oversight

Fleet National Bank, Philadelphia, PA - Mortgagee Review. Fleet National Bank Issued and Submitted for Endorsement Loans With an Increased Risk of Defaults and Claims

Published by the Department of Housing and Urban Development, Office of Inspector General on 2005-01-20.

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

                                                                        Issue Date
                                                                               January 20, 2005
                                                                         Audit Case Number
                                                                               2005-PH-1005




TO:               John C. Weicher, Assistant Secretary for Housing - Federal Housing
                     Commissioner, H


FROM:
                  Daniel G. Temme, Regional Inspector General for Audit, Mid-Atlantic Region,
                    3AGA

SUBJECT: Fleet National Bank, Philadelphia, PA - Mortgagee Review. Fleet National
            Bank Issued and Submitted for Endorsement Loans With an Increased Risk of
            Defaults and Claims


                                          HIGHLIGHTS

    What We Audited and Why

                    We audited the Philadelphia branch of Fleet National Bank (Fleet), a supervised
                    direct endorsement lender approved to originate Federal Housing Administration
                    (FHA) single family mortgage loans. We selected Fleet for audit because it had a
                    high default rate. Our objectives were to determine whether Fleet complied with
                    the U.S. Department of Housing and Urban Development’s (HUD) regulations,
                    procedures, and instructions in the origination of Federal Housing Administration
                    loans and whether Fleet’s quality control plan, as implemented, met HUD
                    requirements.

    What We Found

                    Fleet’s Philadelphia branch office did not originate all Federal Housing
                    Administration loans in accordance with HUD’s loan origination requirements. Of
                    the 20 loans we selected for review,1 the branch office violated HUD requirements

1
    Originally valued at $930,520.
         for 5 of the loans valued at $224,245. Fleet did not exercise due diligence in the
         review of assets and income, did not verify rental history, and approved loans with
         excessive debt to income ratios. These deficiencies contributed to an increased risk
         to the Federal Housing Administration Insurance Fund.

         Fleet also submitted loans for late endorsement when the payment histories of the
         buyer were not current. Of the 27 endorsements the branch office submitted from
         January 1, 2002, through December 31, 2003, 7 loans totaling $434,804 were
         from borrowers who had delinquent mortgage payments. The deficiencies stem
         from Fleet’s lack of supervision over its branch office.

         Fleet’s Philadelphia branch office was not operating in conformance with HUD
         requirements. It did not provide an accessible business environment for its clients
         during normal business hours, nor did it employ a branch manager to supervise
         operations.

         HUD requires its mortgagees to develop and implement a quality control plan to
         ensure loans are originated according to HUD requirements. The quality control
         plan provided by Fleet does not meet the requirements of HUD regulations and,
         therefore, we cannot be assured that loans are originated according to HUD
         requirements.


What We Recommend

         We recommend that the Assistant Secretary for Housing – Federal Housing
         Commissioner require Fleet to take immediate action to determine whether
         deficiencies in Fleet’s loan origination process warrant administrative action and if
         appropriate, request that the Mortgagee Review Board impose civil monetary
         penalties for Fleet’s failure to provide an adequate quality control plan. We also
         recommend that HUD request indemnification from Fleet on Federal Housing
         Administration loans valued at $619,614, which it issued contrary to HUD’s loan
         origination procedures, and repayment of $39,435 on one loan that went into default,
         causing HUD to pay a claim. Further, since we have been informed by Fleet that the
         Philadelphia branch office has been closed, we recommend HUD ensure the branch
         is removed from its systems as an approved direct endorsement lender.

         For each recommendation without a management decision, please respond and
         provide status reports in accordance with HUD Handbook 2000.06, REV-3.
         Please furnish us copies of any correspondence or directives issued because of the
         audit.




                                           2
Auditee’s Response

           We provided Fleet a discussion draft on November 19, 2004, and held an exit
           conference with Fleet on December 16, 2004. We received written comments and
           additional documentation from Fleet on December 15, 2004. In addition, we
           discussed the issues with HUD’s Quality Assurance Division. The discussions
           and additional documentation addressed and resolved many of the issues noted in
           the draft report. Consequently, we extensively revised the report including
           removing resolved issues. The complete text of the auditee’s response, along with
           our evaluation of that response, can be found in Appendix B of this report.




                                           3
                             TABLE OF CONTENTS

Background and Objectives                                                          5

Results of Audit
        Finding 1: Fleet Issued Loans That Increased Risk to HUD                   7
        Finding 2: Fleet Submitted Loans for Late Endorsement When the Payment     10
                   Histories Were Not Current
        Finding 3: Fleet Did Not Administer Its Philadelphia Branch Office in      11
                   Conformance With HUD Requirements
        Finding 4: Fleet Did Not Demonstrate That It Developed and Implemented a   13
                   Quality Control Plan Compliant With HUD Requirements

Scope and Methodology                                                              16

Internal Controls                                                                  17

Follow-up on Prior Audits                                                          18

Appendixes
   A.   Funds To Be Put to Better Use                                              19
   B.   Auditee Comments and OIG’s Evaluation                                      20
   C.   Schedule of Case Files                                                     31
   D.   Narrative Case Presentations                                               32
   E.   Schedule of Late Endorsements                                              37




                                             4
                        BACKGROUND AND OBJECTIVES

The U.S. Department of Housing and Urban Development’s (HUD) Strategic Plan states that
part of its mission is to increase homeownership, support community development, and increase
access to affordable housing free from discrimination.

The National Housing Act, as amended, established the Federal Housing Administration, an
organizational unit within HUD. The Federal Housing Administration provides insurance for
mortgagees against loss on single-family home mortgages.

Beginning in 1983, HUD implemented the Direct Endorsement Program, which authorized
approved mortgagees to underwrite loans without HUD’s prior review and approval. HUD can
place them on credit watch status or terminate their approval if their rate of defaults and claims
exceeds the normal rate for the area. Many sanctions are available for taking actions against
mortgagees or others who abuse the program.

The main office of Fleet National Bank (Fleet) is located in Providence, RI. The Philadelphia, PA,
branch is one of its 30 active branches with direct endorsement approval. HUD approved the
Philadelphia branch office on September 25, 2000. Fleet issued 4,193 Federal Housing
Administration loans worth $555,655,265 between January 1, 2002, and December 31, 2003, 137 of
which were issued by the Philadelphia branch at a value of $7,612,809. Of the 137 loans, we
reviewed 20 loans worth $930,520 that were in default status less than 2 years after closing.

During the period under review (January 1, 2002, to December 31, 2003), Fleet sold its loans and
outsourced its underwriting process. The loans were sold and serviced by another company
between January and December 2002. Between January 2003 and April 2004, Fleet outsourced its
underwriting and processing function to a different company, which then purchased and serviced
the loans.

In April 2004, Fleet began the process of merging with Bank of America. Currently, accounting
and personnel files are being merged. Eventually, each branch office will become part of Bank of
America, with the Philadelphia branch expected to complete its merger by the later part of 2004. As
part of the merger, employees were laid off and offices were closed.

Due to the ongoing merger with Bank of America and the outsourcing and selling of loans,
obtaining historical and background information on Fleet and its Philadelphia branch was difficult.
We were not able to obtain information relating to Fleet’s quality control plan, policies and
procedures related to loan origination, Fleet’s status as a main office, or audited financial
statements. In addition, we were not able to interview loan processors, underwriters, or supervisors.

The objective of our review was to determine whether Fleet originated Federal Housing
Administration-insured loans in accordance with prudent lending practices and HUD
requirements. We reviewed case files from both the Homeownership Center and the mortgagee
and reviewed the oversight of Fleet over its branches to determine whether there was evidence of
lack of oversight, intentional wrongdoing, or lack of professional due care that led to the high



                                                  5
number of defaults and late endorsements from the Philadelphia branch.




                                              6
                                      RESULTS OF AUDIT

Finding 1: Fleet Issued Loans That Increased Risk to HUD

Fleet did not always originate Federal Housing Administration-insured loans in accordance with
HUD requirements. For 5 of the 20 loans we reviewed, originally valued at $232,500, Fleet did not
exercise due diligence in the review of assets and income, did not verify rental history, and
approved loans with excessive debt to income ratios. The deficiencies stem from the lack of
supervision over its branch office. These deficiencies contributed to an increased risk to the Federal
Housing Administration Insurance Fund.




    Fleet Did Not Verify the Rental
    History of All Borrowers

                HUD requires2 the lender to determine the borrower’s payment history of housing
                obligations covering the most recent 12-month period. For 4 of the 20 cases
                reviewed, Fleet did not properly verify the previous rental history of the mortgagor.

    Fleet Did Not Verify
    Borrowers’ Income or Capacity
    to Repay the Mortgage

                HUD requires the lender to verify the borrower’s employment for the most recent
                two full years3 and establish the borrower’s capacity to repay mortgage debt.4 In
                addition, the income must be expected to continue through at least the first 3 years of
                the mortgage loan.5

                For 1 of the 20 cases reviewed, Fleet did not adequately verify the income. For
                FHA case number 441-6872755, Fleet did not verify the borrower’s employment for
                the past two full years. Documentation in the FHA case binder only showed 1 year
                of employment with more than a year lapse between jobs.




2
  HUD Handbook 4155.1, Mortgage Credit Analysis for Mortgage Insurance, One to Four Family Properties,
paragraph 2-3 A.
3
  HUD Handbook 4155.1, Mortgage Credit Analysis for Mortgage Insurance, One to Four Family Properties,
paragraph 2-6.
4
  HUD Handbook 4155.1, Mortgage Credit Analysis for Mortgage Insurance, One to Four Family Properties,
chapter 2, section 2.
5
  HUD Handbook 4155.1, Mortgage Credit Analysis for Mortgage Insurance, One to Four Family Properties,
paragraph 2-7.

                                                     7
Fleet Did Not Verify
Borrowers’ Assets

            HUD requires the lender to verify savings and checking accounts. A verification of
            deposit, along with the most recent bank statement, may be used to accomplish this.
            If there is a large increase in an account or the account was opened recently, the
            lender must obtain a credible explanation of the source of those funds.

            For 1 of the 20 cases reviewed, Fleet did not adequately verify the assets stated on
            the Uniform Residential Loan Application. For FHA case number 441-6941957,
            Fleet did not verify all funds for the borrower’s investment. The FHA case binder
            did not contain bank statements to support funds listed in a bank account on the
            Uniform Residential Loan Application.

Fleet Issued Loans in Which the
Debt to Income Ratios
Exceeded HUD Requirements


            HUD requires debt to income ratios not to exceed 29 and 41 percent (mortgage to
            income and all fixed payment to income, respectively). Ratios exceeding the 29 and
            41 percent may be acceptable only if significant compensating factors are present.
            HUD identifies 10 compensating factors including good rental history, large
            downpayment, and potential for increased earnings.

            For 1 of the 20 cases reviewed, Fleet allowed excessive ratios with no valid
            compensating factors provided. For FHA case number 441-6988925 the fixed
            payment to income ratio was 50.78 percent with no compensating factors listed.

            The above cases illustrate that HUD assumed unnecessarily high risk when insuring
            the loans originated by Fleet. The deficiencies associated with Fleet’s loan
            origination activities stem from its lack of supervision over its branch employees.


Recommendations


            We recommend that the Assistant Secretary for Housing-Federal Housing
            Commissioner:

            1A.    Determine whether Fleet’s deficiencies in the loan origination process
                   warrant administrative action.

            1B.    Request indemnification from Fleet on four loans issued with current unpaid




                                              8
balances of $184,810, in which Fleet’s loan origination procedures did not
comply with HUD requirements, and request repayment for one loan issued,
with a loss to HUD of $39,435, that went into default and a claim was paid.




                         9
Finding 2: Fleet Submitted Loans for Late Endorsement When the
Payment Histories Were Not Current

Fleet submitted loans for late endorsement when the payment histories of the buyers were not
current. We found seven loans, valued at $434,804, that were submitted for late endorsement
when payment histories were not current. The deficiencies stem from Fleet’s lack of supervision
over its branch office.




    Late Endorsements Were Not
    Current


HUD requires late endorsement submissions (more than 60 days after closing) to include a
payment ledger showing the payments received.6 The mortgage payments must not be delinquent
when submitted for endorsement. If a payment is made outside the calendar month due, the
lender cannot submit the case for endorsement until six consecutive payments have been made.

We reviewed all 27 endorsement submissions from January 1, 2002, through December 31,
2003, that were submitted for endorsement more than 60 days after closing. Fleet improperly
submitted seven loans, totaling $434,804, for endorsement more than 60 days after closing when
the borrowers had delinquent payments before submission.

Because HUD relied on Fleet’s loan origination process, it assumed abnormally high risk when it
insured the seven loans.


    Recommendations


                   We recommend that the Assistant Secretary for Housing-Federal Housing
                   Commissioner:

                   2A.     Take appropriate steps against Fleet for not following HUD’s requirements
                           for late endorsement requests, including requiring indemnification for seven
                           loans, totaling $434,804, that were improperly submitted for endorsement.




6
    HUD Handbook 4165.1, Endorsement for Insurance for Home Mortgage Programs (Single Family), paragraph 3-1.

                                                       10
Finding 3: Fleet Did Not Administer Its Philadelphia Branch Office in
Conformance with HUD Requirements

The Philadelphia office of Fleet is not functioning as a true branch, providing an accessible
business environment for its clients, and furnishing proper oversight and supervision to its staff.
Fleet did not maintain an office with adequate personnel and regular business hours and did not
provide onsite supervision to the branch employees. The deficiencies indicate a disregard of
HUD branch operation requirements. Therefore, the Philadelphia branch office’s eligibility as an
approved branch in the origination of Federal Housing Administration-insured loans is
questionable.




    The Philadelphia Branch Did
    Not Employ Adequate Staff or
    Maintain Regular Business
    Hours

                 The Philadelphia office, contrary to HUD requirements,7 only employs two
                 commission-based account executives who do not maintain regular business
                 hours. The employees often work out of their homes or at other locations in the
                 city. The office itself maintains no scheduled hours. For several days, we
                 attempted to contact the office via telephone but received only an answering
                 machine message. When we visited the office during regular business hours, the
                 door was locked, and no one answered the bell. The account executives stated
                 that they only come to the office when they set up a meeting with a client. Thus,
                 accessibility for clients is limited to being able to contact one of the two account
                 executives.


    Fleet National Bank Did Not
    Supervise Its Employees

                 The Philadelphia office does not have a branch manager located onsite as required
                 by HUD.8 Without the onsite supervision of a branch manager, proper oversight of
                 the account executives and the loan process is severely impaired. This absence of
                 supervision reflects a disregard for HUD requirements and has resulted in loans that
                 lack proper documentation and credit analysis being issued and endorsed. These
                 loans contributed to an increased risk to the Federal Housing Administration
                 Insurance Fund. See Findings 1 and 2 for more detail.



7
  Form HUD-92001-B, Title II Branch Office Notification, states that the mortgagee agrees to maintain and staff a
branch open to the public during normal business hours.
8
  Form HUD-92001-B, Title II Branch Office Notification, states that the mortgagee agrees to employ a branch
manager at the branch office.

                                                        11
          Due to the lack of records made available to us, we were not able to determine
          how long the Philadelphia office has been functioning contrary to HUD
          requirements. However, we determined that there has been no onsite branch
          manager since at least July 2002.

          In its response (see Appendix B), the auditee informed us the branch had been
          closed earlier in the year.

Recommendations



          We recommend that the Assistant Secretary for Housing-Federal Housing
          Commissioner:

          3A.     Ensure that Fleet’s Philadelphia branch is removed from HUD’s systems
                  as an approved direct endorsement lender.




                                          12
Finding 4: Fleet Did Not Demonstrate That It Developed and
Implemented a Quality Control Plan Compliant With HUD
Requirements
Fleet originally failed to provide a copy of its quality control plan. After the draft report was
issued, Fleet provided a copy of the plan. We reviewed the plan and found that Fleet’s Quality
Control Plan does not identify HUD-specific requirements as part of their review.




Fleet’s Quality Control Plan Does
Not Identify HUD-Specific
Requirements

                  As part of our audit, we asked Fleet to provide us with its quality control plan and
                  any reports that it generated from the reviews under the plan for a 2 year period.
                  After several requests, Fleet provided a number of reports marked “Quality
                  Control.” When questioned about the quality control plan, Fleet responded that
                  the quality control function had been contracted out to a company, from which it
                  would obtain a copy of the plan. However, Fleet initially did not provide us a
                  copy of the plan. It was not until after the draft was issued that Fleet provided a
                  copy of the plan.

                  We reviewed the plan and found that Fleet’s quality control plan does not identify
                  all HUD requirements as part of their review. We noted Fleet’s Quality Control
                  Plan covered most of the basic elements and requirements, however some were
                  not included. 9 Specifically, the Quality Control Plan does not specify the review
                  of branches and early defaults (less than six months). In addition, the sampling
                  methodology is not outlined in the plan.

                  Also, we noted Fleet’s Quality Control Plan did not include at least the following
                  specific elements which are required:10

                      •   Determine whether there are sufficient and documented compensating
                          factors if the debt ratios exceed FHA limits.
                      •   Determine whether the loan was submitted for insurance within 60 days of
                          closing or included a payment history showing the loan was current when
                          it was submitted for mortgage insurance.
                      •   Determine whether the seller acquired the property at the time of or soon
                          before closing, indicating a possible property “flip.”



9
    HUD Handbook 4060.1, Mortgagee Approval Handbook, paragraph 6-3 and 6-6.
10
    HUD Handbook 4060.1, Mortgagee Approval Handbook, paragraph 6-7.

                                                     13
                      •   If possible, determine whether the mortgagor transferred the property at
                          the time of closing or soon after closing, indicating the possible use of a
                          “strawbuyer” in the transaction.
                      •   Determine that no one is employed for HUD origination, processing,
                          underwriting or servicing who is debarred, suspended, subject to a Limited
                          Denial of Participation or otherwise restricted from participation in
                          HUD/FHA programs. HUD recommends a periodic check of the
                          employee list, at least semi-annually.

     On-Site Quality Control Review
     of the Philadelphia Branch
     Office Was Not Done


                  Although branch reviews can be done electronically, annual visits are mandatory
                  for offices meeting certain higher risk criteria such as high early default rates.11
                  The Philadelphia branch had a default rate four times the national average.
                  Therefore, an onsite quality control review should have been performed.
                  However, we were not provided any documentation supporting a quality control
                  review of the Philadelphia branch.

     Fleet Personnel Were Not
     Aware of Key Monitoring
     Requirements


                  To make quality control reviews more useful, mortgagees are encouraged to
                  implement quality control throughout the loan origination process. Accordingly,
                  HUD recommends mortgagees identify patterns of early defaults by location,
                  program, and loan characteristic.12 HUD’s Neighborhood Watch - Early Warning
                  System (Neighborhood Watch) can be used to identify these patterns.

                  The Philadelphia branch has a default rate four times the national average.
                  However, during an interview with Fleet staff, they questioned how they were
                  supposed to track the defaults to know that the Philadelphia branch had such a
                  high default rate. Fleet personnel were unaware of the monitoring requirements
                  of the quality control plan and did not know how to use Neighborhood Watch to
                  monitor its branches. In fact, they did not know that they had access to
                  Neighborhood Watch.

                  Because Fleet could not demonstrate that it developed and implemented a quality
                  control plan that was in compliance with HUD requirements, we have limited
                  assurance that HUD was protected from unacceptable risk; guarded against errors,
                  omissions, and fraud; and assured that swift and appropriate corrective action



11
     HUD Handbook 4060.1, Mortgagee Approval Handbook, paragraph 6-3 G.2.
12
     HUD Handbook 4060.1, Mortgagee Approval Handbook, paragraph 6-5 C.

                                                     14
          would be taken when necessary in the origination and servicing of Federal
          Housing Administration loans.

Recommendations


          We recommend that the Assistant Secretary for Housing-Federal Housing
          Commissioner:

          4A.     Require Fleet to develop and implement a quality control plan in compliance
                  with HUD requirements.

          4B.     Request the Mortgagee Review Board impose civil money penalties, for
                  each of the two years in our audit period, for Fleet’s failure to provide an
                  acceptable quality control plan.




                                            15
                        SCOPE AND METHODOLOGY

To accomplish our objectives we

   •   Reviewed 100 percent of the Federal Housing Administration-insured loans (20 cases)
       originated by Fleet’s Philadelphia branch between January 1, 2002, and December 31,
       2003, that had gone into default at least once. The 20 loans were part of a universe of
       137 loans originated by the Philadelphia branch during that time. The results of the
       detailed testing apply to the 20 loans reviewed only and cannot be projected to the
       universe of Federal Housing Administration-insured loans.
   •   Examined records and related documents of Fleet.
   •   Reviewed applicable HUD handbooks and mortgagee letters.
   •   Conducted interviews with officials and employees of Fleet and Bank of America and the
       HUD Quality Assurance Division.

In addition, we relied, in part, on data maintained by HUD in the Single Family Data Warehouse
and Neighborhood Watch. We did not perform a detailed analysis of the reliability of these
programs.

The audit generally covered the period from January 1, 2002, to December 31, 2003. This
period was expanded to include the most current data while performing our audit. Therefore,
when applicable, the audit period was expanded to include current data through September 30,
2004. We conducted our fieldwork from May through November 2004.

We performed our review in accordance with generally accepted government auditing standards.




                                              16
                             INTERNAL CONTROLS

Internal control is an integral component of an organization’s management that provides
reasonable assurance that the following objectives are being achieved:

   •   Effectiveness and efficiency of operations,
   •   Reliability of financial reporting, and
   •   Compliance with applicable laws and regulations.

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



 Relevant Internal Controls

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

              •   Loan Origination Process – Policies and procedures that management has in
                  place to reasonably ensure that the loan origination process complies with HUD
                  program requirements.
              •   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, we believe the following items are significant weaknesses:

              •   Fleet did not operate in accordance with HUD requirements as they relate to loan
                  issuance, late endorsements, and branch administration.
              •   Fleet provided a copy of the Quality Control Plan, however, the plan does not
                  contain all HUD requirements.

              The deficiencies are discussed in detail in the Results of Audit section of this
              report.




                                               17
                      FOLLOW-UP ON PRIOR AUDITS

This is the first audit of Fleet National Bank’s Philadelphia branch office conducted by HUD’s
Office of the Inspector General (OIG).




                                               18
                                    APPENDIXES

Appendix A

                  FUNDS TO BE PUT TO BETTER USE



                            Recommendation         Funds To Be Put
                            Number                 to Better Use 1/
                            1B                     $ 224,245
                            2A                     $ 434,804
                            Total                  $ 659,049



1/   “Funds to be put to better use” are quantifiable savings that are anticipated to occur if an
     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.




                                              19
Appendix B

        AUDITEE COMMENTS AND OIG’S EVALUATION


Ref to OIG Evaluation   Auditee Comments




Comments 1
through 14

Comment 15


Comment 16




                         20
Ref to OIG Evaluation   Auditee Comments




Comment 1




Comment 2




Comment 3




Comment 4




                         21
Ref to OIG Evaluation   Auditee Comments




Comment 5




Comment 6




Comment 7




                         22
Ref to OIG Evaluation   Auditee Comments




Comment 8




Comment 9




                         23
Ref to OIG Evaluation   Auditee Comments




Comment 10




Comment 11




Comment 12




                         24
Ref to OIG Evaluation   Auditee Comments




Comment 13




Comment 14




                         25
Ref to OIG Evaluation   Auditee Comments




                         26
                            OIG Evaluation of Auditee Comments

Comment 1

Fleet contends that the borrower was not required to bring any funds to closing because the
closing funds were covered by the borrower's Ameridream gift. Fleet also states that a statement
from Hudson United Bank confirms the balance of the bank account. However, Fleet did not
provide any documentation to support this. Per a discussion with HUD’s Quality Assurance
Division, if the loan were manually underwritten, the down payment from Ameridream would be
acceptable. However, since the loan was underwritten by an automated underwriting system,
and the funds claimed by Hudson United Bank are part of the calculation used for the acceptance
of the loan, the calculation is based on unsupported data.

Further, Fleet states that a landlord referral letter was in the file. However, the only letter we
have was faxed from the selling agent. According to HUD Handbook 4155.1, the verification
must come directly from the landlord, not from an interested third party.

The case will remain in the report.

Comment 2

Fleet maintains the borrower had no previous housing expenses to document. However,
according the Uniform Residential Loan Application, the borrower is 38 years old with two
children. Further, Fleet provided a copy of HUD-92900-A, Direct Endorsement Approval for a
HUD/FHA-Insured Mortgage, stating that the borrower is a first-time homebuyer. There is no
explanation as to the borrower’s former housing situation.

The case will remain in the report.

Comment 3

Fleet provided an explanation to the lack of previous housing obligations. We discussed the
issue with the Quality Assurance Division and they stated that it was a viable explanation.

The case was removed from the report.

Comment 4

Fleet did not provide any additional information to support the rental income. However, Fleet
was able to explain how it calculated the borrower’s income. Based on the supported income
provided by Fleet, we recalculated the total debt to income and housing costs to income ratios.
The lack of support for the rental income did not adversely affect the ratios and thus would not
have changed the borrower’s ability to purchase the home.

The case was removed from the report.




                                                27
Comment 5

Fleet could provide no support for its statement that it was aware of the borrower’s prior housing
situation.

The case will remain in the report.

Comment 6

Fleet is stating that even though the funds in the bank account do not specifically identify the
borrower as the owner of the account, the borrower still could have come up with the closing
costs from payroll and lack of housing expense for the first month of the mortgage. In addition,
the seller paid most of the closing costs for the borrower. Per a discussion with HUD’s Quality
Assurance Division, since the loan was manually underwritten HUD would accept the seller as
the main source of funds for the closing.

In addition, Fleet is now stating as a compensating factor for the high ratios, the mortgage
payment is lower than the previous rental payment.

The case was removed from the report.

Comment 7

Fleet was able to justify the high ratios (no other debt) and provide a letter of payment of
previous housing obligations.

The case was removed from the report.

Comment 8

Fleet provided a viable explanation for the lack of housing expenses and the bank account.
Further, Fleet calculated the income and ratios using the grossing up of income based on its non-
tax status which is allowable under HUD Handbook 4155.1.

The case was removed from the report.

Comment 9

Fleet is stating that public assistance (welfare) is an acceptable form of income. Per HUD’s
Quality Assurance Division, welfare is acceptable income if it is expected to continue for at least
3 years. In this case, the welfare ended and the borrower was now working.

In addition, Fleet provided evidence that the sellers were at settlement on the day of closing.

The case was removed from the report.




                                                 28
Comment 10

Fleet provided support that the income will continue for at least three years. In addition, Fleet is
grossing up the income due to its non-tax status which is allowable under HUD Handbook
4155.1.

The case was removed from the report.

Comment 11

Fleet agrees that the income stated on the Uniform Residential Loan Application is not supported
by documents in the file. However, using only the income that is supportable does not
drastically change the overall ratios and thus would not have changed the borrower’s ability to
purchase the house.

In addition, Fleet cites the mortgage payment as being close to the previous rental payment and
the fact that there is no other debt as compensating factors.

The case was removed from the report.

Comment 12

Fleet cannot provide any justification (without talking to the underwriter who is no longer
employed by Fleet) why it approved the loan with no rental history and high ratios (50.78%).

The case will remain in the report.

Comment 13

Fleet was able to provide support for the rental payments. The compensating factor concerning
the rental payment being more than the mortgage is now supported.

The case was removed from the report.

Comment 14

Fleet provided letters from the borrower explaining the gaps in employment and the lack of
rental history (living with mother and sister). However, continuous employment for the
borrower could only be supported for one of the two years required by HUD Handbook 4155.1.

The case will remain in the report.

Comment 15

Fleet states that the Philadelphia branch office was closed. However, as of January 3, 2005, the
branch was still listed in HUD’s Neighborhood Watch - Early Warning System. Fleet needs to




                                                 29
notify HUD of the closing of the branch office so HUD can take the necessary steps to remove
the office from its records.

Comment 16

Fleet provided a copy of its Quality Control Plan. However, as explained in the report, the plan
does not contain language specific to the requirements of the FHA program as required by HUD
Handbook 4060.1.




                                               30
      Appendix C

                                  SCHEDULE OF CASE FILES



                                                                                             High Ratios
                                  Unpaid                                                       With No
                 Purchase        Principal                Inadequate Unsupported Unsupported Supporting
 FHA Case #        Price         Balance**    Claim Paid Rental History Income     Assets      Factors
 441-6872755     $ 44,000      $ 42,339.58                                 X
 441-6941957     $ 38,000      $       0.00   $39,435.00       X                     X
 441-6944670     $ 43,500      $ 41,944.45                     X
 441-7044758     $ 55,000      $ 49,947.55                     X
 441-6988925     $ 52,000      $ 50,578.59                     X                                  X
                 $232,500      $184,810.17


** Unpaid Principal Balance as calculated in HUD's Insurance in Force System.




                                                        31
Appendix D

                     NARRATIVE CASE PRESENTATIONS



Case Number: 441-6872755

Mortgage Amount: $43,320

Date of Loan Closing: April 26, 2002

Status: Default - First Legal Action to Commence Foreclosure

Payments Before First Default Reported: 0

Unpaid Principal Balance: $42,340

Summary:

Fleet did not properly verify the borrower’s income.

Pertinent Details:

       Income Was Not Properly Verified or Supported

       Fleet did not document two years of consecutive employment. The employment
       certification only shows one year of continuous employment with more than a year lapse
       between jobs (HUD Handbook 4155.1, paragraph 2-6).




                                               32
Case Number: 441-6941957

Mortgage Amount: $37,410

Date of Loan Closing: June 28, 2002

Status: Foreclosure Completed/Conveyance

Payments Before First Default Reported: 2

Unpaid Principal Balance: $36,610

Claim Paid: $39,435

Summary:

Fleet did not (1) properly verify the borrower’s funds to close and (2) include in the loan
origination file or case binder a proper determination of the borrower’s payment history of
housing obligations.

Pertinent Details:

       Funds To Close Were Not Properly Verified or Supported

       All funds for the borrower’s investment in the property were not properly verified. There
       were no bank statements in the file to support funds in an account listed on the Uniform
       Residential Loan Application (HUD Handbook 4155.1, paragraph 2-10B). Since the loan
       was underwritten by an automated underwriting system, and the funds claimed by the
       borrower are part of the calculation used for the acceptance of the loan, the calculation is
       based on unsupported data.

       Payment History of Housing Obligations Was Not Documented

       Fleet did not include in its loan origination file or case binder a determination of the
       borrower’s payment history of housing obligations through either the credit report,
       directly from the landlord or mortgage servicer, or through canceled checks covering the
       most recent 12-month period (HUD Handbook 4155.1, paragraph 2-3A).

       Loan Foreclosure Completed

       The loan was foreclosed, and conveyance was complete September 21, 2004, for a loss to
       HUD of $39,435.




                                               33
Case Number: 441-6944670

Mortgage Amount: $42,822

Date of Loan Closing: July 30, 2002

Status: Default - Foreclosure Started

Payments Before First Default Reported: 12

Unpaid Principal Balance: $41,944

Summary:

Fleet did not include in the loan origination file or case binder a proper determination of the
borrower’s payment history of housing obligations.

Pertinent Details:

       Payment History of Housing Obligations Was Not Documented

       Fleet did not include in its loan origination file or case binder a determination of the
       borrower’s payment history of housing obligations through either the credit report,
       directly from the landlord or mortgage servicer, or through canceled checks covering the
       most recent 12-month period (HUD Handbook 4155.1, paragraph 2-3A).




                                                 34
Case Number: 441-7044758

Mortgage Amount: $51,156

Date of Loan Closing: October 31, 2002

Status: Default - First Legal Action To Commence Foreclosure

Payments Before First Default Reported: 10

Unpaid Principal Balance: $49,948

Summary:

Fleet did not include in the loan origination file or case binder a proper determination of the
borrower’s payment history of housing obligations.

Pertinent Details:

       Payment History of Housing Obligations Was Not Documented

       Fleet did not include in its loan origination file or case binder a determination the
       borrower’s payment history of housing obligations through either the credit report,
       directly from the landlord or mortgage servicer, or through canceled checks covering the
       most recent 12-month period (HUD Handbook 4155.1, paragraph 2-3A).




                                                 35
Case Number: 441-6988925

Mortgage Amount: $51,592

Date of Loan Closing: September 30, 2002

Status: Default - Repayment

Payments Before First Default Reported: N/A

Unpaid Principal Balance: $50,579

Summary:

Fleet did not (1) include in the loan origination file or case binder a proper determination of the
borrower’s payment history of the housing obligations and (2) properly document the borrower’s
qualifying ratios.

Pertinent Details:

       Payment History of Housing Obligations Was Not Documented

       Fleet did not include in its loan origination file or case binder a determination of the
       borrower’s payment history of housing obligations through either the credit report,
       directly from the landlord or mortgage servicer, or through canceled checks covering the
       most recent 12-month period (HUD Handbook 4155.1, paragraph 2-3A).

       Qualifying Ratios Not Properly Documented

       Fleet did not identify any compensating factors to justify approval of a loan. For ratios
       exceeding the benchmark guidelines of 29 percent (mortgage payment to income) and 41
       percent (total fixed payment to income), the underwriters must record the compensating
       factors in the “remarks” section of the Mortgage Credit Analysis Worksheet, and they
       must be supported by documentation. The fixed payment to income ratio is 50.78 percent
       with no compensating factors identified (HUD Handbook 4155.1, paragraphs 2-12 and 2-
       13).

       In addition, the settlement agent signed the HUD-1 Settlement Statement for the trustees
       of the estate (sellers), but there was no documentation authorizing it.




                                                36
Appendix E

             SCHEDULE OF LATE ENDORSEMENTS



                  Original
                 Mortgage    Unpaid Principal              Endorsement     Late
   Case Number    Amount         Balance      Closing Date     Date      Payments
   441-7024202   $ 46,512      $ 45,532.33     10/29/2002   4/22/2003      Yes
   441-7090378   $ 57,855      $ 56,618.85     12/27/2002   4/28/2003      Yes
   441-7037258   $ 38,884      $ 37,965.60     10/31/2002   1/10/2003      Yes
   441-6961642   $ 54,150      $ 53,087.96       8/7/2002   3/11/2003      Yes
   441-6926053   $ 73,742      $ 72,202.32      6/24/2002   1/28/2003      Yes
   441-6852522   $134,436      $131,393.32      4/19/2002   8/13/2002      Yes
   441-6905240   $ 38,870      $ 38,004.09      5/10/2002   7/18/2002      Yes
                 $444,449      $434,804.47




                                         37