oversight

City Bank - Puyallup, Washington, Branch Did Not Comply with HUD Requirements in the Origination of Insured Loans

Published by the Department of Housing and Urban Development, Office of Inspector General on 2005-09-16.

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

                                                                  Issue Date
                                                                         September 16, 2005
                                                                  Audit Report Number
                                                                          2005-SE-1007




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



FROM:      Joan S. Hobbs, Regional Inspector General for Audit, Region X, 0AGA

SUBJECT: City Bank – Puyallup, Washington, Branch Did Not Comply with HUD
         Requirements in the Origination of Insured Loans


                                   HIGHLIGHTS

 What We Audited and Why

            We audited City Bank’s Puyallup, Washington, branch office because it had one
            of the highest defaults to claim percentage for Department of Housing and Urban
            Development (HUD) approved lenders located within the state of Washington.
            Our primary audit objective was to determine whether City Bank’s Puyallup
            branch originated HUD insured loans in accordance with HUD requirements and
            prudent lending practices.

 What We Found

            City Bank’s Puyallup branch office (City Bank) did not originate 10 of the 24
            loans in our sample in accordance with HUD requirements or prudent lending
            practices. The 10 loans contained deficiencies that should have precluded their
            approval. These deficiencies included loans with excessive debt-to-income ratios
            and no valid compensating factors; lack of borrower income stability; improper
            source of funds verification, unacceptable borrower credit histories, and deficient
            appraisal reviews by the underwriter. We attributed these deficiencies to City
            Bank’s failure to use due care when originating the loans compounded by its
           failure to develop and implement an acceptable quality control plan. As a result,
           City Bank placed HUD’s Single Family Insurance Fund at risk for 10
           unacceptable loans with original mortgages totaling $ 1,525,007. Currently, HUD
           remains at risk or has incurred losses totaling $1,418,056 relating to these 10
           loans.

           We recommend that HUD take appropriate administrative action against City
           Bank as available under the Mortgage Review Board and/or other authority. At a
           minimum, this action should include seeking appropriate reimbursement and/or
           indemnification totaling $1,418,056 for the 10 loans that were improperly
           originated and underwritten, including $625 in loss mitigation costs related to one
           of the 10 loans.

           We further recommend that HUD take appropriate steps to ensure that City Bank
           performs quality control reviews and maintains its quality control plan in
           accordance with HUD requirements.

           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 provided City Bank a draft report on August 9, 2005, and held an exit
           conference with bank officials on August 19, 2005. City Bank provided written
           comments on August 25, 2005. Based on our evaluation of City Bank’s response
           to the draft report, substantial changes were made to the final report. The
           complete text of the auditee’s response, along with our evaluation of that
           response, can be found in appendix B of this report.




                                            2
                             TABLE OF CONTENTS

Background and Objectives                                                         4

Results of Audit
        Finding 1: City Bank Did Not Follow HUD Requirements or Prudent Lending   5
                   Practices When Originating HUD Insured Loans

Scope and Methodology                                                             12

Internal Controls                                                                 13

Appendixes
   A.   Schedule of Questioned Costs and Funds to Be Put to Better Use            14
   B.   Auditee Comments and OIG’s Evaluation                                     16
   C.   Schedule of Loan Deficiencies                                             29
   D.   Narrative Case Presentations                                              30




                                              3
              BACKGROUND AND OBJECTIVES

The National Housing Act, as amended, established the Federal Housing Administration,
an organizational unit within the U. S. Department of Housing and Urban Development,
(HUD). The Federal Housing Administration provides approved mortgage lenders with
insurance against losses on mortgage loans to qualifying homebuyers. The mortgage
insurance program is authorized under title II, section 203b, of the National Housing Act,
and is governed by regulations in 24 Code of Federal Regulations 203. Most loans are
insured under HUD’s direct endorsement program, which authorizes lenders to
underwrite and close loans without prior HUD review or approval.

City Bank’s main office in Mukilteo, Washington, was incorporated January 2, 1974, as a
state of Washington for-profit corporation. City Bank operates a branch office located in
Puyallup, Washington, which originates HUD-Federal Housing Administration,
Department of Veterans Affairs, and conventional mortgage loans for the purchase or
refinance of single-family properties.

The Puyallup branch office received its approval from HUD as a Title II supervised direct
endorsement lender on September 14, 1995. We reviewed the branch office’s loan
origination and quality control activities at the branch office located at 2708 East Main
Avenue, Puyallup, Washington 98372.

City Bank has not had a prior HUD Office of Inspector General (OIG) audit. However, it
has had three prior reviews by HUD’s Quality Assurance Division, and in two of those
prior reviews, quality control issues were identified.

From January 1, 2003, to December 31, 2004, City Bank originated 541 HUD insured
loans totaling $85,142,839 (13.5 percent of its total loan origination volume). Of these
541 loans, 478 with a total mortgage amount of $76,485,001 were originated by City
Bank’s Puyallup branch office.

The audit objectives were to determine whether City Bank complied with HUD
requirements when originating and underwriting Federal Housing Administration-insured
single-family mortgages, including implementation of a quality control plan as required
by HUD.




                                         4
                                       RESULTS OF AUDIT

Finding 1: City Bank Did Not Follow HUD Requirements or Prudent
Lending Practices When Originating HUD Insured Loans
City Bank’s Puyallup branch office (City Bank) did not comply with HUD requirements or
prudent lending practices in the origination of 10 of the 24 loans included in our review. These
10 loans, originally totaling $1,525,007, involved origination deficiencies that unnecessarily
increased HUD’s insurance risk. In this regard, HUD has paid insurance claims on three of these
loans1 and the remaining seven other loans totaling $1,068,997 remain at risk for losses. Further,
HUD has paid loss mitigation incentives totaling $625 on one of the improperly originated loans.
We attribute the problems identified to a failure of City Bank to use due care when originating
the loans compounded by its failure to develop and implement an acceptable quality control plan.



    HUD Requirements



         Federal regulations at 24 CFR [Code of Federal Regulations] 202.5(j)(4) require HUD-
         approved lenders, officers, directors, and employees to conform with generally accepted,
         prudent, and responsible lending practices. The specific requirements of HUD-insured
         loan originations are principally described in HUD Handbooks 4000.2, 4000.4, and
         4155.1, the Federal Housing Administration Single Family Homeownership Reference
         Guide, and various mortgagee letters.

         Additionally, HUD Handbook 4060.1,REV-1, CHG-1, paragraph 6-1, provides that as a
         condition of HUD-Federal Housing Administration approval, lenders must have and
         maintain a quality control plan for the origination and servicing of insured mortgages.
         The quality control plan must be a prescribed function of the lender’s operation and
         assure that the lender maintains compliance with HUD requirements as well as
         complying with its own policies and procedures.




1
 In regard to the three claims, HUD has resold one of the involved properties for a net loss of $25,430 and has paid
claims totaling $323,004 for the other two properties which have not yet been resold (see Appendix A for details).

                                                         5
City Bank Originated HUD
Loans with Serious
Underwriting Deficiencies


      We reviewed a total of 24 HUD loans that were originated and underwritten by City
      Bank that had gone into default and/or were given poor mortgage credit or appraisal
      ratings during post endorsement reviews by the Santa Ana Homeownership Center’s
      Processing and Underwriting Division. For 10 of the 24 loans reviewed, City Bank did
      not adhere to prudent lending practices or comply with HUD origination and insurance
      requirements during its origination and underwriting of the loans (see Appendix C for a
      summary of these deficiencies and Appendix D for specific details related to each loan).
      As discussed below, we have categorized the deficiencies noted into five categories:
      excessive debt ratios; borrower income (stability) issues; improperly verified source of
      funds; inadequate borrower credit evaluations; and poor underwriter appraisal reviews.
      These deficiencies in the origination and underwriting process significantly and adversely
      affected HUD’s insurance risk.


 Excessive Debt Ratios with
 Manually Underwritten Loans
 (Three Cases)

      HUD Handbook 4155.1, REV-4, paragraphs 2-12 and 2-13, specify acceptable
      parameters for debt ratios in the absence of what HUD refers to as “compensating
      factors” for loans that are manually underwritten by the lender (as opposed to loans in
      which an automated underwriting system is used). The handbook states that the ratio of
      the total mortgage payment to effective income (front ratio) may not exceed 29 percent
      and the ratio of total fixed payments to effective income (back ratio) may not exceed 41
      percent unless significant and valid compensating factors are provided.

      In three of the loans we reviewed, City Bank failed to provide valid compensating factors
      when debt-to-income ratios exceeded HUD requirements. In these three instances it
      provided either compensating factors that were invalid or highly questionable or simply
      failed to provide compensating factors that, based upon the circumstances, were required
      for loan approval.

      In one case, (561-7730040) the claimed compensating factor was additional income from
      a non-qualifying spouse who had recently been discharged from bankruptcy. In this
      instance, the recent bankruptcy brings into question the validity of this income as a
      compensating factor.

      In another case (561-7186849), even though the original file documentation showed a
      back ratio or 46.43 percent, no valid compensating factors were provided by the lender to
      justify loan approval.

                                              6
Income (Stability) Issues Not
Resolved (Five Cases)


      HUD Handbooks 4155.1, REV-4, CHG-1, paragraph 2-6 and 2-7A, and 4155.1, REV-5,
      require lenders to analyze and document the probability of borrowers’ continued
      employment. Lenders must also examine the borrower’s past employment record,
      qualifications for the position, previous training and education, and the employer’s
      confirmation of continued employment. In doing this, the lender must verify the
      borrower’s employment for the most recent two full years.

      In five cases, City Bank failed to verify that the borrowers had maintained full-time
      employment between the time of application and approval of the loan, failed to require
      support for borrowers’ explanations for lengthy periods of unemployment, or failed to
      provide documentation that fully supported the amount of gross income that was used to
      qualify the borrowers.

      In one case (561-7703080), the borrower’s pay stubs did not demonstrate full-time
      employment. A note in the file stated that the borrower took time off work because a
      close friend passed away. The event supposedly occurred at the end of November 2002.
      However, pay stubs in the file indicated that the borrower was only working part time
      into December. Although the loan did not close until January 31, 2003, no attempt was
      made to supplement the pay stubs before the end of January 2003 to ensure that the
      borrower was actually working full time.

      In another case (561-7730040), City Bank based the borrower’s income on 20 prior
      months during 2001 and part of 2002. The lender stated that only 20 months were used
      because the borrower had been off work for four months during the period due to an on-
      the-job injury. However, there was no evidence in the file that the borrower was disabled
      for four months. Further, there was conflicting information in the file as to whether the
      borrower was self-employed or an employee.

      In a third case (561-7513076), income used to qualify the borrower was $5,124 per
      month. While the borrower’s two previous years’ income supported this computation,
      the year-to-date income on the borrower’s current pay stubs supported only $3,721 per
      month. This actual current income resulted in front and back ratios of 36.67 percent and
      47.63 percent, respectively. No compensating factors existed to warrant approval of the
      loan with these ratios.

  Source of Funds Not Properly
  Verified (Two Cases)


      HUD Handbook 4155.1, REV-4, CHG-1, paragraph 2-10, and HUD Handbook 4155.1,
      REV-5, paragraph 2-10, require the lender to verify all funds used for the borrower’s



                                              7
     investment in the property. The funds may come from the borrower’s savings or
     checking account, but if there is a large increase in an account, the lender must obtain an
     explanation and evidence of the source of funds. Interested third parties are not allowed
     to provide funds toward the borrower’s minimum required investment. In two cases City
     Bank failed to verify sources of funds in accordance with these HUD requirements.

     For example, in case 561-7186849, the mortgage credit analysis worksheet showed that
     the borrower had $5,838 in assets available. The document used to support this was an
     automated teller machine slip. The slip did not show the borrower’s name or account
     number. Also, the last four digits of the card number shown on the slip did not match the
     card numbers for the borrower’s other automated teller machine slips in the file. In
     accordance with Mortgagee Letter 97-26, use of automated teller machine slips is not an
     acceptable form of verification as, “These procedures do not permit asset verification by
     the use of automated teller machine slips. While slips may have some limited use as
     ‘snapshots’ of cash assets, they are insufficient in and of themselves for verifying both
     assets and that improperly borrowed funds are not being used for the cash investment.”

     In this same case, there was a copy of a cashier’s check in the file for $2,500. The
     borrower wrote the following note on the copy of the check: “To whom it may concern,
     this cashier’s check was given to me for work done on my mother’s house – she does not
     wish to sign any documents stating so.” Without a signed statement from the mother, the
     actual source of funds is questionable. Further, there was no evidence that the donor had
     the capacity to gift the funds and that the funds were transferred from the donor’s account
     to the borrower in accordance with HUD requirements.


Inadequate Credit Evaluations
(Eight Cases)


     HUD Handbook 4155.1, REV-4, CHG-1, paragraph 2-3, and HUD Handbook 4155.1,
     REV-5, paragraph 2-3, state that the most useful guide in determining a borrower’s
     attitude toward credit obligations is past credit performance. These handbooks require
     lenders to provide strong offsetting factors to approve loans when borrowers’ credit
     histories reflect continuous slow payments, judgments, and delinquent accounts, despite
     adequate income to support the obligations. Accordingly, sufficiency of income is not
     considered a valid compensating factor for a negative credit history.

     In eight cases, there were deficiencies in City Bank’s evaluation of borrowers’ credit
     histories. The credit histories of the borrower(s) demonstrated significant disregard
     toward credit obligations that should have precluded their loan approval. Credit reports
     on these borrowers included adverse information such as bankruptcies, poor credit
     ratings, and numerous charge-off or collection accounts. In some cases, City Bank
     obtained letters of explanation from the borrowers. However, many of these letters were
     not signed by the borrower, did not make logical sense, or were inconsistent with the
     credit histories themselves. Further, without signed letters of explanation, there was no



                                              8
     assurance as to the validity of the letters or whether the borrowers composed and agreed
     with the letters’ content.

     One example where City Bank did not evaluate significant credit factors in a prudent
     manner was case 561-7730040. In this instance, information submitted with the
     borrower’s rental verification identified several recent late rental payments and related
     charges. This included a November 2002 late payment for October 2002 ($45 late fee
     plus a $75 attorney fee) and January 2003 late payment fees ($45 late fee plus $75
     attorney fee). Additionally, in February 2003 it appears there was a rental related
     judgment and writ with a sheriff’s fee of $250. Such a rent history evidenced a lack of
     concern for one of the borrower’s most elementary needs, the need for housing. In
     addition, the loan was closed on March 16, 2003, but the borrower’s spouse had been
     discharged from Chapter 7 bankruptcy in February 2003, and had two unsatisfied
     judgments at the time of closing. Since the spouse signed the deed of trust she would
     have an interest in the subject property and the outstanding judgments could become liens
     on the subject property because of her interest.

Poor Appraisal Reviews (Three
Cases)


     The lender is responsible for obtaining and reviewing independent property appraisals for
     all HUD insured loans. In addition to the standard appraisal requirements, in the case of
     a manufactured home, the lender must supplement the appraisal with an engineer’s
     certification that the mobile home complies not only with the appraisal and architectural
     requirements of HUD Handbooks 4145.1 REV-2 and 4150.2 CHG-1, but also with the
     additional requirements of HUD Handbook 4930.3G, Permanent Foundation Guide for
     Manufactured Housing. However, those hired to provide the appraisals and certifications
     are agents of the lender, and it is the lender’s responsibility to appropriately review their
     appraisals, inspections and certifications, being vigilant for red flags that could indicate
     problems that could affect the properties’ eligibility.

     In three cases, City Bank’s underwriter did not properly review the appraisal and related
     documents. In these cases, the underwriter did not always ensure that property
     requirements necessary for HUD insurance were met; allowed appraisers to use
     comparables that were higher than the market and did not properly reflect necessary
     adjustments; and did not obtain adequate explanations for large short-term gains in
     property values.

     In one example, case (561-7953910), the property being purchased was a manufactured
     home. The engineer’s report relating to the manufactured home’s rear deck and overhang
     stated that the rear deck and overhang “are not self-supporting.” This was a red flag that
     should have been resolved, but the reporting format did not lend itself to identifying the
     problem so it could be identified and resolved during the underwriting process.
     Properties with this type of uncorrected problem are not eligible for HUD insurance.




                                               9
Effective Quality Control Plan
Not Implemented


     The deficiencies in City Bank’s loan origination process discussed above went
     undetected and uncorrected in part because of its failure to implement an effective quality
     control plan. Under HUD’s single-family direct endorsement program, a mortgage loan
     is underwritten and closed without prior review or approval by HUD. Therefore, it is
     imperative that lenders have a fully implemented quality control plan that meets HUD
     requirements. Without a complete and fully implemented quality control plan, City Bank
     was unable to ensure the accuracy, validity, and completeness of its HUD loan
     origination activities.

     Although City Bank did have a quality control plan in place at the start of our audit, it did
     not contain the basic elements required by HUD. Further, for a five-month period ending
     just prior to the start of our audit, City Bank did not conduct any quality control reviews, as
     its quality control reviewer position was vacant. City Bank did fill the quality control
     reviewer position in January 2005, and once the deficiencies in its quality control system
     were brought to management’s attention during our audit, steps were taken to bring the plan
     into compliance with HUD requirements. However, it should be noted that problems with
     its quality control procedures are not new. Two previous reviews by HUD’s Quality
     Assurance Division identified continuing problems with City Bank’s quality control
     procedures. Because of these continuing problems with City Bank’s implementation of an
     acceptable quality control plan, HUD should take additional steps to ensure that it’s plan
     continues to be implemented and meets HUD requirements.

Conclusion


     City Bank disregarded HUD requirements when originating and underwriting 10 HUD
     insured loans. It did not exercise the care expected of a prudent lender and improperly
     approved the loans even though they contained excessive debt-to-income ratios;
     unresolved income issues; improperly verified sources of funds; borrowers with poor
     credit histories; or unacceptable appraisals. City Bank did not identify and correct these
     origination deficiencies as it had not developed and implemented an effective quality
     control plan to monitor its origination process.




                                               10
Recommendations


    We recommend that HUD’s Assistant Secretary for Housing – Federal Housing
    Commissioner

    1A.   Seek reimbursement and/or indemnification for HUD’s actual and potential losses
          on the 10 loans detailed in appendix A, totaling $1,418,056.

    1B.   Require City Bank to provide copies of its quality control reviews to HUD for an
          appropriate length of time to allow HUD to verify that its quality control plan has
          been fully implemented and meets HUD requirements.




                                           11
                            SCOPE AND METHODOLOGY

City Bank’s Puyallup, Washington, branch office was selected for review because it had one of
the highest defaults to claim percentage for HUD approved lenders located within the state of
Washington.

Using the early warnings capability of HUD’s Neighborhood Watch system, we selected a non-
representative sample of 24 loans from a listing of 541 loans originated by City Bank’s Puyallup,
Washington, branch during the period January 1, 2003, through December 31, 2004.

To accomplish our objectives, we
   o Reviewed relevant HUD rules, regulations, and guidance.
   o Reviewed past reviews that had been conducted by HUD’s Quality Assurance Division.
   o Reviewed City Bank and HUD case files for the 24 sampled loans.
   o Interviewed applicable City Bank and HUD officials.
   o Interviewed borrowers and gift donors as necessary.
   o Interviewed applicable City Bank employees.

We relied upon computer-processed data contained in HUD’s Neighborhood Watch and Single
Family Data Warehouse systems. The reliability of the data in the Single Family Data
Warehouse system has been assessed by an independent contractor and the HUD OIG and has
been found to be adequate. The assessment included relevant general and application controls.
Since the data in HUD’s Neighborhood Watch system are derived from the Single Family Data
Warehouse system, the data in both systems were considered sufficiently reliable to be used in
meeting our objectives. During the audit, we did not note discrepancies between information in
the 24 loan files and the data in these two automated HUD systems.

The audit fieldwork was performed between January 13 and May 31, 2005. The audit was
conducted in accordance with generally accepted government auditing standards.




                                               12
                             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:

              •       Underwriting - Policies and procedures that City Bank has in place to
                      reasonably ensure that its loan underwriting process complies with Federal
                      Housing Administration program requirements.

              •       Quality control - The system of quality control that City Bank has defined
                      and implemented and whether it complies with HUD requirements.

              We assessed the relevant controls identified above.

              A significant weakness exists if management controls do not provide reasonable
              assurance that the process for planning, organizing, directing, and controlling
              program operations will meet the organization’s objectives

 Significant Weaknesses


              Based on our review, we believe the following items are significant weaknesses:

              •       The loan origination process.
              •       The quality control process.




                                               13
                                        APPENDIXES

Appendix A

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

 Recommendation             Ineligible 1/          Unsupported 2/          Funds to be put to
     number                                                                  better use 3/
         1A                   $26,055                $323,004                  $1,068,997


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

2/     Unsupported costs are those costs charged to a HUD-financed or HUD-insured program
       or activity when an eligibility determination cannot be made at the time of the audit. A
       legal opinion or administrative determination may be needed on these costs.

3/     “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 reductions in outlays, deobligation of funds,
       withdrawal of interest, costs not incurred, avoidance of unnecessary expenditures, loans
       and guarantees not made, and other savings.

The table on the next page details the ineligible, unsupported, and funds to be put to better use
amounts listed above.




                                                14
Appendix A (continued)

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



                                       Net loss (ineligible)                Claim paid        Indemnification
Loan          HUD case #                                                     property             amount
file #                                                                     not yet resold
                               Net claim after      Loss mitigation                            (funds put to)
                               property resale        incentives          (unsupported)         (better use)
     1       561-77030802/                          $       625                                  $ 143,451
     2        561-7730040                                                    $143,659              Claim
     3        561-7906831                                                                         165,124
     4        561-7651322                                                                         150,472
      5       561-7833987                                                                         115,406
      6       561-7809560          $ 25,430                                                        Claim
      7       561-7871154                                                                         185,045
      8       561-7953910                                                                         148,223
      9       561-7513076                                                                         61,2763/
     10       561-7186849                                                    179,3453/             Claim

                     Totals        $ 25,430               $625

               Grand totals
                                              $ 26,055                       $ 323,004          $ 1,068,997

          Total of sanctions
             recommended                                            $ 1,418,056




2
    / This case is recommended for reimbursement of actual losses and indemnification.
3
    / These two loans’ indemnifiable balances are based upon the outstanding loan balance of the most recent non-
       credit qualifying refinance on each of the respective original loans that were not eligible when they were initially
       endorsed for HUD mortgage insurance.


                                                               15
Appendix B

        AUDITEE COMMENTS AND OIG’S EVALUATION


Ref to OIG Evaluation   Auditee Comments




                         16
Comment 1




            17
Comment 1




            18
19
Comment 2




            20
Comment 3




            21
Comment 4




            22
Comment 5




            23
Comment 6




            24
Comment 7




            25
                         OIG Evaluation of Auditee Comments

Comment 1   Although we continue to have concerns with the documentation maintained by
            City Bank to support the legitimacy of gift funds provided by non-profit
            organizations, based upon additional documentation provided, we have revised
            our report and eliminated this subject as a reportable underwriting deficiency.
            However, City Bank needs to ensure that in the future documentation required by
            Mortgagee Letter 2004-28 and HUD Handbook 4155.1 REV-5, paragraph 2-10,
            including documentation of the wire transfers of gift funds, is obtained and
            maintained. Such documentation is necessary to verify that the gift funds are
            actually received from the nonprofit donor and not from an unacceptable third
            party, such as the property seller.

Comment 2   Case number 561-7906831

            Debt Ratios/Income Issues

            We concur with City Bank’s comments related to income issues and have
            adjusted our report accordingly. However, we do not agree that qualifying ratios
            of 31.0 and 44.7 are acceptable without valid compensating factors, which were
            not present for this loan. In this regard, the property being purchased was not an
            energy efficient home as claimed by City Bank. Additionally, this was a one-year
            adjustable rate mortgage. As such, the lender is required to document and justify
            how the borrower(s) will meet their future obligations as payments increase under
            this type of mortgage. This was not addressed during the underwriting process.

            Inadequate Credit Evaluation

            We concur with City Bank’s comments related to verification of rent through a
            credit report supplement and the fact that the derogatory credit discussed in our
            draft report was more than two years old. Our report has been revised
            accordingly, removing discussion of these items. However, the borrower’s credit
            file for the 90 days preceding the credit report date contained eight credit inquiries
            that were unexplained by the borrower. HUD requires lenders to obtain
            borrowers’ written explanation for all inquiries shown on the credit report in the
            last 90 days.

Comment 3   Case number 561-7693900

            Additional information provided by City Bank resolved concerns we had relating
            to this loan and we have removed it from our report.

Comment 4   Case number 561-7651339

            Additional information provided by City Bank resolved concerns we had relating
            to this loan and we have removed it from our report. However, in the future, City

                                             26
            Bank needs to ensure that its loan files are appropriately documented when it
            accepts a transfer of an insured loan application from another HUD approved
            lender.

Comment 5   Case number 561- 7809560

            Income Issues

            City Bank’s response and additional documentation provided resolved our
            concerns related to borrower income for this case. Accordingly, the issue has
            been removed from our final report.

            Inadequate Credit Evaluation

            City Bank did not specifically address our concern regarding inadequate credit
            evaluation other than stating that seven of the ten debts on the borrower’s credit
            report were originated prior to her husband leaving her. However, this does not
            address the fact that the borrower had credit problems that occurred after her
            divorce and which were not addressed during loan processing. This included
            unpaid phone bills, a collection account for an unexpired lease, and non-sufficient
            funds checks. Additionally, a significant part of the credit card debt included in
            the bankruptcy was incurred after her divorce. City Bank had previously claimed
            that, based upon the opening dates of the accounts, these debts were incurred prior
            to the divorce. However, although the accounts were opened prior to the divorce,
            much of the activity resulting in the account balances included in the bankruptcy
            took place after the divorce.

            Poor Appraisal Review

            We do not concur with City Bank’s claim that the property’s appraised value was
            not overstated. There were numerous indicators that the appraised value
            ($166,000) was overstated including documentation in the file showing that the
            predominate sales price for similar properties in the area was $155,000 and the
            fact that the real estate agent’s commission was based upon $157,000, not the
            $166,000 sales price as would be typical. It should also be noted that the seller
            provided over $10,000 of incentives to the borrower as an inducement to purchase
            the property. This included over $5,000 passed through a nonprofit to provide the
            borrower’s downpayment and over $5,000 for the borrower’s closing costs. All
            these indicators should have led City Bank to question the legitimacy of the
            appraised value and obtain additional information to validate the value provided.
            This was not done.




                                            27
Comment 6   Case number 561-7953910

            Income Issues

            We agree with City Bank that a rental income history would not have been
            available for the borrowers’ current residence (which was to be leased when they
            moved to their new residence). However, a valid lease agreement needed to be
            obtained and used to determine the affect that such a rental property would have
            on the borrower’s income and expenses. Although a prospective lease and
            purported existing lease were in the loan file, their validity was questionable as
            neither were signed by the landlord (the borrowers) and the purported renters
            signed on the landlord’s signature line. This discrepancy should have been
            resolved, and if it could not, then the outlay for that residence should have been
            handled as strictly an expense/liability, with no income implications. City Bank
            admits that it should have obtained (but did not) a copy of the borrowers’ income
            tax return(s) to support any claimed income from the earliest leave and to
            document related expenses of the other rental property. Since the income and
            expenses related to these rental properties was not properly resolved, the income
            of the borrowers’ was not calculated and supported in accordance with HUD
            requirements (reference HUD Handbook 4155.1 paragraph 2-7 M).

            Source of Funds Not Properly Verified

            We concur with City Bank’s response to this item and have removed it from our
            final report.

Comment 7   Case number 561-7239226

            We agree with City Bank’s response and have removed this case from our final
            report.




                                            28
Appendix C

             SCHEDULE OF LOAN DEFICIENCIES



                             Income          Source of
                 Excessive    issues         funds not   Inadequate      Poor
       Loan      debt           not          properly       credit     appraisal
      number     ratios      resolved         verified    evaluation    review
    561-7703080                  X                            X
    561-7730040       X          X                            X
    561-7906831       X                                       X
    561-7651322                                               X           X
    561-7833987                                 X
    561-7809560                                              X            X
    561-7871154                                              X
    561-7953910                 X                                         X
    561-7513076                 X                            X
    561-7186849       X         X               X            X
          Totals      3         5               2            8            3




                                        29
Appendix D
                    NARRATIVE CASE SUMMARIES

    Case number                         561-7703080
    Loan amount                         $145,713
    Settlement date                     February 1, 2003
    Endorsement date                    March 13, 2003
    Status as of June 1, 2005           Current

    City Bank underwrote and approved the mortgage despite evidence of income instability,
    and unexplained inquiries shown on the borrower’s credit report within 90 days of
    closing. Therefore, HUD insured the loan based on City Bank’s inaccurate representation
    that the borrower met HUD qualifying guidelines.

    Income Issues
    HUD Handbook 4155.1, REV-4, CHG-1, paragraphs 2-6 and 2-7. The borrower’s
    pay stubs did not demonstrate full-time employment. A note in the file stated that the
    borrower took time off work because a close friend passed away. The event supposedly
    occurred at the end of November 2002. However, pay stubs in the file indicated that the
    borrower was only working part time in December 2002. Although the loan did not close
    until January 31, 2003, no attempt was made to obtain supplemental pay stubs in January
    2003 to ensure that the borrower was actually working full time.

    Inadequate Credit Evaluation
    HUD Handbook 4155.1, REV-4, CHG-1, paragraphs 2-3, 2-4. There were three
    inquiries on the borrower’s credit report within 90 days of closing. However, the lender
    did not obtain an explanation for these three inquiries as mandated by HUD requirements.

    Recommendations
      ƒ Indemnify HUD for the mortgage amount of $145,713.
      ƒ Reimburse HUD $625 for the loss mitigation incentives paid on this loan.




                                           30
             NARRATIVE CASE PRESENTATION


Case number                           561-7730040
Loan amount                           $143,659
Settlement date                       March 14, 2003
Endorsement date                      March 24, 2003
Status as of June 1, 2005             Claim

City Bank underwrote and approved the mortgage despite high qualifying ratios and a
lack of valid compensating factors, income stability issues, and a pattern of delinquency
shown on the borrower’s verification of rent. Therefore, HUD insured the loan based on
City Bank’s inaccurate representation that the borrower met HUD qualifying guidelines.

Excessive Debt Ratios
HUD Handbook 4155.1, REV-4, CHG-1, paragraphs 2-12, 2-13; HUD
Homeownership Center Reference Guide, paragraph 2-12; HUD Mortgagee Letter
97-26. Compensating factors used by the underwriter on the mortgage credit analysis
worksheet to support excessive debt ratios were not all valid. The only valid
compensating factor was the income of the borrower’s non-purchasing spouse (tempered
by her recent bankruptcy). This was not sufficient to offset the borrower’s front and back
ratios of 33.4 percent and 43.1 percent.

Additionally, the loan origination file contained a copy of a check to the borrower from
the involved realtor for $1,200, which stated for “loan” on the lower left hand corner of
the check. This was not addressed by City Bank. If it was a loan, the liability should
have been disclosed and considered when calculating debt-to-income ratios. Also, the
check indicated that the borrower was also known by another name. No name affidavit
was in the file to address this inconsistency.

Income Issues
HUD Handbook 4155.1, REV-4, CHG-1, paragraphs 2-6 and 2-7.
City Bank based the borrower’s income on 20 prior months during 2001 and part of 2002.
The lender stated that only 20 months were used because the borrower had been off work
for four months during the period due to an on-the-job injury. However, there was no
evidence in the file that the borrower was disabled for four months.

Additionally, the final loan application, dated March 14, 2003, stated that the borrower
had been working at a business he owned for the past five years. However, there was a
worker’s compensation claim form for the borrower in the file, dated June 14, 2002,
which stated that he had been working at a company with a similar name for the past four
years and that he was not an owner, partner, corporate officer, shareholder, or director of
that company. The borrower’s tax return did not show the name or address of the
company he claimed to own. City Bank did not resolve this inconsistency between his


                                        31
being an owner or employee of the company.

Inadequate Credit Evaluation

HUD Handbook 4155.1, REV-4, CHG-1, paragraphs 2-3, 2-4. Information submitted
with the borrower’s rental verification identified several recent late rental payments and
related charges. This included a November 2002 late payment for October 2002 ( plus a
$45 late fee and a $75 attorney fee) and January 2003 late payment fees ($45 late fee plus
$75 attorney fee). Additionally, in February 2003 it appears there was a rental related
judgment and writ with a sheriff’s fee of $250. Such a rent history evidenced a lack of
concern for one of the borrower’s most elementary needs, the need for housing. In
addition, the loan was closed on March 16, 2003, but the borrower’s spouse had been
discharged from Chapter 7 bankruptcy in February 2003, and had two unsatisfied
judgments at the time of closing. Since the spouse signed the deed of trust she would
have an interest in the subject property and the outstanding judgments could become liens
on the subject property because of her interest.

Recommendation
   ƒ Reimburse HUD for any losses incurred when the property is resold. The amount
     of the claim and expenses to date is $143,659.




                                        32
             NARRATIVE CASE PRESENTATION

Case number                           561-7906831
Loan amount                           $165,124
Settlement date                       August 29, 2003
Endorsement date                      September 18, 2003
Status as of June 1, 2005             In default

City Bank underwrote and approved the mortgage despite excessive debt ratios without
valid compensating factors and a lack of explanation for recent credit inquiries.
Therefore, HUD insured the loan based on City Bank’s inaccurate representation that the
borrower met HUD qualifying guidelines.

Excessive Debt Ratios
HUD Handbook 4155.1, REV-4, CHG-1, paragraphs 2-12 and 2-13; HUD
Homeownership Center Reference Guide, paragraph 2-12; HUD Mortgagee Letter
97-26. This loan was approved with qualifying ratios, 31.0 and 44.7, that exceeded HUD
guidelines (29/41) without valid compensating factors. Additionally, this was a one-year
adjustable rate mortgage. As such, the lender is required to document and justify how the
borrower(s) will meet their future obligations as payments increase under this type of
mortgage. This was not addressed during the underwriting process.

Inadequate Credit Evaluation
HUD Handbook 4155.1, REV-4, CHG-1, paragraphs 2-3, 2-4. The borrower’s credit
file for the 90 days preceding the credit report date contained eight credit inquiries that
were not explained by the borrower. HUD requires lenders to obtain borrowers’ written
explanation for all inquiries shown on the credit report in the last 90 days.

Recommendation
   ƒ Indemnify HUD for the mortgage amount of $165,124.




                                         33
         NARRATIVE CASE PRESENTATION

Case number                          561-7651322
Loan amount                          $150,472
Settlement date                      January 1, 2003
Endorsement date                     January 14, 2003
Status as of June 1, 2005            Current

City Bank underwrote and approved the mortgage without addressing the significant
payment shock resulting from the borrower’s increased housing cost or performing
limited denial of participation/General Service Administration checks on all individuals
and companies involved in the transaction. Further, there were indications that the
appraisal may have resulted in the overvaluation of the property . Therefore, HUD
insured the loan based on City Bank’s inaccurate representation that the borrower and the
property met HUD qualifying guidelines.

Inadequate Credit Evaluation
HUD Handbook 4155.1, REV-4, CHG-1, paragraphs 2-3, 2-4. The borrower
indicated that at the time of his loan application he was living at home and not paying any
rent. Therefore, the borrower went from zero rent to a monthly housing payment of
$1,237, which could have resulted in a major payment shock to the borrower. This was
even more significant as information in the file evidenced that the borrower had a pattern
of apparent disregard for, or an inability to manage, his financial obligations. These
matters were not addressed by the underwriter as required by HUD.

There was no indication in the file that the required limited denial of participation,
suspension, or debarment check was performed on the realtor, construction company, or
escrow company involved in this transaction.

Poor Appraisal Review
HUD Handbook 4150.2, CHG-1, “Valuation Analysis for Home Mortgage Insurance
for Single-Family One to Four Unit Dwellings – MANUFACTURED HOMES.”
Although there were two comparables used in the appraisal that were very similar to the
subject property and only 0.2 miles away, the appraiser based his value on a higher priced
property located a mile from the subject property. The underwriter commented in her
appraisal review that the appraisal was good because the “appraiser took high end of
comps as value.” In our opinion, based upon the value and minimal required adjustments
of the closer, more comparable properties, the subject property was overvalued by
approximately $10,000.

Recommendation
   ƒ Indemnify HUD for the mortgage amount of $150,472.



                                        34
   ƒ NARRATIVE CASE PRESENTATION

Case number                          561-7833987
Loan amount                          $115,406
Settlement date                      June 24,2003
Endorsement date                     August 7, 2003
Status as of June 1, 2005            Current


City Bank underwrote and approved the mortgage despite the fact the borrowers’ source
of funds used for down payment and closing costs was not verified. Additionally, the co-
borrower listed her name two different ways and there was no name acknowledgement in
the file addressing this discrepancy. Therefore, HUD insured the loan based on City
Bank’s inaccurate representation that the borrower met HUD qualifying guidelines.

Source of Funds Not Properly Verified
HUD Handbook 4155.1, REV-4, CHG-1, paragraph 2-10. There was no
documentation in the loan file evidencing that the gift donor had the capacity to provide
the $3,450 gift to the borrowers or that the funds came directly from the donor to the
borrower. These gift funds were approximately 96 percent of the borrowers’ minimum
required investment.

Recommendation
   ƒ Indemnify HUD for the mortgage amount of $115,406.




                                        35
            NARRATIVE CASE PRESENTATION

Case number                          561-7809560
Loan amount                          $25,430
Settlement date                      June 6, 2003
Endorsement date                     June 17, 2003
Status as of June 1, 2005            Claim

City Bank failed to properly address bankrupycy and other derogatory borrower credit
issues. There were also indications that the appraisal may have been inflated which was
not addressed by the underwriter. Therefore, HUD insured the loan based on City Bank’s
inaccurate representation that the borrower and the property met HUD qualifying
guidelines.

Inadequate Credit Evaluation
HUD Handbook 4155.1, REV-4, CHG-1, paragraphs 2-3, 2-4. The borrower stated
that her bankruptcy was mainly due to her husband leaving her; however, the Chapter 7
bankruptcy documents showed that many of the borrower’s debts were incurred after the
divorce.

The borrower’s name was misspelled when conducting the excluded parties system check
and as a result her clearance was not valid. In addition, there was no documentation in
the loan file verifying that the seller, who was the administrator of the estate that was
handling the property sale, was checked against the excluded parties system.

Poor Appraisal Review
HUD Handbook 4150.2, CHG-1, “Valuation Analysis for Home Mortgage Insurance
for Single-Family One to Four Unit Dwellings.” There were indications that the
property’s $166,000 appraised value was inflated. Specifically, the real estate agent’s
commission was based on a lower dollar amount ($157,000) and other documentation in
the file showed that the predominant sale price in the area was approximately $155,000.
Additionally, the appraisal showed that in September 2000, the subject property sold for
$125,700. Thus, over a three-year period, there was a relatively rapid increase in value
($40,000), which, per HUD requirements should have been explained by the appraiser.
These items should have been, but were not, addressed and resolved by the underwriter
during the appraisal review.

Recommendation
   ƒ Reimburse HUD for the loss of $25,430.




                                       36
            ƒ
                       NARRATIVE CASE PRESENTATION

        Case number                       561-7871154
        Loan amount                       $185,045
        Settlement date                   August 1, 2003
        Endorsement date                  September 26, 2003
        Status as of June 1, 2005         Claim 3

        City Bank underwrote and approved the mortgage without obtaining documentation
        evidencing that the borrower received permission from the Chapter 13 bankruptcy court
        to accrue an additional mortgage liability and without specific mention of a discharge of
        the bankruptcty. In addition, there was no borrower explanation in the file for the eight
        recent credit inquiries shown on the credit report. Therefore, HUD insured the loan based
        on City Bank’s inaccurate representation that the borrower met HUD qualifying
        guidelines.

        Inadequate Credit Evaluation
        HUD Handbook 4155.1, REV-4, CHG-1, paragraphs 2-3, 2-4. There was no evidence
        in the file documenting that the borrower obtained the permission of the Chapter 13
        bankruptcy court to accrue an additional mortgage liability. Also, there was no specific
        mention in the file of a discharge of the bankruptcy by the court. Finally, there were
        eight credit inquiries on the credit report that were not explained by the borrower.

        Recommendation
           ƒ Indemnify HUD for the mortgage amount of $185,045.




3
  Gross claim paid by HUD was $185,045. This claim was handled under the accelerated claim disposition
program.

                                                     37
   ƒ NARRATIVE CASE PRESENTATION

Case number                         561-7953910
Loan amount                         $148,223
Settlement date                     December 19, 2003
Endorsement date                    January 15, 2004
Status as of June 1, 2005           Current

City Bank underwrote and approved the mortgage despite unsupported income
computations and a poor appraisal review. Therefore, HUD insured the loan based on
City Bank’s inaccurate representation that the borrower and the property met HUD
qualifying guidelines.

Income Issues
HUD Handbooks 4155.1, REV-4, CHG-1, paragraphs 2-6, 2-7, 2-12, and 2-13;
Mortgagee Letter 97-26; and HUD Homeownership Center Reference Guide,
paragraph 2-12. Both the borrower and the co-borrower contended that they had rental
income. However, there were no tax returns or copies of rental receipts and deposits to
support such rental income. City Bank handled the claimed rental income as an offset
against related mortgage payments. This method of income and offsets does not meet
HUD requirements and accordingly, without additional documentation, the net effect of
the rental properties on the borrowers’ incomes cannot be determined. Thus, the
borrowers’ qualifying income to debt ratio is not supported.

Poor Appraisal Review
HUD Handbook 4150.2, CHG-1, “Valuation Analysis for Home Mortgage Insurance
for Single-Family One to Four Unit Dwellings.” The property being purchased was a
manufactured home. The engineer’s report relating to the manufactured home’s rear
deck and overhang stated that the rear deck and overhang “are not self-supporting.” This
was a red flag that should have been addressed, but the reporting format did not lend
itself to identifying the problem so it could be identified and resolved during the
underwriting process. Properties with this type of uncorrected problem are not eligible
for HUD insurance.

Recommendation
   ƒ Indemnify HUD for the mortgage amount of $148,223.




                                       38
                  NARRATIVE CASE PRESENTATION

     Case number                            561-7513076
     Loan amount                            $161,276
     Settlement date                        April 22, 2002
     Endorsement date                       May 8, 2002
     Status as of June 1, 2005              Active (refinanced under case 561-7718873)

     City Bank underwrote and approved the mortgage despite unsupported income that
     significantly affected the qualifying ratios. In addition, the underwriter did not address
     the borrowers’ lack of sufficient resources to withstand a substantial increase in monthly
     housing expenses nor the borrowers’ derogatory credit. Therefore, HUD insured the loan
     based on City Bank’s inaccurate representation that the borrowers met HUD qualifying
     guidelines.

     Income Issues
     HUD Handbook 4155.1, REV-4, CHG-1, paragraph 2-6, and Mortgagee Letters 98-01
     and 97-26. The income used to qualify the borrowers was $5,124 per month. While the
     borrower’s two previous years’ income supported this amount, the year-to-date income on
     the current pay stub supported only $3,721 per month. This reduced income resulted in
     front and back ratios of 36.67 percent and 47.63 percent, respectively. No compensating
     factors existed to warrant approval of this loan with these ratios. Additionally, this loan was
     an adjustable rate loan. There was no indication that the borrowers’ income would be
     increasing to support an escalating payment, just the opposite, there were indications (as
     previously discussed) that the borrower’s income was decreasing. Further, the borrowers’
     housing expense was increasing from $750 per month rent to $1,224 per month the first year
     of their mortgage with increasing payments possible thereafter. The borrowers lacked
     sufficient cash reserves or income to withstand this kind of increase.

     Inadequate Credit Evaluation
     HUD Handbook 4155.1, REV-4, CHG-1, paragraphs 2-3 and 2-4. The borrowers had
     a prior bankruptcy that was discharged in May 1998. They also had numerous late
     payments after the bankruptcy, including 30-, 60-, and 90-day late payments, last
     reported in October and November 2001, which were within 12 months of the date the
     file was underwritten and approved. In addition, recent inquiries reflected on the credit
     report were not addressed.

Recommendation
       ƒ Indemnify HUD for the mortgage amount of $161,276.




                                               39
            NARRATIVE CASE PRESENTATION

Case number                          561-7186849 (original loan)
Loan amount                          $179,345
Settlement date                      August 16, 2000
Endorsement date                     January 11, 2001
Status as of June 1, 2005            Claim (on refinance case 561-7666718)

City Bank approved the mortgage despite the borrower’s high back ratio and the lack of
valid compensating factors to offset the high ratio. In addition, the source of the
borrower’s funds used for the down payment and loan closing was not adequately
verified and several credit issues were not addressed. Therefore, HUD insured the loan
based on City Bank’s inaccurate representation that the borrower met HUD qualifying
guidelines.

Excessive Debt Ratios
HUD Handbook 4155.1, REV-4, CHG-1, paragraphs 2-12, 2-13; HUD
Homeownership Center Reference Guide, paragraph 2-12, and HUD Mortgagee
Letter 97-26. The mortgagor’s back ratio, as computed by City Bank, was 46.43
percent, but there were no valid compensating factors on the mortgage credit analysis
worksheet to offset this high ratio (also see Income Issues discussed below).

Income Issues
HUD Handbook 4155.1, REV-4, CHG-1, paragraphs 2-6 and 2-7. The borrower’s
income used for loan qualification was overstated. According to the verification of
employment, the borrower earned $26 per hour or approximately $4,544 per month.
(There was also a note in the file that the borrower’s 19-month average equaled $4,110
per month). The underwriter used an unsupported income of $4,749 per month for
qualification purposes. With corrected income, the borrower’s back ratio increased to
48.5 percent, exceeding HUD’s recommended maximum of 41 percent. This loan was
manually underwritten, but City Bank provided no compensating factors for the excessive
back ratio as mandated by HUD requirements.

Source of Funds Not Properly Verified
HUD Handbooks 4155.1, REV-4, CHG-1, paragraph 2-10, and 4000.2, REV-2,
paragraph 3-6E, and HUD Mortgagee Letter 00-28. There was a copy of a cashier’s
check in the file for $2,500. The borrower wrote the following note on the copy of the
check: “To whom it may concern, this cashier’s check was given to me for work done on
my mother’s house – she does not wish to sign any documents stating so.” Without a
signed statement from the mother, there is a question as to the source of these funds.
Further, there was no documentation evidencing that the donor had the capacity to gift
the funds or that the funds were transferred from the donor’s account to the borrower.



                                       40
In addition, the mortgage credit analysis worksheet showed that the borrower had $5,838
in available assets. However, the document used to support this $5,838 in assets was an
automated teller machine slip. The slip did not show the borrower’s name or account
number. Also, the last four digits of the card number on the slip did not match the card
numbers for other automated teller machine slips in the file. HUD requirements, as set
out in Mortgagee Letter 97-26, do not allow the use of teller receipts as supporting
documentation, i.e. “These procedures do not, however, permit asset verification by the
use of automated teller machine slips. While slips may have some limited use as
‘snapshots’ of cash assets, they are insufficient in and of themselves for verifying both
assets and that improperly borrowed funds are not being used for the cash investment.”

Inadequate Credit Evaluation
HUD Handbook 4155.1, REV-4, CHG-1, Paragraphs 2-3 and 2-4. The borrower’s
credit report showed that his credit card payment was 30 days late one time, 60 days late
one time, and 90 days late twice. The credit card payment was last past due in April
2000, approximately four months prior to loan closing. There was no explanation in the
file regarding these derogatory items. In addition, some credit accounts that were shown
as “paid off” on the borrower’s credit report used for the original loan (HUD case file
561-7186849) were shown as not having been paid off on the credit report used for the
refinance loan (HUD case file 561-7195032), bringing into question the accuracy of the
credit information used in the original loan analysis.

The uniform residential loan application stated that the borrower had been paying rent at
his current address for two years, but the letter from the his landlord stated that the
borrower had been renting for only a year. This discrepancy was not resolved and
documented in the file. Accordingly, the required two-year rental payment history was
not provided. Further, the letter from the borrower’s landlord was not dated and
markings showed that it was faxed from “Source Financial.” The loan appeared to have
been transferred from “Source Financial”; however, no explanation regarding the transfer
was in the file.

Finally, there was no quitclaim deed for the property in the file from the borrower’s
spouse, from whom he was separated.

Recommendation
   ƒ Reimburse HUD for any losses incurred when the property is resold. The amount
     of the claim and expenses to date is $179,345.




                                        41