oversight

First Community Resources, Inc., Section 203(b) Home Mortgage Insurance Program, St. Louis, MO

Published by the Department of Housing and Urban Development, Office of Inspector General on 2001-09-28.

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

                AUDIT REPORT




          FIRST COMMUNITY RESOURCES, INC.
                   ST. LOUIS, MO

       SECTION 203(b) HOME MORTGAGE INSURANCE
                        PROGRAM

                      2001-KC-1005

                  SEPTEMBER 28, 2001


               OFFICE OF AUDIT, GREAT PLAINS
                   KANSAS CITY, KANSAS




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                                                                 Issue Date
                                                                         September 28, 2001
                                                                Audit Case Number
                                                                         2001-KC-1005




TO: Ronald C. Bailey, Director, Denver Single Family Homeownership Center, 8AHH



FROM: Roger E. Niesen, District Inspector General for Audit, 7AGA

SUBJECT: First Community Resources, Inc.
         Section 203(b) Home Mortgage Insurance Program
         St. Louis, MO

We have completed an audit of First Community Resources, Inc, a loan correspondent approved by
HUD on August 3, 1995. We selected First Community for audit because of the high default rate
experienced in St. Louis, MO. Our audit objective was to determine whether First Community
originated its HUD/Federal Housing Administration (FHA) insured loans in accordance with
HUD’s requirements.

We reviewed five HUD/FHA insured defaulted loans that were originated by First Community.
The loans were originated under HUD’s section 203(b) program. We concluded that First
Community did not originate four of the five loans in accordance with HUD’s requirements. We
did not find any problems with the other loan. This report contains one finding with four
recommendations requiring action by your office.

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

Should you or your staff have any questions, please contact me at (913) 551-5870.




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Executive Summary
We have completed an audit of First Community Resources, Inc., a loan correspondent since
August 3, 1995. We selected First Community for audit because of their high default rate
experienced in St. Louis. The audit objective was to determine whether First Community
originated its HUD/Federal Housing Administration (FHA) insured loans according to HUD’s
requirements.



                                  First Community Resources, Inc. improperly originated
 First Community Did Not          four of the five HUD/FHA insured loans we reviewed. The
 Properly Originate Loans         four loans were originated under HUD’s section 203(b)
 According to HUD                 program. First Community did not ensure a gift letter was
 Requirements                     included in a loan file, verify a co-borrower’s employment
                                  history, verify borrowers had sufficient funds to close their
                                  loans, and adequately disclose the source of a down
                                  payment. Additionally, First Community does not have an
                                  adequate Quality Control plan. These problems exist
                                  because First Community does not have adequate
                                  management controls (i.e. enforced written policies and
                                  procedures) to ensure the proper origination of HUD/FHA
                                  insured mortgages.

                                  Because HUD relied on First Community’s loan origination
                                  process, HUD assumed abnormally high risks when it
                                  insured the four loans for $293,081. One of the HUD/FHA
                                  loans foreclosed with a loss to HUD of $23,564.

                                  We recommend that the Director of the Denver
                                  Homeownership Center take appropriate action based upon
                                  the information contained in the Finding.

                                  We presented our draft finding and narrative case
                                  presentations to First Community Resources during the audit.
                                  We held an exit conference with First Community on June
                                  13, 2001. First Community Resources provided written
                                  comments to our finding and narrative case presentations on
                                  September 17, 2001. We included excerpts from the
                                  comments with our finding and narrative case presentations.
                                  Appendix C contains the complete text of First Community’s
                                  written comments.




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Table of Contents
i

Management Memorandum                                                           i



Executive Summary                                                          ii



Introduction                                                                1



Finding

           First Community Resources Inc. Does Not Originate Loans
           In Accordance With HUD’s Requirements                            3



Management Controls                                                       12



Follow Up On Prior Audits                                                 13



Appendices
      A Schedule Of Mortgages Reviewed                                    14


      B Narrative Case Presentations                                      15

      C Auditee Comments                                                  21

      D Distribution                                                      25




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Introduction
HUD approved First Community Resources, Inc. as a loan correspondent on August 3, 1995. First
Community originates HUD/Federal Housing Administration (FHA) insured loans, Veterans
Administration loans and conventional loans. The total number of loans originated and closed by
First Community under FHA Programs was 86 in 1998; 61 in 1999 and 30 for the period January
01, 2000 through October 30, 2000.

First Community Resources, Inc. has offices in St. Louis, Missouri and Lincolnwood, Illinois. The
St. Louis Office employs seven people. For the period January 1, 1998 through December 31, 1999
there were eleven mortgages originated by the St. Louis Office that defaulted. The HUD/FHA
loans are underwritten by investors and sold to the investors for servicing. Our audit was limited to
First Community’s St. Louis Office Section 203(b) program activities.

Under the section 203(b) Program, the required downpayment for a loan can be reduced to 3
percent and the borrowers can finance approximately 97 percent of the value of their home
purchase through their mortgage. In addition, closing costs can be financed. Under this program,
the borrower may finance many of the closing costs, which in turn reduces the borrower’s up-
front cost of buying a house. The current limit range for a loan is $81,548 to $160,950
depending on factors such as cost of living and if the mortgage is for a multi dwelling property.

First Community’s books and records are located at 7245 Delmar Boulevard, St. Louis, MO 63130.
The president of the company is Kenneth Goffstein and the vice-president is Millard Goffstein.


                                      The overall audit objective was to determine if First
 Audit Objective                      Community Resources, Inc. originated HUD-insured section
                                      203(b) loans in accordance with HUD’s requirements.

                                      Our audit included tests of compliance with HUD’s
 Audit Scope and                      requirements for the origination of HUD/FHA 203(b) loans.
 Methodology                          We performed in-depth reviews on five of the eleven loans
                                      that were in default status as of December 31, 1999. We
                                      selected loans to review where: the mortgagors had filed for
                                      bankruptcy, or defaults occurred before six payments had
                                      been made, or the seller was a real estate agent.

                                      We interviewed HUD staff and First Community’s
                                      management to evaluate First Community’s management
                                      controls and procedures as they relate to the five defaulted
                                      loans we reviewed. We interviewed one borrower but were
                                      unable to contact the other four borrowers. We reviewed the
                                      adequacy of First Community’s loan origination and quality
                                      control procedures.      We reviewed HUD’s and First
                                      Community’s FHA mortgage files to determine if they
                                      contained all required documents.

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Introduction


               Our audit covered the period January 1, 1998 through
               December 31, 1999. We conducted on-site audit work at
               First Community Resources, Inc. from February 2001
               through June 2001.

               The audit was conducted in accordance with generally
               accepted government auditing standards. We provided a
               copy of this report to the President of First Community
               Resources, Inc.




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                                                                                              Finding 1


    FIRST COMMUNITY RESOURCES, INC.
      DOES NOT ORIGINATE LOANS IN
         ACCORDANCE WITH HUD’s
             REQUIREMENTS
First Community Resources, a loan correspondent, does not always originate loans in accordance with
HUD’s requirements. First Community does not have adequate management controls (i.e., written
policies and procedures) to ensure the proper origination of HUD/Federal Housing Administration
(FHA) insured mortgages. Furthermore, where policies do exist they are not complete or they contain
ineffective procedures. As a result, First Community has experienced a high default rate (8.09 percent),
has not been able to take appropriate actions to identify the cause(s) for the high default rate, and has
increased the risk to HUD’s insurance fund



                                        The following are some of HUD’s requirements that lenders
  HUD Requirements                      should follow when processing loans:

                                        HUD Handbook 4060.1 Rev-1, Mortgagee Approval
                                        Handbook, Chapter 6 - Quality Control Plan requires
                                        mortgagee’s:

                                            ·   To establish a adequate written Quality Control Plan
                                                that provides for an independent review by the
                                                mortgagee’s management/supervisory personnel
                                                who are knowledgeable of required procedures and
                                                do not have direct loan processing, underwriting or
                                                servicing responsibilities.

                                            ·   To analyze loans that go into default within six
                                                months after closing.

                                            ·   To retain for a period of one year the results of
                                                quality control reviews, whether by the mortgagee
                                                or an outside firm.

                                            ·   To report violations of law or regulation to the HUD
                                                regional office.

                                            ·   To include in their Quality Control Plan a provision
                                                for written reverification of a mortgagor's

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Finding 1


                                  employment, deposits, gift letter or other source of
                                  funds.

                           HUD Handbook 4155.1, Mortgage Credit Analysis for
                           Mortgage Insurance on One to Four Family Properties,
                           requires:

                              ·   Lenders to properly establish a borrower's capacity
                                  to repay the mortgage debt by appropriately
                                  verifying employment and income. Income that is
                                  not stable or will not continue should not be used.
                                  The borrower must explain gaps in employment of
                                  one month or more.

                              ·   When applicable, the mortgage file to properly
                                  document the amount of and other appropriate
                                  details regarding a gift.

                              ·   Satisfactory evidence to show that funds borrowed
                                  for the required downpayment are fully secured by
                                  existing marketable assets such as, stocks, bonds,
                                  automobiles, or real estate (other than the property
                                  being purchased).

                              ·   For each loan, a verification of deposit and most
                                  recent bank statements be included in the mortgage
                                  file.

                           Our review consisted of five Section 203(b) Program loans
 Loans Were Not Properly   that defaulted during the period January 1, 1998 through
 Originated.               December 31, 1999. In four out of the five loans, First
                           Community did not originate the loans in accordance with
                           HUD’s requirements. Specifically, First Community did not
                           ensure a gift letter was included in a loan file, verify a co-
                           borrow’s employment history, verify borrowers had
                           sufficient funds to close their mortgages, and adequately
                           disclose the source of a down payment.

                           For one of the five loans we reviewed, First Community did
                           not verify that there was a gift letter in the mortgage file.
                           This gift was the source of funds necessary to close the
                           mortgage for FHA Case Number 292-3509133. The amount
                           needed from the borrower to close the loan was $633. The
                           $633 was paid in money orders and signed by the borrower’s
                           daughter. The loan application stated the borrower’s

2001-KC-1005                   Page 4

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                                                          Finding 1


       daughter would provide the source of the down payment as a
       gift. However, the gift letter was not included in either
       HUD’s or First Community’s mortgage file. Since we were
       unable to contact the borrower’s daughter we could not
       confirm whether or not the down payment was actually a gift.
       HUD regulations require the mortgage file to include a gift
       letter signed by the donor, specifying the dollar amount with
       a statement that the borrower does not need to repay the
       donor.

       For the same loan, First Community did not adequately
       verify the co-borrower’s employment history.            First
       Community properly processed information related to the
       borrower; however, they did not for the co-borrower. For
       this loan the co-borrower’s financial information was used to
       determine credit worthiness. The dates on the co-borrower’s
       application differ from the dates on the verification of
       employment received from the employer. The application
       showed the co-borrower was employed for the period
       January 1997 through August 1997, while the verification of
       employment showed the period was April 1997 through
       August 1997.        First Community did not obtain an
       explanation from the co-borrower for the difference in the
       reported information. HUD regulations state that borrowers
       must explain any gaps in employment of a month or more.

       In addition, First Community did not properly determine the
       co-borrower’s capacity to pay the mortgage debt. The co-
       borrower had three jobs within one year. According to the
       loan application, the co-borrower worked at the Holiday Inn
       from January 1997 through August 1997; at Hardees from
       August 1997 through October 1997; and at the Henry VIII
       Hotel starting in October 1997. The loan application is dated
       November 10, 1997. Since the changes in jobs were not
       promotions or for increased earnings, they indicate that the
       co-borrower may not have had a stable source of income.
       HUD regulations require a lender to only use stable income
       when establishing the borrower’s capacity to repay the
       mortgage debt. Proper verification of a co-borrower’s
       income helps protect HUD and the mortgage insurance fund
       against default. In this case the loan defaulted and HUD lost
       $23,564.

       In two of the five files we reviewed, First Community did not
       properly verify that borrowers had sufficient funds to close

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Finding 1


                           their mortgages. For FHA Case Number 292-3559855, the
                           HUD-1 closing statement showed that the borrower needed
                           $4,088 to close the loan. However, the mortgage files did
                           not contain a verification of deposit or copies of the most
                           recent bank statement to show that the borrower had
                           sufficient funds to close the loan. The verification of deposit
                           and copies of the most recent bank statements were also
                           missing from the mortgage files for FHA Case Number 292-
                           3673161. The HUD-1 closing statement showed the
                           borrower needed $449 to close the loan. HUD regulations
                           state the lender must obtain a verification of deposit and the
                           most recent bank statements or original bank statements
                           covering the most recent three months.

                           For one of the five loans we reviewed, the borrower’s
                           application included an inaccurate description of the source
                           of the down payment. First Community did not properly
                           disclose on the application that the source of the down
                           payment was a loan and not a gift. For FHA Case Number
                           292-3578102, the application showed the source of the down
                           payment was a gift from a relative, when in fact it was a loan
                           from a cousin’s father-in-law. The borrower told us First
                           Community knew the source of the down payment was a
                           loan. The mortgage files contained information that showed
                           the down payment was a loan even though the application
                           showed it was a gift. The application was checked “no”
                           where it asks if the down payment was borrowed and the
                           Vice President of First Community signed the application.
                           HUD regulations say funds can be borrowed for a required
                           down payment as long as satisfactory evidence is provided
                           that they are fully secured by existing marketable assets such
                           as, stocks, bonds, automobiles, or real estate (other than the
                           property being purchased). However, in this case the loan
                           was from a private individual and First Community did not
                           have any evidence that showed the loan was backed by
                           marketable assets.

                           The deficiencies noted above occurred because First
 Management Controls Are   Community does not follow adequate management controls.
 Not Adequate              Specifically, First Community’s policies and procedures do
                           not require the use of their checklist, the duties of the loan
                           officer and loan processor are not segregated, mortgage files
                           are not secured before and after a loan is closed, and their
                           Quality Control Plan is not adequate.


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                                                           Finding 1


       First Community did not include a requirement in their
       written policies and procedures that loan officers must use a
       checklist on all originated mortgage loans.             First
       Community has a checklist that documents all the
       information a loan officer needs to obtain and maintain to
       close a loan. However, this checklist was missing from 3
       of the 5 mortgage files we reviewed. In addition, the loan
       officer only used the checklist in 1 of the 2 files where it
       was included. Use of the checklist helps ensure that loans
       are processed and supported in accordance with
       requirements.

       First Community does not adequately segregate the duties
       between the loan officer and loan processor.              First
       Community’s written policies and procedures allow loan
       officers to process loans they originate. Separating the
       responsibilities to authorize, process, record and review loan
       processing helps to reduce the risk of errors and the
       opportunity to commit fraud.

       First Community does not adequately secure its mortgage
       files while loans are being processed or after they are closed,
       cancelled, or rejected. During our review we noted that open
       files were left on desks or in unsecured file cabinets. Closed
       mortgage files were kept unsecured down in the basement.
       Properly secured files help protect against lost information
       and misuse of sensitive information.

       First Community’s Quality Control Plan does not comply
       with HUD’s requirements. Specifically, First Community’s
       Quality Control Plan does not include the following:

          ·     A requirement to review loans that go into default
                within six months.
          ·     Procedures for expanding the scope of a review when
                a pattern of deficiencies or fraudulent activity is
                disclosed.
          ·     Standards for retaining mortgage files.
          ·     Procedures to notify HUD of significant
                discrepancies.
          ·     Procedures to reverify gift letters.
          ·     Procedures to review loans that have been rejected.
          ·     Procedures that cover who performs a review of the
                mortgage loans (Management/supervisory personnel
                who are knowledgeable and have no direct loan

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Finding 1


                                processing, underwriting or servicing responsibilities
                                should accomplish the reviews).

                        An adequate Quality Control Plan helps to identify and
 HUD’s Increased Risk   correct deficiencies in the loan origination process, and
                        prevent repeat occurrences of problems.

                        The problems we identified all contributed to First
                        Community’s high default rate. First Community has
                        experienced an 8.09 percent default rate while the average
                        for other mortgagee’s in St. Louis is 1.76 percent. First
                        Community’s lack of management controls increases the risk
                        to the HUD insurance fund and to date has resulted in the
                        loss of $23,564.



  Auditee Comments      Excerpts from the Auditee’s comments on our draft finding
                        follow. Appendix C contains the complete text of the
                        comments.

                        First Community has always had a procedures manual and
                        Quality Control Plan in place. Files were turned in to the
                        office manager who logged them in and checked them for
                        completeness, compliance and over-all acceptability. When
                        we discovered that there were inaccuracies in files generated
                        by one loan officer in particular, she was immediately
                        dismissed.

                        Effective as of the date of your report, our company policy
                        was amended to clearly state that First Community
                        Resources does not allow loan officers to process their own
                        files. We have also reminded everyone about the use of the
                        checklist by not only keeping the form with the processors,
                        but including it in the loan application packets made up for
                        the loan officers. We have revised our quality control plan to
                        include all of your recommended changes.

                        I would also like to point out that for the last two years, since
                        the dismissal of this particular loan officer, our company has
                        attained an excellent record as to a low delinquency and
                        default rate.

                        As I mentioned earlier, the loan officer responsible for three
                        of the five files reviewed was discharged from our

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                                                           Finding 1


       employment in November 1998. Prior to her discharge, she
       was questioned by one of our processors as to the reason for
       the lack of gift letters and supporting documentation. She
       stated that she was told by the investor’s underwriter that, in
       lieu of a gift letter, the name, address, phone number and
       relationship of the donor could be put under “assets” on the
       Uniform Residential Loan Application.

       We have recently hired a new sales/office manager to assist
       in the daily operations of the company. He has in excess of
       20 years experience in the mortgage banking field in St.
       Louis with an in depth knowledge of the production,
       processing, and closing of FHA/HUD loans.              His
       responsibilities include the following:

       1. Review all loan applications for accuracy pre-qualifying
          prior to processing.

       2. Review all completed applications with required
          documentation prior to submission for underwriting.

       3. Review all approved applications for conditions required
          prior to closing.

       4. Review all rejected applications to determine the
          accuracy of the underwriter’s decision.

       5. Meet periodically with all loan officers and processors to
          review current FHA/HUD processing and underwriting
          procedures, paying special attention to any recent
          changes.

       In addition, we have refined our processing department to
       develop Quality Control Manager who will have the ultimate
       responsibility for reviewing all pre-closed and closed files.
       This person will work directly with all departments to
       monitor the quality of all files in our office.

       With the relocation of our office we will have the capability
       of properly securing all files when not use.

       The proposed penalties are extremely excessive and do not
       reflect fairly on how First Community operates its business.




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Finding 1




OIG Evaluation of   HUD Handbook 4155.1 requires the mortgage file to contain
Auditee Comments    a gift letter specifying the dollar amount of the gift, signed by
                    the donor and the borrower and stating no repayment is
                    required. The Handbook does not state that in lieu of a gift
                    letter, the name, address, phone number and relationship of
                    the donor can be put under “asset” on the Uniform
                    Residential Loan Application.          If proper management
                    controls were in effect, this error should have been caught.

                    The actions the auditee has taken and planned should correct
                    the problems found in this review if the actions are followed
                    and enforced.

                    We changed Recommendation 1D to recommend the Single
                    Family Homeownership           Center    take  appropriate
                    administrative penalties rather than recommending specific
                    courses of action.



Recommendations     We recommend that the Director, Denver Single Family
                    Homeownership Center:

                    1A.      Requires First Community Resources to implement
                             policies and procedures that ensure loan officers:
                             retain gift letters in mortgage files, properly verify
                             and explain discrepancies in employment histories,
                             verify borrowers have sufficient funds to close loans,
                             and correctly disclose sources of downpayments.

                    1B.      Requires First Community to develop and implement
                             management controls that enforce the use of a
                             checklist to process loans, prevent loan officers from
                             processing loans they originate, and adequately
                             secure mortgage files when not in use.

                    1C.      Requires First Community to develop and implement
                             a Quality Control Plan that complies with HUD’s
                             requirements.

                    1D.      Conducts a Quality Assurance review of First
                             Community within the next six months.


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                                                          Finding 1


       1E.     Takes appropriate administrative action against First
               Community Resources.




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Management Controls
In planning and performing our audit, we considered the management controls in relation to First
Community Resources, Inc.’s HUD/Federal Housing Administration (FHA) loan origination
process to determine our auditing procedures and not to provide assurance on their management
controls. Management controls include the plan of organization, 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 are obtained,
maintained and fairly disclosed in reports.



                                     We determined the following management controls were
 Relevant Management                 relevant to our audit objectives:
 Controls
                                             ·     Controls to ensure that HUD insured loans are
                                                   originated in accordance with HUD
                                                   requirements.

                                     We assessed the relevant controls identified above.

                                     It is a significant weakness if management controls do not
                                     provide 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 reports.

                                     Based on our review, we believe the following items are
 Significant Weaknesses              significant weaknesses:

                                             ·     First Community’s policies and procedures do
                                                   not require the use of their loan checklist, the
                                                   duties of the loan officer and loan processor are
                                                   not segregated, and mortgage files are not secured
                                                   before and after a loan is closed. In addition,
                                                   their Quality Control Plan is not adequate (see
                                                   Finding 1).




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Follow Up On Prior Audits
This is the first OIG audit of First Community Resources, Inc.




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                                                                                Appendix A

Schedule of Mortgages Reviewed


                              MORTGAGES REVIEWED

Appendix     FHA Case    Original     Endorsement      Status as    Number of    Deficiency
              # 292-     Mortgage        Date             of        Payments
                         Amount                        12/31/99
    B        3509133     $ 35,590       01/12/98        Default           2        A, B
    B        3559855     100,099        04/03/98        Default           7         C
    B        3578102      52,137        06/17/98        Default          3          D
    B        3586158     50,853        06/22/98        Default          9         None
    B        3673161      105,255        11/13/98        Default           8          C




                             DEFICIENCIES IDENTIFIED

Deficiency               Explanation of Deficiencies                Number of Deficiencies
    A                       Gift Letter not Verified                          1
    B                  Employment History not Verified                        1
    C        Inadequate Verification on Funds to Close on Loan(s)             2
    D        Inaccurate Description of the Source of Downpayment              1




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                                                                                          Appendix B

Narrative Case Presentations
FHA Case Number: 292-3509133

Property Address: 2024 Bella Clare, St. Louis, MO 63136

Insured Amount: $35,590

Borrowers: Madeline and Joice Woods.

Section of Housing Act: 203(b)

Date of Loan Closing: 1/12/98

Current Status: Foreclosed, default status after 2 payments, sold by HUD at a loss of $23,564

Summary: First Community Resources mortgage file did not contain a gift letter. This gift was
the source of funds needed to close the loan. The application stated the gift was from the
borrower’s daughter. However, we were unable to contact the borrower’s daughter and could not
verify whether the funds provided were actually a gift. Since the source of a borrower’s funds
can have a direct impact on his/her ability to repay a loan, it is important that a mortgagee
properly establish and support that a source of funds is a gift. In addition, First Community
Resources did not explain the gaps in employment that were evident when the initial application
prepared by the co-borrow was compared to documentation received from the employer. Further,
First Community did not adequately assess the co-borrower’s ability to repay the debt. The co-
borrower showed she worked at one job three months longer than the employer reported, creating
an employment gap that should have been explained. The co-borrower also had three jobs within
one year. Since the jobs did not represent increases in responsibility or earnings they may have
reflected that the co-borrower did not have a stable source of income. First Community’s files
did not contain documentation to show how they determined the co-borrower’s income was
stable and could be expected to continue. HUD lost $23,564 due to the foreclosure and resale of
this property

Violations:

              ·   A Gift Letter Was Not Included in the Mortgage File. HUD Handbook 4155.1,
                  section 3, pg.’s 2-21 and 2-22, requires that the mortgage file contain a gift letter
                  specifying the dollar amount of the gift. The letter must be signed by the donor
                  and the borrower and contain a statement that no repayment is required. The gift
                  letter must show the donors name, address, telephone number and relationship to
                  the borrower.

              ·   No Explanation of Gaps in Employment in the Mortgage File. HUD Handbook,
                  chapter 2, pg.’s 2-9 through 2-10 requires that the borrower explain any gaps in
                  employment of a month or more.


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Appendix B


           ·   The Lender Did Not Establish the Borrower’s Capacity to Repay the Debt HUD
               Handbook, chapter 2, pgs 2-9 through 2-10 requires that the lender establish the
               borrower’s capacity to repay the mortgage debt. Income from a source that can
               not be verified, is not stable or will not continue should not be used when
               calculating the borrower’s income ratios.

Mortgagee Comments

The loan officer responsible for three out of the five files reviewed was discharged from our
employment in November 1998. Prior to her discharge, she was questioned by one of our
processors as to the reason for the lack of gift letters and supporting documentation. She stated
that she was told by the investors underwriter that, in lieu of a gift letter, the name, address,
phone number and relationship of the donor could be put under “assets” on the Uniform
Residential Loan Application.

Evaluation of Mortgagee Comments

HUD Handbook 4155.1 requires the mortgage file to contain a gift letter specifying the dollar
amount of the gift, signed by the donor and the borrower and stating no repayment is required.
The handbook does not state that in lieu of a gift letter, the name, address, phone number and
relationship of the donor could be put under “asset” on the Uniform Residential Loan
Application. If the proper management controls were in place, such as the use of a checklist by
the loan officers on all the loans originated, the loan processor should have caught this error. In
addition, if the duties between the loan officer and loan processor had been segregated, the loan
processor should have caught the error before the file went to the underwriter for final approval.

First Community Resources did not explain why they did not obtain an explanation on the gap in
employment for the co-borrower.




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                                                                                        Appendix B


FHA Case Number: 292-3559855

Property Address: 2 Wood Court, St. Louis, MO 63376

Insured Amount: $100,099

Borrowers: Terry and Sherri Lewis

Section of Housing Act: 203(b)

Date of Loan Closing: 4/03/98

Current Status: Active; prior: default status after 7 payments

Summary: First Community Resources did not verify that the borrower had sufficient funds to
close the loan. First Community did not obtain a verification of deposit from the borrower’s
financial institution nor did it have copies of the borrower’s most recent bank statement to show
that the borrowers had sufficient funds to close the loan. Verification of funds is an important step
that helps ensure a borrower is financially able to meet the terms of a loan. Per the HUD-1, the
amount needed from the borrowers to close the loan was $4,088.

Violation:

             ·   Verification of Deposit Not Included in the Mortgage File. HUD Handbook
                 4155.1, chapter 3, section 3.1, letter F requires a verification of deposit and most
                 recent bank statements. If the lender does not use a verification of deposit, the
                 lender must obtain from the borrower, original bank statement(s) covering the
                 most recent three months (not more than 120 days old from when the loan has
                 closed). The bank statement must show the previous month’s balance

Mortgagee Comments

First Community Resources did not explain why they did not verify if the mortgagors had
sufficient funds to close the loan.




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Appendix B


FHA Case Number: 292-3578102

Property Address: 6435 Arthur, St. Louis, MO 63139

Insured Amount: $52,137

Borrower: William E. Walls, Jr.

Section of Housing Act: 203(b)

Date of Loan Closing: 6/17/98

Current Status: Refinanced with another mortgage company; prior: default status after 3 payments

Summary: First Community Resources did not accurately describe the source of the down
payment. The application showed the source of the down payment as a gift when in fact the source
of the down payment was a loan from the borrower’s cousin’s father-in-law. The loan was obtained
from a private individual and was not backed by existing marketable assets. The note included the
terms for re-payment but was not included in the liability section of the application. The note was
included on the assets side of the application as a gift. During our interview with the borrower, he
said the mortgagee knew about the loan. We found a copy of the note in First Community’s
mortgage file and the Vice-President of First Community signed the application. It is important that
the proper status of a borrower’s funds be recorded in a loan file so that the borrower’s ability to
repay the loan is properly assessed.

Violation:

             ·   Source of Down Payment was recorded as a gift but was actually a Loan. HUD
                 Handbook 4155.1, chapter 2, D states that funds can be borrowed for a required
                 down payment as long as there is satisfactory evidence provided that the funds are
                 fully secured by existing marketable securities such as stocks, bonds, automobiles,
                 and real estate (other than the property being purchased). In addition, certain
                 types of loans such as signature loans, the cash value of life insurance policies,
                 loans secured by a 401(k) do not require consideration of repayment for qualifying
                 purposes.

Mortgagee Comments
First Community Resources did not explain why they did not document the source of down
payment as a loan instead of a gift.




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                                                                                        Appendix B


FHA Case Number: 292-3673161

Property Address: 1 Harvest Meadow, St. Louis, MO 63376

Insured Amount: $105,255

Borrowers: James and Rebecca Pennington

Section of Housing Act: 203(b)

Date of Loan Closing: 11/13/98

Current Status: Active; prior: default status after 8 payments

Summary: First Community Resources did not verify that the borrower had sufficient funds to
close the loan. First Community did not obtain a verification of deposit from the borrower’s
financial institution nor did it have copies of the borrower’s most recent bank statement to show
that the borrowers had sufficient funds to close the loan. Verification of funds is an important step
that helps ensure a borrower is financially able to meet the terms of a loan. Per the HUD-1, the
amount needed from the borrowers to close the loan was $449.

Violation:

             ·   Verification of Deposit Not Included in the Mortgage File. HUD Handbook
                 4155.1, chapter 3, section 3.1, letter F requires a verification of deposit or most
                 recent bank statements. If the lender does not use a verification of deposit, the
                 lender must obtain from the borrower, original bank statement(s) covering the
                 most recent three months (not more than 120 days old from the time the initial
                 loan application is made). The bank statement must show the previous months
                 balance.

Mortgagee Comments:
First Community Resources did not explain why they did not verify if the mortgagors had
sufficient funds to close the loan.




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Appendix B


FHA Case Number: 292-3586158

Property Address: 33 Westdell Drive

Insured Amount: $50,853

Borrower: Gwendolyn Fleming

Section of Housing Act: 203(b)

Date of Loan Closing: 6/22/98

Current Status: Active; Prior default status: 9 payments

Summary: Our review did not identify any problems with the way this loan was processed.




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                             Appendix C

Auditee Comments




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                 Appendix C




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                                                                                 Appendix D

Distribution Outside of HUD
Ranking Member, Committee on Governmental Affairs, 340 Dirksen Senate Office Building,
  United States, Senate, Washington, DC 20510
Chairman, Committee on Governmental Affairs, 706 Hart Senate Office Building,
  United States, Senate, Washington, DC 20510
Chairman, Committee on Government Reform, 2185 Rayburn Building, House of
  Representatives, Washington, DC 20515
Ranking Member, Committee on Government Reform, 2204 Rayburn Building
  House of Representatives, Washington DC 20515
Subcommittee on Oversight and Investigations, Room 212 O’Neil House Office Building
  Washington, DC 20515
Director, Housing and Telecommunications Issues, United States General Accounting
  Office, 441 G Street NW, Room 2T23, Washington DC 20548
Senior Advisor, Subcommittee on Criminal Justice, Drug Policy & Human
  Resources, B373 Rayburn House Office Building, Washington, DC 20515
Chief, Housing Branch, Office of Management & Budget, 725 17th Street, NW, Room 9226,
  New Executive Office Building, Washington, DC 20503
Department of Veterans Affairs Office of Inspector General, 810 Vermont Ave., NW
  Washington, DC 20420
Department of Veterans Affairs OIG Audit Operations Division, 1100 Main, RM 1330,
  Kansas City, Missouri 64105-2112
House Committee on Financial Services, 2129 Rayburn House Office Building,
  Washington, DC 20515
Director, Office of Federal Housing Enterprise Oversight, 1700 G Street, NW, Room 4011,
  Washington, DC 20552




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