Issue Date
April 21, 2005
Audit Report Number
2005-KC-1005
TO: John C. Weicher, Assistant Secretary for Housing–Federal Housing
Commissioner and Chairman, Mortgagee Review Board, H
//signed//
FROM: Ronald J. Hosking, Regional Inspector General for Audit, 7AGA
SUBJECT: Mortgage Express’s Quality Control Process Did Not Comply with
HUD Requirements
HIGHLIGHTS
What We Audited and Why
We audited Mortgage Express, Inc. (Mortgage Express), a Federal Housing
Administration-approved loan correspondent located in La Vista, Nebraska,
because its default rate has been significantly higher than the U.S. Department of
Housing and Urban Development (HUD) Des Moines field office’s average over
the past two years.
Our audit objectives were to determine whether Mortgage Express properly
developed and implemented a quality control plan and properly originated Federal
Housing Administration mortgages.
What We Found
Mortgage Express’s quality control process did not comply with HUD
requirements. Mortgage Express’s written quality control plan lacked many
required elements. In addition, Mortgage Express did not conduct all required
quality control reviews, nor did its management review completed quality control
reports and take prompt corrective action when the reports identified deficiencies.
Mortgage Express also did not follow HUD requirements when originating 18 of
41 Federal Housing Administration mortgages reviewed. Because Mortgage
Express’s Federal Housing Administration sponsors are ultimately responsible to
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HUD for these deficiencies, we will address these deficiencies to the appropriate
sponsors in separate reports.
What We Recommend
We recommend that the Assistant Secretary for Housing–Federal Housing
Commissioner and Chairman, Mortgagee Review Board, require Mortgage
Express to implement controls to ensure that it follows HUD’s quality control
requirements and verify that Mortgage Express has implemented proper controls.
We also recommend that HUD take appropriate administrative action against
Mortgage Express for continuing to operate without an adequate quality control
process.
For each recommendation without a management decision, please respond and
provide status reports in accordance with HUD Handbook 2000.06, REV-3.
Please furnish us copies of any correspondence or directives issued because of the
audit.
Auditee’s Response
We provided a draft report to Mortgage Express on April 1, 2005, and received
written comments on April 15, 2005, as requested. Mortgage Express generally
agreed with our conclusions, and responded that it has updated its Quality Control
Manual to conform to HUD requirements. Mortgage Express also plans to hire
quality control staff and have its quality control function in compliance with HUD
rules and regulations by the end of April 2005.
The complete text of the auditee’s response can be found in appendix A of this
report.
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TABLE OF CONTENTS
Background and Objectives 4
Results of Audit
Finding: Mortgage Express’s Quality Control Process Did Not Comply with 5
HUD Requirements
Scope and Methodology 8
Internal Controls 9
Appendix
A. Auditee Comments 10
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BACKGROUND AND OBJECTIVES
Mortgage Express is a loan correspondent located in La Vista, Nebraska. A loan correspondent
is a lender that has as its principal activity the origination of Federal Housing Administration-
insured mortgages for sale or transfer to its sponsors.
Mortgage Express began operations in 1995 and became an approved loan correspondent for the
Federal Housing Administration in June 1998. Mortgage Express currently operates 18 branches
located in 11 states. Approximately 20 percent of Mortgage Express’s overall business involves
origination of Federal Housing Administration loans. Mortgage Express originated 804 Federal
Housing Administration-insured loans that closed from June 1, 2002, through May 31, 2004.
We selected Mortgage Express for review because its default rate has been significantly higher
than the U.S. Department of Housing and Urban Development (HUD) Des Moines field office’s
average over the past two years. At the beginning of our audit period, the percentage of Federal
Housing Administration loans originated by Mortgage Express that had defaulted within the first
two years was 140 percent of the national average, and its default rate had reached 150 percent of
the national average by the end of our audit period. When compared to regional averages,
Mortgage Express’s default rate at the end of our audit period was 390 percent of the Des
Moines field office’s average and 232 percent of the Omaha field office’s average.
Our audit objectives were to determine whether Mortgage Express properly developed and
implemented a quality control plan and complied with HUD regulations, procedures, and
instructions in the origination of Federal Housing Administration mortgages.
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RESULTS OF AUDIT
Finding: Mortgage Express’s Quality Control Process Did Not Comply
with HUD Requirements
Mortgage Express had not established and implemented an adequate quality control process.
Mortgage Express’s written quality control plan did not include many required elements, and its
staff did not conduct all quality control reviews required by HUD. Further, Mortgage Express’s
management did not review the quality control reports of completed reviews and take prompt
corrective action on identified deficiencies. This occurred because Mortgage Express’s senior
management had not made quality control a priority. As a result, Mortgage Express is unable to
ensure the accuracy, validity, and completeness of its loan origination operations.
Mortgage Express’s Process
Did Not Meet HUD Standards
Mortgage Express’s written quality control plan lacked many HUD-required
elements specified in HUD Handbook 4060.1. HUD requires all Federal Housing
Administration-approved lenders, including loan correspondents, to implement
and continuously have in place a quality control plan for the origination of insured
mortgages. The more significant deficiencies in Mortgage Express’s quality
control plan included the absence of guidance on conducting onsite branch
reviews at least once per year, reviewing all loans going into default within the
first six months or first six payments due (i.e, early payment defaults), or
completing quality control reviews within 90 days of loan closing.
Further, Mortgage Express did not conduct all quality control reviews required
during our audit period. It also did not perform the completed reviews in
accordance with HUD regulations and did not take prompt corrective action when
these reviews identified deficiencies. HUD Handbook 4060.1 requires lenders to
conduct quality control reviews of loans within 90 days closing, and requires
reviews either monthly or quarterly, depending on the number of loans closed
each month. HUD also sets parameters on the sample size and selection of loans
for review and requires lenders to review all early payment defaults.
Mortgage Express provided quality control reports for June 2002 through
December 2003. However, the reports did not demonstrate that Mortgage
Express had conducted the reviews in accordance with HUD requirements. For
example, the reports did not show that Mortgage Express had
o Conducted reviews of at least 10 percent of the Federal Housing
Administration loans closed during each review period.
o Conducted onsite reviews of branch offices.
o Reviewed all loans defaulting within six months of the closing date or
within the first six payments due. HUD’s systems showed that nine loans
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had defaults reported within the early default timeframe; however,
Mortgage Express had reviewed only two of these loans.
Additionally, Mortgage Express’s senior management did not review the quality
control reports; therefore, it could not ensure prompt action was taken to correct
deficiencies noted in the reports.
Mortgage Express could not provide reports for the remainder of our audit period,
January through May 2004, because it has not performed quality control reviews
since December 2003. Mortgage Express told us that in October 2003, it
terminated the employee responsible for quality control reviews but did not hire a
replacement until May 2004.
Mortgage Express has been aware of its inadequate quality control program for
more than two years, but it has not taken the necessary actions to ensure that its
quality control program meets HUD requirements. HUD’s Quality Assurance
Division reviewed Mortgage Express in 2002 and reported several problems with
its quality control program. In response, Mortgage Express certified to HUD in
August 2003 that it had updated its plan and that the updated plan met HUD
requirements. However, as of December 2004, Mortgage Express had not
updated its quality control plan and was still using its plan of July 1998–the same
plan that HUD had previously determined did not comply with applicable
requirements. Mortgage Express told us that it is updating its quality control plan
to comply with HUD Handbook 4060.1.
Conclusion
Mortgage Express did not establish and implement a quality control process that
complied with HUD requirements. Its written plan lacked many significant
elements necessary to conduct proper quality control reviews, and it did not
ensure that it conducted quality control reviews in accordance with HUD
regulations. Without a properly implemented quality control process, Mortgage
Express cannot ensure that its loan origination operations comply with HUD
requirements; that it is protecting itself and HUD from unacceptable risk; and that
it is guarding against errors, ommissions, and fraud.
Recommendations
We recommend that the Assistant Secretary for Housing–Federal Housing
Commissioner and Chairman, Mortgagee Review Board,
1A. Require Mortgage Express to establish and implement an adequate quality
control process.
1B. Verify that Mortgage Express’s quality control process is fully implemented in
accordance with HUD regulations.
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1.C. Take appropriate administrative action against Mortgage Express for
continuing to operate without an adequate quality control process.
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SCOPE AND METHODOLOGY
Mortgage Express originated 804 Federal Housing Administration-insured loans that closed from
June 1, 2002, through May 31, 2004. Of these 804 loans, we reviewed 41 loans that defaulted
within the first two years of the loan.
To achieve our objectives, we reviewed HUD’s rules, regulations, and guidance for proper
origination of Federal Housing Administration loans. We also reviewed previous HUD reviews
of Mortgage Express and the HUD case binders for the 41 defaulted loans. In addition, we
interviewed HUD staff to obtain background information on HUD requirements and Mortgage
Express.
We interviewed Mortgage Express’s management and staff to obtain information regarding its
policies, procedures, and management controls. We reviewed Mortgage Express’s written
policies and procedures to gain an understanding of how its processes are designed to function.
We also reviewed Mortgage Express’s case binders for the 41 defaulted loans and its 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 November 2004 through March 2005. The audit was conducted
in accordance with generally accepted government auditing standards.
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INTERNAL CONTROLS
Internal control is an integral component of an organization’s management that provides
reasonable assurance that the following objectives are being achieved:
• Effectiveness and efficiency of operations,
• Reliability of financial reporting, 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 item is a significant weakness:
• Mortgage Express has not properly implemented a quality control plan and
process (see finding).
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Appendix A
AUDITEE COMMENTS
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Mortgage Express's Quality Control Process Did Not Comply with HUD Requirements
Published by the Department of Housing and Urban Development, Office of Inspector General on 2005-04-21.
Below is a raw (and likely hideous) rendition of the original report. (PDF)