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.
Page 15 2004-LA-1003
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.
Page 19 2004-LA-1003
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 B
Schedule of FHA Loans Originated Using False Documents
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Appendix B
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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
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)