oversight

Gateway Funding Diversified, Cherry Hill, New Jersey - Lender Review Gateway Funding Diversified 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 2005-08-11.

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

                                                               Issue Date
                                                                      August 11, 2005
                                                               Audit Report Number
                                                                      2005-PH-1015




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




FROM:      John P. Buck, Regional Inspector General for Audit, Philadelphia Regional
            Office, 3AGA


SUBJECT:   Gateway Funding Diversified, Cherry Hill, New Jersey – Lender Review
            Gateway Funding Diversified Issued and Submitted for Endorsement Loans
            with an Increased Risk of Defaults and Claims


                                 HIGHLIGHTS

 What We Audited and Why

           We audited the Cherry Hill branch of Gateway Funding Diversified (Gateway), a
           non-supervised direct endorsement lender approved to originate Federal Housing
           Administration single-family mortgage loans because it had a high default rate.
           Our objective was to determine whether Gateway 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.

 What We Found

           Gateway’s Cherry Hill branch did not originate all Federal Housing Administration
           loans in accordance with HUD’s loan origination requirements. Of the 32 loans we
                    selected for review,1 the branch did not fully comply with Federal Housing
                    Administration requirements for 7 of the loans valued at $690,241. Gateway did not
                    exercise due diligence in the review of assets, liabilities, and income; did not verify
                    rental history; and approved loans with excessive debt to income ratios. These
                    deficiencies were caused by a lack of due professional care and contributed to an
                    increased risk to the Federal Housing Administration insurance fund.

    What We Recommend

                    We recommend that the Assistant Secretary for Housing – Federal Housing
                    Commissioner request indemnification from Gateway on Federal Housing
                    Administration loans valued at $690,241, which it issued contrary to HUD’s loan
                    origination procedures, and require Gateway to develop internal procedures to
                    more closely monitor its underwriting 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


                    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 $3,234,940


                                                       2
                           TABLE OF CONTENTS


Background and Objectives                                                 4

Results of Audit
      Finding 1: Gateway’s Cherry Hill Branch Did Not Fully Comply with   5
      HUD/Federal Housing Administration Requirements

Scope and Methodology                                                     9

Internal Controls                                                         10

Appendixes
   A. Funds to Be Put to Better Use                                       11
   B. Auditee Comments and OIG’s Evaluation                               12
   C. Schedule of Case File Discrepancies                                 25
   D. Narrative Case Presentations                                        26




                                           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
lenders against loss on single-family home mortgages.

Beginning in 1983, HUD implemented the direct endorsement program, which authorized
approved lenders 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
lenders or others who abuse the program.

The Cherry Hill branch of Gateway Funding Diversified (Gateway) is one of its 25 active branches
with direct endorsement approval. Gateway, whose main office is located in Horsham,
Pennsylvania, issued 3,626 Federal Housing Administration loans worth $424,829,158 between
October 1, 2002, and September 30, 2004, of which 1,787 were issued by the Cherry Hill branch at
a value of $208,122,409. Of the 1,787 loans issued, 73 loans worth $7,805,765 went into default
within the first two years. Of these, we reviewed 32 loans worth $3,234,940 that were in default
status with six payments or fewer after closing.

The objective of our review was to determine whether Gateway 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 lender and
reviewed Gateway’s oversight of its branches.




                                                4
                                    RESULTS OF AUDIT


Finding 1: Gateway’s Cherry Hill Branch Did Not Fully Comply with
HUD/Federal Housing Administration Requirements
Gateway did not always originate Federal Housing Administration-insured loans in accordance
with HUD requirements. For 7 of the 32 loans we reviewed, originally valued at $3,234,940,
Gateway did not exercise due diligence in the review of assets, liabilities, and income; did not
verify rental history; and approved loans with excessive debt to income ratios. The deficiencies
stem from the lack of due professional care at the branch. These deficiencies contributed to an
increased risk to the Federal Housing Administration insurance fund. Therefore, Gateway
should indemnify the 7 loans with remaining balances of $690,241.




    Gateway 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 four of the cases
                reviewed, Gateway did not properly verify the previous rental history of the
                mortgagor. For case number 351-4565556, the borrower claimed a rental history
                of 1.4 years at a stated location but rental verification provided by the landlord
                only supported six months rental history at that location.


    Gateway 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



2
  HUD Handbook 4155.1, “Mortgage Credit Analysis for Mortgage Insurance, One to Four Family Properties,”
paragraph 2-3A
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,”
paragraph 2-2


                                                     5
                addition, the income must be expected to continue through at least the first three
                years of the mortgage loan.5

                For three of the cases reviewed, Gateway did not adequately verify the income. For
                case number 351-4499168, Gateway did not obtain adequate documentation to
                support the self-employment salary claimed.

    Gateway Allowed the Use of
    Overtime When It Could Not
    Be Determined to Be Likely to
    Continue


                HUD allows the use of overtime when the borrower has received such income for
                the past two years and it is likely to continue. The lender must develop an
                average of overtime income for the past two years. 6

                For two of the cases reviewed, Gateway allowed the use of overtime when it
                could not be determined to be likely to continue. For case number 351-4346794,
                Gateway did not average the overtime for the past two years. Instead, it used the
                overtime earned for the past year, even though the overtime jumped significantly
                from the first year to the second (approximately $3,793 one year to $18,624 the
                following year with the borrower working upward of 65 hours per week). Such
                an increase could not be guaranteed to continue and even averaging the two
                would not provide an accurate reflection of expected income. Gateway should
                have attempted to determine a more realistic expectation of overtime from the
                employer.

    Gateway 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.7

                For three of the cases reviewed, Gateway did not adequately verify the assets stated
                on the loan application. For case number 351-4499168, there was an unexplained
                large deposit and only one complete bank statement in the file.

5
  HUD Handbook 4155.1, “Mortgage Credit Analysis for Mortgage Insurance, One to Four Family Properties,”
paragraph 2-7
6
  HUD Handbook 4155.1, “Mortgage Credit Analysis for Mortgage Insurance, One to Four Family Properties,”
paragraph 2-7A
7
  HUD Handbook 4155.1, “Mortgage Credit Analysis for Mortgage Insurance, One to Four Family Properties,”
paragraph 2-10B


                                                     6
    Gateway Did Not Consider All
    Liabilities of the Borrower


                According to HUD guidance, past credit performance helps determine a borrower’s
                attitude toward credit obligations. A borrower who has made payments on previous
                and current obligations in a timely manner represents reduced risk. Conversely, if
                the credit history, despite adequate income to support obligations, reflects
                continuous slow payments, judgments, and delinquent accounts, strong
                compensating factors will be necessary to approve the loan. Further, while minor
                derogatory information occurring two or more years in the past does not require
                explanation, major indications of derogatory credit–including judgments,
                collections, and any other recent credit problems–require sufficient written
                explanation from the borrower. The borrower’s explanation must make sense and
                be consistent with other credit information in the file.8

                For four of the cases reviewed, Gateway did not accurately reflect all liabilities or
                in some cases, did not accurately reflect the monthly payment requirements listed
                on the credit report on the loan application and the mortgage credit analysis
                worksheet. Further, Gateway did not obtain explanations for open judgments or a
                history of late payments. For case number 351-4293712, there were several late
                payments of more than 120 days for a revolving account that was noted on the
                credit report. These late payments were made during the same year as closing.
                Another account was also past due several times, the last time being 10 months
                before closing. In addition, there were other accounts that are now paid in full but
                had numerous past due statuses. There was nothing in the file from the mortgagor
                to explain any of the late payments.


    Gateway 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 29 and 41
                percent may be acceptable only if significant compensating factors are present.
                HUD provides examples of compensating factors such as a good rental history or a
                large downpayment.9



8
  HUD Handbook 4155.1, “Mortgage Credit Analysis for Mortgage Insurance, One to Four Family Properties,”
paragraph 2-3
9
  HUD Handbook 4155.1, “Mortgage Credit Analysis for Mortgage Insurance, One to Four Family Properties,”
paragraphs 2-12 and 2-13


                                                     7
             For three of the cases reviewed, Gateway allowed excessive ratios with no valid
             compensating factors provided. For case number 351-4346794, the fixed payment
             to income ratio was 50 percent with no compensating factors listed.

Miscellaneous Items


             In addition to the above-mentioned issues, we identified three case files valued at
             $340,900, in which HUD requirements were not met. Although these issues do not
             require an indemnification, they did not follow the loan origination requirements of
             HUD. The issues include

                    •   An unsigned lock rate agreement,
                    •   Bank statement faxed from the realtor, and
                    •   Earnest money on the sales contract did not follow through to the
                        settlement statement.


Conclusion


             The above cases illustrate that HUD assumed unnecessarily high risk when
             insuring the loans originated by Gateway. The deficiencies associated with
             Gateway’s loan origination activities stem from the lack of due care in applying
             HUD loan requirements. Therefore, Gateway should indemnify the 7 loans with
             remaining balances of $690,241.

Recommendations



             We recommend that the Assistant Secretary for Housing – Federal Housing
             Commissioner

             1A.    Request indemnification from Gateway on 7 loans issued with current
                    unpaid balances of $690,241, in which Gateway’s loan origination
                    procedures did not comply with HUD requirements.

             1B.    Require Gateway to develop internal procedures to more closely monitor
                    its underwriting procedures.




                                               8
                        SCOPE AND METHODOLOGY


To accomplish our objectives we

       •   Reviewed Federal Housing Administration-insured loans (32 cases) originated by
           Gateway’s Cherry Hill branch between October 1, 2002, and September 30, 2004,
           that had gone into default at least once. The 32 loans were part of a universe of 1,787
           loans originated by the Cherry Hill branch during that time. The results of the
           detailed testing apply to the 32 loans reviewed only and cannot be projected to the
           universe of Federal Housing Administration-insured loans.

       •   Examined records and related documents of Gateway.

       •   Reviewed applicable HUD handbooks and mortgagee letters.

       •   Conducted interviews with officials and employees of Gateway 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 systems. We did not perform a detailed analysis of the reliability of
these programs.

Gateway’s quality control plan was reviewed by HUD’s Quality Assurance Division in January
2005. The Quality Assurance Division recommended Gateway update its quality control plan to
comply with HUD Handbook 4060.1. No further review was performed by the Office of the
Inspector General (OIG).

The audit generally covered the period from October 1, 2002, to September 30, 2004. 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 May 31, 2005.
We conducted our fieldwork from January through May 2005.

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




                                                9
                              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.

              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 Gateway did not operate in accordance with HUD
              requirements as they relate to loan issuance.

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




                                                 10
                                     APPENDIXES


Appendix A

                  FUNDS TO BE PUT TO BETTER USE

                            Recommendation         Funds to be put
                                   number           to better use 1/
                                            1A           $690,241



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.




                                              11
Appendix B

        AUDITEE COMMENTS AND OIG’S EVALUATION


Ref to OIG Evaluation   Auditee Comments




                         12
13
Comment 1




            14
Comment 2




Comment 3




            15
Comment 4




            16
Comment 5




Comment 6




            17
Comment 7




            18
19
20
21
22
                         OIG Evaluation of Auditee Comments


Comment 1   Gateway contends that the borrower’s credit problems were due to late payments
            on a co-signed loan and that the documentation adequately provided enough
            information for the underwriter to assess whether the late payments were based on
            a disregard for financial obligations, an inability to manage debt, or factors
            beyond the control of the borrower. However, the only documents submitted to
            HUD involved a loan statement, written in Spanish, stamped that the loan was
            paid in full. There are no notes in the file or comments on the Mortgage Credit
            Analysis Worksheet indicting the underwriter’s analysis of the late payments or of
            the borrower’s credit worthiness.

            Gateway also contends that documentation was provided that established other
            credit for the borrower. Gateway did provide several letters from non-traditional
            credit sources as examples of the borrower’s payment history. However, the
            underwriter never verified the sources. In fact, the underwriter stated that they
            never verify non-traditional credit because they do not put a lot of weight into
            their validity.

            The case will remain in the report.

Comment 2   Gateway contends that there was a transposed number in the loan application and
            that is the cause of the difference between the application claiming 1.4 years at
            the previous location and the letter from the landlord stating only six months of
            rental history. Gateway agrees the underwriter should have clearly documented
            the most recent 12-month rental history in accordance with HUD 4155.1.

            The case will remain in the report.

Comment 3   Gateway agrees with the indemnification request.

            The case will remain in the report.

Comment 4   Gateway agrees with the indemnification request.

            The case will remain in the report.

Comment 5   Gateway contends that, although there was no credit letter, the borrowers’ credit
            did not indicate that they had a disregard for financial obligations or an inability
            to manage debt. They had a couple of delinquent accounts but not horrendous
            credit.

            Upon re-reviewing the file, we noted that the case was rated as Refer/Eligible
            under Fannie Mae’s Government Underwriting Service using PMI Scorecard.



                                             23
            The case was referred (a Federal Housing Administration registered Direct
            Endorsement underwriter must analyze the loan and determine if the borrower
            meets Federal Housing Administration standard capacity and credit policies and
            guidelines) because the risk exceeded the threshold for automated approval for a
            Federal Housing Administration loan. One of the approval conditions of the
            referral was the requirement to “obtain an explanation for major indication of
            derogatory credit, such as judgments and collections, as well as any minor
            indications within the past two years.” Gateway did not obtain an explanation for
            several late payments made less than a year before closing.

            The case will remain in the report.

Comment 6   Gateway did not provide any additional information to support the income used in
            the loan calculation.

            Gateway agrees the underwriter should have documented compensating factors to
            support the excessive ratios.

            Gateway contends that the rental payment history was not sent by an interested
            third party. Upon re-review of the file, we found the rental history was indeed
            faxed by the borrower’s real estate agent.

            The case will remain in the report.

Comment 7   Gateway did not provide any additional information to support the gift to the
            borrower. Without the gift funds, the borrower would not have had the funds to
            close the loan. Adequate documentation of the source and existence of the funds
            is required by HUD 4155.1.

            Gateway did not provide any additional information to support the non-traditional
            credit.

            The case will remain in the report.




                                             24
Appendix C

                 SCHEDULE OF CASE FILE DISCREPANCIES

                                    Unpaid       Inadequate                                           High Ratios With
                                   Principal       Rental      Unsupported   Unsupported    Credit     No Supporting
                   Sales Price     Balance**       History       Income        Assets      Problems       Factors
 351-4379314    $118,000.00      $114,535.00          X               X          X                           X
 351-4499168    $157,900.00      $154,173.00          X               X          X            X              X
 351-4565556    $ 66,800.00      $ 65,958.00          X
 351-4293712    $115,000.00      $111,977.00                                                  X
 351-4406694    $ 99,000.00      $ 96,428.00                                                  X
 351-4346794    $ 87,000.00      $ 85,720.00          X               X                                      X
 351-4391207    $ 62,900.00      $ 61,450.00                                     X            X
                $706,600.00      $690,241.00


**Neighborhood Watch - Default Information Provided by the Servicer




                                                              25
Appendix D

                     NARRATIVE CASE PRESENTATIONS

Case number: 351-4379314

Mortgage amount: $117,000

Date of loan closing: April 25, 2003

Status: Repayment

Payments before first default reported: n/a *

Unpaid principal balance: $114,535

Summary:

       Gateway did not (1) include in the loan origination file or case binder a proper
       determination of the borrower’s payment history of housing obligations, (2) properly
       verify the borrower’s income, (3) properly verify the borrower’s funds to close, and (4)
       properly document the borrower’s qualifying ratios.

Pertinent Details:

       Payment History of Housing Obligations Was Not Determined

       Gateway 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).

       Gateway Did Not Properly Verify the Borrower’s Income

       The income of each borrower to be obligated for the mortgage debt must be analyzed to
       determine whether it can reasonably be expected to continue through at least the first
       three years of the mortgage loan. Both overtime and bonus income may be used to
       qualify if the borrower has received such income for the past two years and it is likely to
       continue (HUD Handbook 4155.1, paragraphs 2-7 and 2-7A). Gateway used overtime
       pay that it could not verify as having been received for the past two years and as likely to
       continue.




                                                26
Funds to Close Were Not Properly Verified or Supported

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, the lender must verify
the source of funds (HUD Handbook 4155.1, paragraph 2-10B). All funds for the
borrower’s investment in the property were not properly verified. There was only one
complete bank statement to support the funds listed on the loan application. In addition,
the tax return listed as an asset on the loan application was not supported.

Qualifying Ratios Were Not Properly Documented

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 (HUD Handbook 4155.1, paragraphs 2-12
and 2-13). Gateway did not identify compensating factors to justify approval of the loan.
Using the supportable income, the mortgage payment to income ratio is 32 percent, and
the total fixed payment to income ratio is 43 percent with no compensating factors
identified.

* Although Neighborhood Watch does not list the number of payments before the first
default was reported, data indicate six or fewer payments were made.




                                        27
Case number: 351-4499168

Mortgage amount: $154,300

Date of loan closing: August 18, 2003

Status: Foreclosure complete

Payments before first default reported: One

Unpaid Principal Balance: $154,173

Summary:

       Gateway did not (1) include in the loan origination file or case binder a proper
       determination of the borrower’s payment history of housing obligations, (2) properly
       verify the borrower’s income, (3) properly verify the borrower’s funds to close, (4)
       properly account for all debts listed on the credit report, and (5) properly document the
       borrower’s qualifying ratios.

Pertinent Details:

       Payment History of Housing Obligations Was Not Determined

       Gateway 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. The borrower claims to own, but there is no housing
       payment on the credit report or proof of ownership (HUD Handbook 4155.1, paragraph
       2-3A).

       Gateway Did Not Properly Verify the Borrower’s Income

       The income of each borrower to be obligated for the mortgage debt must be analyzed to
       determine whether it can reasonably be expected to continue through at least the first
       three years of the mortgage loan. For self-employed borrowers, the sole proprietorship
       income should be calculated on IRS Form Schedule C (HUD Handbook 4155.1,
       paragraph 2-9). Gateway did not use the income calculated on Schedule C to determine
       the monthly income listed on the loan application. The source for Gateway’s income
       calculation could not be determined.




                                               28
Funds to Close Were Not Properly Verified or Supported

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, the lender must verify
the source of funds (HUD Handbook 4155.1, paragraph 2-10B). All funds for the
borrower’s investment in the property were not properly verified. There was an
unexplained large deposit, and there was only one complete bank statement in the file to
support the assets claimed on the loan application.

Liabilities Listed on the Credit Report Were Not Listed on the Loan Application,
Mortgage Credit Analysis Worksheet, or the Automatic Underwriting System

The borrower’s liabilities should include all installment loans, revolving charge accounts,
real estate loans, and all other continuing obligations. In computing the debt to income
ratios, the lender must include all recurring charges extending 10 months or more. Debts
lasting less than 10 months must be counted if the amount of the debt affects the
borrower’s ability to make the mortgage payment during the months immediately after
loan closing (HUD Handbook 4155.1, paragraph 2-11A). The credit report of the
borrower showed a large debt ($10,207 with monthly payments of $664). Handwritten
notes on the credit report claim the debt was paid down to $6,600, making it less than 10
months. The debt was not listed on the loan application, mortgage credit analysis
worksheet, or the Automatic Underwriting System and, thus, was not considered a factor
in the loan analysis. However, there was no documentation to support the payoff down to
$6,600. Even if the debt were paid down to the 10-month mark, the required payments of
$664 per month would have increased the borrower’s total fixed payment to income ratio
to 65 percent and, thus, should have been included in the loan analysis.

Qualifying Ratios Were Not Properly Documented

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 (HUD Handbook 4155.1, paragraphs 2-12
and 2-13). Using the supportable income and supportable liabilities, the mortgage
payment to income ratio is 32 percent, and the total fixed payment to income is 65
percent with no compensating factors identified.




                                        29
Case number: 351-4565556

Mortgage amount: $66,200

Date of loan closing: March 10, 2004

Status: First legal action to commence foreclosure

Payments before first default reported: One

Unpaid principal balance: $65,958

Summary:

       Gateway 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 Determined

       Gateway 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). In this case, the
       buyer claimed to rent for four years at two different locations. The most current rental
       was claimed to be for 1.4 years, but the rental verification only supported six months at
       this location. The previously claimed rental had no support.




                                               30
Case number: 351-4293712

Mortgage amount: $114,050

Date of loan closing: October 4, 2002

Status: Delinquent

Payments before first default reported: Four

Unpaid principal balance: $111,977

Summary:

       Gateway did not obtain required documentation to approve the loan.

Pertinent Details:

       Required Documentation Was Not Obtained

       When delinquent accounts are revealed, the lender must document its analysis as to
       whether the late payments were based on a disregard for financial obligations, an inability
       to manage debt, or factors beyond the control of the borrower. While minor derogatory
       information occurring two or more years in the past does not require explanation, major
       indications of derogatory credit (including judgments, collections, and any other recent
       credit problems) require sufficient written explanation from the borrower (HUD
       Handbook 4155.1, paragraph 2-3). In this case, there were several late payments of more
       than 120 days for a revolving account. These late payments were made the same year as
       closing. Another account was past due several times less than a year before closing. In
       addition, there were other accounts that are now paid in full but had numerous past due
       statuses. There was nothing in the file from the mortgagor to explain any of the late
       payments.




                                               31
Case number: 351-4406694

Mortgage amount: $98,200

Date of loan closing: June 6, 2003

Status: Partial reinstatement

Payments before first default reported: Three

Unpaid principal balance: $96,428

Summary:

       Gateway did not obtain required documentation to approve the loan.

Pertinent Details:

       Required Documentation Was Not Obtained

       When delinquent accounts are revealed, the lender must document its analysis as to whether
       the late payments were based on a disregard for financial obligations, an inability to manage
       debt, or factors beyond the control of the borrower. While minor derogatory information
       occurring two or more years in the past does not require explanation, major indications of
       derogatory credit (including judgments, collections, and any other recent credit problems)
       require sufficient written explanation from the borrower (HUD Handbook 4155.1, paragraph
       2-3). There is no explanation in the file from the mortgagor explaining the more than 120-
       day late payment, which was made four months before closing.




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Case number: 351-4346794

Mortgage amount: $86,250

Date of loan closing: January 23, 2003

Status: Default – forbearance

Payments before first default reported: Five

Unpaid principal balance: $85,720

Summary:

       Gateway did not (1) determine whether overtime could be expected to continue, (2)
       properly document the borrower’s qualifying ratios, and (3) ensure documents were not
       accepted from an individual involved in the sale.

Pertinent Details:

       Overtime Income Was Used to Qualify without Determining Whether the Overtime
       Could Be Expected to Continue

       Both overtime and bonus income may be used to qualify if the borrower has received
       such income for the past two years and it is likely to continue. The lender must develop
       an average of bonus or overtime income for the past two years, and the employment
       verification must not state that such income is unlikely to continue. Periods of less than
       two years may be acceptable provided the lender justifies and documents in writing the
       reason for using the income for qualifying purposes (HUD Handbook 4155.1, paragraph
       2-7A). Only $3,290 monthly income was allowable out of the $3,885 monthly income
       claimed on the loan application because the $3,885 contained excessive overtime
       payments that could not be expected to continue. The overtime jumped significantly
       from one year to the next (approximately $3,793 one year to $18,624 the following year
       with the borrower working upward of 65 hours per week). Such an increase could not be
       guaranteed to continue.

       Qualifying Ratios Were Not Properly Documented

       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 (HUD Handbook 4155.1, paragraphs 2-12
       and 2-13). Using the supportable income, the recalculated total fixed payment to income
       ratio goes from 42 percent to 50 percent, which exceeds the HUD requirement of 41
       percent.




                                               33
Rental History Was Sent from the Realtor

HUD regulations strictly prohibit the lender from receiving documents from third party
participants (HUD Handbook 4155.1, paragraph 3-1). The rental payment history was
sent from the realtor.




                                       34
Case number: 351-4391207

Mortgage amount: $62,350

Date of loan closing: March 31, 2003

Status: Default - first legal action to commence foreclosure

Payments before first default reported: Three

Unpaid principal balance: $61,450

Summary:

       Gateway (1) accepted a gift letter that was faxed from the realtor and (2) did not verify
       the source of nontraditional credit provided from the buyer.

Pertinent Details:

       Gateway Accepted a Gift Letter Faxed from the Realtor and Did Not Verify the Deposit

       No document used in the processing or underwriting of a loan may be handled or
       transmitted by or through an interested third party to the transaction (e.g., real estate
       agents, builders, sellers) or by using its equipment (HUD Handbook 4155.1, paragraph 3-
       1). Gateway accepted a gift letter that was faxed from the realtor.

       Gateway Did Not Verify Nontraditional Credit Submitted with the Loan Package

       The lender must document that the providers of nontraditional credit exist and verify the
       credit information. To verify the credit information, lenders must use a published address or
       telephone number for that creditor (HUD Handbook 4155.1, paragraph 2-3). Gateway did
       not consider the nontraditional credit to be important in the overall acceptability of the loan
       and, thus, did not verify the existence of nontraditional creditors. OIG auditors were unable
       to re-verify the information.




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