oversight

RBC Mortgage Company, Non-supervised Mortgagee; Houston, TX; Improper Submission of Late Requests for Endorsement Increased the Risk to Insurance Fund

Published by the Department of Housing and Urban Development, Office of Inspector General on 2005-03-29.

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

          AUDIT REPORT




        RBC MORTGAGE COMPANY
       NON-SUPERVISED MORTGAGEE

            HOUSTON, TEXAS

               2005-CH-1007

             MARCH 29, 2005




          OFFICE OF AUDIT, REGION V
              CHICAGO, ILLINOIS


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                                                                Issue Date
                                                                         March 29, 2005
                                                                Audit Report Number:
                                                                         2005-CH-1007




TO:        John Weicher, Assistant Secretary for Housing-Federal Housing Commissioner and
              Chairman of Mortgagee Review Board, H
           Margarita Maisonet, Director of Departmental Enforcement Center, CV
           John W. Herold, Associate General Counsel for Program Enforcement, CE


FROM:      Heath Wolfe, Regional Inspector General for Audit, 5AGA

SUBJECT:   RBC Mortgage Company, Non-supervised Mortgagee; Houston, TX; Improper
             Submission of Late Requests for Endorsement Increased the Risk to Insurance
             Fund

                                   HIGHLIGHTS

 What We Audited and Why

            We audited RBC Mortgage Company (also known as Prism Mortgage), a non-
            supervised mortgagee approved to originate, underwrite, and submit insurance
            endorsement requests under the U.S. Department of Housing and Urban
            Development’s (HUD) Single Family Direct Endorsement program. The audit
            was part of the activities in our fiscal year 2004 Annual Audit Plan. We selected
            RBC Mortgage Company for audit because of its high late endorsement rate. Our
            audit objective was to determine whether RBC Mortgage Company complied with
            HUD’s regulations, procedures, and instructions in the submission of insurance
            endorsement requests.

 What We Found


            RBC Mortgage Company did not always comply with HUD’s requirements on late
            requests for insurance endorsement. RBC Mortgage Company and its contractor
            submitted 170 late requests for insurance endorsement out of 5,123 loans tested.
            The loans were either delinquent or otherwise did not meet HUD’s timely payment
            requirements. RBC Mortgage Company and/or its contractor also incorrectly
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           certified that mortgage and/or escrow accounts were current. RBC Mortgage
           Company lacked adequate procedures and controls to ensure that it and the
           contractor’s employees followed HUD’s requirements regarding late requests for
           insurance endorsement. These improperly submitted loans increased the risk to the
           Federal Housing Administration insurance fund.

What We Recommend


           We recommend that HUD’s Assistant Secretary for Housing-Federal Housing
           Commissioner and Chairman of the Mortgagee Review Board

       •   Require RBC Mortgage Company to indemnify HUD for any future losses on 138
           loans with a total mortgage value of $16,282,212 and take other appropriate
           administrative actions up to and including civil money penalties.

       •   Require RBC Mortgage Company to reimburse HUD $26,066 for the actual loss
           on FHA Case 137-1967877 since the associated property was already sold.

       •   Require RBC Mortgage Company to reimburse HUD for any future losses from a
           $24,510 claim paid on one insured loan (FHA Case 137-1850047) with a total
           mortgage value of $227,930 once the associated property is sold.

       •   Require RBC Mortgage Company to establish and implement an adequate quality
           control plan.

           We recommend that HUD’s Director of Departmental Enforcement Center, in
           consultation with the Assistant Secretary for Housing-Federal Housing
           Commissioner and Chairman of the Mortgagee Review Board,

       •   Take appropriate administrative action against the principals of RBC Mortgage
           Company based on the information in this report.

           We recommend that HUD’s Associate General Counsel for Program Enforcement

       •   Determine legal sufficiency, and, if legally sufficient, pursue remedies under the
           Program Fraud Civil Remedies Act against RBC Mortgage Company’s
           employees and/or its contractor (Financial Dimensions, Incorporated), and/or their
           principals for incorrectly certifying that the mortgage accounts for 2 loans were
           current and no late charges were assessed, and the escrow accounts for taxes,
           hazard insurance premiums, and mortgage insurance premiums were current for
           37 loans submitted for Federal Housing Administration insurance endorsement
           when, in fact, the mortgage and escrow accounts were not current at submission.

           For each recommendation without a management decision, please respond and
           provide status reports in accordance with HUD Handbook 2000.06, REV-3.

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            Please furnish us copies of any correspondence or directives issued because of the
            audit.

Auditee’s Response


            We provided the results of our late endorsement testing and loan file reviews to
            RBC Mortgage Company during the audit. We also provided our revised
            discussion draft audit report to RBC Mortgage Company’s President and Chief
            Executive Officer, and Chief Operating Officer, an attorney representing RBC
            Mortgage Company, and HUD’s staff on February 20, 2005. We conducted an
            exit conference with RBC Mortgage Company’s management and its attorney on
            February 28, 2005.

            We requested RBC Mortgage Company to provide written comments on our
            revised discussion draft audit report by March 7, 2005. RBC Mortgage
            Company’s President and Chief Executive Officer provided written comments to
            the revised discussion draft audit report on March 8, 2005 that partially agreed
            with our finding. With the exception of three exhibits and four binders, the
            complete text of RBC Mortgage Company’s written response, along with our
            evaluation of that response, can be found in appendix B of this report. We
            provided HUD’s Directors of Lender Activities and Program Compliance, and
            Quality Assurance Division with a complete copy of RBC Mortgage Company’s
            comments with the three exhibits and four binders.




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                                    TABLE OF CONTENTS

Background and Objectives                                                    5

Results of Audit

      Finding: RBC Mortgage Company Improperly Submitted Late Requests for   6
               Endorsement

Scope and Methodology                                                        10

Internal Controls                                                            12

Follow up on Prior Audits                                                    14

Appendixes
   A. Schedule of Questioned Costs and Funds to be Put to Better Use         15
   B. Auditee Comments and OIG’s Evaluation                                  16
   C. Federal Requirements                                                   27
   D. Improper Late Requests for Endorsement                                 30




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                        BACKGROUND AND OBJECTIVES

RBC Mortgage Company is a wholly owned subsidiary of RBC USA Holdco Corporation. RBC
Mortgage Company’s headquarters offices are located in Chicago, IL, and Houston, TX. In
November 1996, the U.S. Department of Housing and Urban Development (HUD) approved
RBC Mortgage Company under its previous name (Prism Mortgage) to convert from a loan
correspondent to a non-supervised mortgagee. In December 1996, RBC Mortgage Company
received national approval to participate in HUD’s Direct Endorsement program as a direct
endorsement mortgagee. As a direct endorsement mortgagee, RBC Mortgage Company determines
that the proposed mortgage is eligible for insurance under the applicable program regulations, and
submits the required documents to HUD without its prior review of the origination and closing of
the mortgage loan. RBC Mortgage Company is responsible for complying with all applicable
HUD regulations and handbook instructions.

RBC Mortgage Company’s employees and its contractor processed Federal Housing
Administration mortgage loans for submission to HUD for endorsement during our audit period
from May 1, 2002, through April 30, 2004. Its mortgage payment servicing has been performed
by RBC Centura Banks, Inc., located in Rocky Mount, NC. RBC Mortgage Company has
operations in both retail (originations direct to consumers) and wholesale (originations through
third-party brokers). In addition, it operates as both a mortgage banker (underwriting, closing,
and funding loans) and as a mortgage broker (offering loan products from its lenders).

RBC Mortgage Company is the sponsor for 194 loan correspondents and the acting agent for 21
principals originating or processing Federal Housing Administration loans. Toward the end of
our audit, we were informed that RBC Mortgage Company is in the process of closing its Chicago,
IL, headquarters office and transferring its loan processing to its Houston, TX, headquarters office.

We audited RBC Mortgage Company as part of the activities in our fiscal year 2004 Annual
Audit Plan. We selected RBC Mortgage Company for audit because of its high late endorsement
rate of 45 percent during the period from May 1, 2002, through April 30, 2004. RBC Mortgage
Company sponsored 15,154 Federal Housing Administration loans totaling more than $1 billion.

Our audit objective was to determine whether RBC Mortgage Company complied with HUD’s
regulations, procedures, and instructions in the submission of insurance endorsement requests.




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                                 RESULTS OF AUDIT

Finding: RBC Mortgage Company Improperly Submitted Late Requests for
                          Endorsement
RBC Mortgage Company and its contractor improperly submitted 170 loans with mortgages
totaling more than $20.7 million for insurance endorsement when the borrowers did not make six
monthly consecutive timely payments subsequent to delinquency, but before submission to the U.S.
Department of Housing and Urban Development (HUD). Additionally, RBC Mortgage Company
and/or its contractor incorrectly certified that the mortgage accounts were current and no late
charges were assessed for 2 loans, and the escrow accounts for taxes, hazard insurance premiums,
and mortgage insurance premiums were current for 37 loans when, in fact, the mortgage and/or
escrow accounts were not current. The problems occurred because RBC Mortgage Company
lacked adequate procedures and controls to ensure its employees and contractor followed HUD’s
requirements regarding late requests for insurance endorsement. These improperly submitted loans
increased the risk to the Federal Housing Administration insurance fund.



 Improperly Submitted Late
 Requests for Endorsement

              Our analysis of the mortgage payment histories provided by RBC Mortgage
              Company’s servicer and endorsement data from HUD’s systems showed that for
              the 5,123 loans tested, RBC Mortgage Company and its contractor submitted 170
              loans for endorsement even though the borrowers did not make six monthly
              consecutive timely payments subsequent to the delinquency, but before
              submission to HUD.

              After endorsement, 29 of the 170 loans were paid in full and no longer represent a
              risk to the Federal Housing Administration insurance fund. Because these loans
              are no longer insured, we did not conduct further research or compliance testing
              of these loans. Of the remaining 141 loans, 140 are still insured and pose a risk to
              the insurance fund, as follows:

              •   For two loans having original mortgage amounts totaling $319,886, HUD
                  incurred a loss of $26,066 on one and paid a claim of $24,510 on the other
                  with an indeterminate loss as of March 24, 2005. HUD cannot identify the
                  loss until the associated property is sold. These loans had increased the risk to
                  the insurance fund.

              •   The insurance was terminated without a claim on 14 of the loans, 13 of which
                  totaling $2,072,390 in original mortgages were streamline-refinanced to other
                  Federal Housing Administration loans. Because these 13 loans were
                  improperly submitted for insurance endorsement, the improper endorsement
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              also applies to the refinanced loans. Therefore, we included these 13 loans as
              improperly endorsed loans. The remaining one loan was terminated for
              reasons other than refinancing; therefore, this loan no longer represents a risk
              to the insurance fund.

          •   One hundred twenty-five loans hold active Federal Housing Administration
              insurance with $14,209,822 in total original mortgage amounts.

          Appendix C of this report provides details of Federal requirements regarding late
          requests for insurance endorsement. Appendix D of this report provides the
          categories of the improperly submitted late requests for endorsement.

          Further, RBC Mortgage Company and/or its contractor (Financial Dimensions,
          Incorporated,) signed certification letters for 39 loans they submitted for late
          requests for endorsement and certified that the mortgage accounts for 2 loans
          were current and no late charges were assessed, and the escrow accounts for 37
          loans were current. However, the loans RBC Mortgage Company and/or its
          contractor submitted to HUD for late endorsement had mortgage and/or escrow
          accounts that were not current at the time of submission.


Lack of Procedures and Controls


          RBC Mortgage Company did not have adequate procedures and controls to ensure
          its employees and contractor followed HUD’s mortgage payment requirements
          when submitting late requests for endorsement. During our audit period, RBC
          Mortgage Company’s employees and its contractor submitted loans for late
          requests for endorsement.

          During 2002 and 2003, RBC Mortgage Company contracted with Financial
          Dimensions, Incorporated. Financial Dimensions, Incorporated agreed to follow
          Federal requirements when submitting Federal Housing Administration loans for
          insurance endorsement. In addition, Financial Dimensions, Incorporated, agreed
          to prepare case binders and review loans for adequacy of supporting
          documentation before submission for endorsement. Upon review and securing of
          all missing/incomplete documentation of the case binders, Financial Dimensions,
          Incorporated, would complete the submission for endorsement, including

              Requesting and checking mortgage payment histories,
              Completing submission input to Federal Housing Administration Connection,
              Delivering case binders to applicable Federal Housing Administration
              Regional Offices, and
              Providing weekly status reporting to RBC Mortgage Company.



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            Although Financial Dimensions, Incorporated, provided RBC Mortgage Company
            written reports as to the status of the loans processed and not processed for
            insurance endorsement, RBC Mortgage Company did not verify whether the loans
            submitted for endorsement by Financial Dimensions, Incorporated, met HUD’s
            mortgage payment requirements. RBC Mortgage Company relied instead on its
            contractor to follow such HUD requirements. Likewise, RBC Mortgage
            Company did not verify whether the loans submitted for late endorsement by its
            own employees met HUD’s mortgage payment requirements. The independent
            auditor’s report on RBC Mortgage Company for the year ending December 31,
            2003, disclosed that RBC Mortgage Company had a control environment
            deficiency. This was due to a lack of management oversight of employees and a
            failure to implement and follow policies and procedures that resulted in
            deficiencies in the operating control environment of RBC Mortgage Company’s
            mortgage processing operations. RBC Mortgage Company’s contractor and its
            own employees improperly submitted late requests during 2002, 2003, and 2004.

            As a condition of receiving and maintaining Federal Housing Administration
            approval, RBC Mortgage Company agreed with HUD to implement and
            continuously have in place a quality control plan that meets HUD’s requirements.
            RBC Mortgage Company’s quality control plan did not meet HUD’s requirements
            because the plan did not include the requirements for determining or verifying
            that six monthly consecutive payments were made timely when submitted and
            met HUD’s payment requirements if mortgages have been submitted for late
            requests for endorsement. RBC Mortgage Company is responsible for the proper
            submission of late requests for endorsement processed by either its contractor or
            its own employees.

            According to RBC Mortgage Company’s President and Chief Executive Officer,
            since November 2003, RBC Mortgage Company has undergone a total management
            shift and is in the process of improving its operations. Also, the Company’s Senior
            Vice President of Post Production Operations added that to improve efficiency and
            conserve costs, RBC Mortgage Company has transitioned to processing all Federal
            Housing Administration loans for insurance endorsement in-house (instead of using
            Financial Dimensions, Incorporated) at its Houston, TX, headquarters office.
            Although it is still under contract with RBC Mortgage Company, Financial
            Dimensions, Incorporated, no longer receives loans from RBC Mortgage Company
            to prepare for submission to HUD for late requests for endorsement.


Recommendations



            We recommend that HUD’s Assistant Secretary for Housing-Federal Housing
            Commissioner and Chairman of the Mortgagee Review Board


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       1A.   Require RBC Mortgage Company to indemnify HUD for any future losses
             on 138 loans with a total mortgage value of $16,282,212 and take other
             appropriate administrative actions up to and including civil money
             penalties.

       1B.   Require RBC Mortgage Company to reimburse HUD $26,066 for the
             actual loss on FHA Case 137-1967877 since the associated property was
             already sold.

       1C.   Require RBC Mortgage Company to reimburse HUD for any future losses
             from a $24,510 claim paid on one insured loan (FHA Case 137-1850047)
             with a total mortgage value of $227,930 once the associated property is
             sold.

       We recommend that HUD’s Director of Departmental Enforcement Center, in
       consultation with the Assistant Secretary for Housing-Federal Housing
       Commissioner and Chairman of the Mortgagee Review Board,

       1D.   Take appropriate administrative action against the principals of RBC
             Mortgage Company based on the information in this finding.

       We recommend that HUD’s Associate General Counsel for Program Enforcement

       1E.   Determine legal sufficiency, and, if legally sufficient, pursue remedies
             under the Program Fraud Civil Remedies Act against RBC Mortgage
             Company’s contractor (Financial Dimensions, Incorporated), and/or their
             principals for incorrectly certifying that the mortgage accounts for 2 loans
             were current and no late charges were assessed, and the escrow accounts
             for taxes, hazard insurance premiums, and mortgage insurance premiums
             were current for 37 loans that were submitted for Federal Housing
             Administration insurance endorsement when, in fact, the mortgage and/or
             escrow accounts were not current.




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                                  SCOPE AND METHODOLOGY

We performed our audit work between July 2004 and January 2005. We conducted the fieldwork at
RBC Mortgage Company’s Chicago, IL, and Houston, TX, offices and a servicing company office
located in Rocky Mount, NC. The audit covered the period May 1, 2002, through April 30, 2004.
We extended this period as necessary.

To achieve our audit objective, we relied on computer-processed and hard copy data from RBC
Mortgage Company and its contractor and servicing company, and the data contained in HUD’s
Single Family Data Warehouse. We relied on the loan payment histories provided by RBC
Mortgage Company’s servicing company, the certifications and loan payment histories in the case
binders that RBC submitted to HUD, and the various dates in HUD’s systems data, including loan-
closing dates, notice of rejection dates, and endorsement dates. We assessed the reliability of
computerized data, including relevant general and application controls, and found them to be
adequate. We used mortgage amount and claim status from HUD’s systems for information
purposes only. In addition, we interviewed HUD’s management and staff and RBC Mortgage
Company’s management, staff, contractor, and servicing company. Further, we reviewed HUD’s
rules, regulations, and guidance for proper submission of Federal Housing Administration loans,
and RBC Mortgage Company’s policies, procedures, and quality control plan.

Using HUD’s data systems, we identified that RBC Mortgage Company sponsored 15,154
Federal Housing Administration loans with closing dates from May 1, 2002, to April 30, 2004.
The mortgage value of these loans is more than $1.9 billion. The following table depicts the
adjustments made to the initial universe of 15,154 loans identified for testing. A narrative
explanation follows the chart.

                                                                      Original
                                                          Number      Mortgage
                         Description of Loans             of Loans    Amounts
               Sponsored by RBC Mortgage Company
               from 5/1/2002, through 4/30/2004             15,154 $1,907,290,851
               New construction loans                          149    $21,225,012
               Submitted before first payment due date         511    $62,954,704
               Submitted within 66 days after closing        9,064 $1,139,086,789
               Transferred before submission                   259    $34,397,164
               Loans closed after 4/12/2004, with a
               Notice of Return but were not subject to
               the 90-day requirement                          25      $3,373,618
               Loans subject to late endorsement
               requirements                                  5,146   $646,253,564
               Payment histories not provided                   23     $2,734,952
                             Loans tested                    5,123   $643,518,612

Of the 15,154 loans in the initial universe, we removed 149 new construction loans and 511
submitted for endorsement before the first payment due date because these loans were not
subject to the 60-day pre-April 2004 submission requirement.
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We further limited our universe to only those loans received by HUD more than 66 days after the
loan closed. Further, for the loans closed after April 12, 2004, and were returned to the lender
with a Notice of Return, we only included the loans that were submitted to HUD more than 96
days after the loan closed. While HUD requires mortgagees to submit loans for endorsement
within 60 days of the loan closing and after April 12, 2004, an additional 30 days after closing,
we allowed 6 additional days to ensure that we conservatively selected loans for further testing.
We allowed 6 extra days because HUD’s mailroom and endorsement contractor have 3 business
days to process each loan and because any submission may be delayed in the mail for up to 3
days over a weekend.

As a result, for our testing purposes, we considered only those loans submitted more than 66
days after closing or more than 96 days if the loan closed after April 12, 2004, and was returned
to the lender with a Notice of Return. After removing the 9,064 loans submitted within 66 days
after closing, we removed the 25 loans submitted after April 12, 2004, which were returned to
the lender but were endorsed within 96 days after closing. There were 5,405 loans remaining as
late requests for endorsement.

In evaluating the 5,405 loans, we identified 259 in which RBC Mortgage Company transferred
the loan servicing to another lender/servicer before submission for endorsement; therefore, we
also removed these loans from our sample.

Additionally, RBC Mortgage Company could not provide automated payment histories for 372
loans totaling $45,633,093 in original mortgage amounts that it sponsored during our audit
period. However, RBC Mortgage Company’s servicing company provided the hard-copy
payment histories for 349 of the 372 loans, but was unable to provide any type of documentation
for the remaining 23 payment histories totaling $2,734,952 in original mortgage amounts.
Therefore, we only tested 5,123 loans (automated and hard-copy payment histories) for
compliance with HUD’s late endorsement requirements.

The audit covered the period from May 1, 2002, through April 30, 2004. This period was
adjusted as necessary. We conducted the audit in accordance with generally 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,
   •   Compliance with applicable laws and regulations, and
   •   Safeguarding Resources.

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 objective:

              •       Program Operations - Policies and procedures that management
                      implemented to reasonably ensure that the delayed loan endorsement
                      process complies with HUD’s requirements and meet the objectives of the
                      Direct Endorsement program.

              •       Validity and Reliability of Data - Policies and procedures that
                      management implemented to reasonably ensure that valid and reliable data
                      are obtained, maintained, and fairly disclosed in reports.

              •       Compliance with Laws and Regulations - Policies and procedures that
                      management implemented to reasonably ensure that resource use is
                      consistent with laws and regulations.

                  •   Safeguarding 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.

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Significant Weaknesses


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

            •      Program Operations – RBC Mortgage Company did not operate its late
                   requests for endorsement according to program requirements. RBC
                   Mortgage Company lacked adequate procedures and controls or a quality
                   control plan that met HUD’s requirements to ensure its employees and
                   contractor properly submitted late requests for endorsement (see finding).

            •      Compliance with Laws and Regulations - RBC Mortgage Company and its
                   contractor did not follow HUD’s regulation when it improperly submitted
                   loans for insurance endorsement when the borrowers did not make six
                   monthly consecutive timely payments subsequent to delinquency, but
                   before submission to HUD (see finding).

            •      Safeguarding Resources - RBC Mortgage Company and its contractor
                   improperly submitted 170 loans with mortgages totaling more than $20.7
                   million for insurance endorsement when the borrowers did not make six
                   monthly consecutive timely payments subsequent to delinquency, but
                   before submission to HUD. The improper submission increased the risk to
                   the Federal Housing Administration insurance fund (see finding).




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                               FOLLOW UP ON PRIOR AUDITS


This was the first audit of RBC Mortgage Company by HUD’s Office of Inspector General (OIG).

The last two independent auditor’s reports for RBC Mortgage Company covered the years ending
December 31, 2002, and December 31, 2003. Both reports resulted in no findings.

Between November 2002 and March 2004, HUD’s Homeownership Centers in Santa Ana, CA,
Atlanta, GA, and Denver, CO, performed multiple quality assurance reviews. The reviews resulted
in findings related to loan origination, underwriting, and loss mitigation. The Denver
Homeownership Center’s findings were resolved or closed as of April 28, 2004. As of March 24,
2005, we have not received information from the Atlanta and Santa Ana Homeownership Centers
showing whether the findings cited in their reviews were closed or still outstanding.




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                                       APPENDIXES

Appendix A

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

            Recommendation         Ineligible         Unsupported       Funds To Be Put
                Number                 1/                 2/            To Better Use 3/

                 1A                                                       $16,282,212
                 1B                $26,066
                 1C                _______               $24,510          __________
                Totals             $26,066               $24,510          $16,282,212


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

2/     Unsupported costs are costs charged to a HUD-financed or insured program activity and
       eligibility cannot be determined at the time of the audit. The costs are not supported by
       adequate documentation or there is a need for a legal or administrative determination on
       the eligibility of the cost. Unsupported costs require a future decision by HUD program
       officials. This decision, in addition to obtaining supporting documentation, might
       involve a legal interpretation of Departmental policies and procedures.

3/     “Funds to be put to better use” are quantifiable savings that are anticipated to occur if an
       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




Comment 3




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Ref to OIG Evaluation   Auditee Comments




Comment 4




Comment 6




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Ref to OIG Evaluation   Auditee Comments




Comment 1




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Ref to OIG Evaluation   Auditee Comments




Comment 2




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Ref to OIG Evaluation   Auditee Comments




Comment 5


Comment 2




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Ref to OIG Evaluation   Auditee Comments




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Ref to OIG Evaluation   Auditee Comments




Comment 3



Comment 1


Comment 2




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Ref to OIG Evaluation   Auditee Comments




Comment 3




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Ref to OIG Evaluation   Auditee Comments




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                        OIG Evaluation of Auditee Comments

Comment 1   Of the 157 loans previously reported as improperly submitted and which pose
            a risk to the Federal Housing Administration insurance fund, RBC Mortgage
            Company agreed on 82 and disagreed on the remaining 75. While 50 of the 75
            loans may have been qualified for endorsement at some point in the life of
            each of these loans after they were submitted for late endorsement, HUD
            requires that a loan must have six months of payments within the months due
            before submission for late endorsement. These loans were improperly
            submitted and thus need to be indemnified. The borrowers of the 50 loans did
            not make six monthly consecutive timely payments subsequent to delinquency,
            but before submission to HUD. Although RBC Mortgage Company had
            contracted with Financial Dimensions, Incorporated, to submit loans for
            endorsement on its behalf, RBC still has full responsibility for the loans that
            were improperly submitted by Financial Dimensions, Incorporated.

            RBC Mortgage Company provided additional documentation for 25 of the 75
            loans. After reviewing the additional documentation, we determined that 1 of
            the 25 loans was not part of the previously reported 157 improperly submitted
            loans because the loan was already paid in full. For the remaining 24 loans,
            we determined that 6 were improperly submitted and 18 were properly
            submitted. In addition, we increased the total number of refinanced loans from
            12 to 13 in this report because one of the two loans previously reported as
            terminated for reasons other than refinancing is a Federal Housing
            Administration-insured loan as of March 3, 2005. As a result, we adjusted the
            total number of improperly submitted loans from 157 to 140 that were
            recommended for indemnification and reimbursement of any HUD loss.

            RBC Mortgage Company agreed with 2 of the 49 loans identified in the
Comment 2   revised discussion draft audit report as incorrectly certified loans. However, it
            disagreed with the remaining 47 loans. RBC Mortgage Company indicated
            that the certifications were correct for 14 of the of the 47 loans because the
            loans had current monthly payments of principal, interest, taxes, and insurance
            at the time of submission for late endorsement. After reviewing the supporting
            documentation, we determined that 10 of the 14 loans were correctly certified
            and thus we adjusted the total number of incorrectly certified loans in this final
            report from 49 to 39.

            RBC Mortgage Company also contends that 43 of the 49 loans were current,
            whether or not full monthly payments of principal, interest, taxes, and
            insurance were received within the months due or prior to submission, because
            of the “two month cushion” collected from the borrowers at closing. We
            determined that the loans were incorrectly certified because according to HUD,
            the two-month escrow account “cushion” as permitted under Federal Housing
            Administration and Real Estate Settlements Procedures Act regulations cannot


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                       OIG Evaluation of Auditee Comments

            be applied to a delinquent mortgage payment until it is determined that there
            was a surplus of escrow funds. Then in this case, only the surplus funds can be
            applied to a missed or delinquent mortgage payment.

Comment 3   RBC Mortgage Company did not provide evidence that there was a surplus of
            escrow funds and that these funds could cover missed or delinquent mortgage
            payments. Therefore, we concluded that the loans were incorrectly certified
            because RBC Mortgage Company’s contractor certified that the escrow
            accounts were current even though the borrowers’ mortgage payments were
            delinquent at submission.

            RBC Mortgage Company insisted that the recommendations included in the
Comment 4   draft report regarding the suspension or debarment of the “principals” of RBC
            Mortgage Company, the invocation of the civil money penalties under the
            Program Fraud Civil Remedies Act, and the referral of the issues identified in
            the report to the Mortgagee Review Board, be deleted from the final audit
            report. We removed the words “suspension or debarment” from one of our
            recommendations. We did not change our recommendations regarding civil
            money penalties and referral of our issues to the Mortgagee Review Board
            because such recommendations are appropriate based on the issues cited in this
            report.

Comment 5   Since November 2003, RBC Mortgage Company has undergone a total
            management shift. Of the 170 loans improperly submitted loans, 64 (37.6%)
            were submitted under RBC Mortgage Company’s current management.

Comment 6   RBC Mortgage Company requested that we change our statement in the
            background section of the final report to state that as of November 30, 2004,
            RBC Mortgage Company is a wholly owned subsidiary of RBC USA Holdco
            Corporation. Additionally, it is as of that date, an affiliate of RBC Centura
            Banks Inc. We changed our statement in the background section of this report
            to reflect the new information.

            RBC Mortgage Company contends that the “and/or” formulation in our finding
            does not accurately describe the important distinction between the respective
            acts of RBC Mortgage Company and its contractor. Due to the lack of
            adequate supporting documentation from RBC Mortgage Company, the
            “and/or” in our finding remains unchanged.

            RBC Mortgage Company identified another contractor (Stewart Mortgage
            Information) involved with submitting loans for late endorsement on its behalf.
            Due to lack of adequate supporting documentation, we did not make any changes
            to our statements relating to RBC Mortgage Company’s contractor in our report.


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Appendix C

                                   Federal Requirements


24 Code of Federal Regulation, part 203.255(b), states for applications for insurance involving
mortgages originated under the Direct Endorsement program under this part, the mortgagee shall
submit to the Secretary of Housing and Urban Development (HUD), within 60 days after the date
of closing of the loan or such additional time as permitted by the Secretary, properly completed
documentation and certifications.

HUD Handbook 4165.1, REV-1, “Endorsement for Insurance for Home Mortgage Programs
(Single Family),” dated November 30, 1995, chapter 3, section 3-1(A), states late requests for
endorsement procedures apply if

•   The loan is closed after the firm commitment,
•   Direct Endorsement underwriter’s approval expires, and/or
•   The mortgage is submitted to HUD for endorsement more than 60 days after closing. Section
    3-1 (B) states, a loan request for endorsement from the lender must include

    (1) An explanation for the delay in submitting for endorsement and actions taken to prevent
        future delayed submissions.

    (2) A certification that the escrow account for taxes, hazard insurance, and mortgage
        insurance premiums are current and intact except for disbursements which may have been
        made from the escrow accounts to cover payments of which the accounts were
        specifically established.

    (3) A payment ledger that reflects the payments received, including the payment due for the
        month in which the case is submitted, if the case is submitted after the 15th of the month.
        For example, if the case closed February 3 and the case is submitted April 16, the
        payment ledger must reflect receipt of the April payment even though the payment is not
        considered delinquent until May 1. Payments under the mortgage must not be delinquent
        when submitted for endorsement.

                     (a) The lender must submit a payment ledger for the entire period from the
                         first payment due date to the date of the submission for endorsement.
                         Each payment must be made in the calendar month due.
                     (b) If a payment is made outside the calendar month due, the lender cannot
                         submit the case for endorsement until six consecutive payments have
                         been made within the calendar month due.

    (4) A certification that the lender did not provide the funds to bring the loan current or to
        affect the appearance of an acceptable payment history.

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Mortgagee Letter 2004-14, “Late Request for Endorsement Procedures,” clarifies procedures for
mortgage lenders when submitting mortgage insurance case binders to the Federal Housing
Administration for endorsement beyond the 60-day limit following closing. It replaces the
instructions found in the section “Late Request for Endorsement,” contained in chapter 3 of
HUD Handbook 4165.1, REV-3.

A request for insurance is considered “late” and triggers additional documentation whenever the
binder is received by HUD more than 60 days after the mortgagee loan settlement or funds
disbursement, whichever is later.

If HUD returns the case binder to the lender by issuing a notice of rejection (or a subsequent
notice of rejection), HUD’s Homeownership Center must receive the reconsideration request for
insurance endorsement within the original 60-day window or 30 days from the date of issuance
of the original notice of rejection whichever is greater.

When submitting a late request for endorsement, in addition to including a payment history or
ledger, the mortgage lender is required to include a certification, signed by the representative of
that lender on company letterhead, which includes the lender’s complete address and telephone
number. This certification must be specific to the case being submitted; i.e., identify the Federal
Housing Administration case number and the name(s) of the borrower(s) and state that

   1) All mortgage payments due have been made by the mortgagor before or within the month
      due. If any payments have been made after the month due, the loan is not eligible for
      endorsement until six consecutive payments have been made before and/or within the
      calendar month due.

   2) All escrow accounts for taxes, hazard insurance, and mortgage insurance premiums are
      current and intact, except for disbursements that may have been made to cover payments
      for which the accounts were specifically established.

   3) The mortgage lender did not provide the funds to bring and/or keep the loan current or to
      bring about the appearance of an acceptable payment history.

Title 31, United States Code, section 3801, “Program Fraud Civil Remedies Act of 1986,”
provides Federal agencies, which are the victims of false, fictitious, and fraudulent claims and
statements, with an administrative remedy to recompense such agencies for losses resulting from
such claims and statements; to permit administrative proceedings to be brought against persons
who make, present, or submit such claims and statements; and to deter the making, presenting,
and submitting of such claims and statements in the future.

According to 24 Code of Federal Regulations, part 24.110, HUD is permitted to take administrative
sanctions against employees or recipients under HUD assistance agreements that violate HUD’s
requirements. The sanctions include debarment, suspension, or limited denial of participation
that are authorized by 24 CFR Parts 24.800, 24.700, or 24.1105, respectively. HUD may impose
administrative sanctions based upon the following conditions:


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•     Failure to honor contractual obligations or to proceed in accordance with contract
      specifications or HUD regulations (limited denial of participation);

•     Deficiencies in ongoing construction projects (limited denial of participation);

•     Violation of any law, regulation, or procedure relating to the application for financial
      assistance, insurance, or guarantee or to the performance of obligations incurred pursuant to
      a grant of financial assistance or pursuant to a conditional or final commitment to insure or
      guarantee (limited denial of participation);

•     Violation of the terms of a public agreement or transaction so serious as to affect the
      integrity of an agency program such as a history of failure to perform or unsatisfactory
      performance of one or more public agreements or transactions (debarment); or

•     Any other cause so serious or compelling in nature that it affects the present responsibility of
      a person (debarment).




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Appendix D

                     Improper Late Requests for Endorsement


   We provided HUD staff and RBC Mortgage Company with spreadsheets of the loans
   improperly submitted to HUD as late requests for endorsement.

   The following table illustrates the four categories of late requests for endorsement:

                                    Late         Missed
                                  Payments      Payments      Gaps      Other          Total
  Number of loans                    169            *           *         1             170
  Original mortgage amount       $20,644,610       $0          $0      $123,028     $20,767,638


   Late Payments
   Loans with a transaction recorded after the month due. The spreadsheet lists the due dates of
   such transactions for each questioned loan.

   Missed Payments
   Loans with no payment history record (due date) for the month of submission. The
   spreadsheet provides payment records through the month of submission for each questioned
   loan.

   Gaps
   Loans with no payment history record (due date) for the months before the month of
   submission, but there was a due date for the month of submission. The spreadsheet provides
   payment records through the month of submission for each questioned loan.

   Other
   Loans for which RBC Mortgage Company was unable to provide automated payment
   histories for testing, but provided hard-copy payment histories. These loans are marked on
   the spreadsheet with an asterisk.


Legend
* Some of the loans that were included in the late payment category could also be included in
other categories. We did not want to include these loans twice; therefore, they are identified in
the late payment category.




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