oversight

Leader Mortgage Company Did Not Follow HUD Requirements When Processing Loans

Published by the Department of Housing and Urban Development, Office of Inspector General on 2005-01-25.

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

                                                              Issue Date
                                                                       January 25, 2005
                                                              Audit Report Number
                                                                       2005-KC-1003




TO:        John C. Weicher, Assistant Secretary for Housing – Federal Housing
              Commissioner, and Chairman, Mortgagee Review Board, H


FROM:      Ronald J. Hosking, Regional Inspector General for Audit, 7AGA


SUBJECT: Leader Mortgage Company Did Not Follow HUD Requirements When
           Processing Loans


                                  HIGHLIGHTS

 What We Audited and Why

            We reviewed Leader Mortgage Company (Leader Mortgage), a non-supervised
            direct endorsement lender located in Lenexa, KS, because its default rate was
            significantly higher than the U.S. Department of Housing and Urban
            Development (HUD) Kansas City field office’s average over the past three years.

            Our audit objectives were to determine whether Leader Mortgage properly
            originated Federal Housing Administration loans and to determine whether it
            properly developed and implemented a quality control plan.

 What We Found
            Leader Mortgage did not follow HUD requirements when processing and
            submitting loans for Federal Housing Administration insurance endorsement. It
            improperly originated 7 of the 23 loans reviewed. These seven loans contained
            deficiencies that affected the insurability of the loans, including unsupported
            assets, underreported liabilities, unsupported income, and derogatory credit. As a



                                             1
           result, HUD insured seven loans that placed the insurance fund at risk for
           $911,738.

           Further, Leader Mortgage’s quality control process did not comply with HUD
           requirements. Leader Mortgage’s written quality control plan lacked many
           required elements. In addition, Leader Mortgage did not ensure that it obtained
           quality control reviews that met HUD requirements or that were completed within
           the established timeframes. Leader Mortgage also did not take prompt corrective
           action when quality control reports identified material deficiencies. As a result,
           HUD lacks assurance that Leader Mortgage is able to ensure the accuracy,
           validity, and completeness of its loan origination operations.

What We Recommend
           We recommend that the Assistant Secretary for Housing - Federal Housing
           Commissioner, and Chairman, Mortgagee Review Board, take appropriate
           administrative action against Leader Mortgage based on the information
           contained in these findings. This action should, at a minimum, include requiring
           indemnification for the seven actively insured loans. Leader Mortgage should
           also reimburse the appropriate parties for unallowable costs charged to borrowers.

           Additionally, HUD should require Leader Mortgage to implement controls to
           ensure that it follows HUD’s quality control requirements and verify that Leader
           Mortgage has implemented proper controls.

           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
           Leader Mortgage agreed that it had not consistently followed HUD requirements
           when processing Federal Housing Administration loans, but disagreed with
           specific deficiencies identified in three of the seven loans that we concluded had
           material deficiencies that affected the insurability of the loan. Further, Leader
           Mortgage agreed that it had not met all of HUD’s quality control program
           requirements, but disagreed with our conclusion that it had not met specific
           elements of the requirements. We provided a draft report to Leader Mortgage and
           requested a response by January 4, 2005, and Leader Mortgage provided its
           written comments on that date.

           Appendix B of this report contains the complete text of Leader Mortgage’s
           response, except for specific loan documents that we omitted to maintain the
           privacy of the borrowers. Appendix B also contains our evaluation of Leader
           Mortgage’s response.



                                            2
                             TABLE OF CONTENTS

Background and Objectives                                                           4

Results of Audit
        Finding 1: Leader Mortgage Did Not Follow HUD Requirements When             5
                   Originating Loans
        Finding 2: Leader Mortgage’s Quality Control Process Did Not Comply with    9
                   HUD Requirements

Scope and Methodology                                                              11

Internal Controls                                                                  12

Appendixes
   A.   Schedule of Questioned Costs and Funds to be Put to Better Use             13
   B.   Auditee Comments and OIG’s Evaluation                                      14
   C.   Loan Processing Deficiency Charts                                          22
   D.   Unallowable Fees Charged to Borrowers                                      23
   E.   Case Studies of Improperly Submitted Loans                                 24




                                              3
                      BACKGROUND AND OBJECTIVES

Leader Mortgage Company is a non-supervised lender that began doing business and performing
Federal Housing Administration loan originations in 1992. Leader Mortgage maintains a primary
office in Lenexa, KS, and a branch office in St. Louis, MO.

Leader Mortgage originated 320 Federal Housing Administration-insured mortgages that closed
from May 1, 2002, through April 30, 2004. We selected Leader Mortgage for review because its
default rate was significantly higher than the HUD Kansas City field office’s average over the past
three years.

Our audit objectives were to determine whether Leader Mortgage properly originated loans by
correctly documenting and evaluating income, assets, liabilities, credit history, qualifying ratios,
allowable charges, and borrower eligibility and to determine whether it properly developed and
implemented a quality control plan.




                                                 4
                                 RESULTS OF AUDIT

Finding 1: Leader Mortgage Did Not Follow HUD Requirements When
           Originating Loans
Leader Mortgage did not follow U.S. Department of Housing and Urban Development (HUD)
requirements when processing and submitting 7 of the 23 loans reviewed for compliance. The
loans contained deficiencies that affected the credit quality (insurability) of the loans. The loan
origination deficiencies occurred because Leader Mortgage did not have an adequate control
environment to ensure that its employees followed HUD requirements when processing and
underwriting loans. As a result, HUD insured seven loans that placed the insurance fund at risk
for $911,738 and incurred other related losses.



 Loans Did Not Comply with
 HUD Requirements

               Leader Mortgage originated seven loans totaling $911,738 that contained
               significant loan origination deficiencies. These loans contained material errors,
               including unsupported assets, underreported liabilities, unsupported income, and
               derogatory credit. These deficiencies occurred because Leader Mortgage did not
               have adequate controls to ensure that its employees followed HUD requirements
               when originating loans. Leader Mortgage’s deficient quality control process may
               have also contributed to the loan origination deficiencies (see finding 2).

               As of October 5, 2004, HUD’s data systems showed that all seven loans were
               actively insured with Federal Housing Administration insurance and HUD had
               incurred $5,387 in partial claims on one of the seven loans and $400 in loss
               mitigation costs on another loan. The following table summarizes the categories
               of loan deficiencies on the seven loans.

                                 Deficiency               Number of Loans
                       Unsupported assets                          4
                       Underreported liabilities                   3
                       Unsupported income                          2
                       Derogatory credit                           1

               The deficiencies noted in the table are not independent of one another as several
               of the loans contained more than one deficiency. Detailed descriptions of the
               deficiencies noted are presented below. Appendix C presents a table summarizing the
               deficiencies on each of the loans, and appendix E contains detailed case studies of each
               of the loans with significant deficiencies.


                                                   5
 Unsupported Assets


            Leader Mortgage did not sufficiently verify borrower assets in four of the seven
            loans with material deficiencies. The material deficiencies related to insufficient
            verification of gift fund transfers and bank account assets.

            HUD requires lenders to verify all funds for the borrower’s investment in the
            property. More specifically, HUD requires the lender to properly document the
            transfer of gift funds from the donor to the borrower and to ensure that the gift
            funds are provided by an allowable donor.

            For example, in Federal Housing Administration Case #182-0715856, the
            borrower claimed only $7 in personal assets and anticipated gift funds of $6,200.
            The borrower paid $5,299 to close the loan. According to the gift letter, the donor
            was the the borrower’s relative. However, Leader Mortgage did not verify that
            the donor had the funds available to provide to the borrower or that the donor
            provided the funds to the borrower before the loan closing.

            As another example, in Case #182-0723158, Leader Mortgage based its loan
            evaluation on the borrower having bank assets of $28,388. However, the same
            bank statement used to support the deposit of the $28,388 also showed that the
            borrower had withdrawn $13,337 within 4 days following the deposit and had
            withdrawn another $8,337 to close the Federal Housing Administration loan at the
            end of that same month. The bank statement balance was only $5,291 on the day
            that the lender approved the loan using an automated underwriting system.


Underreported Liabilities


            Leader Mortgage did not consider all relevant liabilities when approving three of
            the seven loans. HUD requires lenders to consider all recurring obligations,
            contingent liabilities, and projected obligations that meet HUD’s specific
            stipulations when evaluating a loan application.

            For example, in Case #291-3101558, Leader Mortgage ommitted liabilities for
            both the borrower and coborrower when evaluating the loan. It did not consider
            monthly debts of $547 and $317 for the borrower and coborrower, respectively, as
            shown on the credit reports. Considering the ommitted liabilities of $864
            monthly, the borrowers’ debt ratio would increase from 38.6 percent to 71
            percent, significantly exceeding HUD’s limit of 41 percent.




                                             6
Unsupported Income

            Leader Mortgage used an unsupported income amount for two of the seven loans.
            Lenders may not use any income in evaluating the borrower’s loan that it can not
            verify, is not stable, or will not continue.

            For example, Leader Mortgage originated Case #291-3001035 using a calculated
            monthly income of $2,969. It calculated the income based on an hourly rate of
            $17.13 per hour and full-time employment of 40 hours per week. However, the
            most current pay stub supported earnings of only $2,611 per month, while only
            one of the four pay stubs obtained supported a 40-hour work week. An average of
            the four pay stubs supported only $2,663 per month.

Derogatory Credit

            Leader Mortgage did not properly evaluate the borrowers’ past credit performance
            and ensure that the borrowers demonstrated financial responsibility in one of the
            seven loans. Leader Mortgage originated the mortgage when the borrowers’
            credit reports and other file documentation indicated significant credit
            deficiencies. HUD considers past credit performance of the borrowers to be the
            most useful guide in determining the attitude toward credit obligations that will
            govern the borrowers’ future actions.

            The borrowers’ credit report in Case# 291-3101558 showed numerous delinquent
            payments on a mortgage loan owed in the year immediately preceding the closing
            of the the Federal Housing Administration loan. The same borrower was also
            delinquent on a U.S. Department of Education student loan and owed a balance of
            $13,498. Leader Mortgage had not obtained any documentation indicating that
            the Federal student loan had been brought current, deferred, forgiven, or paid off.


Other Deficiencies

            Leader Mortgage also originated 15 loans that contained minor underwriting
            deficiencies. While these deficiencies did not affect the overall credit quality
            (insurability) of the individual loans, they do indicate a lack of commitment to
            quality underwriting. Lenders need to ensure that they follow all facets of HUD
            requirements when originating Federal Housing Administration loans. We
            provided details of these deficiencies to Leader Mortgage during our review.
            Appendix C presents a table summarizing the deficiencies on each of the 15 loans.

            Most notably, in multiple instances Leader Mortgage charged fees to borrowers
            that are specifically prohibited on Federal Housing Administration mortgage loan



                                             7
             closings. HUD requires lenders to disclose all closing costs charged to borrowers
             on the HUD-1 Settlement Statement and provides guidance for lenders regarding
             whether the lender can charge borrowers certain closing costs. For 9 of the 23
             loans, Leader Mortgage charged $3,896 in fees to borrowers that were specifically
             prohibited by HUD or were not sufficiently detailed to ensure that the charges
             were allowable. Borrowers paid fees such as broker’s administrative
             commissions, corporate assignment fees, buyer’s coordination fees, and excessive
             loan origination and loan discount fees. Detailed descriptions of the unallowable
             fees charged to borrowers is presented in appendix D.

Conclusion

             Leader Mortgage did not have an effective control environment to prevent its
             employees from approving loans that did not meet HUD requirements. As a
             result, Leader Mortgage originated seven loans that contained deficiencies which
             have placed the Federal Housing Administration insurance fund at risk for
             $911,738 and caused HUD to incur other related losses.

Recommendations

             We recommend that the Assistant Secretary for Housing - Federal Housing
             Commissioner, and Chairman, Mortgagee Review Board

             1A. Take appropriate administrative action against Leader Mortgage for not
                 complying with HUD requirements, including requiring Leader Mortgage to
                 indemnify HUD for the seven loans totaling $911,738 (see appendix C).

             1B. Require Leader Mortgage to reimburse the appropriate borrowers for $3,896
                 in unallowable fees (see appendix D).




                                             8
Finding 2: Leader Mortgage ’s Quality Control Process Did Not
           Comply with HUD Requirements
Leader Mortgage had not established and implemented an adequate quality control process.
Leader Mortgage’s written quality control plan lacked many required elements, and it had not
ensured that it conducted adequate quality control reviews of its loans. As a result, Leader
Mortgage is unable to ensure the accuracy, validity, and completeness of its loan originations.



   Leader Mortgage’s Process Did
   Not Meet HUD Standards

               Leader Mortgage’s written quality control plan lacked many HUD-required
               elements. The more significant deficiencies included the absence of guidance on
               conducting onsite branch reviews at least once per year; ensuring proper release
               of rehabilitation funds on 203(k) loans; confirming that loans are current when
               submitted for insurance endorsement; including loans from all branches, loan
               officers, underwriters, and appraisers in quality control reviews; and reporting any
               violation of law or regulation, false statement, or program abuse to the appropriate
               parties.

               In addition, Leader Mortgage did not perform the required reviews in accordance
               with HUD regulations or within the timeframe required, nor did it take prompt
               corrective action when deficiencies were identified. Leader Mortgage did not
                   o Review any rejected loans, although HUD requires review of at least 10
                       percent of rejected loans.
                   o Review all loans defaulting within 6 months of the closing date. HUD’s
                       systems showed that eight loans had first defaults reported before the sixth
                       payment; however, Leader Mortgage did not review any of these loans.
                   o Ensure that its quality control contractor conducted reviews within 90 days
                       of the loan closing.
                   o Conduct onsite reviews of branch offices.
                   o Ensure that all required quarterly reviews were conducted and reports
                       provided to management. As of mid-August 2004, the quality control
                       contractor had not conducted any reviews for the year because Leader
                       Mortgage did not provide the necessary information until mid-July 2004.
                   o Take prompt corrective action to eliminate deficiencies. The quality
                       control contractor continued to report the same exceptions in the seven
                       quarterly reports available for the period of our review.

               Leader Mortgage outsourced its quality control reviews to an external
               independent contractor. However, Leader Mortgage remains responsible for
               providing adequate information to the contractor in order for the contractor to
               conduct quality control reviews that meet HUD’s requirements.



                                                9
             Under HUD’s Single Family Endorsement program, the lender underwrites and
             closes the loan without prior HUD review or approval. Therefore, it is imperative
             that approved lenders establish and implement quality control policies and
             procedures that meet HUD requirements. Without an adequate quality control
             process, HUD cannot be assured that Leader Mortgage is properly processing and
             submitting Federal Housing Administration loans for insurance endorsement.


Conclusion

             Leader Mortgage did not establish and implement a quality control process that
             complied with HUD requirements. Leader Mortgage’s written plan lacked many
             significant elements necessary to conduct proper quality control reviews, and it
             did not ensure that it provided adequate information to its quality control
             contractor to ensure that it conducted reviews in accordance with HUD
             regulations. Without a properly implemented quality control process, the lender
             cannot ensure that its loan originations comply with HUD requirements; that it is
             protecting itself and HUD from unacceptable risk; and that it is guarding against
             errors, omissions, and fraud.

Recommendations

             We recommend that the Assistant Secretary for Housing - Federal Housing
             Commissioner, and Chairman, Mortgagee Review Board

             2A. Require Leader Mortgage to establish and implement an adequate quality
                 control process.

             2B. Verify that Leader Mortgage’s quality control process is fully implemented in
                 accordance with HUD regulations.




                                             10
                         SCOPE AND METHODOLOGY

Leader Mortgage originated 320 Federal Housing Administration-insured loans that closed from
May 1, 2002, through April 30, 2004. Of these 320 loans, we reviewed all 23 loans that
defaulted within the first 2 years of the loan.

To achieve our objectives, we reviewed HUD’s rules, regulations, and guidance for proper
origination and submission of Federal Housing Administration loans. We also reviewed
previous HUD reviews of Leader Mortgage and the HUD case binders for the 23 defaulted loans.
In addition, we interviewed HUD staff to obtain background information on HUD requirements
and Leader Mortgage.

We interviewed Leader Mortgage’s management and staff to obtain information regarding its
policies, procedures, and management controls. Additionally, we reviewed Leader Mortgage’s
case binders for the 23 defaulted loans; and reviewed its written policies and procedures to gain
an understanding of how its processes are designed to function. We also reviewed Leader
Mortgage’s quality control plan and available quality control reports.

We relied upon computer-processed data contained in HUD’s Single Family Data Warehouse
system. We assessed the reliability of these data, including relevant general and application
controls, and found them to be adequate. We also performed sufficient tests of the data, and
based on the assessments and testing, we concluded that the data are sufficiently reliable to be
used in meeting our objectives.

We performed audit work from July through October 2004. The audit was conducted in
accordance with generally accepted government auditing standards.




                                                11
                             INTERNAL CONTROLS

Internal Control is an integral component of an organization’s management that provides
reasonable assurance that the following objectives are being achieved:
    • Effectiveness and efficiency of operations;
    • Reliability of financial reporting; and
    • Compliance with applicable laws and regulations

Internal controls relate to management’s plans, methods, and procedures used to meet its
mission, goals and objectives. Internal controls include the processes and procedures for
planning, organizing, directing and controlling program operations. They include the systems
for measuring, reporting, and monitoring program performance.



 Relevant Internal Controls
              We determined the following internal controls were relevant to our audit objectives:

                      •   Controls over origination of Federal Housing Administration loans.


              We assessed the relevant controls identified above.

              A significant weakness exists if management controls do not provide reasonable
              assurance that the process for planning, organizing, directing, and controlling
              program operations will meet the organization’s objectives.


 Significant Weaknesses

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

                      •   Leader Mortgage has not properly implemented a quality control plan
                          and process (see finding 2).




                                               12
                                     APPENDIXES

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

 Recommendation           Ineligible 1/    Unsupported      Unreasonable or      Funds to be Put
       Number                                       2/       Unnecessary 3/      to Better Use 4/
      1A                                                                            $911,738
      1B                        $3,896


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
     polices or regulations.

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

3/   Unnecessary/Unreasonable costs are those costs not generally recognized as ordinary,
     prudent, relevant, and or necessary within established practices. Unreasonable costs
     exceed the costs that would be incurred by a prudent person in conducting a competitive
     business.

4/   Funds Put to Better Use are quantifiable savings that are anticipated to occur if an OIG
     recommendation is implemented resulting in reduced expenditures in subsequent period
     for the activities in question. Specifically, this includes costs not incurred, de-obligation
     of funds, withdrawal of interest, reductions in outlays, avoidance of unnecessary
     expenditures, loans and guarantees not made, and other savings.




                                               13
Appendix B

        AUDITEE COMMENTS AND OIG'S EVALUATION


Ref to OIG Evaluation   Auditee Comments




Comment 1




                         14
Comment 2




Comment 3




            15
Comment 3




Comment 4




Comment 5




            16
Comment 6




Comment 7




Comment 8




            17
Comment 8




Comment 9




Comment 10




Comment 11




             **While we reviewed the additional documentation provided by Leader Mortgage
                in its written response to the report, we did not include this information in the
                Auditee Comments to maintain the privacy of the borrowers.




                                              18
                         OIG Evaluation of Auditee Comments

Comment 1   We reviewed Leader Mortgage Company because its default rate was
            significantly higher than the HUD Kansas City field office’s average over the past
            three years. We changed the report to reflect the significance of Leader
            Mortgage’s default rate as compared to other area lenders.

Comment 2   HUD requires lenders to review all loans that default within the first six payments
            due. Although Leader Mortgage may not receive notification from its investors
            when a loan defaults within the first six payments due, Leader Mortgage remains
            responsible for monitoring its loans for defaults, as required by HUD. Leader
            Mortgage, as well as other lenders, can obtain access to Federal Housing
            Administration loan status data in HUD’s systems. During the audit, we provided
            Leader Mortgage with the necessary access information.

            While Leader Mortgage’s senior management may make visits to its branch
            office, these visits are not an acceptable substitute for required quality control
            reviews performed by in-house quality control staff, or by independent
            contractors. HUD requirements state that a lender’s branch offices engaged in
            origination or servicing of Federal Housing Administration-insured loans must be
            reviewed to ensure that branch offices are in compliance with HUD requirements.
            Further, annual visits are mandatory for offices meeting certain higher risk
            criteria, such as high early default rates, new branches or new key personnel,
            sudden increases in volume, and past problems. Therefore, we maintain that
            Leader Mortgage has not conducted required branch office reviews.

            Although Leader Mortgage may be conducting frequent training of its employees,
            recurring loan origination deficiencies during our two-year audit period indicated
            that Leader Mortgage had not taken prompt corrective action to mitigate loan
            processing deficiencies. Further, because Leader Mortgage did not conduct
            timely quality control reviews for 2004, senior management had not received
            timely feedback and was therefore unable to take prompt corrective action.

Comment 3   While the cashiers checks may have been used to pay off the significant
            outstanding debts, Leader Mortgage did not obtain proper documentation prior to
            closing the loan to show that the creditors had released the debts and that the
            borrower was no longer responsible for these debts. Without proper assurance
            that the borrower’s outstanding debts were released, Leader Mortgage should
            have included these liabilities as debts that affected the borrower’s ability to repay
            the Federal Housing Administration loan.

            We agree that Leader Mortgage obtained documentation for the transfer of the
            non-profit gift funds, and we have changed the report accordingly. Further,
            Leader Mortgage confirmed that it had not met HUD’s documentation
            requirements for the two $10,000 gifts, but had only verbally verified the transfer
            of funds. HUD regulations require documentation, not verbal verification, of gift
            fund transfers; therefore, Leader Mortgage still has not ensured that the two
            $10,000 gifts were from a proper source of funds.



                                             19
            We selected the loans for review from the universe of loans originated by Leader
            Mortgage that had defaulted during the first two years of the loan. Although the
            reporting of the default to HUD may have been an error on the part of the
            servicer, our review of the loan origination disclosed major underwriting
            deficiencies.

Comment 4   Leader Mortgage confirmed that it had not met HUD’s documentation
            requirements for the gift fund transfer, but had verbally verified the transfer of
            funds. HUD regulations require documentation, not verbal verification, of gift
            fund transfers; therefore, Leader Mortgage still has not ensured that the gift funds
            were from a proper source of funds.

Comment 5   HUD requires lenders to verify the source of all funds used to close a Federal
            Housing Administration loan. Leader Mortgage confirmed that it had verified
            only a portion of the necessary funds to close the loan, and did not properly
            document the source and transfer of the gift funds necessary to close the loan.

Comment 6   Leader Mortgage agreed that it miscalculated the borrower’s income and used
            incorrect income data to gain approval from an automated underwriting system;
            therefore, we still question the data integrity and automated approval of this loan.

            We agree that subsequent to our review and notification of Leader Mortgage,
            Leader Mortgage obtained and provided to us proper documentation showing that
            the non-profit gift funds were transferred from the donor to the borrower at
            closing. We have changed the report to recognize receipt of the documents.

            We disagree that Leader Mortgage corrected the unallowable charge of $150 for a
            "broker's administrative commission" during our review. Leader Mortgage has
            not provided documentation showing that the broker’s fee was an allowable
            charge to the borrower.

Comment 7   We maintain that the $341 monthly debt was significant to the borrower's ability
            to repay the mortgage during the months immediately following the loan closing.
            The borrower’s credit history shows that the borrower had multiple late payments
            on the installment loan in question, and the loan was in delinquent status. Leader
            Mortgage had no assurance that the borrower would make the remaining monthly
            payments as required (i.e. in full or on time). Therefore, the debt was significant
            to the borrower’s ability to repay the Federal Housing Administration loan and
            should have been considered in the loan evaluation.

Comment 8   Leader Mortgage agreed that it had overstated the borrower’s reserves in gaining
            approval for the loan from the automated underwriting system. Because the loan
            approval was based on significantly overstated funds available to the borrower,
            we still question the data integrity, and therefore the automated approval, of this
            loan.

            We disagree that the monthly salary indicated on the pay stub from the current
            employer was sufficient to support the monthly income claimed in the automated
            underwriting system to gain loan approval. Leader Mortgage relied on the salary


                                             20
              rate indicated on a two-week pay stub – the only pay stub for the borrower, as the
              borrower had just begun new employment. The verbal Verification of
              Employment provided no confirmation of the borrower’s salary or likelihood of
              continued employment; and the only pay stub available for the current
              employment showed only 16 hours worked and earnings of $205. Although the
              W-2 for the previous employment supported a higher monthly income than
              claimed to qualify for the loan, the borrower’s current employment showed a
              decline in monthly income.

Comment 9     Upon further review of the loan documentation, we agree that the real estate
              commission of $1,950 was allowed as a buyer-broker fee. We removed the
              questioned fee from the report.

Comment 10 On Case #182-072661, Leader Mortgage charged the borrower a 7 percent
           ($1,450) discount fee on the $20,699 loan. Leader Mortgage charged other
           borrowers that we reviewed less than 3 percent in discount fees, which caused us
           to conclude that the 7 percent charged to this borrower was excessive. Mortgagee
           Letter 94-16, “Tiered Pricing Final Rule,” says that a lender's customary lending
           practices may not provide for a variation in mortgage charge rates, including
           discount points, origination fees, and other such fees, exceeding two percentage
           points on its Federal Housing Administration-insured loans within a geographic
           area. Any variation within two percentage points must be based on actual
           variations in fees or costs to the lender to make a loan. Leader Mortgage did not
           demonstrate that the 7 percent discount fee was warranted.

              Based on our analysis of loan discount fees charged to other borrowers reviewed,
              we agree that the discount fee of 2.31 percent ($2,038) on Case #182-0722653
              was reasonable. We removed this questioned fee from the report.

              On Case #291-2979865, Leader Mortgage charged a 2 percent loan origination
              fee of $1,216. According to the HUD Homeownership Center Reference Guide,
              Chapter 2, Mortgage Credit Guidelines, "Closing Costs and Other Fees," the loan
              origination fee can not exceed 1 percent of the principal amount of the mortgage,
              excluding any upfront mortgage insurance premium. Leader Mortgage exceeded
              the 1 percent limit on loan origination fees.

Comment 11 Leader Mortgage provided additional documentation to show that the $200
           commitment fee was allowed under HUD regulations. We removed the
           questioned fee from the report.




                                              21
Appendix C

                        LOAN PROCESSING DEFICIENCY CHARTS


                Loans with Deficiencies that Affected Insurability
                  Unsupported          Underreported       Unsupported       Inadequate      Unallowable     Derogatory       Total Number
 Case Number         Assets              Liabilities         Income        Documentation      Charges          Credit         Of Deficiencies
  292-4377252          X                     X                                                                                      2
  182-0715856          X                                                                                                            1
  182-0769020          X                                                         X                                                  2
  291-3001035                                                  X                                 X                                  2
  291-3182227                                X                                                                                      1
  182-0723158          X                                       X                                                                    2
  291-3101558                                X                                   X               X               X                  4


    Totals             4                     3                 2                 2               2               1                  14

***We considered the Inadequate Documentation and Unallowable Charges deficiencies
included in the above chart to be minor deficiencies; however, we included these deficiencies
with the relevant loans to summarize all deficiencies related to the seven loans with deficiencies
that affected the insurability of the loans.


                                       Loans with Minor Deficiencies
                       Unsupported            Unallowable       Inadequate     Unsupported      Derogatory       Total Number
       Case Number            Assets             Charges      Documentation       Income          Credit         Of Deficiencies
       291-2964303                                                                   X               X                    2
       291-2996892              X                                                                    X                    2
       291-3220529              X                                                                                         1
       291-2952567                                     X                                                                  1
       181-1942028              X                      X              X                                                   3
       182-0726661              X                      X                                                                  2
       182-0729697              X                                                                                         1
       291-2974795              X                      X                                                                  2
       291-2979865              X                      X                                                                  2
       291-3114551              X                      X                                                                  2
       181-2005198                                     X                                                                  1
       291-3087115                                                    X                                                   1
       291-3118179                                                    X                                                   1
       182-0722653              X                                                                                         1
       291-3019751              X                                                    X                                    2


         Totals                10                      7              3              2               2                  24




                                                                      22
Appendix D

             Unallowable Fees Charged to Borrowers



                                                            Total
         FHA Case                Description of          Unallowable
          Number              Unallowable Charges         Charges

        291-3001035   Broker's Admin Commission            $ 150

        291-3101558   Rec/Filing Fee Assign                $ 30
        291-2952567   Misc. Charges                        $ 214
        181-1942028   Prepare Seller Documents             $   50
                      Buyer Coordination Fee ($355)
        182-0726661   Excessive Loan Discount ($1,450)     $1,805
                      Misc. Charges ($10)
        291-2974795   Wire Fee ($10)                       $   20
                      Misc. Fee ($165)
        291-2979865   2% Loan Origination Fee ($1,216)     $1,381
                      Corporate Assignment ($29)
        291-3114551   Loan to Title Company ($205)         $ 234
        181-2005198   Corporate Assignment                 $ 12
           Totals                                          $3,896




                                      23
Appendix E

                 Case Studies of Improperly Submitted Loans


FHA Case Number: 292-4377252                     Insured Amount: $171,272

Section of Housing Act: 203(k)                   Status Upon Selection
                                                 Default status after 3 payments
Date of Loan Closing: 6/27/03

Current SFDW Status:                             HUD Costs Incurred:
Reinstated by Mortgagor who retains              $0
Ownership

Underreported Liabilities:
Leader Mortgage did not include $149 in monthly liabilities when using Desktop Underwriter to
approve the loan, which would have increased the borrower’s financial ratios even further
beyond HUD’s limits. The Mortgage Credit Analysis Worksheet, Application, and credit report
of 5/2/03 showed total monthly obligations as $524, with child support accounting for $375 and
other debt of $149. However, the Desktop Underwriter Findings Report showed only $375 for
child support, and did not include the other debts owed to Bank of America and Commerce
Bank. The Bank of America monthly payments were $25 per month with 47 payments
remaining. One of the Commerce Bank accounts required $83 in monthly payments with 34
payments remaining, while the other Commerce Bank account required a $41 payment and 33
payments remaining.

The HUD case file contained additional documentation concerning the three outstanding debts
omitted from Desktop Underwriter. The HUD file contained a copy of a cashiers check to Bank
of America for $993 and another cashiers checks to Commerce Bank for $2,733, both dated
6/27/2003 (the date of closing). Although these cashiers checks may have been for pay off of the
three outstanding debts not included in the loan evaluation, Leader Mortgage provided no
documentation showing that the debts were actually paid off and that the creditor had released
the debt. Leader Mortgage also did not verify the source of the $3,726 to pay off the three debts
to ensure that the funds came from an allowable source.

Further, the borrower’s credit report of 5/2/03 also showed $4,374 owed to Yamaha. The
borrower’s bank statement showed a deposit of $5,094 on 5/14/03, and a payoff statement from
Yamaha shows that the borrower paid off the entire Yamaha account on 5/23/03. Leader
Mortgage did not verify the source of the deposit of $5,094 to ensure that the funds came from
an allowable source.

The case file also contained gift letters for anticipated gifts of $25,192, which are addressed
below.




                                                24
HUD Requirements:
HUD Handbook 4155.1, Revision 4, Paragraph 2-10-B: Saving and Checking Accounts: If
there is a large increase in an account or the account was opened recently, an explanation and
evidence of source of funds must be obtained by the lender.

HUD Handbook 4155.1, Revision 4, Paragraph 2-11-A: Recurring Obligations: The borrower's
liabilities should include all installment loans, revolving charge accounts, real estate loans,
alimony, child support, and all other continuing obligations. In computing the debt-to-income
ratios, the lender must include the housing expense, and all other additional recurring charges
including payments on installment accounts, child support, or separate maintenance payments,
revolving accounts, and alimony, etc., extending ten months or more.

Desktop Underwriter Government Underwriter Service User's Guide for Federal Housing
Administration Loans dated July, 2002, Chapter 2, paragraph 3, states that the lender remains
accountable for compliance with all Federal Housing Administration guidelines, as well as for any
Federal Housing Administration eligibility requirements, credit capacity, and documentation
requirements that are not covered in the User's Guide. All data that is entered into Desktop
Underwriter, or that is downloaded or imported into the system must be true, accurate, and
complete.

The Desktop Underwriting Findings Report notified Leader Mortgage that it had omitted the
Bank of America, Yamaha, and Commerce Bank accounts from the underwriting analysis during
liability reconciliation. The Findings Report also instructed Leader Mortgage to provide
documentation that supported the omission of each of these liabilities.

Unsupported Assets:
Leader Mortgage did not verify the source of funds used to close the loan. The Application listed
assets of $1,083 in Commerce Bank and $25,192 in gift funds. The anticipated gift funds were:
    o $10,000 from the borrower’s stepmother,
    o $10,000 from the borrower’s father, and
    o $ 5,192 non-profit gift from Ameri-Dream.
Leader Mortgage included the $20,000 in gift funds in Desktop Underwriter, which approved the
borrower's loan. However, Leader Mortgage did not obtain bank statements from either the
donors or borrower to indicate whether the donors had the funds available to give, or that the gift
funds were actually transferred to the borrower prior to or at closing. The HUD-1 Settlement
Statement did not show that the borrower received gift funds at closing, other than the gift from
Ameri-Dream. However the borrower paid off significant debts just prior to the loan closing
(explained above).

Further, the Application, Mortgage Credit Analysis Worksheet, and HUD-1 Settlement
Statement showed that the borrower expected to receive gift funds of $5,192 from a non-profit,
Ameri-Dream. Leader Mortgage obtained no evidence that the non-profit provided the funds to
the borrower prior to or at closing. During our audit, we informed Leader Mortgage of the
deficiencies, and it subsequently obtained and provided proper gift funds transfer documentation
for the non-profit funds. However, Leader Mortgage did not provide documentation of the two
additional $10,000 gifts.




                                                25
HUD Requirements:
HUD Handbook 4155.1, Revision 4, Paragraph 2-10-C: An outright gift of cash investment is
acceptable if the donor is an approved provider. The lender must document the transfer of funds
from the donor to the borrower. If the funds are not deposited to the borrower's account prior to
closing, the lender must obtain verification the closing agent received funds from the donor for
the amount of the gift.

Mortgagee Letter 00-28: Gift Transfer Documentation: The donor must be able to furnish
conclusive evidence that the funds given to the homebuyer came from the donor's own funds and,
thus, were not provided directly or indirectly by the seller, real estate agent, builder, or any other
entity with an interest in the sales transaction. The Mortgagee Letter details appropriate
documentation for transfers into the homebuyer's account or funds to be provided at closing.
Further, when the transfer occurs at closing, the lender remains responsible for obtaining
verification the closing agent received funds from the donor for the amount of the gift.

Desktop Underwriter Government Underwriter Service User's Guide for Federal Housing
Administration Loans dated July, 2002, Chapter 2, paragraph 3, states that the lender remains
accountable for compliance with all Federal Housing Administration guidelines, as well as for any
Federal Housing Administration eligibility requirements, credit capacity, and documentation
requirements that are not covered in the User's Guide. All data that is entered into Desktop
Underwriter, or that is downloaded or imported into the system must be true, accurate, and
complete.




                                                   26
FHA Case Number: 182-0715856                      Insured Amount: $129,615

Section of Housing Act: 203(b)                    Status Upon Selection:
                                                  Default status after 12 payments
Date of Loan Closing: 8/30/02

Current SFDW Status:                              HUD Costs Incurred:
First Legal Action to Commence Foreclosure        $200 in Loss Mitigation

Unsupported Assets:
Leader Mortgage did not verify the source of funds used to close the loan. The borrower’s
Application dated 8/30/02, the same day as closing, showed the borrower's assets as only $7.
The Mortgage Credit Analysis Worksheet listed the borrowers’ only assets as $7, plus a $500
earnest deposit, and an anticipated gift of $6,200. According to the gift letter, the co-borrower’s
relative was to provide the gift funds. The HUD-1 Settlement Statement did not credit the
borrowers with the gift funds, but the borrowers paid $5,299 to close the loan on 8/30/02. The
borrowers’ bank statement dated 7/23/02 showed only the $7 in the borrowers’ account, and no
deposits that appeared to be the gift funds. Further, the loan file did not contain evidence that the
donor had the means to provide the gift funds, nor did it contain deposit slips, canceled checks,
or withdrawal slips to support that the gift funds were transferred from the donor to the
borrowers, or that the funds used to close the loan were from an allowable source.

HUD Requirements:
HUD Handbook 4155.1, Revision 4, Paragraph 2-10: All funds for the borrower's investment in
the property must be verified.

HUD Handbook 4155.1, Revision 4, Paragraph 2-10-C: An outright gift of cash investment is
acceptable if the donor is an approved provider. The lender must document the transfer of funds
from the donor to the borrower. If the funds are not deposited to the borrower's account prior to
closing, the lender must obtain verification the closing agent received funds from the donor for
the amount of the gift.

Mortgagee Letter 00-28: Gift Transfer Documentation: The donor must be able to furnish
conclusive evidence that the funds given to the homebuyer came from the donor's own funds
and, thus, were not provided directly or indirectly by the seller, real estate agent, builder, or any
other entity with an interest in the sales transaction. The Mortgagee Letter details appropriate
documentation for transfers into the homebuyer's account or funds to be provided at closing.
Further, when the transfer occurs at closing, the lender remains responsible for obtaining
verification the closing agent received funds from the donor for the amount of the gift.




                                                  27
FHA Case Number: 182-0769020                      Insured Amount: $149,863

Section of Housing Act: 203(b)                    Status Upon Selection:
                                                  Default status after 1 payment
Date of Loan Closing: 12/15/03

Current SFDW Status:                              HUD Costs Incurred:
Reinstated by Mortgagor who retains               $0
Ownership

Unsupported Assets:
Leader Mortgage did not verify the source of funds used to close the funds. The Application and
Mortgage Credit Analysis Worksheet showed that the borrower anticipated a $10,000 gift to use in
closing the loan, and Leader Mortgage included the anticipated gift of $10,000 in the automated
underwriting system used to approve the loan (Desktop Underwriter). The HUD-1 Settlement
Statement did not indicate a credit to the borrower for gift funds, but the borrower paid $10,782 to
close the loan.

According to the gift letter, the gift funds were to be provided by the borrower’s relative, but Leader
Mortgage did not verify that the donor had the funds to provide, or that the donor transferred the
funds to the borrower prior to or at closing. The loan file contained a bank activity report of
12/3/03, but the report did not provide the bank account owner’s name or account number;
therefore, it is not clear whether the bank information was that of the donor or the borrower. The
bank activity report showed a $10,000 deposit on 12/3/2003, two weeks before the loan closing.
The loan file did not contain any additional documentation of a potential transfer of gift funds from
the donor to the borrower, such as proper bank statements, deposit slips, canceled checks, or
withdrawal slips. Therefore, Leader Mortgage did not verify that the funds used to close the loan
were from an allowable source.

HUD Requirements:
HUD Handbook 4155.1, Revision 4, Paragraph 2-10: All funds for the borrower's investment in
the property must be verified.

HUD Handbook 4155.1, Revision 4, Paragraph 2-10-C: An outright gift of cash investment is
acceptable if the donor is an approved provider. The lender must document the transfer of funds
from the donor to the borrower. If the funds are not deposited to the borrower's account prior to
closing, the lender must obtain verification the closing agent received funds from the donor for the
amount of the gift.

Mortgagee Letter 00-28: Gift Transfer Documentation: The donor must be able to furnish
conclusive evidence that the funds given to the homebuyer came from the donor's own funds
and, thus, were not provided directly or indirectly by the seller, real estate agent, builder, or any
other entity with an interest in the sales transaction. If the gift funds are in the homebuyer's
account, the lender must document the transfer of the funds from the donor to the homebuyer by
obtaining a copy of the canceled check or other withdrawal document showing the withdrawal is
from the donor's personal account, along with the homebuyer's deposit slip or bank statement
that shows the deposit.



                                                  28
Desktop Underwriter Government Underwriter Service User's Guide for Federal Housing
Administration Loans dated July, 2002, Chapter 2, paragraph 3, states that the lender remains
accountable for compliance with all Federal Housing Administration guidelines, as well as for any
Federal Housing Administration eligibility requirements, credit capacity, and documentation
requirements that are not covered in the User's Guide. All data that is entered into Desktop
Underwriter, or that is downloaded or imported into the system must be true, accurate, and
complete.

The Desktop Underwriting Findings Report notified Leader Mortgage that it was required to verify
and document the transfer of the $10,000 in gift funds in accordance with HUD Mortgagee Letter
00-28 (as described above).

Inadequate Documentation:
The HUD-1 Settlement Statement showed that the borrower owed total settlement charges of
$6,521, and the seller owed total settlement charges of $7,306. However, the Addendum to the
HUD-1 showed different settlement charges than the HUD-1. The Addendum showed the
borrower's charges as $6,488 (a slight reduction), and the seller's charges as $420, significantly
less than the HUD-1. Leader Mortgage did not explain the differences in the settlement charges
to ensure that the seller was not making unallowable concessions to the borrower.

HUD Requirements:
In HUD Handbook 4000.4, Paragraph 2-5(c): The mortgagee must review all closing statements,
certifications on the closing statements, legal instruments and other documents executed at closing,
and certify to HUD that the transaction and loan meet statutory and regulatory requirements of the
National Housing Act and HUD, and that the loan has been closed in accordance with the terms and
sales price as specified in the sales contract.

Additional Information:
Leader Mortgage told us that it erred in the documentation of the settlement charges. The lender
told us that when it prepared the HUD-1 Settlement Statement and entered the information into
its computer system, it failed to update some of the changes in the settlement charges. As a
result, its computer system issued an Addendum to the HUD-1 that showed different charges
than the original HUD-1. Leader Mortgage told us to rely on the HUD-1 for the correct
information. Leader Mortgage did not provide any additional documentation to explain the
differences; therefore, it remains unclear whether the seller made unallowable concessions to the
borrower.




                                                29
FHA Case Number: 291-3001035                     Insured Amount: $121,099

Section of Housing Act: 203(b)                   Status Upon Selection:
                                                 Default status after 18 payments
Date of Loan Closing: 8/13/02

Current SFDW Status:                             HUD Costs Incurred:
Supplemental Preclaim                            $5,387 in Partial Claim

Unsupported Income:
Leader Mortgage overstated the borrower’s income when using an automated underwriting
system, Loan Prospector, to originate and obtain approval of the loan. The lender calculated the
borrower's monthly income as $2,969, based on a 40-hour work week ($17.13 X 40 X 52 / 12
months). However, the most recent pay stub, dated 7/21/02, shows that the borrower had year-
to-date earnings of $17,496, or $2,611 monthly ($358 less than claimed). The borrower provided
four pay stubs, and only one pay stub showed the borrower working at least 40 hours per week.
Further, if the pay indicated on each weekly pay stub were averaged together, the borrower’s
monthly income was equate to only $2,663 per month ([518 + 711 + 548 + 681] / 4 X 52 / 12
months). Regardless of the calculation method used, Leader Mortgage significantly overstated
the borrower’s income in Loan Prospector. Using the reduced monthly income, the borrower’s
housing ratio becomes 33.79 percent, which exceeds HUD’s allowable housing ratio of 29
percent.

HUD Requirements:
HUD Handbook 4155.1, Revision 4, Chapter 2- Section 2: The anticipated amount of income,
and likelihood of its continuance, must be established to determine the borrower's capacity to
repay the mortgage debt.

HUD Handbook 4155.1, Revision 4, Paragraph 2-12: Ratios are used to determine whether the
borrower can reasonably be expected to meet the expenses involved in homeownership, and
otherwise provide for the family. The lender must compute two ratios: (A) Mortgage payment
expense to effective income, which can not exceed 29 percent of gross effective income unless
significant compensating factors are presented; and (B) Total fixed payment to effective income,
which can not exceed 41 percent of gross effective income unless significant compensating
factors are presented.

Mortgagee Letter 98-14: FHA has approved Freddie Mac's Loan Prospector for use on FHA
insured mortgages, effective March 2, 1998. The lender remains accountable for compliance with
FHA guidelines and those credit, capacity, and documentation aspects not addressed in the LP Users
Guide.

Freddie Mac’s Loan Prospector Automated Underwriting Service Training and Users Guide,
Section 2: The data the user inputs into Loan Prospector must match the application, underwriting
documentation, and delivery information at the time the data is entered, and the user is responsible
for data integrity.




                                                30
Unsupported Assets:
The lender did not properly verify the source of funds to close the loan. Although the HUD-1
Settlement Statement credited the borrower with a gift of $7,251 from a non-profit, Partners in
Charity, Leader Mortgage did not obtain evidence that the non-profit provided the funds to the
settlement agent or borrower prior to or at closing. During our audit, we informed Leader
Mortgage of the deficiency, and it subsequently obtained and provided to us proper gift funds
transfer documentation for the non-profit funds.

HUD Requirements:
HUD Handbook 4155.1, Revision 4, Paragraph 2-10-C: An outright gift of cash investment is
acceptable if the donor is an approved provider. The lender must document the transfer of funds
from the donor to the borrower. If the funds are not deposited to the borrower's account prior to
closing, the lender must obtain verification the closing agent received funds from the donor for
the amount of the gift.

Mortgagee Letter 00-28: Gift Transfer Documentation: The donor must be able to furnish
conclusive evidence that the funds given to the homebuyer came from the donor's own funds
and, thus, were not provided directly or indirectly by the seller, real estate agent, builder, or any
other entity with an interest in the sales transaction. The Mortgagee Letter details appropriate
documentation for transfers into the homebuyer's account or funds to be provided at closing.
Further, when the transfer occurs at closing, the lender remains responsible for obtaining
verification the closing agent received funds from the donor for the amount of the gift.

Unallowable Charges:
The HUD-1 Settlement Statement showed that Leader Mortgage charged the borrower $150 for a
"broker's administrative commission." HUD regulations generally do not allow this fee, and the
lender did not explain the fee to determine whether it may be allowable under HUD regulations as
another type of allowable closing cost.

HUD Requirements:
HUD Homeownership Center Reference Guide, Chapter 2, Mortgage Credit Guidelines: All
closing costs associated with a HUD-insured loan, including Paid Outside of Closing items, must be
itemized on the HUD-1 for Real Estate Settlement Procedures Act Compliance.

HUD Homeownership Center Reference Guide, Chapter 2, Mortgage Credit Guidelines: Broker
Administration/Processing/Transaction Fees are not allowed.

Additional Information:
During our audit, Leader Mortgage agreed that it erred and improperly charged the borrower the
$150 "broker's administrative commission."




                                                  31
FHA Case Number: 291-3182227                    Insured Amount: $92,263

Section of Housing Act: 203(b)                  Status Upon Selection:
                                                Default status after 7 payments
Date of Loan Closing: 8/08/03

Current SFDW Status:                            HUD Costs Incurred:
Reinstated by Mortgagor who Retains             $0
Ownership

Underreported Liabilities:
Leader Mortgage did not properly consider all recurring debts when evaluating and approving
the loan. The only recurring debt considered by the lender was a $366 per month auto loan
payment. The credit report of 7/13/03 showed that this account was in delinquent status, had
approximately 12 more months due, and had 18 late payments recorded in the 62 months
reviewed. Leader Mortgage did not consider a $341 monthly payment on an installment account
with a remaining balance of $2,428. This account was also in delinquent status, and the
borrower was behind by two payments. The borrower had approximately eight monthly
payments left on this account.

While HUD regulations generally require consideration of monthly recurring debts if at least 10
months remain on a debt, this debt was significant to the borrower’s ability to repay the
mortgage in the first few months of the federal loan. If Leader Mortgage had included the $341
monthly debt in its financial ratio calculations, the debt ratio would have increased from 38.36
percent to 50.65 percent, which greatly exceeds HUD's limit of 41 percent. Further, the
Mortgage Credit Analysis Worksheet showed that the borrower had limited cash reserves of only
$1,268.

HUD Requirements:
HUD Handbook 4155.1, Revision 4, Paragraph 2-11-A: Recurring Obligations: The borrower's
liabilities should include all installment loans, revolving charge accounts, real estate loans,
alimony, child support, and all other continuing obligations. In computing the debt-to-income
ratios, the lender must include the housing expense, and all other additional recurring charges
including payments on installment accounts, child support, or separate maintenance payments,
revolving accounts, and alimony, etc., extending ten months or more. Debts lasting less than ten
months must be counted if the amount of the debt affects the borrower's ability to make the
mortgage payment during the months immediately after loan closing; this is especially true if the
borrower will have limited or no cash assets after loan closing.

HUD Handbook 4155.1, Revision 4, Paragraph 2-12: Ratios are used to determine whether the
borrower can reasonably be expected to meet the expenses involved in homeownership, and
otherwise provide for the family. The lender must compute two ratios: (A) Mortgage payment
expense to effective income, which can not exceed 29 percent of gross effective income unless
significant compensating factors are presented; and (B) Total fixed payment to effective income,
which can not exceed 41 percent of gross effective income unless significant compensating
factors are presented.




                                               32
FHA Case Number: 182-0723158                     Insured Amount: $130,524

Section of Housing Act: 203(b)                   Status Upon Selection:
                                                 Default status after 1 payment
Date of Loan Closing: 10/30/02

Current SFDW Status:                             HUD Costs Incurred:
First Legal Action to Commence Foreclosure       $0

Unsupported Assets:
Leader Mortgage significantly overstated the borrower’s assets when entering data into an
automated underwriting system (Desktop Underwriter) to gain approval for the loan. The
Mortgage Credit Analysis Worksheet and the Desktop Underwriting Findings Report (dated
10/30/02 - the same day as the loan closing) showed that the lender included $28,388 in assets
when evaluating the loan. Per the loan file, the borrower obtained the funds in a divorce
settlement. The borrower’s bank statement of 10/30/02 showed the $28,388 deposit on 10/25/02,
but also showed that the borrower withdrew $13,337 in the following four days (between
10/25/02 and 10/29/02). The borrower used another $8,337 to close the loan on 10/30/02,
leaving a balance of $5,291. Leader Mortgage had the bank statement showing the true balance
of the borrower’s assets, but included the improper amount in the automated system evaluation.

Further, Desktop Underwriter approved the loan with a housing ratio of 42.40 percent and debt
ratio of 43.75 percent, which exceed HUD’s limits; but this approval was based on significantly
more reserves than the borrower actually possessed.

HUD Requirements:
Desktop Underwriter Government Underwriter Service User's Guide for Federal Housing
Administration Loans, dated July, 2002, Chapter 2, paragraph 3: The lender remains accountable
for compliance with all Federal Housing Administration guidelines, as well as for any eligibility
requirements, credit capacity, and documentation requirements that are not covered in this User's
Guide. All data that is entered into the Desktop Underwriter, or that is downloaded or imported into
Desktop Underwriter must be true, accurate, and complete.

The Desktop Underwriting Findings Report notified Leader Mortgage that the system had used the
$28,388 as assets to underwrite the case, and that the entire amount must be confirmed to verify the
sufficiency of funds to close. Further, the funds were also considered in the evaluation of cash
reserves, and the system notified the lender that it must verify all cash reserves after closing that
were submitted to Desktop Underwriter.

HUD Handbook 4155.1, Revision 4, Paragraph 2-12: Ratios are used to determine whether the
borrower can reasonably be expected to meet the expenses involved in homeownership, and
otherwise provide for the family. The lender must compute two ratios: (A) Mortgage payment
expense to effective income, which can not exceed 29 percent of gross effective income unless
significant compensating factors are presented; and (B) Total fixed payment to effective income,
which can not exceed 41 percent of gross effective income unless significant compensating factors
are presented.




                                                 33
Unsupported Income:
Leader Mortgage did not properly support/verify the monthly income of $2,250 used by Desktop
Underwriter to approve the loan. The borrower began her current job on 10/14/02, only two
weeks before the closing of the Federal Housing Administration loan; therefore, the lender
obtained only one pay stub, which encompassed a two-week period. The pay stub showed the
borrower’s monthly pay rate as $2,250, but the pay stub showed only 16 hours worked during the
period and total earnings of $205. The lender obtained a verbal Verification of Employment
from the current employer, but the Verification did not confirm the borrower’s income or full-
time/part-time status.

In addition, the borrower previously worked at Leader Mortgage, the lender on this loan, for the
1½ year period prior to the current job (hire date of 3/9/01). The W-2 for 2001 showed that the
borrower earned about $1,600 per month. However, the loan file contained no information
regarding the earnings while an employee at Leader Mortgage in 2002 for 9 ½ months. In its
written response to the audit, Leader Mortgage provided the borrower’s 2002 W-2, which
indicated a monthly income of $2,440. While the employment immediately preceding the
current employment provided a monthly income higher than claimed to qualify for the loan, the
current employment also shows a declining income.

HUD Requirements:
HUD Handbook 4155.1, Revision 4, Chapter 2- Section 2: The anticipated amount of income,
and likelihood of its continuance, must be established to determine the borrower's capacity to
repay the mortgage debt.

HUD Handbook 4155.1, Revision 4, paragraph 2-6: HUD does not impose an arbitrary minimum
length of time a borrower must have held a position to be eligible. However, the lender must verify
the borrower's employment for the most recent two full years.

HUD Handbook 4155.1, Revision 4, Chapter 3-Paragraph 3-1: The application package should
contain sufficient documentation to support the lender's decision to approve the mortgage loan.

HUD Handbook 4155.1, Revision 4, Chapter 3-Paragraph 3-1-E: Mortgage credit analysis
requires documentation of income by Verification of Employment and most recent pay stub (i.e.
most recent at time of application and provided the document is not more than 120 days old
when the loan closes). As an alternative to obtaining a VOE, the lender may choose to obtain
original pay stubs covering the most recent 30-day period, along with copies of the previous two
years' IRS W-2 forms. The lender must also verify by telephone all current employers.

Desktop Underwriter Government Underwriter Service User's Guide for Federal Housing
Administration Loans, dated July, 2002, Chapter 2, paragraph 3, states: The lender remains
accountable for compliance with all Federal Housing Administration guidelines, as well as for any
eligibility requirements, credit capacity, and documentation requirements that are not covered in this
User's Guide. All data that is entered into Desktop Underwriter, or that is downloaded or imported
into Desktop Underwriter must be true, accurate, and complete.




                                                 34
FHA Case Number: 291-3101558                    Insured Amount: $117,102

Section of Housing Act: 203(b)                  Status Upon Selection:
                                                Default status after 9 payments
Date of Loan Closing: 3/25/03

Current SFDW Status:                            HUD Costs Incurred:
Repayment                                       $200 in Loss Mitigation

Underreported Liabilities:
Leader Mortgage did not consider all relevant liabilities when evaluating and approving the loan.
The Application and Mortgage Credit Analysis Worksheet showed no recurring liabilities, other
than the anticipated mortgage payment for the Federal Housing Administration loan. However, the
borrower's credit report showed:
    • a delinquent account for a Department of Education student loan. The borrower owed a
        balance of $13,498, and $2,089 was shown as past due. The loan file did not contain any
        information indicating that the loan had been brought current, deferred, forgiven, or paid
        off. The credit report did not list the monthly payment due.
    • a credit card account with numerous delinquencies in 2001 and 2002 (the two years just
        prior to the loan closing). The account had an outstanding balance of $9,083, with $823
        past due, and a monthly payment due of $360.
    • a credit card account with an outstanding balance of $655, with $75 past due, and a $15
        minimum monthly payment.
    • a credit card account with an outstanding balance of $2,188 in collection status, and a
        $109 monthly payment.
    • a credit card account with an outstanding balance of $1,264 in collection status and $63
        monthly payment.
These monthly payments total $547 ($360 + $15 + $109 + $63) that Leader did not consider in
evaluating the loan, excluding any monthly payment that was due on the federal student loan.
These additional monthly liabilities would increase the debt ratio from 38.6 percent to 59.11
percent, which greatly exceeds HUD's limit of 41 percent.

The credit report also showed that the borrower was delinquent numerous times in 2002 in
making his mortgage payments on his present mortgage. This was the year just prior to the
Federal Housing Administration loan closing of 3/25/03.

In addition, Leader Mortgage provided only the borrower’s credit report to HUD, and omitted
the co-borrower’s credit information that it had obtained on a joint credit report. The
Application and Mortgage Credit Analysis Worksheet included the co-borrower’s information
and signatures, and the co-borrower also signed the Note, showing that the co-borrower was also
responsible for the mortgage debt.

The co-borrower's credit report in the Leader Mortgage file showed an open installment account
with an outstanding balance of $9,548 and a $317 monthly payment. The credit report also showed
four late payments on this account within the year prior to the Federal Housing Administration loan
closing. Leader Mortgage did not include this monthly debt in the total monthly obligations
considered when approving the loan.



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Considering the underreported liabilities of the borrower of $547 (without considering the
federal student loan), and the non-reported liabilities of the co-borrower of $317, Leader
Mortgage did not consider $864 in monthly payments owed by the borrower and co-borrower.
These additional monthly liabilities would have increased the debt ratio from 38.6 percent to 71
percent, which greatly exceeds HUD's limit of 41 percent.

HUD Requirements:
HUD Handbook 4155.1, Revision 4, Paragraph 2-11-A: Recurring Obligations: The borrower's
liabilities should include all installment loans, revolving charge accounts, real estate loans,
alimony, child support, and all other continuing obligations. In computing the debt-to-income
ratios, the lender must include the housing expense, and all other additional recurring charges
including payments on installment accounts, child support, or separate maintenance payments,
revolving accounts, and alimony, etc., extending ten months or more.

HUD Handbook 4155.1, Revision 4, Paragraph 2-12: Ratios are used to determine whether the
borrower can reasonably be expected to meet the expenses involved in homeownership, and
otherwise provide for the family. The lender must compute two ratios: (A) Mortgage payment
expense to effective income, which can not exceed 29 percent of gross effective income unless
significant compensating factors are presented; and (B) Total fixed payment to effective income,
which can not exceed 41 percent of gross effective income unless significant compensating
factors are presented.

HUD Handbook 4155.1, Revision 4, Paragraph 2-2-A: Co-borrower: Co-borrowers take title to
the property and obligate themselves on the mortgage note. We also permit a cosigner with no
ownership interest in the property (does not take title) to execute the loan application and
mortgage note, and thus, become liable for repayment of the obligation. The cosigner's income,
assets, liabilities, and credit history are included in the determination of creditworthiness.

HUD Handbook 4155.1, Revision 4, Paragraph 2-5: Delinquent Federal Debts: If the borrower is
presently delinquent on any Federal debt (e.g. VA-guaranteed mortgage, Title I loan, Federal
student loan, Small Business Administration Loan, delinquent Federal taxes, etc), or has a lien,
including taxes, placed against his or her property for a debt owed to the United States, the
borrower is not eligible until the delinquent account is brought current, paid or otherwise
satisfied, or a satisfactory repayment plan is made between the borrower and the Federal agency
owed and is verified in writing.

Derogatory Credit:
The co-borrower’s credit report in the Leader Mortgage file but not submitted to HUD showed
the co-borrower had numerous accounts in collection. The co-borrower also had accounts that
had charged off by the creditor.

HUD Requirements:
HUD Handbook 4155.1, Revision 4, Paragraph 2-3: Past credit performance serves as the most
useful guide in determining the attitude toward credit obligations that will govern the borrower's
future actions. If the credit history, despite adequate income to support obligations, reflects
continuous slow payments, judgments, and delinquent accounts, strong offsetting factors will be
necessary to approve the loan.




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HUD Handbook 4155.1, Revision 4, Paragraph 2-2-A: Co-borrower: Co-borrowers take title to
the property and obligate themselves on the mortgage note. We also permit a cosigner with no
ownership interest in the property (does not take title) to execute the loan application and
mortgage note, and thus, become liable for repayment of the obligation. The cosigner's income,
assets, liabilities, and credit history are included in the determination of creditworthiness.

Unallowable Charges:
The HUD-1 Settlement Statement showed that Leader Mortgage charged the borrower $30 for a
"Rec/Filing Fee Assignment.” The lender did not adequately explain these charges in the loan
file to ensure that they were allowable under HUD regulations.

HUD Requirements:
HUD Homeownership Center Reference Guide, Chapter 2, Mortgage Credit Guidelines: All
closing costs associated with a HUD-insured loan, including Paid Outside of Closing items, must
be itemized on the HUD-1 for Real Estate Settlement Procedures Act Compliance. Whenever
"actual costs" are permitted, it is expected that they do not exceed what is reasonable and
customary for the area. Recording Fee-Assignment charges are not allowed on the assignment of
the mortgage to the investor.

Inadequate Documentation:
The HUD-1 Settlement Statement shows different totals for the borrower’s settlement charges
than the charges shown on the Addendum to the HUD-1 Settlement Statement. Although the
difference was minor, the file contained no explanation of the difference in charges.

HUD Requirements:
In HUD Handbook 4000.4, paragraph 2-5(c) states: The mortgagee must review all closing
statements, certifications on the closing statements, legal instruments and other documents
executed at closing, and certify to HUD that the transaction and loan meet statutory and
regulatory requirements of the National Housing Act and HUD, and that the loan has been closed
in accordance with the terms and sales price as specified in the sales contract.

Additional Information:
During the audit, Leader Mortgage agreed that it had not considered all relevant liabilities. The
lender also agreed that it had improperly charged the borrower the $30 Rec/Filing Fee
Assignment in the closing costs.

Leader Mortgage told us that it erred in the documentation of the settlement charges. The lender
told us that when it prepared the HUD-1 Settlement Statement and entered the information into
its computer system, it failed to update some of the changes in the settlement charges. As a
result, its computer system issued an Addendum to the HUD-1 that showed different charges
than the original HUD-1. Leader Mortgage told us to rely on the HUD-1 for the correct
information.




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