oversight

Scheller Hess-Yoder and Associates Non-Supervised Loan Correspondent Portland, Oregon

Published by the Department of Housing and Urban Development, Office of Inspector General on 2004-01-09.

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

       AUDIT REPORT




SCHELLER-HESS YODER AND ASSOCIATES
NON-SUPERVISED LOAN CORRESPONDENT
        PORTLAND, OREGON

            2004-SE-1002
          JANUARY 9, 2004


       OFFICE OF AUDIT, REGION X
         SEATTLE, WASHINGTON
                                                                   Issue Date
                                                                           January 9, 2004

                                                                   Audit Case Number
                                                                           2004-SE-1002




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



FROM: Frank E. Baca, Regional Inspector General for Audit, 0AGA

SUBJECT: Scheller Hess-Yoder and Associates
         Non-Supervised Loan Correspondent
         Portland, Oregon

We completed an audit of Scheller Hess-Yoder and Associates (SHYA), doing business as Advanced
Mortgage Resources in Portland, Oregon. We selected SHYA for review because of their high default
and claim rates. Our report contains two 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 report issuance for any recommendations without a management decision. Also,
please furnish us copies of any correspondence or directives issued because of the audit.

We appreciate the courtesies and assistance extended by the management and staff of Scheller Hess-
Yoder & Associates.

Should you or your staff have any questions, please contact me at (206) 220-5360.
Management Memorandum




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2004-SE-1002              Page ii
Executive Summary

We completed an audit of Scheller Hess-Yoder and Associates (SHYA), doing business
as Advanced Mortgage Resources (AMR) in Portland, Oregon. SHYA is a non-supervised loan
correspondent approved by HUD to originate FHA-insured loans under HUD’s Single Family Direct
Endorsement Program.

The audit objectives were to determine if (1) SHYA acted in a prudent manner and complied with HUD
regulations, procedures, and instructions in the origination of Federal Housing Administration (FHA)
loans, and (2) SHYA's Quality Control Plan, as implemented, meets HUD requirements. The review
covered the period from October 1, 1999 to July 31, 2003. A summary of our review results is
provided below.




                                      We found that SHYA disregarded HUD/FHA requirements
 Independent Branches And             and entered into agreements with outside contractors to act as
 Leased Employees                     independent branches or leased employees to originate FHA-
                                      insured loans (Finding 1). The agreements between SHYA and
                                      these contractors are in violation of HUD/FHA requirements
                                      because (1) HUD/FHA prohibits lenders from contracting for
                                      customary loan officer functions; (2) the written agreements
                                      specify that the loan officers are not employees of SHYA; and
                                      (3) the written agreements include provisions that the outside
                                      contractors indemnify SHYA for any actions on the
                                      contractors’ part that were a violation of any applicable statute
                                      or regulation. Further, SHYA did not adequately supervise the
                                      contractors’ employees as required by HUD/FHA. Loan
                                      applications completed by the non-SHYA employees contained
                                      misleading certifications to HUD that full time SHYA employees
                                      processed the applications. HUD/FHA considers the practice
                                      of mortgagees using unauthorized branches and non-employees
                                      for the origination of insured loans a significant risk to the FHA
                                      insurance fund.

                                      We also found that SHYA disregarded HUD's quality control
 Quality Control                      requirements and its own HUD-approved Quality Control Plan
 Requirements                         and allowed the person responsible for conducting SHYA’s
                                      quality control reviews to also process and originate FHA-
                                      insured loans (Finding 2). SHYA’s quality control reviewer
                                      received loan officer commissions on three of the four FHA
                                      loans that she originated. Such a conflict of interest on the part

                                           Page iii                                         2004-SE-1002
Executive Summary


                    of a quality control reviewer is a violation of HUD requirements
                    with respect to the need for an independent quality control
                    review, and limits assurance to HUD that an independent quality
                    control review is performed on SHYA’s loans.

                    We are recommending that (1) SHYA reimburse HUD/FHA
  Recommendations   for claims paid on one loan originated by an unapproved branch
                    and three loans originated under “employee lease” agreements,
                    (2) SHYA indemnify HUD/FHA against current and future
                    losses on four loans originated under its unapproved branch
                    office agreements and 47 loans originated under “employee
                    lease” agreements, (3) HUD/FHA consider seeking civil
                    monetary penalties against Scheller Hess-Yoder and
                    Associates, its unapproved branch offices, and its “leased
                    employees” for submitting false certifications on the loan
                    applications, and (4) SHYA indemnify HUD/FHA against
                    future losses on one of the four loans originated by its quality
                    control reviewer.

                    We are further recommending that HUD/FHA determine
                    whether Scheller Hess-Yoder and Associates’ deficiencies in its
                    loan origination activities warrant its removal from participation
                    in HUD’s Single Family Mortgage Insurance Programs. If
                    HUD determines that Scheller Hess-Yoder and Associates can
                    maintain their approval as a non-supervised loan correspondent,
                    then it should take appropriate monitoring measures to ensure
                    that SHYA (1) discontinues the practice of submitting loans that
                    are originated by “leased employees” or unauthorized branches,
                    and (2) fully implements its Quality Control Plan.

                    We issued a discussion draft report on September 25, 2003,
                    and discussed the audit results with SHYA’s President at an
                    exit conference on October 31, 2003. SHYA provided written
                    comments to the draft report on December 4, 2003,
                    disagreeing with finding one and generally agreeing with finding
                    two. The findings section of this report summarizes and
                    evaluates SHYA’s comments. A copy of SHYA’s response is
                    included in Appendix B.




2004-SE-1002            Page iv
Table of Contents

Management Memorandum                                                         i



Executive Summary                                                          iii



Introduction                                                               1



Findings

1. Scheller Hess-Yoder and Associates Allowed Unapproved Branches
   and Non-Employees to Originate Insured Loans                           5


2. SHYA is Not in Full Compliance With HUD/FHA Quality Control
   Requirements                                                          19



Management Controls                                                       23



Appendices
   A. Schedule of Questioned Costs and Funds Put to Better Use            25

   B. Auditee Comments                                                    27

   C. Loans Originated Under Independent Contractor/Branch
      Agreements                                                          37

   D. Loans Originated Under Employee Lease Agreements                    39

   E. Distribution Outside of HUD                                         43



                              Page v                             2004-SE-1002
Table of Contents




Abbreviations
AMR            Advanced Mortgage Resources
FHA            Federal Housing Administration
HUD            U.S. Department of Housing and Urban Development
ML             Mortgagee Letter
NW             Neighborhood Watch
OIG            Office of Inspector General
QAD            Quality Assurance Division
QCP            Quality Control Plan
SHYA           Scheller Hess-Yoder and Associates
URLA           Uniform Residential Loan Application




2004-SE-1002                            Page vi
Introduction

Background

Scheller Hess-Yoder and Associates (SHYA) doing business as Advanced Mortgage Resources
(AMR), was incorporated under the laws of the state of Oregon on July 15, 1992. SHYA received
approval from HUD as a Title II non-supervised loan correspondent on May 12, 1999. SHYA’s office
is located at 6400 SW Canyon Court, Suite 200, Portland, Oregon 97221. As a non-supervised loan
correspondent, SHYA originates mortgages for sale to FHA-approved sponsor lenders under the
HUD/FHA Single Family Direct Endorsement Program.

In July 2002, HUD’s Quality Assurance Division (QAD) performed a monitoring review of SHYA.
The results of the review were summarized in the August 14, 2002 findings letter to SHYA. QAD’s
findings centered on SHYA’s lack of an adequate Quality Control Plan (QCP). The following is an
excerpt from the findings letter:

       “AMR does not have a QCP that is in conformity with HUD requirements. HUD-
       approved loan correspondents are required to adopt, maintain and implement such a
       plan. While HUD does not prescribe specific elements, guidelines are available in HUD
       Handbook 4060.1 REV-1, Chapter 6. The pertinent elements are outlined in the QCP
       ‘checklist’ that was provided to you during the on-site review. For example, AMR’s
       QCP does not contain procedures for written reverification of employment, deposits,
       gift letter, or other sources of income. The QCP did not contain any procedures for
       review of 203(k) Rehabilitation Mortgage loans as required by Handbook 4240.4
       REV-2, paragraph 1-20 or HUD Mortgagee Letter.

       Also, AMR did not submit early-payment default loans for quality control review. HUD
       Handbook 4060.1, paragraph 6-1(d)(3), requires that mortgagees analyze all
       HUD/FHA insured loans that go into default within the first six months. Mortgagees can
       access a list of defaulted loans originated under their mortgagee identification number
       through Neighborhood Watch Early Warning System. Please refer to Mortgagee Letter
       00-20 for further instructions.

       Because of the seriousness of this violation, you are requested to forward to this office a
       copy of your revised quality control plan. Further, please provide evidence of your
       quality control reviews of early-payment defaults and the assurance that you will
       conduct these reviews in the future.”

By October 1, 2002 SHYA submitted a revised Quality Control Plan that was acceptable to
HUD/FHA and the QAD finding was closed.




                                             Page 1                                           2004-SE-1002
Introduction


According to HUD’s Neighborhood Watch website, for the past two years SHYA had consistently
higher default rates for loans defaulting within 12 months from beginning amortization dates than the
overall average rate for the state of Oregon as follows:

                          Default Rate by Selected Calendar Quarters 6/30/01 – 6/30/03

Quarter Ending               06/30/03       12/31/02        06/30/02       12/31/01       6/30/01

Scheller Hess-Yoder           4.32%          7.77%           7.05%          4.67%          3.70%

Entire State of Oregon        2.20%          2.47%           2.36%          2.43%          2.33%

Relative Comparison           196%            315%           299%            192%          159%


During our audit period of October 1, 1999 to July 31, 2003, SHYA originated 431 FHA-insured
single family loans amounting to $58,950,904. As of July 31, 2003, 43 of these loans have gone into
default status at least once. SHYA’s 10 percent default rate for this period was over three times the
default rate for all FHA single-family loans originated in the state of Oregon during the same period. To
date, foreclosure action has been initiated on 25 of the 43 defaulting loans. Fourteen of the 25 loans in
foreclosure status have gone into claims status, with net losses to HUD of $415,250, for an average net
loss of $29,661 per loan. Net losses on the remaining 11 loans in foreclosure status had yet to be
determined at the time of our audit.


                                        The audit objectives were to determine if SHYA acted in a
 Audit Objectives, Scope,               prudent manner and complied with HUD regulations,
 And Methodology                        procedures, and instructions in the origination of Federal
                                        Housing Administration (FHA) loans, and to determine whether
                                        SHYA's Quality Control Plan, as implemented, meets HUD
                                        requirements.

                                        To accomplish our audit objectives, we:

                                        •   Reviewed the FHA case files for a sample of 32 of the 33
                                            FHA-insured loans originated by SHYA that had gone into
                                            default at least once as of January 9, 2003, at the beginning
                                            of our audit work. The FHA case file for one of the 33
                                            defaulting loans was not available for review. The 32 loans
                                            reviewed were from the universe of 330 originated by
                                            SHYA with beginning amortization dates for the three-year
                                            period from October 1, 1999 to November 1, 2002. The

2004-SE-1002                                 Page 2
                                                      Introduction


    results of the detailed testing apply only to the 32 loans
    selected and cannot be projected to the entire universe of
    330 loans.

•   Examined records at SHYA including loan origination files,
    loan origination logs, loan pipeline reports, payroll records,
    and personnel files.

•   Conducted interviews with SHYA officials and employees.

•   Interviewed available borrowers as needed.

Initially, our audit covered the period October 1, 1999 to
November 1, 2002. This period was expanded to include the
most current data while performing our review. Thus, we
expanded the audit period to include loans originated by SHYA
that were endorsed as of July 31, 2003.

We performed the audit in accordance with Generally
Accepted Government Auditing Standards.




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2004-SE-1002     Page 4
                                                                                         Finding 1


   Scheller Hess-Yoder and Associates Allowed
   Unapproved Branches and Non-Employees to
             Originate Insured Loans
Contrary to HUD/FHA requirements, Scheller Hess-Yoder and Associates (SHYA), doing
business as Advanced Mortgage Resources (AMR), acted as a conduit for loans originated
by unapproved branches and independent loan officers who were not SHYA employees.
SHYA disregarded HUD/FHA requirements and entered into agreements with outside
contractors to act as independent branches or leased employees to originate FHA-insured
loans. The agreements between SHYA and these contractors are in violation of HUD/FHA
requirements because (1) HUD/FHA prohibits lenders from contracting for customary loan
officer functions; (2) the written agreements specify that the loan officers are not employees
of SHYA; and (3) the written agreements include provisions that the outside contractors
indemnify SHYA for any actions on the contractors’ part that were a violation of any
applicable statute or regulation. Further, SHYA did not adequately supervise the contractors’
employees as required by HUD/FHA. Additionally loan applications completed by the non-
SHYA employees contained certifications to HUD that full time SHYA employees processed
the applications. HUD/FHA considers the practice of mortgagees using unauthorized
branches and non-employees for the origination of insured loans a significant risk to the FHA
insurance fund.




                                    HUD Handbook Requirements for Loan Correspondents
 HUD/FHA Prohibits
 Unauthorized Branch                According to HUD Handbook 4060.1 REV-1:
 Offices and Requires Close
 Supervision of Mortgagee           •   Lenders (including loan correspondents) must be approved
 Employees                              by HUD to originate, purchase, hold or sell HUD/FHA
                                        insured mortgages (Paragraph 1-2).

                                    •   Lenders must submit applications to HUD for each branch
                                        office submitting loans for insurance (Paragraph 1-2 A).

                                    •   Lenders are required to pay a $300 application fee and a
                                        $200 annual recertification fee for each branch office
                                        (Paragraph 2-3).

                                    •   Each branch office of a loan correspondent must have a net
                                        worth of $25,000 (Paragraph 2-4 D).

                                         Page 5                                        2004-SE-1002
Finding 1



               •   A lender is fully responsible for the actions of its branch
                   office (Paragraph 2-16).

               •   A lender must pay all of its own operating expenses. This
                   includes the compensation of all employees of its main and
                   branch offices. Compensation may be on the basis of a
                   salary, salary plus commission, and commission only. Other
                   operating expenses that must be paid by the mortgagee
                   include, but are not limited to, equipment, furniture, office
                   rent, overhead, and other similar expenses incurred in
                   operating a mortgage lending business (Paragraph 2-17).

               •   Lenders must exercise control and responsible management
                   supervision over their employees. The requirement
                   regarding control and supervision must include, at a
                   minimum, regular and ongoing reviews of employee
                   performance and work performed (Paragraph 2-13).

               •   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 during normal business hours
                   (Paragraph 2-14).

               Mortgagee Letter Requirements

               Mortgagee Letter 95-36 (ML 95-36) prohibits lenders from
               contracting out for customary loan officer functions.

               Mortgagee Letter 00-15 (ML 00-15) makes it clear that
               HUD/FHA considers the practice of mortgagees using
               unauthorized branches and non-employees for the origination of
               insured loans a significant risk to the FHA insurance fund.
               Accordingly, ML 00-15 provides further guidance and
               clarification regarding the Department's requirements for FHA-
               approved mortgagee branch offices and employee agreements,
               stating, in part:

               “The Department has learned that some HUD/FHA approved
               mortgagees are engaged in the practice of taking on an existing,
               separate mortgage company or broker as a branch and allowing
               that separate entity to originate insured mortgages under the

2004-SE-1002        Page 6
                                                                                    Finding 1


                              approved mortgagee's HUD Mortgagee Number. Some
                              mortgagees refer to this arrangement as a ‘net branch.’ This,
                              however, constitutes a prohibited net branch arrangement…”

                              and

                              “As part of on-site mortgagee monitoring reviews, the
                              Department has obtained ‘employment’ agreements executed
                              by HUD/FHA approved mortgagees and their ‘net branches.’
                              A number of the provisions in these agreements violate
                              Departmental branch requirements. For example, there are
                              provisions that:
                              • require all 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.
                              • require the ‘employee’ (branch) to indemnify the
                                  HUD/FHA approved mortgagee if it incurs damages from
                                  any apparent, express, or implied agency representation by
                                  or through the ‘employee's’ (branch's) actions.
                              • require the ‘employee’ (branch) to issue a personal check
                                  to cover operating expenses if funds are not available from
                                  an operating account.

                              These provisions violate Paragraphs 1-2, 2-13, 2-17, and 3-2B
                              of the Mortgagee Approval Handbook 4060.1 Rev-1. Taken
                              as a whole, such provisions seem designed to maintain a clear
                              separation between the HUD/FHA approved mortgagees and
                              their so-called ‘branches,’ which is inconsistent with the close
                              supervisory control over all employees mandated by the
                              handbook.

                              The Department believes that the origination of insured
                              mortgages by lenders that have not received HUD/FHA
                              approval increases the risk to the FHA insurance funds
                              and to the public. Accordingly, mortgagees found to be
                              in violation may be subject to the full range of HUD
                              sanctions.” (emphasis added)

                              Contrary to HUD/FHA regulations and without obtaining
SHYA Submitted Loans          HUD’s approval, SHYA allowed two independent entities to
Originated by Entities That   originate FHA-insured loans using SHYA’s approved
Were Not HUD Approved         mortgagee name and FHA lender identification number. SHYA

                                    Page 7                                        2004-SE-1002
Finding 1


               entered into an “Independent Contractor Agreement Associate
               Loan Officer” with a mortgage broker doing business as The
               Mortgage Source. According to the agreement, the broker
               would represent SHYA for all real estate loans generated.
               SHYA also entered into an “Independent Contractor
               Agreement Branch Office” with an independent contractor
               doing business as P&L Financial Services Inc. Under this
               agreement, P&L Financial Services would operate and manage
               a branch office of SHYA. These agreements effectively create
               branch offices of SHYA; however, SHYA did not submit
               required branch office notifications to HUD for the two
               branches. Consequently, HUD could not effectively monitor
               the performance of the SHYA branches because it is not aware
               of who is actually responsible for originating the branches’
               loans.

               These agreements are also in direct violation of HUD/FHA
               requirements because neither the broker nor the contractor are
               exclusive employees of SHYA. Both agreements specifically
               state that the broker/contractor is not a partner, agent, or
               employee of SHYA. The contracts further state that the
               broker/contractor is not eligible to participate in any of SHYA’s
               employee benefit programs, and is not covered by any SHYA
               insurance program, including workers’ compensation. The
               contracts also make the broker/contractor responsible for all
               expenses, insurance, and taxes.

               Both contracts include indemnification agreements to protect
               SHYA from any liability associated with the actions of the
               broker/contractor. Mortgagee Letter 00-15 expressly prohibits
               these indemnification agreements. Such indemnification
               agreements put the FHA insurance fund at risk because they are
               structured to transfer any liability associated with improper loan
               origination practices from the HUD-approved lender to a non-
               approved entity that HUD has no knowledge of.

               The agreement with The Mortgage Source states “Independent
               Contractor agrees to indemnify and hold Company harmless for
               any loss, damage, fees, or costs incurred by reason of
               Independent Contractor’s misrepresentation, fraud, or violation
               of any statute or regulation, violation of any rules, regulations or
               policies of Company, or violation of any other applicable statute
               or regulation.”

2004-SE-1002        Page 8
                                                                                      Finding 1



                              The contract with P&L Financial Services contains similar
                              language, stating “Commissioned Contractor agrees to
                              indemnify and hold Company harmless for any loss, damage,
                              fees, or costs incurred by reason of Commissioned
                              Contractor’s misrepresentation, fraud, or violation of any statute
                              or regulation, violation of any rules, regulations or policies of
                              Company, violation of any other applicable statute or regulation,
                              or actions of Commissioned Contractor that result in claims
                              made against Company.”

                              Both contracts required the contractors to pay a loan
                              processing fee to SHYA with each loan package submitted for
                              processing. The processing fees to SHYA were $300 per loan
                              for the Mortgage Source and $395 per loan for P&L Financial.
                              The contracts also allowed SHYA to earn a portion of the fees
                              (loan origination fee, yield spread premiums, and service release
                              premiums) generated by loans originated by the contractors.
                              According to its agreement, The Mortgage Source receives 80
                              percent of the fees from its closed loans with the remaining 20
                              percent going to SHYA. According to its contract, P&L
                              Financial receives 60 to 80 percent of fees from its closed
                              loans, with the remaining 20 to 40 percent going to SHYA.

                              Under its agreement, The Mortgage Source originated four
                              FHA-insured loans totaling $448,704. One of the four loans
                              went into foreclosure and claim status, leading to the payment of
                              an insurance claim by HUD. P&L Financial Services originated
                              eight FHA-insured loans totaling $895,896 under its branch
                              agreement. Four of these eight loans were refinanced with new
                              FHA-insured mortgages originated by P&L Financial under its
                              “Employee Lease Agreement.” Although both agreements
                              establish branch office arrangements between the two
                              contractors and SHYA, HUD was never notified of the
                              existence of the branches, and all loans originated by them were
                              under SHYA’s lender number. This arrangement allowed the
                              branches to operate without providing HUD assurance that the
                              branches had adequate financial reserves and oversight, thereby
                              putting the FHA fund at risk.

                              SHYA ignored HUD requirements that lender employees be
SHYA Submitted Loans          employed exclusively by the lender, and entered into
Originated by Loan Officers   agreements with loan officers that were not SHYA employees
That Were Not SHYA
Employees                           Page 9                                         2004-SE-1002
Finding 1


               to produce loans. In August 2000, SHYA replaced its branch
               office agreement with P&L Financial Services with a “Employee
               Lease Agreement.” Under the terms of this agreement, P&L
               Financial Services “leased” its owner and employees to SHYA
               to originate single family loans. SHYA entered into similar
               contracts in which the owners of two other companies, LS
               Financial Corp. and Diverse Lending Inc., were “leased” to
               SHYA to originate loans.

               According to the agreements, SHYA is the customer and each
               of the three companies is a provider. All three contracts make
               it clear that the provider is not an employee of SHYA stating:
               “…nothing in this agreement shall be construed to make
               Provider a partner, agent, or employee of Customer. Provider
               agrees to be responsible for paying any and all required
               Federal, State or Local taxes or insurance incurred by it’s
               employees actions.” The contracts with LS Financial Corp. and
               Diverse Lending Inc. also specify that the provider is
               responsible for any and all employee benefits.

               Compensation for the contractors is in the form of commissions
               based upon a split of loan origination and other fees between
               the contractor (“leased employee”) and SHYA that are
               generated at loan closing. According to its contract, P&L
               Financial earns from 70 to 80 percent of fees earned on closed
               loans with the remainder going to SHYA. The contracts for
               both LS Financial Corp. and Diverse Lending allowed the
               contractors to earn 70 percent of the loan fees generated, with
               the remainder also going to SHYA.

               As with the above branch agreements, all three employee lease
               contracts contain language to protect SHYA against any
               consequences of detrimental actions on the parts of the
               provider’s employees stating: “Provider agrees to indemnify and
               hold Customer harmless for any loss, damage, fees or costs
               incurred by reason of Providers employee’s misrepresentation,
               fraud, or violation of any statute or regulation, violation of any
               rules, regulations or policies of Customer, violation of any other
               applicable statute or regulation, or actions of Provider that result
               in claims made against the Customer.”

               All three contracts contain language that SHYA would provide
               direct supervision of the provider’s employees in the course of

2004-SE-1002       Page 10
                                                                                  Finding 1


                          day-to-day operations. However, we found inadequate
                          supervision of the leased employees as SHYA did not perform
                          ongoing reviews of the leased employees’ performance.
                          Further, although SHYA’s president told us that the loans
                          generated by the leased employees receive the same quality
                          control review as the loans produced by SHYA’s own
                          employees, prior to the October 2002 closeout of findings of a
                          review conducted by HUD’s Quality Assurance Division,
                          SHYA did not have an adequate quality control plan in place.
                          Thus all loans originated by the leased employees up to then did
                          not receive an adequate quality control review.

                          Under these agreements, the owner of LS Financial Corp.
                          originated five FHA loans totaling $616,042 and the owner of
                          Diverse Lending Inc. originated six FHA loans totaling
                          $770,900. HUD/FHA paid a claim on one of the loans
                          originated by LS Financial. Two of the six loans originated by
                          Diverse Lending have gone into default at least one time, and
                          one of these went into foreclosure and claim status, leading to
                          the payment of an insurance claim by HUD. Under its
                          employee lease agreement, the owner of P&L Financial
                          Services originated 60 loans totaling $7,707,872, one of which
                          was actually originated by the owner’s assistant even though the
                          P&L Financial Services owner signed the mortgage documents
                          as the originating loan officer and as an employee of SHYA.
                          Eight of these 60 loans were refinanced with new FHA-insured
                          loans originated by P&L Financial. Nine of the 60 loans
                          originated by P&L Financial have defaulted at least once, with
                          four of the nine loans going into foreclosure status and one going
                          into claim status.

                          Lenders are required to submit a completed Uniform
Loan Files Contained      Residential Loan Application (URLA), signed and dated by all
Improper Certifications   borrowers and the lender, and the Addendum to the URLA
                          (form HUD- 92900-A) containing signed Lender’s
                          Certifications for each insured loan. Section II B of the
                          Lender’s Certification states “The information contained in the
                          Uniform Residential Loan Application and this Addendum was
                          obtained directly from the borrower by a full-time employee
                          of the undersigned lender or its duly authorized agent and
                          is true to the best of the lender’s knowledge and belief.”
                          (emphasis added)


                                Page 11                                         2004-SE-1002
Finding 1


                    During the review of the 32 FHA case files of defaulting SHYA
                    loans, we found five loans that the contractors, who by contract
                    are neither full-time employees or agents of SHYA, certified
                    that they were SHYA employees on the URLA and/or the
                    HUD-92900-A as follows:

                            Loan Number 569-0512568 – the owner of Diverse
                            Lending signed both the URLA and HUD-92900-A as
                            an employee of SHYA.

                            Loan Number 569-0495611 – the owner of The
                            Mortgage Source signed both the URLA and HUD-
                            92900-A as an employee of SHYA.

                            Loan Number 431-3486696 – the owner of P&L
                            Financial signed both the URLA and HUD-92900-A as
                            an employee of SHYA.

                            Loan Number 431-3502928 – the owner of P&L
                            Financial signed the URLA as an employee of SHYA
                            and a SHYA employee signed the HUD-92900-A.

                            Loan Number 431-3570514 – the owner of P&L
                            Financial signed the URLA as an employee of SHYA
                            and a SHYA employee signed the HUD-92900-A.

                    We also found the following three loans originated by P&L
                    Financial in which a regular SHYA employee “signed for” the
                    owner of P&L Financial on the URLA and a SHYA employee
                    signed the HUD-92900-A:

                    Loan Number 431-3516559
                    Loan Number 431-3544957
                    Loan Number 561-7356616




                    1. At the exit conference, OIG audit staff “effectively ignored”
 Auditee Comments   information provided by SHYA in their initial response. Also,
                    the “Final Audit Report…completely ignores every single piece

2004-SE-1002            Page 12
                                                        Finding 1


of information, documentation, and explanation…” SHYA had
provided in their October 24, 2003 written comments, at the
exit conference, and in an October 31, 2003 letter.

2. It instructed the Mortgage Source to cease all FHA loan
originations in a letter sent July 14, 2001 that was inadvertently
dated July 14, 2000. The last loan originated by The Mortgage
Source was endorsed on October 9, 2001. However, SHYA
agrees to indemnify HUD against four loans originated by The
Mortgage Source.

3. The branch office agreement between SHYA and Phillip
Jack (P & L Financial Services, Inc.) never came to fruition. A
branch office was never created or opened and the agreement
never enforced by either party. Instead, Mr. Jack worked out
of SHYA’s main office. As such, HUD should re-consider its
recommendation that SHYA indemnify HUD against future
losses on four loans.

4. Regardless of the language of the Employee Lease
agreements, which were drafted with tax consequences in mind,
every person that worked under these agreements was in fact
an employee of SHYA under Oregon law. These loans were
processed in the same manner as any other SHYA loan, and
the originators were supervised the same as any other SHYA
employee. In addition, HUD itself has allowed the use of
Independent Contractor agreements. Further, SHYA had
previously received acknowledgement from a HUD Single
Family official that the Employee Lease Agreement was
acceptable for use under FHA. Evidencing this was a fax sent
to the HUD official on July 30, 2002, which was mistakenly
dated July 30, 2000. Shortly after the fax was sent, the
Compliance Officer telephoned the SHYA owner and informed
him that the agreement was acceptable for use under FHA.
However, in accordance with representations made by HUD-
OIG staff, SHYA has complied with HUD’s technical
requirement.

5. In its January 5, 2004 response to our email notifying SHYA
of a modification to the finding recommendations, SHYA
claimed that OIG had no intention whatsoever of taking into
consideration anything that SHYA had to contribute, say, or
provide in support of its position relating to the audit.

      Page 13                                         2004-SE-1002
Finding 1




OIG Evaluation of   1. HUD-OIG staff fully considered all information provided by
Auditee Comments    SHYA. In its response, SHYA mistakenly refers to the formal
                    Draft Audit Report as the Final Audit Report, even though the
                    transmittal letter and every page of the Draft Audit Report
                    clearly identified it as a draft report. Although we issued a
                    Discussion Draft Audit Report on September 25, 2003, the
                    transmittal letter sent with the Discussion Draft explained that it
                    was to be used for discussion at the exit conference, and that
                    subsequent to the exit conference we would issue a formal draft
                    report for SHYA’s written comments. In addition, at the exit
                    conference OIG staff fully discussed with SHYA
                    representatives all issues they wanted to go over regarding their
                    response to the Discussion Draft Audit Report.

                    2. SHYA agreed to indemnify The Mortgage Source loans
                    identified in the audit finding.

                    3. SHYA’s comments are not consistent with what P&L
                    Financial Services (Mr. Phillip Jack) told HUD-OIG audit staff.
                    Mr. Jack indicated that the Independent Contractor Agreement
                    (and subsequently the Employee Lease Agreement) were the
                    only agreements with SHYA that he worked under.

                    4. SHYA’s citations of Oregon law do not appear to conflict
                    with HUD requirements regarding the use of branch offices or
                    non-employees by lenders. The issues raised by the finding are
                    matters of substance, not merely semantics or form. For
                    example, the provision in these individuals’ agreements that
                    shifts liability to the employees or net branches could have
                    material financial implications for HUD. Also, the SHYA
                    contractors indicated to us that they had little if any supervision
                    by SHYA.

                    HUD did not allow a lender to have a similar type of employee
                    agreement such as used by SHYA, as alluded to in SHYA’s
                    response. In the case mentioned by SHYA, HUD had required
                    a lender to revise its employee agreement to meet HUD
                    requirements, most notably to revise the provision that tried to
                    shift liability for indemnification to the employee.


2004-SE-1002            Page 14
                                                                      Finding 1


                  The HUD official that SHYA claims approved the Employee
                  Lease Agreement emphatically told us that she never gave
                  SHYA permission to use these Agreements, nor has she ever
                  received a fax from SHYA regarding the matter. The copies of
                  fax documentation that SHYA provided are incomplete, and in
                  our opinion do not provide support or convincing evidence for
                  their contention that HUD approved the agreements.

                  5. As noted above, the HUD-OIG staff fully considered all
                  information provided by SHYA in response to our draft
                  findings.




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

                  1A. Require Scheller Hess-Yoder and Associates to indemnify
                      HUD/FHA against future losses and reimburse
                      HUD/FHA for the $78,781 claim paid on Loan # 569-
                      0495611 that was originated under the branch office
                      agreement with The Mortgage Source.

                  1B. Require Scheller Hess-Yoder and Associates to indemnify
                      HUD/FHA against current and future losses on the two
                      currently insured loans with no claims paid, that were
                      originated by The Mortgage Source and the two currently
                      insured loans originated by P&L Financial under their
                      branch office agreements. These loans are identified in
                      Appendix C of this report.

                  1C. Require Scheller Hess-Yoder and Associates to indemnify
                      HUD/FHA against future losses and reimburse HUD/FHA
                      for: (1) the $63,623 claim paid on Loan # 431-3570514
                      originated by P&L Financial; (2) the $105,451 claim paid
                      Loan # 569-0514841 originated by LS Financial and (3)
                      the $18,755 claim paid on Loan # 569-0512568
                      originated by Diverse Lending. All three loans were
                      originated under leased employee agreements.



                       Page 15                                      2004-SE-1002
Finding 1


               1D. Require Scheller Hess-Yoder and Associates to indemnify
                   HUD/FHA against current and future losses on the two
                   currently insured loans with no claims paid that were
                   originated by of LS Financial Corp., the four currently
                   insured FHA loans with no claims paid that were
                   originated by Diverse Lending Inc., and the 41 currently
                   insured loans with no claims paid that were originated by
                   P&L Financial under their leased employee agreements.
                   These loans are identified in Appendix D of this report.

               1E. For each loan, identified in Appendix A that was originated
                   by the unapproved branches and leased employees,
                   consider seeking civil monetary penalties against Scheller
                   Hess-Yoder and Associates for submitting false
                   certifications on the loan applications.

               1F. Consider seeking civil monetary penalties against the
                   owner of:
                  • Diverse Lending for false certifications on the loan
                     application forms for FHA loan number 569-0512568;
                  • The Mortgage Source for false certifications on the loan
                     application forms for FHA loan number 569-0495611;
                  • P&L Financial for false certifications on the loan
                     application forms for FHA loan numbers
                     431-3486696, 431-3502928, 431-3570514,
                     431-3516559, 431-3544957, and 561-7356616.

               1G. Determine whether Scheller Hess-Yoder and Associates’
                   deficiencies in its loan origination activities warrant its
                   removal from participation in HUD’s Single Family
                   Mortgage Insurance Programs. Consider taking
                   appropriate administrative sanctions.

               1H. If HUD determines that Scheller Hess-Yoder and
                   Associates can maintain their approval as a non-supervised
                   loan correspondent, take appropriate monitoring measures
                   to ensure that Scheller Hess-Yoder and Associates
                   discontinues the practice of submitting loans that are
                   originated by “leased employees” or unauthorized
                   branches.




2004-SE-1002       Page 16
                   Finding 1




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  Page 17        2004-SE-1002
                                                                                             Finding 2


        SHYA is Not in Full Compliance With
       HUD/FHA Quality Control Requirements
Scheller, Hess Yoder & Associates did not fully implement its Quality Control Plan (QCP),
which they revised as a result of a previous review by HUD’s Quality Assurance Division
(QAD). Specifically, in July 2002 a review by the QAD found that SHYA’s QCP was
inadequate, and required the lender to submit a revised QCP that meets HUD/FHA
guidelines. By October 1, 2002 SHYA submitted a revised QCP that was acceptable to HUD
and the finding by QAD was closed. However, we found that SHYA disregarded HUD's
quality control requirements and its own QCP by allowing the person responsible for
conducting SHYA’s quality control reviews to also process and originate FHA-insured loans.
In addition, the quality control reviewer received loan officer commissions on three of the four
FHA loans that she originated. Such a conflict of interest on the part of a quality control
reviewer is a violation of HUD requirements with respect to the need for an independent
quality control review, and limits assurance to HUD that an independent quality control review
is performed on SHYA’s loans.




                                     To ensure that loans are originated and approved in accordance
 The Quality Control                 with HUD/FHA rules and regulations, HUD requires lenders to
 Reviewer Cannot Process             perform regular quality control reviews. These reviews must
 FHA-Insured Loans                   provide for independent evaluation of the significant information
                                     gathered for use in the mortgage credit decision making and
                                     loan servicing process for all loans originated or serviced by the
                                     mortgagee.

                                     HUD Handbook 4060.1 Chapter 6 Quality Control Plan
                                     Paragraph 6-1 states: “Mortgagees must establish a written
                                     Quality Control Plan which utilizes a program of internal or
                                     external audit or provides for an independent review by the
                                     mortgagee's management/supervisory personnel who are
                                     knowledgeable and have no direct loan processing,
                                     underwriting or servicing responsibilities.”

                                     This requirement for an independent review is reflected in
                                     SHYA’s Quality Control Plan. According to the job
                                     description for the quality control reviewer from Section III,
                                     Paragraph C of the QCP, “The reviewer's job does not involve
                                     processing FHA loans. He or she reports directly to the


                                         Page 19                                           2004-SE-1002
Finding 2


                                           President of the company. The quality control reviewer's job
                                           does not include personnel matters.”


                                           SHYA’s Pipeline report shows that the same person who is
    SHYA’s Quality Control                 responsible for performing its quality control reviews originated
    Reviewer Originated FHA-               the following four FHA-insured loans:
    Insured Loans
                                            FHA Case Number1 Loan                   Endorsement
                                                             Amount                 Date
                                            431-3668869      $171,800               12/04/01
                                            431-3563723      $177,393               05/17/01
                                            569-0538696      $132,914               05/03/02
                                            569-0559116      $136,867               02/11/03

                                           Our review of the loan documents found that the quality control
                                           reviewer signed the initial loan applications as the interviewer for
                                           all four of the above loans, and the lender’s certification for loan
                                           number 431-3563723. The quality control reviewer told us
                                           that she performed all of the duties as the loan officer for these
                                           loans. The reviewer also disclosed that she received a
                                           commission fee for originating and processing three of the four
                                           loans. No commission was paid to her on one loan because the
                                           borrower was also a SHYA loan officer.

                                           In addition to originating the four loans, the quality control
                                           reviewer also performs another loan processing duty: she and
                                           SHYA’s loan processing manager are responsible for inputting
                                           loan and borrower information into the lender’s automated
                                           underwriting system.

                                           In our opinion, HUD does not have adequate assurance that
                                           SHYA is processing loans in conformance with FHA
                                           requirements because the quality control reviewer’s loan
                                           origination and processing duties compromises her
                                           independence when performing quality control reviews.




1
 Loan Numbers 431-3668869, 431-3563723, and 569-0538696 have been terminated and are no longer insured by the
FHA

2004-SE-1002                                    Page 20
                                                                           Finding 2


                    SHYA stated that it now understands that HUD’s prohibition
Auditee Comments    against having the same person review and process FHA loans
                    includes the originating of FHA-insured loans. As such, SHYA
                    has taken action to ensure the Quality Control person is not
                    involved in any aspect of originating and processing FHA loans.
                    SHYA further agreed to indemnify HUD against any future
                    losses attributable to the loan originated by the individual that
                    performed Quality Control reviews.




OIG Evaluation of   SHYA’s response is substantially responsive to the finding.
Auditee Comments




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

                    2A. Require Scheller Hess-Yoder and Associates to indemnify
                        HUD/FHA against future losses on FHA loan number
                        569-0559116.

                    2B. Take appropriate monitoring measures to ensure that
                        Scheller Hess-Yoder and Associates fully implements its
                        Quality Control Plan.




                         Page 21                                         2004-SE-1002
Finding 2




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2004-SE-1002     Page 22
Management Controls

In planning and performing our audit, we considered the management controls of SHYA to determine
our audit procedures, not to provide assurance on their management controls. Management controls
are the plan of an organization, methods and procedures adopted by management to ensure that its
goals are met. Management controls include processes for planning, organizing, directing, and
controlling program operations. They include the systems for measuring, reporting, and monitoring
program performance.




                                      We determined that the following management controls were
 Relevant Management
                                      relevant to our audit objectives:
 Controls
                                          •   Program Operations. Policies and procedures that
                                              management has in place to reasonably ensure that the
                                              loan origination process is in compliance with the
                                              HUD/FHA program requirements, and that the
                                              objectives of the programs are being met.

                                          •   Quality Control Plan. Policies and procedures that
                                              management has in place to reasonably ensure
                                              implementation of HUD/FHA quality control
                                              requirements.

                                      A significant weakness exists if management controls do not
 Significant Weaknesses               give reasonable assurance that resource use is consistent with
                                      laws, regulations, and policies; that resources are safeguarded
                                      against waste, loss, and misuse; and that reliable data are
                                      obtained, maintained, and fairly disclosed in reports.

                                      Based on our review, we believe that SHYA’s management
                                      controls have significant weaknesses and regarding HUD
                                      requirements in the following areas:

                                          •   SHYA violated HUD/FHA requirements regarding
                                              FHA’s loan origination process by submitting loans
                                              originated by unapproved branches and non-employees
                                              (Finding 1).

                                          •   SHYA violated HUD/FHA’s quality control process
                                              requirements because its quality control reviewer also
                                              processed insured loans (Finding 2).

                                          Page 23                                          2004-SE-1002
Management Controls



                      We also found that SHYA does not ensure that policies and
                      standards relating to loan origination are known by SHYA
                      employees. Our interviews with SHYA employees in general
                      indicate that they are not always aware of nor do they possess
                      copies of documents such as written job descriptions, written
                      loan origination policies and procedures, or the SHYA quality
                      control plan.




2004-SE-1002              Page 24
                                                                                                Appendix A

Schedule of Questioned Costs
and Funds Put to Better Use

 Recommendation                    Type of Questioned Cost                        Funds Put
     Number                   Ineligible 1/       Unsupported 2/               To Better Use 3/

         1A.                                              $ 78,781
         1B.                                                                       $ 512,850
         1C.                    $82,387                  $105,451
         1D.                                                                      $6,339,706

         2A.                                                                       $ 136,867

       Totals                   $82,378                  $184,232                 $6,989,423


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 policy or regulations. The
amount shown is for two net claims. A net claim is the total claim paid by HUD less any proceeds from
HUD’s sale of the insured property.

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. The amount shown is for two gross claims. A gross claim is the amount of the
claim paid by HUD prior to any recovery from the sale of the property by HUD. At the time of the
audit, the properties were not yet sold by HUD.

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.




The table on the following page shows a breakdown of the above schedule by the description of each
individual category of questioned cost.




                                              Page 25                                           2004-SE-1002
Appendix A




 Recommen-                                                                 Un-      Funds Put
   dation                                                  Ineligible   supported   To Better
  Number                 Description of Cost                   1/           2/       Use 3/

                       Gross Claim Paid on Loan
                            # 569-0495611
      1A.         Originated by The Mortgage Source                     $ 78,781

               Total Loan Amount of 2 Currently Insured
                             FHA Loans
      1B.        Originated by The Mortgage Source                                  $ 282,864

                Total Loan Amount of 2 Currently Insured
               FHA Loans Originated by P&L Financial as
      1B.                   Branch Office                                           $ 229,986

                Net Loss on Claim Paid on Loan # 431-
      1C.        3570514 Originated by P&L Financial       $63,623

               Gross Claim Paid on Loan # 569-0514841
      1C.      Originated by LS Financial                               $105,451

                Net Claim Paid on Loan # 569-0512568
      1C.            Originated by Diverse Lending         $18,755

               Total Loan Amount of 41 Currently Insured
               FHA Loans Originated by P&L Financial as
     1D.                   Leased Employee                                          $5,581,416

               Total Loan Amount of 4 Currently Insured
                              FHA Loans
     1D.             Originated by Diverse Lending                                  $ 499,492

               Total Loan Amount of 2 Currently Insured
                             FHA Loans
     1D.              Originated by LS Financial                                    $ 258,798

                Loan Amount of Currently Insured FHA
               Loan #569-0559116 Originated by SHYA
      2A.             Quality Control Reviewer                                      $ 136,867

2004-SE-1002                           Page 26
                                          Finding 2



Totals             $82,378   $184,232   $6,989,423




         Page 27                        2004-SE-1002
                                                                                       Appendix B

Auditee Comments




The auditee comments, dated December 4, 2003 and January 5, 2004 are attached to this appendix.
The attachments to the December 4, 2003 comments are voluminous and impractical to include in this
appendix. A hard copy file of the auditee comments and all the attachments are kept at the HUD-OIG
Office in Seattle and are available upon request.




                                          Page 29                                       2004-SE-1002
Appendix B




2004-SE-1002   Page 30
          Appendix B




Page 31   2004-SE-1002
Appendix B




2004-SE-1002   Page 32
          Appendix B




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Appendix B




2004-SE-1002   Page 34
          Appendix B




Page 35   2004-SE-1002
Appendix B




2004-SE-1002   Page 36
          Appendix B




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Appendix B




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2004-SE-1002     Page 38
                                                                                Appendix C

Loans Originated Under Independent
Contractor/Branch Agreements

                P&L Financial – September 10, 1998 Branch Office Agreement
                      Currently Insured Loans (Recommendation 1B.)

                                               Refinanced
 FHA Case        Closing    Endorsement       Case Number           Mortgage   Loan Status
  Number          Date         Date           (if applicable)       Amount *    12/11/03
                                              431-3576415
                                                then to
431-3445026     05/25/00      07/24/00        431-3724006           $107,207     current
                                              569-0523111
                                                 then to
569-0476375     07/31/00      09/08/00        569-0566458           $122,779     current

TOTAL P & L: 2 Loans                                                $229,986




               The Mortgage Source - May 21, 1996 Branch Office Agreement
                     Currently Insured Loans (Recommendation 1B.)

                                               Refinanced
 FHA Case        Closing    Endorsement       Case Number           Mortgage   Loan Status
  Number          Date         Date           (if applicable)       Amount *    12/11/03

                                              569-0507420
                                                 then to
569-0470547     04/28/00      08/07/00        569-0568370           $173,343     current

569-0504938     06/25/01      07/16/01        569-0565814           $109,521     current

TOTAL The Mortgage Source: 2 Loans                                 $282,864

*Original loan amount or loan amount for the loans refinanced by SHYA.




                                          Page 39                                2004-SE-1002
Appendix C




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2004-SE-1002     Page 40
                                                                               Appendix D

Loans Originated Under
Employee Lease Agreements
              P&L Financial – August 4, 2000 Employee Lease Agreement
         Current, Defaulting & Foreclosed Insured Loans (Recommendation 1D.)


                                             Refinanced
 FHA Case      Closing    Endorsement       Case Number           Mortgage    Loan Status
  Number        Date         Date           (if applicable)       Amount *     12/11/03


431-3463115   08/07/00       09/14/00      431-3662646             $ 82,566      current
431-3471163   08/23/00       10/03/00      431-3731427             $131,425      current


431-3474521   08/23/00       01/16/01      431-3674908             $144,591      current
431-3486696   10/11/00       11/07/00                              $135,230    in default
                                           431-3614638
                                           then to
                                           431-3881503
                                           then to
431-3489482   11/08/00       01/03/01      431-3982601             $120,472       current
                                                                               foreclosure
431-3502928   12/08/00       01/04/01                              $173,343   commenced
                                                                              prior default,
431-3516559   01/30/01       02/21/01                              $100,916   now current
431-3516650   02/28/01       03/28/01       431-3789541             $78,828       current
431-3528216   03/13/01       04/23/01       431-3900537            $166,374       current
431-3531868   03/01/01       08/24/01                              $168,617       current
                                                                              prior default,
431-3544957   03/30/01       03/30/01                              $142,980   now current
431-3550707   04/18/01       05/17/01                              $161,994       current
431-3596796   07/03/01       11/09/01                              $149,651       current
431-3622771   08/15/01       01/28/02                              $146,697       current
                                                                              prior default,
431-3628404   09/26/01       11/29/01                              $132,034   now current


  *Original loan amount or loan amount for the loans refinanced by SHYA.



                                        Page 41                                 2004-SE-1002
Appendix D




                                               Refinanced
 FHA Case       Closing     Endorsement       Case Number           Mortgage   Loan Status
  Number         Date          Date           (if applicable)       Amount *    12/11/03
431-3656831     11/15/01      12/07/01                              $177,219     current
431-3665906     11/28/01      12/27/01                              $157,278     current
431-3686804     12/26/01      02/07/02                              $139,806     current
431-3699498     02/05/02      02/20/02                              $121,842     current
431-3724297     03/21/02      04/05/02                              $100,992     current
431-3735412     06/28/02      08/20/02                              $173,093     current
431-3760583     06/26/02      08/16/02                              $130,826     current
431-3765408     06/28/02      07/31/02                              $142,759     current
431-3771767     07/01/02      07/24/02                              $151,620     current
431-3773876     10/17/02      11/21/02                              $157,528     current
431-3785317     08/30/02      11/30/02                              $151,738     current
431-3826956     11/27/02      02/06/03                              $135,351     current
431-3841273     11/22/02      01/13/03                              $ 91,083     current
431-3862714     01/29/03      04/18/03                              $155,099     current
431-3863834     04/30/03      05/29/03                              $138,868     current
431-3866479     03/19/03      06/04/03                              $108,300     current
431-3879408     02/28/03      07/01/03                              $ 94,906     current
431-3891099     03/18/03      04/01/03                              $181,437     current
431-3912958     05/29/03      07/08/03                              $156,545     current
431-3922932     05/07/03      06/19/03                              $135,091     current
431-3931406     05/28/03      07/01/03                              $137,458     current
561-7149449     10/31/00      11/15/00        561-7356616           $129,462   foreclosed
569-0515506     09/28/01      12/26/01                              $108,709     current
569-0531970     02/27/02      05/10/02                              $144,338     current
569-0545979     07/31/02      10/08/02                              $109,026     current

                                                                                foreclosure
569-0553171     12/04/02      02/05/03                              $115,324    commenced

TOTAL P&L: 41 Loans                                               $5,581,416

*Original loan amount or loan amount for the loans refinanced by SHYA.



2004-SE-1002                              Page 42
                                                                                        Appendix D




                Diverse Lending – April 23, 2001 Employee Lease Agreement
                Current & Defaulting Insured Loans (Recommendation 1D.)

                                              Refinanced
 FHA Case       Closing    Endorsement       Case Number          Mortgage         Loan Status
  Number         Date         Date           (if applicable)      Amount *          12/11/03
431-3569988    04/27/01       06/14/01                             $ 91,665             current
431-3688000    12/17/01       02/07/02                             $129,369             current
561-7405571    12/03/01       01/11/02                             $151,452             default
569-0514914    09/17/01       03/11/02                             $127,006             current

TOTAL Diverse Lending: 4 Loans                                    $499,492




                 LS Financial – March 1, 2001 Employee Lease Agreement
                      Current Insured Loans (Recommendation 1D.)


                                              Refinanced
 FHA Case       Closing    Endorsement       Case Number           Mortgage            Loan Status
  Number         Date         Date           (if applicable)       Amount *             12/11/03
431-3555024    04/09/01       05/29/01                              $136,852             current
431-3681270    11/30/01       12/21/01                              $121,946             current

TOTAL LS Financial: 2 Loans                                       $258,798

              *Original loan amount or loan amount for the loans refinanced by SHYA.




                                           Page 43                                       2004-SE-1002
Appendix D




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2004-SE-1002     Page 44
                                                                                  Appendix E

Distribution Outside of HUD

The Honorable Susan M. Collins, Chairman, Committee on Government Affairs
The Honorable Joseph Lieberman, Ranking Member, Committee on Government Affairs
The Honorable Thomas M Davis, III, Chairman, Committee on Government Reform
The Honorable Henry A. Waxman, Ranking Member, Committee on Government Reform
Elizabeth Meyer, Senior Advisor, Subcommittee on Criminal Justice
Andy Cochran, House Committee on Financial Services
Clinton C. Jones, Senior Counsel, Committee on Financial Services
Kay Gibbs, Committee on Financial Services
Mark Calabria, Committee on Banking, Housing, and Urban Affairs
W. Brent Hall, U.S. General Accounting Office
Steve Redburn, Chief Housing Branch, Office of Management and Budget
Linda Halliday, Department of Veterans Affairs, Office of Inspector General




                                      Page 45                                     2004-SE-1002