U.S. Department of Housing and Urban Development Office of Inspector General, Region VI 819 Taylor Street, Room 13A09 Fort Worth, Texas 76102 (817) 978-9309 FAX (817) 978-9316 http://www.hud.gov/offices/oig/ June 4, 2004 2004-FW-1802 MEMORANDUM FOR: John C. Weicher Assistant Secretary for Housing-Federal Housing Commissioner, H FROM: D. Michael Beard Regional Inspector General for Audit, 6AGA SUBJECT: Austin Loan Corporation Non-Supervised Loan Correspondent Austin, Texas INTRODUCTION We have completed an audit of Austin Loan Corporation, a non-supervised loan correspondent. The objective of our audit was to ensure Austin Loan’s compliance with HUD/FHA Single Family Insurance regulations. SCOPE/METHODOLOGY Our audit included defaulted loans originated by Austin Loan during the period May 1, 2001, through May 31, 2003. We selected our sample from the list of Austin Loan’s defaulted loans contained in HUD’s Neighborhood Watch System. 1 In order to achieve our objective, we: • Reviewed loan files provided by Austin Loan, HUD, and various title companies; • Interviewed HUD staff and the staff of Austin Loan; • Reviewed relevant HUD regulations; • Reviewed Austin Loan’s policies and procedures; • Reviewed Austin Loan’s Quality Control Review Reports; • Interviewed third parties to the FHA loans; • Contracted for and reviewed field reviews of appraisals;2 • Analyzed FHA loan and default data from HUD’s automated systems. 1 We did not perform procedures to assess the data contained in HUD’s Neighborhood Watch System. Our audit testing did not include any other computer-generated data. 2 The field reviews were performed by an outside appraiser. We performed our fieldwork from September 15, 2003, through March 24, 2004. We performed our fieldwork at Austin Loan’s office in Austin, Texas, and HUD’s office in San Antonio, Texas. The audit was conducted in accordance with generally accepted government audit standards. BACKGROUND Austin Loan3 is a loan correspondent with multiple direct endorsement sponsors. It began originating FHA mortgages as well as conventional mortgages in 1999. HUD terminated Austin Loan’s ability to originate FHA mortgages in the San Antonio district in September 2002 due to its high default rate. Austin Loan voluntarily discontinued originating FHA mortgages in July 2003. According to Mr. Ollendorff, Austin Loan’s President, he decided to discontinue originating mortgages as Austin Loan after losing the ability to originate mortgages in the San Antonio district since most of its business was generated in that area. Therefore, he approached Premier Mortgage Funding, Inc. (Premier) regarding becoming a branch of Premier. Mr. Ollendorff stated that his company began originating loans for Premier in May 2003.4 RESULTS OF REVIEW Austin Loan did not implement its Quality Control Plan in compliance with HUD regulations. Austin Loan was either unfamiliar with or ignored HUD’s requirements regarding the implementation of Quality Control Plans. As a result, HUD has no assurance that Austin Loan’s quality control process ensured compliance with HUD/FHA regulations. Our audit work also disclosed possible conflict of interest situations and faulty and deficient appraisals. We have referred these issues for possible further review. Criteria HUD Handbook 4060.1, Mortgagee Approval Handbook contains specific guidance for the development and implementation of Quality Control Plans. The Handbook requires analysis of all loans going into default within the first 6 months. These reviews are imperative in order to determine the reasons for the early defaults. Austin Loan did not implement its Quality Control Plan in accordance with HUD regulations. Contrary to HUD regulations, and their own Quality Control Plan, Austin Loan did not review 100 percent of its loans going into default within the first 6 months. In fact, only 2 of the 17 files included in our audit sample were included in the Quality Control Reviews provided by Austin 3 Austin Loan dba Austinloan.com 4 The dba of Austinloan.com was assigned to Premier Mortgage Funding, Inc. At the same time Austin Loan Corp. abandoned the dba of Austinloan.com. 2 Loan. Since each of the loans included in our audit sample defaulted within the first 6 months; they each should have been subjected to a Quality Control Review. One of the primary objectives of a Quality Control Plan is to assure compliance with HUD/FHA requirements and to assure prompt and effective corrective measures are taken when deficiencies in loan origination are identified. HUD should take steps to ensure that the current operation of Premier Mortgage Funding, Inc. (dba, Austinloan.com) is in compliance with HUD regulations concerning Quality Control Plans. We held an exit conference with the auditee on May 18, 2004. In addition, written comments were provided on May 27, 2004. Mr. Ollendorff generally agreed with the finding in the memorandum. AUDITEE COMMENTS Mr. Ollendorff agreed that Austin Loan did not have the required Quality Control procedures in place during the audit timeframe. However, Mr. Ollendorff stated that they have taken drastic steps to correct this deficiency. Numerous consultants provided Mr. Ollendorff and his staff training on Quality Control procedures. As a branch of Premier, Austin Loan is required to submit one of every ten FHA loan files for an outside quality control audit. Mr. Ollendorff also indicated that since operating as a branch of Premier, Austin Loan has no delinquencies or deficiencies in their loan files and have therefore, not had to submit additional files for review. Further, Mr. Ollendorff indicated that Austin Loan would welcome a review by HUD, as they are extremely proud of all the changes they have made. OIG EVALUATION OF AUDITEE COMMENTS We appreciate the steps taken by Austin Loan to strengthen the quality control process. However, since effective quality control plays a major role in the loan origination process, we feel a review of the plan by HUD is necessary. RECOMMENDATION We recommend that HUD: 1A Take steps to ensure that the current operation of Premier Mortgage Funding, Inc. (dba, Austinloan.com) is in compliance with HUD regulations concerning Quality Control Plans. 3 4 5
Austin Loan Corporation, Non-Supervised Loan Correspondent, Austin, TX
Published by the Department of Housing and Urban Development, Office of Inspector General on 2004-06-04.
Below is a raw (and likely hideous) rendition of the original report. (PDF)