oversight

Fortune Escrow, Inc. Closing Agent Contract

Published by the Department of Housing and Urban Development, Office of Inspector General on 2000-08-23.

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

     AUDIT REPORT




    FORTUNE ESCROW, INC.
  CLOSING AGENT CONTRACT

    GLENDORA, CALIFORNIA

         00-FW-222-1006

        AUGUST 23, 2000

OFFICE OF AUDIT, SOUTHWEST DISTRICT
        FORT WORTH, TEXAS
                                                                      Issue Date
                                                                              August 23, 2000

                                                                      Audit Case Number
                                                                              00-FW-222-1006




TO:           Joseph C. Bates
              Acting Director
              Single Family Homeownership Center, 9JHH


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

SUBJECT: Fortune Escrow, Inc. Closing Agent Contract


We performed an audit of Fortune Escrow, Inc. Closing Agent contract. Our attached report contains
two findings.

Within 60 days, please furnish this office, for each recommendation in this report, a status on: (1)
corrective action taken; (2) the proposed corrective action and the date to be completed; or (3) why
action is not considered necessary. Also, please furnish us copies of any correspondence or directives
issued related to 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-222-1006           Page ii
Executive Summary
We performed an audit of Fortune Escrow, Inc. (Fortune), 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 Fortune complied with the
contract terms and conditions of a closing agent. Overall, Fortune substantially complied with
its HUD contract. However, Fortune did charge HUD for ineligible wire transfer fees.




                                    Although we noted some exceptions, Fortune performed the
   Fortune sufficiently             following contractual duties acceptably:
   performed some closing
   agent duties.                    •   Issued clear title;
                                    •   Paid only allowable expenses;
                                    •   Forwarded closing documents to HUD timely;
                                    •   Wired correct amounts;
                                    •   Recorded Grant Deed timely; and
                                    •   Prepared the Grant Deeds correctly.


                                    Fortune overcharged HUD for wire transfer fees. Fortune’s
   Fortune Escrow                   contract with HUD included any wire transfer fees in the closing
   overcharged HUD                  agent fee. However, Fortune charged HUD $50 for each wire
   $43,900.                         transfer. Fortune may owe HUD at least $43,900 based on the
                                    closings that occurred from June 1, 1999, through
                                    September 15, 1999.

                                    This report recommends that the Santa Ana Homeownership
                                    Center require Fortune to reimburse HUD for the ineligible wire
                                    transfer fees. We discussed the findings in the report with
                                    Fortune on October 19, 1999. We provided a draft of this
                                    report to Fortune on August 8, 2000. They provided us with
                                    written comments on August 16, 2000, which are included in
                                    this final report.




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Executive Summary




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00-FW-222-1006       Page iv
Table of Contents

Management Memorandum                                          i


Executive Summary                                             iii


Introduction                                                    1


Findings

1    Fortune Charged Ineligible Wire Transfer Fees              7

2    Fortune Not Always Attentive
9



Management Controls                                             17



Appendices
     A Schedule of Questioned Costs                      19

     B Auditee Comments                                  21

     C Distribution                                      41




                                      Page v         00-FW-222-1006
Table of Contents


Abbreviations
        CFR         Code of Federal Regulations
        HUD         U.S. Department of Housing and Urban Development
        OIG         Office of Inspector General
        RESPA       Real Estate Settlement Procedures Act
        SAMS        Single Family Asset Management System




00-FW-222-1006                    Page vi
Introduction
               Fortune Escrow, Inc. (Fortune) contracted with the U.S.
 Background    Department of Housing and Urban Development (HUD) to
               provide closing services for single family properties owned by
               HUD and located within the counties of Santa Barbara, San
               Luis Obispo, Ventura, and Los Angeles in the State of
               California. The effective date of the contract was October 1,
               1997. Fortune conducted business in its offices located at 302
               W. Foothill Boulevard, Glendora, California. Its contract
               number was C-SFC-00017. Although Fortune’s closing agent
               contract was up for its first year renewal option, HUD only
               extended Fortune’s contract until December 31, 1999, because
               HUD wanted to consolidate the four closing agents in Los
               Angles into one closing agent with multiple offices. Fortune
               closed 878 properties from June 1, 1999, through
               September 15, 1999. As of December 7, 1999, HUD valued
               its contract with Fortune at $1,005,092.

               Fortune had an indefinite quantity contract that provided closing
               services for single family properties owned by HUD. The
               primary objectives of the contract were to ensure that: (1)
               properties closed within the time frame stipulated in the sales
               contract; (2) prompt and accurate payment of all closing costs
               was made; (3) the net proceeds of each sale were deposited
               into a non-interest bearing escrow account and request initiated
               for the wire transfer of the proceeds via FEDWIRE to HUD’s
               account with the U.S. Treasury on the day of closing or not
               later than the next banking day; and (4) the complete and
               accurate closing package was submitted to HUD within 2
               working days of closing.

               In the State of California an escrow company performs the
               following:

               •   Serves as the communication link to all parties in the
                   transaction;
               •   Prepares escrow instructions;
               •   Requests a preliminary title search to determine the basis
                   upon which title insurance may be issued;
               •   Complies with lender’s requirements specified in escrow
                   agreement;
               •   Receives purchase funds from the buyer;

                            Page 1                                00-FW-222-1006
Introduction


                                                •    Prepares or secures the deed or other documents related to
                                                     escrow;
                                                •    Prorates taxes, interest, insurance and rents according to
                                                     instructions;
                                                •    Secures releases of all contingencies or other conditions as
                                                     imposed on any particular escrow;
                                                •    Records deeds and any other documents as instructed;
                                                •    Requests issuance of the title insurance policy;
                                                •    Closes escrow when all of the instructions of buyer and
                                                     seller have been carried out;
                                                •    Disburses funds as authorized by instructions, including
                                                     charges for title insurance, recording fees, real estate
                                                     commissions and loan payoff; and
                                                •    Prepares final statements for the parties accounting for the
                                                     disposition of all funds deposited in escrow.

                                                To conduct a closing, Fortune’s contract required it as closing
                                                agent to:

                                                •    Establish individual property files and maintain in numerical
                                                     sequence by escrow number, cross-referenced by FHA
                                                     case number, property address, and purchaser’s name.
                                                •    Coordinate with the Management and Marketing (M&M)
                                                     contractor1, purchaser, broker, and mortgagee to establish
                                                     a firm closing date on or before the date specified in the
                                                     sales contract.
                                                •    Perform a title examination, including land, judgment and tax
                                                     records, and any other records that may contain information
                                                     that affects the title or may reflect a lien, encumbrance, or
                                                     defect on the title.
                                                •    Order a preliminary title report and forward it to the M&M
                                                     contractor and mortgagee within 4 business days of initial
                                                     assignment.
                                                •    Prepare deed and escrow instructions within 5 days of initial
                                                     assignment and forward to the M&M contractor for
                                                     signature.
                                                •    Explain all closing papers and documents to the purchaser
                                                     at closing.



1
    In 1999, HUD embarked upon a new partnership with the private sector in the management and marketing of HUD homes.
    The management and marketing (M&M) contractors coordinate sales of single family properties with the closing agents.


00-FW-222-1006                                        Page 2
                                                                              Introduction


                        •   Administer requests by brokers for extensions of sales
                            closing date.
                        •   Complete all necessary documents at closing.
                        •   Prorate unpaid property taxes to the date of closing.
                        •   Accept only cashier’s or certified check, postal money
                            order, or broker’s trust account check that has been
                            certified by a bank or trust account made payable to the
                            contractor.
                        •   Deposit the sales proceeds and initiate the request for the
                            wire transfer of the proceeds due HUD on the day of
                            closing or the next banking day. Obtain the bank’s dated
                            confirmation of the wire transfer and verify that the correct
                            amount of sales proceeds was wire transferred.
                        •   Schedule the filing of the deed for record.
                        •   Deliver the closing package to the M&M contractor no
                            later than 2 business days after closing.

                        According to information obtained from HUD’s Single Family
                        Asset Management System (SAMS), Fortune closed 878
                        properties as a closing agent from June 1, 1999, to
                        September 15, 1999. For each closing it performed, HUD
                        paid Fortune a $323 closing agent fee from the closing
                        proceeds.

                        Our audit objectives were to determine whether management
Audit Objectives        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 objectives, we:

                        •   Examined the closing agent contract and HUD’s Property
                            Disposition Handbook.
                        •   Obtained information from SAMS.


                                   Page 3                                   00-FW-222-1006
Introduction


                                                  •    Obtained from SAMS a listing of closings performed by
                                                       Fortune from which we attempted to select an audit sample.
                                                       However, because Fortune did not maintain its files by
                                                       FHA case number nor cross-referenced the closing files by
                                                       the FHA case number, we had to rely on Fortune to
                                                       provide a sample of its closings (see scope limitation).
                                                  •    Interviewed HUD and Fortune staff regarding the closing
                                                       process.
                                                  •    Obtained an understanding of Fortune’s closing process.
                                                  •    Tested 100 closing files for the following specific attributes:

                                                       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 closing expenses were paid;
                                                       5.     The sales proceeds were deposited timely;
                                                       6.     The correct sales proceeds less expenses amount was
                                                              wired timely;
                                                       7.     The Deed was recorded timely;
                                                       8.     The correct amount was collected for the taxing
                                                              authority;
                                                       9.     Clear title was issued;
                                                       10.    The title insurance premium was not split;
                                                       11.    A Warranty Deed was prepared;
                                                       12.    The Warranty Deed was forwarded to HUD timely;
                                                       13.    The selling amount on the sales contract and the
                                                              HUD-12 was identical;
                                                       14.    Closing costs for the buyer were identical on both
                                                              pages of the HUD-1; and
                                                       15.    The correct amount of extension fees was on the
                                                              HUD-1, if applicable.




2
    The HUD-1 is the Settlement Statement used in the sale of properties.

00-FW-222-1006                                          Page 4
                                                                           Introduction


                         We were unable to select a random sample of closings on
Scope Limitation         which to base our audit work. Fortune did not keep records of
                         HUD closings as its contract required. The contract stipulated
                         that Fortune keep records in a manner so each HUD closing
                         could later be identified. Fortune did not keep such records
                         thus, we could not match SAMS data with Fortune’s. Fortune
                         identified HUD closings for our sample testing. Thus, we are
                         not able to conclude we made our selection from the entire
                         universe of HUD closings.

                         We conducted the audit at Fortune’s offices located in
Audit Period and Sites   Glendora, California, during October 1999. The audit covered
                         closings performed during the period June 1, 1999, through
                         September 15, 1999. We selected this period because HUD
                         had changed its closing process with the advent of the M&M
                         contracts in June 1999. The M&M contractor for the Santa
                         Ana HOC is Golden Feather Realty Service (Golden Feather).
                         We conducted our audit in accordance with generally accepted
                         government auditing standards.




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Introduction




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00-FW-222-1006     Page 6
                                                                                             Finding 1



Fortune Charged Ineligible Wire Transfer Fees
Fortune charged HUD a contractually ineligible fee to wire transfer the sales proceeds to the
Treasury. The closing agent contract stated that the closing agent shall be responsible for the
cost of the wire transfer fees because the unit price was inclusive of all costs. Fortune,
erroneously thinking it could charge wire fees, charged HUD a $50 wire transfer fee for each
closing. If Fortune made that charge on every sale, it overcharged HUD $43,900 in wire
transfer fees for the closings during the selected audit period.




                                    The contract clearly stated wire transfer fees are the closing
   Contract Requirement             agent’s responsibility. In Section B. IV of the contract, Price
                                    Schedule, the contract had the following note: “The contractor
                                    shall be responsible for the cost of the wire transfer fees . . .”

                                    The President of Fortune Escrow stated that she was unaware
   Fortune says overcharge          that the contract made the closing agent responsible for wire
   an error.                        fees. She also stated a previous closing agent contract did
                                    allow the agent to charge the wire fee and that Golden Feather
                                    (the M&M contractor) had informed her HUD paid wire fees.
                                    Fortune charged HUD a $50 wire fee, which included $30 for
                                    the outgoing wire, $5 for a wire confirmation, and $15 for
                                    internal costs and staff time. However, even if the closing agent
                                    contract allowed for wire fees, Fortune was overcharging
                                    because it included its internal cost and staff time. We noted
                                    the fee on the 100 files selected for audit. Thus, those files
                                    reflect a $5,000 ineligible cost. Further, during our audit
                                    period, Fortune completed 878 closings, indicating it
                                    overcharged up to $38,900.




   Auditee Comments                 Fortune responded that the wire transfer fee was clearly
                                    allowed because HUD included the wire fee in correspondence
                                    regarding allowable closing costs. Further, Fortune responded
                                    that the wire fee charged to HUD was the company’s standard
                                    wiring fee and there was no overcharge.




                                                 Page 7                                 00-FW-222-1006
Finding 1


                       Although documentation provided by Fortune showed that it
   OIG Evaluation of   believed HUD allowed reimbursement for the wire fee, the
   Comments            contract does not allow the fee.




   Recommendations     We recommend that the Santa Ana Homeownership Center
                       Director:

                       1A. Require Fortune to reimburse HUD $5,000.

                       1B. Determine the number of sales closed by Fortune during
                           its closing agent contract with HUD and require that it
                           reimburse HUD for any additional ineligible wire transfer
                           fees, potentially $38,900 for the period June 1, 1999,
                           through September 15, 1999.




00-FW-222-1006              Page 8
                                                                                            Finding 2



                  Fortune Not Always Attentive
Fortune was not very attentive to the details of its contract with HUD. As a result, we noted
numerous contract infractions with closings, which Fortune could have avoided with a thorough
review of the closing package prior to the closings. While Fortune was substantially compliant
with its HUD contract, the below listed problems show a disregard to detail. Since the
contract between Fortune and HUD expired on December 31, 1999, we have not made
recommendations regarding the following issues. However, some issues may be addressed in
an internal report to HUD.




                                    Fortune did not maintain a separate trustee account for its HUD
   No trustee account in            closings. The closing agent contract stated that the contractor
   HUD’s name.                      would establish a separate non-interest bearing escrow account.
                                    Instead, Fortune commingled the escrow moneys from its other
                                    closings with that from HUD closings in one non-interest
                                    bearing account. The President of Fortune stated that because
                                    its computer was not year 2000 compliant, it was unable to
                                    handle two escrow accounts. However, we noted that the
                                    computer problem was resolved in March 1999, and at that
                                    time, Fortune did not establish separate accounts.

                                    Fortune did not always immediately deposit or wire sales
   Untimely sales proceeds          proceeds to HUD. The closing agent contract requires that the
   deposited and wired to           closing agent deposit and wire proceeds to HUD on the day of
   HUD.                             closing or the next banking day. In 7 of 100 closing files
                                    reviewed, Fortune deposited funds on the second day after
                                    closing. Further, in 73 out of the 100, Fortune did not wire the
                                    sales proceeds timely. The President of Fortune stated that it is
                                    difficult to get the wires out timely because of California real
                                    estate and escrow laws. In California, the deed must be
                                    recorded and the title company must determine the amount of
                                    escrow fees due prior to the title company notifying the escrow
                                    company of the deed recording. Further, the date of closing is
                                    the date the deed is recorded, not the date the closing occurs.
                                    Additionally, according to Fortune, it must balance its escrow
                                    amounts prior to remitting the proceeds to HUD.




                                                 Page 9                                00-FW-222-1006
Finding 2


                                                  Santa Ana HOC personnel did not require the closing agents
                                                  within its jurisdiction to pay late fees for untimely wires of
                                                  proceeds to HUD.

                                                  Fortune calculated the extension fees incorrectly in 11 out of
     Extension fees3                              100 closing files reviewed. Generally, Fortune included the day
     calculated incorrectly.                      the property was originally to close in the calculation or did not
                                                  include in the calculation all the days that the closing was late.
                                                  Prudent business practice requires that the extension fees3 be
                                                  calculated correctly. Because HUD did not receive all the
                                                  extension fees it was entitled to, HUD did not receive the
                                                  maximum return from each sale.

                                                  The following table illustrates the ten properties for which the
                                                  extension fees were incorrectly calculated.

                                                Date Should                                           Extension
                                                   Close          Date        Days      Extension     Fee Owed       Over/(Under)
                               FHA Case No.                      Closed       Late      Fee Paid                      Payment
                               041-886962        7/30/99        8/2/99          3          50              75            (25)
                               041-823791        5/20/99        6/9/99         19         270             285            (15)
                               041-723800        8/16/99        9/13/99        13         350               0            350
                               041-955685        7/26/99        9/10/99        46         925            1150           (225)
                               041-858107        6/7/99         6/14/99         7         200             175             25
                               041-982876        8/12/99        8/16/99         4          75             100            (25)
                               041-933567        7/19/99        7/21/99         2          25              50            (25)
                               041-857928        6/18/99        6/22/99         4         125             100             25
                               041-828163        6/10/99        6/21/99        11         300             275             25
                               041-910878        6/14/99        6/17/99         3          50              75            (25)
                               041-973946        6/18/99        8/19/99         2         425              50            375

                                                  Golden Feather established a closing time frame of 45 days
                                                  throughout the Santa Ana HOC jurisdiction. However, Fortune
                                                  held even the 203(k)4 loans to the 45-day closing time frame.
                                                  HUD regulations5 state in 4310.5 Revision 2 Chapters 10-24
                                                  and 11-12.E that a 203(k) loan is allowed up to a 60-day
                                                  closing time frame and a 30-day free extension if the delay in
                                                  closing was not the purchaser’s fault.

                                                  In one instance (FHA case number 041-723800), a nonprofit
                                                  purchased a property with a 203(k) loan. The sales contract

3
    An extension fee is a fee paid if scheduled closing dates cannot be met.
4
    The 203(k) program allows a buyer to obtain one mortgage loan to finance acquisition and repair, provided the amount of
    repairs required makes financing feasible.
5
    Single Family Property Disposition Handbook.

00-FW-222-1006                                           Page 10
                                                                                                                    Finding 2


                                                   provided for a 60-day closing time frame, as described above.
                                                   However, Golden Feather allowed only the standard 45-day
                                                   closing time frame for this sale. It allowed an initial 15-day
                                                   extension of the closing date at no charge. After the 15-day
                                                   extension, it began charging extension fees until the sale closed.
                                                   When the sale closed on the 75th day, the nonprofit was
                                                   charged extension fees for 14 days. However, had Golden
                                                   Feather followed HUD’s 203(k) guidelines regarding this sale,
                                                   including a 30-day extension at no charge, the nonprofit would
                                                   have been charged no extension fees. Thus, the nonprofit was
                                                   charged inappropriate fees.

                                                   In 6 of 100 closing files reviewed, the closing costs charged to
     Approved closing cost                         HUD exceeded the amount approved on the sales contract.
     amounts exceeded.                             Section C. III of the closing agent contract stated that the
                                                   contractor shall pay only actual closing costs not to exceed the
                                                   amount specified on line 5 of the sales contract. Because
                                                   Fortune was not diligent in its review of the closing contracts,
                                                   HUD did not receive the maximum return from each sale.

                                                   The following table illustrates the properties for which the
                                                   allowable closing costs were exceeded. Generally, this
                                                   occurred when the sale was to a nonprofit and the closing costs
                                                   should have been included in the nonprofit’s total discount, not
                                                   as an additional amount paid by HUD.

                                                                         Approved Closing
                                                      FHA Case            Costs on Sales        Closing Costs on    Difference
                                                       Number                Contract               HUD-1
                                                    041-853958                     3,500.00              3,593.83        93.83
                                                    041-8917526                           0              1,269.56     1,269.56
                                                    041-9556857                           0                487.50       487.50
                                                    041-858107                     3,843.00              3,844.10         1.10
                                                    041-850422                            0                198.00       198.00
                                                    041-910772                     2,777.00              2,789.31        12.31


                                                   Fortune did not include the day of sale in the calculation of the
     Tax proration incorrectly                     tax proration because its computer program only calculated
     calculated.                                   through the day before the sale. Section C. IV.E.12.b. of the
                                                   contract stated that the closing agent at closing shall prorate
                                                   unpaid taxes to the date of closing. The contract further stated,
                                                   if HUD prepaid the taxes, the closing agent shall collect the

6
    This is an example where the nonprofit discount was exceeded. See page 7 for discussion of that finding.
7
    Ibid.

                                                               Page 11                                         00-FW-222-1006
Finding 2


                                                   appropriate amount from the purchaser. In the instances where
                                                   the taxes were unpaid as of closing, HUD did not pay for 1
                                                   day’s worth of taxes. In the instances where HUD prepaid the
                                                   taxes, the purchaser did not pay 1 day’s worth of taxes.

                                                   Closing files maintained by Fortune lacked documentation.
     Closing files lack                            Specifically, the closing files lacked: extension requests (27 out
     documentation.                                of 100 reviewed), documentation of when the post closing files
                                                   were sent to HUD (4 out of 100 reviewed), a HUD-1 (3 out of
                                                   100 reviewed), documentation of when a deed was recorded
                                                   (1 out of 100 reviewed), and documentation of when sales
                                                   proceeds were received and deposited (1 out of 100
                                                   reviewed). Section C. IV.E.13.i. of the closing agent contract
                                                   stated that the contractor shall maintain a complete record of
                                                   each closing . . . retain all pertinent records . . . . Fortune
                                                   provided a computer-generated copy of the HUD-1s for those
                                                   files that lacked a settlement statement. However, Fortune was
                                                   not diligent in its efforts to maintain all the pertinent records for
                                                   each closing. Thus, Fortune did not maintain a complete record
                                                   of all closings nor retain all pertinent records.

                                                   In 3 of 558 nonprofit closing files reviewed (5.5 percent), the 30
     Nonprofit discount                            percent discount that nonprofits receive was not calculated
     incorrectly calculated.                       correctly. As a result, HUD did not receive $19,702 in sales
                                                   proceeds. A nonprofit is allowed a 30 percent discount when it
                                                   purchases a HUD-owned property in a revitalization area.9
                                                   However, the 30 percent discount was to include the amounts
                                                   of closing costs and commissions requested on the sales
                                                   contract. Fortune’s Escrow Officer stated that Fortune did not
                                                   get sales contract changes in writing and Fortune was instructed
                                                   to follow the verbal instructions of Golden Feather personnel
                                                   when real estate transactions should be in writing. Because
                                                   Fortune was not diligent in its review of the closing documents
                                                   and relied on verbal instructions, HUD did not receive the
                                                   maximum return on property sales.

                                                   In one instance, the sales contract showed that the nonprofit
                                                   requested a 29.25 percent discount off the sales price of
                                                   $65,000, or $19,013. However, on the HUD-1, the nonprofit

8
    Of the files reviewed, 55 of the 100 were sales to nonprofit organizations.
9
    Revitalization Area means a neighborhood that has a significant concentration of vacant properties, including properties needing
    extensive repairs that have been in HUD's inventory at least 8 months; exhibits other characteristics of economic distress; and
    has been targeted by the locality for establishing affordable housing and providing adequate supportive services.

00-FW-222-1006                                            Page 12
                                                                                    Finding 2


                           received a 30 percent discount of $19,500, a difference of
                           $487. There was no amendment to the contract in the file
                           approving the adjustment to 30 percent. In another instance,
                           the sales contract showed that the nonprofit would receive a 30
                           percent discount off the sale price of $95,560, or $28,668, less
                           the approved commission of $717, bringing the allowed
                           discount to $27,951. The HUD-1 showed that the discount
                           received by the nonprofit was $28,668 in addition to the
                           approved commission. Thus, HUD did not maximize its return
                           on the property and received $717 less than it was owed. In a
                           final instance, on a sales contract dated May 25, 1999, and
                           approved by HUD on May 28, 1999, the nonprofit did not
                           request any discount. A note attached to the sales contract
                           dated June 7, 1999, shows that Golden Feather approved a 30
                           percent discount. However, a subsequent sales contract
                           requesting the 30 percent discount was not prepared nor
                           approved. Also, the nonprofit did not request any closing costs
                           on the approved sales contract. When the property closed on
                           July 9, 1999, the nonprofit not only received the 30 percent
                           discount of $18,300, but also received credit for $198 in
                           closing costs.

                           In 2 of 100 closing files reviewed, clear title was not passed to
Property closed without    the purchaser because of liens. Section J, Attachment 9 of the
clear title.               closing agent contract stated that the evidence of title shall show
                           that according to public records that there are not any
                           outstanding prior liens. Fortune’s Escrow Officer stated that
                           liens were cleared with time. However, because the liens were
                           not cleared prior to closing, the purchaser did not receive clear
                           title.

                           Fortune did not maintain the closing files by a system that
Closing files not          allowed retrieval by FHA case number. Instead, Fortune
maintained by system       maintained the closing files by its escrow number, cross-
that allows retrieval by   referenced by address. The contract stated that the contractor
FHA case number.           shall establish property files and maintain in numerical sequence
                           by escrow number, cross-referenced by FHA case number,
                           property address, and purchaser’s name. Prior to fieldwork,
                           the auditors selected a random sample using information obtain
                           from SAMS that only included the FHA case numbers.
                           However, because Fortune did not cross-reference the closing
                           files by FHA case number, it was unable to pull the selected
                           closing files. Because Fortune did not cross-reference by FHA

                                     Page 13                                   00-FW-222-1006
Finding 2


                             case number, it was not in compliance with its contractual terms
                             and conditions.

                             Fortune’s hours of operations were 8:30 a.m. to 5:00 p.m. The
   Fortune not open during   closing agent contract required that Fortune be open from
   core hours.               8:00 a.m. to 4:30 p.m. The President of Fortune
                             acknowledged that Fortune was not open during the hours
                             required by the contract. Thus, Fortune was not in compliance
                             with its contractual terms and conditions.

                             Fortune showed the extension fees on the HUD-1 on lines 109
   Extension fees shown on   and 409 when the contract required placement on lines 104 and
   HUD-1 incorrectly.        404. The President of Fortune stated that it used lines 109 and
                             409 since 1994 and HUD never told it that the use of those
                             lines was incorrect. Further, Fortune’s computer system only
                             allowed the extension fees to be inserted on lines 109 and 409.
                             However, the closing agent contract Section C. IV.E.10.d.
                             stated that the full amount of the extension fees shall be shown
                             on lines 104 and 404 on the HUD-1. Because Fortune showed
                             the extension fees on line 109 and 409 and not 104 and 404, it
                             was not in compliance with the terms and conditions of the
                             contract.




                             Untimely Sales Proceeds Deposited and Wired to HUD
   Auditee Comments
   and OIG Evaluation of
                             Fortune stated that the process does not consistently allow for
   Comments                  the immediate release of seller funds, as in other states, in which
                             recording the Deed is not required prior to disbursement of
                             funds from escrow. We noted in the report the conditions that
                             Fortune mentioned in its response.

                             Extension Fees Calculated Incorrectly

                             Fortune responded that it did not “hold” any transactions to a
                             predetermined formulated closing schedule, but to the sales
                             contract or written instructions from HUD or M&M contractor
                             personnel. Although Fortune stated that it did not “hold” any
                             transactions to any predetermined formula regarding closing, it
                             did, as the example in the report shows, hold a 203(k) loan to a
                             45-day closing when the nonprofit should have been allowed a
                             60-day closing.

00-FW-222-1006                    Page 14
                                                                          Finding 2



                 Tax Proration Incorrectly Calculated

                 Fortune stated that in California the tax proration was calculated
                 to the date of recording the Deed. HUD requirements and the
                 contract stated that the tax proration should include the date of
                 closing.

                 Nonprofit Discount Incorrectly Calculated

                 Fortune responded that discrepancies resulted from a lack of
                 consistent, clear, and non-contradictory directions from HUD
                 and the M&M contractor, and the high volume of transactions
                 Fortune processed. However, because there were only 3 out
                 of 55 instances where this occurred, we believe it was caused
                 by oversight.

                 Closing Files Not Maintained by FHA Case Number

                 Fortune responded that the software system was not available
                 to allow it to maintain case files by FHA case number.
                 However, this is a contract requirement.

                 Extension Fees Shown on HUD-1 Incorrectly

                 Fortune responded that it utilized a HUD-1 format specifically
                 modified and in compliance with RESPA laws and instructions
                 by the Santa Ana HOC. However, RESPA Appendix A to
                 Part 3500 specifically states that lines 104, 105, 404, and 405
                 are to be additional amounts owed by the borrower. Further,
                 the contract specifically states that the extension fees are to be
                 shown on lines 104 and 404.




Recommendation   Since the contract between Fortune and HUD expired on
                 December 31, 1999, we have not made recommendations for
                 this finding.




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Finding 2




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00-FW-222-1006     Page 16
Management Controls

In planning and performing our audit, we obtained an understanding of the management
controls that were 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.




                                    We determined the following management controls were
   Relevant Management              relevant to our audit objectives:
   Controls.
                                    •   Policies and procedures of the sales process at HUD.
                                    •   Administrative controls to ensure that accurate data is input
                                        from the settlement statement into the Single Family Asset
                                        Management System.
                                    •   Policies and procedures of the cash receipts and
                                        disbursements controls at the closing agent.
                                    •   Administrative controls to ensure the closing documents
                                        were kept secure.

                                    A significant weakness exists if management controls do not
   Significant Weakness.            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. Our
                                    review did not disclose significant weaknesses.




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00-FW-222-1006          Page 18
                                                                                                                Appendix A


Schedule of Questioned Costs


                                                                        Type of Questioned Costs
           Issue                                                               Ineligible 1/


1A Ineligible costs                                                                 $ 5,000

1B Ineligible wire transfer fees                                                     38,900

           Total                                                                    $43,900




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.




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                              Appendix B

Auditee Comments




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           Appendix B




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           Appendix B




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00-FW-222-1006     Page 40
                                                                                      Appendix C

Distribution
Secretary's Representative, 6AS
Comptroller, 6AF
Director, Accounting, 6AAF
Director, Single Family Homeownership Center, 9JHH
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)
San Francisco ALO, 9AF

                                                Page 41                             00-FW-222-1006
Appendix C



                                  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
Fortune Escrow, Inc.




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