oversight

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)

   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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               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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               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