oversight

Certified Home Loans of Florida, Miami, Florida Did Not Always Comply with Federal Housing Administration Requirements

Published by the Department of Housing and Urban Development, Office of Inspector General on 2006-01-12.

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

                                                           Issue Date
                                                                    January 12, 2006
                                                            Audit Case Number
                                                                        2006-AT-1003




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



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


SUBJECT: Certified Home Loans of Florida, Miami, Florida
         Did Not Always Comply with Federal Housing Administration Requirements


                                  HIGHLIGHTS

 What We Audited and Why

             We audited Certified Home Loans of Florida (Certified) in Miami, Florida.
             Certified is a nonsupervised direct endorsement lender approved by the U.S.
             Department of Housing and Urban Development (HUD) to originate and
             underwrite Federal Housing Administration-insured single-family mortgages. We
             selected Certified for review because of risk factors associated with defaulted
             loans.

             Our audit objectives were to determine whether Certified (1) complied with HUD
             regulations, procedures, and instructions in the origination and underwriting of
             Federal Housing Administration-insured single-family mortgages and
             (2) implemented its quality control plan as required. We reviewed a sample of 17
             Federal Housing Administration-insured loans to accomplish our objectives.




  Table of Contents
What We Found


          Certified did not follow HUD requirements when underwriting Federal Housing
          Administration-insured loans. It improperly underwrote 14 of the 17 loans
          reviewed. These loans contained deficiencies that affected the insurability of the
          loans. Certified approved the loans based on inaccurate employment, income, and
          gift information and other deficiencies. The loans were improperly approved
          because Certified did not exercise due care in originating and underwriting loans,
          primarily by not clarifying inconsistencies in the loan files or adequately
          following up to verify borrower income and employment histories. As a result,
          HUD insured 14 loans that placed the Federal Housing Administration insurance
          fund at risk. Certified therefore unnecessarily increased HUD's risk of insurance
          loss. That increased risk reflects actual and potential insurance claims for nine
          mortgage loans with unpaid balances of $1,389,178. Five of the 14 loans that we
          examined were subsequently paid off, and no longer carry an insurance risk.

          Certified did not fully implement its quality control plan. It did not conduct
          quality control reviews of early defaulted loans and rejected loan applications and
          did not ensure that quality control reviews were performed within 90 days of
          closing. In addition, its quality control plan did not include all required elements
          as prescribed by HUD. We attribute these deficiencies to Certified’s disregard of
          HUD requirements and instructions and reliance on an independent contractor to
          fulfill its responsibilities. As a result, HUD has no assurance of the accuracy,
          validity, and completeness of Certified’s loan origination and underwriting
          operations.

What We Recommend


          We recommend that the assistant secretary for housing-federal housing
          commissioner take appropriate administrative action against Certified based on the
          information contained in this report. This action should, at a minimum, include
          requiring indemnification of $660,699 for four loans and reimbursement of
          $728,479 for claims paid for five loans. We further recommend that HUD take
          appropriate measures to ensure that Certified conducts required quality control
          reviews and that the written quality control plan complies with HUD requirements.
          Finally, we recommend that HUD take administrative action, as appropriate, up to
          and including civil monetary penalties.

          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.



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Auditee’s Response


           We discussed our review results with Certified and HUD officials during the
           audit. We provided the draft report to Certified on October 6, 2005, for their
           comments and discussed the report with them at the exit conference on
           November 22, 2005. Certified provided written comments on
           November 22, 2005.

           Certified disagreed that it did not exercise due care in originating and
           underwriting loans we questioned and therefore did not believe it needed to
           indemnify those loans. While Certified generally disagreed with our
           recommendations for finding 2, they did begin to take corrective action.

           The auditee’s response and their appendix A along with our evaluation of that
           response, can be found in appendix B of this report. Certified also provided
           attachments with its response that are available for review upon request.




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                                            3
                           TABLE OF CONTENTS

Background and Objectives                                                     5

Results of Audit
      Finding 1: Certified Did Not Follow HUD Requirements When Originating   6
      and Approving Loans
      Finding 2: Certified Did Not Fully Comply with Federal Housing          12
      Administration Quality Control Requirements

Scope and Methodology                                                         15

Internal Controls                                                             16

Appendixes
   A. Schedule of Questioned Costs and Funds to Be Put to Better Use          18
   B. Auditee Comments and OIG’s Evaluation                                   19
   C. Summary of Loan Deficiencies                                            88
   D. Narrative Loan Deficiencies                                             89




                                            4
                      BACKGROUND AND OBJECTIVES


The U.S. Department of Housing and Urban Development (HUD) approved Certified Home
Loans of Florida (Certified) as a Title II nonsupervised lender on April 11, 2000, to originate and
underwrite Federal Housing Administration-insured single-family mortgages.

Certified originated and underwrote 590 Federal Housing Administration-insured loans with
mortgages totaling $75,913,686, which had beginning amortization dates (defined as one month
before the first principal and interest payments are due) between January 1, 2003, and
December 31, 2004. According to HUD’s Neighborhood Watch system, 43 of the loans
defaulted within the first two years of origination.

The audit objectives were to determine whether Certified (1) complied with HUD regulations,
procedures, and instructions in the origination and underwriting of Federal Housing
Administration-insured single-family mortgages and (2) implemented its quality control plan as
required.




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                                                 5
                              RESULTS OF AUDIT

Finding 1: Certified Did Not Follow HUD Requirements When
           Originating and Approving Loans
Certified did not follow HUD requirements when underwriting Federal Housing Administration-
insured loans. It improperly underwrote 14 of the 17 loans reviewed. These loans contained
deficiencies that affected the insurability of the loans. All 14 loans contained underwriting
deficiencies that, taken as a whole, should have led a prudent person to not approve the loan.
Certified approved the loans based on inaccurate employment, income, and gift information and
other deficiencies. The loans were improperly approved because Certified did not exercise due
care in originating and underwriting loans, primarily by not clarifying inconsistencies in the loan
files or adequately following up to verify borrower income and employment histories. These
deficiencies increased HUD’s risk to the Federal Housing Administration insurance fund.




 Inaccurate Employment,
 Income, and Gift Information


               HUD Handbook 4000.4, REV-1, paragraphs 2-1 and 2-5, states that the authority
               to participate in the direct endorsement program is a privilege; therefore, a direct
               endorsement lender must conduct its business operations in accordance with
               accepted sound mortgage lending practices, ethics, and standards. Lenders are to
               obtain and verify information with at least the same care that would be exercised
               if the lender were originating a mortgage entirely dependent on the property as
               security to protect its investment.

               Certified approved eight loans based on inaccurate employment, income, and gift
               information. Loan correspondents originated four of the eight loans. We
               confirmed with employers that Internal Revenue Service Form W-2 (W-2 form),
               pay stubs, and employment verification forms were inaccurate. Certified
               approved loans in which the borrower never worked for the employer. Had
               Certified properly verified borrower employment and income with the employer
               or other sources, the underwriter would have discovered the inaccuracies, and the
               loans would not have been approved. In addition, we confirmed with two donors
               that two gifts were actually loans to the borrowers. These donors never
               completed or signed the gift letter. In two other instances, the donors admitted
               that they did not know the borrower; and never completed or signed the gift letter.



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                                                 6
Loan Origination and
Underwriting Deficiencies

            HUD Handbook 4155.1, REV-4, CHG-1, chapters 2 and 3, require lenders to
            determine a borrower’s ability and willingness to repay the mortgage debt and,
            thus, limit the probability of default or collection difficulties. Lenders should
            evaluate the stability and adequacy of income, funds to close, credit history,
            qualifying ratios, and compensating factors. Lenders must ensure the application
            package contains sufficient documentation to support their decision to approve the
            mortgage loan.

            Certified underwrote 14 loans with mortgages totaling $1,885,734 that contained
            significant loan origination and underwriting deficiencies.

            The following table presents the deficiencies noted for the 14 loans:

               Deficiency                                                 Number of loans
               Other deficiencies and inconsistencies                          14
               Questionable source of funds                                    13
               Credit issues                                                    9
               Inaccurate employment, income, and gift information              8
               Excess ratios w/o adequate justification                         4

            The deficiencies noted above are not independent of one another, as many of the
            case binders contained more than one deficiency. Appendix C provides a chart
            summarizing the loan processing deficiencies. Details of the deficiencies
            identified on each loan reviewed, including specific HUD requirements not met,
            are included in appendix D.

            Specific examples of Certified’s poor processing and underwriting include:

            Case number 092-9359262. Certified approved the loan based on inaccurate
            employment and income information. The verification of employment form
            indicated that the borrower was a teacher. We verified with the employer that the
            borrower worked in maintenance. The employer informed us that he signed a
            blank verification of employment form and indicated that the pay stubs and W-2
            forms did not belong to the employer. The verification of employment form also
            showed that the borrower was employed for four years, while the loan application
            indicated only two years. We found no explanation in the case binder for this
            discrepancy. Certified did not maintain original employment and income
            documentation in its files.




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                                             7
         Certified also approved the loan based on inaccurate gift information. We
         verified with the gift donor that she never completed or signed the gift letter found
         in the case binder. In addition, the donor indicated that she did not know the
         borrower and never provided a gift to the borrower. Certified failed to properly
         verify employment, income, and gift information and, therefore, generated and
         submitted to HUD inaccurate employment, income, and gift data for the borrower.

         Certified failed to properly verify the borrower’s source of funds to close. The
         borrower maintained two joint bank accounts with unrelated parties. We are
         unable to determine how much of these funds belong to the borrower including a
         deposit of $2,562 for a tax refund. Therefore, we are concerned that the borrower
         may not have the financial capability to pay the mortgage or related expenses. In
         addition, Certified failed to ensure that the borrower met the minimum
         downpayment in the purchase of the property. We calculated the minimum
         downpayment to be $5,758. The borrower only invested $4,225. We did not find
         supporting documentation in the case binder that the borrower complied with the
         minimum downpayment.

         Certified did not resolve conflicting or inconsistent information in the case binder.
         The final loan application showed the borrower’s debt and income, while the
         initial loan application did not list any debt. The sales contract reported an
         earnest deposit of $900, while the loan application and HUD-1 settlement
         statement reported $0. There was no explanation provided for these
         inconsistencies. In addition, Certified did not provide an explanation for the delay
         in endorsing the loan in a timely manner and what actions it plans to take to
         prevent future delayed submissions.

         Case Number 092-9644668. Certified approved the loan based on inaccurate
         employment and income information. We verified with the borrower’s employer
         that the borrower never worked for the company. The employer told us that the
         company never received, completed, or signed the verification of employment
         form, and the pay stubs and W-2 forms did not belong to the company. Certified
         did not maintain original employment and income documentation in its files.
         Further, the credit report and verification of employment form show different
         employers. Certified failed to properly verify employment and income
         information and, therefore, generated and submitted to HUD inaccurate
         employment and income data for the borrower.

         Certified failed to properly verify the borrower’s source of funds to close. It
         failed to ensure that the borrower met the minimum downpayment and minimum
         required investment in the purchase of the property. The borrower did not
         provide the minimum downpayment and minimum required investment calculated
         to be $7,359 and $3,690, respectively. We did not find supporting documentation
         in the case binder that the borrower complied with these funding requirements.



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                                           8
        Certified did not properly analyze credit performance to ensure that the borrower
        demonstrated financial responsibility. The credit report showed an account that
        had been in collection status since 2002 without an explanation from the borrower
        in the case binder. We also noted that a creditor wrote off $4,239 after not
        receiving payment from the borrower. We did not find an explanation in the case
        binder regarding this account.

        We conducted Internet searches and learned that the interviewer and the selling
        real estate agent appear to be related and are co-owners of a business. We found
        no documentation in the case binder explaining this discrepancy. In addition, we
        believe that the borrower’s income as a welder was high. The verification of
        employment form reported income of $909 weekly or $47,258 per year. We
        conducted Internet searches and learned that a welder in Miami earns an average
        income of $29,982 per year.

        Case number 092-9574386. Certified approved the loan based on inaccurate gift
        information. We verified with the two gift donors that they never completed or
        signed the gift letters found in the case binder. In one instance, it appeared that an
        interested third party (selling broker) informed the donor that the funds were
        necessary to approve the loan for the borrower. However, the donor attested that
        the funds provided were a loan and not a gift to the borrower. In addition, the
        donor confirmed that he is not the borrower’s relative as indicated in the gift
        letter. Further, the borrower did not sign the gift letter. The borrower did repay
        this loan. In the second instance, the donor told us he did not know the borrower
        and did not provide a gift to the borrower. It appears that the loan correspondent
        (donor relative) provided the gift funds to the borrower. Although a loan
        correspondent originated this loan, we believe that Certified failed to properly
        verify gift information and, therefore, generated and submitted to HUD inaccurate
        gift data for the borrower.

        Certified failed to properly verify the borrower’s source of funds to close.
        According to the mortgage agreement, the borrower and employer are married.
        However, the case binder showed that the loan correspondent certified in a letter
        that two of the borrower’s boyfriend’s payroll checks were deposited into the
        borrower’s bank account. The husband and boyfriend had different names. We
        also noted that the borrower’s bank statements had recurring overdraft and
        insufficient fund charges. During a nearly three-month period, the borrower had
        nine overdraft charges. Although the borrower provided an explanation in the
        case binder, we question whether the borrower had the financial capability to
        repay the mortgage. We also noted that a $287 debt was repaid according to a
        credit report without supporting documentation in the case binder indicating the
        source of funds used to repay this debt.

        Certified failed to ensure that the borrower met the minimum downpayment and
        minimum required investment in the purchase of the property. We calculated the
        minimum downpayment and minimum required investment to be $8,073 and


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                                          9
              $5,340, respectively. The borrower only invested $3,390. We did not find
              supporting documentation in the case binder that the borrower complied with
              these funding requirements.

              Certified did not properly analyze credit performance to ensure that the borrower
              demonstrated financial responsibility. Based on the credit report, the borrower
              did not have a sufficient credit history. Certified should have used a
              nontraditional credit history method and considered this when determining
              approval for the loan. In addition, the borrower had one account in collection
              status without an explanation provided in the case binder. It did not appear that
              Certified considered this collection account in its analyses of the borrower’s credit
              worthiness. We consider this important since the borrower did not have an
              established credit history and it could have been an indicator of future financial
              difficulties.

              Certified did not resolve conflicting or inconsistent information in the case binder.
              The final loan application did not list a $266 debt as it appeared in the initial loan
              application. The initial loan application showed funds available of $1,400, and
              the final loan application showed $6,058. The earnest deposit was $2,000 on the
              initial loan application but $3,000 on the final loan application, HUD-1 settlement
              statement, and mortgage credit analysis worksheet and $1,000 on the sales
              contract. We did not find an explanation in the case binder for these
              inconsistencies.

              By reviewing the case binder and Certified’s loan files and conducting Internet
              searches, we learned that the employer was the husband of the borrower. In
              addition, the borrower’s income as an account representative was high. A copy of
              the verification of employment form from the case binder reported income of
              $1,200 weekly or $62,400 per year. We conducted Internet searches and learned
              that an account representative in Miami earns an average income of $25,192 per
              year. Therefore, we question the authenticity of the employment and income
              information generated and submitted to HUD.


 Conclusion


              Certified disregarded HUD requirements and did not exercise sound judgment and
              due diligence in the processing and underwriting of loans to be insured by the
              Federal Housing Administration. In 14 loans, Certified did not exercise the care
              expected of a prudent lender by using inaccurate employment, income, and gift
              information. Certified failed to properly verify employment and gift information
              or the borrower’s source of funds to close, did not provide valid or supported
              compensating factors for excessive debt-to-income ratios, did not provide
              adequate justification for borrowers’ credit issues, and did not clarify important
              file discrepancies. These deficiencies occurred because Certified did not exercise


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                 due care in originating and underwriting loans, primarily by not clarifying
                 inconsistencies in the loan files or adequately following up to verify borrower
                 income and employment histories. Certified admitted that these deficiencies
                 resulted from underwriter oversight. As a result, HUD insured 14 loans that
                 placed the Federal Housing Administration insurance fund at risk. Certified
                 therefore unnecessarily increased HUD's risk of insurance loss. That increased
                 risk reflects actual and potential insurance claims for nine mortgage loans with
                 unpaid balances of $1,389,178. Five of the 14 loans that we examined were
                 subsequently paid off, and no longer carry an insurance risk.


    Recommendation


                 We recommend that the assistant secretary for housing-federal housing
                 commissioner:

                 1A.      Take appropriate administrative action against Certified for not complying
                          with HUD requirements, including requiring Certified to indemnify
                          $660,6991 for four active insured loans and reimburse $728,479 for
                          claims paid on five loans. Appendix C lists the case numbers for the loans
                          included in this recommendation.




1
 According to Neighborhood Watch, as of October 31, 2005, 5 of the 14 loans terminated Federal Housing
Administration insurance without a claim (Case numbers 092-9291283, 092-9331983, 092-9359262, 092-9367167,
and 092-9560516). Because these loans no longer represent a risk to the Federal Housing Administration insurance
fund, we have removed these five loans from our recommendation.


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Finding 2: Certified Did Not Fully Comply with Federal Housing
           Administration Quality Control Requirements
Certified did not fully implement its quality control plan. It did not conduct quality control
reviews of early defaulted loans and rejected loan applications and did not ensure that quality
control reviews were performed within 90 days of closing. In addition, its quality control plan
did not include all required elements as prescribed by HUD. We attribute these deficiencies to
Certified’s disregard of HUD requirements and instructions and reliance on an independent
contractor to fulfill its responsibilities. As a result, HUD has no assurance of the accuracy,
validity, and completeness of Certified’s loan origination and underwriting operations.




 Early Defaulted and Rejected
 Loans Not Reviewed and
 Quality Control Reviews Not
 Performed within 90 Days of
 Closing


               HUD Handbook 4060.1 requires quality control reviews of all loans that default
               within six months of closing. The handbook requires lenders to perform quality
               control reviews on a minimum of 10 percent of rejected loans. The handbook
               also requires lenders to perform quality control reviews within 90 days of closing.

               Certified used an independent contractor to perform quality control reviews. Its
               quality control plan required that it provide the contractor with a monthly list of
               closed, early defaulted, and rejected loans. From these lists, the contractor selects
               loans for quality control review.

               Certified officials informed us that they do not provide a list of early defaulted
               and rejected loans to the contractor for performing quality control reviews.
               Although the HUD requirement to conduct quality control reviews of early
               defaulted and rejected loans is included in Certified’s quality control plan,
               Certified officials said that they were unaware of the requirement. In addition,
               Certified has not ensured that quality control reviews are conducted within 90
               days of closing, as HUD requires.

               Quality control reviews of early defaulted and rejected loans are important since
               such reviews provide valuable information to management regarding the causes of
               defaults and rejections and may disclose underwriting deficiencies associated with
               the loan. Such reviews may disclose indicators of fraudulent activities or other
               significant discrepancies that lenders are required to report to HUD. In addition,
               conducting quality control reviews within 90 days of closing is intended to ensure
               that problems left undetected before closing are identified as soon after closing as
               possible.

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Written Quality Control Plan
Did Not Contain Required
Elements

             HUD Handbook 4060.1 provides that as a condition of HUD 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 operations and assure that the lender maintains compliance with HUD
             requirements and its own policies and procedures.

             Certified’s quality control plan did not include all the required elements
             prescribed by HUD. For example, some of the more significant elements missing
             from the plan include:

              •   The lender reports findings of fraud or serious violations to the appropriate
                  HUD Homeownership Center or to the Office of Inspector General (OIG)
                  for Audit within 60 days of initial discovery.

              •   Telephone reverification is attempted if written reverification is not
                  returned.

              •   Determine whether verifications of employment and deposit or credit reports
                  are suspect due to handling by any interested third party or the borrower.

              •   Determine whether all conditions were cleared before closing.

              •   Determine whether there are sufficient and documented compensating
                  factors if the debt exceeded Federal Housing Administration limits.

              •   Determine whether information in the preliminary and final loan
                  applications and all credit documents is consistent or reconciled.

Conclusion


             Certified’s written quality control plan does not meet HUD requirements. We
             attribute this to Certified disregarding its responsibilities to ensure that quality
             control reviews were conducted and deficiencies were corrected. In addition,
             Certified relied on its independent contractor to assure that its plan met HUD
             requirements and quality control reviews were performed. As a result, Certified is
             unable to ensure the accuracy, validity, and completeness of its loan origination
             and underwriting operations.



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                                              13
Recommendations


          We recommend that the assistant secretary for housing-federal housing
          commissioner:

          2A.     Take appropriate measures to ensure Certified conducts required quality
                  control reviews and the written quality control plan complies with HUD
                  requirements.

          2B.     Take administrative action, as appropriate, up to and including civil
                  monetary penalties.




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                                           14
                      SCOPE AND METHODOLOGY

To achieve our audit objectives we reviewed:

•      Applicable laws, regulations, and other HUD program requirements and
       files and documents from HUD and Certified;
•      Procedures established by Certified in originating FHA insured loans; and
•      Certified’s Quality control plan

We chose a nonrepresentative method to select the loans for review. This method allowed us to
select Federal Housing Administration-insured loans with certain characteristics. This approach
enabled us to focus our review efforts on loans in which there is a greater inherent risk and/or
risk of noncompliance or abuse to the Federal Housing Administration insurance fund.

We reviewed 17 Federal Housing Administration-insured loans that had defaulted within the first
two years from. In addition, we interviewed appropriate officials and staff from Certified and
HUD’s Atlanta Single Family Homeownership Center. We also interviewed employers and gift
donors to verify the information in the files.

We performed our review between March and August 2005. The audit covered the period
January 1, 2003, through December 31, 2004.

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




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                                               15
                             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:

                  •   Program operations. Policies and procedures that management has in
                      place to reasonably ensure that the loan origination process complies with
                      HUD program requirements and that the objectives of the program are
                      met.

                  •   Validity and reliability of data. Policies and procedures that management
                      has implemented to reasonably ensure that valid and reliable data are
                      obtained, maintained, and used during the mortgage loan origination
                      process.

                  •   Compliance with laws and regulations. Policies and procedures that
                      management has implemented to reasonably ensure that its loan
                      origination process is administered in accordance with applicable laws and
                      regulations.

              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.




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                                               16
Significant Weaknesses


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

             •   Certified did not follow HUD requirements when underwriting 14 Federal
                 Housing Administration-insured loans.

             •   Certified had not implemented its quality control plan in accordance with
                 HUD requirements.




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                                           17
                                        APPENDIXES

Appendix A

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

                                                                    Funds to be put
                Recommendation              Ineligible 1/           to better use 2/
                        1A                  $ 728,479                     $ 660,699
                                             ________                     ________
                       Total                $ 728,479                     $ 660,699




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 polices
   or regulations.

2/ “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.




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                                                 18
Appendix B

        AUDITEE COMMENTS AND OIG’S EVALUATION


Ref to OIG Evaluation   Auditee Comments




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                         19
Comment 1




Comment 2




  Table of Contents   20
Comment 2




Comment 3




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                    21
Comment 3




Comment 4




Comment 5




  Table of Contents   22
Comment 5




Comment 6




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                      23
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                    24
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                    25
                                                APPENDIX A

                            Narrative Alleged Loan Deficiencies & CHL Response

Comment 7
              1) FHA Case# 092-9291283

                 OIG Findings: Inaccurate Employment and Income Information

                 The OIG alleges that CHL approved this loan based on inaccurate employment
                 and income information for the co-borrower. The OIG apparently determined
                 through their investigation that the coborrower never worked for the company,
                 and that the company had not completed or signed the verification of employment
                 form provided to CHL. Further, the OIG determined that the paystubs and W2
                 forms provided to CHL were false. The OIG states that, although this loan was
                 originated by a Loan Correspondent, CHL failed to properly verify employment
                 and income information and, therefore, CHL generated and submitted to HUD
                 inaccurate employment and income date for the coborrower. The OIG also complains
                 that CHL did not maintain original employment or income
                 documentation in its files.

                 CHL Response: Respectfully, we disagree with the OIG’s conclusions. Although
                 the VOE, W2 and paycheck stubs for the coborrower ultimately may prove to be
                 false documents, they were regular on their face, consistent and complete. During
                 the origination of this loan, we had no indication that the documents might not be
                 accurate. As noted by the OIG, this loan was originated by a Loan
                 Correspondent. The Loan Correspondent processed the loan and provided CHL
                 with the VOE, W2’s and paycheck stubs. If this information was false, then we
                 respectfully submit that the coborrower and/or the Loan Correspondent provided
                 false information to CHL and CHL was a victim as much as HUD was. The
                 employment information was “generated” by the Loan Correspondent, and not by
                 CHL. As the sponsor, CHL’s responsibility in this case was simply to underwrite
                 the loan. We did so, and did not suspect any fraud at that time. We note,
                 however, that the coborrower re-confirmed the accuracy of the employment and
                 income information when he signed the final loan application (form 1003) at
                 closing. Therefore, respectfully, we believe that CHL properly complied with
                 HUD requirements and appropriately underwrote and approved this loan.

                 All original documents were submitted to HUD office in the FHA case binder.
                 That is why the originals are not retained in CHL’s files. CHL’s files do contain
                 copies of these documents.

                 Finally, we note that the underwriter of this loan is no longer employed with
                 CHL.

                 See Exhibit A.




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         James D. McKay
         Regional Inspector General for Audit       -2-                          November 22, 2005


                 OIG Findings: Questionable Source of Funds.

                 The OIG further alleges, with respect to the            loan, that CHL
                 failed to properly verify the borrower’s source of funds to close the loan.
                 Specifically, the OIG states that there were two separate deposits, one in the
                 amount of $1,500 and the other in the amount of $1,000, into the borrower’s bank
                 account without an explanation of the source of these funds. Additionally, the
                 OIG states, the verification of deposit form indicated an “opening bank balance”
                 of $7,728, without information regarding the source of these funds. The OIG
                 further alleges that CHL failed to ensure that the borrower met the minimum
                 downpayment of $3,731, and the minimum required investment of $2,817, in this
                 property. The OIG believes that the borrower invested only $1,000, and the OIG
                 found no supporting documentation in the case binder that the borrower had met
                 the funding requirements.

                 CHL’s Response: We respectfully disagree with the draft OIG finding. FHA
                 loan underwriting policies and procedures require full, complete and consistent
                 documentation of the applicant’s source of funds, and CHL’s underwriters follow
                 these policies and procedures. The Direct Endorsement Underwriter who
                 reviewed and approved this loan was an experienced and qualified, and fully
                 knowledgeable about CHL’s and FHA’s requirements in this area, and was
                 expressly licensed and approved by FHA to perform these duties. CHL is
                 confident that this loan would not have been approved by CHL’s D.E.
                 Underwriter had these applicable source of funds requirements not been met.

                 It is also true that CHL is not able to produce full written documentation as to the
                 source of all required funds. As noted in our general response, however, original
                 documentation was provided to HUD in the insuring file and to the servicer to
                 which the loan was assigned and transferred. In addition, we note that the loan
                 was originated several years ago and is shown on Neighborhood Watch to have
                 performed.

                 It is well understood that the main purposes of FHA’s source of funds and
                 downpayment requirements are to help assure that the applicant and mortgagor
                 has the financial wherewithal responsibly to enter into the mortgage loan
                 transaction and to meet loan payment obligations. This borrower clearly had both
                 the requisite financial wherewithal and the financial incentives to obtain and pay
                 his mortgage loan, which is what he did.

                 Accordingly, even if the available documentation surrounding the loan’s origination
                 is less than fully complete, the Direct Endorsement Underwriter, we
                 submit, completed the required analysis and determined in her considerable




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          James D. McKay
          Regional Inspector General for Audit       -3-                          November 22, 2005


                  professional judgment that the loan met CHL’s and FHA’s requirements, and that
                  it would perform--which it did. Under these circumstances, it is neither
                  appropriate nor fair or permitted for the OIG to second-guess the Direct
                  Endorsement Underwriter approved by HUD to make these judgments simply
                  because full documentation of the underwriter’s careful consideration of this issue
                  is not currently available to CHL.

                  OIG Findings: Other Deficiencies and Inconsistencies.

                  The OIG alleges that CHL did not resolve conflicting or inconsistent information
                  in the case binder. Specifically, the OIG states that the final loan application
                  showed the borrower had liabilities of $9,573, whereas the initial loan application
                  and the credit report did not show this total. Additionally, the OIG states that the
                  borrower’s monthly income was reported as $2,158 on the VOE form, $2,043 on
                  the loan application, and $2,179 on the mortgage credit analysis worksheet. The
                  OIG implies that CHL did not resolve this conflicting and inconsistent
                  information. Further, the OIG states that the sales contract showed a selling
                   broker but no listing broker, and the HUD-1 settlement statement reflects that the
                  seller paid $2,676 in commissions to a broker that was not shown on the sales
                  contract or any other documents in the case file.

                  CHL’s Response: Respectfully, we disagree with the OIG’s findings. A review of
                  the loan applications (form 1003) in our file shows no borrower debts. This is
                  consistent with credit report. The initial loan application was signed and dated
                  11/18/02 and the final loan application was signed and dated 12/30/02. See
                  Exhibit A.

                  Although the borrower’s monthly income figures, as shown on the initial and final
                  loan applications, VOE, and MCAW were slightly different, the $2,179 figure
                  used for qualifying this borrower was an average amount based on 33.5 month
                  average (less) business expense. This was adequately explained and documented
                  by the underwriter on the Mortgage Credit Analysis Worksheet. (See Exhibit A.)

                  Although the sales contract does not identify either a listing or a selling broker,
                  the HUD-1 Settlement Statement shows that the seller paid a sales commission of
                  $2,676 to Transworld Realty. CHL’s closing instructions do not instruct the
                  settlement agent with respect to any seller paid sales commissions. Therefore, we
                  cannot explain why the seller paid these commissions. We can only assume that
                  the seller did have such an obligation and privately instructed the settlement agent
                  regarding this aspect of the closing. Respectfully, we fail to see how this has or
                  had any relevance to the borrower’s ability to pay the mortgage.




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            James D. McKay
            Regional Inspector General for Audit      -4-                          November 22, 2005


                    OIG Findings: Credit Issues.

                    The OIG alleges that CHL did not properly analyze the borrowers’ credit
                    performance to ensure that the borrowers demonstrated financial responsibility.
                    The OIG states that the coborrower’s credit report indicated four accounts with a
                    zero balance and, therefore, the OIG believes that CHL should have used a
                    nontraditional credit history method when underwriting this loan.

                    Further, the OIG states that, although the credit reports did not show any recent
                    payoffs, the HUD-1 settlement statement indicated that the borrower paid $5,567
                    towards payoff of five debts. The OIG also states that there was no supporting
                    documentation in the file for these payments. The OIG also states that the
                    borrower did not provide an explanation in the case binder for two debts that were
                    in collection status. While the borrower did provide an explanation for the three
                    additional debts, the OIG has determined that these explanations were not
                    acceptable. Finally, the OIG questions the financial stability of this borrower
                    since some of the debts in collection status had been outstanding for more than a
                    year.

                    CHL’s Response: Respectfully, we disagree with the OIG’s conclusion that CHL
                    did not properly analyze the borrowers’ credit performance to ensure that the
                    borrowers demonstrated financial responsibility. We also disagree with the OIG
                    determination that, because the four accounts shown on the coborrower’s credit
                    report had zero balances that CHL should have used a nontraditional credit history
                    method when underwriting this loan. The coborrower’s credit report did show a
                    credit history, even if the accounts currently had zero balances. Further, HUD
                    Handbook 4155.1 Rev-4, CHG.1, Page 2-4, Para. 2-3, states that, “neither the lack
                    of credit history nor the borrower’s decision not to use credit may be used as a
                    basis for rejection.”

                    With respect to the OIG’s statements regarding the payoffs, we note that, since
                    these debts were paid off at the loan closing, the credit reports that were run
                    before closing would not show a payoff of the debts. The HUD-1 settlement
                    statement, however, does show that the borrower paid $5,567 towards payoff of
                    five debts at the closing table. Respectfully, we believe that the supporting
                    documentation for the payoffs, sought by the OIG, is in the HUD-1 settlement
                    statement and the closing agent’s file.

                    See Exhibit A.


Comment 8      2)   FHA Case# 092-9359262

                    OIG Findings: Inaccurate Employment, Income and Gift Information




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        James D. McKay
        Regional Inspector General for Audit       -5-                          November 22, 2005


                The OIG alleges that CHL approved the loan based on inaccurate employment
                and income information. The verification of employment form indicated that the
                borrower was a teacher. The OIG states, however, that the employer advised the
                auditor that the borrower actually worked in maintenance. Apparently, the
                employer also informed the OIG that he signed a blank verification of
                employment form and that the pay stubs and W-2 forms did not belong to the
                employer. Further, the OIG states, the verification of employment form showed
                that the borrower was employed for four years, while the loan application
                indicated only two years employment. The OIG states that there was no
                explanation in the case binder for this discrepancy. The OIG also states that CHL
                did not maintain original employment and income documentation in its files.

                The OIG also alleges that CHL approved the loan based on inaccurate gift
                information. Apparently, the OIG spoke to the gift donor who told the OIG that
                she never completed or signed the gift letter found in the case binder and that she
                did not know the borrower and never provided a gift to the borrower. Thus, the
                OIG states, CHL failed to properly verify employment, income, and gift
                information and, therefore, generated and submitted to HUD inaccurate
                employment, income, and gift data for this borrower.

                CHL Response: Respectfully, we disagree with the OIG’s conclusions. Although
                the VOE, W2 and paycheck stubs for the borrower ultimately may prove to be
                false documents, they were regular on their face and consistent and complete.
                During the origination of this loan, CHL’s underwriter had no indication that the
                documents might not be accurate. CHL’s practice and procedure with respect to
                obtaining the verifications of employment, deposit, etc., is always to mail the
                VOD and VOE requests to the appropriate party. We had no indication that these
                policies and procedures were not followed in this case. In fact, the borrower re-
                confirmed the accuracy of the employment and income information when she
                signed the final loan application (form 1003) at closing. The Loan Officer who
                originated this loan is no longer employed with CHL.

                We concur with the OIG’s finding that the file contains no explanation for the
                discrepancy between the VOE and the loan application regarding the length of
                time the borrower was employed. We believe, however, that the loan application
                was completed to show two years employment because two years employment
                history is what is required. The verification of employment would be the final
                word on the length of employment history. Since the VOE indicated four years
                employment, we believe that this strengthened the application, rather than
                weakened it. See Exhibit B.




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                                            30
         James D. McKay
         Regional Inspector General for Audit      -6-                          November 22, 2005


                 All original documents were sent to HUD in the Case Binder. Unfortunately, we
                 did not maintain copies of all of the gift documentation. Therefore, we are unable
                 to respond to the allegations that the gift information was inaccurate.

                 We note, however, that the underwriter of this loan is no longer employed with
                 CHL. Additionally, the loan officer is no longer employed by CHL either.

                 OIG Findings: Questionable Source of Funds

                 The OIG alleges that CHL failed to properly verify the borrower’s source of funds
                 to close. The OIG states that the borrower maintained two joint bank accounts
                 with unrelated parties, but the OIG was unable to determine how much of these
                 funds actually belong to the borrower, including a deposit of $2,562 for a tax
                 refund. Therefore, the OIG is concerned that the borrower may not have the
                 financial capability to pay the mortgage or related expenses. In addition, the OIG
                 alleges that CHL failed to ensure that the borrower met the minimum
                 downpayment in the purchase of the property. The OIG calculated the minimum
                 downpayment to be $5,758, but states that the borrower invested only $4,225.
                 The OIG found no supporting documentation in the case binder that the borrower
                 complied with the minimum downpayment requirement.

                 CHL’s Response: We respectfully disagree with the OIG’s finding with respect
                 to the borrower’s source of funds. The absence of full documentation of the
                 experienced Direct Endorsement Underwriter’s judgment on this issue is not the
                 same as the failure of the underwriter to make that judgment. We assert that that
                 judgment was made in this loan, and that the underwriter determined that the
                 source of funds had been documented to the extent reasonably required under
                 applicable FHA and CHL requirements, and that a contrary conclusion by the
                 OIG would represent unjustified and improper hindsight second-guessing of the
                 underwriting decision FHA itself properly has delegated to the underwriter it
                 approved and licensed to make such decisions.

                 In addition, we respectfully disagree with the OIG’s conclusions with respect to
                 the borrower’s minimum downpayment and investment in the property. The
                 purchase price was $120,000. Three percent of $120,000 is $4,000. The loan
                 application shows that the borrower made a $900 earnest money deposit, and the
                 HUD-1 shows a                         in the amount of $4,000 was credited to
                 the borrower’s investment at the closing. The borrower was required to bring an
                 additional $743.43 to the closing (cash to close), which together with the $4,000
                 gift funds totals a $4,743.43 downpayment and investment in the property. This
                 is more than sufficient to cover the minimum downpayment requirement.

                 See Exhibit B.




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         James D. McKay
         Regional Inspector General for Audit       -7-                           November 22, 2005


                 OIG Findings: Other Deficiencies and Inconsistencies

                 The OIG alleges that CHL did not resolve conflicting or inconsistent information
                 in the case binder. The OIG states that the final loan application showed the
                 borrower’s debt and income, while the initial loan application did not list any debt
                 and income. Additionally, the OIG notes that the sales contract reported an
                 earnest deposit of $900, while the loan application and HUD-l settlement
                 statement each reported no downpayment. The OIG states that there was no
                 explanation provided for these inconsistencies. In addition, the OIG states, CHL
                 did not provide an explanation for the delay in endorsing the loan in a timely
                 manner and what actions it plans to take to prevent future delayed submissions.

                 CHL’s Response: The OIG cites as an inconsistency that the initial loan
                 application did not list any debt or income, but the final loan application did.
                 Respectfully, we believe that this is not an inconsistency that reasonably requires
                 further explanation. It is well understood that the initial loan application (Form
                 1003) generally is an estimate of the “numbers,” as liabilities especially will
                 change during the course of the loan processing. The information on the final
                 loan application, however, is a firm picture in time, taken from the employment
                 and income information obtaining during the loan processing, and from the debt
                 information obtained in the credit report. Many initial loan applications differ
                 with respect to the actual dollars of employment income and liabilities from that
                 shown on the final loan applications. And that is all that occurred here. It
                 provides no reasonable basis for questioning the accuracy of the final loan
                 application. After all, if “processing” of the initial application was not required,
                 loans would close on the basis of the initial application only and it never would
                 need to be changed.

                 The OIG also states that the sales contract reported an earnest money deposit of
                 $900, while the loan application and HUD-1 Settlement Statement did not.
                 Respectfully, the final loan application, dated 4/30/03, does show the $900 earnest
                 money deposit. We do not know why the HUD-1 Settlement Statement does not
                 reflect this amount. It should have. But, CHL did not prepare the HUD-1, nor
                 was it required to do so. HUD-1 inaccuracies in this area, we respectfully
                 suggest, more properly are addressed by the OIG to those responsible for its accurate
                 preparation.

                 The OIG also notes that this loan was submitted late for insurance endorsement.
                 We concur, but this was an aberration. CHL’s policy and practice is always to
                 make a diligent effort timely to submit loans for insurance endorsement. CHL has
                 created a monthly report as a tool to help assure timely endorsements in the
                 future.




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            James D. McKay
            Regional Inspector General for Audit       -8-                          November 22, 2005


Comment 9       3) FHA Case# 092-9367167

                    OIG Findings: Inaccurate Gift Information

                    The OIG alleges that CHL approved the loan based on inaccurate gift
                    information. The OIG states that the auditor verified with the gift donor that the
                    donor had not completed or signed the gift letter found in the case binder, and that
                    he did not provide a gift to the borrower. Apparently, the donor told that OIG that
                    he did, however, provide a $2,500 loan to help his brother purchase the property.
                    Thus, the OIG states, if CHL had contacted the gift donor, the information in our
                    file would not have been validated.

                    Although a Loan Correspondent originated this loan, the OIG states that CHL
                    failed to properly verify gift information and, therefore, generated and submitted
                    to HUD inaccurate gift data for the borrower.

                    CHL’s Response: Respectfully, we disagree with the draft OIG findings. The
                    gift information was verbally re-verified on 4/8/ 2003, during a Pre-Close Quality
                    Control audit. (Please see Exhibit C.) Furthermore, as noted by the OIG, this
                    loan was originated by a Loan Correspondent. Therefore, the gift information
                    was generated by the Loan Correspondent, and not by CHL. CHL simply
                    underwrote and closed the loan.

                    Additionally, we note that the underwriter of this loan is no longer employed
                    by CHL.

                    OIG Findings: Questionable Source of Funds

                    The OIG further alleges that CHL failed to properly verify the borrower’s source
                    of funds to close the loan. The case binder indicated two personal money orders
                    were used in providing the gift funds of $2,000 to the borrower. However, the
                    OIG states that the purchaser for both money orders was the borrower, not the gift
                    donor. The OIG notes that the case binder also contained the gift donor’s bank
                    account showing a withdrawal of $2,008. However, the OIG states, there was no
                    supporting documentation to ensure the $2,008 was used to purchase the personal
                    money orders.

                    The OIG also alleges that CHL failed to ensure that the borrower met the
                    minimum downpayment and minimum required investment in the purchase of the
                    property. The OIG calculated the minimum downpayment and minimum required
                    investment to be $4,175 and $3,450, respectively. But, the OIG states, the
                    borrower only invested $3,400. The OIG did not find supporting documentation
                    in the case binder that the borrower complied with the funding requirements.




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         James D. McKay
         Regional Inspector General for Audit       -9-                          November 22, 2005


                 CHL’s Response: For the reasons previously, we respectfully disagree with this
                 draft OIG finding based on the lack of the availability of full documentation of a
                 judgment that CHL’s D.E. Underwriter clearly was required to and did make.
                 Respectfully, such hindsight second-guessing by the OIG of such sound
                 underwriting judgments should not form the basis of OIG Findings and required
                 indemnification demands.

                 The OIG also alleges that CHL failed to ensure that the borrower met the
                 minimum required downpayment and cash investment in the property.
                 Respectfully, we disagree with this finding. The purchase price of this property
                 was $115,000. Three percent of the sale price is $3,450, which was the minimum
                 required down payment. The HUD-1 Settlement Statement shows there was an
                 earnest money deposit of $3400 and that the borrower was to come to closing
                 with an additional $414.93. Together, these total $3,864.93, which is more than
                 the required investment amount. Further, the MCAW makes clear that between
                 the gift and the money in the borrower’s account, there were sufficient funds
                 verified for the closing.

                 See Exhibit C.

                 OIG Findings: Excess Ratios without Adequate Justification

                 The OIG alleges that CHL did not provide valid compensating factors for
                 exceeding the ratios when underwriting this loan. The OIG states that CHL
                 justified the excess front and back end ratios by stating that the borrower had (1)
                 minimal outstanding consumer debt, allowing more to be used for housing and (2)
                 a small family whose living needs are less than larger expanding families.
                 According to the OIG, however, it appears that the borrower used his savings for
                 daily purchases to live and remain free of outstanding debt, as reflected in the
                 minimal average bank balance of $251 for two months. In addition, the OIG
                 states, the borrower claimed to have reserves not placed in his bank account but
                 there was no evidence that supported this.

                 CHL’s Response: Respectfully, we disagree with the OIG’s conclusion that CHL
                 did not provide sufficient compensating factors for exceeding the front and back
                 end ratios. A third compensating factor provided (See a copy of the MCAW in
                 Exhibit C) is that “as of January, only six car payments left.” The loan closed in
                 May 2003, when the car loan would have been nearly paid off. We believe
                 that is a huge compensating factor that should have been considered. The
                 borrower may have claimed that he had additional reserves, but since this was not
                 documented, it was not given any consideration by the underwriter.




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         James D. McKay
         Regional Inspector General for Audit      -10-                          November 22, 2005


                 OIG Findings: Credit Issues

                 The OIG alleges that CHL did not properly analyze credit performance to ensure
                 that the borrower demonstrated financial responsibility. While the borrower
                 provided two letters in the case binder explaining all derogatory credit
                 information, the OIG has determined that the explanations were insufficient and
                 inconsistent. For example, the OIG states, the borrower indicated being unaware
                 of medical bills not covered by insurance in collection status. The OIG found
                 this explanation unusual because if a medical provider does not get paid from the
                 insurance company, it then bills the insured person. According to the OIG, after
                 several attempts to get paid, the provider reports the unpaid balance to a collection
                 agency. While the credit report shows some of the accounts were paid, the OIG is
                 uncertain whether other accounts were paid since the credit report only indicates
                 that they were updated.

                 CHL’s Response: Respectfully, we disagree with the OIG’s findings with respect
                 to the borrower’s credit explanations. The underwriter who reviewed this file
                 found the explanations credible. Further, the borrower also had good credit
                 records, and the loan was still performing a year after its closing. Over two years
                 after the loan closing, we submit that the borrower has shown financial stability
                 and a conscious regard for his debts and, therefore, the underwriting was
                 appropriate.

                 OIG Findings: Other Deficiencies and Inconsistencies

                 The OIG alleges that CHL did not resolve conflicting or inconsistent information
                 in the case binder. Specifically, the OIG states that they found several
                 inconsistencies between the initial and final loan applications, including (1) the
                 initial loan application stated that the borrower had two dependents, but the final
                 loan application and credit report indicated zero dependents; (2) the initial loan
                 application did not list any debts, but the final loan application listed a debt of
                 $1,624; (3) the initial loan application showed $1,000 held by the settlement
                 agent, while the final loan application showed $2,900 held in escrow; and (4) the
                 initial loan application indicated the borrower had a bank account with no amount
                 disclosed, but the final loan application disclosed a balance of $506 in the same
                 bank account.

                 In addition, the OIG states, page 2 of the final loan application showed the escrow
                 agent holding $2,900 as an escrow deposit, while page 3 stated $3,400. The OIG
                 alleges that no explanations were provided in the case binder regarding
                 these inconsistencies.




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         James D. McKay
         Regional Inspector General for Audit       -11-                          November 22, 2005


                 While the OIG verified with the employer that the borrower worked for the
                 company, the OIG’s review of the case binder found that the borrower was not
                 employed at the time the loan closed. The OIG apparently came to this
                 conclusion because, the auditor stated, the loan closing occurred in May 2003,
                 and the borrower’s bank statements for April and May 2003 showed that the
                 employer electronically deposited no funds during those months.

                 CHL’s Response: The OIG cites several discrepancies between the initial loan
                 application and the final loan application, and alleges that CHL failed to resolve
                 the inconsistent information. Whether individuals should or should not formally
                 be listed as “dependents” on a HUD Form loan application can, in some
                 circumstances, be a less than straightforward determination for applicants to
                 make. By the time of the final application, after it has been “processed,” that
                 determination had been made. Inconsistencies between the initial and final
                 applications simply reflect the normal processing and clarification of such and
                 other circumstances.

                 We also respectfully disagree with the OIG’s conclusions regarding the
                 differences between the initial and final applications with respect to the
                 borrower’s debts, bank account balance, and earnest money deposit. As noted
                 above, the initial loan application (Form 1003) is generally just an estimate of the
                 “numbers,” as liabilities especially will change during the course of the loan
                 processing. The information on the final loan application, however, is a firm
                 picture in time, taken from the employment and income information obtaining
                 during the loan processing, and from the debt information obtained in the credit
                 report. Many initial loan applications differ with respect to the actual dollars of
                 employment income and liabilities from that shown on the final loan applications.
                 That is all that occurred here, and that does not support the adverse finding by the
                 OIG with respect to this loan.

                 The OIG also apparently draws the conclusion that the borrower’s employment
                 had terminated because the employer had not electronically deposited funds into
                 the borrower’s bank statements for April and May 2003. Respectfully, this is not
                 dispositive. It is possible that the borrower cancelled the electronic deposit of his
                 income or changed the bank account into which his funds were to be deposited.
                 We note, however, that the borrower signed the final loan application at the
                 closing thereby certifying that the information included in that application,
                 regarding his income, employment, liabilities, dependents, etc. was true and




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                                              36
             James D. McKay
             Regional Inspector General for Audit      -12-                         November 22, 2005


                     correct as of the date he signed the form. Respectfully, OIG speculation to the
                     contrary is not a reasonable basis for requiring CHL indemnification or the
                     imposition upon CHL of civil money penalties, as recommended in the draft OIG
                     report.

                 4) FHA Case# 092-9404542

                     OIG Findings: Inaccurate Employment and Income Information

                     The OIG alleges that CHL approved the loan based on inaccurate employment
                     and income information. The OIG states that they verified with the borrower’s
                     employer that the borrower never worked for the company, that the employer
                     never received, completed, or signed the verification of employment form, and the
                     pay stubs and W-2 forms did not belong to the company. The OIG states that
                     they found a letter from the loan officer in the case binder, indicating that the
                     employer refused to provide the borrower’s employment information. The letter,
                     however, according to the OIG, provided inaccurate information about the
                     ownership of the company. Therefore, the OIG concludes that there was no
                     indication that these documents had been mailed to the employer. In addition,
                     the OIG states, CHL did not maintain original employment and income
                     documentation in its files.

                     Although a Loan Correspondent originated this loan, the OIG alleges that CHL
                     failed to properly verify employment and income information and, therefore,
                     generated and submitted to HUD inaccurate employment and income data for the
                     borrower.

                     CHL’s Response: Respectfully, we disagree with the OIG’s conclusions
Comment 10           regarding the employment and income information. Although the VOE, W2 and
                     paycheck stubs for the borrower ultimately may prove to be false documents, they
                     were regular on their face, consistent and complete. During the origination of this
                     loan, we had no indication that the documents might not be accurate. As noted by
                     the OIG, this loan was originated by a Loan Correspondent. The Loan
                     Correspondent processed the loan and provided CHL with the VOE, W2’s and
                     paycheck stubs. Therefore, it was the Loan Correspondent who generated this
                     information, not CHL. As the sponsor, CHL underwrote the loan based upon the
                     documentation provided to us. Additionally, we note that the borrower re-
                     confirmed the accuracy of the employment and income information when he
                     signed the final loan application (form 1003) at closing.




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             James D. McKay
             Regional Inspector General for Audit      -13-                         November 22, 2005


Comment 10           The original documents are sent with the HUD case binder. Our copy of the loan
                     file does not contain the letter from the loan officer cited by the OIG, so we
                     cannot comment upon it. We note, however, that the loan file contains the
                     following documents to verify the borrower’s income and employment:
                     verification of employment form, paycheck stubs, 2002 and 2001 W2 forms,
                     confirmation from the yellow pages as to company's existence, and verification of
                     the employers corporate information from the Florida Department of State,
                     Division of Corporations’ Online Public Inquiry (www.sunbiz.org). Additionally,
                     the credit report verifies the borrower’s employment. There was no reason to
                     believe that these documents were not legitimate.

                     We note, also, that the underwriter of this loan is no longer employed by CHL.

                     See Exhibit D.

                     OIG Findings: Other Deficiencies and Inconsistencies

                     The OIG alleges that CHL did not resolve conflicting or inconsistent information
                     in the case binder. The OIG notes that the initial loan application showed total
                     funds available of $500, while the final loan application showed total funds
                     \available of $7,196. The OIG also notes that both the initial loan application and
                     the sales contract showed a $500 earnest deposit, while the HUD-l Settlement
                     Statement and final loan application showed an earnest deposit of $0. Further, the
                     OIG notes, the mortgage credit analysis worksheet showed $4,200 as the earnest
                     money deposit, while the final loan application showed this amount as a gift. The
                     mortgage credit analysis worksheet showed $1,000 as a gift, notes the OIG,
                     however the case binder did not have supporting documentation for this gift. The
                     OIG concludes that they did not find an explanation in the case binder for these
                     inconsistencies.

Comment 11           CHL’s Response: Respectfully, we disagree with the OIG’s conclusions
                     regarding the apparently inconsistent information. Although the initial
                     application shows that Dade County Title held a $500 earnest money deposit, this
                     amount was changed on the final loan application to reflect the full amount of
                     $4,200 that Dade County Title advised us it held as of 5/29/03. The initial loan
                     application showed no funds available (other than the $500 deposit) because no
                     balance had been provided for the bank account. The final loan application,
                     however, reflects only the gift funds of $4,200 which were held by Dade County
                     Title as earnest money deposit. Although the final loan application had been
                     printed to show a balance of $2,985 in the Washington Mutual Bank account, this
                     was crossed off.




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             James D. McKay
             Regional Inspector General for Audit       -14-                          November 22, 2005



Comment 11           Since we had no evidence of the source of funds for the initial $500, the underwriter
                     did not consider this $500 as available funds. The MCAW reflects the $4200 as
                     earnest money deposit because this gift was given directly to the title company, as
                     evidenced by their letter dated 5/29/03. The underwriter corrected the MCAW to
                     show that the $4,200 earnest money deposit was a gift from a relative, and to delete
                     the $1,000 noted on the MCAW. The $4200 gift is also disclosed on the HUD 1.
                     Our loan file contains the gift letter, evidence of $4200 gift withdrawal from the
                     donor's account, a copy of the cashier's check made payable to the title company in
                     the amount of $4200 and an escrow letter from Dade County Title evidencing that
                     they had received and were holding the $4,200 deposit.

                 5) FHA Case# 092-9574386

                     OIG Findings: Inaccurate Gift Information
                     The OIG alleges that CHL approved the loan based on inaccurate gift
                     information. The OIG states that they verified with the two gift donors that they
                     never completed or signed the gift letters found in the case binder. In one
                     instance, the OIG alleges, it appears that an interested third party (selling broker)
                     informed the donor that the funds were necessary to approve the loan for the
                     borrower. However, the OIG states, the donor attested to the OIG auditor that the
                     funds provided were a loan and not a gift to the borrower, and that he is not the
                     borrower’s relative as indicated in the gift letter. Further, the OIG states, the
                     borrower did not sign the gift letter, and, according to the OIG, the borrower did
                     repay this loan. In the second instance, the donor apparently told the OIG that he
                     did not know the borrower and did not provide a gift to the borrower. The OIG
                     states that it appears to them that the loan correspondent (donor relative) provided
                     the gift funds to the borrower.

                     Although a Loan Correspondent originated this loan, the OIG states that CHL
                     failed to properly verify gift information and, therefore, generated and submitted
                     to HUD inaccurate gift data for the borrower.

                     CHL’s Response: Respectfully, we disagree with the OIG’s conclusions
Comment 12           regarding the gift information. As noted by the OIG, this loan was originated by a
                     Loan Correspondent. The loan also was processed by the Loan Correspondent
                     and, therefore, the gift documentation and other information was generated by the
                     Loan Correspondent and not by CHL. Although the gift documentation
                     ultimately may prove to be false documents, it was regular on its face, consistent
                     and complete, and CHL’s underwriter had no reason to suspect misrepresentation.

                     .




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             James D. McKay
             Regional Inspector General for Audit       -15-                          November 22, 2005


Comment 13           Further, we note that it appears that the OIG verified the information with two gift
                     donors. However, we were aware of only one. Both the final loan application
                     and the HUD-1 reflect a total of $3,000 in earnest money deposit. These funds
                     are further verified by a copy of a check written by the borrower to the settlement
                     agent in the amount of $1,000 and the gift letter from                       in the
                     amount of $2,000. The gift letter from                      is further supported by a
                     copy of the cashier’s check from Continental National Bank of Miami in the
                     amount of $2,000. Although the OIG alleges that the borrower did not sign the
                     gift letter, we do find her signature on the right side of the gift letter, about
                     halfway down the page.

                     We note also that the underwriter of this loan is no longer employed by CHL

                     See Exhibit E.

                     OIG Findings: Questionable Source of Funds

                     The OIG alleges that (1) CHL failed to properly verify the borrower’s source of
                     funds to close. According to the mortgage agreement, the OIG states, the
                     borrower and employer are married. However, the OIG alleges, the case binder
                     shows that the loan correspondent CHL in a letter that two of the borrower’s
                     boyfriend’s payroll checks were deposited into the borrower’s bank account. The
                     OIG notes that the husband and boyfriend had different names. (2) The OIG also
                     noted that the borrower’s bank statements had recurring overdraft and insufficient
                     fund charges. During a nearly three-month period, the borrower had nine
                     overdraft charges. Although the borrower provided an explanation in the case
                     binder, the OIG questions whether the borrower had the financial capability to
                     repay the mortgage. (3) The OIG alleges that a $287 debt was repaid, according
                     to a credit report, without supporting documentation in the case binder indicating
                     the source of funds used to repay this debt. (4) The OIG also alleges that CHL
                     failed to ensure that the borrower met the minimum downpayment and minimum
                     required investment in the purchase of the property. The OIG calculated the
                     minimum downpayment and minimum required investment to be $8,073 and
                     $5,340, respectively. But, the OIG notes, the borrower only invested $3,390, and
                     the OIG did not find documentation in the case binder to support that the
                     borrower had complied with the funding requirements.

                     CHL’s Response: Respectfully, we disagree with the OIG’s conclusion that CHL
Comment 14           did not properly verify the borrower’s source of funds to close. Both the initial
                     and the final loan applications, provided by the Loan Correspondent, show the
                     borrower as a single woman. We saw no documentation indicating that she was
                     married to                    .




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             James D. McKay
             Regional Inspector General for Audit      -16-                          November 22, 2005


                     We concur with the OIG’s statement that there were a number of overdraft
Comment 15           charges listed on the borrower’s bank statements. However, the borrower
                     provided an explanation of these overdrafts, which we think it clear that the
                     experienced underwriter fully considered and accepted. Additionally, we note
                     that the total cash to close was approximately $11, 973 ($8973 bank balance +
                     $3000 earnest money deposit), which exceeds the minimum required investment.

                     With respect to the OIG’s allegation that a $287 debt was repaid, according to a
Comment 16           credit report, without supporting documentation in the case binder indicating the
                     source of funds used to repay this debt, we note a $287 debt does not appear high.
                     This payoff to Target was not addressed by the underwriter because borrower had
                     sufficient assets to pay this amount.

                     The OIG also alleges that CHL failed to ensure that the borrower met the
Comment 17           minimum downpayment and minimum required investment in the purchase of the
                     property. Respectfully, we disagree with the OIG’s conclusion in this regard.
                     The OIG calculated the minimum downpayment and minimum required
                     investment to be $8,073 and $5,340, respectively. The HUD-1 Settlement
                     Statement shows that the borrower made a $3,000 earnest money deposit ($2,000
                     in gift funds and $1,000 in a check from her personal account). The HUD-1 also
                     shows that the borrower was required to bring $5,786 to closing. Together, these
                     amounts total $8,786, which exceeds the minimum downpayment and minimum
                     required investments to close.

                     OIG Findings: Credit Issues

                     The OIG alleges that CHL did not properly analyze credit performance to ensure
                     that the borrower demonstrated financial responsibility. Based on the credit
                     report, the OIG states, the borrower did not have a sufficient credit history.
                     Therefore, the OIG concludes, CHL should have used a nontraditional credit
                     history method and considered this when determining approval for the loan. In
                     addition, the OIG states, the borrower had one account in collection status without
                     an explanation provided in the case binder. The OIG determined that it did not
                     appear that CHL had considered this collection account in its analyses of the
                     borrower’s creditworthiness. The OIG considers this important since the
                     borrower did not have an established credit history and it could have been an
                     indicator of future financial difficulties.

                     CHL’s Response: Respectfully, we disagree with the OIG’s conclusions
Comment 18           regarding the analysis of the borrower’s credit history. The collection account
                     was for a very small amount, just $58.00. We agree underwriter did not request an
                     explanation. However, given that this was such a small amount, it seemed
                     unnecessary. The Credit Report indicates that the borrower had alternate credit
                     for a car loan, that had been established in 02/01 and was reviewed for 29 months.
                     The loan application indicated that the borrower lived with her family and
                     therefore alternate credit such as utilities and landlord history were not available.




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             James D. McKay
             Regional Inspector General for Audit       -17-                          November 22, 2005


                     OIG Findings: Other Deficiencies and Inconsistencies
                     The OIG alleges that CHL did not resolve conflicting or inconsistent information
                     in the case binder. In particular, the OIG states, the final loan application did not
                     list a $266 debt that had appeared in the initial loan application. Additionally, the
                     initial loan application showed funds available of $l,400, and the final loan
                     application showed $6,058 in available funds. And the earnest deposit was shown
                     as $2,000 on the initial loan application but $3,000 on the final loan application,
                     HUD-1 Settlement Statement, and mortgage credit analysis worksheet, and
                     $1,000 on the sales contract. The OIG did not find an explanation in the case
                     binder for these inconsistencies.

                     The OIG states that, by reviewing the case binder and CHL’s loan files and
                     conducting Internet searches, they learned that the employer was the borrower’s
                     husband. Additionally, the OIG determined that the borrower’s income as an
                     account representative was high and inconsistent with the average income of an
                     account representative in Miami. A copy of the verification of employment form
                     in the case binder reported the borrower’s income as $1,200 weekly or $62,400
                     per year. However, the OIG indicates that they conducted Internet searches and
                     “learned” that an account representative in Miami earns an average income of
                     $25,192 per year. Therefore, OIG questions the authenticity of the employment
                     and income information generated and submitted to HUD.

                     CHL’s Response: Respectfully we disagree with the OIG’s conclusion.
Comment 19           Although the $266 debt (account with Home Depot) was not included on the final
                     loan application, this application was provided by the Loan Correspondent in its
                     name. This debt, however, was minimal, as it added only $11 a month to the
                     borrower’s monthly payments. The inconsistent data regarding assets available
                     was due to the gift monies not deposited at time of initial loan application. There
                     was a total of $3000 deposited with title company as earnest money deposit.
                     Check #110 from Bank of America for $1000 from borrower's account and gift of
                     $2000 documented with cashier's check from Continental National Bank
                     #601643. The correct amount of $3000 was reflected on the final loan application.
                     (See Exhibit E.)

                     Finally, CHL had no reason to question the validity of the borrower’s
Comment 20           employment. The Loan Correspondent provided supporting documentation that
                     was consistent and regular on its face and complete. (See Exhibit E.) As to the
                     OIG’s allegation that the borrower’s income appeared higher than the average
                     account representative earns in Miami, respectfully, we believe that an average of
                     other people’s earnings are irrelevant. It is possible that there were other reasons
                      not known to CHL or the OIG why this borrower’s income would be substantially
                     higher than city’s average. Respectfully, for the OIG to conclude otherwise is to
                     substitute the OIG’s hindsight underwriting judgment for that of the experienced
                     D.E. Underwriter who fully considered all of these issues, and then approved this
                     loan as she was authorized by the FHA and CHL to do.




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             James D. McKay
             Regional Inspector General for Audit      -18-                         November 22, 2005

                 6) FHA Case # 0921-9594135

                     OIG Findings: Inaccurate Employment and Income Information

                     The OIG alleges that CHL approved the loan based on inaccurate employment
                     and income information. The OIG apparently verified with the borrower’s
                     employer that the borrower never worked for the company, the company never
                     received, completed, or signed the verification of employment form, and the pay
                     stubs did not belong to the company. Further, the OIG states, CHL did not maintain
                     original employment and income documentation in its files. The OIG also noted that
                     the credit report showed the borrower had worked for the employer since August
                     1999, while the verification of employment form indicated the borrower began
                     working for the employer in 2000. The OIG states that there was no supporting
                     documentation in the case binder that explains this inconsistency. In addition, the
                     OIG states that they verified that the employer identification on the W-2 form was
                     different from that reported by the Florida Department of State, Division of
                     Corporations. Therefore, the OIG concludes that CHL failed to properly verify
                     employment and income information and thereby generated and submitted to HUD
                     inaccurate employment and income data for the borrower.

                     CHL’S Response: CHL respectfully disagrees with the OIG’s findings. The
Comment 21           credit report, dated 9/30/03 indicates that employment had been verified by
                        for the employer, who indicated that the borrower had been employed as
                     office manager for three years. This is consistent with the verification of
                     employment form, signed also by          , which shows the borrower had been
                     employed since 2000 (which would be three years). Therefore, no explanation
                     was deemed necessary. Further, contrary to the OIG’s findings, we confirmed
                     with the Florida Department of State, Division of Corporations (See print-out
                     from the Public Inquiry website at Exhibit F.) that the FEI NUMBER shown on
                     the borrower’s W-2s from                     is correct and is identified in the
                     Florida Department of State records as belonging to               .

                     As stated above, CHL sends all original documents to HUD in the case binder.
Comment 22           That is why originals are not retained in our files.

                     Finally, we note that both the loan officer and the processor who were involved
                     with this loan have terminated their employment with CHL.

                     See Exhibit F.




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             James D. McKay
             Regional Inspector General for Audit       -19-                          November 22, 2005


                     OIG Findings: Questionable Source of Funds

                     The OIG alleges that CHL failed to properly verify the borrower’s source of funds
                     to close and that CHL failed to ensure that the borrower met the minimum
                     downpayment and minimum required investment in the purchase of the property.
                     The OIG calculated the minimum downpayment and minimum required
                     investment to be $5,250 and $4,710, respectively. The OIG states that they found no
                     evidence in the case binder that the borrower met the minimum downpayment
                     or minimum investment requirements.

Comment 23           CHL’S Response: For reasons previously noted in connection with other loans as
                     to which this same OIG allegation is made, the lack of full documentation
                      available to CHL does not equate to the absence of a fully considered judgment
                     by CHL’s underwriter with respect to this issues. In addition, we note that the
                     minimum required investment of $4,710 clearly was met and that documentation
                     of that judgment has been provided. The HUD-1 Settlement Statement indicates
                     that the borrower was required to bring $4719.64 to close the loan. This figure
                     complies with the minimum required investment of $4710.

                      See Exhibit F.

                     OIG Findings: Credit Issues

                     The OIG also alleges that CHL did not properly analyze credit performance
                     to ensure that the borrower demonstrated financial responsibility. The OIG notes
                     that the borrower provided a letter in the case binder explaining all derogatory
                     credit information. However, the OIG has determined that the borrower’s
                     explanations were insufficient and inconsistent. In addition, the OIG notes that
                     the credit report shows several instances in which the borrower was late in
                     repayment of a credit card. Since some of the overdue accounts were in
                     collection status for more than a year, the OIG questions the financial stability of
                     the borrower.

Comment 24           CHL’S Response: As previously noted in connection with other CHL loans
                     criticized by the OIG for these same or similar reasons, CHL’s Direct
                     Endorsement Underwriter reached the opposite conclusion and approved this
                     loan. Respectfully, it is neither fair nor appropriate nor permissible for the OIG to
                     second-guess that judgment simply because the full documentation of that
                     judgment is not now available to CHL.

                     OIG Findings: Other Deficiencies and Inconsistencies

                     The OIG notes that the credit report and the HUD-1 Settlement Statement
                     identified the employer and the settlement agent with the same name. Thus, the
                     OIG apparently concludes, they could be related or the same person.




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             James D. McKay
             Regional Inspector General for Audit       -20-                          November 22, 2005


Comment 25           CHL’S Response: Respectfully, we disagree with the OIG’s conclusions.
                     Although the credit report indicates that one of three repositories reviewed
                     (TransUnion) indicated that the borrower was employed by                      at
                                       , there was no date attached to this reputed employment. The
                     other two credit repositories consulted (Experion and Equifax) did not report
                                          as the employer. The consolidated tri-merge credit report
                     concluded that the borrower was employed with                         and had been for
                     three years. The verification of employment obtained by CHL supports the
                     employment with                     . Further, it is important to note that the
                     underwriter has no knowledge as to whom the settlement agent will be for a
                      particular loan closing, at the time of underwriting. Therefore, we believe that it
                     is simply coincidence that TransUnion had reported employment with “
                            ” while the loan was closed by                             , Attorney at Law.

                     See Exhibit F.

                 7) FHA Case# 092-9644668

                     OIG Findings: Inaccurate Employment and Income Information

                     The OIG alleges that CHL approved the loan based on inaccurate employment
                     and income information. The OIG states that the auditor verified with the
                     borrower’s employer that the borrower never worked for the company, the
                     company never received, completed, or signed the verification of employment
                     form, and the pay stubs and W-2 forms did not belong to the company. The OIG
                     also states that CHL did not maintain original employment and income
                     documentation in its files. Further, the OIG notes, the credit report and
                     verification of employment form show different employers. Thus, the OIG
                     concludes that CHL failed to properly verify employment and income information
                     and, therefore, generated and submitted to HUD inaccurate employment and
                     income data for the borrower.

Comment 26           CHL’s Response: Respectfully, we disagree with the OIG’s conclusions
                     regarding the employment and income information. The loan application reports
                     the borrower’s employment with “
                                                         . The verification of employment form was
                     addressed to this employed at the address shown on the loan application. It was
                     returned from the employer on 11/23/03 confirming the employment. The
                     paycheck stubs further supported this employment information and were
                     consistent in the earnings reported, as were the W-2 forms for 2001 and 2002.
                     We had no reason to suspect that they might not be accurate. CHL’s stated
                     policy and procedure is always to mail all verification forms for loans we
                     originate. We had no reason to suspect that that was not done in this case. The
                     not contain a copy of the credit report and, therefore, we are unable to respond to
                     your allegation about the credit report. We note also that the borrower confirmed
                     the employment and income information at closing, by signing the final 1003.




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             James D. McKay
             Regional Inspector General for Audit      -21-                         November 22, 2005


                     processor and the loan officer who originated this file are no longer employed by
Comment 26           CHL, so we are unable to question them regarding their compliance with our
                     stated policies. At the time this loan was underwritten, the file was fully
                     documented with a verification of employment form, several paycheck stubs and
                     W2's all consistent and confirming borrower's employment and income. The
                     deposits on the borrower’s bank statements also were consistent with the net
                     income reflected on paycheck stubs. As previously stated, all original documents
                     are sent to HUD in the case binder. Unfortunately, our copy of the loan file does

                     We note also that the underwriter of this loan is no longer employed by CHL.


                   See Exhibit G.

                     OIG Findings: Questionable Source of Funds

                     The OIG alleges that CHL failed to properly verify the borrower’s source of funds
                     to close and that CHL failed to ensure that the borrower met the minimum
                     downpayment and minimum required investment in the purchase of the property.
                     The OIG states that the borrower did not provide the minimum downpayment of
                     $7,359 or the minimum required investment of $3,690. The OIG also states that
                     they did not find supporting documentation in the case binder that the borrower
                     complied with these funding requirements.

                     CHL’s Response: Respectfully, we disagree with the OIG’s findings. The
Comment 27           borrower reported, on the loan application, that he had $11, 134 in available funds
                     in a Washington Mutual account. CHL obtained a copy of the borrower’s
                     Washington Mutual bank account statement, dated 10/22/03, which confirms that
                     the ending balance on that date was $11,134.92. (The ending balance on 09/22/03
                     was $11,846.27.) Although neither the loan application nor the HUD-1
                     Settlement Statement reflect that an earnest money deposit had been paid on this
                     property prior to the closing, this does not mean that the borrower did not make a
                     downpayment or minimum required investment. The sale price of this property
                     was $123,000. Three percent of the sale price was $3690. The HUD-1 indicates
                     that the borrower was to bring $9, 145 to the closing. We believe that he did so,
                     because if he hadn’t, the loan would not have closed. Therefore, it appears to us
                     that the borrower exceeded both the minimum down payment and the minimum
                     investment in the property, as indicated on the HUD-1.

                     See Exhibit G.




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             James D. McKay
             Regional Inspector General for Audit      -22-                          November 22, 2005


                     OIG Findings: Credit Issues

                     The OIG alleges that CHL did not properly analyze credit performance to ensure
                     that the borrower demonstrated financial responsibility. In particular, the OIG
                     notes that the credit report showed an account that had been in collection status
                     since 2002 without an explanation from the borrower in the case binder. The
                     OIG also noted that another creditor wrote off $4,239 after not receiving payment
                     from the borrower. The OIG did not find an explanation in the case binder
                     regarding these accounts.

                     CHL’s Response: Our copy of the loan file does not contain copy of the credit
Comment 28           report and therefore we are unable to fully respond to your findings. We note,
                     however, that this loan and the borrower’s credit were evaluated and approved by
                     Loan Prospector, which is noted on the MCAW as CHUMS ID# ZLPR. Please
                     review the MCAW form and HUD 92900-A attached in Exhibit G.

                     OIG Findings: Other Deficiencies and Inconsistencies

                     Finally, the OIG states that they conducted Internet searches and learned that the
                     interviewer and the selling real estate agent appear to be related and are co-
                     owners of a business. The OIG found no documentation in the case binder
                     explaining this discrepancy. In addition, the OIG states that they believe that the
                     borrower’s income as a welder was high. The verification of employment form
                     reported income of $909 weekly or $47,258 per year. However, the OIG states
                     that they conducted Internet searches and learned that a welder in Miami earns an
                     average income of only $29,982 per year.

                     CHL’s Response: We cannot respond to the OIG’s allegations regarding the
Comment 29           interview and the selling agent. We were unaware of any possible relationship
                     between the two. CHL has a strict policy regarding any other employment and
                     any potential conflicts of interest of our employees. We had no reason to suspect
                     that the loan officer who originated this loan was not in compliance with our
                     stated policies. The loan officer is no longer employed by CHL.

                     Nor can we respond to the OIG’s allegation that the borrower’s income was too
Comment 30           high based on the OIG’s research into the average income of a welder in the
                     Miami area. As noted above, we had a verification of income, paycheck stubs and
                     W-2 forms for this borrower, that all were consistent and supported the
                     borrower’s stated income. We had no reason to question if he was being paid
                     “more than the average” or why that might be. Neither, respectfully, does the
                     OIG.




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             James D. McKay
             Regional Inspector General for Audit     -23-                         November 22, 2005


                 8) FHA Case# 092-9689460

                     OIG Findings: Inaccurate Employment and Income Information

                     The OIG alleges that CHL approved the loan based on inaccurate employment
                     and income information. The OIG apparently verified with the employer that
                     borrower income was based on commissions and was reported on an Internal
                     Revenue Service 1099 form. According to the OIG, the employer said that the
                     signature on the verification of employment form was not his and the pay stubs
                     and W-2 forms did not belong to the company. The OIG states that CHL did not
                     maintain original employment and income documentation in its files and that
                     CHL failed to properly verify employment and income information and, therefore,
                     generated and submitted to HUD inaccurate employment and income data for the
                     borrower.

Comment 31           CHL’s Response: Respectfully, we disagree with the OIG’s conclusions.
                     Although the verification of employment, W-2 forms, and paycheck stubs for the
                     borrower ultimately may prove to be false documents, they were regular on their
                     face. Furthermore, since corporate records show the borrower as part-owner of
                     her employer, the loan was conditioned upon receiving an IRS form 4506 and the
                     borrower’s tax returns and a financial statement. The borrower’s bank statements
                     also support the regular deposits of the borrower’s net income. Consequently, we
                     had no indication that any of the documents might be inaccurate. In fact, the
                     borrower re-confirmed the accuracy of the employment and income information
                     when she signed the final loan application (form 1003) at closing.

                     We note that the underwriter of this loan is no longer employed by CHL.

                     See exhibit H.

                     OIG Findings: Questionable Source of Funds

                     The OIG further alleges that CHL failed to properly verify the borrower’s source
                     of funds to close and failed to ensure that the borrower met the minimum
                     downpayment and minimum required investment in the purchase of the property.
                     The OIG calculated the minimum downpayment and minimum required
                     investment to be $6,950 and $6,600, respectively, but the OIG found that the
                     borrower invested only $5,000. The OIG did not find supporting documentation
                     in the case binder to indicate that the borrower complied with the funding
                     requirements.




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                                                48
             James D. McKay
             Regional Inspector General for Audit       -24-                          November 22, 2005

                     CHL’s Response: Respectfully, we disagree with the OIG’s findings. The
Comment 32           borrower had made an earnest money deposit of $5,000, which was supported by
                     a letter from the seller indicating that he was holding the $5,000 deposit in
                     escrow. The $5,000 deposit also is shown on the HUD-1 Settlement Statement.
                     The borrower had additional funds available in the bank of $13,529.00, as
                     supported by a copy of the bank statement dated 12/17/03. The HUD-1
                     Settlement Statement shows that the borrower was to come to closing with an
                     additional $1,612.66 and she had already paid $350.00 outside the closing (for the
                     appraisal), making her total investment $6,962.66. This amount exceeds both the
                     $6950 and the $6,600 that the OIG calculated as the minimum downpayment and
                     investment requirements.

                     See Exhibit H.

                     OIG Findings: Other Deficiencies and Inconsistencies

                     The OIG alleges that the initial loan application showed $0 in liabilities, while the
                     final loan application showed $1,877. Further, the OIG states that, according to
                     the borrower’s bank statement, the earnest deposit funds were withdrawn from the
                     account on December 15, 2003. However, a copy of the check in the case binder
                     showed a date of January 14, 2004. The OIG did not find an explanation in the
                     case binder for these inconsistencies.

Comment 33           CHL’s Response: Respectfully, we disagree with the OIG’s conclusions. It is not
                     unusual for an initial loan application not to show a borrower’s actual assets or
                     liabilities, as the amounts change over time (interest on cash assets accrues, debts
                     are paid off or new debts are incurred, etc). Nor is it unusual for the initial loan
                     application and the final loan application to differ in the amounts of cash assets or
                     liabilities. The cash assets and the liabilities shown on the final loan application,
                     however, are supported by the borrower’s bank account statements and credit
                     report obtained during the loan processing.


Comment 34           With respect to the date the earnest money deposit actually was made, we agree that
                     the borrower’s bank statement shows that check # 4349 was paid by the bank
                     on 12/15/2003, although the copy of the check in HUD’s case binder shows the
                     date the check was written as January 14, 2004. We cannot explain this
                     discrepancy. Perhaps the check actually was written on 12/15/03 or earlier, but
                     since the funds were to be held in escrow, the check was post-dated to the
                     anticipated closing date. But, we respectfully suggest, this discrepancy does not
                     make this loan an uninsured one.




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                                                  49
             James D. McKay
             Regional Inspector General for Audit      -25-                         November 22, 2005

                     9) FHA Case# 092-9331983
Comment 35
                     OIG Findings: Questionable Source of Funds

                     The OIG alleges that CHL failed to properly verify the borrower’s source of funds
                     to close and failed to ensure that the borrower met the minimum downpayment
                     and minimum required investment in the purchase of the property. The OIG
                     calculated the minimum downpayment and minimum required investment to be
                     $4,613 and $3,447, respectively, but states that the borrower invested only
                     $2,570. The OIG states that they did not find supporting documentation in the
                     case binder that the borrower complied with the funding requirements.

                     CHL’s Response: Respectfully, we disagree with the OIG’s findings. The
                     borrower made a total investment of: $5,267.34 as documented in the case file
                     ($2000 in earnest money deposit, $325 paid outside closing for the appraisal, and
                     $2,942.34 brought to the closing from verified funds). We believe that the funds
                     were correctly documented.

                     We note that the underwriter of this loan is no longer employed by CHL.

                     See Exhibit I.

                     OIG Findings: Credit Issues

                     The OIG alleges that CHL did not properly analyze credit performance to ensure
                     financial responsibility. In particular, the OIG notes, the credit report showed
                      accounts in collection status that were paid in 2000 and 2001 but no further
                     information was provided in the case binder. While this transaction was
                     completed in 2003, the OIG concludes that CHL should have obtained an
                     explanation from the borrower about these accounts and considered this during
                     the analysis to approve the loan.

                     Further, the coborrower provided an explanation for all collection accounts, but
                     the OIG determined that these explanations were not acceptable.

                     CHL’s Response: We concur that, even though the collection accounts were paid
                     off more than two years prior to the closing of this loan, the file should have
                     contained an explanation for the borrower’s derogatory credit history. We cannot
                     explain why there was no explanation in the file. Perhaps it was included in the
                     original documents send to HUD in the case binder. We note, however, that since
                     the majority of the co-borrower’s collections were medical and the rest of her
                     credit was very good, her explanation was acceptable to this underwriter.

                     See Exhibit I.




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         Regional Inspector General for Audit      -26-                          November 22, 2005


                 OIG’s Findings: Other Deficiencies and Inconsistencies

                 The OIG states that the coborrower’s Social Security number differed slightly
                 among several documents in the case binder. The OIG states, however, that this
                 could be a typing error since the OIG’s Internet searches confirmed the copy of
                 the Social Security card in the case binder. Other inconsistencies that apparently
                 bother the OIG include the following: The final loan application showed the
                 borrower having zero dependents and the coborrower having one dependent, but
                 the credit reports showed the borrower having one dependent and the coborrower
                 having zero dependents. This could also be caused by clerical errors.

                 Also, the OIG notes that the initial loan application showed the coborrower with a
                 bank balance of $935, while the final loan application showed a balance of
                 $2,942. And the earnest money deposit in the sales contract, initial and final loan
                 applications, and HUD-1 settlement statement was $2,000, while the mortgage
                 credit analysis worksheet showed $2,335. The OIG states that the case binder had
                 no documentation explaining these discrepancies.

                 The OIG also states that CHL did not provide an explanation for the delay in
                 endorsing the loan in a timely manner and what actions it plans to take to prevent
                 future delayed submissions.

                 Finally, the OIG also alleges that CHL approved the loan based on questionable
                 employment information. The OIG states that the auditor attempted to verify
                 employment, but the current employer’s business had dissolved and the prior
                 employer was a contractor whom the OIG was unable to contact. Instead, the
                 OIG states that the auditor verified with the subcontractor (not the employer) that
                 the borrower provided the information to them to complete the verification of
                 employment form. In addition, the OIG states, CHL did not maintain original
                 employment and income documentation in its files.

                 Although a Loan Correspondent originated this loan, the OIG concludes that CHL
                 failed to properly verify employment information and, therefore, generated and
                 submitted to HUD inaccurate employment and income data for the borrower.




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         Regional Inspector General for Audit      -27-                          November 22, 2005


                 CHL’s Response: As noted by the OIG, the slight differences in the coborrower’s
                 ocial security number among various documents in the file were due to clerical
                 (typographical) errors, as the actual social security number was verified and
                 accurate. Also the differences in whether it was the borrower or the coborrower
                 who had a dependent, as shown in the credit report and the loan application, also
                 were due to clerical errors. They did not effect the processing, underwriting or
                 qualification of the borrowers for approval of this loan.

                 The OIG also cites alleged and unexplained discrepancies between the loan
                 application and other documents with respect to the coborrower’s available assets
                 and the earnest money deposit on this property. With respect to the available cash
                  assets, the OIG states that the initial loan application showed the coborrower with
                 a bank balance of $935, while the final loan application showed a balance of
                 $2,942. We concur, however, we respectfully submit that this alleged
                 discrepancy is not unusual nor is it a major issue. As previously stated, there
                 often are changes between the initial and final loan applications, as the initial
                 application numbers are estimates of what the borrower thinks he has, whereas the
                 final loan application numbers are supported by the actual bank account
                 statements and/or credit reports and other related documentation. As noted by the
                 OIG, the final loan application indicates that the coborrower had $2,942 in
                 available assets to close. This is supported by the closing balance on 02/20/2003,
                 as shown on the coborrower’s bank account statement.

                 With respect to the earnest money deposit, the OIG questions why the sales
                 contract, initial and final loan applications and the HUD-1 Settlement Statement
                 all show $2,000 as the earnest money deposit, whereas the MCAW showed that
                 $2,335 had been paid. The difference is that the borrower had also paid $335
                 outside of the closing, for the appraisal and credit report. This number was
                 included in the deposit/funds paid on the MCAW. The initial 1003 shows what
                 borrower had in the bank at the time the initial loan application was taken.
                 Subsequent to the initial application, the borrowers received gift funds that were
                 deposited into the bank account and documented per FHA requirements. The
                 increased funds in the account were documented. The MCAW was incorrect by
                 $10, and that was an oversight, but the $325 was documented as coming out of
                 the borrower’s account. Since there really were no major discrepancies, this
                 underwriter did not feel an explanation was required.




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         James D. McKay
         Regional Inspector General for Audit     -28-                         November 22, 2005


                 The OIG also states that CHL did not provide an explanation for the delay in
                 endorsing the loan in a timely manner and what actions it plans to take to prevent
                 future delayed submissions. While CHL always makes a diligent effort to submit
                 loans for insurance endorsement in a timely manner, we concur that we did not do
                 so for this particular loan. Respectfully, this was an aberration. CHL has created
                 a monthly report as a tool to ensure timely submission for endorsement in the
                 future.

                 We respectfully disagree with the OIG’s conclusions regarding the employment
                 information. It appears that the OIG obtained information after the fact that was
                 not available to CHL when we underwrote the loan. It also is important to note
                 that, as the OIG states, the loan was originated by a Loan Correspondent. It was
                 the Loan Correspondent who generated the employment and income documents,
                 not CHL. The loan file contains the required verification of employment, a letter
                 on the employer’s letterhead explaining that he issues personal paychecks, a copy
                 of the employer’s business card and a breakdown of the borrower’s gross pay and
                 withholdings. The file also contains a copy of a paycheck, front and back, and
                 verification of employment from the borrower’s previous employer. Finally, we
                 note that the credit report also confirmed the borrower’s current and prior
                 employment. The documents were consistent and regular on their face and
                 complete. CHL properly underwrote and approved this loan.

                 See Exhibit I.

                 As noted above with respect to other loans, all original documents were sent to
                 HUD in the case binder. That is why there are no original documents in CHL’s
                 files.

             10) FHA Case# 092-9384317

                 OIG Findings: Questionable Source of Funds

                 The OIG alleges that CHL failed to properly verify the borrower’s source of funds
                 to close and failed to ensure that the borrower met the minimum downpayment and
                 minimum required investment in the purchase of the property. OIG calculated the
                 minimum downpayment and minimum required investment to be $45,420 and
                 $6,000, respectively. However, according to the OIG, the borrower invested only
                 $2,825, and the OIG did not find supporting documentation in the case binder that the
                 borrower complied with the funding requirements.




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             Regional Inspector General for Audit      -29-                          November 22, 2005



Comment 36           CHL’s Response: We respectfully disagree with OIG findings. The minimum
                     required investment was $40,000 as noted on line 10.d. of the MCAW, not
                     $45,425 and $6,000, respectively. In any event, the borrower met and exceeded
                     both of the minimum amounts calculated by the OIG. The HUD-1 Settlement
                     Statement shows the borrower's required cash to close of $45,035.17. This
                     amount was paid to Trust Title Company, the settlement agent, via a Cashier's
                     Check from Intermerican Bank in the amount of $47,000 dated 04/15/2003 (date
                     of closing). The Cashier’s Check shows a remitting account number of
                     01300008741 in the “description” at the bottom of the check. This account
                     number concurs with the account number of the borrower’s savings account, as
                     shown on the information on Verification of Deposit in the file.

                     We note also that both the loan officer and the underwriter of this loan are no
                     longer employed by CHL.

                     See Exhibit J.

                     OIG Findings: Credit Issues

                     The OIG also alleges that CHL did not properly analyze credit performance to
                     ensure that the borrower demonstrated financial responsibility. The OIG notes
                     that the borrower’s credit report indicated the borrower had three accounts sent to
                     collection agencies, however, the credit report did not indicate when these
                     accounts were paid or how much the borrower owed. The borrower provided an
                     explanation for the overdue accounts in the case binder by claiming she had
                     emotional problems. Despite the explanation by the borrower, the OIG questions
                     why the credit accounts would not be paid in a timely manner since the borrower
                     maintained a bank account balance of approximately $50,000.

Comment 37           CHL’s Response: Respectfully, we disagree with the OIG’s conclusions
                     regarding the analysis of the borrower’s credit performance. The credit Report
                              indicates that the borrower was an authorized user on these accounts, as she
                     states in her letter. The accounts were at a minimum one year old. The loan file also
                     contains alternative credit documentation to support a satisfactory payment
                     history of other obligations (utilities, car loan and insurance). Finally, we believe
                     that “emotional problems” is a perfectly understandable reason why someone may
                     have not paid full attention to financial obligations during a particular period in
                     their lives.

                     OIG Findings: Excess Ratios without Adequate Justification

                     The OIG alleges that CHL failed to document the basis for accepting an excess
                     front-end ratio of 33.07 percent.




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             Regional Inspector General for Audit      -30-                         November 22, 2005


Comment 38           CHL’s Response: CHL respectfully disagrees. The loan to value ratio was 80%,
                     as shown on the MCAW, and the borrower had no consumer debt. Therefore, the
                     back-end ratio also was 33.07 percent. We believe these are reasonable and
                     acceptable compensating factors for exceeding the front-end ratio.

                     OIG Findings: Other Deficiencies and Inconsistencies

                     Finally, the OIG alleges that CHL did not resolve conflicting or inconsistent
                     information in the case binder. In particular, the OIG notes, the HUD-I
                     settlement statement, sales contract, and mortgage credit analysis worksheet
                     showed the earnest deposit was $2,500, while both the initial and final loan
                     applications showed the earnest deposit as $500. The OIG did not find an
                     explanation in the case binder for this discrepancy.

Comment 39           CHL’s Response: We cannot explain this error, but nor, we respectfully suggest,
                     is it incumbent upon us to do so at pain of indemnifying HUD for losses that may
                     occur. We believe that it was an oversight by the closer or settlement agent. We
                     note, however, that a $2,500 earnest money deposit was less than 2% of sales price
                     and borrower did have $50,000 in the bank.

                 11) FHA Case# 092-9491433

                     OIG Findings: Questionable Source of Funds

                     The OIG alleges that CHL failed to properly verify the borrower’s source of funds
                     to close and failed to ensure that the borrower met the minimum downpayment
                     and minimum required investment in the purchase of the property. The OIG
                     calculated the minimum downpayment and minimum required investment to be
                     $7,812 and $3,840, respectively, but states that the borrower invested only
                     $3,500. The OIG states that they did not find supporting documentation in the
                     case binder that the borrower complied with the funding requirements.

Comment 40           CHL’s Response: Respectfully, we disagree with the OIG’s conclusions. The
                     Borrower’s source of funds to close were verified as follows: A copy of the
                     borrower’s bank account statement from Wachovia Bank, dated 5/24/2003,
                     showed that the borrower had a closing balance of $4,025.60 and an average
                     balance of $5,850.30. The borrower made an earnest money deposit of $3,500
                      and the bank account statement reflects this withdrawal on 5/23/3003. The HUD-
                     1 Settlement Statement shows that the borrower needed to bring $2,209.05 to
                     closing. This, in addition to the $3,500 earnest money deposit paid earlier, equals
                     $5,709.05. The minimum required investment of 3% was only $3840.

                     We note also that the underwriter of this loan is no longer employed by CHL.

                     See Exhibit K.




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             James D. McKay
             Regional Inspector General for Audit      -31-                         November 22, 2005


                     OIG Findings: Excess Ratios without Adequate Justification

                     The OIG also alleges that CHL did not provide valid compensating factors for
                     exceeding the ratio. The mortgage payment-to-income (front-end) ratio was 30.25
                     percent, which exceeds the 29 percent threshold limit. CHL justified the excess
                     front-end-ratio by stating that the borrower does not currently have outstanding
                     consumer debt. Since this is known, the OIG stated, CHL should have provided
                     other compensating factors to explain why this excess ratio will not impact the
                     borrower’s ability to make future mortgage payments.

Comment 41           CHL’s Response: We respectfully disagree with the OIG’s conclusions. Since
                     the debt-to-income (back-end) ratio at the time was acceptable to 41% and this
                     borrower’s ratios were 30/30, we believe that the compensating factors were more
                     than sufficient. One of the best compensating factors is not having any consumer
                     debt, thus allowing more income to be used for housing costs. The loan file did
                     contain other acceptable compensating factors as well, such as not using rental
                     income from the other unit and qualifying for the entire payment is a good
                     compensating factor.

                     Additional compensating factors were listed on the MCAW, such as “Has savings
Comment 42           account, not documented” and “Note: Application signed 5/22/03 prior to
                     effective date of Mortgagee Letter 2003-07/Seller purchased as foreclosure fixed-
                     up the property for re-sale.” Furthermore, the loan closed at an interest rate that
                     was one percent lower than rate he was approved for, thereby reducing the debt to
                     income ratio to only 28.76%.

                     See Exhibit K.

                     OIG Findings: Credit Issues

                     The OIG alleges that CHL did not properly analyze credit performance to ensure
                     that the borrower demonstrated financial responsibility. The credit reports did not
                     show recent payoffs, but the HUD-I settlement statement showed the borrower
                     paid $131 toward an overdue account. The case binder indicated that the borrower
                     claimed he did not know the account existed because his ex-girlfriend used his
                     Social Security number to obtain the account. The OIG questions the validity of
                     this explanation because creditors usually send monthly invoices requesting
                     payment. In addition, the OIG stated that it is unusual that the borrower had no
                     knowledge of this balance for more than two years. The OIG also found no
                     supporting documentation in the case binder that the borrower paid this amount.




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             James D. McKay
             Regional Inspector General for Audit       -32-                          November 22, 2005

Comment 43           CHL’s Response: Respectfully, we disagree with the OIG’s conclusion that we
                     did not properly analyze the borrower’s credit performance. The underwriter
                     required that the borrower payoff the overdue credit card bill of $131 at the
                     closing. Consequently, it was disclosed on the HUD-1 Settlement Statement.
                     The credit report would not show the account being paid as the credit report was
                      run before the loan closed, and this debt was paid at the closing. The supporting
                     documentation that the borrower actually paid this amount is the HUD-1
                     Settlement Statement because the title company was to make sure that it was paid.
                     That is why it was required to be shown on the HUD-1.

                     See Exhibit K.

                     OIG Findings: Other Deficiencies and Inconsistencies

                     The OIG claims that CHL did not resolve conflicting or inconsistent information
                     in the case binder. In particular, the OIG notes that (1) the verification of
                     employment form and pay stubs showed the borrower earned $4,274 monthly
                     income, but the final loan application indicated the monthly income as $3,835.
                     Also, (2) the final loan application showed monthly payments of $797, while the
                     mortgage credit analysis worksheet showed $881. (3) The OIG also notes that the
                     final loan application showed the borrower was unmarried and did not indicate
                     any dependents. However, a letter in the case binder indicated the borrower had a
                     child. The case binder did not contain a tax return or other supporting
                     documentation to confirm whether the child was a dependent or whether the
                     borrower owes child support. The OIG states that they did not find an
                     explanation in the case binder for these inconsistencies.

                     (4)The OIG notes that the sales contract indicated a broker was involved in the sales
                     transaction, however the HUD-1 settlement statement showed the seller paid
                     commissions to a broker that was not identified in the sales contract or other
                     documents in the case binder. (5) The OIG also states that the HUD- I settlement
                     statement showed an expense for yield spread premium but it is unclear who paid this
                     amount at closing. (6) The OIG notes that the HUD- 1 settlement statement also
                     showed that the seller paid $21,433.08 to an investment company, but the OIG found
                     no explanation in the case binder of the role of this investment company in the sales
                     transaction. (7) Finally, other than a letter indicating a transfer of the escrow deposit
                     to another settlement agent, the OIG states that they did not find supporting
                     documentation in the case binder that this transfer of funds occurred.

Comment 44           CHL’s Response: We concur with the OIG’s statement that we did not fully
                     investigate the status of the borrower’s dependents.


Comment 45           We cannot explain why the HUD-1 Settlement Statement showed the seller paid
                     commissions to a broker who was not identified on the sales contract or other
                     documents in the case binder. We can only assume that the seller must have
                     advised the closing agent to pay this sales commission.




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             Regional Inspector General for Audit       -33-                          November 22, 2005


                     Regarding the yield spread premium amount shown on the HUD-1 Settlement
Comment 46           Statement as paid to the originating lender. Although the HUD-1 Settlement
                     Statement does not adequately disclose that it was CHL who paid this amount to
                     the originating lender, we believe that it is well known and understood in the
                     industry that this is what occurs, and therefore, no further explanatory statement is
                     needed. In any event, this disclosure is one made by the entity that is required
                     under HUD regulations to prepare the HUD-1, which was not CHL. And, it
                     should not affect the insured status of this loan.

Comment 47           The OIG also noted that the HUD-1 Settlement Statement shows that the seller
                     paid $21,433.08 to an investment company, but there is no explanation in the file
                     of the role of this investment company in the transaction. The HUD-1 Settlement
                     Statement shows that the seller paid the $21,433.08 to L&H Investments, Inc. as a
                     “payoff.” Since this was a seller payment, and not a payment by the borrower in
                     this transaction, we do not believe that an explanatory statement was necessary.

                     See Exhibit K.

                 12) FHA Case# 092-9512816

                     OIG Findings: Questionable Source of Funds

                     The OIG alleges that CHL failed to properly verify the borrower’s source of funds
                     to close and failed to ensure that the borrower met the minimum downpayment
                     and minimum required investment in the purchase of the property. The OIG
                     calculated the minimum downpayment and minimum required investment to be
                     $5,317 and $4,920, respectively, but states that the borrower invested only
                      $4,800, and the OIG did not find supporting documentation in the case binder that
                     the borrower complied with the funding requirements.

                     CHL’s Response: Respectfully, we disagree. The required borrower investment
Comment 48           on this loan was $4920 (3%). The borrower had made a $4,800 earnest money
                     deposit and the HUD-1 Settlement Statement shows he needed to bring $120.00
                     to the closing. This totals the required amount of $4,920. The borrower’s
                     available funds were in excess of $120.00 and the file was properly documented
                     showing these funds.

                     We note also that the underwriter of this loan is no longer employed by CHL.

                     See Exhibit L.




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             James D. McKay
             Regional Inspector General for Audit      -34-                         November 22, 2005


                     OIG Findings: Excess Ratios without Adequate Justification

                     The OIG alleges that CHL did not provide valid compensating factors for
                     exceeding the ratio. The OIG states that CHL justified the excess front-end-ratio
                     of 33.35 percent by stating that the borrower (1) has no outstanding debt, allowing
                     more to be used for housing, and (2) has a savings account not documented.
                     However, the OIG states, the auditor found copies of bank statements in the case
                     binder that showed the borrower maintained a minimum bank balance of $36.
                     Therefore, it appears to the OIG that the borrower used his savings for daily
                     purchases to live and remain free of outstanding debt. Thus, the OIG questions
                     the validity of the justifications for the excess qualifying ratio and whether the
                     borrower has the financial capability to make future mortgage payments.

                     CHL’s Response: Respectfully, we disagree with the OIG’s conclusion that the
Comment 49           compensating factors noted by the underwriter were insufficient cause to exceed
                     the front-end ratio. We believe that having no outstanding consumer debt thus
                     allowing more of the income to be used for housing expense is an excellent
                     compensating factor. The underwriter who reviewed this file found the
                     compensating factors credible at time of approval. Respectfully, there is not
                     reasonable basis for the OIG to second-guess the considered and experienced
                     judgment of the Direct Endorsement Underwriter with respect to this issue, or to
                     recommend the denial of insured status for this loan for that reason.

                      OIG Findings: Credit Issues

                     The OIG alleges that CHL did not properly analyze credit performance to ensure
                     that the borrower demonstrated financial responsibility. Based on the credit
                     report, the OIG states, the borrower had no credit history. Although information
                     was provided in the case binder from the landlord, the OIG concludes that CHL
                     should have used a nontraditional credit history method and considered this when
                     determining approval for the loan. The OIG also notes that the landlord
                     information was faxed from the broker to the loan correspondent in violation of
                     prescribed HUD requirements.

Comment 50           CHL’s Response: Respectfully, we disagree. The credit report also showed
                     alternative credit history, including the rental/landlord verification. Therefore,
                     although the verification of rent may have been faxed from the broker to the loan
                     correspondent, this information also was independently verified by the credit
                     report.

                     See Exhibit L.




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             James D. McKay
             Regional Inspector General for Audit      -35-                          November 22, 2005

                     OIG Findings: Other Deficiencies and Inconsistencies

                     The OIG also alleges that CHL did not resolve inconsistent information in the
                     case binder. In particular, the OIG notes, the initial loan application and sales
                     contract showed the earnest money deposit to be $500, while the final loan
                     application, HUD-1 settlement statement and mortgage credit analysis worksheet
                     showed the earnest money deposit was $4,800. The OIG’s review of pay stubs,
                     bank statements, and other documentation in the case binder noted a potential
                     conflicting relationship between the borrower’s girl friend and the landlord. The
                     OIG also states that they found no explanation for the sales contract being faxed
                     from a broker to a real estate agent who appeared to have no involvement in the
                     sales transaction. While the broker was involved in the sales transaction, the
                     verification of employment form was inappropriately faxed from the broker to the
                     loan correspondent in violation of prescribed HUD requirements.

                     CHL’s Response: Respectfully, we disagree with the OIG’s conclusion that
Comment 51           “inconsistencies” between the loan applications and other documents, with respect
                     to the earnest money deposit were not resolved. They were. The initial loan
                     application stated that the earnest money deposit was $500. The final loan
                     application, MCAW and HUD-1 Settlement Statement showed that the earnest
                     money paid was $4,800. The difference was given after the initial loan
                     application was taken. Usually the initial loan application includes simply an
                     estimate of what the borrower thinks they have in assets and liabilities, and is
                     written down by the interviewer. The assets and liabilities of course change over
                     time. The final loan application contains the correct information that has been
                     verified and documented in the file by the credit report and other documentation.
                     The Loan Correspondent provided us with a letter, dated July 9, 2003, from

                                          in which he stated that he is holding in his escrow account the
                     total of $4,800 for the earnest money deposit on the subject property.
                     was the closing agent. The final loan application, MCAW and HUD-1 Settlement
                     Statement reflect the correct earnest money deposit amount.

                     See Exhibit L.

Comment 52           With respect to the OIG’s allegation that there may have been a potential
                     conflicting relationship between the borrower’s girl friend and the landlord, we
                     cannot comment. This was certainly not known to us at the time the loan was
                     underwritten. Nor are we clear on what the OIG is implying may be the result of
                     such a relationship, if it exists.




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             Regional Inspector General for Audit      -36-                          November 22, 2005


Comment 53           Finally, the OIG also stated that they saw no explanation for the sales contract
                     being faxed from a broker to a real estate agent who appeared to have no
                     involvement in the sales transaction. We cannot explain this unusual situation
                     either. But, we respectfully suggest, it does not render this loan uninsurable.

Comment 54           The OIG also alleges that the verification of employment form was inappropriately
                     faxed from the broker to the loan correspondent. We cannot explain. We note
                     however, that at the time the loan was underwritten, the file was fully documented
                     with the verification of employment, paycheck stubs, W-2s and a State of Florida
                     record confirming the corporate employer. These documents were all consistent and
                     complete. Therefore, the underwriter did not comment on the fact that the
                     verification of employment had been inappropriately faxed.

                 13) FHA Case# 092-9554548

                     OIG Findings: Questionable Source of Funds

                     The OIG alleges that CHL failed to properly verify the borrower’s source of finds
                     to close and failed to ensure that the borrower met the minimum downpayment
                     and minimum required investment in the purchase of the property. The OIG
                     calculated the minimum downpayment and minimum required investment to be
                     $6,429 and $3,510, respectively, but states that they did not find supporting
                     documentation in the case binder that the borrower met these funding requirements.

                     The OIG also alleges that CHL failed to clearly identify the gift amount provided
                     to the borrower. The case binder contained the HUD- I settlement statement
                     showing a gift of $10,261 and the mortgage credit analysis worksheet showing a
                     gift of $10,160, while the gift letter found in CHL’s loan file showed a gift of
                     $9,978. The OIG states that CHL provided no further explanation for this
                     discrepancy.

                     CHL’s Response: Respectfully, we disagree with the OIG’s conclusions. The
Comment 55           Seller of this property was a relative of the buyer. Consequently, as shown on the
                     sales contract and the gift letter, the source of funds was a gift of the seller’s
                     equity in the property sufficient to cover the borrower’s closing costs, prepaids,
                     non-allowable expenses, discount points and down payment amount. The
                     MCAW was based on estimated costs, and therefore, the amount shown on the
                     MCAW for the gift was $10,159.65. The HUD-1 Settlement Statement shows
                     the exact amount needed for the gift based on actual costs. No further
                     documentation should be required.




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             James D. McKay
             Regional Inspector General for Audit       -37-                          November 22, 2005


                     Since FHA allows a 100% gift from a relative of the borrower, of course the
                     required investment was met. The down payment required for this loan was
                     $3,510 and it was included in the gift of equity.

                     We note also that the underwriter of this loan is no longer employed by CHL.

                     See Exhibit M.

                     OIG Finding: Other Deficiencies and Inconsistencies

                     The OIG further alleges that CHL did not resolve conflicting or inconsistent
                     information in the case binder. In particular, the OIG notes, the initial and final
                     loan applications showed a different bank account number than the bank
                     statements do, and the verification of employment form showed the borrower
                     being paid on a biweekly basis, while the pay stub showed the borrower being
                     paid on a weekly basis. Further, the pay stub showed no hours worked.


Comment 56           CHL’s Response: CHL’s experienced D.E. Underwriter resolved all of these
                     hindsight underwriting complaints of the OIG in real time on the basis of all of
                     the information before her, and in her considered and experienced judgment.
                     However, as is the case with respect to other similar complaints with respect to other
                     questioned CHL loans, full documentation is not available to CHL of the
                     underwriter’s judgment. Respectfully, the absence of such documentation is not, and
                     should not be, a basis upon which an OIG indemnification demand is based.


Comment 57       14) FHA Case# 092-9560516

                     OIG Findings: Questionable Source of Funds

                     The OIG alleges that CHL failed to properly verify the borrower’s source of funds
                     to close and failed to ensure that the borrower met the minimum downpayment
                     and minimum required investment in the purchase of the property. The OIG
                     calculated the minimum downpayment and minimum required investment to be
                     $5,164 and $2,734, respectively, but states that the borrower invested only $2,000.
                     The OIG did not find supporting documentation in the case binder that the borrower
                     met these funding requirements.




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                                                  62
         James D. McKay
         Regional Inspector General for Audit     -38-                          November 22, 2005


                 CHL’s Response: Respectfully, we disagree with the OIG’s conclusions. The
                 borrower made a $2,000 earnest money deposit, as documented by a letter from
                 the seller indicating that he was holding this deposit and as shown on the HUD-1
                 Settlement Statement. The HUD-1 Settlement Statement also showed that the
                 borrower needed to bring an additional $3,603.49 to closing. (Total $5,603.49
                 paid by the borrower.) The source of funds was the borrower’s bank account
                 with Washington Mutual, which showed that the borrower had more than enough
                 funds in the account to close the loan. The bank account statement, dated 7/16/03
                 showed a closing balance of $12,704.

                 We note also that the underwriter of this loan is no longer employed by CHL.

                 See Exhibit N.

                 OIG Findings: Other Deficiencies and Inconsistencies

                 Finally, the OIG alleges that CHL did not resolve conflicting or inconsistent
                 information in the case binder. In particular, the OIG notes that the initial loan
                 application, dated July 16, 2003, showed $809 in liabilities, while the final loan
                 application showed $427 in liabilities. The OIG notes that the decrease in
                 liabilities was due to repayment of a $17,009 debt as of June 1, 2003, but the OIG
                 alleges that CHL provided no supporting documentation in the case binder for
                 when and how the repayment of this debt occurred.

                 CHL’s Response: As previously noted, these issues were resolved to the contrary
                 by CHL’s Direct Endorsement Underwriter. The absence of full documentation
                 available to CHL, particularly if not available in the original documentation
                 provided to HUD in this insuring file, respectfully is not a basis for the OIG to
                 conclude that that judgment was not exercised, and exercised reasonably and
                 responsibly, by CHL’s underwriter. We also note that although the source of
                 funds for repayment of the $17,009 debt was not fully documented, it was verified
                 as being paid in full by the credit report.

                 See Exhibit N.




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                                             63
                        OIG Evaluation of Auditee Comments



            Finding 1- CHL Did Not Follow HUD Requirements when Originating and
            Approving Loans


Comment 1   Certified believed that proper and required procedures were followed, and appropriate
            and responsible Direct Endorsement Underwriter judgments were made considering
            that full documentation of the judgments are unavailable.

            We disagree that Certified followed proper and required procedures. Certified
            underwrote loans containing deficiencies that affected the insurability of the loans.
            We are not questioning the underwriter’s judgment. However, it is important to
            maintain documentation to understand how the underwriter arrived at their conclusion
            and to show evidence that the transaction occurred. According to HUD Handbook
            4155.1 Revision 4, Change 1, paragraph 3-1, the application package should contain
            sufficient documentation to support the lender’s decision to approve the mortgage
            loan.

Comment 2   Certified reported that the OIG cited loan correspondents as originating eight of the
            loans. The documentation provided to Certified was regular on its face, consistent,
            and complete. Certified had no reason to suspect and further investigate or “verify”
            the documentation.

            We reported that loan correspondents originated four loans. In addition, we disagree
            with Certified that the documentation was regular on its face, consistent, and
            complete. We found questionable documentation such as faxed documents from third
            parties, inconsistent employment information between the final loan application and
            verification of employment form, and unreasonable annual salaries. We also disagree
            that Certified had no reason to further verify documentation provided to them by loan
            correspondents. Section 3-4A (1) of HUD Handbook 4060.1 REV-1, CHG 1 holds
            sponsors responsible for the actions of its loan correspondents in originating insured
            mortgages.




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                                              64
Comment 3   Certified said it has always submitted the original documentation to HUD and that is
            why the original documentation in not in their files. According to Certified, HUD
            does not require that the lender maintain all of the original documentation. Certified
            cites paragraph 5-8 of HUD Handbook 4000.2, Rev-3, that the lender may retain
            documentation in either hardcopy or electronic format for two years from the date of
            insurance endorsement.

            We agree that all original documentation is not required to be maintained by the
            lender. However, HUD Handbook 4155.1, REV-4, CHG 1, Section 3-2, requires that
            the lender maintain the original verification of employment form that was mailed and
            returned from the employer or creditor. We found faxed verifications from third
            parties and the original verification form was not found in HUD’s or Certified’s files.
            We reviewed loans that were within two years from the date of insurance
            endorsement and found several instances in which closing documentation was not in
            HUD’s or Certified’s files.

Comment 4   Certified considers the 14 loans questioned by the OIG not representative of the 590
            FHA-insured loans originated during the audit period or the 1,000 FHA-insured loans
            originated by Certified since being approved by the FHA as a mortgagee.

            We did not conclude that the 14 loans were representative of the 590 FHA loans
            originated during our audit period or the 1,000 FHA-insured loans originated by
            Certified since being approved by the FHA as a mortgagee. We reported that the 14
            loans contained underwriting deficiencies, and they were selected for review because
            of risk factors associated with defaulted loans.




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            Finding 2- CHL Did Not Fully Comply with Federal Housing Administration
            Quality Control Requirements

Comment 5   Certified disagreed with our conclusion and indicated that some areas of its quality
            control operations were deficient, but it was not done deliberately. Certified reported
            a full review and revision of its quality control program including the hiring of a
            Quality Control Director. Certified’s revised quality control plan and procedures
            include a section devoted to the processing and underwriting guidelines of
            HUD/FHA.

            We agree with Certified that the hiring of knowledgeable staff is vital in the
            processing and underwriting of quality loans. The development of a written Quality
            Control Plan to comply with HUD requirements is also vital in assuring HUD that
            Certified’s loan origination and underwriting operations will be accurate, valid, and
            complete. It is in the implementation and application of the plan that HUD can
            evaluate whether Certified’s loan origination and underwriting operations meet HUD
            requirements.

Comment 6   Certified reported that their quality control procedures will include monitoring the
            performance of loans they originate and assuring that all early defaulted and rejected
            loans are timely submitted to their independent quality control provider for review.

            Quality control procedures should include monitoring the performance of FHA-
            insured loans that Certified and loan correspondents originate. As indicated above,
            HUD holds sponsors responsible for the actions of its loan correspondents in
            originating insured mortgages. Quality control reviews conducted in accordance with
            HUD requirements are the responsibility of Certified. According to HUD Handbook
            4060.1, Rev 1- CHG 1, Section 6-3(B), a mortgagee contracting out any part of its
            Quality Control function is responsible for ensuring that the outside source is meeting
            HUD’s requirements. Among the requirements is to review all loans that default
            within the first six payments, and at least 10 percent of all rejected loans. These
            reviews must be conducted within 90 days of loan closing.




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                                              66
Comment 7

            Case Number 092-9291283

            Certified stated that the verification of employment form, W-2, and paycheck stubs
            for the coborrower were regular on their face, consistent, and complete. However, we
            disagree. For example, the paystubs were not originals, which raised questions
            regarding the existence of the employer or the employer address. Had Certified
            properly reviewed employment information, they would have learned that the
            employment information was inaccurate. According to Certified, since the
            verification of employment form was generated by the loan correspondent, they were
            responsible in this case to simply underwrite the loan. The responsibility of an
            underwriter is not to simply approve a loan. It is to ensure that the information
            provided is accurate, complete, and consistent to support the lender’s decision. If
            these procedures are not practiced then the loan was improperly approved adversely
            affecting the risk assumed by the FHA insurance fund.

            Based on HUD Handbook 4000.4 REV-1, paragraph 2-5 the lenders are to obtain and
            verify information with at least the same care that would be exercised if the lender
            were originating a mortgage entirely dependent on the property as security to protect
            its investment.

Comment 8
            Case Number 092-9359262

            Certified stated that the verification of employment form, W-2, and paycheck stubs
            for the borrower were regular on their face, consistent, and complete. We disagree
            because the name of the employer and employer address are different among the
            credit report, verification of employment form and a print out from the Florida
            Department of State, Division of Corporations. Furthermore, the verification of
            employment form showed that the borrower was employed for four years, while the
            loan application indicated only two years employment. We believe this conflicting
            information should have alerted the lender to question the borrower’s employment
            information and contact the employer. Had Certified contacted the employer, they
            would have learned that the employment information was inaccurate.

            Certified did not comment on the gift information because they did not maintain
            copies of all the gift documentation. Our review and verification of gift
            documentation found in HUD’s files revealed that the information was inaccurate.




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                                             67
Comment 9    Case Number 092-9367167

             Certified reported verbally re-verifying the gift information. We disagree because the
             exhibit provided by Certified does not illustrate having contacted the donor. It simply
             shows that Certified assured the package contained a gift letter, donor’s account bank
             statement, and transfer of funds. We maintain that had Certified contacted the gift
             donor, it would have determined that the donor never completed or signed the gift
             letter and that funds provided to the borrower were a loan. In addition, the pre-
             closing quality control clerk informed us that Certified does not require contacting the
             gift donor. Certified also stated that the gift information was generated by the loan
             correspondent. Based on HUD Handbook 4000.4 REV-1, paragraph 2-5 the lenders
             are to obtain and verify information with at least the same care that would be
             exercised if the lender were originating a mortgage entirely dependent on the property
             as security to protect its investment. Moreover, HUD Handbook 4060.1 Rev-1,
             section 3-4A (1) holds sponsors responsible for the actions of its loan correspondents
             in originating insured mortgages.

             Case Number 092-9404542

Comment 10   OIG Findings: Inaccurate Employment and Income Information

             Certified said that although the verification of employment form, W-2, and paycheck
             stubs for the borrower may prove to be false documents, they were regular on their
             face, consistent, and complete. Certified contended it had no indication that the
             documents might not be accurate during the origination of this loan.

             We disagree. The face of the paystub appears suspicious since it was created
             manually. We believe Certified should have reverified the paystub to determine its
             authenticity. Furthermore, the employer address is different among the credit report,
             verification of employment form, a print out from the Florida Department of State,
             Division of Corporations, and Internet searches. We believe this conflicting
             information should have alerted the lender to question the borrower’s employment
             information and contact the employer. Had Certified contacted the employer, they
             would have learned that the employment information was inaccurate. In addition,
             Certified underwrote the loan based on the documentation provided by the loan
             correspondent, and also noted that the borrower reconfirmed the accuracy of the
             employment and income information by signing the final loan application at closing.
             Paragraph 2-5 of HUD Handbook 4000.4 REV-1, states that lenders are to obtain and
             verify information with at least the same care that would be exercised if the lender
             were originating a mortgage entirely dependent on the property as security to protect
             its investment. Certified is ultimately responsible for ensuring that the information
             provided is accurate, complete, and consistent to support the lender’s decision.




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             Case Number 092-9404542

Comment 11   OIG Findings: Other Deficiencies and Inconsistencies

             Certified disagreed with the OIG’s conclusions regarding inconsistent information.
             Certified clarified that the $4,200 was a gift provided to the borrower as indicated on the
             HUD-1 settlement statement, final loan application, and mortgage credit analysis
             worksheet. However, while Certified corrected the mortgage credit analysis worksheet
             to reflect $4,200 in gift funds, this amount appears as both a gift and earnest deposit on
             this document. Certified should have reconciled the information and provided a clear
             explanation of events that occurred. Section 3-1 of HUD Handbook 4155.1, REV-1,
             CHG 1, states that the lender must provide explanatory statements, consistent with other
             information in the application, to clarify or supplement.

             Case Number 092-9574386

Comment 12   OIG Findings: Inaccurate Gift Information

             Certified reported that the loan was processed by a loan correspondent and not the
             lender. The gift documentation provided to Certified was regular on its face,
             consistent, and complete. Certified had no reason to suspect misrepresentation. We
             disagree with Certified that the documentation was regular on its face, consistent, and
             complete. If Certified had contacted the donor and conducted internet searches to
             confirm the gift information, they would have learned that the gift information was
             inaccurate. Furthermore, Certified would have learned that the loan correspondent
             (donor relative) may have provided the gift fund to the borrower. Certified
             underwrote the loan based on the documentation provided by the loan correspondent.
             Section 3-4A (1) of HUD Handbook 4060.1 REV-1, CHG 1, holds sponsors
             responsible for the actions of its loan correspondents in originating insured mortgages.
             Paragraph 2-5 of HUD Handbook 4000.4 REV-1, states that lenders are to obtain and
             verify information with at least the same care that would be exercised if the lender
             were originating a mortgage entirely dependent on the property as security to protect
             its investment. Certified is ultimately responsible for ensuring that the information
             provided is accurate, complete, and consistent to support the lender’s decision.




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             Case Number 092-9574386

Comment 13   OIG Findings: Inaccurate Gift Information

             Certified stated that they were only aware of one gift donor. We found gift
             documentation in HUD’s files for two donors. Certified also said that the HUD-1 and
             final application reflected $3,000 in earnest deposit in which $2,000 was contributed
             by the gift donor and $1,000 by the borrower. The borrower’s bank account history
             indicates two gift deposits totaling $5,500, which corresponds with the information
             provided to HUD. Furthermore, the $2,000 was made out to the settlement agent;
             however, the bank statements indicate two gift deposits to the borrower’s account.
             These inconsistencies should have indicated a potential problem. In addition,
             Certified disagrees that the borrower did not sign the gift letter. We are referring to
             the second gift letter that Certified does not have in its files.

             Case Number 092-9574386

             OIG Findings: Questionable Source of Funds
Comment 14
             Certified disagreed with the OIG’s conclusions that they did not properly verify the
             borrower’s source of funds to close. Certified indicated that both the initial and final
             loan application provided by the loan correspondent show the borrower as a single
             woman. According to Certified, there was no documentation suggesting she was
             married. We disagree. If Certified had reviewed the mortgage note, they would have
             known that the borrower was married. Paragraph 2-5 of HUD Handbook 4000.4,
             REV-1, CHG 2, states that the mortgagee must review all closing statements,
             certifications on the closing statements, legal instruments and other documents
             executed at closing, and certify to HUD that the transaction and loan meet statutory
             and regulatory requirements of the National Housing Act and HUD. As noted above,
             although the information was provided by a loan correspondent, it is the lender’s
             responsibility to ensure that the information provided is accurate, complete, and
             consistent to support the lender’s decision.




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             Case Number 092-9574386

Comment 15   OIG Findings: Questionable Source of Funds

             Certified agreed that the borrower had numerous overdraft charges but feels that the
             explanation provided by the borrower was considered and accepted. The borrower’s
             explanation was for one incident that may have resulted in two overdraft charges
             within one month. However, the borrower’s bank account history shows reoccurring
             bank overdraft charges for an additional two months without explanation.
             Furthermore, the bank account history illustrates the borrower had a negative
             beginning balance prior to these overdraft charges occurring. We continue to
             question the borrower’s ability to repay the mortgage because the ending bank
             balance was attributed to the gift funds the borrower received and several deposits
             with inconsistent explanations from information in the bank statements.

             Case Number 092-9574386

Comment 16   OIG Findings: Questionable Source of Funds

             Certified agreed that it does not have supporting documentation indicating the source
             of funds used to repay a $287 debt. However, Certified believed it was unnecessary
             to address because the amount of debt was low and the borrower had sufficient assets
             to pay this amount. The credit report shows the debt was repaid in July 2003. The
             borrower’s bank account history showed a negative balance through July 2003.

             Case Number 092-9574386

Comment 17   OIG Findings: Questionable Source of Funds

             We believe the borrower only had sufficient funds to repay this debt because of the
             gift.

             Certified claims that the borrower met the minimum downpayment and minimum
             required investment of $8,073 and $5,340, respectively. According to Certified, the
             HUD-1 settlement statement shows the borrower made a $3,000 earnest deposit and
             was required to bring $5,786 to closing. HUD requires the lender to verify all funds
             for the borrower’s investment in the property. Accordingly, we did not find
             supporting documentation showing the borrower made the $5,786 payment at closing
             to meet the minimum required investment and downpayment.




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             Case Number 092-9574386

Comment 18   OIG Findings: Credit Issues

             Certified disagreed with the OIG’s conclusions regarding the analysis of the
             borrower’s credit history. While Certified did agree that an explanation was not
             provided for an account in collection status, they argued that it was unnecessary since
             it was a small amount. Although the amount is minimal, the existence of collections
             indicates the borrower’s disregard for credit obligations and must be considered in the
             analysis of the borrower’s creditworthiness. Section 2-3 of HUD 4155.1 Rev-4,
             Change 1 requires that major indications of derogatory credit, including judgments
             and collections, and any other recent credit problem require sufficient written
             explanation from the borrower.

             In addition, Certified stated that the credit report indicated the borrower had alternate
             credit for a car loan and that other alternative credit was unavailable because the
             borrower lived with her family. The credit report shows a balance for the car loan of
             zero. Therefore, it does not show the borrower’s credit performance and attitude
             towards credit obligations. We maintain that Certified should have used a
             nontraditional credit history method and considered this when determining approval
             for the loan.

             Case Number 092-9574386

Comment 19   OIG Findings: Other Deficiencies and Inconsistencies

             Certified concurred that a $266 debt was not included in the final loan application.
             However, Certified reasoned that the application was provided by a loan
             correspondent. As noted above, although the information was provided by a loan
             correspondent, it is the lender’s responsibility to ensure that the information provided
             is accurate, complete, and consistent to support the lender’s decision. Section 3-4A
             (1) of HUD Handbook 4060.1 REV-1, CHG 1, holds sponsors responsible for the
             actions of its loan correspondents in originating insured mortgages. In addition,
             Certified shared that the inconsistent data regarding assets available was due to the
             gift monies not deposited at the time of initial loan application. We disagree because
             the gift monies were deposited directly to the settlement agent; therefore, the increase
             in the borrower’s funds could not be attributed to the gift.




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             Case Number 092-9574386

Comment 20   OIG Findings: Other Deficiencies and Inconsistencies

             Certified stated that they had no reason to question the validity of the borrower’s
             employment since the loan correspondent provided supporting documentation that
             was consistent and regular on its face and complete. We disagree because if Certified
             had contacted the employer or reviewed the mortgage note at closing, they would
             have learned that the employer was the borrower’s husband. In addition, Certified
             believed that an average of other people’s earnings is irrelevant. We also disagree
             because knowing the average income for a certain position provides a guide in
             determining the reasonableness of the reported income. Section 3-1 of HUD
             Handbook 4155.1, REV-4, CHG 1, states that HUD expects the application package
             to contain sufficient documentation to support the lender’s decision to approve the
             loan.

             Case Number 092-9594135

Comment 21   OIG Findings: Inaccurate Employment and Income Information

             Certified indicated that the credit report shows that employment had been verified by
             the borrower’s employer and the same employer signed the verification of
             employment form. However, the employer informed us that she did not employ the
             borrower, did not sign the verification of employment form, and the information on
             the pay stub and the verification of employment form are inaccurate. In addition, the
             last name of the employer is inconsistent between the credit report and verification of
             employment form. Furthermore, the credit report shows under source of information
             that the borrower worked for the company since August 1999. Had Certified
             contacted the employer, they would have learned that the employment information
             was inaccurate. Certified also stated that it confirmed with the Florida Department of
             State, Division of Corporations that the employer identification number on the
             borrower’s W-2 form is correct and belongs to the borrower’s employer. The
             information provided to us by Certified is a recent print out from the Florida
             Department of State that we also found in the HUD case binder. However, Certified’s
             file also contained a print out from the Florida Department of State, Division of
             Corporations dated September 2003 indicating an employer identification number that
             did not correspond with the employer identification on the borrower’s W-2 form. We
             believe this conflicting information along with the reasons noted above should have
             alerted the lender to question the borrower’s employment information.




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             Case Number 092-9594135

Comment 22   OIG Findings: Inaccurate Employment and Income Information

             Certified indicated that all original documentation was sent to HUD and not
             maintained in their files. We found the original employment verification form in the
             HUD case binder but only copies of pay stubs.

             Case Number 092-9594135

Comment 23   OIG Findings: Questionable Source of Funds

             Certified claims that the minimum required investment of $4,710 was met and
             documentation of that judgment was provided. The HUD-1 settlement statement
             indicates that the borrower was required to bring $4,719.64 to closing. HUD requires
             the lender to verify all funds for the borrower’s investment in the property.
             Accordingly, we did not find supporting documentation showing the borrower made
             the $4,719.64 payment at closing to meet the minimum required investment of
             $4,710. In addition, Certified did not comment on the minimum downpayment of
             $5,250.

             Case Number 092-9594135

Comment 24   OIG Findings: Credit Issues

             Certified did not comment on this issue but reiterated that their Direct Endorsement
             Underwriter reached the opposite conclusion and approved this loan despite the full
             documentation of that judgment is not now available. We are not questioning the
             underwriter’s judgment. However, it is important to maintain documentation to
             understand how the underwriter arrived at their conclusion and to show evidence that
             the transaction occurred. According to HUD Handbook 4155.1 REV- 4, CHG 1,
             paragraph 3-1, the application package should contain sufficient documentation to
             support the lender’s decision to approve the mortgage loan. Therefore, we stand by
             our conclusion.




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                                              74
             Case Number 092-9594135

Comment 25   OIG Findings: Other Deficiencies and Inconsistencies

             Certified indicated that it was simply coincidence that the credit report and HUD-1
             settlement statement identified the employer and settlement agent with the same
             name. According to Certified, the credit report concluded the borrower was employed
             with the employer stated in the verification of employment. We agree with Certified
             that this event is coincidental. However, Certified should have questioned this
             coincidence and verified employment information. As noted above, the employer
             informed us that she did not employ the borrower, did not sign the verification of
             employment form, and the information on the pay stub and the verification of
             employment form are inaccurate.

             Case Number 092-9644668

Comment 26   OIG Findings: Inaccurate Employment and Income Information

             Certified commented that the loan application form, verification of employment form,
             W-2, and paycheck stubs contained the same consistent employer information and
             they had no reason to suspect that they might not be accurate. However, the employer
             informed us that he did not employ the borrower, did not sign the verification of
             employment form, and the information on the pay stub, and W-2 are inaccurate. Had
             Certified contacted the employer, they would have known that the employment
             information was inaccurate. Certified also affirmed that all original documents were
             sent to HUD. We found the original employment verification form in the HUD case
             binder but only copies of pay stubs. In addition, Certified did not comment that the
             credit report and verification of employment form show a different employer because
             they did not have a copy of the credit report. However, Certified stated that this
             information was confirmed at closing by the borrower signing the loan application.
             Section 3-1 of HUD Handbook 4155.1, REV-1, CHG 1, states the lender must
             provide explanatory statements, consistent with other information in the application,
             to clarify or supplement.




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             Case Number 092-9644668

Comment 27   OIG Findings: Questionable Source of Funds

             Certified claims the borrower had sufficient funds to meet the minimum required
             investment and minimum downpayment of $3,690 and $7,359, respectively.
             Although the bank statement shows a high ending balance, there was no verification
             of deposit to ensure the funds did not come from prohibited parties. Furthermore, the
             bank statement shows total withdrawals exceeding total deposits and raises a concern
             on the borrower’s lack of discipline in managing his cash resources. According to
             Certified, the HUD-1 settlement statement indicates the borrower was required to
             bring $9,145 to the closing that would exceed both the minimum downpayment and
             minimum investment in the property. HUD requires the lender to verify all funds for
             the borrower’s investment in the property. Accordingly, we did not find supporting
             documentation showing the borrower made the $9,145 payment at closing. Therefore,
             HUD cannot be assured that the funds did not come from a prohibited source.

             Case Number 092-9644668

Comment 28   OIG Findings: Credit Issues

             Certified did not comment on this issue because it did not have a copy of the credit
             report in their files. However, Certified cited that the loan was evaluated and
             approved by the loan prospector. Section 2-3 of HUD Handbook 4155.1,REV-4,
             CHG 1, states that while minor derogatory information occurring two or more years in
             the past does not require explanation, major indications of derogatory, including
             judgments and collections, and any other recent credit problem require sufficient
             written explanation from the borrower. The borrower’s explanation must make sense
             and be consistent with other information in the file. Additionally, HUD Handbook
             4000.2 Rev-2, Chapter 5, paragraph 5-10 requires lenders must retain the entire case
             file pertaining to loans for two years.




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             Case Number 092-9644668

Comment 29   OIG Findings: Other Deficiencies and Inconsistencies

             Certified cited that they were unaware of any possible relationship between the
             interviewer and selling agent. Furthermore, Certified has strict policy regarding any
             other employment and potential conflicts of interest of their employees. However,
             we found that the interviewer and selling real estate agent are co-owner’s of a
             business. Moreover, based on Certified’s employee list, the selling agent was an
             employee of Certified.

             Case Number 092-9644668

Comment 30   OIG Findings: Other Deficiencies and Inconsistencies

             Certified did not comment on the borrower’s high annual salary. However, Certified
             stated that the verification of income, paycheck stubs, and W-2 forms were consistent
             and supported the borrower’s stated income and they had no reason to question if he
             was being paid more than the average or why that might be. Nevertheless, the
             employer informed us that he did not employ the borrower, did not sign the
             verification of employment form, and the information on the pay stub and W-2 are
             inaccurate. Had Certified contacted the employer, they would have known that the
             employment information was inaccurate. HUD requires lenders to evaluate the
             stability and adequacy of income. They must ensure the application package contains
             sufficient documentation to support their decision to approve the mortgage loan.

             Case Number 092-9689460

             OIG Findings: Inaccurate Employment and Income Information
Comment 31
             Certified disagreed with our conclusion and said that although the verification of
             employment form, W-2, and paycheck stubs for the borrower may prove to be false
             documents, they were regular on their face. Certified added that corporate records
             show the borrower was a part owner of her employer and they had no indication that
             the documents might not be accurate. Certified further stated that the borrower
             re-confirmed the accuracy of the employment and income information by signing the
             final loan application at closing.




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Comment 31   We disagree. If Certified had contacted the employer, they would have known that
             the employment information was inaccurate. Furthermore, we noted that the
             verification of employment form was a fax and the original employment verification
             form was not found in HUD’s or Certified’s files. Section 3-2 of HUD Handbook
             4155.1 REV-4, CHG 1, requires that the lender’s files contain the original verification
             form that was mailed to and returned from the employer or creditor. In addition,
             Section 3-1 of HUD Handbook 4155.1, REV-1, CHG 1, states the lender must
             provide explanatory statements, consistent with other information in the application,
             to clarify or supplement.

             Case Number 092-9689460

Comment 32   OIG Findings: Questionable Source of Funds

             Certified claims the borrower had sufficient funds to meet the minimum required
             investment and minimum downpayment of $6,600 and $6,950, respectively.
             According to Certified, the HUD-1 settlement statement indicates the borrower was
             required to bring $1,612.66 to the closing. Certified did not provide additional
             documentation showing the borrower made the $1,612.66 payment at closing.
             Therefore, HUD cannot be assured that the funds did not come from a prohibited
             source. HUD requires the lender to verify all funds for the borrower’s investment in
             the property.

             Case Number 092-9689460

Comment 33   OIG Findings: Other Deficiencies and Inconsistencies

             Certified reported that it is not unusual for the initial and final loan application not to
             show a borrower’s actual assets or liabilities as the amounts change over time. They
             also stated that the cash assets and liabilities shown on the final loan application are
             supported by the borrower’s bank account statements and credit report. We agree that
             amounts may change between the initial and final loan application. However, the
             credit report indicates that the borrower had several liabilities before the initial loan
             application.




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             Case Number 092-9689460

Comment 34   OIG Findings: Other Deficiencies and Inconsistencies

             Certified was unable to explain the discrepancy why the earnest deposit funds were
             withdrawn on December 15, 2003 while the check was dated January 14, 2004.
             Certified does not believe this discrepancy makes the loan an uninsured one.
             Section 3-1 of HUD Handbook 4155.1, REV-4, CHG 1 states that HUD expects the
             application package to contain sufficient documentation to support the lender’s
             decision to approve the mortgage loan. When standard documentation does not
             provide enough information to support this decision, the lender must provide
             additional explanatory statements, consistent with other information in the
             application, to clarify or supplement.

Comment 35   Case Number 092-9331983

             HUD systems show this loan to have been terminated. Recommendation 1A has been
             revised to reflect those Federal Housing Administration loans that have been paid in
             full.

             Case Number 092-9384317

Comment 36   OIG Findings: Questionable Source of Funds

             Certified disagreed with the OIG’s conclusions regarding the minimum downpayment
             and minimum required investment of $45,420 and $6,000, respectively. Certified
             claims that the borrower met and exceeded both of the minimum amounts calculated
             by the OIG by providing us with a copy of a $47,000 check that the borrower paid at
             closing. However, the copy of the cashier’s check was not provided to us during our
             review and was not included in the HUD case binder and lender’s loan file.




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             Case Number 092-9384317

Comment 37   OIG Findings: Credit Issues

             Certified believes that an emotional problem as stated by the borrower is a perfectly
             understandable reason why someone may have not paid full attention to financial
             obligations during a particular period.

             We agree that emotional problems can be stressful and may cause someone to not pay
             full attention to their obligations. However, the credit report indicates that the
             borrower’s derogatory credit was from 2001 - 2003. While Certified noted that the
             borrower provided alternative credit documentation to support a satisfactory payment
             history, we still found derogatory credit during 2003. We also find it unusual that
             only certain accounts were paid while the borrower avoided other financial
             responsibilities. In addition, we continue to question why credit accounts would not
             be paid in a timely manner since the borrower maintained a bank account balance of
             approximately $50,000. Section 2-3 of HUD Handbook 4155.1, REV-4, CHG1,
             states that while minor derogatory information occurring two or more years in the past
             does not require explanation, major indications of derogatory credit, including
             judgments and collections, and any other recent credit problem require sufficient
             written explanation from the borrower. The borrower’s explanation must make sense
             and be consistent with other information in the file.

             Case Number 092-9384317

Comment 38   OIG Findings: Excess Ratios without Adequate Justification

             Certified stated that the compensating factors they provided were reasonable and
             acceptable for exceeding the front-end ratio. We disagree. Although Certified
             indicated that the borrower had no consumer debt, the mortgage credit analysis
             worksheet in both HUD and Certified’s files does not indicate any compensating
             factors. Also as stated above, the borrower had derogatory credit during 2003.
             Section 2-12A of HUD Handbook 4155.1, REV-4, CHG 1 requires the lender to state
             on the remarks section of the mortgage credit analysis worksheet compensating
             factors when the front-end ratio exceeds 29 percent.




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             Case Number 092-9384317

Comment 39   OIG Findings: Other Deficiencies and Inconsistencies

             Certified was unable to explain the conflicting or inconsistent information but
             believes it was an oversight by the closer or settlement agent. It is Certified’s
             responsibility to provide HUD with information that is accurate, complete, and
             consistent to support the lender’s decision. Certified should have reconciled the
             information and provided a clear explanation of events that occurred. Section 3-1 of
             HUD Handbook 4155.1, REV-1, CHG 1, states that the lender must provide
             explanatory statements, consistent with other information in the application, to clarify
             or supplement.

             Case Number 092-9491433

Comment 40   OIG Findings: Questionable Source of Funds

             Certified claims the borrower had sufficient funds to pay the minimum required
             investment and minimum downpayment of $3,840 and $7,812, respectively.
             According to Certified, the HUD-1 settlement statement indicates the borrower was
             required to bring $2,209.05 to closing. Certified did not provide additional
             documentation showing the borrower made the $2,209.05 payment at closing.
             Therefore, HUD cannot be assured that the funds did not come from a prohibited
             source. HUD requires the lender to verify all funds for the borrower’s investment in
             the property.

             Case Number 092-9491433

Comment 41   OIG Findings: Excess Ratios without Adequate Justification

             Certified disagreed with the OIG’s conclusions and believed that the compensating
             factors were more than sufficient. Certified noted several compensating factors such
             as (1) no consumer debt allowing more income to be used for housing costs; (2) not
             using rental income from the other unit; and (3) the borrower qualifying for the entire
             payment.




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             While we agree that the above compensating factors may be sufficient, Certified
Comment 41
             should have provided other compensating factors to explain why the excess front-end
             ratio will not impact the borrower’s ability to make future mortgage payments. For
             example, the credit report shows the borrower with an outstanding debt for two years.
             In addition, our review found that the borrower had a child and the HUD case binder
             does not provide sufficient information to determine whether the child is the
             borrower’s dependent or whether child support is owed. These issues may impact the
             borrower’s ability to make future mortgage payments.

             Case Number 092-9491433

Comment 42   OIG Findings: Excess Ratios without Adequate Justification

             We disagree with Certified that the additional compensating factors were listed on the
             mortgage credit analysis worksheet.

             Case Number 092-9491433

Comment 43   OIG Findings: Credit Issues

             Certified maintains that the HUD-1 settlement statement is the supporting
             documentation that the borrower actually paid the $131 debt at closing. We disagree.
             Without a cancelled check or another form of payment, HUD cannot be assured that
             the funds did not come from a prohibited source. HUD requires the lender to verify
             all funds for the borrower’s investment in the property. In addition, Certified did not
             address our concern regarding the borrower’s explanation why this account was in
             collection status for over two years.

             Case Number 092-9491433

Comment 44   OIG Findings: Other Deficiencies and Inconsistencies

             Certified did not comment on the conflicting or inconsistent information in the case
             binder involving monthly income and payments on several loan documents. Certified
             did agree that it did not fully investigate the status of the borrower’s dependents.




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             Case Number 092-9491433

Comment 45   OIG Findings: Other Deficiencies and Inconsistencies

             Certified was unable to explain why the HUD-1 settlement statement showed the
             seller paid commissions to a broker that was not identified on the sales contract or
             other documents. Certifies assumes the seller advised the settlement agent to pay this
             commission. However, Section 3-3 of HUD Handbook 4155.1, REV-4, CHG 1 states
             that the borrower, seller, and the selling real estate agent or broker involved in the
             sales transaction must certify that the terms and conditions of the sales contract are
             true to the best of their knowledge and belief and that any other agreement entered
             into by any of the parties in connection with the real estate transaction is part of, or
             attached to, the sales agreement.

             Case Number 092-9491433

             OIG Findings: Other Deficiencies and Inconsistencies
Comment 46
             Certified commented that they paid the yield spread premium amount even though the
             HUD-1 settlement statement does not adequately disclose it. Certified also
             commented that this disclosure is made by the entity that is required under HUD
             regulations to prepare the settlement statement, which was not Certified.

             We disagree. The lender is responsible to review the HUD-1 settlement statement and
             ensure that all charges are allowable based on HUD regulations. Although the loan
             was originated by a loan correspondent, paragraph 2-5 of HUD Handbook 4000.4
             REV-1, states that lenders are to obtain and verify information with at least the same
             care that would be exercised if the lender were originating a mortgage entirely
             dependent on the property as security to protect its investment. Therefore, it is the
             lender’s responsibility for ensuring that the information provided is accurate,
             complete, and consistent to support the lender’s decision.




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             Case Number 092-9491433

             OIG Findings: Other Deficiencies and Inconsistencies
Comment 47
             Certified does not believe that an explanatory statement was necessary because the
             borrower did not make the payment. We disagree because even though it was a seller
             transaction, it was a large amount that the lender should have questioned to ensure the
             seller did not pay other unallowable expenses on behalf of the borrower.
             Additionally, Certified did not comment regarding the transfer of the escrow deposit
             to another settlement agent.

             Case Number 092-9512816

             OIG Findings: Questionable Source of Funds
Comment 48
             Certified said that the borrower had sufficient funds to meet the minimum required
             investment of $4,920. According to Certified, the borrower paid a $4,800 earnest
             deposit and the HUD-1 settlement statement indicates the borrower was required to
             bring $120 to closing. We did not find additional supporting documentation showing
             the borrower made the $120 payment at closing. In addition, Certified did not
             comment on the borrower not meeting the $5,317 minimum downpayment.

             Case Number 092-9512816

             OIG Findings: Excess Ratios without Adequate Justification
Comment 49
             Certified believed that having no outstanding consumer debt thus allowing for more
             income to be used for housing expense is an excellent compensating factor. Certified
             added that the compensating factors were credible at the time of approval. We
             maintain that the bank statements appear to show that the borrower had a minimum
             balance and that the savings were used for daily purchases to live and remain free of
             outstanding debt. We continue to question the validity of the justifications for the
             excess qualifying ratio and whether the borrower has the financial capability to make
             future mortgage payments.




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             Case Number 092-9512816

Comment 50   OIG Findings: Credit Issues

             Certified commented that the credit report showed an alternative credit history
             including rental and landlord verification. We question the validity of the alternative
             credit history because it showed no current balances. Therefore, no conclusion could
             be reached regarding the borrower’s attitude toward the use of credit. We maintain
             that Certified should have used a nontraditional credit history method and considered
             this when determining approval for the loan. In addition, Certified stated that
             although the verification was faxed, it was independently verified by the credit report.
             Section 3-1 of HUD Handbook 4155.1, REV-4, CHG 1, states the underwriter has to
             verify that verification forms are passed directly between the lender and provider
             without being handled by a third party.

             Case Number 092-9512816

Comment 51   OIG Findings: Other Deficiencies and Inconsistencies

             Certified disagreed that inconsistencies between the loan applications and other
             documents were not addressed and provided us with a letter from the loan correspondent
             to support the correct earnest money deposit. During our audit, we did not find this
             explanation in the HUD case binder. Certified should have reconciled the information
             and provided a clear explanation of events that occurred. Section 3-1 of HUD Handbook
             4155.1, REV-4, CHG1, states that the lender must provide explanatory statements,
             consistent with other information in the application, to clarify or supplement.

             Case Number 092-9512816

Comment 52   OIG Findings: Other Deficiencies and Inconsistencies

             Certified did not comment about the potential relationship between the borrower’s girl
             friend and landlord because it was not known to them when the loan was underwritten
             and they are unclear about what the OIG is implying may be a relationship, if it exists.
             We found that the landlord’s last name is similar to the borrower’s girl friend in
             reviewing pay stubs, bank statements, and other documentation in the HUD case
             binder. Since a possible relationship may have existed, we believe that the lender
             should have requested credit information from other objective third parties.




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             Case Number 092-9512816

Comment 53   OIG Findings: Other Deficiencies and Inconsistencies

             Certified was unable to provide an explanation for the sales contract being faxed from
             a broker to a real estate agent who appeared to have no involvement in the sales
             contract. Section 3-3 of HUD Handbook 4155.1 REV-4, CHG 1, states that the
             borrower, seller, and the selling real estate agent or broker involved in the sales
             transaction must certify that the terms and conditions of the sales contract are true to
             the best of their knowledge and belief and that any other agreement entered into by
             any of the parties in connection with the real estate transaction is part of, or attached
             to, the sales agreement.

             Case Number 092-9512816

Comment 54   OIG Findings: Other Deficiencies and Inconsistencies

             Certified was unable to provide an explanation why the verification of employment
             was inappropriately faxed from the broker to the loan correspondent. However, they
             maintain that the file was fully documented with the verification of employment form,
             W-2, and paycheck stubs and these documents were all consistent and complete.
             HUD requires that written verification forms must pass directly between the lender
             and provider without being handled by any third party. HUD also requires the
             lender's file must contain the original verification form that was mailed to and
             returned from the employer or creditor, which we did not find in the lender’s or HUD
             file. A faxed verification of employment should have been an indication that the
             lender needed to further verify the information provided and ensure the employer
             completed the form.




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             Case Number 092-9554548

Comment 55   OIG Findings: Questionable Source of Funds

             Certified clarified that the $10,261 gift provided to the borrower was indicated on the
             HUD-1 settlement statement and that no further documentation was required.
             Certified should have reconciled the information and provided a clear explanation of
             events that occurred. Section 3-1 of HUD Handbook 4155.1, REV-4, CHG 1, states
             that the lender must provide explanatory statements, consistent with other information
             in the application, to clarify or supplement. In addition, Certified stated that this gift
             met the required investment and downpayment. We found no supporting
             documentation in the HUD case binder or lender’s files for the $10,261 gift. As a
             result, we were unable to determine whether the minimum required investment and
             downpayment were met. Section 2-10 of HUD Handbook 4155.1, REV-4, CHG 1,
             requires that all funds for the borrower’s investment in the property be verified.

             Case Number 092-9554548

Comment 56   OIG Findings: Other Deficiencies and Inconsistencies

             Certified indicated that the underwriter resolved all of the OIG complaints based on
             her experienced judgment despite full documentation not being available. However,
             we maintain that Certified did not resolve conflicting or inconsistent information in
             the HUD case binder. According to HUD Handbook 4155.1, REV- 4, CHG 1,
             paragraph 3-1, the application package should contain sufficient documentation to
             support the lender’s decision to approve the mortgage loan.

Comment 57   Case Number 092-9560516

             HUD systems show this loan to have been terminated. Recommendation 1A has been
             revised to reflect those Federal Housing Administration loans that have been paid in
             full.




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   Appendix C

                             SUMMARY OF LOAN DEFICIENCIES


                                                                   Inaccurate         Excess
                       Other         Questionable                 employment,       ratios w/o     Funds to
                   deficiencies &     source of       Credit     income & gift       adequate      be put to    Ineligible
    Case #        inconsistencies       funds         issues      information      justification   better use      cost

092-9291283 *           X                  X             X             X

092-9359262 *           X                  X                           X

092-9367167 *           X                  X             X             X                X

092-9404542             X                                              X                                        $130,269

092-9574386             X                  X             X             X                                        $183,055

092-9594135             X                  X             X             X                                        $165,046

092-9644668             X                  X             X             X                           $120,232

092-9689460             X                  X                           X                           $216,601

092-9331983 *           X                  X             X

092-9384317             X                  X             X                              X          $162,400

092-9491433             X                  X             X                              X                       $133,406

092-9512816             X                  X             X                              X          $161,466

092-9554548             X                  X                                                                    $116,703

092-9560516 *           X                  X

Total                   14                13             9             8                4          $ 660,699    $ 728,479


   * According to Neighborhood Watch, as of October 31, 2005, 5 of the 14 loans terminated. Because these loans no
   longer represent a risk to the Federal Housing Administration insurance fund, we have removed these 5 loans from
   our recommendation.




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Appendix D

                    NARRATIVE LOAN DEFICIENCIES


Case number:                             092-9291283
Insured amount                           $91,787
Date of loan closing:                    December 30, 2002
Current status:                          Terminated (paid in full) as of 10/31/05
Payments before first default report:    3

Inaccurate Employment and Income Information

Certified approved the loan based on inaccurate employment and income information. We
verified with the coborrower’s employer that the coborrower never worked for the company.
The employer told us that the company never completed or signed the verification of
employment form, and the pay stubs and W-2 forms did not belong to the company. In addition,
Certified did not maintain original employment and income documentation in its files. Although
a loan correspondent originated this loan, Certified failed to properly verify employment and
income information and, therefore, generated and submitted to HUD inaccurate employment and
income data for the coborrower.

HUD Requirements

HUD Handbook 4155.1, REV-4, CHG-1, requires lenders to determine a borrower’s ability and
willingness to repay the mortgage debt and, thus, limit the probability of default or collection
difficulties. Lenders should evaluate the stability and adequacy of income, funds to close, credit
history, qualifying ratios, and compensating factors. They must ensure the application package
contains sufficient documentation to support their decision to approve the mortgage loan.
Section 3-2 states that the lender’s files must contain the original verification form that was
mailed to and returned from the employer or creditor.

HUD Handbook 4000.4, REV-1, paragraph 2-5, states that lenders are to obtain and verify
information with at least the same care that would be exercised if the lender were originating a
mortgage entirely dependent on the property as security to protect its investment.

Questionable Source of Funds

Certified failed to properly verify the borrower’s source of funds to close. We noted a $1,500
and $1,000 deposit in the coborrower’s bank statement without an explanation of the source of
these funds. The verification of deposit form indicated an opening bank balance of $7,728
without information on the source of these funds. Certified also failed to ensure that the
borrower met the minimum downpayment and minimum required investment in the purchase of
the property. We calculated the minimum downpayment and minimum required investment to


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be $3,731 and $2,817, respectively. The borrower only invested $1,000. We did not find
supporting documentation in the case binder that the borrower complied with these funding
requirements.

HUD Requirements

HUD Handbook 4155.1, REV-4, CHG-1, section 2-10, requires that all funds for the borrower’s
investment in the property be verified. Paragraph 2-10B states that a verification of deposit may
be used to verify these accounts, along with the most recent bank statement. If there is a large
increase in an account or the account was opened recently, an explanation and evidence of source
of funds must be obtained by the lender.

Mortgagee Letter 98-29 establishes that borrowers have to invest at least 3 percent into the property.
The Federal Housing Administration has determined that the minimum cash investment must be
based on sales price.

Other Deficiencies and Inconsistencies

Certified did not resolve conflicting or inconsistent information in the case binder. The final
loan application showed a liability of $9,573, while the initial loan application and credit report
did not. The borrower’s income was reported as $2,158 on the verification of employment form,
$2,043 on the loan application, and $2,179 on the mortgage credit analysis worksheet. In
addition, the sales contract showed a selling broker and no listing broker. However, the HUD-1
settlement statement showed the seller paid $2,676 in commissions to a broker that was not listed
in the sales contract or any other documents in the case binder.

HUD Requirements

HUD Handbook 4155.1, REV-4, CHG-1, section 3-1, states that HUD expects the application
package to contain sufficient documentation to support the lender’s decision to approve the
mortgage loan. When standard documentation does not provide enough information to support
this decision, the lender must provide additional explanatory statements, consistent with other
information in the application, to clarify or supplement.

Credit Issues

Certified did not properly analyze credit performance to ensure that the borrower demonstrated
financial responsibility. The coborrower’s credit report indicated four accounts with a zero
balance. We believe that Certified should have used a nontraditional credit history method and
considered this when determining approval for the loan. Although the credit reports did not
show any recent payoffs, the HUD-1 settlement statement indicated that the borrower paid
$5,567 toward five debts. The borrower did not give a justification in the case binder for two
debts in collection status. While the borrower provided justification in the case binder for the
other three debts, we do not believe the explanations were acceptable. The borrower claimed
that a cousin used his credit card and left the country without paying the outstanding balance.
The borrower is ultimately responsible for repayment of his debts. We also question the
financial stability of the borrower since some of the debts in collection status seem to have been

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outstanding for more than a year. In addition, we did not find supporting documentation in the
case binder for these payments.

HUD Requirements

HUD Handbook 4155.1, REV-4, CHG-1, section 2-3, states that while minor derogatory
information occurring two or more years in the past does not require explanation, major indications
of derogatory credit, including judgments and collections, and any other recent credit problem
require sufficient written explanation from the borrower. The borrower’s explanation must make
sense and be consistent with other information in the file. For those borrowers who may not have
established a credit history, the lender must develop a credit history from utility payment records,
rental payments, and automobile insurance payments (nontraditional credit history method).




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Case number:                              092-9359262
Insured amount:                           $118,146
Date of loan closing:                     April 30, 2003
Current status:                           Terminated (paid in full) as of 10/31/05
Payments before first default report:     14

Inaccurate Employment, Income and Gift Information

Certified approved the loan based on inaccurate employment and income information. The
verification of employment form indicated that the borrower was a teacher. We verified with the
employer that the borrower worked in maintenance. The employer informed us that he signed a
blank verification of employment form and indicated that the pay stubs and W-2 forms did not
belong to the employer. The verification of employment form also showed that the borrower
was employed for four years, while the loan application indicated only two years. We found no
explanation in the case binder for this discrepancy. Certified did not maintain original
employment and income documentation in its files.

Certified also approved the loan based on inaccurate gift information. We verified with the gift
donor that she never completed or signed the gift letter found in the case binder. In addition, the
donor indicated that she did not know the borrower and never provided a gift to the borrower.
Certified failed to properly verify employment, income, and gift information and, therefore,
generated and submitted to HUD inaccurate employment, income, and gift data for the borrower.

HUD Requirements

HUD Handbook 4155.1, REV-4, CHG-1, requires lenders to determine a borrower’s ability and
willingness to repay the mortgage debt and, thus, limit the probability of default or collection
difficulties. Lenders should evaluate the stability and adequacy of income, funds to close, credit
history, qualifying ratios, and compensating factors. They must ensure the application package
contains sufficient documentation to support their decision to approve the mortgage loan.
Section 3-2 requires that the lender’s files contain the original verification form that was mailed
to and returned from the employer or creditor.

Questionable Source of Funds

Certified failed to properly verify the borrower’s source of funds to close. The borrower
maintained two joint bank accounts with unrelated parties. We are unable to determine how
much of these funds belong to the borrower including a deposit of $2,562 for a tax refund.
Therefore, we are concerned that the borrower may not have the financial capability to pay the
mortgage or related expenses. In addition, Certified failed to ensure that the borrower met the
minimum downpayment in the purchase of the property. We calculated the minimum
downpayment to be $5,758. The borrower only invested $4,225. We did not find supporting
documentation in the case binder that the borrower complied with the minimum downpayment.



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HUD Requirements

HUD Handbook 4155.1, REV-4, CHG-1, section 2-10, requires that all funds for the borrower’s
investment in the property be verified.

Other Deficiencies and Inconsistencies

Certified did not resolve conflicting or inconsistent information in the case binder. The final
loan application showed the borrower’s debt and income, while the initial loan application did
not list any debt and income. The sales contract reported an earnest deposit of $900, while the
loan application and HUD-1 settlement statement reported $0. There was no explanation
provided for these inconsistencies. In addition, Certified did not provide an explanation for the
delay in endorsing the loan in a timely manner and what actions it plans to take to prevent future
delayed submissions.

HUD Requirements

HUD Handbook 4155.1, REV-4, CHG-1, section 3-1, states that HUD expects the application
package to contain sufficient documentation to support the lender’s decision to approve the
mortgage loan. When standard documentation does not provide enough information to support
this decision, the lender must provide additional explanatory statements, consistent with other
information in the application, to clarify or supplement.

HUD Handbook 4165.1, REV-1, CHG-3, paragraph 3-1B, states that when a lender is submitting
a late request for endorsement case, HUD requires an explanation for the delay and actions taken
to prevent future delayed submissions. The lender must also submit a payment ledger showing
the loan was current and certify that escrow accounts for taxes, hazard insurance, and mortgage
insurance premiums are current and intact except for normal disbursements.




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                                                93
Case number:                             092-9367167
Insured amount:                          $113,223
Date of loan closing:                    May 8, 2003
Current status:                          Terminated (paid in full) as of 10/31/05
Payments before first default report:    12

Inaccurate Gift Information

Certified approved the loan based on inaccurate gift information. We verified with the gift donor
that he never completed or signed the gift letter found in the case binder. The donor admitted
never providing a gift to the borrower. He did, however, provide a $2,500 loan to help his
brother purchase the property. If Certified had contacted the gift donor, the information would
not have been validated. Although a loan correspondent originated this loan, Certified failed to
properly verify gift information and, therefore, generated and submitted to HUD inaccurate gift
data for the borrower.

HUD Requirements

HUD Handbook 4155.1, REV-4, CHG-1, requires lenders to determine a borrower’s ability and
willingness to repay the mortgage debt and, thus, limit the probability of default or collection
difficulties. Lenders should evaluate the stability and adequacy of income, funds to close, credit
history, qualifying ratios, and compensating factors. They must ensure the application package
contains sufficient documentation to support their decision to approve the mortgage loan.

HUD Handbook 4000.4, REV-1, paragraph 2-5, states that lenders are to obtain and verify
information with at least the same care that would be exercised if the lender were originating a
mortgage entirely dependent on the property as security to protect its investment.

Questionable Source of Funds

Certified failed to properly verify the borrower’s source of funds to close. The case binder
indicated two personal money orders were used in providing the gift funds of $2,000 to the
borrower. The purchaser for both money orders was the borrower. The case binder also
contained the gift donor’s bank account showing a withdrawal of $2,008. However, there was no
supporting documentation to ensure the $2,008 was used to purchase the personal money orders.

Certified also failed to ensure that the borrower met the minimum downpayment and minimum
required investment in the purchase of the property. We calculated the minimum downpayment
and minimum required investment to be $4,175 and $3,450, respectively. The borrower only
invested $3,400. We did not find supporting documentation in the case binder that the borrower
complied with these funding requirements.




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                                                94
HUD Requirements

HUD Handbook 4155.1, REV-4, CHG-1, section 2-10, requires that all funds for the borrower’s
investment in the property be verified.

Mortgagee Letter 98-29 establishes that borrowers have to invest at least 3 percent into the property.
The Federal Housing Administration has determined that the minimum cash investment must be
based on sales price.

Excess Ratios without Adequate Justification

Certified did not provide valid compensating factors for exceeding the ratios. Certified justified
the excess front and back end ratios by stating that the borrower had (1) minimal outstanding
consumer debt, allowing more to be used for housing and (2) a small family whose living needs
are less than larger expanding families. It appears that the borrower used his savings for daily
purchases to live and remain free of outstanding debt. This is reflected in the minimal average
bank balance of $251 for two months. In addition, the borrower claimed to have reserves not
placed in his bank account. However, there was no evidence that supported this.

HUD Requirements

HUD Handbook 4155.1, REV-4, CHG-1, section 2-12A, states that a ratio exceeding 29 percent
may be acceptable only if significant compensating factors are presented. Section 2-12B states
that a ratio exceeding 41 percent may be acceptable if significant compensating factors are
presented.

Credit Issues

Certified did not properly analyze credit performance to ensure that the borrower demonstrated
financial responsibility. While the borrower provided two letters in the case binder explaining
all derogatory credit information, the explanations were insufficient and inconsistent. For
example, the borrower indicated being unaware of medical bills not covered by insurance in
collection status. We find this explanation unusual because if a medical provider does not get
paid from the insurance company, it then bills the insured person. After several attempts to get
paid, the provider reports the unpaid balance to a collection agency. While the credit report
shows some of the accounts were paid, we are uncertain whether other accounts were paid since
the credit report only indicates that they were updated.

HUD Requirements

HUD Handbook 4155.1, REV-4, CHG-1, section 2-3, states that while minor derogatory
information occurring two or more years in the past does not require explanation, major indications
of derogatory credit, including judgments and collections, and any other recent credit problem
require sufficient written explanation from the borrower. The borrower’s explanation must make
sense and be consistent with other information in the file.



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                                                 95
Other Deficiencies and Inconsistencies

Certified did not resolve conflicting or inconsistent information in the case binder. We found
several inconsistencies between the initial and final loan applications, including (1) the initial
loan application stated that the borrower had two dependents, but the final loan application and
credit report indicated zero dependents; (2) the initial loan application did not list any debts, but
the final loan application listed a debt of $1,624; (3) the initial loan application showed $1,000
held by the settlement agent, while the final loan application showed $2,900 held in escrow; and
(4) the initial loan application indicated the borrower had a bank account with no amount
disclosed, but the final loan application disclosed a balance of $506 in the same bank account.In
addition, page 2 of the final loan application showed the escrow agent holding $2,900 as an
escrow deposit, while page 3 stated $3,400. No explanations were provided in the case binder
regarding these inconsistencies.

While we verified with the employer that the borrower worked for the company, our review of
the case binder found that the borrower was not employed at the time of closing. Closing
occurred in May 2003, and the borrower’s bank statement for April and May 2003 showed that
the employer electronically deposited no funds.

HUD Requirements

HUD Handbook 4155.1, REV 4, CHG 1, section 3-1, states that HUD expects the application
package to contain sufficient documentation to support the lender’s decision to approve the
mortgage loan. When standard documentation does not provide enough information to support
this decision, the lender must provide additional explanatory statements, consistent with other
information in the application, to clarify or supplement.




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                                                 96
Case number:                              092-9404542
Insured amount:                           $125,037
Date of loan closing:                     June 5, 2003
Current status:                           Claim
Claim amount:                             $130,269
Payments before first default report:     13

Inaccurate Employment and Income Information

Certified approved the loan based on inaccurate employment and income information. We
verified with the borrower’s employer that the borrower never worked for the company. The
employer told us that the company never received, completed, or signed the verification of
employment form, and the pay stubs and W-2 forms did not belong to the company. In addition,
Certified did not maintain original employment and income documentation in its files. Although
a loan correspondent originated this loan, Certified failed to properly verify employment and
income information and, therefore, generated and submitted to HUD inaccurate employment and
income data for the borrower.

HUD Requirements

HUD Handbook 4155.1, REV-4, CHG-1, requires lenders to determine a borrower’s ability and
willingness to repay the mortgage debt and, thus, limit the probability of default or collection
difficulties. Lenders should evaluate the stability and adequacy of income, funds to close, credit
history, qualifying ratios, and compensating factors. They must ensure the application package
contains sufficient documentation to support their decision to approve the mortgage loan.
Section 3-2 requires that the lender’s files contain the original verification form that was mailed
to and returned from the employer or creditor.

HUD Handbook 4000.4, REV-1, paragraph 2-5, states that lenders are to obtain and verify
information with at least the same care that would be exercised if the lender were originating a
mortgage entirely dependent on the property as security to protect its investment.

Other Deficiencies and Inconsistencies

Certified did not resolve conflicting or inconsistent information in the case binder. The initial
loan application showed total funds available of $500, while the final loan application showed
total funds available of $7,196. Both the initial loan application and sales contract showed a
$500 earnest deposit, while the HUD-1 settlement statement and final loan application showed
an earnest deposit of $0. The mortgage credit analysis worksheet showed $4,200 as the earnest
deposit, while the final loan application showed this amount as a gift. The mortgage credit
analysis worksheet showed $1,000 as a gift; however, the case binder did not have supporting
documentation for this gift. We did not find an explanation in the case binder for these
inconsistencies.


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                                                97
HUD Requirements

HUD Handbook 4155.1, REV- 4, CHG-1, section 3-1, states that HUD expects the application
package to contain sufficient documentation to support the lender’s decision to approve the
mortgage loan. When standard documentation does not provide enough information to support
this decision, the lender must provide additional explanatory statements, consistent with other
information in the application, to clarify or supplement.




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                                               98
Case number:                               092-9574386
Insured amount:                            $175,249
Date of loan closing:                      September 19, 2003
Current status:                            Claim
Claim amount:                              $183,055
Payments before first default report:      10

Inaccurate Gift Information

Certified approved the loan based on inaccurate gift information. We verified with the two gift
donors that they never completed or signed the gift letters found in the case binder. In one
instance, it appeared that an interested third party (selling broker) informed the donor that the
funds were necessary to approve the loan for the borrower. However, the donor attested that the
funds provided were a loan and not a gift to the borrower. In addition, the donor confirmed that
he is not the borrower’s relative as indicated in the gift letter. Further, the borrower did not sign
the gift letter. The borrower did repay this loan. In the second instance, the donor told us he did
not know the borrower and did not provide a gift to the borrower. It appears that the loan
correspondent (donor relative) provided the gift funds to the borrower. Although a loan
correspondent originated this loan, we believe that Certified failed to properly verify gift
information and, therefore, generated and submitted to HUD inaccurate gift data for the
borrower.

HUD Requirements

HUD Handbook 4155.1, REV-4, CHG-1, requires lenders to determine a borrower’s ability and
willingness to repay the mortgage debt and, thus, limit the probability of default or collection
difficulties. Lenders should evaluate the stability and adequacy of income, funds to close, credit
history, qualifying ratios, and compensating factors. They must ensure the application package
contains sufficient documentation to support their decision to approve the mortgage loan.

HUD Handbook 4000.4, REV-1, paragraph 2-5, states that lenders are to obtain and verify
information with at least the same care that would be exercised if the lender were originating a
mortgage entirely dependent on the property as security to protect its investment.

Questionable Source of Funds

Certified failed to properly verify the borrower’s source of funds to close. According to the
mortgage agreement, the borrower and employer are married. However, the case binder showed
that the loan correspondent certified in a letter that two of the borrower’s boyfriend’s payroll
checks were deposited into the borrower’s bank account. The husband and boyfriend had
different names. We also noted that the borrower’s bank statements had recurring overdraft and
insufficient fund charges. During a nearly three-month period, the borrower had nine overdraft
charges. Although the borrower provided an explanation in the case binder, we question whether
the borrower had the financial capability to repay the mortgage. We also noted that a $287 debt


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                                                 99
was repaid according to a credit report without supporting documentation in the case binder
indicating the source of funds used to repay this debt.

Certified failed to ensure that the borrower met the minimum downpayment and minimum
required investment in the purchase of the property. We calculated the minimum downpayment
and minimum required investment to be $8,073 and $5,340, respectively. The borrower only
invested $3,390. We did not find supporting documentation in the case binder that the borrower
complied with these funding requirements.

HUD Requirements

HUD Handbook 4155.1, REV-4, CHG-1, section 2-10, requires that all funds for the borrower’s
investment in the property be verified.

Mortgagee Letter 98-29 establishes that borrowers have to invest at least 3 percent into the property.
The Federal Housing Administration has determined that the minimum cash investment must be
based on sales price.

Credit Issues

Certified did not properly analyze credit performance to ensure that the borrower demonstrated
financial responsibility. Based on the credit report, the borrower did not have a sufficient credit
history. Certified should have used a nontraditional credit history method and considered this
when determining approval for the loan. In addition, the borrower had one account in collection
status without an explanation provided in the case binder. It did not appear that Certified
considered this collection account in its analyses of the borrower’s credit worthiness. We
consider this important since the borrower did not have an established credit history and it could
have been an indicator of future financial difficulties.

HUD Requirements

HUD Handbook 4155.1, REV-4, CHG-1, section 2-3, states that while minor derogatory
information occurring two or more years in the past does not require explanation, major indications
of derogatory credit, including judgments and collections, and any other recent credit problem
require sufficient written explanation from the borrower. The borrower’s explanation must make
sense and be consistent with other information in the file. For those borrowers who may not have
established a credit history, the lender must develop a credit history from utility payment records,
rental payments, and automobile insurance payments (nontraditional credit history method).

Other Deficiencies and Inconsistencies

Certified did not resolve conflicting or inconsistent information in the case binder. The final
loan application did not list a $266 debt as it appeared in the initial loan application. The initial
loan application showed funds available of $1,400, and the final loan application showed $6,058.
The earnest deposit was $2,000 on the initial loan application but $3,000 on the final loan
application, HUD-1 settlement statement, and mortgage credit analysis worksheet and $1,000 on
the sales contract. We did not find an explanation in the case binder for these inconsistencies.


Table of Contents                                100
By reviewing the case binder and Certified’s loan files and conducting Internet searches, we
learned that the employer was the husband of the borrower. In addition, the borrower’s income
as an account representative was high. A copy of the verification of employment form from the
case binder reported income of $1,200 weekly or $62,400 per year. We conducted Internet
searches and learned that an account representative in Miami earns an average income of
$25,192 per year. Therefore, we question the authenticity of the employment and income
information generated and submitted to HUD.

HUD Requirements

HUD Handbook 4155.1 REV-4, CHG-1, section 3-1, states that HUD expects the application
package to contain sufficient documentation to support the lender’s decision to approve the
mortgage loan. When standard documentation does not provide enough information to support
this decision, the lender must provide additional explanatory statements, consistent with other
information in the application, to clarify or supplement. Section 3-2 requires that the lender’s
files contain the original verification form that was mailed to and returned from the employer or
creditor.




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                                               101
Case number:                              092-9594135
Insured amount:                           $155,769
Date of loan closing:                     October 8, 2003
Current status:                           Claim
Claim amount:                             $165,046
Payments before first default report:     9

Inaccurate Employment and Income Information

Certified approved the loan based on inaccurate employment and income information. We
verified with the borrower’s employer that the borrower never worked for the company. The
employer told us that the company never received, completed, or signed the verification of
employment form, and the pay stubs did not belong to the company. Certified did not maintain
original employment and income documentation in its files.

We also noted that the credit report showed the borrower had worked for the employer since
August 1999, while the verification of employment form indicated the borrower began working
for the employer in 2000. There was no supporting documentation in the case binder that
explains this inconsistency. In addition, we verified that the employee identification on the W-2
form was different from that reported by the Florida Department of State, Division of
Corporations. Certified failed to properly verify employment and income information and,
therefore, generated and submitted to HUD inaccurate employment and income data for the
borrower.

HUD Requirements

HUD Handbook 4155.1, REV-4, CHG-1, requires lenders to determine a borrower’s ability and
willingness to repay the mortgage debt and, thus, limit the probability of default or collection
difficulties. Lenders should evaluate the stability and adequacy of income, funds to close, credit
history, qualifying ratios, and compensating factors. They must ensure the application package
contains sufficient documentation to support their decision to approve the mortgage loan.
Section 3-2 requires that the lender’s files contain the original verification form that was mailed
to and returned from the employer or creditor.

Questionable Source of Funds

Certified failed to properly verify the borrower’s source of funds to close. Certified failed to
ensure that the borrower met the minimum downpayment and minimum required investment in
the purchase of the property. We calculated the minimum downpayment and minimum required
investment to be $5,250 and $4,710, respectively. We found no evidence in the case binder of a
minimum downpayment or investment in the property by the borrower.




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                                                102
HUD Requirements

HUD Handbook 4155.1, REV-4, CHG-1, section 2-10, requires that all funds for the borrower’s
investment in the property be verified.

Mortgagee Letter 98-29 establishes that borrowers have to invest at least 3 percent into the
property. The Federal Housing Administration has determined that the minimum cash
investment must be based on sales price.

Credit Issues

Certified did not properly analyze credit performance to ensure that the borrower demonstrated
financial responsibility. The borrower provided a letter in the case binder explaining all
derogatory credit information. However, the explanations were insufficient and inconsistent.
According to the borrower, her visiting relative placed the mail in a new bundle other than her
ordinary pile. The relative told the borrower about the mail three weeks later and was unaware
that some bills had arrived. This explanation is unacceptable because missing one month’s
payment would not usually prompt the creditor to refer the borrower to a collection agency.
Generally, an account goes into collection status after the creditor has unsuccessfully tried many
times to collect payment. In addition, the credit report shows several instances in which the
borrower was late in repayment of a credit card. Therefore, we question the financial stability of
the borrower since some of the overdue accounts were in collection status for more than a year.

HUD Requirements

HUD Handbook 4155.1, REV-4, CHG-1, section 2-3, states that while minor derogatory
information occurring two or more years in the past does not require explanation, major indications
of derogatory credit, including judgments and collections, and any other recent credit problem
require sufficient written explanation from the borrower. The borrower’s explanation must make
sense and be consistent with other information in the file.

Other Deficiencies and Inconsistencies

The credit report and HUD-1 settlement statement identified the employer and settlement agent
with the same name. They could be related or the same person.

HUD Requirements

HUD Handbook 4155.1, REV-4, CHG-1, section 3-1, states that HUD expects the application
package to contain sufficient documentation to support the lender’s decision to approve the
mortgage loan. When standard documentation does not provide enough information to support
this decision, the lender must provide additional explanatory statements, consistent with other
information in the application, to clarify or supplement.




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                                                103
Case number:                              092-9644668
Insured amount:                           $120,232
Date of loan closing:                     December 24, 2003
Current status:                           Active
Payments before first default report:     8

Inaccurate Employment and Income Information

Certified approved the loan based on inaccurate employment and income information. We
verified with the borrower’s employer that the borrower never worked for the company. The
employer told us that the company never received, completed, or signed the verification of
employment form, and the pay stubs and W-2 forms did not belong to the company. Certified
did not maintain original employment and income documentation in its files. Further, the credit
report and verification of employment form show different employers. Certified failed to
properly verify employment and income information and, therefore, generated and submitted to
HUD inaccurate employment and income data for the borrower.

HUD Requirements

HUD Handbook 4155.1, REV-4, CHG-1, requires lenders to determine a borrower’s ability and
willingness to repay the mortgage debt and, thus, limit the probability of default or collection
difficulties. Lenders should evaluate the stability and adequacy of income, funds to close, credit
history, qualifying ratios, and compensating factors. They must ensure the application package
contains sufficient documentation to support their decision to approve the mortgage loan.
Section 3-2 requires that the lender’s files contain the original verification form that was mailed
to and returned from the employer or creditor.

Questionable Source of Funds

Certified failed to properly verify the borrower’s source of funds to close. It failed to ensure that
the borrower met the minimum downpayment and minimum required investment in the purchase
of the property. The borrower did not provide the minimum downpayment and minimum
required investment calculated to be $7,359 and $3,690, respectively. We did not find
supporting documentation in the case binder that the borrower complied with these funding
requirements.

HUD Requirements

HUD Handbook 4155.1, REV-4, CHG-1, section 2-10, requires that all funds for the borrower’s
investment in the property be verified.

Mortgagee Letter 98-29 establishes that borrowers have to invest at least 3 percent into the
property. The Federal Housing Administration has determined that the minimum cash
investment must be based on sales price.


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                                                104
Credit Issues

Certified did not properly analyze credit performance to ensure that the borrower demonstrated
financial responsibility. The credit report showed an account that had been in collection status
since 2002 without an explanation from the borrower in the case binder. We also noted that a
creditor wrote off $4,239 after not receiving payment from the borrower. We did not find an
explanation in the case binder regarding this account.

HUD Requirements

HUD Handbook 4155.1, REV-4, CHG-1, section 2-3, states that while minor derogatory
information occurring two or more years in the past does not require explanation, major indications
of derogatory credit, including judgments and collections, and any other recent credit problem
require sufficient written explanation from the borrower. The borrower’s explanation must make
sense and be consistent with other information in the file.

Other Deficiencies and Inconsistencies

We conducted Internet searches and learned that the interviewer and the selling real estate agent
appear to be related and are co-owners of a business. We found no documentation in the case
binder explaining this discrepancy. In addition, we believe that the borrower’s income as a
welder was high. The verification of employment form reported income of $909 weekly or
$47,258 per year. We conducted Internet searches and learned that a welder in Miami earns an
average income of $29,982 per year.

HUD Requirements

HUD Handbook 4155.1 REV-4, CHG-1, requires lenders to determine a borrower’s ability and
willingness to repay the mortgage debt and, thus, limit the probability of default or collection
difficulties. Lenders should evaluate the stability and adequacy of income, funds to close, credit
history, qualifying ratios, and compensating factors. They must ensure the application package
contains sufficient documentation to support their decision to approve the mortgage loan.
Section 3-2 requires that the lender’s files contain the original verification form that was mailed
to and returned from the employer or creditor.




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                                                105
Case number:                              092-9689460
Insured amount:                           $216,601
Date of loan closing:                     February 25, 2004
Current status:                           Active
Payments before first default report:     1

Inaccurate Employment and Income Information

Certified approved the loan based on inaccurate employment and income information. We
verified with the employer that borrower income was based on commissions and was reported on
an Internal Revenue Service 1099 form. The employer said that the signature on the verification
of employment form was not the employer’s, and the pay stubs and W-2 forms did not belong to
the company. Certified did not maintain original employment and income documentation in its
files. It failed to properly verify employment and income information and, therefore, generated
and submitted to HUD inaccurate employment and income data for the borrower.

HUD Requirements

HUD Handbook 4155.1, REV-4, CHG-1, requires lenders to determine a borrower’s ability and
willingness to repay the mortgage debt and, thus, limit the probability of default or collection
difficulties. Lenders should evaluate the stability and adequacy of income, funds to close, credit
history, qualifying ratios, and compensating factors. They must ensure the application package
contains sufficient documentation to support their decision to approve the mortgage loan.
Section 3-2 requires that the lender’s files contain the original verification form that was mailed
to and returned from the employer or creditor.

Questionable Source of Funds

Certified failed to properly verify the borrower’s source of funds to close. It failed to ensure that
the borrower met the minimum downpayment and minimum required investment in the purchase
of the property. We calculated the minimum downpayment and minimum required investment to
be $6,950 and $6,600, respectively. The borrower only invested $5,000. We did not find
supporting documentation in the case binder that the borrower complied with these funding
requirements.

HUD Requirements

HUD Handbook 4155.1, REV-4, CHG-1, section 2-10, requires that all funds for the borrower’s
investment in the property be verified.

Mortgagee Letter 98-29 establishes that borrowers have to invest at least 3 percent into the
property. The Federal Housing Administration has determined that the minimum cash
investment must be based on sales price.


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                                                106
Other Deficiencies and Inconsistencies

The initial loan application showed $0 in liabilities, while the final loan application showed
$1,877. According to the borrower’s bank statement, the earnest deposit was withdrawn on
December 15, 2003. However, a copy of the check in the case binder showed a date of January
14, 2004. We did not find an explanation in the case binder for these inconsistencies.

HUD Requirements

HUD Handbook 4155.1, REV-4, CHG-1, section 2, states that the anticipated amount of income,
and likelihood of its continuance must be established to determine the borrower’s capacity to
repay the mortgage debt. Income from any source that cannot be verified, is not stable, or will
not continue may not be used in calculating the borrower’s income ratios.

Section 3-1 states that HUD expects the application package to contain sufficient documentation
to support the lender’s decision to approve the mortgage loan. When standard documentation
does not provide enough information to support this decision, the lender must provide additional
explanatory statements, consistent with other information in the application, to clarify or
supplement.




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                                              107
Case number:                              092-9331983
Insured amount:                           $113,984
Date of loan closing:                     March 4, 2003
Current status:                           Terminated (paid in full) as of 10/31/05
Payments before first default report:     14

Questionable Source of Funds

Certified failed to properly verify the borrower’s source of funds to close. It failed to ensure that
the borrower met the minimum downpayment and minimum required investment in the purchase
of the property. We calculated the minimum downpayment and minimum required investment to
be $4,613 and $3,447, respectively. The borrower only invested $2,570. We did not find
supporting documentation in the case binder that the borrower complied with these funding
requirements.

HUD Requirements

HUD Handbook 4155.1, REV-4, CHG-1, section 2-10, requires that all funds for the borrower’s
investment in the property be verified.

Mortgagee Letter 98-29 establishes that borrowers have to invest at least 3 percent into the
property. The Federal Housing Administration has determined that the minimum cash
investment must be based on sales price.

Credit Issues

Certified did not properly analyze credit performance to ensure financial responsibility. The
credit report showed accounts in collection status that were paid in 2000 and 2001. No further
information was provided in the case binder. While this transaction was completed in 2003,
Certified should have obtained an explanation from the borrower about these accounts and
considered this during the analysis to approve the loan.

The coborrower provided an explanation for all collection accounts, but the explanations were
not acceptable. The coborrower indicated having overdraft bank balances, but the bank never
billed her. Overdraft charges usually appear in bank statements. The coborrower should have
had knowledge of these charges. The coborrower also claimed she had never been billed for
overdue medical debts.

HUD Requirements

HUD Handbook 4155.1, REV-4, CHG-1, section 2-3, states that while minor derogatory
information occurring two or more years in the past does not require explanation, major indications
of derogatory credit, including judgments and collections, and any other recent credit problem
require sufficient written explanation from the borrower. The borrower’s explanation must make
sense and be consistent with other information in the file.

Table of Contents                               108
Other Deficiencies and Inconsistencies

The coborrower’s Social Security number was different among several documents in the case
binder. We believe this could be a typing error since our Internet searches confirmed the copy of
the Social Security card in the case binder.

The final loan application showed the borrower having zero dependents and the coborrower
having one dependent. However, the credit reports showed the borrower having one dependent
and the coborrower having zero dependents. The initial loan application showed the coborrower
with a bank balance of $935, while the final loan application showed a balance of $2,942. The
earnest money deposit in the sales contract, initial and final loan applications, and HUD-1
settlement statement was $2,000, while the mortgage credit analysis worksheet showed $2,335.
The case binder had no documentation explaining these discrepancies. In addition, Certified did
not provide an explanation for the delay in endorsing the loan in a timely manner and what
actions it plans to take to prevent future delayed submissions.

Certified approved the loan based on questionable employment information. We attempted to
verify employment, but the current employer’s business had dissolved. We then attempted to
verify the prior employment. The prior employer was a contractor whom we were unable to
contact. Instead, we verified with the subcontractor (not the employer) that the borrower
provided the information to them to complete the verification of employment form. In addition,
Certified did not maintain original employment and income documentation in its files. Although
a loan correspondent originated this loan, Certified failed to properly verify employment
information and, therefore, generated and submitted to HUD inaccurate employment and income
data for the borrower.

HUD Requirements

HUD Handbook 4155.1, REV-4, CHG-1, requires lenders to determine a borrower’s ability and
willingness to repay the mortgage debt and, thus, limit the probability of default or collection
difficulties. Lenders should evaluate the stability and adequacy of income, funds to close, credit
history, qualifying ratios, and compensating factors. They must ensure the application package
contains sufficient documentation to support their decision to approve the mortgage loan.
Section 3-1 states that HUD expects the application package to contain sufficient documentation
to support the lender’s decision to approve the mortgage loan. When standard documentation
does not provide enough information to support this decision, the lender must provide additional
explanatory statements, consistent with other information in the application, to clarify or
supplement. Section 3-2 requires that the lender’s files contain the original verification form that
was mailed to and returned from the employer or creditor.

HUD Handbook 4000.4, REV-1, paragraph 2-5, states that lenders are to obtain and verify
information with at least the same care that would be exercised if the lender were originating a
mortgage entirely dependent on the property as security to protect its investment.
HUD Handbook 4165.1, REV-1, CHG-3, paragraph 3-1B, states when a lender is submitting a
late request for endorsement case, HUD requires an explanation for the delay and actions taken
to prevent future delayed submissions.


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                                                109
Case number:                              092-9384317
Insured amount:                           $162,400
Date of loan closing:                     April 15, 2003
Current status:                           Active
Payments before first default report:     4

Questionable Source of Funds

Certified failed to properly verify the borrower’s source of funds to close. It failed to ensure that
the borrower met the minimum downpayment and minimum required investment in the purchase
of the property. We calculated the minimum downpayment and minimum required investment to
be $45,420 and $6,000, respectively. The borrower only invested $2,825. We did not find
supporting documentation in the case binder that the borrower complied with these funding
requirements.

HUD Requirements

HUD Handbook 4155.1, REV-4, CHG-1, section 2-10, requires that all funds for the borrower’s
investment in the property be verified.

Mortgagee Letter 98-29 establishes that borrowers have to invest at least 3 percent into the
property. The Federal Housing Administration has determined that the minimum cash
investment must be based on sales price.

Credit Issues

Certified did not properly analyze credit performance to ensure that the borrower demonstrated
financial responsibility. The credit report indicated the borrower had three accounts sent to
collection agencies. However, the credit report did not indicate when these accounts were paid
and how much the borrower owed. The borrower provided an explanation for the overdue
accounts in the case binder by claiming she had emotional problems. Despite the explanation by
the borrower, we question why credit accounts would not be paid in a timely manner since the
borrower maintained a bank account balance of approximately $50,000.

HUD Requirements

HUD Handbook 4155.1, REV-4, CHG-1, section 2-3, states that while minor derogatory
information occurring two or more years in the past does not require explanation, major indications
of derogatory credit, including judgments and collections, and any other recent credit problem
require sufficient written explanation from the borrower. The borrower’s explanation must make
sense and be consistent with other information in the file.

Excess Ratios without Adequate Justification

Certified failed to document the basis for accepting an excess front-end ratio of 33.07 percent.

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HUD Requirements

HUD Handbook 4155.1, REV-4, CHG-1, section 2-12A, states that if the total mortgage
payment (principal and interest; escrow deposits for real estate taxes, hazard insurance, the
mortgage insurance premium, homeowners’ association dues, ground rent, special assessments,
and payments for any acceptable secondary financing) does not exceed 29 percent of the gross
effective income, the relationship of the mortgage payment to income is considered acceptable.
A ratio exceeding 29 percent may be acceptable only if significant compensating factors are
presented.

Other Deficiencies and Inconsistencies

Certified did not resolve conflicting or inconsistent information in the case binder. The HUD-1
settlement statement, sales contract, and mortgage credit analysis worksheet showed the earnest
deposit was $2,500, while both the initial and final loan applications showed the earnest deposit
as $500. We did not find an explanation in the case binder for this discrepancy.
HUD Requirements

HUD Handbook 4155.1, REV-4, CHG-1, section 3-1, states that HUD expects the application
package to contain sufficient documentation to support the lender’s decision to approve the
mortgage loan. When standard documentation does not provide enough information to support
this decision, the lender must provide additional explanatory statements, consistent with other
information in the application, to clarify or supplement.




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Case number:                              092-9491433
Insured amount:                           $126,022
Date of loan closing:                     July 14, 2003
Current status:                           Claim
Claim amount:                             $133,406
Payments before first default report:     1

Questionable Source of Funds

Certified failed to properly verify the borrower’s source of funds to close. It failed to ensure that
the borrower met the minimum downpayment and minimum required investment in the purchase
of the property. We calculated the minimum downpayment and minimum required investment to
be $7,812 and $3,840, respectively. The borrower only invested $3,500. We did not find
supporting documentation in the case binder that the borrower complied with these funding
requirements.

HUD Requirements

HUD Handbook 4155.1, REV-4, CHG-1, section 2-10, requires that all funds for the borrower’s
investment in the property be verified.

Mortgagee Letter 98-29 establishes that borrowers have to invest at least 3 percent into the
property. The Federal Housing Administration has determined that the minimum cash
investment must be based on sales price.

Excess Ratios without Adequate Justification

Certified did not provide valid compensating factors for exceeding the ratio. The mortgage
payment-to-income (front-end) ratio was 30.25 percent, which exceeds the 29 percent threshold
limit. Certified justified the excess front-end-ratio by stating that the borrower does not currently
have outstanding consumer debt. Since this is known, Certified should have provided other
compensating factors to explain why this excess ratio will not impact the borrower’s ability to
make future mortgage payments.

HUD Requirements

HUD Handbook 4155.1, REV-4, CHG-1, section 2-12A, states that if the total mortgage
payment (principal and interest; escrow deposits for real estate taxes, hazard insurance, the
mortgage insurance premium, homeowners’ association dues, ground rent, special assessments,
and payments for any acceptable secondary financing) does not exceed 29 percent of the gross
effective income, the relationship of the mortgage payment to income is considered acceptable.
A ratio exceeding 29 percent may be acceptable only if significant compensating factors are
presented.



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                                                112
Credit Issues

Certified did not properly analyze credit performance to ensure that the borrower demonstrated
financial responsibility. The credit reports did not show recent payoffs, but the HUD-1 settlement
statement showed the borrower paid $131 toward an overdue account. The case binder indicated
that the borrower claimed he did not know the account existed because his ex-girlfriend used his
Social Security number to obtain the account. We question the validity of this explanation because
creditors usually send monthly invoices requesting payment. In addition, it is unusual that the
borrower had no knowledge of this balance for more than two years. We also found no supporting
documentation in the case binder that the borrower paid this amount.

HUD Requirements

HUD Handbook 4155.1, REV-4, CHG-1, section 2-3, states that while minor derogatory
information occurring two or more years in the past does not require explanation, major indications
of derogatory credit, including judgments and collections, and any other recent credit problem
require sufficient written explanation from the borrower. The borrower’s explanation must make
sense and be consistent with other information in the file.

Other Deficiencies and Inconsistencies

Certified did not resolve conflicting or inconsistent information in the case binder. The
verification of employment form and pay stubs showed $4,274 monthly income, but the final
loan application had $3,835. The final loan application showed monthly payments of $797,
while the mortgage credit analysis worksheet showed $881. We question this difference of $85
even though it does not have an adverse affect on the qualifying ratio calculations. The final
loan application showed the borrower was unmarried but did not indicate any dependents.
However, a letter in the case binder indicated the borrower had a child. The case binder did not
contain a tax return or other supporting documentation to confirm whether the child was a
dependent or whether the borrower owes child support. We did not find an explanation in the
case binder for these inconsistencies.

The sales contract indicated a broker was involved in the sales transaction. However, the HUD-1
settlement statement showed the seller paid commissions to a broker that was not identified in
the sales contract or other documents in the case binder. The HUD-1 settlement statement
showed an expense for yield spread premium but it is unclear who paid this amount at closing.
The HUD-1 settlement statement also showed that the seller paid $21,433.08 to an investment
company. We found no explanation in the case binder of the role of this investment company in
the sales transaction.

Other than a letter indicating a transfer of the escrow deposit to another settlement agent, we did
not find supporting documentation in the case binder that this transfer of funds occurred.
HUD Requirements

HUD Handbook 4155.1, REV-4, CHG-1, section 3-1, states that HUD expects the application
package to contain sufficient documentation to support the lender’s decision to approve the


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mortgage loan. When standard documentation does not provide enough information to support
this decision, the lender must provide additional explanatory statements, consistent with other
information in the application, to clarify or supplement. Section 3-3 states that the borrower,
seller, and selling real estate agent or broker involved in the sales transaction must certify that
the terms and conditions of the sales contract are true to the best of their knowledge and belief
and that any other agreement entered into by any of the parties in connection with the real estate
transaction is part of, or attached to, the sales agreement.




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                                                114
Case number:                              092-9512816
Insured amount:                           $161,466
Date of loan closing:                     July 10, 2003
Current status:                           Active
Payments before first default report:     9

Questionable Source of Funds

Certified failed to properly verify the borrower’s source of funds to close. It failed to ensure that
the borrower met the minimum downpayment and minimum required investment in the purchase
of the property. We calculated the minimum downpayment and minimum required investment to
be $5,317 and $4,920, respectively. The borrower only invested $4,800. We did not find
supporting documentation in the case binder that the borrower complied with these funding
requirements.

HUD Requirements

HUD Handbook 4155.1, REV-4, CHG-1, section 2-10, establishes that all funds for the
borrower’s investment in the property to be verified.

Mortgagee Letter 98-29 establishes that borrowers have to invest at least 3 percent into the
property. The Federal Housing Administration has determined that the minimum cash
investment must be based on sales price.

Excess Ratios without Adequate Justification

Certified did not provide valid compensating factors for exceeding the ratio. It justified the
excess front-end-ratio of 33.35 percent by stating that the borrower (1) has no outstanding debt,
allowing more to be used for housing, and (2) has a savings account not documented. However,
we found copies of bank statements in the case binder that showed the borrower maintained a
minimum bank balance of $36. It appears that the borrower used his savings for daily purchases
to live and remain free of outstanding debt. Therefore, we question the validity of the
justifications for the excess qualifying ratio and whether the borrower has the financial capability
to make future mortgage payments.

HUD Requirements

HUD Handbook 4155.1, REV-4, CHG-1, section 2-12A, states that if the total mortgage
payment (principal and interest; escrow deposits for real estate taxes, hazard insurance, the
mortgage insurance premium, homeowners’ association dues, ground rent, special assessments,
and payments for any acceptable secondary financing) does not exceed 29 percent of the gross
effective income, the relationship of the mortgage payment to income is considered acceptable.
A ratio exceeding 29 percent may be acceptable only if significant compensating factors are
presented.


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                                                115
Credit Issues

Certified did not properly analyze credit performance to ensure that the borrower demonstrated
financial responsibility. Based on the credit report, the borrower had no credit history. Although
information was provided in the case binder from the landlord, Certified should have used a
nontraditional credit history method and considered this when determining approval for the loan.
In addition, the landlord information was faxed from the broker to the loan correspondent in
violation of prescribed HUD requirements.

HUD Requirements

HUD Handbook 4155.1, REV-4, CHG-1, section 2-3, states that while minor derogatory
information occurring two or more years in the past does not require explanation, major indications
of derogatory credit, including judgments and collections, and any other recent credit problem
require sufficient written explanation from the borrower. The borrower’s explanation must make
sense and be consistent with other information in the file. For those borrowers who may not have
established a credit history, the lender must develop a credit history from utility payment records,
rental payments, and automobile insurance payments (nontraditional credit history method).
Section 3-1 states that the underwriter has to verify that verification forms are passed directly
between lender and provider without being handled by any third party.

Other Deficiencies and Inconsistencies

Certified did not resolve conflicting or inconsistent information in the case binder. The initial loan
application and sales contract showed the earnest money deposit to be $500, while the final loan
application, HUD-1 settlement statement and mortgage credit analysis worksheet showed the
earnest money deposit was $4,800. Our review of pay stubs, bank statements, and other
documentation in the case binder noted a potential conflicting relationship between the borrower’s
girl friend and the landlord. We also found no explanation for the sales contract being faxed from a
broker to a real estate agent who appeared to have no involvement in the sales transaction. While
the broker was involved in the sales transaction, the verification of employment form was
inappropriately faxed from the broker to the loan correspondent in violation of prescribed HUD
requirements.

HUD Requirements

HUD Handbook 4155.1, REV-4, CHG-1, section 3-1, states that HUD expects the application
package to contain sufficient documentation to support the lender’s decision to approve the
mortgage loan. When standard documentation does not provide enough information to support
this decision, the lender must provide additional explanatory statements, consistent with other
information in the application, to clarify or supplement. Section 3-1 also states that the
underwriter has to verify that verification forms are passed directly between the lender and
provider without being handled by a third party. Section 3-3 states that the borrower, seller, and
selling real estate agent or broker involved in the sales transaction must certify that the terms and
conditions of the sales contract are true to the best of their knowledge and belief and that any


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                                                 116
other agreement entered into by any of the parties in connection with the real estate transaction is
part of, or attached to, the sales agreement.




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                                                117
Case number:                              092-9554548
Insured amount:                           $116,082
Date of loan closing:                     September 12, 2003
Current status:                           Claim
Claim amount:                             $116,703
Payments before first default report:     7

Questionable Source of Funds

Certified failed to properly verify the borrower’s source of funds to close. It failed to ensure that
the borrower met the minimum downpayment and minimum required investment in the purchase
of the property. We calculated the minimum downpayment and minimum required investment to
be $6,429 and $3,510, respectively. We did not find supporting documentation in the case
binder that the borrower met these funding requirements. Certified also failed to clearly identify
the gift amount provided to the borrower. The case binder contained the HUD-1 settlement
statement showing a gift of $10,261 and the mortgage credit analysis worksheet showing
$10,160, while the gift letter found in Certified’s loan file showed a gift of $9,978. Certified
provided no further explanation for this discrepancy.

HUD Requirements

HUD Handbook 4155.1, REV-4, CHG-1, section 2-10, requires that all funds for the borrower’s
investment in the property be verified.

Mortgagee Letter 98-29 establishes that borrowers have to invest at least 3 percent into the
property. The Federal Housing Administration has determined that the minimum cash
investment must be based on sales price.

Other Deficiencies and Inconsistencies

Certified did not resolve conflicting or inconsistent information in the case binder. The initial
and final loan applications showed a different bank account number than the bank statements.
The verification of employment form showed the borrower being paid on a biweekly basis, while
the pay stub showed the borrower being paid on a weekly basis. In addition, the pay stub
showed no hours worked.

HUD Requirements

HUD Handbook 4155.1, REV-4, CHG-1, section 3-1, states that HUD expects the application
package to contain sufficient documentation to support the lender’s decision to approve the
mortgage loan. When standard documentation does not provide enough information to support
this decision, the lender must provide additional explanatory statements, consistent with other
information in the application, to clarify or supplement.



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                                                118
HUD Handbook 4000.4, REV-1, paragraph 2-5, states that lenders are to obtain and verify
information with at least the same care that would be exercised if the lender were originating a
mortgage entirely dependent on the property as security to protect its investment.




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                                               119
Case number:                              092-9560516
Insured amount:                           $89,736
Date of loan closing:                     August 6, 2003
Current status:                           Terminated (paid in full) as of 10/31/05
Payments before first default report:     5

Questionable Source of Funds

Certified failed to properly verify the borrower’s source of funds to close. It failed to ensure that
the borrower met the minimum downpayment and minimum required investment in the purchase
of the property. We calculated the minimum downpayment and minimum required investment to
be $5,164 and $2,734, respectively. The borrower only invested $2,000. We did not find
supporting documentation in the case binder that the borrower met these funding requirements.

HUD Requirements

HUD Handbook 4155.1, REV-4, CHG-1, section 2-10, requires that all funds for the borrower’s
investment in the property be verified.

Mortgagee Letter 98-29 establishes that borrowers have to invest at least 3 percent into the
property. The Federal Housing Administration has determined that the minimum cash
investment must be based on sales price.

Other Deficiencies and Inconsistencies

Certified did not resolve conflicting or inconsistent information in the case binder. The initial
loan application, dated July 16, 2003, showed $809 in liabilities, while the final loan application
showed $427. The decrease in liabilities was due to repayment of a $17,009 debt as of June 1,
2003. Certified provided no supporting documentation in the case binder for when and how the
repayment of this debt occurred.

HUD Requirements

HUD Handbook 4155.1, REV-4, CHG-1, section 3-1, states that HUD expects the application
package to contain sufficient documentation to support the lender’s decision to approve the
mortgage loan. When standard documentation does not provide enough information to support
this decision, the lender must provide additional explanatory statements, consistent with other
information in the application, to clarify or supplement.




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