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
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)