oversight

Huntington National Bank, Supervised Lender; Columbus, Ohio; Generally Complied with Requirements Regarding Submission of Late Requests for Endorsement and Underwriting of Loans

Published by the Department of Housing and Urban Development, Office of Inspector General on 2006-03-15.

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

                                                               Issue Date
                                                                        March 15, 2006
                                                               Audit Report Number:
                                                                        2006-CH-1007




TO:        Brian D. Montgomery, Assistant Secretary for Housing-Federal Housing
             Commissioner, H
           John W. Herold, Associate General Counsel for Program Enforcement, CE


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

SUBJECT: Huntington National Bank, Supervised Lender; Columbus, Ohio; Generally
           Complied with Requirements Regarding Submission of Late Requests for
           Endorsement and Underwriting of Loans

                                   HIGHLIGHTS

 What We Audited and Why

             We audited Huntington National Bank (Huntington), a supervised 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 Huntington for audit because of
             its high late endorsement rate. Our objectives were to determine whether
             Huntington 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

             Huntington generally complied with HUD’s requirements on late requests for
             insurance endorsement; however, it improperly submitted 20 late requests for
             endorsement out of 761 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. Huntington also
         incorrectly certified that all payments due were made by the borrowers before or
         within the month due for 12 loans and the escrow account for taxes, hazard
         insurance, and mortgage insurance premiums was current for one loan when it
         was not.

         Further, Huntington generally complied with HUD’s underwriting requirements.
         However, it underwrote two Federal Housing Administration loans that later
         defaulted by overstating income, understating liabilities, and providing no valid
         compensating factors to approve the two loans. Huntington also charged
         excessive and/or unallowable fees on five loans and incorrectly certified that due
         diligence was used in underwriting 5 of the 32 loans reviewed when it was not.

         These improperly submitted and underwritten loans increased the risk to HUD’s
         Federal Housing Administration insurance fund.

What We Recommend

         We recommend that HUD’s assistant secretary for housing-federal housing
         commissioner require Huntington to indemnify HUD for any future losses on 14
         loans improperly submitted for endorsement with a total mortgage value of more
         than $1.4 million and take appropriate action against Huntington for violating the
         requirements in effect at the time when it submitted two loans with a mortgage
         value of nearly $178,000 without the proper six month payment histories. We
         also recommend that HUD’s assistant secretary for housing-federal housing
         commissioner require Huntington to indemnify HUD for any future losses on two
         defaulted loans with a total mortgage value of more than $228,000 that were
         inappropriately underwritten, require Huntington to reimburse the borrowers or
         HUD as appropriate more than $1,300 in excessive and/or unallowable fees
         charged on five loans, and implement adequate procedures and controls to address
         the deficiencies cited in this report.

         In addition, we recommend that HUD’s associate general counsel for program
         enforcement determine legal sufficiency and if legally sufficient, pursue remedies
         under the Program Fraud Civil Remedies Act against Huntington and/or its
         principals for incorrectly certifying that all payments due were made by the
         borrowers before or within the month due for 12 loans, the escrow account for
         taxes, hazard insurance, and mortgage insurance premiums was current for one
         loan submitted for Federal Housing Administration insurance endorsement when
         the escrow account was not current, and due diligence was used in underwriting
         five loans when it was not.

         For each recommendation without a management decision, please respond and
         provide status reports in accordance with HUD Handbook 2000.06, REV-3.




                                          2
           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 Huntington’s management. We also provided our
           discussion draft audit report to Huntington’s mortgage group director, assistant
           vice president-quality control manager, and HUD’s staff during the audit. We
           conducted an exit conference with Huntington’s management on February 2,
           2006.

           We asked Huntington’s mortgage group director to provide comments on our
           discussion draft audit report by March 1, 2006. The mortgage group director
           provided written comments dated February 27, 2006, that generally agreed with
           our findings, but disagreed with our recommendations for indemnification and
           penalties under the Program Fraud Civil Remedies Act. The complete text of the
           written comments, along with our evaluation of that response, can be found in
           appendix B of this report except for 130 pages of documentation that was not
           necessary for understanding Huntington’s comments. A complete copy of
           Huntington’s comments plus the documentation was provided to the director of
           HUD’s Quality Assurance Division.




                                            3
                             TABLE OF CONTENTS

Background and Objectives                                                  5

Results of Audit

        Finding 1: Huntington Generally Complied with HUD’s Requirements
                   Regarding Late Endorsement Loans                        6
        Finding 2: Huntington Generally Complied with HUD’s Underwriting
                   Requirements                                            10

Scope and Methodology                                                      14

Internal Controls                                                          16

Followup on Prior Audits                                                   18

Appendixes
   A.   Schedule of Questioned Costs and Funds to Be Put to Better Use     19
   B.   Auditee Comments and OIG’s Evaluation                              20
   C.   Federal Requirements                                               56
   D.   Summary of Loans with Incorrect Underwriting Certifications        58
   E.   Summary of Excessive and/or Unallowable Fees Charged               59
   F.   Narrative Case Presentations                                       60




                                              4
                     BACKGROUND AND OBJECTIVES

W. Huntington & Company opened for business in 1866. In 1905, the company was
incorporated as The Huntington National Bank of Columbus. In 1979, 15 banks including The
Huntington National Bank of Columbus merged into one bank named the Huntington National
Bank (Huntington).

As of March 2006, Huntington is part of a $32 billion bank headquartered in Columbus, Ohio. It
provides retail and commercial financial products and services through more than 300 regional
banking offices in Indiana, Kentucky, Michigan, Ohio, and West Virginia. Selected financial
service activities are also conducted in other states including dealer sales offices in Florida,
Georgia, Tennessee, Pennsylvania, and Arizona; private financial group offices in Florida; and
mortgage banking offices in Florida, Maryland, and New Jersey. International banking services
are made available through the headquarters office in Columbus and offices located in the
Cayman Islands and Hong Kong. Huntington has seven individuals sitting on its board of
directors and 17 executives, including seven regional presidents.

In August 1987, the U.S. Department of Housing and Urban Development (HUD) approved
Huntington as a supervised direct endorsement lender. As a direct endorsement lender,
Huntington determines that a proposed mortgage loan is eligible for insurance under the
applicable programs’ regulations and submits the required documents to HUD without its prior
review of the origination and closing of the loan. Huntington is responsible for complying with
all applicable HUD regulations and handbook instructions.

As of March 2006, Huntington is the sponsor of 91 active loan correspondents and authorized
agent for six principals originating or processing Federal Housing Administration loans. From
January 1, 2003, through December 31, 2004, Huntington originated and/or sponsored 2,346
Federal Housing Administration loans totaling more than $264 million. Huntington is approved
to originate Federal Housing Administration insured loans in the following HUD offices’
jurisdictions: Baltimore, Charleston, Cincinnati, Cleveland, Columbus, Coral Gables, Detroit,
Flint, Grand Rapids, Indianapolis, Louisville, and Newark.

We audited Huntington as part of the activities in our fiscal year 2005 annual audit plan. We
selected Huntington for audit because of its high late endorsement rate of 35 percent during the
period of January 1, 2003, through December 31, 2004.

Our objectives were to determine whether Huntington 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: Huntington Generally Complied with HUD’s Requirements
                 Regarding Late Endorsement Loans
From January 2003 to December 2004, Huntington generally met HUD’s requirements regarding
late requests for endorsement. However, it submitted 20 loans totaling more than $2.2 million as
late requests for insurance endorsement when the borrowers did not make six monthly
consecutive timely payments after delinquency but before submission to HUD. For 29 loans’
certifications reviewed, Huntington also incorrectly certified that all payments due were made by
the borrowers before or within the month due for 12 loans and the escrow account for taxes,
hazard insurance, and mortgage insurance premiums was current for one loan submitted for
Federal Housing Administration insurance endorsement when the escrow account was not
current. These deficiencies occurred because Huntington lacked adequate procedures and
controls over its late endorsement process and its staff was not adequately trained on HUD’s late
endorsement requirements. These improperly submitted loans increased the risk to the Federal
Housing Administration insurance fund.



 Huntington Improperly
 Submitted Late Requests for
 Endorsement

              Our analysis of the mortgage payment histories provided by Huntington and
              endorsement data from HUD’s systems showed that for the 761 loans we tested,
              Huntington generally complied with HUD’s requirements regarding late requests
              for endorsement. However, Huntington submitted 20 loans for endorsement when
              the borrowers did not make six monthly consecutive timely payments after
              delinquency but before submission to HUD.

              After endorsement, 4 of the 20 loans were paid in full and no longer represent a
              risk to HUD’s Federal Housing Administration insurance fund. Because these
              loans were no longer insured, we did not conduct further research or compliance
              testing. The remaining 16 loans still hold active Federal Housing Administration
              insurance with $1,654,877 in total original mortgage amounts and pose a risk to
              the insurance fund as of March 2, 2006.

              Huntington signed certification letters for 13 of the 16 loans improperly submitted
              for late requests for endorsement and certified that all payments due were made
              by the borrowers before or within the month due for 12 loans and the escrow
              account for one loan was current. However, Huntington submitted the loans to
              HUD for late endorsement even though it had not received all payments due




                                                6
            before or within the month due, and the escrow account was not current at the
            time of submission.

            Appendix C of this report provides details of the federal requirements regarding
            late request for insurance endorsement as well as a citation for the Program Fraud
            Civil Remedies Act.

            Huntington’s assistant vice president provided us a letter dated August 17, 2005,
            regarding our late endorsement review results. The assistant vice president
            generally agreed with our findings, but disagreed with the number of loans
            recommended for indemnification and the number of loans subject to the Program
            Fraud Civil Remedies Act.


Huntington Took Corrective
Action, but Additional Action
Is Needed

            During our audit period of January 1, 2003, through December 31, 2004,
            Huntington’s insuring department was responsible for submitting loans to HUD
            for late requests for endorsement. When processing loans, Huntington’s
            employees used an insuring procedures manual. The manual did not provide
            adequate guidance since it did not require the employees to ensure that borrowers’
            mortgage payments met HUD’s requirements regarding late requests for
            endorsement before they submitted the loans to HUD.

            Instead, the manual contained instructions on how to track and receive a loan and
            fund upfront mortgage insurance premiums, Federal Housing Administration
            connection instructions, and a checklist that required the employees to ensure the
            completeness of loan documents contained in Huntington’s loan files. Huntington
            lacked adequate procedures and controls to ensure that its employees properly
            determined whether loans were subject to HUD’s late requests for endorsement
            requirements. In addition, Huntington’s quality control plan did not include a
            review of loans to determine whether they met HUD’s late endorsement
            requirements.

            After we provided our preliminary audit results in August 2005, Huntington’s
            post-closing manager retrained all applicable staff and placed the two individuals
            responsible for the incorrect loan submissions on performance improvement
            plans. On May 18, 2005, Huntington’s assistant vice president trained the quality
            control staff to review loans for HUD’s late loan endorsement requirements when
            reviewing a closed loan through the Second Look software program. They were
            trained on how to properly read borrowers’ payment histories and HUD’s
            requirements regarding late requests for endorsement. Again, after we provided
            our preliminary audit results, Huntington’s Second Look program was updated on
            September 12, 2005, to query the quality control reviewer if the mortgage



                                             7
          insurance certificate was in the file and received within 60 days. This was put in
          place for the quality control reviewer to make sure the loan was endorsed in 60
          days and if not determine whether the payments were current when the loan was
          submitted for endorsement. If the reviewer finds that the loan was not endorsed
          in accordance with HUD’s late loan endorsement requirements, an exception is
          noted and it is brought to the attention of Huntington’s assistant vice president
          and post closing manager.

          According to HUD’s Neighborhood Watch, Huntington submitted 7 out of 60
          loans for late endorsement from June 1 through September 30, 2005, which
          represents nearly a 12 percent late endorsement rate. During this same period in
          2004, Huntington submitted 58 of 183 loans late for endorsement for more than a
          31 percent late endorsement rate. We did not determine whether the seven loans
          met HUD’s requirements; we only used the information to determine whether
          Huntington’s late endorsement rate increased or decreased.

          Huntington should implement adequate procedures and controls to ensure that it
          follows HUD’s requirements for late endorsements. Using the 13 loans
          improperly submitted for late endorsement with incorrect certifications from the
          761 we tested with mortgage amounts totaling more than $88.9 million, the
          estimated total risk to the Federal Housing Administration is at least $759,447 for
          the next year if Huntington does not improve its late endorsement procedures and
          controls (13 divided by 761 times $88,913,679 in mortgages for two years).

Recommendations

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

          1A.     Indemnify HUD for any future losses on 14 loans (1 defaulted and 13
                  active with certifications that violated the Program Fraud Civil Remedies
                  Act) with a total mortgage value of $1,477,215 and take other appropriate
                  actions.

          1B.     Follow through on its Second Look software program that was started
                  during this audit. Compliance with this program should ensure that
                  $759,447 in funds will be put to better use over the next year.

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

          1C.     Take appropriate action against Huntington for violating the requirements
                  in effect at the time when it submitted two loans with a total mortgage
                  value of $177,662 without the proper six month payment histories.




                                           8
We recommend that HUD’s associate general counsel for program enforcement

1D.   Determine legal sufficiency and if legally sufficient, pursue remedies
      under the Program Fraud Civil Remedies Act against Huntington and/or
      its principals for incorrectly certifying that all payments due were made by
      the borrowers before or within the month due for 12 loans and the escrow
      account for one loan was current when submitted for Federal Housing
      Administration insurance endorsement when the escrow account was not
      current.




                                9
Finding 2: Huntington Generally Complied with HUD’s Underwriting
                           Requirements
Huntington generally complied with HUD’s underwriting requirements for 32 loans reviewed.
However, Huntington inappropriately underwrote Federal Housing Administration loans when it
funded two loans that subsequently went to a claim or default status. The underwritten loans
also included excessive and/or unallowable fees charged to borrowers on five loans totaling
$1,325. In addition, Huntington incorrectly certified that due diligence was exercised during the
underwriting of 5 of the 32 loans reviewed when it was not. The underwriting deficiencies
occurred because Huntington’s underwriters did not adequately evaluate information presented
to them for compliance with HUD’s requirements before approving the loans. As a result,
HUD’s Federal Housing Administration insurance fund was put at risk due to the inappropriately
underwritten loans and excessive and/or unallowable fees charged.



 Improper Underwriting of
 Federal Housing
 Administration Loans

              Huntington sponsored 2,346 Federal Housing Administration loans between
              January 1, 2003, and December 31, 2004. Of the 2,346 loans, 24 loans defaulted
              and HUD paid a partial or full claim on eight as of February 27, 2006. We
              reviewed all 32 loans (24 defaults and 8 claims) for compliance with HUD’s
              underwriting requirements. Based on our review, Huntington generally complied
              with HUD’s underwriting requirements. However, it underwrote and approved
              two loans based on overstated income, understated liabilities, and no valid
              compensating factors.

              Paragraph 2-7 of HUD Handbook 4155.1, REV-5, states for most cases, borrower
              income will be limited to salaries and wages. However, several other types of
              income may be treated as effective income. To include other types of income as
              effective income, the lender must obtain additional documentation to support its
              determination that these other sources of income can be expected to continue for
              the first three years of the loan. For example, for overtime income to be included
              as effective income, an earnings trend needed to be established. To do so, the
              lender must document the income for the past two years and determine the
              income can reasonably be expected to continue.

              Huntington overstated the borrower’s income on Federal Housing Administration
              loan number 151-7669678. In this case, Huntington included overtime income in
              its calculation without verifying such income for the previous two years and/or
              justifying the likelihood of continuance.

              Paragraph 2-11 of HUD Handbook 4155.1, REV-4, requires a lender to consider
              all recurring obligations, contingent liabilities, and projected obligations that meet


                                                10
HUD’s specific guidelines when evaluating a loan application. In computing
debt-to-income ratios, the lender must include all borrower liabilities extending
10 months or more. Debts lasting less than 10 months must be counted if the
amount of the debt affects the borrower’s ability to pay immediately after loan
closing.

Huntington did not consider all outstanding liabilities when approving Federal
Housing Administration loan number 413-4129633. It did not include four
revolving credit accounts and one installment loan with a combined total of $126
worth of recurring liabilities and a total balance of $2,864.

Paragraphs 2-12 and 2-13 of HUD Handbook 4155.1, REV-4 and REV-5, specify
that the ratio of mortgage payments to effective income (front ratio) generally
may not exceed 29 percent and the ratio of total fixed payments to effective
income (back ratio) may not exceed 41 percent unless significant compensating
factors are presented. The handbook allows greater latitude in considering
compensating factors for the front ratio than the back ratio.

In both loans (151-7669678 and 413-4129633) previously mentioned, the
borrowers’ debt-to-income ratios calculated by Huntington exceeded the
handbook’s requirements, yet it approved the loans and submitted them for
insurance endorsement without presenting valid compensating factors. In
addition, after adjusting for the overstated income and understated liabilities as
previously discussed, the borrowers’ debt-to-income ratios continued to exceed
HUD’s requirements for both loans.

HUD Handbook 4000.2, REV-2, provides guidance as to what customary and
reasonable closing costs and fees can be collected by the lender from the
borrower. Chapter 2-15 of the HUD Homeownership Center Reference Guide
provides a more detailed description of closing costs and fees. Whenever actual
costs are permitted, it is expected that they will not exceed reasonable and
customary costs for the area.

An unallowable fee is one that the local HUD office identified as not being a
necessary/normal part of the loan origination process. An unearned fee is a
closing cost that has no service or thing of value attached to it. An excessive fee
is a closing cost charged to the borrower beyond the amount allowed by HUD.

For five loans we reviewed, Huntington failed to ensure that the borrowers were
not charged excessive and/or unallowable fees. The fees were not accompanied
by supporting documentation or justification for any of the five loans. As a result,
Huntington allowed a total of $1,325 in excessive and/or unallowable fees
(ranging from $235 to $385 per loan) to be charged to the borrowers.

Further, Huntington’s underwriters incorrectly certified that due diligence was
exercised in the underwriting of 5 (includes loans discussed previously) of the 32



                                 11
           loans reviewed when it was not. When underwriting a loan, HUD requires
           underwriters to certify the integrity of data, a review of the appraisals (if
           applicable), and the loans eligibility to be a Federal Housing Administration
           approved automated underwriting system loan. After underwriting a Federal
           Housing Administration loan, HUD requires the direct endorsement underwriters
           certify that they reviewed all associated documents and used due diligence in
           underwriting the mortgages.

           Appendix D of this report provides a summary of all loans for which
           Huntington’s underwriters incorrectly certified that due diligence was exercised in
           underwriting the loans. Appendix E provides a summary of all loans for which
           we are recommending a repayment of an excessive and/or unallowable fee.
           Appendix F provides a detailed description of all loans with underwriting
           deficiencies noted in this finding for which we are recommending
           indemnification.

Huntington Needs to Implement
Adequate Procedures and
Controls for Underwriting of
Loans


           Huntington needs to ensure that its underwriters fully understand HUD’s
           requirements regarding allowable closing cost and prudent lending practices when
           underwriting Federal Housing Administration loans. It needs to implement
           adequate procedures and controls to provide reasonable assurance that its
           underwriters follow HUD’s underwriting requirements, thereby ensuring that
           HUD endorses only Federal Housing Administration loans that have allowable or
           eligible amounts for insurance and protecting the Federal Housing Administration
           fund from future risks. Using the total original mortgage amount for 24 loans
           and/or the claims HUD paid on eight loans, the estimated total risk to the Federal
           Housing Administration is $237,484 per year if Huntington does not improve its
           underwriting procedures and controls (5 divided by 32 times $3,039,797 in claims
           and original mortgage amounts paid for two years).

Recommendations

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

           2A.    Indemnify HUD against potential future losses on two loans (151-7669678
                  and 413-4129633) totaling $228,470 that were inappropriately
                  underwritten cited in this finding.




                                           12
2B.   Reimburse the borrowers or HUD as appropriate $1,325 in excessive
      and/or unallowable fees that violated HUD’s requirements for the five
      loans cited in this finding.

2C.   Implement 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 its underwriting
      certifications submitted to HUD. These procedures and controls should
      help reduce risks to the Federal Housing Administration fund by $237,484
      next year.

We recommend that HUD’s associate general counsel for program enforcement

2D.   Determine legal sufficiency and if legally sufficient, pursue remedies
      under the Program Fraud Civil Remedies Act against Huntington and/or
      its principals for incorrectly certifying that due diligence was exercised
      during the underwriting of five loans when it was not.




                               13
                               SCOPE AND METHODOLOGY

We conducted the audit at HUD’s Columbus Field Office and Huntington’s headquarters office.
We performed our audit work between April and November 2005.

To achieve our objectives, we relied on computer-processed and hard copy data from Huntington,
and data contained in HUD’s Single Family Data Warehouse. We relied on the loan payment
histories provided by Huntington, the certifications and loan payment histories in the case binders
that Huntington submitted to HUD, and the various dates in Huntington’s and HUD’s data systems,
including loan-closing dates, notice of rejection dates, submission dates, resubmission dates, and
endorsement dates. We also relied on the documents in Huntington’s case files and Federal
Housing Administration files from HUD’s Homeownership Centers.

In addition, we interviewed HUD’s and Huntington’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 Huntington’s
policies and procedures.

Using HUD’s data system, we identified that Huntington sponsored 2,346 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 $264 million. In addition, we identified 32
loans that Huntington underwrote that went into default or claim. We selected and reviewed the
32 loans with a total mortgage amount of $3,225,330 to determine whether Huntington complied
with HUD’s underwriting requirements. We also reviewed the accuracy of Huntington’s
underwriting certifications for the loans improperly submitted for late endorsement and the loans
inappropriately underwritten.

The following table depicts the adjustments made to the initial universe of 2,346 loans identified
for late endorsement testing. A narrative explanation follows the chart.

                                                                           Original
                                                              Number       mortgage
                           Description of loans               of loans     amounts
             Originated and/or sponsored by Huntington from
             January 1, 2003, through December 31, 2004          2,346   $264,366,252
             Submitted within 66 days after closing (before
             April 12, 2004)                                     1,452     160,843,155
             New construction                                       17       2,046,764
             Submitted before the first payment was due             53       5,968,531
             Transferred before submission                          24       2,155,689
             Closed after April 12, 2004                            39       4,438,434
                               Loans tested                        761     $88,913,679




                                                 14
For our late endorsement testing of the 2,346 loans in the initial universe, we removed 1,452
loans from our universe to limit it only to those loans received by HUD more than 66 days after
the loans closed (before April 12, 2004).

We then removed 17 new construction loans and 53 loans that were submitted before the first
payment due date because these loans were not subject to the 60-day pre-April 2004 submission
requirements. We then identified 24 loans Huntington transferred the loan servicing to other
lenders/servicers before submission for endorsement; therefore, we also removed these loans from
our testing universe. We further removed 39 loans closed after April 12, 2004, not subject to the
90-day requirement.

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 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.

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.




                                                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,
   •   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.

              •       afeguarding 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.




                                                16
Significant Weakness


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

               •   Huntington lacked adequate procedures and controls over its late requests
                   for insurance endorsement and underwriting of Federal Housing
                   Administration loans (see findings 1 and 2).




                                            17
                        FOLLOWUP ON PRIOR AUDITS

This was the first audit of Huntington’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 Huntington covered the years ending December 31,
2003, and December 31, 2004. Both reports resulted in no findings.

In November 2003 and 2004, HUD’s Quality Assurance Division performed two quality
assurance reviews of Huntington. Both reviews resulted in findings that included
nonconformance with HUD’s requirements for a quality control plan and noncompliance with
HUD’s loan origination requirements by approving a loan with a temporary interest rate buy
down without supporting documentation in the file to show the borrower’s potential for
increased income. Both of the findings were resolved and closed as of May 2004.




                                                 18
                                     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/
                             1A                             $1,477,215
                             1B                                759,447
                             2A                                228,470
                             2B               $1,325
                             2C                                237,484
                            Totals            $1,325        $2,702,616


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.




                                              19
Appendix B
        AUDITEE COMMENTS AND OIG'S EVALUATION


Ref to OIG Evaluation   Auditee Comments




                         20
Ref to OIG Evaluation   Auditee Comments




                         21
Ref to OIG Evaluation   Auditee Comments




                         22
Ref to OIG Evaluation   Auditee Comments




                         23
Ref to OIG Evaluation   Auditee Comments




                         24
Ref to OIG Evaluation   Auditee Comments




Comment 1



Comment 2




                         25
Ref to OIG Evaluation   Auditee Comments




                         26
Ref to OIG Evaluation   Auditee Comments




Comment 3




Comment 4




                         27
Ref to OIG Evaluation   Auditee Comments




Comment 5




Comment 6




                         28
Ref to OIG Evaluation   Auditee Comments




Comment 7




Comment 8




                         29
Ref to OIG Evaluation   Auditee Comments




                         30
Ref to OIG Evaluation   Auditee Comments




                         31
Ref to OIG Evaluation   Auditee Comments




Comment 9




Comment 10




                         32
Ref to OIG Evaluation   Auditee Comments




                         33
Ref to OIG Evaluation   Auditee Comments




                         34
Ref to OIG Evaluation   Auditee Comments




Comment 11




                         35
Ref to OIG Evaluation   Auditee Comments




                         36
Ref to OIG Evaluation   Auditee Comments




Comment 12




                         37
Ref to OIG Evaluation   Auditee Comments




                         38
Ref to OIG Evaluation   Auditee Comments




Comment 13




                         39
Ref to OIG Evaluation   Auditee Comments




Comment 14




                         40
Ref to OIG Evaluation   Auditee Comments




Comment 15




                         41
Ref to OIG Evaluation   Auditee Comments




                         42
Ref to OIG Evaluation   Auditee Comments




                         43
Ref to OIG Evaluation   Auditee Comments




Comment 16




                         44
Ref to OIG Evaluation   Auditee Comments




Comment 17




                         45
Ref to OIG Evaluation   Auditee Comments




Comment 18




                         46
Ref to OIG Evaluation   Auditee Comments




                         47
Ref to OIG Evaluation   Auditee Comments




                         48
Ref to OIG Evaluation   Auditee Comments




                         49
                         OIG Evaluation of Auditee Comments

Comment 1   We adjusted Recommendation 1C to reflect the loan that was paid in full since the
            issuance of our discussion draft audit report to Huntington.

Comment 2   We agree that Huntington’s lender certification for Federal Housing
            Administration loan 412-5204306 loan was dated October 12, 2004. However,
            Huntington’s vice president of post closing provided an Excel computer program
            file from its DOCSMART system that showed the loan was submitted to HUD on
            October 18, 2004. HUD Handbook 4165.1, REV-1, “Endorsement for Insurance
            for Home Mortgage Programs (Single Family),” dated November 30, 1995,
            chapter 3, section 3-1(B) states that a loan request for endorsement from the
            lender must include 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. Additionally, Huntington’s assistant vice
            president provided us a written response dated August 17, 2005, that showed full
            payment was received and applied on October 20, 2004 for this loan. Based upon
            the documentation provided by Huntington, no adjustments were made to this
            report.

Comment 3   We are recommending indemnification of the first 11 loans presented in
            Huntington’s comments based upon the certifications provided to HUD and
            HUD’s requirements in effect when these loans were submitted for endorsement.

Comment 4   The loan payment for the month before submission for endorsement, December
            2004, was not applied to the mortgage until January 18, 2005. Based upon
            HUD’s requirements at the time of submission, the payment was not made in the
            month due, the loan was not eligible for endorsement, and the certification
            provided to HUD was incorrect.

Comment 5   During our audit, we used the applicable HUD regulations, guidelines, and other
            requirements when reviewing Huntington’s late requests for endorsement.
            According to 24 CFR [Code of Federal Regulations] 203.255, 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 as set forth in the applicable
            handbook. As required by HUD’s regulation, we used HUD Handbook 4165.1,
            REV-1, and Mortgagee Letter 2004-14 because these were applicable for
            reviewing loans that Huntington sponsored and submitted to HUD from January
            2003 through March 2005.

Comment 6   We adjusted Recommendation 1C to reflect the payment in full of Federal
            Housing Administration loan 411-3605152. As previously stated, Federal
            Housing Administration loan 412-5204306 and the other 13 loans were not
            submitted for endorsement in accordance with HUD’s requirements. Huntington



                                            50
            contends that the loans no longer pose a risk to the Federal Housing
            Administration insurance fund. We disagree because according to 24 CFR [Code
            of Federal Regulations] 203.255, by insuring the mortgage (or loan), the
            mortgagee (or lender) agrees to indemnify HUD under the conditions of section
            256(c) of the National Housing Act (12 United States Code, section 1717z-21(c)).
            As authorized by HUD’s regulations, indemnifying HUD begins when a mortgage
            is endorsed and not when a mortgage becomes in compliance with HUD’s
            requirements after the endorsement date. We concluded that at endorsement loans
            begin to pose a risk to the Federal Housing Administration insurance fund.

Comment 7   Huntington agrees that the loan was not current at the time of submission for
            endorsement. Since the loan was not current for October 2003, the escrow
            account was also not current. Mortgagee Letter 95-20 states in part that the
            borrower shall include in each monthly payment, together with the principal and
            interest as set forth in the note and any late charges, a sum for (a) taxes and
            special assessments levied or to be levied against the property, (b) leasehold
            payments or ground rents on the property, and (c) premiums for insurance
            required.

Comment 8   Huntington objected to the inclusion of an "inflammatory recommendation" in our
            discussion draft audit report. Specifically, Huntington objected to it being
            referred for administrative penalties under the Program Fraud Civil Remedies
            Act, 31 United States Code, section 3801 et seq., arguing that enforcement-related
            actions are intended to reinforce HUD’s rules and regulations, rather than to
            discourage broad participation in HUD’s Federal Housing Administration
            lending. Our administrative penalties recommendation is not inflammatory, nor
            was it intended as such. Rather, it is a reasonable and appropriate
            recommendation based upon the false certifications regarding the status of loans
            and currency of escrows that Huntington submitted to HUD for insurance
            endorsement.

            Moreover, we disagree with Huntington's argument that holding mortgagees
            responsible for failing to abide by applicable late endorsement requirements and
            the falsely certifying as to the status of loans and the currency of loan escrows
            will “discourage broad participation in Federal Housing Administration lending”.
            Rather, we believe that the overwhelming majority of lenders recognize the
            importance of Federal Housing Administration's requirements and compliance
            with the same, and this recommendation reinforces that understanding.

            Further, Huntington concedes that it is fully responsible for its employees’
            actions, including those of its approved branch offices. Thus, we correctly
            conclude that Huntington is responsible for the 14 false certifications submitted
            by its employees. Generally, direct endorsement loans must be submitted to HUD
            within 60 days after closing. See 24 CFR [Code of Federal Regulations] 203.555
            and HUD Handbook 4165.1, chapter 2, section 2-1. However, mortgagees may
            make a late request for endorsement. See HUD Handbook 4165.1, REV-1,



                                            51
              chapter 3, section 3-1. HUD will evaluate the circumstances and make a
              determination to accept or reject such requests. A mortgage that is in default
              when submitted for endorsement cannot be endorsed for insurance. Thus, lenders
              must certify as part of the late endorsement request, among other things, 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. Lenders seeking late endorsement were also required to submit a
              payment ledger that reflects the payments received, including the payment due
              date for the month in which the late endorsement is requested.

              Huntington submitted 14 requests for late endorsement forms, which included the
              requisite certifications. Attached to each request document was a payment history
              ledger from Huntington. A review of the payment histories indicates that as to
              each of these loans either the loan was in default or at least one monthly payment
              had not been made or cured during the history of the mortgage. Accordingly,
              each of the loans was at least one payment in arrears at the time the late
              endorsement request was submitted by Huntington. Notwithstanding this fact,
              Huntington certified that the loans and/or the escrow accounts were current at the
              time of the requests for endorsement. The certification is a condition of eligibility
              for insurance endorsement, and, thus, is patently material. Further, actual
              knowledge of the status of the loans and escrows (for example, maintenance of
              the payment histories), in combination with the act of affirmatively certifying the
              status of the loan and escrows, demonstrates that the false certifications were
              intentional as opposed to inadvertent.

              In addition, precedent establishes that, since the focus of a False Claim/Program
              Fraud Civil Remedies Act case is the conduct of the presenter/claimant, the fact
              that HUD may have had documentation with which it could have ascertained the
              falsity of the certifications made by Huntington is of no consequence with respect
              to the issue of whether it submitted false certifications.

Comment 9     Huntington contends that the 14 loans with incorrect certifications should be
              removed from this report and that our recommendation related to these incorrect
              certifications is unnecessary. Huntington’s basis for its contention is the loans
              now comply with HUD’s new guidelines in Mortgagee Letter 2005-23. We
              neither removed the loans with incorrect certifications nor the related
              recommendation because the certifications were false.

Comment 10 Huntington claims that our recommendation constitutes selective enforcement in
           that it believes that Huntington is being audited under different standards than
           other national lenders we determined that did not comply with HUD’s late
           endorsement requirements. Huntington respectfully requested that we use our
           discretion in making recommendations to ensure that national lenders receive
           consistent treatment. Huntington states that OIG’s audit reports (audit report
           numbers 2004-KC-1003, 2003-KC-1004, 2003-KC-1001, and 2005-SE-1006) on



                                               52
              other lenders cited the same late endorsement-related issues as cited in this report,
              but refrained from including a recommendation related to the Program Fraud
              Civil Remedies Act. We disagree with Huntington’s claim. We are consistent in
              the treatment of Huntington and other lenders since we have discretion when
              making audit recommendations. Specifically, we either refer cases to HUD
              related to violations of the Program Fraud Civil Remedies Act outside of our audit
              reports or to cite such cases with the appropriate recommendations in our audit
              report. In this case, we cited such cases with the appropriate recommendation in
              this report.

Comment 11 We removed the reference to missing documentation for the truth in lending
           disclosure in appendix F for Federal Housing Administration loan 151-7669678.
           There is no documentation in the loan file to indicate that the borrower received
           overtime earnings for 2002 and 2003. Huntington used The Work Number for its
           verification of employment. The Work Number lists information current as of
           July 22, 2004, and shows the rate of pay as “$36,816 annual” and the average
           hours per pay period as “40.” We disagree with Huntington’s calculation to
           establish an earnings trend. There is no information in the loan’s file to indicate
           whether the borrower earned overtime pay for 2002 and 2003. In fact, the W-2
           information in the loan file indicates that the borrower’s income decreased from
           2002 to 2003 by $4,042. HUD Handbook 4155.1, REV-5, chapter 2-7(A), states
           in part that both overtime and bonus income may be used to qualify if the
           borrower has received such income for the past two years and it is likely to
           continue. The borrower’s employer indicated to us that the company’s policy is
           to never confirm or state that an employee’s overtime earnings would be expected
           to continue. The borrower’s employer also stated that the annual rate of pay on
           The Work Number is based upon the borrower’s 2004 hourly rate of pay times 40
           hours times 52 weeks, which is $36,816. The borrower’s hourly rate of pay was
           available to Huntington when the borrower provided his pay stub. A conservative
           calculation of the borrower’s income would have been to use the wage
           information from the 2002 and 2003 W-2 forms along with The Work Number
           information.

Comment 12 We disagree that the underwriter used a conservative figure for the child support
           income. The child support payment documentation for 12 months of payments in
           2002 and 2003 shows that the borrower actually received an average monthly
           child support payment of $214. Huntington referred to the child support
           agreement that provides for monthly child support payments of $514. Huntington
           contends that the borrower’s monthly housing expense was reduced by $183 after
           the refinancing to $724. This is not completely accurate. The borrower’s
           previous monthly housing expense was $706 per month and a second mortgage of
           $211 per month for a total of $917 monthly housing expense. Huntington
           contends that the borrower demonstrated the ability to consistently make a
           monthly mortgage payment of $907 (actually $917 per our calculations) for more
           than three years. However, the borrower’s credit report dated May 1, 2003,




                                               53
           shows that the second mortgage was opened in March 2003 and there was no
           payment history.
Comment 13 As discussed in our evaluation of Huntington’s comments to our discussion draft
           audit report under Comments 11 and 12 previously mentioned, we addressed the
           inconsequential compensating factors for Federal Housing Administration loans
           151-7669678 and 413-4129633.

Comment 14 We removed the reference to missing documentation for the truth in lending
           disclosure in appendix D for Federal Housing Administration loan 412-5040490.
           We disagree with Huntington’s calculation of income for the co-borrower.
           Huntington used the co-borrower’s pay stub with year-to-date income of $11,204
           as of May 15, 2003. This income amount included income items that were not
           received on a continuing basis and were not explained in the loan’s file
           documentation. Such items were noted on the pay stub as FinSpec, Bravo,
           ExpCreditC, and ExpMerchnt. Any additional income should have been
           documented as to its expected continuance. A verification of employment to
           clarify the pay category and its expected continuance could have validated
           Huntington’s income calculation.

Comment 15 HUD Handbook 4150.2, dated July 1, 1999, chapter 4-6, requires an appraiser to
           consider the amount of time elapsed between the sales date and the effective date
           of the appraisal. Sales data should not exceed six months between the date of the
           appraisal, the sales date of the comparable, and must not exceed 12 months. An
           explanation is required for sales dates in excess of six months. We agree that
           lenders must be able to rely on the appraiser’s decisions regarding comparable
           sales and observations noted in the appraisal report. However, HUD Handbook
           4000.4, REV-1, requires the underwriter to review the appraisal report to
           determine the acceptability of the conclusions reached by the appraiser.
           Huntington and its underwriter did not comply with HUD’s requirements.

Comment 16 We commend Huntington for bringing this weakness to its employees’ attention
           in an effort to prevent this oversight from occurring in the future.

Comment 17 Huntington objected to the inclusion of a recommendation that HUD’s associate
           general counsel for program enforcement determine legal sufficiency and if
           legally sufficient, pursue remedies under the Program Fraud Civil Remedies Act
           against Huntington and/or its principals for incorrectly certifying that due
           diligence was exercised during the underwriting of five loans in our discussion
           draft audit report.

              As stated in HUD Handbook 4000.4, REV-1, chapter 2-4.C., HUD looks to the
              underwriter as the focal point of the direct endorsement program. The
              underwriter must assume the following responsibilities: (1) compliance with
              HUD’s instructions, the coordination of all phases of underwriting, and the
              quality of decisions made under the program, (2) the review of appraisal reports,
              compliance inspections, and credit analyses performed by fee and staff personnel



                                              54
              to ensure reasonable conclusions, sound reports, and compliance with HUD’s
              requirements, (3) the decisions relating to the acceptability of the appraisal, the
              inspections, the buyers capacity to repay the mortgage, and the overall
              acceptability of the mortgage loan for HUD insurance, (4) the monitoring and
              evaluation of the performance of fee and staff personnel used for the direct
              endorsement program, and (5) awareness of the warning signs that may indicate
              irregularities, and an ability to detect fraud, as well as the responsibility that
              underwriting decisions are performed with due diligence in a prudent manner.

              Huntington respectfully requested that we use our discretion in making
              recommendations to ensure that national lenders receive consistent treatment. We
              disagree with Huntington’s belief of inconsistent treatment. We are consistent in
              the treatment of Huntington and other lenders since we have discretion when
              making audit recommendations. Specifically, we either refer cases to HUD
              related to violations of the Program Fraud Civil Remedies Act outside of our audit
              reports or to cite such cases with the appropriate recommendations in our audit
              report. In this case, we cited such cases with the appropriate recommendations in
              this report.

Comment 18 We removed the underwriting fee for Federal Housing Administration loan 411-
           3691859 since the settlement statement indicated that an acceptable third party
           paid this cost outside of closing. We did not remove the underwriting fees for the
           remaining five loans because in one case, the borrower paid the fees, and no
           documentation was provided to show that the seller or an acceptable third party
           paid these costs outside of closing.

              The documentation provided by Huntington for the tax service fee for Federal
              Housing Administration loan 412-5040490 was not sufficient to show that the
              borrower was refunded the fee. The exhibit shows a voided check. The
              documentation did not clearly show if the fee was indeed repaid to the borrower.
              Based upon HUD’s requirements at the time of closing, the tax service fee was
              paid by the borrower in one case, and no documentation was provided to show
              that the seller or an acceptable third party paid these costs outside of closing.




                                               55
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 account for taxes, hazard insurance, and mortgage
        insurance premiums is current and intact except for disbursements which may have been
        made from the escrow account to cover payments for which the account was 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 even though 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.




                                                 56
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 mortgagee 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.

Title 31, United States Code, section 3801, “Program Fraud Civil Remedies Act of 1986,”
provides federal agencies, which are the victims of false, fictitious, and fraudulent claims and
statements, with an administrative remedy to recompense such agencies for losses resulting from
such claims and statements; to permit administrative proceedings to be brought against persons
who make, present, or submit such claims and statements; and to deter the making, presenting,
and submitting of such claims and statements in the future.




                                                57
Appendix D

SUMMARY OF LOANS WITH INCORRECT UNDERWRITING
               CERTIFICATIONS


                     Original
          Loan       mortgage              Income       Debt –to- Improper
        number       amount      Appraisal analysis   income ratio  fees   Documentation
      151-7669678*     $129,270               X            X
      412-5040490       108,605               X                      X
      413-4051601         80,000    X                                X
      413-4129633*        99,200                           X
      413-4135429       100,522                                      X          X
         Totals         $517,597    1         2           2          3           1


      * These loans have underwriting deficiencies that affected their insurability.




                                               58
Appendix E

 SUMMARY OF EXCESSIVE AND/OR UNALLOWABLE FEES
                   CHARGED



                     Excessive
                    origination/                  Underwriting
       Loan number processing fee Tax service fee     fee       Total fees
       151-7269327                            $85         $150        $235
       412-5040490                             85           150         235
       413-4051601                             85           150         235
       413-4128151                             85           150         235
       413-4135429           $200              85           100         385
           Totals            $200           $425          $700      $1,325




                                       59
Appendix F
                   NARRATIVE CASE PRESENTATIONS


Loan number: 151-7669678

Mortgage amount: $129,270

Section of Housing Act: 203 (b)

Date of loan closing: August 18, 2004

Status as of February 27, 2006: Loan no longer active

Prior status: Pre-foreclosure sale completed

Payments before first default reported: Not applicable

Claims paid: $35,542
Summary:

Income analysis

Huntington’s underwriter (M958) overestimated the borrower’s effective monthly income.
Huntington’s and HUD’s loan files lacked evidence to justify the receipt of continuing overtime.
Huntington reported the effective income as $4,172 per month, which included $610 per month
for overtime. However, we calculated effective monthly income as $3,562 per month.
Huntington overestimated the borrower’s effective monthly income by $610 per month.

Inaccurate/excessive debt-to-income ratios

Huntington did not show the borrower as an acceptable credit risk. The underwriter (M958)
calculated the fixed payment-to-income ratio as 41.25 percent. We recalculated the qualifying
ratios using the correct monthly income as discussed above. The recalculated mortgage’s fixed
payment-to-income ratio of 48.31 percent exceeded HUD’s requirement by 7.31 percent. The
loan’s mortgage credit analysis worksheet failed to include valid compensating factors.




Loan number: 413-4129633


                                               60
Mortgage amount: $99,200

Section of Housing Act: 203 (b)

Date of loan closing: June 2, 2003

Status as of February 27, 2006: Default - delinquent

Prior status: Not applicable

Payments before first default reported: Eight

Unpaid principal balance: $96,352
Summary:

Understated liabilities

The borrower’s recurring liabilities of $592 on the mortgage credit analysis worksheet were
understated by $126. Huntington failed to include five credit accounts with a total balance of
$2,864.

Inaccurate/excessive debt-to-income ratios

Huntington did not show the borrower as an acceptable credit risk. Huntington’s underwriter
(BA39) calculated the fixed payment-to-income ration as 44 percent. We recalculated the
qualifying ratio using the omitted liabilities discussed above. The recalculated mortgage’s fixed
payment-to-income ratio of 48.67 percent exceeded HUD’s requirement by 7.67 percent. The
loan’s mortgage credit analysis worksheet failed to include valid compensating factors.




                                                61