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 THIS PAGE LEFT BLANK INTENTIONALLY 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 THIS PAGE LEFT BLANK INTENTIONALLY 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 THIS PAGE LEFT BLANK INTENTIONALLY 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 THIS PAGE LEFT BLANK INTENTIONALLY 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 THIS PAGE LEFT BLANK INTENTIONALLY 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 THIS PAGE LEFT BLANK INTENTIONALLY 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 THIS PAGE LEFT BLANK INTENTIONALLY 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____________________________________________________________________ THIS PAGE LEFT BLANK INTENTIONALLY 2004-LA-1005 Page 40 Appendix F HUD-1 Page 41 2004-LA-1005 Appendix E____________________________________________________________________ THIS PAGE LEFT BLANK INTENTIONALLY 2004-LA-1005 Page 42 Appendix G Auditee Comments Page 43 2004-LA-1005 Names have been redacted for privacy Appendix G 2004-LA-1005 Page 44 Appendix G Page 45 2004-LA-1005 Appendix G 2004-LA-1005 Page 46 Appendix G Page 47 2004-LA-1005 Appendix G 2004-LA-1005 Page 48 Appendix G Page 49 2004-LA-1005 Appendix G 2004-LA-1005 Page 50 Appendix G Page 51 2004-LA-1005 Appendix G 2004-LA-1005 Page 52 Appendix G Page 53 2004-LA-1005 Appendix G 2004-LA-1005 Page 54 Appendix G Page 55 2004-LA-1005 Appendix G 2004-LA-1005 Page 56 Appendix G Page 57 2004-LA-1005 Appendix G 2004-LA-1005 Page 58 Appendix G Page 59 2004-LA-1005 Appendix G 2004-LA-1005 Page 60 Appendix G Page 61 2004-LA-1005 Appendix G 2004-LA-1005 Page 62 Appendix G Page 63 2004-LA-1005 Appendix G 2004-LA-1005 Page 64 Appendix G Page 65 2004-LA-1005 Appendix G 2004-LA-1005 Page 66 Appendix G Page 67 2004-LA-1005 Appendix G 2004-LA-1005 Page 68 Appendix G Page 69 2004-LA-1005 Appendix G 2004-LA-1005 Page 70 Appendix G Page 71 2004-LA-1005 Appendix G 2004-LA-1005 Page 72 Appendix G Page 73 2004-LA-1005 Appendix G 2004-LA-1005 Page 74 Appendix G Page 75 2004-LA-1005 Appendix G 2004-LA-1005 Page 76 Appendix G Page 77 2004-LA-1005 Appendix G 2004-LA-1005 Page 78 Appendix G Page 79 2004-LA-1005 Appendix G 2004-LA-1005 Page 80 Appendix G Page 81 2004-LA-1005
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)