oversight

Corinthian Mortgage Corporation, Mission, KS, Did Not Always Comply with Federal Housing Administration Requirements

Published by the Department of Housing and Urban Development, Office of Inspector General on 2005-05-13.

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

                                                              Issue Date
                                                                       May 13, 2005
                                                              Audit Report Number
                                                                           2005-KC-1006




TO:         Frank L. Davis, General Deputy Assistant Secretary for Housing, H

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


SUBJECT: Corinthian Mortgage Corporation, Mission, KS, Did Not Always Comply with
           Federal Housing Administration Requirements


                                   HIGHLIGHTS

 What We Audited and Why
           We audited Corinthian Mortgage Corporation (Corinthian Mortgage), a
           nonsupervised direct endorsement lender located in Mission, 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 2
           years.

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

 What We Found
             Corinthian Mortgage’s quality control process did not comply with HUD
             requirements. Corinthian Mortgage did not ensure that it conducted sufficient and
             timely quality control reviews. It also did not take prompt corrective action when
             quality control reports identified material deficiencies. As a result, HUD lacks
             assurance that Corinthian Mortgage is able to ensure the accuracy, validity, and
             completeness of its loan origination operations.



                                             1
           Further, Corinthian Mortgage did not follow HUD requirements when processing
           and underwriting Federal Housing Administration loans. It improperly originated
           3 of the 44 loans reviewed. These three loans contained material deficiencies that
           affected the insurability of the loans, including unsupported assets, underreported
           liabilities, and unsupported income. Additionally, Corinthian Mortgage submitted
           one loan with a serious misstatement. As a result, HUD insured four loans that
           placed the insurance fund at risk for $472,833.


What We Recommend


           We recommend that the general deputy assistant secretary for housing take
           appropriate administrative action against Corinthian Mortgage based on the
           information contained in these findings. This action should, at a minimum,
           include requiring indemnification for the three actively insured loans and
           reimbursement for losses already incurred on the remaining loan. Corinthian
           Mortgage should also reimburse the appropriate parties for unallowable costs
           charged to borrowers.

           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


           Corinthian Mortgage generally disagreed with our findings. We provided the
           draft report to Corinthian Mortgage on April 22, 2005, and requested a response
           by April 29, 2005. Corinthian Mortgage provided written comments on April 29,
           2005.

           The complete text of the auditee’s response, along with our evaluation of that
           response, can be found in appendix B of this report.




                                            2
                             TABLE OF CONTENTS

Background and Objectives                                                          4

Results of Audit
        Finding 1: Corinthian Mortgage’s Quality Control Process Did Not Comply    5
                   with HUD Requirements
        Finding 2: Corinthian Mortgage Did Not Follow HUD Requirements When        8
                   Originating Loans

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                                         31
   D.   Unallowable Fees Charged to Borrowers                                     32
   E.   Case Studies of Improperly Submitted Loans                                33




                                             3
                      BACKGROUND AND OBJECTIVES

Corinthian Mortgage Corporation (Corinthian Mortgage) began operations in 1985 and became
an approved lender for the Federal Housing Administration that same year. Corinthian Mortgage
Corporation’s headquarters is located in Mission, KS. At the beginning of our audit period,
Corinthian maintained six branch offices, four in the Kansas City area. All four of the Kansas
City area offices, as well as one other, were sold or closed at the end of 2003. Corinthian
Mortgage currently operates only one branch office doing business as Southbanc in Herndon,
VA. According to Corinthian staff in the Virginia office, they currently originate an average of
only two Federal Housing Administration loans per month. Corinthian performs its own U.S.
Department of Housing and Urban Development (HUD)-required quality control reviews.

Corinthian Mortgage originated 758 Federal Housing Administration-insured mortgages that closed
between September 1, 2002, and August 31, 2004. We selected Corinthian Mortgage for review
because its default rate was significantly higher than the HUD Kansas City field office’s average
over the past 2 years. During our audit period, the percentage of Federal Housing Administration
loans defaulting at Corinthian Mortgage within the first 2 years was 5.66 percent. This was more
than twice the Kansas City field office’s rate.

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




                                                 4
                                RESULTS OF AUDIT

Finding 1: Corinthian Mortgage’s Quality Control Process Did Not
            Comply with HUD Requirements
Corinthian Mortgage did not comply with HUD’s quality control requirements. The written
quality control plan fully met HUD’s requirements; however, the elements of the plan were not
adequately implemented. The deficiencies associated with Corinthian Mortgage’s quality
control plan and procedures can be attributed to several issues including staff turnover and
excessive workload. As a result, Corinthian Mortgage is unable to ensure the accuracy, validity,
and completeness of its loan originations.



   Corinthian Mortgage’s Process
   Did Not Meet HUD Standards

              Corinthian Mortgage’s written quality control plan included all HUD-required
              elements. Corinthian Mortgage did not, however, consistently follow the plan. It
              did not perform sufficient or timely reviews, nor did it take prompt corrective action
              when deficiencies were identified.

              During the audit period, Corinthian Mortgage only began reviewing 10 percent or
              more of its Federal Housing Administration loans in May 2004. HUD requires
              that lenders perform a monthly review of at least 10 percent of all Federal
              Housing Administration loans originated. Additionally, Corinthian did not review
              any Federal Housing Administration loans that went into default within 6 months
              of the closing date, although HUD requires that all such loans be reviewed.
              Furthermore, Corinthian did not perform annual branch office visits for any
              branch in the Kansas City field office during 2003. Corinthian’s explanation is
              that there was a plan to sell or close the branches, so they did not feel it was
              necessary to do the site visits.

              Quality control reviews should be performed on a regular and timely basis.
              Corinthian Mortgage did not have quality control reports for 7 months out of our
              2-year audit period. For the months that reviews were completed (September
              2002-August 2003 and April 2004-August 2004), we determined that the number
              of days between the last day of the reporting month and publication of the quality
              control report ranged from 85 days to 305 days. The average was 186 days.
              Additionally, Corinthian Mortgage did not always perform quality control reviews
              within 90 days of loan closing. For 16 months, Corinthian Mortgage did not
              complete any reviews within 90 days of loan closing. HUD requires that the
              review of a specific mortgage be completed within 90 days of closing. The
              following chart shows by month the total number of loan reviews required to meet



                                                5
             the 10-percent requirement, the number of loans reviewed, and the number of
             those loans that were reviewed within 90 days of closing.


                                                            Monthly Reviews
                            12


                            10


                             8
              Total loans




                             6


                             4


                             2


                             0

                                 Aug-03




                                 Aug-04
                                 May-03




                                 May-04
                                 Jun-03




                                 Jun-04
                                 Oct-02
                                 Nov-02
                                 Dec-02
                                  Jan-03


                                 Apr-03


                                  Jul-03


                                 Oct-03
                                 Nov-03
                                 Dec-03
                                  Jan-04


                                 Apr-04


                                  Jul-04
                                 Sep-02




                                 Feb-03
                                 Mar-03




                                 Sep-03




                                 Feb-04
                                 Mar-04
                                                           Month of review
                                 Number of loan reviews required
                                 Total loans reviewed
                                 Loans reviewed within 90 days of closing


             Corinthian Mortgage’s senior management did not take prompt action to correct
             deficiencies noted in its quality control reports. Corinthian’s quality control
             reports did not include management responses. We were not provided with any
             other evidence of management responses to the quality control reports.

             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 Corinthian Mortgage is properly processing
             and submitting Federal Housing Administration loans for insurance endorsement.

Conclusion

             Corinthian Mortgage did not implement a quality control process that complied
             with HUD requirements. The written quality control plan included all HUD-
             required elements; however, the elements of the plan were not adequately
             followed. The deficiencies associated with Corinthian Mortgage’s quality control
             plan and procedures can be attributed to several issues including staff turnover,
             excessive workload of the quality control supervisor, increased volume of


                                                             6
          indemnification/repurchase issues, and the opening of a high-volume call center.
          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

          Because the branches reviewed are no longer in business, we have no
          recommendation for this finding.




                                          7
Finding 2: Corinthian Mortgage Did Not Follow HUD Requirements
           When Originating Loans
Corinthian Mortgage did not follow HUD requirements when processing and underwriting 3 of
the 44 loans reviewed for compliance. The loans contained material deficiencies that affected
the credit quality (insurability) of the loans. Additionally, Corinthian Mortgage submitted one
loan with a serious misstatement. The loan origination deficiencies occurred because Corinthian
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 four
loans that placed the insurance fund at risk for $472,833 and incurred other related losses.


 Loans Did Not Comply with
 HUD Requirements

              Corinthian Mortgage originated three loans totaling $394,453 that contained
              significant loan origination deficiencies. These loans contained material errors
              including unsupported assets, underreported liabilities, and unsupported income.
              These deficiencies occurred because Corinthian Mortgage did not have adequate
              controls to ensure that its employees followed HUD requirements when
              originating loans. Corinthian Mortgage’s deficient quality control process may
              have also contributed to the loan origination deficiencies (see finding 1).

              As of February 1, 2005, HUD’s data systems showed that two of the three loans were
              actively insured with Federal Housing Administration insurance. HUD had incurred
              $191,049 in claims on the third loan.

              The following table summarizes the categories of loan deficiencies.

                                Deficiency               Number of Loans
                      Unsupported assets                           1
                      Underreported liabilities                    2
                      Unsupported income                           2

              Two 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 three loans, and appendix E contains detailed case studies of
              each of these loans.

   Unsupported Assets


              Corinthian Mortgage did not sufficiently verify borrower assets in one of the three
              loans with material deficiencies. The material deficiency related to a new bank
              account with a large unexplained balance.


                                                  8
            HUD requires lenders to verify all funds for the borrower’s investment in the
            property. More specifically, HUD requires the lender to obtain an explanation
            and evidence of source of funds for any large increases in bank accounts or
            recently opened accounts.


Underreported Liabilities


            Corinthian Mortgage did not consider all relevant liabilities when approving two
            of the three 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. Underreported liabilities have a
            direct effect on the housing and debt ratios. These ratios are an integral part of
            the underwriting decision. The use of incorrect liability information could result
            in an invalid underwriting decision.

Unsupported Income

            Corinthian Mortgage used an unsupported income amount for two of the three
            loans. Lenders may not use any income in evaluating the borrower’s loan that it
            cannot verify, is not stable, or will not continue. Overstating income has a direct
            effect on the housing and debt ratios. These ratios are an integral part of the
            underwriting decision. The use of incorrect income information could result in an
            invalid underwriting decision.


Other Deficiencies

            Corinthian Mortgage also originated 20 loans that contained minor underwriting
            deficiencies. While these deficiencies did not affect the overall credit quality
            (insurability) of the individual loans, this fact does not relieve the lender from
            following all facets of HUD requirements when originating Federal Housing
            Administration loans. We provided details of these deficiencies to Corinthian
            Mortgage during our review. Appendix C presents a table summarizing the
            deficiencies on each of the 20 loans.

            In addition, Corinthian Mortgage submitted one loan to HUD claiming
            downpayment assistance from the state’s housing finance agency that was never
            received. The state agency determined the borrower was ineligible after the loan
            closed, but before Corinthian submitted the loan to HUD. Without the grant
            funds, the borrower did not meet the statutory minimum investment requirement.
            Therefore, this loan was not eligible for Federal Housing Administration
            insurance. As of February 1, 2005, HUD’s data systems showed that the loan, with an



                                             9
             original mortgage amount of $78,380, was actively insured with Federal Housing
             Administration insurance.

             Unallowable fees were charged to borrowers in three loans. A listing of the
             unallowable fees charged to borrowers is presented in appendix D.


Conclusion

             Corinthian Mortgage did not have an effective control environment to prevent its
             employees from approving loans that did not meet HUD requirements. As a
             result, Corinthian Mortgage originated four loans containing deficiencies that
             have placed the Federal Housing Administration insurance fund at risk for
             $472,833 and caused HUD to incur other related losses.

Recommendations

             We recommend that the general deputy assistant secretary for housing

             2A. Take appropriate administrative action against Corinthian Mortgage for not
                 complying with HUD requirements, including imposing appropriate
                 monetary penalties and requiring Corinthian Mortgage to indemnify HUD
                 for the three loans holding active insurance totaling $297,269 and the one
                 loan with claims paid totaling $191,049.

             2B. Require Corinthian Mortgage to reimburse the appropriate borrowers for
                 $590 in unallowable fees (see appendix D).




                                              10
                         SCOPE AND METHODOLOGY

Corinthian Mortgage originated 758 Federal Housing Administration-insured loans that closed
from September 1, 2002, through August 31, 2004. Of these 758 loans, we reviewed 44 loans
that defaulted within the first 2 years of the loan. We also reviewed one loan that did not default
but was submitted with a major misstatement.

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 Corinthian Mortgage and the HUD case binders for the 44 defaulted
loans. In addition, we interviewed HUD staff to obtain background information on HUD
requirements and Corinthian Mortgage.

We interviewed Corinthian Mortgage’s management and staff to obtain information regarding its
policies, procedures, and management controls. We reviewed Corinthian’s written policies and
procedures to gain an understanding of how its processes are designed to function. We also
reviewed Corinthian Mortgage’s quality control plan and available quality control reports.
Additionally, we reviewed Corinthian Mortgage’s case binders for the 44 defaulted loans and the
loan with the misstatement.

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 through February 2005. 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 item is a significant weakness:

                      •   Corinthian Mortgage has not properly implemented a quality control
                          plan and process (see finding 1).




                                               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/
      2A                                       $191,049                            $297,269
      2B                         $590


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 when we cannot determine eligibility at the time of audit. Unsupported costs
     require a 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/   Unreasonable/unnecessary 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 to be put to better use” are quantifiable savings that are anticipated to occur if an
     Office of Inspector General (OIG) recommendation is implemented, resulting in reduced
     expenditures at a later time for the activities in question. This includes costs not incurred,
     deobligation of funds, withdrawal of interest, reductions in outlays, avoidance of
     unnecessary expenditures, loans and guarantees not made, and other savings.




                                              13
Appendix B

        AUDITEE COMMENTS AND OIG’S EVALUATION


Ref to OIG Evaluation   Auditee Comments




Comment 1




                         14
Comment 2




Comment 3


Comment 4




            15
Comment 5




            16
17
Comment 6




            18
Comment 7




            19
Comment 8




            20
Comment 9




            21
Comment 10




Comment 11




             22
Comment 12




             23
Comment 4




Comment 13




Comment 14



Comment 15


Comment 16


Comment 17




Comment 18




             24
Comment 19




Comment 20



Comment 21




             25
Comment 14


Comment 22


Comment 23




             26
                         OIG Evaluation of Auditee Comments

Comment 1   We reviewed Corinthian Mortgage because the default rate for the Kansas City
            area branches was significantly higher than the HUD Kansas City field office’s
            average over the past two years. We only used default rate as the selection
            criteria, not to make assumptions or recommendations.

Comment 2   Corinthian Mortgage does not dispute our findings on its Quality Control
            activities during our audit period. The Quality Control finding only reflects the
            deficiencies for our specified audit period. The report does point out that
            Corinthian Mortgage began reviewing the necessary 10 percent of Federal
            Housing Administration loans. Additionally, the chart shows this improvement as
            well as the fact that Corinthian Mortgage also met the 90-day requirement in the
            final month of our review.

Comment 3   The Quality Control function is to assure compliance with HUD’s origination
            requirements, protect against unacceptable risk, guard against errors, omissions,
            and fraud, and assure corrective action. Since Corinthian was not adequately
            performing this important required function during our audit period, we
            concluded that it did not have appropriate controls.

Comment 4   HUD Handbook 4155.1, Revision 4, Paragraph 2-10-C states that “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.” The Homeownership Center Reference Guide advises that “evidence of the
            actual transfer of funds can be shown as a transaction on the HUD-1.” Mortgagee
            Letter 2004-28 clarifies that the lender is not required to submit a copy of the wire
            transfer to HUD, but “the lender must obtain and keep the documentation of the
            wire transfer in its mortgage loan application binder.” In light of the various
            instructions provided by HUD, and the fact that the clarifying mortgagee letter
            was issued after the loans in question, we will remove the inadequate
            documentation errors related to the documentation of gift funds.

Comment 5   We acknowledge Corinthian Mortgage’s frustration with receiving differing
            advice from the various Homeownership Centers. We suggest that Corinthian
            document any guidance provided by any HUD staff. This would allow Corinthian
            to provide documented proof in the event that actions taken based on the guidance
            is questioned.

Comment 6   Corinthian Mortgage’s argument is based on what it should have done, not what it
            did. The fact is, the underwriter did not include all eligible liabilities and income,
            but did include a liability that was not required. The automated
            underwriting decision is based on incorrect data, rendering it invalid. The
            addition of the excluded liability and the removal of the included liability change
            the debt ratio to at least 47 percent. Since the information pertaining to the rental
            property was incorrectly entered in the application and the automated


                                             27
              underwriting system, it is unclear what the total amount of the negative rental
              income would be. The Desktop Underwriter guide says the calculation for
              negative rental income is 75 percent of gross rental income less mortgage
              payment and less taxes, insurance, maintenance, and miscellaneous. Corinthian’s
              response takes into account the mortgage payment but does not indicate the
              amount to be deducted for taxes, insurance, maintenance, and miscellaneous.
              Additionally, it cannot be assumed that exchanging one type of liability for
              another would result in the same automated underwriting decision. The loan
              might have required compensating factors, as well as any other manual
              underwriting requirements, for approval.

Comment 7     Condition #33 on the Desktop Underwriter Findings Report states that all cash
              reserves must be verified. The amount of reserves is a factor for the automated
              decision and should, therefore, be verified. The $3,000 in question was included
              in the reserves, so it should have been verified. Because the $3,000 was used to
              open a new savings account; the verification should have included an explanation
              or evidence as to the source of funds.

Comment 8     Because the borrower has been at his current job for such a short amount of time,
              has recently changed jobs and is working in a different line of work; we feel that
              calculating an average using prior years’ income is most prudent. In general, the
              income of hourly employees should be considered over a longer term.

Comment 9     Corinthian’s argument is based on what should have been done, not what was
              done. The fact is, the underwriter did not include all required liabilities. The
              automated underwriting decision is based on incorrect data, rendering it invalid.
              The loan would have required compensating factors, as well as any other manual
              underwriting requirements, for approval due to the excessive debt ratio of 46.44
              percent.

Comment 10 Corinthian provided no evidence to substantiate the claim that the lower year-to-
           date earnings are related to the nature of the borrower’s job. We have no
           guarantee that the income will increase to prior levels. Without evidence to the
           contrary, the year-to-date earnings most accurately reflect the income of the
           borrower. The income entered into the automated underwriting system was
           incorrect, invalidating the decision.

Comment 11 Although the automated underwriting system did not require separate
           consideration of these issues, the systems approval was based on unsupported
           income and underreported liabilities. Based on the invalidity of the decision, the
           credit issues, future obligations, lack of assets, and increase in housing expense
           provide strong evidence against compensating factors in a manual underwriting
           decision.

Comment 12 According to the Homeownership Center Reference Guide, Broker
           Administration/Processing/Transaction Fee, etc. are not allowable. Corinthian
           provided no documentation of the Homeownership Center’s advice regarding this
           fee, nor was there documentation to show that the practice was customary in the
           area. We did not find this line item on any of the other loans reviewed.


                                              28
Comment 13 These loans were listed as having inadequate documentation errors because the
           HUD file in each case either did not contain evidence indicating that the Limited
           Denial of Participation or General Services Administration’s lists were consulted
           or that the borrower(s) were assigned a CAIVRS number. These are both HUD
           requirements that must be met. Evidence was found in the Corinthian Mortgage
           lender files, therefore, the errors were considered minor.

Comment 14 Corinthian’s argument that if the Homeownership Center did not reject the loan
           then the documentation must have been sufficient is faulty. The lender is
           ultimately responsible for the quality of its work, not HUD. The lender was
           approved as a Direct Endorsement lender with the expectation that HUD
           regulations would consistently be met.

Comment 15 Condition #30 on the Desktop Underwriter Findings Report states that all cash
           reserves must be verified. The amount of reserves is a factor for the automated
           decision and should, therefore, be verified. The $3,000 in question was included
           in the reserves, so it should have been verified. Because the $3,000 was a
           significant amount and was made near closing, the verification should have
           included an explanation or evidence as to the source of funds. The average daily
           balance has no bearing on this issue.

Comment 16 The borrower’s savings account ending balance as of October 31, 2002 was
           $492.27. The file did not contain the actual listing of activity for the month of
           November. The account ending balance as of November 30, 2002, per the
           December bank statement, was $4,220.65. HUD Handbook 4155.1, Revision 4,
           Paragraph 2-10-B clearly states that any large increase in a banking account
           requires an explanation and evidence of source of funds.

Comment 17 This loan is listed as having an unsupported income error because of the
           overstated child support. Corinthian Mortgage agreed that the income was
           overstated. While the amount is small, its inclusion was still an error.

Comment 18 This loan was listed as having an unsupported asset error. However, Corinthian
           Mortgage did show in the lender file documentation proving the receipt of the tax
           refund loan. Adequate documentation was not provided in the HUD file;
           therefore, this loan will be listed as having an inadequate documentation error.

Comment 19 We agree with Corinthian Mortgage’s response on this loan. It will be dropped
           from the finding.

Comment 20 The case listed with an inadequate documentation error related to an initial
           buydown is 291-3076578. This loan was automatically underwritten and
           approved with a debt ratio of 54.7 percent using the buydown rate. Once the
           buydown term is up, the ratio will increase to 60 percent. HUD Handbook
           4155.1, Revision 4, Paragraph 2-14A requires that the underwriter document
           which of the acceptable criteria the borrower meets to establish that the eventual
           increase in mortgage payments will not adversely affect the borrower and likely
           lead to default. However, the automated underwriting report did not contain a


                                              29
              specific condition related to the buydown so we will remove this loan from the list
              of loans with minor deficiencies.

Comment 21 This loan was listed as having a minor deficiency because a Verification of
           Employment was not found in the HUD file for the co borrower. Corinthian
           Mortgage did show that this document was in the lender file. The error for this
           loan should be listed as an inadequate documentation error and not an
           unsupported income error.

Comment 22 We agree with Corinthian Mortgage’s response on this loan. It will be dropped
           from the finding.

Comment 23 The credit report contained handwritten amounts for two collection accounts
           totaling $25 per month. One account has a balance of $294 and a monthly
           payment of $15. This payment should have been included in the total liabilities
           since there are more than 10 payments remaining.




                                              30
                     Appendix C

                    LOAN PROCESSING DEFICIENCY CHARTS


                   Loans with Deficiencies That Affected Insurability
                                   Underreported Unsupported Unsupported Total Errors -
                    FHA Case # Liabilities       Income      Assets      per Loan
                    291-3027843                1                       1             2
                    291-3178636                            1                         1
                    291-3195243                1           1                         2
                    Total Errors -
                    per deficiency             2           2           1             5

      *** Only the deficiencies that affected insurability are included in this chart. Loan number 291-
      3195243 contained both deficiencies that affected insurability and minor deficiencies. It is found
      in both tables.

                                 Loans with Minor Deficiencies
               Underreported Unsupported Unsupported Derogatory Unallowable Inadequate      Total Errors -
FHA Case # Liabilities        Income     Assets      Credit      Charges     Documentation per Loan
182-0753355                                        1                                                     1
291-3009465                                                                               1              1
291-3011315                                                                1                             1
291-3012327                                                    1           1                             2
291-3033826                                                                1              1              2
291-3057612                                        1                                                     1
291-3059012                                                                               1              1
291-3059931                                                                               1              1
291-3070785                            1                                                  1              2
291-3073247                                                                               1              1
291-3088104                                                                               1              1
291-3088757                                                                               1              1
291-3104350                                                                               1              1
291-3113005                                                                               3              3
291-3116756                                                                               1              1
291-3117071                                                                               1              1
291-3133725                 1                                                                            1
291-3156811                                                                               2              2
291-3184076                            1                                                  1              2
291-3187428                                                                               1              1
Total Errors -
per deficiency              1          2           1           1           3             17            25
      ***Not all errors pertaining to liabilities, income, assets, or credit were considered material
      deficiencies. Only those errors that could have changed the underwriting decision were
      considered material. For instance, some errors in income or liabilities did not significantly affect
      the housing and debt ratios.


                                                      31
Appendix D

    UNALLOWABLE FEES CHARGED TO BORROWERS

                           Description of Unallowable
             Case #        Charge                       Fee Charged
             291-3011315   Loan admin fee                      $445
             291-3012327   Wire/admin fee                       $50
             291-3033826   Other sales agent charge             $95
             Total                                             $590




                                          32
Appendix E

      CASE STUDIES OF IMPROPERLY SUBMITTED LOANS

Case Number: 291-3027843                                Loan Purpose: Purchase
Underwriter Type: Desktop Underwriter                   Date of Loan Closing: 10/16/02
Insured Amount: $175,564                                Housing/Debt Ratio: 20.93/48.6 percent
Status: Property conveyed to insurer                    HUD Costs Incurred: $191,049


Underreported Liabilities:
The borrower’s credit report shows a Department of Veterans Affairs mortgage with a $655 per
month payment. This payment is not included in the liabilities. The file includes a month-to-
month rental agreement for the property but also includes a sales agreement for the property.
Based on the credit report, the mortgage should have been included as a liability when qualifying
the borrower. There is not enough documentation in the file to prove that the property was sold
or is used as a rental property. The lender stated that the property was rented and is still
occupied under the agreement included in the HUD file. A minimum of $93 should have been
included in the liabilities to account for the difference between the $655 mortgage payment and
75 percent of the $750 rental income. We cannot be sure if the mortgage amount includes the
taxes and insurance that must be deducted from the gross rental income when determining net
rental income. This would increase the debt ratio to 50.06 percent.

HUD Requirements:
HUD Handbook 4155.1, REV-4, paragraph 2-11A, 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 10 months or more.

The 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 HUD guidelines as well as for any HUD eligibility
requirements, credit capacity, and documentation requirements that are not covered in this User’s
Guide. All data entered into Desktop Underwriter must be true, accurate, and complete.

HUD Handbook 4155.1, REV-4, paragraph 2-7M, Rental Income: If a property was acquired
since the last income tax filing and is not shown on Schedule E, a current, signed lease or other
rental agreement must be provided. The gross rental amount must be reduced for vacancies and
maintenance by 25 percent (or the percentage developed by the FHA office having jurisdiction
where the property is located) before subtracting principal, interest, taxes, insurance, and any
homeowners’ association dues, etc., and applying the remainder to income (or recurring debts, if
negative).




                                                  33
Unsupported Assets:
The borrower recently opened a savings account with $3,000. The lender did not provide any
explanation or evidence as to the source of funds for the savings account. The borrower did not
need these funds for closing, however, the funds were included in the calculation of reserves and
should have been verified. The automated underwriting system might have returned a different
decision if the reserves only included the funds that were properly verified. Instead of 3 months
worth of reserves, the borrower would only have had 1 month.

HUD Requirements:
HUD Handbook 4155.1, REV-4, paragraph 2-10B, Savings and Checking Accounts: A
verification of deposit may be used to verify these accounts, along with the most recent bank
statement. 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.

Manual Underwriting Considerations:
Because the loan approval was based on incorrect information, we question the data integrity
and, therefore, the validity of the automated approval of this loan. Based on manual
underwriting requirements, the borrower’s creditworthiness should be considered. The
application, underwriting worksheet, and Desktop Underwriter listed monthly liabilities of
$1,787. However, the lender did not consider the borrower’s liabilities of $121 in collections
listed on the credit report. The credit report shows several late payments in the 6 months before
loan closing and several more in the previous 2 years. The underwriter did include $195 in union
dues as a recurring liability. Union dues are not required to be included in the liabilities when
calculating the debt ratios. Removing this liability changes the debt ratio to 47%. Compensating
factors are required when ratios exceed the 29 percent and 41 percent guidelines. No
compensating factors were provided for this loan.

HUD Requirements:
HUD Handbook 4155.1, REV-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.

HUD Handbook 4155.1, REV-4, paragraph 2-3C: Both collections and judgments indicate the
borrower’s regard for credit obligations and must be considered in the analysis of
creditworthiness.

Case Number: 291-3178636                             Loan Purpose: Purchase
Underwriter Type: Desktop Underwriter                Date of Loan Closing: 8/11/03
Insured Amount: $94,254                              Housing/Debt Ratio: 31.7/47 percent
Current Status: Delinquent                           HUD Costs Incurred: $0


Unsupported Income:
The application, underwriting worksheet, and Desktop Underwriter stated the borrower’s total
income was $2,207. The lender computed the borrower’s income based on a 36-hour workweek
at $14 per hour. The borrower had only been employed by his current employer for a short time.


                                                34
This is his second change of employment in two years. While the year-to-date income from the
borrower’s most recent pay stub supports the hourly rate, considering a recent raise, it is only for
three and a half months. Historical income data indicate a much lower monthly income. In
2001, the borrower only averaged $1,524 per month. In 2002, he averaged $1,627 per month. A
more accurate estimate of the borrower’s monthly income, based on employment history and
length of time at current job, would have been an average of his prior year’s earnings and his
year-to-date earnings. That calculation results in an average monthly income of $1,717. Using
this income, the housing ratio would increase from 31.7 to 40.7 percent, and the debt ratio would
increase from 47 to 60.4 percent. Because the loan approval was based on incorrect information,
we question the data integrity and, therefore, the validity of the automated approval of this loan.
Based on the excessive ratios, compensating factors would have been required for manual
underwriting.


HUD Requirements:
HUD Handbook 4155.1, REV-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, REV-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 cannot 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 (see HUD Handbook 4155.1, REV-4, paragraph 2-13, for compensating
factors that may be used in justifying approval of mortgage loans with ratios exceeding HUD’s
guidelines).


Case Number: 291-3195243                              Loan Purpose: Purchase
Underwriter Type: Desktop Underwriter                 Date of Loan Closing: 9/18/03
Insured Amount: $124,635                              Housing/Debt Ratio: 19.11/35.64 percent
Current Status: Repayment                             HUD Costs Incurred: $0

Underreported Liabilities:
The underwriter did not include the co borrower’s $550 child support payment as a liability in
Desktop Underwriter. The payment is listed on the underwriting worksheet and application.
Additionally, the co borrower’s pay stubs show a garnishment for the child support payment.
Without the child support payment, Desktop Underwriter approved the loan with ratios of 19.11
and 35.64 percent. The added liability increases the total debt ratio to 46.44 percent.

HUD Requirements:
HUD Handbook 4155.1, REV-4, paragraph 2-11A, 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 recurring charges including


                                                35
payments on installment accounts, child support or separate maintenance payments, revolving
accounts, and alimony, extending 10 months or more.

In the 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 HUD guidelines, as well as for any HUD eligibility
requirements, credit capacity, and documentation requirements that are not covered in this User’s
Guide. All data entered into Desktop Underwriter must be true, accurate, and complete.

Unsupported Income:
The underwriting worksheet, Desktop Underwriter, and application state that the borrower has
base income of $3,121 per month. This amount was derived from the average of the most recent
19 months. However, the year-to-date income for the most recent 7 months indicates a base pay
of only $2,848 per month. Based on total income from the borrower’s 2002 Internal Revenue
Service Form W-2, her average monthly income in 2002 was $3,280. There is nothing in the file
to explain the decrease in income. The decrease in monthly income would increase the ratios to
20.15 and 48.97 percent.

HUD Requirements:
HUD Handbook 4155.1, REV-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, REV-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 (see HUD Handbook 4155.1, REV-4, paragraph 2-13, for compensating
factors that may be used in justifying approval of mortgage loans with ratios exceeding HUD’s
guidelines).

The 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 HUD guidelines as well as for any HUD eligibility
requirements, credit capacity, and documentation requirements that are not covered in this User’s
Guide. All data entered into Desktop Underwriter must be true, accurate, and complete.

Manual Underwriting Considerations:
Because the loan approval was based on incorrect information, we question the data integrity
and, therefore, the validity of the automated approval of this loan. Based on manual
underwriting requirements, the borrower’s creditworthiness should be considered. The
borrower’s average credit score was below 620. However, the combined average of the
borrower’s and co borrower’s scores is 631. The credit report shows numerous collection
accounts and more than $1,500 in past due payments. Additionally, the borrowers also have
several deferred education loans with a total balance of $11,757. The deferment periods for the
loans end within the first 2 years after loan closing. While these loans are not required to be
included as liabilities, they should be considered. These future liabilities could substantially


                                               36
increase the debt ratio, adversely affecting the borrowers’ ability to repay the home loan.
Another factor to consider is the increase in housing expense. The current housing expense for
the borrower’s documented is $750. The housing expense for the new loan is $1,009, a 25
percent increase. Finally, the borrower’s were only able to verify $6 in assets, other than the gift
funds received from a downpayment assistance program.

HUD Requirements:
HUD Handbook 4155.1, REV-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.

HUD Handbook 4155.1, REV-4, paragraph 2-3C: We don't arbitrarily require that collection
accounts be paid off as a condition for loan approval. Both collections and judgments indicate
the borrower’s regard for credit obligations and must be considered in the analysis of
creditworthiness.




                                                 37