oversight

Decatur Mortgage Company, L.L.C., Non-Supervised Loan Correspondent, Indianapolis, IN

Published by the Department of Housing and Urban Development, Office of Inspector General on 2004-09-23.

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

              AUDIT REPORT




        DECATUR MORTGAGE COMPANY, L.L.C.
       NON-SUPERVISED LOAN CORRESPONDENT

             INDIANAPOLIS, INDIANA

                   2004-CH-1009

                 September 23, 2004




              OFFICE OF AUDIT, REGION V
                  CHICAGO, ILLINOIS




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                                                                  Issue Date
                                                                          September 23, 2004
                                                                 Audit Case binder
                                                                          2004-CH-1009




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

SUBJECT: Decatur Mortgage Company, L.L.C.
         Non-Supervised Loan Correspondent
         Indianapolis, Indiana

We completed an audit of Decatur Mortgage Company, L.L.C., a non-supervised loan correspondent
approved to originate FHA single-family mortgage loans. We selected Decatur for audit because it
had a high loan default rate. Our audit objectives were to determine whether: Decatur acted in a
prudent manner and complied with HUD’s regulations, procedures, and instructions in the
origination of FHA loans; and Decatur’s Quality Control Plan as implemented met HUD’s
requirements. 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 me at (313) 226-6280 extension 8062.




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

We concluded that Decatur Mortgage Company did not adhere to prudent lending practices and
comply with HUD’s regulations, procedures, and instructions when it originated FHA-insured loans.
This was due in part to Decatur’s reliance on its managing owner to perform management oversight
and a failure to ensure that its Quality Control Plan was adequately implemented. We cited the
sponsor’s responsibilities, as well as Decatur’s, and recommended appropriate corrective actions.

HUD’s Quality Assurance Division reviewed Decatur’s loan originations in September 2002 and
cited similar issues. Eight of the 41 loans we reviewed were included in HUD’s review and are
identified in Appendix B of this report.



                                      Decatur did not originate FHA-insured loans in accordance
 Improvements Needed In               with HUD’s requirements and prudent lending practices.
 The Origination Of FHA-              Decatur did not exercise due diligence to: (1) verify or support
 Insured Loans                        borrowers’ income level and stability; (2) ensure unbiased
                                      appraisals were provided; (3) investigate credit inquiries and
                                      additional Social Security Numbers shown on credit reports;
                                      (4) establish the borrower’s ability and willingness to pay; (5)
                                      document the source of deposits and gift funds—and not use
                                      gift funds to pay-off borrower’s debts; (6) estimate borrower’s
                                      expenses and property taxes; and (7) not allow interested third
                                      parties to handle key documentation.

                                      Decatur did not ensure that Quality Control Reviews were
 Management Oversight                 completed on FHA loans as required. Specifically, Decatur
 And Inadequate Quality               did not: (1) perform Quality Control Reviews on early
 Control Reviews                      default FHA loans as required; (2) document work done to
                                      determine if loans were originated properly; and (3)
                                      identify origination deficiencies and corrective actions
                                      needed for its loan originations.

                                      We recommend that HUD’s Assistant Secretary for Housing-
 Recommendations                      Federal Housing Commissioner and Chairman of the
                                      Mortgagee Review Board require Decatur’s sponsors to
                                      indemnify HUD/FHA for any losses. We also recommend
                                      that HUD’s Director of Departmental Enforcement Center
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Executive Summary


                    take appropriate administrative actions against the owners
                    of Decatur.

                    We provided our draft audit report to Decatur’s Chief
                    Executive Officer and its two sponsors, and HUD’s staff
                    during the audit. We held an exit conference with Decatur’s
                    Chief Executive Officer on August 13, 2004. Decatur’s
                    owners provided written comments to our draft report on
                    August 13, 2004. Decatur’s owners generally disagreed with
                    the findings in this report. The complete text of Decatur’s
                    comments is included in Appendix E of this report. We
                    removed borrower names from Decatur’s comments as
                    necessary.




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Table Of Contents

Management Memorandum                                               i



Executive Summary                                                 iii



Introduction                                                       1



Findings

1.     Improvements Needed In The Origination Of
       FHA-Insured Loans                                           5


2.     Inadequate Management Oversight And Quality
       Control Reviews                                           19




Management Controls                                              25



Follow Up On Prior Audits                                        27



Appendices

      A Schedule Of Questioned And Recommendation For
        Funds To Be Put To Better Use                            29


     B Loan Processing Deficiencies Chart                        31


     C Narrative Case Summaries                                  33

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    D Status Of Claims Paid                   105


    E Auditee Comments and OIG’s Evaluation   107




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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 March 2000, HUD approved Decatur Mortgage Company as a non-supervised loan
correspondent mortgagee to originate FHA loans. As a condition for its HUD approval, Decatur
was required to have and maintain a Quality Control Plan for the origination and servicing of
insured loans. The Quality Control Plan must be a prescribed function of Decatur’s operations
and assure that it maintains compliance with HUD’s requirements and its own policies and
procedures.

As a loan correspondent, Decatur must send the FHA loans it originates to a HUD-approved
Direct Endorsement sponsor(s) for underwriting approval prior to loan closing and submission to
HUD for insurance endorsement. The loan origination process includes taking initial loan
applications, initiating the appraisal assignment, obtaining the credit report, and procuring
verifications of deposit and employment. Based on the information gathered by the loan
correspondent, the sponsor mortgagee underwrites the loan and makes a decision whether the
borrower represents an acceptable credit risk for HUD. Since the sponsor bases its underwriting
approval, in large part, on information gathered by the 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.

Decatur had a home office and a branch office in Indianapolis, Indiana. Decatur was part owned
by Dura Homes, Incorporated (affiliated with Dura Builders who built and sold all of the
mortgaged properties) and Homebuilders Financial Network (who managed Decatur as well as other
similar loan correspondents established and owned by various homebuilders across the nation).

HUD terminated Decatur’s home office on June 23, 2003 due to its high default rate. Decatur
voluntarily closed its branch office in November 2003, at the direction of Homebuilder’s
Financial Network. Decatur originated 506 FHA-insured single-family loans totaling about $70
million during the period September 2001 through August 2003. The Chief Executive Officer of
Decatur was Thomas H. Meyer (President of Homebuilders Financial Network). The President
of Decatur was Paul Shoopman (President of Dura Builders, Incorporated and Dura Homes,
Inc.).



                                      Our audit objectives were to determine whether: Decatur
 Audit Objectives                     acted in a prudent manner and complied with HUD’s
                                      regulations, procedures, and instructions in the origination of

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                   FHA loans; and Decatur’s Quality Control Plan, as
                   implemented, met HUD’s requirements.

                   We conducted the audit at Decatur’s branch office and
 Audit Scope And   HUD’s Detroit Field Office. We performed our audit work
 Methodology       from September 2003 through May 2004.

                   To accomplish our objectives, we interviewed: HUD’s staff;
                   Decatur’s management and employees; and loan borrowers.
                   We also contacted the employers of the loan borrowers. In
                   addition, we spoke to a representative of one of the sponsors
                   (National City Mortgage) regarding the defaulted loans
                   originated by Decatur.

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

                   We analyzed all 14 loans identified as early default cases to
                   determine if Decatur conducted the required Quality Control
                   Reviews. We also reviewed the three defaulted loans that
                   Decatur’s managing owner performed Quality Control
                   Reviews on as of October 1, 2003, to determine if Decatur
                   performed the Reviews in accordance with its Quality
                   Control Plan and HUD’s requirements.

                   We tested Decatur’s loan origination process using all loans
                   that closed during the period September 2001 through August
                   2003 that subsequently went into default as of October 2003.
                   Using HUD’s Neighborhood Watch System, we selected a
                   non-representative sample of all 41 loans that went into
                   default from a universe of 506 FHA-insured loans. We tested
                   Decatur’s origination process through a review of HUD’s
                   FHA Case Binders and Decatur’s loan origination files
                   related to our sample.

                   The audit covered the period from September 2001 through
                   August 2003. The period was adjusted as necessary. We
                   conducted the audit in accordance with Generally Accepted
                   Government Auditing standards.

                   We provided copies of this report to Decatur’s President
                   and Chief Executive Officer. We also furnished copies to
                   Decatur’s sponsors—the President of National City

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       Mortgage and the Office Manager at Prime Mortgage
       Company.




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                                                                                               Finding 1


   Improvements Needed In The Origination Of
             FHA-Insured Loans
Decatur Mortgage Company, L.L.C. did not originate FHA-insured loans in accordance with HUD’s
requirements and prudent lending practices. In all 41 loans reviewed, Decatur did not exercise due
diligence to: 1) verify or support borrowers’ income level and stability; 2) obtain unbiased appraisals;
3) investigate credit inquiries and additional Social Security Numbers on credit reports; 4) establish the
borrower’s ability and willingness to pay; 5) document the source of deposits and gift funds, and not
allow the use of gift funds to pay-off borrower debts; 6) estimate borrower expenses and property
taxes; and 7) not allow interested third parties to handle key documentation. The deficiencies
associated with Decatur’s loan origination activities stemmed from: Decatur’s partial ownership by the
builder of homes for whose loans Decatur was established to handle; a lack of management oversight;
and a failure to implement an adequate Quality Control process. These deficiencies contributed to the
high loan default and claim rate, putting at risk over $5.1 million in FHA-insured loans.



                                        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. Depending on their
                                        designation by HUD, the institutions have the authority to
                                        originate, purchase, sell, or service HUD/FHA-insured
                                        mortgages. As a loan correspondent, Decatur’s principal
                                        activity is the origination of mortgages for sale or transfer to
                                        an approved sponsor under HUD’s Single Family Direct
                                        Endorsement Program.

                                        The Federal Register dated March 1, 1999, addressing HUD’s
  Fourteen                              regulation 24 CFR Part 3500 (Real Estate Settlement
  Services/Functions                    Procedures Act), referred to HUD’s letter to the Independent
  Performed During Loan                 Bankers Association of America, dated February 14, 1995.
  Origination                           The letter identified 14 services/functions normally
                                        performed in the origination of a loan. The services/functions
                                        entail, but are not limited to the following:

                                           Obtain information from the borrower and complete the
                                           mortgage loan application/comparable activity;
                                           Analyze the prospective borrower’s income and debt, and
                                           pre-qualification to determine the maximum mortgage
                                           amount the borrower can afford;
                                           Educate the prospective borrower in the home buying and
                                           financing process;


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Finding 1


                              Collect financial information (tax returns, bank
                              statements) and other related documents that are part of
                              the application process;
                              Initiate/order verifications of employment and
                              verifications of deposit;
                              Initiate/order requests for mortgage and other loan
                              verifications;
                              Initiate/order appraisals;
                              Initiate/order inspections of engineering reports;
                              Provide disclosures (truth in lending, good faith estimate,
                              others) to borrower;
                              Assist the borrower in understanding and clearing credit
                              report problems;
                              Maintain regular contact with the borrower, realtors, and
                              lender between application closing;
                              Order legal documents;
                              Determine whether the property is located in a flood zone
                              or order such service; and
                              Participate in the loan closing.

                           Paragraph 2-5 of HUD Handbook 4000.4 REV-1, Single
                           Family Direct Endorsement Program, provides that the
                           mortgagee must obtain and verify information with at least
                           the same care that would be exercised in originating the
                           loan where the mortgagee would be entirely dependent on
                           the property as security to protect its investment.

                           Based on the information contained in the loan package
                           received from the loan correspondent, the underwriter
                           (sponsor) will approve or reject the loan, or approve the loan
                           if certain conditions are met. Therefore, it is critical that the
                           loan correspondent exercises due diligence and follows
                           prudent lending practices during the loan origination process.

                           Decatur Mortgage Company did not originate FHA-insured
 Deficiencies In Loan      loans in accordance with HUD’s requirements and prudent
 Originations              lending practices. We reviewed 41 FHA loans originated by
                           Decatur with a total dollar value of $5,827,404. We selected
                           our non-representative sample from a universe of 506 FHA
                           loans with closing dates between September 2001 and August
                           2003.


                           Decatur Mortgage did not properly verify or support
 Income Was Not Properly   borrower’s income on 18 FHA loans by not obtaining the
 Verified Or Supported     income documentation required by HUD Handbook 4155.1
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       REV-4 CHG-1, paragraph 2-7. These deficiencies included
       use of rental income of other properties owned that was not
       verified (3 of 18 loans) and use of overstated or unstable
       borrower income (17 of 18 loans). Two cases had both
       issues.

       For FHA Case number 151-6605466, Decatur did not
       adequately verify rental income on the borrower’s current
       residence. Decatur provided a copy of a rental agreement for
       the borrower’s current address dated the same day as the
       subject sales agreement. The rental agreement showed
       monthly rent payments of $650 and a copy of an August 2000
       check was provided, but no cancellation was shown. A
       Credit Union Draft History in the loan file through August
       30, 2000 did not show any deposits of $650 to support that
       the rent payments were actually being received. The initial
       Loan Application, dated June 20, 2002, did not show rental
       income despite the June 16, 2002 rental agreement.

       In an interview, the borrower said the seller's sales staff
       provided her with a lease form. The borrower filled out the
       lease form and had her son's girlfriend sign the lease and
       provide a rent check. The sales staff knew the lease was
       invalid. After the sales staff copied the rent check, the
       borrower threw the check out. The borrower never actually
       received rent for her prior residence. The borrower just
       stopped making the mortgage payments on her prior
       residence. The borrower said no one at Decatur asked her
       about her income, debts, or the lease for the prior residence.

       For FHA Case number 151-6542156, Decatur included social
       security benefits received as other income for the borrower's
       two children, ages 16 and 17. The social security benefit
       letter was provided in both the HUD and mortgage files
       showing that total social security benefits were $716.
       However, Decatur and the underwriter used an amount that
       was increased (grossed up) 25 percent without documentation
       on why they did so.

       Income verification or documentation issues for the
       remaining 16 FHA cases are explained in Appendix C of this
       report. It was Decatur’s responsibility to verify and support
       borrower incomes but the sponsor’s responsibility for the
       actual loan approvals.


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Finding 1


                              Decatur Mortgage Company did not provide adequately
 Appraisal Reports Were       documented and unbiased appraisal reports acceptable in
 Not Properly Analyzed Or     accordance with HUD Handbook 4150.2, Sections 4-1, 4-6
 Supported                    and 7-1.

                              We noted 32 cases where appraisers used comparable
                              properties that were either: 1) over a mile from the subject
                              property; 2) were sold more than six months prior to the
                              appraisal without adequate explanation; or 3) comparable
                              properties selected from the same subdivision as the subject
                              property, and were manufactured and sold by the same
                              builder as the subject property. The same appraiser was used
                              in 39 of the 41 cases reviewed.

                              In five cases, (151-6486054, 151-6567251, 151-6561313,
                              151-6485246, and 151-6589970) the appraiser adjusted the
                              appraised value upwards when the sales price of the subject
                              property was increased. We discuss the remaining 27 cases
                              in Appendix C of this report.

                              It was Decatur’s responsibility to obtain proper and unbiased
                              appraisals for submission to the sponsor’s underwriters. It
                              was the responsibility of the underwriter to evaluate the
                              appraisals to ensure that the value supported the mortgage.

                              In 27 of the 41 cases, we identified issues relating to credit
 Credit Inquiries And         reports that were not adequately investigated by Decatur
 Additional Social Security   Mortgage’s employees. These issues related to credit
 Numbers On Credit            inquiries shown on the credit report or credit reports
 Reports Were Not             identifying additional Social Security numbers for one of the
 Investigated                 borrowers that was not investigated. Three cases (151-
                              6550730, 151-6443404, and 151-6838872) had both issues.
                              In 10 of 27 cases, additional Social Security numbers were
                              identified but not investigated, and in 20 of the 27 cases,
                              credit inquiries were not investigated. The 27 cases are
                              discussed in Appendix C of this report.

                              Paragraph 2-3 of HUD Handbook 4155.1 REV-4 CHG-1,
                              states when reviewing the borrower’s credit report, the lender
                              must pay particular attention to recent and/or undisclosed
                              debts. The borrower must explain all inquiries shown on the
                              credit report. Paragraph 3-2 (c) requires that lenders obtain
                              Social Security evidence for each borrower and co-borrower.

                              It was Decatur’s responsibility to investigate credit inquiries
                              and additional Social Security numbers during the processing
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                         of the loan applications. It was the sponsor’s underwriters’
                         responsibility to review the documentation provided by
                         Decatur and not approve loans until such discrepancies were
                         adequately resolved.

                         In 36 of the 41 loans, we identified issues relating to the
Borrower’s Ability And   borrowers ability to afford the mortgage and living
Willingness To Pay Not   expenses, and 22 cases had more than one of these issues.
Established              These issues included: (1) the underwriter not providing
                         adequate compensating factors for loans with credit ratios
                         exceeding HUD’s guidelines (12 of 36 cases); (2)
                         underwriters not adequately explaining how borrowers
                         would be expected to meet mortgage obligations as buy-
                         down agreements expired (23 of 36 cases); and (3) not
                         adequately establishing how borrowers improved their
                         credit worthiness other than having delinquencies paid off
                         from closing proceeds (28 of 36 cases). These 36 cases are
                         discussed in Appendix C of this report.

                         Paragraph 2-1 of HUD Handbook 4155.1 REV-4 CHG-1,
                         Mortgage Analysis for Mortgage Insurance on One-to-Four
                         Family Properties, 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. These include the 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 package to contain
                         sufficient documentation to support the lender’s decision to
                         approve the mortgage loan.

                         It was Decatur’s responsibility to obtain and provide
                         documentation and information to the sponsor’s underwriter.
                         Decatur submitted loans to the underwriters with understated
                         property taxes and where delinquent debts were being paid
                         off out of closing proceeds. It was the underwriter’s
                         responsibility to analyze the loans and document the
                         compensating factors used to approve loans exceeding
                         HUD’s guideline ratios.       The underwriters were also
                         responsible for approving borrowers with bad payment
                         histories and using understated expenses in the mortgage
                         credit analysis.


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Deposits
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Finding 1


               Decatur Mortgage lacked support to show it properly verified
               the borrowers’ sources of funds to close. In 40 of the 41
               cases reviewed, we noted issues relating to the lack of
               adequate documentation of deposits provided by the
               borrowers and provision of gift funds by non-profit donors.
               In 34 of 41 cases, Decatur did not adequately verify the actual
               source of deposits provided by the borrowers. Decatur did
               not provide cancelled checks and bank statements to show the
               cash deposits coming out of the borrowers' accounts.

               In 39 of 41 Cases, Decatur did not document the timing of the
               gift wire transfers from non-profit donors to the settlement
               agent and the timing of the contribution from seller’s
               proceeds back to the nonprofit donor to ensure that the gift
               funds were not actually provided by the seller. The
               settlement agent was not able to provide us actual
               documentation of the wire transfers. The settlement agent's
               bank provided us with the wire transfer documentation.

               The documentation we obtained showed that in one case
               (151-6463779), the settlement agent transferred $9,181 of the
               seller's proceeds to the Housing Action Resource Trust on
               September 14, 2001—the day of closing—but did not receive
               the $8,231 gift from the Trust until September 17, 2001 (three
               days later). The seller provided the gift funds in violation of
               HUD's requirements.

               For FHA Case number 151-6510827, receipts in Decatur's
               loan file show that the borrower gave a $10,000 earnest
               money deposit which was not reflected on the HUD-1
               Settlement Statement or otherwise explained.

               In 23 cases, the settlement agent paid off more of the
               borrowers' delinquent debts than cash provided by the
               borrowers. This caused part of the gifts provided by
               nonprofit donors to be used to pay off delinquent accounts
               rather than being used for the home purchase transactions.
               The sales prices and mortgages were not reduced due to the
               gift funds being used to pay off the borrower’s delinquent
               debts.

               Paragraph 2-10, Funds To Close, HUD Handbook 4155.1
               REV-4 CHG-1, requires that all funds for the borrower’s
               investment in a property be verified. Lenders are required
               to verify the deposit amount and source of funds if earnest
               money deposits are excessive based on the borrower’s
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                        savings history. For gifts, the lender must document the
                        transfer of funds from the donor to the borrower. If the
                        funds are not deposited to the borrower's account prior to
                        closing, the lender must obtain verification that the closing
                        agent received the funds from the donor for the gift
                        amount. The donor of the gift may not be a person or
                        entity with an interest in the sale of the property such as the
                        seller, real estate agent or broker, builder, or entity
                        associated with them. Gifts from these sources are
                        considered inducements and must be subtracted from the
                        sales price.

                        Sponsors rely on information prepared and collected by loan
                        correspondents in determining the eligibility of borrowers to
                        qualify for loans. When irregularities occur with respect to
                        gift funds due to lenders not complying with HUD’s
                        requirements, there may be grounds for administrative
                        action and referral to HUD’s Mortgagee Review Board for
                        imposition of administrative sanctions or civil money
                        penalties against loan correspondents and/or sponsors.

                        It was Decatur’s responsibility to determine and document the
                        source of funds provided on behalf of the borrowers during
                        loan processing. This includes determining how the gift
                        funds were being provided at closing.             It was the
                        responsibility of the sponsor’s underwriters to not approve
                        loans when Decatur had not properly demonstrated the source
                        of the funds provided, and for allowing gift funds to be used
                        at closing to pay off borrower’s bad debts.
                        In 37 of the 41 Cases reviewed, Decatur Mortgage
Borrower Expenses And   Company and the underwriter underestimated the
Property Taxes Were     borrower’s expenses and property taxes. Twelve of the 37
Underestimated          cases had an expense indicated in a file document not
                        considered in the mortgage credit analysis.

                        In 36 cases, Decatur and the underwriter estimated a
                        monthly figure for property taxes that was based on the
                        taxes for the undeveloped land. The actual taxes to be
                        assessed after sale to the buyers were significantly higher
                        and were not figured in to the borrowers’ ability to afford
                        the mortgage. Generally, the estimate Decatur used for
                        property taxes was either $25 or $40 per month, but the
                        actual taxes ranged between $72 and $279 per month based
                        on information obtained from the counties where the
                        properties were located.

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                            Paragraph 2-12 of HUD Handbook 4155.1 REV-4 CHG-1
                            requires lenders to compute two ratios to determine if the
                            borrower can reasonably be expected to meet the expenses
                            of home ownership and provide for the family: 1) mortgage
                            payment expense to effective income (29 percent limit
                            unless significant compensating factors are present); and 2)
                            total fixed payment to effective income (41 percent limit
                            unless significant compensating factors are present).

                            It was Decatur’s responsibility to identify and disclose all
                            liabilities and expenses of the borrowers to be provided to
                            the sponsor for underwriting. This included reasonable
                            estimates of property taxes and other expenses that
                            borrowers would be expected to pay. In the loan
                            applications, Decatur provided an unreasonably low
                            estimate of property taxes. It was the underwriter’s
                            responsibility to review the documentation provided and
                            adjust it as necessary for mortgage credit analysis based on
                            the documentation available.

                            In 10 cases, Decatur obtained wage information,
 Interested Third Parties   verification letters, and letters of explanations about
 Handled Key                income and debts from interested third parties. These
 Documentation              documents in the loan files (151-6605466, 151-6561313,
                            151-6485246, 151-6574687, 151-6476579, 151-6482988,
                            151-6589970, 151-6507102, 151-6415426, and 151-
                            6584264) showed that they were faxed either from one of
                            the seller's sales offices or from the borrowers’ place of
                            employment rather than directly from the source. In three
                            cases (151-6605466, 151-6574687, and 151-6589970),
                            explanation letters were provided that were created for the
                            borrowers by the seller's sales staff and contained incorrect
                            information according to the borrowers.

                            HUD Handbook 4155.1 REV-4 CHG-1, paragraph 3-1, states
                            verification forms must pass directly between the lender and
                            the provider without being handled by any third party. These
                            include explanatory statements or additional documentation
                            needed for a sound underwriting decision.

                            As a loan processor, it was Decatur’s responsibility to obtain
                            documentation directly from borrowers, employers or other
                            sources directly without the documents passing through the
                            hands of interested parties such as the seller. It was the
                            sponsor’s responsibility to not accept documents that show
                            evidence that an interested party provided them.
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                            The deficiencies associated with Decatur Mortgage’s loan
Lack Of Management          origination activities stemmed from: Decatur’s partial
Oversight And A             ownership by the builder of the homes for whose loans
Deficient Quality Control   Decatur was formed to handle; a lack of management
Process                     oversight; and a failure to implement an adequate Quality
                            Control Plan. Decatur was responsible for its own
                            management oversight, but failed to take this responsibility
                            seriously. Decatur also failed to implement an adequate
                            Quality Control Plan and conduct effective Quality Control
                            Reviews of its loan origination practices (see Finding 2).
                            Had it been implemented, Decatur could have prevented
                            various loan origination deficiencies that ultimately
                            resulted in loans going into default. Additionally, it would
                            have allowed Decatur to correct deficiencies in its loan
                            origination process and prevent repeated occurrences of
                            problems.

                            Decatur’s loan origination deficiencies contributed to the high
                            loan default and claim rate of 8.1 percent during the period
                            September 2001 through August 2003. These deficiencies
                            increased the risk to the FHA insurance funds by $5,101,822
                            ($675,063 in ineligible, $356,723 in unsupported costs, and
                            $4,070,036 in funds at risk that could be put to better use).

                            The status of the 41 loans in default—as of September 3,
Current Status Of Loans     2004—is reflected in the following table:
With Deficiencies

                                                                        Mortgage Number
                                             Status                     Amount of Loans
                            Currently in Default                        $4,070,036      28
                            Claim Paid & Property Resold at Loss         $675,063       11
                            Claim Paid but Property Not Resold           $336,706       2
                            Partial Claims Paid on 8 loans in
                            default (non foreclosure) 1/                  $20,017      1/

                                             Totals                     $5,101,822     41
                            1/   Included in the 28 loans in default.

                            As of September 3, 2004, HUD paid claims on 13 FHA
                            loans totaling $1,904,495 and incurred a total loss of
                            $675,063 on the resale of 11 of these 13 properties. The
                            remaining two properties accounted for $336,706 of the
                            claims paid. HUD had not resold these properties as of our
                            audit date, so the total loss to HUD was unknown. HUD
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Finding 1


               also paid non-foreclosure partial claims on eight loans
               totaling $20,017.

               The following table shows the 11 loans with ineligible
               costs due to losses incurred by HUD after foreclosure
               resale.

                         FHA           Sponsor      Foreclosure
                     Loan Number       Number        Sale Loss
                    151-6531249         38092           $60,944
                    151-6550730         38092           $67,282
                    151-6415426         38092           $59,696
                    151-6463779         38092           $67,530
                    151-6476579         38092           $64,912
                    151-6482988         38092           $51,981
                    151-6486185         38092           $56,963
                    151-6507102         38092           $58,437
                    151-6527323         38092           $70,131
                    151-6584264         38092           $55,089
                    151-6584501         38092           $62,098
                                           Total       $675,063

               The following table shows the two loans with unsupported
               costs due to full claim filed but property not yet sold.

                      FHA          Sponsor    Claim Paid
                      Loan         Number      Loss Not
                    Number                    Determined
                  151-6483461       38092      $174,454
                  151-6567251       38092      $162,252
                                      Total    $336,706


               The following are the eight loans in default where HUD paid
               partial non-foreclosure claims to the loan servicer to avoid
               foreclosure.

                FHA Loan                      Partial
                                 Sponsor      Claim
                 Number
                                 Number        Paid    Type Of Claim
                                                      Loan Modification
               151-6907158        73850         $750         Fee
                                                      Loan Modification
               151-6561313        38092           650        Fee
               151-6574687        38092        12,233   Partial Claim
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                                                                     Loan Modification
                      151-6471089          38092              650           Fee
                      151-6443404          38092              100     Forbearance Fee
                                                                     Loan Modification
                      151-6649076          38092              850           Fee
                                                                      Partial Claim &
                                                                          Special
                      151-6476419          38092            4,034       Forbearance
                                                                     Loan Modification
                      151-6486054     38092                  750            Fee
                                Total                    $20,017


                      HUD Handbooks 4000.4 REV-1 and 4060.1, and 24 CFR
Decatur and Sponsor   Part 202.8 state sponsors are responsible to HUD for the
Responsibilities      actions of its loan correspondents. Sponsors can rebut the
                      presumption that they have specific knowledge of the actions
                      of the loan correspondent when there is evidence of fraud, for
                      example.

                      In the deficiencies we cited, only the failure to provide
                      compensating factors for excessive mortgage credit ratios,
                      and approval of loans for borrowers with pre-existing bad
                      debt was solely the responsibility of the sponsors.
                      Decatur was responsible for: 1) failing to adequately verify or
                      support income; 2) acceptance of questionable appraisal
                      practices; 3) failure to investigate credit inquiries; 4) failure to
                      demonstrate credit worthiness; 5) failure to show the timing
                      of gift transfers to and from nonprofit donors; 6) the use of
                      gift funds to pay off bad debts; 7) failing to document the
                      source of funds provided; 8) understating living expenses and
                      property taxes; and 9) allowing interested third parties to
                      provide wage information and explanatory letters.

                      These deficiencies represent actions by Decatur that its
                      sponsors should have had specific knowledge of. As such,
                      the sponsors were responsible to HUD for giving underwriter
                      approval to the loans originated and processed by Decatur,
                      and should be pecuniarily responsible for loans that were not
                      processed in accordance with HUD’s requirements and
                      prudent lending practices. In September 2002, HUD’s
                      Quality Assurance conducted a review of Decatur and
                      identified many of the same deficiencies we identified. In
                      fact, eight of the loans were included in our scope of 41 loans.
                      National City Mortgage agreed to indemnify HUD on losses
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Finding 1


                        associated with these eight loans. HUD should seek
                        indemnification agreements on the remaining loans, except
                        where we are recommending reimbursement for any claims
                        already paid by HUD/FHA.

                        On March 20, 2003, HUD notified Decatur that its home
 Decatur’s Operations   office was having its lender approval status terminated due to
 Were Terminated        an excessive loan default rate. Decatur’s home office
                        terminated operation on June 23, 2003. In October 2003,
                        Decatur’s managing owner, Homebuilders Financial
                        Network, informed us that it was voluntarily closing its
                        remaining branch office by the end of 2003. Decatur’s
                        managing owner terminated the office staff at the end of
                        October and closed its office in November 2003.



   Auditee Comments     Decatur’s owners disagreed with this finding. The owners
                        asserted that they provided adequate management oversight
                        and never submitted documentation that they knew to be
                        deficient. The owners stated that as a loan correspondent,
                        Decatur did loan processing by obtaining information and the
                        sponsor’s underwriters were responsible for the analysis of
                        the documentation provided. The owners maintain that the
                        issues we cited were underwriting issues that should be
                        addressed with the sponsors.

                        The complete response as provided by Decatur’s owners is
                        included in its entirety in Appendix E of this report. We
                        removed the names of individual borrowers from the
                        response.



  OIG Evaluation Of     We disagree that Decatur’s owners adequately oversaw
  Auditee Comments      operations as we discussed in the second finding of this
                        report. We agree that the sponsors are primarily responsible
                        to HUD/FHA for the actions of its loan correspondents and
                        for the underwriting approval decisions.

                        As a loan correspondent, Decatur Mortgage Company was
                        responsible to HUD/FHA and the sponsors for the application
                        process and obtaining and processing documentation in
                        accordance with FHA requirements and prudent lending
                        practices. To a large degree, the sponsors rely on information

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                                                                       Finding 1


                  provided by loan correspondents in performing the
                  underwriting analysis.

                  As we cited in the first finding, Decatur processed loan
                  applications that overstated or provided unverified income
                  and understated expenses. Decatur also did not adequately
                  document the actual source of borrower funds and allowed
                  gift funds provided by non-profit donors to be used to pay-off
                  delinquent debts of the borrowers.           Decatur allowed
                  interested third parties to provide documentation and tended
                  to use the same appraiser for its loans. Although the sponsor
                  is primarily responsible to HUD, our analysis of Decatur’s
                  delinquent loans as a whole did not show that Decatur’s staff
                  used prudent loan origination practices to gather information
                  for the sponsor’s underwriters. We modified our finding to
                  clarify lender responsibilities and our recommendations. Our
                  full analysis of Decatur’s response to our report is included in
                  Appendix E of this report.



Recommendations   We recommend that HUD’s Assistant Secretary for Housing-
                  Federal Housing Commissioner and Chairman of the
                  Mortgagee Review Board:
                  1A. Requires Decatur Mortgage’s sponsors to reimburse
                        HUD for $675,063 in losses on the 11 resold
                        properties.

                  1B.   Requires Decatur Mortgage’s sponsors to reimburse
                        the appropriate amount of $20,017 for the eight partial
                        claims as well as any losses incurred on the two
                        properties for which HUD paid foreclosure claims
                        totaling $336,706, but had not yet resold.

                  1C.   Requires Decatur Mortgage Company’s sponsors to
                        indemnify HUD/FHA against future losses on the 28
                        loans totaling $4,070,036 that are in default, but not
                        yet foreclosed.

                  1D    Notifies HUD’s Office of Lender Approval and
                        Recertification Division of the determination by the
                        Mortgagee Review Board regarding Decatur Mortgage
                        Company and its owners as to violations of HUD’s
                        requirements and prudent lending practices.


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               If determined that Decatur’s owners can reapply for a new
               FHA license as a non-supervised loan correspondent, then
               HUD’s Assistant Secretary for Housing-Federal Housing
               Commissioner and Chairman of the Mortgagee Review
               Board should:

               1E.    Ensures that Decatur’s owners implement adequate
                      procedures and controls to comply with HUD’s
                      requirements for the origination of FHA-insured
                      single-family mortgage loans.

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

               1F.    Takes appropriate administrative action against the
                      owners of Decatur Mortgage Company.

               1G     Obtains a qualified review of the appraisals done for
                      the 41 cases cited in this report to determine if the
                      appraiser properly arrived at a fair property valuation
                      and appropriately raised values when the sale prices
                      changed due to changing gift amounts. If the
                      appraisals are found to be deficient, take appropriate
                      administrative action against the appraiser.




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                                                                                            Finding 2


Inadequate Management Oversight And Quality
              Control Reviews
Decatur Mortgage Company failed to adequately implement its Quality Control process according to
HUD’s requirements. Decatur Mortgage did not review 14 loans that defaulted within the first six
payments after closing. In addition, Decatur did not adequately document what procedures it
performed for the FHA mortgage loans reviewed. We attribute these deficiencies to Decatur’s
inability to access HUD’s Neighborhood Watch system, an ownership relationship with the seller of
the subject properties, and a disregard of HUD’s and its own quality control requirements. As a
result, Decatur was unable to ensure the accuracy, validity, and completeness of its loan origination
operations that contributed to an increased risk of loss to HUD’s FHA insurance fund.



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

                                          •     Establish an adequate written Quality Control Plan
                                                that provides for an independent review by the
                                                mortgagee’s management/supervisory personnel
                                                who are knowledgeable of the required procedures,
                                                and do not have direct loan processing,
                                                underwriting, or servicing responsibilities;

                                          •     Analyze loans that go into default within six months
                                                after closing;

                                          •     Retain for a period of one year the results of quality
                                                control reviews, whether by the mortgagee or an
                                                outside firm;

                                          •     Report violations of law or regulation to HUD; and

                                          •     Include in their Quality Control Plan a provision for
                                                written verification of a mortgagor’s employment,
                                                deposits, gift letter, or other sources of funds.



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                             Decatur Mortgage Company, L.L.C., was owned by two
                             entities in partnership.      The managing owner was
                             Homebuilders Financial Network. The other owner—Dura
                             Homes, Inc., also known as Dura Builders—built and sold
                             all of the homes financed through Decatur Mortgage.

                             Decatur Mortgage Company and its managing owner—
 Deficient Quality Control   Homebuilders Financial Network—did not conduct Quality
 Reviews Done                Control Reviews for 14 early payment default loans as
                             shown in the table below.


                                                                              Included In
                                         FHA Loan Mortgage        Closing       HUD’s
                                          Number    Amount         Date         Review
                                        151-6605466 $152,605       9/5/2002
                                        151-6647913 $167,779      5/28/2002
                                        151-6387115 $164,328     10/19/2001
                                        151-6957663 $127,585     11/27/2002
                                        151-6531249 $126,672     11/30/2001
                                        151-6471089 $148,291       8/1/2002
                                        151-6415426 $119,922      9/14/2001       X
                                        151-6476419 $167,779     11/19/2001       X
                                        151-6476579 $130,935     11/19/2001       X
                                        151-6482988 $120,785      11/8/2001       X
                                        151-6486054 $143,115     11/21/2001       X
                                        151-6486185 $110,229      9/19/2001       X
                                        151-6542156 $153,924      11/5/2001
                                        151-6567251 $151,539     12/31/2001
                                           Totals  $1,985,488                     6

                             Six of the 14 early default loans in the table above were
                             included in HUD’s September 2002 Quality Assurance
                             review.

                             In accordance with HUD Handbook 4060.1 REV-1, all
                             loans going into default within the first six months must be
                             reviewed as part of the Quality Control Plan’s
                             requirements. Until Decatur terminated operations in
                             November 2003, it had relied on its managing owner to
                             conduct the required Quality Control Reviews of its 14
                             early defaulted loans, but this was not done for any of the
                             loans.

                             For reviews that were done, neither Decatur Mortgage nor
                             its managing owner, Homebuilders Financial Network,
                             were able to provide documentation on the procedures or
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                           analyses performed, or what documentation was analyzed
                           or verified. Decatur’s managing owner did Quality Control
                           Reviews on three out of the 41 mortgage loans we
                           reviewed. In the three cases, the Reviews did not identify
                           the origination issues that we found or recommend actions
                           to resolve the deficiencies. These cases are shown in the
                           following table (loan 151-6584501 was cited in HUD’s
                           September 2002 Quality Assurance review).


                              Inadequate Quality Control Review Documentation For
                                                  Reviews Done

                                                                                    HUD's
                             FHA Loan     Mortgage    Closing     Claim Paid       Computed
                              Number      Amount       Date        By HUD          Sale Loss
                           151-6510827    $158,796   10/16/2001      $0                $0
                           151-6527323    $134,842    11/5/2001   $144,970          $70,131
                           151-6584501    $134,893    2/21/2002   $145,898         $62,098
                               Totals     $428,531                $290,868         $132,229



                           Decatur’s managing owner prepared a Quality Control Plan
                           for Decatur Mortgage, but Decatur did not ensure that
                           reviews were done in accordance with the Plan.

                           Decatur did not perform Quality Control Reviews of its
                           loans because it stated that its managing owner—
                           Homebuilders Financial Network—was responsible for
                           conducting all of their quality control reviews based on
                           information Decatur sent to them. This included loans
                           originated during our audit scope—September 1, 2001 to
                           August 31, 2003. Therefore, Decatur Mortgage was unable
                           to ensure the accuracy, validity, and completeness of its
                           loan origination operations.

                           The Branch Operations Manager for Decatur Mortgage
Access To Information On   Company said Decatur’s staff did not have access to
Problem Loans              HUD’s Neighborhood Watch system to identify delinquent
                           loans. He said Decatur did not monitor its own loans
                           because it did not service them, and its sponsors did not
                           report information on loan defaults back to Decatur. The
                           staff at Homebuilders Financial Network also indicated that
                           until mid 2002, they only had limited access to HUD’s
                           Neighborhood Watch system so they were not able to get
                           detailed information about loans going into default.

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                      We do not believe that these reasons relieved Decatur of its
                      responsibility for ensuring that Quality Control Reviews
                      were conducted on its originated loans. Absent of any
                      knowledge of problem loans, Decatur should still have
                      ensured that reviews were done. As a consequence,
                      improper practices were allowed to continue, increasing the
                      risk that more loans would go into default as discussed in
                      Finding 1.



   Auditee Comments   Decatur's owners disagreed with the second finding of this
                      audit report.

                      Decatur's owners asserted that Decatur's Branch Manager
                      oversaw the operations of Decatur's staff with management
                      support of the managing owner Homebuilders Financial
                      Network.     The owners indicated that Homebuilders
                      Financial Network performed quality control reviews over
                      at least 10 percent of Decatur's loan originations each
                      quarter in accordance with its approved Quality Control
                      Plan.

                      Decatur's owners stated that they followed the requirements
                      of the Quality Control Plan in all cases reviewed, but were
                      not required by HUD to record the list of items reviewed or
                      show the analysis done and documents verified in each case
                      reviewed. HUD only requires quality control reports to
                      identify any deficiencies noted.

                      The owners asserted that the deficiencies we identified in
                      this report were underwriting issues that Decatur was not
                      responsible for, and the Quality Control Reviews were not
                      deficient because they did not identify these same issues.
                      Decatur's owners also assert that they were not given
                      access to early default information in HUD's Neighborhood
                      Watch System until mid 2002.

                      We included Decatur's complete response to our report and
                      the findings in Appendix E of this report. We deleted
                      borrower’s names from the response.




    OIG Evaluation
2004-CH-1009    Of          Page 22
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                                                                     Finding 2


                  Although Decatur's owners state that they followed their
                  approved Quality Control Plan, they provided no
                  documentation to show that they did for the cases they
                  reviewed.

                  HUD's Mortgagee Approval Handbook 4060.1 REV-1,
                  dated September 1993, paragraph 6-3(D) requires the
                  quality control reviewers to obtain new credit reports.
                  Paragraph 6-3(E) requires the quality control plan to
                  provide for the written reverification of the mortgagor's
                  employment, deposits, gift letter, or other sources of funds.
                  These requirements indicate that the quality control
                  reviewer will be obtaining documentation needed to
                  perform the reviews.

                  The sole documentation that Decatur's owners were able to
                  provide for each loan reviewed was a one-page summary
                  report showing that Decatur did a good job, or showing
                  what minor problems were identified and corrected.

                  Decatur's owners stated that they did everything required
                  by the Quality Control Plan for all loans reviewed, but
                  provided no support for any of the loans reviewed. If a
                  lender does not document what they did to verify whether
                  the loan origination and processing was done correctly,
                  HUD and the lender lack any real assurance that the lender
                  was prudent in conducting its reviews.

                  We included our analysis of Decatur's complete response in
                  Appendix E of this report following Decatur's response.



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

                  2A.     Determines whether Decatur’s deficiencies related to
                          the Quality Control Reviews warrant any actions
                          against Decatur’s sponsors for not ensuring the
                          required plan and reviews were effectively
                          implemented by Decatur.
                  If determined that Decatur Mortgage Company is able to
                  reapply for approval as an FHA lender, then HUD’s Assistant
                  Secretary for Housing-Federal Housing Commissioner
                  should:
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               2B.   Require Decatur Mortgage Company to take the
                     needed actions to ensure the required Quality Control
                     Plan reviews are conducted and corrective actions are
                     taken and documented for all reported deficiencies.




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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 include the systems for
measuring, reporting, and monitoring program performance.



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

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

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

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

                                     We assessed all of the relevant controls identified above
                                     during our audit of Decatur Mortgage Company’s loan
                                     origination practices and quality control process.

                                     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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                      Decatur Mortgage Company did not operate its loan
                      origination activities in accordance with HUD’s Single
                      Family Housing Program requirements.          Specifically,
                      Decatur did not: originate FHA-insured loans in accordance
                      with HUD’s requirements and prudent lending practices; and
                      adequately implement its quality control process according
                      to HUD’s requirements (see Findings 1 and 2).

                          Validity and Reliability of Data

                      Decatur violated HUD’s requirements regarding FHA loan
                      origination process (see Finding 1). Decatur did not
                      adequately implement its policy for doing Quality Control
                      Reviews (see Finding 2).

                      •   Safeguarding Resources

                      Decatur failed to originate FHA-insured loans in accordance
                      with HUD’s requirements and prudent lending practices that
                      exposed HUD to a risk to the FHA insurance fund (see Finding
                      1).




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Follow Up On Prior Audits
This is the first audit of Decatur Mortgage Company, L.L.C. by HUD’s Office of Inspector General.

The latest Independent Auditor’s Report for Decatur covered the period ending December 31, 2002.
The report did not contain any findings.

In September 2002, HUD’s Quality Assurance Division conducted a Title II origination review
of Decatur’s home office in Indianapolis, Indiana. The review resulted in 10 findings to include:
having a non-conforming Quality Control Plan; not performing Quality Control Reviews on
early default loans; unverified source and adequacy of funds; documents being handled by
interested third parties; inadequate documentation of gift transfers; failure to demonstrate the
adverse affect of buy down expirations; inadequate income and employment documentation; not
establishing borrower income stability; omitting liabilities and using unrealistic tax figures; and
prudent underwriting not done in evaluating borrower credit histories. On May 5, 2003, the two
findings relating to the Quality Control Plan were resolved.

Eight of the 41 cases we reviewed were included in the September 2002 Quality Assurance
Review. HUD and the sponsor for the eight loans, entered into an indemnification agreement
including the eight loans we cited that were included in the Quality Assurance review. The
indemnification agreement covering the eight loans was effective August 12, 2004.




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                                                                                    Appendix A

Schedule Of Questioned Costs And
Recommendation For Funds To Be Put To
Better Use
Recommendation                       Type of Questioned Cost               Funds Put To
   Number                     Ineligible 1/         Unsupported 2/         Better Use 3/
     1A                        $675,063
     1B                                             $356,723
     1C                                                                   $4,070,036
    Totals                     $675,063              $356,723             $4,070,036


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

Loan Processing Deficiencies Chart
                                                                                                     In HUD’s
                                                         Credit Ability Deposit/ Under Third        September
  FHA Loan     Mortgage     Closing     Income Appraisal Report To Pay    Gift   Stated Party          2002
   Number      Amount        Date        Issue  Issue    Issue Issue     Issue Costs Support Sponsor Review
 151-6605466    $152,605     9/5/2002     X       X       X      X      X       X      X     73850
 151-6647913    $167,779    5/28/2002     X       X              X      X                    73850
 151-6387115    $164,328 10/19/2001       X               X      X      X                    38092
 151-6396198    $132,559    9/24/2001     X       X       X      X      X       X            38092
 151-6907158    $117,080    9/27/2002             X       X      X      X       X            73850
 151-6957663    $127,585 11/27/2002                       X      X      X                    73850
 151-6610262    $153,772 12/31/2001                       X      X      X       X            38092
 151-6442972    $144,637    9/24/2001             X              X      X       X            38092
 151-6561313    $154,686    1/30/2002     X       X       X      X      X       X      X     38092
 151-6485246    $150,727 11/19/2001       X       X              X      X       X      X     38092
 151-6510827    $158,796 10/16/2001               X       X             X       X            38092
 151-6531249    $126,672 11/30/2001       X               X      X      X       X            38092
 151-6537560    $141,288 10/30/2001               X              X      X       X            38092
 151-6550730    $133,980 11/15/2001       X       X       X      X      X       X            38092
 151-6574687    $160,014    3/11/2002             X       X      X      X       X      X     38092      X
 151-6611721    $136,720 12/27/2001               X       X      X      X       X            38092
 151-6471089    $148,291     8/1/2002                     X      X      X                    38092
 151-6443404    $142,607 10/15/2001       X               X             X       X            38092
 151-6838872    $167,728    8/30/2002     X       X       X      X      X       X            38092
 151-6688221    $139,156    5/15/2002             X                     X       X            38092
 151-6415426    $119,922    9/14/2001     X       X              X      X       X      X     38092      X
 151-6649076    $164,886    4/24/2002             X       X      X      X       X            38092
 151-6642980    $149,306    2/18/2002             X       X      X      X       X            38092
 151-6589970    $167,576    2/22/2002             X       X      X      X       X      X     38092
 151-6463779    $138,852    9/14/2001     X       X       X      X      X       X            38092
 151-6476419    $167,779 11/19/2001                       X             X       X            38092      X
 151-6476579    $130,935 11/19/2001       X       X       X      X      X       X      X     38092      X
 151-6477778    $128,651    11/7/2001             X              X      X       X            38092
 151-6482988    $120,785    11/8/2001     X       X       X      X      X       X      X     38092      X
 151-6483461    $165,800    12/3/2001             X       X      X      X       X            38092
 151-6486054    $143,115 11/21/2001       X       X       X      X      X       X            38092      X
 151-6486185    $110,229    9/19/2001     X                      X      X       X            38092      X
 151-6490797    $111,954    9/21/2001             X              X      X       X            38092
 151-6494487    $105,864 11/28/2001               X                             X            38092
 151-6507102    $132,660 10/31/2001               X       X      X      X       X      X     38092
 151-6527323    $134,842    11/5/2001     X       X       X      X      X       X            38092
 151-6542156    $153,924    11/5/2001     X       X       X      X      X       X            38092
 151-6567251    $151,539 12/31/2001               X              X      X       X            38092
 151-6584264    $156,259     1/8/2002             X              X      X       X      X     38092
 151-6584501     $134,893   2/21/2002                            X       X     X             38092      X
 151-6588010     $116,623   3/11/2002             X             X       X       X            38092
     Totals    $5,827,404                18      32       27    36      40     37     10                8




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Narrative Case Presentations
FHA Case Number: 151-6605466

Mortgage Amount: $ 152,605

Section of Housing Act: 203B

Date of Loan Closing: 09/05/02

Current Status: Active – Currently in default

Prior Status:   Foreclosure Started 6/01/03 (Default Status Date: 07/30/04). No claim or loss
                determined.

Payments Before First Default Reported:      5

Unpaid Principal Balance:     $151,583

Summary:

The appraisal report issued by Appraiser VIDEWC dated January 11, 2002 was more than six
months prior to the closing. The report was amended June 27, 2002, but the appraisal report
does not indicate what was amended.

Decatur Mortgage did not verify the source of the earnest money deposit. On the date the $1,000
check was written, the bank statement balance was less than $10. The source of a $1,000 deposit
to the borrower’s account two days later was not determined. The borrower informed us that the
sales person provided her with the $1,000 earnest money deposit since she did not have it.

Decatur did not document the timing of the $4,652 gift fund transfer from the nonprofit donor,
Nehemiah, to the Settlement Agent and the $5,152 seller contribution back to the donor. The
undocumented transfer from the donor occurred first.

Decatur did not verify rental income receipt for the prior residence not sold. The underwriter
considered $603 per month as the mortgage on the prior residence, but a Credit Union draft
history indicated an automatic withdrawal for the mortgage of $715. The rental agreement was
dated the same day as the subject sales agreement. Monthly rental per the agreement and an un-
cancelled check copy were not deposited per bank statements. The borrower informed us the
sales staff gave her a blank lease form that she filled out and had her son’s girlfriend sign. The
lease and the rent check used as support for not using the mortgage on the borrower’s prior
residence were not genuine documents. The borrower said she just quit paying the mortgage on
her prior residence. The borrower also said she was not questioned about income, debts, or the
lease by Decatur’s staff.



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The underwriter (#8968) estimated property taxes at $144 per month. A March 9, 2002 tax bill
in Decatur’s file showed property taxes of $1,456 for six months or approximately $243 per
month.

Decatur did not ascertain that the borrower had established good credit after a 1997 Chapter 7
Bankruptcy and the borrower would not be adversely affected as the buy down period expired.
The credit reports showed 14 delinquent accounts after bankruptcy and the borrower was using a
credit counselor to deal with delinquent accounts. Two delinquent accounts were paid off out of
closing proceeds. The ratios computed by the underwriter were just under HUD’s guidelines
using the first year payment of the buy down period. A credit union draft history did not show
any ability to save.

Decatur did not document any inquiry of the six credit inquiries on two credit reports. Decatur
did not verify a credit union account from which transfers were indicated on a credit union
statement in Decatur’s file.

Letters from a credit counseling agency and the borrower’s insurance company were faxed from
the borrower’s place of employment. The borrower informed us that she faxed the letters from
the counseling agency and the insurance company, and she provided her W-2 forms and pay
statements to the sales staff. The borrower informed us the sales staff had her sign blank pieces
of paper that the sales staff used to write explanatory letters. The borrower said the explanatory
letters were incorrect.

The underwriter used $3,818 per month as income, but the verification of employment only
supported $3,668 per month.

This loan went into default after only five mortgage payments were received. Decatur’s
management did not identify this case as an early default and perform a quality control review on
this loan.




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FHA Case Number: 151-6647913

Mortgage Amount: $ 167,779

Section of Housing Act: 203(b)

Date of Loan Closing: 05/28/02

Current Status: Delinquent, but reinstated by mortgagor (As of July 30, 2004).

Prior Status: Delinquent

Payments Before First Default Reported: 3

Unpaid Principal Balance:    $165,037.

Summary:

The Appraiser (JWM17R) did not adequately explain why she used two comparable properties
that were older homes over a mile from the subject property and were sold more than six months
earlier than the appraisal.

Decatur Mortgage did not verify the source of the earnest money deposit of $1,718. The savings
account did not show the funds coming out of the borrower’s account. Decatur also did not
adequately document the source of the $5,000 money order gift funds from the borrower’s Sister.
No bank statements were provided to show where the cash came from to buy the bank cashiers
check provided.

Decatur did not adequately establish that the borrower had established good credit after a 1996
bankruptcy. Credit reports showed derogatory credit and lack of money management ability
since the bankruptcy. Delinquent borrower debt was paid from borrower proceeds at closing.

Decatur did not document the timing of the wire-transferred gift of $5,154 from a non-profit
donor, Nehemiah, and the seller’s contribution of $5,654 back to the donor. The gift transfer
from the donor actually occurred first.

Decatur’s file documents indicated that the co-borrower was receiving disability income prior to
closing, but the underwriter (#8968) used the higher income from the co-borrower’s
employment. Decatur did not document the co-borrower’s most recent pay stub.

This mortgage went into default after only three payments were received. Decatur’s
management did not identify this loan as an early default and perform a quality control review.




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FHA Case Number: 151-6387115

Mortgage Amount: $ 164,328

Section of Housing Act: 203(b)

Date of Loan Closing: 10/19/01

Current Status: Default – First legal action to foreclose started 10/1/02.

Prior Status:   Not Applicable (status date July 30, 2004)

Payments Before First Default Reported: 5

Unpaid Principal Balance:     $163,299

Summary:

Decatur Mortgage did not verify the source of funds for the three Travelers Express Money
Orders totaling $1,748 for the earnest money deposit.

Decatur did not adequately show that the borrower established good credit after a June 1999
Chapter 13 Bankruptcy. Various delinquent accounts of the borrower were paid off at closing.
More than $1,051 in bad debts was paid off at closing than funds provided by the borrower so
gift funds were partly used to pay off bad debts.

The underwriter (#V175) did not explain how the borrower would be expected to make the
higher mortgage payments as the buy down period expired.

The mortgage credit ratios calculated by the underwriter exceeded HUD’s guidelines and no
compensating factors were provided.

The underwriter used a $325 per month child support income, but Decatur did not provide
documentation showing that the payments were being received and were expected to continue.

Decatur did not document any investigation into various credit inquiries reported on the credit
report.

Decatur did not document the timing of the gift wire transfer of $7,407 from the Housing Action
Resource Trust and the contribution by the seller back to the Trust of $8,357. The gift funds
were actually received first.

This loan defaulted after only five payments were received, but Decatur’s management did not
identify this loan as an early default and perform a quality control review.


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FHA Case Number: 151-6396198

Mortgage Amount: $ 132,559

Section of Housing Act: 203(b)

Date of Loan Closing: 09/24/01

Current Status: Delinquent but reinstated (as of 7/30/04).

Prior Status:   In Default

Payments Before First Default Reported: 13

Unpaid Principal Balance:     $128,619

Summary:

Decatur Mortgage did not document the timing of the $4,041 wire transfer gift from a non-profit
donor, Nehemiah, or the $4,841 wire transfer of the seller’s contribution back to the donor. The
gift actually was transferred first.

Decatur did not adequately show that the borrower established good credit since a Chapter 13
Bankruptcy discharge in 1999. The borrower had a judgment satisfied in February 2001 and had
three delinquent accounts. Credit reports showed the borrower just under his credit limits;
however, Decatur did not show the borrower had improved his use of credit and his attitude
towards debt. The bank statements in Decatur’s file do not show an ability to save.

Decatur did not verify the actual source of funds for the earnest money deposits totaling $1,125.
According to documents in Decatur’s file, the initial earnest money check of $500 was replaced
by a money order but Decatur did not document the source of those funds. Bank statements
showed only a $38 balance.

Decatur did not adequately verify rental income from the borrower’s prior residence to justify
lowering the debts in the income sufficiency analysis. Decatur obtained a lease from the
borrower dated the same day as the sales agreement showing rental income of $414 per month.
Decatur did not provide any documentation showing that any of the rent payments required by
the lease were actually received by the borrower. The bank statements did not show deposits of
the rent receipts. The borrower told us that Decatur had him get his sister (who was living in the
former residence without a lease) to sign a formal lease agreement, but that Decatur never
required him to provide evidence that he was actually receiving the rental payments.

The underwriter (#3248) calculated mortgage credit analysis ratios that exceeded HUD’s
guidelines, but did not provide compensating factors.


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Decatur did not document any investigation of two credit inquiries identified on the credit
reports.

The Appraiser (JWM17R) stated that sales in the area occurred within three months, but no
explanation was provided to justify why two comparable properties were sold eight months and
11 months prior to the appraisal. The other two appraisals were FHA insured properties from the
Appraiser’s own files. Three of the four properties used were in the subject property’s
subdivision and may have been built by the same builder/seller as the subject property.




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FHA Case Number: 151-6907158

Mortgage Amount: $ 117,080

Section of Housing Act: 203(b)

Date of Loan Closing: 09/27/02

Current Status:       Delinquent (as of 7/30/04) – Loan modification claim of $750.00 paid by
                      HUD on 5/2/04.

Prior Status:   Not Applicable

Payments Before First Default Reported: 12

Unpaid Principal Balance:    $123,113

Summary:

The Appraiser (PWE2TC) used two comparable properties within six blocks in the same
subdivision as the subject property that may have been built by the same builder/seller. The
other two comparable properties used were over a mile from the subject property. The Appraiser
stated that supply and demand were in balance, but lacked current sales in the area.

Decatur did not verify the source of the $1,190 earnest money deposit. Bank statements did not
show the borrower provided the money and the statements do not indicate an ability to save. The
borrower told us that she provided a $500 earnest money check, which was given back, and of
the $800 she gave at closing, she received $746 back.

Decatur did not document the timing of the $3,569 gift wire transferred from a non-profit donor,
Nehemiah, or the $4,069 in seller contribution wire transferred to the donor. The gift actually
occurred first.

The underwriter (ZLPR Loan Prospector) computed mortgage analysis ratios exceeding HUD’s
guidelines, but did not provide adequate compensating factors. The underwriter also did not
explain how the borrower would not adversely be affected as the buy down period expired.

Decatur and the underwriter used an unrealistically low figure of $90 per month for property
taxes based on unimproved land. The County provided us with the actual taxes assessed to the
borrower of $1,689 or approximately $141 per month.

Decatur did not show that the borrower established good credit. The borrower owed $18,830 in
debts. The credit reports showed three delinquent accounts.
Decatur did not document investigation of three credit inquiries shown on the credit report.


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FHA Case Number: 151-6957663

Mortgage Amount: $ 127,585

Section of Housing Act: 203(b)

Date of Loan Closing: 11/27/02

Current Status: In Default (as of 7/30/04).

Prior Status:   In Default

Payments Before First Default Reported: 5

Unpaid Principal Balance:     $126,400

Summary:

Decatur Mortgage did not document that the borrower actually provided the $500 earnest money
deposit.

Decatur did not adequately show that the borrower was an acceptable credit risk. The credit
reports identified $2,574 in delinquent borrower debt that was paid off at closing from borrower
proceeds. One of the borrower’s explanations for delinquent accounts was that his wife didn’t
pay them and didn’t tell him (not a circumstance out of the borrower’s control).

Decatur did not document the timing of the $3,889 wire transfer gift from a non-profit donor
(Nehemiah) and the seller contribution of $4,389 wire transferred back to the donor. The gift
actually was sent first.

Decatur did not document any investigation of a credit inquiry reported on the credit report.

This loan defaulted after only five payments had been received but Decatur’s Management did
not document a Quality Control Review being done for this loan as required.

The underwriter (W430) did not show how the borrower would not adversely be affected as the
buy-down period expired.




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FHA Case Number: 151-6610262

Mortgage Amount: $ 153,772

Section of Housing Act: 203(b)

Date of Loan Closing: 12/31/01

Current Status: Default (as of 7/30/04)

Prior Status:   Not Applicable

Payments Before First Default Reported: 15

Unpaid Principal Balance:     $149,094

Summary:

Decatur Mortgage did not document the actual provision of the $1,562 earnest money deposit.
The borrower’s only investment was the $1,562 indicated on the settlement statement. At
closing the settlement agent paid $6,009 in settlement proceeds, which exceeded the borrowers’
investment by $4,447. The excess debt payment was covered out of the $10,687 gift from the
non-profit donor.

Decatur did not document the timing of the $10,687 gift wire transferred from the Housing
Action Resource Trust or the $11,637 seller contribution wire transferred back to the Trust. The
gift was actually wire transferred first. The seller added the amount of the contribution to the
non-profit donor into the calculation of the sales price according to documents in Decatur’s file.

Decatur and the underwriter (AF58) used an unreasonably low estimate of property taxes in the
mortgage credit analysis to qualify the borrower. The underwriter estimated $40 per month. The
County Treasurer actually assessed $1,874 against the property, or approximately $156 per
month.

Decatur did not document any investigation of a credit inquiry shown on the credit report.

Decatur and the underwriter did not show how the borrower would not be adversely affected as
the buy down period expired.

Decatur did not show how the borrowers were acceptable credit risks. The co-borrower had a
Chapter 13 Bankruptcy discharged in April 1998. The credit report showed a delinquent $12
medical bill. Gift funds from a non-profit donor were used to pay off a mobile home mortgage
and an IRS lien at closing. Bank statements do not show a pattern of savings.
The Appraiser (VIDEWC) used two out of three comparable properties from the subject
property’s subdivision, which may have been built and sold by the same builder/seller.

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HUD’s file contained two sales agreements with the same date. The higher sales amount was
used and included a higher gift figure from the non-profit donor. The higher price covered the
extra contribution to the non-profit donor that the seller would have to make.




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FHA Case Number: 151-6442972

Mortgage Amount: $ 144,637

Section of Housing Act: 203(b)

Date of Loan Closing: 09/24/01

Current Status: Default (as of 7/3004) – First legal action to start foreclosure 9/1/03

Prior Status: Not applicable

Payments Before First Default Reported:       17

Unpaid Paid Balance: $142,694

Loss on Property Sale:

Summary:

Decatur Mortgage did not document the timing of the $4,409 wire transfers from the non-profit
donor (Nehemiah) and the wire transfer of $5,209 from the seller's proceeds back to the donor.
The gift was actually transferred first.

Decatur did not show how the borrowers were acceptable credit risks. The credit report showed
11 debts transferred to collection agencies, and five judgments. The borrower paid off two
judgments before closing but Decatur did not document how they were paid. Two of the
delinquent accounts were paid off at closing. Bank statements do not show a pattern of saving.
Decatur did not show how the borrowers improved their attitude towards debt but merely paid
off delinquent accounts.

Decatur and the underwriter (V175) did not show how the borrowers would not be adversely
affected as the buy down period expired.

Decatur and the underwriter used an unreasonably low estimate of property taxes for mortgage
credit analysis. The underwriter estimated $40 per month for taxes. The actual taxes assessed
by the County Treasurer were $3,120, or approximately $260 per month.

Three of the five comparable properties were not sold within six months of the appraisal and the
Appraiser did not adequately justify that. The Appraiser (JWM17R) did not adequately justify
using two comparable properties that were over a mile from the subject property.




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Appendix C


FHA Case Number: 151-6561313

Mortgage Amount: $ 154,686

Section of Housing Act: 203(b)

Date of Loan Closing: 01/30/02

Current Status:       Delinquent (as of 7/30/04) Reinstated 2/1/04
                      HUD paid a Loan Modification Claim of $650 on 4/22/04.

Payments Before First Default Reported: 11

Unpaid Principal Balance:    $153,475

Summary:

Decatur Mortgage did not document the timing of the wire transfer of the $9,214 gift from the
Housing Action Resource Trust to the settlement agent, and the seller contribution wire
transferred back to the Trust. The gift was actually transferred first.

Decatur did not adequately support the earnest money deposit of $1,523. The borrower’s bank
statements showed the earnest money checks being cashed but showed large unexplained
deposits to the account just before the checks were issued. The bank statements did not show a
pattern of savings.

The underwriter (Y471) did not adequately consider the borrowers’ credit worthiness. The
borrower was discharged from Chapter 7 Bankruptcy in February 1996. The credit report
showed judgments and collection accounts since the bankruptcy.

According to the HUD-1 Settlement Statement, the borrowers paid $1,523 as earnest money and
gave another $749 at closing—for a total investment of $2,272. The settlement agent paid a total
of $5,891 out of closing proceeds to pay off the borrowers’ delinquent accounts. The non-profit
donor paid this negative investment of the borrower out of the $9,214 gift.

Decatur and the underwriter improperly grossed up monthly child support payments and thereby
overstated the borrowers’ income. To support the child support income, Decatur obtained a copy
of a court order and a child support payment history, but these documents were faxed to Decatur
from one of the seller’s development sales offices, instead of from the borrower and/or court.

The underwriter did not show how the borrowers would not be adversely affected as the buy-
down period expired.




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Decatur and the underwriter used an unreasonably low estimate of property taxes in the
mortgage credit analysis. The underwriter used an estimate of $25 per month for property taxes
based on undeveloped land. Marion County actually assessed $1,878 in taxes on the subject
property, or about $156 per month.

The Appraisal (by JWM17R) used one comparable property that was over a mile from the
subject property, and two of the comparable properties were over six months before the
appraisal.

In addition, Decatur’s loan file contained two appraisal reports. The first—dated January 7,
2002—showed a sales price of $152,349 and an appraised value of $153,000. The second
appraisal report was amended January 8, 2002 to show a revised sale price of $157,141. The
revised appraisal report used the same comparable properties but the comparables were adjusted
upwards to a new appraised value of $157,500.

Decatur did not document any investigation of credit inquiries that were reported on the credit
reports.




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Appendix C


FHA Case Number: 151-6485246

Mortgage Amount: $ 150,727

Section of Housing Act: 203(b)

Date of Loan Closing: 11/19/01

Current Status: Foreclosure completed 6/1/04 (as of 7/30/04).

Payments Before First Default Reported: 7

Unpaid Principal Balance:     $149,055

Summary:

Decatur Mortgage’s loan file contained a worksheet showing how the builder/seller added the
anticipated gift from the non-profit donor [$6,393] and the seller fee [$950] (the seller pays the
total amount to the non-profit donor as a contribution) into the computation of the sales price of
the house. The seller modified the sales agreement with the buyer from a price of $151,091 to
$153,116, to cover an increase of costs relating to switching from one non-profit donor to
another.

On the date of closing, Decatur requested the Appraiser to change the appraisal due to the
increased sales price. The Appraiser (JWM17R) revised the reports estimated value from
$152,000 up to $153,500, which covered the revised sales price.

Decatur did not document the timing of the wire transfers of the gift from the Housing Action
Resource Trust ($6,393) and the seller contribution ($7,343) back to the Trust. The gift was
actually wire transferred first.

Decatur did not adequately verify the source of the borrower’s earnest money deposit. The seller
provided receipts showing three money orders of $500 each, and a check for $1,000 for earnest
money. The bank statements showed the check for $1,000 being cashed but did not show
withdrawals corresponding to the money order purchases. Decatur did not document how the
money orders were obtained. The borrower’s bank statements showed very little cash and low
average balances. Decatur did not investigate the large deposit to the account just prior to the
$1,000 check being issued. A sneak preview loan application in Decatur’s file indicated that
source of funds for the earnest money would be a “loan from Manager.”

According to the HUD-1 Settlement Statement, the borrowers provided earnest money of $1,500
but received $195 back at closing—for a net investment of $1,305. The underwriter (V175) had
cited as a condition of approval that there be no cash out by the borrowers. The settlement agent
paid $2,378 at closing to pay off four of the borrower’s delinquent accounts. This negative
investment of the borrower of $1,073 to pay off the borrower’s delinquent accounts was paid
from the $6,393 gift from the non-profit donor.
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Decatur did not show how the borrower’s attitude towards credit made them an acceptable risk.
The credit reports showed a history of bad debts, but these were only addressed by paying them
off at closing.

The underwriter (V175) improperly grossed up Supplemental Social Security income and
overstated this income by $119 per month. Decatur did not establish that this income would
continue for at least three years as conditioned by the underwriter.

Decatur obtained the verification documents for the Social Security benefits from the seller.
Decatur also allowed the seller to provide a letter from the servicer of four student loans
confirming that the loans were in forbearance.

Decatur did not obtain evidence that the borrowers were actually receiving rent payments from
their prior residence (a mobile home) as indicated by a lease in HUD’s loan file. The
underwriter did not include the mobile home mortgage payment of $349 per month as a liability
in the mortgage credit analysis. The person who signed the lease told us that she never moved
into the mobile home owned by the borrowers, and never made any lease payments to the
borrowers.

Decatur and the underwriter used an unreasonably low estimate of property taxes in the
mortgage credit analysis. The underwriter used $25 per month for taxes. Marion County
actually assessed taxes on the property as a completed home that amounted to approximately
$167 per month.

The underwriter computed a Total Fixed Payment to Income Ratio of 45.7 percent, which
exceeded HUD’s guideline. The underwriter did not provide compensating factors.

The underwriter did not show how the borrower would not adversely be affected as the buy-
down period expired.




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Appendix C


FHA Case Number: 151-6510827

Mortgage Amount: $ 158,796

Section of Housing Act: 203(b)

Date of Loan Closing: 10/16/01

Current Status: In Default – Foreclosure started 7/1/04 (as of 7/30/04).

Payments Before First Default Reported: 16

Unpaid Principal Balance:     $154,467

Summary:

Decatur Mortgage’s loan file showed a receipt from the seller that the borrower provided a
$10,000 check as earnest money deposit, but the HUD-1 does not give the borrower credit for
this deposit and reduce the mortgage. Receipts and check copies show that the borrowers gave
$500 on September 15, 2001, and another $10,000 on September 20, 2001. On September 19,
2001, the borrower’s Mother-in-Law provided a $20,000 gift in the form of a Cashier’s Check.
A bank verification showed that after the gift was deposited, the borrowers had a cash balance of
about $21,541 after the gift was deposited. Bank statements in Decatur’s file did not show a
pattern of savings or show the earnest money deposits being withdrawn. The HUD-1 showed the
borrowers bringing $15,260 to closing. The borrower told us that he provided the $10,000 to the
seller but never received credit for the deposit.

Decatur did not establish that the borrowers improved their attitude towards credit and were
acceptable credit risks. The credit report identified 19 delinquent loans and accounts in
collection. At closing, the settlement agent paid $5,074 to pay off borrower bad debts.

Decatur and the underwriter (H527) used an unreasonably low estimate of property taxes in the
mortgage credit analysis. The underwriter used $25 per month for taxes as provided by Decatur
but was based on the taxes for undeveloped land. The actual taxes assessed on the property as a
completed home were $2,307, or approximately $192 per month.

The credit reports reported an additional Social Security number for the borrower and two
additional numbers for the co-borrower. Decatur did not document any investigation into these
additional Social Security numbers. The borrower said that Decatur never asked him about the
Social Security numbers.

The Appraiser (JWM17R) did not adequately justify using three of four comparable properties that
were over a mile from the subject property. One comparable was over three miles away and two
were over five miles away. Two of the comparable properties were sold over six months prior to the
subject, including the one comparable that was within a mile, without adequate explanation.

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This loan was given a quality control review by Decatur’s managing owner. The review did not
disclose any deficiencies, and the documentation did not indicate what was done to review the
loan.




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Appendix C


FHA Case Number: 151-6531249

Mortgage Amount: $ 126,672

Section of Housing Act: 203(b)

Date of Loan Closing: 11/30/01

Current Status:       Terminated – Conveyed to HUD 12/01/03; Claim of $133,003 Paid on
                      4/4/04; Additional claim of $3,280 paid on 5/9/04.

Payments Before First Default Reported: 6

Unpaid Principal Balance:    $125,715

Loss on property resale: $60,944

Summary:

Decatur Mortgage did not document the source of funds for the $1,275 earnest money deposit
from the borrower. Bank statements did not demonstrate an ability to save or the payment of the
earnest money deposit.

According to the HUD-1 Settlement Statement, the only funds provided by the borrower was the
$1,275 earnest money deposit. At closing, the settlement agent paid a total of $6,950 to pay off
delinquent accounts of the borrower. The negative investment by the borrower of $5,675 was
paid out of the $9,860 gift provided by the Housing Action Resource Trust, a non-profit donor.
Decatur did not show how the borrower was an acceptable credit risk or had improved her
attitude towards debt.

Decatur did not document any investigation of two credit inquiries that were reported on the
credit report.

The underwriter (V175) did not document how the borrower would not be adversely affected as
the buy down period expired.

The underwriter used about a $500 per month higher income figure for the borrower than the
amount supported by the employment verification.

Decatur did not document the timing of the $9,860 gift wire transferred by the non-profit donor,
or the $10,810 seller contribution back to the donor. The gift was actually transferred first.

Decatur and the underwriter used an unrealistically low estimate of property taxes for mortgage
credit analysis. The underwriter used $40 per month as an estimate for property taxes but the
County actually assessed approximately $108 per month as a newly completed home.

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According to a home cost itemized worksheet in Decatur’s loan file, the seller added the
contribution that it would have to make to the non-profit donor into the sales price of the subject
property.

Although this mortgage defaulted after only six payments were made, Decatur’s managing
owner did not perform a quality control review of this loan.




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Appendix C


FHA Case Number: 151-6537560

Mortgage Amount: $ 141,288

Section of Housing Act: 203(b)

Date of Loan Closing: 10/30/01

Current Status: In Default but active. Foreclosure legal action started 3/1/03. (As of 7/30/04).


Payments Before First Default Reported: 9

Unpaid Principal Balance:     $138,530

Summary:

The Appraiser (JWM17R) used four comparable properties that were all located within 4 blocks
of the subject property in the same subdivision. The seller of the subject is the builder, so the
comparables were likely built and sold by the same seller. Two comparables were sold over a
year before the subject. The Appraiser stated that supply and demand were in balance but lacked
current sales data for the area.

Decatur did not document the source of funds for the borrower’s $2,000 earnest money deposit
shown on the HUD-1 Settlement Statement. From Decatur’s file, the seller gave a letter stating
that $1,000 was provided as earnest money provided as two personal checks of $500 each. The
bank statements did not cover the period the checks were provided and did not show the balances
and checks being cashed. The HUD-1 showed a $2,000 deposit. The borrower told us that she
only provided $1,000.

The HUD-1 Settlement Statement showed a $2,000 earnest money deposit and the borrower
received $313 back at closing, leaving a net investment of $1,687 (not considering the overstated
deposit). At closing the settlement agent paid a total of $6,209 to pay off the borrower’s
delinquent debts. This negative investment of $4,522 was paid from the $10,306 gift from the
Housing Action Resource Trust, a non-profit donor.

Decatur and the underwriter did not show why the borrower was an acceptable credit risk. The
credit report showed six delinquent accounts and three civil judgments. These items show a lack
of money management and willingness to pay debts. The paying off of the $6,209 in delinquent
accounts by the settlement agent did not show an improvement in the borrower’s attitude toward
debt.

Decatur did not document the timing of the $10,306 gift transfer from the Housing Action
Resource Trust, or the $11,256 seller contribution back to the Trust. The gift was actually
transferred first.

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The underwriter (Y471) did not show how the increased payments as the buy-down period
expired would not adversely affect the borrower.

Decatur and the underwriter used an unrealistically low estimate for property taxes in the
mortgage credit analysis. The underwriter used $40 per month for taxes (unimproved land). The
County actually assessed $2,116 on the completed property, or about $176 per month.

Decatur did not verify that the borrower’s mother was actually paying car payments of $151 per
month for the borrower to justify omitting the car payments from the mortgage credit analysis.




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Appendix C


FHA Case Number: 151-6550730

Mortgage Amount: $ 133,980

Section of Housing Act: 203(b)

Date of Loan Closing: 11/15/01

Current Status:       Foreclosed and conveyed to HUD on 1/1/04 – Claim paid $142,6001 on
                      1/19/04; Additional claim of $5,853 paid on 3/18/04 (as reported 7/30/04).

Payments Before First Default Reported:     7

Unpaid Principal Balance:    $132,998

Loss on resale of property: $67,282

Summary:

Decatur Mortgage did not document the timing of the gift wire transfer of $4,083 from the non-
profit donor (Nehemiah) and the seller contribution of $4,883 back to the donor. The gift was
actually transferred first.

Decatur did not adequately document the source of the earnest money deposit. The deposit was
provided by a $500 check and an $860 check. The bank statement shows the $500 check cashed
but not the second check. The bank statements don’t show if there was adequate cash to make
the second payment. No savings pattern was established. The bank statements showed a balance
in July 2001 of $57. In July the borrower had an unexplained deposit of $6,000 and an
unexplained withdrawal of $4,831. Bank statements were not provided for the period where the
earnest money was provided.

Decatur and the underwriter (AF58) did not show why the borrower was an acceptable risk. The
credit reports show the borrower had past judgments and a Chapter 7 Bankruptcy in 1994. In
1995 the borrower had a judgment of $25,200 on a mortgage. The credit report showed another
judgment in 1998.

The underwriter included unconfirmed bonuses and overtime in the income for mortgage credit
analysis.

Decatur and the underwriter used an unrealistically low estimate of property taxes in the
mortgage credit analysis. The underwriter used $25 per month for taxes, which approximated
the taxes on the undeveloped land. The County actually assessed taxes of $1,925 on the
completed subject property, or about $160 per month.



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Decatur did not document any investigation of an additional Social Security number identified
on the credit report. Decatur also did not investigate all credit inquiries reported on the credit
report.

The Appraiser (JWM17R) used four comparables. All four comparables were FHA Insured
sales. Three of the four comparables were within 3 blocks of the subject property and were in
the same subdivision and likely built and sold by the same builder/seller as the subject. Two of
the four comparables were sold over 6 months prior to the subject appraisal. The Appraiser said
that supply and demand were in balance.




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Appendix C


FHA Case Number: 151-6574687

Mortgage Amount: $ 160,014

Section of Housing Act: 203(b)

Date of Loan Closing: 03/11/02

Current Status:       Delinquent but reinstated by mortgagor 4/1/04 (as of 7/30/04)
       Indemnification agreement with Sponsor, August 12, 2004 through August 12, 2009.
       Partial claim of $12,233 paid by HUD on 3/20/2004.

Prior Status: In Pre-foreclosure and under repayment.

Payments Before First Default Reported: 7

Unpaid Principal Balance:    $156,800

Summary:

Decatur Mortgage did not document the timing of the $10,877 gift wire transferred from the
Housing Action Resource Trust and the $11,827 seller contribution sent back to the Trust. The
gift was actually wire transferred first.

According to the HUD-1 Settlement Statement the borrower gave an earnest money deposit of
$1,557 and another $259 at closing for an investment of $1,816. At closing the settlement agent
paid a total of $6,736 to pay off nine of the borrower’s delinquent debts. This negative
investment of $4,920 was paid from the $10,877 gift from the non-profit donor.

Decatur did not document the actual provision of the $1,557 earnest money deposit and source of
the funds. Bank account documentation did not show a pattern of savings or the actual deposit.
The borrower told us that Decatur never required him to document the source of the funds for the
money orders he used to pay his earnest money deposit. The borrower said the deposit cash was
from part of his wife’s student loan.

The underwriter (AF58) did not establish how the borrower would not be adversely affected as
the buy-down period expired.

Decatur and the underwriter used an unrealistically low estimate of property taxes for the
mortgage credit analysis. The underwriter used $25 per month for taxes, which approximated
taxes on the undeveloped land. The County assessed taxes of $1,323 on the completed subject
property, which is about $110 per month.

Decatur did not document investigation of credit inquiries that were reported on the credit
reports.

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The appraisal (by VIDEWC) used three comparable properties. Two of the comparable
properties were sold more that six months before the appraisal and one of them was over a mile
away from the subject property. The Appraiser said that current supply and demand were in
balance but did not adequately justify the comparables used.

The borrower told us that the seller’s staff told him not to apply for a mortgage with his wife due
to her bad credit history, lack of a job and the impending foreclosure of their prior residence that
the wife owned. The borrower said that a March 11, 2002 letter in Decatur’s file about past due
accounts was false and typed by Decatur’s Loan Officer. The borrower said that the information
was incorrect. The borrower said that he also hand carried a letter from his school to Decatur.




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Appendix C


FHA Case Number: 151-6611721

Mortgage Amount: $ 136,720

Section of Housing Act: 203(b)

Date of Loan Closing: 12/27/01

Current Status: In Default. Foreclosure started 4/1/04. (As of 7/30/04).

Prior Status:   Reinstated by mortgagor on 2/1/03.

Payments Before First Default Reported:      7

Unpaid Principal Balance:     $133,698

Summary:

Decatur Mortgage’s file contained two different sales agreements dated the same day. The sales
price was dropped from $144,861 to $138,877 to reflect a lower gift fund requirement and less
cash due from the borrower.

Decatur did not adequately document the source of funds for the $1,000 earnest money deposit.
The borrower’s account history did not show that two $500 checks were cashed, and there were
no copies of cancelled checks. At the time the borrower signed the sales agreement showing a
$500 deposit, the borrower’s account balance was only $4. The bank statements did not show an
ability to save.

Decatur did not show that the borrower was an acceptable credit risk. The credit reports showed
nine delinquent accounts and past collections some of which ran up to the credit report date. The
settlement agent paid off two delinquent accounts totaling $356 at closing. The borrower told us
that not all of her delinquent accounts were paid off at closing.

Decatur did not document the timing of the $4,166 gift wire transfer from the non-profit donor
(Nehemiah) and the seller contribution of $4,666 sent back to the donor. The gift was actually
wire transferred first.

The underwriter (V175) omitted a $24 per month delinquent account from the mortgage credit
analysis. The debt was reported as an overdue debt of $1,922 on one credit report but as a
collection account with $0 due on another credit report.

Decatur and the underwriter used an unreasonably low estimate of property taxes in the
mortgage credit analysis. The underwriter used an estimate of $25 per month for taxes, which
approximated taxes for unimproved land. The County assessed $2,090 against the completed
subject property, which was about $175 per month.

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The underwriter did not show how the borrower would not be adversely affected as the buy
down period expired.

The appraisal (by JWM17R) used four comparable properties that were FHA insured loans and
all were within 3 blocks of the subject property in the same subdivision. Being in the same
subdivision means that the comparables were likely built by the same builder/seller as the subject
property.

Decatur did not investigate two credit inquiries shown on the credit report. One of the inquiries
was a company named Direct Rental. We found a judgment listed in the Lexis-Nexis system for
$5,093 by Auto Sales and Service filed on March 19, 2002. This debt was not listed as a debt on
the applications or the credit report but likely existed at the time of the application and closing.




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Appendix C


FHA Case Number: 151-6471089

Mortgage Amount: $ 148,291

Section of Housing Act: 203(b)

Date of Loan Closing: 08/01/02

Current Status: Delinquent but reinstated by mortgagor 4/1/04. – (As of 7/30/04).
                HUD paid a $650 Loan Modification fee on 5/13/2004.

Unpaid Principal Balance: $147,648

Summary:

According to the HUD-1 Settlement Statement, the borrower provided an earnest money deposit
of $1,439 as a total investment. The settlement agent paid a total of $6,464 at closing to pay off
the borrowers delinquent debts. This negative investment of $5,025 was paid from the $10,520
gift from the Housing Action Resource Trust gift.

Decatur Mortgage did not document the timing of the Housing Action Resource Trust gift wire
transfer of $10,520 and the seller’s contribution of $11,020 sent back to the Trust. The gift was
actually wire transferred first.

Decatur did not adequately document that the borrower provided the $1,439 earnest money
deposit. The seller’s letter to Decatur indicated that the borrower provided a check for $500 and
a check for $939. The bank statements Decatur obtained did not cover the period of the checks
to show they were ever cashed and no cancelled check was obtained. The bank statements did
not show a pattern of savings.

Decatur did not show how the borrower was an acceptable credit risk. The credit reports showed
two large collection accounts. The borrower’s explanation was his foolishness at a young age.
These debts were paid off at closing using gift funds.

The underwriter (Y471) used a higher income figure in the mortgage credit analysis than what
was supported by employment documentation.

The underwriter did not show how the borrower would not be adversely affected as the buy
down period expired. The underwriter stated that a second job was not used to qualify but the
income was already overstated.

Decatur did not document any investigation of credit inquiries that appeared on the credit
reports.

The Appraisal (by PWE2TC) used four comparable properties. Three of the comparables were over
a mile away in a neighboring city. One of these three was sold over six months before the appraisal.
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The Appraiser’s comment was that the close comparable was the only one available from the
subject’s subdivision. The Appraiser estimated $135 per month for taxes, which the underwriter
used.




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Appendix C


FHA Case Number: 151-6443404

Mortgage Amount: $ 142,607

Section of Housing Act: 203(b)

Date of Loan Closing: 10/15/01

Current Status:       In Default (as of 7/30/04) – HUD paid a Special Forbearance fee to the
                      servicer of $100 on 10/02/03.

Unpaid Principal Balance: $140,652

Summary:

Decatur Mortgage did not document any investigation of two additional Social Security numbers
identified for the co-borrower on the credit report.

The borrower had sufficient funds in the bank but Decatur did not document that the borrowers
actually provided the $1,439 earnest money deposit from the borrower’s account and not from
some other source.

Decatur did not document that the $4,346 gift from a non-profit donor (Nehemiah) was wire
transferred prior to the seller’s contribution of $5,146 being sent back to the donor. The gift was
actually sent first.

The underwriter (3248) overstated the borrower’s income by $174 per month from what was
confirmed. The borrower would likely still have qualified.

Decatur and the underwriter used an unreasonably low estimate of property taxes in the
mortgage credit analysis. The underwriter used $40 per month as taxes that approximated the
taxes on unimproved land. The County actually assessed taxes on the completed subject
property of approximately $165 per month.

Decatur did not document any investigation of nine credit inquiries that were reported on the
credit report.




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FHA Case Number: 151-6838872

Mortgage Amount: $ 167,728

Section of Housing Act: 203(B)

Date of Loan Closing: 08/30/02

Current Status: Foreclosure completed 7/1/04 – (as of 7/30/04).

Unpaid Principal Balance: $166,549.

Summary:

Decatur Mortgage did not document the timing of the $5,112 gift transfer from a non-profit
donor (Nehemiah) and the seller contribution of $5,612 back to the donor. The gift was actually
transferred first.

Decatur did not adequately document the source of the $1,000 earnest money deposit or the
$3,157 provided at closing. The seller provided a letter showing a $1,000 check payment but the
bank statements Decatur obtained do not show the check being cashed, and there is no copy of a
cancelled check. The bank account showed no pattern of savings and would have barely had
enough funds to pay the earnest money check.

Decatur did not show why the borrower was an acceptable credit risk. The credit report showed
18 accounts in collection. The credit report showed six debts that were not considered in the
mortgage credit analysis or paid off at closing. The borrower’s explanations of bad debts did not
reflect a good attitude towards credit.

According to the HUD-1 Settlement Statement the borrower gave a $1,000 earnest money
deposit and brought another $3,157 to closing for a total investment of $4,157. The settlement
agent paid a total of $3,682 to pay off various delinquent accounts of the borrower. This shows
that the borrower actually only gave $475 towards the transaction and the balance was provided
by the non-profit donor.

The underwriter (Y471) overstated income by $301 per month in the mortgage credit analysis by
using borrower overtime and gain sharing earnings that were not confirmed by the employer.

Decatur and the underwriter used an unreasonably low estimate of property taxes in the
mortgage credit analysis. The underwriter used $40 per month for taxes, which approximated
taxes on unimproved land. The County assessor told us that so far the land had only been
assessed at the developer’s special rate for undeveloped land. The Assessor gave us an
approximation of about $110 per month as an estimate for the subject property based on local tax
rates.


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Appendix C


The appraisal report (by JWM17R) did not show the distance from the subject property for three
of the four properties.

Decatur did not document any investigation into a second Social Security Number shown for the
borrower on a credit report. The Lexis-Nexis system also showed the second number shown for
the borrower.

Decatur did not document any investigation of two credit inquiries shown on the credit report.

The seller raised the sales price on a second sales agreement from $165,300 to $170,412. The
second sales agreement showed a gift from a non-profit sponsor where the first did not.




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FHA Case Number: 151-6688221

Mortgage Amount: $ 139,156

Section of Housing Act: 203(b)

Date of Loan Closing: 05/15/02

Current Status: Delinquent. Partial reinstatement by mortgagor 7/1/04. (As of 7/30/04).

Prior Status: Not applicable

Payments Before First Default Reported:     9

Unpaid Paid Balance: $136,446

Summary:

Decatur Mortgage did not document the timing of the $4,240 gift wire transfer from a non-profit
donor (Nehemiah) and the $4,740 seller’s contribution sent back to the donor. The gift was
actually sent first.

Decatur did not adequately support the source of the earnest money deposit of $1,413. Decatur
did not have copies of cancelled checks, money orders and receipts to show that the earnest
money was provided.

Decatur and the underwriter (Y471) used an unreasonably low estimate of property taxes for the
mortgage credit analysis. The underwriter used $40 per month for taxes, which approximated
taxes on undeveloped land. Hendricks County had not yet assessed the subject property as a
completed property. The County provided us with taxes assessed on other properties sold for
more and less than the subject property so we were able to estimate a tax figure of approximately
$250 per month.

The Appraiser (JWM17R) used three of the five comparable properties were over two miles
from the subject property. The other two comparable properties were within a block of the
subject and were sold over six months before the appraisal. These two comparables were from
information in the builder and appraiser files—were in the same subdivision as the subject—and
likely were built and sold by the same builder/seller.




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Appendix C


FHA Case Number: 151-6415426

Mortgage Amount: $ 119,922

Section of Housing Act: 203(b)

Date of Loan Closing: 09/14/01

Current Status: Claim – Conveyed To HUD 8/1/03 (as of 7/30/04)
Indemnification agreement with sponsor 8/12/2004 through 8/12/2009.

Prior Status: Property Conveyed to Insurer

Claims Paid:     $129,433 8/31/03
                    2,875 1/16/04
     Total       $132,308

Payments Before First Default Reported:       4

Unpaid Paid Balance: $119,542

Loss on Property Sale:       $59,696

Summary:

The appraisal (by JWM17R) cited three comparable properties that were 1.5 miles from the
subject property and one was 2 blocks away in the subject’s subdivision that was likely built by
the same builder/seller as the subject.

Decatur did not document the source of funds for the earnest money deposit totaling $1,218.
The borrower provided two Travelers Express money orders totaling $718 and three personal
money orders totaling $500. Decatur provided no support for the source of cash used to buy the
money orders.

Decatur did not document the timing of the wire transfers of the gift funds of $3,654 from a non-
profit donor (Nehemiah) and the seller’s contribution of $4,454 back to the donor. The gift
actually was transferred first.

Decatur did not establish that the borrower’s income was stable. The borrower worked for three
different employers in three different industries over a two-year period before the loan
application.

The underwriter (Y471) approved this loan even though the Mortgage Payment to Income ratio
exceeded HUD’s guideline. The underwriter’s comments related to holding two jobs since the
end of January, the two for one buy-down, and a minimal increase in housing expense. The
borrower intended on changing jobs and the underwriter qualified the borrower at the lower first
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year buy-down rate. The underwriter did not adequately show how the borrower would not be
adversely affected as the buy-down period expired. The former housing expense was materially
more than the full mortgage payment.

The underwriter omitted auto loan debts totaling $262 per month from the mortgage credit
analysis.

Decatur and the underwriter used an unrealistically low estimate of property taxes, which
approximated what would be paid on unimproved land. The underwriter used $40 per month but
the County actually assessed approximately $128 per month on the completed property.

Decatur did not show that the borrower’s credit worthiness improved since his Chapter 7
Bankruptcy in 1996. The borrower’s credit report still showed eight delinquent accounts.

A bankruptcy discharge notice and a customer ledger from a creditor were faxed to Decatur from
the seller’s development sales office, demonstrating that an interested third party provided them.

Decatur’s Management did not perform a Quality Control Review of this loan even though it
defaulted after only 4 payments.




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Appendix C


FHA Case Number: 151-6649076

Mortgage Amount: $ 164,886

Section of Housing Act: 203(b)

Date of Loan Closing: 04/24/02

Current Status: Foreclosure started 4/1/04 (as of 7/30/04)

Prior Status: Default

$100 Special Forbearance claim paid by HUD 5/22/03
 750 Loan Modification claim paid by HUD 11/9.03
$850 Total partial claims paid

Payments Before First Default Reported:     17

Unpaid Paid Balance: $171,147

Summary:

Decatur Mortgage did not document the timing of the wire transfers of the gift funds of $11,025
from the Housing Action Resource Trust and the seller’s contribution of $11,525 back to the
Trust. The gift actually was transferred first.

According to the HUD-1 Settlement Statement the borrower provided $4,400 as earnest money
as the only investment. At closing the settlement agent paid a total of $9,403 to pay off the
borrower’s delinquent accounts. This negative investment of $5,003 was provided by the
$11,025 gift from the donor. Decatur did not establish how the borrower was an acceptable
credit risk just by paying off delinquent accounts as part of the home financing transaction.

Decatur did not adequately support the source of the earnest money deposit. Receipts from the
seller indicated that the borrower provided two money orders and a bank check totaling $4,400
for the earnest money deposit. Decatur did not establish where the money came from to buy the
money orders and bank check. The bank statements in the file did not show sufficient funds for
these payments.

The underwriter (Y471) omitted a $48 per month liability that was included on the credit report
but was not paid off at closing.

Decatur and the underwriter used an unrealistically low estimate of property taxes, which
approximated what would be expected for unimproved land. The underwriter used $25 per month.
Hendricks County had not yet assessed the subject property as a completed home with a house on
the lot, but as an unimproved lot the assessed taxes were $445, or about $37 per month. The taxes
likely increased when the county reassessed the property as a finished home.
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Decatur did not document any investigation of the credit inquiries identified on the credit
reports.

The sales price was increased in this case from $164,267 to $167,509 to cover the increase in the
gift from the non-profit donor that the seller would have to contribute back to the donor.

The appraisal (by JWM17R) cited three comparable properties. One comparable was 2 miles from
the subject property and the other two were within one block that were in the same subdivision, and
likely built and sold by the same builder/seller as the subject property.




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Appendix C


FHA Case Number: 151-6642980

Mortgage Amount: $ 149,306

Section of Housing Act: 203(b)

Date of Loan Closing: 02/18/02

Current Status: In Default (as of 7/30/04)-

Prior Status: Delinquent

Payments Before First Default Reported:        14

Unpaid Paid Balance: $147,418

Summary:

Decatur Mortgage did not document any investigation of a second Social Security Number
reported for the co-borrower on the credit reports.

The borrower’s monthly rent payment shown on the credit report differed from that confirmed
verbally by Decatur staff. The loan officer who took the application verbally verified the
borrower’s prior rent payments.

Decatur did not document the timing of the wire transfers of the gift funds of $10,551 from
Housing Action Resource Trust and the seller’s contribution of $11,501 back to the Trust. The
gift actually was transferred first.

According to the HUD-1 Settlement Statement the borrower provided a $1,517 earnest money
deposit as the only investment. At closing, the settlement agent paid a total of $6,596 to pay off
delinquent accounts of the borrower. This negative investment of $5,079 was actually paid from
the $10,551 gift from the non-profit donor.

Decatur did not establish how the borrower was an acceptable risk just by paying off delinquent
accounts from the property financing transaction and gift funds. The credit report identified 10
delinquencies and defaults. Decatur did not adequately show how the borrower’s attitude
towards debt had changed.

The seller raised the sales price of the subject property from $149,271 to $151,701 when the
anticipated gift requirements went up.

Decatur did not adequately establish the source of funds for the $1,517 earnest money deposit.
The earnest money was provided by three money orders and Decatur did not document where the
cash came from to buy the money orders.

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The underwriter (AF58) omitted a $414 per month liability from the mortgage credit analysis.
Decatur had the debt paid down at closing to less than 10 months remaining payments. This
monthly payment was still material enough to affect the ability to meet borrower payment
obligations.

Decatur and the underwriter used an unrealistically low estimate of property taxes, which
approximated that of unimproved land. The underwriter used $25 per month for taxes. The
County actually assessed taxes of about $160 per month on the subject property as a completed
home.

The underwriter did not provide adequate compensating factors to show how the borrower would
not be adversely affected as the buy-down period expired. The credit analysis was done using
the initial buy down payment rate.

The appraisal (by JWM17R) cited three comparable properties. All three comparable properties
were located in the subject’s subdivision. One comparable was a cash sale and the other two
were FHA insured. Since the comparables were all in the subject’s subdivision it was likely that
they were all built and sold by the same builder/seller as the subject property.




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Appendix C


FHA Case Number: 151-6589970

Mortgage Amount: $ 167,576

Section of Housing Act: 203(b)

Date of Loan Closing: 02/22/02

Current Status: Default (as of 7/30/04) – First legal action to start foreclosure 6/1/03

Payments Before First Default Reported:       8

Unpaid Paid Balance: $166,091

Summary:

Decatur Mortgage did not document the timing of the wire transfers of the gift funds of $5,108
from a non-profit donor (Nehemiah) and the seller’s contribution of $5,608 back to the donor.
The gift actually was transferred first.

Decatur did not adequately support the source of $3,750 of the $4,250 earnest money deposit.
An initial deposit of $500 was made by check and bank statements in Decatur’s file showed it
being cashed with just enough cash to cover the check. Decatur did not document where the
remaining $3,750 deposit came from. The bank statements did not show a pattern of savings.
The borrower told us that he sold his boat to come up with the earnest money deposit but he
ended up getting $3,447 of the cash back at the closing.

Decatur did not establish that the borrowers were acceptable credit risks. The credit report
showed delinquent accounts for the borrowers.

According to the HUD-1 Settlement Statement, the borrower gave earnest money of $4,250 but
received $3,447 back at closing—leaving a net investment of $803. At closing the settlement
agent paid a total of $3,169 to pay off the borrower’s delinquent accounts. This means that the
negative investment of $2,366 was paid from the $5,108 provided by the non-profit donor’s gift.

Decatur’s file contained three letters explaining account delinquencies and why the borrower’s
pay stub showed less than 40 hours worked. The file also had a letter from a tire company
explaining the borrower’s good payment history. All four of the letters were faxed to Decatur’s
office from the seller’s subdivision sales office. The borrower told us that the letter dated
February 21, 2002 explaining his short pay period was incorrect information and he was unaware
of the letter. The letter said that the borrower’s girlfriend’s father had died so he missed some
work. The borrower said that his girlfriend’s father did not pass away until June of 2003. The
borrower did not know who prepared the letter.

Decatur and the underwriter (AF58) used an unrealistically low estimate of property taxes for the
mortgage credit analysis. The underwriter used $40 per month, which approximated the taxes on
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undeveloped land. Johnson County actually assessed $2,445 in taxes against the completed
property, or about $204 per month.

Decatur did not investigate credit inquiries reported on the credit reports.

The underwriter did not show how the borrower would not be adversely affected as the buy-
down period expired since the borrower was qualified at the reduced rate.

The appraisal (by JWM17R) cited four comparable properties that were all in the subject
property’s subdivision and likely built and sold by the same builder/seller as the subject
property. Two of the comparables were over six months old at the time of the appraisal, and the
other two were taken from the builders and appraiser’s files.

The Appraiser initially issued her report on January 30, 2002 showing a subject sales price of
$165,849 and a value of $167,000. The Appraiser amended her report on February 20, 2002 to
show a sales price of $170,462 and a value of $170,500. The Appraiser did not adjust any of her
comparables and did not justify the amendment.




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Appendix C


FHA Case Number: 151-6463779

Mortgage Amount: $ 138,852

Section of Housing Act: 203(b)

Date of Loan Closing: 09/14/01

Current Status: Claim – Conveyed to HUD on 2/01/04 (as of 7/30/04).

Prior Status: Default

Payments Before First Default Reported:      9

Unpaid Paid Balance: $135,456

Total Claim Amount Paid:      $166,284

Loss on Property Sale:        $67,530

Summary:

Decatur Mortgage did not verify the source of funds for the $1,411 earnest money deposit.
According to a letter from the seller, the borrower provided a check for $500 and two money
orders totaling $911. Decatur did not get bank statements or other documentation to show that
the check came out of the borrower’s account and where the cash for the money orders came
from.

Decatur did not document the timing of the $8,231 wire transferred gift from the non-profit
donor Housing Action Resource Trust and the seller’s contribution of $9,181 sent back to Trust.
According to records we got from the settlement agent’s bank, the settlement agent wire
transferred the seller’s contribution to the donor on September 14, 2001 (day of closing) but did
not receive the wire transfer from the donor until September 17, 2001 (three days later). In this
case, the Seller provided the gift because it paid the donor the cash prior to the gift being made.

According to the HUD-1 Settlement Statement, the borrower gave earnest money of $1,411 but
received $351 back at closing—for a net investment of $1,060. At closing the settlement agent
paid $4,418 to pay off the borrower’s delinquent accounts. This negative investment of $3,358
was paid from the gift funds from the non-profit donor, which were provided by the seller.

The underwriter (V175) approved this loan with a Mortgage Payment to Effective Income ratio
over HUD guidelines without compensating factors.

The underwriter did not show how the borrower would not be adversely affected as the buy-
down period expired.

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Decatur and the underwriter used an unrealistically low estimate of property taxes for the
mortgage credit analysis. The underwriter used $40 per month, which approximated the taxes
on undeveloped land. Hamilton County actually assessed taxes against the completed property
of about $86 per month.

Decatur did not show how the borrower was an acceptable credit risk. The credit reports showed
that the borrower had $4,418 in delinquent debt and had a $1,460 judgment. Decatur did not
show improved credit worthiness just by paying off delinquent accounts from closing proceeds.

Decatur did not show that the borrower had stable income. In a 2 & ½ year period, the borrower
worked at five different companies in two different positions. The borrower had only worked at
her current employer for 10 months prior to closing. Decatur’s processor was unable to verify
the income but used pay statements to calculate the income.

Decatur did not document their investigation of eight credit inquiries that were reported on the
credit report.

HUD’s Neighborhood Watch system showed this loan was in default after 9 payments were
received. The first payment was due 11/1/01. The Sponsor did not submit this loan to HUD for
endorsement until October 9, 2002. The payment history sent by the Sponsor did not show that
this loan was current when it was submitted for endorsement.

The appraisal (by JWM17R) used four comparable properties. Two comparables were from the
subjects’ subdivision and were likely built and sold by the same builder/seller as the subject.
One of these two comparables was over six months prior to the appraisal. The other two
comparable properties were one mile away and 1 & ½ miles away respectively. The Appraiser
stated that supply and demand were in balance but cited a lack of recent comparable sales.




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Appendix C


FHA Case Number: 151-6476419

Mortgage Amount: $ 167,779

Section of Housing Act: 203(b)

Date of Loan Closing: 11/19/01

Current Status: In Default. Foreclosure started 6/1/04 (as of 7/30/04) – Partial claims paid by
HUD totaling $4,034. Indemnification agreement with sponsor for period 8/12/2004 through
8/12/2009.

Prior Status: Reinstated but delinquent

Payments Before First Default Reported:     3

Unpaid Paid Balance: $163,630

Claims Paid:

       Partial Claim $3,934 paid 11/16/02
Special Forbearance    100 paid 6/23/03
              Total: $4,034

Summary:

Decatur Mortgage did not document the timing of the $5,179 wire transferred gift from a non-
profit donor (Nehemiah) and the seller’s contribution of $5,979 sent back to the donor. The gift
was actually sent first.

Decatur did not document the source and provision of $1,500 of the $1,726 earnest money
deposit.

Decatur and the underwriter (V175) omitted a $10 per month debt on the credit report from the
mortgage credit analysis without justification. Another $43 per month debt was deleted from a
revised credit report and Decatur did not explain why this debt was omitted.

Decatur did not show how the borrower improved his attitude towards credit after a Chapter 7
Bankruptcy discharged in 1999. The credit reports reported nine small accounts with
delinquencies. The settlement agent paid off $372 of the borrower’s delinquent accounts at
closing.

Decatur did not document adequate investigation of eight credit inquiries reported on the credit
report. The one credit inquiry that the borrower did explain was an auto inquiry. The
borrower’s explanation was that the auto dealer was looking for the best interest rate for a new

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Chevy Lumina. This explanation indicated that the borrowers were in the process of buying a
new car at the time of the loan application. No further research was indicated.

Decatur and the underwriter used an unrealistically low estimate of property taxes for the
mortgage credit analysis. The underwriter used $40 per month, which approximated the taxes on
undeveloped land. The County actually assessed taxes against the completed property of about
$253 per month.

This loan went into default after only three payments were made. The loan servicer reported that
the cause of the default was excessive obligations. Decatur’s management did not perform a
Quality Control Review of this loan.




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Appendix C


FHA Case Number: 151-6476579

Mortgage Amount: $ 130,935

Section of Housing Act: 203(b)

Date of Loan Closing: 11/19/01

Current Status: Claim Paid. Property conveyed to insurer 2/1/04, claim payment of $136,315 on
2/5/04, and payment of $5,898 on 5/9/04 (as of 7/30/04). Indemnification agreement with
sponsor 8/12/2004 through 8/12/2009.

Prior Status:   Per Neighborhood Watch dated 4/29/04, Foreclosure Completed

Payments Before First Default Reported: 2

Unpaid Principal Balance:     $127,563

Appraiser: Appraiser’s Staff ID # JWM17R

Loss on Resale: $64,912

Summary:

Decatur Mortgage did not document any investigation into an additional Social Security Number
for the borrower shown on the Mortgage Credit Services, Incorporated credit report dated
10/17/01. Decatur did not investigate to determine whether the borrower used the number or
may have co-signed loans.

The sales price increased by $2,500 on the second purchase agreement based on the Nehemiah
Gift being replaced by a Housing Action Resource Trust (Hart) Gift for $1,795 more money.

Decatur did not adequately show that the borrower was an acceptable credit risk. The credit
reports identified 14 delinquent accounts and accounts in collection, and the borrower’s
explanations did not adequately explain how the delinquencies were outside of his control.
Decatur had the settlement agent pay off nine delinquent accounts at closing. This did not make
the borrower an acceptable credit risk.

Decatur did not document the timing of the $5,695 wire transfer gift from the Housing Action
Resource Trust, and the seller contribution of $6,645 wire transferred back to the Trust. The gift
actually was sent first, but it was Decatur’s responsibility to document the source of the gift
funds, and they did not do this.

Decatur did not adequately document the source of funds of $1,100 for the earnest money
deposit. The bank statements did not cover the period of the indicated checks, and the source of
funds for the unusual deposits was not established. The HUD-1 settlement statement only gave
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the borrower credit for a $500 earnest money deposit, and the borrower may have been
overcharged by an additional $600 in earnest money deposit.

Decatur did not document a Quality Control Review for this mortgage loan that defaulted after
two payments. HUD requires a 100 percent full review of any mortgage loan that defaults in the
first six months after closing.

Decatur did not properly verify the borrower’s employment and pay statements, and the
underwriter (AF58) overstated the borrower’s monthly income by $69 per month.

Decatur incorrectly omitted a monthly rental/purchase liability of $115, and the underwriter
understated the borrower’s liabilities by $115 per month by not including the 24-month rental
agreement as a debt.

Decatur did not document an investigation on whether a $356 per month family auto loan on the
Quick Questionnaire was the same debt as the $312 Tranex auto loan, or new debt not reported
on the credit report. The underwriter may have understated the borrower’s debts and mortgage
credit ratios by not including the $356 as debt.

The underwriter used an unreasonably low estimate of property taxes in the mortgage credit
analysis to qualify the borrower. The underwriter estimated $40 per month. The Marion County
Treasurer actually accessed $1,844 against the property, or approximately $154 per month.

The appraiser (JWM17R) used two comparables in the subject property’s subdivision, and two
comparables over two miles from the subject property, that were over six months before the
subject appraisal.

Decatur accepted a faxed rental letter, written explanation of bad debts, borrower pay statements
and a W-2 form, from the seller’s Sales Office at River’s Edge Townhouses—an interested third-
party.




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FHA Case Number: 151-6477778

Mortgage Amount: $ 128,651

Section of Housing Act: 203(b)

Date of Loan Closing: 11/07/01

Current Status: Default (as of 7/30/04).

Prior Status:   Repayment

Payments Before First Default Reported: 14

Unpaid Principal Balance:     $127,080

Appraiser: Appraiser’s Staff ID #JWM17R

Summary:

The Appraiser (JWM17R) used two comparables in the subject property’s subdivision.

The underwriter (H527) used an unreasonably low estimate of property taxes in the mortgage
credit analysis to qualify the borrower. The underwriter estimated $25 per month. The Marion
County Treasurer actually assessed $1,383 against the property, or approximately $115 per
month.

The underwriter used an unreasonably low estimate of property taxes to reduce the mortgage
credit analysis ratios and qualify the borrower. The underwriter did not provide compensating
factors to justify underwriting this mortgage loan.

The underwriter did not adequately show that the borrower was an acceptable credit risk. The
credit reports identified four Civil Judgments and bad debts totaling $8,084 that were paid off at
closing from Housing Action Resource Trust Gift Funds. The use of gift Funds to pay off the
borrower’s debts is an inducement, and reduces the selling price of the property.

Decatur did not document the timing of the $9,922 wire transfer gift from a non-profit donor to
the settlement agent, and the seller payment wire transferred back to the donor. The gift actually
was sent first.

The underwriter did not document how the borrower would not be adversely affected as the buy-
down period expired.

Decatur did not document the source of funds for the earnest money deposit.            The bank
statements do not show the funds being withdrawn from the borrower’s account.

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FHA Case Number: 151-6482988

Mortgage Amount: $ 120,785

Section of Housing Act: 203(b)

Date of Loan Closing: 11/08/01

Current Status: Claim of $125,615 paid 12/11/03. Additional claim of $2,588 paid 4/23/04.
Property conveyed to insurer (on 12/01/03). Indemnification agreement with sponsor for
8/14/2004 through 8/14/2009.

Prior Status: Foreclosure Completed 10/01/03

Payments Before First Default Reported: 4

Unpaid Principal Balance:    $119,742

Appraiser: Appraiser’s Staff ID #JWM17R

Loss on Resale: $51,981

Summary:

Decatur Mortgage did not document the source of funds of $1,250 for the earnest money
deposits that was paid for with money orders. The bank statements did not cover the period
when the earnest money payments were made to the seller, and no ability to save was
established. No evidence was provided to show the actual source of the cash used to buy the
money orders, and the previous months bank balance was $11 as of July 31, 2001.

Decatur did not document the timing of the Housing Action Resource Trust (Hart) Gift wire-
transferred from the non-profit donor to the settlement agent, or the seller contribution wire-
transferred back to the donor. Decatur did not document that the gift funds came from the
donor’s funds and not the sellers. The gift was actually wire transferred first.

The underwriter (AF58) used an unreasonably low $25 per month estimate of property taxes in
the mortgage credit analysis to qualify the borrower. The County Treasurer actually assessed
$1,215 against the property, or approximately $101 per month.

Decatur did not document any investigation of a credit inquiry shown on the credit report to
ensure that the borrower did not obtain any additional credit.

The underwriter did not show how the borrower would not be adversely affected as the two year
buy-down period expired.


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The underwriter did not use an estimate for homeownership association dues in the mortgage
credit analysis. This understated housing expenses by $20.33 per month.

The underwriter would have exceeded HUD’s mortgage credit ratios, and this would have
required compensating factors for loan approval, if the underwriter considered the full principal
and interest amount of the note, the association dues, and property taxes assessed.

The underwriter overestimated the borrower’s monthly income by $425 per month on the
mortgage credit analysis.

Decatur accepted faxed pay statements from the seller’s sales office. The employment
documentation cannot be handled by an interested third party (Arlington Meadows).

The Appraiser (JWM17R) used all three comparable properties from the subject property’s
subdivision, which may have been built and sold by the same builder/seller.

HUD’s file contained two sales agreements with different dates. The higher sales amount was
used and included a higher gift figure from the non-profit donor. The higher price covered the
extra contribution to the non-profit donor that the seller would have to make.

Housing Action Resource Trust Gift Funds were used to pay off the borrower’s debts.
According to the HUD-1 Settlement Statement, the borrower provided $1,250 in earnest money,
and another $43 at closing, for a total investment of $1,293. At closing the settlement agent paid
$2,079 to pay off the borrower’s delinquent accounts. The negative investment of $786 was paid
out of the gift from the non-profit donor.

Decatur did not document a Quality Control Review of this mortgage loan. The mortgage loan
defaulted after four payments, and HUD requires all mortgage loans that default within the first
six months after closing to undergo a 100 percent review.




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FHA Case Number: 151-6483461

Mortgage Amount: $ 165,800

Section of Housing Act: 203(b)

Date of Loan Closing: 12/03/01

Current Status: Foreclosed and conveyed to HUD on 6/1/04. HUD paid claim of $174,454 on
6/24/04. (As of 7/30/04)

Prior Status: Foreclosure Started on 6/01/03

Payments Before First Default Reported: 13

Unpaid Paid Balance: $161,419

Loss on Property Sale: N/A

Appraiser: Appraiser’s Staff ID #JWM17R

Summary:

Decatur Mortgage did not document an investigation of an additional social security number for
the borrower on the credit report.

Decatur did not document the timing of the wire transfers of $10,552 from the non-profit donor
(Housing Action Resource Trust) to the settlement agent, and the wire transfer of the seller’s
contribution of the Gift, plus a fee from the seller's proceeds back to the donor. The Gift was
actually transferred first.

Decatur did not show how the borrowers were acceptable credit risks. The credit report showed
20 delinquencies in excess of $5,000, and one Municipal Court Judgment that was not satisfied.
Decatur did not demonstrate how the borrowers improved their attitude toward debt by paying
off the borrower’s delinquent accounts at closing by proceeds from the non-profit donor and the
borrower.

The underwriter (AF58) used an unreasonably low estimate of property taxes to qualify the
borrower for the mortgage credit analysis. The underwriter estimated $25 per month for taxes.
The actual taxes assessed by the County Treasurer were $2,436, or approximately $203 per
month.

The underwriter did not document how the borrower would be able to afford the increase in
property taxes as of the first escrow analysis.


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Decatur did not document the Omission of Liabilities in excess of $5,000 obtained from the
credit report, and excluded from the initial and final Uniform Residential Loan Application.

The underwriter did not provide compensating factors to justify approving this loan, which
exceeded HUD’s approved maximum ratios.

Two of the four comparable properties are over one mile from the subject property, and the
Appraiser (JWM17R) did not adequately justify using these properties.

According to the HUD-1 Settlement Statement, the borrower gave a $1,701 earnest money
deposit and $49 at closing—for a total investment of $1,750. At closing, the settlement agent
paid a total of $5,814 to pay off the borrower’s delinquent accounts. The Housing Action
Resource Trust (a non-profit donor) provided the negative investment of $4,064.




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                                                                                      Appendix C

FHA Case Number: 151-6486054

Mortgage Amount: $ 143,115

Section of Housing Act: 203(b)

Date of Loan Closing: 11/21/01

Current Status: In Default. (as of 7/30/04)
               HUD Paid $750 loan modification fee on 9/14/2003.
Indemnification agreement with sponsor for 8/12/2004 through 8/12/2009.

Prior Status: Forbearance (on 3/01/04).

Payments Before First Default Reported: 2

Unpaid Principal Balance: $160,622

Appraiser: Appraiser’s Staff ID #JWM17R .

Summary:

Decatur Mortgage did not document the timing of the $6,562 Housing Action Resource Trust
Gift wire-transfer, and the seller contribution of $7,512 wire transfer back to the Trust. The gift
actually was sent first.

According to the HUD-1 Settlement Statement, the borrower provided $1,443 in earnest money,
plus $23 at closing, for a total investment of $1,466. The settlement agent paid $3,094 at closing
to pay off the borrower’s delinquent accounts. This negative investment of $1,628 was paid
from the $6,562 gift from the non-profit donor, Housing Action Resource Trust.

Decatur did not provide documentation to show the borrowers provided the source of funds for
the earnest money deposit. Bank account information did not show the payment and did not
show a history of savings.

The underwriter (AF58) did not adequately consider the borrowers credit worthiness after their
Chapter 7 Bankruptcy. The closing agent paid off 11 collection and delinquency accounts, and
the underwriter did not establish how the borrowers attitude and use of credit had improved.

The underwriter did not establish how the borrower would not adversely be financially affected
as the buy-down period expired.

Decatur and the underwriter used an unrealistically low estimate of property taxes for the
mortgage credit analysis. The underwriter used $40 per month for taxes, which approximated
taxes on unimproved land. The County actually assessed $1,426 on the property as a completed
residence that approximated $119 per month.
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Decatur did not investigate and resolve a second Social Security Number for the co-borrower
that was reported in the credit report.

Decatur did not establish that the borrower had stable income. The borrower held more than 4
unrelated jobs in the last two years, for brief periods

Decatur did not document a quality control review of this case file. This mortgage loan
defaulted after two payments, and HUD requires a 100 percent review of early payment loan
defaults.

The seller raised the sales price of the house on a second sales agreement from $143,459 to
$145,392 when the non-profit donor was changed from Nehemiah to the Housing Action
Resource Trust program.

The Appraiser (JWM17R) issued the appraisal report on October 25, 2001 with an estimated
value of $144,000. The Appraiser modified the appraisal on November 26, 2001 (after closing)
giving a new estimate of $145,500. The Appraiser adjusted each comparable property up by
$1,000 each and the revised value covered the revised sales price of the property.




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                                                                                  Appendix C

FHA Case Number: 151-6486185

Mortgage Amount: $ 110,229

Section of Housing Act: 203(b)

Date of Loan Closing: 09/19/01

Current Status: Property conveyed to insurer (on 9/01/03)
Indemnification agreement with sponsor for 8/12/2004 through 8/12/2009.

Claim: $116,976 claim paid on 9/08/03 and $2,079 claim paid 12/27/03.

Prior Status: Foreclosure completed on 4/1/03 per Neighborhood Watch 5/06/04.

Payments Before First Default Reported: 5

Unpaid Principal Balance: $109,702

Appraiser: Appraiser’s Staff ID #JWM17R.

Loss on Resale: $56,963

Summary:

The underwriter (3248) used an unreasonably low property tax figure of $40 per month to
analyze the borrowers ability to pay the mortgage. The actual taxes assessed amounted to $77
per month.

The underwriter computed a Mortgage Payment to Income Ratio of 32 percent on the Mortgage
Credit Analysis Worksheet. This exceeded HUD’s ceiling of 29 percent, and required
compensating factors. The underwriter did not provide adequate compensating factors to justify
approving this loan

The borrower defaulted after five payments, and HUD requires a 100 percent Quality Control
Review. Decatur Mortgage did not document a review was performed on this early payment
defaulted mortgage loan.

The underwriter did not show how the borrower would not adversely be financially affected as
the buy-down period expired.

Decatur did not establish that the borrower had stable employment. The borrower was showing
10 months full time employment, and the borrower continually changed part time jobs.



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Decatur did not document the timing of the $3,360 Nehemiah Gift wire-transfer to the settlement
agent, and the seller contribution of $4,160 back to the non-profit donor. The gift funds were
actually sent first.




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FHA Case Number: 151-6490797

Mortgage Amount: $ 111,954

Section of Housing Act: 203(b)

Date of Loan Closing: 09/21/01

Current Status: In Default (as of 7/30/04). Foreclosure Started (on 2/01/04)

Prior Status: Delinquent as of 8/01/03.

Payments Before First Default Reported: 19

Unpaid Principal Balance: $109,934

Appraiser: Appraiser’s Staff ID #JWM17R

Summary:

The underwriter (ZLPR Loan Prospector) did not document how the borrower would not
adversely be financially affected as the buy-down period expired.

The underwriter used an unreasonably low property tax figure of $40 per month to analyze the
borrowers ability to pay the mortgage. The actual taxes assessed amounted to $72.68 per month.

The underwriter computed a Total Fixed Payment to Income Ratio of 55 percent on the
Mortgage Credit Analysis Worksheet. This exceeded HUD’s ceiling of 41 percent, and required
compensating factors. The underwriter did not provide adequate compensating factors to justify
approving this loan.

Decatur Mortgage did not document the timing of the $3,413 Nehemiah Gift wire-transfer to the
settlement agent, and the seller contribution of $4,213 (included the fee), wire-transfer back to
the donor. The gift funds were sent first.

All three of the comparable properties were within two blocks of the subject property, and
possibly in the same subdivision. Comparables 2 & 3 were sold more than six months before the
subject appraisal. The Appraiser (JWM17R) did not adequately justify using these properties.




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FHA Case Number: 151-6494487

Mortgage Amount: $ 105,864

Section of Housing Act: 203(b)

Date of Loan Closing: 11/28/01

Current Status: Default (as of 7/30/04). First legal action to commence foreclosure on 3/01/04.

Prior Status: Foreclosure Started on 3/01/03.

Payments Before First Default Reported: 10

Unpaid Principal Balance: $104,680

Appraiser: Appraiser’s Staff ID #JWM17R

Summary:

The underwriter (Y471) used an unreasonably low property tax figure of $25 per month to
analyze the borrowers ability to pay the mortgage. The actual taxes assessed on the completed
residence amounted to $141 per month.

Decatur Mortgage did not document and verify the $334 car payment listed on the pre-loan
application. The exclusion on the Uniform Residential Loan Application is an Omission of
Liabilities, and the exclusion of the car debt on the Mortgage Credit Analysis Worksheet reduced
the borrowers recurring expenses and ratios.

Comparables 3 & 4 were within two blocks of the subject property, possibly in the same
subdivision, and their sales dates were over six months from the appraisal date. Comparables 1
& 2 were located more than two miles from the subject property, and the appraiser (JWM17R)
did not adequately justify using these properties.




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FHA Case Number: 151-6507102

Mortgage Amount: $ 132,660

Section of Housing Act: 203(b)

Date of Loan Closing: 10/31/01

Current Status: Property Conveyed to HUD on 4/01/04.

Prior Status: Foreclosure Completed on 2/01/04.

Claim: $138,025    Date Paid: 4/09/04

Payments Before First Default Reported: 15

Unpaid Principal Balance: $129,391

Appraiser: Appraiser’s Staff ID #VIDEWC

Loss on Resale: $58,437

Summary:

The underwriter (AF58) did not document how the borrower would not adversely be financially
affected as the buy-down period expired.

The underwriter used an unreasonably low property tax figure of $40 per month to analyze the
borrowers ability to pay the mortgage. The actual taxes assessed amounted to $228 per month.

Decatur Mortgage did not document and verify, per the credit report, the two names using the
borrower’s social security number, and two different social security numbers for the co-
borrower, and how these problems were resolved.

Decatur did not document the timing of the $10,042 Housing Action Resource Trust Gift wire-
transfer to the settlement agent, and the seller contribution of $10,992 (includes the fee) wire-
transfer back to the Trust. The gift funds were actually sent first.

All three of the comparable properties were within five blocks of the subject property, and were
in the same subdivision and likely built and sold by the same builder/seller as the subject
property. Comparable 1 was sold more than six months before the subject property appraisal on
10/26/01, and the Appraiser (VIDEWC) did not adequately justify using this property.




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Decatur allowed an interested third party to provide some of the documentation for loan
processing. Earnings statements, social security benefits, various debt, and deposit explanation
letters were faxed from a project named Rivers Edge. Rivers Edge is one of the Builder/Seller’s
developments.

The Housing Action Resource Trust Gift Funds were used to pay off $6,087 of the borrower’s
debts at closing, per the debts listed on the credit report. The HUD-1 Settlement Statement
shows the borrower giving a $1,300 earnest money deposit but getting back $505 at closing for a
net investment of $795. At closing, the settlement agent paid $6,087 to pay off the borrower’s
delinquent accounts. This negative investment of $5,292 was paid from the $10,042 gift from
the Housing Action Resource Trust (non-profit donor).




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FHA Case Number: 151-6527323

Mortgage Amount: $ 134,842

Section of Housing Act: 203(b)

Date of Loan Closing: 11/05/01

Current Status: Property Conveyed to HUD on 9/01/03.

Prior Status: Foreclosure Completed on 2/01/03.

Claim: $144,970     Date Paid: 9/25/03

Payments Before First Default Reported: N/A

Unpaid Principal Balance: $132,490

Appraiser: Appraiser’s Staff ID #JWM17R .

Loss on Resale: $70,131

Summary:

The underwriter (Y471) did not document how the borrowers would not adversely be financially
affected as the buy-down period expired.

The underwriter used an unreasonably low property tax figure of $40 per month to analyze the
borrowers ability to pay the mortgage. The actual taxes assessed amounted to $118 per month.

Decatur Mortgage did not document and verify, per the credit report, the five inquiries within 90
days (one was a collection inquiry). There was no information in the file to determine if the loan
processor followed up or investigated the credit inquiries.

Decatur did not document the timing of the $10,110 Housing Action Resource Trust Gift wire-
transfer to the settlement agent, and the seller contribution of $11,069 (includes the fee) wire-
transfer back to the donor. The gift funds were sent first—in the proper order.

Decatur did not establish that the borrowers had stable employment. The borrowers worked for
two different employers in two different industries over a one-year period leading up to the
mortgage application.

Decatur did not verify the source of funds for the earnest money deposit, which totaled $1,377
over four payments, according to a letter in the file from Dura Builders to Decatur Mortgage.
Bank statements were not verified during this time period, and there was little evidence in the
files to verify that the borrower made the earnest money deposit.
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Comparables 1 & 4 were within one block of the subject property, and possibly in the same
subdivision. Comparables 2 & 3 were more than one mile from the subject property, and the
Appraiser (JWM17R) did not adequately justify using these two comparables when comparables
are located more than one mile from the subject property. All four comparable properties were
FHA insured and three were from the builder and appraiser’s files.

The underwriter did not establish that the borrowers had established good credit. The credit
report showed three Civil Judgments, a tax lien, and over $3,000 in past due debts.

According to the HUD-1 Settlement Statement, the borrower provided $1,377 in earnest money,
plus $202 at closing, for a total investment of $1,579. At closing, the settlement agent paid a
total of $7,265 to pay off the borrower’s delinquent accounts. Housing Action Resource Trust
Gift Funds of $10,110 provided this negative investment of $5,686.

The borrowers went into default after only making three payments, and Decatur’s managing
owner provided insufficient documentation to determine what work was done in the Quality
Control Review they completed. The managing owner found no deficiencies in their review.




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FHA Case Number: 151-6542156

Mortgage Amount: $ 153,924

Section of Housing Act: 203(b)

Date of Loan Closing: 11/05/01

Current Status: In Default as of 7/30/04. Foreclosure Started on 11/01/02.

Prior Status: Delinquent on 10/01/02.

Payments Before First Default Reported: 4

Unpaid Principal Balance: $148,346

Appraiser: Appraiser’s Staff ID #VIDEWC

Summary:

The underwriter (3248) did not document how the borrowers would not adversely be financially
affected as the buy-down period expired.

The underwriter used an unreasonably low property tax figure of $40 per month to analyze the
borrowers ability to pay the mortgage. The actual taxes assessed amounted to $124 per month.

Decatur Mortgage did not document the timing of the $10,691 Housing Action Resource Trust
Gift wire-transfer to the settlement agent, and the seller contribution of $11,641 (includes the
fee) wire-transfer back to the Trust. The gift funds were actually sent first, but Decatur did not
document the source of the gift as required by HUD.

The underwriter overstated the borrowers other income. The borrowers’ two children were
entitled to receive social security benefits until they reach age 18. The underwriter overstated
the benefit (income) by 25%, and should not have used this benefit in the analysis. To count the
benefit it must be scheduled to last for at least three years, and the children were to receive the
benefit for less than two years. HUD does not consider it a reliable source of income unless it
lasts for at least three years.

The underwriter did not verify the source of funds for the earnest money deposit totaling $1,564
over four payments according to a letter in the file from Dura Companies to Decatur. The
borrower did not have a checking or savings account, and no documentation was provided to
support the source of funds for the money orders.




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Comparables 1 & 3 were within five blocks of the subject property, and were in the same
subdivision. They were sold more than six months before the subject property appraisal on
10/26/01. Comparable 1 is 1-1/2 miles from the subject property, and the Appraiser (VIDEWC)
did not adequately justify using this one comparable.

The underwriter did not document that the borrowers had established good credit. The credit
report showed three Civil Judgments, a Repossession, and nine past due debts.

According to the HUD-1 Settlement statement, the borrower provided $1,505 in earnest money
as the total investment. At closing the settlement agent paid $4,604 to pay off the borrower’s
delinquent accounts. The Housing Action Resource Trust Gift Funds of $10,691 provided this
negative investment of $3,099.

Decatur did not document and verify, per the credit report, two names using the same social
security number. Decatur did not document an investigation into the second social security
number.

The underwriter did not provide compensating factors to justify calculating the borrower’s total
mortgage payment using the first year buy-down amount for principal and interest.




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FHA Case Number: 151-6567251

Mortgage Amount: $ 151,539

Section of Housing Act: 203(b)

Date of Loan Closing: 12/31/01

Current Status: Foreclosure Completed on 5/01/03. Conveyed to HUD 7/1/04. Claim of
$162,252 paid on 7/24/04.

Prior Status: Foreclosure completed 5/1/03.

Payments Before First Default Reported: 5

Unpaid Principal Balance: $150,940

Appraiser: Appraiser’s Staff ID #VIDEWC

Summary:

Decatur Mortgage did not document the timing of the $10,619 Housing Action Resource Trust
Gift wire-transfer to the settlement agent, and the seller contribution of $11,569 (includes the
fee) wire-transfer back to the Trust. The gift funds were actually sent first, but Decatur did not
document the source of the gift as required by HUD.

The underwriter (AF58) used an unreasonably low property tax figure of $40 per month (which
approximated taxes on undeveloped land) to analyze the borrowers ability to pay the mortgage.
The actual taxes assessed amounted to $180.53 per month.

The underwriter did not document how the borrowers would not adversely be financially
affected as the buy-down period expired.

Decatur did not document the reasoning for the three different appraisal amounts in the
mortgagee case file, and each time the appraisal amount increased. The appraisal estimated
value increased when the subject’s sales price increased. This showed that the Appraiser
(VIDEWC) raised the property’s value when the sales price increased.

Decatur did not identify this mortgage loan as an early payment default and perform a Quality
Control Review as required by HUD.

The underwriter did not document whether the borrower had established good credit after a
Chapter 7 Bankruptcy. The credit report showed 16 delinquent accounts subsequent to
bankruptcy.


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Decatur did not investigate and document possible day care expenses for the co-borrower. This
recurring expense would have been included in the Mortgage Credit Analysis Worksheet, and
would have affected the fixed payment-to-income ratio, and required a compensating factor.

According to the HUD-1 Settlement Statement, the borrower provided an earnest money deposit
of $1,000 and another $156 at closing, for an investment of $1,156. At closing, the settlement
agent paid $6,733 to pay off the borrower’s delinquent accounts. This negative investment of
$5,577 was paid out of the $10,619 gift from the non-profit donor.




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FHA Case Number: 151-6584264

Mortgage Amount: $ 156,259

Section of Housing Act: 203(b)

Date of Loan Closing: 01/08/02

Current Status: Claim of $166,098 paid on 4/12/04 (as of 7/30/04) – Conveyed to HUD for
Insurance Benefits on 4/1/04.

Prior Status: Foreclosure completed 2/01/04

Payments Before First Default Reported:       8

Unpaid Paid Balance: $152,674

Total Claim Amount Paid:     $166,098

Loss on Property Sale:       $55,089

Summary:

Decatur Mortgage did not verify the source of the $1,587 earnest money deposit. According to
receipts from the builder/seller, the borrowers paid their earnest money deposit in two personal
checks. There were copies of the uncancelled checks. The bank statements in the loan files did
not show these two checks being cashed and the bank statements did not show a history of
savings.

Decatur did not document the timing of the wire transfers of the $4,763 gift from the non-profit
donor (Nehemiah) and the $5,263 seller’s contribution back to the donor. The gift transfer
actually occurred first.

The underwriter (V175) approved this mortgage after computing ratios that exceeded HUD
guidelines. The underwriter did not provide compensating factors to justify the approval.

The underwriter omitted two liabilities as shown on the credit report from the mortgage credit
analysis. The two debts were $258 per month to Bank One, and $152 per month owed to Wells
Fargo. No debts were paid off at closing and the files did not show these debts being paid off.
These two debts totaled $410 per month.

Decatur and the underwriter used an unrealistically low estimate of property taxes in the
mortgage credit analysis. The underwriter used $40 per month, which approximated taxes on the
unimproved land. Marion County actually assessed property taxes of $1,939, or about $161 per
month as a completed residential property.

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The loan officer who took the application also performed a verbal verification of rent.

The Appraiser (JWM17R) used three comparable properties. The Appraiser stated that supply
and demand were in balance. Two of the comparables were 5 blocks away but both were
conventional loans and the sales were over six months prior to the subject appraisal. The third
comparable was an FHA insured loan that was 1.6 miles away from the subject and was derived
from the builder’s and Appraisers files.

In Decatur’s file we noted that all of the pay statements and a bank statement were faxed to
Decatur from a place named Lloyd Meadows. This may have been a subdivision owned by the
seller.

We also noted that Decatur’s file contained two typewritten unsigned letters. One letter
explained a gap in the borrower’s employment, and the other discussed delinquent accounts.
Both of these letters had notes attached that said, “sign at closing.” These letters appeared to
have been prepared by someone other than the borrower, and Decatur was to have the letters
signed by the borrower at closing.




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FHA Case Number: 151-6584501

Mortgage Amount: $ 134,893

Section of Housing Act: 203(b)

Date of Loan Closing: 02/21/02

Current Status: Claim paid. - Conveyance to HUD 10/1/03.
Indemnification agreement with sponsor for 8/12/2004 through 8/12/2009.

Prior Status: Conveyed to HUD 10/01/03

Payments Before First Default Reported:       2

Unpaid Paid Balance: $134,583

Total Claim Amount Paid:       $143,236 paid 10/25/03
                                  2,662 paid 2/21/04
             Total             $145,898

Loss on Property Sale:         $62,098

Summary:

Decatur Mortgage did not verify the source of funds for the $1,370 earnest money deposit.
Decatur did not obtain bank statements showing checks provided as earnest money were cashed.
The bank statements provided showed little cash and no ability to save.

Decatur did not document the timing of the wire transfer of $6,211 from a non-profit donor
Housing Action Resource Trust and the seller’s contribution of $7,161 back to the Trust. The
transfers actually took place in the proper order.

According to the HUD-1 Settlement Statement, the borrower gave earnest money of $1,370, plus
$170 at closing, for a total investment of $1,540. At closing, the settlement agent paid $2,976 to
pay off the borrower’s delinquent accounts. This negative investment of $1,436 was paid from
the $6,211 gift from the non-profit donor.

Decatur did not show how the borrower was an adequate credit risk. The credit report indicated
eight delinquent accounts that Decatur paid off at closing out of closing proceeds. This payoff
did not change the borrower’s attitude towards credit.

Decatur did not investigate a credit inquiry reported on the credit report.



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The underwriter (V175) approved this loan although the mortgage credit ratios exceeded HUD
guidelines. The only compensating factors provided were: job stability, ratios within guidelines
and a 2-for-1 buy-down. The ratios as computed were over HUD’s guidelines as shown on the
Mortgage Credit Analysis Worksheet using the lowest payment level under the buy-down. The
underwriter’s justification was inadequate.

The underwriter did not show how the borrower’s ability to pay would not adversely be affected
as the buy-down period expired. The borrower’s ratios were already over HUD guidelines at the
lowest buy-down amount.

Decatur and the underwriter used an unrealistically low estimate of property taxes for the
mortgage credit analysis. The underwriter used $25 per month for property taxes, which
approximated the taxes on unimproved land. Marion County actually assessed $1,595 against
the completed home, which was about $133 per month.

The Appraisal report (by JWM17R) used three comparable properties one mile from the subject
property and one that was one block away in the same subdivision—and likely built by the same
builder/seller as the subject property. All four comparable properties were FHA insured
properties from the builder’s and Appraiser’s files.

This loan went into default after only two payments had been received. Decatur’s management
did not identify this loan as an early default loan, and did not perform a Quality Control Review
of the loan.




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FHA Case Number: 151-6588010

Mortgage Amount: $ 116,623

Section of Housing Act: 203(b)

Date of Loan Closing: 03/11/02

Current Status: Default. First legal action to commence foreclosure on 3/1/04 (as of 7/30/04) –

Prior Status: In Default

Payments Before First Default Reported:      9

Unpaid Paid Balance: $114,995

Summary:

Decatur Mortgage did not verify the source of funds for the $1,113 earnest money deposit. The
bank statements in the loan file did not support the provision of the deposits, and the statements
did not show a pattern of savings.

Decatur did not document the timing of the wire transfers of $4,675 from the non-profit donor
Housing Action Resource Trust and a $5,625 seller contribution back to the Trust. The gift was
actually wire transferred first.

According to the HUD-1 Settlement Statement, The borrower provided a $1,113 earnest money
deposit, and gave another $236 at closing, for a total investment of $1,349. At closing the
settlement agent paid a total of $1,455 to pay off a judgment against the borrower. This negative
investment of $106 was paid from the $4,675 gift from the non-profit donor.

Decatur did not adequately show that the borrower was an acceptable credit risk. The credit
report showed that the borrower had debts over $4,300 and a civil judgment of $1,455 that was
paid off at closing. The credit report showed a history of poor money management and
unwillingness to pay debts. The credit report showed a liability of $2,359 that was in collection.
Decatur did not pay this off at closing, and it was not considered in the mortgage credit analysis.
The borrower told us that the loan originator knew about this debt but said that they didn’t have
to show it or pay it off. The borrower said that she still owed this debt.

HUD’s file contained an unsigned letter dated October 31, 2001 from the borrower stating that a
charged off Universal account was due to her letting someone else get the card in the borrower’s
name, and that the judgment on a prior residence was due to damages caused by someone else.
The borrower told us that she never provided the letter or the information in the letter. The
borrower said that the information was not true and that the debts were hers.


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The seller raised the sales price from $109,041 to $118,491 four months after the initial sales
agreement. The second sales agreement showed a higher estimate of gift from a different non-
profit donor. The borrower told us that she only knew that the increased sales price had
something to do with her needing the gift since she didn’t have enough money.

The underwriter (ZLPR Loan Prospector) did not adequately show how the borrower would not
be adversely affected as the buy-down expired.

Decatur and the underwriter used an unrealistically low estimate of property taxes in the
mortgage credit analysis. The underwriter used $40 per month, which approximated the taxes on
the undeveloped land. Marion County actually assessed $990 on the property as a developed
property, which was about $82 per month.

The appraisal (by JWM17R) used four comparable properties that were all within the same
subdivision as the subject property, and were likely built and sold by the same builder/seller as
the subject property. Two comparables were over six months prior to the appraisal. Three of the
comparables were shown as being from the builder and Appraiser files. The Appraiser stated
that supply and demand were in balance but cited a lack of similar reported sales to justify using
old comparables.




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Status of Claims Paid
                                                                     HUD's
               FHA Loan                   Mortgage     Claim Paid   Computed
                Number       Status       Amount         By HUD     Sale Loss
               151-6605466    Default       $152,605           $0          $0
               151-6647913 Delinquent       $167,779           $0          $0
               151-6387115    Default       $164,328           $0          $0
               151-6396198 Delinquent       $132,559           $0          $0
               151-6907158 Delinquent       $117,080         $750          $0
               151-6957663    Default       $127,585           $0          $0
               151-6610262    Default       $153,772           $0          $0
               151-6442972    Default       $144,637           $0          $0
               151-6561313 Delinquent       $154,686         $650          $0
               151-6485246 Foreclosed       $150,727           $0          $0
               151-6510827    Default       $158,796           $0          $0
               151-6531249 Claim Paid       $126,672     $136,282     $60,944
               151-6537560    Default       $141,288           $0          $0
               151-6550730 Claim Paid       $133,980     $148,454     $67,282
               151-6574687 Delinquent       $160,014      $12,233          $0
               151-6611721    Default       $136,720           $0          $0
               151-6471089 Delinquent       $148,291         $650          $0
               151-6443404    Default       $142,607         $100          $0
               151-6838872 Foreclosed       $167,728           $0          $0
               151-6688221 Delinquent       $139,156           $0          $0
               151-6415426 Claim Paid       $119,922     $132,307     $59,696
               151-6649076    Default       $164,886         $850          $0
               151-6642980    Default       $149,306           $0          $0
               151-6589970    Default       $167,576           $0          $0
               151-6463779 Claim Paid       $138,852     $166,284     $67,530
               151-6476419    Default       $167,779       $4,034          $0
               151-6476579 Claim Paid       $130,935     $142,213     $64,912
               151-6477778    Default       $128,651           $0          $0
               151-6482988 Claim Paid       $120,785     $128,203     $51,981
               151-6483461 Claim Paid       $165,800     $174,454          $0
               151-6486054    Default       $143,115         $750          $0
               151-6486185 Claim Paid       $110,229     $119,055     $56,963
               151-6490797    Default       $111,954           $0          $0
               151-6494487    Default       $105,864           $0          $0
               151-6507102 Claim Paid       $132,660     $138,025     $58,437
               151-6527323 Claim Paid       $134,842     $144,970     $70,131
               151-6542156    Default       $153,924           $0          $0
               151-6567251 Claim Paid       $151,539     $162,252          $0
               151-6584264 Claim Paid       $156,259     $166,098     $55,089
               151-6584501 Claim Paid       $134,893     $145,898     $62,098
               151-6588010    Default       $116,623           $0          $0
                       Totals             $5,827,404   $1,924,512    $675,063




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                            OIG Evaluation of Auditee Comments

Decatur's overall response was that it followed HUD’s requirements in effect at the time in
gathering information. Additionally, that it was the responsibility of the sponsor and its
underwriters in how they analyzed the information provided and for the decision to approve the
loans we cited in this report. Decatur's owners asserted that they provided adequate oversight of
Decatur, took corrective actions, and voluntarily closed its operations. Therefore, the owners
should not be held responsible for any technical origination deficiencies along with the sponsor's
analysis and loan approval decisions. Decatur's owners also maintained that they performed
adequate Quality Control Reviews over Decatur's loans and although they did not document
what was done during each review—they were not specifically required to do so. Decatur's
owners also stated that corrective actions they and their sponsor took served to lower Decatur's
default rate.

We agree that the sponsors are primarily responsible to HUD for the actions of loan
correspondents; however, the correspondents are still responsible for the origination and
processing that they perform on behalf of the sponsors and HUD/FHA. We cited HUD’s
regulations and requirements in the findings of the report as necessary. In addition to specific
HUD/FHA requirements, loan correspondents and sponsors are required to follow prudent
lending practices. The corrective actions that Decatur's owners indicated were required by the
sponsor were basically already prudent lending practices that Decatur and its sponsor should
have followed. Despite discontinuing the use of the Homeownership Action Resource Trust for
homebuyer assistance, Decatur continued using the Nehemiah program for homebuyer
assistance.

At the time we selected the 41 defaulted loans for review, Decatur's default rate for the period
September 1, 2001 through August 31, 2003 was 8.1 percent, while the National average was
only 2.16 percent and for the State of Indiana State it was 3.09 percent. For the period July 1,
2002 through June 30, 2004, Decatur managed to lower its default rate to 6.27 percent while the
National rate was 1.84 percent and the State rate was 2.84 percent. These rates demonstrate that
while Decatur improved its performance, it still experienced a much higher than average default
rate.

Decatur's owners asserted that HUD's Quality Assurance Division already addressed the issues
we cited with Decatur's sponsor for eight of the loans cited in this report. We included those
eight loans in our review because at the time of our audit, HUD was entering into an
indemnification agreement with the sponsor. HUD and the main sponsor did not enter into an
indemnification agreement for the eight loans until August 12, 2004.

We modified the wording in our findings as needed to clarify who was responsible for what
actions and modified our recommendations as necessary. HUD’s management needs to address
the loans we cited with the sponsors, but we also believe that HUD needs to consider the issues
we identified with Decatur's owners in any possible future applications to originate FHA-insured
loans.

Finding 1
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Decatur’s owners disagreed with this finding. The owners asserted that they provided adequate
management oversight and never submitted documentation that they knew to be deficient. The
owners stated that as a loan correspondent, Decatur did loan processing by obtaining information
and the sponsor’s underwriters were responsible for the analysis of the documentation provided.
The owners maintain the issues we cited were underwriting issues that should be addressed with
its sponsors.

We disagree that Decatur’s owners adequately oversaw operations as we discussed in the second
finding of this report. We agree that the sponsors are primarily responsible to HUD/FHA for the
actions of its loan correspondents and for the underwriting approval decisions.

As a loan correspondent, Decatur Mortgage Company was responsible to HUD/FHA and the
sponsors for the application process and, the obtaining and processing of documentation in
accordance with FHA’s requirements and prudent lending practices. To a large degree, sponsors
rely on information provided by loan correspondents in performing the underwriting analysis.

As we cited in the first finding, Decatur processed loan applications that overstated or provided
unverified income, and understated expenses. Decatur failed to adequately document the actual
source of borrower funds and allowed gift funds provided by non-profit donors to pay-off
delinquent debts of the borrowers. Decatur allowed interested third parties to provide
documentation and tended to use the same appraiser for its loans. Although the sponsor is
primarily responsible to HUD, our analysis of Decatur’s delinquent loans as a whole did not
show that Decatur’s staff was using prudent loan origination practices to gather information for
the sponsor’s underwriters. We modified our finding to clarify lender responsibilities and
modified our recommendations as needed.

Verifying / Supporting Income and source of Funds

Decatur's owners asserted that FHA does not require loan correspondents to analyze employment
or financial documentation to determine the effective income or assets for closing. This analysis
is done by the underwriter and not the loan correspondent. The owners assert that the income
issue is related strictly to underwriting the loan—not to origination or processing.

Decatur's owners stated that in FHA Case number 151-6605466, Decatur properly obtained a
rental agreement and a copy of a rent check from the borrower and had no reason to question the
borrower's veracity. The homebuilder's sales agent confirmed that the borrower herself
furnished the rental information and the sales staff had no knowledge of misinformation.

Decatur's owners stated that for FHA Case number 151-6542156, Decatur properly obtained
copies of the Social Security benefits letters and the loan application disclosed the ages of the
borrower's children. The underwriter decided how to treat the income. The underwriter grossed
up the income in accordance with HUD's rules on nontaxable income.
We do not agree with Decatur's assertions. In FHA Case number 151-6605466, Decatur
obtained a rental agreement dated the day of the subject property sales agreement and a copy of
an uncashed check. The bank statements did not show any such rental payments received by the
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borrower and no explanation was obtained. We agree that the sponsor's underwriter is
responsible for rejecting this loan if there is evidence that the rental income was not being
received, but Decatur did not meet its obligations to the sponsor and HUD to properly verify
income. In this Case, the only documentation Decatur provided was a lease and a copy of the
front of a personal check. The bank statements did not show such a check deposited so the
evidence provided was inadequate. The fact that Decatur's owners had to verify the provision of
the check and lease with the seller's agent demonstrates that Decatur may have obtained this
documentation from the seller's agent and not from the borrower.

In FHA Case number 151-6542156, the Social Security income was for two children that were
approaching the age of 18. According to documents in Decatur's loan file, this income was due
to their deceased father and not due to a disability. Social Security income was nontaxable so
the amount verified by the Social Security Administration was a gross amount and not net. As
such, grossing up an additional 25 percent was improper. The grossed up amount was provided
to the sponsor on the loan application prepared by Decatur. It was Decatur's error to report the
grossed up income on the application and the underwriter’s error in not reducing the income or
eliminating it from the mortgage credit ratio analysis due to its short-term duration.

Appraisals

Decatur's owners asserted that a loan correspondent initiates/orders the appraisals, but does not
evaluate the appraisals. They also stated appraisal evaluation is an underwriting function and not
that of a loan correspondent. Decatur's owners asserted that lenders and correspondents are only
responsible for identifying appraisals they knew or should have known were defective. Decatur
did not know nor should have known of any deficiencies with comparable sales for any of the
cited appraisals.

Decatur's owners asserted that there is no prohibition against using two comparable properties in
the subject' subdivision and the use of comparables over a mile away or over six months old was
explained by the appraiser. In the five cases cited in our first finding where appraisals were
adjusted upwards, Decatur did not condone an increased value without support for the higher
valuation. It was the underwriter's responsibility to ensure that the appraiser's conclusions were
acceptable.

We agree that the primary responsibility for reviewing the appraisals rested with the sponsor.
We modified the wording as appropriate in the report. Although Decatur maintains that it did
not condone unsupported increases in appraisal valuation, we noted that for FHA Case 151-
6485246, a Decatur employee faxed a request to the appraiser that stated "new sales price
$153,116 please adjust appraisal closing at 2:00 today". The appraiser subsequently increased
the appraised value. This indicates that Decatur's staff was able to request and obtain changes in
appraisals based on changes in the sales price. We modified our recommendations to include
HUD reviewing the appraisals on the cases we mentioned in this report to determine if the
appraisals were defective, and to take any actions deemed necessary against the appraiser and
sponsor.

Borrower Credit
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Decatur's owners responded that in the cases we cited in our report, Decatur obtained and
provided adequate documentation to the sponsor, and the sponsor's underwriter made the
determination whether the borrower's credit was worthy of loan approval. Decatur also stated
the credit report inquiries were not credit inquiries, and did not require investigation.

We agree that the sponsor's underwriter was primarily responsible for the underwriting approval
of these loans. Decatur, as a loan correspondent, was responsible for fully processing loan
applications and submitting loans to the sponsor that met HUD’s requirements. For FHA Case
number 151-6387115 cited by Decatur’s owners, the credit inquiries were by Wireless Finance
and Ameritech Small Business. Even though these inquiries may not have been from a lending
institution, they could still represent possible delinquent accounts or other debt. At closing for
this loan, Decatur had more of the borrower's delinquent accounts paid-off than was actually
provided by the borrower. Although the decision to approve this loan was ultimately the
sponsor's underwriter, Decatur had a responsibility to submit only loans to the sponsor that
showed acceptable credit histories.

For FHA Case number 151-6396198 cited by the owners, the credit report inquiries were from a
credit bureau and a mortgage inquiry. These inquiries all represent possible credit that should
have been researched.

A recurring problem we cited in our first finding was delinquent accounts being paid-off at
closing from closing proceeds. Paying off delinquent accounts at closing does not reflect well on
the credit worthiness of a borrower. It is true the sponsor's underwriter was ultimately
responsible for the decision to approve the loans cited, but Decatur's agreement with its sponsor
required loans to comply with FHA’s requirements before submission. Decatur was responsible
for the processing of these loans and the decision that it was acceptable to be approvable by the
sponsor.

Source of Funds

Decatur's owners responded that in the cases we cited in our first finding, the earnest money
deposits were less that two percent of the sales price and did not require verification. They said
if the deposits appeared excessive based on the borrower's savings history, the sponsor's
underwriter should have requested additional documentation of the earnest money deposits.

Regarding nonprofit gift funds, Decatur's owners asserted that HUD Handbook 4155.1 REV-4,
CHG-1, nor any other FHA provision required evidence of a wire transfer from nonprofits to the
closing agents. They asserted that HUD's Single Family Reference Guide states the transfer of
down payment assistance funds could be reflected as a transaction on the HUD-1 Settlement
Statement.
We disagree with Decatur's response. For the loans we cited in this report, the borrowers did not
demonstrate any history of savings—thus Decatur should have documented the earnest money
deposits during the loan processing. HUD Handbook 4155.1 REV-4, Section 2-10, requires
lenders to document fund transfers from the donor to the borrower. Lenders must obtain
verification the closing agent received the gift funds from the donor. We agree the underwriter
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should have required Decatur to obtain such documentation, but it was still Decatur’s
responsibility to the loan processor to gather the documentation.

The closing agent lacked documentation of the wire transfers to and from the nonprofit donors.
We obtained the documentation directly from the closing agent's bank. In only one case—FHA
Case number 151-6463779—the nonprofit donor provided the gift funds after the seller's
contribution was sent to the nonprofit. In this Case, the seller provided the gift funds in violation
of HUD’s requirements. Such verification was a loan processing requirement and the sponsor
should have required verification by Decatur.

The Single Family Reference Guide referred to by Decatur's owners was dated November 27,
2001. The Guide refers to Mortgagee Letter 2000-28. The Letter required donors to show that
gifts to homebuyers did not come from interested parties, and made lenders responsible to obtain
verification the closing agent received funds from the donor. Mortgagee Letter 2002-2 dated
January 16, 2002 states when a seller or a nonprofit pays a homebuyers consumer debt to meet
debt to income ratios, this is an inducement to purchase and is not acceptable underwriting. The
underwriter is ultimately responsible for the mortgage credit analysis. However, Decatur
processed the loans that allowed nonprofit donors to pay-off borrower debts and sellers to
provide gift funds without documenting if this occurred after the receipt of funds from the donor.

Payment of Delinquent Debts

Decatur's owners asserted they complied with FHA’s guidelines in place at the time for using
nonprofit gift funds to pay borrower delinquent accounts. The owners claimed HUD did not
prohibit gift funds to be used to pay-off borrower’s delinquent debts at closing until after
February 16, 2002—after the FHA Case numbers were ordered. The owners cited FHA Case
number 151-6838872 as a Case where the gift funds were not used to pay-off borrower debts.

Decatur's owners are correct about the date of HUD's prohibition on the practice of using gift
funds to pay-off borrower’s delinquent debts; however, the funds had to be used to pay-off
delinquent debts reflects on the borrower's credit worthiness. For FHA Case number 151-
6838872, the borrower only provided $475 toward the transaction after paying off bad debts.
This amounted to only .03 percent of the $170,412 sales price. This Case was not one of the 23
Cases we cited where gift funds were used to pay-off bad debts.

Borrower Expenses and Property Taxes

We do not agree that Decatur was not responsible for the issues cited in this audit report. As a
loan correspondent, Decatur was responsible for processing the loan application for submission
to the sponsor. Since Decatur prepared the application form, it made the decision on the estimate
of taxes and expenses to provide to the sponsor.

The purpose of the mortgage credit analysis is to determine whether the loan applicant will be
able to afford the anticipated mortgage payments and other expenses. To estimate taxes at a
level paid by the developer on undeveloped land rather than what the borrower would be
expected to pay is not a reasonable estimate—regardless of what is specifically prohibited by
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HUD’s regulation. Any monthly expenses omitted from the loan application were improper.
The sponsor was responsible for the underwriting of the loans but must—to a large extent—rely
on information provided by the loan correspondent. In these cases, Decatur failed the sponsor
and HUD by providing low tax estimates, and failed the loan applicants in cases where the
ability to pay their mortgage and living expenses was borderline.

Documentation Provided by Interested Third Parties

Decatur's owners asserted that credit reports and verification forms may not pass through the
hands of interested third parties, but they were not aware of any prohibition against borrowers
furnishing bank statements, pay statements, W-2 forms, letters of explanation, and other items by
using a third parties fax machine. Handbook 4000.2 REV-2 only cited credit reports and
verification forms as examples of what interested third parties were not allowed to handle.
Decatur's practice was to accept faxed documentation prior to formal loan application, but
require original documents at the time of the loan application when Decatur met with the
borrowers. Decatur's owners stated HUD did not prohibit the use of a third party's equipment to
transmit loan documentation until January 2004.

Decatur's owners stated that in the three cases where our report cited incorrect letters of
explanation created by the seller, Decatur had no reason to suspect the information was
inaccurate. The owners asserted the borrowers furnished the documentation and represented that
the information was correct. The owners stated it is ultimately an underwriter's responsibility to
ensure that a file does not contain documentation improperly handled by third parties.

We agree the sponsor's underwriters were responsible for approving the loans when file
documents showed that they were faxed from the seller's office. If the loan correspondent
obtained original documentation from the borrowers after receiving a faxed copy, we would not
have cited the issue. If Decatur's loan officer received the documentation from the borrower
during a face-to-face interview, there would not have been a reason to fax it from the seller's
office.

W-2 statements and letters of explanation are key documents supporting the amount of earnings
and why past delinquencies arose. Even if HUD had not specifically cited the documentation
type in past mortgagee letters or handbooks, prudent lending practices would require the loan
officer to be absolutely sure that the documentation was provided by the borrower and not
fabricated by the seller or someone else with an interest in the transaction. A document faxed in
from a seller or real estate agent does not show that the borrower provided the documentation or
knew about the documentation. For FHA Case number 151-6589970, Decatur asserted that the
borrower provided the letter of explanation about a short pay period. However, the borrower
said the letter was wrong and he had never seen it before. The sponsors are ultimately
responsible to HUD for the actions of their loan correspondents, but Decatur did not properly
follow prudent lending practices in obtaining all documentation for submission to the sponsor.

Finding 2

Decatur's owners disagreed with the second finding of this audit report.
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Decatur's owners asserted that Decatur's Branch Manager oversaw the operations of Decatur's
staff, and the managing owner—Homebuilders Financial Network—provided management
support. The owners indicated Homebuilders Financial Network performed Quality Control
Reviews over at least 10 percent of Decatur's loan originations each quarter in accordance with
its approved Quality Control Plan. Decatur's owners stated they followed the requirements of
the Quality Control Plan in all Cases reviewed, but were not required by HUD to repeat the lists
of items reviewed or show the analysis done and documents verified in each Case reviewed.
HUD only requires quality control reports to identify deficiencies identified and cited. The
owners asserted the deficiencies identified in this report were underwriting issues that Decatur
was not responsible for. Furthermore, they said the Quality Control Reviews were not deficient
because they did not identify the same issues. Decatur's owners also asserted they were not
given access to early default information in HUD's Neighborhood Watch System until mid 2002.

Although Decatur's owners said they followed their approved Quality Control Plan, they had no
documentation to show what they did for the Cases they reviewed. HUD's Mortgagee Approval
Handbook 4060.1 REV-1, dated September 1993, paragraph 6-3(D), requires the quality control
reviewers to obtain new credit reports. Paragraph 6-3(E) of the Handbook requires the quality
control plan to provide for the written reverification of the mortgagor's employment, deposits,
gift letter, or other sources of funds. These requirements indicate the quality control reviewer
will be obtaining documentation needed to perform the reviews. The sole documentation that
Decatur's owners were able to provide for each loan reviewed was a one-page summary report
showing that Decatur did a good job, or showing what minor problems were identified and
corrected. Decatur's owners said they did everything required by the Quality Control Plan for all
loans reviewed, but had no support for what was specifically reviewed for each loan. If a lender
does not document what they did to verify whether the loan origination and processing was done
correctly, HUD and the lender lack assurance that the lender was prudent in conducting its
reviews and it becomes difficult to follow-up on corrective actions taken.




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