oversight

A-Pan-American Mortgage Group, Non-Supervised Loan Correspondent, Chicago, IL

Published by the Department of Housing and Urban Development, Office of Inspector General on 2004-08-09.

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

              AUDIT REPORT




        A-PAN-AMERICAN MORTGAGE GROUP
       NON-SUPERVISED LOAN CORRESPONDENT

               CHICAGO, ILLINOIS

                   2004-CH-1007

                  AUGUST 9, 2004


              OFFICE OF AUDIT, REGION V
                  CHICAGO, ILLINOIS




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                                                                  Issue Date
                                                                         August 9, 2004

                                                                  Audit Case Number
                                                                          2004-CH-1007




TO:     John C. Weicher, Assistant Secretary for Housing, Federal Housing Commissioner and
          Chairman of Mortgagee Review Board, H
        Margarita Maisonet, Director of Departmental Enforcement Center, CV


FROM: Heath Wolfe, Regional Inspector General for Audit, 5AGA

SUBJECT: A-Pan-American Mortgage Group
         Non-Supervised Loan Correspondent
         Chicago, Illinois

We completed an audit of A-Pan-American Mortgage Group, a non-supervised loan correspondent
approved to originate FHA Single-Family mortgage loans. We selected A-Pan-American for audit
because it had a high loan default and claim rate. Our audit objectives were to determine whether: (1)
A-Pan-American’s Quality Control Plan, as implemented, met HUD’s requirements; and (2) A-Pan-
American complied with HUD’s regulations, procedures, and instructions in the origination of FHA
loans. The audit resulted in two findings.

In accordance with HUD Handbook 2000.06 REV-3, within 60 days please provide us, for each
recommendation without management decisions, 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 Rose Capalungan, Assistant Regional
Inspector General for Audit, at (312) 353-6236 extension 2679 or me at (312) 353-7832.




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Executive Summary
We completed an audit of A-Pan-American Mortgage Group, a non-supervised loan correspondent,
approved to originate FHA mortgage loans under the Single Family Direct Endorsement Program. The
audit was part of the activities set forth in our Fiscal Year 2003 Annual Audit Plan. We selected A-
Pan-American for audit because of its high loan default and claim rate. Our audit objectives were to
determine whether: (1) A-Pan-American’s Quality Control Plan, as implemented, met HUD’s
requirements, and (2) A-Pan-American complied with HUD’s regulations, procedures, and instructions
in the origination of FHA loans.

We concluded that A-Pan-American did not comply with HUD’s regulations, procedures, and
instructions in the origination of FHA-insured loans. It allowed unapproved branches and/or non-
employees to originate loans using A-Pan-American’s FHA lender identification number. Also, A-Pan-
American did not have an adequate Quality Control Plan or any evidence that it implemented the Plan.




                                      Contrary to HUD’s requirements, A-Pan-American engaged in
 A-Pan-American Allowed               prohibited loan originations when it allowed unapproved
 Prohibited Loan Originations         branches and/or non-employees to originate 120 of 125 loans
                                      using its FHA lender identification number. This occurred
                                      because the President of A-Pan-American disregarded HUD’s
                                      loan origination requirements in order to generate income from
                                      the prohibited use of A-Pan-American’s FHA lender
                                      identification number.

                                      A-Pan-American Mortgage Group did not follow HUD’s
 A-Pan-American Did Not               Quality Control requirements. Although A-Pan-American had
 Follow HUD’s Quality                 a Quality Control Plan, it was deficient because it did not
 Control Requirements                 contain all the elements as required by HUD. In addition, A-
                                      Pan-American provided no evidence it implemented its Quality
                                      Control Plan.

                                      We recommend that HUD’s Assistant Secretary for Housing-
 Recommendations                      Federal Housing Commissioner and Chairman of the
                                      Mortgagee Review Board: requires A-Pan-American to
                                      indemnify/reimburse HUD for the appropriate amounts cited in
                                      this report; and withdraws A-Pan-American’s approval to
                                      participate in HUD’s Direct Endorsement Program. We also
                                      recommend that HUD’s Director of Departmental Enforcement
                                      Center: takes appropriate administrative action against A-Pan-
                                      American; and seeks Civil Monetary Penalties against A-Pan-
                                      American for the deficiencies cited in this report.

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Executive Summary


                    We provided our draft audit report to A-Pan-American’s
                    President and HUD’s staff during the audit. We held an exit
                    conference with A-Pan-American’s President on July 28, 2004.
                    We requested written comments from A-Pan-American by July
                    31, 2004. As of August 8, 2004, A-Pan-American did not
                    provided written comments to our draft audit report.




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Table Of Contents

Management Memorandum                                                  i



Executive Summary                                                     iii



Introduction                                                          1



Findings

1. A-Pan-American Engaged In Prohibited Loan Originations             3


2. A-Pan-American Did Not Follow HUD’s Quality Control
   Requirements                                                       9




Management Controls                                                  13



Follow Up On Prior Audits                                            15




Appendices

    A. Schedule Of Questioned Costs And Recommendations For
       Funds To Be Put To Better Use                                 17

    B. Schedule Of Discrepancies – Finding 1                         19




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Introduction
Section 203(b)(1) of the National Housing Act, as amended, authorizes HUD to provide mortgage
insurance for single-family homes. HUD must formally approve a lender that originates, purchases,
holds, or sells FHA-insured loans. These lenders must follow the statutory and regulatory requirements
of the National Housing Act and HUD’s regulations and guidelines. Lenders that do not follow these
requirements are subject to administrative sanctions.

In April 1998, HUD approved A-Pan-American Mortgage Group as a non-supervised loan
correspondent to originate FHA-insured loans. As a condition of its HUD’s approval, A-Pan-
American is required to develop a Quality Control Plan for the origination of loans. The Quality Control
Plan must be a prescribed function of A-Pan-American’s operations and assure that it maintains
compliance with HUD’s requirements and its own policies and procedures.

As a loan correspondent, A-Pan-American must send the FHA loans it originates to a HUD-approved
Direct Endorsement sponsor(s) for underwriting approval prior to loan closing and securing an insurance
endorsement from HUD. The loan origination process includes taking an initial loan application,
initiating the appraisal assignment, and obtaining the credit report, verifications of deposit and
employment. Based on the information gathered by the loan correspondent, the sponsor mortgagee
underwrites the loan and decides whether the borrower represents an acceptable credit risk for HUD.
Since the sponsoring lender bases its underwriting approval, in large part, on information gathered by a
loan correspondent, it is critical that the loan correspondent exercises due care and follows HUD’s
requirements.

In June 1997, A-Pan-American incorporated under the laws of the State of Illinois. Its Office is located
at 2815 North Kimball Avenue, Chicago, Illinois. A-Pan-American originated 125 FHA-insured
Single-Family loans totaling more than $18 million from October 2000 through September 2003. The
President of A-Pan-American is Jose R. Garcia-Camilo. A-Pan-American had business relationships
with three entities: RSPL Marketing, Inc. (4234 North Cicero Avenue, Chicago, Illinois), Outsource
Resource (16353 Rowley Lane, Lockport, Illinois), and New Concept Finance (5057 Harlem Avenue,
Chicago, Illinois).




                                       Our audit objectives were to determine whether: (1) A-Pan-
 Audit Objectives                      American complied with HUD’s regulations, procedures, and
                                       instructions in the origination of FHA-insured loans, and (2) A-
                                       Pan-American’s Quality Control Plan, as implemented, met
                                       HUD’s requirements.

                                       We conducted the audit at HUD’s Chicago Regional Office and
 Audit Scope And                       A-Pan-American’s Office. We performed our audit work from
 Methodology                           November 2003 through March 2004.

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Introduction


               To accomplish our audit objectives, we interviewed: HUD’s
               staff; and A-Pan-American’s employees and a contractor. We
               reviewed HUD’s loan origination, Quality Control Plan, and
               Quality Control Review requirements. We also reviewed A-
               Pan-American’s Quality Control Plan for adequacy and
               consistency with HUD’s requirements.

               We analyzed all 125 FHA-insured loans originated under A-
               Pan-American’s FHA lender identification number from
               October 1, 2000 to September 30, 2003. We tested the loan
               files to determine whether they were originated in accordance
               with HUD’s requirements.

               We also analyzed 24 of the 125 FHA-insured loans to
               determine whether A-Pan-American implemented its written
               Quality Control Plan. Our selection criteria included defaulted
               loans, loans terminated with claims, and loans with invalid social
               security numbers. Of the 24 loans, 7 were defaulted loans, 3
               were loans terminated with claims, and 17 were loans for
               borrowers with invalid social security numbers.

               The audit covered the period from October 2000 through
               September 2003. The period was adjusted as necessary. We
               conducted the audit in accordance with Generally Accepted
               Government Auditing Standards.

               We provided a copy of this report to A-Pan-American’s
               President.




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                                                                                              Finding 1


   A-Pan-American Engaged In Prohibited Loan
                 Originations
Contrary to HUD’s requirements, A-Pan-American engaged in prohibited loan originations when it
allowed unapproved branches and/or non-employees to originate 120 of 125 loans using its FHA
lender identification number. This occurred because the President of A-Pan-American disregarded
HUD’s loan origination requirements in order to generate income from the prohibited use of A-Pan-
American’s FHA lender identification number. A-Pan-American’s unacceptable loan origination
practices contributed to its high loan default and claim rate, putting at risk more than $6.8 million in
FHA-insured loans.




                                       Paragraph 1-2 of HUD Handbook 4060.1 REV-1 states that
 HUD’s Requirements                    lenders (including loan correspondents) must be approved by
                                       HUD to originate, purchase, hold, or sell FHA-insured
                                       mortgages. Each branch office to which mortgagees intend to
                                       submit mortgages must be registered with HUD. Further,
                                       paragraph 2-14 states that all employees of the mortgagee
                                       except receptionists, whether full time or part time, must be
                                       employed exclusively by the mortgagee at all times.

                                        Mortgagee Letter 00-15 states HUD prohibits approved
                                        mortgagees from engaging in the practice of taking on an
                                        existing, separate mortgage company or broker as a branch,
                                        and allowing that separate entity to originate insured mortgages
                                        under the approved mortgagee’s HUD mortgagee number.
                                        This prohibited loan origination is called a “net branch”.

                                       We reviewed all 125 of the FHA-insured loans (100 percent)
 FHA-Insured Loans                     originated under A-Pan-American’s mortgagee name and FHA
 Reviewed                              lender identification number between October 2000 and
                                       September 2003. The 125 loans had a total value of
                                       $18,106,689. Of the 125 loans, unapproved branches and/or
                                       non-employees originated 120 loans valued at $17,284,080.




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Finding 1


                             Paragraph 1-2 of HUD Handbook 4060.1 REV-1 requires
 A-Pan-American Engaged      lenders (including loan correspondents) to be FHA-approved
 In Prohibited Loan          to originate FHA-insured mortgages. Additionally, when loans
 Originations With Non-      are originated from a branch, the branch must be registered with
 Employees And/Or Entities   HUD. In all cases, however, Mortgagee Letter 95-36 requires
 That Were Not FHA-          staff performing customary loan officer functions, either at a
 Approved                    branch or main office, to be an employee of the approved
                             mortgagee.

                             Contrary to paragraph 1-2 of HUD Handbook 4060.1 REV-1
                             and Mortgagee Letter 95-36, A-Pan-American allowed
                             unapproved entities and/or non-employees to submit 120 loans
                             totaling $17,284,080 using A-Pan-American’s FHA lender
                             identification number. This type of loan origination engagement
                             is prohibited under Mortgagee Letter 00-15 because A-Pan-
                             American took on existing and separate non-FHA approved
                             entities as branches to originate insured mortgages using A-Pan-
                             American’s FHA lender identification number.

                             Verification with HUD’s Office of Lender Approval and
                             Recertification disclosed that the three entities and their
                             respective offices for RSPL Marketing Inc. (4234 North
                             Cicero Avenue Chicago, Illinois), Outsource Resource (16353
                             Rowley Lane Lockport, Illinois), and New Concept Finance
                             (5057 Harlem Avenue Chicago, Illinois) were not FHA-
                             approved or HUD-registered branch offices of A-Pan-
                             American Mortgage Group. All three entities were separate
                             mortgage companies or brokers from A-Pan-American.

                             In addition, we determined that 11 personnel who performed
                             customary loan officer functions on 120 of the 125 loans were
                             non-employees of A-Pan-American.           The 11 personnel
                             performed customary loan officer functions of interviewing
                             clients; reviewing, processing and following-up on all of the
                             loan-related documents (credit report, appraisal, gift letters,
                             disclosures, certifications, etc.) necessary to complete the
                             clients’ loan origination packages; and interacting with the
                             sponsors to close the loan applications. The 11 personnel who
                             performed customary loan officer functions were not listed as
                             current or former employees on the employee list provided by
                             A-Pan-American to our Office.



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                                                                                      Finding 1


                              This condition occurred because the President of A-Pan-
HUD’s Requirements Were       American disregarded HUD’s loan origination requirements.
Disregarded                   When A-Pan-American received its FHA license in 1998, we
                              concluded that the President intended to use its FHA lender
                              identification number to generate income by charging third
                              parties branch fees without having to participate in any of their
                              loan origination activities.

                              Our conclusion is based on our review of A-Pan-American’s
                              loan origination files, and receipt and payment transactions.
                              Our review disclosed that the President of A-Pan-American
                              earned at least $118,298 in passive income for 12 months by
                              charging branch fees to third parties for the use of A-Pan-
                              American’s HUD-approved mortgagee name and FHA lender
                              identification number. The President did this without: (1)
                              participating in the management and operations of the branch
                              offices; (2) providing any supervision or control over the branch
                              employees; or (3) performing Quality Control Reviews (see
                              Finding 2).

                              A-Pan-American President’s only participation in the business
                              activities of its unapproved branches and non- employees was
                              collecting the fees for the use of its FHA lender identification
                              number, as well as retaining the loan origination files after
                              closing each loan. A-Pan-American’s receipt and check
                              payment transactions revealed that a majority of the checks
                              written to A-Pan-American Mortgage Group were related to
                              branch fees. At least three checks payable to A-Pan-American
                              had a memo written on the face of the checks stating that these
                              branch fees were for the use of A-Pan-American’s license.

                              A-Pan-American’s unacceptable loan origination practices
A-Pan-American’s              contributed to its high loan default and claim rate of 12 percent,
Practices Posed Significant   putting at risk more than $6.8 million in FHA-insured loans.
Risks To The FHA
Insurance Fund                If A-Pan-American’s FHA lender identification number to
                              originate loans was terminated, we estimate that approximately
                              $102,519 (average of 42 loans per year for the last three years
                              times A-Pan-American’s current claim rate of 3.17 percent
                              times HUD’s current average loss of $25,667 per home) in
                              FHA funds would be put to better use. This represents
                              potential savings to the FHA Insurance Fund in terms of
                              reduced risk.

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Finding 1


                      Although we found issues on 120 of the 125 FHA-insured
                      loans originated by prohibited branches and/or non-employees
                      using A-Pan-American’s mortgagee name and FHA lender
                      identification    number,     we     are   only      requesting
                      reimbursement/indemnification on 54 of the 120 loans. The
                      remaining 66 loans are no longer considered a risk to the FHA
                      Insurance Fund since these loans were paid in full by the
                      borrowers. As of June 29, 2004, the insurance status for the
                      54 loans and their corresponding reimbursement/indemnification
                      amounts are shown in the following table. See Appendix B of
                      this report for more details.

                                 Insurance Status         Count        Amount
                            Active                          49      $6,541,291
                            Claim, Resold with Loss         4          145,056
                            Claim, Not Resold               1           128,296
                                      Totals                54      $6,814,643




    Recommendations   We recommend that HUD’s Assistant Secretary for Housing-
                      Federal Housing Commissioner and Chairman of the
                      Mortgagee Review Board:

                      1A.      Requires A-Pan-American to indemnify HUD
                               $6,541,291 against future losses on the 49 active loans
                               originated in violation of HUD’s requirements.

                      1B.      Reimburses HUD $145,056 for the actual losses
                               incurred on the four terminated loans with a claim
                               originated in violation of HUD’s requirements.

                      1C.      Reimburses HUD the appropriate amount of $128,296
                               for the future loss on one terminated loan with a claim
                               originated in violation of HUD’s requirements once the
                               property is resold.

                      1D.      Withdraws A-Pan-American’s approval to participate
                               in HUD’s Single Family Mortgage Insurance Program
                               based on the deficiencies cited in this report. HUD’s
                               withdrawal should help ensure that $102,519 in HUD
                               fund is used appropriately.


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                                                         Finding 1


       We also recommend that HUD’s Director of Departmental
       Enforcement Center:

       1E.     Takes appropriate administrative action against the
               owner of A-Pan-American Mortgage Group.

       1F.     Seeks Civil Monetary Penalties against A-Pan-
               American for the deficiencies cited in this report.




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                                                                                              Finding 2


A-Pan-American Did Not Follow HUD’s Quality
           Control Requirements
A-Pan-American Mortgage Group did not follow HUD’s Quality Control requirements. Although A-
Pan-American had a Quality Control Plan, it was deficient because it did not contain all the elements as
required by HUD. In addition, A-Pan-American provided no evidence it implemented its Quality
Control Plan. The deficiencies existed because of A-Pan-American’s disregard for HUD’s Quality
Control requirements and its inability, as stated by its President, to access HUD’s Neighborhood Watch
system. As a result, HUD lacked assurance of the accuracy, validity, and completeness of A-Pan-
American’s loan origination operations.




                                       HUD Handbook 4060.1 REV-1 includes the requirements for
 HUD’s Requirements                    a mortgagee’s Quality Control Plan for the origination of FHA-
                                       insured mortgages. Chapter 6 of the Handbook provides the
                                       general requirements along with lender specific requirements for
                                       Quality Control Plans. The Handbook requires mortgagees to:

                                           §   Establish a Quality Control Plan that is sufficient in
                                               scope to enable the lender to evaluate the accuracy,
                                               validity, and completeness of its loan origination
                                               operations;
                                           §   Enable the lender to initiate immediate corrective
                                               actions when discrepancies are found;
                                           §   Assure records of Quality Control findings and actions
                                               taken were kept;
                                           §   Analyze loans that go into default within 6 months after
                                               closing;
                                           §   Indicate which of the two methods (for example 10
                                               percent of all loans closed on a monthly basis or 95
                                               percent confidence level with 2 percent precision) will
                                               be used when sampling loans to be reviewed;
                                           §   Retain the results of Quality Control Reviews for a
                                               period of 1 year, whether performed by the mortgagee
                                               or an outside firm; and
                                           §   Perform Quality Control Reviews within 90 days of
                                               closing of the loan.

                                       A-Pan-American had a Quality Control Plan, but it was
 Quality Control Plan Was              deficient. Although the Plan identified the requirements of HUD
 Deficient
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Finding 2


                             Handbook 4060.1 REV-1, it did not contain all of the elements
                             required. The Plan lacked procedures to ensure the accuracy,
                             validity, and completeness of A-Pan-American’s loan
                             origination operations. For instance, the Quality Control Plan
                             did not have:

                                 §   Review procedures for ensuring all loans that defaulted
                                     within the first 6 months were analyzed;
                                 §   Review procedures for ensuring loans that closed within
                                     90 days were reviewed; and
                                 §   Selection sampling plan that identifies the sampling
                                     method to be used and procedures to be followed
                                     when selecting the samples.

                             The President of A-Pan-American copied HUD’s Quality
                             Control Plan checklist directly into the company’s business
                             letterhead, which was later, submitted to HUD as A-Pan-
                             American’s Quality Control Plan.

                             The President of A-Pan-American claimed that A-Pan-
 No Evidence Of Plan         American performed Quality Control Reviews. However,
 Implementation              when asked to provide evidence, he was unable to provide a
                             written report of Quality Control Reviews which would provide:
                             (1) information on how loans were selected for review; (2) a
                             listing of actual loans analyzed or reviewed; or (3)
                             documentation on the procedures or analyses actually
                             performed.

                             Moreover, our review disclosed that A-Pan-American did not
                             conduct Quality Control Reviews for the four early payment
                             default loans as shown in the following table.

                                                                       Total
                        FHA                                 Date      Number       Included
                        Loan                Date First      Last        Of        In HUD’s
                       Number    Mortgage   Payment       Payment    Payments       Review
                         137-    Amount        Due         Made        Made
                       0843838   $352,265    05/01/01     10/01/01       6
                       1174619   $109,589    09/01/01     02/01/02       6            X
                       1457432   $170,012    01/01/02     04/01/02       4            X
                       1524050   $131,087    12/31/01     02/01/02       5            X
                        Totals   $762,953        4           4                        3




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                                                                                  Finding 2


                         Three of four early default loans in the table above were
                         included in HUD’s July 2003 Quality Assurance Review.

                         The Quality Control deficiencies occurred because A-Pan-
Causes Of Deficiencies   American disregarded HUD’s Quality Control requirements.
                         A-Pan-American’s President said A-Pan-American did not
                         have access to HUD’s Neighborhood Watch system and
                         consequently, did not know the loans were in default.

                         In 1998, the President of A-Pan-American said he drafted a
                         Quality Control Plan based on a sponsor’s expert advice. This
                         was supplemented by a kit containing HUD’s Quality Control
                         Plan checklist that a sponsor (Aegis) provided. Later, we
                         found that A-Pan-American submitted a Quality Control Plan to
                         HUD containing information copied from HUD’s Quality
                         Control Plan checklist.

                         The President said he was unaware of HUD’s Neighborhood
                         Watch system and did not learn about the early payment
                         defaults until HUD’s Quality Assurance Division staff informed
                         him.

                         We do not believe the above reasons relieved A-Pan-American
                         of its responsibility to maintain a Quality Control Plan that meets
                         HUD’s requirements, as well as ensure that Quality Control
                         Reviews were conducted according to the Plan. In the absence
                         of maintaining and implementing an effective Quality Control
                         Plan, HUD lacked assurance of the accuracy, validity and
                         completeness of A-Pan-American’s loan origination operations.




  Recommendations        We recommend that HUD’s Assistant Secretary for Housing-
                         Federal Housing Commissioner and Chairman of the
                         Mortgagee Review Board:

                         2A.      Requires A-Pan-American to fully establish and
                                  implement an adequate Quality Control Plan and related
                                  reviews, if HUD allows A-Pan-American to continue to
                                  originate FHA-insured loans.




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Finding 2


               2B.      Reviews A-Pan-American’s implementation of
                        Recommendation 2A and ensure its Quality Control
                        process conforms to HUD’s requirements.




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Management Controls
Management Controls include the plan of organization, methods, and procedures adopted by
management to ensure that its goals are being met. Management controls include the processes for
planning, organizing, directing, and controlling program operations. They include systems for measuring,
reporting, and monitoring program performance.




                                       We determined that the following management controls were
 Relevant Management                   relevant to our audit objectives:
 Controls
                                       §   Program Operations – Policies and procedures that
                                           management has implemented to reasonably ensure that the
                                           loan origination process is in compliance with HUD/FHA
                                           requirements, and the objectives of the programs are met.

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

                                       §   Compliance with Laws and Regulations – Policies and
                                           procedures that management has implemented to
                                           reasonably ensure that resource use is consistent with laws
                                           and regulations.

                                       §   Safeguarding of Resources – Policies and procedures that
                                           management has implemented to reasonably ensure that
                                           resources are safeguarded against waste, loss and misuse.

                                       We assessed all the relevant controls identified above during
                                       our audit of A-Pan-American’s Quality Control and loan
                                       origination processes.

                                       It is a significant weakness if management controls do 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 are obtained,
                                       maintained, and fairly disclosed in reports.

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

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Management Controls


                      §   Program Operations

                      A-Pan-American did not operate its loan origination program in
                      accordance with HUD’s requirements. A-Pan-American
                      allowed unapproved branches and non-employees to originate
                      FHA-insured loans contrary to HUD’s requirements. In
                      addition, A-Pan-American did not establish an adequate
                      Quality Control Plan and implement it accordingly (see Findings
                      1 and 2).

                      §   Validity and Reliability of Data

                      A-Pan-American did not perform Quality Control Reviews on
                      its loans for ensuring accuracy, validity and completeness of
                      loan origination operations (see Finding 2).

                      •   Safeguarding Resources

                      A-Pan-American engaged in prohibited loan originations when
                      it allowed unapproved branches and/or non-employees to
                      originate loans using its FHA lender identification number. A-
                      Pan-American’s unacceptable loan origination practices
                      contributed to its high loan default and claim rate, putting at risk
                      more than $6.8 million in FHA-insured loans (see Finding 1).




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Follow Up On Prior Audits
This is the first audit of A-Pan-American Mortgage Group by HUD’s Office of Inspector General.

In July 2003, HUD’s Quality Assurance Division conducted a Title II origination review of A-Pan-
American. The review resulted in eight findings that included deficient Quality Control procedures, non-
compliance with HUD’s reporting requirements, violation of HUD’s loan origination requirements by
allowing unregistered branch office or non-employees to originate loans, and insufficient loan origination
documentation. As of June 29, 2004, all findings were not yet resolved.




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                                                                                           Appendix A

Schedule Of Questioned Costs And
Recommendations For Funds To Be Put To
Better Use

Recommendation                  Type of Questioned Costs                       Funds To Be Put
    Number              Ineligible Costs 1/    Unsupported Costs 2/            To Better Use 3/

       1A                                                                        $6,541,291
       1B                  $145,056
       1C                                              $128,296
       1E                                                                          $102,519
      Totals               $145,056                     $128,296                 $6,643,810


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

2/          Unsupported costs are costs charged to a HUD-financed or insured program or activity and
            eligibility cannot be determined at the time of the audit. The costs are not supported by
            adequate documentation or there is a need for a legal or administrative determination on the
            eligibility of the cost. Unsupported costs require a future decision by HUD program
            officials. This decision, in addition to obtaining supporting documentation, might involve a
            legal interpretation or clarification of Departmental policies and procedures.

3/          Funds To Be Put To Better Use are quantifiable savings that are anticipated to occur if an
            OIG recommendation is implemented, resulting in a reduced expenditure in subsequent
            periods for the activity in question. This includes an implemented OIG recommendation that
            causes a non-HUD entity not to expend Federal funds for a specific purpose. These funds
            could be reprogrammed by the entity and not returned to HUD.
.




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                                                                                                      Appendix B

Schedule Of Discrepancies – Finding 1
                                                           Loans Originated By                 Originated
        FHA                                Insurance     Unapproved Branch Offices                By
        Case        Insured   Closing      Status As                                             Non-
       Number       Amount     Date            of                  New         Outsource       Employees
                                           06/29/04     RSPL      Concept      Resource
1    137-0646776@   $80,056   10/25/2000      T                                                      X
2    137-0677977@   137,864   10/27/2000      T                                                      X
3    137-0713076    153,265    2/22/2001      T           X
4    137-0766243@   201,734     2/7/2001      A                                                      X
5    137-0788212    112,636    1/31/2001      T           X
6    137-0814139    188,790    2/13/2001      T                                                      X
7    137-0822969    197,925    2/22/2001      T                                                      X
8    137-0824930    151,133    4/24/2001      A           X
9    137-0827263    143,673    2/23/2001      T                                                      X
10   137-0838380     81,301    3/12/2001      T                                                      X
11   137-0838401    143,277    4/30/2001      A           X
12   137-0840316    148,631    3/20/2001      T                                                      X
13   137-0859033    164,443    3/28/2001      A                                                      X
14   137-0864079    160,877    3/30/2001      A                                                      X
15   137-0874307    167,357    3/20/2001      T                                                      X
16   137-0879175    184,373    3/20/2001      T                                                      X
17   137-0890707    204,367    3/30/2001      T                                                      X
18   137-0900118    190,849    3/29/2001      T                                                      X
19   137-0915605    100,738    5/25/2001      T           X
20   137-0944624    186,898    4/25/2001      A           X
21   137-0950528    141,328    4/23/2001      A           X
22   137-0970420    193,216    4/20/2001      T           X
23   137-0972082    104,951    5/25/2001      T                                                      X
24   137-0972099    211,807    4/30/2001      T           X
25   137-0982146*   164,018    4/30/2001      T           X
26   137-0983447    113,527    4/24/2001      A                                                      X
27   137-0983634    110,127    4/24/2001      A                                                      X
28   137-0986335*   138,678    6/20/2001      T           X
29   137-0991081    159,892    6/22/2001      A           X
30   137-1035354*   168,000     5/2/2001      T           X
31   137-1035485    128,550    5/16/2001      A           X
32   137-1035654     55,723    5/23/2001      T           X
33   137-1043236    102,604     5/1/2001      A           X
34   137-1045295    135,198    5/22/2001      A           X
35   137-1067906    205,669    5/29/2001      T           X
36   137-1076482     84,397     6/4/2001      T           X
37   137-1076517    101,560    5/24/2001      T           X
38   137-1083497     98,962    5/25/2001      T                                                      X
39   137-1084197@   192,971    5/14/2001      A                                                      X
40   137-1104505@   177,493     6/1/2001      T
41   137-1104522    209,496     6/5/2001      T            X
42   137-1104942    124,686    6/15/2001      T            X
43   137-1110852    176,274    6/26/2001      T            X
44   137-1111155    150,220     6/1/2001      T            X
45   137-1137639    148,900     7/6/2001      T        Legend:
                                                           X    @ = The loans are purchases, all others are
                                                       refinances; * = The loans are covered by Section
                                                       234C of the National Housing Act, all others are
                                                       203B; A= active; T = terminated without claim; C =
                                                       terminated with claim.



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Appendix B



                                                           Loans Originated By                 Originated
        FHA                                Insurance     Unapproved Branch Offices                By
        Case        Insured   Closing      Status As                                             Non-
       Number       Amount     Date            of                  New         Outsource       Employees
                                           06/29/04     RSPL      Concept      Resource
46   137-1147557     77,454    6/25/2001      A           X
47   137-1147852    100,028    6/22/2001      A           X
48   137-1151248     88,355    6/30/2001      T           X
49   137-1151312     85,970    6/25/2001      A           X
50   137-1182933*    75,370    7/18/2001      T           X
51   137-1191856    156,685    7/24/2001      T           X
52   137-1191879*   118,800    7/23/2001      T           X
53   137-1236468    134,487    7/31/2001      A           X
54   137-1250274    157,500    9/28/2001      T           X
55   137-1250869    108,527    8/16/2001      A           X
56   137-1254411    145,145    8/18/2001      T           X
57   137-1275043    131,848    8/23/2001      T           X
58   137-1275089*   113,700     9/4/2001      T           X
59   137-1275230     74,907    8/22/2001      A           X
60   137-1276531    137,385    8/29/2001      A           X
61   137-1279731    141,135    8/31/2001      A           X
62   137-1283220*   120,250    9/25/2001      A           X
63   137-1283237    152,757    8/27/2001      A           X
64   137-1286857    113,680    8/27/2001      T           X
65   137-1286863    126,113    9/25/2001      A           X
66   137-1303302@   116,176    9/24/2001      A                                                      X
67   137-1305621    116,539    10/1/2001      A           X
68   137-1328044    138,183   10/31/2001      T           X
69   137-1333181    124,352    9/28/2001      A                                                      X
70   137-1356646    114,261    9/25/2001      A           X
71   137-1408687    120,379    11/1/2001      T           X
72   137-1410493    132,914   10/29/2001      T           X
73   137-1410608    182,040   10/27/2001      T           X
74   137-1417462    129,313   10/29/2001      T           X
75   137-1417479    150,746   10/31/2001      T           X
76   137-1444518    182,826   11/26/2001      T           X
77   137-1445174    234,119   11/21/2001      T           X
78   137-1446633*   149,600   11/21/2001      T           X
79   137-1457432    170,012   11/26/2001      T           X
80   137-1457449    176,813   11/30/2001      T           X
81   137-1457455    123,221   11/27/2001      A           X
82   137-1471218@   129,174   11/30/2001      T                                                      X
83   137-1492927    134,741    2/19/2002      T           X
84   137-1493793    127,890   12/19/2001      A           X
85   137-1523712    165,713   12/24/2001      T           X
86   137-1524067    122,464    1/16/2002      A           X
87   137-1567401    190,718    2/15/2002      T           X
88   137-1570026    119,770    3/22/2002      A           X
89   137-1577893    138,050    1/17/2002      T                                      X
90   137-1588765    139,409    2/21/2002      A        Legend:
                                                           X    @ = The loans are purchases, all others are
                                                       refinances; * = The loans are covered by Section
                                                       234C of the National Housing Act, all others are
                                                       203B; A= active; T = terminated without claim; C =
                                                       terminated with claim.




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                                                                    Loans Originated By Unapproved
                                                    Insurance               Branch Offices                      Originated
         FHA                                        Status As                                                      By
         Case           Insured       Closing           of                                      Outsource         Non-
        Number          Amount         Date         06/29/04      RSPL       New Concept        Resource        Employees
91    137-1600691       113,375        2/25/2002        T                                                             X
92    137-1615317       177,371        2/22/2002        T            X
93    137-1646287       112,563        3/22/2002        A            X
94    137-1669382       150,017        3/25/2002        A            X
95    137-1722856@      148,190         5/6/2002        T                                                             X
96    137-1722912@      207,962         5/3/2002        T                           X
97    137-1846433       182,403        7/26/2002        T
98    137-1870376@      118,146        7/25/2002        A
99    137-2111326       114,325        12/9/2002        A                                                             X
100   137-2159504       158,780        2/28/2003        T
101   137-2307924       185,787         4/4/2003        A
102   137-0843838       356,265        3/13/2001        C                                                             X
103   137-0874067       201,354         4/1/2001        A            X
104   137-0971093       178,770        4/23/2001        T            X
105   137-0983628       135,553        4/30/2001        T            X
106   137-1010092@      125,037        4/13/2001        A                                                             X
107   137-1035739       114,187        5/21/2001        A            X
108   137-1035745       142,709        5/17/2001        C            X
109   137-1035751       161,283        5/21/2001        C            X
110   137-1053907        87,290        6/19/2001        T                           X
111   137-1075784       128,296        5/25/2001        C            X
112   137-1086645@       70,644        4/30/2001        A                                                             X
113   137-1163520       113,725         7/5/2001        A            X
114   137-1171419       130,885        7/30/2001        A            X
115   137-1174619       109,589        7/30/2001        A            X
116   137-1202840        90,538        7/23/2001        T            X
117   137-1250361       148,494        8/31/2001        A            X
118   137-1250511       163,922        8/14/2001        A            X
119   137-1404679       206,758        1/11/2002        T            X
120   137-1409358       181,279       10/25/2001        T            X
121   137-1410391       241,257       10/24/2001        T            X
122   137-1488026       205,872       12/12/2001        A            X
123   137-1524050       131,087       12/31/2001        C            X
124   137-1558366       151,458        1/17/2002        A            X
125   137-1669983       173,565        3/21/2002        A            X
          Totals     $18,106,689.00                                  89             2                 1               28


                                                                Legend: @ = The loans are purchases, all others are
                                                                refinances; * = The loans are covered by Section
                                                                234C of the National Housing Act, all others are
                                                                203B; A= active; T = terminated without claim; C =
                                                                terminated with claim.




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