oversight

Union Planters Bank Did Not Follow HUD Requirments When Processing Federal Housing Administration Loans

Published by the Department of Housing and Urban Development, Office of Inspector General on 2005-07-07.

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

                                                            Issue Date
                                                                     July 7, 2005
                                                            Audit Report Number
                                                                     2005-KC-1007




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

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

SUBJECT: Union Planters Bank Did Not Follow HUD Requirements When Processing a
         Federal Housing Administration Loan


                                   HIGHLIGHTS

 What We Audited and Why

            We reviewed one Federal Housing Administration loan sponsored by Union
            Planters Bank (Union Planters) of Memphis, Tennessee. During an audit of a
            Federal Housing Administration-approved loan correspondent, we identified a
            loan sponsored by Union Planters that did not appear to be properly originated
            according to U.S. Department of Housing and Urban Development (HUD)
            regulations. Union Planters also charged the borrower fees prohibited by HUD.
            Because the sponsor of the loan is ultimately responsible for loan processing
            deficiencies, we addressed these deficiencies to Union Planters to determine
            whether it complied with HUD requirements.

 What We Found
            Union Planters did not comply with HUD requirements when underwriting a
            Federal Housing Administration-insured mortgage. It did not adequately support
            the monthly income used in an automated underwriting system that approved the
            loan. As a result, it improperly placed the insurance fund at risk for $74,333. In
            addition, the loan contained $641 in unallowable fees charged to the borrower.




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What We Recommend
           We recommend that the assistant secretary for housing - federal housing
           commissioner take appropriate administrative action against Union Planters. This
           action, at a minimum, should include requiring indemnification for the $74,333
           loan and reimbursement of the $641 in unallowable charges to the appropriate
           parties.

           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
           Union Planters agreed with our conclusions and to indemnify HUD for the
           improperly originated loan. We provided the draft report to Union Planters on
           June 30, 2005, and requested a response by July 11, 2005. Union Planters
           responded on July 5, 2005, and asked that we consider its initial written
           comments provided on May 16, 2005, as its official response.

           The complete text of the auditee’s response can be found in appendix B of this
           report.




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                            TABLE OF CONTENTS

Background and Objectives                                                    4

Results of Audit
         Finding: Union Planters Bank Did Not Follow HUD Requirements When   5
                   Processing a Federal Housing Administration Loan

Scope and Methodology                                                        7

Appendixes
   A. Schedule of Questioned Costs and Funds to Be Put to Better Use         8
   B. Auditee Comments                                                       9
   C. Case Study of Improperly Originated Loan                               10




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                     BACKGROUND AND OBJECTIVES

Union Planters Bank (Union Planters) is a supervised lender that began originating Federal
Housing Administration loans in 1952.

During the audit of a loan correspondent, we identified one Federal Housing Administration loan
sponsored by Union Planters that did not appear to be properly originated according to U.S.
Department of Housing and Urban Development (HUD) requirements. To resolve the
deficiencies, we performed a review of Union Planters’s underwriting of the loan.

Our objective was to determine whether Union Planters complied with HUD regulations,
procedures, and instructions when processing the Federal Housing Administration mortgage that
it sponsored for a loan correspondent.




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                               RESULTS OF AUDIT

Finding: Union Planters Bank Did Not Follow HUD Requirements
         When Processing a Federal Housing Administration Loan
Union Planters did not comply with HUD regulations, procedures, and instructions in the
processing of a Federal Housing Administration-insured single-family mortgage. The lender did
not adequately support the monthly income used in gaining loan approval from an automated
underwriting system. The lender also charged the borrower closing fees prohibited on Federal
Housing Administration mortgages. As a result, HUD insured a loan that placed the insurance
fund at risk for $74,333.


 Union Planters Did Not Follow
 HUD Requirements

              Union Planters overstated the borrower’s income when originating a Federal
              Housing Administration mortgage, which materially affected the insurability of
              the $74,333 loan. The lender originated case number 321-2197119 using a
              monthly income that was based on a 30-month average. However, the borrower’s
              income had continually declined during this period. HUD regulations state that
              lenders may not use income in evaluating a borrower’s loan that it cannot verify,
              is not stable, or will not continue.

              The borrower’s income decreased from $41,060 in 2000 to a projected income of
              $31,808 in 2002, just before the loan closing in January 2003. Also, the
              borrower’s income history was not consistent on employment and income
              verification documents. Union Planters did not address the declining income or
              the income discrepancies at the time of loan approval. Further, three recent pay
              stubs showed an average of only 32 hours worked per week and did not indicate
              any earnings from overtime, although the borrower’s monthly income used to
              qualify for the loan was based on a 40-50 hour work week.

              Union Planters also charged the borrower $641 in prohibited fees. The lender
              improperly charged the borrower administration, tax service, and overnight
              courier fees. Appendix C contains a more detailed analysis of the loan.

              In response to our review, Union Planters agreed with our results and offered to
              indemnify the loan.

              In summary, Union Planters did not comply with HUD requirements when
              processing the loan. It overstated the borrower’s monthly income and
              unnecessarily placed the insurance fund at risk for the $74,333 mortgage. The
              lender also charged the borrower closing fees not allowed by HUD.




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Recommendation


          We recommend that the assistant secretary for housing - federal housing
          commissioner and chairman, Mortgagee Review Board

          1A.    Take appropriate administrative action against Union Planters for not
                 complying with HUD requirements. This should include, at a minimum,
                 requiring Union Planters to indemnify HUD for case number 321-
                 2197119, which had an original mortgage amount of $74,333. HUD
                 should also require reimbursement of the $641 in unallowable closing fees
                 to the appropriate parties (see appendix C).




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                         SCOPE AND METHODOLOGY

We reviewed Union Planters’s processing of one Federal Housing Administration loan that it
sponsored for a Federal Housing Administration-approved loan correspondent. During our audit
of that loan correspondent, we reviewed loans closed from June 1, 2002, through May 31, 2004,
that defaulted within the first two years after closing. We identified a loan, sponsored by Union
Planters, which appeared to be improperly underwritten. Because the sponsor of the loan is
ultimately responsible for loan processing deficiencies, we addressed the deficiencies to Union
Planters.

To accomplish our objective, we prepared a case narrative of the loan processing deficiencies
identified and provided the information to Union Planters. We allowed Union Planters an
opportunity to provide additional information that could affect the initial results of our review of
the loans. Union Planters provided a written response. We evaluated the response when
reaching our conclusions.

We relied on computer-processed data contained in HUD’s Single Family Data Warehouse
system. During the audit of the loan correspondent, we assessed the reliability of the 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 did not assess Union Planters’s underwriting controls because they were not significant to
our objective of reviewing the loan.

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




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                                    APPENDIXES

Appendix A

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

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

                          1A                  $614                $74,333



1/   Ineligible costs are costs charged to a HUD-financed or HUD-insured program or activity
     that the auditor believes are not allowable by law; contract; or federal, state, or local
     policies or regulations.

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




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Appendix B

             AUDITEE COMMENTS




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Appendix C

       CASE STUDY OF IMPROPERLY ORIGINATED LOAN


Case number: 321-2197119                      Insured amount: $74,333

Section of Housing Act: 203(b)                Status upon selection:
                                                  Default status after 22 months
Date of loan closing: Jan. 10, 2003

HUD costs incurred:
  None identified

Unsupported Income:
Loan Prospector provided an automated approval on this loan, but the underwriter did not
adequately support the monthly income claimed. The borrower’s monthly income was entered
as $3,236 per month into Loan Prospector. The monthly income was based on a 30-month
average of the gross earnings reported on a verification of employment. The monthly income
included overtime and bonuses. However, the borrower’s income was continually declining
during the 30-month period.

The verification of employment in the HUD loan file showed total gross earnings of $41,060 for
2000, $40,142 for 2001, and $15,904 through the end of June 2002. However, the 2001 Internal
Revenue Service Form W-2 shows the borrower’s income as $38,978. If the year-to-date income
for 2002 were projected for the entire year, 2002 gross income would be only $31,808 ($15,904
x 2). Therefore, the borrower’s income showed a significant decline over the previous 30
months.

Using the 2002 year-to-date income, including overtime, the borrower’s current monthly income
was only $2,651 per month ($15,904/6). A monthly income of $2,651 produces a 44.5 percent
debt ratio. Using the 2002 year-to-date base income only, the borrower’s monthly income was
$2,365 per month ($14,191/6). A monthly income of $2,365 produces a 49.9 percent debt ratio.
Both monthly income calculations are significantly less than the $3,236 monthly income used in
Loan Prospector, and both debt ratios greatly exceed HUD’s limit of 41 percent. Further, Union
Planters did not identify compensating factors on the mortgage credit analysis worksheet. The
loan documentation showed additional negative factors, including the borrower’s housing
expense was increasing from $500 per month to $631 per month, and the borrower had negative
reserves.

In addition, the loan files contained only three weekly pay stubs. These pay stubs showed an
average of only 32 hours worked per week, with no overtime, and were not current income
information. The pay stubs were dated in June 2002, but the loan did not close until January
2003. Therefore, the borrower’s income, which was entered into Loan Prospector for approval,
was not adequately supported.




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

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

HUD Handbook 4155.1, REV-4, CHG-1, 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. Income from any source that cannot be verified, is not
stable, or will not continue may not be used in calculating the borrower's income ratios.

HUD Handbook 4155.1, REV-4, CHG-1, chapter 2-12B: If the total mortgage payment and all
recurring charges do not exceed 41 percent of gross effective income, the relationship of total
obligations to income is considered acceptable. A ratio exceeding 41 percent may be acceptable
if significant compensating factors are presented.

HUD Handbook 4155.1, REV-4, 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).

Unallowable Charges:
The HUD-1 settlement statement showed the borrower was charged a $550 administration fee
paid to the sponsor (Union Planters), a $66 tax service fee paid to First American Real Estate
Tax, and a $25 overnight courier fee paid to Midlands Land Title & Abstract, Inc. This was not
a refinance loan. In total, the borrower was overcharged $641 (550+66+25).

HUD Requirements:
HUD Homeownership Center Reference Guide, Chapter 2, “Closing Costs and Other Fees,”
states: All closing items associated with a HUD-insured loan, including paid outside closing
items, must be itemized on the HUD-1 settlement statement for Real Estate Settlement
Procedures Act compliance. Administration fees and tax service fees are not allowed. Overnight
courier fees are allowed only on refinance loans, under certain conditions.




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