Department of Housing and Urban Development, Office of Inspector General | Housing and Urban Development | First Community Mortgage, Inc., Non-Supervised Loan Correspondent, Ft Myers, FL

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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2004-AT-1010 Page ii

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.

2004-AT-10101 Page iv

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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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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Finding 2

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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Finding 2

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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Appendix B

(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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Appendix B

(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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Appendix B

(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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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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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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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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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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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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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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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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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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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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Appendix C

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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Appendix D

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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Appendix E

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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Appendix F

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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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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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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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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May 11, 2004
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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

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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

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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,

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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).

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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

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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.

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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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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

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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

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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.

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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

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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

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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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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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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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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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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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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

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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.

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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.

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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.

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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 ).

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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

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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.

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Mr. James McKay
May 11, 2004
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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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Mr. James McKay
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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

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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

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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

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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

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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

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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

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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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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.

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.

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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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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.

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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.

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

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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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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.

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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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