oversight

Taylor, Bean and Whitaker, Inc., Ocala, Florida, Met Temporary Interest Rate Buydown Requirements

Published by the Department of Housing and Urban Development, Office of Inspector General on 2006-07-28.

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

                                                                  Issue Date
                                                                               August 28, 2006
                                                                  Audit Report Number
                                                                               2006-AT-1018




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


 FROM:      James D. McKay
            Regional Inspector General for Audit, 4AGA


 SUBJECT: Taylor, Bean and Whitaker, Inc., Ocala, Florida,
          Met Temporary Interest Rate Buydown Requirements



                                HIGHLIGHTS

  What We Audited and Why

             We audited Taylor, Bean and Whitaker, Inc. (auditee), in Ocala, Florida,
             because of the number of temporary interest rate buydown (buydown)
             loans it underwrote that went into default.

             Our objective was to determine whether the auditee followed U.S.
             Department of Housing and Urban Development (HUD) regulations,
             procedures, and instructions when it assessed borrowers’ eligibility for
             loans it underwrote that involved buydowns.


  What We Found

             We identified no instances in which borrowers did not qualify for the
             buydowns the auditee approved. In most instances, the auditee did not
             document its assessment of the borrowers’ eligibility for the buydowns.


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              However, lenders are no longer permitted to qualify borrowers using
              buydown mortgage payment amounts. Accordingly, there is no need for
              action to address the auditee’s failure to properly document its assessment
              of borrowers’ eligibility for the buydowns.

              This report contains no finding. No further action on your part is
              necessary.

   Auditee’s Response


              We provided the draft report to the auditee on July 17, 2006. The auditee
              elected not to hold an exit conference and not to provide written comments
              to the report.




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                    TABLE OF CONTENTS

Background and Objectives               4

Results of Audit                        5

Scope and Methodology                   6

Internal Controls                       7




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                   BACKGROUND AND OBJECTIVES

 Taylor, Bean and Whitaker, Inc. (auditee), is a nonsupervised direct endorsement lender,
 which operates from its home office, located in Ocala, Florida. The auditee has been
 approved to originate loans and to sponsor loan correspondents since August 21, 1981.
 In addition to the state of Florida, the auditee is approved to operate in 13 other states. It
 has 28 Federal Housing Administration-approved branch offices and 1,352 active loan
 correspondents.

 The audit focused on the auditee’s underwriting of loans that involved temporary interest
 rate buydowns (buydowns). For the period January 1, 2002, through April 6, 2006, the
 auditee underwrote 953 buydown loans in Florida, Georgia, and South Carolina.

 Our objective was to determine whether the auditee followed U.S. Department of
 Housing and Urban Development (HUD) regulations, procedures, and instructions when
 it assessed borrowers’ eligibility for loans it underwrote that involved buydowns.




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                                               4
                             RESULTS OF AUDIT


We identified no instances in which borrowers did not qualify for the buydowns the
auditee approved. However, in most instances, the auditee did not document its
assessment of the borrowers’ eligibility for the buydowns. We reviewed 30 buydown
loans closed between February 2003 and June 2004. The files showed only two loans in
which the auditee properly assessed and documented its assessment of the borrowers’
eligibility for the buydowns. We discontinued review of five loans because even at the
full note rate, the borrowers’ debt-to-income ratios were within HUD’s limit for approval.
For the remaining 23 loans, the files did not show or document the auditee’s assessment
of the borrowers’ eligibility for the buydowns. We reviewed the loan files and
determined that the 23 borrowers qualified for the buydowns despite the missing
documentation of the auditee’s assessment.

In August 2004, HUD changed the buydown requirements, and lenders were no longer
permitted to qualify borrowers using buydown mortgage payment amounts. Since the
lender is no longer permitted to use buydown mortgage amounts, there is no need for
action to address the auditee’s failure to properly document its assessment of borrowers’
eligibility for the buydowns.




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                                        5
                    SCOPE AND METHODOLOGY

To achieve our objective, we reviewed HUD’s rules, regulations, and guidance for proper
approval of temporary interest rate buydown loans (buydowns). We also reviewed
previous HUD reviews of the auditee and interviewed HUD staff to obtain background
information on the auditee and related HUD requirements.

We interviewed the auditee’s management and staff to obtain information regarding its
policies, procedures, and management controls for buydown loans.

We obtained origination, default, and other loan information from HUD’s Neighborhood
Watch and Single Family Data Warehouse systems on the auditee’s buydown loan
activity. For the period January 1, 2002, through April 6, 2006, HUD’s systems show
that the auditee underwrote 953 buydown loans in Florida, Georgia, and South Carolina.
We limited the review to buydown loans that (1) were in default or had been in default,
(2) were active or claim terminated, (3) had a debt-to-income ratio higher than 41
percent, and (4) were closed no later than December 31, 2004. The 953 loans included
83 loans that met the sample criteria. We reviewed 30 loans selected using non-random
methods to focus on the highest risk loans. The results of our review apply only to the
items selected and cannot be projected to the universe.

The audit generally covered the period January 1, 2003, to December 31, 2004. We
performed our review during May and June 2006 at the auditee’s office in Ocala, Florida,
and at our audit office in Jacksonville, Florida.

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




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                           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:

   •   Controls over approval of temporary interest rate buydown loans.

We interviewed auditee officials and reviewed their policies and procedures to gain an
understanding of the internal control environment for processing buydown loans. During
the audit survey, we reviewed 30 loans for compliance with the buydown requirements.

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


We did not identify any ongoing significant weaknesses in the controls cited above.




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