Issue Date
September 16, 2005
Audit Report Number
2005-FW-1016
TO: Brian D. Montgomery
Assistant Secretary for Housing – Federal Housing Commissioner, H
FROM: Frank E. Baca
Regional Inspector General for Audit, 6AGA
SUBJECT: Aegis Wholesale Corporation Did Not Follow HUD Requirements When
Processing a Federal Housing Administration Loan
HIGHLIGHTS
What We Audited and Why
We reviewed a Federal Housing Administration loan sponsored by Aegis
Wholesale Corporation (Aegis) of Houston, Texas. During an audit of a Federal
Housing Administration-approved loan correspondent, we identified a loan
sponsored by Aegis that was not properly originated according to U.S.
Department of Housing and Urban Development (HUD) regulations. Because the
sponsor of the loan is ultimately responsible for loan processing deficiencies, we
addressed these deficiencies to Aegis to determine whether it complied with HUD
requirements.
What We Found
Aegis did not comply with HUD regulations, procedures, and instructions in the
processing of a Federal Housing Administration-insured single-family mortgage.
The lender did not adequately support the borrower’s income, the borrower’s
creditworthiness or the legitimacy of the appraised value of the property. The
lender also charged the borrower $581 in loan discount points without reducing
the borrower’s interest rate. As a result, HUD insured a loan that placed the
insurance fund at risk for $58,088 and the borrower incurred excessive costs for
the loan.
What We Recommend
We recommend that the Assistant Secretary for Housing – Federal Housing
Commissioner take appropriate administrative action against Aegis. This action,
at a minimum, should include requiring indemnification for the $58,088 loan and
reimbursement of the $581 in unearned fees to the appropriate parties
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
On September 7, 2005, Aegis provided its formal written response to our report.
Aegis agreed to a principal reduction of $581 for the unearned discount points. It
also acknowledged deficiencies with the calculation of the borrower's income and
the appraisal, but argued that the borrower was sufficiently qualified and the
appraised value adequately supported. The complete text of Aegis’s formal and
initial response can be found in Appendix B of this report. We omitted the
attachments for conciseness and due to Privacy Act concerns.
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TABLE OF CONTENTS
Background and Objectives 4
Results of Audit
Finding: Aegis Wholesale Corporation Did Not Follow HUD Requirements 5
When Processing a Federal Housing Administration Loan
Scope and Methodology 7
Appendixes
A. Schedule of Questioned Costs and Funds Put to Better Use 8
B. Auditee Comments and OIG Evaluation 9
C. Case Study of Improperly Originated Loan 16
3
BACKGROUND AND OBJECTIVES
Aegis Wholesale Corporation (Aegis) is a nonsupervised lender that began originating Federal
Housing Administration loans in 1951.
During the audit of a loan correspondent, we identified one Federal Housing Administration loan
sponsored by Aegis that was not originated according to U.S. Department of Housing and Urban
Development (HUD) requirements. To resolve the deficiencies, we performed a review of
Aegis’s underwriting of the loan.
Our objective was to determine whether Aegis complied with HUD regulations, procedures, and
instructions when processing the Federal Housing Administration mortgage that it sponsored for
a loan correspondent.
4
RESULTS OF AUDIT
Finding: Aegis Wholesale Corporation Did Not Follow HUD
Requirements when Processing a Federal Housing Administration Loan
Aegis did not comply with HUD regulations, procedures, and instructions in the processing of a
Federal Housing Administration-insured single-family mortgage. The lender did not adequately
support the borrower’s income, the borrower’s creditworthiness, or the legitimacy of the
appraised value of the property. The lender also charged the borrower $581 in loan discount
points without reducing the borrower’s interest rate. As a result, HUD insured a loan that placed
the insurance fund at risk for $58,088 and the borrower incurred excessive costs for the loan.
Aegis Did Not Follow HUD
Requirements
Aegis overstated the borrower’s income and did not show that it was stable. The
lender calculated the borrower’s income based upon the borrower working a 40-
hour workweek. However, pay stubs on file showed the borrower often worked
less than 40 hours a week. Further, the borrower changed employment six times
in the two years prior to his loan application. The borrower did not stay in the
same line of work nor did his income increase with every job change. At the time
of application, the borrower had only been with his current employer for six
months. HUD regulations state that lenders may not use income in evaluating a
borrower’s loan that it cannot verify, is not stable, or will not continue.
In addition, Aegis did not make certain all derogatory credit was explained and
considered in qualifying the borrower. The borrower had multiple late payments
on two separate auto loans. HUD regulations state that lenders must determine
whether late payments were due to a disregard for financial obligations,
mismanagement of financial obligations, or factors beyond the borrower’s
control.
Further, Aegis did not ensure the appraisal met HUD standards. In determining
the appraised value, the appraiser did not analyze the subject sales contract or list
price, adjust the comparables for sales concessions, or include any conventional
loans for comparables. As a result, Aegis cannot be certain of the accuracy of the
appraised value.
Finally, Aegis allowed the loan correspondent to charge the borrower $581 in
loan discount points, without reducing the borrower’s interest rate. The loan
5
correspondent could not provide documentation to show that the borrower
received anything of value for the discount points charged. The Real Estate
Procedures Act prohibits giving or accepting any part of a charge for services not
performed.
The substantial underwriting deficiencies on this loan unnecessarily place the
insurance fund at risk. Further, the unearned fees unfairly imposed costs on the
borrower without providing a benefit in return. Aegis should indemnify HUD for
the $58,088 mortgage and repay the appropriate parties for the $581 in unearned
discount points.
Recommendation
We recommend the Assistant Secretary for Housing-Federal Housing
Commissioner and Chairman, Mortgage Review Board:
1A. Take appropriate administrative action against Aegis Wholesale for not
complying with HUD requirements. This should include, at a minimum,
requiring Aegis to indemnify HUD for case number 491-7971398, which
had an original mortgage amount of $58,088. HUD should also require
reimbursement of the $581 in unearned fees to the appropriate parties.
6
SCOPE AND METHODOLOGY
We reviewed Aegis’s processing of one Federal Housing Administration loan that it sponsored
for a Federal Housing Administration-approved loan correspondent. During our audit of that
loan correspondent, we reviewed loans closed from July 1, 2002, through June 30, 2004, that
defaulted within the first three years of closing. We identified a loan, sponsored by Aegis, which
appeared to be improperly underwritten. Because the sponsor of the loan is ultimately
responsible for loan processing deficiencies, we addressed the deficiencies to Aegis.
To accomplish our objective, we prepare a case narrative of the loan processing deficiencies
identified and provided the information to Aegis. We allowed Aegis an opportunity to provide
additional information that could affect the initial results of our review of the loans. Aegis
provided a written response. We evaluated the response when reaching our conclusions.
In conducting our audit, we used computer-processed data contained in HUD’s Neighborhood
Watch system. However, we did not rely on the data to accomplish our audit objective.
Accordingly, we did not assess the reliability of the data in the system.
We did not assess Aegis’s underwriting controls because they were not significant to our
objective of reviewing the loan.
We performed the work from May through July 2005. The audit was conducted in accordance
with generally accepted government auditing standards.
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APPENDIXES
Appendix A
SCHEDULE OF QUESTIONED COSTS
AND FUNDS PUT TO BETTER USE
Recommendation Funds Put to Better
Number Ineligible 1/ Use 2/
1A $581 $58,088
1/ Ineligible costs are costs charged to a HUD-financed or HUD-insured program or
activity that the auditor believes are not allowable by law, contract or Federal, State or
local policies or regulations.
2/ “Funds to be put to better use” are quantifiable savings that are anticipated to occur if an
Office of Inspector General (OIG) recommendation is implemented, resulting in reduced
expenditures at a later time for the activities in question. This includes costs not
incurred, deobligation of funds, withdrawal of interest, reductions in outlays, avoidance
of unnecessary expenditures, loans and guarantees not made, and other savings.
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Appendix B
AUDITEE COMMENTS AND OIG'S EVALUATION
Ref to OIG Evaluation Auditee Comments
Comment 1
Comment 2
Comment 3
Comment 4
9
Comment 5
Comment 1
Comment 6
10
Comment 7
11
Comment 2
Comment 5
12
Comment 4
Comment 6
Comment 7
13
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OIG Evaluation of Auditee Comments
Comment 1 We omitted the attachments for conciseness and due to Privacy Act concerns. We
also blocked out information in their response due to Privacy Act concerns.
Comment 2 Aegis agreed to a principal reduction of $581 for the unearned discount points.
Comment 3 Aegis’ response indicated they confirmed two-plus years of income and computed
the average income to be $1,482 based on pay stubs. We computed the
borrower’s average pay based on pay stubs to be $1,485. However, Aegis used
income of $1,560 to qualify the borrower for the loan. Thus, Aegis’ response
supports our calculation of income and contention that the borrower’s income was
overstated in the loan file.
Comment 4 Aegis did not verify that the borrower's income was stable. In their response,
Aegis asserts the borrower is employable and provided a letter explaining his job
changes. Yet, the file shows the borrower changed employment six times in the
two years before his loan application. The borrower's written explanation for the
job changes was that he was looking for a better paying job. However, two of his
job changes in 2002 resulted in substantial decreases in income. The borrower's
total income for all of 2002 was only $11,610 or $967 a month.
Comment 5 Aegis’ response that the borrower had a satisfactory installment payment history
on the car loan is not supported by the information in the file. Per payment
history reports in the file, the borrower had two auto loans. The borrower paid
late fees 11 times on the first account and 12 times on the second account.
Comment 6 Aegis agreed the appraisal issues should have been addressed, but disagreed that
the issues affected the appraised value of the property. The appraised value could
be affected because the appraiser did not adjust the sales prices of the comparable
properties for sales concessions.
Comment 7 Again, Aegis agreed the appraisal issues should have been addressed, but
disagreed that the issues affected the appraised value of the property. In
determining the appraised value, the appraiser did not analyze the subject sales
contract or list price, adjust the comparables for sales concessions or include any
conventional loans for comparables. Accordingly, the accuracy of the appraised
value is not supported.
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Appendix C
CASE STUDY OF IMPROPERLY ORIGINATED LOAN
Case Number: 491-7971398
Mortgage Amount: $58,088
Gift Amount: $0
Date of Loan Closing: July 28, 2003
Status as of 03/31/2005: Reinstated by the mortgagor who retains ownership
Payments before First Default Reported: 1
Summary:
Income Overstated or Unsupported
Aegis overstated the borrower’s monthly income by $140. Aegis calculated the borrower's
income based on a 40-hour workweek. However, based on a review of the six pay stubs on file,
the borrower only worked an average of 38 hours a week. The borrower worked some overtime
hours; however, HUD Handbook 4155.1, REV-4, CHG-1, Paragraph 2-7(A) does not allowed
this income to be counted since the borrower does not have a two-year history of receiving the
income.
Income Stability Not Verified
Aegis did not verify that the borrower’s income was stable or could be expected to continue for
at least the first three years of the mortgage. The borrower changed employment six times in the
two years before his loan application. The borrower did not stay in the same line of work nor did
his income always increase with each job change. After only working for one employer for three
months, the borrower took another job, at which his monthly pay dropped approximately $540
per month. For a four-month period, the borrower claimed to have worked for his uncle’s
business without receiving compensation. In the verbal verification of employment with the
borrower's current employer, the loan correspondent did not obtain a response regarding the
probability of continued employment. HUD Handbook 4155.1, REV-4, CHG 1, Section 2 states,
"The anticipated amount of income, and likelihood of its continuance, must be established to
determine the borrower's capacity to repay the mortgage debt. Income from any source that
cannot be verified, is not stable, or will not continue may not be used in calculating the
borrower's income ratios."
16
Creditworthiness Not Fully Considered/Inconsistencies Not Resolved
Aegis did not ensure all derogatory credit was explained and considered in qualifying the
borrower. The credit report shows two closed accounts with an automobile dealership. The
credit report showed and the manager of the dealership confirmed that the borrower always made
his payments on time. However, payment history reports included in the file show that the
borrower paid late fees 11 times on the first account and 12 times on the second account. Aegis
did not resolve these inconsistencies. HUD Handbook 4155.1, REV-4, CHG-1, Paragraph 2-3,
requires lenders to determine whether late payments were due to a disregard for financial
obligations, mismanagement of financial obligations or factors beyond the borrower's control.
Appraisal Adjustments for Sales Concessions on Comparables Not Made
The appraiser did not adjust the sales prices of the comparable properties for sales concessions.
Two of the comparable properties sold with sales concessions. HUD Handbook 4150.2,
Paragraph 4-6(B), requires appraisers to report and analyze the sales concessions on comparable
properties and adjust their sales prices as necessary in determining the appraised value.
Appraisal Did Not Include an Analysis of the Subject Sales Contract or List Price
The appraiser did not analyze the subject sales contract or property listing. The sales contract
showed the seller agreed to pay $2,800 in borrower closing costs and other expenses. HUD
Handbook 4150.2, Paragraph 4.0 requires strict compliance with Uniform Standards of
Professional Appraisal Practice (USPAP). USPAP Standards Rule 1-5(a) requires the appraiser
to analyze all agreements of sale, options, or listings of the subject property in determining a
property's appraised value. Standards Rules 2-2(a)(ix) states that if the information is
unobtainable, the appraiser must provide a statement on efforts made to obtain the information.
Appraisal Did Not Include Any Conventional Loans for Comparables
The appraiser only used comparables financed through the Federal Housing Administration.
HUD Handbook 4150.1, REV-1, Paragraph 6-10(B) requires appraisers to obtain at least one
conventional loan, if available. The appraiser did not indicate that a conventional comparable
was not available.
Ineligible Closing Cost Charged to Borrower
Aegis allowed the loan correspondent to charge $581 in loan discount points without reducing
the borrower's interest rate. Rather than reducing the interest rate, the loan correspondent
charged the borrower an above-market interest rate resulting in a yield spread premium of
$1,380. The loan correspondent did not provide any documentation to show the borrower
received anything of value for the discount points charged. HUD allows lenders who originate
FHA-insured loans to charge borrowers a one-percent loan origination fee and eligible closing
and prepaid costs; however, additional fees should be for specific services performed beyond the
normal loan processing and underwriting. Section 8 of the Real Estate Settlement Procedures
Act prohibits giving or accepting any part of a charge for services not performed. Since the loan
17
correspondent charged loan discount points without reducing the interest rate, the discount points
were unearned fees in violation of the Real Estate Settlement Procedures Act.
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Aegis Wholesale Corporation, Houston, Texas
Published by the Department of Housing and Urban Development, Office of Inspector General on 2005-09-16.
Below is a raw (and likely hideous) rendition of the original report. (PDF)