oversight

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)

                                                                 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




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