Issue Date September 29, 2004 Audit Case Number 2004-DE-1004 TO: John C. Weicher, Assistant Secretary for Housing-Federal Housing Commissioner, H FROM: Robert C. Gwin, Regional Inspector General for Audit, Denver Region, 8AGA SUBJECT: New Freedom, Salt Lake City, UT, Did Not Fully Disclose the Intended Use of Payments Collected from Borrowers of Streamline-refinanced Loans HIGHLIGHTS What We Audited and Why We audited New Freedom Mortgage Corporation (New Freedom), in Salt Lake City, UT. We selected New Freedom for review because it is a large nationwide mortgagee with the origination and refinancing of Federal Housing Administration insured loans as its main source of revenue. After the audit was initiated, we were notified by Denver Homeownership Center program personnel that they were in contact with New Freedom and its lawyers concerning some of New Freedom’s business operating practices. Based on conversations with Denver program personnel, we decided to concentrate our review on New Freedom’s streamline refinancing of insured loans. During our audit period, New Freedom originated 32,967 Federal Housing Administration-insured loans nationwide, with a total original mortgage amount of $3,164,265,358. Of those loans, 21,721 were streamline-refinanced loans valued at $1,892,984,443. Our audit objectives were to determine (1) whether New Freedom complied with Real Estate Settlement Procedures Act (the Act) and U. S. Department of Housing and Urban Development (HUD) related requirements when streamline refinancing Federal Housing Administration insured loans and (2) whether New Freedom's Quality Control Plan, as implemented, meets HUD requirements. What We Found New Freedom did not comply with the Act and HUD related requirements in the streamline refinancing of Federal Housing Administration insured loans. New Freedom collected an inappropriate monthly mortgage payment from borrowers of streamline-refinanced loans. New Freedom collected these payments to help offset its lender-paid closing costs on its advertised “no closing cost to you” streamline-refinanced loans. Because borrowers believed these payments to be the last mortgage payment on their existing loans and because New Freedom did not fully disclose all costs associated with the streamline-refinanced loans, borrowers were unable to make informed decisions concerning their refinanced loans. Our testing showed that from a sample of 866 loans reviewed, New Freedom collected $156,998 in inappropriate monthly mortgage payments on 598 of those loans. New Freedom’s quality control program was in compliance with HUD requirements and it own written policies and procedures. The program also ensured that deficiencies were identified and corrected in a timely manner. What We Recommend We recommend that you require New Freedom to reimburse the borrowers or HUD for the inappropriate monthly mortgage payments collected on the insured streamline refinanced loans. In addition, you should refer New Freedom to the Office of RESPA and Interstate Land Sales for review. For each recommendation without a management decision, please respond and provide status reports in accordance with HUD Handbook 2000.06 REV-3. Please furnish us copies of any correspondence or directives issued because of the audit. Auditee’s Response We provided a discussion draft of our audit report to New Freedom on August 26, 2004, and requested their comments by September 10, 2004. Per New Freedom’s request, we agreed to extend the due date for their comments to September 20, 2004. We received New Freedom’s written response by the agreed upon date of September 20, 2004. New Freedom generally disagreed with the finding, as they believed the situation to be a matter of misunderstanding. The complete text of the New Freedom’s response, along with our evaluation of that response, can be found in Appendix B of this report. 2 TABLE OF CONTENTS Background and Objectives 4 Results of Audit Finding: New Freedom Did Not Fully Disclose the Intended Use of the Prior 5 Loan’s Monthly Mortgage Payment Collected from Borrowers of Streamline- Refinanced Loans Scope and Methodology 10 Internal Controls 12 Appendices A. Schedule of Questioned Costs and Funds Put To Better Use 13 B. Auditee Comments and OIG’s Evaluation 14 C. Criteria 22 D. Overpayment Spreadsheet 24 3 BACKGROUND AND OBJECTIVES New Freedom Mortgage Corporation (New Freedom) was established on December 28, 1995, in the State of Utah as a domestic corporation. It was approved by the U. S. Department of Housing and Urban Development (HUD) to originate and underwrite Federal Housing Administration-insured loans, under HUD’s Title II Single Family Direct Endorsement Program, as a non-supervised direct endorser on June 20, 1996. New Freedom’s main office is located in Salt Lake City, UT. At the time of our review, New Freedom had 17 active branch offices. New Freedom’s principal activity is the origination and underwriting of mortgages under the HUD Single Family Direct Endorsement Program. New Freedom underwrites the loans it originates and is required to supervise and perform quality control reviews of its operations. New Freedom rarely services the loans it originates and underwrites but sells them almost immediately to its investors. During our audit period, March 1, 2002, through February 29, 2004, the majority of New Freedom’s business was streamline refinancing of Federal Housing Administration-insured loans. Over this period, its streamline refinancing business increased dramatically. Approximately 75 percent of its portfolio was Federal Housing Administration-insured loans and approximately 75 percent of those loans were streamline-refinanced loans. During our audit period, New Freedom originated 32,967 Federal Housing Administration-insured loans nationwide. Of those, 21,721 were streamline-refinanced loans. Initially we focused our review on Federal Housing Administration-insured loans refinanced in the State of Utah. New Freedom originated 2,663 Federal Housing Administration-insured loans in Utah between March 1, 2002, and February 29, 2004. Of those, 1,661 were streamline- refinanced loans, 66 of which defaulted. The total mortgage amount for the 2,663 Federal Housing Administration-insured loans was $330,475,943. Of those loans, 1,906 are active, 18 are in claim status, and 739 have been terminated. The total of all claims paid for the 18 loans in claim status was $1,724,900. Since a large majority of New Freedom’s business was Federal Housing Administration-insured streamline-refinanced loans, we focused our review on streamline-refinanced loans. Our audit objectives were to determine (1) whether New Freedom complied with the Act and HUD related requirements when streamline refinancing Federal Housing Administration insured loans and (2) whether New Freedom's Quality Control Plan, as implemented, meets HUD requirements. 4 RESULTS OF AUDIT Finding: New Freedom Did Not Fully Disclose the Intended Use of the Prior Loan’s Monthly Mortgage Payment Collected from Borrowers of Streamline-Refinanced Loans. New Freedom collected an inappropriate monthly mortgage payment from borrowers of streamline-refinanced Federal Housing Administration-insured loans; contrary to both the Act and HUD related requirements (see Appendix C). New Freedom was collecting this money to help offset its own lender-paid closing costs on its advertised “no closing cost to you” streamline-refinanced loans. Because borrowers believed these payments were the last mortgage payment on their existing loans and New Freedom did not fully disclose all costs associated with the streamline-refinanced loans, borrowers were not afforded the opportunity to make an informed decision concerning their refinanced loans. Testing showed that approximately 70.22 percent of all streamline-refinanced federally insured loans, processed out of the Salt Lake City, UT office, charged borrowers the inappropriate monthly mortgage payment. Eight hundred and sixty six streamline-refinanced insured loans were tested during our audit and 598 of those loans were charged the inappropriate monthly mortgage payments. Our testing also showed that the average amount of overcharged money collected, on those loans, was approximately $262, for a total of $156,998 in inappropriate monthly mortgage payments. While New Freedom has stopped the practice of collecting the inappropriate monthly mortgage payment, approximately 15,252 borrowers of the federally insured streamline-refinanced loans may have paid this inappropriate payment. Inappropriate Collection of Borrowers’ Monthly Mortgage Payment on Prior Loan New Freedom inappropriately collected an additional monthly mortgage payment on prior loans from its borrowers of federally insured streamline-refinanced loans. All of these loans were streamline-refinanced loans without appraisals. According to New Freedom’s own research, it charged the borrower an additional monthly mortgage payment on a prior loan in approximately 70.22 percent of a sample 796 streamline-refinanced loan cases. In these cases, the HUD-1 Settlement Statement identifies the payment collected as the next month’s mortgage payment. For example, if a loan closed toward the end of January, the HUD-1 Settlement Statement would show a February mortgage payment. The HUD-1 Settlement Statement is a standard form that should clearly show all charges imposed on the borrowers in connection with the settlement. The HUD-1 Settlement Statement is supposed to show the actual settlement costs of the loan 5 transaction. The mortgage company must clearly disclose all fees charged in settlement transactions so that the consumer (i.e. borrower) can understand the nature and recipient of the payments. New Freedom did not clearly disclose the true nature of the collected monthly mortgage payment to the borrowers. Generally, New Freedom required the borrower to bring to closing one monthly mortgage payment, which usually included principal, interest, taxes, and insurance. This situation would occur whenever HUD’s streamline refinance requirements did not allow the borrower to roll the interest that was due to the prior servicer, on the old loan, into the new loan. New Freedom would have the borrower make out a post dated check, payable to New Freedom, for the entire mortgage payment amount on the prior loan. New Freedom is entitled to the last month’s interest since it is required to pay this amount to the prior servicer. However, it is not entitled to obtain and keep the prior loan’s principal, taxes, and insurance without applying these amounts to the old loan. Eight hundred and sixty six Federal Housing Administration-insured loans were tested during our review. The Office of Inspector General (OIG) auditors reviewed 70 loans and New Freedom’s Quality Control Division reviewed 796 loans. Five hundred and ninety eight of those loans were charged the inappropriate monthly mortgage payments. New Freedom overcharged the borrowers of the 598 loans approximately $156,998 for inappropriate principal, taxes, and insurance. During our detailed analysis of 16 federally insured streamline-refinanced loans, we identified that six of those loans contained the inappropriate monthly mortgage payment. The inappropriate principal, taxes, and insurance collected ranged from $152 to $341. We also interviewed six borrowers in the Denver Metropolitan area who were also charged the inappropriately monthly mortgage payment. The inappropriate principal, taxes, and insurance collected ranged from $185 to $455. New Freedom performed testing of 796 of the streamline-refinanced loans refinanced out of its Salt Lake City, UT office and determined that 559 of those loans had the inappropriate monthly mortgage payment. This means that 70.22 percent of the streamline-refinanced loans tested contained the inappropriate monthly mortgage payment. New Freedom did not perform an analysis to determine the average amount of the inappropriate payments. We analyzed New Freedom’s testing and verified that it was supported. We selected one of the same months New Freedom reviewed and we choose a separate sample of 48 loans to analyze. Of those loans, 27 loans had the inappropriate monthly mortgage payment. The results of our review were comparable with the results of New Freedom’s review. We computed the average amount of the inappropriate principal, taxes, and insurance collected for the 39 loans reviewed by the OIG was $262. Applying 6 this average to the 598 loans reviewed, we determined that New Freedom overcharged the borrowers approximately $156,998. New Freedom streamline-refinanced 21,721 Federal Housing Administration- insured loans from March 1, 2002, through February 29, 2004. Taking 70.22% of the 21,721 loans refinanced, we estimated that 15,252 loans were charged the inappropriate monthly mortgage payment. We multiplied the 15,252 loans times the average inappropriate payment of $262. This computation equals $3,996,024 in inappropriate principal, taxes, and insurance that was collected from the borrowers during our audit period. According to New Freedom officials, the collection of the principal, taxes, and insurance via a post dated check was not an attempt to mislead the borrowers but, rather a way to offset the lender-paid closing costs, while providing borrowers with time to obtain the funds needed to close the loan. New Freedom officials stated that one of the reasons they have borrowers write a post dated check to New Freedom, rather than bring the funds to closing, is that some States have a “good funds” law. This means that the title company will not accept a personal check, and the borrower must provide certified funds at closing. When the borrower writes the check to New Freedom, the check is post-dated for the 15th of the next month, allowing the borrower time to obtain the money and perhaps get money back from the prior escrow account. Therefore, New Freedom officials believed that its practice of collecting the final payment on the prior loan was to the borrower’s advantage, by helping them to streamline refinance their old loan without having to pay any out-of-pocket costs at closing. Further, New Freedom officials contented that they disclosed to the borrowers what the payment was applied toward, and the borrowers should have been aware of how New Freedom applied the payment. New Freedom Did Not Accurately Disclose How the Monthly Mortgage Payment Was Applied We found that New Freedom did not disclose to its borrowers how the monthly mortgage payment would be used. New Freedom advertised “no closing cost to you” streamline refinancing of Federal Housing Administration-insured loans on a mass-mailed flyer. The flyer also stated, “You may have to make one last payment on your present loan and/or possibly repay New Freedom for escrows advanced or escrow shortages on your current loan.” Additionally, New Freedom sends out a package of documents to borrowers to inform them about the streamline refinancing process. Included in this package is a copy of the “Good Faith Estimate.” In the cases we reviewed, that had the inappropriate monthly mortgage payment, the good faith estimate did not disclose this payment as a charge to the borrower even though New Freedom was aware that the borrower would most likely incur this charge. 7 Also included in the package was a document, entitled “Streamline Questions and Answers,” that contains the following question and answer: “Q - Do I have to bring any funds to closing? A – Yes. At closing you will bring in the last payment on your old loan, unless you qualify to roll in the final payment into your new Streamline FHA Refinance. You may post-date your final payment to the 15th of the following month, which will pay off your current loan.” Borrowers may owe interest to the prior mortgagee on the unpaid principal balance from the date the last payment was made until the date the loan is paid off, but, in most cases, they do not owe the principal, taxes, and insurance, to the prior mortgagee. New Freedom should only charge the borrower for costs incurred and due to the prior servicer on the old loan. New Freedom did not apply the money collected for principal, taxes, and insurance from the inappropriate monthly mortgage payment to the prior loan. The way New Freedom disclosed the monthly mortgage payment to the borrower, the principal collected should reduce the principal amount of the prior loan, and the taxes and insurance should be applied to their prior escrow account. Since the principal collected was not applied to the prior mortgage, New Freedom should reduce the principal amount of the new loan. Likewise, since the taxes and insurance collected were not applied to the old escrow account, they should be applied to the new escrow account. Instead, New Freedom used the money to pay some of the closing costs incurred in the loan transaction. Borrowers were not aware, and the disclosure documents did not indicate, that a portion of the monthly mortgage payment was not applied to their prior loan, but was used to pay closing costs. We interviewed six borrowers who were charged the inappropriate monthly mortgage payment to determine their understanding of what the monthly mortgage payment was for. All six of the borrowers believed that the monthly mortgage payment they were required to pay at closing was for their prior loan. The borrowers stated that their understanding was that New Freedom paid their last month’s payment for them and that they were merely paying New Freedom back. We verified that all six of the borrowers had received the “Streamline Questions and Answers” and/or the “Supplementary Closing Instructions for Our Borrower” documents. The “Streamline Questions and Answers” document stated that collecting the last month’s mortgage payment “will pay off your current loan.” The “Supplementary Closing Instructions for Our Borrower” document, which was initialed by the borrower, outlined what items the borrower was required to bring to closing. It states that the purpose of the post-dated check was for “Final Payment on Current Loan.” This type of business practice is in violation of the Act and HUD’s related requirements concerning disclosure. 8 New Freedom Recognized the Situation and Revised Its Policies and Procedures Because of discussions between New Freedom officials and the Denver Homeownership program personnel, New Freedom officials were aware of the confusion with its practice of collecting the final monthly payment on the old loan. As of May 2004, New Freedom revised its policies and procedures for calculating the closing costs required of the borrower. It has also changed the way it discloses on the HUD-1 Settlement Statement the fees and charges associated with closing the loan. The new policies and procedures do not require the borrower to pay the principal, taxes, and insurance portion of the final payment on the old loan. Only the interest owed to the prior lender will be collected from the borrower, if the amount cannot be financed into the new loan. Recommendations We recommend the Assistant Secretary for Housing- Federal Housing Commissioner 1A. Require New Freedom reimburse borrowers for the principal, taxes, and insurance that were inappropriately collected and not applied to the old or new loans. The amount for the 598 loans reviewed is $156,998. 1B. Verify that New Freedom has properly reimbursed the borrowers. 1C. Perform a review of New Freedom to verify that it has implemented its new policies and procedures for collecting payments from borrowers at closing. 1D. Consider referring New Freedom to the Office of RESPA and Interstate Land Sales for review. 9 SCOPE AND METHODOLOGY Our audit generally covered the period of March 1, 2002 through February 29, 2004. However, where applicable, the audit period was expanded to include current data through May 14, 2004. We conducted our fieldwork from May through June 2004. During our audit, we performed tests for compliance with HUD’s requirements for the refinancing of Federal Housing Administration-insured loans. Initially we focused on those loans that were refinanced in the State of Utah by New Freedom with beginning amortization dates within our audit period. Based on the initial methodology, we reviewed a sample of 16 federally insured streamline-refinanced loans that had defaulted within the first 12 months of refinancing. During our audit, we expanded our focus to include streamline-refinanced loans processed by New Freedom’s main office in Salt Lake City, UT. Those loans included loans from other States. Based on the results of our initial testing, New Freedom performed its own testing. This testing consisted of auditing 796 of the 21,185 streamline refinanced loans processed by the Salt Lake City office, during the period March 1, 2002, to March 31, 2004. We performed additional testing to verify New Freedom’s methodology and to determine whether its results were reasonable. We determined that its testing was reasonable; therefore, we relied on New Freedom’s results. Additionally, we interviewed a sample of six borrowers in the Denver Metropolitan area who had loans refinanced through the Salt Lake City office and paid the additional monthly mortgage payment on their prior loan at closing. Our sampling methodology was appropriate to obtain an understanding of the borrower’s knowledge of the refinancing process. To determine whether New Freedom acted in a prudent manner and complied with the Act and HUD related requirements in the streamline refinancing of its federally insured loans selected for review and in implementing its Quality Control Plan, we • Interviewed HUD’s management and staff to obtain background information on New Freedom. We gathered information from HUD’s Quality Assurance Division and the Denver Homeownership Center concerning New Freedom’s business operations. • Reviewed applicable Federal and HUD regulations, and other applicable reference materials related to single-family requirements. • Reviewed the Federal Housing Administration case binders and New Freedom’s scanned loan case files for our initial 16 sample loans. • Reviewed and analyzed New Freedom’s audit of 796 streamline-refinanced loans to determine if their analysis was valid. • Reviewed New Freedom’s scanned loan case files for the sample of six borrowers selected to interview. 10 • Performed an analysis of New Freedom’s accounting records for the financial transactions recorded on the HUD-1 Settlement Statements for the 16 initial sample loans. • Interviewed New Freedom officials and staff to obtain information regarding its policies and procedures. • Interviewed six Denver Metropolitan area mortgagors to determine their understanding of New Freedom’s streamline refinancing procedures and costs. • Reviewed New Freedom’s Quality Control Plan and selected a sample of the most recent quality control reviews performed. • Reviewed the Independent Auditor’s Reports for fiscal years 2002 and 2003. • Relied, in part, on data maintained by HUD in the Single Family Data Warehouse, Neighborhood Watch, and Single Family Insurance System. We did not perform a detailed analysis of the reliability of these systems. However, we did perform testing for the data related to our finding results. The HUD Office of Inspector General, Denver Office of Audit, worked closely with the Office of RESPA and Interstate Land Sales on the applicable sections of the Act pertaining to our audit. We performed our review in accordance with generally accepted government auditing standards, which included tests of internal controls that we considered necessary due to our audit objectives. 11 INTERNAL CONTROLS Internal control is an integral component of an organization’s management that provides reasonable assurance that the following objectives are being achieved: • Effectiveness and efficiency of operations; • Reliability of financial reporting; and • Compliance with applicable laws and regulations. Internal controls relate to management’s plans, methods, and procedures used to meet its mission, goals, and objectives; the processes and procedures for planning, organizing, directing and controlling program operations; and the systems for measuring, reporting, and monitoring program performance. Relevant Internal Controls We determined that the following internal controls were relevant to our audit objectives: • Process for streamline refinancing of Federal Housing Administration- insured loans and • Policies and procedures implemented in the quality control process. We assessed the relevant controls identified above. A significant weakness exists if internal controls do not provide reasonable assurance that the process for planning, organizing, directing, and controlling program operations will meet the organization’s objectives. Significant Weakness Based on our review, we believe the following item is a significant weakness: • New Freedom collected an inappropriate monthly mortgage payment from borrowers of streamline-refinanced Federal Housing Administration- insured loans; contrary to both the Act and HUD related requirements. 12 APPENDICES Appendix A SCHEDULE OF QUESTIONED COSTS AND FUNDS PUT TO BETTER USE Recommendation Unreasonable or Number Unnecessary 1/ 1A $156,998 1/ Unnecessary or unreasonable costs are those costs not generally recognized as ordinary, prudent, relevant, and or necessary within established practices. Unreasonable costs exceed the costs that would be incurred by a prudent person in conducting a competitive business. 13 Appendix B AUDITEE COMMENTS AND OIG'S EVALUATION Auditee Comments 14 15 16 17 18 19 20 OIG Evaluation of Auditee Comments New Freedom suggests that the finding is a matter of misunderstanding. They further state that the manner and application of borrower’s payment was appropriate and the loan costs were fully disclosed. The borrowers were given appropriate information and should have understood that their payment was only their normal out of pocket contribution that equaled, for the most part, their normal mortgage payment. The borrower’s contribution was only for the amount the borrower was accustomed to paying monthly on their old mortgage. Therefore, New Freedom concludes there was no harm to the borrower. As our finding states, we evaluated a sample of streamline-refinanced loans. For each of the loans that contained a borrower’s payment, we evaluated the documents and disclosures for each particular case. For each of these cases, there were no disclosures or other documentation to support New Freedom’s assertion the borrower’s payment was their only out of pocket contribution and was the monthly mortgage amount the borrower was accustomed to paying on their old loan. In fact, as our finding details, the documents that mentioned the payment indicated it was the final payment that would payoff the current loan. Additionally, the borrowers we interviewed believed the monthly payment was necessary to payoff their current loan. The borrowers further believed their payment was used to reimburse New Freedom’s advance of the borrower’s last month mortgage payment at closing. New Freedom collected an inappropriate payment from some borrowers for their streamline- refinanced loans. New Freedom collected these payment to help offset its lender-paid closing costs on its advertised “no closing cost to you’ or “no out-of-pocket cost to you” streamline- refinanced loans. As such, New Freedom did not comply with the Act and related HUD requirements. 21 Appendix C CRITERIA Real Estate Settlement Procedures Act (the Act) The Act contains these statutory provisions: Section 4 of the Act (12 United States Code 2603) states that the HUD-1 Settlement Statement “shall conspicuously and clearly itemize all charges imposed upon the borrowers and all charges imposed upon the seller in connection with the settlement… The HUD-1 Settlement Statement is a standard form that should clearly show all charges imposed on the borrowers in connection with the settlement. Section 5 of the Act (12 United States Code 2604) requires that “each lender shall…(give) a good faith estimate of the amount of or range of charges for specific settlement services the borrower is likely to incur in connection with the settlement…” Section 8 of the Act (12 United States Code 2607) prohibits kickbacks and unearned fees and states, “No person shall give and no person shall accept any portion, split, or percentage of any charge made or received for the rendering of a real estate settlement service in connection with a transaction involving a federally related mortgage loan other than for services actually performed.” HUD Requirements The following HUD requirements provide further guidance, interpretation, and clarification of the Act criteria. Appendix A of title 24, part 3500, of the Code of Federal Regulations contains the instructions for completing the HUD-1 Settlement Statement, which is required under Section 4 of the Act. Appendix A further states, “This form is to be used as a statement of actual charges and adjustments to be given to the parties in connection with the settlement.” The HUD-1 Settlement Statement is supposed to show the actual settlement costs of the loan transaction. The mortgage company must clearly disclose all fees charged in settlement transactions so that the consumer (i.e., borrower) can understand the nature and recipient of the payments. Title 24, part 203, section 27, of the Code of Federal Regulations, lists the charges, fees, and discounts that the mortgagee may collect from the mortgagor. It states “Reasonable and customary amounts, but not more than the amount actually paid by the mortgagee” may be charged for such other reasonable and customary charges as may be authorized by the Commissioner. Subsection (d) of this part requires the mortgagee to furnish a signed statement in a form satisfactory to the Secretary of Housing and Urban Development, listing any charges, fees, or discounts collected by the mortgagee from the mortgagor. Additionally, it states that all charges, fees, or discounts are subject to review by the Secretary both before and after 22 endorsement under part 203, section 255. The HUD-1 Settlement Statement is the signed form satisfactory to the Secretary. The customary and reasonable fees and charges that may be collected from the borrower by the mortgagee are identified in HUD Handbook 4000.2, rev-2, section 5-3. The Handbook states, “The HUD Field Office Manager may authorize or reject any other charge or the amount of any charge based on what is reasonable and customary in the area.” Section 5-5 of the Handbook prohibits unearned fees and specifically states, “A mortgagee is not permitted to pay any fee, compensation, or thing of value: 1) Other than for services actually performed.” Additionally, the regulations implementing the Act under title 24, part 3500, section 14 of the Code of Federal Regulations prohibit unearned fees. Part 3500, section 14(c) states, “No person shall give and no person shall accept any portion, split, or percentage of any charge made or received for the rendering of a settlement service in connection with a transaction involving a federally related mortgage loan other than for services actually performed. A charge by a person for which no or nominal services are performed or for which duplicative fees are charged is an unearned fee and violates this section.” Title 24, part 203, section 24, of the Code of Federal Regulations, states that the mortgagee shall apply the monthly payments collected from the mortgagor to the following items in the set out order: (1) premium charges under the contract for insurance, charges for group rents, taxes, special assessments, flood insurance premiums, and fire and other hazard insurance premiums; (2) interest on the mortgage; (3) amortization of the principal of the mortgage; and (4) late charges, if permitted. Additionally, the regulations implementing the Act under title 24, part 3500, section 17 of the Code of Federal Regulations set out the requirements for an escrow account that a lender establishes in connection with a federally related mortgage loan. It sets limits for escrow accounts using calculations based on monthly payments and disbursements within a calendar year. The mortgagee shall use the procedures set forth in part 3500, section 17 of this title, implementing Section 10 of the Act (12 United States Code 2609), to compute the amount of the escrow, the methods of collection and accounting, and the payment of the bills for which the money has been escrowed. HUD Handbook 4330.1, REV-5, states the requirements for establishing escrow accounts. Section 2-5 states, “Escrow funds shall be used only for the purpose for which they were collected and are subject to audit and examination by HUD.” 23 Appendix D OVERPAYMENT SPREADSHEET 24
New Freedom, Salt Lake City, UT, Did Not Fully Disclose the Intended Use of Payments Collected from Borrowers of Streamline-refinanced Loan
Published by the Department of Housing and Urban Development, Office of Inspector General on 2004-09-29.
Below is a raw (and likely hideous) rendition of the original report. (PDF)