oversight

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)

     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




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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



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Executive Summary




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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




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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.




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Finding 2




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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.




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Follow Up On Prior Audits




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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.




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Appendix A




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2004-LA-1003    Page 22
                                                           Appendix B

Schedule of FHA Loans Originated Using False Documents




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                             Appendix C

Auditee Comments




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                         Appendix C




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          Appendix C




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                         Appendix C




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          Appendix C




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                         Appendix C




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