oversight

Golden First Mortgage Corporation, Nonsupervised Direct Endorsement Lender, Great Neck, New York

Published by the Department of Housing and Urban Development, Office of Inspector General on 2005-09-29.

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

      AUDIT REPORT




   Golden First Mortgage Corporation
Nonsupervised Direct Endorsement Lender
        Great Neck, New York

            2005-NY-1009

          September 28, 2005



        OFFICE OF AUDIT
     New York/New Jersey Region
                                                            Issue Date
                                                                 September 28 2005
                                                            Audit Report Number
                                                                 2005-NY-1009




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


FROM:      Edgar Moore, Regional Inspector General for Audit, 2AGA

SUBJECT:   Golden First Mortgage Corporation Did Not Always Comply with HUD/Federal
           Housing Administration Loan Origination Requirements


                                   HIGHLIGHTS
What We Audited and Why

           We audited Golden First Mortgage Corporation (Golden First), a nonsupervised
           direct endorsement lender located in Great Neck, New York, because its default rate
           for loans originated and underwritten during the period November 1, 2002, through
           October 31, 2004, was nearly double the New York State average default rate.

           The audit objectives were to determine whether Golden First (1) approved insured
           loans in accordance with U.S. Department of Housing and Urban Development
           (HUD)/Federal Housing Administration requirements, which include following
           prudent lending practices, and (2) developed and implemented a quality control plan
           that complied with HUD/Federal Housing Administration requirements.

 What We Found


           Golden First did not always follow prudent lending practices and HUD regulations
           in its loan origination and underwriting processes. Of the 20 loans we reviewed, 5
           exhibited material underwriting deficiencies. These deficiencies occurred because
           Golden First did not adequately verify employment, income, and/or assets. As a
           result, the HUD/Federal Housing Administration insurance fund incurred a loss
           associated with one loan and continues to assume a risk with the other four loans.
         Golden First did not ensure that its quality control plan was implemented in
         accordance with HUD/Federal Housing Administration requirements. It did not
         ensure that (1) loans defaulting within the first six months were reviewed, (2)
         quality control reviews were conducted in a timely manner, and (3) management
         responses and planned corrective action were adequately documented.
         Additionally, Golden First inadequately maintained loan origination files and
         other information. Consequently, the effectiveness of Golden First’s quality
         control plan was impaired, resulting in a lack of assurance that loan origination
         problems were identified and appropriate corrective action was taken to prevent
         similar occurrences.

What We Recommend

         We recommend that the assistant secretary for housing - federal housing
         commissioner require Golden First to (1) indemnify HUD in the amount of
         $1,118,717 against future losses on the four loans currently insured with material
         underwriting deficiencies; (2) reimburse HUD $259,154 for the amount of claims
         and associated fees paid on one loan with a material underwriting deficiency; (3)
         establish and implement underwriting processing procedures that comply with HUD
         requirements, and (4) develop and implement quality control, loan documentation
         and retention procedures in compliance with HUD/Federal Housing Administration
         requirements.


Auditee Response

         Golden First officials disagreed that material deficiencies existed in its origination
         and/or underwriting processes, and stated that its loan files confirmed its concern
         and commitment to following HUD’s guidelines and prudent lending practices.
         Golden First officials also disagreed that it was not adhering to HUD guidelines for
         quality control, and noted that criticism of its quality control program based on a
         “snapshot in time” does not depict the true nature of its quality control plan. We
         discussed the contents of the report with Golden First officials on September 1,
         2005, at which time they provided written comments.

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




                                            2
                            TABLE OF CONTENTS

Background and Objectives                                                               4

Results of Audit
     Finding 1: Golden First Approved Loans That Did Not Qualify for HUD/Federal
                Housing Administration Insurance                                        5

     Finding 2: Golden First Did Not Implement Its Quality Control Plan in Accordance   8
                with HUD Requirements


Scope and Methodology                                                                   10

Internal Controls                                                                       11

Appendixes
     A. Schedule of Questioned Costs and Funds to Be Put to Better Use                  12

     B. Auditee Comments and OIG’s Evaluation                                           13

     C. Summary of Underwriting Deficiencies                                            24

     D. Case Summary Narratives                                                         25




                                            3
                       BACKGROUND AND OBJECTIVES

Golden First Mortgage Corporation (Golden First) was incorporated in the state of New York in
March 1979, under the name Citizens Funding Ltd. In August 1994, it adopted the name Golden
National Mortgage Banking Corp, which was changed in May 2001 to its current name. Golden
First operates in 30 states, and its main office is located in Great Neck, New York.

Golden First was approved in 1980 as a U.S. Department of Housing and Urban Development
(HUD)/Federal Housing Administration nonsupervised lender approved to originate Federal
Housing Administration-insured single-family mortgage loans.

Between November 1, 2002, and October 31, 2004, Golden First originated 410 loans. During this
period, its loan default rate was 6.34 percent. We selected Golden First for audit because this rate
was nearly double the New York State average default rate of 3.22 percent.

The objectives of the audit were to determine whether Golden First (1) approved insured loans in
accordance with HUD/Federal Housing Administration requirements, which include following
prudent lending practices, and (2) developed and implemented a quality control plan that complied
with HUD/Federal Housing Administration requirements.




                                                  4
                                RESULTS OF AUDIT

Finding 1: Golden First Approved Loans That Did Not Qualify for
           HUD/Federal Housing Administration Insurance
Golden First did not always follow prudent lending practices and HUD regulations in its loan
origination and underwriting processes. Of the 20 loans we reviewed, 5 exhibited material
deficiencies. These deficiencies occurred because Golden First did not have adequate controls to
ensure that loans were processed in accordance with HUD requirements. As a result, the
HUD/Federal Housing Administration insurance fund incurred a loss of $259,154 and continues to
be at risk for $1,118,717.


 Origination and Underwriting
 Deficiencies

              Golden First originated five loans that exhibited material origination and
              underwriting deficiencies. While the underwriting process involves some
              subjectivity, these deficiencies occurred because Golden First did not follow HUD
              regulations in the verification of the borrower’s employment and/or sources of
              funds for the loans. The types of material deficiencies in the five loans are listed
              in the table below. These deficiencies are not independent of one another as all
              the loans contained at least one deficiency.

                             Deficiency                              Number of loans
              Inadequate verification of funds                            4
              Inadequate employment verification                          1

   Inadequate Verification of Funds

              Golden First did not always adequately verify the source of borrower or donor
              funds. HUD requires the lender to verify the source of funds and the deposit
              amount if the earnest money deposit exceeds 2 percent of the sales price or
              appears excessive based on the borrower’s savings history. The lender must also
              obtain conclusive evidence that funds given to the borrower came from the
              donor’s own funds.

               Examples of inadequate verifications of funds are as follows:

               (1) Case number 374-4063575 contained a copy of an official bank check for a
                   $5,000 earnest deposit made payable to the seller and a copy of the
                   borrower’s bank statement showing a withdrawal for that amount on the
                   same day. However, there was an unexplained $3,916 deposit five days
                   earlier. Since the borrower’s previous bank statements reported the highest


                                                5
                 average balance as $2,138, Golden First should have obtained an explanation
                 for the source of this deposit to ensure that the funds were those of the
                 borrower.

                 In case number 374-4221853, there was a gift letter, dated March 25, 2003,
                 for a $10,000 gift to the coborrower. The loan file contained the
                 coborrower’s bank statement showing a $10,000 deposit on March 25, 2003,
                 and a copy of the donor’s bank statement, reflecting a withdrawal for the
                 same amount. However, the donor’s bank statement also disclosed an $8,000
                 deposit the same day; yet, Golden First did not verify the source of this
                 deposit. Consequently, there is no assurance that the gift funds were those of
                 the donor.

Inadequate Verification of
Employment

            Golden First inadequately verified employment. For instance, for case number 374-
            4111483 Golden First obtained a letter from the employer indicating that pay stubs
            were not issued, and detailing the coborrower’s weekly gross earnings and itemized
            deductions. However, the employee’s start date and the employer’s telephone
            number on the letter differed from that obtained via the verification of employment
            and telephone verification. Further, the verification of employment for the
            coborrower appeared to be altered. For instance, the year-to-date base pay for the
            year 2002 was changed from $10,000 to $11,000, and the date of the employer’s
            response was changed from November 4, 2002, to November 2, 2002.
            Consequently, Golden First should have obtained an explanation for the
            discrepancies or an independent record of the coborrower’s earnings, such as a W-2
            form.

            Appendix C of this report provides a summary of all loan underwriting deficiencies
            noted in the loans for which we are recommending indemnification or repayment of
            a claim, while appendix D provides a detailed description of the deficiencies and the
            applicable criteria.

Inadequate Underwriting
Processing

            Golden First did not adequately process verifications forms as per HUD
            requirements. It did not ensure that verification forms passed directly between the
            lender and provider without being handled by any third party. As a result,
            verification forms in 6 of 20 loan files contained fax headers indicating that they
            were faxed from another mortgage company or an unidentified source. Moreover,
            the verification forms in ten files were copies rather than originals. Further, although
            all verification forms received by the lender, whether hand carried or mailed, were




                                               6
            required by Golden First procedures to be date stamped, there was no evidence of
            such in the lender’s files.

Recommendations

            We recommend that the assistant secretary for housing - federal housing
            commissioner require Golden First to

            1A.    Indemnify HUD against future losses on four loans valued at $1,118,717,
                   which are considered funds to be put to better use since indemnification
                   prevents future claims against the Federal Housing Administration insurance
                   fund.

            1B.    Reimburse HUD the $259,154, representing a claim and associated fees paid
                   on one loan that had material underwriting deficiencies.

            1C.    Establish and implement procedures that comply with HUD, and its own
                   requirements that files indicate the date of delivery of all verification forms
                   and whether they were hand carried by a lender employee.




                                               7
Finding 2: Golden First Did Not Implement Its Quality Control Plan in
           Accordance with HUD Requirements
Golden First did not ensure that its quality control plan was implemented in accordance with HUD
requirements. It did not ensure that (1) loans defaulting within the first six months were reviewed,
(2) quality control reviews were conducted in a timely manner, and (3) management responses
and planned corrective action were adequately documented. Additionally, Golden First
inadequately maintained loan origination files and other information. These weaknesses
occurred because Golden First did not establish procedures to ensure that its quality control plan
was properly implemented. Consequently, the effectiveness of its quality control plan was
impaired, resulting in a lack of assurance that loan origination problems were identified and
appropriate corrective action was taken to prevent similar occurrences.


            During the period November 2002 through February 2004, Golden First developed and
            implemented its quality control plan in house. However, recognizing the need to
            improve its quality control process, Golden First outsourced the quality control
            review function to a contractor in March 2004. Nevertheless, weaknesses in plan
            implementation continue to exist as described below.

 Loans Defaulting within Six
 Months Were Not Routinely
 Reviewed

            Golden First did not routinely select loans defaulting within six months for review,
            as required by HUD Handbook 4060.1, REV-1, paragraph 6-1D. A quality control
            contractor official advised that these loans were not reviewed because Golden First
            did not provide the contractor information on the defaulted loans. In addition, the
            lender did not establish procedures to ensure that it was given notice of sold loans
            that went into default with six or fewer payments. Quality control reviews on early
            payment default loans can provide valuable information about the causes of default
            that may indicate inadequate underwriting. Golden First officials acknowledged this
            weakness and began providing the contractor reports detailing early payment default
            loans.

 Quality Control Reviews Were
 Not Conducted in a Timely
 Manner


            Of the eight loans for which we obtained and examined quality control reviews, four
            were not completed within 90 days of the closing of the loan, as required by HUD
            Handbook 4060.1, REV-1, CHG-1, chapter 6, paragraph 6-6A. This occurred
            because Golden First did not provide the contractor with a closed loan report in a
            timely manner.



                                                 8
    Management Responses to
    Quality Reviews Was
    Inadequately Documented


               Golden First did not provide evidence that prompt action was taken to address the
               deficiencies noted in the contractor’s quality control reports we reviewed. Neither a
               final report nor an addendum to identify the actions being taken, the timetable for
               their completion, and any planned follow up activities was documented. We
               attribute this to the fact that the employee responsible for this function was new to
               the position and had not been properly trained.

              retained
    Key Documents    in in the future.
                         Loan   Files
    and Other Information Were
    Not Available


               Golden First did not adequately maintain loan origination files in accordance with
               HUD’s requirements. Key documents were missing in 9 of the 20 files we reviewed.
               Some of the missing documents included the HUD-1 settlement statement in four
               cases, the sales contract or an amendment in four cases, the initial loan application in
               three cases, and bank statements in two cases. Consequently, we relied upon the
               files from the Homeownership Center to obtain these documents. A Golden First
               official acknowledged the inadequacy of the files and noted that the employee
               responsible for filing had been fired due to poor performance.

               In addition, Golden First lacked a system to accurately report the number of closed
               loans during our audit period of November 1, 2002, through October 31, 2004. In
               addition, the system could not generate a loan origination log, which included the
               names of the loan officers, sellers, and/or the realtors.

    Recommendation


               We recommend that the assistant secretary for housing - federal housing
               commissioner require Golden First to

               2A.     Develop and institute procedures to ensure that its quality control plan is
                       implemented in accordance with HUD requirements.

.              2B.     Develop and implement procedures to ensure that all documentation supporting
                       its decision to approve mortgage loans is retained in the loan origination files.

               2C.     Implement a system capable of generating reports regarding closed Federal
                       Housing Administration loans, in addition to loan origination logs, which
                       includes the names of loan officers, sellers, and realtors.



                                                     9
                       SCOPE AND METHODOLOGY

To accomplish our objectives, we sampled 19 defaulted loans and 1 current loan that were
originated and underwritten by Golden First during the period from November 1, 2002, through
October 31, 2004. Loan selection criteria included factors such as loans that (1) defaulted after 12
or fewer payments, (2) involved a gift, and (3) were not reviewed or indemnified by HUD.

To achieve our audit objectives, we reviewed documentation from the Homeownership Center’s
loan endorsement files, as well as case files provided by the auditee. We also reviewed Golden
First’s quality control procedures to assess whether they were adequate and properly implemented
in accordance with HUD requirements.

We reviewed applicable laws, regulations, HUD handbooks, and mortgagee letters. We
interviewed Golden First’s management and quality control staff, as well as officials of the quality
control contractor, to obtain an understanding of the policies and procedures related to the auditee’s
management controls. We also analyzed HUD’s postendorsement technical reviews, quality
assurance reports, and independent audit reports.

We performed audit fieldwork from January through July 2005. The audit was conducted in
accordance with generally accepted government auditing standards.




                                                  10
                              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 law and regulations.

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


Relevant Internal Controls


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

              •       Controls over the loan origination process - Policies and procedures that
                      management has in place to reasonably ensure that the loan origination
                      process complies with HUD program requirements.

              •       Controls over the quality control plan - Policies and procedures that
                      management has in place to reasonably ensure implementation of HUD
                      quality control requirements.

              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:

                  •   Golden First did not ensure that certain loans were processed in accordance
                      with all applicable HUD requirements (see finding 1).

                  •   Golden First did not adequately implement its quality control plan to ensure
                      compliance with HUD requirements (see finding 2).




                                                11
                                       APENDIXES

Appendix A

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


                   Recommendation               Ineligible 1/    Funds to be put
                          number                                  to better use 4/
                          1A                                         $1,118,717
                          1B                      $259,154


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

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




                                                12
Appendix B

         AUDITEE COMMENTS AND OIG’S EVALUATION

Ref to OIG Evaluation    Auditee Comments




Comment 1




                           13
Appendix B

Ref to OIG Evaluation   Auditee Comments




Comment 2




Comment 3




Comment 4



Comment 5




                          14
Appendix B

Ref to OIG Evaluation   Auditee Comments




Comment 6




Comment 7




Comment 8




Comment 9




                          15
Appendix B

Ref to OIG Evaluation   Auditee Comments




Comment 10




Comment 11




Comment 12




                         16
Appendix B

Ref to OIG Evaluation   Auditee Comments




Comment 13




Comment 14


Comment 15




Comment 16




                         17
Appendix B

Ref to OIG Evaluation   Auditee Comments




Comment 17




Comment 18




Comment 19




                         18
Appendix B

Ref to OIG Evaluation   Auditee Comments




Comment 20




Comment 21




                         19
Appendix B
                           OIG Evaluation of Auditee Comments

Comment 1   The check issued for the earnest money deposit was an official check, which would
            not be cancelled; accordingly, we deleted reference to the need for a cancelled
            check. However, Golden First should have obtained an explanation of the source of
            the $3,916 deposit made five days before the $5,000 earnest money deposit was
            provided. We agree that the Mortgage Credit Analysis Worksheet reports that the
            borrower receives an average of $600 in overtime pay, and that the file contains
            evidence of $405 in biweekly child support payments. However, these amounts,
            totaling $1,478, along with the borrower’s $1,425 monthly earnings, equals $2,903
            or $1,013 less than the $3,916. Consequently, we do not agree that these amounts
            constitute the source of the deposit.

Comment 2   Golden First should have obtained an explanation for the source of the funds needed
            to close. Golden First attributes this to child support payments. However,
            documentation in the file disclosed that the borrower received $405 in biweekly
            child support. The three unexplained deposits of $420, $800, and $400 between
            October 10 and October 21, 2002 do not appear to be directly attributed to the child
            support payments.

Comment 3   We have removed discussion of the gift letter dated May 21, 2002 because further
            review of the bank statement disclosed that the donor’s overdraft protection
            deposited the shortage in the account to cover the check.

Comment 4   HUD regulations require conclusive evidence that the funds given to the borrower
            came from the donor’s own funds. A copy of the donor’s bank statement reflects a
            $10,000 withdrawal check for the gift funds. However, the bank statement also
            reported an $8,000 deposit on the same day of the withdrawal, and the account
            balance prior to this deposit was $2,780. Accordingly, assurance that the gift funds
            were those of the donor was not obtained.

Comment 5   We have deleted reference to the gift letter dated April 7, 2003 because the gift was
            provided at closing via an official check. However, we did note that the check
            issued was for $5,300, while the gift letter specified a gift of $5,000. Golden First
            did not furnish an adequate explanation for the discrepancy between the gift
            amounts.

Comment 6   Reference to inadequate underwriting documentation has been deleted.

Comment 7   HUD regulations require that verification forms must pass directly between the
            lender and the provider without being handled or transmitted by any third party or
            using any third party’s equipment. The existence of other companies’ fax headers
            on the documents does not provide assurance that this requirement was met.




                                              20
Appendix B
                             OIG Evaluation of Auditee Comments

Comment 8     Although this loan was approved through an automated underwriting system,
              Golden First was required to obtain the most recent year-to-date pay stub
              documenting one full month’s earnings. In lieu of this, the employer noted in a letter
              that it does not issue pay stubs, and provided a letter detailing the coborrower’s
              weekly gross earnings and itemized deductions. However, both the employee’s start
              date and the employer’s telephone number on the letter differed from that which was
              provided via the verification of employment and telephone verification. Golden
              First should have obtained an explanation for the discrepancies, or alternatively, an
              independent record of the coborrower’s earnings, such as a W-2 form.

Comment 9     Adequate explanation and evidence of the source of funds was not documented.
              Our review of deposit activity for three months disclosed a general correlation
              between the date and amount of deposits and the borrower’s weekly earnings, except
              for the five unexplained deposits totaling $1,900. For instance, while the borrower’s
              weekly earnings were $862, these five deposits were made for $220 on November 7
              and December 9, $160 and $600, both on December 10, and $700 on December 16.
              In addition, while the coborrower’s weekly earnings were $177, three unexplained
              deposits, totaling $1,321, were made within a week. Accordingly, these deposits do
              not appear to be reflective of the borrowers’ regular savings pattern.

Comment 10 We agree that the contract of sale, which reported a seller’s concession of
           $14,700, was consistent with the HUD-1. Therefore, the difference between the
           mortgage credit analysis worksheet and the HUD-1 has no material effect, and we
           have deleted this discussion from the report.

Comment 11 HUD regulations require that verification forms pass directly between the lender and
           the provider without being handled by any third party. The verification of
           employment for the borrower’s two employers appeared to be faxed to the same
           location simultaneously on November 8, 2002. Further, the employers erroneously
           dated both forms as November 1, 2002, which was prior to the lender’s request date
           of November 8, 2002. Consequently, the documentation appears to indicate that the
           verification forms were faxed to the same entity, and not directly to the individual
           employers. Thus, it is questionable that the documentation passed directly between
           the lender and the providers as required.

Comment 12 If the employer had submitted a verification of employment that was altered, the
           form should have been so noted. Further, the employment letter attached to the
           verification did not substantiate all the data on the verification of employment
           because there were discrepancies regarding the employee’s start date and the
           employer’s telephone number. As a result, we question the data integrity of the




                                               21
Appendix B
                              OIG Evaluation of Auditee Comments

               employment letter and maintain that it does not confirm the altered year-to-date
               income, as well as the date. In addition, the employment letter did not meet HUD’s
               requirements because it did not contain a certified statement that pay stubs were not
               issued, and it lacked the employer’s address.

Comment 13 While the loan file contained an explanation for a large deposit relating to the sale of
           a vehicle, we question why such documentation was retained in the loan file,
           particularly since it contained discrepant information. Nevertheless, we have deleted
           this deficiency because it was not a factor in the underwriting decision.

Comment 14 Documents in the file do not support that the borrower made a $4,000 down
           payment, and the mortgage credit analysis worksheet did not reflect a $4,000 down
           payment. Therefore, these funds appear to have been provided as a gift. (see
           Comment 15).

Comment 15 Regarding the $7,200 gift, while the file contained a copy of the donor’s withdrawal
           slip and an official check for $7,200 presented on the day of closing, the file also
           documented that the donor made a cash deposit of $7,230 to the account on the same
           day. Prior to that deposit, the donor had an account balance of six cents.
           Consequently, there was not conclusive evidence that the funds given to the
           borrower came from the donor’s own funds as required by Mortgagee Letter 00-28.

Comment 16 The auditee agreed that it did not document the source of the $800 gift, but noted
           that such was not necessary since the borrowers had reserves of over $2,900.
           However, Mortgagee Letter 00-28 requires that the mortgagee obtain conclusive
           evidence that the funds given to the borrower came from the donor’s own funds.
           In addition, the mortgage credit analysis worksheet reported cash reserves of $70.

Comment 17 There was no documentation to support the borrower’s statement of an increase in
           family size, which was used as the reason to purchase another principal residence
           with Federal Housing Administration insurance. Children enrolled in the borrower’s
           day care center would not qualify as family members.

Comment 18 Although the borrower exceeded the 29 and 41 percent ratio guidelines in effect at
           the time of our audit, we have deleted this deficiency because HUD has
           subsequently increased the guidelines to 31 and 43 percent.

Comment 19 The auditee provided an email from HUD advising that a certified statement on
           employer letterhead that pay stubs are not provided, along with documentation




                                                 22
Appendix B
                             OIG Evaluation of Auditee Comments

              showing the employee’s gross earning, deductions and net pay, including year-to-
              date earnings, may be used in lieu of a W-2 form. Therefore, we have removed this
              deficiency from the report.

Comment 20 The auditee provided a letter from its quality control contractor indicating that
           implementation of its quality control program has improved. We have noted in the
           report that the auditee has, or plans to, taken corrective action to improve quality
           control procedures, as applicable.

Comment 21 While the auditee has made improvements in its quality control process, our review
           identified weaknesses in the process that, when corrected, will only enhance the
           auditee’s underwriting process.




                                               23
Appendix C
         SUMMARY OF UNDERWRITING DEFICIENCIES

                                          374-      374-      374-      374-      374-    Total for all
Case #                                  4063575   4221853   4111483   4142002   4199196     cases
Loan amount                             $187,064 $392,466   $255,687 $236,292   $283,500 $1,355,009
Payments before first default
reported                                  10        10        7         2         12
Areas of deficiencies:
Verifications of funds to close:
Inadequate verification of cash gift                X                   X
Inadequate bank account
documentation/assets                                          X
Inadequate earnest money deposit
documentation                              X
Inadequate verification of funds to
close                                      X        X
                             Subtotal      2        2         1         1         0            4
Inadequate verification of income/
employment
Inadequate support for employment                             X
                            Subtotal       0        0         1         0         0            1
Inadequate processing
documentation
Ineligibility for loan                                                            X
Inadequate underwriting processing                  X         X
                             Subtotal      0        1         1         0         1            3
Number of deficiencies for each
case                                       2        3         3         1         1            10
Indemnification recommended             Yes         Yes      Yes        1/       Yes      $1,118,717
Note: 1/ A $259,154 claim has been paid on this loan.




                                                   24
               CASE SUMMARY NARRATIVES

Appendix D-1                                                                         Page 1 of 1



Case number:        374-4063575
Loan amount:        $187,064
Settlement date:    November 1, 2002
Status:             Partial reinstatement

Pertinent Details

A.     Inadequate Earnest Money Deposit Documentation

HUD Handbook 4155.1, REV-4, CHG-1, chapter 2, section 3, paragraph 2-10A, provides that if
an earnest money deposit exceeds 2 percent of the sales price or appears excessive based on the
borrower’s saving history, the deposit amount and the source of funds must be verified.
Satisfactory documentation would include a copy of the borrower’s cancelled check or a
certification from the deposit holder, acknowledging receipt of funds, and separate evidence of
the source of funds. An earnest money deposit of $5,000, which exceeded 2 percent of the sales
price ($190,000 x .02 = $3,800), was listed on the HUD-1 settlement statement. The loan file
contained a copy of an official check, dated May 20, 2002, made payable to the seller. While the
borrower’s bank statement reported a $5,010 withdrawal on May 20, 2002 ($5,000 for the
earnest money deposit and $10 for the official check fee), there was an unexplained $3,916
deposit on May 15, 2002. Before this, the borrower’s highest average balance was $2,138.
Consequently, an explanation should have been obtained for the source of this deposit to ensure
that the funds were those of the borrower.

B.     Inadequate Verification of Funds to Close

The borrower needed $2,104 to close. A verification of deposit, dated September 3, 2002, reported
$1,517 in personal funds. The October 2002 bank statements reflected three unexplained deposits
within two weeks that totaled $1,620. These deposits, $420, $800, and $400 on October 10, 2002,
October 18, 2002, and October 21, 2002, respectively, were not attributed to either payroll or child
support payments and were not reflective of the borrower’s routine savings pattern. Because these
funds were needed to close, the lender should have obtained an explanation from the borrower
regarding their source.




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Appendix D-2                                                                        Page 1 of 2


Case number:        374-4221853
Loan amount:        $392,466
Settlement date:    July 15, 2003
Status:             Reinstated by borrower who retains ownership

Pertinent Details

A.     Inadequate Verification of Gift

HUD Handbook 4155.1, REV-4, CHG-1, chapter 2, paragraph 2-10C, requires a lender to
document the transfer of gift funds from the donor to the borrower by obtaining a copy of the
donor’s withdrawal slip or cancelled check, along with the borrower’s deposit slip or bank
statement showing the deposit. In addition, Mortgagee Letter 00-28 requires that the donor
provide conclusive evidence that the funds given to the borrower came from the donor’s own
funds.

A gift letter, dated March 25, 2003, was for a $10,000 gift to the coborrower. The loan file
contained the coborrower’s bank statement showing a $10,000 deposit on March 25, 2003, and a
copy of the donor’s bank statement, reflecting a withdrawal for the same amount. However, the
donor’s bank statement also disclosed an $8,000 deposit on the day of the withdrawal. Before
this deposit, the account had a balance of $2,780. Mortgagee Letter 00-28 states if the donor
borrowed the gift funds and, thus, cannot provide the documentation from his or her bank or
other savings account, the donor must provide evidence that those funds were borrowed from an
acceptable source, i.e., not from a party to the transaction including the mortgage lender. "Cash
on hand" is not an acceptable source of the donor's gift funds. Consequently, there is no
assurance that the gift funds were those of the donor.

B.     Inadequate Verification of Funds to Close

HUD Handbook 4155.1, REV-4, CHG 1, paragraph 3-1F, requires that the file include
verification of deposit and the most recent bank statement. As an alternative to obtaining a
verification of deposit, the borrower’s original bank statements for a three-month period can be
obtained. Chapter 2, paragraph 2-10B, further 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. The loan file contained a verification of a $5,875 deposit for the
borrower; however, it was illegible, and no recent bank statements were obtained. In addition,
there was no verification of deposit for the coborrower. The borrowers required $25,638 to
close.

C.     Inadequate Underwriting Processing

Verification of gift letters, employment, and deposits appear to have been faxed to Golden First
from another mortgage company. HUD Handbook 4155.1, REV-4, CHG-1, chapter 3, paragraph


                                                26
Appendix D-2                                                                      Page 2 of 2

3-1, provides that verification forms must pass directly between the lender and the provider
without being handled by any third party. In addition, Mortgagee Letter 2001-01 states that if
income/employment or asset documents are faxed to the lender, the documents must clearly
identify the employer or depository/investment firm’s name and source of information. Further,
HUD Handbook 4060.1 REV-1, CHG-1, chapter 2, paragraph 2-25, states that lenders may not
perform only a part of the loan origination process, such as taking the loan application, and
routinely transfer the underwriting package (appraisal report and/or mortgage credit package) to
another lender. The three gift letters, dated May 21, 2002, March 25, 2003, and April 7, 2003,
were faxed from another mortgage company to Golden First on June 20, 2003. In addition, the
fax header on the verification of deposit indicated that it was faxed from another mortgage
company on June 26, 2003, from the depository on June 28, 2003, and from the other mortgage
company again on June 30, 2003. The verifications of employment for both the borrower and
coborrower were also faxed from this same mortgage company. Therefore, the verifications
were neither sent to the depository by the lender nor received directly from the depository as
required.




                                               27
Appendix D-3                                                                         Page 1 of 2


Case number:         374-4111483
Loan amount:         $255,687
Settlement date:     January 15, 2003
Status:              Foreclosure completed

Pertinent Details

A.     Inadequate Support for Employment

HUD Handbook 4155.1, REV-4, CHG-1, chapter 3, paragraph 3-1E, requires that the lender obtain
a verification of employment and the most recent pay stub. In lieu of obtaining the verification of
employment, the lender may obtain alternative documentation, such as the borrower’s original pay
stubs covering the most recent 30-day period, and the original Internal Revenue Service W-2 forms
from the previous two years. The lender must also verify by telephone all current employers and
identify the name, title, and telephone number of the person with whom employment was verified.
If an employer does not provide pay stubs to their employees, HUD requires the lender to obtain a
certified statement from the employer along with the employer’s most recent employee payment
ledger showing the borrower’s name, social security number and year-to-date earnings. If the
payment ledger is unavailable, then the lender must obtain in any format, the employee’s gross
earning, deductions and net pay, including YTD earnings along with a certified statement that pay
stubs are not provided under the employer’s letterhead.

The most recent pay stubs were obtained for only one of the borrower’s two employers, and the one
that was obtained was questionable (see C below). Golden First conducted a telephone verification
of employment for the coborrower and obtained a letter from the coborrower’s employer indicating
that the employer did not issue pay stubs. In addition, the letter detailed weekly gross earnings and
itemized deductions. However, this letter from the employer was not deemed an acceptable
substitute for a pay stub, because it did not contain a certified statement. Further, the employer’s
letterhead did not appear to be official, given that it contained neither an address nor a telephone
number. In addition, the employee’s start date and the employer’s telephone number reflected in the
letter did not agree with the verification of employment. As a result, we question the data integrity
of the employment letter and maintain that the lender should have obtained the original copies of
W-2 forms. Further, the verification of employment for the coborrower appeared to be altered. The
year-to-date base pay for 2002 was changed from $10,000 to $11,000, and the date of the
employer’s response was changed from November 4, 2002, to November 2, 2002. These alterations
should have been explained.

B.     Unexplained Bank Deposits

HUD Handbook 4155.1 REV-4, CHG-1, chapter 2, paragraph 2-10B, provides that if there is a
large increase in a bank account, the lender must obtain an explanation and evidence of the
source of funds from the borrower. Our review of bank statements relating to the borrower and



                                                 28
Appendix D-3                                                                            Page 2 of 2


coborrower for the period November through December 2002, disclosed numerous unexplained
deposits totaling $3,221 that did not appear to be payroll deposits as follows:
                       Date              Amount                        Bank statement
                  Nov. 7, 2002            $220                           Borrower
                  Dec. 9, 2002            $220                           Borrower
                  Dec. 10, 2002           $160                           Borrower
                  Dec. 10, 2002           $600                           Borrower
                  Dec. 16, 2002           $700                           Borrower
        Borrower total                   $1,900

                 Dec. 9, 2002              $250                         Coborrower
                Dec. 10, 2002              $400                         Coborrower
                Dec. 16, 2002              $671                         Coborrower
        Coborrower total                  $1,321
                  Grand total             $3,221


The borrower provided a letter, dated November 2002, stating that a large deposit resulted from the
sale of a vehicle to a friend for $1,000 and the remaining was “cash that I have to deposit.”
However, there was no evidence of this deposit in the borrower’s bank account.

C.     Inadequate Underwriting Processing

HUD Handbook 4155.1, REV-4, CHG-1, chapter 3, paragraph 3-1, states verification forms must
pass directly between the lender and the provider without being handled by any third party. In
addition, Mortgagee Letter 2001-01 states that if income/employment or asset documents are
faxed to the lender, the documents must clearly identify the employer or depository/investment
firm’s name and source of information.

Verification of employment for two current jobs of the borrower were faxed simultaneously from an
unidentified source and dated November 1, 2002, which was before the lender’s request of
November 8, 2002. Consequently, we cannot conclude that these verifications passed directly
between the lender and the borrower’s employers. In addition, the four pay stubs obtained in
support of one of the borrower’s jobs listed inconsistent employer names and contained fax headers
indicating that they were faxed on November 21, 2002, from a bank. This shows that the stubs did
not pass directly between the lender and the provider as required.




                                                   29
Appendix D-4                                                                            Page 1 of 1

Case number:          374-4142002
Loan amount:          $236,292
Settlement date:      February 5, 2003
Status:               Property conveyed to insurer

Pertinent Details

A.      Inadequate Verification of Cash Gift

HUD Handbook 4155.1, REV-4, CHG-1, chapter 2, paragraph 2-10C, requires that the transfer
of any gift funds from the donor to the borrower be documented by obtaining a copy of the
donor’s withdrawal slip or cancelled check, along with the borrower’s deposit slip or bank
statement showing the deposit. Further, Mortgagee Letter 00-28 states that if the gift funds are to
be provided at closing and the donor purchased a cashier’s check or any other type of bank check
as a means of transferring the gift funds, the donor must provide evidence that the funds came
from the donor’s personal account. This could include a withdrawal document or canceled check
for the amount of the gift. If the donor borrowed the gift funds and, thus, cannot provide bank
documentation, the donor must provide evidence that those funds were borrowed from an
acceptable source.

Golden First did not adequately document the source of two gifts totaling $8,000. The donor issued
two official checks to the seller on the day of closing. The lender’s file contained two gift letters for
$7,200 and $800 dated February 5, 2003, the same day as the closing. With regard to the $7,200
gift, the file contained a copy of the donor’s withdrawal slip for $7,200 and the face of the official
check. However, the file further documented that on the date of closing, the donor made a cash
deposit of $7,230 to the same account. Before that deposit, the donor had an account balance of six
cents. Accordingly, without an additional explanation, it is uncertain that the gift funds were those
of the donor, and there was no evidence that the funds were borrowed from an acceptable source. In
addition, the account number identified as the source of the $7,200 gift in the gift letter differed
from the account number reflected on the donor’s deposit slip, withdrawal slip, and the face of the
gift check. Regarding the $800 gift check issued to the seller at closing, the file documented the
face of the check but did not document a copy of the donor’s withdrawal slip or cancelled check as
required. Accordingly, the lender should have obtained an explanation to ensure that the source of
the funds was that of the donor. Without these gift funds, the borrower would not have met the 3
percent minimum cash investment requirement of $7,200, nor would she have had sufficient funds
to close on the loan.




                                                   30
Appendix D-5                                                                       Page 1 of 1


Case number:          374-4199196
Loan amount:          $283,500
Settlement date:      May 29, 2003
Status:               Current

Pertinent Details

A.     Ineligibility for Federal Housing Administration-Insured Loan

HUD Handbook 4155.1, REV-4, CHG-1, chapter 1, paragraph 1-2, provides that an individual or
couple owning a Federal Housing Administration-insured home may not purchase another
principal residence with Federal Housing Administration insurance except under the following
circumstances: (1) relocations, (2) increase in family size, (3) vacating a jointly owned property,
and (4) a nonoccupying coborrower. The borrower was in violation of this regulation. On
March 18, 2003, the borrower refinanced a Federal Housing Administration-insured mortgage
with Golden First on a property that had been the owner’s occupied principal residence, and the
borrower certified on the occupancy agreement the intention to occupy the property as a primary
residence during the 12-month period immediately following the loan closing. However, on
March 26, 2003, the borrower used some of the proceeds from this refinance “cash-out”
transaction as an earnest money deposit on a second Federal Housing Administration-insured
property with Golden First as the lender, which closed on May 29, 2003. As part of the
underwriting process for this loan, the borrower provided written documentation of the intention
to (1) reside in this property and (2) lease the previous property. The file also documented that
the second home was being acquired because the “family is growing.” However, there was
documentation showing that the family size had not changed and no documentation showing that
the property failed to meet the family’s need.




                                                31