oversight

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)

                                                               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