AUDIT REPORT
GUILD MORTGAGE COMPANY
DBA RESIDENTIAL MORTGAGE BANKERS
NON-SUPERVISED DIRECT ENDORSER
DOWNEY, CALIFORNIA
OFFICE OF HOUSING
2004-LA-1005
JULY 9, 2004
OFFICE OF AUDIT
PACIFIC/HAWAII REGION IX
LOS ANGELES, CALIFORNIA
Issue Date
July 9, 2004
Audit Case Number
2004-LA-1005
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: Guild Mortgage Company
Doing Business As Residential Mortgage Bankers
Downey, California
We completed an audit of Guild Mortgage Company dba Residential Mortgage Bankers. The Guild
Mortgage Company corporate office is located in San Diego, California. We selected Residential
Mortgage Bankers for review because of a referral from the Santa Ana Homeownership Center’s
(HOC) Quality Assurance Division (QAD), to the Office of Investigation. During an on-site
monitoring visit, the HUD QAD field representative identified several instances of false documents.
HUD’s Neighborhood Watch system also showed the branch had unusually high default and claim
rates. The objectives of our review were to: (1) determine whether the mortgagee complied with
HUD regulations, procedures, and instructions in the origination and underwriting of FHA insured
loans selected for review; and (2) determine whether there were additional indications of
irregularities or abuses.
Our report contains three 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 action is considered
unnecessary. Additional status reports are required at 90 days and 120 days after the report issuance
for any recommendation 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 Clyde Granderson, Assistant Regional
Inspector General for Audit, at (415) 436-8291.
Management Memorandum
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2004-LA-1005 Page ii
Executive Summary
We have completed an audit of the branch office of Guild Mortgage Company (GMC) doing
business as (dba) Residential Mortgage Bankers (RMB) in Downey, California. The objective of
our audit was to determine whether GMC approved loans in accordance with regulations and
requirements of the U. S. Department of Housing and Urban Development/Federal Housing
Administration (HUD/FHA), which require adherence to prudent lending practices. The review
covered the period between August 1, 1999, and November 30, 2002, and consisted of a review of
40 HUD/FHA insured loans that totaled $6,454,693. A summary of the results of our review is
provided below.
GMC Allowed Predatory GMC allowed RMB to charge loan discount points and
Lending Practices premium rate pricing for which the interest rates were not
reduced nor did the borrowers receive any value or service
for the charges. We also determined a significant number
of loans in our sample had some investors engaging in
property flipping and the use of strawbuyers. In addition,
RMB loan officers were allowed to charge excessive fees
for underwriting and processing. These problems were
caused by the lack of oversight on the part of GMC over
the operations of RMB. Consequently, RMB FHA loan
borrowers had unnecessarily high mortgage payments
resulting in subsequent defaults and foreclosures.
GMC approved RMB, an independent mortgage corporation
RMB Was a Prohibited called Residential Mortgage Associates, to originate FHA
Net Branch Operation mortgages without meeting HUD’s application and asset
requirements. This was caused because of improper GMC
executive decisions when entering into branch manager
agreements. As a result, this branch was a prohibited net
branch office operation, was ineligible to originate FHA-
insured loans, and therefore, caused increased risk to the FHA
insurance funds on loans totaling over $160 million.
GMC failed to establish appropriate loan processing and
GMC Did Not Always
underwriting controls to ensure HUD requirements were
Follow Prudent
followed during the loan origination process. In several
Lending Practices
instances, GMC dba RMB clearly disregarded HUD
underwriting requirements and thus failed to identify and
resolve questionable information and patterns in its loan
origination files and approved loans that did not meet HUD
requirements. GMC’s lack of effective controls and its
failure to use due care allowed its employees to manipulate
Page iii 2004-LA-1005
Executive Summary
the loan origination process and approve loans for unqualified
borrowers. At least 29 of the 40 loans (72.5%) reviewed
were processed and approved using falsified information. As
a result, HUD and the FHA insurance fund assumed an
unnecessary insurance risk and has incurred losses totaling
over $811,000 on 27 of the 40 loans (67.5 percent) reviewed.
In addition, GMC allowed its loan officers to be real estate
agents and development company operators, which is a clear
conflict of interest with their loan officer responsibilities. (See
Appendices A and B)
We recommend your office refer GMC to the Mortgagee
Recommendations Review Board (MRB) for engaging in predatory lending
practices. We also recommend the MRB consider seeking
civil money penalties for failure to comply with the
provisions of the Real Estate Settlement Procedures Act
(RESPA). GMC should also be required to establish policies
and procedures to ensure its branches monitor the charges for
FHA loans and do not engage in predatory lending. GMC
should also be required to review and analyze all FHA-
insured loans originated by the RMB branch with loan
discount points where no interest rate reduction occurred and
report the results to the MRB. Refunds should be made as
follows:
If the loan is current, a refund must be made to the
borrowers.
If the loan is delinquent, a refund must be applied to
the delinquency.
If a claim has been paid, a refund must be paid to
HUD.
In addition you should take appropriate action against
GMC for allowing RMB to be a prohibited net branch.
GMC should be required to discontinue all similar net
branch operations and establish policies prohibiting future
net branch operations. In addition, we believe GMC should
indemnify all remaining FHA loans originated by RMB.
We further recommend your office require GMC to
indemnify HUD/FHA against current and future losses on all
40 loans identified in Appendix B of this report. We also
recommend GMC provide your office with a corrective
2004-LA-1005 Page iv
Executive Summary
action plan containing assurances that all HUD/FHA
guidelines regarding processing and underwriting HUD/FHA
insured loans are followed.
We discussed the findings with GMC officials during the
audit and at an exit conference held April 2, 2004. We also
provided GMC and HUD a copy of the draft audit report for
comments on April 27, 2004. GMC provided a written
response on May 26, 2004. Their response and our
evaluation are discussed in the findings, and the full text of
their response is included at Appendix G.
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1005
Executive Summary
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2004-LA-1005 Page vi
Table of Contents
Management Memorandum i
Executive Summary iii
Introduction 1
Findings
1. GMC Allowed Predatory Lending Practices 3
2. RMB was a Prohibited Net Branch 13
3. GMC Allowed the FHA Loan Process to be Manipulated 17
Management Controls 27
Follow Up On Prior Audits 29
Appendices
A. Schedule of HUD Losses 31
B. Summary of Loan Origination Deficiencies 33
C. Ten Cases of Predatory Lending 35
D. Flipping and Strawbuyer Cases 37
2004-LA-1005 Page vii
Table of Contents
E. Schedule of Questionable Costs and Funds Put to Better Use 39
F. HUD-1 41
G. Auditee Comments 43
2004-LA-1005 Page viii
Introduction
Guild Mortgage Company (GMC) has been an approved non-supervised, direct endorsement
mortgagee since March 27, 1967. The company currently has 40 branches and its corporate office is
located in San Diego, California. The major HUD program affecting the company is the Single
Family Home Mortgage Program established under Section 203(b) of the National Housing Act.
The program permits lenders that meet the requirements established by HUD to submit loans for
insurance by FHA. Section 203(b), the basic home mortgage insurance program, provides for
insurance on loans for single-family residences of one-to-four family structures and is the section of
the Act under which most FHA loans are insured.
The vast majority of HUD/FHA loans are originated pursuant to the Direct Endorsement Program.
This program provides lenders, who are specifically approved by the agency, with the authority to
approve HUD/FHA insured loans without prior approval from HUD. It is the responsibility of the
lender to determine whether the loan should be granted based on the information provided by the
purchaser and the subsequent verification of that information conducted by the lender.
We conducted our audit of a GMC branch in Downey, California. The branch was doing business
as (dba) Residential Mortgage Bankers (RMB) and was in operation between August 1999 and
November 2002. The branch originated 968 FHA loans amounting to $164,390,657 during the time
it was in operation. To date, HUD has incurred losses on 27 loans, totaling over $811,000.
The overall audit objective was to determine whether Guild
Audit Objectives Mortgage Company approved FHA insured loans in
accordance with the HUD/FHA requirements, which require
adherence to prudent lending practices. Additionally, we
wanted to determine whether there were additional
indications of irregularities or abuses of the loan origination
process.
We performed audit work from June 2003 through November
Audit Scope and 2003. The audit covered the period August 1999 through
Methodology November 2002.
The primary audit methodologies included:
Evaluation of GMC’s management and quality
control structure and the assessment of risk.
Interviews of current and prior GMC employees
and Santa Ana Homeownership Center (HOC) staff
in the Quality Assurance Division (QAD).
Page 1 2004-LA-1005
Introduction
Interviews of borrowers; escrow company
employees; and individuals shown as employers,
creditors, and gift fund providers on loan
documents.
Reviews of GMC, RMB branch, and FHA loan
files. In addition, we reviewed selected GMC
personnel files and escrow company files.
Reviews of public records and databases.
When we began the review, we obtained information from
HUD’s Neighborhood Watch system that showed there were
98 defaults reported during the time RMB was in operation.
Of those 98, there were 35 loans in claim status. Based on
updated information, there are currently 41 loans in claim
status and 122 in default.
We initially selected the 35 loans in claim status along with
15 other loans for our review. However, due to time
constraints, we decreased our review to a total of 40 loans
with mortgages totaling $6,454,693. The audit was
conducted in accordance with generally accepted government
auditing standards.
2004-LA-1005 Page 2
Finding 1
GMC ALLOWED PREDATORY LENDING
PRACTICES
GMC allowed RMB to charge loan discount points and premium rate pricing for which the
interest rates were not reduced nor did the borrowers receive any value or service for the
charges. Many of the loans reviewed involved property flipping and/or strawbuyers. In
addition, RMB loan officers were allowed to charge excessive fees for underwriting and
processing. These problems were caused by the lack of oversight on the part of GMC over the
operations of RMB. Consequently, RMB FHA loan borrowers had unnecessarily high mortgage
payments resulting in subsequent defaults and foreclosures.
In April 2000, HUD/Treasury National Predatory Lending
Lending Practice Rules Task Force was convened. The Task Force drew its
and Policies members 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 that “…practices are often
combined with loan terms that, alone or in combination, are
abusive or make the borrower more vulnerable to abusive
practices.”
HUD Mortgagee Letter 94-16 Tiered Pricing Final Rule
pertains to a lender’s customary lending practices in regard
to mortgage charge rates. In Section D, Other Comments
on Mortgage Charge Rates, it states, “HUD does not agree
that the law precludes review of one or more items of
closing costs merely because actual payment may have
been made by the seller in the particular transaction. The
law applies to the mortgagee’s customary lending practices,
not to the terms negotiated between sellers and buyers.”
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).”
Page 3 2004-LA-1005
Finding 1
24 CFR, 3500.14, Prohibition Against Kickbacks and
Unearned Fees, 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
violation of this section is a violation of Section 8 of
RESPA.”
The Real Estate Settlement Procedures Act (RESPA) is a
consumer protection statute, first passed in 1974. The
purposes of RESPA are to:
• Help consumers become better shoppers for
settlement services, and
• Eliminate kickbacks and referral fees that
unnecessarily increase the costs of certain
settlement services.
Section 8 of RESPA prohibits a person from giving or
accepting anything of value for referrals of settlement
service business related to a federally-related mortgage
loan. It also prohibits a person from giving or accepting
any part of a charge for services that are not performed
(unearned fees).
According to Mortgagee Letter 94-7, “Premium rate
mortgages, also known as “rebate pricing”, permit the
borrower to pay a higher interest rate in exchange for the
lender paying the borrower’s closing costs.” If, however, a
premium rate will result in excess funds exceeding closing
costs and prepaids, the principal balance of the mortgage
must be reduced by the overage. If the seller pays the
borrower’s closing costs, the lender should use the funds
from a premium to fund the borrower’s prepaid expenses or
other remaining closing costs.
According to HUD Handbook 4060.1, paragraph 3.2B,
“The mortgagee is fully responsible to HUD for the actions
of its branch offices.”
Predatory Lending Practices GMC allowed RMB to employ predatory lending practices
and to violate Section 8 of RESPA. We analyzed
settlement charges on ten of the 40 loans reviewed. The
2004-LA-1005 Page 4
Finding 1
loans closed in 2000 and involved loan amounts between
$128,838 and $227,127. The settlement charges involved
discount points, premium rate pricing, and miscellaneous
charges for various fees, such as underwriting and
processing. GMC’s Corporate Office collected the
settlement charges and shared these fees with RMB loan
officers and Residential Mortgage Associates (RMA), the
entity owned by RMB’s branch managers. We determined
a significant portion of the settlement charges provided no
benefit to the borrowers. (See Appendix C)
In nine of the ten loans reviewed, discount points were
Discount Points Did Not charged. The discount points were between 1.5 and 3.5
Reduce Interest Rates percent of the loan amount. However, in five of the nine
loans, borrowers did not receive an interest rate reduction
on their loans. For example, one loan for $199,852
included 2 discount points. This amounted to a charge of
$3,997.04; however, the borrower received no interest rate
reduction. The only benefit derived from discount points
was the additional income received by the loan officer.
The loan officer received 100% of the points in addition to
the one percent loan origination fee. The same scenario
applied to the other four loans—the only difference
involved the number of discount points charged.
Three of the nine borrowers actually received a two-year
period of interest rate reduction (temporary buydown);
however, in all cases, the reduction amount did not equal
the charge. For instance, one loan for $172,081 included
3.5 discount points, or a charge to the seller of $6,023. The
two-year buydown calculated to a savings of $4,376 in
mortgage payments for the borrower. In this case, the loan
officer got the difference between the amount charged,
$6,023, and the mortgage payment savings, $4,376, or an
unearned compensation amounting to $1,647.
Loan discount points are normally paid at closing and
generally calculated as a percentage of the total loan
amount. According to HUD, discount points are paid to
reduce the interest rate on a loan.
GMC disguised unearned fees by calling them discount
points on the HUD-1s. Although the HUD-1s showed an
amount on line item 802 as Loan Discount Points, they were
Page 5 2004-LA-1005
Finding 1
in actuality a charge to increase unearned compensation for
GMC that was provided to its RMB loan officers. Anyone
reviewing the HUD-1s, without benefit of GMC loan officer
commission reports and/or price lists (rate sheets), would be
unable to determine the true purpose of the hidden unearned
fees (See Appendix F).
We found that loan officers routinely charged for loan
discount points, performed no service for the fee, and
simply kept the monies intended to lower the borrowers
interest rate. In our opinion, these were unearned fees and
a violation of Section 8 of RESPA.
We determined that nine of the same ten loans involved
Premium Rate Mortgages premium rate or rebate pricing. As previously stated, there
Provided No Benefit is no prohibition of rebate pricing mortgages; however, the
premium rate should be used to pay borrower closing costs
or prepaids. In each of the nine loans reviewed, the loan
officer received 100 percent of the rebate amount.
Depending on the rebate percentage and the loan amount,
this amounted to charges between $1,772 and $4,497.
We did not see evidence that rebate pricing was necessary,
because in the majority of the cases we reviewed, the seller
paid the borrowers closing costs. GMC management stated
rebate pricing was negotiated between the loan officer and
the buyer. However, most of the borrowers appeared to be
non-English speaking, foreign-born individuals buying a
home for the first time. In fact, we used a translator to
interview many of the borrowers in our sample.
There were no loan principal reductions nor did the lender
pay closing costs or prepaids in the loans we reviewed. We
believe these to be classic examples of predatory lending.
We also determined 16 of the 40 loans we reviewed
Property Flipping and
involved property flips and/or strawbuyers. We believe
Strawbuyers
this was an additional resource the loan officers used to
obtain unearned fees since for these type loans the
investors needed to resell quickly and would generally not
question paying discount points. A property flip occurs
when a property is bought and sold in a short time period
and the seller makes a large, unjustified profit. This
frequently also involves an inflated or misleading appraisal
to corroborate the property value. Strawbuyers generally do
2004-LA-1005 Page 6
Finding 1
not occupy the property and are used to conceal the actual
buyer or investor.
For one of the loans we tested, the investor purchased the
property on July 5, 2000 for $63,000 and sold it on July 20,
2000 for $137,000. This property flip resulted in an
increased resale price of $74,000 in only 15 days. The
borrowers defaulted after only seven payments and HUD
paid a claim on the foreclosed property. For another loan
we reviewed, the investor purchased the property on May
1, 2000 for $35,000 and sold it on June 6, 2000 for
$138,000. This property flip resulted in an increased resale
price of $103,000 in slightly over one month. The
borrower defaulted after only eight payments and HUD
also paid a claim on the property. (See Appendix D)
GMC documentation in support of compensation to RMB
Miscellaneous Charges Were loan officers also showed excessive charges for
Excessive underwriting and processing. According to GMC
management, branch managers were allowed to determine
the amount to be charged for underwriting and processing
of the FHA loans. At RMB, loan officers were required to
charge $300 for underwriting and $395 for processing.
However, if the loan officer could “get” more than that, the
“overage” would go into the loan officer’s commission.
One loan we reviewed showed $600 charged for
underwriting and $995 charged for processing; therefore,
an additional $900 was added to the loan officer’s
commission in addition to collecting the loan origination
fee.
When we discussed loan officer compensation (rebate
pricing and overages for underwriting and processing) with
GMC management, they stated GMC had no prohibition
against the practice and did not monitor these charges.
However, they did acknowledge the charges were “high.”
Auditee Comments o GMC disagreed with the finding and stated they did
not allow the Downey Branch to employ predatory
lending practices. GMC does agree the loans we
cited “…were expensive in that they involved high
interest rates and substantial points and fees.”
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Finding 1
However, GMC believes neither civil money
penalties nor refunds/principal reductions are
appropriate. GMC’s response also states, “Although
the loans were expensive, they were sub-prime
loans and… therefore carried higher costs to Guild
than prime loans. For this reason, as is typical in
the lending industry, the borrowers received higher
interest rates and fees. The borrowers understood
the expenses associated with their loans, and all
fees were adequately disclosed.”
o The response further states “…GMC complied with
applicable HUD and RESPA rules and regulations.”
According to GMC, RESPA is merely “…a
disclosure and anti-kickback statute….” GMC
continues by stating, “Guild was permitted to
charge whatever discount points it deemed
appropriate, and it was not required to make
corresponding reductions to the interest rates.”
OIG Evaluation of We disagree with Guild’s justification for higher fees. Since
Auditee Comments the loans in question were FHA-insured loans, they were not
and did not result in an increased credit risk to Guild as
claimed. In fact, with the backing of the FHA insurance fund,
Guild had minimal risk compared to the risks it would take if
it had to rely solely on the properties values, as would have
been the case if these had been conventional loans. FHA
borrowers are required to qualify for the loans using its
published requirements. FHA relies on its direct endorsement
lenders to ensure this happens and based upon that reliance,
FHA endorses each loan through Mortgage Insurance
Certificates.
In addition, we believe GMC disguised unearned fees by
calling them discount points on the HUD-1s. Although the
HUD-1s showed an amount on the line item for loan discount
points, they were in actuality, a charge to increase unearned
compensation for the loan officers. Anyone reviewing the
HUD-1s, without benefit of GMC loan officer commission
reports and/or price lists (rate sheets), would be unable to
determine the true purpose of the hidden unearned fees. We
believe the practice of charging for services not provided
(discount points) and charging higher than necessary interest
2004-LA-1005 Page 8
Finding 1
rates (premium pricing), without benefits being passed on to
borrowers, were predatory lending practices that took unfair
advantage of first-time and minority purchasers. We consider
these types of practices to be abusive, unnecessary and price
gouging. Keep in mind that these borrowers were minority
first time homebuyers and English was a second language for
most of them.
GMC concedes borrowers paid high interest rates and the
FHA loans involved substantial points and fees. However, it
states “…the loans cited in the Report were an anomaly and
are not representative of either the Downey Branch’s loan
originations or Guild’s portfolio.” In addition to the ten loans
on Appendix C, we tested 30 additional loans originated at
the RMB net branch. We found similar rates, points and fees
in many of those loans and firmly believe these were neither
anomalies nor coincidences. We believe these borrowers
were the victims of predatory practices and regardless of
GMC’s claims that the loans were anomalies and not
representative, they occurred and GMC is ultimately
responsible.
We also disagree with GMC’s claim that the audit report is
not correct in concluding that discount points are paid to
reduce a loan’s interest rate. RESPA published a booklet a
number of years ago that lenders provide to purchasers during
the loan process, called Buying Your Home. A copy is also
on the HUD website, and in Section III it describes specific
settlement costs and where they can be found on the HUD-1.
The description for loan discount under line item 802 states,
“Also often called "points" or "discount points," a loan
discount is a one-time charge imposed by the lender or
broker to lower the rate (emphasis added) at which the
lender or broker would otherwise offer the loan to you.”
RESPA Statement of Policy 1999-1 defines a two-part test to
determine whether a payment is in violation of RESPA. The
first question is whether goods or facilities were actually
furnished or services were actually performed for
compensation paid. However, the fact that goods or facilities
have been furnished or that services have been actually
performed by the lender does not by itself make the payment
legal. The second question is whether the payments are
reasonable related to the value of the goods or services that
were actually provided or performed.
Page 9 2004-LA-1005
Finding 1
Since the borrower did not receive a reduced interest rate or
any other service for the discount points, this fails the first
part of the test. Since the borrower did not receive any
service for the discount points charged, the payments were
not reasonably related to the value of the services received,
i.e., there is no value for services not provided. Therefore, the
payments fail part two of the two-part test. This same
analogy follows for charges for premium rate or rebate
pricing. Simply delivering a loan with a higher interest rate is
not a compensable service.
We strongly disagree with GMC’s argument that predatory
lending laws are aimed only at fees charged to the borrowers,
not sellers. RESPA Statement of Policy 1999-1 states, “The
consumer is ultimately purchasing the total loan and is
ultimately paying for all services needed to create the loan.
All compensation to the broker either is paid by the borrower
in the form of fees or points, directly or by addition to
principal, or is derived from the interest rate of the loan paid
by the borrower.” RESPA Statement of Policy 1999-1 was
affirmed and further clarified in RESPA Statement of Policy
2001-1. We firmly believe all unearned fees, regardless of
source, victimize borrowers and are in violation of RESPA.
Although GMC stated they complied with applicable HUD
and RESPA rules and regulations, we have clearly confirmed
that GMC violated 24 CFR, 3500.14, Prohibition Against
Kickbacks and Unearned Fees; and therefore, HUD
Handbook 4060.1 REV-1, paragraph 2-24 B.3.
GMC also stated the loan officer proceeds were overstated in
two instances in Appendix C. Their assertions are inaccurate
and footnotes 4 and 5 explain the computations in the
Appendix.
2004-LA-1005 Page 10
Finding 1
Recommendations We recommend GMC be:
1A. Referred to the Mortgagee Review Board (MRB) for
engaging in predatory lending practices. The MRB
should also consider seeking civil money penalties for
failure to comply with the provisions of RESPA.
1B. Required to establish policies and procedures to
ensure its branches monitor the charges for FHA
loans and to not engage in predatory lending.
1C. Required to review and analyze all FHA-insured
loans generated by the RMB branch with loan
discount points and/or premium rate pricing where no
interest rate or principal balance reduction occurred.
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.
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Finding 1
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2004-LA-1005 Page 12
Finding 2
RMB WAS A PROHIBITED NET BRANCH
GMC approved RMB to originate FHA mortgages in violation of HUD requirements over third
party loan originations. This was caused because of improper GMC executive decisions when
entering into branch manager agreements. As a result, this branch was a prohibited branch office
operation, was ineligible to originate FHA-insured loans, and therefore, caused increased risk to the
FHA insurance funds on loans totaling over $160 million.
HUD Handbook 4060.1, REV-1, paragraph 1-2 specifies that
HUD Requirements HUD/FHA insured mortgages may only be originated,
serviced, purchased, held, or sold by HUD/FHA approved
mortgagees. Approved mortgagees are permitted to conduct
such activities from branch offices. Mortgagee Letter 00-15
states “…separate entities may not operate as “branches” of a
HUD/FHA approved mortgagee and if the separate entity
lacks HUD/FHA approval, its mortgages constitute third
party originations which violate Department requirements.”
HUD Handbook 4060-1, paragraph 2-17 requires a
HUD/FHA approved mortgagee to pay all of its operating
expenses. These operating expenses include, but are not
limited to, equipment, furniture, office rent, and other similar
expenses incurred in operating a mortgage lending business.
Mortgagee Letter 00-15 further elaborates that “…expenses
paid by the branch from a personal or non-mortgagee
account…is prohibited and a true branch does not exist.” The
Mortgagee Letter further states the following requirements in
branch manager “employment agreements” are violations of
“…Departmental branch requirements.”
“Contractual relationships with vendors such as
leases, telephones, utilities, and advertising to be in
the name of the “employee” (branch) and not in the
name of the HUD/FHA approved mortgagee.
The “employee” (branch) must indemnify the
HUD/FHA approved mortgagee if it incurs damages
from any apparent, express (sic), or implied agency
representation by or through the “employee’s”
(branch’s) actions.”
Page 13 2004-LA-1005
Finding 2
GMC required the Residential Mortgage Banker’s branch
Office Space Leases Were manager, as part of the Branch Manager Agreement, to
Executed by RMB negotiate the RMB office space lease in his name. There
were two agreements signed—one dated August 1, 1999 and
another June 29, 2000. The agreement dated August 1, 1999
states, “Manager is responsible for negotiating the terms of
the lease and executing the lease in Manager’s name only.
GMC will subsequently execute a month-to-month sublease
at the actual rent between GMC as subtenant and Manager as
landlord.” In the June 29, 2000 branch manager's agreement
it states, “Manager is responsible for negotiating the terms of
the lease and executing the lease…”.
The office lease, dated September 1, 1999, shows the landlord
to be The Balco Company and the tenant as the independent
mortgage corporation of Residential Mortgage Associates.
This entity is owned by GMC’s branch manager and is not
the same entity as RMB. GMC and the two branch managers
of RMB signed a sublease on September 1, 1999 for the
space.
On March 1, 2001, Residential Mortgage Associates leased
additional office space at the same location from The Balco
Company. GMC also subleased this space as they had done
in the earlier arrangement.
The Office rent for both leases was paid from personal or
non-mortgagee accounts. These requirements in the GMC
branch manager agreements, in our opinion, serve to maintain
a clear separation between the HUD/FHA approved
mortgagees and their RMB branch. This is inconsistent with
the close supervisory control over all employees mandated by
HUD Handbook 4060.1, REV-1, paragraph 2-13 that states,
“Mortgagees are required to exercise control and responsible
management supervision over their employees.”
The GMC branch manager agreement contained an
Required Indemnification indemnification clause. In the August 1, 1999, agreement, it
states, “Manager shall indemnify GMC against any loss or
damage incurred by GMC which has resulted from
Manager’s gross negligence or willful or wanton actions
during the term of this agreement, including but not limited to
fraudulent action known to Manager or participated in by
Manager in connection with any loan originated at or
2004-LA-1005 Page 14
Finding 2
brokered by the branch.” The June 29, 2000 agreement
contains the same paragraph. This is a violation and serves as
another example that RMB was a prohibited net branch.
GMC did not always exercise adequate control and
Inadequate Control and supervision over RMB employees. We interviewed the
Supervision former RMB on-site underwriters and learned they both
considered the two RMB branch managers their supervisors
instead of the Corporate Underwriting Supervisor. A GMC
internal personnel document also showed the two RMB
branch managers as the supervisor of the branch on-site
underwriter. However, the RMB Branch Manager
Agreement clearly stated, “Managers shall have no control
over the underwriting process.”
GMC management believed managers could only be
encouraged to perform personnel appraisals but not required.
We believe this to be inconsistent with a traditional
employer/employee relationship. We determined RMB
branch managers rarely prepared performance appraisals for
branch employees.
Auditee Comments GMC disagrees with the finding and its recommendations.
GMC states the Downey Branch was a legitimate branch
office, the company paid all of its operating expenses, the
indemnification provision in the branch manager agreement
was permissible, and GMC exercised proper supervision and
control over RMB employees. GMC concludes by stating
“since the branch was legitimate and the borrowers qualified
for FHA financing, therefore, indemnifications would be
inappropriate.”
OIG Evaluation of We believe RMB was a prohibitive net branch for all the
Auditee Comments reasons enumerated in this finding. We have documented
that RMB was an existing mortgage corporation, Residential
Mortgage Associates (RMA). State of California
incorporation documentation shows the company was
incorporated May 26, 1999. This was several months prior to
the opening of the Downey Branch office. In addition, some
expenses including the office leases were paid from a
Page 15 2004-LA-1005
Finding 2
personal or non-mortgagee account. In this case, the leases
were paid by RMA.
We also documented that a loan officer who worked in shared
space at a real estate office paid half of the space rent and on
more than one occasion loan officers paid for office
equipment, office equipment repairs, and training. We also
believe there was a lack of GMC supervisory control over the
employees at RMB. This occurred, in our opinion, because
this branch was a highly profitable separate entity and the
relationship benefited both GMC and RMB. Taken as a
whole and in accordance with the provisions of Mortgagee
Letter 00-15, we still believe these issues indicate a clear
separation between GMC and RMB and, therefore, GMC
should be subject to the full range of HUD sanctions as
recommended below.
Recommendations We recommend GMC be required to:
2A. Sign an indemnification agreement with HUD for all
remaining 938 loans (968 loans originated minus 27
loans with known losses minus 3 indemnification
agreements already signed after QAD review)
generated at the net branch. The total amount of the
loans amounts to $159,865,833.
2B. Discontinue all similar net branch operations,
immediately.
2C. Establish policies prohibiting net branch operations.
.
2004-LA-1005 Page 16
Finding 3
GMC ALLOWED THE FHA LOAN
PROCESS TO BE MANIPULATED
GMC failed to establish appropriate loan processing and underwriting controls to ensure HUD
requirements were followed during the loan origination process. In several instances, GMC dba RMB
clearly disregarded HUD underwriting requirements and thus failed to identify and resolve
questionable information and patterns in its loan origination files and approved loans that did not meet
HUD requirements. GMC’s lack of effective controls and its failure to use due care allowed its
employees to manipulate the loan origination process and approve loans for unqualified borrowers. At
least 29 of the 40 loans (72.5%) reviewed were processed and approved using falsified information. As
a result, HUD and the FHA insurance fund assumed an unnecessary insurance risk and has incurred
losses totaling over $811,000 on 27 of the 40 loans (67.5 percent) reviewed. In addition, GMC allowed
its loan officers to be real estate agents and development company operators, which is a clear conflict
of interest with their loan officer responsibilities.
Section 203 of the National Housing Act (12 U.S.C. 1709)
HUD’s Loan Origination states that HUD insures mortgages made by private lending
Requirements institutions. Dependent upon their designation by HUD, the
institutions have the authority to originate, purchase, sell, or
service HUD FHA-insured mortgages.
Under HUD’s Single Family Direct Endorsement Program,
the mortgagee underwrites and closes the mortgage loan
without prior HUD review or approval. HUD Handbook
4155.1 REV-4 CHG-1 contains the basic mortgage credit
underwriting requirements for single-family (1-4 unit)
mortgage loans insured under the National Housing Act.
HUD Handbook 4000.4 REV-1, CHG-2, Single Family
Direct Endorsement Program, requires mortgagees to develop
HUD/FHA insured loans in accordance with accepted sound
lending practices, ethics, and standards. It also provides that
mortgagees must obtain 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. This would necessarily
include ensuring employment verifications are properly
confirmed, thoroughly reviewing all loan origination
documents, and adopting and implementing a quality control
plan that ensures compliance with applicable rules and
Page 17 2004-LA-1005
Finding 3
regulations. In addition, HUD Form 92900-A, Addendum to
the Uniform Residential Loan Application, requires the lender
to certify that GMC has complied with all HUD’s
requirements.
HUD Handbook 4155.1, REV-4 CHG-1, Section 2-6 requires
mortgagees “…verify borrower’s employment for the most
recent two years.” HUD relies on mortgagees to obtain
factual data from the borrower and to verify and analyze the
information obtained.
HUD Handbook 4155.1, REV-4, Chapter 3-2C, states:
“Each borrower must provide the lender with evidence of
his or her social security number. While the actual social
security card is not required, the social security number can
be obtained from pay stubs, the driver’s license, etc.”
HUD Handbook 4155.1, REV-4, Chapter 3-1 states:
“Verification forms must pass directly between lender and
provider without being handled by any third party.”
Mortgagee Letter 96-18, Section IV, Multiple Employers,
states, “With the exception of receptionists, and technical
staff such as appraisers and inspectors, lender employees
may not work for more than one company engaged in the
real estate finance business at the same time. This also
includes working as a real estate agent or broker as well as
originating or underwriting loans for more than one lending
institution.” HUD Handbook 4060.1, REV-1, paragraph 2-
14, also states, “All employees of the mortgagee except
receptionists, whether full time or part-time, must be
employed exclusively by the mortgagee at all times, and
conduct only the business affairs of the mortgagee…”
HUD Handbook 4060.1, REV-1, paragraph 2-16A
provides the requirements for a mortgagee’s main and
branch offices. It states the mortgagee’s facilities should
meet the requirements in the indicated paragraphs:
• “A.3. Be located in a space that is separate and
apart from any other entity.
• A.4. Be clearly identified to the public so that
mortgagors will know, at all times, exactly with
which business entity they are doing business.
2004-LA-1005 Page 18
Finding 3
• A.5. A mortgagee is required to have its own
telephones.”
During our audit, we reviewed 40 loans. This review included
We Reviewed 40 Loan loan origination files at GMC’s corporate office and FHA
Files loan files from the HUD Santa Ana HOC. We subsequently,
learned there were RMB branch files in a storage facility in
Cerritos, California. We were able to obtain and review all
but four of the branch files. The other four branch files were
never provided for review.
During our review, we confirmed that 29 of 40 (72.5
29 Loan Files Contained percent) loans were approved based on false information.
Falsified Information The misrepresented information included false
employment, fictitious identification and alternative credit,
false gift fund and explanation letters, and invalid social
security numbers (SSN). The foregoing concerns are
addressed below:
Employment Verifications Were Falsified
As part of the loan origination process, the potential
borrower’s employment must be verified. However, we
determined that RMB Branch employees falsely claimed that
employment information had been verified and re-verified.
The re-verifications were supposedly done prior to closing
but we confirmed that RMB employees falsely reported the
employment was valid.
An RMB employee, generally a salaried Loan Processor or
Junior Loan Processor, prepares the Request for Verification
of Employment (VOE), Fannie Mae Form 1005, for each of
the borrowers/co-borrowers on an FHA loan. The VOE
should have been mailed to each employer in order to verify
the borrower’s employment, income, and potential for
sustained employment. In some cases, the VOEs were faxed
to the employer.
During our review, we identified 18 of the 40 (45 percent)
loans with false employment information. We confirmed
false employment by interviewing the owner/owner’s
representative, U.S. Postal Service employees, and
information from the HUD Quality Assurance Division’s on-
site mortgagee monitoring review performed in November
2001.
Page 19 2004-LA-1005
Finding 3
For example, we interviewed the owner of a beauty salon and
supply business in Huntington Park, California. The VOE
indicated the owner had signed the VOE in February 2000
verifying the borrower had worked as a Receptionist for his
business since 1996. When we showed the VOE to the
owner, he stated it was not his signature and the borrower had
never worked for him. According to a document in the loan
origination file, the borrower’s employment was subsequently
“reverified” by RMB’s loan closer prior to loan closing.
Although the telephone number shown on the reverification
was the actual number for the business, we concluded the
reverification could not have been performed and was,
therefore, a false statement since the owner stated the
borrower had never worked for the business. Eight payments
were made before the loan went into default and HUD
subsequently incurred a loss of $70,719.
Borrowers Had Fictitious Identities
We determined five of the 40 loans contained eight instances
of fictitious identifications. During our review of the loan
origination and FHA files, we often found photocopies of the
borrower(s) driver license. Based on the photos on the driver
licenses, we determined the same individuals were using false
identifications to obtain more than one FHA loan under
different names.
A man and a woman, representing themselves to be a couple
living together, obtained two FHA loans under different
names. They each had a California driver’s license with the
same picture but a different license number. Both properties
were eventually foreclosed and HUD incurred losses of
$19,188 and $35,956 on the two properties. HUD’s
Neighborhood Watch System shows the first property was a
2-payment default and the second was a 1-payment default.
We confirmed their employment documents were false.
These loans were both originated by the same loan officer.
We also interviewed two brothers who obtained an FHA loan
using false resident alien cards. The brothers stated the loan
officer was aware the cards were falsified. The loan officer
was also one of the RMB branch managers.
Other Documents Were Falsified
2004-LA-1005 Page 20
Finding 3
We determined 15 of 40 (37.5 percent) loans had other false
documents. These documents included, but were not limited
to: invalid or questionable social security numbers (SSN);
false gift, credit, explanation, and relationship letters; an
altered police report; and a falsified tax return.
We determined nine borrowers/co-borrowers on eight loans
had questionable or invalid SSNs such as:
SSNs were shown as issued after March 1, 1999;
however, the borrowers had been using them prior to
that date.
SSNs were shown as issued prior to the borrowers’
year of birth.
An SSN was shown as unissued.
Two SSNs were invalid based on interviews with the
borrowers. Both individuals, who were brothers,
admitted the SSNs were false. The brothers were
borrowers on the same FHA loan.
One co-borrower apparently used more than one SSN.
Four of the eight loans, where the borrowers had questionable
or invalid SSNs, have gone to foreclosure. HUD has already
incurred $71,195 in losses on these loans.
We also identified and confirmed five gift letters that were
false. We interviewed the individuals identified as the
donors and, in all instances the donors were not the actual
source of the gift funds. We also determined relationship
letters had been misrepresented. One borrower stated the
co-borrower shown as his girlfriend was actually a friend of
his mother’s and had never been his girlfriend. She had
only been added to the loan in order to help him to qualify.
The co-borrower never helped with the mortgage payments
and never lived at the residence.
During our review, we determined 15 loans contained
Documents Faxed documents relating to credit, employment or income of
Through Interested borrowers that were faxed from real estate companies. We
Third Parties confirmed that many of the pay stubs, W-2s, etc., had been
Page 21 2004-LA-1005
Finding 3
falsified. These documents should not have been accepted
and the loans should not have been submitted for
endorsement until documents that had not passed through
interested third parties had been obtained and re-verified.
For these 15 loans, we identified seven RMB loan officers
(including one of the branch managers) were involved in
the loan originations.
We determined that 13 of the 40 loans reviewed did not
Sales Contracts were have a sales agreement in the file submitted to HUD for
not in the files endorsement. These loans involved “for sale by owner”
transactions. HUD Handbook 4155.1, REV-4, Chapter 3,
paragraph 3-1 states, “The documents described below are
typically required for mortgage credit analysis in all
transactions except certain streamline refinances.”
Paragraph 3-1H continues: “Sales contract, and any
amendments of other agreements and certifications.”
We further determined in all 13 loans, the seller was an
investor or strawbuyer. Strawbuyers generally do not
occupy the properties and are often used to conceal the
actual buyer or investor.
We reviewed public records and determined some of the
investors had business connections with at least one RMB
employee. These connections included working for the
same real estate company or jointly investing in real estate.
One investor, who was a partner in at least one property
investment with an RMB loan officer, was involved in 6 of
the 13 loans. He was the seller in three of the loans and
received large unexplained payouts at closing in the
remaining three loans. On one loan, the payout was over
$140,000.
GMC allowed RMB to hire a licensed real estate agent as a
GMC Employee loan officer. According to GMC personnel records, the
Conflicts of Interest loan officer/real estate agent was in GMC’s employ
between December 16, 2000, and December 14, 2001. The
personnel records also show he was married to another
GMC loan officer. According to loan origination files for
one FHA loan, the loan officer/real estate agent was shown
as the listing broker and agent (broker representing seller)
on various documents including the sales contract. The
real estate agent/loan officer signed the sales contract as
real estate agent broker (listing firm). He also signed the
Agent’s Inspection Disclosure as agent (broker
2004-LA-1005 Page 22
Finding 3
representing seller) on March 21, 2001. This loan also
involved false employment documents. The real estate
company received a $15,540 for commission on the sale.
The loan officer’s wife received a $5,192 commission for
originating this loan.
On another FHA loan, the same loan officer/real estate
agent was not shown as an agent on the sales contract.
However, he received $6,632 as a real estate commission.
According to public records, another GMC loan officer
operated a development company out of the RMB office.
The business address of the development company was
identical to the RMB office. The loan officer originated
two FHA loans where the seller was a non-profit
organization; however, his development company received
$29,962 in sales proceeds on one loan and $33,378 on the
other. According to escrow company records, the non-
profit seller received $100 on the first loan and nothing for
the second. We believe the non-profit was acting as a
strawbuyer on behalf of the loan officer. This same loan
officer earned commissions totaling $275,162 during the
same year.
GMC approved a lease for workspace for one loan officer
Leased Space was Located within a real estate company. The space was categorized
Inside a Real Estate as a workstation in the real estate office. The lease shows
Company that there was a telephone answered by the real estate
office receptionist. This was clearly in violation of HUD
requirements.
See Appendix B for a summary of all deficiencies.
Page 23 2004-LA-1005
Finding 3
GMC disagreed with this finding and its recommendations.
Auditee Comments
GMC believed it had not allowed the FHA loan process to be
manipulated and continuously had controls in place to
monitor loan origination, processing, and underwriting.
GMC also stated it took swift action, including firing one of
the RMB loan officers (July 2001) in connection with
concerns raised about the Downey Branch. It further states it
should not be held responsible for the alleged deficiencies
and indemnifications were inappropriate. In summary, GMC
stated it neither knew nor should have known:
o There was false information in the files.
o Some transactions may have involved property
flipping and/or strawbuyers.
o There were any conflicts of interest.
OIG Evaluation of We believe this report clearly shows that GMC’s controls
Auditee Comments over RMB loan oringination, processing and underwriting
were inadequate and allowed the approval of loans based
upon misrepresented and inaccurate information. We
confirmed, during site visits and interviews with borrowers
and employers, employment and income information used
for qualifying the borowers was false.
As early as January 2000, GMC performed quality control
early payment default reviews showing indications of
misrepresented information. The review stated it appeared
“…the $4,000 gift letter was misrepresented.” One review
dated in July 2000 stated it appeared “…employment,
VOE, Paystubs and W-2’s have been misrepresented. The
Social Security number for the borrower was issued
between 1999-2000. The 1998 W-2 statement uses the
SSN.”
In November 2001, HUD’s Quality Assurance Division
(QAD) performed a monitoring review of RMB. In its
report dated January 14, 2002, QAD also cited GMC for
failing to resolve false or conflicting information when
originating HUD/FHA loans and obtaining FHA mortgage
2004-LA-1005 Page 24
Finding 3
insurance. In fact , our review was initiated after a referral
from QAD due to concerns they had resulting from their
monitoring review.
We believe false and/or questionable information should
have been detected by RMB employees such as loan
processors, loan closers, and underwriters. In fact, we
confirmed multiple instances where the RMB loan closer
falsely claimed, in written statements in the loan files, that
she had re-verified what we determined to be false
employment. We visited a number of employers who
confirmed the so called re-verified employment did not
occur and the alleged employees did not work for them.
When we interviewed former loan processors they reported
verifications of employment sometimes “appeared” in the
files or the in-box. It is abundantly clear RMB employees
both knew of the false information and file deficiencies.
Although GMC stated it “…took steps to terminate
potentially responsible individuals”, only one RMB
employee was terminated and the others voluntarily
resigned. In fact, after the Branch Managers and their staff
resigned from GMC, they remained in the same location in
Downey, CA and now operate under a different lender
name.
We also determined through interviews with GMC officials
that they were aware several appraisers who did appraisals
for RMB were not doing a good job. In fact, GMC actually
removed four appraisers from their approved panel. When
QAD performed its review of RMB, the report cited four
loans with appraisal deficiencies, including two appraisers
removed from the Guild panel. During our review, we
determined that 12 of 40 loans (30 percent) we reviewed
had appraisals performed by appraisers subsequently
removed from the panel. In addition, all 12 of these loans
involved property flipping.
We obtained conclusive documentation from GMC loan
files regarding the conflicts of interest with RMB
employees. Although GMC stated “…it is not even
certain…” one of their loan officers was considered an
employee when the loans cited in the report were
originated, we verified the GMC list of RMB employees
and compared the property sale and closing dates. We
documented that while a bona fide employee for GMC, the
Page 25 2004-LA-1005
Finding 3
loan officer also was working for a real estate company and
received a real estate commission on at least one of the
loans.
Although GMCstated that they complied with applicable
rules and regulations, our report cites many examples of
non-compliance with HUD Handbooks and Martgagee
Letters.
During our review, we confirmed GMC’s controls over
RMB loan oringination, processing and underwriting
process were inadequate and allowed the approval of loans
based upon misrepresented and inaccurate information.
GMC is responsible and should be accountable; therefore,
we believe the findings and recommendations are
appropriate.
Recommendations We recommend your office require GMC to:
3A. Indemnify HUD in the amount of $811,843 for losses
incurred on foreclosed properties.
(See Appendix A)
3B. Provide your office with a corrective action plan to
ensure that all HUD/FHA loan origination and
underwriting guidelines are followed by its staff.
2004-LA-1005 Page 26
Management Controls
In planning and performing our audit, we considered the management controls of Guild Mortgage
Company 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
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.
Compliance with Laws and Regulations – Policies
and procedures that management has implemented
to reasonably ensure that its loan origination
process is carried out in accordance with applicable
laws and regulations.
We assessed both of the relevant controls identified above.
It is a significant weakness if management controls do not
Significant Weaknesses 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:
• GMC provided inadequate supervision to the
Downey Branch and did not ensure FHA loans were
processed in compliance with HUD rules and
regulations. In addition, GMC’s inadequate
oversight of the Downey Branch allowed unearned
fees, which were not beneficial to the mortgagor.
• GMC entered into sublease agreements with RMB,
which resulted in an unauthorized net branch that
Page 27 2004-LA-1005
Management Controls
was allowed to process high-risk FHA loans. In
addition, manager agreements relieved GMC of any
liability incurred by the net branch for processing
high risks loans.
• GMC’s management policies and procedures were
inadequate to ensure valid and reliable data was
obtained during the loan origination process.
• Loan officers had unlimited access to FHA loan
files throughout the origination process.
2004-LA-1005 Page 28
Follow Up on Prior Audits
This is the first HUD Office of Inspector General audit of Guild Mortgage.
Page 29 2004-LA-1005
Follow Up of Prior Audits
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2004-LA-1005 Page 30
Appendix A
Schedule of HUD Losses
Loss (Gain) to
FHA Case # Loan Amount HUD
197-1750451 $ 122,986 $ 20,950.98
197-1754867 $ 123,978 $ 33,829.55
197-1612259 $ 74,386 $ 21,112.84
197-1936162 $ 132,815 $ (1,183.14)
197-1723722 $ 148,773 $ (7,142.54)
197-1836415 $ 136,871 $ 51,923.75
197-1633469 $ 128,937 $ 71,728.61
197-1546578 $ 142,822 $ 41,747.09
197-1689422 $ 148,773 $ 19,188.29
197-1748963 $ 136,871 $ 55,119.03
048-1971115 $ 108,832 $ (8,233.57)
197-1718751 $ 133,896 $ 21,127.03
197-1507518 $ 146,294 $ 79,947.19
197-1507474 $ 145,798 $ (32,435.33)
197-1645648 $ 227,127 $ 62,930.92
197-1527570 $ 152,741 $ (9,519.21)
197-1596389 $ 146,790 $ 70,719.25
197-1820756 $ 135,880 $ 36,168.01
197-1920162 $ 199,852 $ 35,955.97
197-1707736 $ 128,838 $ 9,326.96
197-1507206 $ 132,116 $ 52,453.64
197-1941439 $ 127,991 $ 23,940.72
197-1638539 $ 223,160 $ 55,551.84
197-1800637 $ 137,863 $ 30,664.34
197-1872782 $ 123,978 $ 26,059.70
197-1560559 $ 136,871 $ 57,007.47
197-1533950 $ 123,978 $ (7,096.42)
Total $3,829,217.00 $ 811,842.57
Page 31 2004-LA-1005
Appendix A Schedule of HUD Losses
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2004-LA-1005 Page 32
Appendix B
Summary of Loan Origination Deficiencies
Guild Mortgage Company
dba Residential Mortgage Bankers
FHA Case # 2003 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15
1 197-1633469 Claim X X X X X X
2 197-1638539 Claim X X X
3 197-1645648 Claim X
4 197-1689422 Claim X X X X
5 197-1693847 Claim X X
6 197-1707736 Claim X
7 197-1718751 Claim X X X X X
8 197-1723722 Claim X X X X
9 197-1748963 Claim X X X X X X X
10 197-1750451 Claim X X X
11 197-2035346 Terminated X X
12 197-1873430 Terminated X X
13 197-2033510 Terminated X X
14 197-1375370 Active X X X X
15 197-2044672 Active
16 197-2141053 Active X X X X X
17 197-2341820 Active X
18 197-1641413 Active X X X X X
19 197-1658720 Active X X X
20 197-1728056 Terminated X X
21 197-2813657 Active X X
22 048-1971115 Claim X X X X
23 197-1754867 Claim X X X X X
24 197-1800637 Claim X X
25 197-1820756 Claim X X X X X X
26 197-1836415 Claim X X X X
27 197-1872782 Claim X X X X X X
28 197-1941439 Claim X
29 197-1920162 Claim X X X X X
30 197-1936162 Claim X X
31 197-2012214 Claim X
32 197-1507206 Claim X X X X X X
33 197-1507474 Claim X X X X X
34 197-1507518 Claim X X X X X X
35 197-1527570 Claim X X X X X X X
36 197-1533950 Claim X X X
37 197-1546578 Claim X X X X X
38 197-1560559 Claim X X X X X
39 197-1596389 Claim X X X X X
40 197-1612259 Claim X X X
Totals 31 20 12 5 8 6 3 4 1 16 1 2 4 13 19
% of Total Loans 78% 50% 30% 13% 20% 15% 8% 10% 3% 40% 3% 5% 10% 33% 48%
Legend
1. False Documentation 6. False Gift Letter 11. False Tax Return
2. False Verification of Employment 7. False Relationship Letter 12. False Explanation Letter
3. False Telephonic Reverification of Employment 8. False Credit Letter 13. Employee Conflicts of Interest
4. False Identification 9. False Police Report 14. Investors
5. Invalid or Questionable Social Security Number 10. Faxed Documentation 15. Property Flipping / Strawbuyers
Page 33 2004-LA-1005
_Appendix B_________________________________________________________________
Summary of Loan Origination Deficiencies
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2004-LA-1005 Page 34
Appendix C _________________________________
Ten Cases of Predatory Lending
Overages Loan
Loan collected Officer Branch
Loan Interest Origination Discount Discount Buydown Rebate Rebate by Loan Gross Gross Total Gross
FHA Case # Amount Rate Fee Points Amount Amount Points Amount Officer Proceeds Proceeds1 Proceeds2
197-1707736 $128,838 8.875% $1,260.03 3.5 $4,509.33 $3,235.80 -1.375 $1,771.52 $200.00 $4,505.08 $3,729.67 $8,234.75
197-19201623 $199,852 8.500% $1,954.55 2 $3,997.04 - -2.25 $4,496.67 $950.00 $11,398.26 $4,908.41 $16,306.67
197-1596389 $146,790 9.250% $1,435.60 1.5 $2,201.85 - -2.75 $4,036.73 $900.00 $8,574.18 $3,937.33 $12,511.51
$1293.60
197-15275704 $152,741 8.875% $1,493.80 1.5 $2,291.12 (seller paid) -1.25 $1,909.26 ($195.00) $5,499.18 $4,216.97 $9,716.15
197-1645648 $227,127 9.375% $2,221.30 3 $6,813.81 $5,798.64 -1.875 $4,258.63 $600.00 $8,095.10 $5,492.72 $13,587.82
197-1693847 $134,888 9.500% $1,319.20 1.5 $2,023.32 - -2.5 $3,372.20 $900.00 $7,614.72 $3,064.66 $10,679.38
197-1641413 $172,081 9.250% $1,682.95 3.5 $6,022.84 $4,375.80 -2.5 $4,302.03 $900.00 $8,532.02 $4,456.42 $12,988.44
197-16894223 $148,773 9.000% $1,455.00 - $ - - -2.125 $3,161.43 $1,300.00 $5,916.43 $4,094.53 $10,010.96
197-1836415 $136,871 8.875% $1,388.60 1.75 $2,395.24 - -2.125 $2,908.51 $950.00 $7,592.35 $3,746.74 $11,389.09
197-16587205 $217,209 8.750% $2,124.30 2 $4,344.18 - 0.625 ($1,357.56) $605.00 $5,715.92 $5,351.66 $11,067.58
1
Includes the branch's portion of service release premium, processing fee, underwriting fee, etc
2
Does not include GMC's corporate revenue (GMC's portion of the service release premium (SRP), Admin Fee, etc. ) from each loan
3
Same borrower using fictitious identification and different name during a seven-month period
4
Loan officer was a branch manager who elected to have a majority of the commission shown distributed through branch proceeds.
5
Loan officer was given only a portion of the commission shown. The remainder went to the branch.
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Appendix C__________________________________________________________________________________________________
Ten Cases of Predatory Lending
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Appendix D____________________________________________________________________
Flipping and Strawbuyer Cases
Flipping
F H A C ase # P urchase Sale R esult
D ate P rice D ate P rice P rice Increase T im e P eriod
1 197-1693847 10/25/1999 $ 68,000.00 4/11/2 000 $ 136,000 .00 $ 68,000.00 6 m onths
2 197-2141053 12/5/2000 $ 155,000.00 4/6/2 001 $ 259,000 .00 $ 104,000.00 4 m onths
3 197-2813657 1/30/2002 $ 145,000.00 5/20/2 002 $ 265,000 .00 $ 120,000.00 3 m onths
4 048-1971115 5/20/1999 $ 70,000.00 9/20/1 999 $ 109,000 .00 $ 39,000.00 4 m onths
1
5 197-1941439 5/18/2000 $ 81,500.00 11/28/20 00 $ 130,000 .00 $ 48,500.00 6 m onths
2
6 197-1596389 9/24/1999 $ 49,000.00 2/24/2 000 $ 149,000 .00 $ 100,000.00 5 m onths
2
7 197-1718751 2/22/2000 $ 52,500.00 5/18/2 000 $ 135,000 .00 $ 82,500.00 3 m onths
8 197-1748963 5/1/2000 $ 35,000.00 6/6/2 000 $ 138,000 .00 $ 103,000.00 1 m onth
9 197-1750451 3/16/2000 $ 67,000.00 4/20/2 000 $ 124,000 .00 $ 57,000.00 1 m onth
2
10 197-1641413 2/22/2000 $ 83,300.00 3/23/2 000 $ 173,500 .00 $ 90,200.00 1 m onth
11 197-1820756 7/5/2000 $ 63,000.00 7/20/2 000 $ 137,000 .00 $ 74,000.00 15 days
12 197-1836415 7/13/2000 $ 72,000.00 9/27/2 000 $ 138,000 .00 $ 66,000.00 2 m onths
13 197-1507206 6/1/1999 $ 60,000.00 11/23/19 99 $ 133,000 .00 $ 73,000.00 5 m onths
14 197-1507518 7/22/1999 $ 73,500.00 11/23/19 99 $ 147,500 .00 $ 74,000.00 4 m onths
15 197-1546578 8/20/1999 $ 74,500.00 12/2/1 999 $ 148,000 .00 $ 73,500.00 4 m onths
16 197-1560559 7/22/1999 $ 67,000.00 12/28/19 99 $ 138,000 .00 $ 71,000.00 5 m onths
Straw buyers
F H A C ase # P urchase Sale N et P roceeds
D ate P rice D ate P rice N on-P rofit Seller Investor
3
1 197-1645648 12/13/1999 $ 70,000.00 5/17/2000 $ 229,000 .00 $ 2,000.00 $ 67 ,058.89
3,4
2 197-1689422 4/11/2000 $ 81,200.00 4/28/2000 $ 150,000 .00 $ 100.00 $ 29 ,962.17
3,4
3 197-1754867 5/22/2000 $ 56,000.00 7/7/2000 $ 125,000 .00 $ - $ 33 ,377.70
1
Investor gift deeded prop erty to her corporation prior to sale
2
N on-p rofit received a 30 % discount on the property from H U D and deeded property to investor p rior to sale
3
N on-profit received a 30% discount on the p roperty from H U D and acted as a strawbuyer
4
Investor was an R M B Loan O fficer
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AppendixD____________________________________________________________________
Flipping and Strawbuyer Cases
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Appendix E____________________________________________________________________
Schedule of Questioned Costs
And Funds Put to Better Use
Finding Number Type of Questioned Cost Funds Put to
Ineligible 1/ Unsupported 2/ Better Use 3/
2A 0 0 $159,865,833
3A $811,843
1/ Ineligible costs are costs charged to a HUD-financed or HUD-insured program or activity that
the auditors believed 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 the 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 are costs that will not be expended in the future if our
recommendations are not 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.
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Appendix E____________________________________________________________________
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Appendix F
HUD-1
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Appendix E____________________________________________________________________
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Appendix G
Auditee Comments
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Names have been redacted for privacy
Appendix G
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Appendix G
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Appendix G
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Appendix G
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Appendix G
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Appendix G
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Appendix G
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Appendix G
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Appendix G
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Appendix G
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Appendix G
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Appendix G
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Appendix G
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Appendix G
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Appendix G
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Appendix G
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Appendix G
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Appendix G
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Appendix G
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Appendix G
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Guild Mortgage Company DBA Residential Mortgage Bankers, Non-Supervised Direct Endorser, Downey, California
Published by the Department of Housing and Urban Development, Office of Inspector General on 2004-07-09.
Below is a raw (and likely hideous) rendition of the original report. (PDF)