oversight

National City Mortgage Company, Non-Supervised Lender; Miamisburg, Ohio

Published by the Department of Housing and Urban Development, Office of Inspector General on 2005-08-23.

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

             AUDIT REPORT




       NATIONAL CITY MORTGAGE COMPANY
            NON-SUPERVISED LENDER

              MIAMISBURG, OHIO

                  2005-CH-1015

                AUGUST 23, 2005




             OFFICE OF AUDIT, REGION V
                 CHICAGO, ILLINOIS



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                                                                  Issue Date
                                                                           August 23, 2005
                                                                  Audit Report Number:
                                                                           2005-CH-1015




TO:         Brian D. Montgomery, Assistant Secretary for Housing-Federal Housing
              Commissioner, H
            John W. Herold, Associate General Counsel for Program Enforcement, CE


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

SUBJECT: National City Mortgage Company, Non-supervised Lender; Miamisburg, Ohio;
           Improper Submission of Late Requests for Endorsement Increased the Risk to
           Insurance Fund

                                     HIGHLIGHTS

 What We Audited and Why

             We audited National City Mortgage Company (National City), a nonsupervised
             lender 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 2005 annual audit plan. We selected National City for audit
             because of its high late endorsement rate. Our objective was to determine
             whether National City complied with HUD’s regulations, procedures, and
             instructions in the submission of insurance endorsement requests.

 What We Found


             National City did not always comply with HUD’s requirements on late requests for
             insurance endorsement. National City submitted 2,071 late requests for
             endorsement out of 68,730 loans tested. The loans were either delinquent or
             otherwise did not meet HUD’s requirements of six monthly consecutive timely
             payments subsequent to delinquency, but before submission to HUD. National City
             also incorrectly certified that both the mortgage and escrow accounts for 133 loans,



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           and the escrow accounts for taxes, hazard insurance premiums, and mortgage
           insurance premiums for 497 loans were current when they were not. National City
           lacked adequate procedures and controls to ensure that it 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 require National City to indemnify HUD for any future losses on
           529 loans with a total mortgage value of $63,543,359 and take other appropriate
           administrative actions up to and including civil money penalties, and reimburse
           HUD $2,305,957 for the actual losses it incurred on 57 loans since the properties
           associated with these loans were sold and for any future losses from $3,194,948 in
           claims paid on 45 insured loans with a total mortgage value of $4,982,334 once
           the associated properties are sold. We also recommend that HUD’s assistant
           secretary for housing-federal housing commissioner take appropriate
           administrative action against National City for violating the requirements in effect
           at the time when it submitted 804 loans with a total mortgage value of
           $99,643,484 without the proper six-month payment histories.

           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 National City and/or its principals for
           incorrectly certifying that the mortgage and/or the escrow accounts for taxes,
           hazard insurance premiums, and mortgage insurance premiums were current for
           630 loans submitted for Federal Housing Administration insurance endorsement
           when the mortgage and/or 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.
           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
           National City during the audit. We also provided our discussion draft audit report
           to National City’s chairman, senior vice president and vice president of post
           funding, and HUD’s staff on June 17, 2005. We conducted an exit conference
           with National City’s management on June 27, 2005.




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       National City’s President provided written comments to the discussion draft audit
       report on July 18, 2005, that generally agreed with our findings but disagreed with
       the number of loans recommended for indemnification. The complete text of
       National City’s written response including a three-paged cover letter, and our
       evaluation of that response, can be found in appendix B of this report.




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                            TABLE OF CONTENTS

Background and Objectives                                                         5

Results of Audit

      Finding: National City Improperly Submitted Late Requests for Endorsement   6

Scope and Methodology                                                             10

Internal Controls                                                                 12

Followup 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                                                        37




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                     BACKGROUND AND OBJECTIVES

National City Mortgage Company (National City) is a division of National City Bank of Indiana.
National City’s headquarters office is located in Miamisburg, Ohio. In May 1955, National City
was approved to originate Federal Housing Administration-insured loans. National City also
participates in the U.S. Department of Housing and Urban Development’s (HUD) direct
endorsement program. As a direct endorsement lender, National City 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. National City is responsible for complying with all applicable HUD regulations
and handbook instructions.

As of May 26, 2005, National City sponsored Federal Housing Administration loans that 4,129
lenders originated. As of June 3, 2005, National City had 114 loan correspondents, 99
principals, and 148 authorized agents. National City is a full service mortgage company that
originates, markets, and services loans. National City originates loans in 37 states through its
300 lending offices coast to coast and the remaining continental United States through direct-to-
consumer telephone and Internet preferred lending centers in Miamisburg, Ohio, and Santa Rosa,
California.

We audited National City as part of the activities in our fiscal year 2005 annual audit plan. We
selected National City for audit because of its high late endorsement rate of more than 40 percent
during the period May 1, 2002, through April 30, 2004. National City originated/sponsored
171,079 Federal Housing Administration loans totaling more than $21 billion.

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




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                             RESULTS OF AUDIT

Finding: National City Improperly Submitted Late Requests for
                            Endorsement
National City improperly submitted 2,071 loans with mortgages totaling more than $263 million for
insurance endorsement when the borrowers did not make six monthly consecutive timely payments
subsequent to delinquency, but before submission to HUD. Additionally, National City also
incorrectly certified that both the mortgage and escrow accounts for 133 loans, and the escrow
accounts for taxes, hazard insurance premiums, and mortgage insurance premiums for 497 loans
were current when they were not. The problems occurred because National City lacked adequate
procedures and controls to ensure its 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.



 Improperly Submitted Late
 Requests for Endorsement

               Our analysis of the mortgage payment histories provided by National City and
               endorsement data from HUD’s systems showed that for the 68,730 loans tested,
               National City submitted 2,071 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, 611 of the 2,071 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 1,460 loans, 1,435 are still
               insured and pose a risk to the insurance fund, as follows:

               •   For 102 loans having original mortgage amounts totaling $11,108,518, HUD
                   incurred a total loss of $2,305,957 on 57 loans and paid $3,194,948 in claims
                   on 45 loans with an indeterminate loss as of July 25, 2005. HUD cannot
                   identify the loss from the 45 loans until the associated properties are sold.
                   These loans represent an increased risk to the insurance fund.

               •   The insurance was terminated without a claim on 195 of the loans, 170 of
                   which totaling $23,851,301 in original mortgages were streamline-refinanced
                   to other Federal Housing Administration loans. Because these 170 loans were
                   improperly submitted for insurance endorsement, the improper endorsement
                   also applies to the refinanced loans. Therefore, we included these 170 loans
                   as improperly endorsed loans. The remaining 25 loans were terminated for


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               reasons other than refinancing; therefore, these loans no longer represent a
               risk to the insurance fund.

           •   One thousand one hundred sixty-three loans hold active Federal Housing
               Administration insurance with $139,355,542 in total original mortgage
               amounts.

           Appendix C of this report provides details of federal requirements regarding late
           requests for insurance endorsement.

           Further, National City signed certification letters for 630 loans it submitted for
           late requests for endorsement and certified that the mortgage and/or escrow
           accounts for these loans were current. However, the loans National City
           submitted to HUD for late endorsement had mortgage and/or escrow accounts that
           were not current at the time of submission.


Improvements Made to
Procedures and Controls


           National City lacked adequate procedures and controls to ensure its employees
           followed HUD’s mortgage payment requirements when submitting late requests
           for endorsement.

           During our audit period of May 1, 2002, through April 30, 2004, National City’s
           post closing department was responsible for submitting loans to HUD for late
           requests for endorsement. National City’s post closing department was staffed
           with new and temporary employees. When processing loans for late requests for
           endorsement, the employees were required by National City to use a checklist.
           The checklist was not adequate in that it did not require the employees to ensure
           that the borrowers’ mortgage payments met HUD’s requirements regarding late
           requests for endorsement before they submitted the loans to HUD. Instead, the
           checklist required the employees to ensure the completeness of loan documents
           contained in National City’s loan files.

           In addition, National City was unable to meet the demands of the high volume of
           loans refinanced during 2002 and 2003. Thus, National City’s employees
           committed more errors when processing and submitting loans for late
           endorsement. Although the new permanent and temporary employees received
           on-the-job training, they did not take time to properly read the borrowers’
           mortgage payment histories before they submitted the loans to HUD for late
           endorsement. National City also did not have an effective system for ensuring
           that its employees properly determined whether the loans were subject to late
           requests for endorsement requirements. When determining whether the loans
           were submitted for endorsement greater than 60 days from the date of closing,



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       National City’s government insuring auditors were required to visually scan the
       closing dates of the loans and determine whether the submission dates exceeded
       the closing dates. The visual scanning process also resulted in the improper
       submission of loans for late requests for endorsement.

       National City strengthened its procedures and controls over the submission of
       loans for late requests for endorsement based on the deficiencies it had during
       2002 and 2003. Toward the end of 2003, National City enhanced its internal goal
       of submitting loans to HUD from 60 days to 55 days. The shorter time increased
       staff focus and urgency, and provided for timely transit and receipt time by HUD.

       During the first quarter of 2004, National City implemented a new internal quality
       assurance process. In this new process, National City’s government insuring
       auditors review the case binder, forwards it to a quality assurance auditor who
       does a second review and accuracy of any noted exceptions. For the new quality
       assurance process, National City designed and implemented new checklists for
       use by its government insuring auditors and the quality assurance auditors. In
       addition, National City also provided a refresh training course for all government
       insuring auditors. The training included a review of HUD’s requirements.

       During the third quarter of 2004, National City increased its focus on late
       endorsement and pay history review processes. National City established a
       quality control process for reviewing all Federal Housing Administration loans
       submitted the month before to determine if any loan was submitted with a
       delinquent payment. Additional training is imposed on employees who submit
       payment histories with delinquencies.

       During the fourth quarter of 2004, National City initiated a system request to
       systematically check for the status of case binders before submission for
       endorsement. This helps National City track case binders with issues for
       immediate resolutions.

       During the first quarter of 2005, National City’s servicing department facilitated a
       training session on how to read and understand payment histories for all
       government insuring auditors involved in submitting case binders to HUD for
       endorsement. National City also focused on the timeliness for submitting case
       binders to HUD for endorsement, accuracy of documentation, and constant
       monitoring of employees and their work to ensure compliance with its own and
       HUD’s requirements regarding loan endorsement.

       The corrective actions taken by National City such as the strengthening of its
       procedures and controls over the submission of loans for late requests for
       endorsement should provide reasonable assurance that National City’s staff
       follow HUD’s mortgage payment requirements when submitting late requests for
       endorsement.




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Recommendations


          We recommend that HUD’s assistant secretary for housing-federal housing
          commissioner require National City to

          1A.     Indemnify HUD for any future losses on 529 loans (23 defaulted loans,
                  420 active loans with certifications that violated the Program Fraud Civil
                  Remedies Act, and 86 active loans that violated HUD’s Mortgagee Letter
                  2005-23) with a total mortgage value of $63,543,359 and take other
                  appropriate administrative actions up to and including civil money
                  penalties.

          1B.     Reimburse HUD $2,305,957 for the actual losses it incurred on 57 loans
                  since the properties associated with these loans were sold.

          1C.     Reimburse HUD for any future losses from $3,194,948 in claims paid on
                  45 insured loans with a total mortgage value of $4,982,334 once the
                  associated properties are sold.

          We also recommend that HUD’s assistant secretary for housing-federal housing
          commissioner

          1D.     Takes appropriate administrative action against National City for violating
                  the requirements in effect at the time when it submitted 804 loans with a
                  total mortgage value of $99,643,484 without the proper six-month
                  payment histories.

          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 National City and/or
                  its principals for incorrectly certifying that the mortgage and/or the escrow
                  accounts for taxes, hazard insurance premiums, and mortgage insurance
                  premiums were current for 630 loans submitted for Federal Housing
                  Administration insurance endorsement when the mortgage and/or escrow
                  accounts were not current.




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                                  SCOPE AND METHODOLOGY

We performed our audit work between October 2004 and June 2005. We conducted the fieldwork
at National City’s Miamisburg, Ohio, and Dallas, Texas, offices and its lockbox payment-
processing center located in Greenbelt, Maryland.

To achieve our objective, we relied on computer-processed and hard copy data from National City,
and the data contained in HUD’s Single Family Data Warehouse. We relied on the loan payment
histories provided by National City, the certifications and loan payment histories in the case binders
that National City submitted to HUD, and the various dates in National City’s and HUD’s data
systems, including loan-closing dates, notice of rejection dates, submission dates, resubmission
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 National City’s management, staff, and lockbox payment
processor. Further, we reviewed HUD’s rules, regulations, and guidance for proper submission
of Federal Housing Administration loans and National City’s policies and procedures.

Using HUD’s data systems, we identified that National City originated/sponsored 171,079
Federal Housing Administration loans with closing dates from May 1, 2002, to April 30, 2004.
The total mortgage value of these loans was more than $21.6 billion. The following table depicts
the adjustments made to the initial universe of 171,079 loans identified for testing. A narrative
explanation follows the chart.

                                                                            Original
                                                          Number of         Mortgage
                      Description of Loans                  Loans           Amounts
            Originated and/or sponsored by National
            City from May 1, 2002, through April 30,
            2004                                               171,079 $21,620,914,242
            Submitted but not endorsed                           3,521      462,931,153
            Submitted within 60 days of closing                 87,783   11,089341,593
            Submitted within 61 to 66 days of closing           10,302    1,279,226,091
            New construction                                       629       77,450,860
            Home equity conversion                                  30        3,765,999
            Submitted before the first payment was due              21        2,345,229
            Transferred before submission                           63        7,283,027
                           Loans tested                         68,730 $8,698,570,290

Of the 171,079 loans in the initial universe, we removed 3,521 loans that were originated but not
endorsed, 629 new construction loans, 30 home equity conversion loans, and 21 loans that were
submitted for endorsement before the first payment due date because these loans were not
subject to the 60-day pre-April 2004 submission requirements.

We further limited our universe to only those loans received by HUD more than 66 days after the
loans had closed. While HUD requires lenders to submit loans for endorsement within 60 days


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of the loan closing and after April 12, 2004, an additional 30 days after closing, we allowed six
additional days to ensure that we conservatively selected loans for further testing. We allowed
six extra days because HUD’s mailroom and endorsement contractor have three business days to
process each loan and because any submission may be delayed in the mail for up to three days
over a weekend.

As a result, for our testing purposes, we considered only those loans submitted more than 66
days after closing and returned to the lender with a notice of return. After removing the 87,783
loans submitted within 60 days after closing and the 10,302 loans that were submitted within 61
to 66 days after closing, there were 68,793 loans remaining as late requests for endorsement.

In evaluating the 68,793 loans, we identified 63 in which National City transferred the loan
servicing to another lender/servicer before submission for endorsement; therefore, we also
removed these loans from our testing universe. After removing the loans that were not subject to
HUD’s late endorsement requirements, we only tested 68,730 loans for compliance with HUD’s
late endorsement requirements.

The audit covered the period of 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 has
                      implemented to reasonably ensure that a program meets its objectives.

              •       Validity and reliability of data - Policies and procedures that management
                      has 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 has 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 internal 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 - National City did not operate its late requests for
                  endorsements according to program requirements. National City lacked
                  adequate procedures and controls to ensure it properly submitted late
                  requests for endorsement (see finding).

           •      Compliance with laws and regulations – National City 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 – National City improperly submitted 2,071 loans
                  with mortgages totaling more than $263 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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                        FOLLOWUP ON PRIOR AUDITS

This was the first audit of National City’s late requests for endorsement by HUD’s Office of
Inspector General (OIG).

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

In March 2002, HUD’s Quality Assurance Division performed a quality assurance review of
National City. The review resulted in findings related to loan origination, underwriting, and late
endorsements. All of the findings were resolved and closed.




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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                                                        $63,543,359
                 1B               $2,305,957
                 1C                                    $3,194,948
                Totals            $2,305,957           $3,194,948          $63,543,359


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

3/     “Funds to be put to better use” are quantifiable savings that are anticipated to occur if an
       OIG recommendation is implemented, resulting in reduced expenditures at a later time
       for the activities in question. This includes costs not incurred, deobligation of funds,
       withdrawal of interest, reductions in outlays, avoidance of unnecessary expenditures,
       loans and guarantees not made, and other savings.




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Appendix B
         AUDITEE COMMENTS AND OIG'S EVALUATION


Ref to OIG Evaluation    Auditee Comments




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Ref to OIG Evaluation   Auditee Comments




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Ref to OIG Evaluation   Auditee Comments




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Ref to OIG Evaluation   Auditee Comments




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Ref to OIG Evaluation   Auditee Comments




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Ref to OIG Evaluation   Auditee Comments




Comment 1




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Ref to OIG Evaluation   Auditee Comments




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Ref to OIG Evaluation   Auditee Comments




Comment 2




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Ref to OIG Evaluation   Auditee Comments




Comment 3




Comment 4




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Ref to OIG Evaluation   Auditee Comments




Comment 5




Comment 6




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Ref to OIG Evaluation   Auditee Comments




Comment 7




Comment 8




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Ref to OIG Evaluation   Auditee Comments




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Ref to OIG Evaluation   Auditee Comments




Comment 9




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Ref to OIG Evaluation   Auditee Comments




Comment 10




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Ref to OIG Evaluation   Auditee Comments




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Ref to OIG Evaluation   Auditee Comments




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                       OIG Evaluation of Auditee Comments

Comment 1   We commend National City for making significant control improvements to
            ensure it complies with HUD’s late endorsement requirements.

Comment 2   National City disagreed with the number of Federal Housing Administration
            loans cited in our discussion draft audit report as improperly submitted for late
            requests for endorsement. National City provided additional documentation
            such as cancelled checks, payment ledgers, and other related-documents
            supporting its disagreement with 397 loans that were previously cited as
            improperly submitted for late requests for endorsement. The additional
            supporting documentation showed the required mortgage payments were made
            for 32 loans; however, the documentation did not show that the required
            mortgage payments were made for the remaining 365 loans. Thus, we
            decreased the number of Federal Housing Administration loans improperly
            submitted for endorsement by 32 loans (from 2,103 loans to 2,071 loans).

            In addition, we reduced the total number of loans recommended for
            indemnification to 529 in part due to HUD’s new guidelines in Mortgagee
            Letter 2005-23. The reduction was made because 23 loans were in default as
            of July 25, 2005, 420 active loans had certifications that violated the Program
            Fraud Civil Remedies Act, and 86 active loans violated HUD’s Mortgagee
            Letter 2005-23.

Comment 3   We adjusted our recommendation regarding loans for indemnification because
            of HUD’s new Mortgagee Letter (ML-2005-23 Amended Late Request for
            Endorsement Procedures). However, we included a recommendation for HUD
            to take appropriate administrative action. During our audit, we used the
            applicable HUD regulations, guidelines, and other requirements when we
            reviewed National City’s late requests for endorsement. According to 24 CFR
            [Code of Federal Regulations], part 203.255, for applications for insurance
            involving mortgages originated under the direct endorsement program, the
            lender shall submit to the secretary of HUD, within 60 days after the date of
            closing or the loan or such additional time as permitted by the secretary,
            properly completed documentation and certifications as set forth in the
            applicable handbook. As required by HUD’s regulation, we used HUD
            Handbook 4165.1, REV-3, and Mortgagee Letter 2004-14 because these were
            applicable for reviewing loans that National City sponsored and submitted to
            HUD from May 1, 2002, through April 30, 2004.




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                     OIG Evaluation of Auditee Comments

Comment 4   Although National City acknowledges the inaccuracies in its submission of
            613 loans, National City contends that the loans had six consecutive monthly
            payments since the submission dates. Thus, the loans no longer pose a risk to
            the Federal Housing Administration insurance fund. Of this, National City
            does not believe that indemnification or reimbursement is an appropriate
            remedy for 613 loans improperly submitted. We disagree because according
            to 24 CFR [Code of Federal Regulations], part 203.255, by insuring the
            mortgage (or loan), the mortgagee (or lender) agrees to indemnify HUD under
            the conditions of section 256(c) of the National Housing Act (12 U.S. Code
            1717z-21(c)). As authorized by HUD’s regulations, indemnifying HUD
            begins when a mortgage is endorsed and not when a mortgage becomes in
            compliance with HUD’s requirements after the endorsement date. We
            concluded that at endorsement, loans begin to pose a risk to the Federal
            Housing Administration insurance fund.

Comment 5   As discussed in our evaluation of National City’s comments to the discussion
            draft report under Comment 2 above, we decreased the total number of loans
            that National City improperly submitted.

Comment 6   National City believes that our recommendation regarding civil money
            penalties is an inappropriate remedy. We did not change our recommendation
            regarding administrative actions, up to and including civil money penalties,
            because such a recommendation is appropriate based on the issues cited in this
            report. Violations of Federal Housing Administration rules are subject to
            administrative action, up to and including civil money penalties. The
            appropriateness of the civil money penalties will be determined by HUD.

Comment 7   We reduced the total number of incorrect certifications from 666 to 630 based
            upon additional documentation such as cancelled checks and other related
            documents showing that the receipt dates of the mortgage payments for 36
            loans were earlier than the effective dates of the mortgage payments shown on
            National City’s computer system. Therefore, this made the certifications
            correct that mortgage payments and/or escrow accounts were current at
            submission. National City had erroneously posted the mortgage payments late
            and therefore the payment data in its computer system did not show the correct
            payment receipt date.




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                    OIG Evaluation of Auditee Comments

Comment 8   National City objected to the inclusion of an "inflammatory recommendation"
            in our discussion draft audit report. Specifically, National City objected to its
            being referred for administrative penalties under the Program Fraud Civil
            Remedies Act, 31 United States Code, section 3801 et seq., arguing that
            enforcement-related actions are intended to reinforce HUD’s rules and
            regulations, rather than to discourage broad participation in HUD’s Federal
            Housing Administration lending. Our administrative penalties
            recommendation is not inflammatory, nor was it intended as such. Rather, it is
            a reasonable and appropriate recommendation based upon the volume of false
            certifications regarding the status of loans and currency of escrows that
            National City submitted to HUD for insurance endorsement.

            Moreover, we disagree with National City's argument that holding mortgagees
            responsible for failing to abide by applicable late endorsement requirements
            and the falsely certifying as to the status of loans and the currency of loan
            escrows will “discourage broad participation in Federal Housing
            Administration lending”. Rather, we believe that the overwhelming majority
            of lenders recognize the importance of Federal Housing Administration's
            requirements and compliance with the same, and this recommendation
            reinforces that understanding.

            Further, National City concedes that it is fully responsible for its employees’
            actions, including those of its approved branch offices. Thus, we correctly
            conclude that National City is responsible for 630 false certifications created
            by those employees. Generally, direct endorsement loans must be submitted
            to HUD within 60 days after closing. See 24 CFR [Code of Federal
            Regulations], part 203.555, and HUD Handbook 4165.1, chapter 2, section 2-
            1. However, mortgagees may make a late request for endorsement. See HUD
            Handbook 4165.1, REV-1, chapter 3, section 3-1. HUD will evaluate the
            circumstances and make a determination to accept or reject such requests. A
            mortgage that is in default when submitted for endorsement cannot be
            endorsed for insurance. Thus, lenders must certify as part of the late




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                    OIG Evaluation of Auditee Comments


            endorsement request, among other things, that the escrow accounts 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 for which the accounts were specifically
            established.
                    OIG Lenders   seeking
                          Evaluation       late endorsement
                                      of Auditee   Comments were also required to submit a
            payment ledger that reflects the payments received, including the payment due
            date for the month in which the late endorsement is requested.

            National City submitted 630 requests for late endorsement forms, which
            included the requisite certifications. Attached to each request document was a
            payment history ledger from National City. A review of the payment histories
            indicates that as to each of these loans either the loan was in default or at least
            one monthly payment had not been made or cured during the history of the
            mortgage. Accordingly, each of the loans was at least one payment in arrears
            at the time the late endorsement request was submitted by National City.
            Notwithstanding this fact, National City certified that the loans and/or the
            escrow accounts were current at the time of the requests for endorsement. The
            certification is a condition of eligibility for insurance endorsement, and, thus,
            is patently material. Further, actual knowledge of the status of the loans and
            escrows (for example, maintenance of the payment histories), in combination
            with the act of affirmatively certifying the status of the loan and escrows,
            demonstrates that the false certifications were intentional as opposed to
            inadvertent.

            In addition, precedent establishes that, since the focus of a False
            Claim/Program Fraud Civil Remedies Act case is the conduct of the
            presenter/claimant, the fact that HUD may have had documentation with
            which it could have ascertained the falsity of the certifications made by
            National City is of no consequence with respect to the issue of whether it
            submitted false certifications.

Comment 9   National City contends that 444 of the loans with incorrect certifications
            should be removed from this report and that our recommendation related to
            these incorrect certifications is unnecessary. National City’s basis for its
            contention is that these loans now comply with HUD’s new guidelines in
            Mortgagee Letter 2005-23. We neither removed the loans from the




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                     OIG Evaluation of Auditee Comments


             revised 630 loans with incorrect certifications nor the related recommendation
             because the certifications were false.

             National City states that our recommendation constitutes selective
Comment 10
             enforcement in that it believes that National City is being audited under
             different standards than other national lenders we determined did not comply
             with HUD’s late endorsement requirements. National City respectfully
             requested that we use our discretion in making recommendations to ensure that
             national lenders receive consistent treatment. National City states that
             OIG’s audit report (audit report #2005-SE-1006) on another lender cited the
             same late endorsement-related issues as cited in this report, but refrained from
             including a recommendation related to Program Fraud Civil Remedies Act.
             We disagree with National City’s belief. We are consistent in the treatment of
             NationalOIG
                       CityEvaluation
                             and other lenders since Comments
                                         of Auditee  we have discretion when making audit
             recommendations. Specifically, we either refer cases to HUD related to
             violations of the Program Fraud Civil Remedies Act outside of our audit
             reports or to cite such cases with the appropriate recommendations in our audit
             report. In this case, we cited such cases with the appropriate recommendation
             in this report.




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Appendix C

                           FEDERAL REQUIREMENTS


According to 24 CFR [Code of Federal Regulations], part 203.255(b), for applications for
insurance involving mortgages originated under the direct endorsement program, the lender shall
submit to the secretary of 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 that 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 is current and intact except for disbursements which may have been
        made from the escrow accounts to cover payments for 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.




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