National City Mortgage, Direct Endorsement Mortgagee, 7500 Dreamy Draw Drive, Suite 245 Phoenix, Arizona

Published by the Department of Housing and Urban Development, Office of Inspector General on 2004-08-10.

Below is a raw (and likely hideous) rendition of the original report. (PDF)

                                                            Issue Date
                                                              August 10, 2004
                                                            Audit Case Number

TO:            John C. Weicher, Assistant Secretary for Housing, Federal Housing
               Commissioner, H

FROM:          Joan S. Hobbs, Regional Inspector General for Audit, 9DGA

SUBJECT:       National City Mortgage Company
               Direct Endorsement Mortgagee
               7500 Dreamy Draw Drive, Ste 245
               Phoenix, AZ 85020

We completed a limited review of National City Mortgage Company (National City), a
Direct Endorsement mortgagee. The review was performed on one of the mortgagee’s
branch offices in Phoenix, Arizona. We selected this branch office for review based on
the results of a previous OIG audit that identified the use of false credit and employment
documents by Keystone Mortgage, a loan correspondent of National City. The review
objective was to determine if National City failed to appropriately identify and follow up
on indicators of fraudulent credit and employment documents within a sample of nine
FHA loans. We conducted the review in accordance with generally accepted government
auditing standards.

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 report issuance for any recommendation without a management decision. Also,
please furnish us copies of any correspondence or directives issued because of the review.

If you have any questions, please contact Charles Johnson, Assistant Regional Inspector
General for Audit, at (602) 379-7243.

We reviewed a sample of nine FHA loans and found National City failed to follow up on
questionable credit and/or employment documents during the underwriting process for all
nine cases. As a result, false employment and credit information used as a basis for
approval of the nine loans was not identified. This report recommends that National City
indemnify HUD for any past or future losses on these nine loans.

We discussed the findings with National City officials during the audit and at an exit
conference held on July 20, 2004. We also provided National City and HUD with a copy
of the draft audit report for comments on June 24, 2004. At the exit conference, National
City officials stated they agreed with the audit report. On August 6, 2004, National City
officials stated they would not provide a formal written response since they agreed with
the report.


National City is a HUD approved non-supervised Direct Endorsement lender. Per
information in HUD’s Neighborhood Watch system, National City has 315 branch offices
throughout the country and is an approved sponsor for 4,464 loan correspondents. Our
review focused on one of National City’s branch offices located at 7500 Dreamy Draw
Drive Ste 245, Phoenix, AZ 85020. This National City Branch uses a “Doing Business As”
(DBA) name of “Accubanc Mortgage”. During 2002 and 2003, this office gave
underwriting approval to 1,727 FHA loans originated by its loan correspondents for
mortgage amounts totaling approximately $180 million. According to National City, this
branch office is a wholesale lender, and therefore does not originate loans, but acts as the
underwriter for loans originated by its loan correspondents.

During a previous HUD-OIG audit of Keystone Mortgage, a loan correspondent of National
City, we identified the use of false credit and employment documents within 48 FHA loan
files, including falsified credit reports, false credit history letters from utility companies,
and/or falsified employment documents, such as pay stubs, W-2s, and verification of
employment (VOE) forms. National City performed the underwriting on nine of these 48
loans as the sponsoring Direct Endorsement mortgagee. We analyzed the underwriting of
these nine loans during our review of National City.

We performed our review during the period February 2004 through May 2004. The
objective of our review was to determine if National City failed to appropriately identify and
follow up on indicators of fraudulent credit and employment documents within a sample of
nine FHA loans.

To accomplish our review objectives, we:

•   Reviewed nine FHA insured loans underwritten by National City during the period
    August 2000 through December 2001,

•   Interviewed National City Managers, and

•   Performed a limited review of National City’s quality control plan and performed
    limited testing to determine if the plan was implemented.

                                        FINDING 1


All nine of the loans reviewed, totaling approximately $1 million, contained indicators of
false credit and/or employment documents that were not appropriately resolved by
National City during the underwriting process. This occurred because National City
failed to exercise due diligence when underwriting the loans. National City did not
identify and follow up on indicators of irregularities that were present in the files. As a
result, loans were approved based on false information, causing FHA/HUD to assume
unnecessary insurance risks. Two of these nine loans have resulted in mortgage
insurance claims to HUD/FHA totaling $140,404, and five additional loans totaling
$482,410 remain insured and represent a continuing insurance risk to FHA (two loans
totaling $174,264 are no longer insured).

Section 203 (b) (1) of the National Housing Act, as amended, authorizes HUD to provide
mortgage insurance for single-family homes. A mortgagee that originates, purchases,
holds or sells FHA insured loans, must be formally approved by HUD. Mortgagees must
follow the requirements of the National Housing Act and HUD instructions, guidelines,
and regulations when originating insured loans. Mortgagees that do not follow these
requirements are subject to administrative sanctions.

As part of the loan origination process, mortgagees are required to obtain a credit report
for each borrower. The credit report is used as a guide in the underwriting process to
evaluate the borrower’s attitude toward credit obligations. If the credit report shows the
borrower has made payments on previous or current obligations in a timely manner, the
underwriter will find the borrower represents a reduced risk. If the borrower has not yet
established a credit history with traditional credit accounts, such as credit cards, car loans
or mortgages, the mortgagee can develop an “alternative” credit history using utility
payment records, rental payments, automobile insurance payments, or other similar non-
traditional credit sources. The mortgagee itself may obtain this alternative credit
information, or the mortgagee may elect to use a credit-reporting agency to develop and

provide a non-traditional mortgage credit report (reference HUD Handbook 4155.1 REV-
5, Mortgage Credit Analysis for Mortgage Insurance on One-to-Four Family Properties).

The mortgagee must also obtain documentation evidencing the borrowers’ history of
employment and income. The anticipated amount of income and likelihood of its
continuance must be established to determine the borrower's capacity to repay the
mortgage debt.

The underwriter’s evaluation of a borrower’s credit and income history is used as a basis
for determining if the borrower represents an acceptable credit risk under HUD
guidelines, and accordingly, whether or not the loan should be approved.

HUD Handbook 4000.4, REV-1 (Single Family Direct Endorsement Program), requires
mortgagees to develop HUD/FHA insured loans in accordance with accepted sound
mortgage lending practices, ethics and standards. This handbook states that mortgagees
and their underwriters must maintain the ability to detect fraud and be aware of the
warning signs that may indicate irregularities.

National City did not adhere to these requirements when it failed to appropriately identify
and/or resolve questionable credit and employment documents when underwriting FHA-
insured loans. All nine loans we reviewed contained indications of fraudulent borrower
credit and/or employment documents, yet National City did not follow up on these to
ensure the documents were legitimate. In some cases, it appears National City did
identify indicators of fraud, yet the underwriters failed to follow up to resolve the
discrepancies. As part of our review, we verified the questionable credit and/or
employment documents were in fact falsified. The following indicators of fraudulent
borrower credit and employment documents were apparent in the loan files but not
resolved by National City.

Indicators of False Employment (See Appendix B for individual loan identification):

•   Four of nine loans - Borrower pay statements and/or IRS W-2 forms reflected
    incorrect Social Security and Medicare withholding percentages. (Loans 1,2,5,7)

•   Two of nine loans – Employers’ signatures were misspelled and/or printed distinctly
    differently between employment verification documents in the file. (Loans 1,2)

•   Two of nine loans – Amount of borrower income was not consistent between
    borrower W-2, VOE and/or pay stubs. (Loans 4,5)

•   For one loan the borrower purportedly received a raise from an hourly rate of $15 to
    an annual salary of $50,000 just prior to the loan. However, this was highly
    suspicious since the borrower had only worked at the employer for 2.5 months. Also,
    based upon the claimed year-to-date wages and claimed pay rate, the borrower
    apparently had only worked 15 hours per week or was absent from work during much
    of the 2.5-month period he worked for the employer. This loan file also contained

    information indicating the borrower had a 3-month gap in employment and this was
    not explained. Also, it appears the underwriter attempted to verify the employment
    start date for this borrower’s prior employer and was unable to do so. Accordingly, a
    full two years of employment was not verified. (Loan 4)

•   For one loan, the underwriter requested a new copy of a verification of employment
    for the borrower because the version provided was apparently changed using white
    out. After the loan officer replied that the employer would not consider making a
    new VOE a “priority”, it appears the underwriter did not follow up on the request for
    a new verification of employment. Also in this case, the initial borrower loan
    application did not list one of the borrower’s current employers; however, this
    employer’s name appeared on the final application with no explanation for the
    change. (Loan 5)

•   One loan file contained a document indicating National City performed some type of
    quality control review on the file to re-verify the borrower’s employment. However,
    this document indicated the employment could not be verified because the telephone
    number for the borrower’s employer (also listed on the loan application) was
    incorrect. It appears National City did not follow up to resolve this discrepancy.
    (Loan 7)

•   One loan file contained a signed handwritten statement from the borrower stating “I
    (borrower name) am paid in cash from my employer & I have supplied this
    information to my mortgage broker.” However, the loan file contained earnings
    statements’ indicating the borrower was paid through a payroll service (ADP).
    (Loan 1)

•   For one loan, the listed length of the borrower’s employment increased from 2 to 3.2
    years between two different versions of the loan application, yet the loan file did not
    contain any explanation for this change. (Loan 2)

Indicators of False Credit (See Appendix B for individual loan identification):

•   Eight of nine loans – Borrower credit reports in the loan files contained references to
    alternative credit sources, yet the reports did not contain any contact information to
    identify the credit sources, such as a telephone number or address as is typically
    included on a credit report. Further, the alternative credit reports for these 8 cases did
    not indicate the accounts were actually verified by the reporting agency. (Loans
    1,2,3,5,7,8,9) The one remaining case listed contact information for some creditors;
    however, no creditor information was provided for the three alternative credit sources
    shown on the report. (Loan 6)

•   Four of nine loans – Borrower credit reports listed alternative credit accounts, yet the
    names of the creditors were not shown on the reports. For example, the credit reports
    in these cases listed only “cable bill” or “private contract”. (Loans 1,6,7,9)

•   One loan file contained separate alternative credit reports for a borrower and co-
    borrower living at different addresses, yet both credit reports listed the same account
    numbers for the borrowers’ utility accounts. Since the borrowers were living at
    different addresses, they would not have the same utility account numbers, indicating
    one or both of the credit reports contained false information. (Loan 6)

•   One loan file contained a credit report that listed no account numbers (Loan 1).

During our review, we also noticed other deficiencies indicating the need for National
City to strengthen its underwriting and control procedures. For example:

•   In one loan file the borrower’s derogatory credit information was not adequately
    explained. (Loan 4)

•   In three loan files recent credit inquiries were not explained. (Loans 6,7, 9)

•   In one loan file it was claimed the borrower did not have a bank account, yet a
    cashier’s check in the file indicated the borrower did have an account with the bank
    that issued the check. (Loan 3)

•   One loan file included a credit report listing multiple last names for the male
    borrower, indicating potentially false use of a Social Security number, but this was
    not resolved in the file. (Loan 6)

•   In one file the Social Security card for the borrower was not legible, indicating this
    document was potentially false, yet this was not resolved in the loan file. (Loan 7)

•   One loan was apparently submitted late for endorsement and National City submitted
    a certification to HUD that the loan was current, yet the payment history in the file
    indicates the payment for the current month had not been paid. (Loan 8)


We recommend you require National City to:

1A. Indemnify HUD/FHA $622,814 for the losses already incurred, and future losses on
    the seven loans set out in Appendix B.


At an exit conference held July 20, 2004, National City officials stated they agreed with
the audit report and did not dispute any facts cited in the report. On August 6, 2004,
National City officials stated they would not provide a formal written response since they
agreed with the report.

                          FOLLOW-UP ON PRIOR AUDITS

This is the first Office of Inspector General review of the National City branch office.


Although we did not perform a complete review of National City’s quality control
function, during the course of our audit we became aware that National City may not
have reviewed all loans going into default (60 days past due) within the first six payments
as required by HUD Handbook 4060.1 REV-1, CHG-1, Chapter 6. These reviews are
intended to limit HUD’s risk by enabling the mortgagee to detect potential instances or
patterns of fraud or violations of HUD requirements and to identify necessary corrective

National City has a centralized Quality Control Department that performs the quality
control review function for all of its branch offices nationwide. For loans originated
through the one branch office we reviewed (which underwrote loans from affiliated loan
correspondents), we requested documentation from National City evidencing that early
default loans were reviewed under its quality control plan. After multiple requests by
OIG for this information, National City failed to produce any documentation showing
these reviews were performed. Therefore, although National City’s quality control plan
indicates reviews are to be performed on all early default loans, it appears that these
reviews may not have actually been conducted.

Further study and consideration of National City’s quality control function, especially as
it relates to review of early default loans and loan correspondent activities, is needed to
determine if National City has implemented adequate quality control procedures in
accordance with HUD requirements.

                                                                             Appendix A


Recommendation                      Type of Questioned Cost                Funds Put to
   Number                    Ineligible 1/         Unsupported 2/           Better Use 3/
     1A                       $38,159               $102,245                $482,410

1/     Ineligible costs are costs charged to a HUD-financed or HUD-insured program or
       activity that the auditor believes are not allowable by law, contract or Federal,
       State or local policies or regulations.

2/     Unsupported costs are costs charged to a HUD-financed or HUD-insured program
       or activity and eligibility cannot be determined at the time of audit. The costs are
       not supported by adequate documentation or there is a need for a legal or
       administrative determination on the eligibility of the costs. Unsupported costs
       require a future decision by HUD program officials. This decision, in addition to
       obtaining supporting documentation, might involve a legal interpretation or
       clarification of Departmental policies and procedures.

3/     Funds Put to Better Use are costs that will not be expended in the future if our
       recommendations are implemented; for example, costs not incurred, de-obligation
       of funds, withdrawal of interest, reductions in outlays, avoidance of unnecessary
       expenditures, loans and guarantees not made, and other savings.

                                                                                          Appendix B


   Loan              FHA Case                   Closing
  Number              Number                     Date            Loan Amount
       1            023-0928952                 12/11/01                94,208
       2            023-0793297                 10/4/01                 91,563
       3            023-0710858                  6/6/01                100,424
        4           023-0712632                  7/6/01                226,796
        5           023-0785681                 8/16/01                 85,655
       6            023-0884063                 11/5/01                 95,895
       7            023-0809788                  9/7/01                 88,609
       8            023-0748637                 7/20/01                 96,485
       9            023-0317715                 8/23/00                100,320

1 Loans were refinanced and are no longer FHA insured.
2 Property was sold under the pre-foreclosure program. Total claim amount to HUD was $38,159.
3 Foreclosure claim of $102,245 was paid by HUD. The property has not yet been resold.