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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Management Memorandum
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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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Introduction
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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Executive Summary
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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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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Finding 1
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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Finding 1
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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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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Finding 1
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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Finding 1
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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Finding 1
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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Finding 1
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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Finding 1
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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Finding 2
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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Finding 2
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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Finding 2
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
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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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Finding 2
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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Management Controls
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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Appendix C
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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Appendix C
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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Appendix C
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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Appendix C
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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Appendix C
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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Appendix C
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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Appendix C
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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Appendix C
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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Appendix C
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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Appendix C
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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Appendix C
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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Appendix C
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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Appendix C
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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Appendix C
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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Appendix C
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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Appendix C
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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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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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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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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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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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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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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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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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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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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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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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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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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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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Appendix E
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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Appendix E
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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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)