oversight

Hartford Funding, Ltd., Non-Supervised Mortgagee, Ronkonkoma, New York

Published by the Department of Housing and Urban Development, Office of Inspector General on 2004-09-28.

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

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                  AUDIT REPORT




               HARTFORD FUNDING, LTD.
             NON-SUPERVISED MORTGAGEE
              RONKONKOMA, NEW YORK

                        2004-NY-1006

                      September 28, 2004



                        OFFICE OF AUDIT
                      NEW YORK/NEW JERSEY




                                                            TOC
                                                            Issue Date
                                                                    September 28, 2004
                                                            Audit Case Number
                                                                    2004-NY-1006




TO: John C. Weicher, Assistant Secretary for Housing-Federal Housing Commissioner,
                        Chairman, Mortgagee Review Board, H


FROM: Alexander C. Malloy, Regional Inspector General for Audit, 2AGA


SUBJECT:      Hartford Funding, Ltd.
              Non-Supervised Mortgagee
              Ronkonkoma, New York

We completed an audit of Hartford Funding, Ltd. (Hartford), a non-supervised mortgagee. The
objectives of the audit were to determine whether Hartford: (1) approved insured loans in
accordance with the requirements of the United States Department of Housing and Urban
Development/Federal Housing Administration (HUD/FHA), which require adherence to prudent
lending practices; and (2) implemented and followed a quality control plan that meets HUD/FHA
requirements. The review generally covered the period between January 1, 2002, and December
31, 2003.

Although Hartford generally complied with HUD regulations, we found that Hartford did not
adhere to prudent lending practices in approving two of the 15 loans that we examined during
our audit. Additionally, we found that Hartford’s quality control plan was not fully
implemented.

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 audit.

Should you or your staff have any questions, please contact Edgar Moore, Assistant Regional
Inspector General for Audit, at (212) 264-4174.



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Management Memorandum




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2004-NY-1006              Page ii
Executive Summary
We completed an audit of Hartford Funding, Ltd. (Hartford), a non-supervised mortgagee
located in Ronkonkoma, New York. The objectives of the audit were to determine whether
Hartford: (1) approved insured loans in accordance with the requirements of the United States
Department of Housing and Urban Development/Federal Housing Administration (HUD/FHA),
which require adherence to prudent lending practices; and (2) implemented and followed a
quality control plan that meets HUD/FHA requirements. The review generally covered the
period between January 1, 2002, and December 31, 2003, and involved a review of 15
HUD/FHA insured loans with mortgage amounts totaling $2,521,500. A summary of the
results of our review is provided below.




Two loans with                     Although Hartford has adequate procedures in place for the
                                   origination of HUD/FHA insured loans and generally
underwriting deficiencies
                                   complied with HUD regulations, our review disclosed that
                                   Hartford did not adhere to prudent lending practices in
                                   approving two HUD/FHA insured loans. In particular, we
                                   noted that two of the 15 loans that we reviewed had at least
                                   one underwriting deficiency. Some of the underwriting
                                   deficiencies identified are as follows:

Underwriting processing                 •   Debt-to-income ratio exceeded HUD/FHA
deficiencies                                standards.
                                        •   Inadequate documentation of down-payment.
                                        •   Inadequate review of a credit report.
                                        •   Minimum cash investment not provided.

                                   We believe that the underwriting deficiencies occurred
                                   because Hartford officials did not obtain the proper
                                   documentation to support the approval of the loans. As a
                                   result, mortgages were approved for unqualified borrowers
                                   causing HUD/FHA to assume an unnecessary insurance risk.

Weaknesses in quality              In addition, Hartford has not implemented procedures or
control plan                       established controls to ensure that all loans defaulting within
                                   the first six payments undergo a quality control review. This
implementation
                                   occurred because Hartford did not have procedures in place
                                   to ensure that data on defaulted loans was received from the
                                   servicer (s) of the HUD/FHA insured loans. Consequently,
                                   Hartford is not fully using its quality control plan, which is
                                   designed to enhance and maintain accuracy, validity, and
                                   completeness in its loan origination process.

                                   Regarding the first finding, we recommend that HUD review
 Recommendations                   the underwriting for the two loans in question and determine
                                   whether Hartford should be required to indemnify HUD/FHA

                                       Page iii                                     2004-NY-1006


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Executive Summary

                    against any future losses on these loans as identified in
                    Appendix B of this report. Also, Hartford should provide
                    your office with a corrective action plan containing
                    assurances that proper documentation will be obtained to
                    support the approval of HUD/FHA insured loans.
                    Regarding the second finding, we recommend that Hartford
                    establish: (a) procedures to ensure that all data on defaulted
                    HUD/FHA insured loans is obtained from loan servicers and
                    reviewed, (b) controls and procedures to ensure that all loans
                    that default within the first six payments are properly
                    reviewed in accordance with its quality control plan and
                    HUD requirements.

                    Although our audit disclosed deficiencies in Hartford’s loan
                    underwriting and quality control plan, we noted that Hartford
                    has implemented new procedures to address these
                    deficiencies. Additionally, Hartford officials and their staff
                    fully cooperated throughout the audit and were proactive in
                    addressing the deficiencies identified throughout the audit.

                    The results of our audit were discussed with Hartford
 Exit conference    personnel throughout the course of the on-site audit work,
                    and at an exit conference held on September 2, 2004, at
                    Hartford’s office. Hartford officials provided written
                    comments to our draft report. Finding one originally
                    discussed deficiencies pertaining to three cases; however,
                    after reviewing Hartford officials’ comments we decided to
                    remove case number 374-4034510 from the finding. We
                    included excerpts of the comments with the findings, and
                    provided the complete text in Appendix C of this report.




2004-NY-1006            Page iv                                         TOC
Table of Contents

Management Memorandum                                                       i



Executive Summary                                                         iii



Introduction                                                               1



Findings

1.     Weaknesses in the Underwriting Process Resulted in the
       Approval of HUD/FHA Insured Loans for Unqualified
       Borrowers                                                          3

2.     Hartford Has Not Fully Implemented Its Quality Control
       Plan                                                               9


Management Controls                                                     13


Follow Up On Prior Audits                                               15


Appendices
     A Schedule of Questioned Costs and Funds Put to Better Use         17

     B Schedule of Loan Origination Deficiencies                        19

     C Auditee Comments                                                 21



                               Page v                           2004-NY-1006
Table of Contents




Abbreviations

FHA            Federal Housing Administration
HOC            Home Ownership Center
HUD            United States Department of Housing and Urban
               Development
OIG            Office of the Inspector General




2004-NY-1006                     Page vi
Introduction
Hartford Funding, Ltd. (Hartford), is a non-supervised mortgagee located in Ronkonkoma, New
York. Hartford became an authorized direct endorsement mortgagee on June 30, 1983 and
currently underwrites HUD/FHA insured and conventional loans. During our audit period
between January 1, 2002, and December 31, 2003, Hartford originated 256 HUD/FHA insured
loans in the New York Field Office jurisdictional area amounting to $46,795,500. On February
29, 2004, the mortgages for 18 of the 256 loans were in default status.



                                   The objectives of the audit were to determine whether
 Audit objectives                  Hartford: (1) approved insured loans in accordance with the
                                   requirements of the United States Department of Housing
                                   and Urban Development/Federal Housing Administration
                                   (HUD/FHA), which require adherence to prudent lending
                                   practices; and (2) implemented and followed a quality
                                   control plan that meets HUD/FHA requirements.

                                   The purpose of our review was to confirm the accuracy of the
 Audit scope and                   information used as a basis for underwriting and closing
 methodology                       loans. We obtained background information by:

                                   •   Reviewing relevant HUD regulations, requirements,
                                       and mortgagee letters.

                                   •   Examining reports and information maintained on
                                       HUD’s Neighborhood Watch Early Warning System
                                       and Single Family Data Warehouse.

                                   •   Reviewing reports from HUD’s Quality Assurance
                                       Division.

                                   To accomplish our audit objectives, we selected a non-
                                   representative sample of 15 loans. The initial sample of 12
                                   loans was from HUD’s Neighborhood Watch Early
                                   Warning System with beginning amortization dates
                                   between January 1, 2002, and January 31, 2004. In
                                   selecting this sample, we focused on identifying loans that
                                   were currently in default, which had 12 or fewer payments
                                   made before the first reported default. The additional three
                                   loans were in default as reported by the servicer and had a
                                   first reported default within six or fewer payments. These
                                   three loans had beginning amortization dates before
                                   January 1, 2002. As a result, our sample consisted of 15
                                   loans on which 12 or fewer payments were made before the
                                   first default was reported. The 15 loans in our sample

                                       Page 1                                     2004-NY-1006

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Introduction


                were HUD/FHA insured loans that totaled $2,521,000. The
                results of our detailed testing only apply to the 15 loans
                selected and cannot be projected over the universe of the
                256 loans.

                Our file review and audit procedures included: (a) analyses
                of borrowers’ income, assets, and liabilities; (b)
                verifications of selected data on the settlement statements;
                (c) confirmations sent to employers, gift donors, and
                landlords; and (d) inquiries with borrowers, HUD officials,
                and Hartford’s staff.

                We performed the audit fieldwork between April and July
 Audit period
                2004. Our audit pertained to loans originated between
                January 1, 2002, and December 31, 2003. As necessary, we
                reviewed loan activity before and after our audit period.
                Our audit work was performed at Hartford’s office in
                Ronkonkoma, New York. The audit was conducted in
                accordance with Generally Accepted Government Auditing
                Standards.




2004-NY-1006        Page 2
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                                                                                      Finding 1


 Weaknesses in the Underwriting Process Resulted in
   the Approval of HUD/FHA Insured Loans for
              Unqualified Borrowers
Although Hartford has adequate procedures in place for the origination of HUD/FHA insured
loans, our review disclosed that Hartford did not adhere to prudent lending practices in
approving two of the HUD/FHA insured loans we reviewed. Each of those loans had at least one
underwriting deficiency. The deficiencies occurred because Hartford officials did not obtain the
proper documentation to support the approval of the loans. As a result, mortgages were
approved for unqualified borrowers causing HUD/FHA to assume an unnecessary insurance risk.

Chapter 2, Section 2-1 of HUD Handbook 4000.4 REV-1, entitled “Single Family Direct
Endorsement Program” requires mortgagees to conduct its business operations in accordance
with accepted sound mortgage lending practices. Also, HUD Handbook 4000.4 REV-l, Chapter
2, section 2-5, provides that mortgagees are to obtain and verify information with at least the
same care that would be exercised in originating a loan when the mortgagee would be entirely
dependent on the property as security to protect its investment.

In our opinion, Hartford did not always adhere to the above requirements, as discussed below,
when it underwrote two of the 15 loans we reviewed.


                                    Our examination of 15 loans approved by Hartford
 Examined 15 loans
                                    disclosed that Hartford did not exercise the care expected
                                    of a prudent lender in approving two of the loans.
                                    Consequently, we found that deficiencies occurred during
                                    the underwriting process of those loans (cases), as shown
                                    below:


                                                  Deficiencies               Number of Loans
                                    Debt-to-income ratio exceeded               1 of 15 loans
                                     HUD/FHA standards
                                    Inadequate documentation of down-           1 of 15 loans
                                    payment
                                    Inadequate review of credit report          1 of 15 loans
                                    Minimum cash investment not                 1 of 15 loans
                                    provided


                                    On May 31, 2004, the mortgages of 11 of the 15 loans were
                                    in default, three loans were terminated, and one loan was
                                    current. The two HUD/FHA insured loans with the
                                    deficiencies had mortgages amounting to $445,150. We

                                         Page 3                                    2004-NY-1006

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Finding 1


                             request that HUD review Hartford’s approval of these loans
                             and determine whether Hartford should indemnify HUD
                             against any losses that may result from claims made to
                             HUD (See Appendix A).

                             Appendix B to this report provides a summary of the loans’
                             underwriting deficiencies noted during our review. An
                             individual description of the underwriting deficiencies for
                             each of the two loans is provided below:


                             FHA Case No. 374-3997570

                             Our review disclosed that the borrower did not provide the
 The borrower did not
                             minimum cash investment, and the lender did not
 provide the minimum
                             adequately review the borrower’s credit report. The earnest
 required cash
                             money deposit of $3,000, plus the $425 paid on account for
 investment.
                             the appraisal and credit report, plus the $2,859.09 paid at
                             closing totals $6,284.09 for the borrower's investment. The
                             minimum required cash investment was $7,140 ($238,000
                             contract sales price times 3%). This represents a difference
                             of $855.91. Mortgagee Letter 98-29, dated October 22,
                             1998 states that the National Housing Act requires the
                             minimum cash investment to be 3 percent of the Secretary's
                             estimate of the cost of acquisition. The mortgagee letter
                             further states that FHA has determined that the minimum
                             cash investment be based on sales price without
                             considering closing costs to further Congressional
                             objectives of simplifying the FHA maximum mortgage
                             amount calculation without significantly increasing FHA's
                             risk. The lender did not ensure that the borrower made the
                             statutory minimum cash investment of $7,140.

                             Additionally, our review disclosed indications that the
The lender’s review of the   lender’s review of the borrower’s credit report was
credit report was            inadequate. The credit report containing the borrower’s
inadequate.                  Social Security number as shown on the loan application
                             indicated that credit accounts were opened that predated the
                             date of birth of the borrower. The credit report also listed a
                             Social Security number alert and indicated that the
                             borrower’s name was used with additional Social Security
                             numbers.      The lender should have identified these
                             discrepancies while analyzing the borrower's credit. In
                             accordance with Paragraph 2-3 of HUD Handbook 4155.1
                             REV-4, the lender should have obtained a written
                             explanation from the borrower regarding these accounts.



2004-NY-1006                     Page 4                                          TOC
                                                                              Finding 1



                           FHA Case No. 374-4127930

                           We noted that the debt-to-income ratio exceeded
                           HUD/FHA standards, and that the lender did not
The debt-to-income ratio
                           adequately document the down-payment. Regarding the
exceeded HUD
                           debt-to-income ratio that exceeded HUD/FHA standards;
standards.
                           the borrower's mortgage payment expense to effective
                           income ratio was 35.92%. HUD Handbook 4155.1 REV-4,
                           CHG-1, paragraph 2-12(a) states that a ratio exceeding
                           29% may be acceptable if significant compensating factors
                           are presented. The underwriter's compensating factor was
                           that the borrower displayed a "conservative use of credit".
                           However, we believe that for this borrower, a conservative
                           use of credit by itself is not a significant compensating
                           factor since the borrower's credit report stated that the
                           borrower did not have sufficient credit to be scored.

                           Regarding the inadequate documentation of the down-
The lender did not         payment; the borrower made an earnest money deposit
properly document the      (down-payment) of $6,000. The $6,000 was provided as
down-payment.              gift funds from the borrower's mother-in-law. The lender
                           documented the gift in accordance with HUD regulations
                           and the borrower used the $6,000 gift to make the down-
                           payment. The lender's file contains a copy of a check from
                           the borrower to the borrower's attorney; however, it is not
                           the canceled check. HUD Handbook 4155.1 REV-4
                           Paragraph 2-10A states, “…if the amount of the earnest
                           money deposit exceeds 2 percent of the sales price or
                           appears excessive based on the borrower's history of
                           accumulating savings, the lender must verify the deposit
                           amount and the source of funds. Satisfactory
                           documentation includes a copy of the borrower's cancelled
                           check. We will also accept a certification from the deposit
                           holder acknowledging receipt of funds and separate
                           evidence of the source of funds…” Although the lender's
                           file contained evidence of the source of funds, there was no
                           certification from the deposit holder acknowledging receipt
                           of funds.

                           In response to our review, the lender obtained a letter dated
                           December 16, 2002 from the borrower's attorney stating
                           that the down-payment monies in the sum of $6,000 were
                           being held in an escrow account. The letter was faxed to
                           Hartford on July 14, 2004. We believe that the lender

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                               Page 5                                      2004-NY-1006
Finding 1


                    should have obtained this information at the time of loan
                    origination, rather than upon our request.




 Auditee comments   Regarding FHA Case No. 374-3997570, Hartford officials
                    agree that the borrower did not provide the minimum cash
                    investment; however, Hartford officials contend that the
                    shortage was $455.91 and not the $855.91 because the
                    borrower received a $400 rent credit. Hartford officials
                    further contend that the $455.91 was caused by a $500 credit
                    given to the borrower from the seller at closing, due to a new
                    “New York State” law, which was not mentioned in the
                    contract. Hartford officials stated in their comments, that
                    procedures have already been implemented requiring the
                    credit to be addressed in all contracts. Regarding the credit
                    report, Hartford officials stated that their procedures require
                    written explanations and the removal of credits that do not
                    apply to the borrower by the credit company. However,
                    Hartford officials stated that for this case, the explanation
                    was not in the file or case binder. Hartford officials further
                    stated that if required, they would try to obtain a letter of
                    explanation from the borrower. Hartford requests that the
                    department not consider indemnification for this case.

                    Regarding FHA Case No. 374-4127930, Hartford officials
                    contends that HUD guidelines allow greater latitude on the
                    mortgage payment expense to effective income ratio for
                    borrowers with limited recurring expense and this borrower
                    had $0 recurring expense. Hartford officials also stated that
                    although it was not written on the MCAW, the
                    compensating factors were: conservative use of credit and
                    the ability to accumulate savings. Also, the borrower’s
                    previous credit history shows that the borrower had the
                    ability to devote a greater portion of income to housing
                    expense. Regarding the inadequate documentation of the
                    down payment, Hartford officials believe that the file
                    adequately documented the down payment with a copy of
                    the borrower’s bank statement and a copy of the down
                    payment check payable to the deposit holder. Hartford
                    officials stated that although we did not have the escrow
                    letter before closing, it is clear the down payment went to
                    the deposit holder. Hartford requests that the department
                    not consider indemnification for this case.




2004-NY-1006            Page 6
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                                                                        Finding 1




OIG evaluation of     Regarding FHA Case No. 374-3997570, there was no
Auditee comments      documentation in the file showing that the $400, for which
                      the borrower received the rent credit, was actually paid.
                      Nevertheless, the borrower did not make the minimum cash
                      investment; therefore, HUD/FHA has assumed an
                      unnecessary risk and indemnification should be considered.

                      Regarding FHA Case No. 374-4127930, the borrower’s
                      conservative use of credit and the ability to accumulate
                      savings were not significant compensating factors to justify
                      approving this loan. Although the lender developed a
                      credit history by examining the borrower’s utility
                      payments, we believe that the lender did not adequately
                      document that the borrower had the ability to accumulate
                      savings. Specifically, our review determined that the
                      borrower only opened a bank account with a $10 deposit
                      during the month that the initial application was submitted.
                      Furthermore, the lender did not obtain adequate
                      documentation to support the down-payment at the time
                      this loan was originated.



     Recommendation   We recommend that the Assistant Secretary for Housing-
                      Federal Housing Commissioner, Chairman, Mortgagee
                      Review Board:

                      1A.     Review the underwriting of the two loans in
                              question (374-3997570, and 374-4127930), and
                              determine whether Hartford should indemnify HUD
                              for any losses that may occur as a result of claims
                              made to HUD. The mortgage amounts associated
                              with these loans totaled $445,150, which would be
                              considered funds put to better use if HUD is
                              indemnified (See Appendix A).

                      1B.     Require Hartford to provide your office with a
                              corrective action plan, which provides assurances
                              that proper documentation will be obtained to
                              support the approval of the HUD HUD/FHA
                              insured loans.



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Finding 1




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2004-NY-1006     Page 8
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                                                                                          Finding 2


Hartford Has Not Fully Implemented Its Quality
                 Control Plan
Our review disclosed that Hartford did not always comply with its quality control plan and HUD
requirements pertaining to reviews of defaulted loans. Specifically, Hartford has not
implemented procedures or established controls to ensure that an analysis is performed on all
HUD/FHA insured loans that go into default within the first six payments as required by HUD.
This occurred because Hartford did not have procedures in place to ensure that data on loans in
default was received from the servicer (s) of the HUD/FHA loans. Consequently, Hartford is not
fully using its quality control plan, which is designed to enhance and maintain accuracy, validity,
and completeness in its loan origination process.



                                      Hartford has established and maintains a quality control
Hartford’s established
                                      plan for the origination of insured mortgages. However, our
quality control plan is not
                                      review showed that Hartford did not fully implement
fully implemented.
                                      certain provisions of its quality control plan. In particular,
                                      procedures have not been implemented, or controls
                                      established, to ensure that an analysis is performed on all
                                      HUD/FHA insured loans that go into default within the first
                                      six payments.

                                      Per Paragraph 6-1D(3) of HUD Handbook 4060.1 REV-1,
Criteria
                                      dated September 30, 1993, a mortgagee's Quality Control
                                      Plan and review procedures must include an analysis of all
                                      loans, which go into default within the first six months.

                                      Paragraph 6-6 D of HUD Handbook 4060.1 REV-1, dated
                                      November 24, 2003, which pertains to "Early Payment
                                      Defaults", provides that in addition to the loans selected for
                                      routine quality control reviews, mortgagees must review all
                                      loans going into default within the first six payments. As
                                      defined here, early payment defaults are loans that become
                                      60 days past due.

                                      Hartford’s quality control plan provides that quality control
Hartford’s quality control
                                      reviews should be performed within 90 days of the closing
plan calls for reviews of
                                      of the loan. It also provides that loans, which go into
early defaulted loans.
                                      default with six or fewer payments made by the mortgagor,
                                      shall also be analyzed. Furthermore, Hartford's quality
                                      control plan provides that for HUD-FHA insured
                                      mortgages only, there should be an analysis of all loans,
                                      which go into default within the first six months.


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Finding 2


                               Despite clearly defined HUD requirements and internally
Early default loans not        established policies that require performing quality control
reviewed for quality control   reviews of loans defaulting within the first six payments,
                               our audit showed that Hartford has not implemented
                               controls or procedures to ensure that early default loans
                               have been adequately reviewed for quality control. Hartford
                               officials state that their FHA loan servicer did not provide
                               them with information on loan defaults because of privacy
                               issues. However, we believe this occurred because Hartford
                               did not have procedures in place to obtain data on the
                               defaulted loans from the servicer (s) of the HUD/FHA
                               loans. Furthermore, only one of the 15 loans selected for
                               our audit testing was reviewed for quality control by
                               Hartford even though 11 of the 15 loans in our sample were
                               in default within the first six payments.

                               Quality control reviews of early default loans are
                               particularly important since such reviews would provide
                               valuable information to management regarding the causes
                               of defaults, and may disclose underwriting deficiencies
                               associated with the loan. Such reviews may also disclose
                               indicators of fraudulent activities or other significant
                               discrepancies that mortgagees are required to report to
                               HUD.

                               As part of our audit, we reviewed a sample of loans
   Recent quality control      recently reviewed under Hartford’s quality control plan.
   reviews not completed in    Our review determined that Hartford is performing quality
   a timely manner.            control reviews on a sample of 10% of loans closed on a
                               monthly basis; however, Hartford is not completing these
                               reviews in a timely manner. Specifically, Hartford did not
                               complete the quality control reviews within 90 days of loan
                               closing as required by Paragraph 6-3D of HUD Handbook
                               4060.1 REV-1 CHG-1. This occurred because Hartford’s
                               quality control plan only requires quality control reviews to
                               be performed within 90 days of loan closing and does not
                               include a provision requiring the reviews to be completed
                               within 90 days of loan closing.




  Auditee comments             Hartford officials contend that although procedures were in
                               place to obtain information from the servicer, the servicer
                               would not release information on the defaulted loans due to
                               privacy issues. Hartford officials stated that in the spring



2004-NY-1006                       Page 10
                                                                                   TOC
Finding 2


                     of this year, they started receiving early payment default
                     reports from the servicer and they started conducting
                     quality control reviews on the loans that show up on the
                     reports.

                     Regarding recent quality control reviews not being
                     completed timely, Hartford officials stated that HUD
                     changed the guideline in November of 2003 and that the
                     old guideline was for the QC reviews to be performed
                     within 90 days of closing. Hartford officials stated that
                     when they updated their quality control plan with the new
                     guidelines, the change was missed. However, they have
                     corrected their quality control plan and have implemented
                     the 90 days from closing timeframe.




 OIG evaluation of   At the time of our audit, Hartford did not have procedures
                     in place to obtain information on defaulted loans from the
 Auditee comments    loan servicer.

                     In addition, the action conducted by Hartford, to update its
                     quality control plan, is responsive to this audit finding.




 Recommendations     We recommend that the Assistant Secretary for Housing-
                     Federal Housing Commissioner, Chairman, Mortgagee
                     Review Board, require Hartford to:


                     2A.      Establish procedures that will ensure that data
                              pertaining to HUD/FHA insured defaulted loans is
                              obtained from the loan servicer (s) and properly
                              reviewed.

                     2B.      Implement controls and procedures to ensure that
                              all loans that go into default within the first six
                              payments are properly reviewed in accordance with
                              its quality control plan and HUD requirements.

                     2C.      Submit its amended quality control plan to HUD for
                              review to ensure that it provides for monthly
                              reviews of a sample of 10% of closed loans to be

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                           Page 11                                  2004-NY-1006
Finding 2


                        completed within 90 days of loan closing as
                        required by Paragraph 6-3D of HUD Handbook
                        4060.1 REV-1 CHG-1.

               We further recommend that the Assistant Secretary for
               Housing-Federal Housing Commissioner, Chairman,
               Mortgagee Review Board:

               2D.      Consider seeking civil monetary penalties against
                        Hartford for early defaulted loans that were not
                        reviewed.




2004-NY-1006         Page 12
                                                               TOC
Management Controls
In planning and performing our audit, we considered the management controls of Hartford 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 program operations. Management controls include the
systems for measuring, reporting, and monitoring program performance.



                                  We determined the following management controls were
 Relevant management              relevant to our audit objectives:
 controls
                                  •   Program Operations – Policies and procedures that
                                      management has implemented to reasonably ensure that a
                                      program meets its objectives.

                                  •   Compliance with Laws and Regulations – Policies and
                                      procedures that management has implemented to
                                      reasonably ensure that resource use is consistent with
                                      laws and regulations.

                                  •   Safeguarding Resources – Policies and procedures that
                                      management has implemented to reasonably ensure that
                                      resources are safeguarded against waste, loss and misuse.

                                  •   Validity and Reliability of Data – Policies and procedures
                                      that management has implemented to reasonably ensure
                                      that valid and reliable data are obtained, maintained and
                                      fairly disclosed in reports.

                                  We assessed all the relevant controls identified above.

                                  It is a weakness if management controls do not provide
                                  reasonable assurance that the process for planning,
                                  organizing, directing, and controlling program operations
                                  will meet an organization’s objectives.

                                  Based on the results of our review, we believe that
 Weaknesses                       weaknesses exist in the following management controls:
                                  Program Operations, and Compliance with Laws and
                                  Regulations. These weaknesses are described in Findings 1
                                  and 2 of this report and summarized below.

                                  •   Hartford did not adhere to prudent lending practices in
                                      approving two of the HUD/FHA loans we reviewed
                                      (see Finding 1).

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Management Controls


                      •   Hartford did not fully implement its quality control plan to
                          ensure that all HUD/FHA insured loans that defaulted
                          within six payments of closing undergo a loan origination
                          quality review, as required by HUD (see Finding 2).

                      •   Hartford did not ensure that recent quality control reviews
                          were completed in a timely manner (see Finding 2).




2004-NY-1006                  Page 14
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Follow up on Prior Audits
This is the initial Office of Inspector General audit report on Hartford Funding, Ltd.




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Follow Up On Prior Audits




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2004-NY-1006                 Page 16         TOC
                                                                                       Appendix A
Schedule of Questioned Costs and Funds Put to Better Use

                                           Type of Questioned Costs

    Finding         Unsupported                     Funds Put
    Number          Costs             1/            to Better Use 2/

    1                       -                       $445,150

    2                       -                            -

    Total                   -                       $445,150

    1/   Unsupported costs are costs whose eligibility cannot be clearly determined during the audit
         since such costs were not supported by adequate documentation. A legal opinion or
         administrative determination may be needed on these costs.

    2/   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.




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Appendix A




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2004-NY-1006    Page 18         TOC
                                                                                    Appendix B
Summary of Loan Origination Deficiencies

                                                                                                 Minimum
                                     Payments     Ratio(s) Inadequate                 Inadequate   Cash
HUD/FHA                  Loan       Before First Exceeded Documentation  Inadequate   Review of Investment
  Case      Mortgage   Settlement     Default    HUD/FHA    of Down -       Gift        Credit     Not
 Number     Amount        Date       Reported    Standards   payment    Documentation   Report   Provided

374-3997570 $234,300   10/09/02         0                                                 X         X

374-4127930 $210,850   03/11/03         5             X         X
Totals      $445,150                                  1         1             1           1         1




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Appendix B




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2004-NY-1006    Page 20         TOC
                             Appendix C
Auditee Comments




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Appendix C




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2004-NY-1006   Page 22
          Appendix C




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Appendix C




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