oversight

National City Mortgage Company, Miamisburg, Ohio

Published by the Department of Housing and Urban Development, Office of Inspector General on 2005-09-15.

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

                                                            Issue Date
                                                            September 15, 2005
                                                           Audit Case Number
                                                            2005-AT-1014




TO:        Brian D. Montgomery, Assistant Secretary for Housing-Federal Housing
              Commissioner, H



           James D. McKay
FROM:      Regional Inspector General for Audit, 4AGA

SUBJECT:   National City Mortgage Company, Miamisburg, OH
           Did Not Always Comply with Federal Housing Administration Requirements




                                 HIGHLIGHTS

 What We Audited and Why

           We audited loans National City Mortgage Company (National City) underwrote at
           the Altamonte Springs, Florida, and Alpharetta, Georgia, branch offices for seven
           loan correspondents that originated loans for properties located in central and
           northern Florida. National City is a nonsupervised direct endorsement lender with
           headquarters located in Miamisburg, Ohio. We selected the two branch offices
           and the seven loan correspondents because their default rates were significantly
           higher than the Florida average.

           Our audit objective was to determine whether National City acted in a prudent
           manner and complied with the U.S. Department of Housing and Urban
           Development’s (HUD) regulations, procedures, and instructions in the
           underwriting process for cash assets, income, and general creditworthiness of its
           Federal Housing Administration-insured loans.




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What We Found

           National City did not always follow HUD requirements when underwriting
           Federal Housing Administration-insured loans. It improperly underwrote 9 of the
           19 loans reviewed. These loans contained deficiencies that affected the
           insurability of the loans, including improper assessment of borrowers’ income,
           debts, and credit histories. As a result, HUD insured nine loans that placed the
           Federal Housing Administration insurance fund at risk for $326,132 in questioned
           costs and $153,674 in funds to be put to better use.

What We Recommend


           We recommend that the assistant secretary for housing-federal housing
           commissioner take appropriate administrative action against National City based
           on the information contained in this report. This action should, at a minimum,
           include requiring indemnification of $153,674 for two defaulted loans, $159,690
           for claims paid on two loans, and reimbursement of $166,442 for losses incurred
           for five loans.

           For each recommendation without a management decision, please respond and
           provide status reports in accordance with HUD Handbook 2000.06, REV-3.
           Please furnish us copies of any correspondence or directives issued because of the
           audit.

Auditee’s Response


           National City generally agreed with our finding and case studies. We provided
           the draft report to National City on August 9, 2005, and requested a response by
           August 26, 2005. National City provided written comments on August 22, 2005.

           The complete text of National City’s response, along with our evaluation of that
           response, can be found in appendix B of this report.




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                                            2
                            TABLE OF CONTENTS

Background and Objectives                                                        4

Results of Audit
      Finding 1: Two Branch Offices of National City Did Not Fully Comply With   5
      HUD’s Underwriting Requirements

Scope and Methodology                                                            10

Internal Controls                                                                11


Appendixes
   A. Schedule of Questioned Costs and Funds to Be Put to Better Use             12
   B. Auditee Comments and OIG’s Evaluation                                      13
   C. Summary of Loan Underwriting Deficiencies                                  17
   D. Case Studies of Improperly Underwritten Loans                              19




                                            3
                      BACKGROUND AND OBJECTIVES

National City Mortgage Company (National City) is a nonsupervised lender and a subsidiary of
National City Bank of Indiana. National City’s home office is located in Miamisburg, Ohio.
The company has more than 300 offices in 37 states. It services the remaining continental
United States through telephone and Internet service centers.

We audited loans National City underwrote at the Altamonte Springs, Florida, and
Alpharetta, Georgia, branch offices for seven loan correspondents. The loan correspondents
originated loans for properties located in central and northern Florida that closed between
January 1, 2002, and December 31, 2004. During this period, the two branch offices underwrote
1,024 loans originated by the seven correspondents. Of the 1,024 loans, 65 went into default and
28 were claim terminated for an overall 9 percent default rate. This default rate was significantly
higher than the Florida average.

Our audit objective was to determine whether National City acted in a prudent manner and
complied with the U.S. Department of Housing and Urban Development’s (HUD) regulations,
procedures, and instructions in the underwriting process for cash assets, income, and general
creditworthiness of its Federal Housing Administration-insured loans.




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                                                4
                               RESULTS OF AUDIT

Finding 1: Two Branch Offices of National City Did Not Fully Comply
With HUD’s Underwriting Requirements
National City did not follow HUD requirements when underwriting 9 of the 19 Federal Housing
Administration-insured loans reviewed for compliance. The loans contained deficiencies that
affected the credit quality (insurability) of the loans. The loan underwriting deficiencies
occurred because National City’s underwriters did not adequately evaluate information presented
by its loan correspondents for compliance with requirements before approving the loans. The
underwriters also allowed questionable information to be entered into the systems used for
automated underwritten loans. As a result, HUD insured nine loans that placed the Federal
Housing Administration insurance fund at risk for $326,132 in questioned costs and $153,674 in
funds to be put to better use.



 Loans Did Not Comply with
 HUD Requirements


              National City underwrote nine loans with mortgages totaling $805,810 that
              contained significant loan underwriting deficiencies. These deficiencies primarily
              involved improper assessment of borrowers’ income, debts, and credit histories.
              These conditions occurred because National City’s underwriters did not
              adequately evaluate information presented by its loan correspondents for
              compliance with requirements before approving the loans. The underwriters also
              allowed questionable information to be entered into the systems used for
              automated underwritten loans.

              The following table presents the deficiency categories noted for the nine loans.

                             Deficiency                            Number of loans
Number of Loans
                     Income not properly assessed                         6
                     Credit not properly assessed                         6
                     Gifts not properly verified                          7
                     Other                                                2

              Each of the nine loans contained one or more significant deficiencies that are
              summarized below. Appendix C presents a table summarizing the loan
              deficiencies, and appendix D contains a detailed case study for each of the nine
              loans.



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Income Not Properly Assessed


           National City did not properly assess income for six borrowers. The six cases
           included three (091-3646793, 091-3701492, and 094-4640149) in which National
           City’s lack of proper verifications caused it to overstate the borrowers’ monthly
           income. The following two examples demonstrate the conditions identified
           during the review:

              •   For case 094-4640149, National City did not document verification of
                  $1,863 of the borrower’s $3,150 gross monthly income. National City’s
                  loan file contained no pay stubs covering the most recent 30-day period
                  and the verbal verification did not document the borrower’s pay rate or
                  likelihood of continued employment. We, therefore, excluded the $1,863
                  in our analysis and calculated a debt-to-income ratio of 76.86 percent,
                  compared to the 32.02 percent rate National City calculated.

              •   For case 091-3646793, National City counted the coborrower’s projected
                  increased income without documenting when the increase would take
                  effect. Without this information, the file did not support use of the higher
                  projected income amount. National City’s representatives also reviewed
                  the file and made a similar observation. Excluding the projected increased
                  income and other adjustments noted during the audit resulted in a debt-to-
                  income ratio of 62.41 percent, compared to the 36.26 percent rate National
                  City calculated and used to approve the loan.

           For the remaining three cases (094-4677762, 091-3604055, 091-3797093),
           National City did not properly assess the stability of the borrowers’ employment
           and their likelihood of continued employment. To illustrate, the file for case
           094-4677762 shows during the two years preceding National City’s loan
           approval, the borrower worked for six separate employers in three different states.
           The loan application also indicated unexplained gaps in the borrower’s
           employment. HUD’s Neighborhood Watch system shows the loan went into
           default due to curtailment of borrower income. The default reason was consistent
           with the borrower’s inconsistent employment history. A National City
           representative reviewed the file during the course of our audit and observed that
           the borrower lacked job stability.

           Handbook 4155.1, REV 4, provides that anticipated amount of income and
           likelihood of its continuance must be established to determine the borrower’s
           capacity to repay the mortgage debt. Income from any source that will not
           continue may not be used in calculating the borrower’s income ratios. To analyze
           the probability of continued employment, lenders must examine the borrower’s



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                                            6
            past employment record, qualifications for the position, previous training and
            education, and the employer’s confirmation of continued employment. HUD does
            not impose an arbitrary minimum length of time a borrower must have held a
            position to be eligible. However, the lender must verify the borrower’s
            employment for the most recent two full years. The borrower must also explain
            any gaps in employment of a month or more.

Credit Not Properly Assessed


            National City did not consider and/or properly evaluate debts and/or credit history
            before approving six of the loans. We selected two case examples to demonstrate
            this condition:

                •   For case 091-3556249, National City did not input into its automatic
                    underwriting system and consider two outstanding debts with monthly
                    payments totaling $627. National City’s file contained no explanation for
                    not considering the two debts. The debts had monthly payments of $427
                    and $200, respectively, and both may require longer than 10 months to
                    pay off. The credit report showed the debt with payments of $200 was
                    60 days delinquent. When considered, the borrower’s debt-to-income
                    ratio amounted to 61.69 percent, versus the 38.42 percent rate National
                    City calculated. National City reviewed the loan file during the course of
                    the audit and noted its omission of the two debts.

                •   For case 094-4677762, National City’s file did not support the exclusion
                    of $531 in monthly child support payments shown on the credit report. In
                    addition, the file provided no explanation for approving the loan despite
                    the borrower’s disregard for past child support obligations. The credit
                    report showed the borrower had $11,906 in delinquent child support
                    payments. The automatic underwriter finding report requested support
                    for omitting the child support obligations. The underwriter did not
                    document the file to provide the requested explanation. National City’s
                    representative reviewed the file during the course of the audit and noted
                    that the file did not document the basis for eliminating several
                    obligations. The additional debts resulted in a 45.17 percent debt-to-
                    income ratio, compared to the 26.85 percent rate National City calculated
                    and used to approve loan.

            Handbook 4155.1, REV 4, provides that if the credit history reflects continuous
            slow payments, judgments, and delinquent accounts, HUD requires strong
            compensating factors to approve the loan. HUD requires lenders to consider all
            recurring obligations that meet HUD’s stipulations when evaluating a loan
            application. When computing debt-to-income ratios, HUD requires lenders to



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            include all recurring charges, including payments for child support or separate
            maintenance payments extending 10 months or more.

   Gifts Not Properly Verified



            National City did not properly verify gift funds paid to closing agents for seven of
            the borrowers. In five of the cases, the gifts were from nonprofit donors, and we
            independently confirmed that they provided the gifts although National City did
            not properly verify the gift amounts. In the other two cases (091-3647861 and
            094-4677762), the loan files showed part or all of the gifts came from relatives of
            the borrower. However, in both cases, National City did not confirm that the
            relatives provided the gifts.

            To illustrate for case 091-3647861, National City allowed the loan to close
            without proper verification of gift funds that included $2,000 from the borrower’s
            mother and $1,132 from the borrower’s cousin. The file contained copies of
            separate cashier’s checks the mother and cousin supposedly purchased and made
            payable to the closing agent for the gifts. The closing agent showed no record of
            receiving the checks. Instead, the closing agent’s loan escrow ledger showed it
            received two different cashier’s checks from the seller. The checks were
            completed to show they came from the relatives. Copies of bank checks obtained
            from the closing agent showed the mother provided a gift of $1,138, versus
            $2,000, and the cousin provided a gift of $2,000, versus $1,132. National City did
            not obtain documents from the closing agent needed to confirm receipt of the
            gifts. That documentation would have identified discrepancies and required
            resolution before loan closing.

            Handbook 4155.1, REV 4, requires that if the gift funds are not deposited to the
            borrower’s account before closing, the lender must obtain verification the closing
            agent received funds from the donor for the amount of the gift. HUD also
            requires that the lender verify the source of the donor’s funds to ensure they were
            not derived in any manner from a party to the sales transaction.


Other Less Significant Deficiencies


            National City also underwrote eight loans that contained less significant
            underwriting deficiencies. The deficiencies involved some of the same violations
            cited for the three categories discussed above. However, we considered the
            deficiencies less significant because they did not affect the overall credit quality
            (insurability) of the individual loans. Thus, the deficiencies would not support
            indemnification of the defaulted loans or repayment of losses on claims. This fact
            does not relieve National City from following all facets of HUD requirements


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             when originating Federal Housing Administration-insured loans. We provided
             details of these deficiencies to National City during our review. Appendix C
             presents a table summarizing the less significant deficiencies for the eight loans.

Conclusion


             National City’s underwriters did not adequately evaluate information presented by
             its loan correspondents for compliance with requirements before approving the
             loans and allowed questionable information to be entered into its system for
             automated underwriting loans. This resulted in National City approving nine
             loans that did not meet HUD requirements and submitting them to HUD for
             Federal Housing Administration endorsement. As a result, HUD insured nine
             loans that placed the Federal Housing Administration’s insurance fund at risk for
             $326,132 in questioned costs and $153,674 in funds to be put to better use.

Recommendations

             We recommend that the assistant secretary for housing-federal housing
             commissioner

             1A.    Take appropriate administrative action against National City for not
                    complying with HUD requirements, including requiring National City to
                    indemnify $153,674 for two defaulted loans, $159,690 for claims paid on
                    two loans, and reimbursement of $166,442 for losses incurred for five
                    loans.




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                        SCOPE AND METHODOLOGY


National City’s Altamonte Springs, Florida, and Alpharetta, Georgia, branch offices underwrote
1,024 loans that closed between January 1, 2002, and December 31, 2004, for the seven loan
correspondents. The loans were originated for properties located in central and northern Florida.
The 1,024 loans included 65 that went into default and 28 that were claim terminated for an
overall 9 percent default rate. This default rate was significantly higher than the state of
Florida’s average. We selected and reviewed 19 of the 93 defaulted loans that went into default
before the eighth payment.

To achieve our objective, we reviewed HUD’s rules, regulations, and guidance for proper
origination and submission of Federal Housing Administration loans. We also reviewed
previous HUD reviews of National City and HUD case binders. In addition, we interviewed
HUD staff to obtain background information on HUD requirements and National City.

We interviewed National City’s management and staff to obtain information regarding its
policies, procedures, and management controls. We reviewed National City’s written policies
and procedures to gain an understanding of how its processes are designed to function. We also
reviewed National City’s quality control review of early payment defaults related to our scope.
Additionally, we reviewed National City’s case binders for the 19 defaulted loans selected in our
sample.

We relied upon computer-processed data contained in HUD’s Single Family Data Warehouse
system. We assessed the reliability of these data, including relevant general and application
controls, and found them to be adequate.

We performed our audit from January 28, 2005, through July 27, 2005. We performed our
review in accordance with general accepted government auditing standards.




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                              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:

              •     Controls over underwriting of Federal Housing Administration loans.

              We assessed the relevant controls identified above.

              A significant weakness exists if internal controls do not provide reasonable
              assurance that the process for planning, organizing, directing, and controlling
              program operations will meet the organization’s objectives.


 Significant Weaknesses

              Based on our review, we believe the following item is a significant weakness:

              •     National City did not have adequate controls over underwriters’ evaluation and
                    assessment of information provided by loan correspondents for loan approval.




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                                       APPENDIXES

Appendix A

                  SCHEDULE OF QUESTIONED COSTS
                 AND FUNDS TO BE PUT TO BETTER USE



             Recommendation                                            Funds to be put to
                 number            Ineligible 1/    Unsupported 2/       better use 3/

                     1A              $166,442            $159,690           $153,674




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

2/      Unsupported costs are those costs charged to a HUD-financed or HUD-insured program
        or activity when we cannot determine eligibility at the time of audit. Unsupported costs
        require a decision by HUD program officials. This decision, in addition to obtaining
        supporting documentation, might involve a legal interpretation or clarification of
        departmental policies and procedures.

3/      “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.




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Appendix B

        AUDITEE COMMENTS AND OIG’S EVALUATION


Ref to OIG Evaluation   Auditee Comments




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                         13
           ATTACHMENT 1

           CASE STUDIES OF IMPROPERLY UNDERWRITTEN LOANS



           Case number:      091-3556249
           Loan number:      1261114
           Borrower:         Groesser

           Audit findings:   Credit Not Properly Assessed, Gift Not Properly Verified, &
                             Documents Not Properly Executed of Retained.
           NCM response:     Concur with audit findings.

           Case number:      091-3646793
           Loan number:      1738188
           Borrower:         Diaz

           Audit findings:   Credit Not Properly Assessed, Income Not Properly Assessed, &
                             Gift Not Properly Verified.
           NCM response:     Concur with audit findings.

           Case number:      094-4677762
           Loan number:      1562817
           Borrower:         Haraison

           Audit findings:   Credit Not Properly Assessed, Income Not Properly Assessed, &
                             Gift Not Properly Verified.
           NCM response:     Concur with audit findings.

           Case number:      091-3604055
           Loan number:      1534578
           Borrower:         McGhee

           Audit findings:   Completion of Repairs Not Verified or Documented, Income Not
                             Properly Assessed, & Gift Not Properly Verified.
           NCM response:     Concur with audit findings.




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                                      14
            Case number:      091-3701492
            Loan number:      2198749
            Borrower:         Lundy

            Audit findings:   Income Not Properly Assessed & Gift Funds Not Properly Verified.
            NCM Response:     Concur that income was not properly calculated.

Comment 1                     Disagree that gift funds were not properly verified. Copies of the
                              signed contract addendum, congratulations letter from Futures
                              Home Assistance Program, & a copy of the gift fund check from
                              Futures for the gift amount of $1947.00 were located in the loan
                              file.

            Case number:      091-3797093
            Loan number:      2808456
            Borrower:         Shelton

            Audit findings:   Income Not Properly Assessed, Credit Not Properly Assessed, &
                              Gift Not Properly Verified.
            NCM response:     Concur with audit findings.

            Case number:      091-36487861
            Loan number:      1698689
            Borrower:         Reep

            Audit finding:    Gift Not Properly Verified.
            NCM response:     Concur with finding.

            Case number:      094-4640149
            Loan number:      1393349
            Borrower:         Marsden

            Audit findings:   Income Not Properly Assessed & Credit Not Properly Assessed.
            NCM response:     Concur that income was not properly assessed.

Comment 2                     Disagree that credit was not properly assessed. HUD guidelines
                              state collections are not required to be paid prior to closing. The
                              borrower did submit in writing that all collections are medical and
                              that she is disputing them with the insurance company.

            Case number:      093-5382708
            Loan number:      1669988
            Borrower:         Martisofski

            Audit finding:    Credit Not Properly Assessed.
            NCM response:     Concur with finding.




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                                        15
                         OIG Evaluation of Auditee Comments




Comment 1     We acknowledge that National City's file contained the noted documents from the donor.
              However, the file did not contain the required documentation to support that the closing
              agent received the gift funds from the donor.


Comment 2     We agree with National City's comment that HUD guidelines do not require collections to
              be paid prior to closing. This was not the point of the finding. Our concern, as stated in
              the report, was that National City approved the loan without first resolving whether the
              medical expenses listed in the credit report were obligations of the mortgagor or of the
              mortgagor's medical insurance company.




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Appendix C

        SUMMARY OF LOAN UNDERWRITING DEFICIENCIES

                     Loans with deficiencies that affected insurability
                       Credit
            Income not  not    Gift not                       Total                                Funds to be
             properly properly properly                       errors       Questioned costs        put to better
Case number  assessed assessed verified              Other   per loan   Ineligible Unsupported          use

 091-3556249                     X           X       X (1)      3       $ 51,232
 091-3646793         X           X           X                  3       $ 28,050
 094-4677762         X           X           X                  3       $ 27,465
 091-3604055         X                                X(2)      2                                  $         68,820
 091-3701492         X                       X                  2       $ 40,988
 091-3797093         X           X           X                  3                                  $         84,854
 091-3647861                                 X                  1                    $   83,356
 094-4640149         X           X                              2       $ 18,707
 093-5382708                     X           X                  2                    $ 76,334
                                                                        $ 166,442    $ 159,690
        Subtotal                                                                     $ 326,132     $        153,674
Total                6           6           7                                                     $        479,806

    (1) Loan application not properly signed, and the executed HUD-1 settlement statement was not on file.
    (2) Repairs not verified as completed.

                            Loans with less significant deficiencies
                         Gift not properly       Credit not properly    Income not properly    Total errors per
   Case number                verified                assessed               assessed                loan
   091-3615954                   X                                              X                      2
    091-3666168                 X                        X                                             2
    091-3651820                 X                                                                      1
    091-3843849                 X                                                                      1
    093-5338974                 X                                                                      1
    091-3620006                 X                                                                      1
    094-4572706                 X                                                                      1
    091-3568985                 X                                               X                      2
  Total errors per              8                        1                       2                     11
    deficiency




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Not all errors pertaining to income, credit, or liabilities were considered material deficiencies.
Only those errors that could have changed the underwriting decision were considered material.
For instance, some errors in income or liabilities did not significantly affect the housing and debt
ratios.




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Appendix D

 CASE STUDIES OF IMPROPERLY UNDERWRITTEN LOANS



Case number:              091-3556249
Loan purpose:             Purchase
Underwriter type:         Loan prospector
Date of loan closing:     May 21, 2002
Insured amount:           $112,411
Debt-to-income ratio:     61.69 percent
Status:                   Claim/sold
HUD’s loss on resale:     $51,232


Credit Not Properly Assessed

National City did not consider two outstanding debts with monthly payments totaling $427 and
$200, respectively, during its credit analysis. Both debts may require longer than 10 months to
pay off the principal and interest balances. The credit report showed the debt with payments of
$200 was 60 days delinquent. National City did not input the debts into its automated
underwriting system for consideration in determining the borrower’s eligibility for the loan.
National City processed the loan showing the borrower had no debts other than the mortgage.
National City’s file contained no explanation for not considering the two debts. When
considered, the borrower’s debt-to-income ratio amounted to 61.69 percent, as opposed to the
38.42 percent rate National City calculated. National City’s representative reviewed the loan file
during the course of the audit and noted omission of the two debts.

HUD Requirements

HUD Handbook 4155.1, REV-4, paragraph 2-11A, requires the lender to consider all recurring
obligations extending 10 months or more. Debts lasting less than 10 months must be counted if
the amount of the debt affects the borrower’s ability to make the mortgage payment during the
months immediately after the loan closing. This is especially true if the borrower will have
limited or no cash assets after loan closing.

Gift Not Properly Verified

National City’s file contained no documentation that it verified receipt of a $31,237 gift paid to
the closing agent by a nonprofit donor. Thus, National City allowed the loan to close without
support that the closing agent received the nonprofit gift used to pay the borrower’s required
investment in the property. OIG verified the receipt of the gift funds with the closing agent and
confirmed the gift amount with the nonprofit. However, OIG’s verification and confirmation


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does not relieve National City of its responsibility to verify the transfer of gift funds before loan
closing.

HUD Requirements

HUD Handbook 4155.1, REV-4, paragraph 2-10C, provides that the lender must document the
transfer of the funds from the donor to the borrower. If the funds are not deposited to the
borrower’s account before closing, the lender must obtain verification the closing agent received
funds from the donor for the amount of the gift.

Documents Not Properly Executed or Retained

National City’s file did not contain a properly signed loan application or a copy of the final
HUD-1 settlement statement signed by all parties to document closing of the loan. The borrower
signed the loan application, but a National City representative did not sign it. We obtained a
copy of the executed HUD-1 settlement statement from the closing agent.

HUD Requirements

HUD Handbook 4155.1, REV-4, paragraph 3-1, requires that uniform residential loan
applications be signed and dated by all borrowers and the lender. The lender’s file should also
contain a copy of the final HUD-1 settlement statement used to close the loan.




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Case number:              091-3646793
Loan purpose:             Purchase
Underwriter type:         Manual underwriting
Date of loan closing:     October 30, 2002
Insured amount:           $113,124
Debt-to-income ratio:     62.41 percent
Current status:           Claim/sold
HUD’s loss on resale:     $28,050


Credit Not Properly Assessed

National City’s loan files contained no evidence of follow-up on a credit inquiry that resulted in
additional monthly debt of $491 for an automobile loan. The borrower made the loan in October
2002, the same month National City closed the borrower’s home loan. The credit report, dated
October 25, 2002, showed an October 04, 2002, inquiry by the creditor who made the auto loan.
The loan file contained no follow-up to the inquiry. The additional debt was shown on a credit
report National City obtained on April 14, 2005, in response to questions we raised because
National City could not support that it performed the required review of this early default loan.
In response to this request, National City reviewed the loan, and its representative observed the
additional debt and lack of follow-up to credit inquiries before or at the time the loan was
approved. The additional debt and income issues (discussed below) resulted in a 62.41 percent
debt-to-income ratio, compared to the 36.26 percent rate National City calculated and used to
approve loan.

HUD Requirements

HUD Handbook 4155.1, REV-4, paragraph 2-3B, states that the lender must determine the
purpose of any recent debts, and the borrower must explain all inquiries shown on the credit
report.

Income Not Properly Assessed

National City inappropriately counted the coborrower’s projected income of $1,300 per month,
versus the verified income of $785 per month. This resulted in a $515 per month overstatement
of the coborrower’s income. National City based the projected income on a confirmation from
the employer that stated the coborrower’s hourly rate and weekly hours would increase. The
confirmation did not indicate when the increase would take effect. Without this information, the
files did not support use of the higher projected income amount. National City’s representatives
reviewed the file during the course of our review and concluded the file contained inadequate
support for using the projected income amount. National City also miscalculated the borrower’s
income, resulting in a $76 per month overstatement. The total income overstatement amounted


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to $591 per month. The overstated income and unreported liability (discussed above) resulted in
a debt-to-income ratio of 62.41 percent, compared to the 36.26 percent rate National City
calculated and used to approve the loan.

HUD Requirements

HUD Handbook 4155.1, Rev 4, paragraph 2-7Q, provides that except in certain situations,
projected or hypothetical income is not acceptable for qualifying purposes. Exceptions are
permitted for income from cost-of-living adjustments, performance raises, bonuses, etc., verified
by the employer and scheduled to begin within 60 days of loan closing.

Gift Not Properly Verified

National City’s file contained no documentation that it verified receipt of a $2,947 gift paid to
the closing agent by a nonprofit donor. Thus, National City allowed the loan to close without
support that the closing agent received the nonprofit gift used to pay the borrower’s required
investment in the property. OIG verified the receipt of the gift funds with the closing agent and
confirmed the gift amount with the nonprofit. However, OIG’s verification and confirmation
does not relieve National City of its responsibility to verify the transfer of gift funds before loan
closing.

HUD Requirements

HUD Handbook 4155.1, REV-4, paragraph 2-10C, provides that the lender must document the
transfer of the funds from the donor to the borrower. If the funds are not deposited to the
borrower’s account before closing, the lender must obtain verification the closing agent received
funds from the donor for the amount of the gift.




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                                                 22
Case number:              094-4677762
Loan purpose:             Purchase
Underwriter type:         Desktop underwriter
Date of loan closing:     September 24, 2002
Insured amount:           $101,200
Debt-to-income ratio:     45.17 percent
Current status:           Claim/sold
HUD’s loss on resale:     $27,465


Credit Not Properly Assessed

National City’s file did not support the exclusion of $531 in monthly child support payments
from its credit analysis, nor did the file adequately document the borrower’s disregard for child
support obligations. The loan application showed the borrower had two dependents, ages ten and
seven. The most recent credit report, dated September 4, 2002, showed the borrower was
obligated to make $531 per month child support payments. The payments included $292 per
month for Georgia and $239 for Colorado. The automatic underwriter finding report requested
support for omitting the child support obligations. The underwriter did not document the file to
provide the requested explanation. National City’s representative reviewed the file during the
course of the audit and noted that the file did not document the basis for eliminating several
obligations. The additional debts resulted in a 45.17 percent debt-to-income ratio, compared to
the 26.85 percent rate National City calculated and used to approve loan.

Further, National City’s credit analysis did not adequately consider the borrower’s consistent
disregard for child support obligations. The most recent credit report, dated September 4, 2002,
showed $11,906 in delinquent child support payments, of which $6,272 was not supported as
paid by the borrower. The amount included $5,634 for Georgia, $4,869 for North Carolina, and
$1,403 for Colorado. The $5,634 due for Georgia was paid at loan closing using proceeds from
the gift discussed below. The $4,869 for North Carolina was shown as a collection write-off.
The file showed no evidence that the $1,403 due for Colorado had been paid. The file contained
an earlier credit report, dated August 27, 2002, that showed the Colorado balances (no amount
indicated) were transferred to Georgia. However, the amount did not agree with the later credit
report that continued to show separate balances for Georgia ($5,634) and Colorado ($1,403).
The file contained no explanation for the discrepancies between the two credit reports.

HUD Requirements

HUD Handbook 4155.1, Rev 4, paragraph 2-11, provides that in computing the debt-to-income
ratio, the lender must include all recurring charges, including payments for child support or
separate maintenance payments extending 10 months or more. Debts lasting less than 10 months
must be counted if the amount of the debt affects the borrower’s ability to make the mortgage


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payment during the months immediately after loan closing. Paragraph 2-3 states that strong
offsetting factors would be needed to approve the loan if the credit history reflects continuous
slow payments, judgments, and delinquent accounts. The file did not contain the required
support. Further, paragraph 2-3C requires court-ordered judgments to be paid off before the
mortgage loan is eligible for Federal Housing Administration insurance endorsement.

Income Not Properly Assessed

National City approved the loan although the file showed the borrower had an unstable
employment history. During the two years preceding National City’s loan approval, the
borrower worked for six separate employers in three different states. Two of the employers were
not listed on the loan application. The loan application also indicated unexplained gaps in the
borrower’s employment from June to September 2001 and July to September 2002. HUD’s
Neighborhood Watch system shows the loan went into default due to curtailment of borrower
income. The default reason was consistent with the borrower’s inconsistent employment history.
National City could not locate its independent review of this early payment default loan.
Therefore, it had its staff to review the file during the course of our audit. National City
determined the borrower lacked job stability because of various jobs not in the same line of
work.

HUD Requirements

HUD Handbook 4155.1, REV-4, paragraph 2-6, provides that HUD does not impose an arbitrary
minimum length of time a borrower must have held a position to be eligible. However, the
lender must verity the borrower’s employment for the most recent two full years. The borrower
must also explain any gaps in employment of a month or more. To analyze the probability of
continued employment, lenders must examine the borrower’s past employment record,
qualifications for the position, previous training and education, and the employer’s confirmation
of continued employment. A borrower who changes jobs frequently within the same line of
work but continues to advance in income or benefits should be considered favorably. In this
case, the borrower did not meet these criteria. Chapter 2, section 2, further states that income
that is not stable may not be used to calculate the borrower’s debt-to-income ratios.

Gift Not Properly Verified

The loan file did not contain proper verification of a $9,000 gift shown as made to the borrower
by a cousin. The gift was supported by a bank check, dated September 24, 2002, and a
transaction summary for a $9,000 withdrawal on the same date. The file also contained a
personal banking account detail that showed the account was opened on March 18, 2002. The
account detail showed a large unexplained $18,773 deposit on September 13, 2002, only 11 days
before the alleged gift. The files contained no explanation for the large deposit. National City
allowed the loan to close without proper verification that the donor purchased the bank check
with funds that came from an acceptable source.




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                                                24
HUD Requirements

HUD Handbook 4155.1, paragraph 2-10C, provides that an outright gift of the cash investment is
acceptable if the donor is a relative of the borrower. As a rule, our concern is not with how the
donor obtains the gift funds, provided they are not derived in any manner from a party to the
sales transaction. The lender did not verify the source of the large deposit to the donor’s account
needed to make this determination. Section 2-10C further provides that if the gift is provided at
closing, the lender must obtain verification the closing agent received funds from the donor for
the amount of the gift. The lender did not properly verify who purchased the cashier check used
for the gift.




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                                                25
Case number:              091-3604055
Loan purpose:             Purchase
Underwriter type:         Manual underwriter
Date of loan closing:     August 23, 2002
Insured amount:           $68,820
Status:                   Default/no claim paid


Completion of Repairs Not Verified or Documented

National City did not verify or document completion of repiping work before it allowed the loan
to close or be submitted for endorsement. The appraisal stated that the subject property had
undergone complete renovation but noted that the house needed to be repiped. The conditional
commitment included a condition that required repiping. National City’s loan file contained a
$1,700 invoice from a plumbing company but did not contain the required certification that the
work was completed. National City reviewed the file during the course of the audit and made
this same observation.

HUD Requirements

HUD Handbook 4000.2, paragraph 2-19, provides that repair requirements outstanding on the
conditional commitment or the appraisal report must be satisfied before the mortgage is
submitted for endorsement.

Income Not Properly Assessed

National City did not verify the borrower’s likelihood of continued employment. His most
recent employer employed the borrower for only 18 months before the loan. Documentation of
the borrower’s continued employment was needed to assess the likelihood of continuous income
needed to pay the mortgage. HUD’s system shows the borrower defaulted due to curtailment of
income.

HUD Requirements

HUD Handbook 4155.1, REV-4, chapter 2, section 2, provides that anticipated amount of
income and likelihood of its continuance must be established to determine the borrower’s
capacity to repay the mortgage debt. Income from any source that will not continue may not be
used in calculating the borrower’s income ratios. Paragraph 2-6, Stability of Income, provides
that to analyze the probability of continued employment, lenders must examine the borrower’s
past employment record, qualifications for the position, previous training and education, and the
employer’s confirmation of continued employment. The file did not contain this documentation.



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 Gift Not Properly Verified

 National City’s loan file contained no documentation to support that National City properly
 verified a $1,997 gift paid to the closing agent by a nonprofit donor. Thus, National City
 allowed the loan to close with no evidence that it properly verified the closing agent received the
 nonprofit gift used to pay the borrower’s required investment in the property. OIG verified the
 receipt of the gift funds with the closing agent and confirmed the gift amount with the nonprofit.
 However, OIG’s verification and confirmation do not relieve National City of its responsibility
 to verify the transfer of gift funds before loan closing.

 HUD Requirements

 HUD Handbook 4155.1, REV-4, paragraph 2-10C, provides that the lender must document the
 transfer of the funds from the donor to the borrower. If the funds are not deposited to the
 borrower’s account before closing, the lender must obtain verification the closing agent received
 funds from the donor for the amount of the gift.




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                                                 27
Case number:              091-3701492
Loan purpose:             Purchase
Underwriter type:         Manual underwriter
Date of loan closing:     March 25, 2003
Insured amount:           $73,742
Debt-to-income ratio:     52.55 percent
Status:                   Claim/sold
HUD’s loss on resale:     $40,988


Income Not Properly Assessed

The $1,211 monthly income National City used for Social Security and child support was
overstated by $761 due to amounts not supported by the file ($501) and ineligible child support
($260). National City used the $1,211, although the file only supported $710, an overstatement
of $501. The file did not contain information needed to resolve this difference. The balance of
the overstatement $260 ($761-$501) was for ineligible child support payments. The underwriter
approved the loan although the payer of the child support owed more than $20,000 in back
payments and the file contained a six-month versus the required twelve-month payment history.
In addition, National City allowed the child support income without obtaining copies of the
divorce decree, legal separation agreement, or voluntary payment agreement. Thus, we adjusted
the borrowers’ income from $3,199 to $2,438. The adjusted income resulted in a 52.55 percent
debt-to-income ratio, compared to the 39.48 percent rate National City calculated.

HUD Requirements

HUD Handbook 4155.1, REV-4, paragraph 2-7F, provides requirements for alimony, child
support, or maintenance income. The requirements provide that income in this category may be
considered as effective if such payments are likely to be consistently received for approximately
the first three years of the mortgage. The borrower must provide a copy of the divorce decree,
legal separation agreement, or voluntary payment agreement and evidence that payments have
been received during the last 12 months. Acceptable evidence of regularity of payments includes
cancelled checks, deposit slips, tax returns, court records, etc. Periods of less than 12 months
may be acceptable, provided the payer’s ability and willingness to make timely payments is
adequately documented by the lender.

Gift Funds Not Properly Verified

National City’s file contained no documentation to support that National City verified a $1,947
gift paid to the closing agent by a nonprofit donor. Thus, National City allowed the loan to close
without first verifying that the closing agent received the nonprofit gift used to pay the
borrower’s required investment in the property. In addition, the borrower did not sign the gift


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                                                28
letter located in National City’s loan file. OIG verified the receipt of the gift funds with the
closing agent and confirmed the gift amount with the nonprofit. However, OIG’s verification
and confirmation do not relieve National City of its responsibility to verify the transfer of gift
funds before loan closing.

HUD Requirements

HUD Handbook 4155.1, REV-4, paragraph 2-10C, provides that the lender must document the
transfer of the funds from the donor to the borrower. If the funds are not deposited to the
borrower’s account before closing, the lender must obtain verification the closing agent received
funds from the donor for the amount of the gift.




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                                                 29
Case number:              091-3797093
Loan purpose:             Purchase
Underwriter type:         Desktop underwriter
Date of loan closing:     October 7, 2003
Insured amount:           $84,854
Status:                   Default/no claim paid


Income Not Properly Assessed

National City did not establish and document the stability of employment and the likelihood of
continued employment for the borrower and the coborrower. This information was required so
that the lender could determine the borrower’s capacity to repay the mortgage debt. National
City established the borrower’s income using a one-week pay stub and a verbal verification that
only confirmed the borrower had been an employee for nine months and his position. The verbal
verification did not confirm the borrower’s pay rate and likelihood of continual employment.
For the coborrower, National City only obtained a two-week pay stub and a verbal verification
that did not contain sufficient information. The verbal confirmation did not reflect the
coborrower’s pay rate, employment date, and likelihood of continued employment. Further, the
verbal confirmation was obtained from a receptionist at the place of employment where the
coborrower also held a receptionist position. The file indicated an individual who was not the
coborrower provided the verbal confirmation.

HUD Requirements

HUD Handbook 4155.1, REV-4, chapter 2, section 2, provides that anticipated amount of
income and likelihood of its continuance must be established to determine the borrower’s
capacity to repay the mortgage debt. Income from any source that will not continue may not be
used in calculating the borrower’s income ratios. Paragraph 2-6, provides that to analyze the
probability of continued employment, lenders must examine the borrower’s past employment
record, qualifications for the position, previous training and education, and the employer’s
confirmation of continued employment. The file did not contain this documentation.

Credit Not Properly Assessed

National City did not properly assess the borrower’s poor credit performance despite having
sufficient income to pay bills. The credit report showed the borrower had one write-off and three
collection accounts with balances that totaled $1,260 within the last 12 months. The file did not
document an explanation for the collections and write-off nor did the underwriter document
compensating factors considered to override these adverse credit characteristics. The automated
underwriter findings report commented that no further explanation was required for any adverse
or other derogatory credit information. However, the collections and write-off were inconsistent


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with the borrower’s low 25.20 percent debt-to-income ratio and should have generated questions
about the borrower’s responsibility toward financial obligations. HUD’s system showed the
borrower defaulted due to excessive obligations.

HUD Requirements

HUD Handbook 4155.1, REV-4, paragraph 2-3, states that past credit performance serves as the
most useful guide in determining a borrower’s attitude toward credit obligation and predicting a
borrower’s future actions. It further states that if the credit history reflects continuous slow
payments, judgments, and delinquent accounts, strong compensating factors will be necessary to
approve a loan. Major indications of derogatory credit, including judgments, collections, and
any other recent credit problems, require sufficient written explanation from the borrower.

Gift Not Properly Verified

National City’s loan file contained no documentation to support that the lender verified receipt of
a $4,400 gift by a nonprofit donor. Thus, National City allowed the loan to close without first
verifying that the closing agent received the nonprofit gift used to pay the borrower’s required
investment in the property. OIG confirmed the gift amount with the nonprofit. However, OIG’s
confirmation does not relieve National City of its responsibility to verify the transfer of gift
funds before loan closing.

HUD Requirements

HUD Handbook 4155.1, REV-4, paragraph 2-10C, provides that the lender must document the
transfer of the funds from the donor to the borrower. If the funds are not deposited to the
borrower’s account before closing, the lender must obtain verification the closing agent received
funds from the donor for the amount of the gift.




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                                                31
Case number:              091-3647861
Loan purpose:             Purchase
Underwriter type:         Loan prospector underwriter
Date of loan closing:     December 23, 2002
Insured amount:           $71,497
Status:                   Claim (not resold)
HUD costs incurred:       $83,356 (claim paid)


Gift Not Properly Verified

National City allowed the loan to close without proper verification of gift funds totaling $23,565
from the borrower’s mother ($2,000), a cousin ($1,132), and a nonprofit donor ($20, 433). The
file contained copies of separate cashier’s checks the mother and cousin supposedly purchased
and made payable to the closing agent for the gifts. Neither of the withdrawal documents
contained preprinted bank account identification needed to support that the withdrawal accounts
belong to the donors. The closing agent showed no record of receiving the checks. Instead, the
closing agent’s loan escrow ledger showed it received two different cashier’s checks from the
seller. The checks were completed to show they came from the relatives. Copies of bank checks
obtained from the closing agent showed the mother provided a gift of $1,138, versus $2,000, and
the cousin provided a gift of $2,000, versus $1,132. The checks were dated December 30, 2002,
although the loan closed on December 23, 2002. National City did not obtain documents from
the closing agent needed to confirm receipt of the gifts. That documentation would have
identified discrepancies and required resolution before loan closing.

National City’s loan file also did not contain documentation to support that it verified a $20,433
gift paid to the closing agent by a nonprofit donor. In addition, the borrower did not sign the
nonprofit gift letter. OIG verified the receipt of the gift funds with the closing agent and
confirmed the gift amount with the nonprofit. However, OIG’s verification and confirmation do
not relieve National City of its responsibility to verify the transfer of gift funds before loan
closing.

HUD Requirements

HUD Handbook 4155.1, REV-4, paragraph 2-10C, provides that the lender must document the
transfer of the funds from the donor to the borrower. If the funds are not deposited to the
borrower’s account before closing, the lender must obtain verification the closing agent received
funds from the donor for the amount of the gift. The file must also contain a gift letter specifying
the dollar amount, signed by the donor and the borrower, stating no repayment is required and
showing the donor’s name, address, telephone number, and relationship to the borrower.



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Case number:              094-4640149
Loan purpose:             Purchase
Underwriter type:         Manual underwriter
Date of loan closing:     August 15, 2002
Insured amount:           $111,244
Debt-to-income ratio:     76.86 percent
Status:                   Claim/sold
HUD’s loss on resale:     $18,707


Income Not Properly Assessed

National City did not properly verify or document verification of $1,863 of the $3,150 gross
monthly income it used to qualify the borrower for the loan. The $1,863 represented the
borrower’s primary income from employment. National City’s loan file contained no pay stubs
covering the most recent 30-day period from the full-time employer to support the $1,863
monthly income amount. The file contained a verbal verification that showed the borrower had
worked for the employer for about seven months. The verbal verification did not document
confirmation of the borrower’s pay rate or likelihood of continued employment, and the file
provided no other confirmations needed to validate this information. We, therefore, excluded the
income amount in our analysis and calculated a debt-to-income ratio of 76.86 percent, compared
to the 32.02 percent rate National City calculated.

HUD Requirements

HUD Handbook 4155.1, REV-4, chapter 2, section 2, provides that the anticipated amount of
income and likelihood of its continuance must be established to determine the borrower’s
capacity to repay the mortgage debt. Income from any source that cannot be verified, is not
stable, or will not continue may not be used in calculating the borrower’s income ratios.

Credit Not Properly Assessed

National City approved the loan despite the borrower’s poor credit history. The borrower had 17
medical accounts in collection status totaling $3,629. The loan file contained a written
explanation from the borrower stating that she had been working unsuccessfully with her
insurance company to cover the expenses. National City approved the loan without resolving
whether the debts were obligations of the borrower or the insurance company. National City
should not have approved the loan before resolving this issue and documenting the file to support
its decision. The automated underwriter system referred the loan to manual underwriting
because of the credit risk. National City’s quality control audit identified the borrower as having
an unacceptable credit history.



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                                                33
HUD Requirements

HUD Handbook 4155.1, REV-4, paragraph 2-3, states that past credit performance serves as the
most useful guide in determining a borrower’s attitude toward credit obligation and predicting a
borrower’s future actions. It further states that if the credit history reflects continuous slow
payments, judgments, and delinquent accounts, strong compensating factors will be necessary to
approve a loan. Major indications of derogatory credit, including judgments, collections, and
any other recent credit problems, require sufficient written explanation from the borrower. The
handbook also states both collections and judgments indicate the borrower’s regard for credit
obligations and must be considered in the analysis of creditworthiness.




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                                               34
Case number:              093-5382708
Loan purpose:             Purchase
Underwriter type:         Desktop underwriter
Date of loan closing:     November 4, 2002
Insured amount:           $68,918
Debt-to-income ratio:     56.34 percent
Status:                   Claim (not resold)
HUD costs incurred:       $76,334 (claim paid)


Credit Not Properly Assessed

National City omitted an automobile loan with monthly payments of $436 from its automated
underwriting system assessment of the borrower’s eligibility for the loan. The automated
underwriting system’s finding report contained a handwritten note that the loan had fewer than
10 payments remaining. This comment was incorrect. More than 10 months would have been
required to pay off the $4,273 balance and related interest. This debt accounted for 50 percent of
the borrower’s monthly installment debts. HUD requires consideration of obligations that affect
the borrower’s ability to make the mortgage payment during the months immediately after loan
closing. We included the $436 in our analysis, and it increased the debt-to-income ratio to 56.34
percent, compared to the 39.52 percent rate National City calculated.

HUD Requirements

HUD Handbook 4155.1, Rev 4, paragraph 2-11, provides that in computing the debt-to-income
ratio, the lender must include all recurring charges extending 10 months or more. Debts lasting
less than 10 months must be counted if the amount of the debt affects the borrower’s ability to
make the mortgage payment during the months immediately after loan closing.

Gift Not Properly Verified

National City’s file contained no documentation that it verified receipt of a $2,100 gift paid to
the closing agent by the nonprofit donor. Thus, National City allowed the loan to close without
support that the closing agent received the nonprofit gift used to pay the borrower’s required
investment in the property. OIG verified that the gift funds were provided to the closing agent
and confirmed the gift amount with the nonprofit. However, OIG’s verification and
confirmation does not relieve National City of its responsibility to verify the transfer of gift
funds before loan closing.




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                                                 35
HUD Requirements

HUD Handbook 4155.1, REV-4, paragraph 2-10C, provides that the lender must document the
transfer of the funds from the donor to the borrower. If the funds are not deposited to the
borrower’s account before closing, the lender must obtain verification the closing agent received
funds from the donor for the amount of the gift.




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