AUDIT REPORT SECURITY ATLANTIC MORTGAGE COMPANY, INC. NONSUPERVISED MORTGAGEE EDISON, NEW JERSEY 2005-NY-1007 September 16, 2005 OFFICE OF AUDIT New York/New Jersey Region Issue Date September 16, 2005 Audit Report Number 2005-NY-1007 TO: Brian D. Montgomery, Assistant Secretary for Housing - Federal Housing Commissioner, H FROM: Edgar Moore, Regional Inspector General for Audit, 2AGA SUBJECT: Security Atlantic Mortgage Company, Inc., Did Not Always Comply with HUD/Federal Housing Administration Loan Origination Requirements HIGHLIGHTS What We Audited and Why We audited Security Atlantic Mortgage Company, Inc. (Security Atlantic), a nonsupervised direct endorsement lender located in Edison, New Jersey, because its 7.02 percent default rate for loans with a beginning amortization date between October 1, 2002, and September 30, 2004, was more than twice the average default rate for the State of New Jersey, which was 3.34 percent. Our audit objectives were to determine whether Security Atlantic (1) approved insured loans in accordance with the requirements of the U.S. Department of Housing and Urban Development (HUD)/Federal Housing Administration, which include following prudent lending practices, and (2) developed and implemented a quality control plan that complied with HUD requirements. What We Found HUD assumed an unnecessary insurance risk for 16 loans valued at $3,208,308 that Security Atlantic approved with material underwriting deficiencies. In addition, borrowers were charged $11,249 for ineligible and/or unsupported fees. Further, Security Atlantic could not document that it complied with HUD regulations that prohibit charging a commitment fee unless borrowers agree to lock in a mortgage rate. Security Atlantic did not comply with HUD tier pricing regulations in the origination of 38 loans, resulting in $60,546 in inappropriate charges. These loans, which had the same interest rate and lock-in date and were within the same metropolitan statistical area, had a variation of more than two discount points. Security Atlantic did not ensure that its quality control plan was implemented in accordance with both HUD’s and its own requirements. Security Atlantic did not ensure that (1) loans that defaulted within six months were analyzed, (2) management responses to quality control findings were timely, and (3) compliance with the HUD tier-pricing rule was monitored. What We Recommend We recommend that the assistant secretary for housing - federal housing commissioner require Security Atlantic to: (1) indemnify HUD for potential losses on 15 loans with significant underwriting deficiencies valued at $3,048,552, (2) reimburse HUD $171,053 for the amount paid in claims and fees on one loan with significant underwriting deficiencies, and (3) reimburse borrowers for $11,249 in ineligible and/or unsupported fees found in 26 loans. In addition, we recommend that the assistant secretary for housing - federal housing commissioner determine the extent to which Security Atlantic violated HUD regulations regarding lock-in fees, take appropriate administrative action, and seek reimbursement to any borrowers erroneously charged fees. We further recommend that Security Atlantic reimburse borrowers for $60,546 in overcharges that were levied in violation of HUD’s tier pricing regulations and implement a quality control process in accordance with HUD requirements. Auditee’s Response Officials of Security Atlantic disagreed with the tone of the report and the recommendations made. Specifically, Security Atlantic officials did not agree with our conclusion that it approved loans that increased risk to the Federal Housing Administration insurance fund. Overall, Security Atlantic officials agreed with many of the underwriting deficiencies we noted, but did not believe that these deficiencies were a contributing factor to the mortgagor’s default. Security Atlantic disagreed that it violated HUD’s tier pricing rule based on the belief that sponsors cannot be held accountable for monitoring tier-pricing rules for loan correspondents. Security Atlantic generally agreed that it had inadequately implemented its quality control plan during our audit period, but noted that it has made improvements. 2 We discussed the contents of the report with Security Atlantic officials during the audit and at an exit conference on July 28, 2005, and they provided their written comments on August 15, 2005. Appendix B of this report contains the complete text of Security Atlantic’s comments, along with our evaluation of the comments. 3 TABLE OF CONTENTS Background and Objectives 5 Results of Audit Finding 1: Security Atlantic Approved Loans That Caused an Unnecessary 6 Risk to the HUD/Federal Housing Administration Insurance Fund Finding 2: Security Atlantic Violated the HUD Tier Pricing Rule 11 Finding 3: Security Atlantic Inadequately Implemented Its Quality Control Plan 13 Scope and Methodology 15 Internal Controls 16 Appendixes A. Schedule of Questioned Costs and Funds to Be Put to Better Use 18 B. Auditee Comments and OIG’s Evaluation 19 C. Summary of Loans with Significant Deficiencies 42 D. Narrative Case Presentations 44 E. Schedule of Tier Pricing Violations 75 F. Schedule of Ineligible and Unsupported Fees 78 4 BACKGROUND AND OBJECTIVES Security Atlantic Mortgage Company, Inc. (Security Atlantic), became an approved U. S. Department of Housing and Urban Development (HUD)/Federal Housing Administration lender in 1993. The company originates loans, which it then sells to investors, banks, and other mortgage bankers. The main office of Security Atlantic is located in Edison, New Jersey, and at the beginning of our audit, there were separate branch offices located in Staten Island, New York, Malvern, Pennsylvania, and Boca Raton, Florida. In addition to being an authorized agent for three principals, Security Atlantic has 166 loan correspondents. Security Atlantic terminated the contract with its quality control contractor in December 2004 and began conducting its own quality control function. Between October 1, 2002, and September 30, 2004, Security Atlantic originated 342 and 5,106 Federal Housing Administration-insured mortgages for its retail and wholesale division, respectively. 1 We selected Security Atlantic for audit because its 7.02 percent default rate for loans with a beginning amortization date between October 1, 2002, and September 30, 2004, was more than twice the average default rate for the State of New Jersey, which was 3.34 percent. The objectives of this audit were to determine whether Security Atlantic (1) approved insured loans in accordance with HUD requirements, which include following prudent lending practices, and (2) developed and implemented a quality control plan that complied with HUD requirements. 1 Retail loans are originated by Security Atlantic staff. Wholesale loans are originated by licensed mortgage brokers, also referred to as third party originators. 5 RESULTS OF AUDIT Finding 1: Security Atlantic Approved Loans That Caused An Unnecessary Risk to the HUD/Federal Housing Administration Insurance Fund Security Atlantic did not follow prudent lending practices and regulations prescribed by HUD in its loan origination and underwriting in 20 of 31 loans we reviewed As a result, loans were approved for potentially ineligible borrowers. Fifteen of these loans valued at $3,048,552 are currently insured, while $171,053 in claims and fees were paid on one remaining loan. The remaining four loans were paid in full during the course of our audit, and thus no longer represent a risk to the HUD/Federal Housing Administration insurance fund. In addition, borrowers were charged $11,249 for ineligible and/or unsupported fees. These deficiencies occurred because Security Atlantic did not have adequate controls to ensure that loans were processed in accordance with HUD requirements. Origination and Underwriting Deficiencies We found material origination and underwriting deficiencies in 20 of 31 loans we reviewed with beginning amortization dates between October 1, 2002, and September 30, 2004. These deficiencies occurred because Security Atlantic did not adequately (1) verify of borrowers’ income, employment, and/or source of funds for down payment and closing costs, and (2) analyze borrowers’ liabilities, credit history, and/or ability to pay. HUD Handbook 4155.1, REV-4, entitled “Mortgage Credit Analysis for Mortgage Insurance,” prescribes basic underwriting requirements for HUD- insured single-family mortgage loans. Lenders must ensure that borrowers have the ability and willingness to repay the mortgage debt. Four major elements are typically evaluated in assessing a borrower’s ability to repay mortgage debt: (1) qualifying ratios and compensating factors, (2) stability and adequacy of income, (3) funds to close, and (4) credit history. This assessment must be based on sound underwriting principles in accordance with the guidelines described in Handbook 4155.1 and be supported by sufficient documentation. In addition, section 3-1 of this handbook requires that the application package contain sufficient documentation to support a lender’s decision to approve a mortgage. While this decision will involve some subjectivity, Security Atlantic did not always follow the above requirements in its loan origination and underwriting. As shown in the chart below and in appendix C, we found a variety of significant underwriting deficiencies in 16 loans. The deficiencies noted are not independent of one another, as many of the loan files contained more than one deficiency. 6 Areas of deficiency Number of loans Nonqualifying ratios and/or inadequate 13 of 16 loans compensating factors Inadequate verification of funds to close 14 of 16 loans Inadequate verification of income/employment 6 of 16 loans Inadequate credit analysis 3 of 16 loans Other processing procedures 4 of 16 loans Specific examples of Security Atlantic’s inadequate underwriting are as follows: • Case 352-5094184 was approved with a mortgage payment expense to effective income ratio and a total fixed payment to effective income ratio of 37.97 and 50.83 percent, respectively. HUD Handbook 4155.1, REV-4, CHG 1, sections 2-12 and 2-13, provide that the borrower’s mortgage payment to effective income ratio and total fixed payment to income ratio should not exceed 29 and 41 percent, respectively, unless the lender identifies compensating factors that could justify exceeding these ratios. “Excellent credit, very good job stability, 203k with repairs, and a reserved savings pattern” were listed as compensating factors. However, except for “a reserved savings pattern,” the factors cited are not allowable compensating factors as defined in section 2- 13. Further, the reserved savings pattern was inadequate because the borrower had significant credit card debts and numerous deposits were unexplained. The loan defaulted after five payments, and the reported cause was excessive obligations. • In case number 352-5033337, Security Atlantic inadequately evaluated the borrowers’ ability to repay the mortgage. The verification of current employment lacked an address, telephone number, and the starting date of employment; and the verification of prior employment was provided by the current employer. In addition, (1) borrowers’ income was not accurately calculated, (2) the credit analysis was inadequate, (3) liabilities were not adequately disclosed, (4) one of the borrowers had discrepant birth date information, and (5) the closing did not comply with the loan approval. The loan defaulted after one payment with no specific reason cited. • Case number 352-4927551 lacked adequate verification of funds to close because the file did not contain adequate verification of deposits. There was no documentation for $6,100 in personal funds listed on the borrower’s application. Without these funds, the borrower would have had a negative $3,864 cash reserve at closing. Further, verification of $7,468 in non-payroll deposits, a debt payment of $2,010, and a $500 earnest money deposit was inadequate. The loan defaulted after six payments, and the reason reported was curtailment of income. 7 • Case number 352-4957069 was approved with a mortgage payment expense to effective income ratio and a total fixed payment to effective income ratio of 30.90 and 48.04 percent, respectively, without adequate compensating factors. After taking into consideration overstated overtime income, the ratios would be 32.24 and 50.11 percent. In addition, (1) the borrower did not have sufficient funds to close with a negative cash reserve of $1,830 at closing, and (2) the closing was not in compliance with loan approval because there were differences between the HUD-1 settlement statement and the mortgage credit analysis worksheet for a seller concession, gift, and earnest money deposit. The loan defaulted before any payments were made, and the reason reported was curtailment of income. As of June 1, 2005, eight of the 16 loans were in default, seven were current, and claims had been paid on one. We are requesting indemnification for 15 of the 16 loans with significant underwriting deficiencies. These loans are insured for $3,048,552. Indemnification of these loans would preclude a potential future claim against the HUD/Federal Housing Administration insurance fund, resulting in funds to be put to better use. We are also requesting repayment of the claims and fees paid of $171,053 on one loan with significant underwriting deficiencies. Four additional loans with significant underwriting deficiencies were paid in full during the course of our audit; therefore, they no longer represent a risk to the HUD/ Federal Housing Administration insurance fund. Appendix C to this report provides a summary of the significant underwriting deficiencies noted in the 15 cases still actively insured, and in the one case for which a claim has been paid, while appendix D provides a more detailed description of the deficiencies. The deficiencies occurred because Security Atlantic did not have adequate controls to ensure that loans were processed in accordance with applicable HUD requirements. The deficiencies resulted in the approval of mortgages for potentially ineligible borrowers, which caused HUD to assume an unnecessary insurance risk. Ineligible/Unsupported Fees Charged Borrowers Security Atlantic charged ineligible and/or unsupported fees in 26 of the 31 loans reviewed. Mortgagee Letter 94-7, section IV, provides that a commitment or lock-in fee must be in writing and guarantee the mortgage interest rate and/or discount points for a period of not less than 15 days before the anticipated closing date. HUD Handbook 4000.2, REV-2, section 5-3, identifies the types of costs, such as obtaining credit report fees, that a lender is allowed to charge a borrower and limits the charge to actual cost. We found that borrowers were charged the following ineligible and unsupported fees: 8 Type of ineligible/unsupported Number of Amount of fee loans fee Ineligible commitment fee 9 loans $4,255 Ineligible shipping fee 2 loans $ 120 Total ineligible fees $4,375 Unsupported commitment fee 16 loans $6,720 Unsupported credit report fee 5 loans $ 154 Total unsupported fees $6,874 Total ineligible/unsupported fees $11,249 HUD Handbook 4000.2, REV-3, section 1-9A, provides that lenders are permitted to charge a commitment fee to guarantee, in writing, the interest rate and discount points for a specific period or to limit the extent to which they may change. The minimum time for lock-ins is 15 days. The loan may close in less than 15 days at the convenience of the borrower, and the lock-in fees may still be earned. Lenders are expected to honor all such commitments. Of the 25 loans charged a commitment fee, 16 lacked documentation to substantiate that the borrowers agreed to lock in their loans, and the remaining nine loans contained lock-in agreements signed by the borrowers; however, the agreement stated that the borrower did not want an interest rate commitment. Monthly quality control reports provided by Security Atlantic also reported deficiencies regarding commitment fees. These reports noted that borrowers were charged commitment fees with written commitments that were incomplete or missing or when a lock-in was declined. Other ineligible and unsupported fees charged included shipping fees and credit report fees. During our audit period, October 1, 2002, through September 30, 2004, Security Atlantic underwrote 5,106 loans in its wholesale division. Given the incidence of ineligible or unsupported fees disclosed in our sample (25 of 31, or 80.6 percent), as well as by Security Atlantic’s quality control reviews, and the large number of loans underwritten, there is the potential that significant numbers of borrowers have been erroneously charged a commitment fee. Appendix F lists the ineligible and unsupported costs by loan. Recommendations We recommend that the assistant secretary for housing - federal housing commissioner require Security Atlantic to: 1A. Indemnify HUD against potential future losses on 15 loans totaling $3,048,552, which are considered as funds to be put to better use since 9 indemnification prevents future claims against the Federal Housing Administration insurance fund. 1B. Reimburse HUD the $171,053 on the one loan for which claims and fees have been paid that contained serious underwriting deficiencies. 1C. Reimburse borrowers for the $4,375 in ineligible fees. 1D. Work with the Homeownership Center to determine the eligibility of the $6,874 in unsupported fees charged borrowers. If the fees are determined to be ineligible, Security Atlantic should be required to reimburse the borrowers accordingly. 1E. Provide your office with a corrective action plan to assure compliance with all HUD guidelines regarding the origination and underwriting of Federal Housing Administration-insured loans. 1F. Work with the Home Ownership Center to review the 5,106 loans with beginning amortization dates between October 1, 2002, and September 30, 2004, for ineligible commitment fees. If it is determined that borrowers were charged ineligible commitment fees, Security Atlantic should be required to reimburse borrowers or HUD, as applicable, for these fees. 10 Finding 2: Security Atlantic Violated the HUD Tier Pricing Rule Our review found that Security Atlantic originated 38 loans that did not comply with HUD tier pricing regulations resulting in $60,546 in inappropriate charges. Security Atlantic charged certain borrowers discount points although other borrowers with the same mortgage interest rate and lock-in date and who were in the same metropolitan statistical area were not charged discount points. These deficiencies occurred because Security Atlantic did not have adequate controls to ensure that loans complied with tier pricing guidelines. Consequently, Security Atlantic’s lending practices may have unfairly imposed greater costs on some borrowers. Violations of HUD Tier Pricing Regulations HUD’s tier pricing rule (24 CFR [Code of Federal Regulations] 202.12) limits variation in mortgage charge rates to no more than two percentage points when borrowers lock in the interest rate on or around the same day, using the same mortgage type, and the properties financed are located in the same geographical area. Mortgagee Letter 94-43 provides that Federal Housing Administration- approved lenders should determine that any permitted overage does not violate the tiered pricing rule and include in their quality control program a system to monitor and supervise their overage activities to prevent violations of tiered pricing prohibitions. We obtained and analyzed a tier-pricing database from Security Atlantic that contained 5,106 wholesale loans closed between October 1, 2002, and September 30, 2004, and we identified 38 loans that had a variation greater than two discount points with the same interest rate, lock-in date, and metropolitan statistical area. For instance, two loans with the same interest rate were locked in on May 12, 2004, for properties within the same metropolitan statistical area. One loan was charged four discount points, while the other loan was not charged discount points, resulting in a $3,940 overcharge to the borrower who paid the points. Security Atlantic officials did not have an adequate system to monitor for violations of tier pricing regulations. As a result, we found that 38 borrowers were inappropriately charged $60,546 due to violations of HUD’s tier pricing regulations. See appendix E for a detailed list of the loans. Recommendations We recommend that the assistant secretary for housing - federal housing commissioner require Security Atlantic to: 2A. Reimburse the borrower the $60,546 in overcharges that were levied in violation of HUD’s tier pricing rule. 11 2B. Submit a corrective action plan for HUD’s review to ensure that Security Atlantic is adequately documenting its monitoring for compliance with HUD’s and its own tier pricing rules and regulations. 12 Finding 3: Security Atlantic Inadequately Implemented Its Quality Control Plan Security Atlantic did not ensure that its quality control plan was implemented in accordance with both HUD’s and its own requirements. It did not ensure that (1) loans that defaulted within six months were analyzed and (2) management responded in a timely manner to quality control findings. Additionally, Security Atlantic did not monitor its loans to ensure compliance with the HUD tier-pricing rule as required by its quality control plan. These weaknesses occurred because Security Atlantic did not establish procedures to ensure that its quality control plan was properly implemented. Consequently, the effectiveness of Security Atlantic’s quality control plan was lessened, with the result that Security Atlantic is unable to ensure the accuracy, validity, and completeness of its loan origination process. Loans Defaulting within Six Months Not Selected for Review Loans defaulting within six months were not adequately reviewed as required by HUD Handbook 4060.1, REV-1, paragraph 6-6D, and as intended by Security Atlantic’s quality control plan, sections 7.19 and 7.23. While Security Atlantic selected 2 of the 17 loans in our sample of 31 that had defaulted within six months for quality control review, the remaining 15 were not reviewed. Further, the two loans reviewed were apparently randomly selected, as opposed to being selected because they defaulted within six months. This occurred because Security Atlantic did not have adequate controls over its quality control functions. Quality control reviews of these early defaulted loans can provide valuable information about the causes of default that may indicate inadequate underwriting. Security Atlantic officials acknowledged this weakness and advised that review of these defaulted loans will be routine. Inadequate Management Response Management response to quality control reports was not always adequate. Of 24 monthly quality control reports we reviewed, we found that Security Atlantic had not prepared management responses for 18 of the reports. HUD Handbook 4060.1, REV-1, CHG-1, section 6-3I, requires that management take prompt action to deal appropriately with any material findings and that the final report or an addendum identify actions taken, the timetable for their completion, and any planned follow-up activities. In an effort to better use the results of monthly quality control reports, in October 2003, Security Atlantic officials hired a liaison to work with them and their quality control contractor. In December 2004, Security Atlantic terminated its quality control contractor and hired the liaison to supervise a quality control department to improve the effectiveness of its quality control function. 13 Nevertheless, Security Atlantic must address the quality control deficiencies noted in this report to ensure that HUD does not continue to assume an unnecessary insurance risk. Our review also disclosed that Security Atlantic could not provide evidence to support management’s monitoring of its tier pricing practices. As stated in Security Atlantic’s quality control plan, section 3.3, Security Atlantic shall extend strong oversight to monitor overages and tier pricing by its loans officers. However, Security Atlantic lacks assurance that its lending practices do not impose greater costs on some borrowers. Recommendations We recommend that the assistant secretary for housing - federal housing commissioner require Security Atlantic to: 3A. Develop procedures to implement an adequate quality control process to ensure that (1) all loans that default within the first six payments are properly reviewed, (2) quality control reviews and appropriate management responses are completed in a timely manner, and (3) proper review for compliance with tier pricing regulations is performed and documented. 14 SCOPE AND METHODOLOGY We sampled 31 defaulted loans that were originated by Security Atlantic with a beginning amortization date between October 1, 2002, and September 30, 2004. Thirty loans were selected from Neighborhood Watch, and one was referred by the Philadelphia Homeownership Center. Sample selections included loans underwritten for Security Atlantic’s wholesale and retail divisions. Loan selection criteria included factors such as loans that 1) defaulted within 12 payments, 2) had a high-back ratio, 3) involved a gift of $25,000 or more, and 4) were not reviewed or indemnified by HUD. To achieve our audit objectives, we reviewed documentation from the Homeownership Center loan endorsement files, as well as electronic case files provided by the auditee. We also reviewed Security Atlantic’s quality control procedures to assess whether they were adequate and properly implemented in accordance with HUD requirements. Lastly, we obtained pertinent database files from the auditee to determine whether tier-pricing practices conducted by Security Atlantic complied with HUD’s tier pricing rule. We interviewed Security Atlantic’s management and quality control staff to obtain an understanding of the policies and procedures related to the auditee’s management controls. We also analyzed the auditee’s post-endorsement technical reviews, quality assurance reports, and independent audit reports. We performed audit fieldwork from December 2004 through June 2005. The audit was conducted in accordance with generally accepted government auditing standards. 15 INTERNAL CONTROLS Internal controls are 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 that the following internal controls were relevant to our audit objectives: • Program operations - Policies and procedures that management has implemented to reasonably ensure that a program meets its objectives. • Compliance with laws and regulations - Policies and procedures that management has implemented to reasonably ensure that resource use is consistent with laws and regulations. • Safeguarding resources - Policies and procedures that management has implemented to reasonably ensure that resources are safeguarded against waste, loss, and misuse. • Validity and reliability of data - Policies and procedures that management has implemented to reasonably ensure that valid and reliable data are obtained, maintained, and fairly disclosed in reports. 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, the following items are considered significant weaknesses: 16 • Security Atlantic did not ensure that certain loans were processed in accordance with all applicable HUD requirements (see Finding 1). • Security Atlantic did not ensure that it complied with HUD’s tier pricing rule (see Finding 2). • Security Atlantic did not ensure that it complied with HUD regulations regarding lock-in fees (see Finding 1). • Security Atlantic did not adequately implement its quality control plan to ensure compliance with HUD requirements (see Finding 3). 17 APPENDIXES Appendix A SCHEDULE OF QUESTIONED COSTS AND FUNDS TO BE PUT TO BETTER USE Type of questioned costs Finding Ineligible Unsupported Funds to be put number costs 1/ costs 2/ to better use 3/ 1 $ 175,428 2 $ 6,874 $ 3,048,552 2 $ 60,546 3 Total $ 235,974 $ 6,874 $ 3,048,552 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/ Unsupported costs are those costs charged to a HUD-financed or HUD-insured program or activity whose eligibility could not be determined at the time of the 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/ “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. 2 Represents $4,375 of ineligible fees charged borrowers and $171,053 in claims paid by HUD. 18 Appendix B Auditee Comments and OIG Evaluation Ref to OIG Evaluation Auditee Comments Comment 1 19 Appendix B Auditee Comments and OIG Evaluation Ref to OIG Evaluation Auditee Comments 20 Appendix B Auditee Comments and OIG Evaluation Ref to OIG Evaluation Auditee Comments Comment 2 Comment 3 Comment 4 Comment 5 21 Appendix B Auditee Comments and OIG Evaluation Ref to OIG Evaluation Auditee Comments Comment 5 Comment 6 22 Appendix B Auditee Comments and OIG Evaluation Ref to OIG Evaluation Auditee Comments Comment 7 Comment 8 Comment 9 Comment 10 Comment 4 23 Appendix B Auditee Comments and OIG Evaluation Ref to OIG Evaluation Auditee Comments Comment 3 24 Appendix B Auditee Comments and OIG Evaluation Ref to OIG Evaluation Auditee Comments Comment 11 Comment 12 25 Appendix B Auditee Comments and OIG Evaluation Ref to OIG Evaluation Auditee Comments Comment 13 26 Appendix B Auditee Comments and OIG Evaluation Ref to OIG Evaluation Auditee Comments Comment 14 Comment 15 27 Appendix B Auditee Comments and OIG Evaluation Ref to OIG Evaluation Auditee Comments Comment 16 28 Appendix B Auditee Comments and OIG Evaluation Ref to OIG Evaluation Auditee Comments Comment 17 Comment 18 29 Appendix B Auditee Comments and OIG Evaluation Ref to OIG Evaluation Auditee Comments Comment 19 Comment 20 30 Appendix B Auditee Comments and OIG Evaluation Ref to OIG Evaluation Auditee Comments Comment 21 Comment 22 31 Appendix B Auditee Comments and OIG Evaluation Ref to OIG Evaluation Auditee Comments Comment 23 32 Appendix B Auditee Comments and OIG Evaluation Ref to OIG Evaluation Auditee Comments Comment 24 Comment 25 Comment 26 33 Appendix B Auditee Comments and OIG Evaluation Ref to OIG Evaluation Auditee Comments Comment 27 Comment 28 34 Appendix B Auditee Comments and OIG Evaluation Ref to OIG Evaluation Auditee Comments Comment 29 Comment 30 35 Appendix B Auditee Comments and OIG Evaluation Ref to OIG Evaluation Auditee Comments Comment 31 Comment 32 36 Appendix B Auditee Comments and OIG Evaluation Comment 1 Our report responds to the audit objectives to determine whether Security Atlantic approved insured loans and implemented a quality control plan in accordance with HUD requirements for the tested loans during the review period. As such, the conclusions address deficiencies and weaknesses in Security Atlantic’s underwriting and quality control processes as measured against HUD requirements. When appropriate, we have recognized improvements made by Security Atlantic, and recommended additional measures to ensure that Security Atlantic complies with these requirements. As such, our objective is not to drive a company out of business, but to help eliminate future underwriting deficiencies so that a business may continue to function efficiently as a Federal Housing Administration approved lender. Comment 2 Our report cites the default rate for loans originated during our audit period, October 1, 2002 through September 30, 2004, in order to provide the reason that Security Atlantic was selected for audit. This rate will fluctuate over time in response to the both the number of loans originated and the default history. Comment 3 During the review period, Security Atlantic did not implement its quality control plan in accordance with HUD regulations that require loans that default within six months to be reviewed, and management responses to quality control findings to be timely. However, our report points out the actions and improvements that Security Atlantic has taken to improve its quality control process. As such, our report is not inaccurate and unfair. Comment 4 Security Atlantic maintains that it cannot be held responsible for monitoring/enforcing tiered pricing rules for its loan correspondents, and should not be responsible for the alleged $60,547 overcharges because it never received those funds. However, HUD Handbook 4060.1 REV-1, section 3-4A(1) holds the sponsor responsible for the actions of its loan correspondents in originating insured mortgages. A sponsor is required to supervise and perform quality control reviews of its loan correspondents to assure that they comply with the HUD loan origination requirements. Mortgagee Letter 94-43 states that lenders should determine that any permitted overage does not violate the tier-pricing rule, and include in their quality control program a system to monitor and supervise overage activities to prevent violations. Further, Security Atlantic’s quality control plan states that it will exercise strong oversight to monitor overages and tier pricing by its loan officers. Comment 5 We recommended indemnification for cases in which we believe the significance of the underwriting deficiencies adversely affected the risk assumed by the Federal Housing Administration insurance fund. This decision was based upon criteria in HUD regulations and additional guidance promulgated by HUD. In its response to each case noted in Appendix D, Security Atlantic provided additional 37 Appendix B Auditee Comments and OIG Evaluation documents and information that was not previously available. As a result of this information, we deleted indemnification requests for three loans. Comment 6 Security Atlantic provided a HUD-1 that evidences sale of the borrower’s previously owned property; consequently, we have deleted a request for payment of a claim on this case. Reimbursement to HUD for the other claim paid and any associated fees should be made as per HUD regulations. Comment 7 The $4,375 represents commitment and shipping fees charged which are not allowable charges as per HUD regulations. These fees should be refunded to the borrowers regardless of whether Security Atlantic or its loan correspondents charged the borrowers. Comment 8 The $6,874 represents commitment and credit report fees for which there was no support in the file. Security Atlantic believes that it should not be liable for commitment fees charged by its loan correspondents. However, three of the 16 cases with unsupported commitment fees were originated by Security Atlantic, as were three of the five loans with unsupported credit report fees. Regardless of who originated the loans, if these are unsupported fees, the borrowers should be reimbursed. Comment 9 While we recognize, and acknowledge in the report, that Security Atlantic has taken action to improve its quality control process, we believe that Security Atlantic needs to specifically detail how it has, or plans to, ensure that the underwriting deficiencies found in the cases reviewed will be addressed. Comment 10 Given the high incidence (80.6 percent) of ineligible and/or unsupported commitment fees that we found in the 31 cases reviewed, we believe that Security Atlantic and the HOC need to further determine the extent to which borrowers may have been charged ineligible and unsupported fees. Comment 11 Regarding issues A and B, Security Atlantic agreed that a $60 recurring debt was excluded, but did not believe the $388 debt should be included because there was evidence of satisfactory payment during the previous 12 months. However, the satisfactory payment refers to another loan on which the borrower was a co- signor, and was properly excluded. The $388 debt evidenced two delinquencies within the past 12 months, and therefore should have been included. We deleted reference to the verification of paid-outside closing costs in issue C. Comment 12 The borrower had two bank accounts at Fleet Bank, for which there were two statements as noted by Security Atlantic, but only one statement for the other account, which was not addressed by Security Atlantic in issue C. Concerning issue E, the HUD-1 noted that the borrower paid a $379 appraisal fee outside closing that was not verified. 38 Appendix B Auditee Comments and OIG Evaluation Comment 13 The $1,002 prepaid items noted in issue H were accounted for as a seller concession, after which we calculated that the borrower had inadequate funds to close. Comment 14 Reference to inadequate origination of a nonprocessed borrower was deleted because of the New Jersey State law governing non-purchasing spouses. Comment 15 HUD regulations do not specifically cite taking a homeownership course as a compensating factor as noted by Security Atlantic to issue A. Concerning the calculation of overtime in issues B and C, we computed an average ($1,227) for a two-year period, and can not determine how Security Atlantic computed $1,305. With regard to inadequate credit analysis in issue D, the late payments occurred after the separation agreement, and some even after the presumed divorce decree in early 2002. Concerning issue F, if the $11,500 were not a gift as Security Atlantic states, then the borrower would not have had sufficient funds to close. With the $7,633 bank asset that already included the fund from the borrower’s 401k plan, the borrowers could not afford $13,137 cash due on HUD-1. In addition, there is no support for the check the co-borrower made to herself as mentioned in item F. Comment 16 Regarding issue A, although Loan Prospector was used to process the loan, which would not require compensating factors, proper application of Loan Prospector requires data integrity. The file contained a Loan Prospector Feedback Certificate that listed a different property address and different mortgage amount from that for which the loan was processed. Further, the closing occurred more than six months after the processing through Loan Prospector in violation of HUD Handbook 4155.1, REV-4, CHG 1, section 3-1. Regarding issue C, if the $10,000 was not a gift, but derived from the proceeds of stock sales, these proceeds were not properly sourced and verified. Comment 17 Based upon additional information provided by Security Atlantic, we deleted the inadequate support for employment deficiency. Concerning inadequate credit analysis, we do not believe that an adequate explanation was obtained as to why the borrower, as co-mortgagor on another mortgage, had not made the payments. Nevertheless, we have deleted reference to this deficiency since the mortgage had been paid in full prior to the closing of the current loan. Comment 18 Concerning issues A, B and C, Security Atlantic erroneously calculated overtime/bonus income based upon a year-to-date statement; HUD regulations require that a 2-year average be used. Based upon the information provided by Security Atlantic, we deleted the inadequate funds to close deficiency. Comment 19 Auditee concurs. 39 Appendix B Auditee Comments and OIG Evaluation Comment 20 There were inadequate compensating factors to justify a back ratio of 55.9 percent. Comment 21 HUD Handbook 4155.1, REV-4, CHG 1, section 2-7 requires that if income is used to qualify as other than a compensating factor, a determination must be made as to the likelihood that it will continue; as Security Atlantic agreed, this was not done. Comment 22 Security Atlantic subsequently provided the borrower’s credit explanation letter; consequently, we deleted this deficiency. Comment 23 Regarding compensating factors, the late credit card payments and unexplained deposits contradict the assertion that there was sufficient evidence of a determined saver to compensate for a back ratio of 50.83 percent. Since the borrower’s 401k plan would be allowable as reserves after closing, we have deleted the inadequate reserves after closing deficiency. While the late payments noted in the inadequate credit analysis deficiency were within two years of closing, we have eliminated this deficiency based upon the borrower’s explanation. We also eliminated the verification of paid outside closing deficiency after Security Atlantic provided a copy of the check used to pay the paid-outside-closing items. Comment 24 Although Security Atlantic could not produce evidence that the paid-outside closing costs were paid or that the borrower had the $707 needed to close, we have deleted the case because of the minimal amounts involved. Comment 25 Auditee unable to locate case file, therefore no comments were provided. Comment 26 Auditee concurs. Comment 27 Security Atlantic provided documentation to support most of the calculation of the borrowers’ income. The unexplained difference had a minimal impact upon the qualifying ratios. Although Security Atlantic admitted that the compensating factor was inadequate, we deleted this case because the back ratio would be 42 percent, which although in excess of the HUD guidelines in effect at the time, is below the current threshold for which a compensating factor is required. Comment 28 Security Atlantic advised that it has obtained a copy of the HUD-1 for the sale of the borrowers’ prior property; accordingly, we have deleted this case pending receipt of the HUD-1. Comment 29 Auditee concurs. Comment 30 We deleted this case because, although there was no gift letter, the contract of sale recorded the gift of equity. 40 Appendix B Auditee Comments and OIG Evaluation Comment 31 Auditee concurs. Comment 32 Auditee concurs 41 Appendix C Page 1 of 2 SUMMARY OF LOANS WITH SIGNIFICANT DEFICIENCIES 42 Appendix C Page 2 of 2 SUMMARY OF LOANS WITH SIGNIFICANT DEFICIENCIES 43 Appendix D-1 page 1 of 1 Appendix D NARRATIVE CASE PRESENTATIONS Case number: 351-4404800 Loan amount: $128,981 Settlement date: April 23, 2003 Status: Reinstated by borrower who retains ownership Pertinent Details A. Inaccurate Debt to Income Ratios B. Inadequate Disclosure of Liabilities The ratios calculated by Security Atlantic were incorrect because two debts were omitted, which caused a $448 understatement of liabilities. After considering this deficiency, we calculated the debt to income ratios to be 16.36 and 48.03 percent, respectively. The borrower cosigned for a loan of $15,698, giving the borrower liability exposure of $388 per month. In addition, the underwriter did not include a recurring liability of $60 per month on a balance of $2,463 owed by the borrower. HUD Handbook 4155.1, REV-4, CHG-1, section 2-11A, provides that the lender must include monthly housing expense and all other additional recurring charges, including child support, installment accounts, and revolving accounts, when computing debt to income ratios. C. Ineligible/Unsupported Commitment Fee Mortgagee Letter 94-7, section IV, provides that a commitment or lock-in fee be in writing and guarantee the interest rate and/or discount points for a period of not less than 15 days before the anticipated closing date. However, the case file did not contain a lock-in agreement for the $495 paid by the borrower on April 23, 2003 (closing date). 44 Appendix D-2 page 1 of 2 Case number: 352-4762508 Loan amount: $141,175 Settlement date: November 8, 2002 Status: First legal action to commence foreclosure Pertinent Details A. Excessive Debt to Income Ratios without Compensating Factors HUD Handbook 4155.1, REV-4, CHG 1, sections 2-12 and 2-13, provide that the borrower’s mortgage payment to effective income ratio and total fixed payment to income ratio should not exceed 29 and 41 percent, respectively, unless the lender identifies compensating factors to justify exceeding these ratios. Security Atlantic computed debt to income ratios of 30.53 and 42.70 percent, respectively, without listing compensating factors. B. Inadequate Credit Analysis HUD Handbook 4155.1, REV-4, CHG 1, section 2-3, provides that major indications of derogatory credit require a sufficient written explanation from the borrower. Security Atlantic did not obtain an explanation for three delayed payments in the borrower’s Nelnet account. C. Inadequate Bank Account Documentation Handbook 4155.1, REV-4, CHG 1, section 3-1 F, provides that as an alternative to obtaining a verification of deposit, the lender may choose to obtain original bank statements for the most recent three-month period. Security Atlantic chose the alternative methodology, and while there were bank statements for the borrower for a three-month period, there was one statement for the coborrower covering the period July 17 to August 15, 2002. D. Inadequate Underwriting Documentation HUD Handbook 4155.1, REV-4, CHG 1, section 3-1, provides that when standard documentation does not provide enough information to support a decision, the lender must provide additional explanatory statements, consistent with information in the application, to clarify or supplement the documentation submitted by the borrower. Security Atlantic should have clarified questions about the marital status of the borrower. While the file contained an application indicating that the borrower was married, the mortgage note indicated that the borrower was unmarried. In addition, the file contained a gift letter from the borrower’s husband. 45 Appendix D-2 page 2 of 2 E. Verification of Paid-Outside-Closing Cost Not Obtained HUD Handbook 4155.1, REV-4, CHG 1, section 2-10, requires that all funds for the borrower’s investment in the property be verified and documented. The HUD-1 settlement statement in the file reported that the borrower paid a $379 appraisal fee outside of closing. However, there was no documentation to show that this had been paid before closing without reducing the funds available to close. F. Ineligible/Unsupported Commitment Fee Mortgagee Letter 94-7, section IV, provides that a commitment or lock-in fee be in writing and guarantee the interest rate and/or discount points for a period of not less than 15 days before the anticipated closing date. A commitment fee of $395, included on the HUD-1 settlement statement, was paid by the borrower to Sunset Mortgage on November 8, 2002 (closing date). However, the lock-in agreement, dated July 25, 2002, disclosed that the borrower did not choose to lock-in the interest rate or discount points. Consequently, the $395 is an ineligible fee. 46 Appendix D-3 page 1 of 3 Case number: 352-4927551 Loan amount: $100,424 Settlement date: May 13, 2003 Status: Reinstated by Borrower who retains ownership Pertinent Details A. Inadequate Compensating Factors B. Inaccurate Debt to Income Ratios C. Inadequate Disclosure of Liabilities HUD Handbook 4155.1, REV-4, CHG 1, sections 2-12 and 2-13, provide that the borrower’s mortgage payment to effective income ratio and total fixed payment to income ratio should not exceed 29 and 41 percent, respectively, unless the lender identifies compensating factors that could justify exceeding these ratios. Security Atlantic computed ratios of 25.14 and 46.13 percent, respectively. “Job stability, low mortgage payment to income ratio, and saving ability” were listed as compensating factors. However, job stability and low mortgage to income ratio are not allowable compensating factors as defined in section 2-13. In addition, the file did not contain appropriate documentation supporting the borrower’s saving ability or history. Further, the ratios calculated by Security Atlantic were incorrect because a monthly liability of $14 was not factored into the calculation of the ratios. Including this liability in the ratio calculation would increase the debt to income ratios to 25.15 and 46.54 percent, respectively. D. Inadequate Support for Employment HUD Handbook 4155.1, REV-4, CHG 1, section 2-9B, provides that a year-to-date profit-and- loss statement and balance sheet are required for self-employed borrowers. While the file contained a profit-and-loss statement, a balance sheet was not included. E. Inadequate Bank Account Documentation F. Verification of Deposit Not Obtained Handbook 4155.1, REV-4, CHG 1, section 3-1F, provides that the file must include verification of deposit and most recent three-month bank statements. The file did not contain bank statements to document the $6,100 personal funds listed on the borrower’s application form, which were needed for closing. Section 2-10B provides that if there is a large increase in a bank account or the bank account was opened recently, the lender must obtain an explanation and evidence of the source of funds from the borrower. The file contained a bank statement from the borrower’s business account, which was opened on March 19, 2003, two months before the closing date. However, no verification was obtained for four large deposits ($1,508 on March 19, 2003, $1,880 on April 3, 2003, $1,300 on April 11, 2003, and $2,780 on April 23, 2003). The available balance of $1,514 in this business account on April 28, 2003, was needed for closing. 47 Appendix D-3 page 2 of 3 G. Inadequate Earnest Money Deposit HUD Handbook 4155.1, REV-4, CHG-4, section 2-10A, provides that if the amount of the earnest money deposit exceeds 2 percent of the sales price or appears excessive, based on the borrower’s history of accumulating savings, the lender must verify the amount of deposit and the source of funds. The mortgage credit analysis worksheet contained an earnest money deposit of $500. Since the file did not contain adequate bank documentation as stated in section E, we conclude that there was insufficient documentation to support the borrower’s history of accumulating savings. As a result, the $500 earnest money needs to be explained. H. Inadequate Funds To Close on Mortgage Credit Analysis Worksheet HUD Handbook 4155.1, REV-4, CHG 1, section 2-10, provides that the cash investment in a property equals the difference between the amount of the insured mortgage, excluding any up-front mortgage insurance premium, and the total cost to acquire the property, including prepaid expenses. In addition, section 2-10 provides that the lender must estimate the settlement requirements to determine the cash required to close. The file contained a mortgage credit analysis worksheet that did not include prepaid expenses of $1,002 as stated on the good faith estimate. After offsetting against the seller concession, which was the only funds available to the borrower due to the unverified personal bank assets (refer to section E), the borrower would have a negative cash reserve of $2,012. I. Inadequate Funds To Close on HUD-1 Settlement Statement J. Verification of Paid-Outside-Closing Costs Not Obtained HUD Handbook 4155.1, REV-4, CHG 1, section 2-10, provides that all of the funds for the borrower’s investment in the property must be verified and documented. The borrower did not appear to have sufficient funds to close. The file did not contain documentation to show that a paid-outside-closing appraisal fee of $450 had been paid without reducing the funds available to close. Cash due from the borrower on the HUD-1 settlement statement was $2,913. If the total $450 paid outside of closing and $500 unverified earnest deposit (see section G) are added to the $2,913 owed by the borrower, the borrower has a $3,864 deficit at closing without appropriate verification of the $6,100 personal funds in the bank (see section E). K. Verification of Debt Payments Not Obtained. HUD Handbook 4155.1, REV-4, section 1-7B requires that certain other expenses paid on behalf of the borrower and other inducements to purchase result in a dollar-for-dollar reduction to the sales price before applying the appropriate LTV ratio. The HUD-1 settlement statement listed that the borrower satisfied a $2,010 debt to New Jersey Family Support Center on the date of closing. However, the file contained no support that the funds used to pay the debts originated from the borrower’s bank account. The borrower did not have enough funds to close as mentioned in section I. 48 Appendix D-3 page 3 of 3 L. Unsupported Credit Report Fee HUD Handbook 4000.2, REV-2, section 5-3, permits the lender to charge the borrower actual costs of credit reports. The file contained a credit report that cost $39. However, the borrower was charged $60 for the credit report on the HUD-1 settlement statement. Thus, the $21 is an unsupported fee. M. Ineligible/Unsupported Commitment Fee Mortgagee Letter 94-7, section IV, provides that a commitment or lock-in fee be in writing and guarantee the interest rate and/or discount points for a period of not less than 15 days before the anticipated closing date. A commitment fee of $395, paid by the borrower on May 13, 2003 (closing date), was included on the HUD-1 settlement statement. However, the lock-in document, dated February 26, 2003, indicated that the borrower did not choose a lock-in. Therefore, the $395 is an ineligible fee. 49 Appendix D-4 page 1 of 2 Case number: 351-4420218 Loan amount: $214,801 Settlement date: May 29, 2003 Status: First legal action to commence foreclosure Pertinent Details A. Inadequate Compensating Factors HUD Handbook 4155.1, REV-4, CHG 1, sections 2-12 and 2-13, state that the borrower’s mortgage payment to effective income ratio and total fixed payment to income ratio should not exceed 29 and 41 percent, respectively, unless the lender identifies compensating factors that could justify exceeding these ratios. Security Atlantic computed ratios of 13.8 and 42.52 percent. Compensating factors listed were a 5 percent increase on housing payment and 5 percent downpayment. HUD Handbook 4155.1, REV-5, section 2-13 F, provides that only a minimal increase in the borrower’s housing expense is justified as a compensating factor. We do not consider five percent a minimal increase. HUD Handbook 4155.1, REV-5, section 2-13 B, provides that a large downpayment is a compensating factor, however, we do not regard a five percent downpayment as large. In addition, we noted that the borrowers received a 4 percent adjustable interest rate for the first year, and the rate may change on the first day of October 2004 and on that day of each succeeding year. Since the borrowers were highly leveraged, a small interest rate increase may cause financial distress to the borrowers. B. Inaccurate Debt to Income Ratios C. Inadequate Support for Income Calculation The ratios calculated by Security Atlantic were incorrect because income was overstated by $148. HUD Handbook 4155.1, REV-4, CHG 1, section 2-7A, provides that overtime may be used as qualifying income if the borrower has received such income for approximately the past two years and there are reasonable prospects of its continuance. We calculated the two-year monthly average overtime income and bonus as $1,227 based on the employment verification information, which would increase the debt to income ratios to 14.01 and 43.16 percent, respectively. We cannot determine the basis for Security Atlantic’s computation of bonus and overtime income of $1,375. D. Inadequate Credit Analysis Handbook 4155.1, REV-4, CHG-1, section 2-3, provides that major indications of derogatory credit require a sufficient written explanation from the borrower. The borrower noted that he could not explain the reason for late credit card payments because his ex-wife incurred the delinquencies. However, we noted that 29 of these late payments were for credit cards under the borrower’s name only and occurred after the date of separation as stated in the divorce decree. 50 Appendix D-4 page 2 of 2 E. Verification of Deposits Not Obtained HUD Handbook 4155.1, REV-4, CHG 1, section 2-10B, provides that if there is a large increase in a bank account or the bank account was opened recently, the lender must obtain an explanation and evidence of the source of funds from the borrower. Security Atlantic did not obtain explanation from the borrower regarding six deposits totaling $13,425. After deducting $6,324 we identified as a withdrawal from the borrower’s 401k plan, total nonsourced deposits would be $7,101. F. Verification of Gift Not Obtained HUD Handbook 4155.1, REV-4, CHG 1, section 2-10C, requires that the lender obtain a copy of the withdrawal slip or canceled check from the gift donor’s bank, along with the borrower’s deposit slip or bank statement showing the deposit into the borrower’s bank account. Paragraph 2-10C further provides that the lender must be able to determine that the gift funds ultimately were not provided from an unacceptable source and were indeed the donor’s own funds. Mortgagee Letter 00-28 also requires that the donor furnish conclusive evidence that the funds given to the homebuyer came from the donor’s own funds. We noted that the donor deposited $11,700 to her bank account the same day she withdrew $11,500 as a gift. The ending balance after these transactions became $583. Therefore, we could not determine the source of the gift. The file contained a gift letter for $11,500, and a noncanceled check of $11,500 made by the donor “payable to cash.” Since there was no other supporting documentation for this gift transaction, we cannot verify whether the borrower or the closing agent received the funds. 51 Appendix D-5 page 1 of 2 Case number: 351-4475365 Loan amount: $120,531 Settlement date: September 15, 2003 Status: First legal action to commence foreclosure Pertinent Details A. Excessive Debt to Income Ratios without Compensating Factors HUD Handbook 4155.1, REV-4, CHG 1, sections 2-12 and 2-13, provide that the borrower’s mortgage payment to effective income ratio and total fixed payment to income ratio should not exceed 29 and 41 percent, respectively, unless the lender identifies compensating factors to justify exceeding these ratios. Security Atlantic computed debt to income ratios of 32.89 and 48.08 percent, respectively, without listing compensating factors. While LoanProspector was used to underwrite this loan, there are questions about the integrity of the data used in the risk assessment. The LoanProspector Feedback Certificate listed a different property address than the property for which the loan was approved, and the LoanProspector evaluation was completed over six months before the closing date, which exceeds the 120 day timeframe required by HUD Handbook 4155.1, REV-4, CHG 1, section 3-1. Accordingly, compensating factors would be required. B. Inadequate Funds to Close on Mortgage Credit Analysis Worksheet HUD Handbook 4155.1, REV-4, CHG 1, section 2-10, provides that the cash investment in the property equal the difference between the amount of the insured mortgage, excluding any up- front mortgage insurance premium, and the total cost to acquire the property, including prepaid expenses. In addition, Handbook 4155.1, REV-4, CHG 1, section 1-9, provides that the lender estimate the settlement requirements to determine the cash required to close. The mortgage credit analysis worksheet listed a $10,000 gift and $10,507 in available bank assets. However, we noted that the borrower’s bank assets of $10,507 already included the $10,000 gift. Since the gift was double counted, the borrower’s cash reserve would be negative $1,132. C. Verification of Gift Not Obtained HUD Handbook 4155.1, REV-4, CHG 1, section 2-10C, requires that the lender document the gift funds by obtaining a gift letter, signed by the donor and borrower, that specifies the dollar amount of the gift; provides that no repayment is required; shows the donor’s name, address, and telephone number; and provides the nature of the donor’s relationship to the borrower. The file contained a gift letter that lacked the donor’s address and was not signed and dated by the borrower. 52 Appendix D-5 page 2 of 2 D. Closing Not in Compliance with Loan Approval Handbook 4155.1 REV-4, CHG 1, section 3-12B, provides that the loan must close in the same manner in which it was underwritten and approved. The mortgage credit analysis worksheet listed discount points of $2,411, which was reduced to $1,205 on the HUD-1 settlement statement. In addition, earnest money was $2,000 on the mortgage credit analysis worksheet but $2,100 on the HUD-1 settlement statement. E. Verification of Paid-Outside-Closing Costs Not Obtained HUD Handbook 4155.1, REV-4, CHG 1, section 2-10, provides that all of the funds for the borrower’s investment in the property must be verified. The file did not contain documentation to show that a $375 paid-outside-closing appraisal fee had been paid before closing. F. Ineligible/Unsupported Commitment Fee Mortgagee Letter 94-7, section IV, provides that a commitment or lock-in fee be in writing and guarantee the interest rate and/or discount points for a period of not less than 15 days before the anticipated closing date. A commitment fee of $395 was included on the HUD-1 settlement statement, which was paid by the borrower on September 15, 2003 (closing date). However, the file did not contain the lock-in confirmation document. Therefore, the $395 is an unsupported fee. 53 Appendix D-6 page 1 of 1 Case number: 352-4877503 Loan amount: $164,112 Settlement date: February 14, 2003 Status: Reinstated by borrower who retains ownership Pertinent Details A. Inadequate Compensating Factors HUD Handbook 4155.1, REV-4, CHG 1, sections 2-12 and 2-13, provide that the borrower’s mortgage payment to effective income ratio and total fixed payment to income ratio should not exceed 29 and 41 percent, respectively, unless the lender identifies compensating factors that could justify exceeding these ratios. Security Atlantic computed ratios of 27.5 and 45.88 percent, respectively. The compensating factors were listed as (1) less than 10 percent increase in housing payments, (2) ability to save, and (3) 5 percent down payment. HUD Handbook 4155.1, REV-5, section 2-13 F, provides that only a minimal increase in the borrower’s housing expense is justified as a compensating factor. We do not consider 10 percent a minimal increase. Prior rental expense was $1,200 per month, while the projected housing expense was $1,500 per month, or more than a 25 percent increase. HUD Handbook 4155.1, REV-5, section 2-13 B, provides that large down payment is a compensating factor. As a result, a five percent down payment was not an adequate compensating factor. B. Inadequate Bank Account Documentation Handbook 4155.1, REV-4, CHG 1, section 3-1F, provides that as an alternative to obtaining a verification of deposit, the lender may choose to obtain the borrower’s original bank statements for the most recent three-month period. The bank statements in the file for the period April 26 to November 26, 2002, were missing pages. As a result, we could not document a full three-month period. In addition, we noted that the ending balance of the bank statement was illegible. C. Nonitemized Lender Credit The HUD-1 settlement statement reported a $700 nonitemized lender credit. HUD Handbook 4155.1, REV-4, section 1-9A, part 1, provides that closing costs and prepaid expenses paid on behalf of the borrower by the lender must be disclosed on the good faith estimate and the HUD-1 settlement statement. The good faith estimate and HUD-1 settlement statement must include an itemized statement indicating which items are being paid on the borrower’s behalf; disclosing a lump sum is unacceptable. 54 Appendix D-7 page 1 of 1 Case number: 352-5089740 Loan amount: $159,756 Settlement date: August 27, 2003 Status: Property conveyed to insurer Pertinent Details A. Inaccurate Debt to Income Ratios B. Inadequate Disclosure of Liabilities C. Inadequate Support for Income Calculation Security Atlantic computed debt to income ratios of 31.20 and 42.99 percent, respectively. However, this calculation omitted a debt and overstated bonus income. After considering these deficiencies, we calculated debt to income ratios of 35.23 and 50.38 percent, respectively. HUD Handbook 4155.1, REV-4, CHG-1, section 2-11A, provides that the lender must include monthly housing expense and all other additional recurring charges, including child support, installment accounts, and revolving accounts, when computing debt to income ratios. A debt balance of $6,017 was omitted, causing a $76 understatement of monthly liabilities. HUD Handbook 4155.1, REV-4, CHG-1, section 2-7A, requires the lender to develop an average of bonus or overtime income for the past two years and verify that such income is likely to continue. We could not determine how the lender calculated the monthly bonus income amount of $756. We calculated the amount at $225 (by dividing the total annual bonus amounts listed on the verification of employment by the total number of months covered), resulting in an overstatement of $531. D. Ineligible/Unsupported Commitment Fee Mortgagee Letter 94-7, section IV, provides that a commitment or lock-in fee be in writing and guarantee the interest rate and/or discount points for a period of not less than 15 days before the anticipated closing date. However, the case file did not contain a lock-in sheet or other document explaining the $495 commitment fee charge, which was paid by the borrower on August 27, 2003 (closing date). Therefore, the $495 is an unsupported fee. 55 Appendix D-8 page 1 of 2 Case number 352-4894655 Loan amount: $188,680 Settlement date: April 15, 2003 Status: Reinstated by borrower who retains ownership Pertinent Details A. Excessive Debt to Income Ratio with Inadequate Compensating Factors HUD Handbook 4155.1, REV-4, CHG 1, sections 2-12 and 2-13, state that the borrower’s mortgage payment to effective income ratio and total fixed payment to income ratio should not exceed 29 and 41 percent, respectively, unless the lender identifies compensating factors to justify exceeding these ratios. Security Atlantic computed debt to income ratios of 42.90 and 55.58 percent, respectively. The compensating factors listed on the mortgage credit analysis worksheet were credit explanation for derogatoriness, good credit scores, income stability, savings pattern, and daughter lives with her (borrower) and helps with payments. However, the compensating factors listed were either not valid or inadequate. The first and second factors were inadequate because the borrower’s credit scores were marginal and explanations for credit problems were inadequate. The third and fifth factors are not valid factors. The fourth factor was inadequate because the bank statement did not demonstrate accumulative savings pattern. Moreover, the borrower’s daughter had specified in writing that she was an unemployed mother, and the extent of help with payments was undocumented. B. Verification of Gift Not Obtained HUD Handbook 4155.1, REV 4, CHG 1, provides that a lender must document the transfer of the funds from the donor to the borrower. While the file contained a gift check for $8,700, there was inadequate documentation that the funds came from the donor because the donor’s bank statement had pages missing. The donor’s bank statement disclosed an available balance of $437.64; however, we could not determine whether the $8,700 was recently deposited or whether the donor had the funds available prior to the gift. C. Verification of Paid-Outside-Closing Cost Not Obtained HUD Handbook 4155.1, REV-4, CHG 1, section 2-10, requires that all funds for the borrower’s investment in the property be verified and documented. The HUD-1 settlement statement reported that the borrower paid $400 as an appraisal fee and a $58 credit report fee. Although, the file contains an appraisal report, it does not contain documentation for the cost of the appraisal or whether the fee was paid. Similarly, there was inadequate documentation to indicate that the credit report fee was paid. As a result, the documentation was insufficient to prove that the paid-outside-closing items had been paid before closing without reducing the funds available to close. 56 Appendix D-8 page 2 of 2 D. Unsupported Credit Report Fee Handbook 4000.2, REV-2, paragraph 5-3, provides that the lender is permitted to charge the actual costs of credit reports. The file contained one credit report at a cost of $14. However, the borrower was charged $58 for credit reports on the HUD-1 settlement statement as opposed to the actual cost of $14. Consequently, the $44 is regarded as unsupported fees. E. Ineligible/Unsupported Commitment Fee Mortgagee Letter 94-7, section IV, provides that a commitment or lock-in fee be in writing and guarantee the interest rate and/or discount points for a period of not less than 15 days before the anticipated closing date. A commitment fee of $495 was included on the HUD-1 settlement statement, which was paid by the borrower on August 15, 2003 (closing date). However, the lock-in agreement document, dated December 18, 2002, indicated that the borrower did not choose a lock-in. Therefore, the $495 is an ineligible fee. 57 Appendix D-9 page 1 of 2 Case number: 352-5069903 Loan amount: $422,890 Settlement date: August 25, 2003 Status: First legal action to commence foreclosure Pertinent Details A. Excessive Debt to Income Ratios with Inadequate Compensating Factors HUD Handbook 4155.1, REV-4, CHG 1, sections 2-12 and 2-13, state that the borrower’s mortgage payment to effective income ratio and total fixed payment to income ratio should not exceed 29 and 41 percent, respectively, unless the lender identifies compensating factors to justify exceeding these ratios. Security Atlantic computed debt to income ratios of 44.53 and 55.90 percent, respectively. The compensating factors listed on the mortgage credit analysis worksheet were “credit explanation for derogatoriness, borrower has been paying mom’s bills, he will be occupying property, wife’s income is comp factor, income, job stability, and savings reserves, and property self-sufficient.” The first and sixth compensating factors are not valid because they are loan requirements. The second and third factors are not valid factors according to HUD Handbook 4155.1, REV-4, CHG 1, section 2-13. Concerning the eighth factor, it is questionable whether the property is self-sufficient since it suffered a devastating fire and the file did not indicate whether or when the units would be rentable. The file includes a document from the contractor in charge of 203k repairs of the property in which he estimates the total repair costs at $176,659. The fact that the property needed extensive repairs during the time of closing may indicate that the property’s ability to generate rental income was impaired. The seventh factor is not adequate because the borrower did not have enough funds to close (See section B). The fourth factor is valid; however, given the condition of the property, we question whether these were adequate compensating factors to justify ratios of 44.53 and 55.90 percent. B. Inadequate Funds to Close on HUD-1 Settlement Statement Handbook 4155.1, REV-4, CHG 1, section 2-10, provides that all of the funds for the borrower’s investment in the property must be verified and documented. Based on the HUD-1 settlement statement, the borrower was required to have funds amounting to $64,675 to close (cash due from borrower $64,172 plus paid-outside-closing costs of $503). However, the borrower did not appear to have sufficient funds to close. First, there was no documentation to show that paid- outside-closing items were paid before closing without reducing the funds available to close. Second, bank documents disclosed that the borrower had assets available of $12,688, and other documents supported a $49,219 gift of equity (which was not recorded on the HUD-1 settlement statement). Consequently, the borrower would have had a $2,768 deficit at closing. Further, there was a letter from the borrower explaining that savings were reduced from $35,000 to $4,000. If this pertains to the bank balance after the documented $12,688 balance, then a larger deficit would result at closing. The borrower defaulted after four payments. 58 Appendix D-9 page 2 of 2 C. Verification of Paid-Outside-Closing Cost Not Obtained HUD Handbook 4155.1, REV-4, CHG 1, section 2-10, requires that all funds for the borrower’s investment in the property be verified and documented. The HUD-1 settlement statement in the file reported that the borrower paid $450 for an appraisal fee and a credit report fee of $53. Although, the file contains an appraisal report showing that an appraisal was performed, it does not contain documentation showing the cost of the appraisal or whether the appraisal or credit report fees were paid. As a result, the documentation was insufficient to prove that the paid- outside-closing items had been paid before closing without reducing the funds available to close. D. Closing Not in Compliance with Loan Approval Handbook 4155.1, REV-4, CHG 1, section 3-12B, provides that the loan must close in the same manner in which it was underwritten and approved. The HUD-1 settlement statement did not disclose a $49,219 gift of equity that the seller of the property gave to the borrower. In addition, a $15,000 seller concession listed on the mortgage credit analysis worksheet was not listed on the HUD 1 settlement statement. The undisclosed gift of equity and seller concession was needed for closing. E. Unsupported Credit Report Fee HUD Handbook 4000.2, REV-2, paragraph 5-3, permits the lender to charge the actual costs of credit reports. The file contained a credit report at a cost of $24; however, the borrower was charged $53. Consequently, the $29 is an unsupported fee. F. Ineligible/Unsupported Commitment Fee Mortgagee Letter 94-7, section IV, provides that a commitment or lock-in fee be in writing and guarantee the interest rate and/or discount points for a period of not less than 15 days before the anticipated closing date. A commitment fee of $495 was included on the HUD-1 settlement statement, which was paid by the borrower on August 25, 2003 (closing date). However, the lock-in agreement, dated July 1, 2003, indicated that the borrower did not choose a lock-in. Therefore, the $495 is an ineligible fee. 59 Appendix D-10 page 1 of 3 Case number: 352-5083379 Loan amount: $157,426 Settlement date: August 28, 2003 Status: Foreclosure completed Pertinent Details A. Inaccurate Debt to Income Ratios B. Inadequate Support for Income Calculation The ratios calculated by Security Atlantic are incorrect due to an overstatement of income by $1,025. Security Atlantic calculated the borrower’s estimated monthly income of $5,062 based on foster care payments for the period from July 1-31, 2003. The file did not contain a document supporting the continuance of this income. We calculated monthly income of $4,037, based on the contractual income indicated in the letter provided by the borrower’s contracting house, which resulted in debt to income ratios of 36.89 and 38.27 percent, respectively, instead of 29.42 and 30.52 percent calculated by Security Atlantic. C. Inadequate Support for Employment HUD Handbook 4155.1, REV-4, CHG 1, section 2-6, requires that the lender verify the borrower’s employment for the most recent two full years. Handbook 4155.1, REV-4, CHG 1, paragraph 3-1E, provides that as an alternative to obtaining verification of employment, the lender may obtain the borrower’s original pay stub(s) covering the most recent 30-day period, along with original payroll tax forms from the previous 2 years. Mortgagee Letter 97-26 provides that the lender may perform telephone verification of current employment when the alternate procedure is used. HUD Handbook 4155.1, REV-4, CHG 1, section 2-7, provides that the income of each borrower to be obligated for the mortgage debt must be analyzed to determine whether it can reasonably be expected to continue through at least the first three years of the mortgage loan. The file contained a letter from a care service indicating the borrower had a contractual relationship with it for the past three years and provided the income earned for the last two years. However, there was no document to support the reasonable continuance of the borrower’s income for the next three years. D. Closing Not in Compliance with Loan Approval Handbook 4155.1, REV-4, CHG 1, section 3-12B, provides that the loan must close in the same manner in which it was underwritten and approved. The HUD-1 settlement statement in the file listed a seller concession of $8,000, which was $233 higher than the amount of $7,767 indicated on the mortgage credit analysis worksheet, and the principal mortgage amount was $155,100 on the HUD-1 settlement statement, while it was $157,426 on the mortgage credit analysis worksheet, mortgage, and note. 60 Appendix D-10 page 2 of 3 E. Inadequate Documentation of Earnest Money Deposit HUD Handbook 4155.1, REV-4, CHG 1, section 2-10A, provides that if the amount of any earnest money deposit exceeds 2 percent of the sales price or appears excessive based on the borrower’s savings history, the lender must verify the deposit amount and the source of funds. The mortgage credit analysis worksheet listed the earnest money as $5,676, which was more than 2 percent of the sales price ($159,900 x 2 percent = $3,198). While the file contained supporting documents for $5,243, we were unable to locate support for the remaining $433. F. Inadequate Funds to Close on Mortgage Credit Analysis Worksheet HUD Handbook 4155.1, REV-4, CHG 1, section 2-10, provides that the cash investment in the property equal the difference between the amount of the insured mortgage, excluding any up- front mortgage insurance premium, and the total cost to acquire the property, including prepaid expenses. In addition, Handbook 4155.1, REV-4, CHG 1, section 1-9, provides that the lender must estimate the settlement requirements to determine the cash required to close. The file contained a mortgage credit analysis worksheet that did not include prepaid expenses of $1,887 and discount points of $2,069 as stated on the good faith estimate. In addition, the mortgage credit analysis worksheet listed an overstated earnest money amount of $433 as stated in section E. After offsetting against the borrower’s assets and seller’s concession, the borrower would have a negative cash reserve of $323. G. Inadequate Funds to Close on HUD-1 Settlement Statement H. Verification of Paid-Outside-Closing Costs Not Obtained Handbook 4155.1, REV-4, CHG 1, section 2-10, provides that all of the funds for the borrower’s investment in the property must be verified and documented. The borrower did not appear to have sufficient funds to close. There was no documentation to show that paid-outside-closing items totaling $433 had been paid before closing without reducing the funds available to close. Cash due from the borrower on the HUD-1 settlement statement was $2,724. If the $433 paid- outside-closing amount were added to the $2,724 owed by the borrower and offset against $617 in available assets, the borrower would have a $2,540 deficit at closing. I. Inadequate Bank Account Documentation J. Verification of Deposits Not Obtained Handbook 4155.1, REV-4, CHG 1, section 3-1F, provides that as an alternative to obtaining a verification of deposit, the lender may choose to obtain the borrower’s original bank statements for the most recent three-month period. The bank statements in the file only covered one month. The borrower also deposited $1,143 in cash to the bank account on July 31, 2003, without explanation. This amount was needed for closing. 61 Appendix D-10 page 3 of 3 K. Ineligible/Unsupported Commitment Fee Mortgagee Letter 94-7, section IV, provides that a commitment or lock-in fee be in writing and guarantee the interest rate and/or discount points for a period of not less than 15 days before the anticipated closing date. A commitment fee of $495 was included on the HUD-1 settlement statement, which was paid by the borrower on August 28, 2003 (closing date). However, the lock-in agreement, dated July 13, 2003, indicated that the borrower did not choose a lock-in. Therefore, the $495 is an ineligible fee. 62 Appendix D-11 page 1 of 2 Case number: 352-5094184 Loan amount: $238,500 Settlement date: October 14, 2003 Status: First legal action to commence foreclosure Pertinent details A. Inadequate Compensating Factors HUD Handbook 4155.1, REV-4, CHG 1, sections 2-12 and 2-13, state that the borrower’s mortgage payment to effective income ratio and total fixed payment to income ratio should not exceed 29 and 41 percent, respectively, unless the lender identifies compensating factors that could justify exceeding these ratios. Security Atlantic computed ratios of 37.97 and 50.83 percent. “Excellent credit, very good job stability, reserved savings pattern, and 203k with repairs” were listed as compensating factors. However, except for “reserved savings pattern,” the factors cited are not allowable compensating factors as defined in section 2-13. Section 2-13 provides that if the borrower has demonstrated an ability to accumulate savings and has a conservative attitude toward the use of credit, it may be considered as an allowable compensating factor. The bank statements in the file indicated the borrower had numerous unexplained nonpayroll deposits as mentioned in section C. As a result, the borrower has not demonstrated a reserved savings ability. B. Closing Not in Compliance with Loan Approval Handbook 4155.1, REV-4, CHG 1, section 3-12B, provides that the loan must close in the same manner in which it was underwritten and approved. The HUD-1 settlement statement in the file listed a seller concession of $4,772, which was $495 lower than the amount of $5,267 indicated on the mortgage credit analysis worksheet. The earnest deposit was $1,000 on HUD-1 settlement statement, while it was $503 as listed on mortgage credit analysis worksheet. C. Verification of Deposits Not Obtained HUD Handbook 4155.1, REV-4, CHG 1, section 2-10B, provides that if there is a large increase in a bank account or the bank account was opened recently, the lender must obtain an explanation and evidence of the source of funds from the borrower. During the period August 18-October 7, 2003, the borrower made numerous nonpayroll deposits totaling $12,874. Security Atlantic did not obtain an explanation from the borrower. It is important to note that this amount was needed for closing. D. Ineligible Shipping Fee The borrower was charged $50 for a Federal Express fee, which is not listed on the approved listing of closing costs and other fees in HUD Handbook 4000.2, REV-2, section 5-3. 63 Appendix D-11 page 2 of 2 E. Unsupported Credit Report Fee HUD Handbook 4000.2, REV-2, section 5-3, permits the lender to charge the actual costs of credit reports. The file reported credit report costs of $14. However, the borrowers were charged $58 for credit reports on the HUD-1 settlement statement. Consequently, the $44 is an unsupported fee. 64 Appendix D-12 page 1 of 2 Case number 352-4957069 Loan amount: $253,953 Settlement date: July 31, 2003 Status: First legal action to commence foreclosure Pertinent Details A. Excessive Debt to Income Ratios without Compensating Factors HUD Handbook 4155.1, REV-4, CHG 1, sections 2-12 and 2-13, state that the borrower’s mortgage payment to effective income ratio and total fixed payment to income ratio should not exceed 29 and 41 percent, respectively, unless the lender identifies compensating factors to justify exceeding these ratios. Security Atlantic computed debt to income ratios of 30.90 and 48.04 percent, respectively, without listing compensating factors. While LoanProspector was used to underwrite this loan, there are questions about the integrity of the data used in the risk assessment. First, there was no amount provided for reserves on the LoanProspector sheet when we calculated a negative reserve as noted in D below. Second, as noted in C below, Security Atlantic appears to have underestimated the borrower’s income. Accordingly, compensating factors would be required. B. Inaccurate Debt to Income Ratios C. Inadequate Support for Income Calculation HUD Handbook 4155.1, REV-4, CHG-1, section 2-7, provides that overtime may be used as qualifying income if the borrower has received such income for approximately the past two years and there are reasonable prospects of its continuance. The lender must develop an average of overtime income for the past two years. The ratios calculated by Security Atlantic were incorrect due to overstated overtime income of $281. We calculated the two years’ monthly average overtime income as $454 based on the employment verification information, while Security Atlantic calculated $735. Based upon our calculation, the debt to income ratios would be 32.24 and 50.11 percent, respectively. D. Inadequate Funds to Close on Mortgage Credit Analysis Worksheet HUD Handbook 4155.1, REV-4, CHG 1, section 2-10, provides that the cash investment in the property should equal the difference between the amount of the insured mortgage, excluding any up-front mortgage insurance premium, and the total cost to acquire the property, including prepaid expenses. In addition, Handbook 4155.1, REV-4, CHG 1, section 1-9, provides that the lender must estimate the settlement requirements to determine the cash required to close. The mortgage credit analysis worksheet listed the borrower’s available assets as $8,683 and a seller concession of $7,921. However, the borrower needed $18,434 to close. Therefore, the borrower’s cash reserves would be negative $1,830. 65 Appendix D-12 page 2 of 2 E. Closing Not in Compliance with Loan Approval Handbook 4155.1, REV-4, CHG 1, section 3-12B, provides that the loan must close in the same manner in which it was underwritten and approved. The HUD-1 settlement statement in the file listed a seller concession of $6,628, which was $1,293 lower than the amount of $7,920 indicated on the mortgage credit analysis worksheet, and did not list a $7,000 gift. In addition, the HUD-1 settlement statement indicated that the borrower made a $3,000 earnest money deposit, while the mortgage credit analysis worksheet listed it as $1,000. We located a canceled checked (check no. 0510) for $1,000 as support for the earnest deposit in the file. The remaining $2,000 was unsupported. Both the gift and earnest money were needed for closing. F. Ineligible/Unsupported Commitment Fee Mortgagee Letter 94-7, section IV, provides that a commitment or lock-in fee be in writing and guarantee the interest rate and/or discount points for a period of not less than 15 days before the anticipated closing date. A commitment fee of $445 was included on the HUD-1 settlement statement, which was paid by the borrower on July 31, 2003 (closing date). However, the file did not contain the lock-in confirmation document. Therefore, the $445 is an unsupported fee. 66 Appendix D-13 page 1 of 2 Case number: 352-5090016 Loan amount: $275,674 Settlement date: July 31, 2003 Status: Reinstated by borrower who retains ownership Pertinent Details A. Inadequate Earnest Money Deposit Documentation HUD Handbook 4155.1, REV-4, CHG-1, section 2-10A, provides that if the amount of the earnest money deposit exceeds 2 percent of the sales price or appears excessive, based on the borrower’s history of accumulating savings, the lender must verify the amount of deposit and the source of funds. A HUD-1 settlement statement in the file listed an earnest money deposit of $4,000. An escrow letter in the file stated that the borrower’s realtor was in possession of $1,000 of a $5,000 earnest money deposit. To support the amount held by the realtor, the file included a canceled check and corresponding bank statements from the borrower for $1,000. The escrow letter also stated that the remaining $4,000 portion of the earnest money deposit was being held by the borrower’s attorney. The file, however, did not include attorney correspondence, supporting bank statements, or a cancelled check to adequately source the remaining $4,000 earnest money deposit. In addition, available bank statements in the file revealed the borrower’s inability to accumulate savings. The $4,000 earnest deposit claimed on the HUD-1 settlement statement was needed for closing, and the borrower went into default after one payment. B. Verification of Deposits Not Obtained HUD Handbook 4155.1, REV-4, CHG 1, section 2-10B, provides that if there is a large increase in a bank account or the bank account was opened recently, the lender must obtain an explanation and evidence of the source of funds from the borrower. There was a large increase in the borrower’s personal funds without explanation. The file included two bank statements for the period February 27 to April 26, 2003, that disclosed negative beginning and ending balances of ($96) and ($137), respectively. A third bank statement for the period May 28 to June 25, 2003, disclosed a beginning and ending balance of $5,827 and $2,043, respectively. This would indicate that in excess of $6,000 was deposited into the borrower’s bank account between April 27 and May 27, 2003. However, the bank statement for this period was not in the file. This significant increase should have been sourced according to HUD Handbook 4155.1, REV-4, CHG 1, section 2-10B. This amount was needed for closing. 67 Appendix D-13 page 2 of 2 C. Verification of Paid-Outside-Closing Cost Not Obtained HUD Handbook 4155.1, REV-4, CHG 1, section 2-10, requires that all funds for the borrower’s investment in the property be verified and documented. The HUD-1 settlement statement in the file reported that the borrower paid $450 as an appraisal fee and a broker fee of $2,068. Although, the file contains an appraisal report showing that an appraisal was performed, the file does not contain documentation showing the cost of the appraisal or whether fees were paid. As a result, the documentation was insufficient to prove that the paid-outside-closing items had been paid before closing without reducing the funds available to close. D. Ineligible/Unsupported Commitment Fee Mortgagee Letter 94-7, section IV, provides that a commitment or lock-in fee be in writing and guarantee the interest rate and/or discount points for a period of not less than 15 days before the anticipated closing date. A commitment fee of $445 was included on the HUD-1 settlement statement, which was paid by the borrower on July 31, 2003 (closing date). However, the case file did not contain a lock-in sheet or other document explaining the $445 commitment fee charge. Therefore, the $445 was an unsupported fee. 68 Appendix D-14 page 1 of 1 Case number: 352-4961335 Loan amount: $211,678 Settlement date: September 12, 2003 Status: Delinquent A. Inadequate Earnest Money Deposit Documentation HUD Handbook 4155.1, REV-4, CHG-1, section 2-10A, provides that if the amount of the earnest money deposit exceeds 2 percent of the sales price or appears excessive, based on the borrower’s history of accumulating savings, the lender must verify the amount of deposit and the source of funds. The HUD-1 settlement statement lists an earnest deposit of $9,000, which exceeds 2 percent of the sales price. The endorsement file contains supporting documentation showing that the borrowers made an earnest deposit of $8,500, not $9,000. Moreover, the file did not contain bank documentation showing the borrower’s history of accumulating savings. The borrowers needed the earnest money deposit to close on the property. B. Ineligible/Unsupported Commitment Fee Mortgagee Letter 94-7, section IV, provides that a commitment or lock-in fee be in writing and guarantee the interest rate and/or discount points for a period of not less than 15 days before the anticipated closing date. A commitment fee of $395 was included on the HUD-1 settlement statement, which was paid by the borrower on September 12, 2003 (closing date). However, the case file did not contain a lock-in sheet or other document explaining the $395 commitment fee charge. Therefore, the $395 was an unsupported fee. C. Inadequate Underwriting Documentation HUD Handbook 4155.1, REV-4, CHG 1, section 3-1, provides that when standard documentation does not provide enough information to support a decision, the lender must provide additional explanatory statements, consistent with other information in the application, to clarify or supplement the documentation submitted by the borrower. The file contained seven Internal Revenue Service W-2 forms from different employers for the year 2002 (one year before closing). These employers did not match with the employment information on the verification of employment forms in the loan file. 69 Appendix D-15 page 1 of 2 Case number: 352-5052966 Loan amount: $263,088 Settlement date: August 28, 2003 Status: Repayment Pertinent Details A. Verification of Deposits Not Obtained HUD Handbook 4155.1, REV-4, CHG 1, section 2-10B, provides that if there is a large increase in a bank account or the bank account was opened recently, the lender must obtain an explanation and evidence of the source of funds from the borrower. Security Atlantic did not obtain an explanation for numerous nonpayroll deposits totaling more than $11,000 ($1,000 on May 13, 2003, $2,691 on May 29, 2003, $1,500 on June 16, 2003, and $6,000 on June 16, 2003). We also noted that the account’s beginning balance was zero, which may indicate that this account was recently opened. These deposits were needed for closing. B. Inadequate Evaluation of Savings Pattern HUD Handbook 4155.1, REV-5, section 2-1, requires the lender to evaluate the borrower’s capacity to make payments. Section 3-1 also requires that when standard documentation does not provide enough information to support this decision, the lender must provide additional explanatory statements, consistent with other information in the application, to clarify or to supplement the documentation submitted by the borrower. The file contained bank statements with a beginning balance of zero and an ending balance of $150 for the period of May 12 to July 17, 2003. As mentioned in section A, the borrower made $11,191 in nonpayroll deposits into the bank account during the same period and withdrew $11,041 in two months. The file contained a canceled check for $2,000 for the first down payment; however, this amount was not disclosed on the HUD-1 settlement statement. No other explanation about the remaining $9,041 expenses was provided in the file. As a result, we concluded that the borrower did not demonstrate her savings ability, and may lack the capacity to make mortgage payment. Security Atlantic did not evaluate the borrower’s ability to repay as required. C. Inadequate Funds to Close on Mortgage Credit Analysis Worksheet A mortgage credit analysis worksheet, dated August 26, 2003, did not list discount points of $1,973 as stated on the HUD-1 settlement statement, and discount points on the good faith estimate were $2,863. Since the interest rate was 3 percent on the good faith estimate but 6 percent on the mortgage credit analysis worksheet, we concluded that the underwriting was not conducted based on the good faith estimate. Therefore, we used the discount points on the HUD- 1 settlement for our calculation. The mortgage credit analysis worksheet listed assets as 70 Appendix D-15 page 2 of 2 $11,009. Based on the bank statements and other supporting documents, such as canceled checks, we noted that the borrower had a bank balance of $150 as of July 17, 2003, and an earnest deposit of $2,000 (which was not disclosed on the HUD-1 settlement statement or mortgage credit analysis worksheet) according to the real estate sales contract and a canceled check. Considering the overstated available assets and omitted discount points, the borrower would have a negative cash reserve of $4,619, instead of $6,218 as reported. In addition, the worksheet indicated that the seller concession was $7,997, of which $3,437 was used to pay closing costs. Therefore, with the remaining seller concession of $4,560, the cash reserve would be negative $59. D. Inadequate Funds to Close on HUD-1 Settlement Statement HUD Handbook 4155.1, REV-4, CHG 1, section 2-10, provides that all of the funds for the borrower’s investment in the property must be verified and documented. The borrower did not appear to have sufficient funds to close. Cash due from the borrower on the HUD-1 settlement statement was $3,037. As of July 17, 2003, the borrower’s available assets were $150 according to the bank statement. After including $2,000 nondisclosed earnest money as stated in section B, the borrower would have an $887 deficit at closing. 71 Appendix D-16 page 1 of 3 Case number: 352-5033337 Loan amount: $166,639 Settlement date: October 30, 2003 Status: Foreclosure completed Pertinent Details A. Inaccurate Debt to Income Ratios B. Inadequate Support for Income Calculation The ratios calculated by Security Atlantic are incorrect due to an overstatement of income by $2,275. After considering this deficiency, we calculated the debt to income ratios to be 35.07 and 35.07 percent, respectively, instead of 21.655 and 21.655 percent as listed on mortgage credit analysis worksheet. The overstatement of income appears to be due to a number of factors. First, Security Atlantic double counted the borrower’s base salary of $1,533 per month. Second, Security Atlantic included monthly income of $767 derived from seminars provided by the borrower; however, there is no evidence that this income would continue as required by HUD Handbook 4155.1, REV-5, section 2-7. Third, we noted payments from the U.S. Department of Veterans Affairs for one coborrower was $429, while Security Atlantic used $404, and we could not determine how Security Atlantic computed the Social Security income of $748, for which we calculated $838. C. Inadequate Support for Employment HUD Handbook 4155.1, REV-4, CHG 1, section 2-6, requires that the lender verify the borrower’s employment for the most recent two years. Handbook 4155.1, REV-4, CHG 1, paragraph 3-1E, provides that as an alternative to obtaining verification of employment, the lender may obtain the borrower’s original pay stub(s) covering the most recent 30-day period, along with original payroll tax forms from the previous two years. In addition, Mortgagee Letter 97-26 provides that the lender may perform telephone verification of current employment when the alternate income documentation procedure is used. The file contained a letter from one coborrower, who was the president of a not-for-profit organization. This letter indicated the borrower’s job title and salary information but did not provide the organization’s address or telephone number or starting date of employment. The file also contained a verification of employment from the same organization, which verified the borrower’s current employment as well as prior employment in another company. Therefore, we consider that Security Atlantic did not properly verify the borrower’s prior employment. 72 Appendix D-16 page 2 of 3 D. Closing Not in Compliance with Loan Approval Handbook 4155.1 REV-4, CHG 1, section 3-12B, provides that the loan must close in the same manner in which it was underwritten and approved. The HUD-1 settlement statement in the file listed a seller concession of $10,000, which was $183 higher than the amount of $9,817 indicated on the mortgage credit analysis worksheet. E. Verification of Paid-Outside-Closing Costs Not Obtained Handbook 4155.1, REV-4, CHG 1, section 2-10, provides that all of the funds for the borrower’s investment in the property must be verified and documented. There was no documentation to show that an appraisal fee of $450 had been paid before closing without reducing the funds available to close. F. Inadequate Credit Analysis Handbook 4155.1, REV-4, CHG-1, section 2-3, provides that major indications of derogatory credit require a sufficient written explanation from the borrower. Section 2-3 also requires that the lender develop a credit history from utility payment records, rental payments, automobile insurance payments, or other means of direct access from the credit provider for the borrowers who do not use traditional credit. The credit report in the file indicated that the three borrowers did not have sufficient credit histories. Alternative credit support provided, such as receipts from a drug store, a hunting club membership, and a magazine subscription, are not acceptable. Further, the credit report listed numerous collections that were unexplained. G. Inadequate Disclosure of Liabilities According to HUD Handbook 4155.1, REV-4, CHG 1, section 2-10C, when someone other than a family member has paid off debts, the funds used to pay off the debt must be treated as an inducement to purchase, and the sales price must be reduced by a dollar-for-dollar amount in calculating the maximum insurable mortgage. The HUD-1 settlement statement indicated $3,250 was used to satisfy judgments; however, no creditor information was provided. H. Inadequate Verification of Power of Attorney Handbook 4155.1, REV-5, section 3-5 B, provides that the lender must provide evidence that the signer has authority to purchase the property and to obligate the borrower. Acceptable evidence includes a durable power of attorney specifically designed to survive incapacity and avoid the need for court proceedings. We noted that the borrower signed as power of attorney on behalf of both co-borrowers for the documents such as the sales contract, mortgage applications, HUD-1 settlement statement, and mortgage and adjustable rate note before or on the closing date of October 30, 2003. However, one power of attorney for one co-borrower was dated October 29, 2003, and the other October 31, 2003, which was one day after closing. Therefore, we 73 Appendix D-16 page 3 of 3 concluded that the borrower signed certain documents for the two co-borrowers before the power of attorney was effective. I. Nonitemized Lender Credit HUD Handbook 4155.1, Rev-4, section 1-9A, part 1, provides that closing costs and prepaid expenses paid on behalf of the borrower by the lender must be disclosed on the good faith estimate and the HUD-1 settlement statement. The HUD-1 settlement statement listed a realtor closing cost credit of $380 without providing itemized information. J. Inadequate Underwriting Documentation HUD Handbook 4155.1, REV-4, CHG-1, section 3-1, indicated that when standard documentation does not provide enough information to support a lender’s decision, the lender must provide additional explanatory statements, consistent with other information in the application, to clarify or to supplement the documentation submitted by the borrower. The age of one coborrower was inconsistent. On the application the age was listed as 67 years, while a U.S. Department of Veterans Affairs hospital memorandum indicated the age would be 74, and a life insurance document indicated 66. 74 Appendix E page 1 of 3 75 Appendix E page 2 of 3 76 Appendix E page 3 of 3 77 Appendix F SCHEDULE OF INELIGIBLE AND UNSUPPORTED FEES page 1 of 1 Ineligible/Unsupported Fees FHA Case # Ineligible Ineligible Unsupported Unsupported Commitment Shipping Credit Report Commitment Fee Fee Fee Fee 352-4762508 $395 352-4927551 $395 $21 352-4779975 $495 $16 352-4894655 $495 $44. 352-5049757 $495 352-5069903 $495 $29 352-5083379 $495 352-5097014 $495 352-5167620 $495 351-4404800 $495 352-4779692 $395 351-4475365 $395 352-5089740 $495 352-4957069 $445 352-5049179 $395 352-5090016 $445 352-4734667 $395 352-4735633 $445 352-4758844 $395 352-4779549 $395 352-4835578 $445 352-4891251 $70 $395 352-4961335 $395 352-5010076 $395 352-5135809 $395 352-5094184 $50 $44 Total: 26 cases $4,255 $120 $154 $6,720 78
Security Atlantic Mortgage Company, Inc., Nonsupervised Mortgagee, Edison, New Jersey
Published by the Department of Housing and Urban Development, Office of Inspector General on 2005-09-16.
Below is a raw (and likely hideous) rendition of the original report. (PDF)