oversight

Cornerstone Mortgage Group, Limited Non-Supervised Loan Correspondent Inverness, IL

Published by the Department of Housing and Urban Development, Office of Inspector General on 2004-09-10.

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

         AUDIT REPORT




 CORNERSTONE MORTGAGE GROUP, LIMITED
  NON-SUPERVISED LOAN CORRESPONDENT

          INVERNESS, ILLINOIS

              2004-CH-1008

          SEPTEMBER 10, 2004




         OFFICE OF AUDIT, REGION V
             CHICAGO, ILLINOIS




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                                                                  Issue Date
                                                                          September 10, 2004
                                                                 Audit Case Number
                                                                          2004-CH-1008




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: Thomas Towers, Acting Regional Inspector General for Audit, 5AGA

SUBJECT: Cornerstone Mortgage Group, Limited
         Non-Supervised Loan Correspondent
         Inverness, Illinois

We completed an audit of Cornerstone Mortgage Group, Limited, a non-supervised loan
correspondent, approved to originate FHA Single-Family mortgage loans. We selected Cornerstone
for audit because it had a high loan default and claim rate. Our audit objectives were to determine
whether: (1) Cornerstone’s Quality Control Plan, as implemented, met HUD’s requirements; and (2)
Cornerstone followed prudent lending practices and 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 (313) 226-6280 extension
8062.




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Executive Summary
We completed an audit of Cornerstone Mortgage Group, Limited, 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 Cornerstone for audit because of its high loan default and claim
rate. Our audit objectives were to determine whether: (1) Cornerstone’s Quality Control Plan, as
implemented, met HUD’s requirements, and (2) Cornerstone followed prudent lending practices and
complied with HUD’s regulations, procedures, and instructions in the origination of FHA loans.

We concluded, that due to the lack of management oversight and a deficient Quality Control Plan,
Cornerstone did not adequately perform Quality Control Reviews of FHA loans as required. Also,
Cornerstone did not: adhere to prudent lending practices; and comply with HUD’s regulations,
procedures, and instructions when it originated FHA-insured loans.



                                    Due to the lack of management oversight and a deficient
 Lack Of Management                 Quality Control Plan, Cornerstone did not adequately perform
 Oversight And A                    Quality Control Reviews on FHA-loans as required.
 Deficient Quality Control          Cornerstone did not review 18 loans that defaulted within the
 Plan                               first six payments after closing. Additionally, Cornerstone
                                    did not always: (1) perform Quality Control Reviews on
                                    FHA loans in a timely manner; (2) consistently complete
                                    written reverification of borrowers’ employment, deposits,
                                    and gift letters, or other sources of funds; (3) maintain
                                    supporting documentation for its desk reviews of the
                                    property appraisals; (4) generate periodic Quality Control
                                    reports on the deficiencies to reasonably notify its senior
                                    management; and (5) formally and consistently document
                                    the deficiencies and the actions taken to resolve the
                                    deficiencies found during its reviews.

                                    Cornerstone did not always originate FHA-insured loans in
 Due Diligence In                   accordance with HUD’s requirements and prudent lending
 Packaging Loans Was Not            practices. Cornerstone did not exercise due diligence to always
 Exercised                          verify or support borrowers’ sources of funds to close, income,
                                    and credit information and reports. In addition, Cornerstone
                                    did not always ensure that: cash investment requirements were
                                    met; inconsistencies of information contained in the loan
                                    documents were explained or resolved; complete loan
                                    origination files were maintained; and face-to-face interviews
                                    with first-time borrowers were conducted.

                                    HUD’s Quality Assurance Division previously noted some of
 Some Deficiencies Noted            the deficiencies found during our audit. For example, during a
 Were Repeat Findings               Title II origination review in March 2001, HUD’s Quality
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Executive Summary


                    Assurance Division found that Cornerstone’s Illinois home
                    office had a non-conforming Quality Control Plan and lacked
                    supporting documentation. Additionally, during a Title II
                    origination review in December 2001, HUD’s Quality
                    Assurance Division noted that Cornerstone’s Nevada branch
                    office performed inadequate Quality Control Reviews, did not
                    properly verify the source of funds for the down payment
                    and/or closing, and failed to maintain origination files or
                    documentation.

                    We recommend that HUD’s Assistant Secretary for Housing-
 Recommendations    Federal Housing Commissioner and Chairman of the
                    Mortgagee Review Board: requires Cornerstone and/or its
                    sponsor to indemnify/reimburse HUD for the appropriate
                    amounts cited in this report; and determines whether HUD
                    should withdraw Cornerstone’s approval to participate in
                    HUD’s Single Family Mortgage Insurance Program. We
                    also recommend that HUD’s Director of Departmental
                    Enforcement Center take appropriate administrative actions
                    against Cornerstone for its failure to follow HUD’s
                    requirements.

                    We presented our draft audit report to Cornerstone’s
                    President and Vice President, and HUD’s staff during the
                    audit. We held an exit conference with Cornerstone’s
                    President and Vice President on July 28, 2004. Cornerstone
                    provided written comments to the draft audit report on
                    August 13, 2004 that generally did not agree with our
                    findings. We included excerpts of the comments with each
                    finding (see Findings 1 and 2).

                    The complete text of Cornerstone’s comments including
                    attachments is in Appendix E.




2004-CH-1008            Page iv

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Table Of Contents

Management Memorandum                                                      i



Executive Summary                                                       iii



Introduction                                                             1



Findings
1.     Lack Of Management Oversight And Deficient Quality Control
       Plan Resulted In Inadequate Quality Control Reviews               3

2.     Cornerstone Did Not Exercise Due Diligence In Packaging The
       Loans For Direct Endorsement Approval                             9



Management Controls                                                    23



Follow Up On Prior Audits                                              25



Appendices
     A. Schedule Of Questioned Costs And Recommendation For
        Funds To Be Put to Better Use                                 27

     B. Summary Of Deficiencies – Finding 2                           29

     C. Narrative Case Presentations                                  31

     D. Status Of 37 FHA-Insured Loans                                79


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    E. Auditee Comments             81




2004-CH-1008              Page vi

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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 mortgagee that
originates, purchases, holds, or sells FHA-insured loans. Mortgagees must follow the statutory
and regulatory requirements of the National Housing Act and HUD’s instructions, guidelines,
and regulations when originating insured loans. Mortgagees that do not follow these
requirements are subject to administrative sanctions.

In January 1992, HUD approved Cornerstone as a non-supervised loan correspondent mortgagee
to originate FHA loans. As a condition for its HUD approval, Cornerstone is required to have
and maintain a Quality Control Plan for the origination and servicing of FHA-insured loans. The
Quality Control Plan must be a prescribed function of Cornerstone’s operations and assure that it
maintains compliance with HUD’s requirements and its own policies and procedures.

As a loan correspondent, Cornerstone must send the FHA loans it originated to a HUD-approved
Direct Endorsement sponsor(s) for underwriting approval prior to loan closing and the
submission to HUD for insurance endorsement. 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 makes a decision as to whether
the borrower represents an acceptable credit risk for HUD. Since the sponsor 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 prudent lending practices and
HUD’s requirements when originating the loan.

Cornerstone has a home office located in Inverness, Illinois and one branch office located in Las
Vegas, Nevada. In December 2003, HUD terminated the FHA loan origination approval of
Cornerstone’s Las Vegas office based on its high loan default and claim rate. Cornerstone
originated 510 FHA-insured Single-Family loans totaling more than $65 million from September
2001 through August 2003. The President of Cornerstone is Michael O’Neill.



                                     Our audit objectives were to determine whether (1)
 Audit Objectives                    Cornerstone’s Quality Control Plan, as implemented, met
                                     HUD’s requirements, and (2) Cornerstone followed prudent
                                     lending practices and complied with HUD’s regulations,
                                     procedures, and instructions in the origination of FHA-
                                     insured Single Family mortgage loans.

                                     We conducted the audit at HUD’s Chicago Regional Office
 Audit Scope And                     and Cornerstone’s Inverness, Illinois office. We performed
 Methodology                         our audit work between September 2003 and May 2004.



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               To accomplish our objectives, we interviewed HUD’s staff
               and Cornerstone’s management, employees, and loan
               borrowers. We also contacted the borrowers’ employers.

               We reviewed HUD’s loan origination, Quality Control Plan,
               and Quality Control review requirements. We also reviewed
               Cornerstone’s Quality Control Plan for adequacy and
               consistency with HUD’s requirements.

               We analyzed all 43 loans that Cornerstone performed Quality
               Control Reviews on as of October 1, 2003 to determine if
               Cornerstone implemented its Quality Control Plan.
               Specifically if Cornerstone performed the Quality Control
               Reviews in accordance with its Quality Control Plan and
               HUD’s requirements.

               We tested Cornerstone’s loan origination process using a
               sample of loans closed during the period September 2001
               through August 2003. We chose 37 loans from a universe of
               480 FHA-insured loans using Computer Assisted Audit
               Techniques, including the ACL program. Our selection
               criteria included: defaulted loans and loans terminated with
               claims. The 37 loans were comprised of 19 loans originated
               or refinanced by Cornerstone’s Illinois office, and the
               remaining 18 loans originated by its Nevada branch office.
               All loans originated by its Nevada branch office were
               terminated with claims. We tested Cornerstone’s origination
               process through a review of HUD’s FHA Case Binders and
               Cornerstone’s loan origination files related to our sample.

               The audit covered the period from September 2001 to August
               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 the President of
               Cornerstone.




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                                                                                         Finding 1


 Lack Of Management Oversight And Deficient
  Quality Control Plan Resulted In Inadequate
           Quality Control Reviews
Cornerstone Mortgage Group, Limited did not adequately perform Quality Control Reviews on
FHA-loans as required. Cornerstone did not review 18 loans that defaulted within the first six
payments after closing. Additionally, Cornerstone did not always: (1) perform Quality Control
Reviews on FHA loans in a timely manner; (2) consistently complete written reverification of
borrowers’ employment, deposits, gift letters, or other sources of funds; (3) maintain supporting
documentation for its desk reviews of the property appraisals; (4) generate periodic Quality
Control reports on the deficiencies to reasonably notify its senior management; and (5) formally
and consistently document the deficiencies and the actions taken to resolve the deficiencies
found during its reviews. The problems occurred because of a lack of management oversight
and Cornerstone’s written Quality Control Plan was not consistent with HUD’s requirements.
As a result, Cornerstone was unable to ensure the accuracy, validity, and completeness of its loan
origination operations and contributed to an increased risk of loss to HUD’s FHA insurance
fund.



                                     HUD Handbook 4060.1 REV-1, Mortgagee Approval
 HUD Requirements                    Handbook, Chapter 6, requires mortgagees including loan
                                     correspondents to:

                                         Have and maintain a Quality Control Plan that is
                                         sufficient in scope to enable the mortgagee to evaluate the
                                         accuracy, validity, and completeness of its loan
                                         origination operations and also allow for independent
                                         evaluation of significant information gathered for use in
                                         the mortgage credit decision making for all loans
                                         originated by the mortgagee;

                                         Include in their Quality Control Plan a provision for:
                                         (1) periodic reports that would identify for senior
                                         management areas of deficiency including, for example,
                                         errors and omissions, unacceptable patterns or trends,
                                         as well as fraud and intentional violations of
                                         regulations; and (2) written reverification of a
                                         mortgagor’s employment, deposits, and gift letter or
                                         other sources of funds;
                                         Analyze all loans that go into default within the first six
                                         months;

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Finding 1


                         Formally document the actions taken by management
                         by citing each deficiency;

                         Provide management’s response or actions taken;

                         Perform Quality Control Reviews within 90 days of the
                         closing of the loan; and

                         Perform a desk review of the property appraisal on all
                         loans chosen for a Quality Control review.

                      As of October 1, 2003, Cornerstone performed Quality
 Sample Selection     Control Reviews on 43 FHA loans with closing dates
                      between September 1, 2001 and August 31, 2003. We
                      reviewed all 43 loans. Therefore, the results of our review of
                      Cornerstone’s Quality Control process were based on a 100
                      percent sample.

                      Cornerstone did not perform Quality Control Reviews for
 Inadequate Quality   18 early payment default loans as shown in the table on the
 Control Reviews      next page.




                                                                         Included
                                      FHA Loan Mortgage      Closing      In OIG’s
                                       Number    Amount       Date         Review
                                     332-3714363 $116,955     8/9/2002
                                     332-3806322 $145,938     6/3/2002
                                     332-3867679  $70,700    5/21/2002
                                     332-3880958 $218,377    6/20/2002
                                     332-3923916  $83,979     8/7/2002

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                     332-3710819 $134,944         9/7/2001
                     332-3734424 $142,962         1/4/2002       X
                     332-3754385 $124,439        11/9/2001       X
                     332-3761515 $126,976       11/28/2001
                     332-3781815 $112,462       12/26/2001       X
                     332-3786727 $130,123       12/18/2001       X
                     332-3793422 $118,907       12/13/2001       X
                     332-3797686 $146,921       12/10/2001
                     332-3800155 $142,962       12/20/2001
                     332-3805123 $112,969        1/17/2002       X
                     332-3729736 $133,675        9/28/2001
                     332-3738478 $122,865        9/28/2001       X
                     332-3856414 $111,999        9/13/2002
                        Totals  $2,298,153         18            7

       Of the 18 early default loans in the table above, seven were
       included in our review (Finding 2).

       Cornerstone did not always perform Quality Control Reviews
       in a timely manner (within 90 days of closing dates).
       Specifically, of the 43 FHA loans, Cornerstone performed
       timely Quality Control Reviews on three; did not perform
       timely Quality Control Reviews on 27; and did not have
       documentation showing that the remaining 13 loans were
       reviewed. For the 27 loans that were untimely reviewed,
       Cornerstone performed the Quality Control Reviews 91 to
       584 days late.

       Cornerstone did not always consistently complete its written
       reverification of borrowers’ employment, deposits, gift
       letters, or other sources of funds. Specifically, although
       evidence existed that it consistently performed complete
       written reverification of deposits, gift letters, or other sources
       of funds on 10 of the 43 FHA loans, Cornerstone did not do
       so on the remaining 33 loans.

       Cornerstone lacked supporting documentation to show that it
       performed desk reviews of the property appraisals on 38 of
       the 43 FHA loans during its Quality Control Reviews.

       Cornerstone did not generate periodic Quality Control
       reports, at least on a quarterly basis, to notify Cornerstone’s
       senior management of deficiencies cited as a result of the
       Quality Control Reviews. Instead, the staff performing the
       Quality Control review reported the deficiencies verbally to

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Finding 1


                             senior management. HUD requires that the deficiencies
                             found during reviews be in writing.

                             Cornerstone did not adequately document the deficiencies
                             found during its Quality Control Reviews and/or the actions it
                             took to resolve the deficiencies.

                             Cornerstone was not diligent in performing its Quality
 Lack Of Management          Control Reviews on FHA loans with closing dates between
 Oversight And A             September 2001 and August 2003.             In addition,
 Deficient Quality Control   Cornerstone relied completely on its sponsor, Irwin
 Plan                        Mortgage Corporation, to perform the Quality Control
                             Reviews on 100 percent of FHA loans originated in its
                             Nevada branch office. HUD Handbook 4060.1 REV-1
                             provides that a loan correspondent may enter into a
                             contractual agreement with its sponsor to perform its
                             quality control. However, Cornerstone did not enter into a
                             formal agreement with its sponsor for the quality control
                             services. Cornerstone’s management was still responsible
                             for the timely and adequate execution of Quality Control
                             Reviews, and accountable for adequately meeting
                             HUD/FHA’s requirements because it was a condition of its
                             approval to originate FHA loans.

                             Cornerstone implemented a deficient Quality Control Plan.
                             Specifically, Cornerstone failed to have and maintain a
                             written Quality Control Plan that met HUD’s requirements.
                             Its Plan did not:
                                  Provide for an on-site branch office review to be
                                  performed at least once a year for each branch that
                                  originated or serviced FHA-insured mortgages;
                                  Make any reference or include the review of alternative
                                  loan documents as required by HUD’s Mortgagee Letters
                                  91-51 and 92-15;
                                  Mention the file retention on the results of the Quality
                                  Control Reviews;
                                  Require a written notification to Cornerstone’s senior
                                  management of deficiencies cited as a result of the
                                  Quality Control Reviews;
                                  Assure that a face-to-face interview was performed with
                                  the mortgagor prior to signing the fully completed loan
                                  application Form HUD 92900; and
                                  Assure that the mortgagor or employee(s) of Cornerstone
                                  initialed all corrections made to the signed loan
                                  documents.

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                                                                        Finding 1


                    As a result, HUD lacks assurance of the accuracy, validity, and
                    completeness of Cornerstone’s loan origination operations.
                    Additionally, Cornerstone contributed to an increased risk of
                    loss to HUD’s FHA insurance fund.



Auditee Comments    [Excerpts paraphrased from the comments provided by
                    Cornerstone on our draft audit report follow. Appendix E,
                    page 85, contains the complete text of the comments for
                    this finding in the report. Appendix E, pages 90 to 96
                    contain the attachments related to this finding.]

                    Cornerstone did not provide a statement of agreement with
                    this finding. However, Cornerstone believes it can solve
                    issues with timeliness and retention of documentation and
                    stay up to date with Quality Control standards, as dictated
                    by HUD. It has always modified and improved its Quality
                    Control plan in response to direction from prior audits.
                    Cornerstone recently entered into an agreement with
                    Callender Mortgage Services to provide off-site Quality
                    Control services. Cornerstone pledges to maintain a proper
                    and sufficient Quality Control program and welcomes
                    FHA’s review of their efforts.




OIG Evaluation Of   Cornerstone did not provide us a modified and improved
                    Quality Control Plan based on the deficiencies noted in this
Auditee Comments    finding.     As a condition of HUD-FHA approval,
                    Cornerstone is required to have and maintain a Quality
                    Control Plan for the origination of insured mortgages. The
                    plan should be sufficient in scope to enable Cornerstone to
                    evaluate the accuracy, validity and completeness of its loan
                    origination operations.

                    Although Cornerstone provided us an agreement between
                    Cornerstone and Callender Mortgage Services for Quality
                    Assurance services, it did not provide Callender’s Quality
                    Control Plan to determine whether it met HUD’s
                    requirements. The agreement was not dated; therefore, it is
                    not clear whether Callender has begun providing its
                    services. Cornerstone provided us a printout of HUD’s 37-
                    Point Quality Control Plan Checklist from Callender
                    Mortgage Services’ website. However, this checklist does
                    not replace establishing an adequate Quality Control Plan
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Finding 1


                    as we recommended in Recommendation 1A. We note that
                    Cornerstone embraces actions in Recommendation 1B of
                    this finding.



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

                    1A.    Requires Cornerstone to fully establish and
                           implement an adequate Quality Control Plan and
                           related reviews.
                    1B.    Reviews      Cornerstone’s  implementation    of
                           Recommendation 1A and ensure its Quality Control
                           process is fully implemented in accordance with
                           HUD’s requirements.

                    1C.    Determines whether HUD should withdraw
                           Cornerstone’s approval to participate in HUD’s
                           Single Family Mortgage Insurance Program.

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

                    1D.    Takes appropriate administrative action(s) against
                           Cornerstone.




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                                                                                             Finding 2


Cornerstone Did Not Exercise Due Diligence In
Packaging The Loans For Direct Endorsement
                 Approval
Cornerstone Mortgage Group, Limited did not always originate FHA-insured loans in accordance with
HUD’s requirements and prudent lending practices. Cornerstone failed to exercise due diligence to
always verify or support borrowers’ sources of funds to close and income, credit information, and
credit reports. In addition, Cornerstone did not always ensure that: cash investment requirements were
met; information on inconsistencies contained in the loan documents were explained or resolved;
complete loan origination files were maintained; and face-to-face interviews with first time borrowers
were conducted. The deficiencies associated with Cornerstone’s loan origination activities stemmed
from its lack of management oversight; failure to implement an adequate Quality Control process; and
reliance on its sponsor for the adequacy of the loan origination package. These deficiencies contributed
to the high loan default and claim rate, and increased the risk to the FHA insurance fund by $677,183.


                                       Under Section 203 of the National Housing Act (Title 12 of
 HUD’s Requirements                    United States Code Section 1709), HUD insures mortgages
                                       made by private lending institutions. Dependent upon their
                                       designation by HUD, the institutions have the authority to
                                       originate, purchase, sell, or service FHA-insured mortgages.
                                       As a loan correspondent, Cornerstone’s principal activity is
                                       the origination of mortgages for sale or transfer to an
                                       approved sponsor under HUD’s Single Family Direct
                                       Endorsement Program.

                                       Paragraph 2-5 of HUD Handbook 4000.4 REV-1, CHG-2,
                                       states mortgagees are to obtain and verify information with
                                       at least the same care that would be exercised in originating
                                       the loan in which the mortgagee would be entirely
                                       dependent on the property as security to protect its
                                       investment.

                                       Paragraph 2-1 of HUD Handbook 4155.1 REV-4 CHG-1,
                                       requires mortgagees to determine the borrower’s ability and
                                       willingness to repay the mortgage debt, and thus, limit the
                                       probability of default or collection difficulties. Four major
                                       elements are typically evaluated in assessing a borrower’s
                                       ability and willingness to repay the mortgage debt: stability
                                       and adequacy of income, funds to close, credit history, and
                                       qualifying ratios and compensating factors. Paragraph 3-1
                                       of the Handbook states HUD expects the application

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Finding 2


                            package to contain sufficient documentation to support the
                            lender’s decision to approve the mortgage loan.

 Underwriter’s Loan         The underwriter (sponsor) will approve or reject the loan, or
 Approval Subject To        approve the loan if certain conditions are met based on the
 Information Gathered       information contained in the loan package received from the
                            loan correspondent. Therefore, it is critical that the loan
                            correspondent exercises due diligence and follows prudent
                            lending practices during the loan origination process.

                            We reviewed 37 FHA loans originated by Cornerstone with a
                            total dollar value of $4,707,898. We selected the sample
 Sample FHA Loans           from a universe of 480 FHA loans with closing dates
 Reviewed                   between September 2001 and August 2003.

                            Cornerstone did not properly verify or support borrowers’
 Funds To Close Were Not    funds to close. Cornerstone’s files failed to include
 Always Properly Verified   documentation to support the source of funds and/or the
 Or Supported               adequacy of the borrowers’ funds to close on 11 FHA-
                            insured loans. Specifically, Cornerstone lacked support to
                            show that it properly verified the: savings and checking
                            deposits used as the borrowers’ investment on four loans; and
                            cash saved at home on seven loans.

                            For example, for FHA Case Number 137-1409761, all the
                            funds for the borrower’s investment in the property were
                            not properly verified. Specifically, the FHA Case Binder
                            did not include any bank statements to support the checking
                            and savings accounts listed on two Verifications of
                            Deposit. The large increase in one of the checking
                            accounts was not explained in the FHA Case Binder.

                            HUD requires mortgagees to verify all funds for a
                            borrower’s investment in the property. Additionally,
                            mortgagees should obtain and verify information with as
                            much care as would be used if entirely dependent on the
                            property as security.

                            The following table shows the 11 FHA loans that funds to
                            close were not properly verified or supported.

                                                                      Savings     Cash
                                                                        and       Saved
                                       FHA Case        Mortgage      Checking      At
                                        Number         Amount        Accounts     Home
                                     137-1409761        $106,219         X
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                                 137-1581796         $148,849        X
                                 137-1609308           $92,250       X
                                 332-3711691         $230,202                   X
                                 332-3723733         $123,880                   X
                                 332-3738478         $122,865                   X
                                 332-3749537         $138,040                   X
                                 332-3759898         $134,081        X
                                 332-3760584         $122,865                   X
                                 332-3786727         $130,123                   X
                                 332-3792961         $108,909                   X
                                     Totals        $1,458,283        4          7

                        Cornerstone did not properly verify or support the income of
Income Was Not Always   borrowers for seven FHA loans in that it did not obtain the
Properly Verified Or    required income documentation.          For example, the
Supported               Verification of Employment or adequate alternate
                        documentation was not provided for one of the borrowers
                        for FHA Case Binder 137-1409761. The loan application
                        listed an amount of $872 for the borrower’s average year-
                        to-date earnings. However, no explanation was found in
                        the FHA Case Binder on how the amount was calculated.
                        No Verification of Employment was found in the FHA
                        Case Binder for the borrower’s employer either.
                        Additionally, the Binder contained no documentation to
                        support any telephone verifications.           Further, the
                        borrower’s earnings statements listed his wages in 1999
                        and 2000 as $14,028 and $3,886, respectively. However,
                        no explanation was found in the Binder for the significant
                        difference in the borrower’s wages for the two years.

                        The remaining six FHA cases with issues on income
                        verification or documentation are explained in Appendix C of
                        this report.

                        Cornerstone did not ensure that three FHA loan borrowers
Cash Investment         met the statutory three percent cash investment requirements.
Requirements Not Met    The borrower did not meet HUD’s requirement for
                        investing three percent of the contract sale price for FHA
                        Case Binder 137-1293908. The borrower was required to
                        invest three percent, or $3,570 of $119,000. However, the
                        borrower paid or invested only $1,000, which is .84 percent
                        of the total investment required. The borrower’s closing
                        costs paid by the seller cannot be added to meet the
                        statutory three percent cash investment required from the
                        borrower.

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Finding 2


                            The Settlement Statement for FHA Case Binder 137-
                            1409761 listed that the borrower invested a total of $2,996,
                            including $2,146 as cash from the borrower; $500 of
                            earnest money; and $350 of appraisal fee. The total
                            borrower’s cash investment was less than the required
                            statutory three percent cash investment of $3,237. The
                            borrower’s closing costs of $2,429 paid by the seller were
                            not allowed to be added to meet the statutory three percent
                            cash investment required from the borrower.

                            For FHA Case Binder 137-1609308, Cornerstone did not
                            ensure the borrowers met the statutory three percent cash
                            investment. Per the Settlement Statement, we determined
                            that the cash investment from the borrower totaled $2,255,
                            consisting of borrower’s cash of $1,255 and earnest money
                            of $1,000. The $2,255 invested by the borrower did not
                            meet the statutory three percent cash investment of $2,835.

                            Paragraph 2-3 of HUD Handbook 4155.1 REV-4 CHG-1,
 Insufficient Credit        requires the lender to develop a credit history for
 Information And Credit     prospective borrowers that may not have established a
 Report Requirements Not    credit history and those who do not use traditional credit
 Met                        from utility payment records, rental payments, and
                            automobile insurance payments. Additionally, paragraph
                            2-4 of the Handbook requires that one credit report is
                            required for each borrower. A Residential Mortgage Credit
                            Report should provide a detailed account of the borrower’s
                            employment history, verify each borrower’s current
                            employment and income (if obtainable), and include a
                            statement attesting to its certification of employment and
                            date verified.

                            Cornerstone did not verify sufficient credit information on
                            three FHA loans, and meet HUD’s credit report requirements
                            when it obtained the credit reports for four FHA loans.

                            For FHA Case Binder 137-1459042, Cornerstone ordered a
                            credit report for a borrower that did not meet HUD’s
                            requirements. The credit report included in the FHA Case
                            Binder did not list employment and income information for
                            the borrower.

                            The remaining six FHA cases with issues related to credit
                            information and reports are explained in Appendix C of this
                            report.

2004-CH-1008                      Page 12
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                         Paragraph 2-5 of HUD Handbook 4000.4 REV-1, requires
                         the mortgagee to obtain and verify information with at least
                         the same care that a mortgagee would exercise in
                         originating a loan that was entirely dependent on the
                         property as security to protect its investment.

                         The loan files for eight FHA cases contained inconsistencies
                         in their loan applications, gift letters, and credit reports.
                         Cornerstone did not explain or clearly resolve such
                         inconsistencies.

                         Inconsistencies between the Settlement Statement and the
                         residential real estate contract existed for FHA Case Binder
                         137-0918329. The seller’s name and address as listed on the
                         Settlement Statement were different from the seller’s name
                         and address listed in the residential real estate contract.

                         An inconsistency between the Settlement Statement and the
                         residential real estate contract also existed for FHA Case
                         Binder 137-1293908. The residential real estate contract
                         indicated that the borrower needed $4,500 for closing.
                         However, the Settlement Statement did not show that such
                         an amount was needed.

                         For FHA Case Binder 137-1395974, the loan file contained
                         some inconsistencies such as the Uniform Residential Loan
                         Application was not explained or was not clearly resolved
                         by Cornerstone. Specifically, inconsistencies between the
                         initial and final Uniform Residential Loan Applications
                         concerning deposits and income information existed.

                         We explained the remaining five of the eight FHA cases
                         with unresolved inconsistencies in Appendix C of this
                         report.

                         Cornerstone lacked copies of the loan origination files for
Loan Origination Files   11 of the 37 FHA loans originated and/or refinanced by its
Did Not Exist            Illinois main office. Cornerstone’s electronic copies for
                         these loans were lost due to a system malfunction and the
                         hard copies were shredded. Cornerstone was unable to
                         retrieve the data on these loans because it lacked a backup
                         system in its computer database. Paragraph 5-10 of HUD
                         Handbook 4000.2 REV-2 requires the originating
                         mortgagee to retain the entire case file pertaining to loan
                         origination, either in hard copy or microfilm form, for at

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                             least two years from the date of insurance endorsement for
                             auditing purposes.

                             The following table shows the FHA loans in our sample
                             without loan origination files.

                                       FHA Case         Closing    Endorsement   Mortgage
                                       Number             Date         Date       Amount
                                      137-1293908       09/28/01     03/22/02      $117,131
                                      137-1301534       09/28/01     11/14/01      $150,981
                                      137-1323234       09/28/01     03/08/02      $122,053
                                      137-1368384       03/13/02     05/02/02      $123,068
                                      137-1385239       10/25/01     12/17/01      $117,638
                                      137-1393354       10/25/01     11/29/01      $122,612
                                      137-1396701       11/8/01      02/04/02      $149,154
                                      137-1409761       11/13/01     01/11/02      $106,219
                                      137-1447651       11/15/01     12/19/01      $108,300
                                      137-1481924       11/26/01     01/18/02      $115,202
                                      137-1497057       12/28/01     02/07/02       $87,188
                                           Total                                 $1,319,546

                             Because of the unavailability of the loan files, we could not
                             assess if Cornerstone properly originated the 11 loans.

                             Cornerstone did not conduct face-to-face interviews with
 Face-To-Face Interviews     first-time borrowers for three FHA loans. During our
 Were Not Conducted          interviews, the borrowers for the three FHA loans informed
                             us that they neither had face-to-face interviews with
                             Cornerstone’s staff nor met them during the application
                             process. However, Cornerstone indicated on the Uniform
                             Residential Loan Applications that it conducted face-to-face
                             interviews with the three borrowers.

                             Paragraph 3-5 of HUD Handbook 4155.1 REV-4 CHG-1,
                             requires face-to-face interviews to be conducted with all first-
                             time borrowers who make less than 10 percent down payment
                             unless the borrower receives pre-purchase counseling on the
                             responsibilities of homeownership from a HUD-approved
                             housing counseling agency.

                             The deficiencies occurred because Cornerstone lacked
 Lack Of Management          management oversight, failed to implement an adequate
 Oversight And A             Quality Control Plan and effective Quality Control
 Deficient Quality Control   Reviews (see Finding 1).       Cornerstone could have
 Process                     prevented various loan origination deficiencies if it
                             implemented an adequate Quality Control Plan and
                             effective Quality Control Reviews to identify and correct

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                                                                               Finding 2


                            deficiencies in the loan origination process, and prevent
                            repeat occurrences of problems.

                            In addition, Cornerstone relied on its sponsor, Irwin
Cornerstone Relied On Its   Mortgage Corporation, to inform it when a loan package
Sponsor For The             was missing an item. If Cornerstone’s management was
Adequacy Of Loan            not informed anything from its sponsor during their
Package                     underwriting process, they assumed the loan origination
                            packages submitted to the sponsor were acceptable.
                            Cornerstone’s management did not feel it needed to
                            question the ability of a big organization such as Irwin
                            Mortgage Corporation.

                            Cornerstone’s loan origination deficiencies contributed to its
                            high loan default and claim rate of 11.13 percent during the
                            period January 2001 through December 2002. Also, such
                            deficiencies increased the risk to the FHA insurance fund by
                            $677,183 ($545,091 in ineligible and $132,092 in unsupported
                            costs).

                            As shown in Appendix D of this report, as of May 4, 2004,
                            HUD paid claims on 19 FHA loans totaling $2,626,824 and
                            incurred a total loss of $545,091 on the resale of 15 with
                            material loan origination deficiencies cited in this report.
                            The actual loss of $545,091 on the 15 properties and the
                            claim paid of $132,092 for the property not resold are
                            disallowed costs. We are recommending indemnification
                            for the other seven (four in active status and three that are
                            currently in default) of 23 FHA loans totaling $916,034, in
                            which we classified this total amount as funds to be put to
                            better use in Appendix A of this report.

                            The remaining 14 out the 37 FHA loans reviewed are no longer
                            contributing any risk to the FHA insurance fund. Of the 14
                            loans, one is currently active without any loan origination
                            deficiency and three were terminated with claims, but did not
                            have any material loan origination deficiency. Deficiencies
                            existed on the remaining 10 of the 14 loans as shown in
                            Appendix C of this report.



Auditee Comments            [Excerpts paraphrased from the comments provided by
                            Cornerstone Mortgage Group, Ltd. on our draft report
                            follow. Appendix E, pages 83 to 89, contains the complete
                            text of Cornerstone’s comments for this finding.]
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Finding 2



               Cornerstone cannot agree with all the findings in the report.
               Cornerstone totally relied on Irwin Mortgage Company’s
               underwriting, as the industry led it to believe that this was
               the right way to proceed. Cornerstone, as a loan originator,
               has relied on the Direct Endorsement underwriter as having
               the final word. Cornerstone refers to the HUD Handbook
               4155.1 when it has an underwriting question; however, it
               knows that different people interpret the manual in
               different ways. In the past when Cornerstone has contacted
               the Atlanta Home Ownership Center, Cornerstone was
               informed to ask “the underwriter”.

               Cornerstone generally disagreed with this finding.
               Cornerstone failed to make written documentation of its
               efforts and will do better at generating written reports and
               retaining these reports. Cornerstone did not have the
               personnel resources or the audit acumen to fully understand
               and grasp the level of detail we documented as a result of
               this audit.

               Cornerstone takes time to fully review the data presented so
               as to package an acceptable loan file. Its originators and
               processors are trained, but not as an underwriter. The
               underwriter has the final responsibility for approving a loan
               to satisfy FHA requirements. Only after the loan receives
               underwriting approval would the loan be closed.
               Cornerstone questions whether it is reasonable to hold the
               originator liable for content of a file when it is the
               underwriters’ judgment that dictates what documents are
               required in the file to receive approval. Cornerstone
               believes the originator assembles a loan package that
               conforms to guidelines. The underwriter reviews the file
               for the final stamp of approval.

               Cornerstone used prudent lending practices in its
               origination of FHA loans. The completeness of the data in
               the loan files was subject to a difference of opinion
               between an underwriter and an auditor. However, some of
               the relevant data may have not been retained in the FHA
               case binder, and this clearly was a deficiency. Cornerstone
               must work harder to assure that complete files are retained.
               Its goal has always been to assemble a complete and
               accurate loan package clearly reflecting the borrowers’
               financial situation.

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                                                          Finding 2


       We found that files in Illinois were destroyed
       unintentionally. On the other hand, the Nevada files had
       more inherent problems. Cornerstone is now performing
       repetitive backups of electronically stored files.      It
       suspended storing files using a single backup system once
       it discovered the problem with the system. Cornerstone is
       now evaluating different storage systems.

       Cornerstone has always verified the funds for the three
       percent minimum investment. FHA questioned one of
       Cornerstone’s sponsors regarding the minimum investment
       not being met at closing. The difference at the closing is
       due to the real estate tax proration transferred from the
       seller to the buyer on every real estate transaction in
       Illinois. Lenders are only allowed to take a predetermined
       amount to establish the borrower’s tax escrow. For a
       closing in October 2004, for instance, the seller must
       prorate ten months of taxes because the 2004 tax will be
       paid in 2005. The borrower would still be responsible for
       paying those taxes in the future. As a result, the Settlement
       Statement shows less than the three percent minimum
       investment. It has consistently been this way in Illinois.

       Reasonable time constraints in dealing with prospective
       borrowers dictated that Cornerstone assemble a loan
       package and close the loan in 30 to 60 days. This meant
       that it must evaluate the borrowers’ data and verify
       information on a faster pace than the ten months our staff
       of three auditors used to examine 37 files. Cornerstone
       believes it exercised reasonable care in the loan process. It
       is not practical to perform the extreme depth and scope of
       an audit to discover some discrepancies while still
       satisfying the public’s demand for speed and efficiency.

       Cornerstone has focused on new loans in process. It has
       made every effort, including multiple phone calls to
       employers and borrowers to certify employment prior to
       closing loans, to discover inconsistencies before it closed
       the loans. Its focus was towards preventing additional
       losses by being very diligent on new files, rather than
       evaluating closed files, as part of the quality control
       program.

       Cornerstone believes that there may have been some
       confusion in some of the interviews conducted with
       borrowers during face-to-face meetings, as required. Were
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Finding 2


               all borrowers present at the initial application interview?
               Did some of the borrowers change during the processing of
               the loan?      Employers were also interviewed.         Are
               employers more likely to respond to a government auditor
               than an employee whom we are simply trying to reverify
               old employment data? The question coming from auditors
               may carry more weight and beg a careful response.
               Cornerstone did not have access to transcripts of the
               interviews of borrowers or employers in order to evaluate
               the information gathered. Cornerstone does not believe it
               had time to cross-examine these individuals either to
               establish contradictory findings.

               The underwriters at two different sponsors accepted credit
               reports without employment and income data after HUD
               allowed that these reports were acceptable, which also did
               not contain employment and income data. It may be a
               judgment call on what is reasonable in the underwriters’
               opinion.

               The items shown as findings under prior audits were
               subject to further review by both Cornerstone and the
               auditor. Items shown in the draft report were simply a
               listing of the preliminary findings of the auditor prior to
               Cornerstone’s protestations and response. Some of these
               items did require Cornerstone to modify its system;
               however, many items were found to be aberrations or
               otherwise not representative of Cornerstone’s general loan
               practices.

               For FHA Case Number 332-3792961, Cornerstone pointed
               out that HUDOIG determined that the borrowers could
               only save $1,042 per month based on a monthly net income
               of $3,542, which was based on the net on the pay stub in
               the file. Year-to-date gross was $40,800, which was a net
               of $34,680, or $3,853 per month. Different people will
               come up with different figures. Therefore, Cornerstone
               relied upon the direct endorsement underwriter who is
               reviewing that specific loan. In the FHA Case Number
               332-3792961, the underwriter determined that the “Cash
               Saved At Home” was reasonable. To simply apply a
               formula to calculate this data does not take into account
               real world situations.     The auditors’ statement “We
               determined the borrower had the ability to save …” shows
               impressive knowledge of each of these very individual
               borrowers’ lifestyles. The underwriters and Cornerstone’s
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                                                                        Finding 2


                    staff thought the “Cash Saved At Home” statements were
                    reasonable based on what Cornerstone could discern
                    without going further into the borrowers’ personal habits.

                    Regarding FHA Case Number 137-1593584, Cornerstone
                    pointed out that the title company prepares the settlement
                    statement, which is revised numerous times prior to and
                    during the closing of the transaction.

                    Cornerstone acknowledged it had areas of improvement to
                    focus on in order to more closely maintain HUD’s
                    guidelines. It has taken steps to solve concerns raised in
                    the audit findings, and will continue to work diligently to
                    handle FHA loans properly.



OIG Evaluation Of   Cornerstone indicated that it relied totally upon its
Auditee Comments    sponsor's underwriting. However, it was Cornerstone's
                    reliance on its sponsor for the adequacy of the loan
                    packages that attributed to the deficiencies associated with
                    its loan origination activities. Although HUD Handbook
                    4155.1 covers underwriting items and different people can
                    interpret the contents of the handbook in different ways,
                    underwriting activities are not the responsibility of
                    Cornerstone, who is a loan originator. We are addressing
                    in this report Cornerstone's responsibility to originate loans
                    for sale or transfer to its sponsors as a HUD-FHA approved
                    mortgagee.

                    Cornerstone staff was not expected to have audit training in
                    order to participate in the loan origination process.
                    However, Cornerstone should have obtained and verified
                    information with as much care as would be used if entirely
                    dependent on a property as security, as required by HUD
                    Handbook 4000.2 REV-2, paragraph 3-6.

                    Although the underwriter has the final responsibility for
                    approving a loan, the underwriter bases its approval largely
                    on information gathered by the loan correspondent.
                    Therefore, the loan correspondent is expected to exercise
                    due care and follow prudent lending practices and HUD's
                    requirements when originating FHA loans. Cornerstone
                    did not exercise due diligence in packaging the loans for
                    direct endorsement approval.

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Finding 2


               We acknowledge that only the Illinois files were destroyed
               and that Cornerstone is now performing backups of
               electronically stored files. Having an adequate backup
               system would reduce the loss of electronic loan files in the
               future. According to HUD Handbook 4060.1 REV-1,
               paragraph 2-16, a mortgagee is fully responsible for the
               actions of its branch office. So the inherent problems in the
               Nevada files, as Cornerstone pointed out, was also
               Cornerstone's responsibility.       Cornerstone was fully
               responsible for the actions of its Nevada branch office.
               According to Cornerstone officials, Cornerstone's Nevada
               branch office was acting independent from Cornerstone's
               Illinois home office.

               The real estate tax proration is not part of meeting the
               minimum investment and Cornerstone should not consider
               the tax credit when verifying whether the borrower meets
               the minimum investment requirement. Cornerstone did not
               provide support for the files in question that the borrowers
               met the minimum investment requirement before loan
               closing. The files should have contained support that
               Cornerstone verified the borrowers' source of funds—
               whether a gift, bank accounts, sweat equity, or cash on
               hand.

               The borrowers expressed no confusion during the
               interviews concerning whether there were face-to-face
               interviews with Cornerstone. These borrowers informed
               HUDOIG auditors that their real estate agents were their
               contact during the loan application process, who explained
               the application process to them. There is no indication in
               the FHA Case binders for FHA Case Number 137-
               1323234, 137-1351763, and 137-1396701 that some of the
               borrowers were changed during the loan processing.

               HUD requires that if a lender uses a Residential Mortgage
               Credit Report, it should meet all the requirements of the
               Traditional Residential Mortgage Credit Report and verify
               each borrower’s current employment and income (if
               obtainable) and include a statement attesting to its
               certification of employment and date verified. Cornerstone
               did not provide us with supporting documentation of HUD
               allowing Cornerstone to use infile reports (a type of credit
               report) for manually underwritten loans. Additionally,
               Cornerstone indicated that it used the infile report instead

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                                                                      Finding 2


                  of a Residential Mortgage Credit Report. This is not
                  supported by HUD Handbook 4155.1 REV-4.

                  Concerning the prior audits, our statements were based on
                  information obtained from HUD documentation.
                  Cornerstone did not provide us with any documentation to
                  support its protestations concerning the findings. We
                  stated in the report that the findings presented by HUD's
                  Quality Assurance Division were resolved.

                  HUD requires a lender to determine the reasonableness of
                  the accumulation of the funds based on the borrower’s
                  income stream, the time period funds were saved, spending
                  habits, and history of using financial institutions. Using the
                  Cash Saved At Home Statements/Letters and pay
                  information provided in the FHA Case Binders, we
                  assessed the borrowers’ ability to save the indicated
                  amounts based on using a reasonableness test.

                  We understand that revisions are made to documentation
                  prior to and during the loan closing. However, Cornerstone
                  is still responsible for submitting the loan package to HUD
                  for insurance endorsement.           HUD expects a loan
                  application package to contain sufficient documentation,
                  supporting a lender's decision to approve the mortgage
                  loan.        Cornerstone should have resolved any
                  inconsistencies in the loan application before submitting
                  the loan package to its sponsor for approval and before
                  finally submitting it to HUD for insurance endorsement.
                  This relates back to adhering to prudent lending practices.

                  We acknowledge that Cornerstone has taken steps to solve
                  concerns and that it will work diligently to handle FHA
                  loans properly. By fully establishing and implementing an
                  adequate Quality Control Plan and related reviews, as cited
                  in Recommendation 1A, Cornerstone will further realize its
                  goal of handling FHA loans properly.



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

                  2A.     Requires Cornerstone Mortgage Group and/or its
                          sponsor to reimburse HUD the applicable amount of
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Finding 2


                     $132,092 for the claim paid on FHA Case 332-
                     3774090 once the property is sold.

               2B.   Requires Cornerstone Mortgage Group and/or its
                     sponsor to reimburse HUD $545,091 for the actual
                     losses on FHA Cases 137-1393354, 332-3711691,
                     332-3723581, 332-3723733, 332-3738478, 332-
                     3749537, 332-3754385, 332-3756760, 332-3759898,
                     332-3760584, 332-3781815, 332-3786727, 332-
                     3792961, 332-3793422, and 332-3805123 since the
                     properties were already sold.

               2C.   Requires Cornerstone Mortgage Group and/or its
                     sponsor to indemnify HUD against future losses on
                     seven loans totaling $916,034 (FHA Cases 137-
                     0918329, 137-1368384, 137-1395974, 137-1396701,
                     137-1459042, 137-1481924, and 137-1497057).




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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 met. Management controls include the processes for
planning, organizing, directing, and controlling program operations. They also include the 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 that the objectives of the
                                         program 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 Cornerstone’s Quality Control and loan
                                     origination processes.

                                     It is a significant weakness if management controls do not
                                     provide reasonable assurance that the process for planning,
                                     organizing, directing, and controlling program operations
                                     will meet an organization's objectives.
                                     Based on our review, we believe the items on the following
 Significant Weaknesses              page are significant weaknesses:

                                     •   Program Operations

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                      Cornerstone did not operate its loan origination program in
                      accordance with HUD/FHA’s requirements. Cornerstone did
                      not establish an adequate Quality Control Plan and implement
                      it accordingly. In addition, Cornerstone did not exercise due
                      diligence to always verify or support borrowers’: sources of
                      funds to close; income; and credit information and reports.
                      Further, Cornerstone did not always ensure that: cash
                      investment requirements were met; inconsistencies of
                      information contained in the loan documents were explained or
                      resolved; complete loan origination files were maintained; and
                      face-to-face interviews with first time borrowers were
                      conducted (see Findings 1 and 2).

                          Validity and Reliability of Data

                      Cornerstone did not maintain accurate and complete loan
                      origination records; and perform Quality Control Reviews
                      on loans to ensure accuracy, validity, and completeness of
                      its loan origination operations (see Findings 1 and 2).

                      •   Safeguarding Resources

                      Cornerstone’s loan origination process was deficient which
                      contributed to its high loan default and claim rate, and
                      increased the risk to HUD’s FHA insurance fund (see Finding
                      2).




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Follow Up On Prior Audits
This is the first audit of Cornerstone Mortgage Group, Limited by HUD’s Office of Inspector
General.

The latest Independent Auditor’s Report for Cornerstone covered the period ending December 31,
2003. The report did not contain any findings.

In March 2001, HUD’s Quality Assurance Division conducted a Title II origination review of
Cornerstone’s main office in Illinois. The review resulted in nine findings that included: a non-
conforming Quality Control Plan; non-compliance with the Home Mortgage Disclosure Act; lack
of supporting documentation; qualification ratios that exceeded HUD’s guidelines on the
Mortgage Credit Analysis Worksheet; miscalculation of borrowers’ income; unallowable loan
fees; improper closing of loans; missing documents; and violation of the Real Estate Settlement
Procedures Act. In November 2002, the findings were resolved.

In December 2001, HUD’s Quality Assurance Division conducted a Title II origination review of
Cornerstone’s branch office in Nevada. The review resulted in six findings that included:
inadequate Quality Control Reviews; failure to perform Quality Control Reviews on loans that went
into default within the first six months; improper verification of the source of funds for the down
payment and/or closing; failure to maintain origination files or documentation; failure to obtain
signed explanatory statements regarding credit from all borrowers; and charging of unallowable fees
to borrowers. In April 2002, the findings were resolved.




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                                                                                           Appendix A

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

      2A                                         $132,092
      2B                 $545,091
      2C                                                             $916,034
     Totals              $545,091                $132,092            $916,034

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.

2/            Unsupported costs are costs charged to a HUD-financed or HUD-insured program or
              activity and eligibility cannot be determined at the time of 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 costs. 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. Specifically, 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

            Summary Of Deficiencies – Finding 2
                            Funds to     Income Not                     Insufficient Credit             Unexplained or
              Mortgage/    Close Not       Properly     Cash Investment and Credit Report No Mortgagee     Unresolved
 FHA Loan      Insured     Verified or    Verified or    Requirements Requirements Not Loan Origination Inconsistencies   Appendix
  Number       Amount      Supported      Supported        Not Met              Met           File        In Loan Files   Number
137-0918329   $130,173                                                                                         X            C-1
137-1293908   $117,131                                        X                                X               X            C-2
137-1301534   $150,981                                                                         X                            C-3
137-1323234   $122,053                                                                         X                            C-4
137-1351763   $126,976                                                                                                      C-5
137-1368384   $123,068                                                                         X                            C-6
137-1385239   $117,638                                                                         X                            C-7
137-1393354   $122,612                                                                         X                            C-8
137-1395974   $173,514                                                                                         X            C-9
137-1396701   $149,154                                                                         X                           C-10
137-1409761   $106,219         X              X               X                                X                           C-11
137-1447651   $108,300                                                                         X                           C-12
137-1459042   $137,735                        X                                X                               X           C-13
137-1481924   $115,202                                                                         X                           C-14
137-1497057    $87,188                        X                                X               X                           C-15
137-1581796   $148,849         X              X                                X                                           C-16
137-1593584   $147,581                                                         X                               X           C-17
137-1609308    $92,250         X              X               X                X                                           C-18
332-3711691   $230,202         X              X                                                                            C-19
332-3723581   $128,143                        X                                                                X           C-20
332-3723733   $123,880         X                                               X                                           C-21
332-3738478   $122,865         X                                                                                           C-22
332-3749537   $138,040         X                                                                                           C-23
332-3754385   $124,439                                                                                                     C-24
332-3756760    $71,253                                                                                                     C-25
332-3759898   $134,081         X                                                                               X           C-26
332-3760584   $122,865         X                                                                                           C-27
332-3774090   $123,373                                                                                                     C-28
332-3781815   $112,462                                                                                                     C-29
332-3786727   $130,123         X                                                                               X           C-30
332-3792961   $108,909         X                                                                                           C-31
332-3793422   $118,907                                                         X                                           C-32
332-3805123   $112,969                                                                                                     C-33
  Totals      $4,179,135       11             7               3                7               11              8




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            Appendix B



                                              Premium                         Inaccurate      Payment History
               Mortgage/   Face-To-Face     Interest Rate                   Verification of     of Housing
 FHA Loan       Insured    Interviews Not   Requirement      Questionable   Employment        Obligations Not               Appendix
  Number        Amount       Conducted         Not Met      Documentation    Information       Documented Improper Charge   Number
137-0918329    $130,173                                                                                                       C-1
137-1293908    $117,131                                                                                                       C-2
137-1301534    $150,981                                                                                          X            C-3
137-1323234    $122,053          X                                                                                            C-4
137-1351763    $126,976          X                                                                                            C-5
137-1368384    $123,068                                                                                                       C-6
137-1385239    $117,638                                                                                                       C-7
137-1393354    $122,612                                                                                                       C-8
137-1395974    $173,514                                                                            X                          C-9
137-1396701    $149,154          X                                                                                           C-10
137-1409761    $106,219                                                                                                      C-11
137-1447651    $108,300                                                                                                      C-12
137-1459042    $137,735                                                                            X                         C-13
137-1481924    $115,202                                                                                                      C-14
137-1497057    $87,188                                                                                                       C-15
137-1581796    $148,849                                                                            X                         C-16
137-1593584    $147,581                                                                                                      C-17
137-1609308    $92,250                                                                                                       C-18
332-3711691    $230,202                                                                                                      C-19
332-3723581    $128,143                                                                                                      C-20
332-3723733    $123,880                                                                                                      C-21
332-3738478    $122,865                                                                                                      C-22
332-3749537    $138,040                                          X                X                                          C-23
332-3754385    $124,439                          X               X                                                           C-24
332-3756760    $71,253                                           X                X                                          C-25
332-3759898    $134,081                                                           X                                          C-26
332-3760584    $122,865                          X               X                                                           C-27
332-3774090    $123,373                          X               X                X                                          C-28
332-3781815    $112,462                          X               X                                                           C-29
332-3786727    $130,123                                          X                                                           C-30
332-3792961    $108,909                                                                                                      C-31
332-3793422    $118,907                                          X                                 X                         C-32
332-3805123    $112,969                          x                                                                           C-33
  Totals      $4,179,135         3               5               8                4                4             1




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                                                                                     Appendix C

Narrative Case Presentations
                                                                                   Appendix C-1
                                                                                         Page 1

FHA Case Number: 137-0918329

Insured Amount: $130,173

Date of Loan Closing: 09/20/01

Loan Originating Office: Cornerstone’s main office in Inverness, Illinois

Sponsor Name and Identification Number: Irwin Mortgage Corporation; 1377909991
Status: Default - First Legal Action to Commence Foreclosure (19 payments made before first
default reported)

Summary:

Cornerstone Mortgage Group failed to explain or resolve inconsistencies in the loan file.

Pertinent Details:

   Inconsistencies In Loan File

   The loan file contained inconsistencies concerning the Uniform Residential Loan
   Applications that were not explained or not clearly resolved by Cornerstone. Specifically,
   the Loan Application dated February 14, 2001 showed $3,100 as cash on hand; however, the
   Loan Application dated September 20, 2001 listed the $3,100 as a gift. Additionally, the
   Loan Application dated February 2001 showed gross monthly income of $2,375 for the
   borrower and $1,082 for the co-borrower. However, the Loan Application dated September
   2001 listed gross monthly income of $2,817 for the borrower and $1,514 for the co-borrower.
   We also found inconsistencies between the Settlement Statement and the residential real
   estate contract (purchase contract). The seller’s name and address as listed on the Settlement
   Statement were different from the seller’s name and address listed in the purchase contract.
   (Paragraph 2-5 of HUD Handbook 4000.4 REV-1)




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Appendix C


                                                                                 Appendix C-2
                                                                                       Page 1

FHA Case Number: 137-1293908

Insured Amount: $ 117,131

Date of Loan Closing: 09/28/01

Loan Originating Office: Cornerstone’s main office in Inverness, Illinois

Sponsor Name and Identification Number: Irwin Mortgage Corporation; 1377909991

Status: Terminated

Summary:

Cornerstone Mortgage Group failed to: (1) maintain the loan origination file for this loan; (2)
ensure the borrowers met the statutory three percent cash investment requirement; and (3)
explain or resolve inconsistencies in the loan package submitted to its sponsor.

Pertinent Details:

   Mortgagee File Was Not Available

   We were unable to review the mortgagee loan origination file for consistency with the data
   contained in the FHA Case Binder. According to Cornerstone’s President, the loan
   origination file for FHA Case Binder 137-1293908 was one of the files that Cornerstone
   entered into its computer system database and later shredded. However, Cornerstone lost
   some information from its hard drive, including data on this FHA Case, and was unable to
   recover the information. (HUD Handbook 4000.2 REV-2, Paragraph 5-10)
   Cash Investment Requirements Were Not Met

   Cornerstone did not ensure the borrowers met the statutory three percent cash investment.
   The borrower was required to invest three percent of $119,000 ($3,570); however, the
   borrower paid or invested only $1,000 in earnest money, which was .84 percent of the total
   investment. The seller paid all the closing costs for this loan. (24 CFR 203.19(a)(1) and
   Mortgagee Letter 98-29, Single Family Production – Mortgage Calculation Simplification).

                                                                                 Appendix C-2
                                                                                       Page 2

   Inconsistencies In Loan Files


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                                                                             Appendix C

Cornerstone did not resolve a discrepancy, between the Uniform Residential Loan
Application dated September 28, 2001 and the borrower’s credit report dated September 13,
2001. Cornerstone did not follow-up on four debts totaling $1,419 that were listed on the
credit report. The debts were not listed on the Loan Application. We also found an
inconsistency between the Settlement Statement dated September 28, 2001 and the
residential real estate contract (purchase contract) dated August 11, 2001. The purchase
contract indicated that the borrower needed $4,500 for closing. However, the Settlement
Statement did not show that such an amount was needed. Additionally, there was an
unexplained deposit of $1,737 on August 11, 2001 that was contained in the FHA Case
Binder but was not explained by Cornerstone. (Paragraph 2-5 of HUD Handbook 4000.4
REV-1)




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Appendix C

                                                                                 Appendix C-3
                                                                                       Page 1

FHA Case Number: 137-1301534

Insured Amount: $150,981

Date of Loan Closing: 09/28/01

Loan Originating Office: Cornerstone’s main office in Inverness, Illinois

Sponsor Name and Identification Number: National City Mortgage Company; 3809207219

Status: Terminated

Summary:

Cornerstone Mortgage Group: (1) failed to maintain the loan origination file for this loan; and
(2) inappropriately charged the borrower for legal services not received.

Pertinent Details:

  Mortgagee File Was Not Available

  We were unable to review the mortgagee loan origination file for consistency with the data
  contained in the FHA Case Binder. According to Cornerstone’s President, the loan
  origination file for FHA Case Binder 137-1301534 was one of the files that Cornerstone
  entered into its computer system database and later shredded. However, Cornerstone lost
  some information from its hard drive, including data on this FHA Case, and was unable to
  retrieve/recover the information. (HUD Handbook 4000.2 REV-2, paragraph 5-10)

   Improper Charge For Legal Services

   Cornerstone improperly charged the borrower for fees not incurred. A review of the
   Settlement Statement dated September 28, 2001 revealed that the borrower was charged $375
   for attorney’s fees. However, the borrower said he did not use an attorney.




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                                                                                     Appendix C

                                                                                   Appendix C-4
                                                                                         Page 1

FHA Case Number: 137-1323234

Insured Amount: $122,053

Date of Loan Closing: 09/28/01

Loan Originating Office: Cornerstone’s main office in Inverness, Illinois

Sponsor Name and Identification Number: Irwin Mortgage Corporation; 1377909991

Status: Terminated

Summary:

Cornerstone Mortgage Group failed to:(1) maintain the loan origination file for this loan; and (2)
conduct a face-to-face interview with the borrowers as indicated in the Uniform Residential
Loan Application submitted to HUD.

Pertinent Details:

   Mortgagee File Was Not Available

   We were unable to review the mortgagee loan origination file for this loan for consistency
   with the data contained in the FHA Case Binder. According to Cornerstone’s President, the
   loan origination file for this loan was one of the files that Cornerstone entered into its
   computer system database and later shredded. However, Cornerstone lost some information
   from its hard drive, including data on this FHA case, and was unable to retrieve/recover the
   information. (HUD Handbook 4000.2 REV-2, Paragraph 5-10)

   Face-to-Face Interviews Were Not Conducted

   Cornerstone did not conduct a face-to-face interview with the borrowers on this loan. During
   our interview with one of the borrowers, he said he did not have a face-to-face interview with
   Cornerstone’s staff. However, Cornerstone’s Loan Officer indicated on the Uniform
   Residential Loan Application dated September 28, 2001 that she conducted a face-to-face
   interview with the borrowers. (Paragraph 3-5 of HUD Handbook 4155.1 REV-4 CHG-1)




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Appendix C

                                                                                Appendix C-5
                                                                                      Page 1

FHA Case Number: 137-1351763

Insured Amount: $126,976

Date of Loan Closing: 10/04/01

Loan Originating Office: Cornerstone’s main office in Inverness, Illinois

Sponsor Name and Identification Number: National City Mortgage Company; 3809207219

Status: Terminated

Summary:

Cornerstone Mortgage Group did not conduct a face-to-face interview with the borrowers, as
indicated in the Uniform Residential Loan Application submitted to HUD.

Pertinent Details:

   Face-to-Face Interviews Were Not Conducted

   Cornerstone did not conduct face-to-face interviews with the borrowers on this loan. During
   our interview with the borrowers, they said they did not have a face-to-face interview with
   Cornerstone’s staff. Cornerstone’s Loan Officer indicated on the Uniform Residential Loan
   Application dated October 4, 2001 that she conducted a face-to-face interview with the
   borrowers. (Paragraph 3-5 of HUD Handbook 4155.1 REV-4 CHG-1)




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                                                                                     Appendix C

                                                                                   Appendix C-6
                                                                                         Page 1

FHA Case Number: 137-1368384

Insured Amount: $123,068

Date of Loan Closing: 03/13/02

Loan Originating Office: Cornerstone’s main office in Inverness, Illinois

Sponsor Name and Identification Number: Irwin Mortgage Corporation; 1377909991

Status: Active

Summary:

Cornerstone Mortgage Group failed to maintain the loan origination file for this loan.

Pertinent Details:

   Mortgagee File Was Not Available

   We were unable to review the mortgagee loan origination file for this loan for consistency
   with the data contained in the FHA Case Binder. Cornerstone was unable to locate its loan
   origination file for our review. (HUD Handbook 4000.2 REV-2, Paragraph 5-10)




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Appendix C

                                                                                   Appendix C-7
                                                                                         Page 1

FHA Case Number: 137-1385239

Insured Amount: $117,638

Date of Loan Closing: 10/25/01

Loan Originating Office: Cornerstone’s main office in Inverness, Illinois

Sponsor Name and Identification Number: Irwin Mortgage Corporation; 1377909991

Status: Terminated

Summary:

Cornerstone Mortgage Group failed to maintain the loan origination file for this loan.

Pertinent Details:

   Mortgagee File Was Not Available

   We were unable to review the mortgagee loan origination file for this loan for consistency
   with the data contained in the FHA Case Binder. According to Cornerstone’s President, the
   loan origination file for this loan was one of the files that Cornerstone entered into its
   computer system database and later shredded. However, Cornerstone lost some information
   from its hard drive, including data on this FHA case, and was unable to retrieve/recover the
   information. (HUD Handbook 4000.2 REV-2, Paragraph 5-10)




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                                                                                     Appendix C

                                                                                   Appendix C-8
                                                                                         Page 1

FHA Case Number: 137-1393354

Insured Amount: $122,612

Date of Loan Closing: 10/25/01

Loan Originating Office: Cornerstone’s main office in Inverness, Illinois

Sponsor Name and Identification Number: Irwin Mortgage Corporation; 1377909991

Status: Claim Paid (Nine payments made)

Summary:

Cornerstone Mortgage Group failed to maintain the loan origination file for this loan.

Pertinent Details:

   Mortgagee File Was Not Available

   We were unable to review the mortgagee loan origination file for this loan for consistency
   with the data contained in the FHA Case Binder. According to Cornerstone’s President, the
   loan origination file for this loan was one of the files that Cornerstone entered into its
   computer system database and later shredded. However, Cornerstone lost some information
   from its hard drive, including data on this FHA case, and was unable to retrieve/recover the
   information. (HUD Handbook 4000.2 REV-2, Paragraph 5-10)




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Appendix C

                                                                                  Appendix C-9
                                                                                        Page 1

FHA Case Number: 137-1395974

Insured Amount: $173,514

Date of Loan Closing: 10/26/01

Loan Originating Office: Cornerstone’s main office in Inverness, Illinois

Sponsor Name and Identification Number: Irwin Mortgage Corporation; 1377909991

Status: Active

Summary:

Cornerstone Mortgage Group failed to: (1) explain or resolve inconsistencies in the loan package
submitted to its sponsor; and (2) include in the loan origination file or the FHA Case Binder a
determination of the borrower’s payment history of the housing obligations.

Pertinent Details:

   Inconsistencies In Loan Files

   The loan file contained inconsistencies concerning the Uniform Residential Loan
   Applications that were not explained or clearly resolved by Cornerstone. Specifically, the
   initial Loan Application dated October 6, 2001 a checking account with $4,000; however, the
   final Loan Application dated October 26, 2001 did not show the checking account.
   Additionally, the initial Application showed the borrower and co-borrower had monthly
   incomes of $2,892 and $1,104, respectively. However, the final Application listed the
   borrower and co-borrower had monthly incomes of $1,759 and $3,509, respectively.
   (Paragraph 2-5 of HUD Handbook 4000.4 REV-1)

   Payment History Of Housing Obligations Was Not Documented

   Cornerstone did not include in its the loan origination file or the FHA Case Binder a
   determination of the borrower’s payment history of his housing obligations through either the
   credit report, directly from the borrower’s landlord or mortgage servicer, or through canceled
   checks covering the most recent 12-month period. (HUD Handbook 4155.1 REV-4, CHG-1,
   Paragraph 2-3(A))




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                                                                                      Appendix C

                                                                                   Appendix C-10
                                                                                          Page 1

FHA Case Number: 137-1396701

Insured Amount: $149,154

Date of Loan Closing: 11/08/01

Loan Originating Office: Cornerstone’s main office in Inverness, Illinois

Sponsor Name and Identification Number: Irwin Mortgage Corporation; 1377909991

Status: Active

Summary:

Cornerstone Mortgage Group failed to: (1) maintain its loan origination file for this loan; and (2)
conduct a face-to-face interview with the borrowers as indicated in the Uniform Residential
Loan Application submitted to HUD.

Pertinent Details:

   Mortgagee File Was Not Available

   We were unable to review the mortgagee loan origination file for this loan for consistency
   with the data contained in the FHA Case Binder. According to Cornerstone’s President, the
   loan origination file for this loan was one of the files that Cornerstone entered into its
   computer system database and later shredded. However, Cornerstone lost some information
   from its hard drive, including data on this FHA Case, and was unable to retrieve/recover the
   information. (HUD Handbook 4000.2 REV-2, Paragraph 5-10)

   Face-to-Face Interviews Were Not Conducted

   Cornerstone did not conduct a face-to-face interview with the borrowers on this loan. During
   our interview with one of the borrowers, he said he did not have a face-to-face interview with
   Cornerstone’s staff. However, Cornerstone’s Loan Officer indicated on the Uniform
   Residential Loan Application (not dated) that she conducted a face-to-face interview with the
   borrowers. (Paragraph 3-5 of HUD Handbook 4155.1 REV-4 CHG-1)




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Appendix C

                                                                                Appendix C-11
                                                                                       Page 1

FHA Case Number: 137-1409761

Insured Amount: $106,219

Date of Loan Closing: 11/13/01

Loan Originating Office: Cornerstone’s main office in Inverness, Illinois

Sponsor Name and Identification Number: National City Mortgage Company; 3809207219

Status: Terminated

Summary:

Cornerstone Mortgage Group failed to: (1) maintain its loan origination file for this loan; (2)
ensure the borrowers met the statutory three percent cash investment requirement; (3) properly
verify the borrower’s funds to close; and (4) obtain a Verification of Employment or adequate
alternative documentation for one of the borrowers.

Pertinent Details:

   Mortgagee File Was Not Available

   We were unable to review the mortgagee loan origination file for this loan for consistency
   with the data contained in the FHA Case Binder. According to Cornerstone’s President, the
   loan origination file for this loan was one of the files that Cornerstone entered into its
   computer system database and later shredded. However, Cornerstone lost some information
   from its hard drive, including data on this FHA case and was unable to retrieve/recover the
   information. (HUD Handbook 4000.2 REV-2, Paragraph 5-10)

   Cash Investment Requirements Were Not Met

   Cornerstone did not ensure that the borrowers met the statutory three percent cash investment
   ($3,237) of $107,900. The borrowers invested only $2,996 (includes $500 in earnest money,
   $350 for appraisal fee, and $2,146 in closing cost). Page 12 of this report includes the
   specific details for this loan. (HUD Handbook 4000.2 REV-2, paragraph 1-9, 24 CFR Part
   203.19(a)(1) and Mortgagee Letter 98-29, Single Family Production – Mortgage Calculation
   Simplification)


                                                                                Appendix C-11
                                                                                       Page 2

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                                                                               Appendix C

Funds To Close Were Not Properly Verified Or Supported

All the funds for the borrower’s investment in the property were not properly verified.
Specifically, the FHA Case Binder did not include any bank statements to support the
checking and savings accounts listed on two Verifications of Deposit dated October 2, 2001.
The large increase of $2,137 in one of the checking accounts was not explained in the FHA
Case Binder. (HUD Handbook 4155.1 REV-4 CHG-1, Paragraph 2-10(B), Savings and
Checking Accounts)

Income Was Not Properly Verified Or Supported

A verification of employment or adequate alternate documentation was not obtained for one
of the co-borrowers. (HUD Handbook 4155.1 REV-4 CHG-1, Paragraph 3-1(E))




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Appendix C

                                                                                  Appendix C-12
                                                                                         Page 1

FHA Case Number: 137-1447651

Insured Amount: $108,300

Date of Loan Closing: 11/15/01

Loan Originating Office: Cornerstone’s main office in Inverness, Illinois

Sponsor Name and Identification Number: Irwin Mortgage Corporation; 1377909991

Status: Terminated

Summary:

Cornerstone Mortgage Group, Limited failed to maintain the loan origination file for this loan.

Pertinent Details:

   Mortgagee File Was Not Available

   We were unable to review the mortgagee loan origination file for this loan for consistency
   with the data contained in the FHA Case Binder. According to the President of Cornerstone,
   the loan origination file for this loan was one of the files that Cornerstone entered into its
   computer system database and later shredded. However, Cornerstone lost some information
   from its hard drive, including data on this FHA case, and was unable to retrieve/recover the
   information. (HUD Handbook 4000.2 REV-2, Paragraph 5-10)




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                                                                                    Appendix C

                                                                                 Appendix C-13
                                                                                        Page 1

FHA Case Number: 137-1459042

Insured Amount: $137,735

Date of Loan Closing: 11/28/01

Loan Originating Office: Cornerstone’s main office in Inverness, Illinois

Sponsor Name and Identification Number: Irwin Mortgage Corporation; 1377909991

Status: Default - First Legal Action to Commence Foreclosure (Five payments made before first
default reported)

Summary:

Cornerstone Mortgage Group failed to: (1) meet the credit report requirements; (2) include in the
loan origination file or the FHA Case Binder a determination of the borrower’s payment history
of the housing obligations; and (3) ensure the loan application was dated by the borrower and the
interviewer.

Pertinent Details:

   Credit Report Requirements Were Not Met

   Cornerstone ordered credit reports for the borrower that did not meet HUD’s requirements.
   The credit reports dated November 2, 2001 and November 15, 2001 included in the FHA
   Case Binder did not list employer and income information for the borrower. (HUD
   Handbook 4155.1 REV-4, CHG-1, Paragraph 2-4)

   Payment History Of Housing Obligations Was Not Documented

   Cornerstone did not include in its loan origination file or the FHA Case Binder a
   determination of the borrower’s payment history of his housing obligations through either the
   credit report, directly from the landlord or mortgage servicer, or through canceled checks
   covering the most recent 12-month period. (HUD Handbook 4155.1 REV-4, CHG-1,
   Paragraph 2-3(A))




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Appendix C

                                                                         Appendix C-13
                                                                                Page 2

   Loan Application Was Not Dated

   The final Uniform Residential Loan Application was signed by the borrower and the
   interviewer, but was not dated. (HUD Handbook 4155.1 REV-4, CHG-1, paragraphs 3-1(A)
   and 3-2(A))




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                                                                                     Appendix C

                                                                                  Appendix C-14
                                                                                         Page 1

FHA Case Number: 137-1481924

Insured Amount: $115,202

Date of Loan Closing: 11/26/01

Loan Originating Office: Cornerstone’s main office in Inverness, Illinois

Sponsor Name and Identification Number: Irwin Mortgage Corporation; 1377909991

Status: Active

Summary:

Cornerstone Mortgage Group failed to maintain the loan origination file for this loan.

Pertinent Details:

   Mortgagee File Was Not Available

   We were unable to review the mortgagee loan origination file for this loan for consistency
   with the data contained in the FHA Case Binder. According to Cornerstone’s President, the
   loan origination file for this loan was one of the files that Cornerstone entered into its
   computer system database and later shredded. However, Cornerstone lost some information
   from its hard drive, including data on this FHA case, and was unable to retrieve/recover the
   information. (HUD Handbook 4000.2 REV-2, Paragraph 5-10)




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Appendix C

                                                                                    Appendix C-15
                                                                                           Page 1

FHA Case Number: 137-1497057

Insured Amount: $87,188

Date of Loan Closing: 12/28/01

Loan Originating Office: Cornerstone’s main office in Inverness, Illinois

Sponsor Name and Identification Number: Irwin Mortgage Corporation; 1377909991

Status: Default - First Legal Action to Commence Foreclosure (12 payments made before first
default reported)

Summary:

Cornerstone Mortgage Group failed to: (1) properly verify the borrower’s income; (2) develop a
credit history from alternate sources; (3) obtain proper form of identification for the borrower; and
(4) maintain the loan origination file for this loan.

Pertinent Details:

   Income Was Not Properly Verified Or Supported

   Cornerstone did not properly verify the borrower’s income. Cornerstone did not perform
   income verification for the borrower’s first job (United Building Maintenance) through a
   written verification of employment. Additionally, the Verification of Employment form
   dated November 11, 2001 and signed November 28, 2001 for the borrower’s second job
   (Tenacious Cleaning Services) did not contain gross earnings for 1999, 2000, and 2001 or
   supporting documentation such as W-2s and paystubs. (HUD Handbook 4155.1 REV-4,
   CHG-1, Chapter 2, paragraph 2-6 and Chapter 3)

   Insufficient Credit History

   The credit reports ordered for the borrower and co-borrower did not contain sufficient credit
   information about the individuals. Cornerstone obtained an alternative credit statement
   (Automobile Insurance) for the borrowers, which is not considered sufficient development of
   the borrowers' credit history. (HUD Handbook 4155.1 REV-4, CHG-1, paragraph 2-3)


                                                                                    Appendix C-15
                                                                                           Page 2

   Use Of Improper Identification
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Cornerstone did not obtain proper identification for the borrower; an identification card
issued by Mexico was used as identification. (HUD Handbook 4000.4 REV-1, paragraph 2-
5)

Mortgagee File Was Not Available

We were unable to review the mortgagee loan origination file for this loan for consistency
with the data contained in the FHA Case Binder. According to Cornerstone’s President, the
loan origination file for this loan was one of the files that Cornerstone entered into its
computer system database and later shredded. However, Cornerstone lost some information
from its hard drive, including data on this FHA case, and was unable to retrieve/recover the
information. (HUD Handbook 4000.2 REV-2, Paragraph 5-10)




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Appendix C

                                                                                Appendix C-16
                                                                                       Page 1

FHA Case Number: 137-1581796

Insured Amount: $148,849

Date of Loan Closing: 02/14/02

Loan Originating Office: Cornerstone’s main office in Inverness, Illinois

Sponsor Name and Identification Number: Irwin Mortgage Corporation; 1377909991

Status: Terminated

Summary:

Cornerstone Mortgage Group, Limited failed to: (1) properly verify the borrower’s deposits or
funds to close; (2) properly verify the borrower’s income or employment; (3) include in the loan
origination file or the FHA Case Binder a determination of the borrower’s payment history of the
housing obligations; and (4) meet credit report requirements.

Pertinent Details:

   Funds To Close Were Not Properly Verified Or Supported

   Cornerstone Mortgage Group did not verify a $5,000 Certificate of Deposit using a
   verification of deposit. Additionally, Cornerstone failed to obtain a bank statement to
   support an $834 bank account. The Certificate of Deposit and bank account were listed on
   the Uniform Residential Loan Application dated February 14, 2002. (HUD Handbook
   4155.1 REV-4, CHG-1, paragraphs 2-10(B) and 3-1(F))

   Income Was Not Properly Verified Or Supported

   Cornerstone obtained a pay stub dated December 12, 2001 that showed the borrower’s year-
   to-date earnings were $10,927. Additionally, Cornerstone obtained a Verification of
   Employment dated January 16, 2002 that showed the borrower’s 2001 earnings were
   $42,369. The FHA Case Binder included a letter dated February 7, 2002 that attempted to
   explain the earnings difference between the pay stub and the Verification of Employment.
   However, Cornerstone should have obtained adequate documentation to justify the earnings
   difference. Additionally, Cornerstone only obtained the co-borrower’s 2000 W-2 form and
   did not include a signed copy of the Request for Copy of Tax form in the

                                                                                Appendix C-16
                                                                                       Page 2

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FHA Case Binder and its loan origination file. (HUD Handbook 4155.1 REV-4, Paragraph
3-1(E))

Payment History Of Housing Obligations Was Not Documented

Cornerstone did not include in its loan origination file or the FHA Case Binder a
determination of the borrowers’ payment history of their housing obligations through either
the credit report, directly from the landlord or mortgage servicer, or through canceled checks
covering the most recent 12-month period. (HUD Handbook 4155.1 REV-4, CHG-1,
Paragraph 2-3(A))

Credit Report Requirements Were Not Met

The residential mortgage credit report dated February 7, 2002 included in the FHA Case Binder
did not list an employer for the borrower. Since Cornerstone used a residential mortgage credit
report, the credit report had to include a verification of each borrower’s current employment and
income. (HUD Handbook 4155.1 REV-4, CHG-1, Paragraph 2-4)




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Appendix C

                                                                                   Appendix C-17
                                                                                          Page 1

FHA Case Number: 137-1593584

Insured Amount: $147,581

Date of Loan Closing: 03/26/02

Loan Originating Office: Cornerstone’s main office in Inverness, Illinois

Sponsor Name and Identification Number: National City Mortgage Company; 3809207219

Status: Terminated

Summary:

Cornerstone Mortgage Group failed to: (1) meet credit report requirements; and (2) explain or
resolve inconsistencies in the loan package submitted to its sponsor.

Pertinent Details:

   Credit Report Requirements Were Not Met

   Cornerstone used a residential mortgage credit report dated February 11, 2002, but the credit
   report did not include a verification of each of the borrower’s current employment and income.
   (HUD Handbook 4155.1 REV-4, CHG-1, Paragraph 2-4)

   Inconsistencies In Loan File

   Inconsistencies existed between the Settlement Statement in the FHA Case Binder and
   Cornerstone’s loan origination file regarding the settlement charges. Page 2 of the Statement in
   the Case Binder showed the charges were $8,280; however, page 1 of the Statement in
   Cornerstone’s file and page 1 of the borrower’s side of the Statement in the Case Binder showed
   the charges were $8,598. (Paragraph 2-5 of HUD Handbook 4000.4 REV-1)




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                                                                                 Appendix C-18
                                                                                        Page 1

FHA Case Number: 137-1609308

Insured Amount: $92,250

Date of Loan Closing: 02/28/02

Loan Originating Office: Cornerstone’s main office in Inverness, Illinois

Sponsor Name and Identification Number: Irwin Mortgage Corporation; 1377909991

Status: Terminated

Summary:

Cornerstone Mortgage Group failed to: (1) properly verify or support the borrower’s funds to
close; (2) properly verify or support the borrower’s income; (3) meet credit report requirements;
and (4) ensure the borrowers met the statutory three percent cash investment requirement.

Pertinent Details:

   Funds To Close Were Not Properly Verified Or Supported

   Cornerstone did not properly verify the borrower’s funds for the investment in the property.
   Specifically, no Verifications of Deposit were included for the one savings account of $1,179
   and the one checking account of $769 listed on the Uniform Residential Loan Application
   dated February 28, 2002 in the FHA Case Binder. (HUD Handbook 4155.1 REV-4 CHG-1,
   Paragraph 2-10(B))

   Verification Of Documentation Was Not Complete

   Cornerstone did not include in its loan file a lender certification indicating that original
   documents were examined for alternate employment documentation for the borrower.
   Cornerstone did not maintain in its loan file the original Verification of Employment form
   that was mailed to and returned from the co-borrower’s employer. (HUD Handbook 4155.1
   REV-4 CHG-1, paragraphs 3-2(B) and 3-1(E))




                                                                                 Appendix C-18
                                                                                        Page 2

   Credit Report Requirements Were Not Met
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   Cornerstone ordered two residential mortgage credit reports dated February 5, 2002 and
   February 20, 2002 for the borrowers that did not include a verification of their current
   employment and income. (HUD Handbook 4155.1 REV-4, CHG-1, Paragraph 2-4)

   Cash Investment Requirements Were Not Met

   Cornerstone did not ensure that the borrowers met the statutory three percent cash
   investment. Page 12 of this report shows the specifics for this FHA loan. (HUD Handbook
   4000.2 REV-2, paragraph 1-9, 24 CFR Part 203.19(a)(1) and Mortgagee Letter 98-29, Single
   Family Production – Mortgage Calculation Simplification)




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                                                                                  Appendix C

                                                                              Appendix C-19
                                                                                     Page 1

FHA Case Number: 332-3711691

Insured Amount: $230,202

Date of Loan Closing: 11/30/01

Loan Originating Office: Cornerstone’s branch office in Las Vegas, Nevada

Sponsor Name and Identification Number: Irwin Mortgage Corporation; 1377909991

Status: Claim Paid (Two payments made)

Summary:

Cornerstone Mortgage Group failed to: (1) properly verify or support the borrower’s funds to
close; and (2) verify the rental income for the borrower.

Pertinent Details:

   Funds To Close Were Not Properly Verified Or Supported

   The cash saved-at-home letter dated October 15, 2001 that was in the FHA Case Binder
   showed the borrower paid $2,000 to escrow. Additionally, the Uniform Residential Loan
   Application dated November 28, 2001 in the Case Binder showed an earnest money amount
   of $2,000. However, the Real Property Purchase Agreement and Deposit Receipt dated July
   11, 2001 in the Case Binder do not support that the borrower paid the $2,000. The FHA
   Case Binder showed another individual as the buyer of the property and who paid the $2,000
   earnest money amount. (HUD Handbook 4155.1 REV-4, CHG-1, paragraph 2-10 Part A &
   M)

   Cornerstone did not properly verify the borrower’s ability generate cash saved at home of
   $14,000. In the Cash Saved At Home letter dated October 15, 2001 obtained by Cornerstone,
   the borrower claimed he saved $1,400 a month for 10 months ($14,000) to purchase a home
   and his monthly expenses totaled approximately $2,500. However, we determined the
   borrower could only save $1,042 per month totaling $10,423 for 10 months based on a
   monthly net income of $3,542. (HUD Handbook 4155.1 REV-4, CHG-1, paragraph 2-10
   Part M)



                                                                              Appendix C-19
                                                                                     Page 2

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   Income Was Not Properly Verified Or Supported

   Cornerstone did not verify the borrower’s $1,755 in monthly rental income listed on the
   Uniform Residential Loan Application dated November 28, 2001 in the FHA Case Binder.
   (HUD Handbook 4155.1 REV-4, CHG-1, chapter 2 and paragraph 2-7(M))




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                                                                                Appendix C-20
                                                                                       Page 1

FHA Case Number: 332-3723581

Insured Amount: $128,143

Date of Loan Closing: 9/18/01

Loan Originating Office: Cornerstone’s branch office in Las Vegas, Nevada

Sponsor Name and Identification Number: Irwin Mortgage Corporation; 1377909991

Status: Claim Paid (Eight payments made)

Summary:

Cornerstone Mortgage Group failed to: (1) explain or resolve inconsistencies in the loan package
submitted to its sponsor; and (2) properly support or verify the borrower’s income.

Pertinent Details:

   Inconsistencies In Loan Files

   The borrower’s income information included in Cornerstone’s loan origination file was
   inconsistent with the income information in the FHA Case Binder. The monthly income
   shown on the handwritten Uniform Residential Loan Application dated August 6, 2001 in
   Cornerstone’s file was $3,987. The monthly income on the September 10, 2001 automated
   Uniform Residential Loan Application submitted to HUD was $6,333. (HUD Handbook
   4000.4 REV-1, paragraph 2-5)

   Income Was Not Properly Verified Or Supported

   The pay stub and income presented on the Verification of Employment dated August 27,
   2001 in the FHA Case Binder did not support the $6,333 monthly income on the September
   10, 2001 automated Uniform Residential Loan Application. The calculation of income per
   the pay stub dated August 24, 2001 and the Verification of Employment dated August 27,
   2001 showed that the monthly income for the borrower was $3,984. (HUD Handbook
   4155.1 REV-4, CHG-1, Mortgage Credit Analysis for Mortgage Insurance on One-to-Four-
   Family Properties, chapter 2, paragraph 2-6 and chapter 3)

                                                                                Appendix C-21
                                                                                       Page 1

FHA Case Number: 332-3723733

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Appendix C

Insured Amount: $123,880

Date of Loan Closing: 09/28/01

Loan Originating Office: Cornerstone’s branch office in Las Vegas, Nevada

Sponsor Name and Identification Number: Irwin Mortgage Corporation; 1377909991

Status: Claim Paid (Three payments made)

Summary:

Cornerstone Mortgage Group failed to: (1) develop sufficient credit history using alternate sources;
and (2) properly verify or support funds to close the loan.

Pertinent Details:

   Insufficient Credit History

   The FHA Case Binder showed that Cornerstone completed the order of the Residential
   Mortgage Credit Report for the borrower on September 21, 2001. The Residential Mortgage
   Credit Report showed the borrower had insufficient credits. Cornerstone then obtained credit
   history documentation for the borrower using another source such as from the borrower’s utility
   company, Southwest Gas Corporation. Southwest Gas Corporation did not properly complete
   the credit history document, by not filling in the appropriate box. Specifically, the credit history
   document from the borrower’s utility company did not indicate whether or not the borrower had
   made late payments for the service during the last 12 months. Therefore, Cornerstone failed to
   adequately develop a credit history for the borrower. (HUD Handbook 4155.1 REV-4, CHG-1,
   Mortgage Credit Analysis for Mortgage Insurance on One-to-Four-Family Properties, Paragraph
   2-3)

   Funds To Close Were Not Properly Verified Or Supported

   Cornerstone did not properly verify the borrower’s ability to save total cash at home of $4,400.
   The FHA Case Binder showed that Cornerstone obtained the Cash Saved At Home letter dated
   September 19, 2001 indicating the borrower had: saved $400 a month or $4,400 for 11 months
   to purchase a home, and approximately $2,900 a month in expenses. Our analysis of the
   borrower’s total cash saved at home was lower than the $400 a month indicated in the Cash
   Saved At Home letter. Based on a monthly net income of $3,105, we determined that the
                                                                                     Appendix C-21
                                                                                            Page 2

   borrower had the ability to save only $205 a month or $2,255 for 11 months. (HUD Handbook
   4155.1 REV-4 CHG-1, paragraph 2-10 and subparagraph 2-10(M))


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                                                                                  Appendix C-22
                                                                                         Page 1

FHA Case Number: 332-3738478

Insured Amount: $122,865

Date of Loan Closing: 09/28/01

Loan Originating Office: Cornerstone’s branch office in Las Vegas, Nevada

Sponsor Name and Identification Number: Irwin Mortgage Corporation; 1377909991

Status: Claim Paid (Seven Payments made)

Summary:

Cornerstone Mortgage Group failed to properly verify or support funds to close the loan.

Pertinent Details:

   Funds To Close Were Not Properly Verified Or Supported

   Cornerstone did not properly verify the borrower’s ability to save cash at home of $4,800. The
   FHA Case Binder showed that Cornerstone obtained a Cash Saved At Home letter dated
   September 24, 2001 indicating the borrower had: saved $800 a month or $4,800 for six months
   to purchase a home, and approximately $2,300 a month in expenses. Our analysis of the
   borrower’s total cash saved-at-home was lower than the $800 a month indicated in the
   September 2001 letter. Based on a monthly net income of $2,987, we determined that the
   borrower had the ability to save $687 a month or $4,122 for six months. (HUD Handbook
   4155.1 REV-4 CHG-1, Mortgage Credit Analysis for Mortgage Insurance on One-to-Four-
   Family Properties, paragraph 2-10 and subparagraph 2-10(M))




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Appendix C

                                                                                 Appendix C-23
                                                                                        Page 1

FHA Case Number: 332-3749537

Insured Amount: $138,040

Date of Loan Closing: 10/25/01

Loan Originating Office: Cornerstone’s branch office in Las Vegas, Nevada

Sponsor Name and Identification Number: Irwin Mortgage Corporation; 1377909991

Status: Claim Paid (Six payments made)

Summary:

Cornerstone Mortgage Group failed to: (1) properly verify or support the borrower’s funds to
close; and (2) address questionable documentation used in the loan process. Additionally, we
determined that inaccurate information was presented on the Verification of Employment form
for the borrower.

Pertinent Details:

   Funds To Close Were Not Properly Verified or Supported

   Cornerstone did not properly verify the borrower’s ability to save cash at home of $5,000. The
   FHA Case Binder showed that Cornerstone obtained a Cash Saved At Home letter dated
   October 12, 2001 indicating the borrower had: saved $500 a month or $5,000 for 10 months to
   purchase a home, and approximately $3,100 a month in expenses. Our analysis of the
   borrower’s total cash saved at home was lower than the $500 a month indicated in the Cash
   Saved At Home letter. Based on a monthly net income of $3,540, we determined that the
   borrower had the ability to save $440 a month or $4,400 for 10 months. (HUD Handbook
   4155.1 REV-4 CHG-1, Mortgage Credit Analysis for Mortgage Insurance on One-to-Four-
   Family Properties, Paragraph 2-10(M))

   Questionable Documentation

   Cornerstone used questionable documentation to process the loan. The borrower’s pay stub
   covering the payroll period September 30, 2001 through October 6, 2001 was questionable
   because it lacked the borrower’s employer name. Also, the borrower’s pay stub looked the
   same as the pay stub used for the borrower in FHA Case Number 332-3754385.




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                                                                           Appendix C-23
                                                                                  Page 2

The differences between the two pay stubs were the payroll and payroll tax amounts. (HUD
Handbook 4000.4 REV-1, paragraph 2-5)

Inaccurate Verification Of Employment Information

The FHA Case Binder showed inaccuracies of information in the Verification of
Employment form signed on August 13, 2001. Based on our re-verification with the
Controller of the borrower’s employer (Granite World Limited in Las Vegas, Nevada), the
borrower was earning $12 per hour, not $24 per hour or $4,200 per month as indicated in the
August 2001 Verification of Employment form; the letterhead on the Verification of
Employment did not belong to the employer and the signature on the letter was not the
signature of the General Manager; and the borrower’s pay stub for the payroll period
September 30, 2001 through October 6, 2001 was not the same pay stub Granite World
Limited used for the borrower. (HUD Handbook 4000.4 REV-1, paragraph 2-5)




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Appendix C

                                                                                  Appendix C-24
                                                                                         Page 1

FHA Case Number: 332-3754385

Insured Amount: $124,439

Date of Loan Closing: 11/09/01

Loan Originating Office: Cornerstone’s branch office in Las Vegas, Nevada

Sponsor Name and Identification Number: Irwin Mortgage Corporation; 1377909991

Status: Claim Paid (Six payments made)

Summary:

Cornerstone Mortgage Group failed to: (1) address questionable documentation for the loan
process; and (2) provide an itemized statement indicating which items were paid on the
borrower’s behalf. Additionally, we determined that inaccurate information was presented on
the Credit Report for the borrower.

Pertinent Details:

   Questionable Documentation

   Cornerstone used questionable documentation to process this loan. The FHA Case Binder
   included a Verification of Employment form dated October 26, 2001 and was shown as verified
   by the General Manager of Camino Motors, borrower’s employer. The verifier’s title on the
   Verification of Employment was not the same in the letter of employment verification also dated
   October 26, 2001. The verifier’s title as shown in the letter of employment verification was
   owner of Camino Motors. The borrower’s pay stub was also questionable because it lacked the
   borrower’s employer name. Also, the borrower’s pay stub looked the same as the pay stub used
   for the borrower in FHA Case Number 332-3749537. The differences between the two pay
   stubs were the payroll and payroll tax amounts. (HUD Handbook 4000.4 REV-1, paragraph 2-
   5)

   Inaccurate Credit Information

   The FHA Case Binder included a Residential Mortgage Credit Report dated October 30, 2001
   that Cornerstone obtained from Factual Data. The Credit Report showed the borrower’s rent
   amount of $895 per month. However, when we re-verified the information with the Customer
   Service Representative and the Office Manager of Factual Data, they both said their computer



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                                                                               Appendix C-24
                                                                                      Page 2

system did not list any rent or employment information for the borrower. (HUD Handbook
4000.2 REV-2, paragraph 3-6)

Premium Interest Rate Requirements Were Not Met

The FHA Case Binder included the Settlement Statement dated November 9, 2001 that disclosed
$2,201 as a lump sum payment by the lender on behalf of the borrower. Cornerstone did not
provide an itemized statement indicating which items were paid on the borrower’s behalf for the
lender’s contribution amount. Disclosing only a lump sum was not acceptable. (Mortgagee
Letter 94-7)




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Appendix C

                                                                                 Appendix C-25
                                                                                        Page 1

FHA Case Number: 332-3756760

Insured Amount: $71,253

Date of Loan Closing: 11/05/01

Loan Originating Office: Cornerstone’s branch office in Las Vegas, Nevada

Sponsor Name and Identification Number: Irwin Mortgage Corporation; 1377909991

Status: Claim Paid (Nine payments made)

Summary:

Cornerstone Mortgage Group failed to address questionable documentation for the loan process.
Additionally, we determined that inaccurate information was presented on the Verification of
Employment form for the borrower.

Pertinent Details:

   Questionable Documentation

   Cornerstone used questionable documentation for this loan. The borrower’s October 5, 2001
   pay stub showed a net pay of $357 was questionable because it lacked the borrower’s employer
   name and earnings period. The information on the pay stub was handwritten and was similar to
   the pay stub used for the borrower in FHA Case Number 332-3774090. The differences
   between the two pay stubs were the payroll and payroll tax amounts. (HUD Handbook 4000.4
   REV-1, paragraph 2-5)

   Inaccurate Verification Of Employment Information

   The FHA Case Binder’s verification of employment form signed on October 3, 2001 did not
   have the same information as what we re-verified with the borrower’s employer, Mobile Chef
   Catering Corporation in Las Vegas, Nevada. According to the owner of Mobile Chef Catering
   Corporation, the earnings information on the October 3, 2001 Verification of Employment form
   was incorrect and that the signature on the form was not hers. The FHA Case Binder also
   contained a letter of employment verification, which was also dated October 3, 2001. The owner
   of Mobile Chef Catering Corporation confirmed the information on the letter was inaccurate and
   the signature was not hers. She said that an employee of her company could only earn up to
   $300 per week as opposed to the $400 per week as listed in the Verification of Employment
                                                                                   Appendix C-25
                                                                                           Page 2

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   form that Cornerstone obtained for the borrower. (HUD Handbook 4000.4 REV-1, paragraph 2-
   5)




                                                                             Appendix C-26
                                                                                    Page 1

FHA Case Number: 332-3759898

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Appendix C

Insured Amount: $134,081

Date of Loan Closing: 11/05/01

Loan Originating Office: Cornerstone’s branch office in Las Vegas, Nevada

Sponsor Name and Identification Number: Irwin Mortgage Corporation; 1377909991

Status: Claim Paid (11 payments made)

Summary:

Cornerstone Mortgage Group failed to: (1) explain or resolve inconsistencies in the loan package
submitted to its sponsor; and (2) properly verify the borrower’s deposits for funds to close.
Additionally, we determined that inaccurate information was presented on the Verification of
Employment form for the borrower.

Pertinent Details:

   Inconsistencies In Loan Files

   The loan documents in the FHA Case Binder showed inconsistencies in the amount of the
   borrower’s earnest money. The October 1, 2001 Purchase Agreement and the November 5,
   2001 Settlement Statement each showed $500 as the earnest money. However, the
   November 2, 2001 Uniform Residential Loan Application showed $1,500 as the earnest
   money. (HUD Handbook 4000.4 REV-1, paragraph 2-5)

   Funds To Close Were Not Properly Verified Or Supported

   Cornerstone did not obtain proper support to verify the borrower’s bank checking deposit of
   $2,718 as shown on the Uniform Residential Loan Application dated November 2, 2001.
   Cornerstone obtained a verification of checking deposit from the borrower’s bank, Wells
   Fargo Bank; however, the bank statement that served as the verification document was not
   the most recent bank statement for the borrower. (HUD Handbook 4155.1 REV-4, CHG-1,
   paragraphs 2-10(B) and 3-1(F))



                                                                                Appendix C-26
                                                                                       Page 2

   Inaccurate Verification Of Employment Information

   The FHA Case Binder included the Verification of Employment form signed on October 18,
   2001. The information on the Verification of Employment form conflicted with information
   obtained during our re-verification with the borrower’s employer, Dabco Products Incorporated
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in Boulder City, Nevada. According to the President of Dabco Products, the October 19, 2001
pay stub showing a net pay of $721 for the borrower was not valid because he said his company
did not use the same kind of a pay stub form. (HUD Handbook 4000.4 REV-1, paragraph 2-5)




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Appendix C

                                                                                   Appendix C-27
                                                                                          Page 1

FHA Case Number: 332-3760584

Insured Amount: $122,865

Date of Loan Closing: 10/25/01

Loan Originating Office: Cornerstone’s branch office in Las Vegas, Nevada

Sponsor Name and Identification Number: Irwin Mortgage Corporation; 1377909991

Status: Claim Paid (Six Payments made)

Summary:

Cornerstone Mortgage Group failed to: (1) properly verify or support the borrower’s funds to close;
(2) address questionable documentation for the loan process; and (3) meet the premium interest rate
requirements.

Pertinent Details:

   Funds To Close Were Not Properly Verified Or Supported

   Cornerstone did not properly verify the borrower’s ability to save cash at home of $4,800. The
   FHA Case Binder showed that Cornerstone obtained a Cash Saved At Home letter dated
   October 18, 2001 indicating the borrower had: saved $600 a month or $4,800 for eight months to
   purchase a home, and approximately $2,600 a month in expenses. Our analysis of the
   borrower’s total cash saved at home was lower than the $600 a month indicated in the Cash
   Saved At Home letter. Based on a monthly net income of $2,981, we determined that the
   borrower had the ability to save $381 a month or $3,048 for eight months. (HUD Handbook
   4155.1 REV-4 CHG-1, Mortgage Credit Analysis for Mortgage Insurance on One-to-Four-
   Family Properties, subparagraph 2-10(M)

   Questionable Documentation

   Cornerstone used questionable documentation to process this loan. The borrower’s pay stub
   dated October 5, 2001 was questionable because it lacked the borrower’s employer name and
   earnings period. Also, the borrower’s pay stub was in the same as the pay stub for the
   borrower in FHA Case Number 332-3774090. The differences between the two pay stubs
   were the payroll and payroll tax amounts.

                                                                                   Appendix C-27
                                                                                          Page 2

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Additionally, the FHA Case Binder showed that Cornerstone ordered an October 11, 2001
Residential Mortgage Credit Report from Credit Service Company that indicated there were
no open, closed, or derogatory accounts found for the borrower. Cornerstone’s Quality
Control Review file; however, included a Residential Mortgage Credit Report from another
credit reporting agency, Factual Data. Factual Data issued a report on April 28, 2003 that
showed the borrower had credit accounts and accounts in collection status and bankruptcy
proceeding before the borrower’s loan closing date of October 25, 2001. Specifically, the
April 28, 2003 Residential Mortgage Credit Report from Factual Data indicated the borrower
had: accounts at Toyota and First USA Bank; accounts in collection status with University
Medi; and accounts that were listed in borrower’s April 2001 bankruptcy such as his FHA
mortgage account (number 5868006203396) with Chase Home Mortgage. The accounts
listed in the April 2003 Residential Mortgage Credit Report from Factual Data were not
listed at all in the October 2001 Residential Mortgage Credit Report from Credit Service
Company. (HUD Handbook 4000.4 REV-1, paragraph 2-5)

Premium Interest Rate Requirements Were Not Met

The FHA Case Binder included the Settlement Statement dated October 25, 2001 that disclosed
$321 as a lump sum paid by the lender on behalf of the borrower. Cornerstone did not provide
an itemized statement indicating which items were paid on the borrower’s behalf for the lender
contribution amount. Disclosing only a lump sum was not acceptable. (Mortgagee Letter 94-7)




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Appendix C

                                                                                Appendix C-28
                                                                                       Page 1

FHA Case Number: 332-3774090

Insured Amount: $123,373

Date of Loan Closing: 11/15/01

Loan Originating Office: Cornerstone’s branch office in Las Vegas, Nevada

Sponsor Name and Identification Number: Irwin Mortgage Corporation; 1377909991

Status: Claim Paid (Nine payments made)

Summary:

Cornerstone Mortgage Group failed to: (1) meet the premium interest rate requirements; and (2)
address questionable documentation for the loan process. Additionally, we determined that
inaccurate information was presented on the Verification of Employment form for the borrower.

Pertinent Details:

   Premium Interest Rate Requirements Were Not Met

   The FHA Case Binder for the borrower included a Settlement Statement dated November 15,
   2001 that disclosed $1,621 as a lump sum paid by the lender on behalf of the borrower.
   Cornerstone did not provide an itemized statement indicating which items were paid on the
   borrower’s behalf for the lender contribution amount. Disclosing only a lump sum was not
   acceptable. (Mortgagee Letter 94-7)

   Questionable Documentation

   Cornerstone used questionable documentation for this loan. The borrower’s October 26, 2001
   pay stub showing a net pay of $643 was questionable because it lacked the borrower’s employer
   name and earnings period. The pay information on the pay stub was handwritten and looked as
   same in format as the pay stubs used for the borrowers in FHA Case Numbers 332-3760584 and
   332-3756760. The differences among the three pay stubs were the payroll and payroll tax
   amounts. (HUD Handbook 4000.4 REV-1, paragraph 2-5)



                                                                                Appendix C-28
                                                                                       Page 2

   Inaccurate Verification Of Employment Information
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The Verification of Employment form signed on October 18, 2001 included in the FHA Case
Binder showed that the borrower was working at the Windmill Donuts in Las Vegas, Nevada
since July 12, 1998 and was paid at an hourly rate over $18. Based on our re-verification results,
the borrower had only worked with Windmill Donuts for two days. Also, the Store Manager for
Windmill Donuts confirmed the borrower only worked for two days, but only earned a minimum
hourly wage, which was less than the hourly rate on the October 18, 2001 Verification of
Employment form. (HUD Handbook 4000.4 REV-1, paragraph 2-5)




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Appendix C

                                                                                  Appendix C-29
                                                                                         Page 1

FHA Case Number: 332-3781815

Insured Amount: $112,462

Date of Loan Closing: 12/26/01
Loan Originating Office: Cornerstone’s branch office in Las Vegas, Nevada

Sponsor Name and Identification Number: Irwin Mortgage Corporation; 1377909991

Status: Claim Paid (Four payments made)

Summary:

Cornerstone Mortgage Group, Limited failed to: (1) provide an itemized statement indicating which
items were paid on the borrower’s behalf; and (2) address questionable documentation for the loan
process.

Pertinent Details:

   Premium Interest Rate Requirements Were Not Met

   The FHA Case Binder included a December 26, 2001 Settlement Statement that disclosed
   $1,841 as a lump sum payment by the lender on behalf of the borrower. Cornerstone did not
   provide an itemized statement indicating which items were paid on the borrower’s behalf for the
   lender contribution amount. Disclosing only a lump sum was not acceptable. (Mortgagee Letter
   94-7)

   Questionable Documentation

   Cornerstone used questionable documentation for this loan. The FHA Case Binder included
   a November 15, 2001 Verification of Employment form that showed the borrower was
   employed with Wilson Dynamic Webpages. Our re-verification results indicated that the
   borrower’s employer, Wilson Dynamics, did not exist. We called Wilson Dynamic using the
   telephone number listed on the Verification of Employment form and found that the
   telephone number was a residential telephone number. Also, Wilson Dynamic was not listed
   in the Yellow Pages website or in Lexis Nexis. (HUD Handbook 4000.4 REV-1, paragraph
   2-5)




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                                                                                      Appendix C

                                                                                   Appendix C-30
                                                                                          Page 1

FHA Case Number: 332-3786727

Insured Amount: $130,123

Date of Loan Closing: 12/18/01

Loan Originating Office: Cornerstone’s branch office in Las Vegas, Nevada

Sponsor Name and Identification Number: Irwin Mortgage Corporation; 1377909991

Status: Claim Paid (Five payments made)

Summary:

Cornerstone Mortgage Group failed to: (1) properly verify or support the borrower’s funds to
close; (2) explain or resolve inconsistencies in the loan package submitted to its sponsor; and (3)
address questionable documentation for the loan process.

Pertinent Details:

   Funds To Close Were Not Properly Verified Or Supported

   Cornerstone did not properly verify the borrower’s ability to save cash at home of $4,000. The
   FHA Case Binder showed that Cornerstone obtained a Cash Saved At Home letter dated
   December 10, 2001 indicating the borrower had: saved $500 a month or $4,000 for eight months
   to purchase a home, and approximately $3,200 a month in expenses. Our analysis of the
   borrower’s total cash saved at home was lower than the $500 a month indicated in the Cash
   Saved At Home letter. Based on a monthly net income of $3,394, we determined that the
   borrower had the ability to save $194 a month or $1,552 for eight months. (HUD Handbook
   4155.1 REV-4 CHG-1, Mortgage Credit Analysis for Mortgage Insurance on One-to-Four-
   Family Properties, paragraph 2-10 and subparagraph 2-10(M)

   Inconsistencies In The Loan Files

   The FHA Case Binder included a November 15, 2001 Verification of Employment form that
   the borrower’s employer, IB Landscaping, completed. The Verification of Employment form
   showed the borrower’s 2001 year-to-date earnings as $41,360, but was not consistent to the
   amount shown in IB Landscaping’s letter also dated November 15, 2001. In its letter, IB
   Landscaping indicated that the borrower had 2001 year-to-date earnings of $36,960. (HUD
   Handbook 4000.4 REV-1, paragraph 2-5)
                                                                              Appendix C-30
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   Questionable Documentation

   Cornerstone used questionable documentation to process this loan. The borrower’s
   handwritten pay stub covering the payroll period November 18, 2001 through November 24,
   2001 was questionable because it lacked the borrower’s employer name and looked the same
   in format as the pay stubs used for the borrowers in FHA Case Numbers 332-3749537 and
   332-3754385. The differences among the three pay stubs were the payroll and payroll tax
   amounts, and that the pay stub for the borrower in this case was handwritten. (HUD
   Handbook 4000.4 REV-1, paragraph 2-5)




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                                                                                    Appendix C

                                                                                 Appendix C-31
                                                                                        Page 1

FHA Case Number: 332-3792961

Insured Amount: $108,909

Date of Loan Closing: 12/06/01

Loan Originating Office: Cornerstone’s branch office in Las Vegas, Nevada

Sponsor Name and Identification Number: Irwin Mortgage Corporation; 1377909991

Status: Claim Paid (Eight payments made)

Summary:

Cornerstone Mortgage Group failed to properly verify or support the borrower’s funds to close.

Pertinent Details:

   Funds To Close Were Not Properly Verified or Supported

   Cornerstone did not properly verify the borrower’s ability to save cash at home of $3,500. The
   FHA Case Binder showed that Cornerstone obtained a Cash Saved At Home letter dated
   November 27, 2001 indicating the borrower had: saved $500 a month or $3,500 for seven
   months to purchase a home, and $2,700 a month in expenses. Our analysis of the borrower’s
   total cash saved at home was lower than the $500 a month indicated in the Cash Saved At Home
   letter. Based on a monthly net income of $2,998, we determined that the borrower had the
   ability to save $298 a month or $2,086 for seven months. (HUD Handbook 4155.1 REV-4
   CHG-1, Mortgage Credit Analysis for Mortgage Insurance on One-to-Four-Family Properties,
   paragraph 2-10 and subparagraph 2-10(M))




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Appendix C

                                                                               Appendix C-32
                                                                                      Page 1

FHA Case Number: 332-3793422

Insured Amount: $118,907

Date of Loan Closing: 12/13/01

Loan Originating Office: Cornerstone’s branch office in Las Vegas, Nevada

Sponsor Name and Identification Number: Irwin Mortgage Corporation; 1377909991

Status: Claim Paid (Five payments made)

Summary:

Cornerstone Mortgage Group failed to: (1) develop a sufficient credit history for the borrower
using an alternate source; (2) obtain documentation to support the borrower’s housing
obligations; and (3) address questionable documentation for the loan process.

Pertinent Details:

   Insufficient Credit History

   The FHA Case Binder included a December 7, 2001 Residential Mortgage Credit Report that
   Cornerstone ordered for the borrower. The Credit Report showed that the borrower had
   insufficient credit information. Although the credit report showed that the borrower did not
   have sufficient credit information, Cornerstone did not obtain credit history documentation
   from alternate sources such as utility, rent, and automobile insurance payment records.
   (HUD Handbook 4155.1 REV-4, CHG-1, paragraph 2-3)

   Payment History Of Housing Obligations Was Not Documented

   The FHA Case Binder did not include any documentation regarding the payment history of
   the borrower’s housing obligations. Also, Cornerstone lacked documentation in its loan
   origination file for the borrower that it obtained the borrower’s payment history of housing
   obligations through a credit report, directly from the borrower’s landlord or mortgage
   servicer, or through the most recent cancelled checks the borrower issued. (HUD Handbook
   4155.1 REV-4, CHG-1, paragraph 2-3 (A))



                                                                               Appendix C-32
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Questionable Documentation

Cornerstone used questionable documentation to process this loan. The borrower’s
handwritten pay stub dated November 30, 2001 was questionable because it lacked the
borrower’s employer name and earnings period. Also, the pay stub looked as the same
format as the pay stubs used for borrowers in FHA Case Numbers 332-3760584 and 332-
3774090. The differences among the three pay stubs were the payroll and payroll tax
amounts. (HUD Handbook 4000.4 REV-1, paragraph 2-5)




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                                                                                Appendix C-33
                                                                                       Page 1

FHA Case Number: 332-3805123

Insured Amount: $112,969

Date of Loan Closing: 01/17/02

Loan Originating Office: Cornerstone’s branch office in Las Vegas, Nevada

Sponsor Name and Identification Number: Irwin Mortgage Corporation; 1377909991

Status: Claim Paid (Four payments made)

Summary:

Cornerstone Mortgage Group, Limited failed to provide an itemized statement indicating which
items were paid on the borrower’s behalf.

Pertinent Details:

       Premium Interest Rate Requirements Were Not Met

       The FHA Case Binder included a Settlement Statement dated January 17, 2002 that
       disclosed $1,972 as a lump sum payment by the lender on behalf of the borrower.
       Cornerstone did not provide an itemized statement indicating which items were paid on the
       borrower’s behalf for the lender contribution amount. Disclosing only a lump sum was not
       acceptable. (Mortgagee Letter 94-7)




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                                                                              Appendix D

Status Of 37 FHA-Insured Loans
                               As of May 4, 2004

                                            Number of
                                             Payments
                                            Before First      Claim      (Loss) on
     FHA Case      Mortgage                   Default       Amount       Resale of
      Number        Amount       Status      Reported         Paid       Property
    137-0918329     $130,173    Default         19              -             -
    137-1293908     $117,131   Terminated        -              -             -
    137-1301534     $150,981   Terminated        -              -             -
    137-1323234     $122,053   Terminated        -              -             -
    137-1351763     $126,976   Terminated        -              -             -
    137-1368384     $123,068     Active          -              -             -
    137-1385239     $117,638   Terminated        -              -             -
    137-1393354     $122,612     Claim           9          $138,106     ($30,743)
    137-1395974     $173,514     Active          -              -             -
    137-1396701     $149,154     Active          -              -             -
    137-1409761     $106,219   Terminated        -              -             -
    137-1447651     $108,300   Terminated        -              -             -
    137-1450434     $124,540     Active          -              -             -
    137-1459042     $137,735    Default          5              -             -
    137-1481924     $115,202     Active          -              -             -
    137-1497057      $87,188    Default         12              -             -
    137-1581796     $148,849   Terminated        -              -             -
    137-1593584     $147,581   Terminated        -              -             -
    137-1609308      $92,250   Terminated        -              -             -
    332-3711691     $230,202     Claim           2          $261,641     ($44,466)
    332-3722403     $124,236     Claim           8          $132,872     ($84,884)
    332-3723581     $128,143     Claim           8          $136,433     ($18,423)
    332-3723733     $123,880     Claim           3          $132,036     ($39,330)
    332-3734424     $142,962     Claim           4          $151,469     ($92,471)
    332-3738478     $122,865     Claim           4          $130,549     ($78,815)
    332-3749537     $138,040     Claim           6          $147,203     ($30,297)
    332-3754385     $124,439     Claim           6          $132,898     ($31,465)
    332-3756760      $71,253     Claim           9           $77,853     ($37,381)
    332-3759898     $134,081     Claim          11          $141,116      ($6,726)
    332-3760584     $122,865     Claim           3          $132,496     ($33,143)
    332-3774090     $123,373     Claim           9          $132,092          -
    332-3781815     $112,462     Claim           4          $121,293     ($55,337)
    332-3786727     $130,123     Claim           5          $145,152     ($31,027)
    332-3792961     $108,909     Claim           8          $115,265     ($30,684)
    332-3793422     $118,907     Claim           5          $132,351     ($53,113)
    332-3803384     $137,025     Claim           0          $145,952     ($26,193)
    332-3805123     $112,969     Claim           4          $120,046     ($24,141)
       Totals     $4,707,898                               $2,626,824   ($748,639)




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