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
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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
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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
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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)