AUDIT REPORT HOMEWIDE LENDING CORPORATION NON-SUPERVISED MORTGAGEE 2004-LA-1003 MAY 19, 2004 OFFICE OF AUDIT PACIFIC/HAWAII REGION LOS ANGELES, CALIFORNIA Issue Date May 19, 2004 Audit Case Number 2004-LA-1003 TO: John C. Weicher, Assistant Secretary for Housing-Federal Housing Commissioner, Chairman, Mortgagee Review Board, H FROM: Joan S. Hobbs, Regional Inspector General for Audit, 9DGA SUBJECT: Homewide Lending Corporation Non-Supervised Mortgagee City of Industry, California We completed an audit of Homewide Lending Corporation (Homewide), a non-supervised mortgagee, based in City of Industry, California. We selected Homewide for audit based on the existence of identified risk factors. The audit objectives were to determine whether Homewide originated Federal Housing Administration (FHA) insured mortgages in accordance with prudent lending practices and HUD requirements, and implemented its Quality Control Plan as required. Our report contains two findings with recommendations requiring action by your office. In accordance with HUD Handbook 2000.06, REV-3, within 60 days please provide us for each recommendation without a management decision, a status report on (1) the corrective action taken; (2) the proposed corrective action and the date to be completed; or (3) why corrective action is considered unnecessary. Additional status reports are required at 90 days and 120 days after report issuance for each recommendation without a management decision. Also, please furnish us with copies of any correspondence or directives issued because of the audit. Should you or your staff have any questions, please contact me or Tanya Voigt, Assistant Regional Inspector General for Audit, at (213) 894-8016. Management Memorandum THIS PAGE LEFT BLANK INTENTIONALLY 2004-LA-1003 Page ii Executive Summary We completed an audit of Homewide Lending Corporation (Homewide), a non-supervised mortgagee based in City of Industry, California. Homewide was approved as a Loan Correspondent in February 2000, but at the time of our audit had conditional approval as a non- supervised mortgagee and was completing the required test cases to obtain unconditional approval. The audit objectives were to determine whether Homewide originated Federal Housing Administration (FHA) insured mortgages in accordance with prudent lending practices and HUD requirements, and implemented its Quality Control Plan as required. Homewide used false employment and income 21 of 30 Loan Files documentation to originate FHA loans. Specifically, 21 of Reviewed Contained 30 loans we reviewed, totaling $3.5 million, contained false False Documents documents and information, including: (1) false or altered Internal Revenue Service (IRS) W-2 forms, pay stubs, and verification of employment forms; (2) false down payment and gift fund documentation; and (3) false statement of occupancy on the loan applications. Our review also identified other loan origination deficiencies with the 21 loans including: (1) overstated income; (2) inaccurate or excessive qualifying ratios; (3) unsupported down payment and/or gift funds; and (4) understated liabilities. The problem occurred because of Homewide’s complicity in the document falsification and a serious lack of due care by mortgagee personnel involved in the loan origination process. Additionally, as detailed in Finding 2, Homewide’s failure to fully implement its Quality Control Plan allowed the use of false documents to go undetected and uncorrected. As a result, loans were approved based on false information and caused unnecessary risk to the FHA insurance fund. Homewide did not fully implement its Quality Control Plan Homewide Did Not as required. Our review disclosed that while Homewide had Conduct Required Quality established a written Quality Control Plan that met HUD Control Plan Reviews requirements, it failed to conduct the required quality control reviews, and to ensure that immediate corrective action was taken on deficiencies identified in the reviews. Since HUD had previously instructed Homewide to implement and maintain a Quality Control Plan, we attribute the deficiency Page iii 2004-LA-1003 Executive Summary to Homewide management’s disregard of its responsibilities to assure the reviews were conducted and that any identified deficiencies were corrected. As a result, as discussed above, the use of false documentation in the origination of FHA loans was allowed to go undetected and continue unnecessarily. We are recommending that HUD: (1) Remove Homewide Recommendations from participation in HUD’s Single Family Mortgage Insurance Programs; (2) Require Homewide to indemnify HUD/FHA for any losses already incurred, and against future losses, on the 21 loans identified in Appendix B that were originated using false documents; (3) Consider taking civil monetary penalties against Homewide for each loan identified in Appendix B that was originated using false documents; and (4) Require Homewide to take the needed action to ensure the required Quality Control Plan reviews are conducted, and that corrective action is taken, and documented, for all reported deficiencies. We discussed the findings with Homewide officials during Audit Results Discussed the audit and at an exit conference held on March 25, 2004. With Auditee We also provided Homewide and HUD with a copy of the draft audit report for comments on March 16, 2004. We received Homewide’s response on April 30, 2004. Homewide’s response and our evaluation is discussed in the findings, and the full text of their response is included as Appendix C. 2004-LA-1003 Page iv Table of Contents Management Memorandum i Executive Summary iii Introduction 1 Findings 1. Homewide Used False Documents In Its Origination Of FHA-Insured Loans 5 2. Homewide Did Not Fully Implement Its Quality Control Plan As Required 13 Management Controls 17 Follow Up On Prior Audits 19 Appendices A. Schedule of Questioned Costs and Funds Put to Better Use 21 B. Schedule of FHA Loans Originated Using False Documents 23 C. Auditee Comments 25 Page v 2004-LA-1003 Executive Summary THIS PAGE LEFT BLANK INTENTIONALLY 2004-LA-1003 Page vi Introduction The National Housing Act, as amended, established the Federal Housing Administration (FHA), an organizational unit within the Department of Housing and Urban Development (HUD). FHA provides insurance to private mortgagees against loss on mortgages financing homes. The basic home mortgage insurance program is authorized under Title II, Section 203(b) of the National Housing Act and governed by regulations in Title 24 Code of Federal Regulations (CFR), Section 203. Homewide Lending Corporation (Homewide) was approved as a loan correspondent mortgagee in February 2000. Subsequently, at the time of our audit, Homewide was granted conditional approval as a non-supervised mortgagee and was in the process of completing the test cases required for unconditional approval. As a loan correspondent, and also while it has only conditional approval as a non-supervised mortgagee, Homewide may originate loans, but they must be sent to a HUD-approved sponsor for underwriting approval prior to loan closing, and submission to HUD for insurance endorsement. The loan origination process includes taking the initial loan application, obtaining the credit report, obtaining the appraisal report, and conducting the verifications of employment and deposits. Based on the information gathered by Homewide, the sponsor underwrites the loan and determines whether the borrower represents an acceptable credit risk for HUD/FHA. The sponsor bases its underwriting decision and approval, largely on the information gathered by Homewide. As such, it is critical that Homewide exercises due care and follows prudent lending practices when originating the loans. Homewide’s home office was located in North Hollywood, California, at the time of our audit, but then relocated to City of Industry, California prior to the issuance of this report. Homewide retained the North Hollywood office open as a branch office. Homewide had two other branch offices, but closed them in 2003. Homewide originates and underwrites FHA-insured loans and conventional loans. Between April 1, 2001, and March 31, 2003, Homewide originated 148 FHA-insured loans totaling $24,633,814. The objectives of our audit were to determine whether Audit Objectives and Homewide (1) originated FHA loans in accordance with Scope and Methodology prudent lending practices and HUD requirements, and (2) implemented its Quality Control Plan as required. To accomplish our objectives, we performed the following: Reviewed pertinent HUD/FHA regulations, requirements, and Mortgagee Letters. Page 1 2004-LA-1003 Introduction Reviewed Homewide’s loan origination procedures and interviewed appropriate Homewide officials to obtain an understanding of the loan origination process, including its controls for ensuring loans are in compliance with HUD/FHA requirements. Reviewed Homewide’s financial records to determine if Homewide met HUD’s net worth and liquidity requirements, and to identify any improper mortgagee expenditures. Contacted appropriate HUD Quality Assurance Division officials and reviewed monitoring results and information. Examined records and reports maintained on HUD’s Single Family Data Warehouse, Single Family Insurance System, and Neighborhood Watch Early Warning System. Queried Internet systems such as Lexis Nexis and Real Quest to validate loan information and locate borrowers and purported employers. Selected and reviewed a non-representative sample of 30 loans to determine whether Homewide originated the loans in accordance with prudent lending practices and HUD/FHA requirements. We selected these loans because they reported a default within the first two years of the mortgage (22 loans), they received a poor rating in the post-endorsement technical review (4 loans), or they showed indications of possible property flipping (4 loans). Conducted site visits and/or contacted the borrowers and employers as needed to validate the purported employment and income information contained in the loan files to qualify the borrowers for the mortgage loans. We also obtained State of California wage reports for the borrowers in the 30 loans to validate the employment and income information in the loan files. Our audit generally covered the period from April 2001 through March 2003. Where appropriate, we extended our review to cover other periods. We substantially performed our audit fieldwork between May and December 2003. We 2004-LA-1003 Page 2 Introduction conducted our review in accordance with generally accepted government auditing standards. Page 3 2004-LA-1003 Introduction THIS PAGE LEFT BLANK INTENTIONALLY 2004-LA-1003 Page 4 Finding 1 Homewide Used False Documents To Originate FHA-Insured Loans Homewide used false employment and income documentation to originate FHA loans. Specifically, 21 of 30 loans we reviewed, totaling $3.5 million, contained false documents and information including: (1) false or altered Internal Revenue Service (IRS) W-2 forms, pay stubs, and verification of employment forms; (2) false down payment and gift fund documentation; and (3) false statement of occupancy on the loan applications. Our review also identified other loan origination deficiencies with the 21 loans including: (1) overstated income; (2) inaccurate or excessive qualifying ratios; (3) unsupported down payment and/or gift funds; and (4) understated liabilities. The problem occurred because of Homewide’s complicity in the document falsification and an apparent serious lack of due care by mortgagee personnel involved in the loan origination process. Additionally, as detailed in Finding 2, Homewide management’s failure to fully implement its Quality Control Plan allowed the use of false documents and other deficiencies to go undetected and uncorrected. As a result, loans were approved based on false and inaccurate information, which caused unnecessary risk to the FHA insurance fund. Mortgagees must follow the statutory and Loan Origination regulatory requirements of the National Housing Requirements Act and HUD requirements, instructions, guidelines, and regulations when originating FHA- insured loans. HUD Handbook 4000.4 REV-1, Single Family Direct Endorsement Program, Section 2-1, states that a Direct Endorsement mortgagee must conduct its business operations in accordance with accepted sound mortgage lending practices, ethics, and standards. Further, Section 2- 5 of the same Handbook provides that mortgagees are to obtain and verify information with at least the same care that would be exercised if originating a mortgage when the mortgagee would be entirely dependent on the property as security to protect its investment. HUD Handbook 4060.1 REV-1, Mortgagee Approval Handbook, Section 6-1, states that as a condition of HUD/FHA approval, mortgagees must have and maintain a Quality Control Plan for the Page 5 2004-LA-1003 Finding 1 origination and servicing of insured mortgages. The Quality Control Plan must be a prescribed function of the mortgagee’s operations and assure that the mortgagee maintains compliance with HUD/FHA requirements and its own policies and procedures. It must be sufficient in scope to enable the mortgagee to evaluate the accuracy, validity and completeness of its loan origination and servicing operations. Homewide’s Quality Control Plan included a Homewide Loan chapter on loan processing policies and procedures. Processing Procedures This chapter provided that Verifications of Employment, Deposit, Mortgage Loan Account(s) or Other Source of Funds must be sent out unless the loan will be processed using alternative documentation or limited documentation. All verifications must be sent to the verifier by U.S. mail with a prepaid return envelope. If the verification is hand-carried by a messenger service, this information must be included in the loan application package. No verification may be hand- carried by a loan officer or other representative of the company who is directly involved in the origination of the loan. All verifications should be sent to street addresses, not to a post office address, if possible. The returned verification must be date stamped “received” and compared with the information provided on the application and shown on the credit report. Any discrepancies must be explained in writing by the applicant(s). We reviewed 30 of 148 FHA-insured loans Summary of Findings originated between April 1, 2001 and March 31, 2003 and found that Homewide did not comply with HUD/FHA requirements and prudent lending practices in 21 of 30 loans, totaling $3.5 million. We found the 21 loans were originated based on false documents and information, which included: • False or altered Internal Revenue Service (IRS) W-2 forms, pay stubs, and VOE forms (19 of 30 loans); • False down payment and gift funds documentation (11 of 30 loans); and 2004-LA-1003 Page 6 Finding 1 • False statement of occupancy on the loan application (5 of 30 loans). Our review also identified other loan origination deficiencies with the 21 loans including: • Overstated income (15 of 30 loans); • Inaccurate/excessive qualifying ratios (14 of 30 loans) • Unsupported down payment and/or gift funds (12 of 30 loans); and • Understated liabilities (2 of 30 loans). Details are discussed separately below. We reviewed a sample of 30 of 148 FHA-insured 21 Loans Totaling $3.5 loans that were originated by Homewide between Million Contained False April 1, 2001 and March 31, 2003 to determine Documents whether Homewide complied with HUD/FHA requirements and prudent lending practices. Our review disclosed that in 21 of 30 loans reviewed (70 percent) we found that false documents were used in the origination of the loans. More specifically, 19 of the 30 loan files contained false IRS W-2 forms, pay stubs, and VOE forms, and false down payment or gift funds. We found that in some cases the borrowers’ W-2s or pay stubs had been altered to overstate the borrower’s income, or length of employment. In other cases, the documents were fabricated, and the borrowers never worked for the purported employers, and instead were either unemployed, or worked elsewhere at a lower income. The remaining two loans had valid employment documentation, but had false down payment or gift funds documentation. We found, through our interviews with selected False Down Payment and borrowers, that in at least 11 of 30 loans (37 percent), Gift Funds Page 7 2004-LA-1003 Finding 1 the documentation in the loan file used to support the source of the down payments and/or gift funds had been fabricated. For example, one loan file showed the borrower purportedly received a gift of $3,900 from an uncle. However, when we interviewed the borrower, the borrower informed us that he did not know anyone by that name, and it was not his uncle. In fact, the borrower did not receive any gift funds from anyone. In another example, the loan settlement statement showed that a total of $9,100 had been deposited to escrow by the borrowers. When we interviewed the borrowers they informed us that they had only deposited between $4,000 and $5,000, and they thought the seller had deposited the difference. Thus, it appears that the down payment and gift funds documents were falsified to hide the fact that the borrower either did not have the required down payment, or that the true source of funds was some other interested third party involved in the transaction. Our review also disclosed that in at least 5 of 30 loans False Statements of (17 percent), the borrowers either made a statement of Occupancy false occupancy in the loan application, or the loan contained one or more strawbuyers. More specifically, in one case, the borrower’s landlord used the borrower’s personal information to purchase the property without the borrower’s knowledge or permission. The borrower recalled signing documents from his landlord but thought they were related to his rental unit. In two other cases, there was a false statement of occupancy because the borrower was purchasing the property to aid close relatives. For example, one borrower purchased the property from her daughter so it would not be foreclosed, and then later executed a quit claim deed to transfer it back to the daughter. In a second case, we interviewed the borrower, who informed us that she never had any intention of residing at the property, and planned to rent out all the units of the multiple unit property. The borrower said that she did not qualify for the loan, so the real estate agent arranged to add two co-borrowers to the loan so that she would qualify. The two co-borrowers did not contribute any funds towards the down payment or the mortgage loan, and their identity and credit was used solely for purposes of getting the loan approved. 2004-LA-1003 Page 8 Finding 1 Collectively, the falsified documents were apparently intended to enhance the appearance of the borrowers’ employment history and creditworthiness, and make it appear more favorable in order to influence the loan underwriter to approve the loan. The loans involving the use of false documents are detailed in Appendix B of this report. In addition to the false documents, our review Other Loan Origination identified other loan origination deficiencies with the Deficiencies Also Existed 21 loans, which included: overstated income; understated liabilities; inaccurate/excessive qualifying ratios; and unsupported down payment and/or gift funds. The deficiencies were due to the inclusion of false employment income or mathematical errors in loan processing. For example, in one loan, the loan processor inappropriately included rental income although there were no supporting rental agreements for the multiple units. In another case, the loan processor failed to adequately consider the downward earnings trend of the borrower. More specifically, the VOE form showed the borrower’s income was decreasing dramatically each year, from an annual income of about $66,000 in the first year, down to about $22,000 the next year. The underwriter did not adjust for the downward trend and used a monthly gross income of $3,833 for the calculations. We used the corrected, adjusted monthly income of $1,640 and calculated that the mortgage payment-to-income ratio exceeded HUD guidelines by 40 percent, and the total fixed payment-to-income ratio exceeded HUD guidelines by 27.6 percent. Thus, the loan should not have been approved without sufficient compensating factors. Details of the loan origination deficiencies for all 21 loans are also shown in Appendix B of this report. The problem occurred because of Homewide’s Homewide Failed to Exercise complicity in the document falsification and a Due Care serious lack of due care by mortgagee personnel involved in the loan origination process. Based on our interviews with the borrowers and employers we determined that employment documents and VOE forms were improperly handled and/or Page 9 2004-LA-1003 Finding 1 processed by interested third parties, such as the real estate agent and loan processor or loan officer. To illustrate, we identified a pattern with six loans that involved the same seller, real estate agent, and loan officer. All of these loans were approved using false employment documentation. When we interviewed the borrowers they confirmed the falsity of the employment information, but did not have any knowledge of the source of the false documents. The borrowers also stated that the real estate agent or loan officer provided them with all the loan documents for signature. Thus, the false documents must have been obtained by one of the parties involved in the loan transactions, not the borrower. To further illustrate the breach of controls that occurred at Homewide, we identified that in at least 19 of the 30 loans, the VOE forms were either false and/or improperly handled by an interested third party. For example, we identified two borrowers, on two different loans, that worked for the same employer. When we visited the employer to confirm the borrowers’ employment, the office manager admitted she signed the handcarried VOE forms, in exchange for some cash, even though she knew the borrowers never worked there and the information was false. Had these VOE forms been processed through the mail as required, the employment would not have been validated, and the loan would not have been approved. In other cases, we attempted to visit the purported employers to validate the borrowers’ employment and income, but were unable to locate the employer because it had never existed at the reported location. Thus, it is highly unlikely that the VOE forms were processed through the mail to an employer that we found to be non-existent. Collectively, these examples illustrate mortgagee complicity in the falsification and an apparent lack of due care by mortgagee personnel. In addition, as detailed in Finding 2, Homewide management’s failure to fully implement its Quality Control Plan allowed the use of false documents to go undetected. As a result, loans were approved 2004-LA-1003 Page 10 Finding 1 based on false information and caused unnecessary risk to the FHA insurance fund. Auditee Comments Homewide disagreed with the finding and recommendations. Homewide essentially stated that it: Was not involved in any deceitful practices or misconduct in gathering these documents; Performed due diligence and quality control to the best of their ability, including the verbal and written verifications of employment; Relied on the HUD-approved lenders to underwrite the loans and they should have done their due diligence on these loans, and notified Homewide if there were errors or questionable documentation; and Cannot afford to indemnify the loans, and offered to stop originating FHA loans until it can restructure its quality control procedures and retrain the staff. OIG Evaluation of We disagree with Homewide. Our audit work, Auditee Comments including site visits and contacts with the borrowers and employers disclosed that Homewide circumvented its procedures and policies for gathering and validating the loan information, and instead used false employment and income information. Had the loans been processed as required by its procedures, then Homewide would have detected the false information before it was forwarded to the HUD-approved lender for underwriting. In our opinion, the recommendations are appropriate based on the severity of the problems found. Recommendations We recommend that you: Page 11 2004-LA-1003 Finding 1 1A. Remove Homewide from participation in HUD’s Single Family Mortgage Insurance Programs. 1B. Require Homewide to indemnify HUD/FHA for the $318,872 in losses already incurred, and against future losses, valued at $3,163,750, on the 21 loans identified in Appendix B that were originated using false documents. 1C. Consider seeking civil monetary penalties against Homewide for each loan identified in Appendix B that was originated using false documents. 2004-LA-1003 Page 12 Finding 2 Homewide Did Not Fully Implement Its Quality Control Plan As Required Contrary to HUD requirements, Homewide did not fully implement its Quality Control Plan as required. Our review disclosed that while Homewide had established a written Quality Control Plan that met HUD requirements, it failed to conduct the required quality control reviews, and to ensure that immediate corrective action was taken on deficiencies identified in the reviews. We attribute the deficiencies to Homewide management’s disregard of its responsibilities to assure the reviews were conducted and that deficiencies were corrected. As a result, as discussed in Finding 1, this unnecessarily increased the risk to the FHA insurance fund by approving loans that did not comply with HUD/FHA requirements. HUD Handbook 4060.1, REV-1, Mortgagee Approval Quality Control Plan Handbook, Chapter 6, provides that as a condition of HUD- Requirements FHA approval, mortgagees must have and maintain a Quality Control Plan for the origination and servicing of insured mortgages. The Quality Control Plan must be a prescribed function of the mortgagees operations and assure that the mortgagee maintains compliance with HUD/FHA requirements and its own policies and procedures. It must be sufficient in scope to enable the mortgagee to evaluate the accuracy, validity and completeness of its loan origination and servicing. It must provide for independent evaluation of the significant information gathered for use in the mortgage credit decision making and loan servicing process for all loans originated or serviced by the mortgagee. The quality control plan must enable the mortgagee to initiate immediate corrective action where discrepancies are found. In November 2001 HUD, conducted a review of Homewide Quality Control Plan and found that Homewide failed to maintain and implement Reviews Not Conducted a Quality Control Plan in compliance with HUD requirements, and instructed Homewide to revise and implement procedures to correct the deficiencies. Homewide revised its Quality Control Plan as needed, and outsourced the quality control review function to an independent contractor. We found, however, that the contractor only conducted two reviews in April and June 2002. No quality control reviews had been conducted Page 13 2004-LA-1003 Finding 2 since June 2002, up to the time of our audit. Homewide's procedures provided that it would have quality control reviews conducted on 10 percent of its loans closed. During 2002, Homewide closed 70 loans, and therefore, should have had reviews conducted on at least 7 loans. We found, however that only one FHA loan was reviewed. We also reviewed the results of the two reviews conducted by the contractor and found that although the reviews identified numerous deficiencies, no corrective action was taken by management to remedy the problems, or prevent future occurrences. For example, the April 2002 review identified 10 deficiencies with the one FHA loan reviewed. Some of the deficiencies identified included: (1) unable to locate evidence that the donor's funds were withdrawn from the corresponding bank account; (2) the good faith estimate in the file did not list all fees and costs associated with the transaction; (3) and unable to locate the escrow amendment or addendum to the purchase contract to delete an individual. The June 2002 review did not include any FHA loans. We attribute the deficiencies to Homewide management’s Homewide Management disregard of its responsibilities to assure the reviews were Disregarded Its conducted and that deficiencies were corrected. Since Responsibilities HUD had previously instructed Homewide of its responsibilities to maintain and implement a quality control plan, Homewide management was knowledgeable of the requirements. Yet, Homewide management failed to assure it fulfilled its responsibilities. Homewide’s FHA Underwriter explained that there was insufficient staff to perform the work. In our opinion, this was not an acceptable explanation for not performing an integral component of its FHA loan program responsibilities. The work required by Homewide was minimal since it had outsourced the actual review function to a contractor. As a result, as discussed in Finding 1, Homewide Homewide Increased The unnecessarily increased the risk to the FHA insurance fund Risk To The FHA by approving loans that did not comply with HUD/FHA Insurance Fund requirements. 2004-LA-1003 Page 14 Finding 2 Auditee Comments Homewide agreed the quality control plan reviews were not conducted, and has hired a quality control consultant to put together revised policies and procedures and to restructure Homewide. Homewide also reviewed the provisions of the HUD Handbook on the requirements of an acceptable quality control plan, and has now adopted a plan that meets those requirements. Additionally, Homewide has contracted with another company to perform post closing quality control reviews. The planned corrective actions taken will help Homewide better combat deceptive business practices in the future. OIG Evaluation of Since Homewide agreed with the finding, we have no Auditee Comments further comment. Recommendations We recommend that you: 2A. Require Homewide to take the needed action to ensure the required Quality Control Plan reviews are conducted, and that corrective action is taken, and documented, for all reported deficiencies. Page 15 2004-LA-1003 Finding 2 THIS PAGE LEFT BLANK INTENTIONALLY 2004-LA-1003 Page 16 Management Controls In planning and performing our audit, we obtained an understanding of the management controls that were relevant to our audit. Management is responsible for establishing effective management controls. Management controls, in the broadest sense, include the plan of organization, methods and procedures adopted by management to ensure 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 the following management controls were Relevant Management relevant to our audit objectives: Controls Validity and Reliability of Data – Policies and procedures that management has implemented to reasonably assure that valid and reliable data are obtained, maintained, and used during the loan origination process. Compliance with Laws and Regulations – Policies and procedures that management has implemented to reasonably ensure its loan origination process is carried out in accordance with applicable laws and regulations. The following audit procedures were used to assess the relevant controls identified above: Reviewed and obtained an understanding of Homewide’s policies, procedures and practices for originating FHA-insured loans; Interviewed appropriate Homewide management and staff; and Reviewed 30 of 148 FHA-insured loans originated between April 1, 2001 and March 31, 2003. A significant weakness exists if management controls do Significant Weaknesses not give reasonable assurance that control objectives are met. Based on the results of our review, we conclude the following were significant weaknesses: Page 17 2004-LA-1003 Management Controls Homewide’s policies and procedures, as implemented were inadequate to ensure valid and reliable data was obtained during the loan origination process (Finding 1). Homewide management’s policies and procedures were inadequate to ensure compliance with HUD requirements and prudent lending practices (Findings 1 and 2). 2004-LA-1003 Page 18 Follow Up On Prior Audits This is the Office of Inspector General’s (OIG) first audit of Homewide Lending Corporation. Page 19 2004-LA-1003 Follow Up On Prior Audits THIS PAGE LEFT BLANK INTENTIONALLY 2004-LA-1003 Page 20 Appendix A Schedule of Questioned Costs and Funds Put to Better Use Recommendation Type of Questioned Costs Funds Put to Number Ineligible 1/ Unsupported 2/ Better Use 3/ 1A $318,872 0 $3,163,7501 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 put to better use relates to costs that will not be expended in the future if our recommendations are implemented; for example, costs not incurred, de-obligation of funds, withdrawal of interest, reductions in outlays, avoidance of unnecessary expenditures, loans and guarantees not made and other savings. 1 This represents the total mortgage amounts for 19 of the 21 loans originated using false documents, but that had not yet gone into claim status ($3,163,750), plus the actual claim amounts (as of our audit) for the other two loans ($318,872). Appendix B shows the individual amounts for each of the 21 loans. Page 21 2004-LA-1003 Appendix A THIS PAGE LEFT BLANK INTENTIONALLY 2004-LA-1003 Page 22 Appendix B Schedule of FHA Loans Originated Using False Documents Page 23 2004-LA-1003 Appendix B THIS PAGE LEFT BLANK INTENTIONALLY Page 24 2004-LA-1003 Appendix C Auditee Comments Page 25 2004-LA-1003 Appendix C 2004-LA-1003 Page 26 Appendix C Page 27 2004-LA-1003 Appendix C 2004-LA-1003 Page 28 Appendix C Page 29 2004-LA-1003 Appendix C 2004-LA-1003 Page 30
Homewide Lending Corporation, Non-Supervised Mortgagee City of Industry, California
Published by the Department of Housing and Urban Development, Office of Inspector General on 2004-05-19.
Below is a raw (and likely hideous) rendition of the original report. (PDF)