AUDIT REPORT WALLER, SMITH & PALMER, PC HUD CLOSING AGENT NEW LONDON, CONNECTICUT 2001-BO-1002 JANUARY 5, 2001 OFFICE OF AUDIT, NEW ENGLAND BOSTON, MASSACHUSETTS Issue Date January 5, 2001 Audit Case Number 2001-BO-1002 TO: Engram Lloyd, Director, Homeownership Center, 3AHH FROM: William D. Hartnett, District Inspector General, Office of Audit 1AGA SUBJECT: Waller, Smith & Palmer, P.C. HUD Closing Agent New London, Connecticut We performed an audit of HUD’s closing agent for Connecticut, Waller, Smith & Palmer, P.C. (WSP). The objective of our audit was to determine whether WSP complied with the terms of their closing agent contract and HUD regulations. The report contains three findings: (1) HUD was overcharged for wire transfer and closing agent fees; (2) title insurance premiums are split, which is prohibited by WSP’s closing agent contract and the Real Estate Settlement Procedures Act; and (3) WSP is not fulfilling all its closing agent contract requirements. Within 60 days, please provide us 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 not considered necessary. Also, please furnish us with copies of any correspondence or directives issued related to this audit. If you have any questions, please contact our office at (617) 565-5259. Management Memorandum THIS PAGE LEFT BLANK INTENTIONALLY 2001-BO-1002 Page ii Executive Summary We performed an audit of HUD’s closing agent, Waller, Smith & Palmer, P.C. (WSP), as part of a nationwide effort to review closing agents. The primary purpose of our audit was to determine whether WSP complied with the terms of its closing agent contract and HUD regulations. HUD was overcharged $20,347 for wire transfer and closing Audit Results agent fees. WSP overcharged HUD $1,960 to wire transfer the proceeds from 392 HUD property sales to the Department of the Treasury between March 16, 2000 and September 19, 2000. In addition, WSP overcharged HUD $18,387 by improperly charging the full closing agent fee for 42 of a sample of 69 third party closings rather than the required 50 percent of the full fee. Potentially HUD may have also been overcharged an additional $58,905. We question $54,540 in wire transfer fees charged during the period June 1, 1996 to March 15, 2000. We believe these fees were included in WSP’s closing agent fee, resulting in duplication of cost, which is a violation of Section 8 of the Real Estate Settlement Procedures Act (RESPA). Further, WSP may have charged HUD an additional $4,365 in excess of their closing agent fee for 27 closings, which occurred subsequent to their current contract. Although prohibited by its contract, WSP collects a sixty percent title insurance premium fee split for each case whereby a title insurance policy was issued by WSP, on behalf of the specific title insurance company. In addition, WSP may be collecting duplicative fees for the same services required by both the closing agent contract and its agreements with title insurance companies. Section 8 of RESPA prohibits fee splitting and collecting unearned fees, including duplicative payments. Although RESPA allows fees to be collected for actual services rendered, WSP did not bill title insurance companies based on actual services rendered, but rather collected a fixed sixty percent fee for each title insurance policy issued. WSP staff advised that they believe Connecticut law permits them to collect a sixty percent fee for the issuance of a title insurance policy where WSP is the title insurance agent. Page iii 2001-BO-1002 Executive Summary WSP did not comply with all of its closing agent contract requirements. Specifically, WSP did not always ensure that only allowable expenses were paid by HUD on the buyer’s behalf. Furthermore, WSP did not deposit sales proceeds timely; wire sales proceeds to the Department of the Treasury timely; or submit a complete closing package to CitiWest New England, Inc., Management and Marketing Contractor for HUD. We are recommending the Homeownership Center direct and Recommendations ensure that WSP complies with the terms of their closing agent contract and HUD regulations. We are recommending that the Homeownership Center require WSP to reimburse HUD a total of $20,347 for overcharges related to wire transfer and closing agent fees for the period March 2000 to September 2000. Additional overcharges for wire transfers since September 19, 2000 should be calculated and reimbursed. Support for $54,540 in wire transfer fees prior to March 15, 2000 should be obtained. Closing agent fees on the 27 closings occurring subsequent to the current contract effective date should also be reviewed. In addition, we are recommending the Homeownership Center require WSP to provide support for fees earned from title insurance companies and require WSP to claim only actual costs up to sixty percent of the premium to comply with regulations. Further, we are recommending the Homeownership Center instruct and ensure that WSP includes only allowable expenses in the amount HUD pays on the buyer’s behalf. Finally, we are recommending that the Homeownership Center instruct and ensure that WSP submits a complete closing package to HUD’s Designee, and comply with all sales closing requirements. We discussed the findings in this report with WSP staff during Findings and the course of the audit. On November 20, 2000, we provided Recommendations WSP a copy of the draft audit report for comment. We Discussed received WSP’s written response by letter dated December 7, 2000. Appropriate revisions were made where deemed necessary. We included WSP’s pertinent comments in the Findings section of this report. Due to its voluminous content, WSP’s entire response was forwarded to program staff under a separate letter. WSP’s letter forwarding their response is included in Appendix C. 2001-BO-1002 Page iv Table of Contents Management Memorandum i Executive Summary iii Introduction 1 Findings 1 HUD Was Over Charged for Wire Transfer and Closing Agent Fees 5 2 Title Insurance Premiums Are Split 11 3 Closing Agent Contract Requirements Not Fulfilled 17 Management Controls 23 Appendices A Ineligible and Unsupported Costs 25 B Schedule of Unsupported Closing Agent Fees 27 C Auditee Comments 29 D Distribution 31 Page v 2001-BO-1002 Table of Contents Abbreviations CFR Code of Federal Regulations CitiWest CitiWest New England, Inc. Contract Closing Agent Contract FHA Federal Housing Administration GTR General Technical Representative HOC Homeownership Center HUD Department of Housing and Urban Development HUD-1 HUD-1 Settlement Statement M&M Management and Marketing OIG Office of Inspector General RESPA Real Estate Settlement Procedures Act U.S.C. United States Code WSP Waller, Smith and Palmer 2001-BO-1002 Page vi Introduction The law office of Waller, Smith & Palmer, P.C. (WSP) contracted with the Department of Housing and Urban Development (HUD) to conduct closings of HUD’s single-family properties for the State of Connecticut. Valerie Votto, Partner at WSP, is responsible for administering the closing agent contract with HUD. WSP’s original contract was a three-year contract, effective May 27, 1996. Through contract amendments, the contract was extended to March 15, 2000. WSP’s current closing agent contract is also a three year contract, effective March 16, 2000. WSP has an indefinite quantity contract to provide closing services for single-family properties owned by HUD. The primary objectives of WSP’s contracts are to ensure that: (1) the sale of all properties assigned under the contract close within the time stipulated by the Sales Contract; (2) accurate payments of all closing costs are made within three to five business days; (3) net proceeds from each sale are deposited into a non-interest bearing escrow account and 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 are delivered to HUD or HUD’s Designee within 2 business days after closing. To conduct a closing, WSP’s contracts required them as closing agent 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; • Administer all requests from brokers for extensions of sales closings, in writing; • Perform a complete title search, which covers the preceding 10 years from the scheduled date of closing; • 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; • Explain all closing documents to the purchaser(s); • Pay any allowable closing expenses which are due and payable at the time of closing from HUD’s proceeds; • On day of closing or next banking day, deposit sales proceeds, initiate the wire transfer, file the deed for record, obtain the bank’s wire transfer confirmation, and submit a complete closing package to HUD’s Designee; and Page 1 2001-BO-1002 Introduction • Store title documents that are the property of HUD in a secure cabinet furnished by the closing agent. WSP’s original contract provided WSP would receive $850 from HUD for each closing conducted for the first, two year options and $900 for the third year option. If the closing was conducted by a third party, WSP would receive 50 percent or $425 to $450, to represent HUD at the closing. WSP’s current contract provides WSP would receive $400 for each closing conducted. Although WSP’s new contract states that WSP will be paid 50 percent of the fixed unit price for third party closings, we note that correspondence between HUD and WSP indicates that under certain circumstances, regardless of whether or not an attorney representing the buyer attended the closing, WSP expected to be paid the full fee and HUD agreed to allow the full fee. As of September 19, 2000, WSP closed 4,028 HUD owned properties. According to the Philadelphia Homeownership Center, WSP received in excess of $3.6 million in closing agent fees between May, 27 1996 and November 2, 2000. As noted in Appendix C, WSP disagrees with this figure. HUD’s monitoring report for WSP, dated June 3, 1999, cited WSP for not depositing and wiring the net proceeds to the Department of the Treasury within the required time frame and for not submitting closing packages to HUD timely. In addition, WSP was cited for overcharging HUD the full fee for third party closings and for not verifying that closing costs paid by HUD on the buyer’s behalf were actual costs. The overall audit objective was to determine whether WSP Audit Objectives complied with the terms of their closing agent contract and HUD regulations. To accomplish our audit objective, we: Audit Scope and Methodology • Obtained and reviewed closing agent contracts, the Connecticut Title Insurance Act, HUD regulations, including the Real Estate Settlement Procedures Act (RESPA), and HUD Handbooks relating to real estate sales closing policies and procedures. • Obtained and reviewed HUD’s monitoring report for WSP, dated June 3, 1999 and Liquidated Damage Reports for July through September, 2000. • Reviewed WSP’s procedures for accounting of funds, cash receipts and disbursements. 2001-BO-1002 Page 2 Introduction • Selected a random sample of 98 closings (May 1996 to April 2000) and determined whether WSP: ⇒ Deposited sales proceeds, wired the funds to the Department of the Treasury, and submitted closing packages within the specified time period in the contract. ⇒ Supported title insurance premium received. ⇒ Charged HUD for actual wire transfer fees. ⇒ Ensured that only allowable costs were charged to HUD for costs paid on the buyer’s behalf. ⇒ Charged the correct closing agent fee. • Selected a judgmental sample of 27 closings between May 15, 2000 and July 31, 2000, to determined whether WSP overcharged HUD for closing agent fees under WSP’s current contract. • Held discussions with appropriate WSP staff, the Philadelphia Homeownership Center, HUD Contracting Division, and the Connecticut and Massachusetts State Office of Housing staff. We conducted the audit at WSP’s offices located in Old Lyme, CT and New London, CT and covered the period between July 1, 1999 and July 31, 2000. Where appropriate, the review was extended to include other periods. Audit work was performed from August 2000 to October 2000. Our audit was conducted in accordance with generally accepted government auditing standards. Page 3 2001-BO-1002 Introduction 2001-BO-1002 Page 4 Finding 1 HUD Was Overcharged for Wire Transfer and Closing Agent Fees HUD was overcharged $20,347 for wire transfer and closing agent fees. Waller, Smith & Palmer, P.C. (WSP) overcharged HUD $1,960 to wire transfer the proceeds from 392 HUD property sales to the Department of the Treasury between March 16, 2000 and September 19, 2000. In addition, WSP overcharged HUD $18,387 by improperly charging the full closing agent fee for 42 of a sample of 69 third party closings rather than the required 50 percent of the full fee. Potentially HUD may have been overcharged an additional $58,905. We question $54,540 in wire transfer fees charged during the period June 1, 1996 to March 15, 2000. We believe these fees were included in WSP’s closing agent fee, resulting in duplication of cost, which is a violation of Section 8 of the Real Estate Settlement Procedures Act (RESPA). Further, WSP may have charged HUD an additional $4,365 in excess of their closing agent fee for 27 closings, which occurred subsequent to their current contract. WSP’s original contract and modifications, effective May 27, Wire Transfer Fees 1996 and WSP’s current contract, effective March 16, 2000, requires WSP to charge the actual cost for the wire transfer of sales proceeds to HUD and include it with settlement charges to the seller . . . and deduct the cost from the net proceeds due HUD. WSP overcharged HUD $5 for each closing between March Wire Transfer Fees 16, 2000 and September 19, 2000. Actual wire fees charged Overcharged to WSP by the bank were only $10 for each wire transfer and WSP charged HUD $15. Per WSP’s records, as of September 19, 2000, WSP performed 392 closings between March 16, 2000 and September 19, 2000. Therefore, WSP overcharged HUD $1,960 for wire transfer fees during this period. Through review of WSP’s solicitation for the original closing Wire Fees Were Included agent contract and discussion with WSP’s officials, we believe In Original Closing Agent the wire transfer fees were included in the closing agent fee. Fee The closing agent fee ($850) under the original contract for year one and two, consisted of among other things, $25 for bank charges. The closing agent fee ($900) for year three under the original contract consisted of, among other things, $25 for bank Page 5 2001-BO-1002 Finding 1 charges. Therefore, any additional charge to HUD for wire transfer fees during the period of May 27, 1996 to March 15, 2000 are questionable costs. WSP charged HUD a $15 wire transfer fee on each closing between June 1, 1996 and March 15, 2000 even though the cost of the wire transfer was included in the closing agent’s fee calculation. Per WSP’s records, as of September, 19, 2000, WSP performed 3,636 closings between June 1, 1996 and March 15, 2000. Therefore, WSP may have overcharged HUD an additional $54,540 for wire transfer fees during this period. Furthermore, WSP may have received duplicative fees for wire transfers, which is a violation of Section 8 of RESPA. RESPA (12 U.S.C. 2607 and 24 CFR 3500.14) is a HUD RESPA Prohibits Unearned consumer protection statute passed in 1974. One of its Fees purposes is to eliminate kickbacks and referral fees that unnecessarily increase the costs of certain settlement services. RESPA section entitled “Prohibition against kickbacks and unearned fees” provides in part (c): “No person shall give and no person shall accept any portion, split, or percentage of any charge made or received for the rendering of a settlement service in connection with a transaction involving a federally related mortgage loan other than for services actually performed. A charge by a person for which no or nominal services are performed or for which duplicative fees are charged is an unearned fee and violates this section.” During a September 7, 2000 meeting with WSP, WSP WSP Claims Wire Transfer acknowledged that the $25 allotment for bank charges were for Fees Were Not Inclusive wire transfer fees. However, in a subsequent written response, WSP stated their belief was that the bank charge component of the solicitation was for internal administrative costs related to the banking requirements of the HUD contract. Although, no documentation was provided to support their belief. WSP original and current contract contained clauses concerning Closing Agent Fees for the use of third-party closing agents. HUD considers third Third Party Closings party closings as those which included the participation of 2001-BO-1002 Page 6 Finding 1 mortgagee’s counsel. Foremost, the closing agent contracts limit WSP’s fee to 50 percent of the full fee for third party closings. In a HUD monitoring report dated June 3, 1999, WSP was Full Fee Charged for Third cited for charging the full original contract fee of $900, when Party Closings there was a third party closing agent involved. The report stated that “since the buyer’s attorney acted as the Settlement Agent/third party closing agent, the Contractor was entitled to only $450 per closing”. As a result, WSP was required to immediately reimburse the government in the amount of the overcharge. In our review of a sample of 98 closings between May 1996 and April 2000, we determined that 69 were conducted by a third party agent (mortgagee’s attorney). WSP improperly charged the full fee, not 50 percent of the full fee, for 42 of the 69 closings (61 percent) resulting in $18,387 in overcharges. Contrary to WSP’s current contract, we note that HUD Allows Full Fee correspondence between HUD and WSP indicated that under Under Certain certain circumstances, regardless of whether or not a mortgagee Circumstances attorney attended the closing, WSP is expected to be paid the full fee. HUD agreed to allow the full fee, based on a letter, dated February 16, 2000, from the New York Field Contracting Operations Office, which states: “This is to confirm our position that when you are in attendance at the closing, do all the preparation work for the HUD-1 Settlement Statement, and fulfill all other duties regarding the closing, that under this solicitation, that this is not a third party closing. This is regardless of the presence of a mortgagee’s attorney.” Some of WSP’s contract requirements at closing are to 1) complete and execute the HUD-1 Settlement Statement (HUD- 1); 2) pay any allowable closing expenses at the time of closing; and 3) explain all closing papers and documents to the buyer. WSP may not be fulfilling all contractual requirements during a WSP Not Fulfilling All third party closing. In our review, we noted that WSP Contractual Requirements provided an incomplete HUD-1 to the mortgagee’s attorney (buyer’s expenses are not included and figures are not final), via a fax, and advises the attorney to please fax back the mortgagee’s final HUD-1 and verify the closing credits. Page 7 2001-BO-1002 Finding 1 Therefore, it cannot be said that WSP is completing the HUD- 1. In addition, a fax provided by WSP to the mortgagee’s attorney also instructed the mortgagee’s attorney that they are responsible for cutting all checks and providing copies of the same at the closing. Furthermore, the mortgagee’s attorney explains all closing papers and documents to the buyer. In fact, during our review of the files we noted instances where the mortgagee’s attorney would advise WSP to arrive at the closing later to give the mortgagee’s attorney time to review the paperwork with the buyer and have the buyer sign all the necessary paperwork. WSP may have overcharged HUD $4,365 for 27 closings Closing Agent Fees performed between May 15, 2000, which is 60 days after the Overcharged effective date of the current contract, and July 26, 2000 (See Appendix B). Per WSP’s current contract, effective March 16, 2000, WSP receives a fixed fee of $400 per closing. However, WSP overcharged HUD between $25 and $525 for these 27 closings. WSP advised that their review of each closing file covering the current contract period, indicated that the closing agent fee did not exceed $400. However, WSP needs to provide support for these 27 closings because our review indicated just the opposite. WSP indicates that the $5 overcharge in wire fees from March Auditee Comments 16, 2000 to September 19, 2000 was inadvertent. WSP also indicates that the original bank fee was $15. However, through considerable growth in the relationship between WSP and the bank, the bank reduced the wire fee to $10. WSP advised that the lower wiring fee derives entirely from actions taken by WSP to concentrate its banking relationship with the bank. As a result, WSP believes that the benefit of those actions should accrue to WSP. WSP indicates in its response that “when WSP bid on its first HUD contract and was asked to comprise a fee structure, it understood that the bank charges component of the bids was for internal administrative cost relating to the banking 2001-BO-1002 Page 8 Finding 1 requirements associated with the execution of the HUD contract. Such services include those provided by the bookkeeper, oversight by the business manager, and special banking and financial related services necessitated by the live auction practice.” WSP responds that this bank charge was never considered the wire fee charged by a lending institution. WSP responds that “as Settlement Agent, the lender’s (Mortgagee’s) attorney is responsible for the completion of all financing documents, including completion of the official HUD-1 Settlement Statement for the transaction. In addition the Mortgagee’s attorney is responsible for the correct distribution of the transaction’s proceeds.” WSP further responds that “a Seller’s attorney does not explain financing documents to a buyer” and that “the buyer’s attorney has a duty to his client to ensure that the Buyer understands the intricacies of the financial portion of the transaction, and additionally, the responsibilities associated with purchasing a particular piece of real property.” WSP advised that the lower wiring fee derives entirely from OIG Evaluation of actions taken by WSP to concentrate its banking relationship Auditee Comments with the bank, and that as a result, WSP should benefit from those actions. WSP is HUD’s closing agent which holds the professional responsibility to pass any savings along to the government. Nevertheless, the closing agent contract provides for only actual cost associated with the wire transfer, and in this case, that would be the $10 wire transfer fee. WSP’s impression was that the bank charges component of the contract solicitation was for internal administrative cost relating to the banking requirements of the HUD contract. However, we note that WSP did not include the $25 allotment on the administrative line item available in the solicitation, but chose to include it in the bank charge line item. Based upon WSP’s response to work performed during third party closings, it is clearly shown that WSP does not do all the preparation work for the HUD-1 and does not perform all other duties regarding the closing. There may be some conflict between the duties required of a mortgagee attorney and HUD Page 9 2001-BO-1002 Finding 1 closing agent. The duties required of WSP when there is a third party closing need to be defined, while recognizing that all contractual requirements may not be performed by the closing agent when a mortgagee’s attorney is present. With that said, WSP may not be in compliance with HUD’s February 16, 2000 letter, and therefore, would not be entitled to the current full closing agent contract fee during a third party closing. Recommendations We recommend that the Philadelphia Homeownership Center: 1A. Direct and ensure that WSP complies with their closing agent contract, in relation to wire transfer and closing agent fees. 1B. Require WSP to reimburse HUD a total of $20,347 for overcharges; $1,960 for ineligible wire transfer fees and $18,387 for overcharged closing agent fees. 1C. Require WSP to reimburse HUD for any additional ineligible wire transfer fees on any other HUD closings processed after September 19, 2000. 1D. Determine whether wire transfer fees were included in the closing agent fee, during the original contract period of June 1, 1996 to March 15, 2000, and if so, recover the $54,540 in overcharges. 1E. Fully define the duties required of WSP for third party closings, in order for WSP to receive its full contract fee. 1F. Require WSP to provide support that the correct closing agent fee was collected on the 27 closings, occurring subsequent to their current contract, and reimburse HUD for any overcharges. 2001-BO-1002 Page 10 Finding 2 Title Insurance Premiums Are Split Although prohibited by their contract, Waller, Smith & Palmer, P.C. (WSP) collected a sixty percent title insurance premium fee split for each case whereby a title insurance policy was issued by WSP, on behalf of the specific title insurance company. In addition, WSP may be collecting duplicative fees for the same services required by both their closing agent contract and their agreements with title insurance companies. Section 8 of the Real Estate Settlement Procedures Act (RESPA), prohibits fee splitting and collecting unearned fees, including duplicative payments. Although RESPA allows fees to be collected for actual services rendered, WSP does not bill title insurance companies based on actual services rendered, but rather collects a fixed sixty percent fee for each title insurance policy issued. WSP believes Connecticut State law permits them to collect a sixty percent fee for the issuance of a title insurance policy where they are the title insurance agent. Section H - Special Contract Requirements; part H-9 of Requirements Prohibit Title WSP’s contract, effective March 16, 2000, provides the Insurance Premium Split following: “An attorney, acting as a HUD sales closing agent, may not split or divide a title insurance premium in an amount keyed to the amount of the premium, but may charge a fee to the title insurance company for legal services actually rendered for title examination based on time and difficulty of the services performed.” RESPA is a consumer protection statute passed in 1974. One of its purposes is to eliminate kickbacks and unearned fees which increase the costs of settlement services to home buyers. Title 24 CFR 3500.14 (RESPA), Prohibition against kickbacks and unearned fees, provides in part (c): “No person shall give and no person shall accept any portion, split, or percentage of any charge made or received for the rendering of a settlement service in connection with a transaction involving a federally related mortgage loan other than for services actually performed. A charge by a person for which no or nominal services are performed or for which duplicative fees are charged is an unearned fee and violates this section.” Page 11 2001-BO-1002 Finding 2 WSP receives sixty percent of the premium for each title Title Insurance Premium insurance policy issued by WSP, on behalf of the specific title Split insurance company. However, WSP could not provide the total dollars received in title insurance premiums while serving as HUD’s closing agent because their financial records are not maintained in a fashion which provides such information. WSP believes that the sixty percent fee is predetermined by Connecticut State statute. WSP further believes that as acting Title Insurance Agent, the abuses on the attorney fees charged by third parties are restrained, which is a benefit to HUD. Included in Section B of WSP’s original and current contract, Requirements Prohibit WSP may not: Duplicate Fees Collect from any party, any fees for services required hereunder and associated with closings conducted under the contract above and beyond the unit price set forth in B.2 (a) (1). If the purchaser or purchaser’s lender demands additional services, such as title examination and/or insurance, outside of the contract duties, and such services are performed by the contractor, the contractor must look outside of this contract for payment for those services. Furthermore, duplicative fees charged are considered unearned fees, and are a violation of Section 8 of RESPA. WSP’s current closing agent contract requires a “lien and Same Services Required by judgment” full title search covering the ten years preceding the Contract scheduled closing date and resolution of any problems such as defects, liens, or encumbrances on the title prior to closing. The closing agent contract also requires WSP to conduct the closing and deposit all escrow and closing funds in a separate escrow account, record the deed, and pay all allowable closing expenses, such as unpaid property taxes, utility bills, and condo fees. These same duties are also required of WSP for their sixty percent split fee. A letter to WSP dated September 12, 2000, from Title Insurance Company Commonwealth Land Title Insurance Company, one of the Illustrates Duties insurance companies frequently used by WSP, provides that in connection with HUD closings, WSP will receive a commission of sixty percent of the gross premium. Per the letter, to earn 2001-BO-1002 Page 12 Finding 2 this commission WSP must in each instance perform 1) the evaluation of the title search to determine the insurability of title; 2) the clearance of underwriting objections; 3) the actual issuance of the policy or policies on behalf of Commonwealth; and 4) the actual closing. In connection with residential closings, WSP must record the requisite documents in the appropriate Land Records. In addition, the agreement with Commonwealth Land Title Insurance Company and WSP, executed May 11, 1987, states that WSP must make payments out of escrow or closing funds for all obligations which constitute liens on the property and be responsible for the satisfaction of such liens. The agreement further states that all escrow or closing funds deposited with WSP must be deposited into a separate escrow account. We noted that many of the services WSP provides to the title Potential Duplicative Fees insurance companies for their sixty percent premium split are also a requirement of their closing agent contract with HUD. However, since WSP does not bill the title insurance companies based on actual services, but instead receives a sixty percent premium split, we could not determine the amount of duplicative fees paid to WSP. WSP provides in its response that “Connecticut is a fixed-rate Auditee Comments State for title insurance premiums. The rates are established in accordance with state statute and approved by the Insurance Department of the State of Connecticut. This structure, in many cases, keeps costs lower and predictable. Should an agent be required to be compensated for work done for title agent purposes on an hourly basis, the costs would be considerable higher, and inconsistent based on the expertise of the Title Insurance Agent performing the core services.” In their response, WSP advised that “core title agent services include: the evaluation of the title search to determine the insurability of the title; clearance of underwriting objections; in some cases, the issuance of a title commitment; and in all cases the issuance of the title insurance policy or policies on behalf of the title insurance company.” Page 13 2001-BO-1002 Finding 2 Based on the Connecticut Title Insurance Act, we note that a OIG Evaluation of division of the premium is allowed, not a percentage split of the Auditee Comments premium. The statute further provides that a title insurance agent may not receive more than sixty percent of the premium. The statute does not provide that a title insurance agent is guaranteed sixty percent for each premium. The Connecticut Title Insurance Act does not prohibit reasonable payments for services actually rendered to the title agent in connection with the title insurance business, as does RESPA. Therefore, WSP should not automatically claim sixty percent of a title insurance premium, but rather support the fees earned and receive actual cost not to exceed sixty percent. Section 38a-414 of the Connecticut Title Insurance Act, Prohibition on rebates and inducements, provides that “(c) Nothing in this section shall be construed as prohibiting reasonable payments for services actually rendered to either a title insurer or a title agent in connection with title insurance business.” Section 38a-415 of the Connecticut Title Insurance Act, Division of premiums and charges, provides that “ (a) Nothing in sections 38a-400 to 38a-425, inclusive, shall be construed as prohibiting the division of premiums and charges between or among a title insurer and its title agent……(b) Notwithstanding subsection (a) of this section, for any title insurance policy issued after October 1, 1990, no title insurer shall pay to any title insurance agent or permit such agent to retain any amount exceeding 60 percent of the gross premium for any policy of the title insurer issued by such agent.” As WSP illustrates in its response, the title search is part of the core title agent services. As mentioned previously, WSP’s closing agent contract requires a title search. We are not saying that all services provided by WSP as title insurance agent are duplicate. But we are saying that some of the services may be duplicate, and HUD needs assurances that WSP’s title agent scope of services are outside their closing agent obligations. 2001-BO-1002 Page 14 Finding 2 Recommendations We recommend that the Philadelphia Homeownership Center: 2A. Require WSP to identify and provide support for fees earned from title insurance companies. 2B. Ensure the services provided by WSP as title insurance agent are outside of their contractual obligations with HUD. Page 15 2001-BO-1002 Finding 2 2001-BO-1002 Page 16 Finding 3 Closing Agent Contract Requirements Not Fulfilled Waller, Smith & Palmer, P.C. (WSP) did not comply with all of its closing agent requirements stipulated in its contract. Specifically, WSP did not always ensure that only allowable expenses were paid by HUD on the buyer’s behalf. Furthermore, WSP did not deposit sales proceeds timely; wire sales proceeds to the Department of the Treasury timely; or submit complete closing packages to CitiWest New England, Inc.(CitiWest), Management and Marketing Contractor for HUD. As a result, HUD’s Single Family closing process cannot operate efficiently. In Section B of WSP’s original and current contract, WSP Eligibility Requirements shall: Pay actual closing .financing costs that are reasonable and customary for the area(s) covered by the contract (e.g. credit reports, inspection service fees, title search, title exam, surveys, etc.), not to exceed the amount specified on line 5 of the Sales Contract. More specifically, HUD Handbook 4310.5 REV-2 - Property Disposition Handbook-One to Four Family, Chapter 11 Sales Closings; Section III(11-17)(B) provides guidance on which buyers expenses, as shown on the HUD-1 Settlement Statement, can and cannot be charged. Expenses that are chargeable to HUD as long as the costs are actual, reasonable and customary for the area and only to the extent that funds requested in Item 5 of the Sales Contract are available, are as follows: • Fees charged by the lender to process, approve, and make the mortgage loan; • Fee to establish a repair escrow account; • Title charges; • Government recording and transfer fees; and Page 17 2001-BO-1002 Finding 3 • Pest inspection. Expenses that may not be charged to HUD: • Items required by lender to be paid in advance; • Reserves deposited with lender; and • Closing agent fee. Sellers fee is allowed to be charged to HUD, buyers fees is not allowed to be charged to HUD. WSP included buyer expenses not allowed by HUD in the Costs Paid by HUD not in closing cost credit calculation. In eighteen (18) of a sample of Accordance With twenty-nine (29) closings (62 percent), HUD agreed as part of Regulations the sale to pay a certain amount of closing costs on the buyer’s behalf, as indicated on line 5 of the sales contract. We noted that in twelve (12) of the eighteen(18) closings (67 percent), the credit applied per the HUD-1 Settlement Statement (HUD-1) exceeded the total amount of allowable expenses. For the 18 cases, WSP allowed a total of $42,524 in credits. Of the $42,524, $14,425 (34 percent) was for expenses such as prepaid items, reserves required by lender, and buyers attorney fees, not allowed to be paid by HUD. In Section C of WSP’s original and current contract, WSP Timeliness Requirements must deposit the sale proceeds and wire the sale proceeds to the Department of the Treasury on or the next business day after the closing. Section C of WSP’s original and current contract also provides Requirements for the that a complete closing package is to be submitted to HUD or Submission of Closing HUD’s Designee (CitiWest) no later than the second business Packages day after the date of the closing. A complete closing package must include all of the following: • The original HUD-1 plus one copy; • A copy of the tax certificate or locally accepted proof that taxes were paid; • The original dated wire transfer confirmation; • A copy of the Special Warranty Deed; and 2001-BO-1002 Page 18 Finding 3 • The Contractor’s (WSP) certification that all payments and deductions from the closing (including the Contractor’s fee) have been paid from the funds deposited in the escrow account containing the closing proceeds, and a statement that all actions have occurred on time and no liquidated damages should be assessed or an estimation by the contractor of liquidated damages. If WSP fails to perform the services within the time frame specified in both contracts, they will be assessed liquidated damages for each calendar day late, as specified in Section F of both the original contract and current contract. The Philadelphia Homeownership Center did not assess liquidated damages on WSP until August 2000, although, a monitoring report dated June 3, 1999, identified problems with untimely deposits, wire transfers of sales proceeds, and closing packages. In our review, seven of a sample of thirteen cases (54 percent) Timeliness Requirements had sales proceeds which were not deposited timely. Five of Not Met the seven were one day late and the remaining two were two days late. As a result of the late deposits, all thirteen of the wires were late by one or two days to the Department of the Treasury. We determined that the HUD-1 and the wire transfer request Incomplete Closing were submitted to CitiWest within the 2-day requirement for Packages Submitted nine of a sample of thirteen closed cases. The remaining four closed cases in our sample did not have a date identified on the cover letter, so we could not determine if the HUD-1 and wire transfer request were submitted timely. Although in nine of the thirteen cases the HUD-1 and wire transfer request were submitted on time, there were no complete closing packages submitted. We were advised that WSP does not send a copy of the Special Warranty Deed, a copy of the tax certificate or proof that taxes were paid, or a certification that all payments and deductions from the closing have been paid from the proceeds and a statement that all actions have/have not occurred timely to CitiWest. WSP advised that they were unaware of the requirement and that if it is required, WSP will comply. Page 19 2001-BO-1002 Finding 3 In addition, WSP sends wire transfer confirmations in bulk once a week to CitiWest. As stated in WSP’s original and current contract, the original wire transfer confirmation is to be submitted, as part of the complete closing package, within 2 business days of the closing date. WSP should be complying with their contractual obligations. WSP stated that as a sales incentive to move existing inventory, Auditee Comments the HUD Connecticut State Office (CSO) allowed any payment made by a buyer as an eligible closing cost. WSP indicated that numerous attempts to the CSO and the Philadelphia Homeownership Center to obtain written direction on allowable closing costs went unanswered. CSO and Homeownership Center staff did acknowledge that OIG Evaluation of additional closing expenses, besides the standard allowable Auditee Comments expenses, may have been allowed. However, this does not preclude the fact that these cost were unallowable. No cost should be charged to HUD, outside the standard expenses, without the written guidance superseding any current published HUD regulations. WSP did not respond to additional issues relating to timeliness requirements and incomplete closing packages. Recommendations We recommend that the Philadelphia Homeownership Center: 3A. Instruct and ensure that WSP include only expenses allowed by HUD Handbook 4310.5 REV-2, in the amount HUD pays on the buyer’s behalf from the line 5 amount in the sales contract. 3B. Instruct and ensure that WSP complies with its closing agent contract requirements, specifically to make deposits of sales proceeds and wire transfers to the Department of the Treasury within the prescribed time frame in their contract. 2001-BO-1002 Page 20 Finding 3 3C. Instruct and ensure that WSP submits a complete closing package to CitiWest as required within the specified time frame in their contract. 3D. Continue to assess WSP liquidated damages for untimely wires and incomplete closing packages per the formula in WSP’s closing agent contract. Page 21 2001-BO-1002 Finding 3 2001-BO-1002 Page 22 Management Controls In planning and performing our audit, we considered management controls of Waller, Smith & Palmer, P.C (WSP), one of HUD’s Connecticut Closing Agents, specifically as related to its closing agent responsibilities, in order to determine our auditing procedures and not to provide assurance on management controls. Management controls embody a plan of organization and methods and procedures adopted by management to ensure that resource use is consistent with laws, regulations, and policies; that resources are safeguarded against waste, loss, and misuse; and that reliable data is obtained, maintained, and fairly disclosed in reports. We determined that management controls in the following areas Relevant Management were relevant to our audit objectives: Controls • Contractual requirements • Policies and procedure of the sales and closing process • Policies and procedures of receipts and disbursements A significant weakness exists if management controls do not Assessment Results 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 is obtained, maintained, and fairly disclosed in financial statements and reports. Our review identified significant weaknesses over WSP’s ability Significant Weaknesses to properly follow contractual requirements, policies and procedures of the sales and closing process, and policies and procedures of receipts and disbursements. Specific weaknesses were identified in all of the management control areas disclosed above. These weaknesses are described in the Findings section of this report. Page 23 2001-BO-1002 Management Controls 2001-BO-1002 Page 24 Appendix A Ineligible and Unsupported Costs Ineligible 1) Unsupported 2) Finding 1 -Wire Transfer Fees $ 1,960 $54,540 -Closing Agent Fees $18,387 $ 4,365 Total $20,347 $58,905 1) Ineligible amounts obviously violated law, contract, HUD or local agency policies or regulations, such as buying unneeded services or not depositing receipts. 2) Unsupported amounts do not obviously violate law, contract, policy, or regulation, but warrant being contested for various reasons, such as lack of satisfactory documentation to support eligibility and HUD approval. Page 25 2001-BO-1002 Appendix A THIS PAGE LEFT BLANK INTENTIONALLY Page 26 2001-BO-1002 Appendix B Schedule of Unsupported Closing Agent Fees Sample No. WSP File No. Closing Date Amount Charged Unsupported Amount 1 4228 05/15/2000 $425 $ 25 2 4231 05/17/2000 $425 $ 25 3 3621 05/18/2000 $425 $ 25 4 4098 05/19/2000 $425 $ 25 5 4242 05/19/2000 $425 $ 25 6 3410 05/22/2000 $425 $ 25 7 4223 05/24/2000 $425 $ 25 8 4238 05/24/2000 $425 $ 25 9 4198 05/25/2000 $425 $ 25 10 3809 06/02/2000 $425 $ 25 11 4040 06/06/2000 $425 $ 25 12 4163 06/12/2000 $425 $ 25 13 4222 06/14/2000 $425 $ 25 14 3954 06/22/2000 $425 $ 25 15 3351 07/26/2000 $425 $ 25 16 4248 06/30/2000 $425 $ 25 17 4282 06/06/2000 $445 $ 45 18 4150 06/06/2000 $470 $ 70 19 4194 06/02/2000 $500 $ 100 20 4260 05/17/2000 $850 $ 450 21 3619 05/22/2000 $850 $ 450 22 4234 05/23/2000 $850 $ 450 23 4245 05/23/2000 $850 $ 450 24 4227 06/09/2000 $850 $ 450 25 4084 07/07/2000 $850 $ 450 26 4239 05/24/2000 $925 $ 525 27 4254 06/27/2000 $925 $ 525 Total $4,365 Page 27 2001-BO-1002 Appendix B THIS PAGE LEFT BLANK INTENTIONALLY Page 28 2001-BO-1002 Appendix C Auditee Comments Page 29 2001-BO-1002 Appendix C 2001-BO-1002 Page 30 Appendix D Distribution Secretary, S, Room 1000 (1) Deputy Secretary, SD, Room 10100 (1) Chief of Staff, S., Room 10000 (1) Office of Administration, S, Room 10110 (1) Assistant Secretary for Intergovernmental Relations. J, Room 10120 (1) Deputy Assistant Secretary for Public Affairs, W., Room 10222 (1) Deputy Assistant to the Secretary, S, Room 10222 (1) Deputy Assistant Secretary for Administrative Services, Office of the Executive Secretariat, S, Room 10220 (1) Acting Deputy Chief of Staff, S, Room 10226 (1) Deputy Chief of Staff for Policy, S, Room 10226 (1) Deputy Chief of Staff for Programs, S, Room 10026 (1) Special Counsel to the Secretary, S, Room 10234 (1) Senior Advisor to the Secretary, S, Room 10222 (1). Special Assistant for Inter-Faith Community Outreach, S, Room 10222 (1) Executive Office for Administrative Operations and Management, S, Room 10220 (1) General Counsel, C., Room 10214 (1) Assistant Secretary for Housing/Federal Housing Commissioner, H, Room 9100 (1) Assistant Secretary for Policy Development and Research, R, Room 8100 (1) Assistant Secretary for Community Planning and Development, D, Room 7100 (1) Assistant Secretary for Fair Housing and Equal Opportunity, E, Room 5100 Assistant Deputy Secretary for Field Policy and Management, SDF, Room 7108 (2) Office of Government National Mortgage Association, T, Room 6100 (1) Director, Office of Departmental Equal Employment Opportunity, Room 10126 (1) Chief Procurement Officer, N, Room 5184 (1) Assistant Secretary for Public and Indian Housing, P, Room 4100 (1) Director, Office of Departmental Operations and Coordination, I, Room 2124 (1) Office of the Chief Financial Officer, F, Room 2202 (1) Chief Information Officer, Q, Room 3152 (1) Director, Real Estate Assessment Center, X, 1280 Maryland Avenue, SW, Suite 800 (1) Director, Office of Multifamily Assistance Restructuring, Y, 4000 Portals Building (1) Inspector General, G, Room 8256 (1) Deputy Inspector General, G, Room 8256 (1) Deputy Assistant Inspector General for Audit, GA, Room 8286 (1) Assistant Inspector General for Investigation, GI, Room 8272 (1) Acting Director, Program Research and Planning Division, GAP, Room 8180 (1) Director, Financial Audits Division, GAF, Room 8286 (1) Director, Information Systems Audit Division, GAA, Room 8172 (1) Counsel to the Inspector General, GC, Room 8260 (1) Central Records, GF, Room 8256 (4) Semi-Annual Report Coordinator, GF, Room 8254 (1) Page 31 2001-BO-1002 Appendix D Office of Inspector General Webmaster - Electronic format Public Affairs Officer, G, Room 8256 (1) Acquisitions Librarian, Library, AS, Room 8141 (1) District Inspector General (Districts 2 - 11) Secretary’s Representative, 1AS (2) Appropriate Special Agent-In-Charge, 1AGI (1) Primary Field Audit Liaison Officer, 3AFI (2) Headquarters Audit Liaison Officer, DOT (2) Departmental Audit Liaison Officer, FM, Room 2206 (2) Auditee (2) Armando Falcon, Director, Office of Federal Housing Enterprise Oversight,1700G Street, NW, Room 4011, Washington, DC (1) Frank Edington, Deputy Staff Director, Counsel, Subcommittee on Criminal Justice, Drug Policy & Human Resources, B373 Rayburn House Office Building, Washington, DC 20515 (1) The Honorable Fred Thompson, Chairman, Committee on Governmental Affairs, 340 Dirksen Senate Office Building, United States Senate, Washington, DC 20510 (1) The Honorable Joseph Lieberman, Ranking Member, Committee on Governmental Affairs, 706 Hart Senate Office Bldg., United States Senate, Washington, DC 20510 (1) The Honorable Dan Burton, Chairman, Committee on Government Reform, 2185 Rayburn Bldg., House of Representatives, Washington, DC 20515 (1) The Honorable Henry A. Waxman, Ranking Member, Committee on Government Reform, 2204 Rayburn Bldg., House of Representatives, Washington, DC 20515 (1) Ms. Cindy Fogleman, Subcommittee on Oversight and Investigations, Room 212, O’Neill House Office Building, Washington, DC 20515 (1) Steve Redburn, Chief, Housing Branch Office of Management & Budget, 725 17th Street, NW, Room 9226, New England Executive Office Building, Washington, DC 20503 (1) Stanley Czerwinski, Associate Director, Resources, Community, and Economic Development Division, United States General Accounting Office, 441 G Street, NW, Room 2T23, Washington, DC 20548 (1) Michael Flachta, Assistant Inspector General for Audits, Department of Veteran Affairs, Office of Inspector General (52A), 810 Vermont Avenue, NW, Washington, DC 20410 (reports on FHA and Single Family only). The Honorable A. Waxman, Ranking Member, Committee on Government Reform, 2204 Rayburn Bldg., Housing of Representatives, Washsington, DC 20515. 2001-BO-1002 Page 32
Waller, Smith & Palmer, PC HUD Closing Agent New London, CT
Published by the Department of Housing and Urban Development, Office of Inspector General on 2001-01-05.
Below is a raw (and likely hideous) rendition of the original report. (PDF)