Department of Housing and Urban Development, Office of Inspector General | Housing and Urban Development | Wells Fargo Home Mortgage, Des Moines, IA

Wells Fargo Home Mortgage, Des Moines, IA

Published by the Department of Housing and Urban Development, Office of Inspector General on 2005-09-28.

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

Issue Date
September 28, 2005
Audit Report Number
2005-FW-1019

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

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

SUBJECT: Wells Fargo Did Not Follow HUD Requirements When Processing 10 Loans

HIGHLIGHTS

What We Audited and Why

We reviewed Federal Housing Administration loans sponsored by Wells Fargo of
Des Moines, Iowa. During an audit of a Federal Housing Administration-
approved loan correspondent, we identified 11 loans sponsored by Wells Fargo
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 Wells Fargo to determine whether it complied with HUD
regulations, procedures, and instructions when processing the mortgages.

What We Found

Wells Fargo did not comply with HUD regulations, procedures, and instructions
in the processing of 10 out of the 11 Federal Housing Administration-insured
single-family mortgages we reviewed. Underwriting deficiencies included
overstated income, income stability not verified, understated liabilities,
creditworthiness not fully considered, unresolved inconsistencies, and insufficient
or ineligible compensating factors. For nine loans, Wells Fargo did not ensure
that the appraisal met HUD requirements. In addition, Wells Fargo allowed the
loan correspondent to charge $11,474 in loan discount points, without reducing
the borrowers’ interest rates. As a result, the risk to the insurance fund was
increased, four ineligible borrowers received financing, and nine 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 Wells Fargo for not
complying with HUD requirements. At a minimum, this should include
indemnifying HUD $383,469 for case numbers 492-6765199, 491-8071128, and
491-8206149; reimbursing HUD for the $64,321 loss on case number 491-
7646781; and reimbursing appropriate parties for the $11,472 in unearned fees.
We further recommend that HUD ensure Wells Fargo has implemented sufficient
controls to provide reasonable assurance that its underwriting complies with HUD
regulations, procedures, and instructions.

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 14, 2005, Wells Fargo provided a written response to our report.
Wells Fargo agreed to provide indemnification for the four loans with the most
serious deficiencies. However, it expressed disagreement with other report
findings including the disallowance of loan discount points when the interest rate
on the loan was not reduced. The complete text of Wells Fargo’s response can be
found in Appendix B of this report.

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TABLE OF CONTENTS

Background and Objectives 4

Results of Audit
Finding: Wells Fargo Did Not Follow HUD Requirements when Processing 10 Loans 5

Scope and Methodology 10

Appendixes
A. Schedule of Questioned Costs and Funds To Be Put to Better Use 11
B. Auditee Comments and OIG’s Evaluation 12
C. Case Studies of Improperly Originated Loans 20

3
BACKGROUND AND OBJECTIVES

Wells Fargo is a supervised lender that began originating Federal Housing Administration loans
in 1985.

During an audit of a Federal Housing Administration-approved loan correspondent, 1 we
identified 11 loans sponsored by Wells Fargo 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 Wells Fargo’s underwriting of these loans.

Our objective was to determine whether Wells Fargo 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, Texas, issued May 24, 2005.

4
RESULTS OF AUDIT

Finding: Wells Fargo Did Not Follow HUD Requirements when
Processing 10 Loans
Wells Fargo did not comply with HUD regulations, procedures, and instructions in the
processing of 10 Federal Housing Administration-insured single-family mortgages.
Underwriting deficiencies included overstated income, income stability not verified, understated
liabilities, creditworthiness not fully considered, unresolved inconsistencies, and insufficient or
ineligible compensating factors. For nine loans, Wells Fargo did not ensure that the appraisal
met HUD requirements. In addition, Wells Fargo allowed the loan correspondent to charge
$11,472 in loan discount points without reducing the borrowers’ interest rates. As a result, the
risk to the insurance fund was increased, four ineligible borrowers received financing, and nine
borrowers incurred excessive costs for their loans.

Wells Fargo Did Not Follow
HUD Requirements

Wells Fargo did not follow HUD requirements for 10 of the 11 loans we
reviewed. The following paragraphs summarize the deficiencies with the loans.
For more detailed information, see Appendix C.

Case Number 491-7646781

Wells Fargo accepted what appears to be false identification from the borrower.
The driver’s license and Social Security card appear fictitious. HUD requires
lenders to verify information with at least the same care they would exercise in
originating a loan that was entirely dependent on the property as security to
protect the investment.

Wells Fargo did not verify that the borrower’s income was stable or sufficient to
qualify for the loan. At the time of application, the borrower had only worked for
his current employer for three months. The borrower claimed to have worked as a
contractor for the previous 10 months, but the lender did not verify his assertion.
Further, the lender calculated the borrower’s income based upon a 48-hour
workweek even though the borrower’s pay stubs showed he worked fewer hours.
Using the pay rates as provided in the employment verification and an average of
the borrower’s regular and overtime hours worked, the borrower’s income was
not sufficient to qualify for the loan.

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Wells Fargo did not ensure the appraisal met HUD standards. In determining the
appraised value, the appraiser did not make property adjustments to account for
the inferior condition of the subject property and failed to adequately support
adjustments to the comparables. In addition, the appraiser did not analyze the
subject sales contract or list price. As a result, Wells Fargo cannot be certain of
the accuracy of the appraised value.

Case Number 492-6765199

Wells Fargo approved the loan even though the borrower’s debt to income ratio
was too high to qualify for Federal Housing Administration financing. The lender
provided four compensating factors. However, only one of the factors was valid
and by itself was not sufficient to qualify the borrower.

Wells Fargo 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, Wells Fargo cannot be certain of the accuracy of the appraised
value.

Case Number 491-7662516

Wells Fargo did not fully assess the borrower’s creditworthiness. The lender did
not require the borrower to provide explanations for all collection accounts. HUD
requires lenders to obtain explanations from borrowers for all collection accounts
to assess their attitudes toward credit and the likelihood they will repay the loan.

Case Number 491-8122656

Wells Fargo 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 or adjust the comparables for sales concessions. As a result, Wells Fargo
cannot be certain of the accuracy of the appraised value.

Case Number 491-7953575

Wells Fargo did not resolve inconsistencies in the co borrower’s claimed
employment history or verify the stability of the co borrower’s income. The co
borrower’s employment history changed significantly from the original loan
application to the final loan application. Not only did the periods of employment
change, the lender also removed a four-month period of unemployment from the
final application. Wells Fargo did not resolve these inconsistencies. Accordingly,
it cannot show that the co borrower’s income was stable.

Wells Fargo did not ensure the appraisal met HUD standards. In determining the
appraised value, the appraiser did not analyze the subject sales contract or list

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price or adjust the comparables for sales concessions. As a result, Wells Fargo
cannot be certain of the accuracy of the appraised value.

Case Number 492-6553929

Wells Fargo did not address the possibility of a significant contingent liability.
The borrower indicated the Social Security Administration was seeking
repayment on a disability claim. Wells Fargo should have investigated this
contingent debt further and made a determination as to what effect it might have
on the borrower’s ability to repay the loan.

Case Number 492-6390936

Wells Fargo did not resolve inconsistencies in the loan file. The file contains
inconsistent information on the borrowers’ ages, addresses, and employers. HUD
requires lenders to verify information with at least the same care they would
exercise in originating a loan that was entirely dependent on the property as
security to protect the investment.

Case Number 491-8071128

Wells Fargo approved the loan even though the borrower’s debt-to-income ratio
was too high to qualify for Federal Housing Administration financing. The lender
incorrectly excluded five deferred student loans from consideration. All five
loans were scheduled to begin within 12 months of the loan closing and would
increase the borrower’s total fixed payments by $580. The lender listed five
compensating factors. However, only one of the factors was valid and by itself
was not sufficient to qualify the borrower.

Wells Fargo did not ensure the appraisal met HUD standards. In determining the
appraised value, the appraiser did not analyze the subject sales contract or list

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price or adjust the comparables for sales concessions. As a result, Wells Fargo
cannot be certain of the accuracy of the appraised value.

Case Number 491-8034119

Case Number 491-8206149

Wells Fargo did not resolve questionable assertions by the borrower. Wells Fargo
accepted what appears to be false identification from the borrower. It also failed
to resolve other questionable items related to the borrower’s employment. HUD
requires lenders to verify information with at least the same care they would
exercise in originating a loan that was entirely dependent on the property as
security to protect the investment.

Wells Fargo 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 at least one
conventional loan as a comparable. As a result, Wells Fargo cannot be certain of
the accuracy of the appraised value.

Unallowable Fees Charged to
Borrowers

For nine loans, Wells Fargo allowed the loan correspondent to charge a total of
$11,472 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.

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Discount points Yield spread
Case number charged premiums
491-7646781 $ 645 $ 4,243
492-6765199 552 3,809
491-7662516 2,878 7,064
491-8122656 659 4,041
491-7953575 2,843 2,327
492-6553929 460 2,634
492-6390936 2,200 5,721
491-8071128 1,010 1,307
491-8206149 225 5,790
Totals $11,472 $36,936

Conclusion

The underwriting deficiencies on these loans unnecessarily place the insurance
fund at risk. Further, the unearned fees unfairly impose costs on the borrowers
without providing a benefit in return. Wells Fargo should indemnify HUD
$383,469 for case numbers 492-6765199, 491-8071128, and 491-8206149 and
reimburse HUD for the $64,321 loss on case number 491-7646781. Further,
Wells Fargo should repay the appropriate parties for the $11,472 in unearned fees.

Recommendations

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

1A. Take appropriate administrative action against Wells Fargo for not
complying with HUD requirements. At a minimum, this should include
indemnifying HUD $383,469 for case numbers 492-6765199, 491-8071128,
and 491-8206149 and reimbursing HUD for the $64,321 loss on case
number 491-7646781.

1B. Require Wells Fargo to reimburse the appropriate parties for $11,472 in
unearned fees.

1C. Ensure Wells Fargo has implemented sufficient controls to provide
reasonable assurance that its underwriting complies with HUD regulations,
procedures, and instructions.

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SCOPE AND METHODOLOGY

We reviewed Wells Fargo’s processing of 11 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 11 loans sponsored by Wells
Fargo, which appeared to be improperly underwritten. Because the sponsor of the loan is
ultimately responsible for loan processing deficiencies, we addressed the deficiencies to Wells
Fargo.

To accomplish our objective, we prepared case narratives of loan processing deficiencies
identified and provided the information to Wells Fargo. We allowed Wells Fargo an opportunity
to provide additional information that could resolve the deficiencies identified. Wells Fargo
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 Wells Fargo’s underwriting controls because they were not significant to our
objective of reviewing these eleven loans.

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 TO BE PUT TO BETTER USE

Recommendation Funds to be put
Number Ineligible 1/ to better use 2/

1A $64,321 $383,469
1B $11,472

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

12
13
Comment 1

Comment 2

Comment 3

14
Comment 4

Comment 5

15
Comment 6

Comment 7

16
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OIG Evaluation of Auditee Comments

Comment 1 Wells Fargo concurs that the borrower only worked an average of 42.75 hours a
week including overtime. In calculating the borrower’s income based on an
average of 48 hours, Wells Fargo overstated the borrower’s income in the loan
file by $376 a month.

Comment 2 Wells Fargo contends a written explanation from the borrower that he worked as a
contractor should suffice in lieu of a verification of employment. We disagree.
HUD Handbook 4155.1, REV-4, CHG-1, paragraph 2-6, requires the lender to
verify the borrower’s employment for the most recent two full years.

Comment 3 Wells Fargo notes that the underwriter relies on the appraiser’s knowledge of the
local market for adjustment such as that needed for a garage unless the adjustment
appears to be egregious or unreasonable. We concur, but contend that a $1,000
adjustment for a one-car garage and a $2,000 adjustment for a two-car garage is
not reasonable.

Comment 4 Wells Fargo did not provide any documentation to support its assertion that it
appeared the application was edited to include unemployment in the time frames
for which the co borrower worked with the temporary staffing agencies. The co
borrower’s employment history was revised substantially from his April 2002
loan application to his May 2002 application. These revisions should have been
explained and supported.

Co Borrower Employment History
April 2003 Loan Application May 2003 Loan Application
Spectrum Supply Chain Spectrum Supply Chain
(.9 Yrs. on this job) (1.3 Yrs. on this job)
Unemployment Randstad North America
(9/01-1/7/02) (3/20/01-3/15/02)
Ranstad North America Volt Information
(3/01-8/01) (8/17/00-12/17/01)

Comment 5 Wells Fargo notes that it is not uncommon for borrowers to show 21 as the age on
the loan application regardless of their actual age. Wells Fargo does not provide
any support for their assertion. Further, in signing the loan application, the
borrowers certify that the information is correct and acknowledge their
understanding that any intentional misrepresentation may result in civil liability
and/or criminal penalties.

Comment 6 Wells Fargo states that as a lender they do not obtain the listing agreement in
addition to the purchase contract. However, Wells Fargo does not offer any
explanation as to why the appraiser did not obtain and analyze the sales contract

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for the nine loans in question. Uniform Standards of Professional Appraisal
Practice require the appraiser to analyze all agreements of sale, options, or listings
of the subject property in determining a property’s appraised value. As the
underwriter, Wells Fargo was responsible for ensuring the appraisals met HUD
requirements and adequately supported the appraised values.

Comment 7 Wells Fargo believes it is acceptable for the loan correspondent to charge loan
discount points without reducing the interest rate on the loans. Wells Fargo
believes the practice is acceptable since HUD does not regulate fees charged to
sellers and the loan correspondent provided services in originating the loans. We
concur that HUD does not regulate fees charged to sellers. However, the Real
Estate Settlement Procedures Act prohibits lenders from accepting fees for
services not performed. The loan origination services listed by Wells Fargo were
compensated through loan origination fees. The loan correspondent did not
provide documentation to show they provided any additional services for the
discount points charged.

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Appendix C

CASE STUDIES OF IMPROPERLY ORIGINATED LOANS
Case number: 491-7646781

Mortgage amount: $91,229

Gift amount: $2,759

Date of loan closing: August 2, 2002

Status as of March 31, 2005: Property conveyed to insurer

Payments before first default reported: 0

Summary:

Inconsistencies Not Resolved

Wells Fargo accepted what appears to be false identification from the borrower. Deficiencies
with the driver's license included, but were not limited to: 1) the Department of Public Safety
audit number was identical to the driver's license number, 2) the signature of the Department of
Public Safety Director was omitted, and 3) the license provides an issue date not found on a
Texas driver's license. Deficiencies with the social security card included: 1) the card has lines
across the top of the card that extend beyond the card edges, 2) The background of the card is
white when it should show up in gray tones, and 3) the social security watermark is so dark it is
difficult to read the social security number. HUD Handbook 4000.4, REV-1, paragraph 2-5
requires the mortgagee to obtain and verify information with at least the same care that a
mortgagee would exercise in originating a loan that was entirely dependent on the property as
security to protect its investment.

Income Overstated or Unsupported

Wells Fargo overstated the borrower income by $376 and did not justify the use of overtime
income to qualify the borrower. Wells Fargo used the hours and pay rates provided in the
employment verification (32 regular hours and 16 overtime hours per week). However, the
borrower’s weekly pay stubs showed that on average the borrower worked fewer hours than
indicated on the employment verification (30.71 regular hours and 12.04 overtime hours). Using
the pay rates as provided in the employment verification and an average of the borrower’s
regular and overtime hours worked for seven pay periods, the borrower’s income is significantly
less. Further, HUD Handbook 4155.1, REV-4, CHG-1, paragraph 2-7(A) requires lenders to
justify the use of overtime to qualify a borrower if the borrower has received the income for less
than two years. Since the borrower had only worked for his current employer for three months,
Wells Fargo should have justified the use of the overtime income.

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Income Stability Not Verified

Wells Fargo did not verify the borrower’s income for the most recent two years or verify the
likelihood of the borrower's continued employment. At the time of application, the borrower had
only been with his current employer for three months. Prior to his current employment, the
borrower indicated he had worked as a contractor for 10 months. Wells Fargo did not verify the
borrower’s work as a contractor. HUD Handbook 4155.1, REV-4, CHG-1, paragraph 2-6,
requires the lender to verify the borrower's employment for the most recent two full years.

Borrower Ineligible for Federal Housing Administration Financing

Wells Fargo did not provide sufficient compensating factors to justify approval of the loan.
According to Wells Fargo, the borrower’s front and back ratios were 28 and 44 percent.
However, these ratios were based on Wells Fargo's incorrect calculation of income. Using the
correct income, the borrower’s front and back ratios were 32.41 and 50.12 percent. Wells Fargo
used the borrower’s bonus income as a compensating factor. However, it only confirmed bonus
income of $400 per quarter or $133.33 a month. Even if the amount of bonus were added to the
borrower’s income, the back ratio would still be 47.62 percent. HUD Handbook 4155.1, REV-4,
CHG-1, paragraph 2-12(B), requires lenders to provide significant compensating factors for back
ratios over 41 percent.

Appraisal Adjustments for Property Condition Not Made or Unsupported

The appraiser did not make property adjustments to account for the inferior condition of the
exterior of the subject property. In contrast to the comparable sales, the exterior of the subject
property was poorly maintained. The driveway had a large diagonal crack, and the sidewalk
appeared to have sunken places. The grass had not been trimmed and was growing through the
cracks in the sidewalk and driveway. A large stump is in the front yard. The comparables were
very well maintained and had mature landscaping not found on the subject property. Also, the
appraiser only provided a $1,000 adjustment for a one-car garage and a $2,000 adjustment for a
two-car garage. These adjustments were not adequate. Further, the appraiser failed to
adequately support a $4,000 adjustment to comparables two and three based on their condition.
HUD Handbook 4150.2, paragraph 4-6(B) requires appraisers to make adjustments for
quantifiable differences between the subject property and the comparables.

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

The appraiser did not analyze the subject sales contract and did not fully analyze the property
listing. The sales contract, dated before the date of the appraisal, showed the seller agreed to pay
$7,700 in closing costs and other borrower expenses. The appraiser should have identified these
sales concessions and considered them in determining the final appraised value. In addition, the
property sold for $4,950 more than the list price. The appraiser should have reported this price
increase and analyzed it in relation to the appraised value as well. 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

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property's appraised value. 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.

Ineligible Closing Cost Charged to Borrower

Wells Fargo allowed the loan correspondent to charge $645 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 $4,243. 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.

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Case number: 492-6765199

Mortgage amount: $107,153

Gift amount: $3,240

Date of loan closing: May 22, 2003

Status as of March 31, 2005: Forbearance

Payments before first default reported: 0

Summary:

Borrower Ineligible for Federal Housing Administration Financing

Well's Fargo listed four compensating factors to approve a loan for a borrower with a back ratio
of 46.89. However, only one of the compensating factors was valid and by itself was not
sufficient to qualify a borrower with such a high back ratio. Wells Fargo provided the following
compensating factors: 1) new construction/energy efficient; 2) spouse’s income not considered
in ratios; 3) child support payments end in June 2004; and 4) homebuyers education course. The
energy efficient factor can only be used to exceed the qualifying ratios by 2 percent. The
remaining factors were not valid compensating factors. The income of a non-purchasing spouse
may not be used to qualify for a loan. Further, the file does not contain support for the spouse’s
income, nor does it indicate an amount. In addition, the loan file does not contain verification of
the child support amount or termination date. The homebuyer’s education course may be used to
reduce the upfront mortgage insurance premium, but is not a 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 over 41 percent. Paragraph 2-13 provides a list of valid
compensating factors.

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 appraiser noted
that she was not provided a copy of the contract, but did not state what efforts she took to obtain
it. The appraiser provided no information regarding the property listing. The sales contract,
dated before the date of the appraisal, showed the seller agreed to provide a grant to a nonprofit
down payment assistance program for $8,150. 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. 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.

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Ineligible Closing Cost Charged to Borrower

Wells Fargo allowed the loan correspondent to charge $552 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 $3,809. 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.

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Case number: 491-7662516

Mortgage amount: $148,722

Gift amount: $4,497

Date of loan closing: 08/07/2002

Status as of March 31, 2005: Foreclosure started

Payments before first default reported: 0

Summary:

Creditworthiness Not Fully Considered

Wells Fargo did not require the borrower to provide explanations for 3 of 12 collection accounts
appearing on the borrower’s credit report. HUD Handbook 4155.1, REV-4, CHG-1, paragraph
2-3, requires lenders to obtain written explanations from the borrower for collection accounts.

Ineligible Closing Cost Charged to Borrower

Wells Fargo allowed the loan correspondent to charge $2,878 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 $7,064. 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.

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Case number: 491-8122656

Mortgage amount: $128,041

Gift amount: $3,872

Date of loan closing: August 29, 2003

Status as of March 31, 2005: Foreclosure started

Payments before first default reported: 0

Summary:

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 of what she considered unusual. All
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 or Price

The appraiser did not analyze the subject sales contract or property listing. The sales contract,
dated before the date of the appraisal, showed the seller agreed to provide a grant to a nonprofit
down payment assistance program for 3 percent of the sales price or $3,872. 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
appraisers to analyze all agreements of sale, options, or listings of the subject property in
determining a property's appraised value. 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.

Ineligible Closing Cost Charged to Borrower

Wells Fargo allowed the loan correspondent to charge $659 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 $4,041. 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 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

26
reducing the interest rate, the discount points were unearned fees in violation of the Real Estate
Settlement Procedures Act.

27
Case number: 491-7953575

Mortgage amount: $147,115

Gift amount: $4,448

Date of loan closing: May 01, 2003

Status as of March 31, 2005: Accelerated claim disposition

Payments before first default reported: 1

Summary:

Income Stability Not Verified/Inconsistencies Not Resolved

Wells Fargo did not resolve inconsistencies in the co borrower’s claimed employment history.
The co borrower’s employment history changed significantly from the original loan application
to the final loan application. Not only did the periods of employment change, the lender also
removed a four-month period of unemployment from the final application. The loan
correspondent used an online employment service to verify the borrower's prior employment
history. The verifications reported employment timeframes consistent with what loan
correspondent used in the final application, but they did not provide the co borrower’s previous
salaries. Further, the co borrower provided a letter stating that one of the verifications was
incorrect. To verify that the co borrower’s income was stable, Wells Fargo should have resolved
the inconsistencies in the co borrower’s employment history. HUD Handbook 4155.1, REV-4,
CHG-1, paragraph 2-6 requires the lender to assess the stability of borrower's income. As part of
the assessment, the lender must verify the borrower's income for the most recent two full years.
Further, the borrower must explain any gaps in employment of a month or more.

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 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 or List Price

The appraiser did not analyze the subject sales contract or property listing. The sales contract,
dated before the date of the appraisal, showed the seller agreed to provide a grant to a nonprofit
down payment assistance program for $3,678. 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

28
appraised value. 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

Wells Fargo allowed the loan correspondent to charge $2,843 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 $2,327. 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.

29
Case number: 492-6553929

Mortgage amount: $89,294

Gift amount: $2,700

Date of loan closing: March 27, 2003

Status as of March 31, 2005: Repayment

Payments before first default reported: 1

Summary:

Liabilities Understated

Wells Fargo ignored indications of a possibly significant contingent liability. In a handwritten
note from the borrower, the borrower noted that the Social Security Administration was seeking
repayment for an undisclosed amount due to what it asserted was an overpayment on the
borrower’s disability claim. The borrower said he requested a waiver of the overpayment, but
that the “matter has yet to be decided.” Wells Fargo should have investigated this contingent
debt further and made a determination as to what effect it might have on the borrower’s ability to
pay the mortgage. HUD Handbook 4000.4, REV-1, paragraph 2-5, requires the mortgagee to
obtain and verify information with at least the same care that a mortgagee would exercise in
originating a loan that was entirely dependent on the property as security to protect its
investment.

Creditworthiness Not Fully Considered

Wells Fargo did not require the borrower and co borrower to provide explanations for 2 of 18
collection accounts appearing on their credit report. HUD Handbook 4155.1, REV-4, CHG-1,
paragraph 2-3, requires lenders to obtain written explanations from the borrower for collection
accounts.

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,
dated before the date of the appraisal, showed the seller agreed to provide a grant to a nonprofit
down payment assistance program for $7,500. The appraiser should have identified the sales
concessions and considered them in determining the final appraised value. Further, the appraiser
notes that the property was listed for $90,000, the contract sales price. However, the seller’s real
estate listing agreement shows the seller instructed the broker to market the property at $84,500.
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. Rules 2-2(a)(ix) states that if the

30
information is unobtainable, the appraiser must provide a statement on efforts made to obtain the
information.

Ineligible Closing Cost Charged to Borrower

Wells Fargo allowed the loan correspondent to charge $460 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 $2,634. 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: 492-6390936

Mortgage amount: $124,019

Gift amount: $3,750

Date of loan closing: July 15, 2002

Status as of March 31, 2005: Property conveyed to insurer

Payments before first default reported: 2

Summary:

Inconsistencies Not Resolved

The file contains inconsistent information on the borrowers’ ages, addresses and employers. The
loan applications and a May 2002 credit report showed that both the borrower and co borrower
are 21 years old. However, the credit report showed the borrowers opened up 15 accounts when
they would not yet have been of legal age. In addition, the borrowers’ driver’s licenses showed
that the borrower was 23 and the co borrower was 22. Although the loan applications showed
the borrowers lived at their current address for over 2 years, their pay stubs provided a different
address. A December 2001 credit report, showed the borrower's current employer as
LoanByPhone and the co borrower's current employer as Albertson's. The borrowers did not
show either company as a current or former employer. HUD Handbook 4000.4, REV-1,
paragraph 2-5 requires the mortgagee to obtain and verify information with at least the same care
that a mortgagee would exercise in originating a loan that was entirely dependent on the property
as security to protect its investment.

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. 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. 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.

Ineligible Closing Cost Charged to Borrower

Wells Fargo allowed the loan correspondent to charge $2,200 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 $5,721. The loan correspondent did not provide documentation to show the

32
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
Case number: 491-8071128

Mortgage amount: $130,469

Gift amount: $3,945

Date of loan closing: July 28, 2003

Status as of March 31, 2005: Foreclosure started

Payments before first default reported: 2

Summary:

Liabilities Understated

Wells Fargo did not consider all of the borrowers’ debt. Wells Fargo incorrectly excluded five
deferred student loans from consideration. All five loans were scheduled to begin within 12
months of the loan closing and would increase the borrower’s total fixed payments by $580.
HUD Handbook 4155.1 REV-4, CHG 1, paragraph 2-11(C) requires lenders to include projected
obligations in the underwriting analysis if the debt is scheduled to begin within twelve months of
the mortgage loan closing.

Borrower Ineligible for Federal Housing Administration Financing

Wells Fargo did not provide sufficient compensating factors to justify approval of the loan.
According to Wells Fargo, the borrowers’ front and back ratios were 23.16 and 44.85 percent.
However, these ratios were based on Wells Fargo's incorrect computation of the borrowers’ total
fixed payment. Using the correct fixed payment amount, the borrowers’ back ratio was 56.44
percent. The underwriter provided the following compensating factors: 1) new construction-
energy efficient; 2) deferred loan applicant still in school upward mobility as she is educating
herself; 3) derogatory credit old and explained; 4) homebuyer's education course; and 5) good
rental history. An energy efficient house and the borrower’s potential for increased earnings due
to her education are valid compensating factors. However, the remaining factors provided are
not valid. The homebuyer’s education course may only be used to reduce the upfront mortgage
insurance premium. Derogatory credit being old/explained and a good rental history are
qualifying factors, but are not valid compensating factors. HUD Handbook 4155.1, REV-4,
CHG-1, paragraph 2-12(B), requires lenders to provide significant compensating factors for back
ratios over 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.
All three 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.

34
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 appraiser notes
that the property was under contract for $132,845. The sales contract, dated before the date of
the appraisal, showed the property was under contract for $131,500. It also showed the seller
agreed to pay $8,800 in borrower closing costs and other expenses. HUD Handbook 4150.2,
paragraph 4.0, requires strict compliance with Uniform Standards of Professional Appraisal
Practice. 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. 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.

Ineligible Closing Cost Charged to Borrower

Allied charged $1,010 in loan discount points, but did not reduce the borrower’s interest rate.
Instead, they charged the borrower an above-market interest rate resulting in a yield spread
premium of $1,307. 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 Allied charged loan discount points without reducing the interest
rate, the discount points were unearned fees in violation of the Real Estate Settlement Procedures
Act.

35
Case number: 491-8034119

Mortgage amount: $146,367

Gift amount: $4,426

Date of loan closing: July 7, 2003

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

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 or property listing. The sales contract,
dated before the date of the appraisal, showed the seller agreed to pay $4,000 toward the
borrower’s closing costs or prepaids. 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.
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.

36
Case number: 491-8206149

Mortgage amount: $145,847

Gift amount: $4,410

Date of loan closing: October 15, 2003

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

Payments before first default reported: 2

Summary:

Inconsistencies Not Resolved

Wells Fargo accepted what appears to be false identification from the borrower. Deficiencies
with the driver's license included, but were not limited to: 1) the driver's license number was
identified as "ID" rather than "DL"; 2) the Department of Public Safety audit number was
identical to the driver's license number; 3) the signature of the Department of Public Safety
Director was omitted; and 4) the borrower's signature on the driver's license was inconsistent
with his signature on loan applications. Problems with the social security card included: 1) the
copy of the card did not include the square edges from the border of the card; 2) the background
of the card was white when it should show up in gray tones; 3) the line on the inside edge of the
right column was broken; and 4) the signature was inconsistent with his signature on loan
applications.

Wells Fargo also failed to resolve other questionable items related to the borrower’s
employment. The borrower’s claimed employment history was not consistent with what was
shown on his credit report. The borrower claimed to have been a full time student for an eight-
month period before obtaining his loan. However, the borrower did not provide an explanation
as to how he was able to pay his bills, including rent of $800, without incurring debt. Although
the borrower claimed to be currently employed by a home health care organization, Wells Fargo
obtained a social security report through a credit bureau that showed that the borrower was self-
employed. The report also showed that a woman in Florida used the same social security
number and that the number was issued in Florida. HUD Handbook 4000.4, REV-1, paragraph
2-5 requires the mortgagee to obtain and verify information with at least the same care that a
mortgagee would exercise in originating a loan that was entirely dependent on the property as
security to protect its investment.

Appraisal Adjustments for Sales Concessions on Comparables Not Made

37
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 appraiser only
noted that the subject’s current and prior sales prices are consistent with his sales analysis. The
sales contract, dated before the date of the appraisal, showed the seller agreed to provide a grant
to a nonprofit down payment assistance program for $11,327. 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. 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 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

Allied charged $225 in loan discount points, but did not reduce the borrower’s interest rate.
Instead, they charged the borrower an above-market interest rate resulting in a yield spread
premium of $5,790. 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 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 Allied charged loan discount points without reducing the interest
rate, the discount points were unearned fees in violation of the Real Estate Settlement Procedures
Act.