AUDIT REPORT
SAHARA MORTGAGE COMPANY
NON-SUPERVISED MORTGAGEE
LAS VEGAS, NEVADA
2004-LA-1004
JUNE 17, 2004
OFFICE OF AUDIT
PACFIC/HAWAII REGION
LOS ANGELES, CALIFORNIA
Issue Date
June 17, 2004
Audit Case Number
2004-LA-1004
TO: John C. Weicher, Assistant Secretary for Housing, Federal Housing
Commissioner and Chairman Mortgagee Review Board, H
FROM: Joan S. Hobbs, Regional Inspector General for Audit, 9DGA
SUBJECT: Sahara Mortgage Company
Non-Supervised Mortgagee
Las Vegas, Nevada
We completed an audit of Sahara Mortgage, a non-supervised mortgagee located in Las Vegas,
Nevada. We selected Sahara because of its high default rate. Sahara had the eighth highest
default ratio of the 72 active FHA lenders in the Las Vegas area. The objective of the audit was
to determine if Sahara originated Federal Housing Administration (FHA) insured mortgages in
accordance with prudent lending practices and HUD requirements.
Our report contains four 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 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 action is considered
unnecessary. Additional status reports are required at 90 days and 120 days after report issuance for
any recommendations without a management decision. Also, please furnish us copies of any
correspondence or directives issued because of the audit.
Should you or your staff have any questions, please contact me at (213) 894-8016, or
Clyde Granderson, Assistant Regional Inspector General for Audit, at (415) 436-8291.
Management Memorandum
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2004-LA-1004 Page ii
Executive Summary
We completed an audit of Sahara Mortgage (Sahara), a non-supervised direct endorsement
mortgagee located in Las Vegas, Nevada. The objective of the audit was to determine if Sahara
complied with prudent lending practices and HUD regulations, requirements, and instructions in
the origination and underwriting of FHA-insured mortgage loans. The review generally covered
the period between January 1, 2001, and December 31, 2003, and consisted of a review of 20 FHA-
insured loans that totaled $2,307,225. We found that Sahara engaged in predatory lending, approved
loans for unqualified borrowers, and failed to implement a quality control plan. Sahara’s president
also obtained investment properties with FHA-insured loans. A summary of our review is provided
below.
Sahara took advantage of first-time homebuyers by
Sahara Engaged In charging loan discount points with no corresponding
Predatory Lending reduction in the interest rate, and by charging higher than
Practices par interest rates for which the borrower received no
benefit. Borrowers were routinely charged a 1% or 2 %
discount fee, but the funds were not applied to lower the
loan interest rate. Instead, the funds were simply retained
by the lender as profit. Sahara charged a total of $21,479
in discount fees on 18 of the 20 loans we reviewed, and the
average discount fee was $1,193. In addition, when Sahara
sold the loans to investors, Sahara received an average
$2,542 rebate for each loan due to the high interest rates
charged. This occurred because Sahara’s president, who
was also Sahara’s primary underwriter during the period
covered by the audit, chose to disregard HUD
requirements. Sahara’s president admitted that Sahara did
not lower interest rates in exchange for the discount fees
and stated she believed this was standard practice.
Sahara also overcharged for credit reports. Sahara routinely
charged $65 for the reports, although the actual costs
varied between $12 and $50. The average overcharge to
borrowers was $34 per credit report.
Sahara and its underwriter/president did not exercise due
Sahara Approved diligence in the origination and underwriting of FHA loans,
Unqualified Borrowers or perform these functions in accordance with HUD
requirements and prudent lending practices. As a result,
loans were approved for unqualified borrowers, defaults
occurred, and HUD paid four claims. HUD resold one
house at a net loss of $14,157. HUD retains the other three
homes in its inventory.
Page iii 2004-LA-1004
Executive Summary
Our review disclosed that each of these loans had multiple
significant underwriting deficiencies. We believe these
deficiencies occurred because of Sahara’s disregard for
HUD/FHA requirements.
The president of Sahara was the secretary and treasurer of
Sahara’s President Obtained Titan Investment, an investment company that obtained
FHA Insured Properties as ownership of four properties with FHA-insured loans.
Investments HUD’s tracking systems show the original FHA
mortgagors retained title. Sahara’s president co-owns Titan
Investment with the president of Canyon Lake Mortgage,
Sahara’s only loan correspondent. Through their actions,
they violated FHA’s single-family insurance program
requirements that generally restrict insured loans to owner-
occupied principal residences.
Sahara had not adequately implemented its quality control
Sahara Did Not Implement plan and was deficient in its overall quality control
Its Quality Control Plan processes. HUD requires lenders to adopt a written quality
control plan that will ensure at least 10 percent of all FHA
loans are reviewed within 90 days of closing for
compliance with HUD requirements for the origination and
underwriting of insured loans. In addition, the plan should
ensure the lender reviews all loans that go into default
before the first six monthly payments are made. At the
time of our review, Sahara was a full year behind in its
reviews, and management had not taken action to correct
deficiencies that were listed in the last two quality control
reports it had received. As a result, there was no assurance
that Sahara originated and underwrote loans in accordance
with HUD’s regulations. We believe this occurred because
Sahara’s president did not make quality control a priority.
We recommend that the Assistant Secretary for Housing –
Recommendations Federal Housing Commissioner and Chairman, Mortgagee
Review Board: (1) take appropriate administrative action
against Sahara for not adhering to HUD’s program
requirements, up to and including removal from
participation in HUD’s Single Family Mortgage Insurance
Program; (2) require Sahara to repay the overcharges for
loan discount points and credit reports; (3) require Sahara
to pay HUD for the $14,157 sustained loss; (4) require
Sahara to indemnify HUD for any losses on 3 loans
conveyed but not yet sold, insured for $329,762 and for 13
other loans insured for $1,518,704; and (5) require Sahara’s
2004-LA-1004 Page iv
Executive Summary
president pay off all loans held with FHA insurance
obtained through deed-in-lieu or foreclosure actions. If
Sahara is allowed to continue originating FHA-insured
loans, we further recommend Sahara provide your office
with documentation showing it is current with its quality
control reviews and has taken appropriate corrective action
on reported deficiencies.
We discussed the findings with Sahara officials during the
Audit Results Discussed
audit and at an exit conference held on May 12, 2004. We
With Auditee – Auditee
provided a discussion draft audit report to Sahara on April
Comments Not Provided
27, 2004, prior to the exit conference. Based on
discussions at the exit conference, we made minor changes
to the report and issued the final draft report on May 24,
2004. A one-week extension to the June 7, 2004, due date
was granted. As of June 16, 2004, Sahara’s response had
not been received. Therefore, the report was issued without
auditee comments.
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Executive Summary
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2004-LA-1004 Page vi
Table of Contents
Management Memorandum i
Executive Summary iii
Introduction 1
Findings
1. Sahara Engaged In Predatory Lending Practices 3
2. Sahara Approved Unqualified Borrowers for FHA Insured Loans 9
3. Sahara’s President Obtained Ownership of FHA Insured Properties 13
4. Sahara Did Not Implement Its Quality Control Plan 17
Management Controls 21
Follow Up On Prior Audits 23
Appendices
A. Schedule of Questioned Costs and Funds Put to Better Use 25
B. Predatory Lending – Schedule of Fees Collected 27
C. Overcharges for Credit Reports 29
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Table of Contents
D. Debt Ratios for Sahara’s Borrowers 31
E. Origination and Underwriting Deficiencies 33
F. Schedule of Loans Sahara Should Indemnify/Pay In Full 35
2004-LA-1004 Page viii
Introduction
Section 203 (b) (1) of the National Housing Act, as amended, authorizes HUD to provide
mortgage insurance for single-family homes. HUD must formally approve a mortgagee that
originates, purchases, holds or sells FHA-insured loans. Mortgagees must follow the statutory
and regulatory requirements of the National Housing Act and HUD instructions, guidelines, and
regulations when originating insured loans. Mortgagees that do not follow these requirements
are subject to administrative sanctions.
Sahara is a non-supervised, direct endorsement lender, and therefore may originate and
underwrite loans. The loan origination process includes taking the initial loan application,
initiating the appraisal assignment, obtaining the credit report, and processing verifications of
deposit and employment. Based on the information gathered by its loan processors, Sahara
underwrites the loan and makes a decision as to whether the borrower represents an acceptable
credit risk for HUD.
Sahara’s main office, in Las Vegas, Nevada, received FHA approval on October 29, 1996.
Currently, Sahara has one approved loan correspondent, Canyon Lake Mortgage. Although
Sahara has five FHA approved branches, almost all FHA loans are originated from the main
office.
In July 2002, the Quality Assurance Division (QAD) of the Santa Ana Homeownership Center
(HOC) did an on-site review of Sahara, including a review of 31 loans. QAD’s report included
13 findings, including:
Finding 1: Sahara failed to maintain and implement a quality control plan.
Finding 7: Sahara failed to retain all loan origination case files.
Finding 13: Sahara charged excessive fees to mortgagors.
The other 10 findings consisted of processing and underwriting deficiencies. As a result, the
HOC imposed a Limited Denial of Participation on Sahara’s underwriter, who is also Sahara’s
president, and Sahara agreed to indemnify HUD for any losses incurred on 29 of the 31 loans
reviewed.
The objective of our audit was to determine if Sahara
Audit Objectives complied with prudent lending practices and HUD
regulations, requirements, and instructions when originating
and underwriting FHA insured single-family mortgages.
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Introduction
We performed our audit from August through November of
Audit Scope and 2003. We selected Sahara for audit based on its high
Methodology number of early defaults.
To accomplish our audit objectives, we:
• Selected and performed in depth reviews on 18
FHA-insured loans originated by Sahara during the
period from January 2001 through December 2002.
• Selected and performed limited reviews on two
additional Sahara FHA-insured loan files originated
between March and October 2001. We are reporting
on one additional mortgage for which our review
was limited to title transfers and rental information.
We reviewed these additional loans when we
discovered their titles had transferred to an
investment company, but the FHA mortgages were
still active.
• Interviewed Sahara management and employees.
• Interviewed FHA borrowers and borrowers’
employers to verify information submitted to
HUD/FHA as part of the FHA loan files reviewed.
• Verified purported borrower wage information.
• Reviewed settlement agents’ escrow files to verify
sources and uses of funds for loan closing costs and
prepaid expenses.
The audit generally covered the period from January 1,
2001, through December 31, 2003, and the loans reviewed
were originated between January 1, 2001, and December
31, 2002. During this period, Sahara originated 228 FHA
loans. The audit was conducted in accordance with
generally accepted government auditing standards.
2004-LA-1004 Page 2
Finding 1
Sahara Engaged In Predatory Lending Practices
Sahara used several methods to obtain profits on FHA loans in violation of the Real Estate
Settlement Procedures Act (RESPA). Sahara charged its FHA borrowers $21,479 in loan discount
fees, an average of $1,193 per mortgage, on 18 of the 20 loans we reviewed, but did not provide any
reduction in interest rates. Sahara obtained additional profit by selling its FHA loans at premium
prices (also known as rebate pricing), and the rebates on all 12 loans reviewed, totaling $30,501,
were not used to pay borrower's closing costs. Finally, Sahara overcharged some borrowers for
credit reports. We believe this occurred because Sahara’s president chose to disregard the law and
HUD requirements. As a result, first-time homebuyers paid more for their loans than necessary and
the higher interest rates contributed to mortgage payment defaults and subsequent foreclosures.
In April 2000, the HUD/Treasury National Predatory Lending
Lending Practices, Rules, Task Force was convened. The Task Force drew its members
and Policies from a large group of individuals interested in, and affected
by, predatory lending, including consumer advocacy groups,
industry trade associations, local and state government
officials, and academics. In a report issued by the Task
Force, it described predatory lending as “… engaging in
deception or fraud, or taking unfair advantage of a borrower’s
lack of understanding of loan terms.” The report further
stated the “…practices are often combined with loan terms
that, alone or in combination, are abusive or make the
borrower more vulnerable to abusive practices.”
HUD Handbook 4060.1, REV-1, paragraph 2-24B.3 does
not allow a lender to “Pay any compensation or fee that is
prohibited by the Real Estate Settlement Procedures Act
(RESPA).”
The Real Estate Settlement Procedures Act (RESPA) is a
consumer protection statute first passed in 1974. Section 8
of RESPA prohibits a person from giving or accepting any
part of a charge for services that are not performed.
In 24 CFR 3500.14, Prohibition Against Kickbacks and
Unearned Fees, it states, “A charge by a person for which
no or nominal services are performed or for which
duplicative fees are charged is an unearned fee and violates
this section. The source of the payment does not determine
whether or not a service is compensable,” and “any
Page 3 2004-LA-1004
Finding 1
violation of this section is a violation of Section 8 of
RESPA.”
Mortgagee Letter 94-7, states premium rate mortgages, also
known as “rebate pricing” mortgages, permit the borrower
to pay a higher interest rate in exchange for the lender
paying the borrower’s closing costs.” It also states, “…if a
premium rate will result in excess funds (an amount
exceeding closing costs and prepaids), the principal balance
of the mortgage must be reduced by the overage. A seller
may pay the borrower’s closing costs (or a portion), with
the lender using the funds from a premium to fund the
borrower’s prepaid expenses or other remaining closing
costs.”
Sahara charged a total of $21,479 in loan discount points on
Discount Point Charges 18 of the 20 loans we reviewed. The discount points were 1
Did Not Result in Lowered to 2 percent of the loan amount and the average charge for
Interest Rates each loan was $1,193 (See Appendix B). It is generally
accepted and agreed that loan discount points are paid to
reduce the interest rate on a loan. Sahara was unable to
provide any evidence it reduced interest rates for these loans.
In fact, Sahara’s president admitted the rates were not
discounted, and told us she believed HUD allowed the lender
to earn two points, or two percent of the loan amount, on each
loan. Sahara’s president also said she believed it was
standard practice for lenders to charge one origination point
and one discount point. The president’s understanding of
HUD regulations is erroneous and so is her implication that
Sahara only earned two percentage points on each loan. In
addition to the origination fee and the loan discount fee,
Sahara received profits through premium pricing and
overcharges for credit reports.
HUD allows lenders who originate FHA insured loans to
charge borrowers a one percent origination fee and eligible
closing and prepaid costs; however, additional fees should be
for specific services performed beyond the normal loan
processing and underwriting. Section 8 of RESPA prohibits
giving or accepting any part of a charge for services that are
not performed (unearned fees). Since loan discount points
were charged and the interest rates were not reduced, we
concluded these were unearned fees, a RESPA violation, and
a predatory lending practice.
2004-LA-1004 Page 4
Finding 1
Most of the borrowers we interviewed were first-time
homeowners and said they were unaware they had a choice
of lenders. Generally, they were directed to Sahara by the
developers of new housing or by real estate agents. One
borrower had visited other lenders before Sahara and said
Sahara was the only lender who would work with her, due
to her poor credit history. Most borrowers said they did not
know what discount points were and Sahara never
explained them. Some were not aware discount points had
been paid when their loan closed. Others paid the points,
but were not aware they had a choice.
We asked Sahara to provide purchase advices for each of
Premium Rate Mortgages the 20 loans in our sample. The purchase advices show the
details of Sahara’s sale of loans to investors, including the
price the investor paid, rebates for premium pricing, and
service release premiums. Sahara’s president said she
could only find purchase advices for 12 of the 20 loans.
Each of the 12 purchase advices Sahara’s president
provided showed premium rate, or rebate pricing
mortgages for which Sahara received $30,501 in loan
rebates (See Appendix B).
Premium pricing occurs when the lender sells a loan to an
investor with an above par interest rate and receives a
rebate from the investor. HUD allows this practice and
expects the rebate to be used to pay the borrower’s closing
costs or prepaid expenses; however, our test results
indicated Sahara sold its loans at premium prices and did
not apply the rebates to the borrowers’ costs. Sahara did
not apply rebate credits to closing costs or prepaid
expenses, all of which the borrower or the seller had paid.
Sahara received an average rebate of $2,542 per loan for
those we tested. This was in addition to the service release
premiums, which are the customary amounts loan
originators receive when they sell the servicing rights to
their loans. Sahara received an average of $2,515 in
service release premiums for each loan we tested.
Lenders are allowed to recover actual costs they must pay
Overcharges for Credit to outside firms in order to process a loan. These costs
Reports include appraisal fees to determine the value of the
property and credit reports to determine if the borrower is
credit worthy. HUD does not allow the lender to charge
Page 5 2004-LA-1004
Finding 1
the borrower more than the actual cost or more than the
amount customary in the area. Sahara routinely charged
$65 dollars for credit reports, when actual costs ranged
from $12 to $50. The average overcharge to borrowers was
$34. In some cases, the borrowers paid the charges and in
other cases the sellers paid. (See Appendix C)
Recommendations We recommend the Assistant Secretary for Housing –
Federal Housing Commissioner and Chairman, Mortgagee
Review Board:
1A. Take appropriate action against Sahara up to and
including removal from participation in HUD’s
Single Family Mortgage Insurance Program.
1B. Require Sahara to establish written policies and
procedures for when loan discount fees and premium
interest rates may be charged, and certify it will not
engage in predatory lending practices.
1C. Require Sahara to review and analyze all FHA-
insured loans generated by Sahara since August 1,
1999, with loan discount points (including the
$21,479 shown in Appendix B) where no interest rate
reduction occurred and report the results to the MRB.
Refunds should be issued in the following order:
1. If the loan is current, a refund must be made to the
borrowers.
2. If the loan is delinquent, a refund must be applied
to the delinquency.
3. If a claim has been paid, a refund must be paid to
HUD and sent to HUD Single Family Claims.
1D. Require Sahara to review and analyze all FHA-
insured loans it generated since August 1, 1999, with
premium pricing rebates (including the $30,501
shown in Appendix B) and report the results to the
2004-LA-1004 Page 6
Finding 1
MRB. Refunds should be issued in the same order
shown in recommendation 1C.
1E. Require Sahara to charge for only actual costs for
credit reports and refund the $207 in overcharges
identified in Appendix C to the respective borrowers.
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Finding 1
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2004-LA-1004 Page 8
Finding 2
Sahara Approved Unqualified Borrowers For
FHA Insured Loans
Sahara did not comply with HUD’s requirements for prudent lending practices in the origination
and underwriting of FHA insured loans on 17 of the 20 loans reviewed, valued at $2.3 million.
Sahara did not exercise due diligence in the: (1) verification of the borrowers’ income or source
of funds for down payments and closing costs; (2) review of the borrowers’ liabilities and credit
characteristics; and (3) analysis of the borrowers’ ability to pay. As a result of these
deficiencies, Sahara approved mortgagors who were not qualified for FHA-insured loans.
Sahara’s deficiencies in loan origination and underwriting activities are a result of its
noncompliance with HUD requirements and contributed to Sahara’s high default rate, which led
to claims against the FHA insurance fund.
Under HUD’s Single Family Direct Endorsement Program,
Loan Origination and the mortgagee underwrites and closes the mortgage loan
Underwriting without prior HUD review or approval. HUD Handbook
Requirements 4155.1 REV-4 CHG-1 contains the basic mortgage credit
underwriting requirements for single-family mortgage loans.
Section 2-3, Analyzing the Borrower’s Credit, states in part:
“Past credit performance serves as the most useful guide in
determining the attitude toward credit obligations that will
govern the borrower's future actions. A borrower who has
made payments on previous or current obligations in a timely
manner represents reduced risk. Conversely, if the credit
history, despite adequate income to support obligations,
reflects continuous slow payments, judgments, and
delinquent accounts, strong offsetting factors will be
necessary to approve the loan.”
Section 2-12, Debt to Income Ratios, states in part: “Ratios
are used to determine whether the borrower can reasonably be
expected to meet the expenses involved in homeownership,
and otherwise provide for the family. The lender must
compute two ratios:
A. Mortgage payment expense to effective income. If the
total mortgage payment does not exceed 29 percent of
Page 9 2004-LA-1004
Finding 2
gross effective income, the relationship of the mortgage
payment to income is considered acceptable.
B. Total fixed payment to effective income. If the total
mortgage payment and all recurring charges do not exceed
41 percent of gross effective income, the relationship of
total obligations to income is considered acceptable.”
Section 3, Funds to Close, paragraph 2-10, states in part:
“The cash investment in the property must equal the
difference between the amount of the insured mortgage,
excluding any upfront MIP, and the total cost to acquire the
property, including prepaid expenses, (see paragraph 1-9).
All funds for the borrower's investment in the property
must be verified.”
Sahara approved loans for borrowers with extremely poor
Sahara Approved credit patterns and/or excessive current obligations. The
Borrowers with Poor borrowers in our sample typically had numerous accounts
Credit Patterns that were referred for collection and multiple judgments
against them. Credit histories for 13 of the 20 mortgagors
in our sample indicated an inability to manage money and
obligations. Borrowers in 17 out of 20 loans had excessive
current obligations that indicated they would have
difficulty making monthly mortgage payments (See
Appendix D). Predictably, the borrowers defaulted on their
FHA insured loans.
In one case, the borrower had 5 collections listed on his
credit report, and two were from the last two apartments he
had rented prior to purchasing the home. The co-borrower
had 19 collections and 1 judgment on her credit report.
The file did not document any acceptable compensating
factors. Foreclosure was completed on the $130,281
mortgage on November 3, 2003, and HUD’s Neighborhood
Watch System listed the reason for the default as
“excessive obligations.”
In another case, the borrower had 21 collections and 3
judgments shown on the credit report. The compensating
factors cited on the Mortgage Credit Analysis Worksheet
were that the borrower was a "minimum credit user" and
had a second job with income of $1,690. The cited
compensating factor regarding credit use was apparently
not true, and the second job was not verified or supported.
2004-LA-1004 Page 10
Finding 2
Again, the borrower's reason for default, according to
Neighborhood Watch, was "excessive obligations."
Foreclosure was completed on the $135,670 loan in May
2003.
In 17 of the 20 loans we reviewed, either the borrowers’
Sahara Approved mortgage payment-to-income ratios exceeded HUD’s
Borrowers, Despite High guideline of 29% or they exceeded HUD’s guideline of
Debt-to-Income Ratios 41% for total fixed obligations to effective income (See
Appendix D). Review of the loan origination files did not
reveal any acceptable compensating factors, such as large
cash reserves, large down payments, previous history of
making similar payments for housing, or conservative use
of credit.
Sahara miscalculated effective income by overstating
earnings and/or understating debts in 15 cases.
For one loan, the file documentation showed the borrower
paid $701 each month in child support. In its calculations,
Sahara used $475 for the child support amount. Sahara did
not provide any explanation or support for the change, and
had Sahara used the correct amount, it would have calculated
the fixed obligations to effective income ratio at 52.6%, more
than ten percentage points over HUD’s guideline.
Foreclosure was completed on the $130,281 loan in
November 2003.
In another loan, Sahara included unsupported amounts of
$332 in overtime earnings and $347 in child support in its
calculation of the mortgagor’s effective monthly income.
The mortgagor’s employer did not verify employment in
writing and there was no documentation of child support
payments. Wage statements showed sporadic overtime over a
period of four months, and the origination file contained a
written statement from the mortgagor that she received child
support based on a verbal agreement with the child’s father.
If Sahara had not included the unsupported amounts in its
calculations, the mortgagor’s ratios would have been 49% for
mortgage payment to income and 62% for total fixed
payments to income. The loan was in default in February
2002, when Titan Investment took ownership through a deed
in lieu of foreclosure..
Funds to Close Were Not Page 11 2004-LA-1004
Certified
Finding 2
In 17 of the 20 cases in our sample, Sahara also failed to fully
verify the borrowers’ source of funds to close. Most
borrowers received part of their closing funds as a gift from
nonprofit organizations, and the sources of gift funds were
verified. However, the gifts did not cover all of the closing
requirements. Sahara failed to fully verify the source of
closing funds attributed to the borrowers. In most cases, the
borrowers’ funds were deposited into escrow in the form of
cashiers’ checks. The borrowers’ bank statements, which
should have shown the withdrawal of the funds, showed that
the borrowers never had sufficient funds in the bank to cover
the deposits. Sahara also failed to verify any other source for
the funds. As a result, there was no assurance the borrowers
did not obtain prohibited second loans.
We believe Sahara’s president, who was the primary
Risk of Losses Increased underwriter, was more interested in generating profits than in
adhering to HUD requirements. She explained her intent was
to help people to attain home ownership; however, the
mortgagors who defaulted on their loans because of excessive
obligations or insufficient income did not benefit from
Sahara’s lack of due diligence. As a result, the risk of losses
increased for HUD’s FHA insurance fund.
Recommendations We recommend the Assistant Secretary for Housing –
Federal Housing Commissioner and Chairman, Mortgagee
Review Board require Sahara Mortgage to:
2A. Reimburse HUD for the $14,157 loss on one paid
claim (See Appendix F).
2B. Indemnify HUD for future losses on the loans listed
in Appendix F (13 loans totaling $1,518,704 and 3
loans in HUD’s inventory insured for a total of
$329,762).
2004-LA-1004 Page 12
Finding 3
Sahara’s President Obtained Ownership of FHA
Insured Properties
The president of Sahara was the secretary and treasurer of Titan Investment, an investment
company that obtained ownership of four properties with FHA-insured loans totaling $439,593.
Sahara’s president co-owned Titan Investment with the president of Canyon Lake Mortgage,
Sahara’s only loan correspondent. Through their actions, they violated FHA’s single-family
insurance program requirements, which generally restrict insured loans to owner-occupied
principal residences. When the transfers occurred, Sahara’s president was also Sahara’s primary
underwriter, and she was responsible for ensuring Sahara conducted business in accordance with
FHA requirements. We believe the co-owners of Titan Investment disregarded FHA regulations
in pursuit of personal gain.
HUD Handbook 4155.1 REV-4, CHG-1, states in Chapter
Investors Are Prohibited 1-1 that HUD’s single-family FHA programs are generally
From Obtaining FHA limited to owner-occupied principal residences. In Chapter
Loans 1-2, it states individuals may not obtain more than one
FHA mortgage at a time, except for very limited exceptions
which included relocations, increase in family size,
vacating a jointly-owned property, or a non-occupying co-
borrower (where the other borrower is a family member
who will occupy the property as a principal residence).
Chapter 1-2 explained the one mortgage limit as follows:
“To prevent circumvention of the restrictions on
FHA-insured mortgages to investors, we generally
will not insure more than one mortgage for any
borrower.”
Chapter 1-4 listed the limited exceptions to the ban on FHA
loans on investment properties:
• Section 203(k) Rehabilitation loans;
• Purchases of FHA-owned properties (when
permitted by the local FHA office selling the
property); and
Page 13 2004-LA-1004
Finding 3
• Streamline refinances without appraisals for
properties the investor purchased with an
FHA loan prior to the 1989 ban on
investors.”
Titan Investment did not meet any of the exceptions listed
Titan Acquired Three above and all of the loans were originated by Sahara.
Properties through Three of the loans were in default, with the first legal
Deeds In Lieu of action to foreclose initiated. The president of Sahara
accepted deeds in lieu of foreclosure in the name of Titan
Investment, but did not terminate the FHA loans. As a
result, HUD was misled to believe the mortgagors had
reinstated the loans and retained ownership. Although she
was the underwriter for only one of the three defaulted
loans, Sahara’s president was the primary underwriter for
Sahara at the time.
The loan origination files showed processing and
Mortgagors Did Not underwriting deficiencies for all of the loans in default. In
Qualify for FHA Loans all three loans, Sahara failed to verify the mortgagors’
source of funds for the down payment, and in one, the
mortgagor did not meet the requirement to provide at least
a 3% investment in the property. For one of these loans,
the mortgagor’s credit history showed 22 accounts that
were in collection and one judgment. Sahara did not
identify adequate compensating factors, such as large cash
reserves. HUD recommends a maximum mortgage
payment-to-income ratio of 29% and a maximum fixed
payment-to-income ratio of 41%. For this loan, the
mortgagor’s ratios far exceeded HUD's guidelines when we
recomputed them to be 49% and 62% respectively.
Sahara’s president underwrote this loan and understated the
ratios.
The fourth property was purchased by Titan Investment in
Family Member October 2001 and transferred to a member of Sahara’s
Transferred Property Back president’s family four days later. The family member
to Titan Investment obtained an FHA loan from Sahara for the purchase. In
April 2002, the family member transferred the property
back to Titan but did not terminate the FHA insured loan.
Titan transferred the property back to the family member in
January 2003, and he obtained a FHA-insured streamline
refinance loan.
2004-LA-1004 Page 14
Finding 3
Titan Investment entered into Section 8 Housing Assistance
Titan Investment Rented Payment (HAP) contracts with the City of Las Vegas
Properties with owner- Housing Authority for two of the properties it obtained
occupied loans to Section through deeds-in-lieu and for the property it transferred
8 Tenants back and forth to the family member. The Section 8
Program provides HUD funds to assist low-income renters
by paying landlords the difference between thirty percent
of the eligible renter’s income and the contract rent
amount. The HAP contract on the family member’s
property was in effect during the time Titan owned it.
On December 9, 2003, we visited one home and spoke to
the Section 8 tenant, who confirmed she has lived there and
has been a Section 8 recipient since March 2002. The FHA
loan on this property was in default when Titan Investment
took possession through a Deed-In-Lieu on February 27,
2002. The president of Sahara Mortgage (and secretary-
treasurer for Titan Investment) signed the transfer deed on
behalf of Titan. On March 12, 2002, Titan entered into a
HAP contract with the City of Las Vegas Housing
Authority for a Section 8 tenant. Since then, Titan has been
receiving monthly rental payments.
Conclusion Regarding the FHA insured properties that Titan obtained
through deeds in lieu, we believe Sahara’s president acted
first to prevent Sahara’s default rate from increasing and
jeopardizing its standing as an FHA lender. At the same
time, we believe the president saw an opportunity to profit
from the acquisition of investment properties. In the fourth
property case, where a family member took title in order to
obtain an FHA loan on the property and then transferred
the property back to Titan, we can only conclude Sahara’s
president knowingly ignored HUD’s requirements for
personal gain. As a result, the FHA insurance program was
used for the benefit of investors rather than owner-
occupants, as intended.
Recommendations We recommend the Assistant Secretary for Housing –
Federal Housing Commissioner and Chairman, Mortgagee
Review Board:
Page 15 2004-LA-1004
Finding 3
3A. Require Sahara to immediately pay in full and
terminate the four loans with FHA insurance
totaling $439,593 (See Appendix F).
3B. Permanently withdraw the underwriter
identification approval of Sahara’s president.
2004-LA-1004 Page 16
Finding 4
Sahara Did Not Implement Its Quality Control
Plan
At the time of our audit, Sahara was more than a year in arrears in performing required quality
control reviews of its origination files. In addition, Sahara had not taken any action on the
deficiencies reported in the last two quarterly reports it received from its quality assurance
contractor. Unless the quality control plan is fully implemented, there can be no assurance Sahara is
originating and underwriting loans in compliance with HUD/FHA requirements or that deficiencies
are corrected.
HUD Requirements Quality control requirements are detailed in HUD Handbook
4060.1 REV-4, Chapter 6. In addition to a review of any loan
that goes into default before six payments are made, the
handbook states that the selection process for the review of
10% of all other FHA loans must provide assurance that all
loan officers, underwriters, and appraisers will have loans
subjected to reviews. Further, the handbook requires that
lenders have a written quality control plan to ensure the
reviews are conducted and management takes appropriate and
timely corrective action.
HUD’s Quality Assurance Division (QAD) did a review of
Sahara in July 2002 and provided the results to Sahara in
September 2002. The first of QAD’s 13 findings stated,
“Sahara failed to maintain and implement a quality control
plan in compliance with HUD’s requirements.” After
explaining that Sahara’s written quality control plan was
inadequate, the report went on to say that the most recent
reviews had been performed on loans originated a year
earlier, in June 2001. QAD required Sahara to revise its
quality control plan to include all elements required by HUD,
and to provide HUD with the steps it had taken to assure that
quality control reviews were performed within 90 days of
loan closing. When Sahara received the results of QAD’s
review in September 2002, Sahara revised its quality control
plan to include these requirements, but Sahara did not
implement the plan. A year later, in September 2003, the
only periods for which reviews had been completed were the
first two quarters of 2002. Further, Sahara’s management had
not yet taken corrective action on the deficiencies found
during the reviews, although they received the results of the
Page 17 2004-LA-1004
Finding 4
reviews in April 2003. As of September 30, 2003, no
additional loans had been reviewed.
Sahara's president blamed the delays on poor performance by
a quality control firm, which she replaced in January 2003.
However, the new firm stated it could usually provide a 30-
day turnaround on loan reviews and the last two reports
included reviews of only 4 loans each; therefore, there was no
reason the reviews for 2003 were not timely. After sending
the 8 files for the first two quarters of 2002, Sahara did not
send any funding logs to the contractor until September 2003;
therefore, the contractor did not select any additional loans to
review until September 2003.
As we completed our audit, the contractor was reviewing 8 of
Sahara’s files for the period July through December 2002, but
had not yet selected any files for 2003. Further, for the first
half of 2002, we learned that Sahara selected the files for
review. The employee who selected the files stated he
consciously chose the ones least likely to have deficiencies.
The same employee was the loan officer for many of the
loans. Although this employee continues to act as a loan
officer, he currently also carries the title “Quality Control
Manager.” The selection method Sahara used obviously
violated the intent of the quality control requirements, which
is to ensure that all loans are processed and underwritten in
compliance with HUD requirements. Further, naming a
person who directly participated in the loan’s processing as
the quality control manager creates a conflict of interest and
compromises the integrity of the quality control process.
At the time of our audit, Sahara had not accomplished
reviews of any of the loans that had defaulted before six
payments were made. Sahara’s president said she was
unaware of the early default review requirement until HUD’s
QAD review. She stated that she did not know how to find
out when loans went into default, because Sahara sold all of
its loans to a warehouse lender and the lender did not provide
the information. Sahara amended its contract with the
warehouse lender and began receiving default reports in May
2003. Sahara’s president said there have been no early
defaults since then.
Some of the deficiencies the quality control requirements are
designed to prevent and correct were evident in the loan
2004-LA-1004 Page 18
Finding 4
origination files we reviewed. In Findings 1 and 2, we
discussed significant deficiencies in Sahara’s origination and
underwriting processes including: improper and excessive
charges for services (Finding 1); approval of unqualified
borrowers for FHA loans; and Sahara did not do an adequate
job of verifying the source of funds each borrower was
required to provide at closing (Finding 2). Therefore, until
Sahara fully implements the quality control plan, there is no
assurance that it is originating and underwriting loans in
accordance with HUD/FHA requirements, or that deficiencies
are being corrected.
Recommendations We recommend the Assistant Secretary for Housing –
Federal Housing Commissioner and Chairman, Mortgagee
Review Board require Sahara to:
4A. Provide evidence that its required loan reviews are
up to date and management has taken appropriate
action to correct deficiencies.
4B. Replace the quality control manager with someone
who has no direct participation in the origination or
underwriting processes.
Page 19 2004-LA-1004
Finding 4
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2004-LA-1004 Page 20
Management Controls
In planning and performing our audit, we considered the management controls of Sahara in order to
determine our auditing procedures, not to provide assurance on the controls. Management controls
include the plan of organization, methods and procedures adopted by management to ensure that its
goals are met. Management controls include the processes for planning, organizing, directing and
controlling its business operations. They include the systems for measuring, reporting and
monitoring business performance.
We determined the following management controls were
Relevant Management
relevant to our audit objectives:
Controls
Compliance with Laws and Regulations – Policies and
procedures implemented by management to reasonably
ensure that its loan origination process is carried out in
accordance with applicable laws and regulations.
Validity and Reliability of Data - Policies and procedures
that management has implemented to reasonably ensure
that valid and reliable data are obtained, maintained, and
used during the mortgage loan origination process.
We assessed the relevant controls identified above.
It is a significant weakness if management controls do not
provide reasonable assurance that the process for planning,
organizing, directing, and controlling business operations
will meet an organization’s objectives.
Based on our review, we believe the following items are
Significant Weaknesses significant weaknesses:
• Compliance with laws and regulations for the loan
origination and underwriting processes and the quality
control process (Findings 1, 2, 3 and 4).
• Validity and reliability of data (Findings 1 and 2).
Page 21 2004-LA-1004
Management Controls
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2004-LA-1004 Page 22
Follow Up On Prior Audits
This is the first HUD Office of Inspector General audit of Sahara. The mortgagee’s last two
independent audits for the years ending December 31, 2001, and December 31, 2002, did not contain
any findings.
HUD’s Quality Assurance Division performed a monitoring review of Sahara in July 2002.
Page 23 2004-LA-1004
Follow Up On Prior Audits
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2004-LA-1004 Page 24
Appendix A
Schedule of Questioned Costs
and Funds Put to Better Use
Recommendation Type of Questioned Cost Funds Put to
Number Ineligible 1/ Unsupported 2/ Better Use 3/
1C $21,479
1D 30,501
1E $207
2A $14,157
2B $329,762 $1,518,704
3A $ 439,593
1/ Ineligible costs are costs charged to a HUD-financed or HUD-insured program or activity that
the auditor believes are not allowed 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 the audit. The costs are not supported by
adequate documentation or there is a need for 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 documentation, might involve a legal interpretation or
clarification of Departmental policies and procedures.
3/ Funds put to better use are costs that will not be expended in the future if our
recommendations are implemented.
Page 25 2004-LA-1004
Appendix A
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2004-LA-1004 Page 26
Appendix B
Predatory Lending - Fees Collected By Sahara
Loan Loan Loan
Loan Interest Origination Discount Rebate Rebate Other
FHA Case # Amount Rate Fee Fee Points Amount Fees** Total
1 332-3503789 $ 58,362.00 7.500% $ 575.00 $ 583.62 0.375 $ 218.86 $1,167.24 $ 2,544.72
2 332-3546148 $ 109,520.00 8.125% $ 1,079.02 $1,095.20 2.5 $2,738.00 $2,409.44 $ 7,321.66
3 332-3549013* $ 101,559.00 8.000% $ 1,000.59 $1,048.49 $ 775.00 $ 2,824.08
4 332-3563776 $ 117,059.00 8.375% $ 1,153.30 $2,341.18 2 $2,341.18 $3,450.30 $ 9,285.96
5 332-3569292 $ 75,617.00 8.250% $ 745.00 $ 756.17 2.375 $1,795.90 $2,136.11 $ 5,433.18
6 332-3599591* $ 98,445.00 8.000% $ 969.90 $ 984.45 $ 1,954.35
7 332-3611149 $ 131,885.00 8.000% 1,298.68 $1,318.16 2.625 $3,457.85 $3,128.53 $ 9,203.22
8 332-3611871* $ 126,297.00 7.875% $ 1,244.31 $1,262.97 $ 775.00 $ 3,282.28
9 332-3618755 $ 124,489.00 7.875% $ 1,226.50 $1,244.89 2.218 $2,759.27 $3,785.56 $ 9,016.22
10 332-3619413 $ 116,866.00 8.000% $ 1,151.39 $1,168.66 2.625 $3,065.67 $3,601.26 $ 8,986.98
11 332-3638982* $ 117,151.00 8.000% $ 1,154.20 $1,171.51 $ 2,325.71
12 332-3663494 $ 96,387.00 8.000% $ 949.63 $ 963.87 2.5 $2,409.68 $2,383.40 $ 6,706.58
13 332-3689824* $ 141,518.00 7.875% $ 1,394.27 $1,415.18 $ 775.00 $ 3,584.45
14 332-3693024* $ 130,281.00 8.000% $ 1,283.56 - $ 1,283.56
15 332-3706997* $ 118,144.00 8.000% $ 1,163.99 $1,181.44 $ 775.00 $ 3,120.43
16 332-3707905 $ 135,670.00 7.875% $ 1,336.66 $1,356.70 2.515 $3,412.10 $4,058.21 $ 10,163.67
17 332-3756118 $ 123,561.00 7.375% $ 1,217.35 $1,235.61 2.238 $2,765.30 $3,765.18 $ 8,983.44
18 332-3855375 $ 149,458.00 8.000% $ 1,472.50 - 3 $4,483.74 $2,989.16 $ 8,945.40
19 332-3867968 $ 120,353.00 7.000% $ 1,185.75 $1,203.53 0.875 $1,053.09 $2,407.06 $ 5,849.43
20 332-3909365* $ 114,700.00 7.500% $ 1,130.05 $1,147.00 $1,000.00 $ 3,277.05
*Sahara would not provide sale information (rebate points, rebate amount) for these 8 loans; therefore total fees collected are
understated.
**”Other Fees” includes Service Release Premiums, Loan Processing Fees, Underwriting Fees, and Administrative Fees.
Page 27 2004-LA-1004
Appendix B
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2004-LA-1004 Page 28
Appendix C
Overcharges for Credit Reports
Charged to
Borrower Per Actual Total
FHA# 332- HUD-1 Cost Overcharged
3693024 $ 65.00 $ 65.00 $ -
3867968 $ 65.00 $ 37.00 $ 28.00
3707905 $ 65.00 $ 50.00 $ 15.00
3638982 $ 65.00 $ 27.00 $ 38.00
3663494 $ 65.00 $ 12.00 $ 53.00
3855375 $ 65.00 $ 35.00 $ 30.00
3599491 $ 65.00 $ 22.00 $ 43.00
$ 207.00
Page 29 2004-LA-1004
Appendix C
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2004-LA-1004 Page 30
Appendix D
Debt Ratios for Sahara's Borrowers
Reported by Sahara Calculated by OIG
Front Ratio Back Ratio Front Ratio Back Ratio
(should not (should not (should not (should not Excessive
FHA# 332- exceed 29%) exceed 41%) exceed 29%) exceed 41%) Ratio(s)
1 3693024 25.70% 47.50% 25.70% 52.60% X
2 3909365 31.13% 35.88% 31.63% 35.88% X
3 3563776 38.15% 48.83% 38.86% 51.35% X
4 3756118 28.20% 32.30% 65.01% 74.49% X
5 3867968 35.58% 35.58% 58.79% 58.79% X
6 3707905 27.45% 35.31% 27.45% 35.31%
7 3689824 38.30% 39.90% 43.27% 45.02% X
8 3503789* N/A N/A N/A N/A
9 3546148 39.43% 42.52% 39.43% 60.94% X
10 3569292 29.43% 44.67% 29.43% 75.85% X
11 3618755 42.80% 48.30% 48.20% 54.30% X
12 3619413 22.00% 35.50% 28.80% 46.40% X
13 3638982 37.30% 46.60% 49.00% 62.00% X
14 3663494 46.20% 51.50% 54.06% 60.91% X
15 3706997 41.96% 41.96% 41.96% 41.96% X
16 3855375 20.70% 32.68% 20.70% 32.68%
17 3549013 32.90% 33.80% 32.93% 33.80% X
18 3611149 28.85% 33.51% 36.16% 53.39% X
19 3599951 39.76% 39.76% 39.76% 39.76% X
20 3611871 27.11% 29.33% 30.03% 32.49% X
Number of loans with excessive ratios 17
*This was a streamline finance that did not require calculation of ratios.
Page 31 2004-LA-1004
Appendix D
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2004-LA-1004 Page 32
Appendix E
Origination and Underwriting Deficiencies
Source of
High Poor Over- Under- Funds
FHA# Loan Debt Credit stated stated Not
332- Amount Ratios Record Income Debts Verified Status
1 3693024 $ 130,281 X X X X foreclosed
2 3909365 $ 114,700 X X X X default
3 3563776 $ 117,059 X X X X default
4 3756118 $ 123,561 X X X default
5 3867968 $ 120,353 X X default
6 3707905 $ 135,670 X X foreclosed
7 3689824 $ 141,518 X X X X default
8 3503789 $ 58,362 X reinstated
9 3546148 $ 109,520 X X X X reinstated
10 3569292 $ 75,619 X X X X default
11 3618755 $ 124,489 X X X X default
12 3619413 $ 116,866 X X X X claim
13 3638982 $ 117,151 X X X X X deed-in-lieu
14 3663494 $ 96,387 X X claim
15 3706997 $ 118,114 X X default
16 3855375 $ 149,458 X X reinstated
17 3549013 $ 101,559 X X X refi & claim
18 3611149 $ 131,816 X X X X X claim
19 3611871 $ 126,297 X X X deed-in-lieu
20 3599591 $ 98,445 X X X deed-in-lieu
Total $2,307,225 17 13 12 6 17
Page 33 2004-LA-1004
Appendix E
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Page 34 2004-LA-1004
Appendix F
Active Loans Sahara Should Indemnify
Settlement
FHA# 332- Loan Amount Date Status
1 3693024 $ 130,281 7/20/2001 Foreclosure Completed
2 3909365 $ 114,700 6/12/2002 In Default
3 3563776 $ 117,059 2/28/2001 In Default
4 3756118 $ 123,561 11/5/2001 In Default
5 3867968 $ 120,353 3/13/2002 In Default
6 3707905 $ 135,670 10/2/2001 Foreclosure Completed
7 3689824 $ 141,518 7/12/2001 In Default
8 3503789 $ 58,362 7/20/2001 Reinstated by Mortgagor
9 3546148 $ 109,520 1/26/2001 Reinstated by Mortgagor
10 3569292 $ 75,619 4/2/2001 In Default
11 3618755 $ 124,489 4/11/2001 In Default
12 3706997 $ 118,114 8/7/2001 In Default
13 3855375 $ 149,458 3/15/2002 Reinstated by Mortgagor
Total $ 1,518,704
Schedule of HUD Losses Sahara Must Indemnify
Loss
(Gain) to
FHA# 332- Loan Amount HUD Status
14 3663494 $ 96,387 Unknown Claim - property in HUD's inventory
15 3549013 $ 101,559 Unknown Claim - property in HUD's inventory
16 3611149 $ 131,816 Unknown Claim - property in HUD's inventory
Subtotal $ 329,762
17 3619413 $ 116,866 $14,157 Claim & Loss
Total $ 446,628
Loans Sahara's President Should Pay in Full
Settlement
FHA# 332- Loan Amount Date Status
18 3638982 $ 117,151 5/1/2001 Investment Property
19 3611871 $ 126,297 3/23/2001 Investment Property
20 3599591 $ 98,445 5/1/2001 Investment Property
21 4073536* $ 97,700 1/31/2003 Investment Property
Total $ 439,593
* Investment property currently owned by a member of Sahara's president's family
Not included in OIG’s review of processing and underwriting.
Page 35 2004-LA-1004
Sahara Mortgage Company Non-Supervised Mortgagee, Las Vegas, Nevada
Published by the Department of Housing and Urban Development, Office of Inspector General on 2004-06-17.
Below is a raw (and likely hideous) rendition of the original report. (PDF)