oversight

Mortgagee Review of the Peoples National Bank Branch Office, Towson, MD, Determined That Peoples National Bank �s Loan Origination Process and Quality Control Plan Did Not Comply With HUD Regulations and Requirements

Published by the Department of Housing and Urban Development, Office of Inspector General on 2005-02-16.

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

                                                                 Issue Date
                                                                              February 16, 2005
                                                                 Audit Report Number
                                                                              2005-PH-1006




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: Mortgagee Review of the Peoples National Bank Branch Office, Towson, MD,
           Determined That Peoples National Bank’s Loan Origination Process and
           Quality Control Plan Did Not Comply With HUD Regulations and
           Requirements


                                   HIGHLIGHTS

 What We Audited and Why


             We audited the Towson branch of Peoples Mortgage Corporation (Peoples), a
             nonsupervised branch approved to originate Federal Housing Administration
             single family mortgage loans, because it had a high default rate. Our objectives
             were to determine whether Peoples 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 Peoples’ quality control plan, as implemented, met HUD requirements.


 What We Found

             Peoples’ Towson branch office did not originate all Federal Housing Administration
             loans in accordance with HUD’s loan origination requirements. Of the 26 loans we




                                              1
                    selected for review,1 the branch office did not fully comply with Federal Housing
                    Administration requirements for 14 of the loans valued at $2,425,471. Peoples did
                    not exercise due diligence in the review of assets and gifts or resolve signature,
                    Social Security number, and employment inconsistencies. These deficiencies were
                    caused by a lack of management oversight and contributed to an increased risk to the
                    Federal Housing Administration Insurance Fund.

                    Further, Peoples’ quality control plan and the corresponding contract for quality
                    control reviews did not contain requirements to identify patterns of early defaults
                    or to perform onsite reviews at branch locations. If Peoples had included these
                    elements in its plan and contract, it would have discovered the deficiencies in the
                    Towson office sooner.

                    After bringing these matters to its attention, Peoples corrected its loan origination
                    process and its quality assurance plan.


    What We Recommend


                    We recommend that the Assistant Secretary for Housing – Federal Housing
                    Commissioner require Peoples to take immediate action to correct the branch
                    operational deficiencies not in compliance with HUD branch requirements. We also
                    recommend that HUD request indemnification from Peoples on 14 Federal Housing
                    Administration loans valued at $2,369,959, which it issued contrary to HUD’s loan
                    origination procedures.

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


    Auditee’s Response

                    We requested Peoples’ response on December 21, 2004, and received their
                    written response, including comments on each loan, on January 11, 2005. At our
                    exit conference on January 18, 2005, we agreed to use Peoples’ January 11
                    responses as its final comments. Peoples generally agreed with our finding and
                    recommendations and corrected its loan origination process and quality assurance
                    plan during the audit. We verified implementation of the recommendations, and
                    we will record final action in the departmental audit resolution tracking system
                    upon report issuance. The complete text of the auditee’s response, along with our
                    evaluation of that response, can be found in Appendix B of this report.


1
    Originally valued at $4,281,368


                                                      2
                             TABLE OF CONTENTS

Background and Objectives                                                    4

Results of Audit
        Finding 1: Peoples’ Towson Branch Office Did Not Fully Comply With   5
        HUD/Federal Housing Administration Requirements

Scope and Methodology                                                        10

Internal Controls                                                            11

Appendixes
   A.   Funds To Be Put to Better Use                                        12
   B.   Auditee Comments and OIG’s Evaluation                                13
   C.   Schedule of Case File Discrepancies                                  42
   D.   Narrative Case Presentations                                         43




                                            3
                    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.

Peoples Mortgage Corporation’s (Peoples) corporate offices are located in South Easton, MA.
The Lutherville/Towson, MD branch is one of Peoples’ seven active branches with direct
endorsement approval. The Lutherville branch moved to Towson in August 2003. HUD
approved the Towson office as a branch in February 2004. Peoples issued 3,719 Federal
Housing Administration loans worth $526,847,188 between January 1, 2002, and December 31,
2003. The Towson branch issued 521 loans valued at $71,216,414, of which 172 with a value
of $26,337,594 were for Richmond, VA, properties. Of the 172 loans, we reviewed 26 loans
worth $4,281,368 that were in default status less than 2 years after closing.

During the period under review (January 1, 2002, to December 31, 2003), Peoples sold its loans
to 51 investors for servicing.

Our audit objectives were to determine whether Peoples originated Federal Housing
Administration-insured loans in accordance with prudent lending practices and HUD
requirements and whether Peoples’ quality control plan met HUD requirements. We
reviewed case files from both the Homeownership Center and the mortgagee and reviewed
the oversight of Peoples over its branches.




                                             4
                                  RESULTS OF AUDIT

  Finding 1: Peoples’ Towson Branch Office Did Not Fully Comply
  With HUD/ Federal Housing Administration Requirements

  Peoples did not exercise due diligence in the review of assets and gifts or resolve signature,
  Social Security number, and employment inconsistencies for 14 loans valued at $2,425,471.
  Further, Peoples’ quality control plan and its implementing contract did not comply with HUD
  requirements to identify patterns in defaulted loans and to perform onsite reviews. The
  deficiencies stem from the lack of supervision over its branch office, the lack of due diligence
  by its branch employees, and the volume of business Peoples conducted in 2002 and 2003.
  These deficiencies contributed to an increased risk to the Federal Housing Administration
  Insurance Fund. Therefore, Peoples should indemnify the 14 loans with remaining balances of
  $2,369,959.

  Peoples noted that it took some action in late 2003 and 2004 to correct problems in the Towson
  branch. As of November 2003, Peoples began referring all loan applications with credit scores
  below 570 to the corporate office for review. In addition, in March 2004, Peoples promoted
  two individuals locally to oversee the Towson and Severna Park, MD branches. Finally, after
  the audit, Peoples corrected its loan origination and quality control procedures.

  A. Peoples’ Branch Office Issued Loans That Increased the Risk to HUD
  Peoples did not always originate Federal Housing Administration-insured loans in accordance
  with HUD requirements. Of the 26 loans we reviewed, originally valued at $4,281,368, Peoples
  did not exercise due diligence in the review of assets and gifts or resolve signature, Social
  Security number, and employment inconsistencies for 14 loans valued at $2,425,471. These
  deficiencies stem from a lack of supervision over its branch office and a lack of due diligence by
  its branch employees. As a result, the Federal Housing Administration Insurance Fund was
  under increased risk.

Peoples Did Not Verify
Borrowers’ Assets


             Peoples did not adequately verify the assets stated on the Uniform Residential Loan
             Application for 14 of the 26 cases reviewed. It did not identify sources of funds for
             earnest money (6 cases), gifts (4 cases), and account deposits (10 cases) or obtain
             required check copies or bank statements (4 cases). 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. If the earnest money deposit exceeds two



                                                5
           percent, the lender must verify the deposit amount and source of funds with
           documentation.

           Further, Peoples did not determine the reasons borrowers did not meet scheduled
           earnest money payments for six new construction loans. The borrowers agreed to
           make scheduled earnest money payments while the homes were being built. The
           case files showed that the borrowers did not make their scheduled payments as
           required, but there was no indication that Peoples determined the reasons for the
           delinquencies or their impact on the loan. Missing scheduled earnest money
           payments indicates that borrowers might have trouble making mortgage payments in
           the future. HUD looks to the underwriter as the focal point of the Direct
           Endorsement Program. The underwriter must have an awareness of the warning
           signs that may indicate irregularities, an ability to detect fraud, and the responsibility
           that underwriting decisions are performed with due diligence in a prudent manner.
           Prudent business practice would involve researching the reasons for the earnest
           money delinquencies before issuing the loan.

Peoples Issued a Loan With
Improper Gift Fund Activity


           Peoples issued a loan where the gift funds were used to pay off the borrower’s
           outstanding debts. HUD does not allow gift funds to be used to pay off outstanding
           debts.

Peoples Issued Loans When
Problems With Signatures
Existed


           Peoples issued four loans in which required signatures did not match signatures on
           other documents or were missing. For three loans, the underwriter’s signature on
           the Form HUD-92900-A, Direct Endorsement Approval for a HUD/FHA-Insured
           Mortgage, did not match the signature on the Mortgage Credit Analysis Worksheet.
           The underwriter’s signature certifies that the underwriter reviewed all pertinent
           documents, used due diligence in underwriting the loan, and approved the loan as
           eligible for HUD Mortgage Insurance under the Direct Endorsement Program.
           HUD requires the Uniform Residential Loan Application and its Addendum be
           signed and dated by all borrowers and the lender for mortgage credit analysis in all
           transactions.

           In addition, the real estate agent did not sign the real estate certification for three
           loans as required by HUD.




                                               6
Peoples Issued a Loan Before
Resolving Social Security
Number Inconsistencies


             Peoples issued a loan with Social Security number inconsistencies. One W-2 form
             listed a different number than the Uniform Residential Loan Application, other W-2
             forms, pay stubs, and employment verifications. HUD requires the lender to resolve
             any inconsistencies or multiple Social Security numbers.


Peoples Issued a Loan With
Unresolved Conflicting
Employment Information


             Peoples issued a loan with conflicting employment information. The credit report
             and the Uniform Residential Loan Application provided conflicting employer and
             former employer entities. HUD requires that the lender must verify the borrower’s
             employment for the most recent full two years.

             The above cases illustrate that HUD assumed unnecessarily high risk when insuring
             the loans originated by Peoples. The deficiencies associated with Peoples’ loan
             origination activities stem from its lack of supervision over its branch office and the
             lack of due diligence by the branch employees. Therefore, Peoples should
             indemnify the 14 loans with remaining balances of $2,369,959.

             After we discussed these issues, Peoples terminated the two employees responsible
             for loan origination and underwriting for these cases. Further, Peoples developed
             new procedures for reviewing loan defaults to ensure employees follow HUD
             procedures and underwriting standards. We verified implementation of the
             recommendations and will record final action in the departmental audit resolution
             tracking system upon report issuance.

  B. Peoples’ Quality Control Plan and Its Implementation Did Not Comply
     With HUD Requirements

  Peoples’ quality control plan and its corresponding contract with an independent auditing
  firm did not require Peoples or the contractor to identify early default patterns and
  commonalities or require the contractor to visit the branch offices when performing onsite
  reviews. Peoples did not update the contract due to extremely high volumes of business in
  2002 and 2003 and only recently updated its plan. As a result, we have limited assurance
  that Peoples adequately protected HUD from unacceptable risk. If the plan and its
  implementing contract had contained the required elements, Peoples might have discovered
  the Towson branch office deficiencies sooner.



                                                7
    Peoples’ Quality Control Plan
    Did Not Contain a Required
    Process to Identify Early
    Default Patterns


                  Peoples’ quality control plan and its corresponding contract with an independent
                  auditing firm did not contain a requirement to identify patterns of early default
                  and commonalities among loan origination participants.2 Peoples noted that it had
                  just updated the plan in June 2004 but was not aware of the requirement to
                  identify patterns. Further, it had not updated the contract since 2001 due to the
                  overwhelming volume of loans issued in 2002 and 2003. Recently, Peoples
                  discovered Neighborhood Watch and stated it would use this tool in the future to
                  identify patterns in the loan process.


    Peoples’ Contractor Did Not
    Perform Required Onsite
    Quality Control Reviews of the
    Towson Branch Office

                  Peoples did not require the quality control contractor to perform onsite branch
                  reviews because it believed review of the case files, maintained at the corporate
                  office, satisfied the onsite review requirement. Although branch reviews can be
                  done electronically, annual visits are mandatory for offices meeting certain higher
                  risk criteria such as high early default rates.3 The Towson branch had a default
                  rate of more than six times the national average. Therefore, onsite quality control
                  reviews should have been performed.

                  Because Peoples’ quality control process did not comply 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 would be taken when necessary in the origination
                  and servicing of Federal Housing Administration loans.

                  After bringing this to management’s attention, Peoples corrected their quality control
                  plan and its implementation to include the missing elements and provided
                  documentation with their comments. We verified implementation of the
                  recommendations and will record final action in the departmental audit resolution
                  tracking system upon report issuance.




2
    HUD Handbook 4060.1, Mortgagee Approval Handbook, Paragraph 6-5C
3
    HUD Handbook 4060.1, Mortgagee Approval Handbook, Paragraph 6-3G.2


                                                    8
Recommendations


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

           1A.    Take appropriate administrative action up to and including indemnification
                  for the 14 loans, with unpaid balances of $2,369,959, that did not comply
                  with HUD requirements.

           1B.    Require Peoples to develop and implement enhanced control procedures that
                  provide assurance that its employees follow proper procedures to satisfy
                  HUD’s requirements for loan origination.

           1C.    Require Peoples to revise and implement its quality control plan to comply
                  with HUD requirements.




                                            9
                    SCOPE AND METHODOLOGY

To accomplish our objectives we:

       •   Reviewed 100 percent of the Federal Housing Administration-insured loans (26
           cases) originated by Peoples’ Towson branch between January 1, 2002, and
           December 31, 2003, that had gone into default at least once. The 26 loans were
           part of a universe of loans originated by the Towson branch during that time. The
           results of the detailed testing apply only to the 26 loans reviewed and cannot be
           projected to the universe of Federal Housing Administration-insured loans.

       •   Examined records and related documents of Peoples.

       •   Reviewed applicable HUD handbooks and mortgagee letters.

       •   Conducted interviews with officials and employees of Peoples 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. We
expanded this period to include the most current data while performing our audit. Therefore,
when applicable, the audit period was expanded to include current data through
November 30, 2004. We conducted our audit from April through December 2004.

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




                                           10
                               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 Peoples did not operate in accordance with HUD
              requirements as they relate to loan issuance and quality control.

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




                                               11
                                    APPENDIXES


Appendix A


                  FUNDS TO BE PUT TO BETTER USE

                            Recommendation         Funds To Be Put
                            Number                 to Better Use 1/

                            1A                     $2,369,959




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.




                                              12
Appendix B

        AUDITEE COMMENTS AND OIG’S EVALUATION


Ref to OIG Evaluation   Auditee Comments




Comment 1




                         13
Comments
2 through 16
Comment 17




Comment 18




Comment 18




Comment 18




               14
Comment 18




             15
Comment 19




Comment 19




             16
17
18
19
20
21
Comment 2




            22
Comment 3




            23
Comment 4




            24
Comment 5




            25
Comment 6




            26
Comment 7




            27
Comment 8




            28
Comment 9




            29
Comment 10




             30
Comment 11




             31
Comment 12




             32
Comment 13




             33
Comment 14




             34
Comment 15




             35
Comment 16




             36
                         OIG Evaluation of Auditee Comments

Comment 1   We found problems with 14 of the 26 loans that we reviewed. Note that Peoples’
            comments pages are numbered 1 through 16, but page 15 is missing. We
            removed one case from the report prior to receiving Peoples’ comments.
            Apparently, Peoples removed the applicable page without renumbering their
            comments.

Comment 2   Peoples agreed that they did not identify the source of funds for the $1,200 bank
            check.

            Peoples provided a copy of the closing instructions and documentation (neither
            available at the time of our review) showing that the multiple Social Security
            numbers were resolved prior to closing. This element was removed from the
            report.

            The case remains in the report.

Comment 3   Peoples noted that the income for 2002 was only for 9 months. Calculating the
            monthly income from 2001 to 2002 shows the income did increase. This element
            was removed from the report.

            Peoples stated that they did not document funds to close totaling $695 because
            they did not consider the deposits “large”. In its response to case 541-6487423,
            Peoples stated that standard practice defines large deposits as $1,000. HUD
            Handbook 4155.1 does not define “large’ deposits. However, discussion with the
            Philadelphia Quality Assurance Division disclosed that $1,000 was a high
            threshold and large aggregate amounts should be verified as well as large
            individual deposits.

            Peoples agreed that the bank statements used to support funds to close were not
            consecutive, but stated the missing October 2002 statement accounted for only
            $300 of the funds to close and therefore had no effect. However, the ending
            account balance as of October 4, 2002, was $4.13 and the beginning account
            balance as of November 5, 2002, was $993.20, a difference of $989.07. There
            was no documentation available to account for the increase to the account
            balance.

            Peoples stated that it is not standard underwriting practice to determine why the
            seller renegotiates terms of the sales contract. However, as noted in the report,
            the borrower failed to meet scheduled earnest money payments, which could
            indicate that borrowers might have trouble making mortgage payments. HUD
            Handbook 4000.4, REV-1, CHG-2, states that HUD looks to the underwriter as
            the focal point of the Direct Endorsement Program. One of the responsibilities
            the underwriter must assume is an awareness of the warning signs that may


                                              37
            indicate irregularities, and an ability to detect fraud, as well as the responsibility
            that underwriting decisions are performed with due diligence in a prudent manner.
            We believe that prudent business practice would involve researching the reasons
            for these missed payments.

            The case remains in the report.

Comment 4   While the specific requirement for wire transfer documentation was added in
            October 2003, the HUD Handbook 4155.1 requirement that lenders properly
            document the transfer of gifts from charitable organizations was in effect at the
            time of the loan.

            HUD Handbook 4155.1 does not define “large’ deposits. However, discussion
            with the Philadelphia Homeownership Center Quality Assurance Division
            disclosed that $1,000 was a high threshold and large aggregate amounts should be
            verified as well as large individual deposits. Further, the lender did not document
            that the deposits were actually paychecks.

            See Comment 3 concerning scheduled earnest money payments.

            The case remains in the report.

Comment 5   See Comment 4 concerning large deposits.

            The case remains in the report.

Comment 6   Peoples agreed they did not have the source of the $1,600 bank check in the file,
            nor did they have support for the $1,000 gift check.

            See Comment 4 concerning large deposits.

            Peoples stated that the underwriter’s signature was on the MCAW worksheet and
            conditional commitment, which verified she reviewed pertinent documents and
            approved the loan. However, the underwriter’s signature on the Direct
            Endorsement Approval form certifies that she reviewed the documents and
            approved the loan.

            Peoples stated the real estate agent’s missing signature had no impact on the
            overall credit worthiness of the file. However, HUD requires the real estate
            agent’s signature on the real estate certification.

            Peoples stated that the credit bureau does not verify employment information.
            However, there was no indication in the file that Peoples attempted to determine
            the reason for this disparity compared to the W-2s, pay stubs, and employment
            verifications.

            The case remains in the report.


                                              38
Comment 7    See Comment 4 concerning large deposits. Further, the lender did not document
             that the deposits were actually self-employed income.

             See Comment 3 concerning scheduled earnest money payments.

             See Comment 6 concerning the underwriter’s signature.

             The case remains in the report.

Comment 8    See Comment 4 concerning large deposits. Further, the fact that the borrower had
             over $6,500 in reserves after closing does not affect the fact that Peoples did not
             properly verify deposits totaling $7,676, including one for $2,000.

             See Comment 6 concerning the underwriter’s signature.

             See Comment 6 concerning the real estate agent’s signature.

             The case remains in the report.

Comment 9    Peoples agreed that the $1,500 gift check was not properly documented.

             See Comment 4 concerning large deposits.

             The case remains in the report.

Comment 10 See Comment 4 concerning large deposits.

             Peoples agreed that third party gift funds were used to pay off student loans and
             the gift was credited to HUD.

             See Comment 4 concerning gift funds and wire transfers.

             Peoples stated that the Social Security Number was off by one digit, which it
             attributed to a typographical error. The file did not contain any documentation
             that indicated Peoples investigated this discrepancy.

             See Comment 6 concerning the real estate agent’s signature.

             The case remains in the report.

Comment 11 See Comment 4 concerning large deposits.

             Peoples noted that the loan closed on September 27, 2002, and bank statements
             for June and July were in the file, well within required time frames. This element
             was removed from the report.



                                               39
              See Comment 3 concerning scheduled earnest money payments.

              The case remains in the report.

Comment 12 Peoples stated that the unverified deposit of $1,907.66 amounted to approximately
           2 months of child support payments. Peoples provided documentation that the
           borrower received child support payments of $207.66 per week. However, there
           was no documentation that Peoples determined child support payments were the
           source of this deposit during the underwriting process.

              See Comment 3 concerning scheduled earnest money payments.

              The case remains in the report.

Comment 13 Peoples noted that the insurance on this loan was cancelled through refinance on
           April 23, 2004.

              The case was removed from the report.

Comment 14 Peoples acknowledged that the source of the broker’s deposit was not verified.

              See Comment 3 concerning scheduled earnest money payments.

              The case remains in the report.

Comment 15 Peoples noted that the Promissory note, signed by the borrower, was prepared by
           the Thrift Savings Plan for $18,510.86. It also noted that the agreement stated the
           check would be sent to the borrower at the beginning of the following month.
           Peoples stated there was a deposit for this amount in the Thrift Savings account
           and a wire transfer confirmation for $10,000 deposited into the seller’s account.
           However, as noted in the report, the Promissory note was not signed by a Thrift
           Savings Plan official. Further, there is no documentation to show where the funds
           deposited into the Thrift Savings account actually came from.

              The case remains in the report.

Comment 16 Peoples noted that the loan was approved by Loan Prospector, an automated
           underwriting system. It also noted that the lender could accept automated
           findings without compensating factors. Further, Peoples stated that it calculated
           the ratios based on a signed offer of employment, which is a valid contract for
           employment. The Philadelphia Quality Assurance Division concurred with
           Peoples’ assessments. These elements were removed from the report.

              Peoples stated that bank statements in the file showed withdrawals equivalent to
              the amount of the cashier’s checks and provided copies of the statements. We
              noted that the bank statements supported three cashier’s checks for deposits in



                                                40
               February, May, and July, 2002. However, the four unsupported deposits
               mentioned in the report were made in January, April, June, and August, 2002.

               Peoples acknowledged that there was no HUD settlement statement in the file, but
               contended that it was sent in the original case binder. However, we noted in the
               report that the statement was missing from the HUD files.

               The case remains in the report.

Comment 17 Peoples agreed that it submitted the loan to HUD when it was already late.
           Peoples noted that this was an oversight due to the exceptionally high volume of
           loans in the system at that time.

Comment 18 Peoples noted that it took corrective action while the auditor was on-site to develop a
           new procedure for review and analysis of loan defaults and provided a copy of the
           revised Plan. Peoples’ action to require on-site reviews at loan production offices
           satisfies the intent of the recommendation. Based on the action taken and the
           revision to the plan, which includes a process to identify patterns of early default and
           commonalities among loan origination participants, we will record final action in the
           departmental audit resolution tracking system upon report issuance.

Comment 19 Peoples noted that it developed new procedures to ensure loan originators and
           underwriting staff follow HUD procedures and underwriting standards and provided
           a summary of the new procedures. In conjunction with the termination of the loan
           originator and the underwriter for the cases in question, the new procedures should
           correct the deficiencies noted. Therefore, we will record final action in the
           departmental audit resolution tracking system upon report issuance.




                                                 41
Appendix C

         SCHEDULE OF CASE FILE DISCREPANCIES



                                                 Signature
                                                    and
                     Unpaid                        Social               Earnest
   Case Mortgage    Principal Claim      Gift     Security               Money
 Number Amount      Balance Paid Assets Funds     Number     Employment Schedule
541-
6734854  $160,098     $159,174    $0    X
541-
6523730  $162,058     $158,311 $750     X                                  X
541-
6487423  $148,317     $144,738    $0    X                                  X
541-
6429857  $148,824     $143,969    $0    X
541-
6259312  $160,547     $156,485    $0    X           X            X
541-
6493940  $163,398     $159,623 $750     X           X                      X
541-
6205002  $158,500     $153,630    $0    X           X
541-
6792767  $272,182     $267,387    $0    X
541-
6570799  $175,875     $173,779    $0    X    X      X
541-
6487554  $172,645     $168,684    $0    X                                  X
541-
6258431  $155,188     $150,981    $0    X                                  X
541-
6352049  $165,490     $156,485    $0    X                                  X
541-
6649088  $271,651     $266,204    $0    X
541-
6487980  $113,641     $110,508    $0    X           X

Total    $2,425,471 $2,369,959 $1,500




                                        42
Appendix D

                     NARRATIVE CASE PRESENTATIONS


Case Number: 541-6734854

Mortgage Amount: $162,098

Date of Loan Closing: April 25, 2003

Status: Default - Repayment

Payments Before First Default Reported: 2

Unpaid Principal Balance: $159,174

Summary:

Peoples did not properly verify or support the borrower’s funds to close.

Pertinent Details:

       Funds To Close Were Not Properly Verified or Supported

       Peoples did not obtain a copy of the $1,200 bank check to the seller. HUD Handbook
       4155.1, Paragraph 2-10A, states that if the earnest money deposit exceeds two percent of the
       sale price, the lender must verify with documentation the deposit amount and source of
       funds.

       In addition, Peoples obtained only one bank statement. HUD Handbook 4155.1, Paragraph
       3-1F, states that as an alternative to obtaining a verification of deposit, the lender can obtain
       the two most recent, consecutive bank statements if the bank statement shows the previous
       month’s balance.




                                                  43
Case Number: 541-6523730

Mortgage Amount: $162,058

Date of Loan Closing: December 19, 2002

Status: Reinstated by mortgagor who retains ownership

Payments Before First Default Reported: N/A

Unpaid Principal Balance: $158,311

Claim Paid: $750

Summary:

Peoples did not verify or support the borrower’s funds to close.

Pertinent Details:


       Funds To Close Were Not Properly Verified or Supported

       Peoples did not verify the source of the seven deposits found on the borrower’s bank
       statements totaling $695. HUD Handbook 4155.1, Paragraph 2-10B, states that a
       verification of deposit, along with the most recent bank statement, may be used to verify
       savings and checking accounts. If there is a large increase in the account or the account
       was opened recently, the lender must obtain a credible explanation of the source of those
       funds.

       In addition, Peoples did not obtain consecutive bank statements. It included statements
       for September and November but did not obtain the October statement. HUD Handbook
       4155.1, Paragraph 3-1F, states that as an alternative to obtaining a verification of deposit,
       the lender can obtain the two most recent, consecutive bank statements if the bank
       statement shows the previous month’s balance.

       Peoples did not investigate the reason that the borrower missed three of the five
       scheduled earnest money deposits. On the Sales Addendum, the borrower agreed to
       make payments totaling $3,500. However, the earnest money deposit on the Settlement
       Statement (HUD-1) amounted to only $1,625. This indicated the borrower might have
       trouble making mortgage payments, since the borrower could not provide the earnest
       money deposit as agreed.




                                                44
Other Matters Noted

The loan was in default, and a loan modification claim of $750 was paid on February 23,
2004. The loan is no longer in default and has been reinstated by the mortgagor who
retains ownership.




                                       45
Case Number: 541-6487423

Mortgage Amount: $148,317

Date of Loan Closing: October 24, 2002

Status: Default – First legal action to commence foreclosure

Payments Before First Default Reported: 9

Unpaid Principal Balance: $144,738

Summary:

Peoples did not properly verify or support the borrower’s funds to close.

Pertinent Details:

       Funds To Close Were Not Properly Verified or Supported

       Peoples did not document that the gift fund from a nonprofit organization in the amount
       of $10,656 was wired to the closing office. HUD Handbook 4155.1, Paragraph 2-10C,
       states that mortgage lenders are responsible for assuring that the transfer of gifts to the
       homebuyer from the charitable organization is properly documented.

       Peoples did not verify the source of $400 used to open the bank account in September
       2002, or a later deposit of $501. HUD Handbook 4155.1, Paragraph 2-10B, states that a
       verification of deposit, along with the most recent bank statement, may be used to verify
       savings and checking accounts. If there is a large increase in the account or the account
       was opened recently, the lender must obtain a credible explanation of the source of those
       funds.

       Peoples did not investigate the reason that the borrower missed five payments and made
       only one partial payment of seven scheduled earnest money deposits. On the Sales
       Addendum, the borrower agreed to make payments totaling $4,390. However, the
       earnest money deposit on the Settlement Statement (HUD-1) amounted to only $1,500.
       This indicated the borrower might have trouble making mortgage payments, since the
       borrower could not provide the earnest money deposit as agreed.




                                                46
Case Number: 541-6429857

Mortgage Amount: $148,824

Date of Loan Closing: July 30, 2002

Status: Reinstated by mortgagor who retains ownership

Payments Before First Default Reported: 11

Unpaid Principal Balance: $143,969

Summary:

Peoples did not properly verify or support the borrower’s funds to close.

Pertinent Details:

       Funds To Close Were Not Properly Verified or Supported

       Peoples did not obtain an explanation of the five deposits found on the borrower’s bank
       statements totaling $1,485. HUD Handbook 4155.1, Paragraph 2-10B, states that a
       verification of deposit, along with the most recent bank statement, may be used to verify
       savings and checking accounts. If there is a large increase in the account or the account
       was opened recently, the lender must obtain a credible explanation of the source of those
       funds.




                                               47
Case Number: 541-6259312

Mortgage Amount: $160,547

Date of Loan Closing: April 30, 2002

Status: Default – Modification

Payments Before First Default Reported: 3

Unpaid Principal Balance: $156,485

Summary:

Peoples did not (1) properly verify or support the borrowers’ funds to close, (2) obtain required
signatures, and (3) resolve conflicting employment information.

Note: HUD’s Quality Assurance Division reported this loan in 2003.

Pertinent Details:

       Funds To Close Were Not Properly Verified or Supported

       Peoples did not document the source of two gift funds totaling $2,600. A bank check for
       the first gift of $1,600 was made out to the realtor as part of the borrowers’ earnest
       money deposit. There was no evidence in the file to show that the bank check came from
       the borrowers’ account or that it cleared their bank. There was a fax sheet in the file
       stating that a gift letter of $1,600 from the donor would be faxed. However, there was
       no evidence in the file of the gift letter or any documentation showing that $1,600 was
       given to the borrowers as a gift and deposited in their account. In addition, only $1,000
       of the second gift of $2,000 was documented as deposited in the borrowers’ account.
       HUD Handbook 4155.1, Paragraph 2-10A, requires that if the earnest money deposit
       exceeds two percent of the sale price, the lender must verify with documentation the
       deposit amount and source of funds.

       Peoples did not verify the source of 11 deposits found on the borrower’s bank statements
       totaling $4,567. HUD Handbook 4155.1, Paragraph 2-10B, states that a verification of
       deposit, along with the most recent bank statement, may be used to verify savings and
       checking accounts. If there is a large increase in the account or the account was opened
       recently, the lender must obtain a credible explanation of the source of those funds.

       Required Signatures Were Not Obtained

       The underwriter stated that although it was her name on the Form HUD-92900-A, Direct
       Endorsement Approval for a HUD/FHA-Insured Mortgage, the signature was not hers.
       The underwriter’s signature certifies that the underwriter reviewed all pertinent
       documents, used due diligence in underwriting the loan, and approved the loan as eligible


                                                48
for HUD Mortgage Insurance under the Direct Endorsement Program. HUD Handbook
4155.1, Paragraph 3-1, states that the application package must contain all documentation
supporting the lender’s decision to approve the mortgage loan. The Uniform Residential
Loan Application and the Addendum, signed and dated by all borrowers and the lender,
are required for mortgage credit analysis in all transactions.

The real estate agent did not sign the real estate certification as required. HUD
Handbook 4155.1, Paragraph 3-1I, states that the real estate certification signed by the
buyer, seller, and selling real estate agent or broker (if not contained within the purchase
agreement) is required.

Conflicting Employment Information Was Not Resolved

Peoples did not resolve inconsistencies in employment information. The credit report
listed the borrower’s employer as a bank and the former employer as a computer service
company. However, the Uniform Residential Loan Application showed different entities
as the borrower’s employer and former employer. HUD Handbook 4155.1, Paragraph 2-
6, states that the lender must verify the borrower’s employment for the most recent full 2
years.




                                         49
Case Number: 541-6493940

Mortgage Amount: $163,398

Date of Loan Closing: November 18, 2002

Status: Default – Foreclosure started

Payments Before First Default Reported: 17 (originally listed as N/A in Neighborhood Watch)

Unpaid Principal Balance: $159,623

Claim Paid: $750

Summary:

Peoples did not properly (1) verify or support the borrower’s funds to close and (2) approve the
loan.

Pertinent Details:

       Funds To Close Were Not Properly Verified or Supported

       Peoples did not verify the source of the 21 deposits found on the borrower’s bank
       statements totaling $5,239. HUD Handbook 4155.1, Paragraph 2-10B, states that a
       verification of deposit, along with the most recent bank statement, may be used to verify
       savings and checking accounts. If there is a large increase in the account or the account
       was opened recently, the lender must obtain a credible explanation of the source of those
       funds.

       Peoples did not investigate the reason that the borrower missed one payment and made a
       partial payment of six scheduled earnest money deposits. On the Sales Addendum, the
       borrower agreed to make payments totaling $5,515. However, the earnest money deposit
       on the Settlement Statement (HUD-1) amounted to only $3,915. This indicated the
       borrower might have trouble making mortgage payments, since the borrower could not
       provide the earnest money deposit as agreed.

       The Loan Was Not Properly Approved

       The underwriter stated that although it is her name on the Form HUD-92900-A, Direct
       Endorsement Approval for a HUD/FHA-Insured Mortgage, the signature is not hers. The
       underwriter’s signature certifies that the underwriter reviewed all pertinent documents,
       used due diligence in underwriting the loan, and approved the loan as eligible for HUD
       Mortgage Insurance under the Direct Endorsement Program. HUD Handbook 4155.1,
       Paragraph 3-1, states that the application package must contain all documentation
       supporting the lender’s decision to approve the mortgage loan. The Uniform Residential



                                               50
Loan Application and the Addendum, signed and dated by all borrowers and the lender,
are required for mortgage credit analysis in all transactions.

Other Matters Noted

A loan modification of $750 was paid on January 9, 2004. The loan is currently in
default, foreclosure-started status.




                                       51
Case Number: 541-6205002

Mortgage Amount: $158,500

Date of Loan Closing: January 25, 2002

Status: Default – Foreclosure started

Payments Before First Default Reported: 3

Unpaid Principal Balance: $153,630

Summary:

Peoples did not (1) properly verify or support the borrower’s funds to close and (2) ensure
required signatures were obtained.

Pertinent Details:

       Funds To Close Were Not Properly Verified or Supported

       Peoples did not verify the source of 14 deposits found on the borrower’s bank statements
       totaling $7,676. HUD Handbook 4155.1, Paragraph 2-10B, states that a verification of
       deposit, along with the most recent bank statement, may be used to verify savings and
       checking accounts. If there is a large increase in the account or the account was opened
       recently, the lender must obtain a credible explanation of the source of those funds.

       Required Signatures Were Not Obtained

       The underwriter’s signature on the Form HUD-92900-A, Direct Endorsement Approval
       for a HUD/-FHA-Insured Mortgage, does not match her signature on the Mortgage Credit
       Analysis Worksheet. The underwriter’s signature certifies that the underwriter reviewed
       all pertinent documents, used due diligence in underwriting the loan, and approved the
       loan as eligible for HUD Mortgage Insurance under the Direct Endorsement Program.
       HUD Handbook 4155.1, Paragraph 3-1, states that the application package must contain
       all documentation supporting the lender’s decision to approve the mortgage loan. The
       Uniform Residential Loan Application and the Addendum, signed and dated by all
       borrowers and the lender, are required for mortgage credit analysis in all transactions.

       The real estate agent did not sign the real estate certification as required. HUD
       Handbook 4155.1, Paragraph 3-1I, states that the real estate certification signed by the
       buyer, seller, and selling real estate agent or broker (if not contained within the purchase
       agreement) is required.




                                                52
Case Number: 541-6792767

Mortgage Amount: $272,182

Date of Loan Closing: June 30, 2003

Status: Default - Repayment

Payments Before First Default Reported: N/A

Unpaid Principal Balance: $267,387

Summary:

Peoples did not properly verify or support the borrower’s funds to close.

Pertinent Details:

       Funds To Close Were Not Properly Verified or Supported

       Peoples did not verify the source of gift funds. The borrower received $1,500 as a gift from
       a relative, which was used as part of the earnest money deposit. There is a copy of a check
       from the donor to the borrower amounting to $1,500. However, there is no evidence that the
       gift came from the donor’s own funds. HUD Handbook 4155.1, Paragraph 2-10A, requires
       that if the earnest money deposit exceeds two percent of the sale price, the lender must
       verify with documentation the deposit amount and source of funds.

       Peoples did not verify the source of the two deposits found on the borrower’s bank
       statements totaling $479. HUD Handbook 4155.1, Paragraph 2-10B, states that a
       verification of deposit, along with the most recent bank statement, may be used to verify
       savings and checking accounts. If there is a large increase in the account or the account
       was opened recently, the lender must obtain a credible explanation of the source of those
       funds.




                                               53
Case Number: 541-6570799

Mortgage Amount: $175,875

Date of Loan Closing: August 28, 2003

Status: Default - Repayment

Payments Before First Default Reported: 1

Unpaid Principal Balance: $173,779

Summary:

Peoples did not (1) properly verify or support the borrower’s funds to close, (2) obtain required
documentation to approve the loan, and (3) resolve inconsistencies in Social Security numbers.

Pertinent Details:

       Funds To Close Were Not Properly Verified or Supported

       Peoples did not obtain an explanation of the two deposits found on the borrower’s bank
       statements totaling $830. HUD Handbook 4155.1, Paragraph 2-10B, states that a
       verification of deposit, along with the most recent bank statement, may be used to verify
       savings and checking accounts. If there is a large increase in the account or the account
       was opened recently, the lender must obtain a credible explanation of the source of those
       funds.

       Peoples allowed funds from a third party gift to be used to pay off the borrower’s
       outstanding debt. Mortgagee Letter 2002-22, dated November 14, 2002, and Mortgagee
       Letter 2002-02, dated January 16, 2002, specifically bar this practice.

       Peoples did not document the gift fund wire from a nonprofit organization in the amount
       of $5,825. HUD Handbook 4155.1, Paragraph 2-10C, states that mortgage lenders are
       responsible for assuring that the transfer of funds for the gift to the homebuyer from the
       charitable organization is properly documented.

       Required Documentation Was Not Obtained

       Peoples did not resolve inconsistencies in Social Security numbers. The number on a
       2002 W-2 form is different from the number on the Uniform Residential Loan
       Application, other W-2 forms, pay stubs, and employment verification. HUD Handbook
       4155.1, Paragraph 3-1C, requires the lender to resolve any inconsistencies or multiple
       Social Security numbers for individual borrowers.




                                                54
Required Signature Was Not Obtained

The real estate agent did not sign the real estate certification as required. HUD
Handbook 4155.1, Paragraph 3-1I, states that the real estate certification signed by the
buyer, seller, and selling real estate agent or broker (if not contained within the purchase
agreement) is required.




                                         55
Case Number: 541-6487554

Mortgage Amount: $172,645

Date of Loan Closing: September 27, 2002

Status: Delinquent

Payments Before First Default Reported: 1

Unpaid Principal Balance: $168,684

Summary:

Peoples did not properly verify or support the borrower’s funds to close.

Pertinent Details:

       Funds To Close Were Not Properly Verified or Supported

       Peoples did not verify the source of funds for two deposits on the Uniform Residential
       Loan Application totaling $557. HUD Handbook 4155.1, Paragraph 2-10B, states that a
       verification of deposit, along with the most recent bank statement, may be used to verify
       savings and checking accounts. If there is a large increase in the account or the account
       was opened recently, the lender must obtain a credible explanation of the source of those
       funds.

       Peoples did not investigate the reason that the borrower missed three of nine scheduled
       earnest money deposits. On the Sales Addendum, the borrower agreed to make payments
       totaling $15,585. However, the earnest money deposit on the Settlement Statement
       (HUD-1) amounted to only $10,050. This indicated the borrower might have trouble
       making mortgage payments, since the borrower could not provide the earnest money
       deposit as agreed.




                                               56
Case Number: 541-6258431

Mortgage Amount: $155,188

Date of Loan Closing: February 25, 2002

Status: Delinquent

Payments Before First Default Reported: 2

Unpaid Principal Balance: $150,981

Summary:

Peoples did not properly verify or support the borrower’s funds to close.

Pertinent Details:

       Funds To Close Were Not Properly Verified or Supported

       Peoples did not verify the source of a deposit found on the borrower’s bank statements
       totaling $1,908. HUD Handbook 4155.1, Paragraph 2-10B, states that a verification of
       deposit, along with the most recent bank statement, may be used to verify savings and
       checking accounts. If there is a large increase in the account or the account was opened
       recently, the lender must obtain a credible explanation of the source of those funds.

       In addition, Peoples did not investigate the reason that the borrower missed five of nine
       scheduled earnest money deposits. On the Sales Addendum, the borrower agreed to
       make payments totaling $4,500. However, the earnest money deposit on the Settlement
       Statement (HUD-1) amounted to only $2,000. This indicated the borrower might have
       trouble making mortgage payments, since the borrower could not provide the earnest
       money deposit as agreed.




                                               57
Case Number: 541-6352049

Mortgage Amount: $160,547

Date of Loan Closing: April 26, 2002

Status: Foreclosure completed

Payments before First Default Reported: 5

Unpaid Principal Balance: $156,485

Summary:

Peoples did not properly verify or support the borrower’s funds to close.

Pertinent Details:

       Funds To Close Were Not Properly Verified or Supported

       Peoples did not determine the source of funds or verify that earnest money funds came from
       the borrower’s account. Peoples did not identify the source of funds for a cashier's check for
       $4,000. Peoples documented the front of an additional earnest money check in the amount
       of $4,000 but did not include a bank statement to show the check cleared. HUD Handbook
       4155.1, Paragraph 2-10A, requires that if the earnest money deposit exceeds two percent of
       the sale price, the lender must verify with documentation the deposit amount and source of
       funds.

       In addition, Peoples did not investigate the reason that the borrower missed four
       payments and made a partial payment of nine scheduled earnest money deposits. On the
       Sales Addendum, the borrower agreed to make payments totaling $23,250. However, the
       earnest money deposit on the Settlement Statement (HUD-1) amounted to only $9,750.
       This indicated the borrower might have trouble making mortgage payments, since the
       borrower could not provide the earnest money deposit as agreed.




                                                58
Case Number: 541-6649088

Mortgage Amount: $271,651

Date of Loan Closing: February 26, 2003

Status: Delinquent

Payments Before First Default Reported: 6

Unpaid Principal Balance: $266,205

Summary:

Peoples did not properly verify or support the borrowers’ funds to close.

Pertinent Details:

       Funds To Close Were Not Properly Verified or Supported

       Peoples did not adequately verify the source of earnest money funds totaling $10,000. A
       January 2003 Thrift Savings Plan Loan Agreement in the amount of $18,511 was signed
       by the borrowers but not by a Thrift Savings Plan official. An automated teller machine
       deposit slip, dated February 2003 showing a deposit of $18,511, did not identify the
       source of the funds. Further, there was no credit union account statement to verify the
       funds came from the Thrift Savings Plan. The loan closed on February 26, 2003. HUD
       Handbook 4155.1, Paragraph 2-10A, requires that if the earnest money deposit exceeds
       two percent of the sale price, the lender must verify with documentation the deposit
       amount and source of funds.




                                               59
Case Number: 541-6487980

Mortgage Amount: $113,641

Date of Loan Closing: September 27, 2002

Status: Modification

Payments Before First Default Reported: 10

Unpaid Principal Balance: $110,508

Summary:

Peoples Mortgage did not (1) verify or support the borrower’s funds to close, and (2) ensure that
a signed Settlement Statement (HUD-1) was in the file.

Pertinent Details:

       Funds To Close Were Not Properly Verified or Supported

       Peoples did not adequately verify the source of funds for four cashier’s checks totaling
       $2,120 of the $3,500 earnest money deposits. There were no bank statements to show the
       funds came from the borrower’s account. HUD Handbook 4155.1, Paragraph 2-10A,
       requires that if the earnest money deposit exceeds two percent of the sale price, the lender
       must verify with documentation the deposit amount and source of funds.

       A Signed Settlement Statement (HUD-1) Was Not in the File

       There was no signed Settlement Statement (HUD-1) in either the HUD file or the lender’s
       file. There was an unsigned copy of the Settlement Statement in the lender file. Without
       a signed Settlement Statement, there is no reasonable assurance that the borrower met the
       three percent investment requirement or that the seller did not pay more than six percent
       of the net closing costs in violation of requirements, nor can it be adequately determined
       whether there were any unusual payments from the seller to the buyer at settlement.
       HUD Handbook 4000.2, REV-3, Paragraph 5-8, stipulates that the originating mortgagee
       must retain the entire case file pertaining to loan origination.




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