oversight

Allied Home Mortgage Corporation, Houston, TX

Published by the Department of Housing and Urban Development, Office of Inspector General on 2005-09-22.

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

                                                                  Issue Date
                                                                          September 22, 2005
                                                                  Audit Report Number
                                                                           2005-FW-1017




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


FROM:      Frank E. Baca
           Regional Inspector General for Audit, 6AGA

SUBJECT: Allied Home Mortgage Corporation Did Not Follow HUD Requirements When
         Processing Four Loans


                                   HIGHLIGHTS

 What We Audited and Why

            We reviewed Federal Housing Administration loans sponsored by Allied Home
            Mortgage Corporation (Allied) of Houston, Texas. During an audit of a Federal
            Housing Administration-approved loan correspondent, we identified four loans
            sponsored by Allied that did not appear to be properly originated according to
            U.S. Department of Housing and Urban Development (HUD) regulations.
            Because the sponsor of the loans is ultimately responsible for loan processing
            deficiencies, we addressed these deficiencies to Allied to determine whether it
            complied with HUD requirements.

 What We Found


            Allied did not comply with HUD regulations, procedures, and instructions in the
            processing of four Federal Housing Administration-insured single-family
            mortgages. Allied overstated the borrower’s income for two loans and
            understated the borrower’s liabilities for one loan. For all four loans, Allied did
            not ensure that the appraisal met HUD requirements. In addition, Allied allowed
           the loan correspondent to charge three borrowers a total of $1,919 in loan
           discount points without reducing their interest rates. As a result, the risk to the
           insurance fund was increased, and three borrowers incurred excessive costs for
           their loans.

What We Recommend


           We recommend that the Assistant Secretary for Housing – Federal Housing
           Commissioner take appropriate administrative action against Allied for not
           complying with HUD requirements. At a minimum, this should include
           indemnifying HUD $123,028 for one of the loans and reimbursement of the
           $1,919 in unearned fees. We further recommend that Allied be required to take
           action to improve the quality of its appraisals.

           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 2, 2005, Allied provided a written response to our report. Allied
           disagreed with nearly all of our report findings. The complete text of Allied’s
           response can be found in Appendix B of this report.




                                             2
                           TABLE OF CONTENTS


Background and Objectives                                                          4

Results of Audit
      Finding: Allied Did Not Follow HUD Requirements When Processing Four Loans   5

Scope and Methodology                                                              8

Appendixes
   A. Schedule of Questioned Costs                                                  9
   B. Auditee Comments and OIG’s Evaluation                                        10
   C. Case Studies of Improperly Originated Loans                                  27




                                           3
                       BACKGROUND AND OBJECTIVES

Allied Home Mortgage Corporation (Allied) is a nonsupervised lender that began originating
Federal Housing Administration loans in 1991.

During an audit of a Federal Housing Administration-approved loan correspondent, 1 we
identified four loans sponsored by Allied that did not appear to be properly originated according
to U.S. Department of Housing and Urban Development (HUD) regulations. To resolve the
deficiencies, we performed a review of Allied’s underwriting of these loans.

Our objective was to determine whether Allied complied with HUD regulations, procedures, and
instructions when processing these Federal Housing Administration mortgages that it sponsored
for a loan correspondent.




1
    Report number 2005-FW-1009, Allied Home Mortgage Capital Corporation, Nonsupervised Loan
    Correspondent, Houston, TX, issued May 24, 2005.


                                                   4
                                 RESULTS OF AUDIT

Finding: Allied Did Not Follow HUD Requirements When Processing
Four Loans
Allied did not comply with HUD regulations, procedures, and instructions in the processing of
four Federal Housing Administration-insured single-family mortgages. Allied overstated the
borrower’s income for two loans and understated the borrower’s liabilities in one loan. For all
four loans, Allied did not ensure that the appraisal met HUD requirements. In addition, Allied
allowed the loan correspondent to charge three borrowers a total of $1,919 in loan discount
points without reducing their interest rates. As a result, the risk to the insurance fund was
increased, and three borrowers incurred excessive costs for their loans.




 Allied Did Not Follow HUD
 Requirements


               Allied did not follow HUD requirements for the four loans we reviewed. The
               following paragraphs summarize the deficiencies with the loans. For more
               detailed information, see Appendix C.

               Case Number 491-7796924

               Allied did not verify sufficient income for the borrower to qualify for the loan.
               Allied improperly included child support income of $518 per month without
               obtaining evidence the borrower was receiving the child support. Without the
               child support income, the borrower did not qualify for the loan.

               In addition, Allied did not ensure the appraisal met HUD standards. In
               determining the appraised value, the appraiser did not analyze the subject sales
               contract or adjust the comparables for sales concessions. As a result, Allied
               cannot be certain of the accuracy of the appraised value.

               Case Number 491-7795964

               Allied overstated the borrower’s monthly income by $471 and understated the
               borrower’s liabilities by $117. Allied calculated the borrower’s income based on
               a 40-hour workweek even though the borrower’s pay stubs showed he only
               worked an average of 31.40 hours per week. Also, Allied incorrectly recorded the
               borrower’s liabilities in the automated underwriting system.




                                                 5
           Further, Allied did not ensure the appraisal met HUD standards. In determining
           the appraised value, the appraiser did not analyze the subject sales contract, adjust
           the comparables for sales concessions, or include conventional loans for
           comparables. As a result, Allied cannot be certain of the accuracy of the
           appraised value.

           Case Number 492-6708865

           Allied 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. As a result, Allied cannot be certain of the accuracy of the appraised value.

           Case Number 492-6810853

           Allied accepted an appraisal with numerous violations of HUD requirements. The
           appraiser used comparables that were more than six months old without
           explanation and overstated the sales price of one comparable by more than
           $10,000. In addition, the appraiser did not provide explanations for not making
           adjustments based on differences in lot size and the stated inferior condition of
           one comparable. The appraiser also provided inconsistent information regarding
           the condition of the subject property and failed to provide an analysis of the
           subject sales contract or list price. As a result, Allied cannot be certain of the
           accuracy of the appraised value.

Unallowable Fees Charged to
Borrowers



           For three of the four loans we reviewed, Allied allowed the loan correspondent to
           charge the borrowers a total of $1,919 in loan discount points without reducing
           the borrowers’ interest rates. Instead, the loan correspondent charged the
           borrowers above-market interest rates. The loan correspondent received
           compensation in the form of yield spread premiums for the above-market interest
           rates. HUD believes yield spread premiums can be a legitimate tool to reduce
           borrowers’ closing costs through a higher interest rate. However, the loan
           correspondent could not provide documentation to show that the borrowers
           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.




                                             6
                                      Discount points       Yield spread
                    Case number          charged             premium
                    491-7796924                 $ 320              $ 3,575
                    492-6708865                    669                 752
                    492-6810853                    930               1,105
                     Total                     $ 1,919              $5,432


Conclusion


             The underwriting deficiencies on these loans unnecessarily place the insurance
             fund at risk. Further, the unearned fees unfairly imposed costs on the borrowers
             without providing a benefit in return. Allied should indemnify HUD $123,028 for
             case number 491-7796924 and repay the appropriate parties for the $1,919 in
             unearned discount points. In addition, Allied should take steps to ensure
             appraisals fully support the stated appraised value.

Recommendations



             We recommend that the Assistant Secretary for Housing – Federal Housing
             Commissioner and Chairman, Mortgage Review Board:

             1A. Take appropriate administrative action against Allied for not complying
                 with HUD requirements. At a minimum, this should include indemnifying
                 HUD $123,028 for case number 491-7796924.

             1B. Require Allied to reimburse the appropriate parties for $1,919 in unearned
                 fees.

             1C. Require Allied to take steps to improve the quality of its appraisals.




                                              7
                         SCOPE AND METHODOLOGY

We reviewed Allied’s processing of four Federal Housing Administration loans 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 four loans, sponsored by Allied,
which appeared to be improperly underwritten. Because the sponsor of the loan is ultimately
responsible for loan processing deficiencies, we addressed the deficiencies to Allied.

To accomplish our objective, we prepared case narratives of loan processing deficiencies
identified and provided the information to Allied. We allowed Allied an opportunity to provide
additional information that could resolve the deficiencies identified. Allied provided a written
response, which we evaluated in 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 Allied’s underwriting controls because they were not significant to our
objective of reviewing these four loans.

We performed the work from May through July 2005. The audit was conducted in accordance
with generally accepted government auditing standards.




                                                8
                                     APPENDIXES

Appendix A

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




                                                            Funds to be
                    Recommendation                          Put to Better
                        number     Ineligible 1/               Use 2/

                            1A                                  $123,028
                            1B                     $1,919




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.




                                               9
Appendix B

        AUDITEE COMMENTS AND OIG’S EVALUATION


Ref to OIG Evaluation   Auditee Comments




                         10
Comment 1




Comment 2




            11
Comment 3




Comment 4




            12
Comment 5




            13
Comment 6




Comment 7




Comment 8




            14
Comment 2




Comment 3




            15
Comment 4




Comment 5




            16
Comment 9




Comment 5




            17
Comment 10



Comment 11




Comment 12




Comment 13




             18
Comment 6




            19
Comment 14




Comment 15




Comment 4




             20
Comment 5




Comment 3


Comment 10



Comment 11




Comment 12




             21
Comment 16




             22
Comment 6




            23
                         OIG Evaluation of Auditee Comments

Comment 1   Allied states that its policies and practices required it to obtain evidence of child
            support payments. This agrees with HUD’s requirements, which state that in order
            for a lender to consider child support income in approving a borrower, the lender
            must obtain evidence that the borrower received the payments during the prior 12
            months. It was Allied’s responsibility to obtain sufficient documentation to
            approve its underwriting decisions. However, Allied did not provide any
            documentation to show that it obtained such evidence and it states it is unable to
            determine why the information is missing from its file. Accordingly, it should not
            have used the child support income in qualifying the borrower.

Comment 2   Allied submits that HUD’s requirements for sales concessions were unclear prior
            to the issuance of Mortgage Letter 2005-02. We do not concur. Paragraph 4-6(B)
            of HUD Handbook 4150.2 (effective July 1, 1999), requires appraisers to account
            for differences between the subject property and the comparable properties. It
            specifically lists sales concessions as a required adjustment. Further, the Uniform
            Residential Appraisal Report form provides a separate line item for the appraiser
            to insert adjustments based on sales and financing concessions.

Comment 3   Allied states that the underwriter believed the sales concessions were within the
            six percent limit contained in HUD Handbook 4155.1 REV-5 and REV-4.
            However, the criteria cited by Allied is not applicable to appraisals. HUD
            Handbook 4150.2, paragraph 4-6(B), requires appraisers to account for
            differences between the subject property and the comparable properties. The
            handbook does not limit the appraisers’ responsibilities to sales concessions in
            excess of six percent or any set percentage.

Comment 4   Allied suggests that the OIG has not performed sufficient work to show the
            appraised values were inaccurate. We concur. However, we did identify serious
            deficiencies with the appraisals that would impact the appraised value. For Case
            Numbers 491-7796924 and 491-7795964, Allied did not ensure the appraiser
            adjusted the comparables for sales concessions or analyzed the subject sales
            contracts. For Case Number 492-6810853, the appraiser used old comparables,
            overstated the sales price of Comparable 3 by $10,000 (over 25 percent) and
            failed to adjust Comparable 3 for its inferior condition. In addition, the appraiser
            did not perform an analysis of the subject sales contract or list price. As the
            underwriter, Allied was responsible for ensuring the appraisal met HUD
            requirements and adequately supported the appraised value.

Comment 5   Allied argues that HUD did not provide specific instructions requiring appraiser
            comments on the analysis of the sales contract prior to Mortgagee Letter 2005-02.
            We disagree. Uniform Standards of Professional Appraisal Practice rule 1-5(a)
            was in effect at the time the loan was underwritten. The rule requires appraisers
            to analyze all agreements of sale, options, or listings of the subject property in



                                             24
              determining the appraised value. Further, the Uniform Residential Appraisal
              Report form provides space for the appraiser to respond to “Analysis of the
              current agreement of sale, option, or listing of the subject property….”

Comment 6     Allied submits that Real Estate Settlement Procedures Act does not prohibit a
              lender from receiving discount points, nor does it require that discount points
              must be used to reduce a borrower’s interest rate. We agree, but the act does
              prohibit lenders from accepting fees for services not performed. The loan
              correspondent did not provide documentation to show the borrower received
              anything of value for the discount points charged. As a result, the discount points
              charged are in violation of the Real Estate Settlement Procedures Act.

Comment 7     Allied concurs that the income on the loan was overstated.

Comment 8     Allied concurs that the borrower’s total debt was understated.

Comment 9     HUD requires appraisers to use at least one comparable that was financed with a
              conventional loan. Sound business practices would dictate that the appraiser
              provide an explanation if she were unable to identify a suitable comparable with a
              conventional loan.

Comment 10 Allied asserts that the OIG is mischaracterizing seller contributions to nonprofit
           down payment assistance programs. We disagree. The report correctly
           characterizes seller contributions stipulated in the sales contracts as sales
           concessions that the appraisers should have considered in determining the
           appraised value. Down payment assistance is a sales concession regardless of the
           source of the funds. Mortgage Letter 2005-02, states, “The appraiser must report
           the total dollar amount of the loan charges and/or concessions to be paid by any
           party [Emphasis Added] on behalf of the borrower and describe which party
           provided the concession in the Subject Section of the appraisal report.”

Comment 11 Allied misapplies criteria in HUD Handbook 4155.1 REV-4 to suggest that
           appraisers should not have to consider contributions to down payment assistance
           programs since the handbook does not consider them seller concessions or
           contributions. HUD Handbook 4155.1 Rev-4 does not contain appraisal
           requirements. Accordingly, the specific paragraphs cited by Allied have no
           bearing on determining a property’s appraised value.

Comment 12 Allied notes that HUD expressly approved nonprofit down payment assistance
           programs. We concur and the report does not take exception to their use.
           However, the appraiser is required to report and analyze the related sales
           concessions in determining the appraised value.

Comment 13 Allied indicates that the property was not listed. Yet, page 2 of the appraisal
           states, “The subject was most recently offered for sale through MLS for $34,000
           (as-is).”



                                              25
Comment 14 Allied incorrectly states that only one of the comparables was more than six
           months old. The appraisal is dated May 20, 2003. Accordingly, the three
           comparable sales should not have been any earlier than November 18, 2002.
           However, two of the comparables sales were in October 2002 and one was in July
           2002.

Comment 15 HUD does not allow appraisers to use sales comparables that are more than a year
           old at the time of the appraisal. HUD Handbook 4150.2, paragraph 4-6(A) (2),
           Selection of Comparable Sales for Analysis, states, “Sales data should not exceed
           six months between the date of the appraisal and the sale date of the comparable,
           and must not exceed twelve months. An explanation is required for sales dates in
           excess of six months."

Comment 16 Allied indicates that the property was not listed. Neither the appraisal in HUD’s
           file nor the loan correspondent’s loan file contains Form 953, which has a box for
           indicating whether the property was listed. However, the settlement statement
           shows a real estate commission was paid on the sale. Therefore, the property was
           likely listed.




                                             26
Appendix C

    CASE STUDIES OF IMPROPERLY ORIGINATED LOANS

Case number: 491-7796924

Mortgage amount: $123,028

Gift amount: $3,270

Date of loan closing: December 27, 2002

Status as of March 31, 2005: First legal action to commence foreclosure

Payments before first default reported: 0

Summary:

Income Overstated or Unsupported

Allied improperly included child support of $518 per month in calculating the borrower’s
income. Although Allied obtained copies of court documents ordering the child support, it did
not provide evidence that the borrower had received the income over the prior 12 months. HUD
Handbook 4155.1, REV-4, CHG-1, paragraph 2-7(F), prohibits lenders from using child support
income to qualify a borrower unless the borrower provides evidence that he or she has received
the child support during the previous 12 months. Without such evidence, Allied should not have
considered the income in qualifying the borrower.

Borrower Ineligible for Federal Housing Administration Financing

The sponsor’s underwriter did not provide sufficient compensating factors to justify approval of
the loan. According to the lender, the borrower’s front and back ratios were 28.561 and 40.309
percent, respectively. However, these ratios were based on the lender’s incorrect calculation of
income. Using the correct income, the borrower’s front and back ratios were 32.94 and 46.49.
The underwriter provided the following compensating factors: 1) new construction/energy
efficient and 2) job stability. The energy efficient factor can only be used to exceed the
qualifying ratios by 2 percent. Job stability is not valid compensating factor. HUD Handbook
4155.1, REV-4, CHG-1, paragraph 2-12(B), requires lenders to provide significant compensating
factors for back ratios of more than 41 percent. Paragraph 2-13 provides a list of valid
compensating factors.

Appraisal Adjustments for Sales Concessions on Comparables Not Made

The appraiser did not adjust the sales prices of the comparable properties for sales concessions.
The appraiser noted, “No unusual concessions listed,” but did not provide detailed information
regarding the sales concessions or provide an explanation as to what she considered unusual. All


                                               27
three comparables 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

The appraiser did not analyze the subject sales contract. Under analysis of the current sales
agreement, the appraiser notes, “There are no unusual concessions listed on the sales selected.”
HUD Handbook 4150.2, paragraph 4.0, requires strict compliance with Uniform Standards of
Professional Appraisal Practice. Uniform Standards of Professional Appraisal Practice 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. Rule 2-2(a)(ix) states that if the
information is unobtainable, the appraiser must provide a statement on efforts made to obtain the
information.

Ineligible Closing Cost Charged to Borrower

Allied allowed the loan correspondent to charge $320 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
$3,575. The loan correspondent did not provide documentation to show the borrower received
anything of value for the discount points charged. HUD allows lenders who originate Federal
Housing Administration-insured loans to charge borrowers a 1 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 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.




                                                28
Case number: 491-7795964

Mortgage amount: $126,826

Gift Amount: $3,834.84

Date of loan closing: December 16, 2002

Status as of March 31, 2005: Reinstated by borrower who retains ownership

Payments before first default reported: 1

Summary:

Income Overstated or Unsupported

Allied overstated the borrower’s monthly income by $471. Allied calculated the borrower’s
income based on a 40-hour workweek. However, based on a review of the pay stubs on file, the
borrower did not always work a 40-hour week. Using the borrower’s pay through November 9,
2002, we determined that the borrower worked an average of 31.40 hours per week.

Liabilities Understated

Allied calculated the total mortgage payment as $1,193 and recurring expenses as $462 for a
total fixed payment of $1,655. However, the payment was recorded as $1,538 in Desktop
Underwriter.

Appraisal Adjustments for Sales Concessions on Comparables Not Made

The appraiser did not adjust the sales prices of the comparable properties for sales concessions.
The appraiser noted, “No unusual concessions listed,” but did not provide detailed information
regarding the sales concessions or provide an explanation as to what she considered unusual.
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

The appraiser did not analyze the subject sales contract. The sales contract, dated before the date
of the appraisal, showed the seller agreed to pay $4,000 in borrower closing costs and other
expenses. HUD Handbook 4150.2, paragraph 4.0, requires strict compliance with Uniform
Standards of Professional Appraisal Practice. Uniform Standards of Professional Appraisal
Practice 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. Rule 2-2(a)(ix) states that if the
information is unobtainable, the appraiser must provide a statement on efforts made to obtain the
information.



                                                 29
Appraisal Did Not Include Conventional Loans for Comparables

The appraiser only used comparables financed through the Federal Housing Administration.
HUD requires appraisers to obtain at least one conventional loan, if available. The appraiser did
not indicate that a conventional comparable was not available.




                                               30
Case number: 492-6708865

Mortgage amount: $33,434

Gift amount: $6,832.95

Date of loan closing: May 1, 2003

Status as of March 31, 2005: Foreclosure started

Payments before first default reported: 2

Summary:

Appraisal Did Not Include an Analysis of the Subject Sales Contract or List Price

The appraiser did not analyze the subject sales contract. The sales contract, dated before the date
of the appraisal, showed the seller agreed to provide a grant to a nonprofit downpayment
assistance program for $7,405. HUD Handbook 4150.2, paragraph 4.0, requires strict
compliance with Uniform Standards of Professional Appraisal Practice. Uniform Standards of
Professional Appraisal Practice 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.
Rule 2-2(a)(ix) states that if the information is unobtainable, the appraiser must provide a
statement on efforts made to obtain the information.

Ineligible Closing Cost Charged to Borrower

Allied allowed the loan correspondent to charge $669 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 $752.
The loan correspondent did not provide documentation to show the borrower received anything
of value for the discount points charged. HUD allows lenders who originate Federal Housing
Administration-insured loans to charge borrowers a 1 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 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.




                                                31
Case number: 492-6810853

Mortgage amount: $46,507

Gift amount: $3,400

Date of loan closing: July 25, 2003

Status as of March 31, 2005: Delinquent

Payments before first default reported: 2

Summary:

Appraisal Adjustments for Property Condition Not Made or Unsupported

The appraiser used comparables that were more than six months old without providing
justification for doing so. The appraiser showed that only one of the comparables was more than
six months old. However, based on the date of the comparable sales, all of the sales were at least
200 days old. HUD Handbook 4150.2, paragraph 4-6(A)(2), states that comparable sales data
“... should not exceed six months between the date of the appraisal and the sale date of the
comparable, and must not exceed twelve months.” The appraiser must provide an explanation
for sales in excess of six months. The appraiser also listed comparable 3’s sales price as $50,350
when the actual sales price was $40,000. He performed the appraisal for comparable 3. He did
not provide an explanation for not making adjustments to account for the lot size of comparable
1 or the inferior condition of comparable 3. HUD Handbook 4150.2, paragraph 4-6(B), requires
the appraiser to make property adjustments if the difference between the comparable sale and the
subject property is quantifiable and supported by the market. The appraiser also provided
inconsistent information concerning the condition of the subject property. On page one, he
stated that the subject property was in average to good condition, yet on page two, he stated the
condition was average.

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. HUD requires
appraisers to obtain and analyze all sales contracts and listings in determining a property’s
appraised value. If such information is not available, the appraiser must provide a statement on
what efforts he or she undertook to obtain the information. The sales contract, dated before the
date of the appraisal, showed the seller agreed to pay up to $1,500 toward the borrower’s closing
costs and provide a grant to a nonprofit downpayment assistance program for $3,400. HUD
Handbook 4150.2, paragraph 4.0, requires strict compliance with Uniform Standards of
Professional Appraisal Practice. Uniform Standards of Professional Appraisal Practice 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. Rule 2-2(a)(ix) states that if the
information is unobtainable, the appraiser must provide a statement on efforts made to obtain the
information.



                                                32
Ineligible Closing Cost Charged to Borrower

Allied allowed the loan correspondent to charge $930 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
$1,105. The loan correspondent did not provide documentation to show the borrower received
anything of value for the discount points charged. HUD allows lenders who originate Federal
Housing Administration-insured loans to charge borrowers a 1 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 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.




                                                33