AUDIT REPORT
Fairfield Financial Mortgage Group, Inc., Danbury, Connecticut,
Did Not Always Comply with Federal Housing Administration
Requirements
2005-BO-1007
September 26, 2005
OFFICE OF AUDIT, REGION 1
Boston, MA
Issue Date
September 26, 2005
Audit Report Number
2005-BO-1007
TO: Brian D. Montgomery, Assistant Secretary for Housing-Federal Housing
Commissioner, H
FROM: For John A. Dvorak, Regional Inspector General for Audit, 1AGA
SUBJECT: Fairfield Financial Mortgage Group, Inc., Danbury, Connecticut, Did Not
Always Comply with Federal Housing Administration Requirements
HIGHLIGHTS
What We Audited and Why
We audited Fairfield Financial Mortgage Group, Inc. (Fairfield Financial), a
nonsupervised lender approved by the U.S. Department of Housing and Urban
Development (HUD) to originate Federal Housing Administration-insured single-
family mortgages. We selected Fairfield Financial for review because of risk
factors associated with defaulted loans, including higher risk multiunit properties,
early payment defaults, and income-excessive obligations cited for several
defaulted loans, which suggested potential problems with the qualifying
documentation.
Our objectives were to determine whether Fairfield Financial complied with HUD
regulations, procedures, and instructions in the origination of Federal Housing
Administration loans and whether Fairfield Financial’s quality control plan, as
implemented, met HUD requirements.
1
What We Found
Fairfield Financial did not always comply with HUD regulations, procedures, and
instructions in the origination of Federal Housing Administration loans. It
improperly originated 4 of the 24 loans reviewed. These four loans contained
deficiencies that affected the insurability of the loans, including unsupported
income, underreported liabilities, excessive qualifying ratios, and derogatory
credit information. As a result, HUD insured loans that placed the insurance fund
at risk for $1,204,981. In addition, Fairfield Financial did not properly disclose to
borrowers $11,390 for commitment fees in 20 of the 24 loans reviewed.
Further, Fairfield Financial’s quality control plan, as implemented, did not meet
HUD requirements. Its written quality control plan lacked required elements, and
it did not implement procedures to ensure that reviews of early defaulted loans
took place or that its operations complied with fair lending laws. As a result,
HUD lacks assurance that Fairfield Financial is able to ensure the accuracy and
completeness of its loan origination operations.
What We Recommend
We recommend that the assistant secretary for housing-federal housing
commissioner require Fairfield Financial to (1) indemnify HUD against future
losses on the four loans totaling $1,204,981 and (2) revise its procedures to ensure
that each borrower charged a commitment fee is properly informed, in writing, of
the fee, the amount of the fee, and the purpose of the fee, and that the actual fee
charged coincides with the amount disclosed to the borrower. Additionally, HUD
should require Fairfield Financial to implement controls to ensure that it follows
HUD’s quality control requirements and verify that it has implemented proper
controls.
For each recommendation in the body of the report 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.
2
Auditee’s Response
We provided Fairfield Financial a draft report on August 24, 2005, and held an
exit conference with Fairfield Financial officials on August 31, 2005. Fairfield
Financial provided written comments on September 21, 2005, in which it
generally expressed disagreement with finding 1 and agreement with finding 2.
The complete text of the auditee’s response, along with our evaluation of that
response, is in appendix B of this report.
3
TABLE OF CONTENTS
Background and Objectives 5
Results of Audit
Finding 1: Fairfield Financial Did Not Follow HUD Requirements When 6
Originating Four Loans
Finding 2: Fairfield Financial’s Quality Control Plan Did Not Comply with 11
HUD Requirements
Scope and Methodology 14
Internal Controls 15
Appendixes
A. Schedule of Questioned Costs and Funds to Be Put to Better Use 17
B. Auditee Comments and OIG’s Evaluation 18
C. Narrative of Loan Deficiencies 29
D. Commitment Fees Charged to Borrowers 36
E. Audit Criteria 37
4
BACKGROUND AND OBJECTIVES
The National Housing Act, as amended, established the Federal Housing Administration, an
organizational unit within the U.S. Department of Housing and Urban Development (HUD). The
Federal Housing Administration provides insurance for lenders against loss on single-family home
mortgages.
HUD approved Fairfield Financial Mortgage Group, Inc. (Fairfield Financial), as a nonsupervised
direct endorsement lender on September 4, 1998. As a HUD-approved direct endorsement lender,
Fairfield Financial can underwrite and close Federal Housing Administration loans without prior
HUD review or approval.
Fairfield Financial originated 423 Federal Housing Administration-insured loans with mortgages
totaling $79.6 million, which had beginning amortization dates (defined as one month before the
first principal and interest payments are due) between January 1, 2003, and December 31, 2004.
According to HUD’s Neighborhood Watch system, 14 of the loans defaulted within the first two
years of origination, equating to an average default rate of roughly 3.3 percent. This default rate
compared favorably to the national average default rate of 4.2 percent during that same two-year
period. As of the latest reporting period ending June 30, 2005, Fairfield Financial’s two-year
average default rate has declined to 3.1 percent, while the national two-year average default rate
has increased to 4.6 percent. Fairfield Financial sells 100 percent of the loans it originates to the
secondary market.
The audit objectives were to determine whether Fairfield Financial complied with HUD
regulations, procedures, and instructions in the origination of Federal Housing Administration
loans and whether Fairfield Financial’s quality control plan, as implemented, met HUD
requirements.
5
RESULTS OF AUDIT
Finding 1: Fairfield Financial Did Not Follow HUD Requirements
When Originating Four Loans
Fairfield Financial did not follow HUD requirements when originating and approving 4 of the 24
loans reviewed. The loans contained deficiencies that affected the credit quality (insurability) of
the loans. Fairfield Financial approved the loans based on unsupported income, underreported
liabilities, excessive qualifying ratios, and derogatory credit information. The deficiencies
occurred because Fairfield Financial did not exercise due care in originating and underwriting
loans and did not adequately implement its quality control plan. As a result, HUD insured four
loans that placed the Federal Housing Administration insurance fund at risk for $1,204,981. In
addition, Fairfield Financial did not properly disclose to borrowers $11,390 for commitment fees
in 20 of the 24 loans reviewed.
Loans Did Not Comply with
HUD Requirements
Fairfield Financial originated four loans totaling $1,204,981 that contained
significant loan origination deficiencies. These loans contained material errors,
including unsupported income, underreported liabilities, inadequate qualifying
ratios, and derogatory credit. Fairfield Financial’s quality control process
contributed to the loan origination deficiencies (see finding 2).
As of August 31, 2005, HUD’s data systems showed that all four of the loans were
actively insured with Federal Housing Administration insurance. HUD has not
incurred any claims associated with these loans. The following table summarizes
the mortgage amounts and categories of loan deficiencies.
Case # Mortgage Unsupported Underreported Excessive Derogatory
amount income liabilities qualifying credit
ratios
251-3097987 $446,067 X X
251-2928528 296,656 X X
251-3084029 265,828 X X
352-5211304 196,430 X X X
Total $1,204,981 2 2 3 2
All four loans contained more than one deficiency. Descriptions of the
deficiencies noted are presented below. Appendix C contains detailed narrative
case presentations for each loan.
6
Unsupported Income
Fairfield Financial relied on unsupported income for two loans, case numbers
251-3097987 and 251-2928528. The anticipated amount of income and the
likelihood of its continuance must be established to determine a borrower’s
capacity to repay mortgage debt. Lenders may not use income in evaluating the
borrower’s loan that it cannot verify, is not stable, or will not continue.
Overstating income affects the debt-to-income ratios. The use of incorrect
income information could result in an invalid underwriting decision.
For example, Fairfield Financial originated case number 251-3097987 using a
calculated monthly income of $4,687, consisting of $2,542 in base pay and $2,145
in overtime income. Fairfield Financial calculated the monthly income using only
one of the pay stubs provided by the borrower, although the borrower provided
six pay stubs and Internal Revenue Service W-2 forms from the prior two years.
HUD requires that lenders develop an average of overtime income over the last
two years or otherwise justify and document the reason for using the income. A
more accurate estimate of the borrower’s monthly income would have been an
average of his 2003 earnings and year-to-date earnings. That calculation resulted
in an average monthly income of $3,916, well below the income Fairfield
Financial used to qualify the borrower.
Underreported Liabilities
Fairfield Financial did not consider all relevant liabilities when approving two
loans, case numbers 352-5211304 and 251-2928528. HUD requires lenders to
consider all recurring obligations, contingent liabilities, and projected obligations
that meet HUD’s specific stipulations when evaluating a loan application.
Underreported liabilities affect the debt-to-income ratios. The use of incorrect
liability information could result in an invalid underwriting decision.
For example, for case number 251-2928528, Fairfield Financial omitted liabilities
for the borrower when evaluating the loan. It requested tax returns to support the
borrower’s income. However, the borrower was self-employed and had neglected
to prepare and submit federal tax returns. Although the borrower submitted
proforma tax returns, Fairfield Financial did not consider more than $32,300 in
federal taxes and penalties owed by the borrower for the prior two tax years, as
indicated on the unfiled tax returns. It was Fairfield Financial’s obligation to
consider this significant liability in evaluating the loan application and its impact
on the borrower’s capacity to repay mortgage debt.
7
Excessive Qualifying Ratios
Fairfield Financial allowed excessive qualifying ratios without valid
compensating factors in three loans, case numbers 251-3084029, 352-5211304,
and 251-3097987. HUD requires debt-to-income ratios not to exceed 29 and 41
percent (mortgage payment-to-effective income and total fixed payment-to-
effective income ratio, respectively). Ratios exceeding 29 and 41 percent may be
acceptable only if significant compensating factors are present. HUD identifies
10 compensating factors that may be considered to justify approving mortgage
loans with qualifying ratios exceeding HUD’s established thresholds. The three
loans approved by Fairfield Financial did not adequately document any of the 10
compensating factors recognized by HUD.
For example, case number 352-5211304 had a mortgage payment-to-income ratio
of 38.09 percent and a total fixed payment-to-income ratio of 43.50 percent.
Fairfield Financial should have documented compensating factors to justify the
excess ratios; especially considering that the borrower’s housing payment was
increasing 600 percent from $300 per month to just over $2,100 per month.
Derogatory Credit
Fairfield Financial did not properly evaluate the borrowers’ past credit
performance and ensure that the borrowers demonstrated financial responsibility
in two of the four loans, case numbers 251-3084029 and 352-5211304. HUD
considers past credit performance of the borrowers to be the most useful guide in
determining the attitude toward credit obligations that will govern the borrowers’
future actions. If the credit history, despite adequate income to support
obligations, reflects continuous slow payments, judgments, and delinquent
accounts, strong compensating factors will be necessary to approve the loan.
While minor derogatory information occurring two or more years in the past does
not require explanation, major indications of derogatory credit—including
judgments, collections, and any other recent credit problems—require sufficient
written explanation from the borrower.
For example, the borrower’s credit report for case number 251-3084029 identified
six different accounts that went into collection. Shortly before the loan
application, all six of these accounts were brought current, and they all had no
balances. Derogatory credit, including accounts in collection, requires a sufficient
written explanation from the borrower. The borrower provided a letter of
explanation, citing a divorce as the reason for falling behind on payments. The
letter further indicated that efforts had been made over the last several months to
8
settle and pay off the debts. The divorce cited by the borrower occurred
approximately eight years before the loan application, and five of the six accounts
in collection were opened after the divorce finalization. This does not constitute a
sufficient written explanation.
$11,390 Charged for
Commitment Fees without
Adequate Disclosure
Fairfield Financial charged $11,390 for loan commitment fees, without adequate
disclosure, in 20 of the 24 loans reviewed. Commitment fees are an allowable
charge if there is a lock-in or commitment agreement, in writing, that guarantees
the rate or discount points for a period of not less than 15 days before the
anticipated closing date. Fairfield Financial did not provide adequate disclosure
of written lock-in or commitment agreements to its borrowers as required. While
these deficiencies did not affect the overall credit quality (insurability) of the
individual loans, they do indicate a lack of full commitment to quality
underwriting. Lenders need to ensure that they follow all facets of HUD
requirements when originating Federal Housing Administration loans. We
provided details of these deficiencies to Fairfield Financial during our review.
Appendix D presents a table summarizing the commitment fees charged to
borrowers for each of the 20 loans.
Conclusion
Fairfield Financial did not always exercise due care in originating and
underwriting loans and did not adequately implement its quality control plan. As
a result, Fairfield Financial originated four loans containing deficiencies that
placed the Federal Housing Administration insurance fund at risk for $1,204,981.
In addition, Fairfield Financial charged $11,390 for loan commitment fees,
without adequate disclosure, in 20 of the 24 loans reviewed.
9
Recommendations
We recommend that the assistant secretary for housing-federal housing
commissioner
1A. Require Fairfield Financial to indemnify HUD against future losses on the
four loans totaling $1,204,981.
1B. Require Fairfield Financial to revise its procedures to ensure that each
borrower charged a commitment fee is properly informed, in writing, of
the fee, the amount of the fee, and the purpose of the fee, and that the
actual fee charged coincides with the amount disclosed to the borrower.
10
Finding 2: Fairfield Financial’s Quality Control Plan Did Not Comply
with HUD Requirements
Fairfield Financial did not establish and implement an adequate quality control process in
accordance with HUD regulations. Fairfield Financial’s quality control plan did not include all
of the HUD-required elements. In addition, its staff did not ensure that loans going into early
payment default were reviewed as part of the quality control process or that its operations
complied with applicable fair lending laws. Further, Fairfield Financial’s quality control plan
lacks specific procedures regarding single-family loan servicing. These deficiencies existed
because of Fairfield Financial’s lack of understanding concerning its responsibility to ensure that
it met HUD requirements when contracting with an outside firm to perform quality control
reviews. As a result, it was unable to ensure the accuracy and completeness of its loan
origination operations, contributing to an increased risk of loss to the Federal Housing
Administration insurance fund.
Outside Firm Contracted to
Perform Quality Control
Reviews
HUD provides that a lender may engage outside sources to perform the quality
control function. 1 A lender contracting out any part of its quality control function is
responsible for ensuring that the outside source meets HUD’s requirements.
Fairfield Financial contracted with an outside firm to perform its quality control
reviews. It relied on the quality assurance program prepared by the contractor
(Fairfield Financial’s quality control plan). However, Fairfield Financial did not
ensure that this program contained all HUD-required elements or that it completed
quality control reviews in accordance with the plan.
Written Quality Control Plan
Did Not Contain Required
Elements
HUD 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
1
HUD Handbook 4060.1, REV-1, CHG-1, paragraph 6-3(B)(2).
11
with HUD-Federal Housing Administration requirements and its own policies and
procedures. 2
Fairfield Financial’s quality control plan was not dated and did not include the
following elements:
• Determine whether there are sufficient and documented compensating
factors if the debt ratios exceed Federal Housing Administration limits.
• Determine whether all conditions were cleared before closing.
• Determine whether the seller acquired the property at the time of or soon
before closing, indicating a possible property “flip.”
Additionally, Fairfield Financial’s quality control plan lacked specific procedures
regarding single-family loan servicing. We recognize that Fairfield Financial
intended to sell 100 percent of the loans it originated. However, from time to time
and in varying degrees, it serviced the loans it originated, including Federal Housing
Administration-insured loans.
Early Default and Rejected
Loans Not Reviewed
Fairfield Financial did not fully implement its quality control plan. It did not
ensure that quality control reviews were performed on all loans defaulting within
six months of closing, as required and as outlined in its own quality control plan.
This occurred because Fairfield Financial did not submit the required loan listing
of early payment defaults to its quality control contractor. It mistakenly believed
that this function was part of the quality control process of the secondary lending
market in which it sells its loans. Accordingly, the contractor did not perform the
required reviews.
Further, Fairfield Financial did not provide a list of rejected loans to its quality
control contractor to use in performing quality control reviews. Without these
reviews, there was no assurance that Fairfield Financial’s operations complied
with applicable fair lending laws. We noted that, with the exception of the four
months between January and April 2004, Fairfield Financial did not provide the
required rejected loan listing to its quality control contractor. Therefore, the
contractor was unable to perform the required fair lending review. Fairfield
Financial stated that this was an oversight.
2
HUD Handbook 4060.1, REV-1, CHG-1, paragraph 6-1.
12
Fairfield Financial, along with its quality control contractor, expressed an interest
in ensuring that its quality control plan meets HUD requirements.
Conclusion
Fairfield Financial did not establish and implement a quality control process that
complied with HUD requirements. Its quality control plan lacked required
elements necessary to conduct proper quality control reviews, and it did not
ensure that it routinely provided adequate information to its quality control
contractor to ensure that it conducted reviews in accordance with HUD
requirements. Without a properly implemented quality control process, Fairfield
Financial cannot ensure that its loan originations comply with HUD requirements;
that it is protecting itself and HUD from unacceptable risk; and that it is guarding
against errors, omissions, and fraud.
Recommendations
We recommend that the assistant secretary for housing-federal housing
commissioner
2A. Require Fairfield Financial to establish and implement an adequate quality
control process.
2B. Verify that Fairfield Financial’s quality control process is fully
implemented in accordance with HUD regulations.
13
SCOPE AND METHODOLOGY
Fairfield Financial originated 423 Federal Housing Administration-insured loans, which had
beginning amortization dates (defined as one month before the first principal and interest
payments are due) between January 1, 2003, and December 31, 2004. To achieve our objectives,
we chose a nonrepresentative method to select loans for review from that period. This method
allowed us to select Federal Housing Administration-insured loans with certain characteristics,
enabling us to focus our review efforts on Federal Housing Administration-insured loans in
which there was a greater inherent risk to the Federal Housing Administration insurance fund
and/or risk of noncompliance or abuse.
We selected all 14 loans that defaulted within the first two years of loan origination for review
and, based on the high percentage of defaulted loans that were multiunit, we selected an
additional 10 multiunit loans for review. The results of our detailed testing only apply to the 24
loans reviewed and may not be projected to the universe of 423 Federal Housing Administration-
insured loans.
We reviewed HUD’s rules, regulations, and guidance for proper origination and submission of
Federal Housing Administration loans. We interviewed HUD staff to obtain background
information on HUD requirements and on Fairfield Financial, and we reviewed the HUD case
binders for the 24 loans selected.
We interviewed Fairfield Financial’s management and staff to obtain information regarding its
policies, procedures, and management controls. We reviewed Fairfield Financial’s written
policies and procedures to gain an understanding of how its processes are designed to function.
We also reviewed Fairfield Financial’s quality control plan, as well as the quality assurance
program of its quality control provider, and available quality control reports. Additionally, we
reviewed Fairfield Financial’s origination binders for the 24 loans selected for review.
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 for the data obtained. We also performed sufficient tests
of the data, and based on the assessments and testing, we concluded that the data are sufficiently
reliable to be used in meeting our objectives.
The audit generally covered the period from January 1, 2003, through December 31, 2004. We
expanded this period, when applicable, to include the most current data through August 31, 2005,
while performing the audit. We performed our fieldwork from January through July 2005.
We performed our review in accordance with generally accepted government auditing standards.
14
INTERNAL CONTROLS
Internal control is an integral component of an organization’s management that provides
reasonable assurance that the following objectives are being achieved:
• Effectiveness and efficiency of operations,
• Reliability of financial reporting, and
• Compliance with applicable laws and regulations.
Internal controls relate to management’s plans, methods, and procedures used to meet its
mission, goals, and objectives. Internal controls include the processes and procedures for
planning, organizing, directing, and controlling program operations. They include the systems
for measuring, reporting, and monitoring program performance.
Relevant Internal Controls
We determined the following internal controls were relevant to our audit objectives:
• Program operations. Policies and procedures that management has
implemented to reasonably ensure that the loan origination process
complies with HUD/Federal Housing Administration 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 valid and reliable data are obtained,
maintained, and fairly disclosed in reports.
• Compliance with laws and regulations. Policies and procedures that
management has implemented to reasonably ensure that resource use is
consistent with laws and regulations.
• Safeguarding of resources. Policies and procedures that management has
implemented to reasonably ensure that resources are safeguarded against
waste, loss, and misuse.
We assessed the relevant controls identified above.
A significant weakness exists if management controls do not provide reasonable
assurance that the process for planning, organizing, directing, and controlling
program operations will meet the organization’s objectives.
15
Significant Weaknesses
Based on our review, we believe the following items are significant weaknesses:
• Compliance with laws and regulations. Fairfield Financial did not follow
HUD requirements when originating four Federal Housing Administration-
insured loans (see finding 1).
• Compliance with laws and regulations. Fairfield Financial has not
implemented its quality control plan in accordance with HUD requirements
(see finding 2).
16
Appendix A
SCHEDULE OF FUNDS TO BE PUT TO BETTER USE
Recommendation Funds to be put
number to better use 1/
1A $1,204,981
1/ ”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.
17
Appendix B
AUDITEE COMMENTS AND OIG’S EVALUATION
Ref to OIG Evaluation Auditee Comments
Comment 1
18
Comment 2
Comment 3
Comment 4
Comment 5
Comment 6
19
Comment 7
Comment 8
Comment 9
Comment 10
Comment 11
20
Comment 12
Comment 13
Comment 14
21
Comment 15
Comment 16
Comment 17
Comment 18
Comment 19
22
23
OIG Evaluation of Auditee Comments
Comment 1 Fairfield Financial agreed to make the recommended changes, but noted
that their Quality Control Plan (QCP) was not deficient. As detailed in
this report, Fairfield Financial’s QCP is deficient, as it lacks HUD-
required elements and procedures regarding single-family loan servicing.
Comment 2 Fairfield Financial disagreed that the borrower’s income was incorrectly
calculated. We agree that the loan file contained six pay stubs. The loan
file also contained Internal Revenue Service W-2 forms for 2002 and
2003. Fairfield Financial, however, only used one of those pay stubs and
none of the W-2 forms to calculate the borrower’s base income, as well as
the borrower’s overtime income. This is not adequate and does not meet
HUD/FHA requirements. Fairfield Financial stated that, an average of the
borrower’s earnings prior to his elevated position, with its increased
overtime demands, would have been inappropriate in the underwriters
opinion. We agree, and that’s why we indicate in the report that a more
accurate estimate of the borrower’s monthly income would have been an
average of his 2003 earnings (the year of his promotion) and his year-to-
date earnings; not a single a pay stub.
Comment 3 We did not present this issue in the audit report. Fairfield Financial is
referring to comments we made in an earlier OIG letter, dated June 9,
2005, in which we detailed our preliminary concerns and provided
Fairfield Financial an opportunity to respond. Fairfield Financial did not
revise its comments prepared in response to that letter to reflect only the
issues presented in the audit report. As we did not carry this issue forward
to the audit report, we offer no response.
Comment 4 We agree that the loan closed in May 2004, and that it was completely
acceptable to qualify the borrower at the first year bought-down rate.
Regardless of whether the loan closed prior to, or subsequent to May
2004, Fairfield Financial was required to establish that the eventual
increase in mortgage payments would not adversely affect the borrower
and lead to default. Fairfield Financial did not establish, or document as
required, that the eventual increase would not adversely affect the
borrower.
Comment 5 Fairfield Financial disagrees that the borrower’s income was not
sufficiently established. Prior to his mortgage application, the borrower
failed to prepare Federal tax returns for the prior two years and, most
likely, for prior years as well. The Federal tax returns included in the loan
file indicated that they were prepared by a “paid preparer” on March 26,
2003, but did not include the paid preparer’s signature. Further, the
borrower did not sign and date the tax returns until the day of his loan
closing. There is no indication that those returns were ever filed or
24
accurately reflect the borrower’s self-employment income. Our main
concern lies with the $32,000 plus owed for taxes and penalties reflected
on the 2001 and 2002 tax returns and not considered by Fairfield Financial
during the underwriting process (see comment 10).
Comment 6 The loan file does contain a conflicting Social Security number for the
borrower. The loan file contains two separate certificates from the City of
Brockton; one from 1998 and one from 2002. Both certificates include the
borrower’s printed name and signature, but reflect two different Social
Security numbers. There is nothing in the loan file indicating that the
conflicting Social Security number is that of the borrower’s business
partner.
Comment 7 We do not dispute that the borrower appears to be self-employed.
Comment 8 We agree that the loan file does not contain any other Social Security
discrepancies and that the credit report did not contain a warning.
Comment 9 We disagree that Fairfield Financial was unaware that the borrower had
not filed previous tax returns or that he had not paid any tax liability to the
Internal Revenue Service. The tax returns for 2001 and 2002 are both
dated by the “paid preparer” on March 26, 2003, providing evidence that
they were prepared at the time of the borrower’s application for a
mortgage loan. The tax returns clearly indicate the tax liability and
penalties of over $32,000 and there is no indication in the loan file that
Fairfield Financial considered this, as required. Fairfield Financial
correctly pointed out that the borrower would be eligible if the delinquent
account was brought current, paid, or otherwise satisfied or a satisfactory
repayment plan was made between the borrower and the Federal agency
owed and verified in writing. There is no indication that Fairfield
Financial made any effort to determine if this occurred. Further, our
concern did not lie with the closing stipulations or instructions, but with
the timeliness of the returns and the significant liability owed by the
borrower that was not addressed by Fairfield Financial.
Comment 10 Fairfield Financial did not consider the borrower’s significant liability in
evaluating the loan application and its impact on the borrower’s capacity
to repay mortgage debt, as required. Neither the loan file nor the HUD
case binder provided any justification for moving forward with this loan or
any evidence that the borrower brought current, paid, or otherwise
satisfied the delinquent account. Further, Fairfield Financial presumes to
know what the borrower’s liability with the Internal Revenue Service
would be. In the absence of a repayment agreement, the borrower’s
liability is unknown. The tax returns in question represent only two years
and the borrower was self-employed prior to that. Therefore, it is likely
25
that the borrower’s liability to the Internal Revenue Service may far
exceed the $32,000 owed for the 2001 and 2002 tax years.
Comment 11 We agree with Fairfield Financial that, as of August 31, 2005, the loan
does not appear in the early warning default section of HUD’s
Neighborhood Watch system. This does not excuse Fairfield Financial
from adhering to HUD/FHA regulations in the origination and
underwriting of FHA-insured loans.
Comment 12 Again, Fairfield Financial is referring to comments we made in an earlier
OIG letter, dated June 9, 2005, in which we detailed our preliminary
concerns and provided Fairfield Financial an opportunity to respond.
Fairfield Financial did not revise its comments prepared in response to that
letter to reflect only the issues presented in the audit report. We agree that
the borrower had three months of reserves, as reflected in the audit report.
The borrower’s fixed payment to effective income ratio, however, was
49.90, well above the HUD/FHA threshold.
Comment 13 Fairfield Financial presented the argument that an additional compensating
factor was present. The loan file, however, only included two
compensating factors on the Mortgage Credit Analysis Worksheet
(MCAW); “3-months reserves” and “job longevity.” We agree that the
borrower had three months of reserves. Job longevity, though, is not
recognized as a compensating factor. The loan file does not contain any
other information or documentation regarding compensating factors
present. If Fairfield Financial felt other compensating factors were
relevant, they should have documented those factors on the MCAW as
required.
Comment 14 Fairfield Financial stated that five of the six accounts actually went into
collection within 12-24 months of the borrower’s divorce. This is
incorrect. In fact, four of the six accounts were not opened by the
borrower until October 1999 or later, over three years after the divorce.
Only one of the accounts was open prior to the divorce. This is why the
borrower’s explanation that the divorce caused her to fall behind on
payments was inadequate, as five of the six accounts were opened
subsequent to the divorce. It was not until the borrower applied for a
mortgage loan that she made an effort to clear her delinquent accounts.
Comment 15 Fairfield Financial stated that the borrower sold the subject property on
August 31, 2005 and that it would be inappropriate to indemnify the loan.
A check of HUD’s Neighborhood Watch system, as of August 31, 2005,
showed that foreclosure was started on the subject property. If the
property was in fact sold, we would still recommend that Fairfield
Financial indemnify HUD from paying any claims or costs associated with
this loan.
26
Comment 16 Fairfield Financial stated they no longer employ the underwriter or the
originator of this loan. Fairfield Financial believes that the file reflects the
two properties, but concedes that the file documentation should be
improved and that the analysis should have been contained in the file
documentation. We did not find that the loan file reflected both
properties. The initial application included both properties, whereas, the
final application reflected only the FHA-insured property. There was no
explanation regarding the discrepancy between the initial and final
application, as required. The borrower stated that the originator was well
aware of his intent to purchase both properties, but he could not recall why
the final application did not reflect this.
Comment 17 Fairfield Financial stated that the $190 debt was an installment loan with a
balance of $520, based on a March 9, 2004, credit report. Fairfield
Financial further stated that the loan would have been paid off prior to the
first mortgage payment due August 1, 2004. This is incorrect. The credit
report was ordered on March 9, 2004, but was revised as of June 7, 2004
and still reflected the $520 balance. We stand by our conclusion that the
$190 monthly payment would have adversely affected the borrower’s
ability to make his mortgage payment in consideration that his monthly
housing payment was increasing 600 percent.
Comment 18 Fairfield Financial stated that the property purchased was a three family
dwelling and that, when the potential rental income is considered as an
offset to the housing payment, the net increase to the borrower’s monthly
housing expense is significantly less than the 600 percent cited in the
report. We disagree. As Fairfield Financial correctly stated, the
borrower’s previous monthly housing payment was $300. The new
monthly housing payment was $2,120. This equates to over a 600 percent
increase. Fairfield Financial is quick to point out that the potential rental
income would reduce the burden on the borrower of meeting this increase,
but neglects to mention the second property purchased by the borrower
that also required a monthly housing payment. The fact remains that the
borrower’s monthly housing payment was increasing from $300 a month
to over $2,100 a month, regardless of any other potential income sources.
Comment 19 Fairfield Financial provided twelve commitment letters evidencing that
they locked in each borrower for a minimum of 15 days. For the
remaining eight loans in question, Fairfield Financial provided copies of
their investor locks showing the borrowers were locked in prior to or on
the day of the issuance of their commitment letters. Fairfield Financial
contends that the borrowers were properly informed of their lock in
protection.
27
The commitment letters provided, in most cases, were not included in the
loan files or the HUD case binders at the time of our review. We
recognize that the borrowers received a rate lock for the commitment fees
paid. We disagree, however, that the borrowers were properly informed.
Of the twelve commitment letters, only seven included the correct
commitment fee amount charged to the borrower. Furthermore, of the
twelve commitment letters: two were not dated by the borrower; one was
not signed or dated by the borrower; and the remaining nine were all
signed on the date of the closing. We have no way of knowing whether
the borrowers received any notification for the eight loans where Fairfield
Financial was unable to provide commitment letters. Accordingly, we
disagree that the borrowers were properly informed considering the
inconsistent amounts listed on the commitment letters to what was actually
charged and that the borrowers, in most cases, did not sign the
commitment letters until the day of closing.
As this was the first review of Fairfield Financial, and it appears that the
borrowers received a rate lock for the commitment fees paid, we revised
our recommendation. We revised the recommendation from requesting
repayment of the $11,390 charged, to require Fairfield Financial to ensure
it properly discloses the fee to each borrower.
28
Appendix C
NARRATIVE OF LOAN DEFICIENCIES
Case number: 251-3097987
Mortgage amount: $446,067
Date of loan closing: May 28, 2004
Current status Current
(as of August 31, 2005):
Cause of default: Not applicable
Number of payments before Not applicable
first default reported:
Unpaid principal balance $439,634
(as of August 31, 2005):
Summary:
Unsupported Income
The application indicated the borrower’s total monthly employment income was $4,687,
which consisted of $2,542 in base income and $2,145 in overtime income. Fairfield
Financial computed the income during its verification process by using one of the
borrower’s pay stubs. While the year-to-date earnings reflected on the pay stub were
sufficient to establish the borrower’s base income, considering a recent raise, they were not
sufficient to establish the overtime income of the borrower. HUD allows overtime income
in qualifying a borrower so long as the borrower has earned overtime income for
approximately two years. Otherwise, the lender must adequately justify and document its
reasons for using the income.
The borrower’s historical income data revealed that the borrower averaged only $3,153 per
month in 2002, the year of his last promotion. In 2003, the borrower averaged $3,626 per
month. A more accurate estimate of the borrower’s monthly income would have been an
average of his 2003 earnings and year-to-date earnings. That calculation resulted in an
average monthly income of $3,916, including overtime, well below the $4,687 monthly
income Fairfield Financial used to qualify the borrower. Using that income, the mortgage
payment-to-effective income ratio increased from 39.10 to 43.78 percent, and the total fixed
payment-to-effective income ratio increased from 44.00 to 49.20 percent.
Excessive Qualifying Ratios
29
Fairfield Financial exceeded HUD’s allowable limits without compensating factors. The
mortgage credit analysis worksheet showed the borrower’s mortgage payment-to-
effective income ratio as 39.10 percent and total fixed payment-to-effective income ratio
as 44.00 percent. The worksheet indicated “credit an isolated situation” and “job
longevity” as compensating factors. These are not included in the 10 compensating
factors recognized by HUD. Also, as pointed out above, we calculated the debt ratios to
be 43.78 percent and 49.20 percent based on the revised income calculation, further
illustrating the need for compensating factors.
Other Deficiencies
Contrary to HUD requirements, Fairfield Financial approved a buydown interest rate loan
without establishing and documenting that the eventual increase in mortgage payment
would not adversely affect the borrower’s ability to make higher mortgage payments in
the future. As noted above, Fairfield Financial improperly calculated the borrower’s
monthly income, resulting in lower debt-to-income ratios. The debt-to-income ratios
were actually much higher, which would have an adverse impact on the borrower’s
ability to make higher mortgage payments in the future.
30
Case number: 251-2928528
Mortgage amount: $296,656
Date of loan closing: April 18, 2003
Current status Reinstated by borrower who retains
(as of August 31, 2005): ownership; December 1, 2003
Cause of default: Other
Number of payments before Two
first default reported:
Unpaid principal balance $288,571
(as of August 31, 2005):
Summary:
Unsupported Income
The application indicated the borrower was self-employed with total monthly
employment income of $4,167. To support this income, Fairfield Financial requested
federal tax returns for the past two years and learned that the borrower had not prepared
the required tax returns. Fairfield Financial allowed the borrower to have the federal tax
returns prepared. Although the borrower signed and dated the prepared tax returns, the
preparer did not sign the tax returns, and there is no indication that the borrower ever
filed the tax returns with the Internal Revenue Service. Further, the loan file contains a
conflicting Social Security number for the borrower, as reported on the certificate he
signed as the owner of the business. Fairfield Financial did not address this conflicting
Social Security number and did not sufficiently establish the borrower’s reported self-
employment income.
Underreported Liabilities
In addition, Fairfield Financial omitted liabilities for the borrower when evaluating the
loan. As noted above, Fairfield Financial requested tax returns to support the borrower’s
income. However, the borrower was self-employed and had neglected to prepare and
submit federal tax returns. Although the borrower submitted proforma tax returns,
Fairfield Financial did not consider more than $32,300 in federal taxes and penalties
owed by the borrower for the prior two tax years, as indicated on the unfiled tax returns.
31
When a borrower is delinquent on any federal debt, HUD declares that the borrower is
not eligible until the delinquent account is brought current, paid, or otherwise satisfied or
a satisfactory repayment plan is made between the borrower and the federal agency owed
and verified in writing. It was Fairfield Financial’s obligation to consider this significant
liability in evaluating the loan application and its impact on the borrower’s capacity to
repay mortgage debt. As there is no repayment agreement in place for the borrower’s tax
liability, we were unable to calculate the effect on the debt-to-income ratios.
32
Case number: 251-3084029
Mortgage amount: $265,828
Date of loan closing: April 1, 2004
Current status Foreclosure started; August 1, 2005
(as of August 31, 2005):
Cause of default: Inability to rent property
Number of payments before Four
first default reported:
Unpaid principal balance $261,357
(as of August 31, 2005):
Summary:
Excessive Qualifying Ratios
Fairfield Financial exceeded HUD’s allowable limits without compensating factors. The
mortgage credit analysis worksheet showed the borrower’s mortgage payment-to-
effective income ratio as 42.94 percent and total fixed payment-to-effective income ratio
as 49.90 percent. The worksheet indicated “job longevity” and “3-months reserves” as
compensating factors. HUD does not recognize job longevity as a compensating factor.
Although the borrower did have three months of reserves, HUD requires that the lender
judge the overall merits of the loan application when determining to what extent the
ratios may be exceeded. Considering the excessive ratios and the derogatory credit
detailed below, the one compensating factor cited by Fairfield Financial was not
sufficient to qualify the borrower.
Derogatory Credit
The borrower’s credit report identified six different accounts that went into collection.
Derogatory credit, including accounts in collection, requires a sufficient written
explanation from the borrower. The borrower provided a letter of explanation, citing a
divorce as the reason for falling behind on payments. The letter further indicated that
efforts had been made over the last several months to settle and pay off the debts. The
divorce cited by the borrower occurred approximately eight years before the loan
application, and five of the six accounts in collection were opened after the divorce
finalization. This did not constitute a sufficient written explanation.
33
Case number: 352-5211304
Mortgage amount: $196,430
Date of loan closing: June 14, 2004
Current status Reinstated by mortgagor who retains
(as of August 31, 2005): ownership; December 31, 2004
Cause of default: Curtailment of borrower income
Number of payments before One
first default reported:
Unpaid principal balance $194,304
(as of August 31, 2005):
Summary:
Underreported Liabilities
The borrower’s initial loan application indicated rental income from a single-family
residence suggesting that he owned another residence. The final loan application did not
include the rental income from this single-family residence and further indicated that the
borrower did not own any other real estate. HUD requires a satisfactory letter of
explanation from the borrower addressing any significant variances between the initial
application and final application. Fairfield Financial did not document how this
discrepancy was resolved and should have asked the borrower about this potential other
property so that it could consider the asset and corresponding liability in the qualifying
process.
We learned that the borrower purchased two properties from the same seller, including
the Federal Housing Administration property. The borrower closed on the other single-
family property in the month before closing on the Federal Housing Administration
property. The borrower stated that Fairfield Financial was aware of his intent to purchase
both properties, but he was supposed to close on the Federal Housing Administration
property first. Regardless of the order of closings on the properties, Fairfield Financial
was obligated to include this liability in its analysis.
Additionally, the borrower’s credit report included a $190 monthly payment to one
creditor. Fairfield Financial excluded the debt because there were fewer than 10 monthly
payments left on the obligation. HUD requires that lenders include debts lasting less than
10 months if the amount of the debt will affect the borrower’s ability to make the
mortgage payment during the months immediately after loan closing. In this instance, the
borrower’s monthly housing payment was increasing from $300 per month to more than
$2,100 per month, a 600 percent increase. The borrower also owned another property on
which he was making mortgage payments. Considering this substantial increase and the
34
borrower’s obligations to his other property, the additional $190 monthly payment would
adversely affect the borrower’s ability to make his mortgage payments.
Excessive Qualifying Ratios
Fairfield Financial exceeded HUD’s allowable limits without compensating factors. The
mortgage credit analysis worksheet showed the borrower’s mortgage payment-to-
effective income ratio as 38.10 percent, requiring compensating factors, and total fixed
payment-to-effective income ratio as 40.10 percent. Including the $190 monthly
payment excluded by Fairfield Financial (detailed above), we calculated the total fixed
payment-to-effective income ratio at 43.50 percent, also requiring compensating factors.
Fairfield Financial did not document compensating factors. We were unable to determine
what effect the borrower’s other property would have on the debt-to-income ratios.
Derogatory Credit
The borrower’s credit report identified a past judgment, various late payments, and six
different accounts that went into collection. Derogatory credit, including accounts in
collection, requires a sufficient written explanation from the borrower. The borrower
provided a letter of explanation citing that the derogatory credit items were due to address
changes and extended vacations and that he was a victim of identity theft. Address
changes and extended vacations were not sufficient explanations, and there was nothing
in the loan file or otherwise documented by Fairfield Financial substantiating that the
borrower was a victim of identity theft.
Other Deficiencies
Fairfield Financial did not ensure the loan complied with HUD’s self-sufficiency
requirements, as required. As a result, the monthly mortgage payment exceeded the
property’s monthly net rental income, resulting in an over-insured loan.
35
Appendix D
COMMITMENT FEES CHARGED TO BORROWERS
Case # Description of fee Fee charged
061-2594624 Commitment fee; inadequate disclosure $180
251-2948755 Commitment fee; inadequate disclosure 500
061-2662310 Commitment fee; inadequate disclosure 595
061-2672274 Commitment fee; inadequate disclosure 595
251-2877993 Commitment fee; inadequate disclosure 595
251-2928528 Commitment fee; inadequate disclosure 595
251-2978060 Commitment fee; inadequate disclosure 595
251-2987969 Commitment fee; inadequate disclosure 595
251-2992447 Commitment fee; inadequate disclosure 595
251-3040714 Commitment fee; inadequate disclosure 595
251-3041749 Commitment fee; inadequate disclosure 595
251-3059409 Commitment fee; inadequate disclosure 595
251-3066191 Commitment fee; inadequate disclosure 595
251-3084029 Commitment fee; inadequate disclosure 595
251-3097987 Commitment fee; inadequate disclosure 595
251-3099102 Commitment fee; inadequate disclosure 595
352-5211304 Commitment fee; inadequate disclosure 595
352-5303820 Commitment fee; inadequate disclosure 595
374-4333229 Commitment fee; inadequate disclosure 595
374-4399067 Commitment fee; inadequate disclosure 595
Total $11,390
36
Appendix E
AUDIT CRITERIA
HUD Handbook 4060.1, REV-1, CHG-1, “Mortgagee Approval Handbook,” Chapter 6,
“Quality Control Plan,” provides guidelines and requirements to be implemented by all
lenders.
Paragraph 6-1 requires all Federal Housing Administration-approved lenders, including
loan correspondents, to implement and continuously have in place a quality control plan
for the origination and/or servicing of insured mortgages as a condition for receiving and
maintaining Federal Housing Administration approval. The quality control plan must be
a prescribed and routine 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.
Paragraph 6-3 contains the basic elements that are required in all quality control
programs. The lender must properly train its staff involved in quality control and provide
them with access to current guidelines relating to the operations that they review. It is
not necessary for lenders to maintain these guidelines in hard copy format if they are
accessible in an electronic format. Many of the statutes, regulations, HUD handbooks,
and mortgagee letters that establish the requirements for Federal Housing Administration
programs may be accessed through HUD’s home page on the World Wide Web.
Paragraph 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.
Paragraph 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.
Paragraph 6-7 prescribes minimum elements for the production portion of a quality
control program. The lender must address the following elements, among others:
• Determine whether there are sufficient and documented compensating factors if
the debt ratios exceed Federal Housing Administration limits (paragraph 6-7J).
• Determine whether all conditions were cleared before closing (paragraph 6-7 L).
• Determine whether the seller acquired the property at the time of or soon before
closing, indicating a possible property “flip” (paragraph 6-7P).
37
HUD Handbook 4000.4, REV-1, CHG-2, “Single Family Direct Endorsement Program,”
paragraph 2-1, states that a lender must conduct its business operations in accordance
with accepted sound mortgage lending practices, ethics, and standards.
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, REV-4, CHG-1 (September 1995) and HUD Handbook 4155.1,
REV-5 (October 2003), “Mortgage Credit Analysis for Mortgage Insurance on One- to
Four-Family Properties,” requires lenders to determine the borrowers’ 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.
Paragraph 1-8C imposes self-sufficiency requirements on three- and four-unit properties
as follows:
“THREE- AND FOUR-UNIT PROPERTIES, regardless of occupancy status, must
be self-sufficient, i.e., the maximum mortgage is limited so that the ratio of the
monthly mortgage payment divided by the monthly net rental income does not exceed
100 percent.”
Paragraph 2-3 states that while minor derogatory information occurring two or more
years in the past does not require explanation, major indications of derogatory credit,
including judgments and collections, and any other recent credit problems require
sufficient written explanation from the borrower. The borrower’s explanation must make
sense and be consistent with other information in the file.
Paragraph 2-5B states if the borrower, as revealed by public records, credit information,
or HUD’s Credit Alert Interactive Voice Response System, is presently delinquent on any
federal debt (e.g., U.S. Department of Veterans Affairs-guaranteed mortgage, Title I loan,
federal student loan, Small Business Administration loan, delinquent federal taxes) or has
a lien, including taxes, placed against his or her property for a debt owed to the United
States, the borrower is not eligible until the delinquent account is brought current, paid,
or otherwise satisfied or a satisfactory repayment plan is made between the borrower and
the federal agency owed and verified in writing. Tax liens may remain unpaid provided
the lien holder subordinates the tax lien to the Federal Housing Administration-insured
mortgage. If any regular payments are to be made, they must be included in the
qualifying ratios.
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
the mortgage debt.
38
Paragraph 2-7A states that overtime may be used to qualify if the borrower has received
such income for approximately two years and the employment verification must not state
categorically that such income is not likely to continue. Periods of less than two years
may be acceptable provided the underwriter adequately justifies and documents his or her
reasons for using the income.
Paragraph 2-9B prescribes documentation requirements for self-employed borrowers as
follows:
1. Signed and dated individual tax returns, plus all applicable schedules, for the most
recent two years;
2. Signed copies of federal business income tax returns for the last two years with all
applicable schedules if the business is a corporation, an “S” corporation, or a
partnership;
3. A year-to-date profit-and-loss statement and balance sheet; and
4. A business credit report on corporations and “S” corporations.
Paragraph 2-11A indicates the borrower’s liabilities include all installment loans,
revolving charge accounts, real estate loans, alimony, child support, and all other
continuing obligations. In computing the debt-to-income ratios, the lender must include
the monthly housing expense and all additional recurring charges extending 10 months or
more, including payments on installment accounts, child support, or separate
maintenance payments, revolving accounts and alimony, etc. 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.
Paragraph 2-11C states if a debt payment, such as a student loan, is scheduled to begin
within 12 months of the mortgage loan closing, the lender must include the anticipated
monthly obligation in the underwriting analysis unless the borrower provides written
evidence that the debt will be deferred to a period outside this timeframe.
Section 5, “Borrower Qualifying,” states that HUD does not set an arbitrary percentage
that ratios may never exceed. However, it is left up to the lender to judge the overall
merits of the loan application and determine what compensating factors apply and to
what extent the ratios may be exceeded. Establishing that a loan transaction meets
minimal standards does not necessarily constitute prudent underwriting.
Paragraph 2-12 states that debt-to-income ratios are used to determine whether the
borrower can reasonably be expected to meet the expenses involved in homeownership
and otherwise provide for the family. The lender must compute two ratios: (1) mortgage
payment expense-to-effective income, which is considered acceptable if it does not
exceed 29 percent of gross effective income, and (2) total fixed payment-to-effective
income, which is considered acceptable if it does not exceed 41 percent of gross effective
income. However, these ratios may be exceeded if significant compensating factors are
presented.
39
Paragraph 2-13 establishes the 10 compensating factors that may be used in justifying
approval of the loan with ratios exceeding HUD benchmark guidelines. Underwriters
must state on the “remarks” section of the mortgage credit analysis worksheet the
compensating factors used to support loan approval.
Paragraph 2-14 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.
4. The cash investment made by the borrower substantially exceeds the minimum
required.
Paragraph 3-6 requires a satisfactory letter of explanation from the borrower addressing
any significant variances between the initial application and final application.
40
Fairfield Financial Mortgage Group, Inc., Danbury, Connecticut, Did Not Always Comply with Federal Housing Administration Requirements
Published by the Department of Housing and Urban Development, Office of Inspector General on 2005-09-26.
Below is a raw (and likely hideous) rendition of the original report. (PDF)