oversight

National City Mortgage Company, Non-Supervised Mortgagee, Buffalo, New York

Published by the Department of Housing and Urban Development, Office of Inspector General on 2001-08-23.

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                AUDIT REPORT




      NATIONAL CITY MORTGAGE COMPANY
         NON-SUPERVISED MORTGAGEE
             BUFFALO, NEW YORK

                       2001-NY-1004

                    AUGUST 23, 2001



                     OFFICE OF AUDIT
                   NEW YORK/NEW JERSEY



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                                                                Issue Date
                                                                        August 23, 2001
                                                                Audit Case Number
                                                                        2001-NY-1004




 TO: Engram Lloyd, Director, Homeownership Center
                       Philadelphia, Pennsylvania, 3AHH


 FROM: Alexander C. Malloy, District Inspector General for Audit, 2AGA


 SUBJECT:      National City Mortgage Company
               Non-Supervised Mortgagee
               Buffalo, New York


 We completed an audit of the books and records of National City Mortgage Company, (National)
 a non-supervised mortgagee. The objective of the audit was to determine whether National
 originated loans in accordance with the requirements of the U.S. Department of Housing and
 Urban Development/Federal Housing Administration (HUD/FHA), which require adherence to
 prudent lending practices. The review covered the period between December 1, 1998 and
 November 30, 2000.

 Our review concluded that for seven of the 33 loans we reviewed, National did not adhere to
 prudent lending practices during the underwriting process. In addition, we found that National
 did not properly account for prepaid items paid on behalf of the borrower and did not have
 adequate controls to ensure that appraisals were completed in accordance with the Uniform
 Standards of Professional Appraisal Practice (USPAP).

 Within 60 days, please provide 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 not considered necessary. Also, please furnish us copies of any correspondence
 or directives issued related to this audit.

 Should you or your staff have any questions, please contact William H. Rooney, Assistant
 District Inspector General for Audit, on (212) 264-8000, extension 3976.



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 Management Memorandum




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 Executive Summary
 We completed an audit of the books and records of the Buffalo Branch Office of National City
 Mortgage Company, (National) a non-supervised mortgagee. The objective of the audit was to
 determine whether National originated loans in accordance with regulations and requirements of
 the U.S. Department of Housing and Urban Development/Federal Housing Administration
 (HUD/FHA), which require adherence to prudent lending practices. The review covered the
 period between December 1, 1998 and November 30, 2000, and consisted of a review of 33
 HUD/FHA insured loans. A summary of the results of our review is provided below.



                                     Our review concluded that for seven of the 33 loans we
    Four loans in default
                                     reviewed, National did not adhere to prudent lending
                                     practices during the underwriting process. Our review
                                     disclosed that each of the seven loans had at least one
                                     significant processing deficiency and that four were in
                                     default. The specific processing deficiencies were: earnest
                                     money was not verified, minimum investments were not
                                     provided, income was overstated, sources of gift funds
                                     were not verified, loan ratios exceeded HUD/FHA
                                     standards, and funds from an unsecured loan was used as
                                     an earnest money deposit. We believe these deficiencies
                                     occurred because National’s personnel did not assure that
                                     those loans were processed in accordance with HUD/FHA
                                     requirements. Consequently, mortgages were approved for
                                     unqualified borrowers causing HUD/FHA to assume an
                                     unnecessary insurance risk.

                                     Our review also disclosed that National did not properly
                                     accounted for prepaid items that were paid on behalf of the
    Prepaid items not properly
                                     borrowers. In this regard, National failed to identify the
    accounted
                                     premium pricing credits and the seller contributions on both
                                     the Good Faith Estimate and the HUD-1 Settlement
                                     Statement. For 21 of the 33 loans we reviewed, we found
                                     that National or the sellers paid prepaid items on behalf of
                                     the borrowers, but the amounts paid were not itemized on
                                     neither the Good Faith Estimate nor the HUD-1 Settlement
                                     Statement. Also, for 18 of those loans, National provided a
                                     premium pricing credit to the borrowers, however, the
                                     amount was only shown as a lump sum on the HUD-1
                                     Settlement Statement. We believe these deficiencies
                                     occurred because National did not adequately review loan
                                     closing documents to ensure that all requirements were met.
                                     As a result, we found four loans where the borrowers did
                                     not meet the minimum required cash investment.

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Executive Summary



                           Additionally, our review disclosed that for six of the 33
 Appraisals not properly
                           loans reviewed the appraisal did not indicate that there was
 completed
                           a prior sale of the property.      This occurred because
                           National did not have adequate controls to ensure that
                           appraisals were completed in accordance with the Uniform
                           Standards of Professional Appraisal Practice (USPAP). As
                           a result, HUD/FHA based its decision to insure the loans on
                           incomplete and/or inaccurate information.

                           Regarding the first finding (inadequate loan origination
 Recommendations           practices), we recommend that you indemnify HUD/FHA
                           against future losses on five of the seven loans in question.
                           Regarding the second and third findings, we made specific
                           recommendations for your action.

                           The results of the audit were discussed with representatives
  Exit Conference          of National during the course of the audit and at an exit
                           conference held on July 10, 2001, at National’s Buffalo
                           Branch Office. National provided documentation, which
                           supported that the minimum cash investment had been met
                           by the borrower in one of the cases in our review.
                           Therefore, we revised Finding 1 to reflect the correction
                           supported by the documentation provided.           National
                           indicated that they would provide a written response to the
                           findings    upon     request    from    the    Philadelphia
                           Homeownership Center.




2001-NY-1004                   Page iv

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Table of Contents
Management Memorandum                                                   i



Executive Summary                                                    iii



Introduction                                                            1



Findings

1.     Inadequate Loan Origination Practices Resulted in
       Approval of HUD/FHA Insured Loans for Unqualified
       Borrowers                                                    3


2.     National Did Not Comply With Prepayment
       Requirements Pertaining to Prepaid Items                     5

3.     National Did Not Ensure That Appraisals Were
       Properly Completed                                           9



Management Controls                                                 13



Follow Up On Prior Audits                                           15



Appendices
     A Summary Of Loan Origination Deficiencies                     17


     B Narrative Case Presentations                                 19


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Table of Contents



   C Distribution                                                          29



Abbreviations

FHA                 Federal Housing Administration
HUD                 U.S. Department of Housing and Urban Development
OIG                 Office of Inspector General
USPAP               Uniform Standards of Professional Appraisal Practice




2001-NY-1004                          Page vi
 Introduction
 National City Mortgage Company (National) is a non-supervised mortgagee with its headquarters
 located in Miamisburg, Ohio. The Buffalo Branch Office originates loans in the western area of
 the State of New York and is located at 5500 Main Street, Suite 210, Williamsville, New York,
 14221. National’s Regional Office for underwriting and closings loans is located at 60 Hickory
 Drive, Waltham, Massachusetts.

 During our audit period, from December 1, 1998 to November 30, 2000, National’s Buffalo
 Branch Office originated 238 HUD/FHA loans under the Direct Endorsement Program. At May
 1, 2001, the mortgages for 15 of the 238 loans were in default. National originates and services
 HUD/FHA insured loans, Veterans Administration insured loans, and conventional loans.



                                     Our audit objectives were to determine whether National
  Audit Objectives                   originated its HUD/FHA mortgages in accordance with
                                     HUD requirements, which required adherence to prudent
                                     lending practices, and to determine whether National's
                                     quality control plan, as implemented, meets HUD
                                     requirements.

  Audit Scope and                    The purpose of our examinations were to confirm the
  Methodology                        accuracy of all material information used as a basis for
                                     originating and closing the loans. We obtained background
                                     information by:

                                     •   Reviewing relevant HUD regulations, requirements and
                                         Mortgagee Letters.

                                     •   Examining records and reports maintained on HUD’s
                                         Single Family Insurance System, Neighborhood Watch
                                         Early Warning System, Single Family Acquired Asset
                                         Management System and Computerized Home
                                         Underwriting Management System.

                                     •   Interviewing HUD’s Philadelphia Homeownership
                                         Center Staff.

                                     To accomplish our audit objectives, we performed an
                                     examination of 33 loans. We review the files of 12 loans
                                     that had gone into default. The remaining 21 loans
                                     consisted of 17 loans that were randomly selected using
                                     Audit Command Language (ACL) software and four loans
                                     that involved the same seller who sold the properties after
                                     holding them for less than a year.

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Introduction



                   Our audit procedures included: (a) a reconfirmation of the
                   borrowers’ income and assets, (b) a verification of selected
                   data on the settlement statements; and (c) interviews with
                   the borrowers, members of HUD and National staff,
                   Appraisers, and Closing Agents.


    Audit Period   We performed the audit field work between March 2001
                   and June, 2001. Our audit pertained to loans generally
                   originated between December 1, 1998, and November 30,
                   2000. However, as necessary, we reviewed loan activity
                   prior and subsequent to our audit period. Our audit work
                   was performed at National’s Buffalo, New York and
                   Waltham, Massachusetts Offices, in accordance with
                   generally accepted governmental auditing standards.
       .
                   A copy of this report was provided to National.




2001-NY-1004           Page 2

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                                                                                         Finding 1


 Inadequate Loan Origination Practices Resulted
   in Approval of HUD/FHA Insured Loans for
             Unqualified Borrowers
 Our review disclosed that National did not adhere to prudent lending practices when processing
 seven of the 33 loans that we examined during our audit. We noted that processing deficiencies
 occurred because National personnel did not assure that the loans were processed in accordance
 with HUD/FHA requirements. As a result, mortgages were approved for unqualified borrowers
 causing HUD/FHA to assume an unnecessary insurance risk.

 Section 2-1 of HUD Handbook 4000.4 REV-1, Single Family Direct Endorsement Program
 requires mortgagees to develop HUD/FHA insured loans in accordance with accepted sound
 mortgage lending practices. Also, HUD Handbook 4000.4 REV-l, Chapter 2, Section 2-5,
 provides that the mortgagee must obtain and verify information with at least the same care that
 would be exercised in originating the loan in which the mortgagee would be entirely dependent
 on the property as security to protect its investment.

 In our opinion, National did not adhere to the above requirements, as discussed below, when it
 underwrote seven of the 33 loans we reviewed.



                                      Our examination of 33 loans originated by National between
  Examined 33 loans                   May 1, 1998, and November 30, 2000, disclosed that in
                                      seven cases National either did not follow HUD
                                      requirements or did not exercise the care expected of a
                                      prudent lender in underwriting the loans. Consequently, we
                                      found significant origination deficiencies in seven cases, as
                                      shown below:


                                           Deficiency                           Number of Loans
                        Earnest Money Not Verified                           2 of the 7 loans
                        Minimum Investment Not Provided                      6 of the 7 loans
                        Overstated Income and Understated Ratio              1 of the 7 loans
                        Source of Gift Not Verified                          2 of the 7 loans
                        Ratios Exceeded HUD/FHA Standards                    1 of the 7 loans
                        Unsecured Loan Used for Earnest Money                1 of the 7 loans

                                      Additionally, the mortgages of four of the seven cases were
                                      in default as of May 1, 2001 (See Appendix A).


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Finding 1


                                             Appendix A to this report provides a summary of the loan
                                             origination deficiencies noted during our review, while
                                             Appendixes B-1 through B-7 provide an individual
                                             description of the origination deficiencies for each of the
                                             seven loans1 that National did not adhere to prudent lending
                                             practices. The deficiencies occurred because National
                                             representatives did not adhere to HUD/FHA requirements,
                                             nor comply with prudent lending practices. In our opinion,
                                             the deficiencies resulted in the approval of mortgages for
                                             unqualified borrowers, which have caused HUD/FHA to
                                             assume an unnecessary risk.


Recommendations                              We recommend that the you require National to:

                                             1A.      Indemnify HUD/FHA against future losses on five
                                                      of the seven loans in question (FHA Case Nos. 372-
                                                      2942863, 372-2800182, 372-2840385, 372-2864510
                                                      and 372-2889830).


                                             1B.      Provide your office with an explanation and a
                                                      corrective action plan to assure that all HUD/FHA
                                                      guidelines regarding origination and underwriting
                                                      are followed by its loan processing, underwriting
                                                      and closing employees.




1
  When we provided draft copies to the HUD Philadelphia Homeownership Center for comment, we were advised
that if a deficiency is less than $500, the deficiency would not warrant indemnification but would require corrective
action regarding future cases. Because two of our seven cases involved deficiencies that were less than $500, we
recommended that five of the seven cases be indemnified.

2001-NY-1004                                       Page 4

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                                                                                                       Finding 2




     National Did Not Comply With Requirements
              Pertaining to Prepaid Items
 National did not properly accounted for prepaid items paid on behalf of the borrowers. National
 failed to identify the premium pricing credits and seller contributions on both the Good Faith
 Estimate and the HUD-1 Settlement Statement. We attribute this to National’s failure to
 adequately review loan closing documents to ensure that all requirements were met. As a result,
 we found four1 loans where the borrowers did not meet the minimum required cash investment.



                                            According to Handbook 4155.1 Rev-4, CHG-1, Paragraph
     Criteria                               1-9, the Good Faith Estimate and the HUD-1 must provide
                                            an itemized statement indicating which items are being paid
                                            on the borrowers’ behalf. The disclosure of only a lump
                                            sum amount is not acceptable. Also, Mortgagee Letter 98-
                                            29, Single Family Loan Production - Mortgage Calculation
                                            Simplification, provides that the National Housing Act
                                            requires the minimum cash investment to be 3 percent of
                                            the estimated cost of the property’s acquisition. HUD/FHA
                                            has determined that the minimum cash investment should
                                            be based on the property’s sales price without considering
                                            loan closing costs.

Reviewed 33 Loans                           We conducted a review of prepaid items for all 33 loans in
                                            our sample. We reviewed the Mortgage Credit Analysis
                                            Worksheet to determine whether any premium pricing
                                            credits or seller contributions were identified. Also, we
                                            examined the HUD-1’s to determine if any prepaid items
                                            existed that were not identified on the Mortgage Credit
                                            Analysis Worksheet. For those loans in which we
                                            identified prepaid items, we reviewed the Good Faith
                                            Estimate and the HUD-1 Settlement Statement to determine
                                            if the items paid on behalf of the borrowers were itemized.
 21 loans where prepaid
                                            There were 25 loans in which National or the seller paid
 amounts were not
                                            prepaid items on behalf of the borrowers. In 21 of those
 itemized
                                            loans, the amounts paid were not itemized on neither the

 1
  In Finding 1, we mentioned six loans did not meet the minimum cash investment requirement. As addressed in this
 Finding; four of the six loans did not meet the minimum cash investment requirement because of premium pricing
 credits and seller contributions. The four cases were HUD/FHA case numbers 372-2800182,372-2707963,371-
 2805940 and 372-2864510.

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Finding 2


                             Good Faith Estimate nor the HUD-1 Settlement Statement.
                             There were 18 loans that National provided a premium
                             pricing credit to the borrower. In all of these loans, the
                             amount was shown as a lump sum on the HUD-1
                             Settlement Statement.

                             We discussed this situation with National’s Regional
                             Underwriting Manager. The Underwriting Manager
                             examined 11 of the loans to determine if they were in fact
                             loans containing premium pricing credits. After consulting
                             several other National staff, the Underwriting Manager
                             concluded that any time National pays any of the
                             borrowers’ costs it should be considered premium pricing
                             credits.

Borrowers did not meet       Next, we explained that for four of the loans that National
the minimum cash             paid costs on behalf of the borrowers, the borrowers did not
requirement                  meet the minimum cash investment requirement. The
                             Underwriting Manager explained that the underwriters
                             calculate the minimum investment requirement on the
                             Mortgage Credit Analysis Worksheet. However, it is the
                             responsibility of the Closing Department to make the
                             underwriters aware of any items recorded on the HUD-1
                             that would affect the minimum cash investment.

                             When we spoke with the Regional Operations Manager,
                             who is responsible for the Closing Department, the
                             Manager explained that the underwriters generally verify
                             the minimum cash investment requirement. We asked the
                             Operations Manager about items that occur at closings such
                             as funds returned to the borrower. The Operations Manager
                             was unsure of whether the post closing review that is
                             performed at National’s headquarters would check to
                             determine if the minimum cash investment had been met.

                             Subsequent to our conversation with the Operations
  Closing Department         Manager, we followed-up with the Underwriting Manager
  responsible for ensuring   and were told that the Operations Manager agreed that it is
  minimum cash investment    the responsibility of the Closing Department to ensure that
  is met                     the minimum cash investment requirement is met.




2001-NY-1004                     Page 6

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                                                                                  Finding 2


                               In addition, during our review we determined that the
   Closing instructions did
                               Closing Department provided the closing attorneys with
   not include procedures on
                               loan closing instructions.      The instructions included
   costs paid on borrowers
                               procedures regarding the sellers contribution. However, the
   behalf
                               instructions did not include procedures regarding the costs
                               National pays on behalf of the borrowers. Furthermore, the
                               loan closing instructions for the four loans where the
                               borrowers did not meet the minimum cash investment did
                               not include any instructions regarding the required
                               minimum cash investment.

                               We explained to the Underwriting Manager that it is
                               National’s responsibility to ensure that items paid on behalf
                               of borrowers are itemized on the Good Faith Estimate and
                               the HUD-1 Settlement Statement. Also, National must
                               ensure that each borrower meets the minimum cash
                               investment. The Underwriting Manager claimed that
                               National was aware of this, but after talking to the loan
                               closing staff it became apparent that the closing staff was
                               not paying as much attention to these items as they should
                               have been.


 Recommendations               We recommend that you require National to:

                               2A.     Ensure that all items prepaid by either National or
                                       the sellers on behalf of borrowers are itemized on
                                       both the Good Faith Estimate and the HUD-1
                                       Settlement Statement.

                               2B.     Include minimum cash investment instructions as
                                       part of the loan closing instructions to the closing
                                       attorneys and ensure that each borrower has met the
                                       minimum cash requirement.




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Finding 2




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                                                                                            Finding 3


  National Did Not Ensure That Appraisals Were
               Properly Completed
 Our review disclosed six cases that the appraisal did not indicate that a prior sale of the property
 occurred less than a year before the appraisal. National has not developed adequate controls to
 ensure that appraisals are completed in accordance with Uniform Standards of Professional
 Appraisal Practice (USPAP). As a result, HUD/FHA based its decisions to insure the loans on
 incomplete and /or inaccurate information. Mortgagee Letter 94-54 states that a mortgagee that
 selects its own appraiser must accept responsibility, equally with the appraiser for the integrity,
 accuracy and thoroughness of the appraisal.




                                       Mortgagee Letter 96-26 provides that each appraisal shall
  Criteria                             conform to the USPAP and further states that each appraisal
                                       shall analyze and report in reasonable detail all prior sales of
                                       the property being appraised that occurred within one year
                                       preceding the date when the appraisal is prepared.

                                       Standard Rule 1-5(b) of the USPAP states that when
                                       developing a real property appraisal, an appraiser must
                                       analyze any prior sale of the property that occurred within
                                       one year for the one to four-family residential property.
                                       Further, under the comments to Standard rule 2-2 (a) (xi), it
                                       states that when the purpose of the assignment is to develop
                                       an opinion of market value, a summary of the results of the
                                       information required by Standards Rule 1-5 is required. If
                                       such information was unobtainable, a statement of the
                                       efforts undertaken by the appraiser to obtain the
                                       information is required.


                                       Appraisals Failed to Disclose Prior Sales

    Prior sales not disclosed          Our review disclosed that appraisals for six loans in our
                                       sample did not disclose that a prior sale had occurred less
                                       than a year before the appraisal. In each case, the property
                                       had been purchased and then resold within a short period of
                                       time at a higher price with a FHA/HUD insured borrower
                                       as shown below:



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Finding 3


     Case Number       Date of Prior       Prior Sale         Date of             HUD/FHA
                           Sale            Purchase          HUD/FHA               Mortgage
                                             Price          Mortgage Sale        Purchase Price
      371-2805940           12/7/99         $44,000            2/2/00               $61,064
      372-2800182            5/4/98         $21,500           7/31/98               $44,500
      372-2811728           5/15/98         $23,500           8/28/98               $48,000
      372-2839341           8/14/98         $18,000           11/5/98               $42,900
      372-2885477           10/30/98        $23,250            4/9/99               $48,900
      372-2889830           10/16/98        $22,000           4/26/99               $46,000


                               For five of the six properties, the same entity originally purchased
                               the properties and then resold the properties within 6 months. In
                               fact the sales contract for 372-2800182 was dated April 30, 1998,
                               which was four days prior to the entity purchasing the property.
                               None of the appraisals disclosed the prior sale and the date that the
                               prior sale occurred.

                               National did not Adequately Review Appraisals

                               National’s staff indicated that if they had been aware of the prior
Appraisals not adequately      sale they would have based the loan amount on the prior sales
reviewed                       price. Our review disclosed that the same loan officer processed all
                               five cases where the entity referred to above was the seller. The
                               loan officer, who is no longer employed by National, stated that the
                               entity selling the properties was in the business of purchasing and
                               reselling properties and that National’s staff knew that these
                               properties had been involved in prior sales.

                               Mortgagee Letter 94-54 states that a mortgagee that selects its own
                               appraiser must accept responsibility, equally with the appraiser for
                               the integrity, accuracy and thoroughness of the appraisal. Further.
                               Section 3-3 G of HUD Handbook 4000.4, Single Family Direct
                               Endorsement Program requires the mortgagee’s underwriter to
                               review the appraisal to determine whether or not the appraiser’s
                               conclusions are acceptable. In our opinion, National did not use due
                               diligence when reviewing the appraisals to ensure that appraisers
                               were complying with USPAP requirements, especially since a
                               member of its staff was aware that the seller was involved in
                               properties being resold in short periods of time. As a result, the
                               appraisals did not provide complete information; thus, this may have
                               prevented an accurate valuation of the properties, which would have
                               affected the maximum insurable mortgage amounts.



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                                                                       Finding 3




 Recommendations   We recommend that National be instructed to:

                   3A.      Implement adequate controls to ensure that appraisal
                            are in compliance with all USPAP Standards.




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Finding 3




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2001-NY-1004               Page 12

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 Management Controls
 In planning and performing our audit, we obtained an understanding of the management controls
 that were relevant to our audit. Management is responsible for establishing effective
 management controls. Management controls, in the broadest sense, include the plan of
 organization, methods and procedures adopted by management to ensure its goals are met.
 Management controls include the processes for planning, organizing, directing and controlling
 program operations. They include the systems for measuring, reporting and monitoring program
 performance.




                                    We determined the following management controls were
  Relevant Management               relevant to our audit objective:
  Controls
                                    •   Program operations - Policies and procedure that
                                        management has implemented to reasonably ensure that
                                        a program meets its objectives.

                                    •   Validity and Reliability of Data - Policies and
                                        procedures that management has implemented to
                                        reasonably ensure that valid and reliable data are
                                        obtained, maintained and fairly disclosed in reports.

                                    •   Compliance with Laws and Regulations - Policies and
                                        procedure that management has implemented to
                                        reasonably ensure that resource use is consistent with
                                        laws and regulations.

                                    •   Safeguarding Resources - Policies and procedure that
                                        management has implemented to reasonably ensure that
                                        resources are safeguarded against waste, loss and
                                        misuse.

                                    We assessed all of the relevant controls identified above.

                                    It is a significant weakness if management controls do not
                                    provide reasonable assurance that the process for planning,
                                    organizing, directing, and controlling program operations
                                    will meet an organization’s objectives.




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Management Controls


                          Based on our review, we believe that significant
 Significant Weaknesses   weaknesses exist in the following management
                          controls. These weaknesses are described in the
                          findings section of this report.

                          •   National did not develop adequate procedures
                              regarding origination of HUD/FHA loans and
                              conducting underwriter reviews of loans
                              proposed for HUD/FHA mortgage insurance,
                              Finding 1 (Program Operations).

                          •   National did not develop adequate closing
                              policies, Finding 2 (Compliance with Laws and
                              Regulations).

                          •   National did not implement adequate procedures
                              to ensure accurate mortgage information,
                              Finding 1 (Validity and Reliability of Data),
                              (Compliance with Laws and Regulations).

                          •   National did not implement adequate controls
                              regarding appraisers, Finding 3 (Validity and
                              Reliability of Data).




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2001-NY-1004                  Page 14
 Follow Up On Prior Audits
 Ernst & Young LLP, Certified Public Accountant, audited National City Mortgage Company for
 the Year ended December 31, 1999. The accounting firm’s audit report on National did not
 contain any findings related to the Buffalo Office.




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 Follow Up On Prior Audits




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                                       Appendix A

 Summary of Loan Origination Deficiencies




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 Appendix A




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                                                                                   Appendix B-1
                                                                                     Page 1 of 1

 Narrative Case Presentations
 FHA Case Number:      372-2942863

 Loan Amount:          $90,286

 Settlement Date:      12/22/99

 Status:               Default - last payment made 2/1/00

 Summary

 National approved the mortgage without resolving a significant discrepancy that existed between
 the amount of earnest money held by the broker and the amount reported on the HUD-1. Without
 the earnest money the borrower would not have had sufficient funds to meet the minimum cash
 investment requirement. Therefore, HUD/FHA’s decision to insure the loan was based on
 National’s inaccurate representation that the borrower met HUD/FHA requirements.

 Pertinent Details


 A.         Source of Earnest Money Deposit Funds Not Verified
 B.         Borrower Did Not Provide the Minimum Required Cash Investment


 National did not resolve a significant discrepancy regarding the amount of earnest money on
 deposit. On the application, earnest money was listed as $650 and the seller/builder provided
 verification in the form of a check from the borrower that $650 in earnest money was being held
 as a deposit. The Mortgage Credit Analysis Worksheet did not list any earnest money; however,
 the HUD-1, Settlement Statement listed $3,000 as the amount of earnest money that was on
 deposit. In this regard, there was no documentation in the file to verify that the borrower
 provided the $3,000, in earnest money. During an interview, the borrower stated that only $650
 was provided as earnest money, not the $3,000, as stated on the HUD-1. In addition, the HUD-1
 listed $203.40 as cash due from the borrower at the loan closing. Pertaining to this, the
 borrower stated that no additional funds were provided at the closing. Neither National nor its
 closing agent verified that the $3,000 of earnest money existed or that the borrower provided the
 $203.40 due at the loan closing. As a result, the borrower did not provide the minimum required
 cash investment.



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                                                                                   Appendix B-2
                                                                                    Page 1 of 2


FHA Case Number:        372-2800182

Loan Amount:            $44,928

Settlement Date:        7/31/98

Status:                 Current

Summary

National approved the mortgage although the borrower did not meet the minimum cash
investment requirement. Our review disclosed that the borrower invested $497.67 less than the
required minimum cash investment.          Also, National incorrectly calculated the borrower’s
income regarding a bonus. As a result of this miscalculation, the total fixed payment to determine
the income ratio was 47.61 percent, not 44.65 percent as indicated on the Mortgage Credit
Analysis Worksheet. Therefore, HUD/FHA’s decision to insure the loan was based on
National’s inaccurate representation that the borrower met HUD/FHA requirements.

Pertinent Details

A.        Borrower Did Not Provide the Minimum Required Cash Investment

The borrower made a deposit of $1,300 and paid $255 for a credit and appraisal report. At the
loan closing National returned $499.43 to the borrower; thus, the borrower’s total cash
investment was $1,055.57. The $1,055.57 is $497.67 less than the required minimum cash
investment of $1,553.24 The National Housing Act requires the minimum cash investment to be
3 percent of the Secretary's estimate of the cost of the acquisition of the property. HUD/FHA
determined that the minimum cash investment was to be based on the property’s sales price
without considering loan closing costs (Mortgagee Letter 98-29, October 22, 1998). A review
of the loan closing file did not disclose any documentation indicating that National identified or
instructed the Closing Attorney as to the amount of minimum cash investment that was to be
made by the borrower.

B.        Overstated Income and Understated Credit Ratios

National indicated on the Mortgage Credit Analysis Worksheet that the borrower’s monthly
bonus wages were $759. Handbook 4155.1 REV-4 CHG 1, Paragraph 2-7A, allows for the use
of bonus income, if the borrower has received such income during the past two years and there
are reasonable prospects of its continuance.

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                                                                                     Page 2 of 2



 In such cases the mortgagee must develop an average estimate of the bonus amount or overtime
 income for the past two years. Based on the information on the Verification of Employment
 form, the borrower averaged $7,258.43 in bonuses each year. This would amount to $604.87 per
 month, not $759 per month as computed by National. As a result, National approved the loan
 using inaccurate income amounts, which understated the fixed payment used to determine the
 income ratio. The correct ratio amount was 47.61 percent not the 44.65 percent as indicated on
 the Mortgage Credit Analysis Worksheet. More importantly, the total fixed payment to the
 effective income ratio had already exceeded the 41 percent standard that was in effect at the time
 the loan was approved.




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                                                                                   Appendix B-3
                                                                                     Page 1 of 1



FHA Case Number:       371-2707963

Loan Amount:           $84,918

Settlement Date:       6/3/99

Status:                Current

Summary

National approved the mortgage although the borrower did not meet the minimum cash investment
requirement. Our review disclosed that the borrower invested $447.29 less than the minimum
required cash investment. Therefore, HUD/ FHA’s decision to insure the loan was based on
National’s inaccurate representation that the borrower met HUD/FHA requirements.

Pertinent Details

A.        Borrower Did Not Provide the Minimum Required Cash Investment

The borrower’s earnest money deposit of $500, plus the $1,602.71 paid at the loan closing
totaled $2,102.71 as the borrower’s investment. The $2,102.71 is $447.29 less than the minimum
required cash investment of $2,550. The National Housing Act requires the minimum cash
investment to be 3 percent of the Secretary’s estimate of the cost of acquisition of the property.
HUD/ FHA determined that the minimum required cash investment was to be based on the
property’s sales price without considering loan closing costs. (Mortgagee Letter 98-29, October
22, 1998)




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                                                                                   Appendix B-4
                                                                                     Page 1 of 1



 FHA Case Number:       371-2805940

 Loan Amount:           $60,634

 Settlement Date:       2/28/00

 Status:                Default – Last payment made 7/1/00

 Summary

 National approved the mortgage although the borrower did not meet the minimum cash investment
 requirement. Our audit disclosed that the borrower invested $30.84 less than the required minimum
 cash investment. Therefore, HUD/ FHA’s decision to insure the loan was based on National’s
 inaccurate representation that the borrower met HUD requirements.

 Pertinent Details

 A.        Borrower Did Not Provide the Minimum Required Cash Investment

 The borrower’s earnest money deposit of $2,000, less the $198.92 returned to the borrower at
 loan closing, left a total of $1,801.08. The $1,801.08 is $30.84 less than the required minimum
 cash investment of $1,831.92 . The National Housing Act requires the minimum cash investment
 to be 3 percent of the Secretary’s estimate of the cost of acquisition of the property. HUD/FHA
 determined that the minimum cash investment was to be based on the property’s sales price
 without considering loan closing costs. (Mortgagee Letter 98-29, October 22, 1998)




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                                                                                   Appendix B-5
                                                                                     Page 1 of 2



FHA Case Number:        372-2840385

Loan Amount:            $64,969

Settlement Date:        1/21/99

Status:                 Default – Last payment made 11/1/99

Summary

National approved the mortgage without verifying the source of gift funds deposited into the
borrower’s account. Furthermore, the borrower's 35.26 percent ratio of mortgage payment to
effective income exceeded HUD/FHA's standard of 29 percent. Therefore, HUD/FHA's decision
to insure the loan was based on National's inaccurate representation that the borrower met HUD
requirements.

Pertinent Details

A.        Source of Gift Not Verified

National did not verify the source of gift funds as required by Handbook 4155.1 Rev-4,
Paragraph 2-10C. The file contains a gift letter form, copies of a official bank check for $1,150,
and a money order for $400, totaling $1,550, along with a letter from the borrower's bank
statements identifying $1,150 as being deposited into the borrower’s bank account. The file did
not contain documentation showing the donor's source of the funds. National's gift letter form
requests information as to the donor's source of funds, such as the depository name and address,
and the account number, however, that information was not provided. Without the $1,550 gift,
the borrower would not have had sufficient assets to close the loan and would not have been
eligible for the $5,000 Home Buyer Equity Funds Grant that the borrower received.

B.        Credit Analysis Ratio Exceeded HUD/FHA Standard

National approved the loan despite the fact that the Mortgage Credit Analysis Worksheet showed
an excessive 35.26 percent ratio of mortgage payment to effective income. The HUD/FHA
standard in effect at the time specified a 29 percent limit on the mortgage payment to effective
income ratio (Handbook 4155.1 REV-4 CHG 1, Paragraph 2-12).




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                                                                                  Appendix B-5
                                                                                    Page 2 of 2



 The compensating factors used by National to justify using the higher ratio were that the net
 housing payment decreased and the borrower had little debt. Our review indicated that the
 borrower’s housing payments would increase from $595 to $670.89. In addition, the level of debt
 does not effect the mortgage payment to effective income ratio. In our opinion, the compensating
 factors did not provide adequate justification for approving a loan that exceeded the HUD/FHA
 standard.




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                                                                                  Appendix B-6
                                                                                    Page 1 of 2



FHA Case Number:        372-2864510

Loan Amount:            $43,143

Settlement Date:        12/31/98

Status:                 Default – Last payment made 2/1/00


Summary

National approved the mortgage without properly verifying the source of gift funds deposited
into the borrower's account. Furthermore, the borrower used funds from an unsecured loan as the
earnest money deposit. Thus, the borrower did not meet the minimum cash investment
requirement. Consequently, HUD/FHA’s decision to insure the loan was based on National’s
inaccurate representation that the borrower met HUD requirements.

Pertinent Details

A.        Source of Gift Not Verified

National did not verify the source of gift funds as required by Handbook 4155.1 Rev-4,
Paragraph 2-10C. The file contains a gift letter, a copy of an official check, and the borrower’s
bank deposit slip showing $1,700 as going into the borrower’s account. The file did not contain
documentation showing the source of the funds. National's gift letter form requests information
as to the donor's source of funds, such as depository name and address, and the account number,
however, that information was not provided. Without the $1,700 gift, the borrower would not
have had sufficient assets to close the loan.


B.        Unsecured Loan Funds Used For Earnest Money

The borrower’s earnest money of $500 was obtained from the proceeds of a $2,500 unsecured
loan. National should have been aware of this since the file contained a copy of the borrower’s
bank statement showing that the earnest money had been paid with a check from the borrower’s
account on 10/5/98, at which time the only funds in the account were from the $2,500 unsecured
loan. In addition, on the loan application the borrower checked that no part of the downpayment
was borrowed. The Mortgage Credit Analysis Worksheet did not list any earnest money deposit;


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                                                                                    Appendix B-6
                                                                                      Page 2 of 2



 however, the $500 was listed on the HUD-1. National approved this loan with knowledge that
 the borrower had not met the earnest money requirements.

 C.     Borrower Did Not Provide the Minimum Required Cash Investment

 The borrower’s earnest money deposit of $500, plus the $470 paid by the borrower at loan
 closing totaled $ 970 as the borrower’s investment. The $970 is $317 less than the required
 minimum investment of $1,287. The National Housing Act requires the minimum cash
 investment to be 3 percent of the Secretary's estimate of the cost of acquisition of the property.
 HUD/ FHA determined that the minimum cash investment was to be based on the property’s
 sales price without considering loan closing costs (Mortgagee Letter 98-29, October 22, 1998) .




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                                                                                     Appendix B-7
                                                                                       Page 1 of 1



FHA Case Number:       372-2889830

Loan Amount:           $46,447

Settlement Date:       4/26/99

Status:                Current

Summary

National approved the mortgage without resolving a significant discrepancy that existed with the
source of the earnest money deposit. Without the earnest money the borrower did not have
sufficient funds to meet the minimum cash investment requirement. Therefore, HUD/FHA’s
decision to insure the loan was based on National’s inaccurate representation that the borrower
met HUD/FHA requirements.

Pertinent Details

   A. Source of Earnest Money Deposit Funds Not Verified
   B. Borrower Did Not Provide the Minimum Required Cash Investment

The HUD-1 Settlement Statement showed that the earnest money deposit was $1,250, which is
2.7 percent of the sales price. If the amount of the earnest money deposit exceeds 2 percent of
the sales price or appears excessive based on the borrower's history of accumulating savings, the
mortgagee must verify the amount deposited and the source of funds (HUD Handbook 4155.1
REV-4 CHG 1, paragraph 2-10A). The borrower did not have a history of savings based on the
information contained in the file. The file contained a note signed by the borrower stating that the
borrower planned to give $300 a week from the borrower’s paychecks to the seller as the earnest
money deposit. The support for the earnest money deposit was four money orders. The money
orders had dates of issuance of 2/5/99, 2/12/99, 2/26/99, and 3/11/99 and totaled $1,200.
However, our review disclosed that the money orders were in consecutive numeric order between
02464551 and 02464554. It is apparent that the money orders were obtained all at one time. In
addition, the information submitted to HUD pertaining to the earnest money deposit had
discrepancies. The HUD-1 Settlement Statement indicated the amount was $1,250. The sales
contract indicated that it was $1,500. Lastly, the Loan Application showed $1,200. National did
not adequately verify the source of funds for the earnest money deposit. Without the $1,200 of
earnest money funds the borrower would not have had sufficient assets to close, and would not
have met the minimum cash investment requirement.


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                                                                                    Appendix C

 Distribution
 President, National City Mortgagee Co., Miamisburg, OH
 Principal Staff
 (Acting) Secretary’s Representative, New York/New Jersey, 2AS
 Senior Community Builder, Buffalo Office
 Director, HOC, Philadelphia Office, 3AHH
 Assistant General Counsel, New York/New Jersey, 2AC
 CFO, Mid-Atlantic Field Office, 3AFI
 Office of Housing Of Housing/Federal Housing Commissioner, (Attention: Senior
    Management Analyst, HQC, Room 6232)
 Acquisitions Librarian, Library, AS, Room 8141
 Secretary, Mortgagee Review Board, VD, Portals Building, Suite 200, 250 Maryland
      Avenue, SW, Washington, DC 20024

 Michael Flachta, AIGA,
 Department of Veteran Affairs, OIG (52A)
 810 Vermont Avenue, NW
 Washington, DC 20410

 Armando Falcon, Director
 Office of Federal Housing Enterprise Oversight
 1700 G. Street, NW, Room 4011
 Washington, DC 20515

 Sharon Pinkerton, Staff Director
 Subcommittee on Criminal Justice, Drug Policy & Human Resources
 B373 Rayburn Housing Office Building
 Washington, DC 20515

 Cindy Fogleman
 Subcommittee on Oversight and Investigations, Room 212
 O’Neill House Office Building
 Washington , DC 20515

 Stanley Czerwinski, Associate Director
 Resources, Community and Economic Development Division
 US General Accounting Division Office, 441 G Street, NW, Room 2T23
 Washington, DC 20515

 Steve Redburn, Chief Housing Branch
 Office of Management and Budget
 725 17th Street, NW, Room 9226
 New Executive Office Building
 Washington, DC 20503


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Appendix C

The Honorable Fred Thompson, Chairman
Committee on Governmental Affairs
340 Dirksen Senate Office Building
United States Senate
Washington, DC 20510

The Honorable Joseph Lieberman
Ranking Member
Committee on Government Affairs
706 Hart Senate Office Building
United States Senate
Washington, DC 20510

The Honorable Dan Burton
Chairman
Committee on Government Reform
2185 Rayburn Building
House of Representatives
Washington, DC 20515-6143

The Honorable Henry A. Waxman
Ranking Member
Committee on Governmental Reform
2204 Rayburn Building
House of Representatives
Washington, DC 20515-4305

Andy Cochran
House Committee on Financial Services
2129 Rayburn, H.O.B
Washington, DC 20515




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