Issue Date
March 15, 2005
Audit Case Number
2005-AT-1007
TO: John Weicher, Assistant Secretary for Housing-Federal Housing
Commissioner, H
FROM:
Sonya D. Lucas
Acting Regional Inspector General for Audit, 4AGA
SUBJECT: Interstate Financial Mortgage Group Corporation
Non-Supervised Direct Endorsement Lender
Miami, FL
HIGHLIGHTS
What We Audited and Why
We audited Interstate Financial Mortgage Group Corporation (Interstate) in
Miami, FL. Interstate is a non-supervised direct endorsement lender approved by
the U.S. Department of Housing and Urban Development (HUD) to originate and
approve Federal Housing Administration-insured single-family mortgages. We
selected Interstate for review because of risk factors associated with defaulted loans.
The audit objectives were to determine whether Interstate: (1) complied with
HUD regulations, procedures, and instructions in the origination and underwriting
of Federal Housing Administration-insured single-family mortgages, and
(2) implemented its quality control plan as required. We reviewed a sample of 18
loans to accomplish our objectives.
What We Found
Interstate did not follow HUD requirements when originating and approving 15
Federal Housing Administration-insured loans totaling $1,599,281. Fifteen of the
18 loans we reviewed had problems. All 15 loans contained underwriting
deficiencies that, taken as a whole, should have led a prudent person to not
approve the loan. Interstate approved the loans based on inaccurate employment,
income and gift documentation, and other deficiencies. This occurred because
Interstate did not exercise due care in originating and underwriting loans,
primarily by not clarifying inconsistencies in the loan files or adequately
following up to verify borrower income and employment histories. Interstate also
improperly allowed independent loan officers to originate loans and maintained
no supporting documentation to ensure HUD that interest rates, loan discount
points, and other fees were appropriately charged. These deficiencies increased
HUD’s risk to the Federal Housing Administration insurance fund.
Interstate did not fully implement its quality control plan. Interstate did not
conduct the required number of quality control reviews, including early defaulted
loans and rejected loan applications, nor ensure that immediate corrective action
was taken when deficiencies were identified by its contractor. Interstate’s quality
control plan was also incomplete, as it did not include all required elements. We
attribute these deficiencies to Interstate’s disregard of HUD requirements and
instructions. As a result, HUD has no assurance of the accuracy, validity, and
completeness of Interstate’s loan origination and underwriting operations.
What We Recommend
We recommend that the Assistant Secretary for Housing-Federal Housing
Commissioner require Interstate to: (1) indemnify HUD against future losses on
10 loans totaling $1,057,905, (2) reimburse HUD for a loss already incurred of
$36,951 on one property, and (3) reimburse HUD for a loss, if applicable, on
another property for which HUD paid a claim of $110,866. We recommend that
HUD require Interstate to stop using independent loan officers to originate
Federal Housing Administration loans and maintain documentation to justify
interest rates, loan discount points, or other fees charged. We further recommend
that HUD take appropriate measures to ensure that Interstate conducts required
quality control reviews, corrective action is taken and documented for all reported
deficiencies, and the written quality control plan complies with HUD
requirements. Finally, we recommend that HUD take administrative action, as
appropriate, up to and including civil monetary penalties.
Auditee’s Response
We discussed our review results with Interstate and HUD officials during the
audit. We provided a copy of the draft report to Interstate officials on
January 25, 2005, for their comments and discussed the report with them at the
exit conference on January 27, 2005. Interstate provided written comments on
February 11, 2005.
2
Interstate expressed concerns regarding finding 1 that it did not exercise due care
in originating and underwriting loans we questioned and therefore did not believe
it needed to indemnify those loans. Interstate generally agreed with our
recommendations for finding 2. We commend Interstate for being responsive and
taking prompt action to correct and improve its quality control process. We
believe that Interstate's new Quality Control Plan, if correctly implemented and
taking into consideration our evaluation and HUD's suggestions, will enable
Interstate to better ensure the accuracy, validity, and completeness of its loan and
underwriting operations.
The complete text of the auditee’s response along with our evaluation of that
response can be found in appendix B of this report.
3
TABLE OF CONTENTS
Background and Objectives 5
Results of Audit
Finding 1: Interstate Did Not Follow HUD Requirements When Originating 6
Approving Loans
Finding 2: Interstate Did Not Fully Comply With Federal Housing 10
Administration Quality Control Requirements
Scope and Methodology 14
Internal Controls 15
Appendixes
A. Schedule of Questioned Costs and Funds To Be Put to Better Use 17
B. Auditee Comments and OIG’s Evaluation 18
C. Narrative Loan Deficiencies 46
D. Summary of Loan Deficiencies 62
4
BACKGROUND AND OBJECTIVES
The U.S. Department of Housing and Urban Development (HUD) approved Interstate Financial
Mortgage Group Corporation (Interstate) as a Title II non-supervised lender on
September 22, 1999, to originate, purchase, hold, and service or sell loans or insured mortgages.
Additionally, HUD approved Interstate to be a direct endorsement lender to underwrite and close
Federal Housing Administration loans without prior HUD review or approval.
Interstate originated and underwrote 751 Federal Housing Administration-insured loans with
mortgages totaling $83.1 million, which had beginning amortization dates (defined as 1 month
prior to when the first principal and interest payments are due) between April 1, 2002, and
March 31, 2004. According to HUD’s Neighborhood Watch system, 37 of the loans defaulted
within the first 2 years of origination.
The audit objectives were to determine whether Interstate: (1) complied with HUD regulations,
procedures, and instructions in the origination and underwriting of Federal Housing
Administration-insured single-family mortgages, and (2) implemented its quality control plan as
required.
5
RESULTS OF AUDIT
Finding 1: Interstate Did Not Follow HUD Requirements When
Originating and Approving Loans
Interstate did not follow HUD requirements when originating and approving 15 Federal Housing
Administration-insured loans totaling $1,599,281. Fifteen of the 18 loans we reviewed had
problems. All 15 loans contained underwriting deficiencies that, taken as a whole, should have
led a prudent person to not approve the loan. Interstate approved the loans based on inaccurate
employment, income, and gift documentation, and other deficiencies. This occurred because
Interstate did not exercise due care in originating and underwriting loans, primarily by not
clarifying inconsistencies in the loan files or adequately following up to verify borrower income
and employment histories. Interstate also improperly allowed independent loan officers to
originate loans and maintained no supporting documentation to ensure HUD that interest rates,
loan discount points, and other fees were appropriately charged. These deficiencies increased
HUD’s risk to the Federal Housing Administration insurance fund.
Inaccurate Employment,
Income, and Gift
Documentation
HUD Handbook 4000.4, Rev-1, paragraphs 2-1 and 2-5, states that for the
authority to participate in the Direct Endorsement Program is a privilege;
therefore, a direct endorsement lender must conduct its business operations in
accordance with accepted sound mortgage lending practices, ethics, and
standards. Lenders are to obtain and verify information with at least the same
care that would be exercised if the lender were originating a mortgage entirely
dependent on the property as security to protect its investment.
Interstate approved a total of 10 loans based on inaccurate employment, income,
and gift documentation. We confirmed with employers and borrowers that
Internal Revenue Service W-2s, pay stubs, and employment verification forms
were inaccurate. Interstate approved loans in which the borrower never worked
for the employer or the employer did not exist. Had Interstate properly verified
borrower employment and income with the employer or other sources, the
underwriter would have discovered the inaccuracies, and the loans would not have
been approved. In addition, we confirmed with donors that two gifts were
actually loans to the borrower, and in another instance, the seller provided a gift
and made it appear to be from the donor.
6
Loan Origination and
Underwriting Deficiencies
HUD Handbook 4155.1, Rev-4, Chg-1, chapters 2 and 3, require lenders to
determine a borrower’s ability and willingness to repay the mortgage debt and,
thus, limit the probability of default or collection difficulties. Lenders should
evaluate the stability and adequacy of income, funds to close, credit history,
qualifying ratios, and compensating factors. They must ensure the application
package contains sufficient documentation to support their decision to approve the
mortgage loan.
Mortgagee Letter 2003-07 states if a property is re-sold 90 days or fewer
following the date of acquisition by the seller, the property is not eligible for a
mortgage insured by the Federal Housing Administration.
Our review identified several loan origination and underwriting deficiencies with
the 15 loans. The review found that Interstate did not:
• Verify borrower source of funds to close (12 loans),
• Ensure compliance with HUD borrower credit requirements (10 loans),
• Verify employment information provided by borrower (10 loans),
• Clarify inconsistent data among loan documents (six loans),
• Provide valid or supported compensation factors when HUD’s debt to
income ratios of 29 and 41 percent were exceeded (five loans), or
• Ensure compliance with HUD requirements to resell properties
(two loans).
The deficiencies noted above are not independent of one another, as many of the
loan files contained more than one deficiency. Details of the deficiencies
identified on each loan reviewed, including specific HUD requirements not met,
are included in appendix C. Appendix D provides a chart summarizing the loan
processing deficiencies.
Other Violations
Interstate improperly allowed 16 independent loan officers to originate 121 of 678
Federal Housing Administration loans from January 2002 to August 2004.
Though Mortgagee Letter 95-36 permits lenders to contract for certain loan
origination functions, the loan officer function may not be contracted out.
Interstate reported earnings for independent loan officers on Internal Revenue
Service Form 1099 and reported earnings for loan officers employed by Interstate
7
on Internal Revenue Service Form W-2. The Internal Revenue Service Form
1099 is used to report miscellaneous income for payments or services performed
by independent contractors, and the Internal Revenue Service Form W-2 is used
to report wages and other compensation to employees. Interstate believes the
only difference between an independent loan officer and a loan officer employed
by Interstate is their tax status. In addition, the employment package for the
independent loan officer contains no assurances to Interstate and HUD that they
will work solely for Interstate or contains a clause to prevent possible conflict-of-
interest situations.
In addition, according to 24 Code of Federal Regulation, part 202.12(a)(8),
lenders are required to maintain records on pricing information, satisfactory to the
Secretary of Housing and Urban Development, that would allow for reasonable
inspection by HUD for a period of at least 2 years. Our review did not find
sufficient documentation to allow HUD to readily determine the appropriateness
of the loan interest rates and discount points charged by Interstate. HUD also
cannot ensure that loan discount points lowered the interest rate charged by
Interstate and that other fees charged were proper. Interstate was unaware of this
requirement.
Prior HUD Review
HUD conducted a review of Interstate in November 2002. HUD reported that
Interstate
• Used false income, employment, asset, occupancy, and gift information to
originate and approve Federal Housing Administration-insured mortgages.
• Failed to maintain documentation identifying the source or adequacy of
funds used for the down payment and closing costs.
• Failed to provide sufficient compensating factors when front-end ratios
were exceeded.
• Failed to resolve conflicting information in the loan file.
The review resulted in Interstate indemnifying 17 Federal Housing
Administration loans. Our audit results indicate that these same issues continue to
occur.
Conclusion
Interstate disregarded HUD requirements and did not exercise sound judgment
and due diligence in the processing and underwriting of loans to be insured by the
Federal Housing Administration. In 15 loans, Interstate did not exercise the care
expected of a prudent lender by using inaccurate employment, income, and gift
documentation. Interstate failed to properly verify employment information or
the borrower’s source of funds to close, did not provide valid or supported
compensation factors for excessive debt to income ratios, did not properly
8
evaluate borrowers’ debts, did not clarify important file discrepancies, and
allowed resale properties to be Federal Housing Administration-insured in
violation of HUD requirements. Interstate also improperly allowed independent
loan officers to originate Federal Housing Administration loans and did not
maintain documentation to justify that interest rates, loan discount points, and
other fees were appropriately charged. The deficiencies occurred because
Interstate failed to exercise due care in originating and approving loans. These
deficiencies increased HUD’s risk to the Federal Housing Administration
insurance fund and resulted in actual losses to HUD.
Recommendations
We recommend that the Assistant Secretary for Housing-Federal Housing
Commissioner:
1A. Require Interstate to indemnify HUD against future losses for the 10
actively insured loans totaling $1,057,905 for which Interstate did not
follow HUD requirements.1 Appendix D lists case numbers for the loans
included in this recommendation.
1B. Require Interstate to reimburse HUD $36,951 for losses already incurred.2
Appendix D lists the case number for the loan included in this
recommendation.
1C. Require Interstate to reimburse HUD $110,866 for claims already incurred.
Appendix D lists the case number for the loan included in this
recommendation.
1D. Require Interstate to stop using independent loan officers to originate
Federal Housing Administration loans.
1E. Require Interstate to maintain in its Federal Housing Administration loan
files the daily rate sheet or other documentation to justify the interest rate,
loan discount points, or other fees charged.
1
According to Neighborhood Watch, as of January 25, 2005, 3 of the 15 loans have terminated Federal Housing
Administration insurance without a claim. (Case numbers 092-9106318, 092-9584181, and 092-9604022)
Because these loans no longer represent a risk to the Federal Housing Administration insurance fund, we have
removed these 3 loans from our recommendation.
2
As of January 25, 2005, the claimed amount paid by HUD for case number 092-9264929 increased to $36,951.
9
Finding 2: Interstate Did Not Fully Comply With Federal Housing
Administration Quality Control Requirements
Interstate did not fully implement its quality control plan. Interstate did not conduct the required
number of quality control reviews, including early defaulted loans and rejected loan applications,
nor ensure that immediate corrective action was taken when deficiencies were identified by its
contractor. Interstate’s quality control plan was also incomplete, as it did not include all required
elements. We attribute these deficiencies to Interstate’s disregard of HUD requirements and
instructions. As a result, HUD has no assurance of the accuracy, validity, and completeness of
Interstate’s loan origination and underwriting operations.
Ten Percent of Federal Housing
Administration Loans Not
Reviewed for Quality Control
According to HUD Handbook 4060.1, lenders may choose to review the lesser of
10 percent of all loans closed on a monthly basis or a random sample that
provides a 95 percent confidence level with 2 percent precision. A change to the
Handbook, dated November 2003, requires lenders originating 7,000 or fewer
Federal Housing Administration loans per year to review 10 percent of the loans.
In addition, loans must be reviewed within 90 days of the closing of the loan.
Interstate uses an independent contractor to perform quality control reviews.
Interstate’s quality control plan requires that it provide the contractor with a
monthly list of closed loans. From these lists, the contractor selects loans for
quality control review. For the loans selected, the contractor requests the loan
files from Interstate.
Interstate did not obtain quality control reviews on 10 percent of closed loans for
the 3 months we tested. In May 2003, Interstate closed 89 loans. As of
December 1, 2004, only seven of the nine required reviews had been performed.
Interstate could not locate the two files to provide them to the contractor for
review. In February and April 2004, Interstate closed 23 and 25 Federal Housing
Administration loans, respectively. No quality control reviews were conducted
for these 2 months. The contractor stated that Interstate never provided the list of
closed loans for these 2 months. Interstate did provide the list of closed loans in
December 2004 after a second request from the contractor. Interstate still needs to
provide the contractor with the loan files selected for quality reviews.
10
Since Interstate did not ensure that 10 percent of closed loans had a quality
control review performed, HUD cannot be assured that a representative sample of
loans has been reviewed against HUD requirements. In addition, Interstate has
not ensured that quality control reviews are conducted within 90 days of closing,
as HUD requires.
Early Default And Rejected
Loans Not Reviewed For
Quality Control
HUD Handbook 4060.1 requires performing quality control reviews of all loans
defaulting within 6 months of closing. The Handbook also requires lenders to
perform quality control reviews on 10 percent of rejected loans. In November
2002, HUD conducted a review and found that Interstate did not ensure that
quality control reviews were performed on all loans defaulting within 6 months of
closing. Since this review, Interstate has only twice provided a monthly list of
defaulted loans to the contractor. In addition, Interstate does not provide a list of
rejected loans to the contractor to perform quality control reviews. Interstate
informed us that they have no plans to submit such information to the contractor
for review.
Quality control reviews of early default and rejected loans are important since
such reviews provide valuable information to management regarding the causes of
defaults and rejections and may disclose underwriting deficiencies associated with
the loan. In addition, such reviews may disclose indicators of fraudulent activities
or other significant discrepancies that lenders are required to report to HUD.
Required Corrective Actions
Were Not Taken
HUD Handbook 4060.1 requires that prompt action to correct material
deficiencies be formally documented by citing each deficiency, identifying the
cause of the deficiency, and providing management’s response or actions taken.
In addition, lenders are required to report any violations of law or regulation, false
statements, or program abuses to HUD within 60 days of initial discovery.
HUD’s prior review found that Interstate failed to complete follow-up procedures
to explain discrepancies found by the quality control contractor and to notify
HUD of violations of law, false statement, or program abuse. We reviewed two
quality control reports provided by the contractor and found that Interstate did not
take corrective actions. In one example, Interstate told the contractor it does not
11
conduct post-closing quality control reviews and will not verify the information.
In another example, the contractor noted the existence of fraudulent tax returns on
August 30, 2004, and reported this to Interstate on October 11, 2004. However,
Interstate did not report this to HUD.
Written Quality Control Plan Did
Not Contain Required Elements
HUD Handbook 4060.1 provides that as a condition of HUD approval, lenders
must have and maintain a quality control plan for the origination and servicing of
insured mortgages. The plan must be a prescribed function of the lender’s
operations and assure that the lender maintains compliance with HUD
requirements and its own policies and procedures.
HUD’s prior review found that Interstate had a quality control plan that did not
comply with HUD requirements. Interstate updated its written quality control
plan in May 2004. However, the plan does not contain the required elements
prescribed by HUD.
For example, the quality control plan does not contain the following required
elements:
Personnel are trained to conduct thorough quality control reviews.
A system of review exists to help identify patterns and look for cases
similar to those that have gone into early payment default.
Appraised values have been established using reasonable comparables,
reasonable adjustments, and in expectation of repairs required to meet
minimum safety and soundness requirements.
Federal Housing Administration loans selected for quality control review
are reviewed for compliance against HUD requirements.
Federal Housing Administration loans have been closed and funds
disbursed in accordance with lender underwriting and subsequent closing
instructions.
Federal Housing Administration loans selected for quality control review
and exceeding the qualifying ratio limits have acceptable documented
compensating factors.
12
Conclusion
Interstate’s written quality control plan does not meet HUD requirements. We
attribute this to Interstate disregarding its responsibilities to ensure that quality
control reviews were conducted and deficiencies were corrected. HUD reported
this matter to Interstate. Interstate is unable to ensure the accuracy, validity, and
completeness of its loan origination and underwriting operations.
Recommendations
We recommend that the Assistant Secretary for Housing-Federal Housing
Commissioner:
2A. Take appropriate measures to ensure Interstate conducts required quality
control reviews, corrective action is taken and documented for all reported
deficiencies, and the written quality control plan complies with HUD
requirements.
2B. Take administrative action, as appropriate, up to and including civil
monetary penalties.
13
SCOPE AND METHODOLOGY
To achieve our audit objectives we reviewed:
• Applicable laws, regulations, and other HUD program requirements, and
• Files and documents from HUD and Interstate.
We chose a non-representative method to select the loans for review. This method allowed us to
select Federal Housing Administration-insured loans with certain characteristics. This approach
enabled us to focus our review efforts on loans where there is a greater inherent risk and/or risk
of noncompliance or abuse to the Federal Housing Administration insurance fund.
We reviewed 18 Federal Housing Administration-insured loans that had defaulted within the first
2 years from origination. In addition, we reviewed two loans that had a quality control review
conducted.
In addition, we interviewed appropriate officials and staff from Interstate and HUD’s Atlanta
Single Family Homeownership Center. We also interviewed borrowers, employers, and gift
donors to verify the information in the files.
We performed our review between May and November 2004. The audit covered the period
April 1, 2002, through March 31, 2004, but we extended the period as necessary to achieve the
audit objectives.
We performed our review in accordance with generally accepted government auditing standards.
14
INTERNAL CONTROLS
Internal Control is an integral component of an organization’s management that provides
reasonable assurance that the following objectives are being achieved:
• Effectiveness and efficiency of operations,
• Reliability of financial reporting, and
• Compliance with applicable laws and regulations.
Internal controls relate to management’s plans, methods, and procedures used to meet its
mission, goals, and objectives. Internal controls include the processes and procedures for
planning, organizing, directing, and controlling program operations. They include the systems
for measuring, reporting, and monitoring program performance.
Relevant Internal Controls
We determined the following internal controls were relevant to our audit objectives:
• Program Operations. Policies and procedures that management has in place
to reasonably ensure that the loan origination process complies with HUD
program requirements and that the objectives of the program are met.
• Validity and Reliability of Data. Policies and procedures that management
has implemented to reasonably ensure that valid and reliable data are
obtained, maintained, and used during the mortgage loan origination
process.
• Compliance with Laws and Regulations. Policies and procedures that
management has implemented to reasonably ensure that its loan origination
process is administered in accordance with applicable laws and regulations.
We assessed the relevant controls identified above.
A significant weakness exists if management controls do not provide reasonable
assurance that the process for planning, organizing, directing, and controlling
program operations will meet the organization’s objectives.
15
Significant Weaknesses
Based on our review, we believe that the following items are significant weaknesses:
Interstate did not follow HUD requirements when originating and approving 15 Federal
Housing Administration–insured loans (see finding 1).
Interstate has not implemented its quality control plan in accordance with HUD
requirements (see finding 2).
16
APPENDIXES
Appendix A
SCHEDULE OF QUESTIONED COSTS
AND FUNDS TO BE PUT TO BETTER USE
Recommendation Funds To Be Put
Number Ineligible 1 to Better Use 2
1A $ 1,057,905
1B $ 36,951
1C 110,866
Total $ 147,817 $ 1,057,905
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
polices or regulations.
2/ Funds to be put to better use are quantifiable savings that are anticipated to occur if an
Office of Inspector General (OIG) recommendation is implemented resulting in reduced
expenditures at a later time for the activities in question. This includes 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.
17
Appendix B
AUDITEE COMMENTS AND OIG’S EVALUATION
Ref to OIG Evaluation Auditee Comments
18
Comment 1
19
Comment 1
Comment 1
Comment 2
20
Comment 1
Comment 3
Comment 4
21
Comment 5
Comment 6
22
Comment 7
Comment 8
Comment 9
23
Comment 9
Comment 10
Comment 11
Comment 12
Comment 13
24
Comment 14
Comment 15
Comment 16
Comment 17
Comment 17
Comment 18
25
Comment 19
Comment 20
Comment 18
Comment 21
Comment 22
Comment 23
Comment 24
Comment 25
26
Comment 26
Comment 27
Comment 27
Comment 28
Comment 29
Comment 30
Comment 31
27
Comment 32
Comment 33
Comment 34
Comment 35
Comment 38
Comment 36
Comment 37
28
Comment 38
Comment 41
Comment 39
Comment 40
Comment 41
Comment 42
Comment 43
29
Comment 44
Comment 45
Comment 46
Comment 47
Comment 48
30
31
OIG Evaluation of Auditee Comments
I. FINDINGS BY HUD
Comment 1
A. Changes in the Corporate Structure of IFMG
B. Review of FHA Loans for Quality Control
C. IFMG Quality Control Procedures
Interstate reported significant changes to its corporate structure and to its Quality
Control Plan.
We agree with Interstate that the hiring of knowledgeable staff is vital in the
processing and underwriting of quality loans. The development of a written
Quality Control Plan to comply with HUD requirements is also vital in assuring
HUD that Interstate's loan origination and underwriting operations will be
accurate, valid, and complete. It is in the implementation and application of the
plan that HUD can evaluate whether Interstate's loan origination and
underwriting operations meet HUD requirements.
II. QUALITY CONTROL
Comment 2
B. Review of FHA Loans for Quality Control
Interstate retained a new third party independent contractor to perform the
quality control reviews.
Quality control reviews conducted in accordance with HUD requirements is the
responsibility of Interstate. Among the requirements is to review at least 10
percent of all Federal Housing Administration loans, all loans that default within
the first six payments, and at least 10 percent of all rejected loans. These
reviews must be conducted within 90 days of loan closing.
C. IFMG Quality Control Procedures
1. Training
Comment 3
Interstate agreed with recommendation 2A and modified its written Quality
Control Plan to ensure that personnel are trained to conduct thorough quality
control reviews.
32
2. Early Default Pattern Detection and Corrective Action
Comment 4
Interstate modified its written Quality Control Plan to ensure that all loans that
have gone into default within the first 18 months will be analyzed. Section 6-6D
of HUD Handbook 4060.1 requires that lenders 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.
3. Appraisals
Comment 5
Interstate agreed with recommendation 2A and modified its written Quality
Control Plan to ensure that appraised values should be established using
reasonable comparables and adjustments and take into account any expectation
of repairs required to meet minimum safety and soundness requirements.
4. Compliance and Disbursement in Accordance with HUD Requirements
Comment 6
and Underwriting
Interstate modified its written Quality Control Plan to ensure that all Federal
Housing Administration loans must comply with HUD requirements as well as
underwriting and subsequent closing instructions.
Interstate's written Quality Control Plan should also include assurances that
Federal Housing Administration loans selected for quality control review are
reviewed for compliance against HUD requirements. Additionally, those loans
exceeding the qualifying ratio limits must have acceptable and documented
compensating factor(s).
5. Civil Monetary Sanctions
Comment 7
Interstate requests that HUD not impose civil monetary sanctions based on
changes it made to its corporate structure since the time of the audit and its
willingness to indemnify HUD for various loans.
Recommendation 2B has been revised. We will refer to HUD to determine
whether administrative action against Interstate is warranted.
33
III. LOAN FILES
Comment 8
Interstate agrees to reimburse HUD in the amounts of $36,755 for a loss
(recommendation 1B) and $110,866 for a claim (recommendation 1C) already
incurred on two Federal Housing Administration-insured properties. An update
from HUD's computer system indicates that the loss to the insured property
increased to $36,951.
III. LOAN FILES
Comment 9
Interstate concurred with recommendation 1D and agreed to no longer use
independent loan officers and will not do so in the future to originate Federal
Housing Administration loans. Interstate had interpreted Section 2-10 of HUD
Handbook 4700.2, Title I Lender Approval Handbook, to allow loan officers to
be 1099 employees.
HUD approved Interstate to be a Title II non-supervised lender, who may
originate, purchase, hold, service or sell loans or insured mortgages. A Title I
lender, on the other hand, may originate and receive insurance on property
improvement loans or loans for manufactured housing.
III. LOAN FILES
Comment 10
Interstate agreed with recommendation 1E to maintain in its loan files
documentation identifying the interest rate, loan discount points or other fees
charged. Interstate needs to ensure that the documentation justifies and not just
identifies the interest rate, loan discount points or other fees charged.
Case Number 092-9017524
Comment 11
Based on the verification of employment form, credit report, and Florida
Secretary of State records, Interstate reasoned there is nothing from the face of
the information to believe that the employer or its address were inaccurate.
However, our site visit to the premises verified that no such employer existed at
the time. Therefore, it is questionable how Interstate and the credit reporting
agency was able to independently obtain the verification. In addition, the
corporation name on the State record is different than that listed on the
verification of employment form. Our discussion with the employer listed on
the State's record confirmed that they were not associated with the employer on
the verification of employment form and they did not employ the borrower.
34
Comment 12 Case Number 092-9017524
Interstate believed that the questioned deposits may have reflected alimony or
child support that does not have to be disclosed or considered for underwriting
purposes. However, Section 2-10 of HUD Handbook 4155.1, Rev-4, Change 1,
requires that all funds for the borrower's investment in the property must be
verified. This includes the $2,000 earnest money deposit, which the borrower
paid on February 26, 2002. According to borrower's bank statements, the
borrower made deposits of $3,725 from February 20, 2002 to February 28, 2002
despite a claimed monthly salary of $2,590. Interstate did not verify the source
of funds for the earnest money deposit and thus cannot assure HUD that the
funds were from an acceptable source. In addition, though the overdraft fees are
minor, the repetition of such fees may reflect borrower's lack of discipline in
managing her cash resources.
Comment 13 Case Number 092-9017524
Since the borrower had provided a written explanation of the collection accounts
and they were fully paid, Interstate believed that the borrower was not an
inappropriate credit risk. Section 2-3C of HUD Handbook 4155.1, Rev-4,
Change 1, does not require that collection accounts be paid off as a condition for
loan approval, but the existence of collections indicate the borrower's regard for
credit obligations and must be considered in the analysis of the borrower’s
creditworthiness.
Comment 14 Case Number 092-9017524
Interstate stated that the "Coral Gables, FL 33134" listed on the pay stub was not
identified as the employer's address and therefore was not inconsistent with the
address listed on the loan application. However, the copy of the pay stub
contained in the loan file submitted to HUD clearly identifies the name of the
employer with the Coral Gables address. Interstate failed to question the
inconsistency of the employment address between the pay stub and the loan
application. Interstate also did not address borrower's relatively high annual
salary as an accounts payable clerk.
35
Case Number 092-9017524
Comment 15
Interstate equated the statutory investment requirement as the minimum required
investment. Mortgagee Letter 98-29, Single Family Loan Production- Mortgage
Calculation Simplification specifies a method for calculating the minimum
required investment. According to this requirement, we calculated the minimum
required investment to be $4,584. Since the borrower only contributed $3,935,
Interstate did not ensure that the borrower provided the minimum required
investment.
Case Number 092-9017524
Comment 16
For the above reasons, Interstate feels that it should not have to indemnify this
loan. Based on our evaluation of Interstate's responses, we maintain our position
that HUD should require Interstate to indemnify this loan. In addition, Interstate
did not comment on its failure to provide valid compensating factors for
exceeding the qualifying ratio as required by Section 2-13 of HUD Handbook
4155.1, Rev-4, Change 1.
Case Number 092-9091627
Comment 17
Though we verified with the borrower that the real estate agent handled the loan
process (i.e., obtaining borrower's personal and financial data and documentation
for loan approval), Interstate believes that the borrower's recollection is
inaccurate. Given the borrower's statement, we do not believe the interviewer's
signature on the loan application sufficiently proves that the interviewer met
with the borrower and was not instead provided with the loan documents from
the real estate agent, who is an interested third party.
In addition, Interstate believes there was no objective information to question the
accuracy of the employment information. We disagree. Had Interstate met with
the borrower, they would have known that the employment information as stated
on the loan application was inaccurate. The borrower informed the real estate
agent of the inaccurate employment information, but was told it had to be this
way for the loan to qualify. Further, the borrower certified that he never worked
for the claimed employer. When shown the verification of employment form
and pay stub, the borrower stated that they were false.
36
Case Number 092-9091627
Comment 18
Interstate shared that the borrower's inaccurate personal asset information was
not considered in the approval process due to the subjective nature of the
valuations. In addition, Interstate believed the inconsistency with the borrower's
marital status was resolved when the mortgage was signed by both the borrower
and his wife.
We question whether Interstate met with the borrower. While we agree that the
valuations are subjective, the personal asset information provided to HUD was
inaccurate. In addition, the borrower informed us that he was never married to
the woman whose name is on the mortgage.
Case Number 092-9091627
Comment 19
Interstate disagreed that it did not ensure that the borrower demonstrated
financial capability. Section 2-10 of HUD Handbook 4155.1, Rev-4, Change 1,
requires that all funds for the borrower's investment in the property must be
verified. Though the loan file included a source of funds statement indicating a
monthly savings of $742, the loan file also contained the borrower's bank
statement that does not support this amount. Interstate should have reconciled
the data from both statements. In addition, based on our verification with the
borrower, the income on the source of funds statement is inaccurate.
Case Number 092-9091627
Comment 20
Interstate did not comment on whether or not it failed to document compensating
factors to justify the excess ratio. Section 2-12 of HUD Handbook 4155.1,
Rev-4, Change 1, states that a ratio exceeding 29 percent may be acceptable if
significant compensating factors are presented.
Case Number 092-9091627
Comment 21
Interstate equated the statutory investment requirement as the minimum required
investment. Mortgagee Letter 98-29, Single Family Loan Production-Mortgage
Calculation Simplification specifies a method for calculating the minimum
required investment. According to this requirement, we calculated the minimum
required investment to be $2,879. The borrower stated he only invested $2,175
for the earnest money deposit and $300 for fees related to the loan for a total of
$2,475.
37
Case Number 092-9091627
Comment 22
For the above reasons, Interstate feels that it should not have to indemnify this
loan. Based on our evaluation of Interstate's responses, we maintain our position
that HUD should require Interstate to indemnify this loan.
Case Number 092-9106318
Comment 23
Recommendation 1A has been revised to reflect those Federal Housing
Administration loans that have been paid in full.
Case Number 092-9114133
Comment 24
Interstate commented that the verification of employment form and the pay stubs
contained the same consistent employer information. However, the employer
informed us that he did not employ the borrower, did not sign the verification of
employment form, and the information on the pay stub and the verification of
employment form are inaccurate. If Interstate had sent a verification of
employment form to this employer, the inaccurate employment and salary
information would not have been validated. In addition, Interstate did not
comment that the loan application, verification of employment form, and credit
report show the borrower beginning employment in March 2000 when the
employer was not incorporated until March 2001.
Case Number 092-9114133
Comment 25
Interstate stated that none of the documents provided by the borrower and
available to the underwriter called into question the accuracy of the gift letter.
Since Interstate did not contact the donor to confirm the gift information or
conduct Internet searches on the prior residence of the borrower, we agree that
Interstate would not have known that the gift donor was not the borrower's
uncle.
38
Case Number 092-9114133
Comment 26
For the above reasons, Interstate feels that it should not have to indemnify this
loan. Based on our evaluation of Interstate's responses, we maintain our position
that HUD should require Interstate to indemnify this loan. Interstate did not
comment on not properly verifying the borrower's source of funds to close,
analyzing the borrower's credit to ensure that she demonstrated financial
capability and responsibility, verifying questionable employment information, or
reconciling basic personal information.
Case Number 092-9242091
Comment 27 Case Number 092-9264929
As noted on page 6 of their response, Interstate agrees to reimburse HUD for the
loss amount and claim paid by HUD for the two Federal Housing
Administration-insured properties.
Case Number 092-9368468
Comment 28
Interstate did not directly comment on whether it obtained the bank statement in
question, but did agree that the bank account belonged to the borrower.
Section 2-10 of HUD Handbook 4155.1, Rev-4, Change 1, requires that all funds
for the borrower's investment in the property must be verified. The $1,000 used
to pay the earnest money deposit appeared to have come from another one of the
borrower's bank accounts. However, Interstate did not obtain a copy of this
other bank statement to show that the $1,000 came from an acceptable source
and that the borrower had sufficient funds to close. Additionally, after the
$1,000 check cleared, subsequent withdrawals for food items and gas resulted in
five overdraft charges and a negative balance.
Case Number 092-9368468
Comment 29
Interstate did not comment on whether it properly analyzed the borrower's
stability of income, but commented that it had verified all borrower's past
employment.
39
Section 2-6 of HUD Handbook 4155.1, Rev-4, Change 1 requires lenders to
Comment 29
verify the borrower's employment for the most recent 2 full years. Though
Interstate verified the borrower's employment for the most recent 2 full years, it
did not appear to have considered the borrower's stability of employment and
income. At the time of the loan application, the borrower had been with the
employer for a little over one year. Previously, the borrower was employed at
three different jobs spanning between 2-6 months.
Case Number 092-9368468
Comment 30
Interstate responded that according to the appraisal report, two of the
comparables were valued in excess of $87,000. We question why the appraiser
did not use comparables that were the same model (floor plan) as the subject
unit. The data we obtained shows that the sales price of the subject unit
($86,414) is $4,600 higher than that of similar units at similar periods.
Case Number 092-9368468
Comment 31
For the above reasons, Interstate feels that it should not have to indemnify this
loan. Based on our evaluation of Interstate's responses, we maintain our position
that HUD should require Interstate to indemnify this loan. Interstate did not
comment on its failure to resolve conflicting information related to the
borrowers' past rental amount.
Case Number 092-9403894
Comment 32
Interstate learned that the loan has been paid in full and, therefore, no
indemnification is required. As of February 18, 2005, HUD's system does not
indicate that this loan has been paid in full. It reflects that the loan is active and
was reinstated by the borrower.
Case Number 092-9403894
Comment 33
Interstate believed it properly analyzed the borrower's credit to ensure that the
borrower demonstrated financial capability and responsibility.
40
Comment 33 Section 2-3 of HUD Handbook 4155.1, Rev-4, Change 1 states that past credit
performance serves as the most useful guide in determining the attitude toward
credit obligations that will govern the borrower's future actions. This
requirement also states that a borrower whose previous residence was foreclosed
within the previous 3 years is generally not eligible for an insured mortgage.
Documentation in the loan file suggests that the borrower's previous residence
was being foreclosed, which resulted in him filing for bankruptcy in 2000. The
borrower applied for the Federal Housing Administration loan in 2003. In
discharging the bankruptcy, the court also discharged the $94,000 liability the
borrower owed on the property.
Case Number 092-9403894
Comment 34
Interstate equated the statutory investment requirement as the minimum required
investment. Mortgagee Letter 98-29, Single Family Loan Production- Mortgage
Calculation Simplification specifies a method of calculating the minimum
required investment. According to this requirement, we calculated the minimum
required investment to be $2,910. The borrower informed us that besides the
$1,000 in earnest money deposit, he paid $1,653 at closing. He did not pay $275
for the appraisal report or $65 for the credit report, which was paid outside of
closing. Therefore, the borrower’s investment in the property is $2,653, which
is less than the minimum required investment.
Case Number 092-9403894
Comment 35
For the above reasons, Interstate feels that it should not have to indemnify this
loan. Based on our evaluation of Interstate's responses, we maintain our position
that HUD should require Interstate to indemnify this loan. Interstate did not
comment on its failure to verify inconsistent rental payments with the borrower.
Case Number 092-9509172
Comment 36
Interstate believed that since the loan was approved for Loan Prospector
documentation requirements, they did not need to provide compensating factors
to justify the excess qualifying ratios of 31.8 percent and 46.3 percent. Section
2-12 of HUD Handbook 4155.1, REV-4, CHG 1, states that qualifying ratios
exceeding 29 percent or 41 percent, respectively, may be acceptable if
significant compensating factors are presented.
41
Comment 37 Case Number 092-9509172
Interstate stated that there are two credit reports in the file dated May 21, 2003
and June 27, 3003 (date of closing). However, the credit report dated
May 21, 2003, in Interstate's loan file was not in the loan file submitted to HUD.
The one page excerpt of the May 21, 2003, credit report listed the borrower as
having serious delinquencies, a number of delinquent accounts, and
proportionally high balances to credit limits.
Comment 38 Case Number 092-9509172
Since the mortgage was reinstated by the borrower as of March 2004, Interstate
believed the loan is not contributing any risk to the Federal Housing
Administration insurance fund. We believe the present status of a loan does not
dictate its future performance.
In addition, for the above reasons, Interstate feels that it should not have to
indemnify this loan. Based on our evaluation of Interstate's responses, we
maintain our position that HUD should require Interstate to indemnify this loan.
Interstate did not comment on the borrower's inaccurate employment and income
information or its failure to provide a verification of deposit or other
documentation to support the borrower's financial ability to close and make
mortgage payments.
Comment 39 Case Number 092-9511392
Interstate stated that the rental income was from a lease to commence after the
closing date and therefore the rental income would not be reflected in any of the
bank statements or the borrower's tax return.
Section 2 of HUD Handbook 4155.1, Rev-4, Change 1 states that the anticipated
amount of income, and likelihood of its continuance, must be established to
determine the borrower's capacity to repay the mortgage debt. Specifically, the
income of each borrower to be obligated for the mortgage debt must be analyzed
to determine whether it can reasonably be expected to continue through at least
the first 3 years of the mortgage loan. Since the lease of the borrower's other
property is on a monthly basis, there is no guarantee the monthly income from
the lease will continue. There is also no rental history of the property.
42
Comment 39 Therefore, the net rental income may only be considered as a compensating
factor and must be adequately documented by the lender as stipulated by Section
2-7M of the Handbook. Accordingly, we disagree with Interstate for including
the monthly net rental income of $241 when calculating the borrower's monthly
income. Our calculation of qualifying ratios less the net rental income was 34.9
percent and 61.7 percent.
We subsequently learned from the borrower that he moved back into his prior
residence after living in the Federal Housing Administration-insured property for
only 3 or 4 months. This raises a concern of the owner-occupancy of the Federal
Housing Administration-insured property and supports our contention that the
rental income may not be permanent.
Comment 40 Case Number 092-9511392
Interstate did not address our concern that the borrower's employment income
did not appear to be deposited into any of his three bank accounts. Interstate did
note that the borrower's large cash reserve was used as a compensating factor to
justify the excessive ratios. However, we believe the compensating factor used
is inadequate in light of our calculation of the ratios.
Comment 41 Case Number 092-9511392
Since the loan is current as of January 2005, Interstate believed the loan is not
contributing any risk to the Federal Housing Administration insurance fund. We
believe the present status of a loan does not dictate its future performance.
In addition, for the above reasons, Interstate feels that it should not have to
indemnify this loan. Based on the borrower's excessive qualifying ratios, we
maintain our position that HUD should require Interstate to indemnify this loan.
Comment 42 Case Number 092-9563354
Interstate disagreed that it did not properly verify the borrower's employment
and gift data. Given that Interstate did not contact the employer to verify the
borrower's employment information, we agree that they would not have known
that the employer did not distribute the pay stub in the loan file. Since Interstate
did not contact the gift donor, it would not have known that the gift was actually
a loan.
43
Comment 43 Case Number 092-9563354
Interstate disagreed that it did not properly analyze the borrower's credit based
on a lack of credit history. Though Interstate requested and received alternative
credit information for the borrower, we believe this information should be
considered in calculating the qualifying ratios.
Comment 44 Case Number 092-9563354
For the above reasons, Interstate feels that it should not have to indemnify this
loan. However, we maintain our position that HUD should require Interstate to
indemnify this loan. Interstate did not comment on its failure to verify the
borrower's source of funds to close, whether the borrower has the financial
capability and discipline to manage her finances and pay the mortgage,
borrower's questionable salary as an administrative assistant, and its failure to
ensure that the borrower provided the minimum required investment.
Comment 45 Case Number 092-9584181
Recommendation 1A has been revised to reflect those Federal Housing
Administration loans that have been paid in full.
Comment 46 Case Number 092-9604022
The loan has been paid in full and is no longer a risk to the Federal Housing
Administration insurance fund. Recommendation 1A has been revised to reflect
the change.
Comment 47 Case Number 092-9615614
Interstate concurs with our recommendation to indemnify the loan.
44
Comment 48 Case Number 095-0034417
Interstate believes that since the loan is current as of January 2005, it does not
contribute any risk to the Federal Housing Administration insurance fund. We
believe the present status of a loan does not dictate its future performance. In
addition, Interstate does not expect a reoccurrence of entering faulty transaction
dates into HUD's system.
Mortgagee Letter 2003-07 clearly states that any resale of a property occurring
90 or fewer days from the last sale may not be eligible for Federal Housing
Administration financing. Therefore, we maintain our position that HUD should
require Interstate to indemnify this loan.
45
Appendix C
NARRATIVE LOAN DEFICIENCIES
Case Number: 092-9017524
Interstate approved the loan based on inaccurate employment information. Interstate did not
confirm the employer’s name and address as listed on the loan application. The verification of
employment form shows the employer located in North Miami Beach, FL. Our site visit to the
North Miami Beach address and discussions with various persons on the premises indicated there
was no such employer at the address. Interstate failed to properly verify employment
information and, therefore, generated and submitted inaccurate employment and salary data to
HUD. If Interstate had sent the verification of employment form to this address, employment
information would not have been validated.
• Questionable Source of Funds – Interstate failed to properly verify the borrower’s source of
funds to close. We noted several questionable deposits and overdraft charges. During the
bank statement period when the sales contract was executed, the borrower deposited more
than $4,000, with three deposits made on consecutive days, despite a monthly salary of
$2,590. Other bank statements show deposits totaling no more than $2,780. Bank statements
also showed three overdraft charges and one returned check charge, which raises concerns
about the borrower’s financial capability.
• Credit Issue – Interstate did not properly analyze the borrower’s credit performance to ensure
that the borrower demonstrated financial responsibility. The credit report showed the
borrower had three accounts in collection status. Thus, the borrower’s poor credit was not
fully considered by Interstate in its analysis of the borrower’s liabilities.
• Questionable Employment and Salary – Interstate failed to verify conflicting and
questionable employment and salary information provided by the borrower. The pay stub
shows the employer located in Coral Gables, FL, while the loan application and verification
of employment form shows the employer located in North Miami Beach, FL. The
verification of employment form also indicated the borrower’s annual salary of $44,507 as an
accounts payable clerk. Our Internet search revealed that the average annual salary for an
accounts payable clerk is $24,164.
• Excess Ratios Without Adequate Justification – Interstate did not provide valid compensating
factors for exceeding the ratio. Interstate justified the excess front-end ratio by stating that:
(1) the borrower has the ability for increase in earnings due to job training and (2) the
borrower was a first-time homebuyer. The verification of employment form does not
indicate that earnings will increase. The loan application also showed that the borrower had
recently begun employment.
Interstate also did not ensure that the borrower provided the minimum required investment. We
calculated the minimum required investment as $4,584, but the borrower only provided $3,935.
46
Case Number: 092-9091627
Interstate failed to properly verify employment, income, and asset information. Our interview
with the borrower indicated that the real estate agent obtained the borrower’s personal and
financial data and documentation for loan approval. The borrower never met with Interstate staff
and only signed documents at the time of closing.
The borrower never worked for the employer listed on the verification of employment form and
pay stub. The borrower mentioned the inaccurate employment and income information to the
real estate agent before closing but was told that it had to be this way for the loan to qualify.
Interstate inappropriately relied on the documents provided by the real estate agent, who is an
interested party to the sales transaction. Had Interstate sent a verification of employment form to
the employer, the inaccurate employment and income information would have been disclosed.
In addition, the borrower indicated to us that the loan application contained inaccurate asset
information. The loan application submitted to HUD valued his vehicle at $11,000 when the
sales price was only $7,500. The loan application also showed that the borrower owned $8,000
in personal property when he did not.
• Questionable Source of Funds – Interstate did not ensure that the borrower demonstrated
financial capability. According to a document in the loan file, the borrower claimed to have
monthly savings of $742, but the bank statement does not indicate such a high balance.
• Inconsistent Data – Interstate did not resolve conflicting or inconsistent information in the
loan file. The loan application showed the borrower as married, while the credit report
showed he was unmarried. A letter from a utility company misspelled the borrower’s name
and also indicated that the borrower opened an account 8 months after starting to rent the
property.
• Excess Ratios Without Adequate Justification – Interstate failed to document the basis for
accepting an excess front-end ratio of 31 percent.
Interstate also did not ensure that the borrower provided the minimum required investment. We
calculated the minimum required investment as $2,879, but the borrower only provided $2,475.
47
Case Number: 092-9106318
Interstate approved the loan based on inaccurate employment and income information. We
verified with the borrower’s employer that the information on the verification of employment
form and pay stub are inaccurate. Though we were unable to verify income information for a co-
borrower, we did confirm that the signature on the verification of employment form was also
inaccurate. Interstate failed to properly verify employment and income information and,
therefore, generated and submitted to HUD inaccurate employment and income data for both the
borrower and co-borrower. If Interstate had sent the verification of employment form to the
employers, the inaccurate information would not have been validated.
• Questionable Source of Funds – Interstate did not verify the borrower’s source of funds to
close. Before closing in November 15, 2002, we noted unexplained deposits totaling $4,260
when the ending bank balance 2 months earlier in September 15, 2002, was only $353.
• Credit Issues – Interstate did not properly analyze the borrower’s credit. The borrower
reported living in a rental property. Based on Internet searches of county records, the address
is located in a restricted commercial zone. In addition, the landlord listed on the credit report
does not agree with the owners listed in our search. Interstate relied on the credit report
without obtaining additional documentation to support borrowers’ past rental history.
Therefore, we question whether the borrowers resided at the former residence, paid the rent
amount listed on the loan application, and whether the borrowers can make future mortgage
payments.
• Questionable Employment – Interstate failed to verify questionable employment information
provided by the borrower. Internet searches of state records revealed that the signature of the
borrower’s employer on the Uniform Business Report does not agree with the signature on
the verification of employment form. Florida records also show a different owner for the co-
borrower's employment address than that stated on the credit report. Given the availability of
such access to State records, Interstate should have found these discrepancies and resolved
them before loan approval.
The subject property sold for $91,000, or $21,000 more than the prior sale 4 months earlier. The
appraisal report noted that the seller had totally renovated the property. However, we found no
documentation in the loan file to indicate that Interstate made a determination that the
renovations justified the increased appraisal value.
48
Case Number: 092-9114133
Interstate approved the loan based on inaccurate employment and gift information. We verified
with the employer that the borrower worked independently as an interpreter for his clients who,
in turn, paid the borrower directly. The employer confirmed that the verification of employment
form and pay stubs were inaccurate, including the signature on the verification of employment
form. Interstate failed to properly verify employment information and, therefore, generated and
submitted inaccurate employment data to HUD. We also verified that the gift donor was the
husband and not the borrower’s uncle as stated on the gift letter. If Interstate had sent a
verification of employment form to the employer and contacted the gift donor, the information
would not have been validated.
• Questionable Source of Funds – Interstate did not properly verify the borrower’s source of
funds to close. The verification of deposit form shows the borrower having three bank
accounts. However, the loan file only contained the bank statement of one account.
• Credit Issues – Interstate did not properly analyze the borrower’s credit to ensure that the
borrower demonstrated financial capability and responsibility. The borrower had four credit
card accounts with large balances. Two accounts had balances that exceeded the credit limits
and were 30-59 days past due. Interstate also failed to obtain additional documentation to
support the borrowers’ past rental history. The credit report and loan application showed the
borrower paid rent to a rental property. However, Internet searches revealed that the property
was listed to the borrower and her husband. We question whether the borrower paid rent and
has the capability and discipline to pay a monthly mortgage. Thus, the borrower’s poor
credit was not fully considered by Interstate in its analysis of the borrower’s liabilities.
• Questionable Employment – Interstate failed to verify questionable employment information.
The loan application, verification of employment form, and credit report show the borrower
beginning employment in March 2000. However, according to State records, the employer
was not incorporated until March 2001. Given the availability of access to State records,
Interstate should have found the discrepancy and resolved it before loan approval.
• Inconsistent Data – Interstate did not reconcile basic personal information. The loan
application shows the borrower having two dependents, while the credit report shows no
dependents.
49
Case Number: 092-9242091
Interstate approved the loan based on inaccurate employment and income information. We
verified with the employer that it never hired the borrower. In addition, the Internal Revenue
Service Form W-2, pay stub, and verification of employment form were altered to look as if they
belonged to the borrower. Interstate failed to properly verify employment and income
information and, therefore, generated and submitted inaccurate employment and salary data to
HUD. If Interstate had sent the verification of employment form to the employer, the
information would not have been validated.
• Questionable Source of Funds – Interstate did not verify or question borrower’s source of
funds to close. The pay stub showed that the borrower was paid only once per month, but
many additional deposits were recorded on the bank statements.
• Questionable Employment – Interstate did not exercise sound judgment in assessing the
borrower’s income. The initial loan application showed monthly employment income of
$1,520 at one employer. The final loan application submitted to HUD showed monthly
employment income of $4,273 at another employer. We believe this difference should have
made a prudent person question the employment and the substantial increase in salary
between the two employments.
• Inconsistent Data – Interstate did not resolve inconsistencies presented in the loan file. The
borrower’s signature on the Purchase Contract Addendum is not the same as the loan
application, Social Security card, driver’s license, etc. The gift donor also did not know the
spelling of the borrower’s name.
Properties sold during the prior 2 years in close proximity to the subject property were sold at a
much lower price even with larger lot sizes. We found no documentation in the loan file to
indicate that Interstate questioned the appraisal value or sales price, both at $100,000.
The borrower only made one payment before defaulting on the subject property. Within 2
months of purchasing the subject property, the borrower purchased another property.
50
Case Number: 092-9264929
Interstate approved the loan based on inaccurate employment, income, and gift information. We
verified with the employer that the employment information on the pay stub and verification of
employment form are inaccurate, including the signature on the verification of employment
form. We also verified with the donor that the $3,100 listed on the gift letter was not actually a
gift to the borrower. The donor loaned the borrower $2,000, and the remaining $1,100 was
provided by the borrower for deposit into the donor’s bank account to look like a gift. In
addition, despite signing the gift letter as the borrower’s cousin, the donor said he was just a
friend. Interstate failed to properly verify employment, income, and gift information and,
therefore, generated and submitted inaccurate employment, salary, and gift data to HUD. If
Interstate had sent the verification of employment form to the employer and contacted the gift
donor, the inaccurate information would not have been validated.
• Questionable Source of Funds – Interstate failed to properly verify the borrower’s source of
funds to close. The bank statement for the gift donor indicated that on the same day the
$3,100 gift amount was withdrawn, there was a deposit of $3,300.
• Questionable Employment – Interstate failed to properly verify questionable employment
information provided by the borrower. According to Internet searches, the employer’s
address on the loan application and verification of employment form is a residential property,
and the telephone number provided is to a different address than the residential property.
Given the availability of access to State records, we believe Interstate should have found
these discrepancies and resolved them before loan approval.
The prior sale of the subject property was within 1 year of the current sale and the current sales
price of $102,000 was $48,000 more than the prior sale. The appraisal report noted that after the
prior sale, the subject property was renovated. We found no documentation in the loan file to
indicate that Interstate questioned the relatively high increase in sales price.
51
Case Number: 092-9368468
Questionable Source of Funds – Interstate did not properly verify the borrower’s source of
funds to close. There was a $1,000 transfer from a bank account, but there is no copy of the
respective bank statement to support that adequate funds were available to the borrower.
• Credit Issues – Interstate did not resolve conflicting information related to the borrowers’
past rental history. The loan application showed monthly rent of $700, while the credit
report stated the borrowers lived with family rent-free.
• Questionable Employment – Interstate did not properly analyze whether the borrower’s
income was stable. The borrower had been employed a little over 1 year and employment
history shows several jobs of short duration. Besides one employment for about 6 months,
all other employments were for less than 2 months. As such, we question borrower’s ability
to maintain current employment and income levels.
The sales price of $86,414 is $4,600 more than comparable properties sold during the same
period. We found no documentation in the loan file questioning the appraisal report to ensure
the accuracy of the appraisal value at $87,000.
52
Case Number: 092-9403894
• Credit Issues – Interstate did not properly analyze the borrower’s credit to ensure that the
borrower demonstrated financial capability and responsibility. The borrower failed to repay
a $94,000 mortgage loan. During this time, the borrower had been employed with the same
employer for about 14 years. While this debt was satisfied as part of a bankruptcy judgment
in September 2000 and despite the borrower’s reason for the bankruptcy, we believe this
poor credit history was not fully considered by Interstate in its analysis of the borrower’s
liabilities.
• Inconsistent Data – Interstate did not verify inconsistent rental payments with the borrower.
We verified with the borrower that he lived with his parents and paid them $550 per month.
The credit report showed the borrower paid $750 per month. The loan application also
showed the borrower paid $750 per month, whereas, the estimated monthly housing expenses
were $705. Since the borrower paid $550 per month and estimated monthly housing
expenses increased to $705 per month, it becomes questionable whether the borrower has the
financial ability to pay the increased amount.
Interstate did not ensure that the borrower provided the minimum required investment. We
calculated the minimum required investment at $2,910, but the borrower only provided $2,653.
53
Case Number: 092-9509172
Interstate approved the loan based on inaccurate employment and income information. The
employer informed us that he never employed the borrower. The employer also stated that the
employment and salary documents (verification of employment form, pay stubs, and 2001 and
2002 Internal Revenue Service Form W-2s) are inaccurate, including the signature on the
verification of employment form. Interstate failed to properly verify employment and income
information and, therefore, generated and submitted inaccurate employment and salary data to
HUD. If Interstate had sent the verification of employment form to the employer, the inaccurate
information would not have been validated.
• Questionable Source of Funds – Interstate failed to provide a verification of deposit or other
documentation in the loan file to support the borrower’s financial ability to close and make
mortgage payments.
• Credit Issue – Interstate did not properly analyze the borrower’s credit to ensure that the
borrower demonstrated financial capability and responsibility. The credit report was ordered
and completed the same day as closing.
• Questionable Employment – Interstate failed to properly verify employment information.
The employer’s vice president signed the verification of employment form on June 12, 2003.
Our Internet search of State records revealed that this official was president at the time the
verification of employment form was signed. Given the availability of access to State
records, we believe Interstate should have found the discrepancy and resolved it before loan
approval.
• Excess Ratios Without Adequate Justification – Interstate did not provide any compensating
factors to justify the excess ratios of 31.8 percent and 46.3 percent.
54
Case Number: 092-9511392
• Questionable Source of Funds – Interstate did not properly verify the borrower’s source of
funds to close. In reviewing the limited transaction details statement from the borrower’s
three bank accounts, we could not determine that employment income was deposited.
• Excess Ratios Without Adequate Justification – Interstate disregarded HUD requirements
when calculating the qualifying ratios. Interstate calculated the front and back qualifying
ratios on the Mortgage Credit Analysis Worksheet as 31.3 percent and 43.1 percent,
respectively. Section 2 of HUD Handbook 4155.1, Rev-4, Change 1 states that the
anticipated amount of income, and likelihood of its continuance, must be established to
determine the borrower's capacity to repay the mortgage debt. Specifically, the income of
each borrower to be obligated for the mortgage debt must be analyzed to determine whether
it can reasonably be expected to continue through at least the first three years of the mortgage
loan. Since the lease of the borrower's other property is on a monthly basis, there is no
guarantee the monthly income from the lease will continue. There is also no rental history of
the property. Therefore, the net rental income may only be considered as a compensating
factor and must be adequately documented by the lender as stipulated by Section 2-7M of the
Handbook. Accordingly, we disagree with Interstate for including the monthly net rental
income of $241 when calculating the borrower's monthly income. Our calculation of
qualifying ratios less the net rental income was 34.9 percent and 61.7 percent.
55
Case Number: 092-9563354
Interstate approved the loan based on inaccurate employment, income, and gift information. The
employer informed us that the borrower had never worked there, and that the employer did not
issue the pay stub. The employer mentioned that the borrower's husband had worked on her
house. The employer also could not be certain that the signature on the verification of
employment form was that of her mother-in-law (former president of the company). We also
verified with the gift donor that the $1,500 provided was not a gift but a loan. The gift letter
claimed the monies went to the donor’s sister, but the donor and borrower are not related. The
donor signed the gift letter to help the borrower get approval for the loan.
• Questionable Source of Funds – Interstate did not verify borrower’s source of funds to close.
The bank statement for the period June 6 through July 7, 2003, showed total deposits of
$1,200 and an ending balance of negative $5.59. On August 5, 2003, the borrower made a
deposit of $2,000 and withdrew $1,500 the following day. Other than this $2,000 deposit,
the bank statement for the period July 8 through August 6, 2003, showed total deposits of
$850 and an ending balance of $103.20.
We also noted that the borrower’s bank statements had recurring overdraft and non-sufficient
fund charges. Most of these charges occurred 1 month before closing. The borrower had six
overdraft and three non-sufficient fund charges. Interstate asked the borrower about these
charges and was satisfied with the response. The borrower’s reason for the charges was that
funds were withdrawn from the bank account using a debit card, and the deposits that
followed were untimely. This explanation raises serious questions about whether the
borrower has the financial capability and discipline to manage her finances and pay the
mortgage. Therefore, we believe Interstate did not exercise sound judgment when assessing
this matter.
• Credit Issues - Interstate did not properly analyze the borrower’s credit to ensure that the
borrower demonstrated financial capability and responsibility. The credit report shows the
borrower having no credit history. Other information in the loan file shows the borrower
making installment payments to vendors. Interstate did not reconcile the borrower’s credit
report against vendor letters indicating outstanding debt. We question the accuracy of the
credit report and whether the borrower may have other non-disclosed debts.
• Questionable Employment –Interstate failed to verify questionable employment and salary
information provided by the borrower. The loan application listed the borrower’s annual
salary as an administrative assistant at $42,000. However, our Internet searches revealed that
the average annual salary for such a position for that area was $30,315.
Interstate did not ensure that the borrower provided the minimum required investment. We
calculated the minimum required investment at $4,277, but the borrower only provided $3,415.
56
Case Number: 092-9584181
Interstate approved the loan based on inaccurate employment and income information. We
verified with the employer that the Internal Revenue Service Form W-2s and pay stub are
inaccurate, and the employer’s signature on the verification of employment form was also
inaccurate. Interstate failed to properly verify employment and income information and,
therefore, generated and submitted inaccurate employment and salary data to HUD. If Interstate
had sent the verification of employment form to the employer, the inaccurate information would
not have been validated.
• Credit Issue – Interstate did not properly analyze the borrower’s credit to ensure that the
borrower demonstrated financial capability and responsibility. The credit reports do not
show any credit history. There were two reference letters from creditors in the loan file that
used the same fonts. We believe that Interstate should have contacted the creditors to verify
the authenticity of the letters.
• Questionable Employment – Interstate failed to verify questionable employment information
provided by the borrower in the loan application. The name of the employer, address, and
phone number are not listed in the Internet telephone directories. Internet searches of State
records revealed that the employer is not incorporated or registered in Florida, and the
Federal Employment Identification number (on the Internal Revenue Service Form W-2 in
the loan file) does not exist in Florida. Given the availability of access to the Internet and
State records, Interstate should have found the discrepancy and resolved it before loan
approval.
The sales price of $176,000 was an increase of $46,000 from the prior sale about 2 years earlier.
We did not find documentation in the loan file that Interstate questioned the accuracy of the
$176,000 appraisal value.
The borrower appears to have used another Social Security number to obtain the loan and
purchase the property.
57
Case Number: 092-9604022
• Questionable Source of Funds - Interstate did not ensure that the borrower demonstrated
financial capability to pay the mortgage debt. The borrower’s mother provided all funds to
close. The borrower’s bank statements show less than a $700 monthly ending balance. At
the time of the loan application, the borrower lived with her parents and paid no rent. The
loan application estimated the borrower’s monthly housing expense at $757.
• Credit Issue – Interstate did not properly analyze the borrower’s credit to ensure that the
borrower demonstrated financial responsibility. Both credit reports indicate that the
borrower has “serious delinquency and derogatory public record or collection filed.”
• Questionable Employment – Interstate failed to verify questionable employment information
provided by the borrower. The bank statements only show deposits from the first employer.
There is no indication of deposits from the second employer.
• Inconsistent Data – Interstate failed to clarify important file discrepancies. The borrower
certified in a letter that all bills had been paid in a timely manner for the past 3 years;
however, this conflicts with the credit report, which indicates problems with borrower’s
credit. The borrower’s signature on the gift letter does not agree with other documents in the
loan file such as the loan application, Social Security card, driver’s license, etc. The initial
loan application indicated the borrower had worked for a second employer for 2 years, which
would have her beginning employment in October 2001; however, the final loan application
submitted to HUD indicated the borrower began employment in November 2000. The initial
loan application indicated that the borrower did not intend to occupy the property as her
primary residence; however, the final loan application submitted to HUD indicated
otherwise.
58
Case Number: 092-9615614
Interstate approved the loan based on inaccurate gift information. We verified with the donor
that the gift was actually provided by the seller. The seller deposited the funds into the donor's
bank account and then had the donor obtain a cashier’s check payable to the borrower. This was
intended to have the gift appear to be from the donor. Interstate failed to properly verify gift
information and, therefore, submitted inaccurate gift data to HUD. If Interstate had contacted the
gift donor, the inaccurate information would not have been validated.
• Questionable Source of Funds - Interstate did not ensure the continuity and stability of the
borrower’s source of funds or considered the probability of the borrower’s continued
employment. The verification of employment form states that the probability of continued
employment is based on the company’s needs. In addition, the verification of employment
form shows the borrower employed from October 30, 1997, to January 2, 1998, and rehired
August 27, 1998, to August 25, 1999.
• Credit Issues – Interstate did not properly analyze the borrower’s credit to ensure that the
borrower demonstrated financial responsibility. We verified with the borrower that the seller
paid three collection accounts. The seller also prepared a justification letter for the collection
accounts that the borrower signed at closing. The borrower informed us that the justification
stated in the letter was incorrect.
• Inconsistent Data – Interstate failed to clarify important file discrepancies. The credit report
shows the borrower has five dependents, while the loan application shows zero dependents.
The loan application shows $3,000 held in deposit, the Mortgage Credit Analysis Worksheet
shows $3,000 as a gift from a cousin, and the gift letter shows the gift from the borrower’s
father.
• Excess Ratios Without Adequate Justification – Interstate exceeded HUD’s allowable limits
without compensating factors. Interstate calculated both qualifying ratios at 33.5 percent.
We recalculated the front- and back-end qualifying ratios at 28 percent and 49 percent,
respectively. Interstate did not separate monthly overtime and bonuses in calculating total
monthly income (HUD Handbook 4155.1, Rev-4, section 2-7A). Interstate used $3,279 for
total monthly income, while we used $3,930.92. Interstate also calculated the total monthly
fixed payment as $1,100 while we calculated this payment at $1,921. It failed to consider
monthly liabilities of $821 in its calculation. There were no compensating factors for
approving the loan at the higher ratios.
• Property Resale – Interstate disregarded Mortgagee Letter 2003-07 when approving this loan.
The letter states that any resale of a property may not occur 90 or fewer days from the last
sale to be eligible for Federal Housing Administration financing. The seller purchased the
subject property on August 27, 2003, and resold it to the borrower on October 15, 2003,
(49 days later).
59
The property was appraised and sold for $125,000, which is an increase of $52,000 from the
prior sale. The appraisal report appeared to be missing some basic data. We found no
documentation in the loan file to indicate that Interstate questioned the accuracy of the appraised
value.
60
Case Number: 095-0034417
• Property Resale – Interstate should not have approved this loan based on Mortgagee Letter
2003-07. The letter states that any resale of a property may not occur 90 or fewer days from
the last sale to be eligible for Federal Housing Administration financing. Interstate’s loan
file indicated that the seller purchased the subject property in February 2004 and resold it to
the borrower on March 29, 2004.
Interstate also appears to have improperly entered this transaction into HUD’s Computerized
Homes Underwriting Management System. Interstate’s loan file indicated that the seller
purchased the subject property in February 2004 and resold it to the borrower on March 29,
2004. However, Interstate entered January 1, 2004, and May 26, 2004, into the HUD system
for this transaction. The erroneous dates entered into HUD’s system would have prevented
HUD from identifying the loan as ineligible for Federal Housing Administration financing.
61
Appendix D
SUMMARY OF LOAN DEFICIENCIES
Excess
Questionable Questionable Ratios w/o
Source of Credit Employment Adequate
Inconsistent Property Finding 1
Funds Issues Data Data Justification Resale Recommendation
092-9017524 x x x x 1A
092-9091627 x x x 1A
092-9106318 x x x
092-9114133 x x x x 1A
092-9242091 x x x 1C
092-9264929 x x 1B
092-9368468 x x x 1A
092-9403894 x x 1A
092-9509172 x x x x 1A
092-9511392 x x 1A
092-9563354 x x x 1A
092-9584181 x x
092-9604022 x x x x
092-9615614 x x x x x 1A
095-0034417 x 1A
12 10 10 6 5 2
62
Interstate Financial Mortgage Group Corporation Non-Supervised Direct Endorsement Lender Miami, Florida
Published by the Department of Housing and Urban Development, Office of Inspector General on 2005-03-15.
Below is a raw (and likely hideous) rendition of the original report. (PDF)