oversight

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)

      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.




             Page v                                    2004-LA-
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.”
                                 Page 7                                     2004-LA-1005
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.




                        Page 11                                     2004-LA-1005
Finding 1




                 THIS PAGE LEFT
                     BLANK
                 INTENTIONALLY




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.




                                                                                                      Page 35                                                     2004-LA-
           1005
Appendix C__________________________________________________________________________________________________
Ten Cases of Predatory Lending




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2004-LA-1005                                      Page 36
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




                                                                       Page 37                                                    2004-LA-1005
AppendixD____________________________________________________________________
Flipping and Strawbuyer Cases




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2004-LA-1005                     Page 38
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.




                                               Page 39                                   2004-LA-1005
Appendix E____________________________________________________________________




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2004-LA-1005                     Page 40
Appendix F

HUD-1




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Appendix E____________________________________________________________________




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2004-LA-1005                     Page 42
Appendix G

Auditee Comments




                        Page 43                     2004-LA-1005
             Names have been redacted for privacy
Appendix G




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          Appendix G




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