                                                                              00-FW-222-1005




TO:           Engram Lloyd
              Director
              Philadelphia Single Family Homeownership Center, 3AHH


FROM:         D. Michael Beard
              District Inspector General for Audit, 6AGA

SUBJECT: Portnoy & Greene Closing Agent Contract


We performed an audit of Portnoy & Greene’s Closing Agent contract to determine whether
management controls were adequate to ensure the prevention of fraud, waste, and abuse. Our report
contains two significant findings concerning Portnoy & Greene’s performance as a closing agent.

Within 60 days please give us, for each recommendation in this report, a status report on: (1) the
corrective action taken; (2) the proposed corrective action and the date to be completed; or (3) why
action is considered unnecessary. Also, please furnish us copies of any correspondence or directives
issued because of the audit.

If you have any questions, please contact Theresa A. Carroll, Assistant District Inspector General for
Audit, at (817) 978-9309.
Management Memorandum




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00-FW-222-1005           Page ii
Executive Summary
We performed an audit of the law offices of Portnoy & Greene, P.C. (Portnoy & Greene), a
closing agent for HUD, as part of a nationwide effort to review closing agents. Our audit
objective was to determine whether management controls were adequate to ensure the
prevention of fraud, waste, and abuse. To meet this objective, we performed audit steps to
determine whether the closing agent complied with its contract terms and conditions. Overall,
Portnoy & Greene’s management controls were insufficient to ensure that it complied with its
HUD contract. Instead, Portnoy & Greene’s overall performance as a closing agent was
substandard. In addition, we found that Portnoy & Greene was improperly collecting the full
closing agent fee even though another entity performed the closing.




                                    Portnoy & Greene’s overall performance as a closing agent was
   Portnoy & Greene’s
                                    substandard. Portnoy & Greene did not comply with all of the
   overall performance was
                                    terms of its closing agent contract. Portnoy & Greene did not:
   substandard.
                                    (1) deposit sales proceeds in a timely manner; (2) wire the
                                    proceeds to HUD in a timely manner; (3) accept only cash or
                                    certified funds; (4) properly itemize closing costs; (5) maintain
                                    sufficient documentation in its closing files; and (6) limit charges
                                    to only allowable expenses. Substandard performance
                                    occurred because Portnoy & Greene lacked or did not follow
                                    management controls to ensure contract compliance. Portnoy
                                    & Greene’s inability to perform its duties negatively impacted
                                    HUD financially. In addition, HUD has no assurance that
                                    Portnoy & Greene properly conducted closings.

                                    Portnoy & Greene improperly collected the full closing agent
   Portnoy & Greene
                                    fee even though another entity conducted the closing. Portnoy
   improperly collected the
                                    & Greene’s closing agent contract limited its fee for third-party
   full closing agent fee.
                                    closings to 50 percent of the full closing agent fee. Portnoy &
                                    Greene charged the full fee because, in its opinion, it was not
                                    conducting third-party closings. Third-party closing agents
                                    closed 98 percent of the 60 closing files reviewed. Thus, one-
                                    half of the fee Portnoy & Greene received on the 59 identified
                                    files or $16,933 is ineligible. In addition, Portnoy & Greene
                                    may owe HUD an additional $258,587 for 98 percent of the
                                    remaining 901 closings conducted under its current HUD
                                    contract, if the closings were performed by a third-party closing
                                    agent.




                                                   Page iii                              00-FW-222-1005
Executive Summary



                     As a result of these findings, we recommend that HUD
   Recommendations
                     terminate its closing agent contract with Portnoy & Greene.
                     HUD should recover from Portnoy & Greene the $105 in
                     ineligible charges. Further, HUD should require Portnoy &
                     Greene to review all closings conducted under this contract to
                     identify and repay any other improper charges. In addition,
                     HUD should recover $16,933 in fees on the 59 files reviewed
                     where third-party closings occurred, since Portnoy & Greene
                     was only entitled to one-half of its contract fee rather than the
                     full fee. HUD should also require Portnoy & Greene to review
                     the other 901 closings it conducted under this contract to
                     disclose all other instances where a third-party closing
                     occurred. Finally, HUD should recover one-half of the fee paid
                     to Portnoy & Greene for any other third-party closing which
                     could amount to $258,587.

                     We provided a draft of this report to Portnoy & Greene and the
                     Director, Philadelphia Homeownership Center on June 23,
                     2000. We discussed the findings with Portnoy & Greene on
                     July 1, 1999. Portnoy & Greene provided a written response
                     to the draft report on July 19, 2000. We have summarized and
                     evaluated the response in the findings and included it in its
                     entirety as Appendix C. We have also modified this final report
                     from the draft, where appropriate.




00-FW-222-1005           Page iv
Table of Contents

Management Memorandum                                                            i


Executive Summary                                                            iii


Introduction                                                                         1


Findings

1    Portnoy & Greene’s Overall Performance was Substandard                  5


2    Portnoy & Greene Improperly Collected the Full Closing                  11
     Agent Fee


Management Controls                                                           17



Appendices
     A Schedule of Questioned Costs                                     19

     B Report Schedule                                                  21

     C Auditee Comments                                                 23

     D Distribution                                                     49



Abbreviations
     CFR          Code of Federal Regulations
     HUD          U.S. Department of Housing and Urban Development
     OIG          Office of Inspector General



                                          Page v                     00-FW-222-1005
Table of Contents




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00-FW-222-1005       Page vi
Introduction
                                       The Law Office of Portnoy & Greene, P. C. (Portnoy &
      Background                       Greene) contracted with the Department of Housing and Urban
                                       Development (HUD) to conduct closings of HUD’s single
                                       family properties for the State of Massachusetts. Portnoy &
                                       Greene’s current closing agent contract1 started on May 6,
                                       1996. However, Portnoy & Greene has been a closing agent
                                       for HUD in this area since 1992.

                                       Portnoy & Greene had an indefinite quantity contract to provide
                                       closing services for single family properties owned by HUD.
                                       The primary objectives of Portnoy & Greene’s contract were to
                                       ensure that: (1) the sale of all properties closed within the time
                                       stipulated by the Sales Contract; (2) prompt and accurate
                                       payment of all closing costs were made; (3) net proceeds from
                                       each sale were wire transferred to HUD’s account with the
                                       United States Treasury on the day of closing or the next
                                       banking day; and (4) complete and accurate closing packages
                                       were submitted to HUD within 2 business days after closing.

                                       To conduct a closing, Portnoy & Greene’s contract required it
                                       to:
                                       • Establish individual property files and maintain the files by
                                           FHA case number;
                                       • Coordinate with purchaser, broker, and if appropriate,
                                           mortgagee, to establish a firm closing date on or before the
                                           date specified in the Sale Contract;
                                       • Review title and title evidence submitted by mortgagee;
                                       • Prepare all necessary documents at closing to provide a
                                           complete closing including a settlement statement (HUD-1),
                                           deed, note and mortgage, or deed of trust, if applicable;
                                       • On day of closing or next banking day, deposit sales
                                           proceeds, initiate the wire transfer, and obtain the bank’s
                                           wire transfer confirmation; and
                                       • Store title documents2 that are the property of HUD in a
                                           secure cabinet furnished by the closing agent.

                                       According to information obtained from HUD’s Single Family
                                       Asset Management System (SAMS), Portnoy & Greene closed
                                       961 properties as a closing agent from May 6, 1996, to July 5,
                                       1999. According to its contract, Portnoy & Greene would

1
    Contract number H01C96000300000.
2
    Such as title policy and deed.


                                                      Page 1                              00-FW-222-1005
Introduction


                           receive $574 from HUD for each closing it conducted. If the
                           closing was conducted by a third party, Portnoy & Greene
                           would receive 50 percent of the $574 fee or $287 to represent
                           HUD at the closing. If a sale canceled, HUD would pay
                           Portnoy & Greene 25 percent of its fee or $143.50.

                           Our audit objective was to determine whether management
   Audit Objective         controls were adequate to ensure the prevention of fraud,
                           waste, and abuse.

                           We obtained background information by:
   Scope and Methodology   • Reviewing prior closing agent audit programs.
                           • Participating in a teleconference with KPMG regarding its
                              findings for the fiscal year 1998 FHA Financial Statement
                              Audit.
                           • Reviewing the KPMG Briefing Paper regarding the fiscal
                              year 1998 FHA Financial Statement Audit.

                           To accomplish our audit objective, we:
                           • Examined the contract and HUD’s Property Disposition
                              Handbook.
                           • Obtained information from the Single Family Asset
                              Management System (SAMS).
                           • Obtained from SAMS a listing of closings performed by
                              Portnoy & Greene. We selected 70 closed files
                              judgmentally using a random number generator for testing.
                           • Interviewed HUD and Portnoy & Greene staff regarding
                              the closing process.
                           • Obtained an understanding of Portnoy & Greene’s closing
                              and accounting processes.
                           • Obtained and reviewed closing files while on site. Due to
                              time constraints, we reviewed only 60 files. We tested the
                              selected closing files for the following contractual and HUD
                              Handbook requirements:
                              1. The property closed timely and, if the property did not
                                   close timely, we documented the number of days late;
                              2. The closing file contained an extension request and
                                   approval, if applicable;
                              3. The correct extension fee was collected, if applicable;
                              4. Only allowable expenses were paid;
                              5. The correct fees were collected;
                              6. The sale proceeds were deposited timely;
                              7. The correct amount was wired timely;


00-FW-222-1005                 Page 2
                                                                          Introduction


                           8.    The Deed was recorded timely;
                           9.    The correct amount was collected for the taxing
                                 authority;
                           10.   The correct amount was paid to the closing agent;
                           11.   Returned funds were distributed correctly;
                           12.   Clear title was issued;
                           13.   The title insurance premium was not split;
                           14.   A Warranty Deed was prepared;
                           15.   The Warranty Deed was forwarded to HUD timely;
                           16.   The selling amount on the sales contract and the
                                 settlement statement were identical;
                           17.   Closing costs for the buyer were identical on both
                                 pages of the HUD-1; and
                           18.   The correct amount of extension fees were on the
                                 HUD-1, if applicable.

                        We conducted the audit at Portnoy & Greene’s offices located
Audit Period and Site   at 113 Union Wharf, Boston, Massachusetts. The audit
                        covered closings by Portnoy & Greene from April 1, 1998, to
                        March 26, 1999. We extended the scope of our review to
                        include all closings conducted by Portnoy & Greene under this
                        contract. We performed site work from June through July
                        1999. We performed additional audit work in May and June
                        2000 to update our findings. We conducted our audit in
                        accordance with generally accepted government auditing
                        standards.




                                Page 3                              00-FW-222-1005
Introduction




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00-FW-222-1005    Page 4
                                                                                                                      Finding 1


     Portnoy & Greene’s Overall Performance
                was Substandard
Portnoy & Greene’s overall performance as a closing agent was substandard. Portnoy &
Greene did not comply with all of the terms of its closing agent contract. Portnoy & Greene
did not: (1) deposit sales proceeds in a timely manner; (2) wire the proceeds to HUD in a
timely manner; (3) accept only cash or certified funds; (4) properly itemize closing costs; (5)
maintain sufficient documentation in its closing files; and (6) limit charges to only allowable
expenses. Substandard performance occurred because Portnoy & Greene lacked or did not
follow management controls to ensure contract compliance. Portnoy & Greene’s inability to
perform its duties negatively impacted HUD financially. In addition, HUD has no assurance
that Portnoy & Greene properly conducted closings. Since the findings are systemic in
nature, we recommend that HUD terminate its contract with Portnoy & Greene.




                                                  The Portnoy & Greene’s closing agent contract stated that it, as
    Criteria
                                                  contractor, would furnish the necessary services, personnel,
                                                  material, equipment and facilities to provide sales closing
                                                  services for single family properties owned by HUD.3

                                                  Portnoy & Greene’s contract duties included the following
                                                  responsibilities:
                                                  • Complete all documents necessary to provide a complete
                                                      closing, including the settlement statement, deed, note and
                                                      mortgage, or deed of trust, if applicable.
                                                  • Prorate unpaid property taxes to the date of closing.
                                                  • Collect recording fees from the purchaser and record the
                                                      deed.
                                                  • Accept only cash, a certified check, cashier’s check, or
                                                      money order made payable to Portnoy & Greene.
                                                  • Deposit the sale proceeds and wire transfer the amount to
                                                      HUD on the day of closing or the next banking day.
                                                  • Deliver the closing package to HUD within 2 working days
                                                      after the closing.
                                                  • Maintain a complete record of the closing.4




3
    Section B.1.
4
    Sections C.2(b)(9) paragraphs i through iv; C.2(b)(11) paragraphs i and iv; C.2(b)(14); and C.2(b)(18).


                                                                  Page 5                                      00-FW-222-1005
Finding 1


                                                In addition, Portnoy & Greene’s contract required it to pay only
                                                those closing costs determined to be reasonable and customary
                                                for the local real estate market.5 Finally, Portnoy & Greene’s
                                                fee was to be inclusive of all postage and shipping costs.6

                                                In 32 (or 53 percent) of the files reviewed, Portnoy & Greene
    Sales proceeds not                          did not deposit the sales proceeds timely. 7 Instead of
    deposited timely.                           depositing the sales proceeds on the day of closing or the next
                                                banking day, Portnoy & Greene made deposits ranging from 2
                                                to 13 days after closing. Portnoy & Greene’s late deposits
                                                occurred because its staff did not attend closings conducted by
                                                third parties (see Finding 2). Since Portnoy & Greene was not
                                                present at the closing, the closing entity would express mail the
                                                proceeds to Portnoy & Greene the day of or the day after
                                                closing. Thus, Portnoy & Greene did not even have the sale
                                                proceeds available for deposit until the day after closing at the
                                                earliest.

                                                In 59 (or 98 percent) of the files reviewed, Portnoy & Greene
    Sale proceeds not wired                     did not wire the sale proceeds to HUD timely. Portnoy &
    to HUD timely.                              Greene’s contract required that a wire transfer request be
                                                initiated to wire the sale proceeds to HUD on the day of closing
                                                or the next banking day. As in the cases of late deposits,
                                                Portnoy & Greene’s late wires also occurred because of the
                                                third parties performing its closings. Portnoy & Greene’s late
                                                wires resulted in HUD not getting its sales proceeds timely.
                                                Thus, the government would have had to pay interest if HUD
                                                needed funds and the proceeds were unavailable.

                                                Portnoy & Greene accepted uncertified funds from third-party
    Uncertified funds                           closing agents. Portnoy & Greene’s contract required
    accepted at closing.                        acceptance of only cash, cash equivalents, or certified funds.
                                                Since Portnoy & Greene did not attend third-party closings, the
                                                other entities would issue checks for the sale proceeds on their
                                                attorney trust accounts and express mail the checks to Portnoy
                                                & Greene. Portnoy & Greene had to wait for these uncertified
                                                funds to clear its bank before it could wire the proceeds to

5
    Section B.4.
6
    Section D.1.
7
    Portnoy & Greene may have been late depositing the proceeds on an additional two closings. However, Portnoy & Greene’s
    file documentation was so poor that we were unable to determine when the sales proceeds were deposited in both cases and
    when the closing took place on one.



00-FW-222-1005                                       Page 6
                                                                                    Finding 1


                            HUD. In addition to causing a delay in the wires, Portnoy &
                            Greene’s acceptance of uncertified funds exposed it and HUD
                            to the risk that sufficient funds did not exist for the check to
                            clear.

                            Portnoy & Greene did not itemize closing costs on the
Closing Costs were not      settlement statements it prepared for HUD. Portnoy &
itemized.                   Greene’s contract did not require itemization of closing costs.
                            However, Portnoy & Greene was required to pay only those
                            closing costs determined to be reasonable and customary for
                            the local real estate market. Without an itemization of closing
                            costs, HUD has no way of knowing what costs it is paying and
                            no assurance that the costs being paid are reasonable or
                            customary. Portnoy & Greene stated that a HUD contract
                            representative told it to show items this way on the settlement
                            statement. Yet, Portnoy & Greene could not provide us written
                            documentation showing where HUD approved its use of a
                            summary amount for closing costs. In addition, HUD Single
                            Family staff stated they had not instructed Portnoy & Greene to
                            show costs in a summary manner.

                            Portnoy & Greene’s contract files lacked sufficient
Closing files lacked        documentation in several required categories. Portnoy &
sufficient documentation.   Greene’s files lacked documentation to support that it correctly
                            prorated the amount of taxes due on 49 (or 82 percent) of the
                            files reviewed. Portnoy & Greene’s files did not contain any
                            evidence that clear title was conveyed on all 60 of the cases
                            reviewed. In addition, one instance was noted where clear title
                            may not have been conveyed. None of Portnoy & Greene’s
                            files documented when the file was conveyed to HUD. In 12 of
                            the 21 cases where a closing did not occur timely, Portnoy &
                            Greene’s file did not document that an extension was obtained
                            and the appropriate fee was paid to or waived by HUD. In 12
                            (or 20 percent) of the files reviewed, Portnoy & Greene’s
                            records did not document that the deed was properly recorded.
                            Portnoy & Greene’s contract required it to perform and
                            document all of the above items. Portnoy & Greene’s
                            management stated that these items were performed. Yet
                            based the substandard conditions of the files, Portnoy &
                            Greene obviously lacked the necessary management system and
                            controls to ensure that proper record-keeping occurred. Since
                            the files lack the above required documentation, HUD has no



                                         Page 7                            00-FW-222-1005
Finding 1


                               assurance that the closings performed by Portnoy & Greene
                               were proper or complete.

                               Portnoy & Greene improperly charged HUD a total of $105 in
   Ineligible mail expenses    overnight shipping charges on 6 of the 60 files reviewed.
   charged to HUD.             According to Portnoy & Greene’s contract, shipping and
                               postage costs are included in its contract fee. Portnoy &
                               Greene admitted that these improper charges occurred and
                               stated it charged HUD in error.

                               Portnoy & Greene had similar problems in the past. A Price
   Similar problems found in   Waterhouse audit in the early 1990’s had findings concerning
   the past.                   the timeliness of wires and deposits. A HUD Single Family
                               review in early 1999 found problems with the timeliness of
                               deposits. HUD’s 1999 review also questioned Portnoy &
                               Greene’s assertion that it was the settlement agent when third
                               parties were performing the closings.

                               In a July 23, 1999 letter to OIG, Portnoy & Greene stated that
                               it was now performing all closings in person and having the
                               proceeds wired to its account by the lender’s attorney.
                               However, we performed no testing to determine if Portnoy &
                               Greene was following the new procedures.

                               Based on the above facts, Portnoy & Greene obviously lacks
                               the necessary management and system controls to fulfill its
                               contract. Portnoy & Greene’s inability to fulfill its contract was
                               demonstrated not only by its inability to deposit funds timely but
                               also by its failure to properly complete and document a large
                               number of its other contract duties. The identified duties are
                               core responsibilities of a closing agent and Portnoy & Greene’s
                               performance of them was substandard.




                               Portnoy & Greene disagreed with all items in this finding except
   Auditee Comments            for the $105 of improperly billed overnight charges which it
                               agreed to repay. Portnoy & Greene said that its position was
                               that the firm met or exceeded performance standards
                               established by HUD. The firm further stated that in those few
                               instances where the technical requirements of the contract were
                               not met, it was due to either HUD’s actions or inactions, or to
                               express directions from HUD employees. In addition, Portnoy


00-FW-222-1005                     Page 8
                                                                             Finding 1


                    & Greene said they were hampered in responding to the report
                    as we had not provided them with specific closing files and had
                    presented the findings in the aggregate.




                    We stand by our original conclusions and recommendations.
                    Portnoy & Greene’s response clearly shows that it either did
OIG Evaluation of   not fully understand or was unwilling to fulfill its contract. For
Comments            example, Portnoy & Greene stated that it was not required to
                    order a title search until its contract was modified in April 1999.
                    However, Portnoy & Greene’s 1996 contract required it to
                    obtain a 50-year title search and review the title on each
                    closing. Further, Portnoy & Greene stated that it accepted law
                    firm checks because it was standard practice in Massachusetts
                    and was as secure as certified funds. Yet, Portnoy & Greene’s
                    response did not address the fact that its contract required
                    certified funds and that it was not fulfilling that requirement.
                    Regarding their complaint of our not providing specific files, we
                    supplied a list of the closing files to Portnoy & Greene during
                    the audit.

                    Portnoy & Greene did not provide us with written contract
                    amendments or written directions from HUD to support its
                    contract deviations and assertions. As a law firm, Portnoy &
                    Greene should have known that verbal directions do not change
                    a written contract. In fact, Portnoy & Greene obviously
                    realized that a contract modification was necessary. During the
                    audit, the firm wrote several letters to HUD seeking several
                    contract modifications. However, prior to the end of our field
                    work, HUD had not approved any modifications which would
                    have an impact on this report.




                    We recommend that the Director of the Philadelphia
Recommendations
                    Homeownership Center:

                    1A. Request HUD’s Contracting Operations Branch terminate
                        HUD’s closing agent contract with Portnoy & Greene for
                        default.




                                 Page 9                             00-FW-222-1005
Finding 1


                 1B. Recover the $105 in ineligible overnight shipping costs
                     from Portnoy & Greene.

                 1C. Require Portnoy & Greene to review all closing
                     statements for any other possible overcharges that were
                     made to HUD and repay any other instances of improper
                     billing.




00-FW-222-1005       Page 10
                                                                                                     Finding 2


        Portnoy & Greene Improperly Collected
              the Full Closing Agent Fee
Portnoy & Greene improperly collected the full closing agent fee even though another entity
conducted the closing. Portnoy & Greene’s closing agent contract limits its fee for third-party
closings to 50 percent of the full closing agent fee. Portnoy & Greene charged the full fee
because, in its opinion, it was not conducting third-party closings. However, a close analysis
of the situation showed that third-party closing agents conducted the majority of Portnoy &
Greene’s closings. Third-party closing agents closed 59 or (98 percent) of the 60 closing files
reviewed. Thus, one-half of the fee Portnoy & Greene received on the 59 identified files or
$16,933 is ineligible. In addition, Portnoy & Greene may owe HUD an additional $258,587 for
98 percent of the remaining 901 closings conducted under its HUD contract, if the closings
were performed by a third-party closing agent.




                                              HUD defines third-party closings in its Single Family Property
     Criteria
                                              Disposition Handbook.8 Under the paragraph titled Third Party
                                              Closing Agents9, the Handbook states “There will be instances
                                              where a purchaser/funding lender uses a closing agent other
                                              than HUD’s. Such third party (defined as any closing agent not
                                              under a HUD-authorized contractual arrangement who is
                                              conducting the closing of property sold by HUD) closings shall
                                              be handled as follows:” The Handbook goes on to say that the
                                              HUD contractor is responsible for ensuring that the closing is
                                              completed accurately, the correct amount of sales proceeds is
                                              properly wired and that the sales package is forwarded to HUD
                                              on a timely basis.

                                              Portnoy & Greene’s contract contains clauses concerning the
                                              use of third-party closing agents. Foremost, the contract limited
                                              Portnoy & Greene’s fee to 50 percent of the full $574 fee for
                                              third-party closings at which it represented HUD. 10
                                              Additionally, Portnoy & Greene’s contract required it to
                                              “Physically represent HUD at closings being conducted by third
                                              party closers.” Further, Portnoy & Greene’s contract required
                                              it to ensure that the HUD-1 Settlement Statement was accurate,
                                              the proper amount of the sale proceeds was deposited within 1

8
     HUD Handbook 4310.5, Rev-2, dated April,1994.
9
     HUD Handbook 4310.5, Rev-2, paragraph 11-10.
10
     Contract Section B.2(a)(2).


                                                            Page 11                             00-FW-222-1005
Finding 2


                                    banking day of closing, the request for wire transfer to HUD
                                    was initiated, the closing package was sent to HUD within 2
                                    working days of closing, and the deed was filed.11

                                    Another entity conducted the closing for Portnoy & Greene in
     Third-party agents             59 out of the 60 files reviewed. HUD did not have a contract
     performed the majority of      with any of the entities which conducted the closings. Based on
     closings reviewed.             HUD’s Handbook definition, third-party agents performed the
                                    closings. Thus, Portnoy & Greene should have only collected
                                    one-half of its fee. However, in each case, Portnoy & Greene
                                    charged and collected its full $574 fee from HUD.

     Portnoy & Greene did           Portnoy & Greene did not attend closings conducted by third
     not attend closings.           parties. Portnoy & Greene’s contract required it to physically
                                    attend closings to represent HUD. Attorneys for Portnoy &
                                    Greene admitted they did not attend closings outside the Boston
                                    area. Closing file reviews supported their comments since 98
                                    percent of the closings occurring outside Boston were not
                                    attended by Portnoy & Greene. However, Portnoy & Greene
                                    did not attend five closings that were only 15 miles or less from
                                    Boston. Thus, the facts indicate that Portnoy & Greene did not
                                    attend any closing conducted by a third party. Since Portnoy &
                                    Greene did not attend closings, no one represented HUD at the
                                    closings.

     Two settlement                 Contrary to standard closing practices, two settlement
     statements prepared.           statements were prepared for third-party closings of HUD
                                    properties. The third-party agents who actually conducted the
                                    closing normally prepared their own settlement statement and
                                    listed themselves as the settlement agent. However, Portnoy &
                                    Greene also prepared a settlement statement which showed
                                    Portnoy & Greene as the settlement agent even though it was
                                    not at the closing. Portnoy & Greene would sign the settlement
                                    statement before closing and mail or fax it to the entity
                                    conducting the closing. HUD and several Massachusetts
                                    attorneys stated that the practice of completing two settlement
                                    statements was unusual. The attorneys further stated that the
                                    only time they ever had buyers sign two settlement statements
                                    was for HUD closings conducted for Portnoy & Greene.
                                    Portnoy & Greene stated that it prepared the separate
                                    settlement statement because HUD wanted certain costs shown

11
     Contract Section C.2(b)(22).


00-FW-222-1005                          Page 12
                                                                                  Finding 2


                         in a particular manner. This explanation does not explain why
                         Portnoy & Greene showed itself as settlement agent when it
                         was not at the closing. Portnoy & Greene’s practice of
                         preparing a separate settlement statement in addition to the
                         third-party agent’s settlement statement was misleading to HUD
                         and confusing to the buyer.

Portnoy & Greene         In Portnoy & Greene’s opinion, third-party closings do not
believed it was not      occur in Massachusetts. Portnoy & Greene defined a third-
performing third-party   party closing agent as an escrow agent or title company that
closings.                conducts closings and acts on behalf of all the parties.
                         However, Portnoy & Greene provided HUD Single Family staff
                         with the third-party closing agent definition from HUD’s Single
                         Family Property Disposition Handbook. Thus, Portnoy &
                         Greene was aware of what HUD considered to be a third-party
                         closing agent. Portnoy & Greene also stated that it prepared an
                         additional settlement statement because HUD wanted certain
                         figures shown in certain ways and because HUD did not want
                         third-party closings to be occurring.

                         Portnoy & Greene’s actions and statements are contradictory
                         and illogical. For example, if Massachusetts did not have third-
                         party closings as it contends, Portnoy & Greene should not
                         have been so intent on issuing another settlement statement that
                         showed itself as the settlement agent for the closing. Further,
                         Portnoy & Greene asserted that it was not participating in third-
                         party closings because it represented HUD at closings. Yet,
                         Portnoy & Greene did not physically attend the majority of
                         closings conducted under its contract. Additionally, if Portnoy
                         & Greene knew how its contract and HUD defined third-party
                         closing agents, Portnoy & Greene should not have used another
                         definition. Portnoy & Greene is arguing with itself.

                         HUD Contracting complicated the third-party closing agent
                         issue by issuing a letter to Portnoy & Greene during our audit.
                         Contracting’s letter was issued based on a request for a
                         contract modification by Portnoy & Greene and without the
                         Contracting Officer contacting OIG or HUD Single Family staff.
                         Contracting’s letter stated that as long as Portnoy & Greene
                         was performing its contracted duties it was not performing
                         third-party closings. First, this letter incorrectly defines third-
                         party closings and is contradictory to Portnoy & Greene’s
                         contract and HUD’s Single Family Property Disposition


                                     Page 13                             00-FW-222-1005
Finding 2


                       Handbook. Second, Portnoy & Greene was not performing its
                       contracted duties. Further, we believe that if Contracting had
                       possessed the information that OIG had concerning Portnoy &
                       Greene’s lack of representation at closings and other problems
                       cited in this report, the letter would not have been issued.




                       Portnoy & Greene’s position is that the firm collected the
   Auditee Comments    proper fee under the circumstances. Portnoy & Greene said
                       that the firm performed all of the work HUD expected it to
                       perform to earn the fee. Further, the firm stated that HUD’s
                       own contract concedes that local law, custom and practice
                       would control the closing process and that was what the firm
                       adhered to in Massachusetts.




                       We disagree with Portnoy & Greene’s comments. First, as
   OIG Evaluation of   Finding 1 clearly shows, Portnoy & Greene did not properly
   Comments            perform all of the work required under its contract. Second,
                       HUD’s contract does not concede that local law would control
                       the closing process. The only place Portnoy & Greene’s
                       contract mentions local law is part of a 1999 amendment that
                       deals only with homeownership association dues.

                       Portnoy & Greene’s contract allowed for two methods of
                       compensation for services: (1) a fixed fee for closings
                       conducted by the contractor and (2) 50 percent of the fixed fee
                       for closings at which the contractor represented HUD. As the
                       report clearly states, other entities conducted the closings
                       because Portnoy & Greene was not physically at the closings.
                       Thus, Portnoy & Greene should have only received 50 percent
                       of the fixed fee for compensation.




00-FW-222-1005             Page 14
                                                                       Finding 2


                  We recommend that the Director of the Philadelphia
Recommendations
                  Homeownership Center:

                  2A. Recover the $16,933 in ineligible fees received by
                      Portnoy & Greene.

                  2B. Require Portnoy & Greene to disclose all other instances
                      where another entity conducted the closings. After
                      determining the number of cases, repay HUD one-half of
                      its fee for those closings, which could be as much as
                      $258,587.




                             Page 15                          00-FW-222-1005
Finding 2




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00-FW-222-1005    Page 16
Management Controls
In planning and performing our audit, we obtained an understanding of management controls
relevant to our audit. Management is responsible for establishing effective management
controls. Management controls, in the broadest sense, include the plan of organization,
methods, and procedures adopted by management to ensure that its goals are met.
Management controls include the processes for planning, organizing, directing, and controlling
program operations. They include the systems for measuring, reporting, and monitoring
program performance.




   Relevant Management              We determined that the following management controls were
   Controls                         relevant to our audit objective:

                                    •   Policies and procedures of the sales process at HUD.
                                    •   Policies and procedures of closing agent to ensure that
                                        closings were properly conducted according to its contract.
                                    •   Administrative controls of the closing agent to ensure the
                                        closing files and documents were complete, accurate and
                                        secure.

                                    A significant weakness exists if management controls do not
   Significant Weaknesses           give reasonable assurance that resource use is consistent with
                                    laws, regulations, and policies; that resources are safeguarded
                                    against waste, loss, and misuse; and that reliable data are
                                    obtained, maintained, and fairly disclosed in reports. Based on
                                    our review, we believe the following items are significant
                                    weaknesses as discussed in this report:

                                    •   Portnoy & Greene’s overall performance was substandard
                                        because it either lacked or did not follow a system of
                                        effective management controls to ensure compliance with its
                                        contract (Finding 1).

                                    •   Portnoy & Greene improperly collected the full closing
                                        agent fee even though another entity conducted the closing
                                        (Finding 2).




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Management Controls




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00-FW-222-1005         Page 18
                                                                                                                     Appendix A

Schedule of Questioned Costs

                                                                                  Type of Questioned Costs
           Issue                                                                  Ineligible 1/ Unsupported 2/

1B. Overnight shipping costs                                                          $105

2A. Ineligible fees                                                                 16,933

2B. One-half of closing fees                                                                             $258,587


           Totals                                                                 $17,038                $258,587




1
    Ineligible costs are costs charged to a HUD-financed or insured program or activity that the auditor believes are not allowable
    by law, contract, or federal, state, or local policies or regulations.
2
    Unsupported costs are costs questioned by the auditor because the eligibility cannot be determined at the time of audit. The
    costs are not supported by adequate documentation or there is a need for a legal or administrative determination on the
    eligibility of the costs. Unsupported costs require a future decision by HUD program officials. This decision, in addition to
    obtaining supporting documentation, might involve a legal interpretation or clarification of Departmental policies and
    procedures.




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00-FW-222-1005    Page 20
                                                                                                 Appendix B

Report Schedule
                                            PORTNOY & GREENE
                                                      Sales                          Correct
                                                    Proceeds                        Amount to
                                       Extension    Deposited    Wire      Deed      Taxing           Docs
Case             Settlement Agent      in Writing    Timely     Timely   Recorded   Authority     Forwarded to
Number                                                                    Timely                   HUD Timely
251-189263   GREEN, MILES, LIPTON         N/A         YES         NO       YES         ?               ?
251-189706   RICHARD NOVITCH              N/A         YES         NO       YES        YES              ?
251-176594   JOHN F LUCEY                 N/A         YES         NO       YES         ?               ?
251-176623   ANTHONY COPANI               YES         YES         NO         ?         ?               ?
251-176676   BOULEY&DONAHOE               YES         NO          NO       YES         ?               ?
251-179107   RICHARD TASKIN               N/A         NO          NO       YES        YES              ?
251-181169   PONICHTERA&DENARDIS          N/A         YES         NO         ?        YES              ?
251-181990   DAVID LADIZKI                N/A         NO          NO       YES         ?               ?
251-195164   GREENWALD,GREENWALD           NO         NO          NO       YES         ?               ?
252-000461   DAVID LADIZKI                N/A         NO          NO       YES         ?               ?
252-001899   THOMAS ROOKE                 YES         YES         NO       YES         ?               ?
251-152988   MICHAEL NEWHOUSE             N/A         NO          NO       YES         ?               ?
252-004690   WILLIAM BARRY                N/A         YES         NO       YES        YES              ?
252-005080   DAVID LADIZKI                N/A         NO          NO       YES         ?               ?
252-005578   DAVID LADIZKI                N/A         NO          NO         ?         ?               ?
253-000588   DAVID LADIZKI                 NO         NO          NO       YES         ?               ?
251-136293   SIMS & SIMS                   NO         NO          NO       YES         ?               ?
251-143620   GOLDMAN & GOLDMAN            N/A         YES         NO       YES         ?               ?
251-141734   RUSSO & SCOLNICK             N/A         NO          NO         ?         ?               ?
251-142754   GILMARTIN & FITZSIMMONS       NO         NO          NO       YES        YES              ?
251-148161   DAVID LADIZKI                N/A         NO          NO       YES         ?               ?
251-149433   SIMS & SIMS                  N/A         YES         NO       YES         ?               ?
251-149566   CARLOS GOMEZ                  NO         NO          NO        NO         ?               ?
251-150006   AHALT, BALL, BRODEUR         N/A         NO          NO         ?        YES              ?
251-152270   AHALT, BALL, BRODEUR         N/A         YES         NO       YES         ?               ?
251-153815   TASHJIAN, SIMSARIAN          YES         YES         NO       YES         ?               ?
251-156550   DAVID LADIZKI                 NO         YES         NO       YES         ?               ?
251-156877   DAVID LADIZKI                 NO         NO          NO       YES         ?               ?
251-174053   BARRY GRUNIN                 YES         YES         NO       YES         ?               ?
251-176494   JOHN MURPHY                  YES         YES         NO         ?        NO               ?
251-170066   ?                            N/A         YES         NO       YES         ?               ?
251-170280   SAULINO & SILVA              N/A         NO          NO       YES         ?               ?
251-171329   BACON & WILSON               YES         YES         NO       YES        YES              ?
251-166039   RICHARD GOLDMAN              N/A         YES         NO         ?         ?               ?
251-166232   KORTEZ & MURPHY              N/A         NO          NO         ?         ?               ?
251-166645   GIANNINI CRAVEN LEACH        N/A         NO          NO        NO         ?               ?
251-182900   FLEMING TITLE                N/A         NO          NO       YES         ?               ?
251-176767   ARTHUR F. HALEY               NO         NO          NO         ?         ?               ?
251-190775   RICHARD A. BROOSLIN        request       NO          NO       YES         ?               ?
                                          only
252-000694   JOHN S. O'BRIEN              N/A         YES         NO       YES          ?              ?
252-000979   FRATAR & KERN                N/A         NO          NO       YES          ?              ?
252-002527   HUNTER & GRAZIANO            N/A         NO          NO       YES          ?              ?
252-003151   FREEDMAN, DeROSA, &          N/A         YES         NO       YES          ?              ?
             RONDEAU
252-003753   DRAYMORE, MASTIN, &          N/A          NO         NO       NO           ?              ?
             GOLDBERG
252-004376   DANIEL P. GARVEY             N/A         YES         NO       YES         ?               ?
252-004990   HUNTER & GRAZIANO            N/A         YES         NO       YES         ?               ?
252-005255   PORTNOY & GREENE             N/A         YES         YES      YES        YES              ?
253-000132   GERALD B. BERG               N/A         NO          NO        ?          ?               ?




                                                            Page 21                         00-FW-222-1005
Appendix B

                                                   Sales                          Correct
                                                 Proceeds                        Amount to
                                    Extension    Deposited    Wire      Deed      Taxing         Docs
Case             Settlement Agent   in Writing    Timely     Timely   Recorded   Authority   Forwarded to
Number                                                                 Timely                 HUD Timely
253-000717   DRAYMORE, MASTIN, &       NO           YES       NO        YES          ?            ?
             GOLDBERG
251-136777   DRAYMORE, MASTIN, &       NO           YES       NO        YES          ?            ?
             GOLDBERG
251-147687   COSTELLO & GREYDANUS      N/A          NO        NO        NO          ?             ?
251-146306   ARTHUR F. HALEY           NO           NO        NO        YES         ?             ?
251-150506   JAMES V. PAOLINO          N/A          NO        NO        YES        YES            ?
251-154506   THOMAS P. MILLOTT         N/A          NO        NO        YES        YES            ?
251-157005   VICTOR M. FORSLEY         YES          NO        NO        YES         ?             ?
251-173152   LEVIN & LEVIN             N/A          NO        NO        YES         ?             ?
251-172194   JOSEPH M. FIDLER          N/A          YES       NO        YES         ?             ?
251-176683   SIMS & SIMS               N/A           ?        NO        YES         ?             ?
251-166682   GOULD & GOULD             N/A          YES        ?         ?          ?             ?
251-164108   DANIEL W. MURRAY          NO            ?         ?         ?          ?             ?


YES                                     8            26        1        44          10            0
NO                                     12            32        57        4           1            0
N/A                                    39            0         0         0           0            0
WAIVED                                  0            0         0         0           0            0
?                                       0            2         2        12          49            60
MAYBE
REQUEST                                 1
ONLY




00-FW-222-1005                                   Page 22
                              Appendix C

Auditee Comments




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00-FW-222-1005    Page 48
                                                                                      Appendix D

Distribution
Secretary's Representative, 6AS
Comptroller, 6AF
Director, Accounting, 6AAF
Director, Single Family Homeownership Center, 3AHH (4)
Saul N. Ramirez, Jr., Deputy Secretary, SD (Room 10100)
Kevin Simpson, Deputy General Counsel, CB (Room 10214)
Jon Cowan, Chief of Staff, S (Room 10000)
B. J. Thornberry, Special Asst. to the Deputy Secretary for Project Management, SD (Rm 10100)
Joseph Smith, Acting Assistant Secretary for Administration, A (Room 10110)
Hal C. DeCell III, A/S for Congressional and Intergovernmental Relations, J (Room 10120)
Ginny Terzano, Sr. Advisor to the Secretary, Office of Public Affairs, S (Room 10132)
Roger Chiang, Director of Scheduling and Advance, AL (Room 10158)
Howard Glaser, Counselor to the Secretary, S (Room 10218)
Rhoda Glickman, Deputy Chief of Staff, S (Room 10226)
Todd Howe, Deputy Chief of Staff for Operations, S (Room 10226)
Jacquie Lawing, Deputy Chief of Staff for Programs & Policy, S (Room 10226)
Patricia Enright, Deputy A/S for Public Affairs, W (Room 10222)
Joseph Hacala, Special Asst for Inter-Faith Community Outreach, S (Room 10222)
Marcella Belt, Executive Officer for Admin Operations and Management, S (Room 10220)
Karen Hinton, Sr. Advisor to the Secretary for Pine Ridge Project (Room 10216)
Gail W. Laster, General Counsel, C (Room 10214)
Armando Falcon, Office of Federal Housing Enterprise Oversight (Room 9100)
William Apgar, Assistant Secretary for Housing/FHA, H (Room 9100)
Susan Wachter, Office of Policy Development and Research (Room 8100)
Cardell Cooper, Assistant Secretary for CPD, D (Room 7100)
George S. Anderson, Office of Ginnie Mae, T (Room 6100)
Eva Plaza, Assistant Secretary for FHEO, E (Room 5100)
V. Stephen Carberry, Chief Procurement Officer, N (Room 5184)
Harold Lucas, Assistant Secretary for Public & Indian Housing, P (Room 4100)
Gloria R. Parker, Chief Information Officer, Q (Room 8206, L’Enfant Plaza)
Frank L. Davis, Director, Office of Dept Operations and Coordination, I (Room 2124)
Office of the Chief Financial Officer, F (Room 2202)
Edward Kraus, Director, Enforcement Center, V, 200 Portals Bldg., Wash. D.C. 20024
Donald J. LaVoy, Acting Director, REAC, X, 800 Portals Bldg., Wash. D.C. 20024
Ira Peppercorn, Director, Office of MF Asst Restructuring, Y, 4000 Portals Bldg., D.C. 20024
Mary Madden, Assistant Deputy Secretary for Field Policy & Mgmt, SDF (Room 7108) (2)
Deputy Chief Financial Officer for Operations, FF (Room 2202)
David Gibbons, Director, Office of Budget, FO (Room 3270)
Rebecca J. Holtz, Housing Program Officer, HUCI (Room 9146)
FTW ALO, 6AF (2)
Philadelphia ALO, 3AF



                                                   Page 49                          00-FW-222-1005
Appendix D


                                  DISTRIBUTION (Cont’d)

Housing ALO, HF (Room 9116) (2)
Dept. ALO, FM (Room 2206) (2)
Acquisitions Librarian, Library, AS (Room 8141)
Director, Hsg. & Comm. Devel. Issues, US GAO, 441 G St. NW, Room 2474
      Washington, DC 20548 Attn: Judy England-Joseph
Henry A. Waxman, Ranking Member, Committee on Govt Reform,
      House of Rep., Washington, D.C. 20515
The Honorable Fred Thompson, Chairman, Committee on Govt Affairs,
      U.S. Senate, Washington, D.C. 20510
The Honorable Joseph Lieberman, Ranking Member, Committee on Govt Affairs,
      U.S. Senate, Washington, D.C. 20510
Cindy Fogleman, Subcomm. on Gen. Oversight & Invest., Room 212,
      O'Neill House Ofc. Bldg., Washington, D.C. 20515
The Honorable Dan Burton, Chairman, Committee on Govt Reform,
      House of Representatives, Washington, D.C. 20515
Deputy Staff Director, Counsel, Subcommittee on Criminal Justice, Drug Policy & Human
      Resources, B373 Rayburn House Ofc. Bldg., Washington, D.C. 20515
Steve Redburn, Chief, Housing Branch, Office of Management and Budget
      725 17th Street, NW, Room 9226, New Exec. Ofc. Bldg., Washington, D.C. 20503
Inspector General, G
Portnoy & Greene, P.C.




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