oversight

Trust America Mortgage, Inc. Non-Supervised Direct Endorsement Lender Cape Coral, Florida

Published by the Department of Housing and Urban Development, Office of Inspector General on 2005-03-25.

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

                                                           Issue Date
                                                                   March 25, 2005
                                                          Audit Case Number
                                                                   2005-AT-1008




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


FROM:

           Sonya D. Lucas
           Acting Regional Inspector General for Audit, 4AGA

SUBJECT: Trust America Mortgage, Inc.
         Non-Supervised Direct Endorsement Lender
         Cape Coral, FL


                                 HIGHLIGHTS

 What We Audited and Why

            We audited Trust America Mortgage, Inc. (Trust America) in Cape Coral, FL.
            Trust America 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 Trust America for review because of risk factors associated with
            defaulted loans.

            The audit objectives were to determine whether Trust America: (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 17 Federal Housing Administration-insured loans to accomplish our objectives.
What We Found

           Trust America did not follow HUD requirements when originating and approving 16
           Federal Housing Administration-insured loans totaling $1,949,079. Sixteen of the
           seventeen loans we reviewed had problems. All 16 loans contained underwriting
           deficiencies that, taken as a whole, should have led a prudent lender to not approve
           the loan. Trust America approved the loans based on inadequate asset and debt
           verification and other deficiencies. The deficiencies occurred because Trust
           America failed to exercise due care in originating and underwriting loans, primarily
           by not clarifying inconsistencies in the loan files. These deficiencies increased
           HUD’s risk to the Federal Housing Administration insurance fund.

           Trust America did not fully implement its quality control plan. Trust America did
           not conduct the required number of quality control reviews, including reviews of
           early defaulted loans and rejected loan applications. Trust America’s quality
           control plan was also incomplete, as it did not include all required elements as
           prescribed by HUD. We attribute these deficiencies to Trust America’s disregard
           of HUD requirements and instructions and reliance on an independent contractor
           to fulfill its responsibilities. As a result, HUD has limited assurance of the
           accuracy, validity, and completeness of Trust America’s loan origination and
           underwriting operations.

What We Recommend


           We recommend that the Assistant Secretary for Housing-Federal Housing
           Commissioner require Trust America to: (1) indemnify HUD against future
           losses on eight loans totaling $977,709; (2) reimburse HUD for a loss already
           incurred of $17,502 on one property; and (3) reimburse HUD for a loss, if
           applicable, on another property for which HUD paid a claim of $113,002. We
           further recommend that HUD take appropriate measures to ensure Trust America
           conducts required quality control reviews 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 Trust America and HUD officials during the
           audit. We provided a copy of the draft report to Trust America officials on
           February 2, 2005, for their comments and discussed the report with them at the exit
           conference on February 8, 2005. Trust America provided written comments on
           February 11, 2005.



                                            2
Trust America expressed concerns regarding finding 1 that it did not act negligent
in any way in the processing and underwriting of the loans. Trust America
generally agreed with finding 2.

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 – Trust America Did Not Follow HUD Requirements When        6
        Originating and Approving Loans

        Finding 2 – Trust America Did Not Fully Comply With Federal Housing   10
        Administration Quality Control Requirements

Scope and Methodology                                                         13

Internal Controls                                                             14

Appendixes
   A.   Schedule of Questioned Costs and Funds To Be Put to Better Use        16
   B.   Auditee Comments and OIG’s Evaluation                                 17
   C.   Active Loans Trust America Should Indemnify                           48
   D.   Summary of Loan Deficiencies                                          49
   E.    Narrative Loan Deficiencies                                          50
   F.   Criteria                                                              75




                                             4
                     BACKGROUND AND OBJECTIVES

The U.S. Department of Housing and Urban Development (HUD) approved Trust America
Mortgage, Inc. (Trust America) as a nonsupervised direct endorsement lender on
January 6, 1988, to originate, purchase, or sell loans or insured mortgages. As a direct
endorsement lender, HUD approved Trust America to underwrite and close Federal Housing
Administration loans without prior HUD review or approval.

Trust America originated and underwrote 491 Federal Housing Administration-insured loans
with mortgages totaling $60.5 million, which had beginning amortization dates (defined as 1
month before 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 Trust America: (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: Trust America Did Not Follow HUD Requirements When
           Originating and Approving Loans
Trust America did not follow HUD requirements when originating and approving 16 Federal
Housing Administration-insured loans totaling $1,949,079. Sixteen of the 17 loans we reviewed
had problems. All 16 loans contained underwriting deficiencies that, taken as a whole, should have
led a prudent lender to not approve the loan. Trust America approved the loans based on inadequate
asset and debt verification and other deficiencies. The deficiencies occurred because Trust America
failed to exercise due care in originating and underwriting loans, primarily by not clarifying
inconsistencies in the loan files. These deficiencies increased HUD’s risk to the Federal Housing
Administration insurance fund.




 Trust America Did Not Comply
 With HUD Requirements

               Trust America did not comply with HUD requirements when originating and
               approving 16 loans. We identified processing and underwriting deficiencies in all
               16 loans as shown below:

                                          Deficiencies          Number of Loans
                             Inadequate asset verification         16 of 17
                             Inadequate debt verification           9 of 17

               The deficiencies noted above are not independent of one another as many of the
               loan files contained more than one deficiency. Appendix D provides a chart
               summarizing the loan processing deficiencies. Details of the deficiencies
               identified on each loan reviewed, including specific HUD requirements not met,
               are included in appendix E.

               Specific examples of Trust America’s poor processing and underwriting include:

                    Case File Number 092-9016031. Trust America approved the loan without
                    properly computing qualifying ratios. Trust America improperly included
                    overtime in computing the monthly income. The verification of
                    employment indicated that overtime income was not likely to continue, and
                    the borrower had been employed for less than 2 years. Contrary to HUD
                    Handbook 4155.1, Trust America did not justify and document the reason
                    for using the overtime income to qualify the borrower. We calculated the
                    mortgage payment to income ratio at 36.04 percent and the total fixed
                    payment to income ratio at 50.62 percent. Trust America should have
                    provided compensating factors to justify the excess ratios.


                                                6
Trust America approved the loan without properly verifying the borrower’s
assets. Trust America did not obtain supporting documentation from a
down-payment assistance program on how the gift funds were transferred to
the borrower. The gift funds represented more than 97 percent of the
minimum down payment. Trust America informed us that it was not aware
of this requirement. Trust America did not properly verify and document
the source of the earnest deposit, which was the borrower’s only
contribution toward the acquisition of the property. Trust America did not
resolve conflicting loan documentation regarding the earnest deposit. The
residential construction contract and the final loan application showed an
earnest deposit, but the HUD-1 Settlement Statement did not. Trust
America did not verify three large deposits of between $1,144 and $3,200
into the borrower’s bank accounts. Trust America did not provide evidence
of the source of funds used to repay more than $1,280 in collections, as
required. Without proper documentation, Trust America cannot ensure
funds from prohibited parties were not used to repay the debt.

Contrary to HUD requirements, Trust America approved the buydown
interest rate loan without properly documenting the borrower’s ability to
make higher mortgage payments in the future. The qualifying ratios for the
buydown interest rate loan were 30.61 percent and 42.99 percent. We
calculated the qualifying ratios without the buydown interest rate loan as
43.09 percent and 57.67 percent.

Case File Number 092-9291317. Trust America approved the loan without
properly computing a qualifying ratio. Trust America excluded child
support payments of $174 from the debt analysis. We calculated the total
fixed payment to income ratio at 45.55 percent. Trust America should have
provided compensating factors to justify the excess ratio.

Trust America approved the loan without properly verifying the borrower’s
assets. Trust America did not properly verify and document the source of
the earnest deposit, which was the borrower’s only contribution toward the
acquisition of the property. Trust America did not resolve conflicting loan
documentation regarding the earnest deposit. The agreement to build the
home and the final loan application showed an earnest deposit, but the
HUD-1 Settlement Statement did not. In addition, Trust America did not
verify the source of funds for three large deposits of between $655 and
$1,500 into the borrower’s bank account.

Contrary to HUD requirements, Trust America approved the buydown
interest rate loan without properly documenting the borrower’s ability to
make higher mortgage payments in the future. The qualifying ratios for the
buydown interest rate loan were 18.25 percent and 42.02 percent. We
calculated the qualifying ratios without the buydown interest rate loan as
21.75 percent and 49.05 percent.



                           7
Case File Number 092-9308470. Trust America approved the loan without
properly computing a qualifying ratio. Trust America excluded monthly
payments totaling $160 to one creditor from the debt analysis. We calculated
the total fixed payment to income ratio at 54.57 percent. Trust America should
have provided compensating factors to justify the excess ratio.

Trust America approved the loan without properly verifying the borrower’s
assets. Trust America did not obtain supporting documentation from a down-
payment assistance program on how the gift funds were transferred to the
borrower. The gift funds represented more than 90 percent of the minimum
down payment. Trust America informed us that it was not aware of this
requirement. Trust America did not properly verify the source of the earnest
deposit, which was the borrower’s only contribution toward the acquisition of
the property. While loan file documentation showed an earnest deposit, Trust
America failed to provide evidence showing how it was paid.

Case File Number 092-9319257. Trust America calculated the mortgage
payment to income ratio at 35.67 percent and the total fixed payment to
income ratio at 51.51 percent, which exceeds HUD’s permissible rates of 31
percent and 43 percent, respectively, as prescribed in HUD Handbook
4155.1, Revision 4, Change 1, paragraph 2-19.

Trust America approved the loan without properly verifying the borrower’s
assets. Trust America did not properly verify and document the source of
the earnest deposit, which was the borrower’s only contribution toward the
acquisition of the property. Trust America did not resolve conflicting loan
documentation regarding the earnest deposit. The agreement to build home
and the final loan application showed an earnest deposit, but the HUD-1
Settlement Statement did not.

Trust America approved the loan without properly verifying the borrower’s
earnings. According to our Internet searches, the one-way commuting
distance between the property and the borrower’s employer was more than
140 miles. According to Florida Department of State records, the employer
has been inactive since September 2000. The property closed in December
2002. Given the availability of access to State records, we believe Trust
America should have found the discrepancy and resolved it before loan
approval. In addition, our attempts to locate the employer were
unsuccessful.

Contrary to HUD requirements, Trust America approved the buydown
interest rate loan without properly documenting the borrower’s ability to
make higher mortgage payments in the future. The qualifying ratios for the
buydown interest rate loan were 35.67 percent and 51.51 percent. We
calculated the qualifying ratios without the buydown interest rate loan as
42.44 percent and 58.28 percent.



                            8
    Conclusion

                 Trust America 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 16 loans, Trust America did
                 not exercise the care expected of a prudent lender in the analysis of the borrowers’
                 assets and debts. Trust America failed to properly document the borrowers’
                 source of funds to close, improperly computed qualifying ratios, did not provide
                 valid or supported compensating factors for excessive qualifying ratios, did not
                 establish the borrowers’ ability to make higher mortgage payments in the future
                 when approving buydown interest rate loans, and did not clarify important file
                 discrepancies. These deficiencies increased HUD’s risk to the Federal Housing
                 Administration insurance fund.

    Recommendations

                 We recommend that the Assistant Secretary for Housing-Federal Housing
                 Commissioner:

                 1A. Require Trust America to indemnify HUD against future losses for the eight
                     active insured loans totaling $977,709, in which Trust America did not follow
                     HUD requirements.1 Appendix C lists case numbers for the loans included in
                     this recommendation.

                 1B. Require Trust America to reimburse HUD/Federal Housing Administration
                     $17,502 for losses already incurred. See appendix E (Case Number
                     092-9287653) for the loan included in this recommendation.

                 1C. Require Trust America to reimburse HUD $113,002 for claims already
                     incurred. See appendix E (Case Number 092-9308470) for the loan
                     included in this recommendation.




1
       According to Neighborhood Watch, as of December 2004, 6 of the 16 loans have terminated Federal Housing
       Administration insurance without a claim. (Case Numbers 092-9031856, 092-9184889, 092-9221657,
       092-9251108, 092-9295695, and 092-9312350). Because these loans no longer represent a risk to the Federal
       Housing Administration insurance fund, we have removed them from our recommendation.

                                                       9
Finding 2: Trust America Did Not Fully Comply With Federal Housing
           Administration Quality Control Requirements
Trust America did not fully implement its quality control plan. Trust America did not conduct
the required number of quality control reviews, including reviews of early defaulted loans and
rejected loan applications. Trust America’s quality control plan was also incomplete, as it did
not include all required elements as prescribed by HUD. We attribute these deficiencies to Trust
America’s disregard of HUD requirements and instructions and reliance on an independent
contractor to fulfill its responsibilities. As a result, HUD has limited assurance of the accuracy,
validity, and completeness of Trust America’s loan origination and underwriting operations.



 Ten Percent of Federal Housing
 Administration-Insured Loans
 Not Reviewed


               Trust America uses an independent contractor to perform quality control reviews.
               It provides the contractor with a monthly list of closed loans. From this list, the
               contractor selects loans for quality control review and requests the loan files from
               Trust America.

               Trust America did not conduct quality control reviews on 10 percent of closed
               loans for the 5 months we tested. Between February and June 2004, Trust
               America closed 141 Federal Housing Administration-insured loans, but only 7
               loans (approximately 5 percent) have been reviewed because Trust America
               submitted inaccurate monthly lists of closed loans to the contractor. In addition,
               the contractor performed quality control reviews on 10 percent of all closed loans
               rather than Federal Housing Administration loans, as required. Since Trust
               America has not ensured that 10 percent of closed Federal Housing
               Administration loans have a quality control review performed, HUD cannot be
               assured that a representative sample of loans are reviewed against HUD
               requirements.


 Early Default and Rejected Loans
 Not Reviewed

               Trust America did not ensure that quality control reviews were performed on all
               loans defaulting within 6 months of closing, as required. HUD’s Neighborhood
               Watch system reported two early defaulted loans between January and
               August 2004. Trust America did not submit the loan files to the contractor.
               In March 2003, HUD conducted a review and reported the same issue. Trust
               America did not provide a list of rejected loans for the contractor to use in
               performing quality control reviews. Trust America informed us that it was not
               aware of this requirement.


                                                10
             Quality control reviews of early defaulted 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.

Written Quality Control Plan Did
Not Contain Required Elements


             HUD Handbook 4060.1, Revision 1, Change 1, paragraph 6-1, provides that as a
             condition of HUD-Federal Housing Administration approval, lenders must have
             and maintain a quality control plan for the origination and servicing of insured
             mortgages. The quality control plan must be a prescribed function of the lender’s
             operations and assure that the lender maintains compliance with HUD-Federal
             Housing Administration requirements and its own policies and procedures.

             HUD’s prior review found that Trust America had a quality control plan that did
             not comply with HUD requirements. Trust America updated its written quality
             control plan in February 2004. However, the plan does not contain all elements
             required by HUD.

             For example, the quality control plan does not contain the following required
             elements:

                •   A quality control review of 10 percent of all Federal Housing
                    Administration loans closed on an annual basis was performed.
                •   Procedures exist for expanding the scope of the quality control review
                    when fraud or patterns of deficiencies exist.
                •   The compensating factors are sufficient and documented if the debt to
                    income ratios exceeded Federal Housing Administration benchmarking
                    limits.
                •   The lender and HUD are protected from unacceptable risk and guarded
                    against errors, omissions, and fraud.
                •   The preliminary and final loan applications and all credit documents are
                    consistent or reconciled.

Conclusion

             Trust America’s written quality control plan does not meet HUD requirements.
             We attribute this to Trust America disregarding its responsibilities to ensure that
             quality control reviews were conducted. In addition, Trust America relied on its
             independent contractor to assure that its plan met HUD requirements and quality



                                              11
          control reviews were performed. As a result, Trust America is unable to fully
          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 Trust America conducts required
              quality control reviews and the written quality control plan complies with
              HUD requirements.

          2B. Take administrative action, as appropriate, up to and including civil
              monetary penalties.




                                          12
                         SCOPE AND METHODOLOGY

To achieve our audit objectives, we reviewed:

•   Applicable laws, regulations, and other HUD program requirements; and
•   Files and documents from HUD, Trust America, and closing agents.

We chose a non-representative method to select the loans for review. This method allowed us to
select Federal Housing Administration-insured loans that met certain characteristics. This
approach enabled us to focus our review efforts on Federal Housing Administration-insured
loans in which there is a greater inherent risk and/or risk of noncompliance or abuse to the
Federal Housing Administration insurance fund.

We reviewed 17 Federal Housing Administration-insured loans that had defaulted within the first 2
years from origination. In addition, we interviewed appropriate officials and staff from Trust
America, HUD’s Atlanta Single Family Homeownership Center, and borrowers’ employers.

We performed our review between July and December 2004. Though the audit covered the
period from April 1, 2002 to March 31, 2004, we extended the period as necessary to achieve the
audit objectives.

We performed our review in accordance with generally accepted government auditing standards.




                                                13
                               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/Federal Housing
       Administration 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 Regulations. Policies and procedures that management has
       implemented to reasonably ensure that its loan origination process is carried out in
       accordance with applicable 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.




                                                14
 Significant Weaknesses


Based on our review, we believe the following items are significant weaknesses:

   •   Trust America did not follow HUD requirements when originating and approving 16
       Federal Housing Administration-insured loans (see finding 1).

   •   Trust America did not fully comply with Federal Housing Administration quality control
       requirements (see finding 2).




                                                15
                                             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                                                    $ 977,709
             1B                       $ 17,502
             1C                       $ 113,002
            Total                     $ 130,504                    $ 977,709




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

2/   “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,
     deobligation of funds, withdrawal of interest, reductions in outlays, avoidance of
     unnecessary expenditures, loans and guarantees not made, and other savings.




                                              16
Appendix B

        AUDITEE COMMENTS AND OIG’S EVALUATION


Ref to OIG Evaluation   Auditee Comments




Comment 1



Comment 2




Comment 3
Comment 4




                         17
Comment 5




Comment 6


Comment 7




Comment 8



Comment 9




            18
Comment 10




Comment 11




Comment 12




Comment 13




             19
Comment 14




Comment 15




Comment 16




             20
Comment 17




Comment 18

Comment 19

Comment 20




Comment 21

Comment 22




Comment 23




             21
Comment 24

Comment 25



Comment 26




Comment 27




             22
Comment 28



Comment 29




Comment 30




Comment 31




Comment 32




             23
Comment 33




Comment 34




Comment 35




Comment 36




             24
Comment 37



Comment 38




Comment 39




Comment 40




             25
Comment 41




Comment 42


Comment 43




Comment 44


Comment 45




             26
Comment 46




Comment 47

Comment 48




             27
Comment 49




Comment 50




Comment 51


Comment 52




             28
Comment 53




Comment 54




Comment 55




             29
30
                      OIG’s Evaluation of Auditee Comments



Comment 1   Trust America’s response did not state whether they concur or not with our audit
            recommendations.

Comment 2   Case Number 092-9308470
            Inadequate Debt Verification

            Trust America acknowledges it miscalculated the total fixed payment to income
            ratio.

Comment 3   Case Number 092-9308470
            Inadequate Asset Verification

            Trust America provided us with the gift funds wire transfer confirmation. This
            document was not in the HUD case binder or the lender’s loan file. During the
            exit conference, Trust America informed us that they would obtain the wire
            transfer confirmations from the nonprofit gift donor. The wire transfer date was
            December 23, 2002. This loan closed on December 20, 2002. The wire transfer
            confirmation shows a revision date of August 4, 2004. This gives the
            appearance that the document was prepared over a year after the transaction
            occurred.

            According to HUD Handbook 4155.1 Revision 4, Change 1, paragraph 3-1, the
            application package should contain sufficient documentation to support the
            lender’s decision to approve the mortgage loan.

Comment 4   Case Number 092-9308470
            Inadequate Asset Verification

            HUD requires the lender to verify all funds for the borrower’s investment in the
            property. Without the earnest deposit of $350, the borrower would have not met
            the minimum down-payment.




                                           31
Comment 5   Case Number 092-9308470
            Other Deficiencies

            Trust America states it had no financial interest nor was affiliated in any way
            with the builder/seller. However, no documentation was provided to support this
            statement. Documentation we reviewed and an interview with a loan officer
            disclosed the affiliated business relationship between Trust America and the
            builder/seller. The HUD case binder and the lender’s loan file had no evidence
            the borrower was aware of the relationship.

Comment 6   Case Number 092-9287653
            Inadequate Asset Verification

            Trust America provided us with the gift funds wire transfer confirmation. This
            document was not in the HUD case binder or the lender’s loan file. During the
            exit conference, Trust America informed us that it would obtain the wire transfer
            confirmations from the nonprofit gift donor.

            According to HUD Handbook 4155.1 Revision 4, Change 1, paragraph 3-1, the
            application package should contain sufficient documentation to support the
            lender’s decision to approve the mortgage loan.

Comment 7   Case Number 092-9287653
            Inadequate Asset Verification

            HUD requires all funds for the borrower’s investment to be verified. HUD also
            requires the earnest deposit amount and source of funds to be verified if it
            appears excessive based on the borrower’s history of accumulating savings.
            This borrower did not have a bank account and Trust America did not provide
            satisfactory evidence of the borrower’s ability of accumulating savings.

            Trust America provided us with an invoice showing it billed $360 to the
            builder/seller for the appraisal and credit report. The invoice does not properly
            support that the borrower paid the earnest deposit and raises the concern whether
            the builder/seller provided the earnest deposit. The invoice was not provided to
            us during our review and was not included in the HUD case binder or in the
            lender’s loan file. Without proper documentation, Trust America cannot ensure
            the funds did not come from prohibited parties.




                                          32
Comment 8    Case Number 092-9287653
             Inadequate Asset Verification

             Trust America did not provide any additional information on the source of funds
             for recent debt payoff issues.

Comment 9    Case Number 092-9287653
             Other Deficiencies

             Trust America states the borrower was debt free and a greater portion of her
             earnings would be available to make the mortgage payment. However, this
             explanation was not in the HUD case binder or the lender’s loan file. Lenders
             must establish the borrower’s ability to make higher mortgage payments in the
             future and it must be supported by sufficient documentation.

Comment 10   Case Number 092-8937759
             Inadequate Debt Verification

             Trust America states the reason for using the overtime income. However, this
             justification was not documented in the HUD case binder or the lender’s loan
             file. According to HUD Handbook 4155.1 Revision 4, Change 1, paragraph 3-1,
             the application package should contain sufficient documentation to support the
             lender’s decision to approve the mortgage loan.

Comment 11   Case Number 092-8937759
             Inadequate Asset Verification

             Trust America did not verify assets in accordance with HUD requirements.
             Trust America states the borrower’s investment toward the purchase of the
             property was $4,855. Trust America provided us with an escrow letter that
             includes a schedule of the amount and date the borrower paid to the
             builder/seller. The escrow letter is not sufficient to meet HUD requirements or
             ensure funds did not originate from an unallowable source. The escrow letter
             was not in the HUD case binder or in the lender’s loan file.

             Trust America did not comment on the issues that the borrower did not meet the
             minimum down-payment.




                                            33
Comment 12   Case Number 092-8937759
             Other Deficiencies

             We acknowledged the borrower received child support income and it was not
             used as effective income in qualifying the borrower. However, Florida State
             records located in the HUD case binder show the child support payments made
             to the borrower were not steady and amounts in arrears existed. We considered
             the child support income not to have met any of the four criteria established in
             HUD requirements.

Comment 13   Case Number 092-8944460
             Inadequate Asset Verification

             Trust America provided us with the gift funds wire transfer confirmation. This
             document was not in the HUD case binder and the lender’s loan file. During the
             exit conference, Trust America informed us that it would obtain the wire transfer
             confirmations from the nonprofit gift donor. The wire transfer date was
             September 5, 2002. This loan closed on September 4, 2002.

             According to HUD Handbook 4155.1 Revision 4, Change 1, paragraph 3-1, the
             application package should contain sufficient documentation to support the
             lender’s decision to approve the mortgage loan.

Comment 14   Case Number 092-8944460
             Inadequate Asset Verification

             HUD requires all funds for the borrower’s investment to be verified. HUD also
             requires the earnest deposit amount and source of funds to be verified if it
             appears excessive based on the borrower’s history of accumulating savings.
             Documentation in the HUD case binder demonstrates that the earnest deposit of
             $500 was excessive based on the borrower’s history of accumulating savings.

             Trust America provided us invoices it billed to the builder/seller for the appraisal
             and credit report. The invoices do not properly support that the borrower paid
             the earnest deposit and raises the concern whether the builder/seller provided the
             earnest deposit. These invoices were not provided to us during our review and
             were not included in the HUD case binder or the lender’s loan file. Without
             proper documentation, Trust America cannot ensure that the funds did not come
             from prohibited parties.




                                           34
             Trust America did not properly verify assets in accordance with HUD
             requirements. Trust America states the borrower had sufficient assets of $518 in
             his bank account to satisfy the source of funds to close. However, the bank
             statement included in the HUD case binder supporting the $518 was for the
             period ending July 12, 2002. This loan closed on September 4, 2002.

             Case Number 092-8944460
Comment 15   Inadequate Debt Verification

             Trust America states the borrower had sufficient assets of $518 in his bank
             account to satisfy the payment of the $260 collection. However, the bank
             statement included in the HUD case binder supporting the $518 was for the
             period ending July 12, 2002. The collection was paid on August 27, 2002.

             The credit explanation letters were faxed by the builder/seller (interested third
             party), which violates HUD regulations.

Comment 16   Case Number 092-8944460
             Other Deficiencies

             We acknowledge that the lender might not have been aware of the borrower’s
             employment issue.

             Trust America states the borrower had minimal debt and a greater portion of his
             earnings would be available to make the mortgage payment. However, this
             explanation was not in the HUD case binder or the lender’s loan file. Lenders
             must establish the borrower’s ability to make higher mortgage payments in the
             future and it must be supported by sufficient documentation.

             Case Number 092-9016031
Comment 17   Inadequate Debt Verification

             HUD allows overtime income to be used to qualify if the verification of
             employment does not state categorically that such income is not likely to
             continue.

             Trust America did not comment on the compensating factors issue.




                                           35
             Case Number 092-9016031
Comment 18   Inadequate Asset Verification

             Trust America provided us with the gift funds wire transfer confirmation report.
             The report was generated on February 9, 2005. This document was not in the
             HUD case binder or the lender loan file. During the exit conference, Trust
             America informed us that it would obtain wire transfer confirmations from the
             nonprofit gift donor. The wire transfer date was August 1, 2002. This loan
             closed on July 30, 2002.

             According to HUD Handbook 4155.1 Revision 4, Change 1, paragraph 3-1, the
             application package should contain sufficient documentation to support the
             lender’s decision to approve the mortgage loan.

             Case Number 092-9016031
Comment 19   Inadequate Asset Verification

             Trust America did not comment on the source of the earnest deposit, but
             indicated it cannot determine whether the borrower should have received a credit
             from the builder/seller at the time of closing. Without a credit for the earnest
             deposit, the borrower would have not met the minimum down-payment of
             $3,061. The borrower only invested $2,985, which represented a gift from a
             down-payment assistance program.

             Case Number 092-9016031
Comment 20   Inadequate Asset Verification

             Trust America did not comment on the source of funds for the three large
             deposits and the collection payments.

             In addition, Trust America did not comment on the buydown interest rate loan,
             and the conflicting relationship between its owner and the builder/seller.

             Case Number 092-9031856
Comment 21
             Trust America provided us with the gift funds wire transfer confirmation report.
             This document was not in the HUD case binder or the lender loan file. During
             the exit conference, Trust America informed us that it would obtain wire transfer
             confirmations from the nonprofit gift donor.




                                          36
             According to HUD Handbook 4155.1 Revision 4, Change 1, paragraph 3-1, the
             application package should contain sufficient documentation to support the
             lender’s decision to approve the mortgage loan.

Comment 22   Case Number 092-9031856

             HUD requires all funds for the borrower’s investment to be verified. HUD also
             requires the earnest deposit amount and source of funds to be verified if it
             appears excessive based on the borrower’s history of accumulating savings.
             Documentation in the HUD case binder demonstrates that the earnest deposit of
             $350 was excessive based on the borrower’s history of accumulating savings.

             Trust America provided us with an invoice showing it billed $360 to the
             builder/seller for the appraisal and credit report. The invoice does not properly
             support that the borrower paid the earnest deposit and raises the concern whether
             the builder/seller provided the earnest deposit. This invoice was not provided to
             us during our review and was not included in the HUD case binder or the
             lender’s loan file. Without proper documentation, Trust America cannot ensure
             the funds did not come from prohibited parties.

             Case Number 092-9031856
Comment 23   Other Deficiencies

             Trust America states the borrower had potential for increased income as
             indicated by her position as general manager of a restaurant. However, this
             explanation was not in the HUD case binder or the lender’s loan file. In
             addition, the verification of employment shows no indication of recent or future
             pay increases. Lenders must establish the borrower’s ability to make higher
             mortgage payments in the future using one of four criteria prescribed by HUD
             and it must be supported by sufficient documentation.

             Case Number 092-9178802
Comment 24   Inadequate Asset Verification

             Trust America provided us with the gift funds wire transfer confirmation report.
             This document was not in the HUD case binder or the lender loan file. During
             the exit conference, Trust America informed us that it would obtain the wire
             transfer confirmations from the nonprofit gift donor. The report was generated
             on February 9, 2005.




                                          37
             Case Number 092-9178802
Comment 25   Inadequate Asset Verification

             Trust America commented that the minimum required investment ($3,120) was
             three percent, which was provided 100 percent by the gift funds. The borrower
             received his earnest deposit back since this was a zero percent loan due to the
             gift fund contribution.

             The borrower’s minimum required investment (down-payment) to acquire this
             property was $3,209. The minimum down-payment is the difference between
             the acquisition cost (sales price plus borrower-paid closing costs) and the
             maximum mortgage amount. The $3,120 represents the statutory investment
             requirement, which is three percent of the sales price.

             Case Number 092-9178802
Comment 26   Other Deficiencies

             The explanation provided by Trust America was not documented in the HUD
             case binder and lender’s loan file. Lenders must establish the borrower’s ability
             to make higher mortgage payments in the future using one of four criteria
             prescribed by HUD and it must be supported by sufficient documentation.

             Trust America did not comment on the issue regarding the relationship between
             the owner of Trust America and the builder/seller entity.

             Case Number 092-9184889
Comment 27   Inadequate Asset Verification

             HUD requires all funds for the borrower’s investment to be verified. HUD also
             requires the earnest deposit amount and source of funds to be verified if it
             appears excessive based on the borrower’s history of accumulating savings.
             This borrower did not have a bank account and Trust America did not provide
             satisfactory evidence of the borrower’s ability of accumulating savings.




                                          38
             Case Number 092-9184889
Comment 28   Inadequate Asset Verification

             The borrower’s minimum required investment (down-payment) to acquire this
             property was $3,501. The minimum down-payment is the difference between
             the acquisition cost (sales price plus borrower-paid closing costs) and the
             maximum mortgage amount. The $3,306 (gift funds) represents the statutory
             investment requirement, which is three percent of the sales price.

             Case Number 092-9184889
Comment 29   Inadequate Asset Verification

             Trust America provided no additional documentation regarding the recent debts
             payoff issue. Trust America states the borrower’s monthly disposable income
             was over $1,450. However, the borrower did not maintain a bank account and
             Trust America did not provide satisfactory evidence of the borrower’s ability of
             accumulating savings.

             Case Number 092-9184889
Comment 30   Other Deficiencies

             Trust America states the compensating factor was that both ratios at the note rate
             were 37 percent. Trust America added that the borrowers were basically debt
             free and only had a $15 per month payment, which means that a greater portion
             of their earnings could be devoted to their housing expense. This explanation
             was not in the HUD case binder and lender’s loan file. In addition, the borrower
             has not demonstrated an ability to manage financial obligations as indicated by
             the collection accounts. Lenders must establish the borrower’s ability to make
             higher mortgage payments in the future using one of the four criteria prescribed
             by HUD and it must be supported by sufficient documentation.

             Case Number 092-9184889
Comment 31   Other Deficiencies

             We acknowledge that since the file was submitted to HUD prior to the 15th of the
             month, a payment ledger was not required. We revised our narrative
             accordingly.




                                          39
Comment 32   Case Number 092-9221657

             HUD requires all funds for the borrower’s investment to be verified. HUD also
             requires the earnest deposit amount and source of funds to be verified if it
             appears excessive based on the borrower’s history of accumulating savings.
             Documentation in the HUD case binder demonstrates that the earnest deposit of
             $350 was excessive based on the borrower’s history of accumulating savings.

             Trust America provided us with an invoice showing it billed $350 to the
             builder/seller for the appraisal and credit report. The invoice does not properly
             support that the borrower paid the earnest deposit and raises the concern whether
             the builder/seller provided the earnest deposit. In addition, the document was
             not provided to us during our review and was not included in the HUD case
             binder and lender’s loan file. Without proper documentation, Trust America
             cannot ensure the funds did not come from prohibited parties.

Comment 33   Case Number 092-9221657
             Inadequate Debt Verification

             Trust America did not properly verify assets in accordance with HUD
             requirements. Trust America states the borrower had assets in excess of $400 in
             his bank account to repay the collections. However, the borrower did not have a
             bank account. The co-borrower had a bank account, but the bank statement
             included in the loan file supporting the $400 was for the period ending
             August 14, 2002. The collections were paid on September 27, 2002. The
             collections were not paid with personal checks.

Comment 34   Case Number 092-9221657
             Inadequate Debt Verification

             Documentation in the file indicated the borrower was retroactively paying child
             support of $1,434. This debt was considered in the qualification process. The
             collection for child support shown in the credit report was $3,252.




                                       40
             Case Number 092-9221657
Comment 35   Other Deficiencies

             Trust America states the borrower had potential for increased income as
             indicated by his position as general manager of a restaurant. This explanation
             was not documented in the HUD case binder or the lender’s loan file. Lenders
             must establish the borrower’s ability to make higher mortgage payments in the
             future using one of the four criteria prescribed by HUD and it must be supported
             by sufficient documentation.

             Trust America did not comment on the issue that the HUD-1 Settlement
             Statement was altered after settlement.

             Case Number 092-9251108
Comment 36   Inadequate Debt Verification

             HUD requires the lender to verify all funds for the borrower’s investment in the
             property. Without the earnest deposit of $500, the borrower would have not met
             the minimum down-payment.

             Trust America provided us with an invoice showing it billed $420 to the
             builder/seller for the appraisal and credit report. The invoice does not properly
             support that the borrower paid the earnest deposit and raises the concern whether
             the builder/seller provided the earnest deposit. In addition, the document was
             not provided to us during our review and was not included in the HUD case
             binder and lender’s loan file. Without proper documentation, Trust America
             cannot ensure the funds did not come from prohibited parties.

             Trust America claims the borrowers had sufficient assets in their bank accounts
             to satisfy the source of funds to close of $3,690. However, this is inconsistent
             with the information in the HUD case binder. The bank statements were faxed
             by the builder/seller (interested third party), which violates HUD regulations.
             There were no verifications of deposit to ensure the funds did not come from
             prohibited parties. The property closed October 25, 2002. As we indicated
             above, HUD requires the lender to verify all funds for the borrower’s investment
             in the property.




                                          41
                                               Amount               Date
                       Bank Account # 1          $2,803.17        10/24/02
                       Bank Account # 2           2,704.28        10/07/02
                       Bank Account # 3              54.87        10/07/02


Comment 37   Case Number 092-9291317
             Inadequate Debt Verification

             Trust America acknowledges it miscalculated the total fixed payment to income
             ratio.

             Case Number 092-9291317
Comment 38   Inadequate Asset Verification

             Trust America did not provide any other information regarding the source of
             funds for the three large deposits.

             Trust America did not comment on the earnest deposit issue.

Comment 39   Case Number 092-9291317
             Other Deficiencies

             Trust America did not submit documentation to support the compensating factor
             listed on the mortgage credit analysis worksheet. The verification of the
             co-borrower’s employment was faxed by the borrower’s employment location
             (interested third party), which violates HUD requirements.

Comment 40   Case Number 092-9295695
             Inadequate Asset Verification

             HUD requires all funds for the borrower’s investment to be verified. Without
             the earnest deposit of $350, the borrower would have not met the minimum
             down-payment.




                                         42
             Trust America provided us with an invoice showing it billed $350 to the
             builder/seller for the appraisal and credit report. The invoice does not properly
             support that the borrower paid the earnest deposit and raises the concern whether
             the builder/seller provided the earnest deposit. This invoice was not provided to
             us during our review and was not included in the HUD case binder and lender’s
             loan file. Without proper documentation, Trust America cannot ensure the funds
             did not come from prohibited parties.

Comment 41   Case Number 092-9295695
             Other Deficiencies

             HUD’s Neighborhood Watch system shows the first payment for this loan was
             due on July 1, 2003. HUD received this loan for endorsement on
             August 8, 2003. Trust America should have provided a payment ledger showing
             the loan was current and an explanation for the delay and actions taken to
             prevent future delayed submissions.

Comment 42   Case Number 092-9312350
             Inadequate Asset Verification

             Trust America provided us with the gift funds wire transfer confirmation. This
             document was not in the HUD case binder or the lender’s loan file. During the
             exit conference, Trust America informed us that it would obtain the wire transfer
             confirmations from the nonprofit gift donor. This loan closed on
             February 21, 2003. However, the wire transfer confirmation showed a revision
             date of August 4, 2004. This gives the appearance the document was prepared
             over a year after the transaction occurred.

Comment 43   Case Number 092-9312350
             Inadequate Asset Verification

             HUD requires all funds for the borrower’s investment to be verified. HUD also
             requires the earnest deposit amount and source of funds to be verified if it
             appears excessive based on the borrower’s history of accumulating savings. The
             borrower did not have a bank account and Trust America did not provide
             satisfactory evidence of the borrower’s ability of accumulating savings.




                                           43
             Case Number 092-9312350
Comment 44   Inadequate Asset Verification

             The borrower’s minimum required investment (down-payment) to acquire this
             property was $3,675. The minimum down-payment is the difference between
             the acquisition cost (sales price plus borrower-paid closing costs) and the
             maximum mortgage amount. The real estate tax proration of $15 was a credit
             (not cash) on page 1 of the HUD-1 Settlement Statement under “items unpaid by
             seller.” The builder/seller was responsible for paying the taxes while it owned
             the property. Seller’s contribution is not an acceptable source for the cash
             investment as prescribed in HUD Handbook 4155.1, Revision 4, Change 1,
             paragraph 2-10.

             Trust America did not comment on the source of funds for recent debt payoffs
             issue.

Comment 45   Case Number 092-9312350
             Inadequate Asset Verification

             Trust America states it had no financial interest nor was affiliated in any way
             with the builder/seller. However, no documentation was provided to support this
             statement. Documentation we reviewed and an interview with a loan officer
             disclosed the affiliated business relationship between Trust America and the
             builder/seller. The HUD case binder showed no evidence the borrower was
             aware of the relationship.

             Case Number 092-9319257
Comment 46   Inadequate Asset Verification

             HUD requires all funds for the borrower’s investment to be verified. Without
             the earnest deposit of $350, the borrower would have not met the minimum
             down-payment. Some of the bank statements located in the HUD case binder
             were faxed by the builder/seller (interested third party), which is prohibited by
             HUD regulations.




                                          44
             Trust America provided us with an invoice showing it billed $350 to the
             builder/seller for the appraisal and credit report. The invoice does not properly
             support that the borrower paid the earnest deposit and raises the concern whether
             the builder/seller provided the earnest deposit. This invoice was not provided to
             us during our review and was not included in the HUD case binder and lender’s
             loan file. Without proper documentation, Trust America cannot ensure the funds
             did not come from prohibited parties.

             Trust America did not comment on the verification of the borrower’s earnings,
             buydown interest rate loan, and alteration of the HUD-1 Settlement Statement.

             Case Number 092-9319546
Comment 47   Inadequate Asset Verification

             Trust America provided us with the gift funds wire transfer confirmation. This
             document was not in the HUD case binder or the lender’s loan file. During the
             exit conference, Trust America informed us that it would obtain the wire transfer
             confirmations from the nonprofit gift donor. This loan closed
             February 14, 2003. However, the wire transfer date was February 18, 2003.

             Case Number 092-9319546
Comment 48   Inadequate Asset Verification

             HUD requires all funds for the borrower’s investment to be verified. HUD also
             requires the earnest deposit amount and source of funds to be verified if it
             appears excessive based on the borrower’s history of accumulating savings.
             Documentation in the HUD case binder demonstrates that the earnest deposit of
             $500 was excessive based on the borrower’s ability of accumulating savings. In
             addition, the bank statements included in the HUD case binder were faxed by the
             builder/seller (interested third party), which violates HUD requirements.

             Trust America provided us with an invoice showing it billed $360 to the
             builder/seller for the appraisal and credit report. The invoice does not properly
             support that the borrower paid the earnest deposit and raises the concern whether
             the builder/seller provided the earnest deposit. The invoice was not provided to
             us during our review and was not included in the HUD case binder and lender’s
             loan file. Without proper documentation, Trust America cannot ensure the funds
             did not come from prohibited parties.




                                          45
Comment 49   Case Number 092-9319546
             Other Deficiencies

             Trust America states the borrowers had demonstrated the ability to manage
             financial obligations in such a way that a greater portion of the income may be
             devoted to housing expenses. This explanation was not documented in the HUD
             case binder or the lender’s loan file. Lenders must establish the borrower’s
             ability to make higher mortgage payments in the future using one of the four
             criteria prescribed by HUD and it must be supported by sufficient
             documentation.

             Trust America did not comment on the HUD employee issue.

Comment 50   Case Number 092-9348985
             Inadequate Asset Verification

             HUD requires all funds for the borrower’s investment to be verified. HUD also
             requires the earnest deposit amount and source of funds to be verified if it
             appears excessive based on the borrower’s history of accumulating savings.
             Documentation in the HUD case binder demonstrates that the earnest deposit
             was excessive based on the borrower’s ability of accumulating savings.

             Trust America did not comment on the minimum down-payment and source of
             funds for recent debt payoffs issues.

Comment 51   Case Number 092-9348985
             Inadequate Debt Verification

             The mortgage credit analysis worksheet submitted to HUD shows a total fixed
             payment to income ratio of 44.14. Trust America did not provide a valid
             compensating factor for exceeding the ratio.




                                         46
             Case Number 092-9348985
Comment 52   Inadequate Debt Verification

             Trust America states it had no financial interest nor was affiliated in any way
             with the builder/seller. However, no documentation was provided to support this
             statement. Documentation we reviewed and an interview with a loan officer
             disclosed the affiliated business relationship between Trust America and the
             builder/seller. The HUD case binder showed no evidence the borrower was
             aware of the relationship.

             Quality Control Response:
Comment 53   Ten Percent of FHA insured loans not reviewed

             Trust America agrees that ten percent of Federal Housing Administration-
             insured loans were not reviewed and has implemented procedures to ensure that
             the required quality control reviews are completed.

             Quality Control Response:
Comment 54   Early Default and Rejected Loans Not reviewed

             Trust America agrees that two early defaulted loans were not sent to the
             contractor for a quality control review due to recent hurricanes in the area. Trust
             America states that it has a policy of sending defaulted loans for review and will
             continue to do so.

             Trust America states it will send a list of rejected Federal Housing
             Administration loans from 2004 to the contractor for review.

             Quality Control Response:
Comment 55   Written Quality Control Plan did not contain required elements

             Trust America states that it modified its written quality control plan to comply
             with HUD requirements. However, Trust America did not provide us with its
             revised plan.




                                            47
Appendix C

  ACTIVE LOANS TRUST AMERICA SHOULD INDEMNIFY


        Case         Loan     Settlement
       Number       Amount       Date                  Status
     092-8937759   $133,980    06/12/02    In default, repayment
     092-8944460    133,792    09/04/02    In default, repayment
     092-9016031    98,719     07/30/02    In default, delinquent
     092-9178802    103,184    09/03/02    In default, repayment
     092-9291317    135,925    06/27/03    In default, repayment
                                           Reinstated by mortgagor who
     092-9319257   117,868     12/30/02    retains ownership
     092-9319546   125,806     02/14/03    In default, modification
                                           Reinstated by mortgagor who
     092-9348985    128,435    04/11/03    retains ownership
        Total      $977,709




                               48
Appendix D

             SUMMARY OF LOAN DEFICIENCIES


                                Inadequate             Inadequate
                        Loan       Asset    Other         Debt
       Case Number    Amount Verification Deficiencies Verification
       092-8937759     $133,980     X          X            X
       092-8944460      133,792     X          X            X
       092-9016031       98,719     X          X            X
       092-9031856      116,281     X          X
       092-9178802      103,184     X          X
       092-9184889      109,335     X          X
       092-9221657      120,646     X          X            X
       092-9251108      134,437     X                       X
       092-9287653      125,904     X          X
       092-9291317      135,925     X          X            X
       092-9295695      146,244     X          X
       092-9308470      109,038     X          X            X
       092-9312350      109,485     X          X
       092-9319257      117,868     X          X            X
       092-9319546      125,806     X          X
       092-9348985      128,435     X          X            X
           Total     $1,949,079     16         15            9




                                   49
Appendix E

                     NARRATIVE LOAN DEFICIENCIES


Case number:                          092-8937759
Mortgage amount:                      $133,980
Date of loan closing:                 06/12/02
Current status:                       In default as of 12/30/04, repayment
Cause of default:                     Other
Number of payments before
  first default was reported:         Cannot be accurately calculated.

Summary:

Inadequate Debt Verification

Trust America approved the loan without properly computing the qualifying ratios. It calculated the
front and back qualifying ratios as 25.24 and 44.52 percent, respectively, on the mortgage credit
analysis worksheet. Trust America improperly included overtime in computing the monthly
income. The verification of employment in the loan file indicated the borrower had been employed
for less than 2 years. Trust America failed to document the probability of the continuance of the
borrower’s overtime income as required by HUD. Contrary to HUD Handbook 4155.1, Trust
America did not justify and document the reason for using the overtime income to qualify the
borrower. We calculated the front and back qualifying ratios as 31.29 and 55.17 percent,
respectively.

Inadequate Asset Verification

Trust America approved the loan without properly verifying the borrower’s assets. It did not
properly verify and document the source of the earnest deposit. It did not clarify important file
discrepancies. The agreement to build the home and the final loan application showed an earnest
deposit of $350. According to the HUD-1 Settlement Statement, the earnest deposit was $4,505.
The loan file included a letter from the builder/seller acknowledging it was holding $4,505 as an
earnest deposit. Trust America told us that the builder/seller arranged a monthly payment plan
for the borrower to pay the earnest deposit during construction of the property. However, there
is no documentation in the loan file showing how and when the amounts were paid. In addition,
Trust America failed to ensure the borrower met the minimum down payment in the purchase of
the property. The minimum down payment to acquire the property was $4,001. Trust America
did not provide sufficient documentation in the loan file to support that the borrower met the
requirement.




                                                50
Other Deficiencies

Contrary to requirements outlined in HUD Handbook 4155.1, Revision 4, Change 1, paragraph
2-14, Trust America approved the buydown interest rate loan without properly documenting the
borrower’s ability to make higher mortgage payments in the future. The qualifying ratios for the
buydown interest rate loan were 25.24 percent and 44.52 percent. We calculated the qualifying
ratios without the buydown interest rate loan as 37.18 percent and 61.06 percent.




                                               51
Case number:                          092-8944460
Mortgage amount:                      $133,792
Date of loan closing:                 09/04/02
Current status:                       In default as of 12/30/04, repayment
Cause of default:                     Curtailment of borrower income
Number of payments before
  first default was reported:         4

Summary:

Inadequate Asset Verification

Trust America approved the loan without properly verifying the borrower’s assets. Contrary to
requirements in HUD Handbook 4155.1, Revision 4, Change 1, paragraph 2-10C, Trust America
did not obtain supporting documentation from a down-payment assistance program on how the gift
funds were transferred to the borrower. The gift funds of $4,045 represented 100 percent of the
borrower’s minimum down payment.

Trust America did not properly verify and document the source of the earnest deposit and cash
paid at closing, which were the borrower’s only contributions toward the acquisition of the
property. Trust America did not clarify important file discrepancies. The agreement to build the
home showed a $500 earnest deposit. Both the initial and final loan applications showed a $350
earnest deposit. According to the HUD-1 Settlement Statement, the earnest deposit was $150.
The HUD-1 Settlement Statement also showed the borrower paid $136 at closing. Trust
America told us that the seller/builder collected $500 from the borrower when the agreement to
build the home was signed. Trust America then billed the seller/builder $350 to cover the cost of
the credit report and appraisal with the $150 balance credited as earnest money on the HUD-1
Settlement Statement. The loan file contains no evidence showing how the earnest deposit and
closing amount were paid.

Inadequate Debt Verification

Trust America approved the loan without properly analyzing the borrower’s credit to ensure that the
borrower demonstrated financial responsibility. It failed to provide supporting documentation in the
loan file regarding the borrower’s credit history. A mortgage advisor data package and the initial
loan application showed a debt with monthly payments of $36 and an unpaid balance of $4,026.
The credit report showed a note stating, “Deleted Sears Auth User 8/22/02.” The debt was not listed
in the final loan application. Trust America told us that the debt was removed from the credit report
and not used in the qualification process because the borrower was an authorized user and not
responsible for the account. In another instance, a $260 medical collection was paid without
documentation of the source of funds used.

The loan file contained justification letters faxed from the builder/seller for the collection
accounts. Trust America told us that builders/sellers often assist borrowers during the loan
process by preparing letters explaining derogatory credit information. It claimed that the



                                                 52
builders/sellers prepare the letters with information provided by the borrowers, and the
borrowers sign the letters. We question the authenticity of these letters since the builders/sellers
have a financial interest in the transaction.

Other Deficiencies

We verified with the employer that the borrower was employed through August 19, 2002. On
the final loan application dated September 4, 2002 (also closing date), the borrower certified that
he still worked for this employer. The borrower refused to discuss this matter with us.

Contrary to the requirements of HUD Handbook 4155.1, Revision 4, Change 1, paragraph 2-14,
Trust America approved the buydown interest rate loan without properly documenting the
borrower’s ability to make higher mortgage payments in the future.




                                                 53
Case number:                          092-9016031
Mortgage amount:                      $98,719
Date of loan closing:                 07/30/02
Current status:                       In default as of 12/30/04, delinquent
Cause of default:                     Illness of principal mortgagor
Number of payments before
  first default was reported:         15

Summary:

Inadequate Debt Verification

Trust America approved the loan without properly computing qualifying ratios. It calculated the
mortgage payment to income ratio at 30.61 percent and the total fixed payment ratio at 42.99
percent on the mortgage credit analysis worksheet. Trust America improperly included overtime
in computing the monthly income. The verification of employment indicated that overtime
income was not likely to continue and the borrower had been employed for less than 2 years.
Contrary to HUD Handbook 4155.1, Trust America did not justify and document the reason for
using the overtime income to qualify the borrower. We calculated the mortgage payment to
income ratio at 36.04 percent and the total fixed payment to income ratio at 50.62 percent, which
exceeds HUD’s permissible rates of 31 percent and 43 percent as prescribed in HUD Handbook
4155.1, Revision 4, Change 1, paragraph 2-19. Since the qualifying ratios exceeded the limit,
Trust America should have provided compensating factors to justify the excess ratios.

Inadequate Asset Verification

Trust America approved the loan without properly verifying the borrower’s assets. It did not obtain
supporting documentation from a down-payment assistance program on how the gift funds were
transferred to the borrower. The gift funds totaled $2,985 and represented more than 97 percent of
the minimum down payment. Trust America informed us that it was not aware of this requirement.

Trust America did not properly verify and document the source of the earnest deposit, which was
the borrower’s only contribution toward the acquisition of the property. Trust America did not
resolve conflicting loan documentation regarding the earnest deposit. The residential
construction contract and the final loan application showed an earnest deposit of $360, but the
HUD-1 Settlement Statement showed $0. Trust America told us that the borrower should have
received a $360 credit at closing for the earnest deposit, adding that the borrower was due a
refund from the builder/seller. The loan file contains no evidence showing how the earnest
deposit was paid.

Trust America did not verify three large deposits of between $1,144 and $3,200 into the
borrower’s bank accounts. It also did not provide evidence of the source of funds used to repay
more than $1,280 in collections. Without proper documentation, Trust America cannot ensure
funds from prohibited parties were not used to repay the debt.




                                                54
Other Deficiencies

Contrary to the requirements of HUD Handbook 4155.1, Revision 4, Change 1, paragraph 2-14,
Trust America approved the buydown interest rate loan without properly documenting the
borrower’s ability to make higher mortgage payments in the future. The mortgage payment to
income ratio and total fixed payment to income ratio for the buydown interest rate loan were 30.61
percent and 42.99 percent, respectively. We calculated the mortgage payment to income ratio and
total fixed payment to income ratio without the buydown interest rate loan as 43.09 percent and
57.67 percent, respectively.

The owner of Trust America was also the owner of the builder/seller entity. The underwriter
certified in the Direct Endorsement Approval for a HUD/ Federal Housing Administration-
Insured Mortgage form that the lender did not have a financial interest in or a relationship with
the builder or seller involved in this transaction. The loan file contained no evidence that the
borrower was aware of this relationship. HUD’s prior review also reported this issue.




                                                55
Case number:                          092-9031856
Mortgage amount:                      $116,281
Date of loan closing:                 10/01/02
Current status:                       Terminated (paid in full) as of 08/31/04
Cause of default:                     Curtailment of borrower income
Number of payments before
   first default was reported:        6

Summary:

Inadequate Asset Verification

Trust America approved the loan without properly verifying the borrower’s assets. It did not obtain
supporting documentation from a down-payment assistance program on how the gift funds were
transferred to the borrower. The gift funds totaled $3,516 and represented more than 91 percent of
the minimum down payment. Trust America informed us that it was not aware of this requirement,
adding that the gift funds were wired from the nonprofit to the settlement company.

Trust America did not properly verify and document the source of the earnest deposit, which was
the borrower’s only contribution toward the acquisition of the property. Trust America did not
resolve conflicting loan documentation regarding the earnest deposit. The agreement to build the
home and the final loan application showed an earnest deposit of $350, but the HUD-1
Settlement Statement showed $0. Trust America told us that the seller/builder collected a $350
deposit at the time of the contract. Trust America then billed the seller/builder $350 to cover the
appraisal and credit report and gave a credit to the borrower in the HUD-1 Settlement Statement.
The loan file contains no evidence showing how the earnest deposit was paid.

Other Deficiencies

Contrary to the requirements of HUD Handbook 4155.1, Revision 4, Change 1, paragraph 2-14,
Trust America approved the buydown interest rate loan without properly documenting the
borrower’s ability to make higher mortgage payments in the future. The mortgage payment to
income ratio and total fixed payment to income ratio for the buydown interest rate loan were 27.10
percent and 39.83 percent, respectively. We calculated the mortgage payment to income ratio and
total fixed payment to income ratio without the buydown interest rate loan as 32.60 percent and
45.30 percent, respectively.




                                                56
Case number:                        092-9178802
Mortgage amount:                    $103,184
Date of loan closing:               09/03/02
Current status:                     In default as of 12/30/04, repayment
Cause of default:                   Curtailment of borrower income
Number of payments before
  first default was reported:       12

Summary:

Inadequate Asset Verification

Trust America approved the loan without properly verifying the borrower’s assets. It did not
obtain supporting documentation from a down-payment assistance program on how the gift
funds were transferred to the borrower. The gift funds totaled $3,120 and represented more than
97 percent of the minimum down payment. Trust America informed us that it was not aware of
this requirement. In addition, it failed to ensure the borrower met the minimum down payment
in the purchase of the property. The minimum down payment to acquire the property was
$3,209. The borrower only invested $3,120, which was received from the down-payment
assistance program.

Other Deficiencies

Contrary to the requirements of HUD Handbook 4155.1, Revision 4, Change 1, paragraph 2-14,
Trust America approved the buydown interest rate loan without properly documenting the
borrower’s ability to make higher mortgage payments in the future.

The owner of Trust America was also the owner of the builder/seller entity. The loan file
contained no evidence that the borrower was aware of this relationship. HUD’s prior review also
reported this issue.




                                              57
Case number:                                 092-9184889
Mortgage amount:                             $109,335
Date of loan closing:                        05/02/03
Current status:                              Terminated (paid in full) as of 12/30/04
Cause of default:                            Excessive obligations
Number of payments before
  first default was reported:                0

Summary:

Inadequate Asset Verification

Trust America approved the loan without properly verifying the borrower’s assets. It did not
properly verify and document the source of the earnest deposit, which was the borrower’s only
contribution toward the acquisition of the property. Trust America did not clarify important file
discrepancies. The agreement to build the home showed a $360 earnest deposit, and the initial
and final loan applications showed $350. According to the HUD-1 Settlement Statement, the
earnest deposit was $0. Trust America told us that the seller/builder collected the $360 deposit at
the time of the contract. Trust America then billed the seller/builder for the $360 to cover the
appraisal and credit report and gave a credit to the borrower on the HUD-1 Settlement Statement.
Trust America also told us that the $350 listed in the loan applications was a typographical error.
The loan file contains no evidence showing how the earnest deposit was paid.

Trust America failed to ensure the borrower met the minimum down payment in the purchase of
the property. The minimum down payment to acquire the property was $3,646. The borrower
only invested $3,501, which included $3,306 from a down-payment assistance program. Trust
America did not provide sufficient documentation in the loan file to support that the borrower
met the requirement.

Trust America did not properly document the source of funds for recent debt payoffs. The credit
reports and other information in the loan file indicated medical bills, credit cards, and other
collections were recently repaid. However, the loan file lacked sufficient documentation to
assess the amounts paid and the source of funds used. The borrower did not have a bank
account. Without proper documentation, Trust America cannot ensure funds from prohibited
parties were not used to repay the debts.

Other Deficiencies

Contrary to the requirements of HUD Handbook 4155.1, Revision 4, Change 1, paragraph 2-14,
Trust America approved the buydown interest rate loan without properly documenting the
borrower’s ability to make higher mortgage payments in the future.




                                                 58
Trust America did not comply with late endorsement procedures outlined in HUD Handbook
4165.1, REV-1, paragraphs 3-1A and B. The property closed on May 2, 2003. According to
HUD’s Neighborhood Watch system, HUD received the endorsement package on July 7, 2003,
(66 days after closing), and endorsed the loan on July 8, 2003. Trust America told us that it
believed HUD would have received the loan file on time. Contrary to the requirements, Trust
America failed to provide an explanation for the delay and actions taken to prevent future
delayed submissions. It also failed to certify that escrow accounts were current and intact except
for normal disbursements.
.




                                                59
Case Number:                           092-9221657
Mortgage Amount:                       $120,646
Date of Loan Closing:                  09/27/02
Current Status:                        Terminated (paid in full) as of 8/31/04
Cause for Default:                     Other
Number of payments before
  first default was reported:          3

Summary:

Inadequate Asset Verification

Trust America approved the loan without properly verifying the borrower’s assets. It did not
properly verify and document the source of the earnest deposit, which was the borrower’s only
contribution toward the acquisition of the property. Trust America did not clarify important file
discrepancies. The agreement to build the home and the final loan applications showed a $350
earnest deposit. According to the HUD-1 Settlement Statement, the earnest deposit was $0.
Trust America told us that the seller/builder collected the $350 deposit at the time of the contract.
Trust America then billed the seller/builder for the $350 to cover the appraisal and credit report
and gave a credit to the borrower on the HUD-1 Settlement Statement. The loan file contains no
evidence showing how the earnest deposit was paid.

Inadequate Debt Verification

Trust America approved the loan without properly analyzing the borrower’s credit to ensure that
the borrower demonstrated financial responsibility. It failed to provide supporting
documentation in the loan file regarding the borrower’s credit history. The loan file showed two
money orders totaling $270 payable to Trust America to settle collection accounts. While this
may indicate the borrower and co-borrower repaid these debts, there is no evidence to support
the source of funds used to purchase the money orders. In addition, Trust America told us that it
advised the borrowers to pay off their collections. On occasion, a borrower would
misunderstand and write the check to Trust America, which would send it to the collection
agency. However, there is no evidence in the loan file to support that the money orders were
sent to the collection agencies. Without proper documentation, Trust America cannot ensure
funds from prohibited parties were not used to repay the debts.

Trust America did not ensure derogatory information in the credit report was fully explained or
resolved. The credit report showed a pattern of accounts sent to collection agencies. In letters to the
lender, the borrower stated that he was not aware of the collections. The credit report showed a
$3,252 debt that was sent to a collection agency without Trust America obtaining an explanation
from the borrower. There is no evidence in the loan file that this account was repaid before closing
or considered in the qualifying ratio calculations.




                                                  60
Other Deficiencies

Contrary to the requirements of HUD Handbook 4155.1, Revision 4, Change 1, paragraph 2-14,
Trust America approved the buydown interest rate loan without properly documenting the
borrower’s ability to make higher mortgage payments in the future. The mortgage payment to
income ratio and total fixed payment to income ratio for the buydown interest rate loan were 26.23
percent and 44.90 percent, respectively. We calculated the mortgage payment to income ratio and
total fixed payment to income ratio without the buydown interest rate loan as 31.67 percent and
50.34 percent, respectively.

The HUD-1 Settlement Statement was altered after settlement. The changes resulted from the
correction of the homeowner insurance premium and escrow amounts and affected the seller’s
side of the HUD-1 Settlement Statement. However, Trust America certified that the document
was a true and exact copy of the original.




                                                61
Case number:                          092-9251108
Mortgage amount:                      $134,437
Date of loan closing:                 10/25/02
Current status:                       Terminated (paid in full) as of 08/31/04
Cause of default:                     Marital difficulties
Number of payments before
  first default was reported:         8

Summary:

Inadequate Debt Verification

Trust America calculated the total fixed payment to income ratio at 47.12, which exceeds HUD’s
permissible rate of 43 percent, as prescribed in HUD Handbook 4155.1, Revision 4, Change 1,
paragraph 2-19.
Inadequate Asset Verification

Trust America approved the loan without properly verifying the borrower’s assets. It did not
properly verify and document the source of the earnest deposit and cash paid at closing. Trust
America did not clarify important file discrepancies. The agreement to build the home and final
loan application showed a $500 earnest deposit. The HUD-1 Settlement Statement showed an
earnest deposit of $80. It also indicated the borrower paid $3,690 at closing. Trust America told
us that the seller/builder collected $500 at the time of the contract. Trust America then billed the
seller/builder $420 to cover the cost of the credit reports and appraisal and gave an $80 credit of
the earnest deposit to the borrower on the HUD-1 Settlement Statement. The loan file contains
no evidence showing how the earnest deposit and closing amount were paid.




                                                 62
Case number:                         092-9287653
Mortgage amount:                     $125,904
Date of loan closing:                01/28/03
Current status:                      Claim (property sold with a $17,502 loss) as of 11/10/04
Cause of default:                    Curtailment of borrower income
Number of payments before
  first default was reported:        0

Summary:

Inadequate Asset Verification

Trust America approved the loan without properly verifying the borrower’s assets. It did not
obtain supporting documentation from a down-payment assistance program on how the gift
funds were transferred to the borrower. The gift funds totaled $3,807 and represented more than
98 percent of the minimum down payment. Trust America informed us that it was not aware of
this requirement.

Trust America did not properly verify and document the source of the earnest deposit, which was
the borrower’s only contribution toward the acquisition of the property. Trust America did not
resolve conflicting loan documentation regarding the earnest deposit. The agreement to build the
home and the final loan application showed an earnest deposit of $500, but the HUD-1
Settlement Statement showed $140. The loan file contains no evidence how the earnest deposit
was paid.

Trust America did not properly document the source of funds for recent debt payoffs. The credit
report indicated the borrower paid off collections of $228 before loan closing. The borrower did
not have a bank account. Without proper documentation, Trust America cannot ensure funds
from prohibited parties were not used to repay these debts.

Trust America believed that because the borrower was debt free, it was reasonable that the
borrower would have the funds for the earnest deposit, and to repay the debts despite not having
a bank account.

Other Deficiencies

Contrary to the requirements of HUD Handbook 4155.1, Revision 4, Change 1, paragraph 2-14,
Trust America approved the buydown interest rate loan without properly documenting the
borrower’s ability to make higher mortgage payments in the future.




                                               63
Case number:                         092-9291317
Mortgage amount:                     $135,925
Date of loan closing:                06/27/03
Current status:                      In default as of 12/30/04, repayment
Cause of default:                    Illness of mortgagor’s family member
Number of payments before
   first default was reported:       1

Summary:

Inadequate Debt Verification

Trust America approved the loan without properly computing a qualifying ratio. It excluded
child support payments of $174 from the debt analysis. The co-borrower’s pay stubs and a letter
in the file indicated child support of $174 was deducted from the co-borrower’s salary twice a
month for a total of $348. Trust America agreed that it miscalculated the amount and only
considered $174 in the debt determination. We calculated the total fixed payment to income
ratio at 45.55 percent, which exceeds HUD’s permissible rate of 43 percent, as prescribed in
HUD Handbook 4155.1, Revision 4, Change 1, paragraph 2-19. Trust America should have
provided compensating factors to justify the excess ratio.

Inadequate Asset Verification

Trust America approved the loan without properly verifying the borrower’s assets. It did not
properly verify and document the source of the earnest deposit, which was the borrower’s only
contribution toward the acquisition of the property. Trust America did not resolve conflicting
loan documentation regarding the earnest deposit. The agreement to build the home and the final
loan application showed an earnest deposit of $350, but the HUD-1 Settlement Statement
showed $0. Trust America told us that the seller/builder collected the $350 deposit at the time of
the contract. Trust America then billed the seller/builder $350 to cover the appraisal and credit
report and gave a credit to the borrower on the HUD-1 Settlement Statement. The loan file
contains no evidence showing how the earnest deposit was paid.

Trust America did not verify the source of funds for three large deposits of $655, $925, and
$1,500 into the borrower’s bank account. It believed the first two deposits represented the
co-borrower’s salary, but there was no supporting documentation in the loan file. In addition, the
co-borrower’s pay stubs in the loan file indicated uneven amounts. As for the deposit of $1,500,
Trust America agreed that it did not verify the source of funds.




                                                64
Other Deficiencies

Contrary to HUD requirements, Trust America approved the buydown interest rate loan without
properly documenting the borrower’s ability to make higher mortgage payments in the future.
The qualifying ratios for the buydown interest rate loan are 18.25 percent and 42.02 percent,
respectively. We calculated the qualifying ratios without the buydown interest rate loan as 21.75
percent and 49.05 percent, respectively.

Trust America did not exercise due care in the verification of the co-borrower’s employment. The
verification of employment was faxed from the borrower’s (interested third party) employment
location, which violates HUD requirements. In addition, the co-borrower’s employer informed us
that the salary rate shown on the verification of employment was inaccurate.




                                               65
Case number:                         092-9295695
Mortgage amount:                     $146,244
Date of loan closing:                11/26/02
Current status:                      Terminated (paid in full) as of 12/30/04
Cause of default:                    Illness of principal mortgagor
Number of payments before
  first default was reported:        3

Summary:

Inadequate Asset Verification

Trust America approved the loan without properly verifying the borrower’s assets. It did not
properly verify and document the source of the earnest deposit, which was the borrower’s only
contribution toward the acquisition of the property. Trust America did not resolve conflicting
loan documentation regarding the earnest deposit. The agreement to build the home and the final
loan application showed an earnest deposit of $350, but the HUD-1 Settlement Statement
showed $0. Trust America told us that the seller/builder collected the $350 deposit at the time of
the contract. Trust America then billed the seller/builder $350 to cover the appraisal and credit
report and gave a credit to the borrower on the HUD-1 Settlement Statement. The loan file
contains no evidence showing how the earnest deposit was paid.

Other Deficiencies

The HUD-1 Settlement Statement was altered after settlement. The changes resulted from the
correction of the homeowner insurance premium and escrow amounts and affected the seller’s
side of the HUD-1 Settlement Statement. However, Trust America certified that the document
was a true and exact copy of the original.

Trust America did not comply with late endorsement procedures outlined in HUD Handbook
4165.1, Revision 1, paragraphs 3-1A and B. The property closed on November 26, 2002.
According to HUD’s Neighborhood Watch system, HUD received the endorsement package on
August 8, 2003 (255 days after closing), and endorsed the loan on August 11, 2003. Trust
America told us that this loan was not submitted late for endorsement. The loan was a
construction/permanent loan, and Trust America was not allowed to submit it for insurance until
the home is complete. The loan was modified on June 26, 2003, and was endorsed
August 12, 2003, which is less than 60 days from modification. However, in a letter to HUD,
dated June 30, 2003, Trust America indicated the loan was submitted late because it was a
construction permanent loan. Contrary to the requirements, Trust America failed to provide an
explanation for the delay and actions taken to prevent future delayed submissions. Trust
America also failed to submit a payment ledger showing the loan was current.




                                               66
Case number:                          092-9308470
Mortgage amount:                      $109,038
Date of loan closing:                 12/20/02
Current status:                       Claim (HUD paid $113,002) as of 12/30/04
Cause of default:                     Curtailment of borrower income
Number of payments before
  first default was reported:         9

Summary:

Inadequate Debt Verification

Trust America approved the loan without properly computing a qualifying ratio. It excluded
monthly payments totaling $160 to one creditor from the debt analysis. This debt was shown in
a credit report, but Trust America admitted overlooking it. We calculated the total fixed
payment to income ratio at 54.57 percent, which exceeds HUD’s permissible rate of 43 percent,
as prescribed in HUD Handbook 4155.1, Revision 4, Change 1, paragraph 2-19. Trust America
should have provided compensating factors to justify the excess ratio.

Inadequate Asset Verification

Trust America approved the loan without properly verifying the borrower’s assets. It did not
obtain supporting documentation from a down-payment assistance program on how the gift
funds were transferred to the borrower. The gift funds of $3,297 represented more than 90
percent of the minimum down payment. Trust America informed us that it was not aware of this
requirement.

Trust America did not properly verify the source of the earnest deposit, which was the
borrower’s only contribution toward the acquisition of the property. While loan file
documentation showed a $350 earnest deposit, Trust America failed to provide evidence
showing how it was paid. Trust America told us that the seller/builder collected the earnest
deposit at the time of the contract and Trust America gave a credit to the borrower for the
appraisal and credit report on the HUD-1 Settlement Statement.

Other Deficiencies

The son of the owner of Trust America (also an ex-employee of Trust America) was also the
owner of the builder/seller entity. The owner of Trust America was also a former director of the
builder/seller entity. The underwriter certified in the Direct Endorsement Approval for a
HUD/Federal Housing Administration- Insured Mortgage form that the lender did not have a
financial interest in or a relationship with the builder or seller involved in this transaction. The
loan file contained no evidence that the borrower was aware of this relationship. HUD’s prior
review also reported this issue.




                                                 67
Case Number:                         092-9312350
Mortgage Amount:                     $109,485
Date of Closing:                     02/21/03
Current Status:                      Terminated (paid in full) as of 12/30/04
Cause for Default:                   Excessive obligations
Number of payments before
  first default was reported:        5

Summary:

Inadequate Asset Verification

Trust America approved the loan without properly verifying the borrower’s assets. It did not
obtain supporting documentation from a down-payment assistance program on how the gift
funds were transferred to the borrower. The gift funds of $3,310 represented more than 90
percent of the minimum down payment. Trust America stated that it has the gift letter but
neglected to get the wire transfer and that it was not aware of this requirement.

Trust America did not properly verify and document the source of the earnest deposit, which was
the borrower’s only contribution toward the acquisition of the property. While loan file
documentation showed a $350 earnest deposit, Trust America failed to provide evidence
showing how it was paid. Trust America told us that the seller/builder collected the $350 deposit
at the time of the contract and Trust America gave a credit to the borrower for the appraisal and
credit report on the HUD-1 Settlement Statement. Since the borrower did not have a bank
account and the seller/builder acknowledged it received the $350, Trust America assumed the
deposit was paid in cash.

Trust America failed to ensure the borrower met the minimum down payment in the purchase of
the property. The minimum down payment to acquire the property was $3,675. The borrower
only invested $3,661, which included $3,310 from a down-payment assistance program. Trust
America did not provide sufficient documentation in the loan file to support that the borrower
met the requirement.

Trust America did not properly document the source of funds for recent debt payoffs. The credit
report and other documentation in the loan file indicated the borrower and co-borrower paid off
collections of $1,221. The borrower did not have a bank account. The loan file contains no
evidence to support the source of funds used to pay the collections. Trust America stated that the
collections were paid with money orders since the borrower and co-borrower did not have bank
accounts. Trust America added that it should have requested an explanation on how the borrower
and co-borrower paid the collections. Without proper documentation, Trust America cannot
ensure funds from prohibited parties were not used to repay these debts.




                                               68
Other Deficiencies

The son of the owner of Trust America (also an ex-employee of Trust America) was also the
owner of the builder/seller entity. The owner of Trust America was also a former director of the
builder/seller entity. The underwriter certified in the Direct Endorsement Approval for a HUD/
Federal Housing Administration-Insured Mortgage form that the lender did not have a financial
interest in or a relationship with the builder or seller involved in this transaction. The loan file
contained no evidence that the borrower was aware of this relationship. HUD’s prior review also
reported this issue.

We verified with the employer that the borrower was employed through December 19, 2002. On
the final loan application dated February 21, 2003, (also closing date), the borrower certified that
he still worked for this employer. While we understand that the lender may not have been aware
of this, the borrower misrepresented the facts when he signed the final loan application.




                                                69
Case number:                          092-9319257
Mortgage amount:                      $117,868
Date of loan closing:                 12/30/02
Current status:                       Reinstated by mortgagor who retains
                                      ownership as of 12/30/04
Cause of default:                     Excessive obligations
Number of payments before
  first default was reported:         0

Summary:

Inadequate Debt Verification

Trust America calculated the mortgage payment to income ratio at 35.67 percent and the total
fixed payment to income ratio at 51.51 percent, which exceeds HUD’s permissible rates of 31
percent and 43 percent, as prescribed in HUD Handbook 4155.1, Revision 4, Change 1,
paragraph 2-19.

Inadequate Asset Verification

Trust America approved the loan without properly verifying the borrower’s assets. It did not
properly verify and document the source of the earnest deposit, which was the borrower’s only
contribution toward the acquisition of the property. Trust America did not resolve conflicting
loan documentation regarding the earnest deposit. The agreement to build home and the final
loan application showed an earnest deposit of $350, but the HUD-1 Settlement Statement
showed $0. Trust America told us that the seller/builder collected the earnest money of $350 at
the time of the contract. Trust America then billed the seller/builder $350 to cover the appraisal
and credit report and gave a credit to the borrower on the HUD-1 Settlement Statement. The
loan file contains no evidence showing how the earnest deposit was paid.

Other Deficiencies

Trust America approved the loan without properly verifying the borrower’s earnings. According
to our Internet searches, the one-way commuting distance between the property and the
borrower’s employer was more then 140 miles. According to Florida Department of State
records, the employer has been inactive since September 2000. The property closed in
December 2002. Trust America told us that it was not aware of the commuting distance and if
they had known, it would not have qualified the borrower and approved the loan. Given the
availability of access to State records, we believe Trust America should have found the
discrepancy and resolved it before loan approval. In addition, our attempts to locate the
employer were unsuccessful.




                                                70
Contrary to HUD requirements, Trust America approved the buydown interest rate loan without
properly documenting the borrower’s ability to make higher mortgage payments in the future.
The qualifying ratios for the buydown interest rate loan were 35.67 percent and 51.51 percent,
respectively. We calculated the qualifying ratios without the buydown interest rate loan as 42.44
percent and 58.28 percent, respectively.

The HUD-1 Settlement Statement was altered after settlement. The changes resulted from the
correction of the homeowner insurance premium and escrow amounts and affected the seller’s
side of the HUD-1 Settlement Statement. However, Trust America certified that the document
was a true and exact copy of the original.




                                               71
Case number:                         092-9319546
Mortgage amount:                     $125,806
Date of loan closing:                02/14/03
Current status:                      In default as of 12/30/04, modification
Cause of default:                    Curtailment of borrower income
Number of payments before
  first default was reported:        8

Summary:

Inadequate Asset Verification

Trust America approved the loan without properly verifying the borrower’s assets. It did not
obtain supporting documentation from a down-payment assistance program on how the gift
funds were transferred to the borrower. The gift funds of $3,804 represented more than 98
percent of the minimum down payment. Trust America informed us that it was not aware of this
requirement.

Trust America did not properly verify and document the source of the earnest deposit, which was
the borrower’s only contribution toward the acquisition of the property. Trust America did not
clarify important file discrepancies. The agreement to build a home and the final loan
application showed an earnest deposit of $500. The HUD-1 Settlement Statement showed an
earnest deposit of $150. Trust America told us that the seller/builder collected the $500 deposit
at the time of the contract. It agreed that it does not have evidence of the source of the earnest
deposit. Trust America did believe that the borrower was capable of providing the $500 based
on the borrower’s earnings history. The loan file contains no evidence showing how the earnest
deposit was paid.

Other Deficiencies

Contrary to HUD requirements, Trust America approved the buydown interest rate loan without
properly documenting the borrower’s ability to make higher mortgage payments in the future.
The qualifying back ratio for the buydown interest rate loan is 41.21 percent. We calculated the
qualifying back ratio without the buydown interest rate loan as 43.34 percent.

Contrary to HUD Handbook 4000.4, Revision 1, Change 1, paragraph 1-15B(5), Trust America
failed to submit the loan to HUD for processing since the co-borrower was a HUD employee.
Trust America informed us that it was not aware of this requirement.




                                               72
Case number:                         092-9348985
Mortgage amount:                     $128,435
Date of loan closing:                04/11/03
Current status:                      Reinstated by mortgagor who retains ownership as of
                                     12/30/04
Cause of default:                    Curtailment of borrower income
Number of payments before
  first default was reported:        2

Summary:

Inadequate Asset Verification

Trust America approved the loan without properly verifying the borrower’s assets. It did not
properly verify and document the source of the earnest deposit, which was the borrower’s only
contribution toward the acquisition of the property. Trust America did not clarify important file
discrepancies. The residential construction contract and the final loan application showed a $350
earnest deposit while the HUD-1 Settlement Statement showed $850. The loan file contains no
evidence showing how the earnest deposit was paid.

Trust America failed to ensure the borrower met the minimum down payment in the purchase of
the property. The minimum down payment to acquire the property was $4,762. Assuming an
earnest deposit of $350 and a gift of $3,883 from a down-payment assistance program, the
borrower only invested $4,233. Trust America did not provide sufficient documentation in the
loan file to support that the borrower met the requirement.

Trust America did not properly document the source of funds for recent debt payoffs. The credit
report in the loan file reflected that collections of $1,297 were paid off before the loan closed.
The loan file contains no evidence to support the source of funds used to pay the collections.
Without proper documentation, Trust America cannot ensure funds from prohibited parties were
not used to repay these debts.

Inadequate Debt Verification

Trust America did not provide valid compensating factors for exceeding the ratio. According to
the mortgage credit analysis worksheet, the total fixed payment to income ratio was 44.14
percent, exceeding the permissible rate of 43 percent, as prescribed in HUD Handbook 4155.1,
Revision 4, Change 1, paragraph 2-19.




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Other Deficiencies

The son of the owner of Trust America (also an ex-employee of Trust America) was also the
owner of the builder/seller entity. The owner of Trust America was also a former director of the
builder/seller entity. The underwriter certified in the Direct Endorsement Approval for a HUD/
Federal Housing Administration-Insured Mortgage form that the lender did not have a financial
interest in or a relationship with the builder or seller involved in this transaction. The loan file
contained no evidence that the borrower was aware of this relationship. HUD’s prior review also
reported this issue.




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Appendix F

                                         CRITERIA

HUD Handbook 4060.1, Revision 1, Change 1, “Mortgagee Approval Handbook,” Chapter 6,
“Quality Control Plan,” provides guidelines and procedures to be implemented by all lenders.

Section 6-1 requires all Federal Housing Administration approved lenders, including loan
correspondent, to implement and continuously have in place a quality control plan for the
origination of insured mortgages as a condition for receiving and maintaining Federal Housing
Administration approval. The quality control plan must be a prescribed function of the lender’s
operations and assure that the lender maintains compliance with HUD-Federal Housing
Administration requirements and its own policies and procedures.

Section 6-6C, “Sample Size and Loan Selection,” states that a lender originating 7,000 or fewer
Federal Housing Administration loans per year must review 10 percent of the Federal Housing
Administration loans it originates.

Section 6-8A (1), “Rejected Application,” states that a minimum of 10 percent of total loans
rejected must be reviewed.

Section 6-6D, “Early Payment Defaults,” provides that in addition to the loans selected for
routine quality control reviews, lenders must review all loans going into default within the first
six payments. Early payment defaults are loans that become 60 days past due.

Handbook 4000.4, Revision 1, Change 2, paragraph 2-1, states that a lender must conduct its
business operations in accordance with accepted sound mortgage lending practices, ethics, and
standards.

Paragraph 1-15B(5) requires lenders to submit to HUD for processing all loans in which a HUD
employee is an applicant. This includes co-borrowers, nonoccupying co-borrowers, and family
members living with HUD employees (i.e., son, daughter, etc., living at home).

Paragraph 2-4C states that lenders are expected to exercise due diligence in the underwriting of
loans to be insured by the Federal Housing Administration.

HUD Handbook 4155.1, Revision 4, Change 1, “Mortgage Credit Analysis for Mortgage
Insurance on One-to-Four Family Properties,” requires 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. Lenders must ensure the application
package contains sufficient documentation to support their decision to approve the mortgage
loan.




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Section 2-3, “Analyzing the Borrower’s Credit,” states that while minor derogatory information
occurring 2 or more years in the past does not require explanation, major indications of
derogatory credit, including judgments and collections, and any other recent credit problem
require sufficient written explanation from the borrower. The borrower’s explanation must make
sense and be consistent with other information in the file.

Section 2 and paragraph 2-7 require the lender to establish the anticipated amount of income, and
the likelihood of its continuance to determine a borrower’s capacity to repay mortgage debt.

Paragraph 2-7A states that overtime may be used to qualify if the borrower has received such
income for approximately 2 years and the employment verification must not state categorically
that such income is not likely to continue. Periods of less than 2 years may be acceptable
provided the underwriter adequately justifies and documents his or her reasons for using the
income.

Section 2-10, “Funds to Close,” establishes that all funds for the borrower’s investment in the
property to be verified. Paragraph 2-10B also states that if there is a large increase in the
borrower’s checking or saving account, the lender must obtain an explanation and evidence of
source of funds. In addition, paragraph 2-10C requires the lender to document the transfer of the
funds from the donor to the borrower. Acceptable procedures include obtaining a copy of the
donor’s withdrawal slip or cancelled check, along with the borrower’s deposit slip or bank
statement showing the deposit. If the funds are not deposited to the borrower’s account before
closing, the lender must obtain verification that the closing agent received funds from the donor
for the amount of the gift.

Section 2-14, ‘Temporary Interest Rate Buydowns,” permits lenders to provide borrowers with
interest rate buydowns. Interest rate buydowns are designed to reduce the borrower’s monthly
payment during the early years of the mortgage. It also requires the lender to establish that the
eventual increase in mortgage payments will not adversely affect the borrower and likely lead to
default. The underwriter must document which of four criteria the borrower meets.

   1. The borrower has a potential for increased income that would offset the scheduled
      payment increases, as indicated by job training or education in the borrower’s profession
      or by a history of advancement in the borrower’s career with attendant increases in
      earnings.

   2. The borrower has a demonstrated ability to manage financial obligations in such a way
      that a greater portion of income may be devoted to housing expenses. This criterion also
      may include borrowers whose long-term debt, if any, will not extend beyond the term of
      the buydown agreement.

   3. The borrower has substantial assets available to cushion the effect of the increased
      payments.




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   4. The cash investment made by the borrower substantially exceeds the minimum required.

Section 2-13, “Compensating Factors”, establishes the compensating factors that may be used in
justifying approval of the loan with ratios exceeding HUD benchmark guidelines include those
listed below. Underwriters must state on the “remarks” section of the HUD-92900WS the
compensating factors used to support loan approval.

   A.    The borrower has successfully demonstrated the ability to pay housing expenses equal
         to or greater than the proposed monthly housing expense for the new mortgage. If the
         borrower over the past 12-24 months has met his or her housing obligation as well as
         other debts, there should be little reason to doubt the borrower’s ability to continue to
         do so despite having ratios in excess of those prescribed.

   B.    The borrower makes a large down-payment toward the purchase of the property.

   C.    The borrower has demonstrated a conservative attitude toward the use of credit and an
         ability to accumulate savings.

   D.    Previous credit history shows that the borrower has the ability to devote a greater
         portion of income to housing expenses.

   E.    The borrower receives compensation or income not reflected in effective income, but
         directly affecting the ability to pay the mortgage, including food stamps and similar
         public benefits.

   F.    There is only a minimal increase in the borrower’s housing expense.

   G.    The borrower has substantial cash reserves after closing.

   H.    The borrower has substantial nontaxable income (if no adjustment made previously in
         the ratio computations).

   I.    The borrower has potential for increased earnings, as indicated by job training or
         education in the borrower’s profession.

   J.    The home is being purchased as a result of relocation of the primary wage-earner, and
         the secondary wage-earner has an established history of employment, is expected to
         return to work, and there is reasonable prospects for securing employment in a similar
         occupation in the new area. The underwriter must address the availability of such
         possible employment.

Section 2-19, Energy-Efficient Property,” allows the benchmark qualifying ratios to exceed the
limits by up to 2 percent when the borrower is purchasing an energy efficient home. All new
construction begun after April 24, 1994, is considered energy efficient.




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Section 3-1, “Documentation requirements”, expects the application package to contain
sufficient documentation to support the lender’s decision to approve the mortgage loan. This
section also establishes that written verification forms must pass directly between lender and
provider without being handled by any third party.

HUD Handbook 4165.1, Revision 1, Change 3, “Endorsement for Insurance for Home Mortgage
Program,” provides guidelines and procedures to be implemented by lenders when submitting
case binders to HUD for insurance.

Paragraph 3-1A states that a late request for procedures applies if the loan is submitted to HUD
for endorsement more than 60 days after closing.

Paragraph 3-1B states that when a lender is submitting a late request for endorsement case, HUD
requires an explanation for the delay and actions taken to prevent future delayed submissions.
The lender must also submit a payment ledger showing the loan was current and certify that
escrow accounts for taxes, hazard insurance, and mortgage insurance premiums are current and
intact except for normal disbursements.




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