oversight

Trustcorp Mortgage Company, Nonsupervised Lender; South Bend, Indiana, Substantially Complied with Requirements Regarding Late Requests for Endorsement and Underwriting of Loans

Published by the Department of Housing and Urban Development, Office of Inspector General on 2005-12-22.

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

                                                                 Issue Date
                                                                          December 22, 2005
                                                                 Audit Report Number:
                                                                          2006-CH-1004




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


FROM:      Heath Wolfe, Regional Inspector General for Audit, 5AGA

SUBJECT: Trustcorp Mortgage Company, Nonsupervised Lender; South Bend, Indiana,
            Substantially Complied with Requirements Regarding Late Requests for
            Endorsement and Underwriting of Loans

                                    HIGHLIGHTS

 What We Audited and Why

             We audited Trustcorp Mortgage Company (Trustcorp), a nonsupervised lender
             approved to originate, underwrite, and submit insurance endorsement requests
             under the U.S. Department of Housing and Urban Development’s (HUD) single
             family direct endorsement program. The audit was part of the activities in our
             fiscal year 2005 annual audit plan. We selected Trustcorp for audit because of its
             high late endorsement rate. Our objectives were to determine whether Trustcorp
             complied with HUD’s regulations, procedures, and instructions in the submission
             of insurance endorsement requests and underwriting of Federal Housing
             Administration loans.

 What We Found


             Trustcorp substantially complied with HUD’s requirements on late requests for
             insurance endorsement; however, before Trustcorp improved its procedures, it
             improperly submitted five late requests for endorsement out of 1,035 loans tested.
             The loans were either delinquent or otherwise did not meet HUD’s requirements
             of six monthly consecutive timely payments after delinquency but before
           submission to HUD. Four of the five loans were later paid in full and no longer
           pose a risk to the Federal Housing Administration insurance fund. Trustcorp also
           incorrectly certified that escrow accounts for taxes, hazard insurance, and
           mortgage insurance premiums for two of 34 loans’ certifications reviewed were
           current when they were not.

           Further, Trustcorp substantially complied with HUD’s underwriting requirements
           for nine loans reviewed. However, it included unallowable charges when
           determining the debt for two loans that went to claim in excess of HUD’s
           maximum insurable mortgage limits. It also incorrectly certified that due
           diligence was used in underwriting the two loans reviewed when it was not.

           As a result, the risk to HUD’s Federal Housing Administration insurance fund
           was increased.

What We Recommend

           We recommend that HUD’s assistant secretary for housing-federal housing
           commissioner take appropriate action against Trustcorp for not following the
           requirements in effect at the time when it submitted one loan with a total
           mortgage value of $99,759 without the proper six-month payment history, require
           Trustcorp to reimburse HUD $2,889 for unallowable charges on the two loans
           that went to claim, implement adequate procedures and controls to ensure its
           underwriters follow HUD’s underwriting requirements regarding allowable
           charges and the accuracy of underwriting certifications submitted to HUD, and
           review Trustcorp’s implementation of procedures and controls for full compliance
           with HUD’s underwriting requirements.

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

Auditee’s Response


           During the audit, we provided the results of our late endorsement and
           underwriting reviews to Trustcorp’s management. We also provided our
           discussion draft audit report to Trustcorp’s president, senior vice president/chief
           operating officer, senior vice president and vice president of compliance, and
           HUD’s staff on December 2, 2005. We conducted an exit conference with
           Trustcorp’s management on December 16, 2005.

           We asked Trustcorp’s president to provide comments on our discussion draft
           audit report by December 17, 2005. Trustcorp’s vice president of compliance



                                             2
provided written comments dated December 16, 2005, that agreed with our
findings. The complete text of the written comments can be found in appendix B
of this report.




                               3
                            TABLE OF CONTENTS

Background and Objectives                                                   5

Results of Audit

      Finding 1: Trustcorp Substantially Complied with HUD’s Requirements
                 Regarding Late Requests for Endorsement                    6
      Finding 2: Trustcorp Substantially Complied with HUD’s Underwriting
                 Requirements                                               9

Scope and Methodology                                                       12

Internal Controls                                                           14

Followup on Prior Audits                                                    16

Appendixes
   A. Schedule of Questioned Costs and Funds to Be Put to Better Use        17
   B. Auditee Comments                                                      18
   C. Federal Requirements                                                  20




                                            4
                     BACKGROUND AND OBJECTIVES

In 1975, the U.S. Department of Housing and Urban Development (HUD) approved St. Joseph
Mortgage Company to originate, purchase, and sell Federal Housing Administration loans. In
1987, St. Joseph Mortgage Company changed its name to Trustcorp Mortgage Company
(Trustcorp). Trustcorp operates as a nonsupervised lender under HUD’s direct endorsement
program. Under the direct endorsement program, Trustcorp is required to determine that a
proposed loan is eligible for mortgage insurance under applicable program regulations without
prior HUD review of the loan package.

As of October 2005, Trustcorp is the authorized agent for four principals as well as the acting
principal for 44 loan correspondents involved in Federal Housing Administration loans. From
January 2003 through December 2004, Trustcorp submitted 3,215 Federal Housing
Administration loans for mortgage insurance totaling more than $331 million.

Trustcorp is a wholly owned mortgage banking subsidiary of 1st Source Corporation, which has
more than $3.5 billion in total assets as of October 2005. Trustcorp is headquartered in South
Bend, Indiana and has five offices in Indiana and Ohio. It services more than 15,000 mortgages
totaling in excess of $1.3 billion as of October 2005.

We audited Trustcorp as part of the activities in our fiscal year 2005 annual audit plan. We
selected Trustcorp for audit because of its high late endorsement rate of 36 percent during the
period of January 1, 2003, through December 31, 2004. Trustcorp originated and/or sponsored
3,215 loans totaling more than $331 million between January 2003 and December 2004.

Our objectives were to determine whether Trustcorp complied with HUD’s regulations,
procedures, and instructions in the submission of insurance endorsement requests and
underwriting of Federal Housing Administration loans.




                                                5
                            RESULTS OF AUDIT

Finding 1: Trustcorp Substantially Complied with HUD’s Requirements
              Regarding Late Requests for Endorsement
Trustcorp implemented improvements to its procedures and controls for late requests for
endorsement in 2004. However, before the procedures and controls were strengthened,
Trustcorp improperly submitted five loans with mortgages totaling more than $499,000 for
insurance endorsement when the borrowers did not make six monthly consecutive timely
payments after delinquency but before submission to HUD. Four of the five loans were later
paid in full and no longer pose a risk to the Federal Housing Administration insurance fund.
Trustcorp also incorrectly certified that the escrow accounts for taxes, hazard insurance, and
mortgage insurance premiums for two of 34 loans’ certifications reviewed were current when
they were not. Trustcorp improperly submitted loans for late endorsement due to errors made by
its staff such as misreading the loans’ mortgage payment histories. As a result, the remaining
one loan poses a risk to the Federal Housing Administration insurance fund.



 Trustcorp Took Corrective
 Actions Regarding Late
 Endorsements

              During 2004, Trustcorp implemented improvements to its procedures and controls
              for processing Federal Housing Administration loans for endorsement.

              Trustcorp implemented a more efficient loan processing system for its
              Underwriting, Post Closing, and Document Control Departments to use when
              processing Federal Housing Administration loans. The computerized loan
              processing system provides the departments with the current status of loans being
              processed for endorsement. Such status includes but is not limited to the types of
              loan deficiencies to be addressed in a timely manner or within a reasonable period
              so loans can be properly submitted to HUD for endorsement.

              Additionally, Trustcorp’s Post Closing Department’s process was restructured to
              thoroughly audit loan files before the loans are set up for servicing and before
              they are submitted to HUD for endorsement. Such a thorough audit minimizes
              errors made by Trustcorp’s staff when reading the mortgage payment histories
              before submitting loans to HUD for late endorsement.

              Further, Trustcorp changed the way its staff manages all loans. It has separate
              management and staff who process conventional loans versus government loans,
              including Federal Housing Administration loans. Splitting the management
              oversight of these loans helps Trustcorp to efficiently and effectively manage its



                                               6
           loan processing, thus reducing untimely and improper submissions of loans to
           HUD for endorsement.

Improperly Submitted Late
Requests for Endorsement

           Our analysis of the mortgage payment histories provided by Trustcorp and
           endorsement data from HUD’s systems showed that for the 1,035 loans we tested,
           Trustcorp substantially complied with HUD’s requirements regarding late
           requests for endorsement. However, before Trustcorp improved its procedures, it
           improperly submitted five loans for endorsement when the borrowers had not
           made six monthly consecutive timely payments after the delinquency but before
           submission to HUD.

           After endorsement, four of the five loans were paid in full and no longer represent
           a risk to HUD’s Federal Housing Administration insurance fund. One remaining
           loan (case number 201-3228116) holds active Federal Housing Administration
           insurance as of December 19, 2005, with $99,759 in total mortgage value and
           poses a risk to the insurance fund.

           According to HUD’s Neighborhood Watch system, Trustcorp submitted 7 out of
           270 loans for late endorsement from January 1 through September 30, 2005,
           which represents more than a 2 percent late endorsement rate. During this same
           period in 2004, Trustcorp submitted 32 of 302 loans late for endorsement for
           more than a 10 percent late endorsement rate. We did not determine whether the
           seven loans met HUD’s requirements; we only used the information to determine
           whether Trustcorp’s late endorsement rate had increased or decreased.

           Trustcorp signed certification letters for two of 34 loans’ certifications reviewed
           (case numbers 411-3581272 and 411-3633987) it submitted for late requests for
           endorsement and certified that the escrow accounts for these loans were current.
           However, the loans Trustcorp submitted to HUD for late endorsement had escrow
           accounts that were not current at the time of submission. We did not make a
           recommendation relating to the incorrect certifications in this report because
           Trustcorp’s implementation of the improved procedures and controls in 2004
           provides reasonable assurance that loans are correctly certified for late
           endorsement.

           Appendix C of this report provides details of federal requirements regarding late
           request for insurance endorsement.

           During our review, Trustcorp’s vice president of compliance provided us a letter
           dated October 27, 2005, regarding our late endorsement review results. The vice
           president agreed with our findings in that Trustcorp improperly submitted and
           underwrote Federal Housing Administration loans.



                                            7
Recommendation

          We recommend that HUD’s assistant secretary for housing-federal housing
          commissioner

          1A.    Take appropriate action against Trustcorp for not following the
                 requirements in effect at the time when it submitted one loan with a total
                 mortgage value of $99,759 without the proper six-month payment history.




                                          8
Finding 2: Trustcorp Substantially Complied with HUD’s Underwriting
                            Requirements
Trustcorp substantially complied with HUD’s underwriting requirements for nine loans
reviewed. However, Trustcorp included unallowable charges when determining the debt for two
loans that went to claim in excess of HUD’s maximum insurable mortgage limits. Trustcorp also
incorrectly certified that due diligence was used in underwriting the two loans reviewed when it
was not. The problems occurred because Trustcorp’s underwriters misinterpreted HUD’s
requirements regarding the types of allowable costs. As a result, the two loans collectively
exceeded HUD’s maximum insurable mortgage limit by $2,889.



 Trustcorp Included
 Unallowable Charges When
 Determining Two Loans

              Trustcorp sponsored 3,215 Federal Housing Administration loans between
              January 1, 2003, and December 31, 2004. Of the 3,215 loans, HUD paid
              $927,513 in claims on nine loans (four home purchase, three streamline
              refinanced with appraisals, and two streamline refinanced without appraisals).

              We reviewed all nine loans for compliance with HUD’s underwriting
              requirements. Based on our review, Trustcorp substantially complied with
              HUD’s underwriting requirements. However, it included unallowable charges
              when it funded two of the nine insured loans in excess of HUD’s maximum
              insurable mortgage limits. These two loans were streamline refinanced without
              appraisals.

              Paragraph 1-12 of HUD Handbook 4155.1, REV-4, requires Trustcorp to fund
              Federal Housing Administration streamline loans up to HUD’s maximum
              insurable mortgage limits. Further, paragraph 1-12 prohibits delinquent interest,
              late charges, or escrow shortages from being included in the mortgages of
              streamline refinanced loans.

              Section IV of HUD’s Mortgagee Letter 94-7 states that HUD does not object to
              commitment or “lock-in” fees charged for guaranteeing the interest rate and/or
              discount points for a specific period. Commitment or “lock-in” fees may be paid
              by the borrower but not financed in the loan.

              From January 2003 through December 2004, Trustcorp funded two streamline
              refinanced loans in excess of HUD’s maximum insurable mortgage limits.
              Trustcorp funded the two loans for a total of $252,375. HUD’s maximum
              insurable limit for the two loans totaled $249,486. Therefore, the two loans
              exceeded HUD’s limit by $2,889.



                                               9
           Trustcorp overfunded the loans because its underwriters misinterpreted HUD’s
           requirements regarding the types of costs that can be included when calculating
           the mortgage amounts for streamline refinanced loans. For loan number 151-
           7513632, Trustcorp’s underwriter included in the new mortgage amount
           unallowable charges including escrow shortages of the previous loan as well as
           the unpaid late charges. For loan number 201-3221631, Trustcorp’s underwriter
           included in the new mortgage amount unallowable closing costs such as
           commitment or “lock-in” fees. HUD paid $31,544 in claims on these loans.

           Further, Trustcorp’s underwriters also incorrectly certified that due diligence was
           exercised in the underwriting of the two loans reviewed when it was not. When
           underwriting a loan, HUD requires direct endorsement underwriters to calculate
           the mortgage amounts to be funded based upon their review of information and
           other associated loan documents that were compiled for a particular loan. After
           underwriting a Federal Housing Administration loan, HUD requires the direct
           endorsement underwriters to certify that they reviewed all associated documents
           and used due diligence in underwriting the mortgages. HUD relies on these
           certifications to ensure that direct endorsement underwriters follow HUD’s
           underwriting requirements.


Trustcorp Needs to Implement
Adequate Procedures and
Controls Regarding Allowable
Costs and Accuracy of
Underwriting Certifications


           Although Trustcorp kept current with HUD’s underwriting requirements by
           updating its underwriting manual, it needs to ensure that its underwriters fully
           understand HUD’s requirements regarding allowable closing and other types of
           costs when calculating new mortgages under streamline refinanced loans.
           Trustcorp needs to implement adequate procedures and controls to provide
           reasonable assurance that its underwriters follow HUD’s underwriting
           requirements, including but not limited to adequate training. In addition,
           implementing adequate procedures and controls over the underwriting of loans
           would ensure that HUD endorses only Federal Housing Administration loans that
           have allowable or eligible amounts for insurance, thereby, not only preventing
           HUD from overinsuring loans but also protecting the Federal Housing
           Administration fund from future risks. The adequate procedures and controls
           should also ensure the accuracy of Trustcorp’s underwriting certifications
           submitted to HUD.

           Using the two loans with unallowable charges/incorrect certifications and the total
           claims HUD paid on the nine loans we reviewed, the estimated total risk to the
           Federal Housing Administration is $102,026 per year if Trustcorp does not



                                            10
          improve its underwriting procedures and controls (two divided by nine, times
          $927,513 in claims paid for two years) over Federal Housing Administration
          loans.

          Trustcorp’s vice president of compliance provided us a letter dated October 27,
          2005, regarding our underwriting review results. The vice president agreed that
          Trustcorp included unallowable charges for the two loans cited in this finding.

Recommendations

          We recommend that HUD’s assistant secretary for housing-federal housing
          commissioner

          2A.     Requires Trustcorp to reimburse HUD $2,889 for the two loans ($2,592
                  for case number 151-7513632 and $297 for case number 201-3221631)
                  that went to claim with unallowable charges.

          2B.     Requires Trustcorp to implement adequate procedures and controls to
                  ensure its underwriters follow HUD’s underwriting requirements. Such
                  procedures and controls must include but are not limited to providing
                  adequate training to the underwriters regarding HUD’s underwriting
                  requirements for Federal Housing Administration loans, adequately
                  monitoring the underwriting of Federal Housing Administration loans to
                  ensure full compliance with HUD’s requirements, and ensuring the
                  accuracy of underwriting certifications submitted to HUD. These
                  procedures and controls should help reduce future risks to the Federal
                  Housing Administration fund by $102,026.

          2C.     Reviews Trustcorp’s implementation of Recommendation 2B for full
                  compliance with HUD’s underwriting requirements.




                                          11
                          SCOPE AND METHODOLOGY

We performed our audit work between July and October 2005. We conducted our audit at
Trustcorp’s headquarters office and HUD’s Chicago Regional Office.

To achieve our objectives, we relied on computer processed and hard-copy data from Trustcorp, and
data contained in HUD’s Single Family Data Warehouse system. We relied on the loan payment
histories provided by Trustcorp, the certifications and loan payment histories in the case binders that
Trustcorp submitted to HUD, and the various dates in Trustcorp’s and HUD’s data systems,
including loan-closing dates, notice of rejection dates, submission dates, resubmission dates, and
endorsement dates. We assessed the reliability of computerized data, including relevant general and
application controls. We used mortgage amount and claim status from HUD’s systems for
information purposes only.

In addition, we interviewed HUD’s and Trustcorp’s management and staff involved in
processing late requests for endorsement, mortgage payments, and underwriting of Federal
Housing Administration loans. Further, we reviewed HUD’s rules, regulations, and guidance for
proper submission and underwriting of Federal Housing Administration loans and Trustcorp’s
policies and procedures.

Using HUD’s data system, we identified that Trustcorp sponsored 3,215 Federal Housing
Administration loans with closing dates between January 1, 2003, and December 31, 2004. The
total mortgage value of these loans was more than $331 million. The following table depicts the
adjustments made to the initial universe of 3,215 loans identified for testing. A narrative
explanation follows the chart.

                                                                             Original
                                                              Number         mortgage
                          Description of loans                of loans       amounts
             Originated and/or sponsored by Trustcorp from
             January 1, 2003, through December 31, 2004           3,215   $330,804,810
             Closed after April 12, 2004                             15        1,622,440
             Submitted within 61 to 66 days of closing            2,028      207,607,605
             New construction                                        10        1,364,059
             Submitted before the first payment was due              59        5,952,779
             Transferred before submission                           68        7,880,466
                              Loans tested                        1,035     $106,377,461

 For our late endorsement testing of the 3,215 loans in the initial universe, we removed 15 loans
 closed after April 12, 2004, not subject to the 90-day requirement, 10 new construction loans,
 and 59 loans that were submitted before the first payment due date because these loans were not
 subjected to the 60-day pre-April 2004 submission requirements.

 We further limited our universe to only those loans received by HUD more than 66 days after
 the loans closed. While HUD requires lenders to submit loans for endorsement within 60 days
 of the loan closing and after April 12, 2004, an additional 30 days after closing, we allowed six


                                                  12
additional days to ensure that we conservatively selected loans for further testing. We allowed
six extra days because HUD’s mailroom and endorsement contractor have three business days
to process each loan and because any submission may be delayed in the mail for up to three
days over a weekend.

As a result, after removing the 2,028 loans submitted within 61 to 66 days after closing, there
were 1,103 loans remaining as late requests for endorsement.

In evaluating the 1,103 loans, we identified 68 for which Trustcorp transferred the loan
servicing to other lenders/servicers before submission for endorsement; therefore, we also
removed these loans from our testing universe. After removing the loans that were not subject
to HUD’s late endorsement requirements, we tested 1,035 loans for compliance with HUD’s
late endorsement requirements. For accuracy and proper format, we also reviewed Trustcorp’s
late endorsement certifications of 34 loans initially determined as improperly submitted.

We reviewed all nine loans that went to claim between January 1, 2003, and December 31,
2004, to determine whether Trustcorp complied with HUD’s underwriting requirements. We
also reviewed the accuracy of Trustcorp’s underwriting certifications for two loans
inappropriately underwritten out of the nine loans that defaulted and went to claim.

The audit covered the period of January 1, 2003, through December 31, 2004. This period was
adjusted as necessary. We conducted the audit in accordance with generally accepted
government auditing standards.




                                               13
                              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,
   •   Compliance with applicable laws and regulations, and
   •   Safeguarding resources.

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
                      implemented to reasonably ensure that a program meets its objectives.

              •       Validity and reliability of data - Policies and procedures that management
                      has implemented to reasonably ensure that valid and reliable data are
                      obtained, maintained, and fairly disclosed in reports.

              •       Compliance with laws and regulations - Policies and procedures that
                      management has implemented to reasonably ensure that resource use is
                      consistent with laws and regulations.

              •       Safeguarding resources - Policies and procedures that management has
                      implemented to reasonably ensure that resources are safeguarded against
                      waste, loss, and misuse.

              We assessed the relevant controls identified above.

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




                                                14
Significant Weakness


           Based on our audit, we believe the following item is a significant weakness:

               •   Trustcorp lacked adequate procedures and controls to ensure its
                   underwriters followed HUD’s requirements regarding allowable charges
                   and submitted accurate underwriting certifications to HUD (see finding 2).




                                           15
                        FOLLOWUP ON PRIOR AUDITS

This was the first audit of Trustcorp’s late requests for endorsement and underwriting of Federal
Housing Administration-insured loans by HUD’s Office of Inspector General (OIG).

The last two independent auditor’s reports for Trustcorp covered the years ending December 31,
2003, and December 31, 2004. Both reports indicated the independent auditors’ opinion that
Trustcorp complied, in all material respects, with the program requirements under HUD’s Title II
Non-Supervised Mortgagees and Loan Correspondents.

In August 2004, HUD’s Quality Assurance Division performed a quality assurance review of
Trustcorp. The review resulted in findings related to a deficiency in Trustcorp’s quality control
plan. All of the findings were resolved and closed as of December 27, 2004.




                                                 16
                                    APPENDIXES
Appendix A

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

                  Recommendation           Ineligible       Funds to be put
                      number                   1/           to better use 2/
                         2A                 $2,889
                         2B                                    $102,026
                        Totals              $2,889             $102,026


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

2/   “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 later 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.




                                              17
Appendix B
             AUDITEE COMMENTS




                    18
Auditee Comments




       19
Appendix C

                           FEDERAL REQUIREMENTS

According to 24 CFR [Code of Federal Regulations] Part 203.255(b), for applications for
insurance involving mortgages originated under the direct endorsement program, the lender shall
submit to the secretary of HUD, within 60 days after the date of closing of the loan or such
additional time as permitted by the secretary, properly completed documentation and
certifications.

HUD Handbook 4165.1, REV-1, “Endorsement for Insurance for Home Mortgage Programs
(Single Family),” dated November 30, 1995, chapter 3, section 3-1(A), states late requests for
endorsement procedures apply if

•   The loan is closed after the firm commitment,
•   The direct endorsement underwriter’s approval expires, and/or
•   The mortgage is submitted to HUD for endorsement more than 60 days after closing. Section
    3-1(B) states that a loan request for endorsement from the lender must include

    (1) An explanation for the delay in submitting for endorsement and actions taken to prevent
        future delayed submissions.

    (2) A certification that the escrow accounts for taxes, hazard insurance, and mortgage
        insurance premiums are current and intact except for disbursements which may have been
        made from the escrow accounts to cover payments for which the accounts were
        specifically established.

    (3) A payment ledger that reflects the payments received, including the payment due for the
        month in which the case is submitted if the case is submitted after the 15th of the month.
        For example, if the case closed February 3 and the case is submitted April 16, the
        payment ledger must reflect receipt of the April payment although the payment is not
        considered delinquent until May 1. Payments under the mortgage must not be delinquent
        when submitted for endorsement.

                     (a) The lender must submit a payment ledger for the entire period from the
                         first payment due date to the date of the submission for endorsement.
                         Each payment must be made in the calendar month due.
                     (b) If a payment is made outside the calendar month due, the lender cannot
                         submit the case for endorsement until six consecutive payments have
                         been made within the calendar month due.

    (4) A certification that the lender did not provide the funds to bring the loan current or to
        affect the appearance of an acceptable payment history.




                                                 20
Mortgagee Letter 2004-14, “Late Request for Endorsement Procedures,” clarifies procedures for
mortgage lenders when submitting mortgage insurance case binders to the Federal Housing
Administration for endorsement beyond the 60-day limit following closing. It replaces the
instructions found in the section “Late Request for Endorsement,” contained in chapter 3 of
HUD Handbook 4165.1, REV-3.

A request for insurance is considered “late” and triggers additional documentation whenever the
binder is received by HUD more than 60 days after the lender loan settlement or funds
disbursement, whichever is later.

If HUD returns the case binder to the lender by issuing a notice of rejection (or a subsequent
notice of rejection), HUD’s Homeownership Center must receive the reconsideration request for
insurance endorsement within the original 60-day window or 30 days from the date of issuance
of the original notice of rejection, whichever is greater.

When submitting a late request for endorsement, in addition to including a payment history or
ledger, the mortgage lender is required to include a certification, signed by the representative of
that lender on company letterhead, which includes the lender’s complete address and telephone
number. This certification must be specific to the case being submitted (i.e., identify the Federal
Housing Administration case number and the name(s) of the borrower(s)) and state that

   1) All mortgage payments due have been made by the borrower before or within the month
      due. If any payments have been made after the month due, the loan is not eligible for
      endorsement until six consecutive payments have been made before and/or within the
      calendar month due.

   2) All escrow accounts for taxes, hazard insurance, and mortgage insurance premiums are
      current and intact, except for disbursements that may have been made to cover payments
      for which the accounts were specifically established.

   3) The mortgage lender did not provide the funds to bring and/or keep the loan current or to
      bring about the appearance of an acceptable payment history.




                                                21