oversight

First Community Mortgage, Inc., Non-Supervised Loan Correspondent, Ft Myers, FL

Published by the Department of Housing and Urban Development, Office of Inspector General on 2004-06-17.

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

                    AUDIT REPORT




          FIRST COMMUNITY MORTGAGE, INC.

     NON-SUPERVISED LOAN CORRESPONDENT

                    FORT MYERS, FLORIDA

                         2004-AT-1010

                         JUNE 17, 2004



                    OFFICE OF AUDIT, REGION 4
                       ATLANTA, GEORGIA




Table of Contents
                                                             Issue Date
                                                                     June 17, 2004
                                                             Audit Case Number
                                                                     2004-AT--1010




TO:            John C. Weicher, Assistant Secretary for Housing/Federal Housing
                  Commissioner, H, and

               Margarita Maisonet, Director, Departmental Enforcement Center, CV




FROM:          James D. McKay
               Regional Inspector General for Audit, 4AGA

SUBJECT:       First Community Mortgage, Inc.
               Non-Supervised Loan Correspondent
               Fort Myers, Florida

We have completed an audit of First Community Mortgage, Inc. (FCM), located at
3049 N. Cleveland Avenue, Fort Myers Florida. We conducted the audit as part of our annual
plan emphasis on Single Family loans. Our audit objective was to determine whether FCM
complied with HUD regulations and instructions in the origination of Federal Housing
Administration (FHA)-insured single-family mortgages. Our report contains three findings and
recommends withdrawal of authority to originate loans and debarment of FCM’s principal
owner/officers.

In accordance with the Department of Housing and Urban Development (HUD) Handbook
2000.06 REV-3, within 60 days please provide us, for each recommendation without a
management decision, 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.
Additional status reports are required at 90 days and 120 days after report issuance for any
recommendation without a management decision. 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 or Terry Cover, Assistant
Regional Inspector General for Audit, at (404) 331-3369.




      Table of Contents
Management Memorandum




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    Table of Contents
Executive Summary
We conducted an audit of FCM of Ft. Myers Florida, a HUD approved loan correspondent, as
part of our annual audit plan to audit Single Family loans. Our audit objective was to determine
whether FCM complied with HUD regulations and instructions in the origination of FHA insured
single-family mortgages.



                                    FCM officer/owners effectively circumvented HUD’s
 FCM violated HUD                   suspension of FCM by creating two new mortgage
 requirements                       companies and obtaining HUD approval for them to
                                    originate loans. FCM officer/owners created, and FCM
                                    employees were named as officers of, the two new entities
                                    while the employees were still working for FCM. The new
                                    entities also used FCM’s office address.

                                    FCM did not comply with HUD requirements in its origination
                                    of FHA-insured loans. In 18 of the 19 loans we reviewed,
                                    FCM staff did not obtain complete documentation, made
                                    improper income determinations, or did not ensure compliance
                                    with other HUD standards.

                                    FCM did not implement the Quality Control (QC) Plan it
                                    submitted to HUD in January 2003, and its QC processes
                                    did not comply with HUD regulations. FCM’s QC Plan did
                                    not address key elements such as: (1) documenting
                                    corrective actions taken as a result of QC reviews,
                                    (2) reporting significant discrepancies to HUD, (3) timely
                                    performance of QC reviews, and (4) QC review of rejected
                                    loans. FCM’s actual QC performance was materially
                                    deficient.

 Recommendations                    We recommend that HUD suspend FCM’s authority, and the
                                    two new mortgage entities authority to originate FHA loans.
                                    We also recommend that the Departmental Enforcement
                                    Center (DEC) debar FCM principals from further
                                    participation in HUD and other Federal programs and
                                    consider imposing civil money penalties, as appropriate.


                                    We presented our results to the FCM officials and HUD
 Auditee comments
                                    officials during the audit. We provided a copy of the report
                                    to FCM officials and HUD’s Assistant Secretary of
                                    Housing on February 27, 2004. We discussed the report
                                    with FCM officials at the exit conference on April 6, 2004.
                                    We received written comments from FCM on
                                    May 14, 2004.          FCM’s comments were extensive,

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Executive Summary


                        consisting of a 43-page letter and 24 multiple-page
                        exhibits. We have included excerpts of their response in the
                        auditee comments sections of each audit finding. The
                        auditee’s letter is included as Appendix F. The auditee’s
                        complete response, including exhibits, has been provided to
                        HUD under separate cover.

                        We also received a written response from the former
                        President of Family Home Funding Enterprise (FHFE), one
                        of the new companies created by a FCM’s owner/officer.
                        This response included evidence that FCM’s owner/officer
                        also owned and controlled FHFE at the time its application
                        was submitted to HUD. Their ownership interest was not
                        disclosed in the application. This response was also
                        provided to HUD.




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    Table of Contents
Table of Contents
Management Memorandum                                                  i



Executive Summary                                                    iii



Introduction                                                          1



Findings

1.    FCM Officers Created New Mortgagee Entities, Circumventing
      Suspension of FCM                                               3


2.    FCM Did Not Originate Loans in Accordance With HUD
      Requirements                                                   13

3.    FCM Quality Controls Did Not Comply With HUD Regulations       19



Management Controls                                                  23



Follow-Up On Prior Audits                                            25



Appendices
     A. Status of Loans Reviewed As Of January 20, 2004              27


     B. Case Files Reviewed                                          29


     C. Schedule of Questioned Costs                                 49




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Table of Contents


   D. Chronology of Key Events – Neighborhood Funding, Inc.   51


   E. Chronology of Key Events – Family Home Funding
      Enterprises, Inc.                                       53


   F. Auditee Comments                                        55

Abbreviations
DEC       Departmental Enforcement Center
FCM       First Community Mortgage
FHA       Federal Housing Administration
FHFE      Family Home Funding Enterprises, Inc.
HUD       Department of Housing and Urban Development
MAP       Mortgage Assistance Program
NFI       Neighborhood Funding, Inc.
QC        Quality Control
VOD       Verification of Deposit
VOE       Verification of Employment




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    Table of Contents
Introduction
HUD approved FCM to act as a Title II loan correspondent in March 2000. As a loan
correspondent, FCM may originate HUD-FHA insured mortgages and submit applications for
mortgage insurance to sponsoring/underwriting mortgage companies. FCM may not sell insured
mortgages to any mortgagees other than its sponsor(s) without the prior approval by the
Department and may not hold, purchase, or service insured mortgages in its own portfolio. The
sponsor mortgage company is responsible to HUD for the actions of its loan correspondent(s) in
originating insured mortgages. From the period April 1, 2001, through April 30, 2003, FCM’s
Fort Myers office originated 221 loans, of which 40, or 18.1 percent, had defaulted as of
May 21, 2003. During a similar time frame, April 1, 2001, through March 31, 2003, the national
average of defaults was 3.97 percent.

On June 23, 2003, HUD suspended FCM’s authority to originate loans in the Miami area
because its default rate exceeded 200 percent of the average default rate in the HUD field office
jurisdiction.



                                     Our audit objective was to determine whether FCM
 Audit Objectives, Scope,            complied with HUD regulations and instructions in the
 and Methodology                     origination of FHA-insured single-family mortgages. Our
                                     audit reviewed FCM’s pertinent management controls
                                     including its quality control plan and procedures. We
                                     reviewed 19 loans with beginning amortization dates
                                     between April 1, 2001, and April 30, 2003, and that went
                                     into default within 2 years of the beginning amortization
                                     date. We focused our selection on loans that defaulted with
                                     the fewest number of payments, and that had not been
                                     reviewed by HUD during its June 2002 quality assurance
                                     review of FCM. We reviewed FCM’s loan origination files
                                     and related records to assess whether FCM complied with
                                     HUD requirements, and we compared FCM’s files with
                                     HUD files to assess whether they were consistent. We
                                     interviewed FCM officials to gain an understanding of the
                                     business processes at FCM. We also interviewed HUD
                                     staff to obtain clarification of HUD’s rules and regulations.


                                     We also conducted audit work at Irwin Mortgage Co.,
                                     13773 Icot Boulevard, Clearwater, Florida, which was the
                                     underwriter/sponsoring mortgagee for 5 of the 19 FCM
                                     loans. We assessed whether loan origination data agreed
                                     with the data submitted to HUD-FHA for insurance
                                     approval, and that underwriting analyses were supported.
                                     We also performed audit work at 14 settlement agents’
                                     offices to determine whether loan settlement transactions as

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Introduction


                        reported on forms HUD-1, Settlement Statement, were
                        supported and agreed with records submitted to HUD for
                        insurance approval.

                        During the audit, we learned that the owner/officers of
                        FCM had created two new mortgage companies. Since this
                        was potentially in conflict with HUD rules, we expanded
                        the scope of audit work to include collection of information
                        concerning creation of the two new mortgage companies,
                        and loans sponsored by one of the companies,
                        Neighborhood Funding, Inc. (NFI).

                        We conducted the audit in accordance with generally
                        accepted government auditing standards.




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                                                                                                    Finding 1


FCM Officers Created New Mortgagee Entities,
    Circumventing Suspension of FCM
FCM’s Vice President/owner started two new mortgagee entities, Neighborhood Funding Inc.
(NFI) and Family Home Funding Enterprises Inc. (FHFE), after HUD suspended FCM from
originating FHA loans in the Miami/Coral Gables area1 on June 23, 2003. FCM officers and
employees were named as officers and employees of the two new entities, while they were still
working for FCM. Subsequently, HUD approved the two new companies, one as a non-
supervised lender and one as a non-supervised loan correspondent. Further, we noted that the
two new companies were located in the same complex as FCM, and one was co-located with
FCM. Thus, FCM owner/officers effectively circumvented HUD’s suspension of FCM in
Miami/Coral Gables. In concert with the poor loan origination practices and inadequate quality
controls observed at FCM (see findings 2 and 3), this increased the risk of losses to FHA-
insurance funds.

HUD Handbook 4060.1 REV-1, Mortgagee Approval Handbook, establishes the following
requirements applicable to HUD approved mortgagees, and available administrative actions to
address non-compliance:

    •   All employees of the mortgagee, except receptionists, whether full time or part-time,
        must be employed exclusively by the mortgagee at all times, and conduct only the
        business affairs of the mortgagee during normal business hours. Branch managers must
        be located at the branch office they manage and cannot operate or be the manager of
        more than one branch office at the same time.
    •   The senior corporate officers must spend their full time on the mortgagee's operations.
    •   A mortgagee's main and branch office facilities must be located in a space that is separate
        and apart from any other entity. A mortgagee may share general reception-type entrances
        or lobbies with another business entity.
    •   A mortgagee's main office must be its designated facility to which the Department directs
        all communications about the management affairs of the mortgagee, and from which the
        public obtains information on the activities of the mortgagee. The mortgagee may
        conduct its loan origination activities from any of its approved offices that are adequately
        staffed and qualified. A mortgagee is fully responsible for the actions of its branch
        office.
    •   Mortgagees are required to notify the Department within 10 days of all corporate changes
        including: corporation conversions, mergers, consolidations, successions, liquidations,
        termination; and changes in their charter provisions, name, location, control of
        ownership, character of business, executive officers or branch managers.




1
    On June 23, 2003, FCM was suspended from originating loans in the Miami/Coral Gables area of Florida due to
    its high number of defaults in the HUD field office jurisdiction.

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Finding 1


     •   The Department's Mortgagee Review Board is authorized to take administrative action
         against approved mortgagees that do not comply with HUD-FHA requirements. The
         Board may issue a letter of reprimand, place a mortgagee on probation, suspend,
         withdraw a mortgagee's approval, or enter into a Settlement Agreement. The Board and
         Housing Civil Penalties Panel are authorized to impose a civil money penalty whenever
         an approved mortgagee knowingly and materially violates HUD-FHA program
         regulations or requirements.



                                              On January 24, 2003, the Vice President and 50 percent
    Neighborhood Funding,                     owner of FCM, incorporated NFI, naming herself as its sole
    Inc.                                      Director. The address provided to the Florida State
                                              Department of Corporations was the same as FCM’s except
                                              that NFI’s suite number was 201 and FCM’s was 2002. On
                                              April 9, 2003, the President and 50 percent owner of FCM,
                                              who was also the husband of the Vice President, was
                                              named as sole Director and Officer of NFI. Finally, on July
                                              2, 2003, an FCM employee (loan processor), and
                                              granddaughter of the FCM’s President and Vice President,
                                              was named sole Director and President of NFI. The new
                                              President identified herself as the 100 percent owner and
                                              President of NFI in the application sent to HUD’s Lender
                                              Approval Division. Further, she provided a resume stating
                                              that she had ended her employment with FCM on January
                                              17, 2003. However, in July 2003 we interviewed the
                                              President of NFI as a loan processor for FCM, and we
                                              observed her working at FCM through mid September
                                              2003. Also, documentation provided by FCM showed that
                                              she was an employee through October 2003. NFI received
                                              HUD approval as a non-supervised Lender in the
                                              Miami/Coral Gables area effective November 24, 2003.

                                              Although the application to HUD stated that NFI had been
                                              in operation since January 2003, the financial statements
                                              submitted to HUD showed no operating revenues or
                                              expenses from January 2003 through September 30, 2003.
                                              The primary corporate asset, valued at $200,000, was land.
                                              The land was transferred to NFI3 from FCM on
                                              March 6, 2003, via a quitclaim deed. According to FCM

2
     Suites 200 and 201 were the same office. At the time of our site visits, there were two doors, but the offices
     were not separate.
3
     Property was transferred to “Neighbor Funding” per County records, but details of the transactions support that
     this was a clerical error and the intent was to transfer the property to Neighborhood Funding.


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                                                                                                             Finding 1


                                              officials, this property was donated to NFI. At the time of
                                              donation, the same persons owned and controlled both
                                              FCM and NFI. Generally accepted accounting principles
                                              require that the land transfer be recorded on NFI’s books at
                                              the carrying value of FCM4. Based on the county records
                                              we observed, the carrying value should have been $50,000.
                                              As such, the net worth of NFI was overstated by $150,000.
                                              Thus, NFI did not meet the minimum net worth
                                              requirement to obtain HUD approval as a non-supervised
                                              lender.

                                              NFI had a storefront sign in front of the office complex
                                              where FCM was located, and we determined that location
                                              was NFI’s main contact point with the public in December
                                              2003. HUD requires that a mortgagee's main office must
                                              be its designated facility to which the Department directs
                                              all communications about the management affairs of the
                                              mortgagee, and from which the public obtains information
                                              on the activities of the mortgagee.             HUD-web
                                              documentation showed a different main office address. We
                                              also noted that other documents such as mortgage lender
                                              licenses and corporate registrations showed different
                                              addresses than the address reported to HUD. The address
                                              on the corporate registration was changed on
                                              January 20, 2004, to the address reported to HUD. See
                                              Appendix D for a chronology of key events.

                                              We also reviewed county records of NFI’s lending activity
                                              from the date of its inception through March 31, 2004. We
                                              identified 10 loans made by NFI, of which 2 were FHA
                                              loans. One of these loans was within the Miami/Coral
                                              Gables jurisdiction and the other was in the Orlando
                                              jurisdiction. Mortgages for both of the FHA loans showed
                                              NFI’s address as 1621 N Tamiami Trail Ste 3, but the
                                              remaining 8 mortgages showed NFI’s address as 3049
                                              Cleveland Ave. Ste 234. NFI closed non-FHA loans before
                                              and after closing the two FHA loans, indicating that NFI
                                              had more than one office. Neighborhood Watch shows that
                                              FHFE originated both of the FHA loans. Further, the
                                              underwriters of the two FHA loans were the vice-president
                                              of FCM and the operations manager of FCM. These facts
                                              show that FCM’s Vice President underwrote loans for NFI

4
    SFAS 141 Business Combinations Appendix D - When accounting for a transfer of assets between entities
    under common control, the entity that receives the net assets shall initially recognize the assets transferred at
    their carrying amounts in the accounts of the transferring entity at the date of transfer.


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Finding 1


                        before terminating FCM’s origination authority, and that
                        NFI had a second office that was not timely reported to
                        HUD.

 Family Home Funding    One day after FCM was suspended, on June 24, 2003, the
                        Vice President and 50 percent owner of FCM incorporated
 Enterprises, Inc.
                        FHFE, naming herself as the sole Director. The address
                        provided to the Florida State Department of Corporations
                        was the same address as FCM except that the suite number
                        was 2012. On July 2, 2003, the directorship/presidency was
                        transferred to an FCM employee (loan officer). The
                        application to HUD’s Lender Approval Division, dated
                        September 8, 2003, showed the FCM employee was the
                        President and 100 percent owner of FHFE. On the same
                        date, a change of address was submitted to the Florida State
                        Department of Corporations to change FHFE’s address to
                        the address reported on the HUD application. FHFE also
                        provided a resume for its President stating that his
                        employment with FCM ended in June 2003. However, we
                        interviewed him as an employee of FCM in July 2003, and
                        FCM provided documentation showing that he was an
                        FCM employee as of July 21, 2003. Further, we observed
                        that he remained employed at FCM during our on-site audit
                        work through September 19, 2003. On October 31, 2003,
                        FHFE was approved as a FHA non-supervised loan
                        correspondent in the Miami/Coral Gables area as well as
                        the Tampa and Orlando, Florida jurisdictions.

                        FHFE also had a storefront sign in front of the FCM office
                        complex, and after our on-site work at FCM; we observed
                        that FHFE was located in the same office space where
                        FCM was located. FCM continued to be located in the
                        same space as its window signs were still present, but
                        FHFE appeared to be the prominent entity, displaying a
                        door marker sign. We also determined that FHFE was no
                        longer located at the address it reported to HUD as its main
                        office. On November 24, 2003, FHFE changed its address
                        with the Florida Department of Corporations back to the
                        complex address where FCM is located. At that date,
                        FHFE also added the President of FCM as its Vice
                        President and Director, and the registered agent for FCM’s
                        Ohio branch as its Assistant Secretary and Director. The
                        registered agent for FCM’s Ohio branch is also the
                        registered agent for FHFE and NFI branches in Ohio.




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                                                                                       Finding 1


                                     We also noted that FCM employees were reported as
                                     employees of FHFE. While applying for authority to
                                     originate FHA loans, HUD asked the FHFE President to
                                     provide resumes for its employees. He provided resumes
                                     for two persons that we observed were employees of FCM.
                                     One employee was identified as a loan officer for FHFE.
                                     Her resume identified her current employer as NFI and her
                                     responsibilities as Quality Control. The resume did not
                                     include her position with FCM. During our audit, we
                                     observed her working at FCM. Further, FCM staff
                                     identified her as their receptionist and Quality Control
                                     person. The second FHFE employee, identified as a loan
                                     processor, provided a resume stating that she had ended her
                                     employment with FCM in May 2003. However, we
                                     observed her working at FCM through mid September
                                     2003, and FCM’s employee listing as of July 21, 2003,
                                     identified her as a junior loan processor. See Appendix E
                                     for a chronology of FHFE key events.


The actions of the FCM owner/officials, creating and gaining HUD approval for new mortgagee
companies while FCM was suspended in the Miami/Coral Gables areas, reporting FCM
employees as employees of the new entities and co-locating the entities with FCM illustrate their
disregard of HUD requirements. We concluded that FCM, NFI, FHFE, and their principal
officers/owners cannot be relied upon to act in accordance with HUD rules and regulations.
Therefore, any loans originated or underwritten by these entities pose a greater risk to the FHA-
insurance fund.

We also noted that a similar pattern appears to be underway in Ohio, where FCM has a branch
office. The Ohio office also had a high rate of defaults and appears to be at risk of a HUD
suspension. We noted that FHFE and NFI have obtained business licenses in Ohio.



                                     FCM disagreed with the finding. Excerpts from their
Auditee Comments                     written comments follow. The complete text is included as
                                     Appendix F. “…the owners of FCM at no time intended to
                                     circumvent FCM’s Credit Watch termination of origination
                                     authority in the Miami/Coral Gables jurisdiction. FCM
                                     was a small company owned and operated by two
                                     individuals desiring to provide for their family. The
                                     owner’s incorporation of two new entities was an exit
                                     strategy for them out of the mortgage business and into
                                     retirement to deal with their health issues.       These
                                     companies were created for reasons wholly apart from the
                                     termination of FCM’s origination authority in one of the

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Finding 1


                        jurisdictions in which it was approved to engage in FHA
                        lending. In addition, the incorporations were undertaken
                        before FCM was informed that it’s Origination Authority
                        Agreement for the Miami/Coral Gables jurisdiction had
                        been terminated, and FCM did not need to circumvent the
                        suspension, as it was still able to originate loans in other
                        jurisdictions in Florida and through other branch offices.
                        As the actions of the owners of FCM were not intended to
                        circumvent the Credit Watch proceeding, we believe that
                        the Report’s recommendations regarding the suspension of
                        the companies and the debarment of FCM’s principals is
                        unwarranted in this instance.”



OIG Evaluation of       In general, the voluminous documents provided by FCM
Auditee Comments        were copies of documents reviewed by OIG during the
                        audit. FCM did not provide any significant new evidence
                        to persuade us that its owner/officers made reasonable
                        efforts to comply with HUD requirements.

                        We revised the report to eliminate any inferences of FCM’s
                        principals’ intent in creating the two new mortgage
                        companies. OIG recognizes that FCM’s principals likely
                        had multiple reasons or intentions for the actions they took
                        to incorporate and make the companies operational. We
                        also revised Finding 1 by adding information obtained from
                        county records about 10 loans made by NFI from its
                        inception through March 31, 2004, and information on
                        Generally Accepted Accounting Principles related to the
                        valuation of land acquired by donation from a related party.

                        OIG acknowledges that NFI was incorporated before FCM
                        was notified by the Department of the potential termination
                        of origination authority in the Miami/Coral Gables
                        jurisdiction. However, all other actions, such as obtaining
                        the requisite State licenses and HUD approval occurred
                        after March 20, 2003, when FCM was informed of the
                        potential termination of FCM’s loan origination authority.
                        Furthermore, the principals of FCM did not indicate to the
                        OIG auditors or to their independent public accountant (via
                        financial statement disclosures) that they intended to cease
                        operations.

                        OIG does not view the actions by FCM principals as
                        consistent with their stated intent of exiting the mortgage

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                                                                      Finding 1


                    industry and passing businesses to their children and
                    grandchildren. The child and grandchild of FCM’s owners
                    were employed by FCM, and ownership of FCM could
                    have been transferred to them rather than creating new
                    companies. While FCM’s principals gave NFI to their
                    grandchild, ownership of FHFE was not transferred to a
                    family member. FCM’s owners remained active in both
                    NFI and FHFE. The President/Owner of FCM was named
                    as Vice President of FHFE on December 11, 2003, and
                    remained through April 28, 2004. The Vice President
                    /owner of FCM was identified as an underwriter for NFI on
                    December 10, 2003. Further, the independent public
                    accountant who audited NFI’s financial statements as of
                    September 30, 2003, identified FCM’s Vice President as a
                    NFI officer and as his primary contact with NFI for the
                    financial audit. These positions with NFI and FHFE
                    illustrate continued violation of HUD’s exclusive
                    employment requirement for officers of FCM.

                    FCM’s reply to the audit stated: “As with NFI, above, at
                    all times during the [surname’s] ownership of FHFE, the
                    new entity was a non-functioning, shell corporation without
                    state licensing or federal approval.” It further stated that
                    FCM’s owner/officers merely established shell companies,
                    did not engage in substantive business of NFI and FHFE,
                    and spent their full time on the operations of FCM. To the
                    contrary, the former President of FHFE provided a written
                    agreement documenting that when FHFE applied for and
                    received HUD approval as a non-supervised loan
                    correspondent, it was actually owned and controlled by the
                    principals of FCM. Further, as cited above, exhibits to
                    FCM’s written reply show that FCM’s owner/officers
                    served as employees or officers of both NFI and FHFE
                    before voluntarily terminating FCM’s loan origination
                    authority.

                    Information about the ownership of FHFE contained in
                    FCM’s written reply raised new questions about the
                    accuracy of the application for lending authority submitted
                    to HUD. The application identified a FCM employee as
                    the sole owner of FHFE. Copies of stock issuance
                    documents provided as exhibits to FCM’s written reply
                    showed 100 shares issued to the sole owner. This
                    information conflicts with the audited financial statements
                    for FHFE which show 500 shares authorized, issued, and
                    outstanding. The existence of 400 additional shares would

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Finding 1


                        indicate that the FCM employee was not the sole owner of
                        FHFE.

                        FCM’s written reply stated that since it retained loan
                        origination authority in other Florida and Ohio
                        jurisdictions, it did not need to circumvent the termination
                        of authority in the Miami/Coral Gables area.            The
                        Miami/Coral Gables area was FCM’s largest source of
                        business. From July 1, 2001 through June 30, 2003, the
                        Miami/Coral Gables jurisdiction represented 75 percent of
                        all FHA loan activity for FCM’s Fort Myers office.
                        Further, the Miami/Coral Gables jurisdiction represented
                        40 percent of FCM’s FHA loan activity for all branches.
                        Loss of origination authority in Miami/ Coral Gables would
                        have significantly impacted FCM’s loan volume. Both NFI
                        and FHFE were authorized by HUD to originate loans in
                        Miami/Coral Gables.

                        FCM’s reply acknowledged that its principals used FCM’s
                        address when they created the two new companies, and
                        stated that neither company operated from FCM’s office. It
                        also stated that a wall was built separating suites 200 and
                        201 sometime prior to December 2003, before FHFE
                        operated from one of the suites. FCM’s reply does not
                        explain why in December 2003 NFI’s answering service
                        was giving callers 3049 Cleveland Avenue as the point of
                        contact, not 1621 N. Tamiami Trail Suite 3.

                        FCM’s written response also stated that the resumes
                        submitted to HUD, for the Presidents of NFI and FHFE and
                        two NFI employees, all contained similar errors in the dates
                        of employment with FCM and the new companies. All of
                        the errors aligned the employment termination and start
                        dates to show no overlap of employment between FCM and
                        NFI or FHFE. FCM’s reply states that employees were
                        kept on FCM’s payroll until the new entities became
                        operational.    FCM’s reply also contradicted written
                        comments provided by the President of NFI stating that she
                        continued to work periodically as a fee processor for FCM
                        during her employment with NFI.


Recommendations         We recommend that HUD:

                        1A.      Withdraw the authorization for FCM, FHFE, and NFI
                                 to originate and/or underwrite HUD-FHA loans.

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                                                                      Finding 1



                    1B.     Consider imposing appropriate civil money penalties
                            on FCM and its owners/officers.

                    We recommend that the DEC:

                    1C.     Debar the principal officers/owners of FCM from
                            participation in federal programs.

                    1D.     Consider debarring the principal officers/owners of
                            FHFE and NFI.




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  FCM Did Not Originate Loans In Accordance
          With HUD Requirements
FCM did not comply with HUD regulations in its origination of FHA-insured loans. Although
FCM staff appeared to be aware of HUD requirements, they did not comply with one or more
requirements when originating 18 of the 19 loans we reviewed. Furthermore, FCM’s quality
controls were inadequate to detect and prevent such errors (see Finding 3). As a result,
substandard loan applications were submitted to underwriters, and HUD-FHA insurance funds
were placed at greater risk of loss.

FCM’s procedures for originating loans began with a loan officer or loan representative taking an
application (HUD form 1003) from a potential borrower, including collection of a bank
statement, four pay stubs, two W-2 forms, copies of a driver’s license and social security card, 2-
years of tax returns for self employed applicants, and any divorce decrees or bankruptcy papers.
FCM’s front desk then ordered a credit report and Verification of Deposit (VOD), if required.
The process then passed to the loan processor. Loan processors received a fax copy and the
original Verifications of Employment (VOE) from employers. The processor then compared the
pay stubs and W-2 forms to the VOE to determine effective income. Loan processors were
responsible for completing the remaining validations and the final Loan Application (HUD form
1003). The loan processor was also responsible for reviewing the loan file for completeness and
sending it to an underwriter.

HUD Handbooks (4000.2 Revision 2, Mortgagees Handbook Application through Insurance, and
4155.1 Revision 4 Change 1, Mortgage Credit Analysis for Mortgage Insurance, One to Four
Family Properties) establish the following requirements for loan originations:

   •   Lenders must verify the applicant’s employment for the most recent 2-years.
   •   VOEs must be sent by the mortgagee directly to the employer, and must be returned
       directly to the mortgagee.
   •   Effective income may include overtime/bonus income as long as it is verifiable and is
       documented by the employer as likely to continue. Where the employer does not indicate
       that continuance of such payments is likely, it may not be included as effective income in
       determining mortgage eligibility.
   •   Assets of borrowers must be verified by VODs and by obtaining bank statements.
   •   Lenders must obtain an understanding of the source of funds and the expected use of the
       property by the borrower.
   •   Lenders must document the receipt of all gifts, and
   •   Lenders must ensure that seller or third party contributions do not exceed HUD
       prescribed limits.




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The HUD Home Ownership Center Reference Guide dated August 20, 2000, states that:

   •   Lenders may not charge application fees except for bond loans and MAP (Mortgage
       Assistance Program) loans.

We reviewed 19 defaulted loans and noted at least 1 origination deficiency in 18 loans. See
Appendices A and B for a table of loans reviewed and a discussion of each deficiency noted.

FCM improperly computed effective income on five loans. Four of the five loans exhibited
improper treatment of overtime income. FCM overstated three applicant’s incomes by
improperly including overtime when the employer stated that overtime was not likely to
continue. This caused monthly incomes to be overstated on the three applications by $87, $160,
and $603, respectively. Such overstatements made the borrowers appear more able to assume
additional debt, and could result in loans being approved when there was insufficient repayment
ability. One borrower’s income was understated because FCM improperly excluded overtime
income. In the fifth case, FCM’s files did not document, and FCM’s staff could not explain,
how the borrower’s income was calculated. We calculated that the income was understated by
$163 per month. Additionally, on this fifth loan, FCM had not verified employment for a
complete 2-year period, and had not explained a 6-month gap in employment during that period.

FCM also did not verify the availability and/or source of funds needed by three borrowers to
close their loans. Two months before loan closing, one borrower documented a bank balance of
$771. However, closings costs were $836, and FCM did not obtain current data to verify the
source and availability of funds. Another borrower was required to bring $256 to the loan
closing. The only documentation obtained by FCM was a deposit slip for $2,000. This deposit
document did not verify the identity of the account owner or the source of funds. Similarly, in
the third instance, FCM verified the availability of funds with two VODs from the bank,
however, it was a new account, and FCM did not verify the source of funds deposited.

FCM did not properly verify employment on three loans. For one loan, FCM accepted a VOE
and two explanatory letters that were faxed from a hotel where the borrower was residing. HUD
regulations prohibit the handling of VOEs by the loan applicant/borrower. Letters purportedly
from the employer attested to a promotion and showed a large increase in income from 2000 to
2001. However, the business phone number shown on the letters differed from the phone
number on the VOE, and both numbers differed from the phonebook number shown for the
employer. At the time of our audit, the employer was out of business and we were unable to
confirm the validity of the documentation. On the other two loans, the borrowers provided
information on the loan application indicating a complete 2-year job history, but FCM did not
obtain verification to support 2 years. In one case, the loan application showed that the borrower
had worked 2-years at one company, but the employment verification service reported only 18
months employment in the prior 2-years. FCM’s files did not note, nor explain, this discrepancy.
FCM’s staff stated that the VOE showed wages over a 3-year period, thus they did not note the
latest employment start date. FCM’s staff also noted the underwriter did not request any
clarification. In the third case, the applicant listed a previous employer, but FCM’s files did not
have a VOE or an explanation for not obtaining a VOE. FCM did obtain a VOE from an earlier
employer (prior to the unverified employment), and this left an unexplained gap of 10 months.

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                                                                                        Finding 2



In six cases, FCM allowed loans to close when settlement statements showed sellers or other
interested third parties contributed more than 6 percent of the sales price toward closing costs.
Where sellers or other interested parties contribute more than this threshold, HUD considers it an
inducement to purchase and requires a reduction in the maximum insurable mortgage amount. In
the six cases, no adjustments were made. The excess contributions ranged from $28 to $1,204.

FCM did not verify the receipt of gift funds in accordance with HUD requirements for 15 of 17
loans where gifts were received. In 14 cases, the gifts funds were received from ‘gift programs’
operated by non-profit entities such as AmeriDream, and in one case the gift was from a relative.
FCM officials stated that they were not able to obtain documentation from the settlement agent
or the nonprofit gift giver. We did note that settlement agents properly documented the receipt
of gift funds in 14 of these cases. We did not visit the settlement agent for the 15th case.

On one refinancing loan, FCM charged the borrower an unallowable application fee of $700.
The loan was neither a MAP loan nor a bond loan. Thus, FCM was not allowed to charge an
application fee. FCM staff reviewed the file and stated that the fee should have been listed as an
origination fee. However, FCM and the underwriter/sponsor closed the loan with the application
fee reported on the HUD-1. FCM also received a 1 percent loan discount fee. The ‘application
fee’ was .75 percent of the sales price, whereas the typical origination fee charged by FCM was
.985 percent. The application fee should be refunded to the borrower.

HUD requirements for originating FHA-insured loans were established to mitigate the risk
associated with making loans to individuals. When these requirements are not met, HUD
potentially assumes a greater risk to the FHA-insurance fund. Non-compliance occurred on 18
loans totaling $1,462,009, and which defaulted within the first 2-years. As of January 20, 2004,
6 of the 18 loans had gone to foreclosure and FHA paid insurance claims totaling $468,826.
HUD had resold three of the foreclosed properties and incurred actual losses totaling $82,320.
See Appendix A for a schedule of loans reviewed and their status as of January 20, 2004.



Auditee Comments                     FCM disagreed with the finding. Excerpts from their
                                     written comments follow. The complete text is included as
                                     Appendix F “…the Company’s review indicated that many
                                     of the findings in the Report are at variance with the facts,
                                     do not constitute violations of HUD/FHA requirements on
                                     the part of FCM, or do they affect the underlying loans’
                                     insurability.”

                                     “…Loan correspondents are not authorized to perform any
                                     underwriting function, including any analysis of the
                                     appraisal or the borrower’s credit. Id. Furthermore, HUD
                                     regulations dictate that ‘each sponsor shall be responsible
                                     for the actions of its loan correspondent lenders or
                                     mortgagees in originating loans or mortgagees.’ 24 CFR

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Finding 2


                        §202.08(b)(7). In fact, the OIG acknowledges on page four
                        of the draft Report that ‘the sponsor mortgage company is
                        responsible to HUD for the actions of its loan
                        correspondent(s) in originating insured mortgages.’

                        “In accordance with these FHA guidelines, the Department
                        traditionally has accepted that loan correspondents take a
                        borrower’s initial application, collect income and
                        employment documentation, and process the loan, but [sic]
                        that the evaluation and analysis of the borrower’s credit and
                        the sufficiency of the loan documentation is the
                        responsibility of the underwriter and sponsoring lender.
                        When HUD determines that the borrower’s income, funds
                        to close, or credit was insufficient, the Department in the
                        past has held the underwriter and sponsoring lender
                        accountable…”



OIG Evaluation of       In general the voluminous documents provided by FCM
Auditee Comments        were copies of documents already reviewed by OIG during
                        the audit. The comments were not persuasive and we did
                        not amend our audit findings.

                        OIG acknowledges that the final determination of whether
                        to underwrite a loan is the decision of the
                        underwriter/sponsor. However, it is incumbent upon the
                        loan correspondent, FCM, to ensure that all originating
                        documentation is present in their files. In keeping with
                        HUD quality assurance review standards, our report to
                        FCM included finding that the sponsor did not adhere to
                        HUD/FHA requirements, such as inadequate compensating
                        factors. With the exception of recommending FCM repay
                        one improperly charged fee, our audit recommendations do
                        not specifically address any of the loan origination and
                        underwriting issues. The finding identifies a trend of
                        routine loan origination deficiencies and is presented as
                        evidence supporting the overall audit recommendations to
                        withdraw loan origination authority from FCM, FHFE, and
                        NFI and to seek debarment of the principals of FCM.




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                                                                       Finding 2




Recommendations        We recommend that HUD:

                       2A.     Require FCM to repay the borrower for the improper
                               $700 application fee.

                       2B.     See recommendations 1A and 1B

                       We recommend that the DEC:

                       2C.     See recommendation 1C




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                                                                                      Finding 3


  FCM Quality Controls Did Not Comply With
              HUD Regulations
FCM did not implement the QC Plan it submitted to HUD in January 2003, and its QC processes
did not comply with HUD regulations. FCM provided us with a QC Plan that was materially
different than the Plan it provided to HUD, and did not address key elements such as:
(1) documenting corrective actions taken as a result of QC reviews, (2) reporting significant
discrepancies to HUD, (3) timely performance of QC reviews, and (4) QC review of rejected
loans. FCM’s actual QC performance was also materially deficient. FCM managers made little
or no effort to implement a QC Plan as required by HUD regulations. The inadequate QC Plan
and QC performance contributed to FCM’s loan origination deficiencies (see Finding 2), its high
rate of defaults, and ultimately increased losses to the FHA insurance fund.

HUD Handbook 4060.1, Chapter 6, requires that each FHA approved mortgagee, including loan
correspondents, implement a QC Plan. The purpose of a QC Plan is to:

   •   Assure compliance with HUD's and the mortgagee's own origination requirements
       throughout its operations.
   •   Protect the mortgagee and HUD from unacceptable risk.
   •   Guard against errors, omissions, and fraud.
   •   Assure swift and appropriate corrective action.

The Handbook also sets out the following requirements to achieve these goals.

   •   Mortgagees may choose to review the lesser of 10 percent of all loans closed on a
       monthly basis, or a random sample that provides a 95 percent confidence level with
       2 percent precision. Where mortgagees choose to use the random sample method, they
       must review all loans that went into default within six months of closing, in addition to
       the number selected for random sample.
   •   The QC Plan must require that reviews be performed within 90 days of the loan closing.
   •   The QC Plan must require that a minimum of 10 percent of total loans rejected be
       reviewed.
   •   The QC Plan must require written notification to the mortgagee's senior management, at
       least quarterly, of deficiencies cited in QC reviews.
   •   Actions taken by management must be formally documented by citing each deficiency,
       identifying the cause of the deficiency, and providing management's response or actions
       taken.
   •   QC documentation must be retained for 1 year.
   •   The QC Plan must require mortgagees to report any violation of law or regulation, false
       statements or program abuses by the mortgagee, its employees or any other party to the
       transaction, to the HUD Regional Office, the HUD Area Office, or to the HUD Regional
       Office of Inspector General.



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Finding 3


In June 2002, HUD found that QC reviews performed for FCM by a contractor were deficient.
In response, FCM assumed responsibility for its QC process, and in January 2003, submitted a
written QC Plan to HUD. We requested FCM provide us with its QC Plan. The QC Plan it
provided was not the same Plan it had provided to HUD. We noted material deficiencies in
FCM’s written Plan and in FCM’s actual QC performance. The QC Plan that FCM provided to
us did not address documenting corrective actions taken as a result of QC reviews, reporting
significant discrepancies to HUD, timely performance of QC reviews, and review of rejected
loans.

FCM’s Plan did address the requirement that all loans defaulting within the first 6 months shall
be reviewed. However, FCM’s staff did not review 4 of 18 loans that defaulted from October
2002 through June 2003. FCM’s officials were unable to explain why QC reviews were not
performed.

FCM’s QC Plan did not address the requirement to review 10 percent of all loans that were
rejected by the sponsor/underwriter. This requirement is noted on HUD’s QC checklist, which
FCM’s officials said was being used. A FCM employee stated that she and the vice-president
reviewed all rejected loans, but stated that FCM does not maintain documentation of those
reviews. FCM was unable to identify loans that were rejected, and could not provide any
documentation of QC reviews on rejected loans. HUD requires that documentation of QC
reviews be maintained for at least 1-year.

FCM’s QC reviews were not timely performed. Only 3 of 40 loans that FCM performed QC
reviews on in June 2003 were reviewed within 90 days of loan closing. This requirement was
not addressed in FCM’s QC Plan, but was an element noted in the HUD QC checklist that FCM
said it was using.

Finally, FCM’s QC Plan and actions did not ensure that corrective actions were identified,
documented, and implemented. FCM’s QC Plan did require that a report be produced for each
QC review performed. However, QC reports only documented the actions taken in performing
the review. Although the QC reviewer had, in many instances, noted discrepancies between the
initial loan processing and the QC results, no corrective actions were recommended. We also
noted no indication that FCM management was notified of the QC results. FCM management
stated that they reviewed each QC report and had found no need for corrective actions.

Due to the significant differences between the QC Plan that FCM sent to HUD in January 2003,
and the QC Plan it provided to us in July 2003, and our observations of FCM’s actual
performance, we conclude that FCM managers made little or no effort to implement a QC Plan
as required by HUD regulations. It appears that FCM management places little importance on
HUD requirements and on QCs. Thus, FCM loan origination deficiencies were not identified to
enable prompt corrective actions, resulting in a high percentage of defaults and a greater risk to
the FHA insurance fund. HUD regulations provide that when the mortgagee allows known and
material violations of HUD requirements, the mortgagee is subject to corrective actions by the
Department which include removal from the HUD program, and other federal programs, as well
as civil money penalties.



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                                                                         Finding 3




Auditee Comments       FCM disagreed with the finding. Excerpts from their
                       written comments follow. The complete text is included as
                       Appendix F “…with regard to FCM’s Quality Control
                       practices and procedures, contrary to the allegations in the
                       Report, FCM at all times put forth a good faith effort to
                       implement its Quality Control Plan and perform quality
                       control reviews in a thorough and timely manner. Based on
                       FCM’s continuous, good faith efforts to improve our
                       Quality Control Plan and quality control review procedures
                       and act in compliance with HUD requirements, we believe
                       that the recommended sanctions are unwarranted in this
                       instance.”



OIG Evaluation of      As explained in the Finding, the QC Plan provided to HUD
Auditee Comments       and the QC Plan provided to OIG were two distinctly
                       different documents; and FCM did not adhere to either
                       plan. The plan provided to OIG omitted material elements
                       required by HUD regulations. Further, regardless of
                       FCM’s good faith efforts, informal and undocumented
                       meetings do not meet HUD QCR requirements. FCM did
                       not provide any evidence to contradict the conditions cited
                       in Finding 3.



Recommendations        We recommend that:

                       3A.     See recommendations 1A and 1B.

                       We recommend that the DEC:

                       3B.     See recommendation 1C.




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Management Controls
In planning and performing our audit, we considered the management controls of FCM to
determine our audit procedures, not to provide assurance on their management controls.
Management controls are the plan of an organization, methods, and procedures adopted by
management to ensure that 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 objectives:
 Controls
                                       •   Loan origination process
                                       •   QC Plan and process

                                   The following audit procedures were used to evaluate the
                                   management controls:

                                       •   Review of established procedures used by FCM in
                                           originating FHA insured loans.
                                       •   Review of FCM’s QC Plan and process.
                                       •   Interviews with officials and employees of FCM
                                           and other related parties and entities.
                                       •   Examination of records and documents for FHA
                                           insured loans originated between April 1, 2001, and
                                           April 30, 2003.
                                       •   Review of records and files maintained by HUD’s
                                           Quality Assurance Division in connection with the
                                           oversight of the HUD-FHA approved loan
                                           correspondent FCM.

                                   A significant weakness exists if management controls do
    Significant Weakness           not give reasonable assurance that resource use is
                                   consistent with laws, regulations, and policies; that
                                   resources are safeguarded against waste, loss, and misuse;
                                   and that reliable data is obtained and maintained, and fairly
                                   disclosed in reports.

                                   Our review of FCM’s management controls over its loan
                                   origination and QC procedures for FHA insured loans
                                   showed that FCM did not comply with HUD requirements.
                                   Based on our audit we believe that significant weaknesses
                                   exist in the following areas:



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Management Controls


                           •   Operating in accordance with HUD and FHA
                               requirements (Findings 1, 2 and 3)
                           •   Quality control process (Finding 3)
                           •   Loan origination process (Finding 2)

                        The deficiencies are discussed in the findings of this report.




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Follow-Up On Prior Audits
This is the first Office of Inspector General audit of First Community Mortgage.
Miriam De Toro, CPA, PA completed the most recent Independent Auditor audit report for the
12-month-period ended December 31, 2002. The report did not contain any findings.




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                                                                                   Appendix A

Status of Loans Reviewed As Of
January 20, 2004


  FHA Case        Mortgage                     If Claim, Has         If Sold, Gain/(Loss)
                                 Status
   Number          Amount                   Property Been Sold?     Realized by HUD-FHA
 092-8584081      $ 93,759         D                N/A                       N/A
 092-8622768           54,834      C                 N                        N/A
 092-8666769          104,176      D                N/A                       N/A
 092-8709785           92,783      D                N/A                       N/A
 092-8822776           76,200      C                 Y                     ($ 24,121)
 092-8838493           75,602      D                N/A                       N/A
 092-8851286           85,226      A                N/A                       N/A
 092-8862985           92,459      C                 Y                     ( 35,652)
 092-8878072           58,834      C                 Y                     ( 22,547)
 092-8943906           68,756      D                N/A                       N/A
 092-9027547           96,600      T                N/A                       N/A
 092-9042836           72,576      C                 Y                     ( 19,301)
 092-9053789           74,411      D                N/A                       N/A
 092-9060087           94,105      A                N/A                       N/A
 092-9068413           82,845      C                 N                        N/A
 092-9228763           61,414      D                N/A                       N/A
 092-9228792          128,720      D                N/A                       N/A
 093-4979173          106,657      T                N/A                       N/A
 093-5100268           63,696      C                 N                        N/A
 Totals           $ 1,583,653                                            ($101,621.00)

Status:
T – Terminated, loan paid in full
C – Claim, mortgagee submitted claim to HUD-FHA/foreclosure
D – Default, loan is still FHA insured but payments have not been made as scheduled.
A – Active, loan is FHA insured. Mortgagor is not in default as of January 20, 2004.

N/A – Not Applicable
N – No
Y – Yes




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                                                                                    Appendix B

Case Files Reviewed
                                              (1)

FHA Case Number: 092-8584081
Sponsoring Mortgagee: Irwin Mortgage
Date of Closing: March 27, 2001
Original Principal Balance: $93,759
Cash Due from Borrower at Close: $0

Incomplete Loan Application
Preliminary loan application showed $34,000 in assets not shown on final loan application.
FCM explanation: processing error.

Gift Fund Documentation
Receipt of gift funds from AmeriDream was not documented in FCM’s file.

FCM explanation: FCM is generally unable to obtain documentation of receipt of these funds.

Compensating Factors
The debt-to-income ratios were not recomputed when the underwriter increased the mortgage
payment. The ratios increased to .3209 and .4324, which are above HUD limits. Before
correction, the ratios were .3074 and .4189. The underwriter provided the following
compensating factors: 1) minimal credit user, 2) housing cost not increasing substantially, and
3) minimal recurring debt.

OIG analysis: Factors 1 and 3 are synonymous and do not meet HUD guidelines which require a
borrower show both a conservative attitude toward credit and an ability to accumulate savings.
The increased mortgage payment was a substantial 21 percent increase in housing costs. Thus,
each compensating factor was invalid.




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Appendix B



                                               (2)

FHA Case Number: 092-8622768
Sponsoring Mortgagee: Irwin Mortgage
Date of Closing: April 19, 2001
Original Principal Balance: $58,834
Cash Due from Borrower at Close: $255.86

Credit Analysis
Documentation was not present in the file to substantiate that an acceptable credit history
evaluation was performed. The file contained a credit report list of four credit sources, but did
not provide outstanding balances and payment history.
FCM explanation: The credit report contained four sources of credit. HUD requirements only
require three.

Income Analysis
FCM did not document how it arrived at effective income of $1,560/mo. FCM’s staff stated that
it was based on average income for 2001. Using this same data, OIG calculated average monthly
income to be $1366/mo. Based on year-to-date income (including a new raise) OIG calculated
effective income to be $1473/mo. This is a difference of $87/month.
FCM explanation: FCM staff was unable to explain the discrepancy.

Source of Funds/Verification of Deposit
FCM did not obtain a VOD or document the source of funds. The file contained a deposit slip
identifying a $2,000 deposit to an account. However, the account owner and source of funds was
undeterminable from the information provided.
FCM explanation: FCM staff stated that they deemed the deposit slip sufficient documentation
for a VOD.

Gift Fund Documentation
Receipt of gift funds from Nehemiah was not documented in FCM’s file.
FCM explanation: FCM is generally unable to obtain documentation of receipt of these funds.

Compensating Factors
The mortgage to income ratio was .3325. Three compensating factors were provided, yet only
one was acceptable by HUD guidelines. The factors provided by the underwriter were
1) overtime was received, 2) conservative attitude toward credit, and 3) not increasing housing
expense. Factor 1 was invalid, because overtime had to be included in FCM’s and the
underwriter’s effective income assessment and because the employer verified it was not likely to
continue. Factor 2 was not valid because HUD requires the borrower show both a conservative
use of credit and an ability to accumulate savings. Factor 3 was valid.




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                                                                                  Appendix B



                                             (3)

FHA Case Number: 092-8666769
Sponsoring Mortgagee: Ivanhoe Financial
Date of Closing: June 27, 2001
Original Principal Balance: $104,176
Cash Due from Borrower at Close: $0

Gift Fund Documentation
Receipt of gift funds from AmeriDream was not documented in FCM’s file.

FCM explanation: FCM is generally unable to obtain documentation of receipt of these funds.




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Appendix B


                                              (4)

FHA Case Number: 092-8709785
Sponsoring Mortgagee: Wells Fargo
Date of Closing: July 24, 2001
Original Principal Balance: $92,783
Cash Due from Borrower at Close: $705.63

Overstated Maximum Mortgage
The maximum mortgage basis was overstated by $677. This was attributable to the difference
between the closing costs allowed by the underwriter (and later by FCM) versus the closing costs
used by the sponsoring mortgagee in calculating the maximum insurable mortgage. Further,
both FCM and the sponsoring mortgagee used an improper form, HUD 92900-PUR, to compute
the maximum insurable mortgage. They should have used HUD 92900-WS.

Improper Fees
FCM charged a $700 ‘application fee’ to the borrower. HUD procedures preclude a lender from
charging such fees to the borrower except when making a MAP (mortgage assistance program)
loan or bond loan. FCM also received a $928 discount fee.

FCM explanation: This fee was improperly recorded and should have been recorded as a loan
origination fee.




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                                                                                      Appendix B


                                               (5)

FHA Case Number: 092-8822776
Sponsoring Mortgagee: Birmingham Bancorp Mortgage
Date of Closing: October 2, 2001
Original Principal Balance: $76,200
Cash Due from Borrower at Close: $0

Inaccurate Loan Application
The final loan application did not show all assets that were presented on the initial URLA.
FCM explanation: This was likely a processing error.

Gift Fund Documentation
Receipt of gift funds from Nehemiah was not documented in FCM’s file.

FCM explanation: FCM is generally unable to obtain this documentation.

Excess Seller/3rd Party Contributions
Seller contributions exceeded the HUD prescribed limit of 6 percent of sales price by $419.
HUD program staff identified the excess after we asked them to review the file for potential
overage issues.
FCM explanation: FCM attests to seller paying $2,788.70 in buyer closing costs.
(Auditor Note: FCM does not believe that the 6 percent rule was violated. FCM’s explanation
does not include $2,119.10 shown on the HUD-1.)

Overstated Maximum Mortgage
The maximum mortgage basis was overstated by $515. This was attributable to the difference
between the closing costs allowed by the underwriter (and by FCM) versus the closing costs used
by the sponsoring mortgagee in calculating the maximum insurable mortgage.

Compensating Factors
The total debt to income ratio was .415. The underwriter provided two compensating factors
1) minimal increase in housing costs and 2) 1-month reserves. The actual increase in housing
expense was 13 percent. This is not a minimal increase. Further, HUD regulations require 3-
months cash reserves to qualify as a compensating factor. We noted that the borrower did not
have a complete 1-month reserve. Thus, there were no valid compensating factors to justify loan
approval.




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                                            (6)

FHA Case Number: 092-8838493
Sponsoring Mortgagee: Wells Fargo
Date of Closing: October 15, 2001
Original Principal Balance: $75,602
Cash Due from Borrower at Close: $0

Gift Fund Documentation
Receipt of gift funds from Nehemiah was not documented in FCM’s file.
FCM explanation: FCM is generally unable to obtain this documentation.




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                                               (7)

FHA Case Number: 092-8851286
Sponsoring Mortgagee: Wells Fargo
Date of Closing: October 30, 2001
Original Principal Balance: $85,226
Cash Due from Borrower at Close: $671.79

Income Analysis
The effective income for one of the borrowers was improperly computed. FCM reported the
effective income as $1,868/mo, but FCM staff was unable to explain how it calculated this
amount. Upon reassessing the file, FCM staff arrived at an effective income of $2,013/mo. This
amount improperly included overtime and bonus income that the employer identified as unlikely
to continue. OIG calculated effective monthly income as $1,265/mo. FCM overstated effective
income by $603/mo.

Gift Fund Documentation
Receipt of gift funds from Future Homes was not documented in FCM’s file.
FCM explanation: FCM is generally unable to obtain this documentation.

Intent to Occupy
This was a two-bedroom property that was being purchased by two married couples with one child.
Documentation indicated that these families had previously lived in separate residences, thus they
were ‘downsizing’ their dwelling size. One of the borrowers did not have a valid driver’s license
and his previous residence was at his place of employment. Thus, we questioned how the borrow
intended to travel back and forth to work, or if he intended to maintain his residence at the
workplace. FCM staff did not fulfill their responsibility to gain a complete understanding of the
borrower’s intended use of the property. We determined that this borrower continued to rent a
residence at his workplace, and did not report this as a continuing housing cost on the loan
application.

Compensating Factors
The underwriter adjusted the income for one of the borrowers from $1,868 as reported by FCM to
$2,056/mo. The higher income included bonus and overtime. However, the employer reported these
were not likely to continue, and they should have been excluded from the effective income. Based
on the income numbers used by the underwriter, the ratios were .19 and .41. However, because
FCM did not obtain a complete understanding of the borrower’s intent, it did not include the
continuing rent in the ratio calculation. Correcting for the rent and overstated income, OIG
calculated the ratios at .3171 and .5920. Although the ratios reported by the underwriter were .19
and .41, the underwriter cited two compensating factors: 1) long stable job history and 2) decreasing
housing expense. Job stability is not a valid compensating factor per HUD regulations. Actual
housing expense increased by 14.6 percent including the unreported rent. Thus, the cited decrease in
housing cost was not a valid compensating factor. However, based on the information provided by
FCM, the underwriter would not have known about the unreported rent.




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                                              (8)

FHA Case Number: 092-8862985
Sponsoring Mortgagee: Irwin Mortgage
Date of Closing: October 30, 2001
Original Principal Balance: $92,459
Cash Due from Borrower at Close: $425.90

Source of Funds
FCM did document the availability of funds. The file contained two VODs for a new account,
but no explanation as to the source of deposited funds. One of these documents showed $881
available in checking prior to closing.
FCM explanation: FCM staff stated that payroll was the source of these funds, but it was not
documented. They noted that this should have been documented in their file.

Gift Fund Documentation
Receipt of gift funds from Nehemiah was not documented in FCM’s file.
FCM explanation: FCM is generally unable to obtain this documentation.

Compensating Factors
The mortgage to income ratio was .371. The underwriter provided three compensating factors:
1) potential for increase in earnings, 2) overtime not used in qualifying, and 3) minimal credit
user. The potential for increased earnings was not documented as related to job training or
education and thus would not meet HUD guidelines as an acceptable compensating factor.
Documented overtime income was only 3.75 hours and was not a valid compensating factor.
Finally, although the borrower was a minimal credit user, HUD’s requirement states that the
borrower must show a conservative attitude toward credit and exhibit an ability to save money.
Since no ability to save had been demonstrated, this was an invalid compensating factor.




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                                              (9)

FHA Case Number: 092-88780872
Sponsoring Mortgagee: Irwin Mortgage
Date of Closing: November 20, 2001
Original Principal Balance: $58,834
Cash Due from Borrower at Close: $0

Inaccurate Loan Application
The initial loan application showed three places of employment. The final loan application
omitted a job held from 2/2000 through 2/2001. As a result, FCM did not verify that
employment and did not satisfy the requirement to examine a complete 2-year employment
history. Further, the sponsoring mortgagee did not note this or take exception to the gap in
employment from 3/2000 through 1/2001.
FCM explanation: FCM staff stated that this was a processing error and the employment should
have been included on the final loan application.

Gift Fund Documentation
There were multiple gift fund applications in FCM’s file, and the receipt of any gift funds was
not documented in the file. Additionally, the HUD-1 showed that gifts funds were received from
AmeriDream, but the sales contract stated the gift funds were provided by National Home.
FCM explanation: FCM is generally unable to obtain documentation of gift funds. However,
the gift fund was properly identified on the HUD-1 and the sales contract should have been
changed accordingly.

Compensating Factors
The mortgage to income ratio was .325, exceeding HUD’s prescribed limit of .29.            The
underwriter provided no compensating factors.




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                                              (10)

FHA Case Number: 092-8943906
Sponsoring Mortgagee: Wells Fargo
Date of Closing: December 31, 2001
Original Principal Balance: $68,756
Cash Due from Borrower at Close: $0

Income Analysis
FCM staff did not properly compute and document their computations of effective income for
the borrower. The borrower received non-taxable SSI benefits. FCM elected to ‘gross-up’ the
non-taxable income, a practice accepted by HUD. However, they miscalculated the grossed up
income due to a mathematical error. The error understated income by $33/mo. The loan
application also showed that the borrower earned $740/mo through employment. FCM did not
document and its staff could not explain how it calculated this amount. Based on documentation
on file, we computed earned income to be $870/mo.

Verification of Employment
FCM did not verify a full 2-year employment history for the borrower. The loan application
showed that the borrower had the same employer for 2-years, but the VOE showed that the
applicant had only been employed for 18 months. FCM staff did not follow-up on this
discrepancy as required by HUD regulations.
FCM explanation: This was on oversight on FCM’s part and should have been caught by the
processor.

Compensating Factors
The mortgage to income ratio based on income reported by FCM was .3262. The underwriter
revised the income downward, which raised the ratio to .344. The only compensating factor
provided by the underwriter was excellent rental history. This is not a valid compensating factor
in accordance with HUD guidelines.




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                                             (11)

FHA Case Number: 092-9027547
Sponsoring Mortgagee: Wells Fargo
Date of Closing: April 18, 2002
Original Principal Balance: $96,660
Cash Due from Borrower at Close: $0

Excess Seller/3rd Party Contributions
Seller contributions exceeded the HUD prescribed limit of 6 percent of sales price by $28. HUD
program staff identified the excess after we asked them to review the file for potential overage
issues.
FCM explanation: FCM attests that the seller paid $6 over the 6 percent limit. FCM staff stated
that the lender (Wells Fargo) should not have approved this.

Overstated Maximum Mortgage
The maximum mortgage basis was overstated by $736. This was attributable to the difference
between closing costs allowed by HUD’s underwriter (and by FCM) versus closing costs used by
the underwriter to calculate the maximum insurable mortgage.

Compensating Factors
The debt to income ratio was .4281, exceeding HUD prescribed limits. The underwriter
provided one compensating factor: “a similar payment history.” However, information in the
case file on prior housing cost was contradictory. The application prepared by the borrower
listed his housing cost as $657/mo. A previous sales contract on the house showed that the
seller, who was also the landlord, had previously sold the house to the borrower with seller
financing, and $657 was the monthly payment excluding taxes and insurance. But the
landlord/seller later provided a statement that the monthly rent had been $861. The FHA loan
application was presented as a sale, not as a refinancing. The prior sale had not been recorded.
There was no evidence that the underwriter confirmed the relevant facts to ensure the
compensating factor was valid.




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                                            (12)

FHA Case Number: 092-9042836
Sponsoring Mortgagee: Wells Fargo
Date of Closing: April 18, 2002
Original Principal Balance: $72,576
Cash Due from Borrower at Close: $0

Compensating Factors
The mortgage to income ratio was .314. The underwriter provided no compensating factors.




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                                              (13)

FHA Case Number: 092-9053789
Sponsoring Mortgagee: Wells Fargo
Date of Closing: July 1, 2002
Original Principal Balance: $74,411
Cash Due from Borrower at Close: $0

Inaccurate Loan Application
The loan application was not fully supported by the data contained in the credit report. The
credit report showed a delinquent liability in the amount of $7,462 that was reported by FCM to
be the student loan identified by the borrower. However, the borrower identified an outstanding
balance of $2,056; a difference of over $5000 for which there is no explanation in the file. A
credit report noted that the borrower had entered into a repayment agreement and these payments
were included in the ratio calculations.

Gift Fund Documentation
Receipt of gift funds from National Homes was not documented in FCM’s file.
FCM explanation: FCM is generally unable to obtain this documentation.

Excess Seller/3rd Party Contributions
Seller contributions exceeded the HUD prescribed limit of 6 percent of sales price by $70. HUD
program staff identified the excess after we asked them to review the file for potential overage
issues.
FCM explanation: FCM attests to seller paying $3,542 in buyer closing costs. FCM does not
believe the 6 percent rule was violated.

Compensating Factors
The mortgage to income ratio of .34 exceeded HUD prescribed limits. The underwriter provided
three compensating factors: 1) child support was counted for only 2 of 3 children, 2) tax savings,
and 3) client wasn’t a credit user. The only valid factor was child support for the third child.
Tax savings is not a valid compensating factor and HUD requires that the borrower be both a
conservative credit user and show the ability to save money.

Additionally, the underwriter improperly ‘grossed up’ income from child support. Correcting
this income raised the ratios to .3535 and .4150.




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FHA Case Number: 092-9060087
Sponsoring Mortgagee: Wells Fargo
Date of Closing: April 25, 2002
Original Principal Balance: $94,105
Cash Due from Borrower at Close: $0

Income Analysis
FCM did not compute income in accordance with HUD guidelines. FCM computed income for
the borrower as $2947/mo based on a flat hourly rate and did not consider any overtime. The
applicant routinely received overtime and the VOE attested that it was likely to continue. We
calculated income was understated by $201 per month.

Gift Fund Documentation
Receipt of gift funds from National Homes was not documented in FCM’s file.
FCM explanation: FCM is generally unable to obtain this documentation.

Excess Seller/3rd Party Contributions
Seller contributions exceeded the HUD prescribed limit of 6 percent of sales price by $450.
HUD OIG analysis identified this overage.
FCM explanation: FCM attests to seller paying $4376 in buyer closing costs. FCM does not
believe that the 6 percent rule was violated.




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                                              (15)

FHA Case Number: 092-9068413
Sponsoring Mortgagee: Wells Fargo
Date of Closing: April 30, 2002
Original Principal Balance: $82,845
Cash Due from Borrower at Close: $0

Inaccurate Loan Application
Liabilities reported on loan application were incorrect. A debt of the applicant’s ex-spouse was
improperly reported as a debt of the applicant, and a derogatory account of the applicant was
excluded from the loan application. As a result, debts were slightly understated.
FCM explanation: This was a processing error.

Verification of Employment
FCM accepted a VOE and two explanatory letters that were faxed from the hotel where the
borrower was residing. The letters explained a large increase in salary from 2000 to 2001 and a
recent promotion. The header on each of these documents clearly identified where the fax
originated. Further, the employer phone number on one of the letters did not match the phone
number provided on the VOE and neither number agreed with the phonebook number. At the
time of the audit, the employer entity was out of business and we could not confirm the
employment data.

Gift Fund Documentation
Receipt of gift funds from National Homes was not documented in FCM’s file.
FCM explanation: FCM is generally unable to obtain this documentation.




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                                            (16)

FHA Case Number: 092-9228763
Sponsoring Mortgagee: MIT Lending
Date of Closing: October 16, 2002
Original Principal Balance: $61,414
Cash Due from Borrower at Close: $0

Gift Fund Documentation
Receipt of gift funds from National Homes was not documented in FCM’s file.
FCM explanation: FCM is generally unable to obtain this documentation.

Excess Seller/3rd Party Contributions
Seller contributions exceeded the HUD prescribed limit of 6 percent of sales price by $1,204.
HUD program staff analyzed this file when we identified potential overages.
FCM explanation: FCM attests to seller paying $4,025 in buyer closing costs when they should
only have paid $3,714. FCM staff states that the lender should not have approved this loan to
close with this discrepancy.




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                                             (17)

FHA Case Number: 092-4979173
Sponsoring Mortgagee: Popular Mortgage
Date of Closing: July 23, 2001
Original Principal Balance: $106,657
Cash Due from Borrower at Close: $836.35

Gift Fund Documentation
The file indicates that the applicant received a gift from his aunt. However, there was no
verification of receipt of funds from the relative in the FCM file. We later noted that proper
documentation was present in the HUD case binder. However, FCM should have documented
the gift in their file.
FCM explanation: FCM could not explain why documentation was not present in their file.

Sufficient Funds to Close/Source of Funds
FCM’s file contained an ATM receipt showing the account balance of $2,056.23 as of
6/18/2001, but not a bank statement or VOD. The ATM document is not sufficient to meet HUD
requirements and did not identify the source of funds. Complete bank statements, the latest
dated 4/10/2001, were present in the HUD case file, but funds available were not sufficient for
closing. As of 4/10/2001, the available balance was $771.87. Again, the source of funds was not
identified. The HUD file also contained a copy of the ATM receipt.




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FHA Case Number: 093-4983450
Sponsoring Mortgagee: Transland Financial Services
Date of Closing: May 10, 2001
Original Principal Balance: $75,652
Cash Due from Borrower at Close: $0

Income Analysis
Income reported by FCM on the loan application was not supported. The income calculation
made by FCM included overtime, but the VOE provided that overtime was not likely to
continue. As a result, FCM overstated monthly income by $160/mo. The sponsoring mortgagee
noted this and made the necessary adjustment on the mortgage credit analysis worksheet.

Gift Fund Documentation
Receipt of gift funds from AmeriDream was not documented in FCM’s file.
FCM explanation: FCM is generally unable to obtain this documentation.




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                                              (19)

FHA Case Number: 093-5100268
Sponsoring Mortgagee: Irwin Mortgage
Date of Closing: September 24, 2001
Original Principal Balance: $63,696
Cash Due from Borrower at Close: $196.62

Gift Fund Documentation
Receipt of gift funds from AmeriDream was not documented in FCM’s file.
FCM explanation: FCM is generally unable to obtain this documentation.

Excess Seller/3rd Party Contributions
Seller contributions exceeded the HUD prescribed limit of 6 percent of sales price by $70. OIG
analysis identified the overage.




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Schedule of Questioned Costs



               Recommendation                          Type of Questioned Cost
                   Number                                    Ineligible 1/
                     3A                                          $700




1/     Ineligible costs are costs charged to a HUD-financed or HUD-insured program or activity
       that the auditor believes are not allowable by law, contract or Federal, State or local
       policies or regulations.




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Chronology of Key Events – Neighborhood
Funding, Inc.
           Date                          Neighborhood Funding Event/ Information
06/02 thru 02/03         HUD QA review of FCM. QA results shared with FCM, review closed.
01/24/03                 NFI incorporated at 3049 Cleveland Ave. Ste 201
03/20/03                 HUD notified FCM of potential suspension of authority to originate FHA loans.
06/23/03                 HUD suspended FCM in the Coral Gables/Miami area.
06/05/03                 Granddaughter of NFI Director obtained mortgage broker license.
                         Address at 3049 Cleveland Ave Ste 200.
                         License expires 8/31/03.
06/26/03                 Neighborhood Funding obtained mortgage lender license.
                         Address at 3049 Cleveland Ave Ste 234, exp 8/31/04.
07/01/03                 Effective date of fidelity bond for NFI.
                         Address at 1621 N Tamiami Trail Ste 3.
07/01/03                 Effective date of omissions and errors insurance for NFI.
                         Address at 1621 N Tamiami Trail Ste 3.
10/02/03                 NFI obtained warehouse Letter of Credit.
                         Address at 1621 N Tamiami Trail Ste 3.
11/03/03                 NFI applied to HUD for Lender Approval, the “owner’s” resume stated
                         employment with FCM terminated on 01/17/03.
                         NFI financial statements showed $0 operating expenses thru 9/30/03.
                         Address at 1621 N Tamiami Trail Ste 3.
11/17/03 (on or          NFI changed address to 1621 N Tamiami Trail Ste 3 on mortgage lender
before)                  license.
12/10/03                 FCM Vice-President and FCM Operations Manager approved as pre-closing
                         Direct Endorsement Underwriters for NFI
12/11/03                 OIG determined that 3049 Cleveland Ave Ste 234 was ‘main contact point’ for
                         NFI.
01/20/04                 NFI changed its address with FL Dept of Corp to 1621 N Tamiami Trail Ste 3.
03/2004                  OIG determined vacant land owned by NFI, which was $200,000 capital
                         required by HUD, was acquired from FCM on March 6, 2003. The land was
                         previously acquired by FCM on 4/12/2002 for $50,000.
04/05/04                 Registered Change of Address with Florida Licensing Agency to reflect address
                         at 3830 Evans Avenue, Suite 1A, Fort Myers, FL 33901, Principal
                         Representative of NFI identified (to state licensing agency) as President of FCM
                         Changed address with HUD to 3830 Evans Avenue
04/28/04                 Daughter of FCM principals, partial funder of FHFE, and previous Assistant
                         Secretary of FHFE named as President and Director of NFI.




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Chronology of Key Events – Family Home
Funding Enterprises, Inc.
        Date                    Family Home Funding Enterprises Event/ Information
06/02 thru 02/03     HUD QA review of FCM. QA results shared with FCM, review closed.
03/20/03             HUD notified FCM of potential suspension of its authority to originate FHA
                     loans.
06/23/03             HUD suspended FCM in the Coral Gables/Miami area.
06/24/03             FHFE incorporated at 3049 Cleveland Ave Ste 201
08/05/03             FHFE obtained Mortgage Lender License.
                     Address listed at 3049 Cleveland Ave Ste 250J .
08/11/03             FHFE changed address with FL Dept of Corp to 3049 Cleveland Ave, Ste 250 J.
09/08/03             FHFE applied to HUD as Non-Supervised Loan Correspondent, Equity Financial
                     Group as Sponsor. Address reported at 13180 North Cleveland Ave., Ste 320.
                     FCM employee shown as President, Sole Director, and 100% owner.
                     Resume of FHFE Director states employment with FCM terminated 6/03.
                     FHFE financial statements showed $0 operating expenses thru 8/27/03.
09/08/03             FHFE changed office address with State Dept of Corp to 13180 N Cleveland Ave
                     Ste 320, filed on 09/18/03.
11/24/03             FHFE changed its address with FL Dept. of Corp. to 3049 Cleveland Ave., Ste
                     201.
                     FCM President added as Vice-President of FHFE, named registered agent of
                     FCM’s Ohio office (child of FCM owners) as Assistant Secretary of FHFE.
04/01/04             Registered Change of Address with Florida Licensing Agency to reflect address
                     at 2709 Swamp Cabbage Court, Fort Myers, FL 33901
                     Transfer of ownership of FHFE (via stock certificate exchange) from previously
                     named owner to another FCM employee
04/07/04 (on or      Changed Address of FHFE with HUD to 2709 Swamp Cabbage Court
before)
04/28/04             FHFE filed annual report with Florida State Department of Corporations. Named
                     another FCM employee (same as State licensing change) as President and
                     Director.
                     Identified 4066 Evans Ave Ste 18, Fort Myers, FL 33901 as principal place of
                     business.
                     Removed the current President, (former FCM employee) as the President and
                     director.
                     Removed the President of FCM and Registered Agent of FCM’s Ohio office as
                     Vice-President/Director and Assistant Secretary/Director of FHFE, respectively.




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Auditee Comments

                                FIRST COMMUNITY MORTGAGE, INC
                                        5120 SW 18TH AVE.
                                       CAPE CORAL, FL 33914
                                    PHONE or FAX: (239) 540-5745
                                        cmsmtgfm@aol. Com


                                                   May 11 , 2004

        VIA FEDERAL EXPRESS
        Mr. James McKay
        Regional Inspector General for Audit
        U.S. Department of Housing
        and Urban Development
        District Office of the Inspector General
        Office of Audit, Box 42
        Richard B. Russell Federal Building
        75 Spring Street, SW, Room 330
        Atlanta, Georgia 30303-3388

                                                   Re: First Community Mortgage, Inc.
                                                       Fort Myers, Florida
                                                       Office of the Inspector General Audit

        Dear Mr. McKay:

               The purpose of this letter is for First Community Mortgage, Inc. ("FCM" or
        "Company") to respond to the draft audit report ("Report") of preliminary findings issued
        by the District Office of the Inspector General ("OIG") of the U.S. Department of Housing
        and Urban Development ("HUD" or "Department"). The OIG's audit of FCM, which
        began on July 21, 2003, reviewed FCM's operations to determine compliance with HUD
        guidelines in the origination of Federal Housing Administration ("FHA") insured
        mortgage loans. The OIG's review was conducted between July and September 2003,
        covered the period between April 1, 2003 and April 30, 2003, and consisted of a review
        of 19 HUD/FHA insured mortgage loans. We understand that the OIG also conducted
        audit work at Irwin Mortgage Company, one of FCM's former sponsors, as well as at 14
        settlement agents' offices.

               The Report contains three findings, in which it alleges that: (1) FCM
        circumvented HUD's suspension of FCM through the Credit Watch Initiative by creating
        two new mortgage entities after the suspension of its Fort Myers office through the
        Credit Watch Initiative; (2) FCM did not adhere to HUD requirements in its origination of
        certain FHA-insured loans; and (3) FCM did not fully implement its Quality Control Plan.
        Based on these findings, the Report recommends that HUD suspend the origination

        DC-637093 vl 0307765-0100




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        Mr. James McKay
        May 11, 2004
        Page 2


        Based on these findings, the Report recommends that HUD suspend the origination
        authority of FCM and the two new mortgage entities created by FCM's principals, and
        debar FCM's principals from further participation in HUD and other federal programs.
        The OIG provided the Company an opportunity to submit written comments for inclusion
        in the final report. We appreciate this opportunity to respond to the OIG's
        recommendations.

        I.     INTRODUCTION

               While FCM responds below to the OIG's individual findings, we would like to
        generally address the Report's overall allegations against FCM and the two entities
        created by the owners of FCM. After receiving the Report, FCM conducted a thorough
        review of the referenced conduct and loan files. We also consulted applicable HUD
        Handbooks, Mortgagee Letters, and regulations, as well as examined Company policies
        and procedures, to provide pertinent information and documentation with this response.
        To the extent necessary to respond to the allegations in the Report, FCM provided
        information contained in the Report to the principals of the additional two entities that
        are the subject of the Report, and have included information from these entities in this
        response.

                 FCM's review indicated that suspension of the origination authority of the three
        companies that are the subject of this proceeding, as well as the debarment of FCM's
        principals, is unwarranted. An initial review of the OIG's Report paints a picture of a
        nefarious plot by the principals of FCM to circumvent HUD's termination of the Fort
        Myers office's Origination Approval Agreement in the Miami/Coral Gables jurisdiction
        through the Department's Credit Watch Initiative. When one closely examines the
        circumstances surrounding these entities, however, the facts and chronology of the
        creation of the two new entities demonstrates that most of the OIG's allegations are
        simply not true. Contrary to the allegation that FCM's owners intentionally tried to
        circumvent a Credit Watch termination of the Fort Myers office's origination authority in
        the Miami/Coral Gables jurisdiction, the owners of FCM decided to create new entities
        for the benefit of their family and slowly close down FCM well before they were made
        aware of the Department's determination in the Credit Watch proceeding.

                  As discussed in detail below, FCM's principals were diagnosed with serious
        illnesses and were approaching retirement in late 2002. In an effort to provide a legacy
        in the mortgage industry for their children and grandchildren, they began the process of
        setting up two new mortgage entities and shutting down FCM. The decision of FCM's
        owners to begin new entities rather than pass on FCM was a business decision to move
        from loan origination to wholesale lending that was made prior to the receipt of any
        correspondence from the Department regarding the Credit Watch proceeding. The




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        Mr. James McKay
        May 11, 2004
        Page 3


        establishment of these entities was an exit strategy for the owners of FCM and a way
        for them to pass along their mortgage business to their children. FCM has since closed
        its doors, and NFI and FHFE have been established as viable mortgage entities. We
        acknowledge that, as a small, family-run mortgage business without in-house counsel or
        a significant regulatory compliance staff, some technical mistakes were made in
        establishing these entities. Nevertheless, FCM's owners and the subsequent owners
        and officers of the new entities acted in good faith and strived to comply with FHA
        requirements at all times during the establishment of these entities. We are not
        suggesting that inexperience or lack of in-house counsel is an excuse, or that the
        entities are not responsible for full compliance with FHA requirements. Nevertheless,
        the relevant parties to this proceeding acted in good faith at all times in creating the new
        entities and winding down FCM, and none of these actions threatened the Department
        or caused harm to the FHA Insurance Fund. Based on these facts, the Report's
        recommended sanctions are excessive and inappropriate under the circumstances.

                Furthermore, in connection with the allegations regarding the 19 loans reviewed
        by the OIG discussed in Finding 2 of the Report, the Company's review indicated that
        many of the findings in the Report are at variance with the facts, do not constitute
        violations of HUD/FHA requirements on the part of FCM, or do not affect the underlying
        loans' insurability. Importantly, it appears that the Report did not distinguish between
        the responsibilities and requirements of loan correspondents and sponsoring lenders in
        originating FHA-insured loans. Many of the findings in the Report go directly to the
        sponsor's underwriting decisions and not to the processing responsibilities of FCM. As
        FCM was not responsible and, in fact, was not authorized, to analyze the borrower's
        credit or make underwriting decisions in these cases, the Company should not be held
        responsible for any underwriting deficiencies in these cases.

               Finally, with regard to FCM's Quality Control practices and procedures, contrary
        to the allegations in the Report, FCM at all times put forth a good faith effort to
        implement the Quality Control Plan submitted to the Atlanta Homeownership Center in
        connection with its prior audit by HUD's Quality Assurance Division. In addition, FCM
        acted in good faith to comply with HUD guidelines regarding quality control reviews.
        While FCM's quality control reviews were done on a very small scale, the Company
        consistently made an effort to conduct reviews in accordance with HUD guidelines.
        Based on our continuous, good faith efforts to improve our Quality Control Plan and
        quality control review procedures and act in compliance with HUD requirements, we
        believe that the recommended sanctions are unwarranted in this instance.

              In summary, it appears that the Report chose to present the circumstances
        surrounding this case in the worst possible light, without regard to many of the facts
        involved in this case, and recommended the most draconian penalties in connection




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          Mr. James McKay
          May 11, 2004
          Page 4


          with the entities and their principals. After review of the actual facts and circumstances
          in this case, as well as the motivation of the individuals who created the entities at issue
          in the Report, it would be inappropriate for the Department to determine that these
          individuals and entities are unfit to participate in FHA programs. We believe, and we
          hope the OIG will agree, that this response and accompanying exhibits demonstrate
          that suspension of the origination authority of FCM, NFI, and FHFE, as well as the
          debarment of FCM's former principals, is unwarranted. We ask that the OIG revise its
          recommendations to fit the facts of this case.

          II.    BACKGROUND

                 A.     First Community Mortgage. Inc.

                 FCM was incorporated on November 9, 1999. It received approval to participate
          in the Department's FHA mortgage insurance programs as a loan correspondent on
          March l, 2000. Headquartered in Fort Myers, Florida, with two branch offices in Elyria,
          Ohio and Las Vegas, Nevada, FCM employed between six and fifteen employees
          during its corporate history. As a loan correspondent, the Company took loan
          applications, gathered verification forms, as well as credit reports and other required
          documentation, and submitted loan packages to its sponsors for underwriting. At no
          time did FCM underwrite or approve the loans that it originated, and therefore did not
          make any credit decisions. FCM's sponsors are solely responsible for these functions.
          During the time period relevant to the OIG's audit, FCM's primary sponsors included
          Irwin Mortgage Company and Wells Fargo Home Mortgage.

                 As discussed in greater detail below, in 2002, the principals of FCM, [* Owner/President]
          and his wife [* Owner/Vice-President] (Exhibit A), decided to retire from the
          mortgage industry based on a combination of age, serious health problems, and the
          onset of social security retirement benefits. Wishing to pass their mortgage expertise
          onto their children and grandchildren, but realizing how little control over the origination
          process a loan correspondent has, the [*] decided to slowly wind up FCM and
          create a separate mortgage lender with full underwriting authority for their heirs. The
          [*] began the process of establishing two new companies for the benefit of their
          family members in January of 2003. As discussed below, these entities, Neighborhood
          Funding, Inc. ("NFI") and Family Home Funding Enterprises, Inc. ("FHFE") were formed
          and obtained HUD approval in 2003. After fully establishing independent mortgage
          businesses for their families, the [*] closed FCM's doors to the public and
          voluntarily terminated the Company's FHA origination authority on April 15, 2004
          (Exhibit B). While FCM has ceased doing business, we wish to preserve our reputation
          and the reputation of FCM, as well as the viability of the mortgage entities created for


[*] Names of individual principals, family members, FCM employees, and borrowers were redacted by OIG to
preserve their privacy. In some instances, titles were inserted to preserve the meaning of the text.




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          Mr. James McKay
          May 11, 2004
          Page 5


          the [*] family's future. Thus, we are responding to the allegations made in the
          Report.

                  FHA lending constituted approximately 95% of FCM's business operations.
          FCM was committed to working with marginal borrowers and concentrated its
          origination efforts in the minority and underserved communities in South Florida.
          Because FHA lending represented a significant portion of FCM's overall production, the
          Company remains committed to its relationship with the Department and takes its
          responsibilities under the FHA program seriously. While in operation, we were
          dedicated to working with HUD to extend credit to qualified borrowers, and we would
          never knowingly violate FHA requirements nor endanger the reputation of the Company
          or its employees.

                B.     Neighborhood Funding, Inc.

                  In 2002, the owners of FCM were diagnosed with serious illnesses. [*]
          was diagnosed with lupus on February 23, 2002 (Exhibit C-1). [*] was
          diagnosed with chronic obstructive pulmonary disease ("COPD") on April 18, 2002
          (Exhibit C-2). After being diagnosed with these serious illnesses, and with retirement
          benefits on the horizon for both, the owners of FCM decided to begin the process of
          turning their mortgage business over to their children and grandchildren. In 2002,
          FCM's Fort Myers and Elyria, Ohio offices were audited by the HUD's Atlanta and
          Philadelphia Quality Assurance Divisions in June and May, respectively. While those
          audits were resolved on February 11, 2003 and August 14, 2003 (Exhibit C-3), during
          the course of the audits, FCM realized how little control a loan correspondent has over
          the mortgage process and the performance of the loans it originates by not being able
          to underwrite or service these loans. For example, based on the terms of agreements
          with sponsoring lenders, loan correspondents are not permitted to contact borrowers
          after closing and receive little if any information regarding a borrower's performance
          until a loan is seriously delinquent. As the owners of FCM had experienced first-hand
          through the Quality Assurance Division audits how loan correspondents may be held
          responsible for the actions of others over which the correspondent cannot control, the
          owners determined that the best course of action was to give their children and
          grandchildren control of their own destiny. Therefore, the [*] decided to establish
          a wholesale lender with non-supervised Direct Endorsement authority.

                To this end, on January 24, 2003, two months before FCM received the March
          20, 2003 letter informing the Company of the Credit Watch termination proceeding, and
          almost six months before the Coral Gables Origination Approval Agreement was
          terminated, NFI was incorporated (Exhibit C-4). The Articles of Incorporation listed
          [* FCM Vice-President] as the sole owner and director of NFI, and listed the new entity's


[*] Names of individual principals, family members, FCM employees, and borrowers were redacted by OIG to
preserve their privacy. In some instances, titles were inserted to preserve the meaning of the text.




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          Mr. James McKay
          May 11, 2004
          Page 6

          address as 3049 Cleveland Avenue, Suite 201, Fort Myers, Florida 33901 (Exhibit C-
          4). NFI was established with the intent to create a wholesale mortgage lender that
          engaged in third party originations as a sponsoring lender. At no time did any of the
          principals of NFI intend for the company to originate loans in its name and, in fact, to
          date NFI has not originated a loan in its name. On March 14, 2003, NFI relocated to
          3049 Cleveland Avenue, Suite 234, Fort Myers, Florida 33901, and [* FCM President]
          was added as an officer of the Company (Exhibit C-5), and briefly had complete
          ownership of NFI (Exhibit C-6).

                  As explained in [* granddaughter’s] letter to the OIG dated March 9,2004 (Exhibit C-
          7), the [*] desired to pass this new entity to their daughter, [*].
          [*], however, is located in Ohio and has children who are still in high
          school. As [*] did not intend to relocate to Florida until June of 2004, the
          [*] transferred ownership to her daughter, [*], in the interim. Contrary
          to the allegation in the Report, [*] is the granddaughter, not the niece, of
          the [*].

                  At its inception, NFI could not open for business as a mortgage entity until it and
          its principals obtained the requisite licensing, approval, and credit line to operate as a
          wholesale lender. In preparation to take over NFI and establish its current "shell" into a
          mortgage lender, [* granddaughter] completed the requisite state and federal training courses
          to manage an FHA-approved wholesale lender. [*] completed FHA Direct
          Endorsement Training in February of 2003 (Exhibit C-8), and obtained her individual
          mortgage broker license from the state of Florida on June 5, 2003 (Exhibit C-9). As a
          state-Iicensed mortgage broker, [*] obtained a mortgage lender license for NFI
          from the state of Florida on June 26, 2003 (Exhibit C-10). Once [*] and NFI
          were properly licensed under Florida law, the [*] transferred ownership of NFI to
          [* granddaughter] on July 2, 2003 (Exhibit C-11 ).

                 As the corporation was finally licensed as a mortgage lender, it could legally
          open for business. Thus, [* granddaughter] set out to obtain a warehouse line and
          purchasing investors. [*] secured a warehouse line of credit from PCFS
          Mortgage Resources on October 2, 2003 (Exhibit C-12). NFI received its initial
          operating income on October 31, 2003, after obtaining the line of credit, when NFI
          closed its first, conventional loan.

                  After NFI became operational in October of 2003, NFI relocated to a larger office
          at 1621 Tamiami Trail, Suite 3, North Fort Myers, Florida 33917. NFI began paying rent
          for this office space in November 2003 (Exhibit C-13). While the company informed the
          Florida Department of Financial Services of NFI's new address and applied for FHA-
          approval from this new location, NFI inadvertently overlooked its corporate filing with the



[*] Names of individual principals, family members, FCM employees, and borrowers were redacted by OIG to
preserve their privacy. In some instances, titles were inserted to preserve the meaning of the text.




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          Mr. James McKay
          May 11, 2004
          Page 7


                 Florida Department of State regarding the address change. Upon discovering this
          oversight, NFI immediately filed the necessary corporate amendment regarding the
          address change (Exhibit C-14).

                 On November 24, 2003, after the Department reviewed NFI's application and
          audited financials, NFI received approval as a HUD/FHA non-supervised mortgagee
          (Exhibit C-15), and, on December 10, 2003, received approval to submit mortgages in
          the Direct Endorsement program for pre-closing review (Exhibit C-16). Since obtaining
          FHA approval, NFI has grown beyond the capacity of the Tamiami Trail office. Thus, it
          has relocated to 3830 Evans Avenue, Suite 1-A, Fort Myers, Florida 33901, its current
          registered address with the state of Florida and the Department (Exhibit C-17).

                 Finally, on April 20, 2004, the ownership of NFI was transferred from [* granddaughter]
          to her mother, [*], who was the [*] ultimate intended recipient of this
          new mortgage entity (Exhibit C-18). [* granddaugther] is expecting a child shortly, and
          [* daughter] has purchased property in Florida to accommodate her impending
          relocation from Ohio to South Florida (Exhibit C-19). Thus, to accommodate these
          changes, [* daughter] has taken control of NFI as the sole director, owner, and
          president of NFI (Exhibit C-17).

                C.     Family Home Funding Enterprises. Inc.

                  In approximately May of 2003, as NFI was being established, some of the
          [*] children and grandchildren expressed an interest in remaining in the loan
          origination business, instead of participating in the wholesale lender business being
          established. One of these children, [* daughter], pledged the assets for the new
          entity. As discussed above, however, [*] was located in Ohio and was not
          licensed as a mortgage broker under Florida law, but wanted to establish the new entity
          in Florida because she intended to relocate from Ohio to Florida in 2004. As the
          [*] had made a business decision in 2002 to wind up and close the doors of FCM,
          many of FCM's loan officers were aware that they would be unemployed upon the
          closing of FCM. One such loan officer was [*FCM Employee 1], a friend of the family. [*FCM
          Employee 1]
          expressed an interest in participating in the new corporation being set up for
          the benefit of the [*] heirs. As [*] was located in Florida and had a
          Florida broker's license, the [*] agreed to allow [*] to participate in the
          new venture.

                 To establish the new entity, [* FCM Vice-President] incorporated FHFE. [*]
          requested the corporate documentation on or around June 20, 2003. The incorporation
          documents were filed by the Florida Division of Corporations on June 24, 2003 (Exhibit
          D-1); however, the Division of Corporations received and reviewed the documents,


[*] Names of individual principals, family members, FCM employees, and borrowers were redacted by OIG to
preserve their privacy. In some instances, titles were inserted to preserve the meaning of the text.



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          Mr. James McKay
          May 11, 2004
          Page 8


          accepted the corporate filing, and charged [* FCM Vice-President] the incorporation fees on June
          23, 2003 (Exhibit D-2), the day before FCM received a letter sustaining the termination
          of the Company's origination authority in the Miami/Coral Gables jurisdiction. The initial
          address for FHFE was 3049 Cleveland Avenue, Suite 201, Fort Myers, Florida 33901
          (Exhibit D-1). A few days after incorporating the new entity on her children's behalf, on
          July 2, 2003, [*] transferred ownership of FHFE to [* FCM Employee 1] (Exhibit D-3),
          who became the President and sole Director of FHFE (Exhibit D-4).

                 To begin establishing FHFE as a mortgage broker, [* FCM Employee 1] began the state
          licensing process and rented a small executive office for the corporation at 3049
          Cleveland Avenue, Suite 250-J, Fort Myers, Florida 33901 (Exhibit D-5). FHFE
          obtained a correspondent mortgage lender license on August 5, 2003 (Exhibit D-6).
          On August 27, 2003, FHFE obtained audited financials from an independent account in
          preparation for its FHA application (Exhibit D-7). In September of 2003, [* daughter]
          deposited $21,671 into a money market account established for FHFE (Exhibit
          D-8). Also in September of 2003, FHFE moved from its executive office to 13180 North
          Cleveland Avenue, Suite 320, North Fort Myers, Florida, 33903 (Exhibit D-9), a larger
          office that could accommodate a mortgage origination business. Finally, FHFE applied
          for FHA approval as a loan correspondent and, on October 31,2003, received approval
          from the Department (Exhibit D-10). FHFE began making loans in December of 2003.

                 In November of 2003, [*FCM Vice-President] approached [*FCM Employee 1] and offered FHFE
          office space in Suite 201 at the 3049 Cleveland Avenue address. Suites 200 and 201
          had been separated by walls at that time, and [*] stated that FHFE could take
          over Suite 200 when FCM closed in doors in the spring of 2004. [* FCM Employee 1] agreed
          and FHFE relocated to the Suite 201 offices (Exhibit D-11). At that time, [* FCM President]
          and [* daughter] were added as officers of FHFE to facilitate the
          establishment of an Ohio branch office of FHFE for one of the [*] grandchildren
          who intends to remain in Ohio (Exhibit D-11). After this relocation, however, the owner
          of the building raised the rent by $635 per month. As FHFE was able to find adequate
          office space for less than the increased rent, FHFE again moved its operations to its
          present location at 2709 Swamp Cabbage Court, Fort Myers, Florida 33901 (Exhibit D-
          12). While at this location, FHFE has been in the process of renovating a larger office
          complex, and plans to move to a new office building in the new future.

                 In early 2004, [* FCM Employee 1] decided to leave FHFE. As FCM was within days of
          closing its doors, when an FCM employee, [* FCM Employee 2], expressed an interest in
          replacing [*]. Thus, on April 1, 2004, [*] transferred his ownership
          interest in FHFE to [*] (Exhibit D-13). [* FCM Employee 2] is currently the majority owner
          and sole officer of FHFE (Exhibit D-14).


[*] Names of individual principals, family members, FCM employees, and borrowers were redacted by OIG to
preserve their privacy. In some instances, titles were inserted to preserve the meaning of the text.




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          Mr. James McKay
          May 11, 2004
          Page 9


          III.    RESPONSE TO THE FINDINGS

                 As previously noted, the Report contains three findings with recommendations for
          action by HUD and the Departmental Enforcement Center. Contrary to the allegations
          in the Report, however, FCM and its principals substantially adhered to FHA
          requirements identified therein and their actions did not harm the FHA Insurance Fund.
          We address each finding in turn below.

                 A.    Finding 1 - Incorporation of New Mortgage Entities

                       1.   FCM Did Not Intend to Circumvent the Credit Watch
                            Termination When It Established NFI and FHFE

                 In Finding 1, the Report alleges that FCM's owners effectively circumvented
          HUD's suspension of FCM in a termination proceeding under the Department's Credit
          Watch Initiative by creating two new mortgage companies and obtaining HUD approval
          for them to originate loans. The Report alleges that these entities were created to
          "continue business as usual" after the Credit Watch "suspension." The Report suggests
          that the alleged violations increased the risk to the FHA Insurance Fund and
          recommends that HUD withdraw the origination authority for FCM, NFI, and FHFE and
          invoke civil money penalties and that the Departmental Enforcement Center debar the
          principal officers of FCM from participation in federal programs and consider debarring
          the principals of NFI and FHFE.

                 Contrary to the allegations in the Report, at no time did FCM intend to circumvent
          HUD guidelines when its principals established the two mortgage entities. As discussed
          above in the introduction section of this response, the owners of FCM decided in late
          2002, after being diagnosed with serious illnesses, to exit the mortgage industry and
          pass their business to their children and grandchildren. After being subject to two audits
          by the Department's Quality Assurance Divisions, the owners of FCM realized how little
          control a loan correspondent has over the loan process and the loans for which it is
          responsible. Thus, the owners initially decided to slowly wind down FCM's operations
          and incorporate a new entity that would engage in wholesale lending and third party
          originations. The [*] incorporated NFI in January of 2003 to accomplish this goal
          (Exhibit C-4). After discussing their plans to close FCM with their children and
          grandchildren, the [*] discovered that some of them desired to remain in the loan
          origination business. Thus, in June of 2003, the [*] incorporated a second
          company, FHFE, which they intended to act as the loan originating company for their
          children after FCM was closed. The new companies obtained authority to engage in the
          mortgage business in Ohio for the benefit of the [*] grandchildren as well. At least
          one grandchild intends to remain in Ohio, and the Ohio business licenses were obtained


[*] Names of individual principals, family members, FCM employees, and borrowers were redacted by OIG to
preserve their privacy. In some instances, titles were inserted to preserve the meaning of the text.




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          Mr. James McKay
          May 11, 2004
          Page 10


          by NFI and FHFE for his benefit, not, as the Report suggests, to circumvent any
          suspension of the Ohio office of FCM. As discussed below, FCM was never suspended
          in Ohio.

                  The decision to create, and the process of creating, the two new mortgage
          entities was undertaken before FCM was made aware of the possible termination of its
          origination authority in HUD's Miami/Coral Gables jurisdiction. FCM received a letter
          from the Department dated March 20, 2003 informing the Company that HUD was
          considering terminating FCM's authority to originate FHA-insured loans from its Fort
          Myers office in HUD's Miami/Coral Gables jurisdiction (Exhibit E-1). After submitting a
          written response to the Department and engaging in an informal hearing via telephone
          with Department officials to discuss the termination notice, on June 24, 2003, FCM
          received a letter from HUD, dated June 23, 2003, indicating that the Department had
          terminated the Company's Origination Approval Agreement in the Miami/Coral Gables
          jurisdiction (Exhibit E-2). As discussed above, however, NFI was incorporated on
          January 24, 2003 (Exhibit C-4), two months before FCM received the March 20. 2003
          letter and almost six months before the Coral Gables Origination Approval Agreement
          was terminated. In addition, FHFE's incorporation documents were submitted to the
          Florida Division of Corporations, and were reviewed, accepted, and paid for on June 23,
          2003, the day the termination notice was issued. Therefore, FHFE was effectively
          created the day before FCM was made aware of the termination of its origination
          authority in the Miami/Coral Gables jurisdiction. The timing of the [*] decisions to
          incorporate two new mortgage entities evidence that they did not intend to circumvent
          the Credit Watch termination proceeding.

                 The allegations in the Report that the incorporation of these two entities was an
          attempt to continue FCM's "business as usual" are also incorrect. As discussed above,
          the owners of FCM decided to close their business and retire from the mortgage
          industry. These new, independent entities were created for the benefit of their children
          and grandchildren. As discussed in detail in the background section above, one of
          these entities, NFI, does not engage in loan origination, which was FCM's primary
          business as a loan correspondent, and has never originated a loan in its own name.
          Furthermore, while FHFE was incorporated with the intent to originate loans, the
          process of establishing FHFE with the proper licensing and approvals took months and
          the company did not begin originating loans until December of 2003, six months after
          FCM lost its origination authority in the Miami/Coral Gables jurisdiction. Thus, FCM's
          business did not move forward uninterrupted through these companies. Rather, FCM
          slowly wound down its loan origination business, as the owners decided to do in 2002,
          and the new, independent agencies were slowly established as a wholesale lender and
          loan correspondent for the benefit of persons other than the owners of FCM.


[*] Names of individual principals, family members, FCM employees, and borrowers were redacted by OIG to
preserve their privacy. In some instances, titles were inserted to preserve the meaning of the text.




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        Mr. James McKay
        May 11, 2004
        Page 11

               Finally, circumvention of the Credit Watch "suspension" of FCM was
        unnecessary. As the OIG and the Department are aware, Credit Watch termination
        proceedings do not "suspend" a company from originating all FHA-insured loans.
        Rather, Credit Watch proceedings apply only to the specific office named in the
        termination notice and only terminate a company's origination authority in a specific
        FHA jurisdiction. In this case, the Credit Watch proceeding was limited to the Fort
        Myers office's authority to originate FHA-insured loans in the Miami/Coral Gables
        jurisdiction (Exhibits E-1 and E-2). At the time of the termination, FCM had two other
        branch offices with origination authority that were unaffected by the proceeding (Exhibit
        B). Furthermore, the Fort Myers office maintained origination authority in three other
        Florida jurisdictions after its Origination Approval Agreement was terminated in the
        Miami/Coral Gables jurisdiction (Exhibit E-3). Therefore, contrary to the allegations in
        the Report, FCM was not "suspended" from participation in FHA programs as a result of
        the Credit Watch termination proceeding. FCM retained authority to, and in fact did,
        engage in FHA originations in other Florida jurisdictions from its Fort Myers office and in
        its two branch offices after receiving the June 23, 2003 termination letter. As the
        Company maintained the ability to originate FHA loans in other offices and FHA
        jurisdictions, any effort to circumvent the termination of its Origination Approval
        Agreement in one FHA jurisdiction was unnecessary and certainly not a motive for
        creating NFI or FHFE.

               In summary, as demonstrated by the attached documents, the owners of FCM at
        no time intended to circumvent FCM's Credit Watch termination of origination authority
        in the Miami/Coral Gables jurisdiction. FCM was a small company owned and operated
        by two individuals desiring to provide for their family. The owner's incorporation of two
        new entities was an exit strategy for them out of the mortgage business and into
        retirement to deal with their health issues. These companies were created for reasons
        wholly apart from the termination of FCM's origination authority in one of the
        jurisdictions in which it was approved to engage in FHA lending. In addition, the
        incorporations were undertaken before FCM was informed that it's Origination Authority
        Agreement for the Miami/Coral Gables jurisdiction had been terminated, and FCM did
        not need to circumvent the suspension, as it was still able to originate loans in other
        jurisdictions in Florida and through other branch offices. As the actions of the owners of
        FCM were not intended to circumvent the Credit Watch proceeding, we believe that the
        Report's recommendations regarding the suspension of the companies and the
        debarment of FCM's principals is unwarranted in this instance.




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          Mr. James McKay
          May 11, 2004
          Page 12


                          2.   Employees of NFI and FHFE Were Exclusive at All Relevant
                               Times
                               a. NFI Employees

                Finding 1 further alleges that FCM's officers created, and FCM's employees were
          named as officers of, the two new entities while the employees were still working for
          FCM. In connection with NFI, Finding 1 specifically alleges that: (1) the owners of FCM
          were named the initial owners and directors of NFI; (2) the owners of FCM transferred
          ownership to [* granddaughter]; and (3) [* granddaughter] continued to work for FCM until
          October 2003, contrary to her resume supplied to the Department.

                  The owners of FCM, as well as the officers and employees of NFI, understand
          and appreciate that all employees of FHA-approved entities, except receptionists, must
          be employed exclusively by the mortgagee at all times, and conduct only the business
          affairs of the mortgagee during normal business hours and may not have additional
          employment in the mortgage or real estate industry. HUD Handbook 4060.1 REV-1, ¶
          2-14; Mortgagee Letter 94-39. The owners of FCM and NFI are also aware that senior
          corporate officers of FHA-approved entities are required to spend their full time on the
          mortgagee's operations. HUD Handbook 4060.1, ¶11 2-11 (A). Notwithstanding this
          requirements, FHA guidelines permit corporate officers to represent more than one
          company, provided that: (1) there is a clear and effective separation of the two entities
          and mortgagors know at all times exactly with which entity they are doing business; and
          (2) there is a duly constituted senior corporate officer designated to conduct exclusively
          the affairs of the mortgagee during normal business hours. Id. ¶ 11 2-11 (8). The officers
          and employees of FCM and NFI substantially complied with these requirements.

                 With respect to the allegation that FCM's owners were the initial corporate
          officers and owners of NFI before transferring the company to [* granddaughter], the
          owners of FCM acknowledge this fact. As discussed above, the [*] initially
          incorporated a shell corporation in January of 2003 to begin the process of establishing
          a wholesale lender for their children and grandchildren. The [*] relied on their
          business experience to begin this process as their granddaughter, [*], was
          obtaining the requisite training to take over the shell corporation and establish it as a
          wholesale lender. Upon her completion of this training, the [*] transferred
          ownership to [* granddaughter] in July of 2003 (Exhibit C-11).

                 At all times during the [*]’s ownership of NFI, the new entity was a non-
          functioning, shell corporation. The company was not licensed in the state of Florida,
          was not approved to engage in FHA lending, and did not have a warehouse line of


[*] Names of individual principals, family members, FCM employees, and borrowers were redacted by OIG to
preserve their privacy. In some instances, titles were inserted to preserve the meaning of the text.




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          Mr. James McKay
          May 11, 2004
          Page 13


          credit enabling it to engage in mortgage lending. The [*] merely began the
          process of establishing the corporate entity for their heirs, and transferred ownership of
          the entity to their granddaughter upon her obtaining the requisite training. NFI was
          transferred to [* granddaughter] immediately upon its license as a mortgage lending entity
          and prior to its approval by HUD as a mortgagee. At no time did the [*] engage in
          any substantive business through NFI. Rather, the [*] spent their full time on the
          operations of FCM in accordance with FHA guidelines and, where they served as joint
          officers, FCM had a senior corporate officer dedicated to FCM's operations and NFI was
          essentially a non-functioning start-up entity without any corporate responsibilities for the
          officers to fulfill.

                  With regard to the allegations concerning [* granddaughter], at all times during
          which NFI was operational and open to the public, [* granddaughter] was exclusively working
          at NFI and serving as its senior corporate officer. As discussed above, [* granddaughter]
          took over ownership of NFI in July of 2003 (Exhibit C-11 ), but did not obtain a
          warehouse line of credit to engage in business until October 2, 2003 (Exhibit C-12). By
          that time, [* granddaughter] had completely ceased her employment with FCM and was
          concentrating her full efforts on NFI's success. Prior to that time, although [* granddaughter]
          had ceased her employment with FCM, she was included on the payroll of FCM to
          maintain her health benefits. [*] was expecting a child and her grandparents,
          the owners of FCM, wanted her to receive health benefits even as she established NFI.
          Thus, after consulting with [*], a compliance officer in the U.S. Department
          of Labor's Wage and Hour Division, the owners of FCM retained [* granddaughter] on FCM's
          payroll to maintain her health benefits. While this decision gave the appearance that
          [*] was still working at FCM, she had already left her duties at FCM to
          concentrate her efforts on NFI.

                 Finally, [* granddaughter] was exclusively employed by and working for NFI at the time
          NFI applied for and received HUD approval in November of 2003. [* granddaughter],
          however, acknowledges that her resume incorrectly stated that she had been so
          exclusively employed by NFI since its incorporation in January of 2003; however, as
          discussed above, [*] remained employed by FCM until NFI began obtaining
          the requisite licensing and credit line. [* granddaughter’s] resume should have more properly
          stated that she did not begin employment with NFI until the entity was properly licensed
          and had obtained a warehouse line of credit enabling the entity to actually conduct
          business. Employment situations similar to [*granddaughter’s] are fairly common in
          established mortgage entities when the established entity sets out to incorporate
          subsidiaries or affiliated entities. Often, the established entity wishes to transfer
          employees to the new entity; however, such employees understandably do not want to
          forego salaries and health benefits while the new entity obtains requisite licensing and
          capital. Under such circumstances, lenders often inform the Department's Office of


[*] Names of individual principals, family members, FCM employees, and borrowers were redacted by OIG to
preserve their privacy. In some instances, titles were inserted to preserve the meaning of the text.




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          Mr. James McKay
          May 11, 2004
          Page 14


          Lender Approval and Recertification Division that employees of an established
          mortgage business will be reassigned to the new mortgage entity once it becomes
          operational. Had NFI taken this approach when submitting her resume to the
          Department, [*granddaughter’s] employment likely would not have been at issue.

                  In summary, the corporate officers of FCM complied with HUD requirements in
          their incorporation of NFI. In addition, while [*granddaughter’s] resume and appearance on
          FCM's employee list after NFI was incorporated suggest that [*] did not
          adhere to HUD's exclusivity requirements, [*]'s continued employment by
          FCM was for the purpose of continuing to receive health benefits through her
          pregnancy, not to engage in substantive loan origination activities. While inaccuracies
          occurred in [*]'s employment documentation, at no time while NFI was
          operational or approved by the Department did [*] perform work for another
          company. Since NFI has become operational, [*] has been exclusively
          employed by NFI. Given that [*] was exclusively employed by only one
          operational company at any time, we maintain that the Report's recommendation to
          debar these individuals or suspend NFI is inappropriate in this instance.

                              b.   FHFE Employees

                  In connection with FHFE's officers and employees, Finding 1 specifically alleges
          that: (1) the owners of FCM were named the initial owners and directors of FHFE; (2)
          the owners of FCM transferred ownership to a loan officer who was employed by FCM
          at the time; and (3) employees of FHFE submitted resumes to HUD listing them as
          employees of FHFE while the employees were still employed by FCM.

                 With respect to the allegation that FCM's owners were the initial corporate
          officers and owners of FHFE before transferring the company to [* FCM Employee 1],
          the owners of FCM acknowledge this fact. As discussed above, the [*] initially
          incorporated a shell corporation in June of 2003 to begin the process of establishing a
          loan origination entity for their children and grandchildren who wished to continue in this
          line of business after FCM ceased doing business. The [*] relied on their business
          experience to begin this process and subsequently transferred ownership to [* FCM Employee 1]
          in July of 2003 (Exhibit D-3). As with NFI, above, at all times during the
          [*] ownership of FHFE, the new entity was a non-functioning, shell corporation
          without state licensing or federal approval. The [*] merely began the process of
          establishing the corporate entity for their heirs. At no time did the [*] engage in
          any substantive business through FHFE. Rather, the [*] spent their full time on the
          operations of FCM in accordance with FHA guidelines and, where they served as joint
          officers, FCM had a senior corporate officer dedicated to FCM's operations.


[*] Names of individual principals, family members, FCM employees, and borrowers were redacted by OIG to
preserve their privacy. In some instances, titles were inserted to preserve the meaning of the text.




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          Mr. James McKay
          May 11, 2004
          Page 15

                 With regard to the allegations in the Report concerning [* FCM Employee 1], at all
          times during which FHFE was operational and open to the public, [* FCM Employee 1] was
          exclusively working at FHFE and serving as its senior corporate officer. As discussed
          above, [*] took over ownership of FHFE in July of 2003 (Exhibit D-3), but the
          entity did not obtain a state license to engage in loan origination until August 5, 2003
          (Exhibit D-6) and did not obtain FHA approval until October 31,2003 (Exhibit D-10).
          By that time, [* FCM Employee 1] had completely ceased his employment with FCM and was
          concentrating his full efforts on FHFE's success. We acknowledge that while [*]
          resume incorrectly indicated that he ended his employment with FCM in June
          of 2003, [*] remained with FCM for a few more months to close out his
          existing files and await approval of the new entity as a viable mortgage entity.

                  With regard to the allegations regarding the two employees whose resumes were
          submitted with FHFE's FHA application, [*FCM Employee 3] and [* FCM Employee 4], at
          no time during which FHFE was operational and open to the public did these employees
          engage in non-exclusive employment. As discussed above, FHFE did not obtain FHA
          approval until October 31, 2003, and did not begin originating loans until December of
          2003. While the resumes submitted to HUD incorrectly listed FHFE's incorporation date
          as the employees' start date, these employees did not cease working for FCM until
          FHFE became a viable mortgage business able to originate loans. In the months
          between FHFE's incorporation and its establishment as an operational mortgage
          business open to the public, [* FCM Employee 3] served as FCM 's receptionist and performed
          FCM's quality control on a contract basis. [*]'s income from FCM ceased in July
          of 2003 (Exhibit E-4). [* FCM Employee 4] was employed as a fee processor for FCM during
          this period. While their resumes reflect earlier start dates at FHFE, these employees
          were not engaged in business on behalf of FHFE until it obtained the proper approvals
          and opened to the public. Furthermore, neither employee engaged in loan origination
          activities for FCM, but rather performed clerical and ministerial duties.

                 With regard to the allegations concerning the initial employees of FHFE, as
          discussed above, employment situations similar to these circumstances are fairly
          common in established mortgage entities when the established entity sets out to
          incorporate subsidiaries or affiliated entities. Under such circumstances, lenders often
          inform the Department's Office of Lender Approval and Recertification Division that
          employees of an established mortgage business will be reassigned to the new
          mortgage entity once it becomes operational. Had FHFE taken this approach when
          submitting her resume to the Department, the employment allegations regarding FHFE
          likely would not have been at issue.

               We appreciate that FHFE employees' resumes should have reflected the
          employees' actual start dates and not the incorporation date of FHFE. Furthermore, we



[*] Names of individual principals, family members, FCM employees, and borrowers were redacted by OIG to
preserve their privacy. In some instances, titles were inserted to preserve the meaning of the text”




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          Mr. James McKay
          May 11, 2004
          Page 16


          understand and appreciate that employees of FHA-approved entities must strictly
          adhere to FHA requirements regarding exclusive employment. While we acknowledge
          that some overlap in employment by FHFE and FCM occurred, at no time did such
          overlap occur when FHFE was a viable mortgage business open to the public. Thus,
          we do not believe that the harsh sanctions recommended by the OIG are warranted in
          this instance.

                       3.     NFI and FHFE Established Separate Office Space Upon
                              Becoming Licensed Mortgage Entities

                  Finding 1 alleges that both NFI and FHFE were incorporated using an address
          that, while listed as a different suite number, was the same office space in which FCM
          was located. In connection with NFI, the Report alleges that NFI had a storefront sign in
          front of the office complex where FCM was located, and the OIG determined that
          complex to be NFI's main contact point with the public in December of 2003; however,
          HUD documentation listed a different address for NFI. Finding 1 further alleges that
          NFI's corporate licenses and documentation listed an address different than the one
          listed in HUD's documentation. In connection with FHFE, Finding 1 alleges that FHFE
          had a storefront sign in front of FCM's office complex and was located in the same
          office space as FCM. Finding 1 also alleges that FHFE changed its address back to the
          complex address where FCM was located and added officers, including [* daughter]
          and [* FCM President], to its list of directors.

                 With regard to the allegation concerning the incorporation address of NFI and
          FHFE, we acknowledge that both entities were incorporated using the address of 3049
          Cleveland Avenue, Suite 201. Nevertheless, the use of the Suite 201 address to
          establish these two shell corporations constituted, at worst, harmless error. At the time
          these entities were listed as being located at this address, both were shell corporations
          without state licensing, FHA approval, or employees. HUD requirements regarding the
          separate of office space are in place to ensure that the public can easily locate and
          discern mortgage companies. In this case, NFI and FHFE were not open to the public
          during their brief tenures at Suite 201 in the Cleveland Avenue building and, at all times
          during its location there, it was clear to the public that FCM was operating out of Suite
          200. Both entities were quickly relocated to separate office space to obtain licenses,
          approvals, and hire employees. NFI was relocated to separate office space in Suite 234
          in March of 2003 (Exhibit C-5), two months after incorporation, and FHFE was
          relocated to Suite 250J a few weeks after incorporation in June of 2003 (Exhibit D-5).
          Both entities relocated to completely different office buildings before becoming
          operational and holding themselves out to the public (Exhibits C-13, C-14 and D-9).
          Thus, while the official addresses of these two entities at their inception placed them in



[*] Names of individual principals, family members, FCM employees, and borrowers were redacted by OIG to
preserve their privacy. In some instances, titles were inserted to preserve the meaning of the text.




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                                                                                                     Appendix F




          Mr. James McKay
          May 11, 2004
          Page 17


          the same office space at FCM, NFI and FHFE did not engage in business or make
          contact with the public from this space.1

                  In connection with the allegations regarding NFI's conflicting addresses, the
          differing addresses listed in NFI's corporate documentation and in HUD's
          documentation occurred because NFI inadvertently omitted filing a change of address
          with the state of Florida. Contrary to the allegation in Finding 11 NFI's main point of
          contact with the public in December of 2003 was its location at Tamiami Trail, where it
          moved and began paying rent in November of 2003 (Exhibit C-13). NFI filed its
          address change to the Tamiami Trail location with the Florida Department of Financial
          Services at the time of the relocation, as well as with HUD in accordance with its filing
          requirements for location changes. See HUD Handbook 4060.1 REV-1, ¶ 2-21.
          Unfortunately, NFI inadvertently omitted filing a corporate resolution of address change
          with the Florida Department of State. When NFI realized its oversight, the company
          immediately filed the requisite corporate amendment with the Secretary of State on
          January 20, 2004 (Exhibit C-14). Currently, all state and HUD records demonstrate
          NFI's current address, which is located at 3830 Evans Avenue (Exhibit C-17). With
          regard to the storefront sign, NFI placed the sign in front of the office complex while it
          was located in Suite 234 of that building. As explained in [* granddaughter’s] March 9, 2004
          letter to the OIG, this sign was abandoned when NFI relocated to the Tamiami Trail
          address, as the sign did not fit in the new location (Exhibit C-7).

                  In connection with the allegations regarding FHFE, as discussed in detail above,
          FHFE relocated several times during its brief corporate history to accommodate its loan
          origination activities. In December of 2003, FHFE relocated to the Suite 201 office at
          the 3049 Cleveland Avenue address (Exhibit D-11 ). This relocation was not
          accomplished to merge the two entities or to do business from the same location. To
          the contrary, this relocation complied with HUD requirements, as Suite 201 had been
          separated from Suite 200 in compliance with HUD requirements and, as the OIG
          acknowledges in the Report, FHFE displayed a door-front sign and was the prominent
          entity in Suite 201. In addition, FCM was in the process of closing, and FHFE was
          aware that Suite 200 would become available when FCM closed its doors and vacated
          the space. Thus, the storefront sign in front of this office complex accurately informed
          the public of FHFE's location inside the building. When the owner of the building,
          however, raised the rent on this office space, FHFE relocated to its present location at


          1 Please note that, as discussed above, FHFE did relocate to Suite 201 after it obtained
          state licensing and FHA approval and began engaging in business (Exhibit D-11 ). This
          relocation occurred after Suites 200 and 201 had been separated in accordance with
          HUD guidelines and could clearly be identified to the public as separate and apart from
          FCM, which was winding up its operations at the time.


[*} Names of individual principals, family members, FCM employees, and borrowers were redacted by OIG to
preserve the meaning of the text.




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          Mr. James McKay
          May 11, 2004
          Page 18


          2709 Swamp Cabbage Court, Fort Myers, Florida 33901 (Exhibit D-12). With regard to
          the allegation concerning the addition of directors to FHFE, [* FCM President] and
          [* daughter] were added to FHFE's board to facilitate state licensing of the entity in
          Ohio. FHFE sought to establish a branch office in Ohio for one of the [*]
          grandchildren, who intends to remain in Ohio. [*FCM President] and [* daughter] have since
          been removed as directors of FHFE (Exhibit D-13), and [* daughter] has purchased
          property in anticipation of relocating to Florida (Exhibit C-19).

                  In summary, while we appreciate that HUD-approved lenders must strictly adhere
          to all FHA requirements, and that separate office space should have been established
          for NFI and FHFE prior to incorporation, we do not believe that this oversight should
          result in the termination of NFI's origination authority or the debarment of the principals
          of FCM or NFI. The above discussions demonstrate that NFI and FHFE: (1) were
          merely shell corporations with no corporate function during their initial location in Suite
          201; (2) otherwise strictly complied with HUD's office space requirements; and (3)
          maintain separate locations from FCM and each other throughout the remainder of their
          corporate histories. Based on these facts, we believe that the Report's recommended
          sanctions would be overly harsh and are not appropriate in this circumstance.

                       4.     NFI Satisfied the Requisite Net Worth Requirements

                 Finally, Finding 1 alleges that the OIG's computerized searches of county land
          records did not uncover any land or other assets owned by NFI, although NFI's primary
          corporate asset used to satisfy its net worth requirement was land. Furthermore, the
          timeline submitted during the OIG's exit interview alleges that the vacant land owned by
          NFI that was valued at $200,000 in NFI's FHA application was purchased from FCM on
          March 6, 2003 for $39,100.

                  With regard to the allegation that NFI does not own the land listed as its
          corporate asset, we respectfully disagree. As discussed in [* granddaughter’s] March
          9, 2004 letter to the OIG, there was an apparent clerical error at the Lee County
          recording office, where the property in question is recorded (Exhibit C-7). Upon receipt
          of the OIG's Report, NFI investigated the ownership of the land that is listed as an asset
          of NFI in its application for FHA approval. NFI discovered that the owner of the property
          is listed as "Neighbor Funding, Inc." instead of "Neighborhood Funding, Inc." (Exhibit F-
          1). NFI is not aware if this incorrect spelling of the company's name occurred because
          of a data entry error or because county tax records do not allow enough spaces for the
          word "Neighborhood" to be completely spelled out. Whatever the reason for the error
          on the part of the recorder's office, there is no question that NFI owns the property in
          question and, thus, that the property is a component of NFI's net worth.



[*] Names of individual principals, family members, FCM employees and borrowers were redacted by OIG to
preserve their privacy. In some instances, titles were inserted to preserve the meaning of the text.




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        Mr. James McKay
        May 11, 2004
        Page 19


               With regard to the allegation concerning the value of the property, we respectfully
        disagree with the suggestion in the Report that the property was worth only $39,100 in
        March of 2003. As the Department is aware, the accepted process of determining the
        value of property is to consult an appraisal of the property from an independent
        appraiser. In preparing NFI's audited financials in connection with its initial FHA
        application in November of 2003, NFI's accountants based the value of the property on
        an appraisal prepared on December 16, 2002, in which the property was valued at
        $300,000 (Exhibit F-2). NFI's accountants, however, used a much more conservative
        value of $200,000 in land to calculate NFI's net worth (Exhibit F-3). Furthermore, in
        preparation of this response, NFI obtained another independent appraisal of the
        property on April 13, 2004, which valued the land at $207,000 (Exhibit F-4).

               We believe that the value of $39,100 cited in the OIG's timeline resulted from the
        OIG's examination of the deed of the land from FCM to NFI. In Florida, when a property
        has no outstanding mortgage and is transferred via quitclaim deed, as was the case
        with the property at issue, the county charges the seller transfer fees in the amount of
        the property's assessed value for tax purposes. The tax assessment value is stamped
        on the deed. In this case, the 2002 assessed value of the property for tax purposes
        was $39,100. As evidenced by the 2003 tax assessment statement, this assessed
        value has already increased to $93, 100 (Exhibit F-1 ). As the Department and the OIG
        are aware, the tax assessment value of a property is often much less than the
        property's market value. In this case, the recent appraisal of $207,000 represents an
        accurate market value of the property, and is $7,000 more than the listed value of the
        property in NFI's audited financials used to meet HUD's net worth requirements.

              In summary, the property used to achieve NFI's required net worth is properly
        owned by NFI and was accurately valued in the audited financials submitted in
        connection with NFI's FHA application.

                               B. Finding 2 -Loan Origination Issues

               In Finding 2, the Report alleges that FCM did not comply with HUD requirements
        in the origination of 18 loans that the OIG reviewed during its audit, as FCM did not
        obtain complete documentation, made improper income determinations, or did not
        ensure compliance with other HUD standards. Specifically, Finding 2 alleges that FCM:
        (1) improperly computed effective income in five of 18 loans; (2) did not verify the
        availability and/or source of funds needed by three borrowers to close their loans; (3)
        did not verify the borrower's employment in three of the 18 loans reviewed; (4) allowed
        six loans to close when settlement statements showed sellers or other interested third
        parties contributed more than six percent of the sales price toward closing costs; (5) did
        not verify the receipt of gift funds in accordance with HUD requirements in 15 of 17




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        Mr. James McKay
        May 11, 2004
        Page 20

        loans in which gift funds were received, 14 of which were gifts from non-profit
        downpayment assistance organizations; and (5) in one refinancing loan, charged the
        borrower an unallowable application fee of $700. Based on these allegations, the
        Report recommends that FCM repay the borrower, and repeats its recommendations
        that HUD withdraw the origination authority for FCM, FHFE, and NFI and debar the
        principal officers/owners of FCM in participation in federal programs.

                     •    Allegations Regarding Underwriting Deficiencies

               Below, FCM responds to each individual allegation made in the Report and in
        Appendix A. First and foremost, however, we would like to point out that it appears that
        the Report and Appendix A do not distinguish between the responsibilities and
        requirements of loan correspondents and sponsoring lenders in originating FHA-insured
        loans. As the Department and the OIG are aware, loan correspondents are responsible
        for taking the initial loan application, handling the appraisal assignment with HUD,
        procuring verifications of deposit and employment and the credit report, and closing and
        submitting the loan for endorsement after it has been underwritten. HUD Handbook
        4000.4 REV-1, CHG-2, ¶ 2-13. Loan correspondents are not authorized to perform any
        underwriting function, including an analysis of the appraisal or the borrower's credit. Id.
        Furthermore, HUD regulations dictate that "each sponsor shall be responsible for the
        actions of its loan correspondent lenders or mortgagees in originating loans or
        mortgages." 24 C.F.R. § 202.08(b)(7). In fact, the OIG acknowledges on page four of
        the draft Report that "the sponsor mortgage company is responsible to HUD for the
        actions of its loan correspondent(s) in originating insured mortgages."

               In accordance with these FHA guidelines, the Department traditionally has
        accepted that loan correspondents take a borrower's initial application, collect income
        and employment documentation, and process the loan, but that the evaluation and
        analysis of the borrower's credit and the sufficiency of the loan documentation is the
        responsibility of the underwriter and the sponsoring lender. When HUD determines that
        the borrower's income, funds to close, or credit was insufficient, the Department in the
        past has held the underwriter and sponsoring lender accountable. In this case, contrary
        to HUD's practices in the past, the Report appears to hold FCM, a loan correspondent,
        responsible for the credit and document analysis performed by its sponsors. Many of
        the findings in the Report, go directly to the sponsor's underwriting decisions and not to
        the processing responsibilities of FCM. FCM was not responsible and, in fact, was not
        authorized to analyze the borrower's credit or make underwriting decisions in these
        cases.

              Finally, we note that one of FCM's former sponsors, Irwin Mortgage Company,
        underwrote 5 of the 18 loans reviewed by the OIG. We understand that the OIG audited




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        Mr. James McKay
        May 11, 2004
        Page 21

        Irwin in connection with its audit of FCM. During its Quality Assurance Division audits in
        late 2002 and early 2003, FCM developed concerns regarding the prudence of some of
        the underwriting decisions made by this sponsor. Therefore, as a result of those audits,
        FCM ceased doing business with Irwin Mortgage Company. The loans that are the
        subject of the OIG's audit were originated before the quality assurance audits were
        conducted and before FCM terminated its relationship with this sponsor.

                      •   Allegations Regarding Downpayment Assistance Gift Documentation

               With regard to the allegations concerning documentation of downpayment
        assistance gifts from non-profit organizations, FCM understands and appreciates that it
        must fully document any downpayment assistance gifts provided to borrowers by non-
        profit organizations. As you know, Page 2-11 of HUD's Single Family Reference Guide
        ("Guide") expressly states that, with respect to gifts provided by a nonprofit or
        municipality through a downpayment assistance program, "[e]vidence of the actual
        transfer of funds can be shown as a transaction on the HUD-1 [Settlement Statement]."
        As demonstrated in the individual responses below, in each of the 14 cases at issue in
        the Report, FCM obtained a HUD-1 demonstrating that the borrower received a
        downpayment assistance grant from a nonprofit organization.

                FCM also understands and appreciates that Page 2-11 of the Guide requires
        lenders to obtain evidence from the nonprofit organization of the amount of the
        downpayment assistance grant. In several cases, at issue here, documentation from
        the non-profit organization in FCM's file evidenced the grant amount. As FCM
        explained to the OIG during its audit, it is difficult for a loan correspondent to obtain
        complete documentation of the transfer of these funds at closing. Often, gift funds in
        the form of downpayment assistance are provided to the borrower through a wire
        transfer of the funds form the non-profit organization to the borrower's settlement agent.
        After closing, the settlement agent forwards copies of the fund transfer documentation
        to the sponsoring lender, but does not forward that documentation to the loan
        correspondent. In fact, FCM had great difficulties obtaining copies of the documentation
        from either the sponsoring lender or the settlement agent for its files. Employees of
        FHFE have learned from FCM's past difficulties and obtain documentation of the
        transfer of gift funds directly from the non-profit organization that provides the gift funds
        when such funds are used by a borrower.

               In each of the 14 cases reviewed by the OIG in which downpayment assistance
        funds were used, FCM attempted but was unable to obtain complete documentation of
        the transfer of funds from the sponsoring lender at the time of closing. Nevertheless,
        the Report acknowledges that it audited 14 settlement agents in connection with these
        loans and, in al114 cases, the settlement agents property documented the receipt of gift




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          Mr. James McKay
          May 11, 2004
          Page 22


          funds. Thus, in each of these gift funds cases, the borrowers actually received the gift
          funds necessary to close the loan and any lack of documentation in FCM's files
          constituted, at worst, harmless error.

                       •    Remaining Loan Documentation Allegations

                 With regard to the remaining allegations in Finding 2 and Appendix A, FCM
          respectfully disagrees with many of the Report's findings. Several of the findings in the
          Report are at variance with the facts, do not constitute violations of FHA requirements
          on the part of FCM, or do not affect the underlying loans' insurability. FCM
          acknowledges that file documentation could have been more specific in certain
          instances. Where FCM's loan files did not contain adequate documentation, FCM has
          attempted to obtain the documentation in response to this audit from the borrower,
          sponsor, or employer, as applicable. In addition, please note that the OIG examined
          loans originated between April 1 , 2001 and April 30, 2003. This time period is the same
          time period examined during the Quality Assurance Division audits of the Fort Myers
          office of FCM. Thus, although FCM made significant changes to its practices and
          procedures as a result of the Quality Assurance Division's audit, the OIG reviewed
          loans originated before these improvements could be reflected in the loans the
          Company originated. Our individual responses follow.

                       1.    [*] - FHA Case Number 092-8584081

                 In the [*] case, Finding 2 alleges that: (1) the preliminary Uniform Residential
          Loan Application ("URLA") showed $34,000 in assets that were not shown on the final
          URLA; (2) receipt of gift funds from a non-profit downpayment assistance organization
          was not documented in FCM's file; and (3) the borrower's debt-to-income ratios were
          not recomputed when the underwriter increased the mortgage payment and the loan file
          did not document sufficient compensating factors.

                  With regard to the absence of the $34,000 in assets on the final URLA, FCM
          understands and appreciates the importance of accurately completing all applications
          and ensuring that all relevant information is included in loan documents. In this case,
          the initial URLA demonstrated that the borrower had a car, furniture, and other personal
          property valued at $34,000 (Exhibit G-1). FCM acknowledges that this information
          should have been included on the borrower's final URLA, as well. During its operation,
          it was FCM's policy and practice to ensure that all final URLAs were completed fully and
          accurately to permit the underwriter in each case to evaluate the borrower's complete
          financial situation. In this case, the absence of these assets on the borrower's final
          URLA was an oversight. Nevertheless, any oversight in this regard constituted, at
          worst, harmless error. The assets were recorded on the initial URLA in the loan file, the


[*] Names of individual principals, family members, FCM employees, and borrowers were redacted by OIG to
preserve their privacy. In some instances, titles were inserted to preserve the meaning of the text.




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          Mr. James McKay
          May 11, 2004
          Page 23


          inclusion of the personal property assets would not have altered the underwriter's
          evaluation of the borrower, and the borrower in this case qualified for FHA financing
          without consideration of these assets.

                 With regard to the downpayment assistance documentation, as discussed above,
          FCM obtained a copy of the HUD-1 , which demonstrates that the borrower received a
          downpayment assistance grant of $2,835 from a nonprofit organization (Exhibit G-2).
          Furthermore, the loan file contained a gift letter from the nonprofit organization informing
          the borrower that she had received gift funds in the amount of $2,835 (Exhibit G-3).
          Thus, FCM complied with the Reference Guide's downpayment assistance grant
          documentation requirements in this case. While FCM attempted to obtain
          documentation regarding the actual receipt of these gift funds by the borrower at the
          time of closing, FCM was unable to obtain this documentation from the settlement agent
          or the sponsoring lender. If the gift funds had not been given to the settlement agent at
          closing, then the agent would not have permitted the loan to close, and neither the
          settlement agent nor the buyer and seller should have certified on the HUD-1 that the
          gift funds were received. Finally, the Report acknowledges that the OIG's audit of 14
          settlement agents in connection with this audit revealed documentation that the
          borrower received gift funds in these cases.

                  With regard to the borrower's qualifying ratios and compensating factors, these
          allegations relate to underwriting deficiencies in the loan file. As discussed above, FCM
          was a loan correspondent and did not underwrite the [*] loan. According to
          HUD/FHA requirements, FCM gathered borrower's financial information in this case and
          submitted the information to its sponsor for underwriting and credit approval. The
          sponsor evaluated the loan application and made the underwriting decision. It was the
          sponsor's responsibility to determine and demonstrate that the borrower had sufficient
          credit to qualify for this loan. To the extent that the OIG disagrees with the sufficiency of
          the credit analysis in this case, the sponsor who underwrote the [*] loan should
          resolve this disagreement.

                   2.      [*] -FHA Case Number 092-8622768

                 In Finding 2, the Report alleges that: (1) FCM did document how it arrived at the
          borrower's effective income of $1,556 per month; (2) FCM did not obtain a Verification
          of Deposit ("VOD") or document the source of funds, as the deposit slip included in the
          loan file identifying a $2,000 deposit did not include the account owner and source of
          funds; (3) the receipt of downpayment assistance gift funds was not documented in
          FCM's file; (4) documentation substantiating that an acceptable evaluation of the
          borrower's credit history was not in the loan file; and (5) the compensating factors listed
          were unsatisfactory.


[*] Names of individual principals, family members, FCM employees, and borrowers were redacted by OIG to
preserve their privacy. In some instances, titles were inserted to preserve the meaning of the text.




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Appendix F




        Mr. James McKay
        May 11, 2004
        Page 24

               With regard to the allegation concerning income calculation, FCM acknowledges
        the importance of accurately calculating the borrower's income to ensure that the
        underwriter has an accurate picture of the borrower's financial situation and ability to
        repay the FHA loan. During its operation, it was FCM's policy and practice to ensure
        that income was calculated accurately using all available documentation regarding a
        borrower's income. In this case, FCM acknowledges that the loan processor, as well as
        the underwriter, miscalculated the borrower's income. Please note that this was an
        isolated incident in which the loan processor and underwriter inadvertently
        miscalculated the borrower's income as $87 more per month than demonstrated by the
        borrower's income documentation. Nevertheless, the loan file contained evidence that
        the borrower was not increasing his housing expense and had minimal debt in addition
        to his mortgage payment (Exhibit H-1). Using the borrower's accurate monthly income,
        this borrower would have qualified for FHA financing and, thus, any oversight in this
        case constituted harmless error.

               With regard to the allegation that FCM did not document the borrower's source of
        funds, FCM is aware that loan correspondents must verify borrower deposits by
        obtaining a VOD and verifying the source of the funds the borrower uses to close a
        loan. See HUD Handbook 4155.1, REV-4, CHG-1, ¶ 3-1 (F). FCM acknowledges that
        the deposit slip in this loan file did not document the source of the $2,000 deposited.
        During operation, it was FCM's policy and practice to obtain a VOD in each case and
        verify that the funds used to close a loan were not obtained from an improper source. In
        this case, there is no evidence to suggest that the $2,000 was derived from an improper
        source. Furthermore, the borrower needed only $255.86 to close the loan on April 19,
        2001 (Exhibit H-2). The loan file contained income documentation demonstrating that
        the borrower earned approximately $375 per week (Exhibit H-3). Thus, the borrower
        would have received a weekly paycheck the week of April 19, 2001, and could have
        used a portion of that $375 to cover the $255.86 needed to close the loan. Thus, any
        oversight on the part of FCM and the underwriter did not affect the borrower's eligibility
        for FHA financing.

               With regard to the downpayment assistance documentation, as discussed above,
        FCM obtained a copy of the HUD-1, which demonstrates that the borrower received a
        downpayment assistance grant of $1,779 from a nonprofit organization (Exhibit H-3).
        Furthermore, the loan file contained a gift letter from the nonprofit organization informing
        the borrower that she had received gift funds in the amount of $1,779, as well as
        instructions to the settlement agent regarding disbursement of these assistance funds
        (Exhibit H-4). Thus, FCM complied with HUD's downpayment assistance grant
        documentation requirements in this case. As discussed above, while FCM attempted to
        obtain documentation regarding the actual receipt of these gift funds by the borrower at




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                                                                                                        Appendix F




          Mr. James McKay
          May 11, 2004
          Page 25


          the time of closing, FCM was unable to obtain this documentation from the settlement
          agent or the sponsoring lender. If the gift funds had not been given to the settlement
          agent at closing, then the agent would not have permitted the loan to close, and neither
          the settlement agent nor the buyer and seller should have certified on the HUD-1 that
          the gift funds were received. Finally, the Report acknowledges that the OIG's audit of
          14 settlement agents in connection with this audit revealed documentation that the
          borrower received gift funds in these cases.

                 Finally, with regard to the allegations concerning the analysis of the borrower's
          credit history and the borrower's compensating factors, these allegations relate to
          underwriting deficiencies in the loan file. As discussed above, FCM was a loan
          correspondent and did not underwrite the [*] loan. The sponsor evaluated the
          loan application and made the underwriting decision in this case. It was the sponsor's
          responsibility to analyze the borrower's credit and to document that analysis in the file.
          To the extent that the OIG disagrees with the sufficiency of the credit analysis in this
          case, the sponsor who underwrote the [*] loan should resolve this disagreement.

                       3.      [*] - FHA Case Number 092-8666769

                In Finding 2, the Report alleges that the receipt of gift funds by this borrower from
          a nonprofit downpayment assistance organization was not documented in FCM's file.

                  In this case, FCM obtained a copy of the HUD-1 , which demonstrates that the
          borrower received a downpayment assistance grant of $3,150 from a nonprofit
          organization at settlement on June 27, 2001 (Exhibit 1-1). As discussed above, while
          FCM attempted to obtain documentation regarding the actual receipt of these gift funds
          by the borrower at the time of closing, FCM was unable to obtain this documentation
          from the settlement agent or the sponsoring lender. If the gift funds had not been given
          to the settlement agent at closing, then the agent would not have permitted the loan to
          close, and neither the settlement agent nor the buyer and seller should have certified on
          the HUD-1 that the gift funds were received. Nevertheless, in response to this audit,
          FCM contacted the nonprofit organization in this case, and was able to obtain a wire
          transfer statement demonstrating that the nonprofit organization, The Ameridream
          Charity, Inc., transferred $3,150 to the settlement agent in this case on June 26, 2001,
          one day before closing (Exhibit 1-2). This documentation demonstrates that the
          borrower in fact received gift funds used for the downpayment in this case.




[*] Names of individual principals, family members, FCM employees, and borrowers were redacted by OIG to
preserve their privacy. In some instances, titles were inserted to preserve the meaning of the text.




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Appendix F




          Mr. James McKay
          May 11, 2004
          Page 26


                     4.       [*] - FHA Case Number 092-8709785

                 In the [*] case, Finding 2 alleges that the maximum mortgage amount in
          this case was overstated by $677, which was attributable to the difference between the
          closing costs allowed by the underwriter and FCM and the closing costs used by the
          sponsor to calculate the maximum insurable mortgage amount. Finding 2 also alleges
          that the underwriter used form HUD 92900-PUR to compute the maximum insurable
          mortgage, but should have used form HUD 92900-WS to do so. Furthermore, the
          Report alleges that FCM charged the borrower a $700 application fee and also received
          a $928 discount fee in this case.

                 With regard to the allegations concerning the calculation of the maximum
          mortgage amount and the use of the improper form to do so, these allegations relate to
          underwriting deficiencies in the loan file. As discussed above, FCM was a loan
          correspondent and did not have the authority to complete these forms, calculate the
          borrower's maximum mortgage amount, or underwrite the [*] loan. The sponsor
          evaluated the loan application and the documents obtained by FCM in this case and
          calculated the maximum mortgage amount in this case. It was the sponsor's
          responsibility to calculate this amount and to document that analysis on the correct
          Mortgage Credit Analysis Worksheet ("MCAW") form. To the extent that the OIG
          disagrees with the calculation of the maximum mortgage amount in this case, the
          sponsor who underwrote the [*] loan should resolve this disagreement.

                 With regard to the $700 fee FCM charged the borrower, FCM did not intentionally
          charge the borrower an application fee in this case. FCM understands and appreciates
          that FHA lenders and loan correspondents are not authorized to charge application
          fees, except in connection with bond loans or Mortgage Assistance Program loans. See
          HUD Single Family Reference Guide, ¶ 2-15. The original Good Faith Estimate ("GFE")
          prepared by FCM did not indicate that the borrower would be charged a $700
          application fee, but only that the borrower would be charged an origination fee of $920,
          which was within one percent of the original principal amount of the mortgage, as
          permitted by FHA requirements. See HUD Handbook 4000.2 REV-2, ¶ 5-3(0). The
          revised GFE also evidences that FCM intended only to charge the permissible
          origination fee (Exhibit J-2).2 When the sponsoring lender in this case prepared the


          2
           Finding 2 also states that FCM received a discount fee in connection with this loan.
          FCM acknowledges that it did receive a discount fee in this case, which is permissible
          under FHA requirements, which provide that lenders may receive an agreed upon
          percentage of the principal amount of the mortgage, including any financed up-front
          MIP. See HUD Handbook 4000.2 REV-2, ¶ 5-3(P)(1 ).




[*] Names of individual principals, family members, FCM employees, and borrowers were redacted by OIG to
preserve their privacy. In some instances, titles were inserted to preserve the meaning of the text.



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                                                                                                      Appendix F




          Mr. James McKay
          May 11, 2004
          Page 27


          HUD-1, the origination fee was inadvertently listed as an "application fee" and reduced
          to $700. This fee should have been listed as an origination fee on the HUD-1 , as it was
          so listed on the GFEs prepared by FCM. Thus, the listing of this fee as an "application
          fee" was merely a clerical error .

                       5.     [*] - FHA Case Number 092-8822776

                 In the [*] case, Finding 2 alleges that: (1) the final loan application did not
          show all assets that were presented on the Initial URLA; and (2) that the receipt of gift
          funds by the borrower were not documented in FCM's file. Appendix A to the Report
          also alleges that seller contributions exceeded the HUD prescribed limit of 6%, the
          maximum mortgage basis was overstated, and the loan file did not document sufficient
          compensating factors to justify the borrower's qualifying ratios.

                  With regard to the allegation concerning the loan application, FCM understands
          and appreciates the importance of accurately completing all applications and ensuring
          that all relevant information is included in loan documents. In this case, the initial
          URLA, which was completed on July 24, 2001, demonstrated that the borrower had a
          car and other personal property valued at approximately $17,000 (Exhibit K-1). The
          final URLA, however, lists personal assets valuing at approximately $12,000 (Exhibit K-
          2). This difference could have occurred because the borrower reevaluated his personal
          property and estimated a lower asset value, or could have been a processing oversight
          on the part of FCM. Whatever the reason for the difference in the asset amount on the
          borrower's loan applications, the inclusion of the $5,000 in personal property assets on
          the final URLA would not have altered the underwriter's evaluation of the borrower, and
          the borrower in this case qualified for FHA financing without consideration of these
          assets.

                 With regard to the allegation concerning the downpayment assistance
          documentation, FCM obtained a copy of the HUD-1 , which demonstrates that the
          borrower received a downpayment assistance grant of $2,307 from a nonprofit
          organization (Exhibit K-3). Furthermore, the loan file contained instructions from the
          downpayment assistance organization to the settlement agent regarding disbursement
          of these assistance funds (Exhibit K-4). As discussed above, while FCM attempted to
          obtain documentation regarding the actual receipt of these gift funds by the borrower at
          the time of closing, FCM was unable to obtain this documentation from the settlement
          agent or the sponsoring lender. If the gift funds had not been given to the settlement
          agent at closing, then the agent would not have permitted the loan to close, and neither
          the settlement agent nor the buyer and seller should have certified on the HUD-1 that
          the gift funds were received. Finally, the Report acknowledges that the OIG's audit of




[*] Names of individual principals, family members, FCM employees, and borrowers were redacted by OIG to
preserve their privacy. In some instances, titles were inserted to preserve the meaning of the text.



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Appendix F




          Mr. James McKay
          May 11, 2004
          Page 28


          14 settlement agents in connection with this audit revealed documentation that the
          borrower received gift funds in these cases.

                  Finally, with regard to the allegations in Appendix A concerning the seller
          contributions, maximum mortgage amount and compensating factors, these allegations
          relate to underwriting deficiencies in the loan file. As discussed above, FCM was a loan
          correspondent and did underwrite this loan. The sponsor evaluated the loan application
          and the documents obtained by FCM in this case, calculated the maximum mortgage
          amount and maximum seller contribution, and made a credit decision in this case. To
          the extent that the OIG disagrees with the underwriter's calculations or decisions in this
          case, the sponsor who underwrote the [*] loan should resolve this disagreement.

                        6.     [*] - FHA Case Number 092-8838493

                In the [*] loan, Finding 2 alleges that the borrower's receipt of gift funds
          was not documented in FCM's file.

                 In this case, FCM obtained a copy of the HUD-1 , which demonstrates that the
          borrower received a downpayment assistance grant of $2,286 from a nonprofit
          organization (Exhibit L-1). Furthermore, the loan file contained instructions from the
          downpayment assistance organization to the settlement agent regarding disbursement
          of these assistance funds (Exhibit L-2). As discussed above, while FCM attempted to
          obtain documentation regarding the actual receipt of these gift funds by the borrower at
          the time of closing, FCM was unable to obtain this documentation from the settlement
          agent or the sponsoring lender. If the gift funds had not been given to the settlement
          agent at closing, then the agent would not have permitted the loan to close, and neither
          the settlement agent nor the buyer and seller should have certified on the HUD-1 that
          the gift funds were received. Finally, the Report acknowledges that the OIG's audit of
          14 settlement agents in connection with this audit revealed documentation that the
          borrower received gift funds in these cases.

                        7.      [*] - FHA Case Number 092-8851286

                  In the [*] case, Finding 2 alleges that: (1) the effective income for one of
          the borrower's was improperly calculated, as it included overtime and bonus income
          that was unlikely to continue; (2) FCM's staff did not fulfill their responsibility to gain a
          complete understanding of the borrowers' intended use of the property; (3) the receipt of
          gift funds from a downpayment assistance organization was not documented in FCM's
          file; and (4) the compensating factors were not satisfactory.




[*] Names of individual principals, family members, FCM employees, and borrowers were redacted by OIG to
preserve their privacy. In some instances, titles were inserted to preserve the meaning of the text.




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                                                                                                    Appendix F




        Mr. James McKay
        May 11, 2004
        Page 29

               During its operation, FCM's policy and practice was to properly calculate a
        borrower's effective income by verifying a borrower's income and calculating the
        average income over a monthly basis. FCM understood and appreciated that overtime
        income could only be included in a borrower's effective income if the borrower had been
        earning such income for approximately the past two years and there were reasonable
        prospects that such income would continue. See HUD Handbook 4155.1 REV-4, CHG-
        1, ¶ 2-7(A). In this case, FCM acknowledges that the loan processor, as well as the
        underwriter, analyzed overtime income without evidence of its likelihood of continuance.
        Please note that this was an isolated incident in which the loan processor and
        underwriter included overtime income after inadvertently overlooking the employer's
        indication on the VOE that such income may not continue. Nevertheless, as the
        underwriter was ultimately responsible for ensuring that the income was calculated
        accurately, any disagreement should be resolved with the sponsor in this case.

               With regard to the allegation concerning FCM's investigation into the borrower's
        intended use of the property secured by the FHA loan, the Report suggests that, as the
        borrower had previously lived at his workplace and did not have a valid driver's license,
        FCM should have known that he would not occupy the property. The Report states that
        the OIG determined that the borrower continued to rent a residence at his workplace,
        and did not report this housing cost on the loan application. In this case, the borrowers
        did not speak English as a first language. In our interviews with the borrowers, FCM
        attempted to the best of our ability to determine who would in fact occupy the property.
        The borrowers assured us that they would both be living in the house, and made no
        mention of any intent to continue to rent housing at one borrower's workplace. FCM
        was not aware before or after closing that the borrower continued to rent housing at his
        place of employment. In fact, the borrowers certified under the threat of penalties that
        they both intended to occupy the property at issue within 30 days of closing (Exhibit M-
        1). Thus, FCM complied with its duty to ensure to the best of its ability that the
        borrowers would in fact occupy the property secured by this FHA loan.

                With regard to the allegation concerning downpayment assistance gift funds,
        FCM obtained a copy of the HUD-1, which demonstrates that the borrower received a
        downpayment assistance grant of $2,577 from a nonprofit organization (Exhibit M-2).
        As discussed above, while FCM attempted to obtain documentation regarding the actual
        receipt of these gift funds by the borrower at the time of closing, FCM was unable to
        obtain this documentation from the settlement agent or the sponsoring lender. If the gift
        funds had not been given to the settlement agent at closing, then the agent would not
        have permitted the loan to close, and neither the settlement agent nor the buyer and
        seller should have certified on the HUD-1 that the gift funds were received. Finally, the
        Report acknowledges that the OIG's audit of 14 settlement agents in connection with
        this audit revealed documentation that the borrower received gift funds in these cases.




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Appendix F




          Mr. James McKay
          May 11, 2004
          Page 30

                 With regard to the compensating factors allegation, this allegation relates to an
          underwriting deficiency in the loan file. As discussed above, FCM was a loan
          correspondent and did underwrite this loan. To the extent that the OIG disagrees with
          the underwriter's credit analysis in this case, the sponsor who underwrote the [*]
          loan should resolve this disagreement.

                       8.    [*] - FHA Case Number 092-8862985

                 In the [*] case, Finding 2 alleges that FCM did not document the source of
          funds, as the files contained two VODs for a new account, but no explanation as to the
          source of deposited funds. Finding 2 also alleges that the borrower's receipt of gift
          funds from a downpayment assistance organization was not documented in FCM's file,
          and that the compensating factors used to qualify the borrower were unsatisfactory.

                 With regard to the allegation that FCM did not properly document the source of
          funds in the borrower's banking account, FCM respectfully disagrees. In this case, the
          borrower was employed as licensed nurse, and was earning net income of
          approximately $945 on a bi-weekly basis (Exhibit N-1). The borrower in this case did
          not have a bank account prior to applying for FHA financing. Therefore, in an effort to
          demonstrate an ability to save, the borrower opened a bank account in October of 2001
          and deposited a total of $880.79 before closing to demonstrate her ability to save
          (Exhibit N-2). The borrower obtained the deposited funds from her two October
          paychecks, each in the amount of $945. Contrary to the allegation in Finding 2, this
          income source was documented on the VOD dated October 30, 2001 (Exhibit N-2).
          Thus, the loan file did document the borrower's source of funds in this case.

                 With regard to the allegation concerning the transfer of downpayment assistance
          funds, FCM obtained a copy of the HUD-1 ,which demonstrates that the borrower
          received a downpayment assistance grant of $2,795 from a nonprofit organization
          (Exhibit N-3). Furthermore, the loan file contained instructions from the downpayment
          assistance organization to the settlement agent regarding disbursement of these
          assistance funds (Exhibit N-4). As discussed above, while FCM attempted to obtain
          documentation regarding the actual receipt of these gift funds by the borrower at the
          time of closing, FCM was unable to obtain this documentation from the settlement agent
          or the sponsoring lender. Nevertheless, the Report acknowledges that the OIG's audit
          of 14 settlement agents in connection with this audit revealed documentation that the
          borrower received gift funds in these cases.

                With regard to the compensating factors allegation, this allegation relates to an
          underwriting deficiency in the loan file. As discussed above, FCM was a loan




[*] Names of individual principals, family members, FCM employees, and borrowers were redacted by OIG to
preserve their privacy. In some instances, titles were inserted to preserve the meaning of the text.



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                                                                                                      Appendix F




          Mr. James McKay
          May 11, 2004
          Page 31


          correspondent and did underwrite this loan. To the extent that the OIG disagrees with
          the underwriter's credit analysis in this case, the sponsor who underwrote the [*]
          loan should resolve this disagreement.

                       9.   [*] - FHA Case Number 092-88780872

                  In the [*] case, Finding 2 alleges that, while the initial URLA evidences
          three places of employment, the final loan application omitted a job held from February
          2001 through February 2002 and, as a result, FCM did not verify that employment and
          failed to examine the borrower's employment history for a two-year period. Finding 2
          also alleges that the borrower's receipt of gift funds from a downpayment assistance
          organization was not documented in FCM's file, and that the borrower's qualifying ratios
          were unsatisfactory .

                 With regard to the borrower's employment, FCM understands and appreciates
          that a borrower's employment must be verified for the most recent two full years prior to
          closing. HUD Handbook 4155.1 REV-4, CHG-1, ¶ 2-6. During FCM's operations, it was
          the Company's policy and practice to obtain employment verifications for each job held
          by the borrower during that two-year period, and to obtain explanations from borrowers
          regarding any gaps in employment. Nevertheless, in this case, one of the borrower's
          jobs was inadvertently overlooked on the initial URLA, and it appears that neither the
          loan processor nor the underwriter attempted to obtain verification that the borrower
          held this position. Please note that this was an isolated oversight of a loan processor
          who was no longer employed by FCM at the time of the OIG's audit. At any rate, FCM
          did verify that the borrower had been at his current position for the past eight months,
          and that the probability of his continued employment in this position was "good" (Exhibit
          0-1). While the loan file omitted certain documentation, the borrower still qualified for
          FHA financing.

                 As to the allegation concerning the downpayment assistance funds, while the
          sales contract stated that the gift funds were to be provided by National Home, during
          the course of closing, the borrower decided to apply for such funds from Ameridream.
          The buyer was awarded a downpayment assistance gift by Ameridream, and the
          borrower's receipt of $1,779 in gift funds from this source is documented on the HUD-1
          (Exhibit 0-2). Furthermore, the loan file contained instructions from the Ameridream to
          the settlement agent regarding disbursement of these assistance funds (Exhibit 0-3).
          As discussed above, while FCM attempted to obtain documentation regarding the actual
          receipt of these gift funds by the borrower at the time of closing, FCM was unable to
          obtain this documentation from the settlement agent or the sponsoring lender.
          Nevertheless, in response to the OIG's audit, FCM contacted Ameridream and obtained
          evidence that the nonprofit agency transferred $1,779 in gift funds to the settlement



[*] Names of individual principals, family members, FCM employees, and borrowers were redacted by OIG to
preserve their privacy. In some instances, titles were inserted to preserve the meaning of the text.



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Appendix F




          Mr. James McKay
          May 11, 2004
          Page 32


          agent in this loan on 11, 20, 2001 (Exhibit 0-4),the day the loan closed (Exhibit 0-2).
          This documentation demonstrates that the borrower in fact received the downpayment
          assistance grant.

                 With regard to the qualifying ratios allegation, this allegation relates to an
          underwriting deficiency in the loan file. As discussed above, FCM was a loan
          correspondent and did underwrite this loan. To the extent that the OIG disagrees with
          the underwriter's credit analysis in this case, the sponsor who underwrote the [*]
          loan should resolve this disagreement.

                       10.       [*] -FHA Case Number 092-8943906

                 In the [*] case, Finding 2 alleges that: (1) FCM staff did not property compute
          and document their computations of effective income, as it miscalculated the borrower's
          grossed up social security income due to a mathematical error, which resulted in a $33
          understatement of the borrower's income; (2) FCM did not verify a full two-year
          employment history for the borrower, as the loan application showed that the borrower
          had a two year employment history, but the VOE showed only an 18-month history with
          the employer; and (3) that the compensating factors were unsatisfactory.

                  In connection with the allegations regarding income calculation, HUD regulations
          permit the use of social security income to qualify a borrower, provided that the income
          is verified by the Social Security Administration or through federal tax returns. See HUD
          Handbook 4155 REV-4, CHG-1, ¶ 2-7(E). Furthermore, HUD guidelines permit lenders
          to "gross up" social security income. Id. 2-7(0). FCM complied with these
          requirements in this instance by obtaining evidence of the borrower's social security
          benefits from the Social Security Administration (Exhibit P-1). In this case, FCM
          acknowledges that the loan processor misstated the borrower's social security income
          by $33 per month. However, this misstatement was an understatement. While FCM
          appreciates the importance in accurately calculating each borrower's income, any
          miscalculation in this case provided the underwriter with a more conservative income
          calculation. Any error in connection with the borrower's income in this case constituted,
          at worst, harmless error, as the borrower qualified for FHA financing with a more
          conservative income amount than she actually earned.

                 As to the allegation regarding the borrower's employment history, FCM
          understands and appreciates that income must be documented for a full two year period
          prior to the loan closing. HUD Handbook 4155.1 REV-4, CHG-1, ¶ 2-6. During FCM's
          operations, it was the Company's policy and practice to obtain employment verifications
          for each job held by the borrower during that two-year period, and to obtain
          explanations from borrowers regarding any gaps in employment. Nevertheless, in this




[*] Names of individual principals, family members, FCM employees, and borrowers were redacted by OIG to
preserve their privacy. In some instances, titles were inserted to preserve the meaning of the text.



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                                                                                                        Appendix F




          Mr. James McKay
          May 11, 2004
          Page 33


          case, although the URLA indicated that the borrower held her current job for two years
          prior to closing, the VOE obtained indicated a continuous employment history of 18
          months. Nevertheless, the VOE indicated that the borrower had earned income from
          this employer in 1999, which indicated that the borrower had been employed there more
          than two years before the loan closing date (Exhibit P-2). Furthermore, the loan file
          contained a letter from the borrower's doctor indicating some past health problems,
          which may have been the reason for her gap in employment with her current employer
          (Exhibit P-3). At any rate, FCM did verify that the borrower had been at her current
          position for the past eighteen months, and there was no evidence to suggest that her
          employment would not continue. While the loan file omitted certain documentation, the
          borrower still qualified for FHA financing in this case.

                 Finally, with regard to the compensating factors allegation, this allegation relates
          to an underwriting deficiency in the loan file. As discussed above, FCM was a loan
          correspondent and did underwrite this loan. To the extent that the OIG disagrees with
          the underwriter's credit analysis in this case, the sponsor who underwrote the [*]
          loan should resolve this disagreement.

                       11.      [*] - FHA Case Number 092-9027547

                 In the [*] case, Finding 2 alleges that the seller contributions exceeded
          HUD's prescribed limit of six percent, the maximum mortgage amount was overstated,
          and the compensating factors were unsatisfactory. These allegations relate to
          underwriting deficiencies in the loan file. As discussed above, FCM was a loan
          correspondent and did underwrite this loan. To the extent that the OIG disagrees with
          the underwriter's credit analysis and calculations in this case, the sponsor who
          underwrote the [*] loan should resolve this disagreement.

                       12.       [*] - FHA Case Number 092-9042836

                 In the [*] case, Finding 2 alleges that the qualifying ratios were not sufficient
          and the underwriter did not provide compensating factors. This allegation relates to an
          underwriting deficiency in the loan file. As discussed above, FCM was a loan
          correspondent and did underwrite this loan. To the extent that the OIG disagrees with
          the underwriter's credit analysis in this case, the sponsor who underwrote the [*]
          loan should resolve this disagreement.

                       13.        [*] - FHA Case Number 092-9053789

                In the [*] case, Finding 2 alleges that the loan application was not fully
          supported by the data in the credit report. Specifically, the credit report showed a




[*] Names of individual principals, family members, FCM employees, and borrowers were redacted by OIG to
preserve their privacy. In some instances, titles were inserted to preserve the meaning of the text.


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          Mr. James McKay
          May 11, 2004
          Page 34

          delinquent liability of $7,462, which FCM reported as the student loan identified by the
          borrower. The borrower, however, identified the outstanding balance on the loan as
          $2,056. Finding 2 further alleges that FCM's loan file did not document the receipt of
          downpayment assistance funds by the borrower, that the seller contributions exceeded
          HUD-prescribed limits, and that the compensating factors were unsatisfactory.

                 In connection with the borrower's liabilities, FCM appreciates that any
          discrepancies in the loan documentation that require an explanation or resolution by
          contacting the homebuyer are the responsibility of the loan correspondent. See
          Mortgagee Letter 94-56. The Company acknowledges that the difference between the
          outstanding balance of the student loan on the borrower's credit report and the URLA
          should have been resolved prior to closing. In any event, the Report acknowledges the
          credit report indicated that the borrower had entered into a repayment plan with the
          lender, and that these payments were included on the MCAW (Exhibit Q-1). Thus, any
          discrepancy between the outstanding loan amounts reported by the borrower and on
          the credit report did not affect the borrower's eligibility for FHA financing.

                  With regard to the allegation concerning the receipt of downpayment assistance
          by the borrower, FCM obtained a copy of the HUD-1, which demonstrates that the
          borrower received a downpayment assistance grant of $2,250 from a nonprofit
          organization at settlement on July 1, 2002 (Exhibit Q-2). As discussed above, while
          FCM attempted to obtain documentation regarding the actual receipt of these gift funds
          by the borrower at the time of closing, FCM was unable to obtain this documentation
          from the settlement agent or the sponsoring lender. Nevertheless, in response to this
          audit, FCM contacted the nonprofit organization in this case, and was able to obtain a
          letter stating that the nonprofit agency wired $2,250 in gift funds to the borrower on June
          28,2002 (Exhibit Q-3), a few days before settlement (Exhibit Q-2). This
          documentation demonstrates that the borrower in fact received gift funds used for the
          downpayment in this case.

                 Finally, the allegations regarding the seller's contribution and the compensating
          factors relate to underwriting deficiencies in the loan file. As discussed above, FCM
          was a loan correspondent and did underwrite this loan. To the extent that the OIG
          disagrees with the underwriter's credit analysis and calculations in this case, the
          sponsor who underwrote the [*] loan should resolve this disagreement.

                       14.      [*] - FHA Case Number 092-9060087

                In the [*] case, Finding 2 alleges that the Company miscalculated the
          borrower's income, as FCM used only the borrower's base salary without including the
          borrower's overtime income. Finding 2 further alleges that FCM's loan file did not



[*] Names of individual principals, family members, FCM employees, and borrowers were redacted by OIG to
preserve their privacy. In some instances, titles were inserted to preserve the meaning of the text.



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          Mr. James McKay
          May 11, 2004
          Page 35


          document the borrower's receipt of downpayment assistance funds and that seller
          contributions exceeded the HUD-prescribed limit.

                 With regard to the allegation concerning income calculation, FCM respectfully
          disagrees with Finding 2. In this case, although the loan file evidenced regular overtime
          earnings by the borrower (Exhibit R-1), FCM conservatively calculated the borrower's
          qualifying income using only the borrower's base salary. While FHA guidelines provide
          that overtime income may be used to calculate effective income, provided certain
          conditions are met, these guidelines do not require such use. See HUD Handbook
          4155.1 REV-4, CHG-1, ¶ 2-7(A). Thus, FCM's calculation of the borrower's income did
          not violate FHA requirements and, in fact, provided a more conservative qualifying
          income to the underwriter (Exhibit R-2).

                 With regard to the allegation concerning the transfer of downpayment assistance
          funds, FCM obtained a copy of the HUD-1 , which demonstrates that the borrower
          received a downpayment assistance grant of $2,845 from a nonprofit organization on
          April 25, 2002 (Exhibit R-3). Furthermore, the loan file contained letters from the
          nonprofit organization setting forth the requirements for the provision of the
          downpayment assistance funds (Exhibit R-4). As discussed above, while FCM
          attempted to obtain documentation regarding the actual receipt of these gift funds by the
          borrower at the time of closing, FCM was unable to obtain this documentation from the
          settlement agent or the sponsoring lender. Nevertheless, in response to this audit, FCM
          contacted the nonprofit organization in this case, and was able to obtain a letter stating
          that the nonprofit wired $2,845 in gift funds to the borrower on April 24, 2002 (Exhibit
          R-5), a few days before settlement (Exhibit R-3). This documentation demonstrates
          that the borrower in fact received gift funds used for the downpayment in this case.

                 With regard to the allegation concerning seller contributions, this allegation
          relates to an underwriting deficiency in the loan file. As discussed above, FCM was a
          loan correspondent and did underwrite this loan. To the extent that the OIG disagrees
          with the underwriter's credit analysis in this case, the sponsor who underwrote the loan
          should resolve this disagreement.

                     15.     [*] - FHA Case Number 092-9068413

                  In the [*] loan, Finding 2 alleges that the liabilities reported on the loan
          application were incorrect, as a debt of the applicant's ex-spouse was improperly
          reported as a debt of the applicant and a derogatory account of the applicant was
          excluded from the loan application, resulting in the borrower's liabilities being slightly
          understated. Finding 2 further alleges that FCM accepted a VOE and two explanatory
          letters that were faxed form a hotel where the borrower was residing and the phone




[*] Names of individual principals, family members, FCM employees, and borrowers were redacted by OIG to
preserve their privacy. In some instances, titles were inserted to preserve the meaning of the text.



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        Mr. James McKay
        May 11, 2004
        Page 36


        number of the borrower's employer on one of the letters did not match the phone
        number provided on the VOE. Finally, Finding 2 alleges that FCM's loan file did not
        document the borrower's receipt of downpayment assistance funds.

               With regard to the allegations concerning the borrower's liabilities, FCM
        understands and appreciates the importance of accurately completing all applications
        and ensuring that all relevant information is included in loan documents. In this case,
        the URLA misstated the liabilities of the borrower. The credit report obtained by FCM
        indicated that, absent the account for which the borrower's ex-spouse was responsible,
        the borrower's monthly debt obligation was $233 (Exhibit 5-1). This amount is $2.00
        less than the ex-spouse's obligation of $235 (Exhibit 5-1). Thus, while the liabilities
        were inaccurate on the URLA, the borrower's debt obligation was actually overstated by
        $2.00. Thus, any inaccuracy on the URLA in this case constituted, at worst, harmless
        error. The borrower qualified for the loan with a debt obligation of $235 (Exhibit 5-2)
        and, thus, would have qualified for the loan with a debt obligation of $233.

                As to the allegation regarding the borrower's employment documentation, FCM
        respectfully disagrees. With regard to the borrower's letters of explanation, such letters
        are always obtained directly from the borrowers. The fact that the borrower provided
        these documents via facsimile did not violate any FHA requirement of which we are
        aware. With regard to the faxed employment verification, FCM understands and
        appreciates that employment verification forms must not pass through the hands of the
        applicant, a real estate agent, or other interested third party. HUD Handbook 4000.2
        REV-2, ¶ 3-6. During its operation, FCM required that all employment and deposit
        verification forms were derived directly from the employer or financial institution. To the
        best of our knowledge and recollection, the employment verification form was faxed by
        the employer in this case. As demonstrated in the loan file, the borrower was employed
        by Pride Lawn Services, a small, owner-operated company (Exhibit 5-3), which was
        conducted out of the owner's home instead of a formal office. The owner of the
        business picked the borrower up on the way to the business's daily lawn care jobs and,
        as the small business did not have a fax machine, used the machine located at the
        borrower's temporary hotel residence to forward the VOE to FCM. While FCM should
        have mailed a copy of the VOE to the employer to verify this faxed document, the VOE
        in this case did not pass through the hands of an interested third party. With regard to
        the differing phone numbers on the VOE and the borrower's letter, one phone number
        was the business owner's home number and the other phone number was the owner's
        cell phone number, which was provided so that FCM could contact the owner during
        normal business hours when he was working on-site.

               With regard to the allegation concerning the transfer of downpayment assistance
        funds, FCM obtained a copy of the HUD-1, which demonstrates that the borrower




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          Mr. James McKay
          May 11, 2004
          Page 37


          received a downpayment assistance grant of $2,505 from a nonprofit organization on
          April 30, 2002 (Exhibit 5-4). Furthermore, the loan file contained letters from the
          nonprofit organization setting forth the requirements for the provision of the
          downpayment assistance funds (Exhibit 5-5). As discussed above, while FCM
          attempted to obtain documentation regarding the actual receipt of these gift funds by the
          borrower at the time of closing, FCM was unable to obtain this documentation from the
          settlement agent or the sponsoring lender. Nevertheless, in response to this audit, FCM
          contacted the nonprofit organization in this case, and was able to obtain a letter stating
          that the nonprofit agency wired $2,505 in gift funds to the borrower on April 25, 2002
          (Exhibit 5-6), a few days before settlement (Exhibit 5-4). This documentation
          demonstrates that the borrower in fact received gift funds used for the downpayment in
          this case.

                     16.      [*] - FHA Case Number 092-9228763

                In the [*] case, Finding 2 alleges that FCM's loan file did not document the
          borrower's receipt of downpayment assistance funds and that seller contributions
          exceeded the HUD-prescribed limit.

                 With regard to the allegation concerning the transfer of downpayment assistance
          funds, FCM obtained a copy of the HUD-1 , which demonstrates that the borrower
          received a downpayment assistance grant of $1,857 from a nonprofit organization on
          October 16, 2002 (Exhibit T-1). As discussed above, while FCM attempted to obtain
          documentation regarding the actual receipt of these gift funds by the borrower at the
          time of closing, FCM was unable to obtain this documentation from the settlement agent
          or the sponsoring lender. Nevertheless, in response to this audit, FCM contacted the
          nonprofit organization in this case, and was able to obtain a letter stating that the
          nonprofit agency wired $1,857 in gift funds to the borrower on October 16, 2002
          (Exhibit T-2), the date of closing (Exhibit T-1). This documentation demonstrates that
          the borrower in fact received gift funds used for the downpayment in this case.

                 With regard to the allegation concerning seller contributions, this allegation
          relates to an underwriting deficiency in the loan file. As discussed above, FCM was a
          loan correspondent and did underwrite this loan. To the extent that the OIG disagrees
          with the underwriter's credit analysis in this case, the sponsor who underwrote the
          [*] loan should resolve this disagreement.

                       17.     [*] - FHA Case Number 092-4979173

                In the [*] loan, Finding 2 alleges that the loan file contained an ATM receipt
          showing an account balance of $2,056.23, but did not include a bank statement or VOE.




[*] Names of individual principals, family members, FCM employees and borrowers were redacted by OIG to
preserve their privacy. In some instances, titles were inserted to preserve the meaning of the text.


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        Mr. James McKay
        May 11, 2004
        Page 38

        Complete bank statements dated April 1 0, 2001 were contained in the file; however,
        Finding 2 alleges that these statements demonstrated that the $771.87 in available
        funds was not sufficient to close the loan. In addition, Finding 2 alleges that loan file
        indicates that the borrower received a gift from his aunt; however, the loan file did not
        verify receipt of these gift funds.

                With regard to the allegation regarding the borrower's source of funds to close in
        this case, FCM respectfully disagrees. Contrary to Finding 2, the documentation from
        the borrower's financial institution was not an ATM receipt; rather, the document was a
        mini-statement provided by the financial institution between regular monthly statements
        (Exhibit U-1). This mini-statement indicated that, as of June 11, 2001, the borrower
        had $2,056.23 in his account, which was more than sufficient to satisfy the $836.35
        needed to close the loan on July 23, 2001 (Exhibit U-2). Furthermore, to the extent
        that the mini-statement is not acceptable to verify the borrower's source of funds to
        close, the loan file contained documentation demonstrating that the borrower had an
        annual salary of $60,000 per year, and received weekly paychecks of $1,153 (Exhibit
        U-3). Thus, the borrower could easily has used a portion of his weekly paycheck to
        cover the $836.35 needed to close the loan. Finally, the loan file contained evidence
        that the borrower had $3,457 in an IRA account as of December 31, 2000, which also
        could have been used to close the loan (Exhibit U-4). Therefore, the documentation
        contained in the loan file demonstrated that the borrower had several sources from
        which to derive the funds needed to close this loan.

                With regard to gift funds obtained from a relative, FCM understands and
        appreciates that HUD guidelines require a lender to obtain the following documents
        when the gift funds are in the home buyer's account prior to closing: (1) a gift letter
        specifying, among other items, the dollar amount given, the donor's name, address,
        telephone number, and relationship to the borrower, and stating that no repayment is
        required; (2) a copy of the canceled check or other withdrawal document showing the
        withdrawal from the donor's personal account; and (3) the homebuyer's deposit slip or
        bank statement that shows the deposit of the gift funds. See HUD Handbook 4155.1,
        REV-4, CHG-1 , ¶ 2-10 (C); Mortgagee Letter 00-28. In this case, FCM's loan file
        contained a gift letter from the borrower's aunt, indicating that she would provide $2,700
        in gift funds to the borrower (Exhibit U-5). The loan file also contains a letter from the
        settlement agent indicating that it was holding $2,700 in its account for the borrower on
        May 31, 2001 (Exhibit U-6), almost two months prior to closing on July 23, 2001
        (Exhibit U-2). Thus, the loan file indicates that the borrower received the gift funds in
        this case. Furthermore, while the Company's file did not contain a deposit or withdrawal
        slip, the Report acknowledges that the HUD file contained documentation sufficient to
        evidence receipt of these funds by the borrower. Therefore, FCM must have obtained
        the requisite documentation and inadvertently passed it along to HUD before making




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          Mr. James McKay
          May 11, 2004
          Page 39


          copies for the Company's file. In any event, the borrower in fact received the gift funds
          in this case and any deficiency in FCM's loan file documentation did not affect the
          borrower's eligibility for FHA financing.

                       18.      [*] - FHA Case Number 093-4983450

                 In the [*] case, Finding 2 alleges that the income reported by FCM on the
          loan application was not supported, as FCM's income calculation included overtime, but
          the VOE provided that such income was not likely to continue. Finding 2 also alleges
          that the receipt of downpayment assistance funds by the borrower was not documented
          in FCM's file.

                 With regard to the calculation of the borrower's income, FCM understands and
          appreciates the importance of accurately calculating the borrower's income. In this
          case, while the VOE did not indicate that overtime income would continue, it also did not
          indicate that the borrower was paid overtime income (Exhibit V-1). The borrower's pay
          stubs, however, indicated that the borrower often worked more than 40 hours per week
          and earned significantly more than her base salary (Exhibit V-2). Thus, the inclusion of
          such income was not unreasonable on FCM's part. Nevertheless, FCM appreciates
          that such income should not be included in the borrower's effective income unless the
          loan file demonstrates that such income is likely to continue. In this case, however, the
          underwriter recalculated the borrower's effective income without considering her
          overtime earnings, and the borrower qualified for FHA financing based on this reduced
          income calculation (Exhibit V-3). Thus, any deficiency in this case did not affect the
          borrower's eligibility for FHA financing.

                  With regard to the allegation concerning the transfer of downpayment assistance
          funds, FCM obtained a copy of the HUD-1 , which demonstrates that the borrower
          received a downpayment assistance grant of $2,287 from a nonprofit organization on
          May 10, 2001 (Exhibit V-4). As discussed above, while FCM attempted to obtain
          documentation regarding the actual receipt of these gift funds by the borrower at the
          time of closing, FCM was unable to obtain this documentation from the settlement agent
          or the sponsoring lender. Nevertheless, in response to this audit, FCM contacted the
          nonprofit organization in this case, and was able to obtain a letter stating that the
          nonprofit agency wired $2,287 in gift funds to the borrower on May 4, 2001 (Exhibit T -
          2), a few days before settlement (Exhibit V-4). This documentation demonstrates that
          the borrower in fact received gift funds used for the downpayment in this case.




[*] Names of individual principals, family members, FCM employees, and borrowers were redacted by OIG to
preserve their privacy. In some instances, titles were inserted to preserve the meaning of the text.



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          Mr. James McKay
          May 11, 2004
          Page 40


                  19.      [*] -FHA Case Number 093-5100268

          In the [*] case, Finding 2 alleges that FCM's loan file did not document the
          borrower's receipt of downpayment assistance funds and that seller contributions
          exceeded the HUD-prescribed limit.

                 With regard to the allegation concerning the transfer of downpayment assistance
          funds, FCM obtained a copy of the HUD-1 , which demonstrates that the borrower
          received a downpayment assistance grant of $1 ,926 from a nonprofit organization on
          October 16, 2002 (Exhibit W). As discussed above, while FCM attempted to obtain
          documentation regarding the actual receipt of these gift funds by the borrower at the
          time of closing, FCM was unable to obtain this documentation from the settlement agent
          or the sponsoring lender. However, if the gift funds had not been given to the
          settlement agent at closing, then the agent would not have permitted the loan to close,
          and neither the settlement agent nor the buyer and seller should have certified on the
          HUD-1 that the gift funds were received.

                 With regard to the allegation concerning seller contributions, this allegation
          relates to an underwriting deficiency in the loan file. As discussed above, FCM was a
          loan correspondent and did underwrite this loan. To the extent that the OIG disagrees
          with the underwriter's credit analysis in this case, the sponsor who underwrote the
          [*] loan should resolve this disagreement.

                C.      Finding 3 -Quality Control Plan and Procedures

                 In Finding 3, the Report alleges that FCM did not implement the Quality Control
          Plan that it submitted to the Department in January of 2003 in connection with its prior
          review by HUD's Quality Assurance Division and that FCM's Quality Control processes
          did not comply with HUD regulations. Finding 3 further alleges that FCM's Quality
          Control Plan did not address the following key elements: (1) documenting corrective
          actions taken as a result of quality control reviews; (2) reporting significant
          discrepancies to HUD; (3) timely performance of quality control reviews; and (4) quality
          control review of rejected loans. Finding 3 finally alleges that FCM's actual quality
          control performance was materially deficient. Based on these allegations, the Report
          repeats its recommendations that HUD withdraw the origination authority for FCM,
          FHFE, and NFI and debar the principal officers/owners of FCM in participation in federal
          programs.

                In connection with its Quality Control Plan, FCM strived to adopt and adhere to a
          Quality Control Plan that met HUD requirements. Prior to the Quality Assurance



[*] Names of individual principals, family members, FCM employees and borrowers were redacted by OIG to
preserve their privacy. In some instances, titles were inserted to preserve the meaning of the text.




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        Mr. James McKay
        May 11, 2004
        Page 41


        Division's audit of the Fort Myers office, FCM relied on a Quality Control Plan prepared
        by its third-party quality control contractor. As a result of the audit, FCM moved its
        quality control procedures in-house and redrafted its Quality Control Plan to meet the
        needs of this small loan correspondent. Contrary to the allegations in the Report, FCM
        at all times put forth a good faith effort to implement the Quality Control Plan submitted
        to the Atlanta Homeownership Center in connection with its prior audit. A large
        component of that Plan was the Quality Control Plan Checklist -Loan Origination
        (Exhibit X-1). Contrary to the allegations in the Report, it was FCM's policy and
        practice to make use of this checklist, as well as bullet-point quality control outlines
        (Exhibit X-2), to ensure that quality control reviews were performed in a thorough and
        timely manner. Despite our best efforts, FCM recognizes that its Quality Control Plan
        may have omitted certain items and could have been more specific in some instances.
        Specifically, While FCM was aware of HUD's rules and regulations concerning quality
        control, we did not express all of the Company's quality control policies in our written
        plan. Nevertheless, based on our continued efforts to improve our Quality Control Plan
        and bring it into compliance with HUD requirements, we believe that the recommended
        sanctions are unwarranted in this instance.

               With regard to FCM's performance of quality control reviews, FCM respectfully
        disagrees with the allegations in the Report. First, FCM conducted a review of all loans
        defaulting within the first six months, in compliance with HUD requirements. The Report
        alleges that FCM's staff did not review 4 of 18 loans that went into default between
        October 2002 and June 2003; however, a review of FCM's Neighborhood Watch data
        identified only 12 loans in that category during that time period. FCM performed a
        quality control review of all 12 of the loans identified on the Neighborhood Watch
        system. Furthermore, FCM performed the requisite ten percent review of all loans that
        were rejected by its sponsors. As a small loan correspondent that originated a small
        number of loans on a monthly basis, FCM did not generate a large number of loans that
        met these criteria.

               With regard to the allegation that FCM did not properly generate quality control
        reports and document corrective actions taken, the Company disagrees. As a small
        mortgage lender, very few loan files were reviewed on a monthly basis. Thus, instead
        of issuing a formal report, FCM generated documentation of the quality control review
        performed and held meetings to discuss any review findings. Where discrepancies
        were noted, FCM management met with the relevant FCM personnel to discuss the
        problems and provided training to ensure improved performance. While corrective
        actions were taken, such occurrences were rare. Thus, the documentation of such
        actions was maintained in personnel files for two years in accordance with FHA
        requirements. Contrary to the allegations in the Report, FCM acted in good faith to
        comply with HUD guidelines regarding quality control reviews. While FCM's quality




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        Mr. James McKay
        May 11, 2004
        Page 42


        control reviews were done on a very small scale, the Company consistently made an
        effort to conduct reviews in accordance with HUD guidelines.

               In summary, FCM has always engaged quality control. During its operation,
        FCM consistently reviewed and analyzed Company practices and procedures, and took
        responsibility to ensure that FHA requirements are met. As discussed above, FCM
        continued to improve upon its Quality Control Plan and quality control review
        procedures throughout its corporate existence to ensure compliance with HUD/FHA
        requirements. Based on the Company's good faith effort to comply with HUD's Quality
        Control requirements, we believe that the sanctions recommended in the Report would
        be unduly severe.

        IV.    CONCLUSION

               In summary, FCM's thorough review of the findings set forth in the Report
        indicated that the recommended suspension of the origination authority of the three
        companies that are the subject of this proceeding, as well as the debarment of FCM's
        principals, is unwarranted.

                An initial review of the allegations in Finding 1 of the Report suggests a that FCM
        engaged in a plot to circumvent HUD's termination of the Fort Myers office's Origination
        Approval Agreement in the Miami/Coral Gables jurisdiction through the Department's
        Credit Watch Initiative. A close examination of the circumstances surrounding these
        entities, however, demonstrates that most of the OIG's allegations are simply not true.
        Contrary to the allegation that FCM's owners intentionally tried to circumvent a Credit
        Watch termination of the Fort Myers office's origination authority in the Miami/Coral
        Gables jurisdiction, the owners of FCM decided to create new entities for the benefit of
        their family and slowly close down FCM well before they were made aware of the
        Department's determination in the Credit Watch proceeding. The establishment of
        these entities was an exit strategy for the owners of FCM and away for them to pass
        along their mortgage business to their children. FCM has since closed its doors, and
        NFI and FHFE have been established as viable mortgage entities. FCM's owners and
        the subsequent owners and officers of the new entities acted in good faith and strived to
        comply with FHA requirements at all times during the establishment of these entities.
        None of their actions threatened the Department or caused harm to the FHA Insurance
        Fund. Based on these facts, the Report's recommended sanctions are excessive and
        inappropriate under the circumstances.

               Furthermore, in connection with the allegations regarding the 19 loans reviewed
        by the OIG discussed in Finding 2 of the Report, the Company's review indicated that
        many of the findings in the Report are at variance with the facts, do not constitute




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    Mr. James McKay
    May 11, 2004
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    violations of HUD/FHA requirements on the part of FCM, or do not affect the underlying
    loans' insurability. In addition, many of the findings in the Report go directly to the
    sponsor's underwriting decisions and not to the processing responsibilities of FCM. As
    FCM was not responsible and, in fact, was not authorized, to analyze the borrower's
    credit or make underwriting decisions in these cases, the Company should not be held
    responsible for any underwriting deficiencies in these cases.


           Finally, with regard to FCM's Quality Control practices and procedures, contrary
    to the allegations in the Report, FCM at all times put forth a good faith effort to
    implement its Quality Control Plan and perform quality control reviews in a thorough and
    timely manner. Based on FCM's continuous, good faith efforts to improve our Quality
    Control Plan and quality control review procedures and act in compliance with HUD
    requirements, we believe that the recommended sanctions are unwarranted in this
    instance.

          After review of the actual facts and circumstances in this case, as well as the
    motivation of the individuals who created the entities at issue in the Report, it would be
    inappropriate to determine that these individuals and entities are unfit to participate in
    FHA programs. We believe, and we hope the OIG will agree, that this response and
    accompanying exhibits demonstrate that the draconian penalties recommended by the
    Report in connection with the entities and their principals are unwarranted. We ask that
    the OIG revise its recommendations to fit the facts of this case.

           If you have any additional questions, or if you need additional information, please
    do not hesitate to contact our Washington counsel, Phillip L. Schulman, at (202) 778-
    9027.

          Thank you for your kind consideration.




    cc: Terry A. Cover, Assistant Regional Inspector General, HUD
        Phillip L. Schulman, Esq.




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