oversight

US Bank NA, Supervised Lender; Minneapolis, Minnesota; Did Not Always Comply with HUD�s Requirements Regarding Late Requests for Endorsement and Underwriting of Loan

Published by the Department of Housing and Urban Development, Office of Inspector General on 2006-03-31.

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

                AUDIT REPORT




                    US BANK NA
                 SUPERVISED LENDER

              MINNEAPOLIS, MINNESOTA

US Bank Did Not Always Comply with HUD’s Requirements
Regarding Late Requests for Endorsement and Underwriting of
                           Loans

                      2006-CH-1008

                    MARCH 31, 2006

                 OFFICE OF AUDIT, REGION V
                     CHICAGO, ILLINOIS
                                                                Issue Date
                                                                         March 31, 2006
                                                                Audit Report Number:
                                                                         2006-CH-1008




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: US Bank NA, Supervised Lender; Minneapolis, Minnesota; Did Not Always
           Comply with HUD’s Requirements Regarding Late Requests for
           Endorsement and Underwriting of Loans

                                   HIGHLIGHTS

 What We Audited and Why

            We audited US Bank NA (US Bank), 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 US Bank for audit because of its high late
            endorsement rate. Our objectives were to determine whether US Bank 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

            US Bank did not always comply with HUD’s requirements regarding late requests
            for insurance endorsement. It improperly submitted 67 (1.52 percent) late
            requests for endorsement out of 4,406 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.
         US Bank also incorrectly certified that both the mortgage and escrow accounts for
         six loans and the escrow accounts for taxes, hazard insurance, and mortgage
         insurance premiums for 14 loans were current when they were not.

         Further, US Bank inappropriately underwrote 13 Federal Housing Administration
         loans out of 28 loans reviewed and which went to claim. It included unallowable
         amounts (overdue principal, interest, and late charges) when determining the debt
         for six streamline refinanced loans and therefore these loans exceeded HUD’s
         maximum insurable limits by $6,910; approved seven purchase loans when
         required documentation was missing, out of date, or not adequate to support the
         income of the borrowers; and understated the borrowers’ expenses for three loans.
         For the 13 loans’ certifications reviewed, US Bank incorrectly certified the
         integrity of the data supplied by other lenders used to determine the quality and
         insurance eligibility of one loan, and that due diligence was used in underwriting
         the remaining 12 loans even though it was not.

         These improperly submitted and inappropriately 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 US Bank to indemnify HUD for any future losses on 14
         loans (12 active loans with certifications which violated the Program Fraud Civil
         Remedies Act and 2 active loans which violated HUD’s Mortgagee Letter 2005-
         23) with a total mortgage value of more than $1.5 million, reimburse HUD nearly
         $455,000 for the actual losses it incurred on 14 loans (three improperly submitted
         and 11 inappropriately underwritten) and for any future losses from more than
         $129,000 in claims paid on three loans (two improperly submitted and one
         inappropriately underwritten) once the properties are sold, and implement
         adequate procedures and controls to address the deficiencies cited in this report.
         We also recommend that HUD’s assistant secretary for housing-federal housing
         commissioner take appropriate action against US Bank for violating the
         requirements in effect at the time when it submitted 18 loans with a mortgage
         value of more than $2 million without the proper six month payment histories.

         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 US Bank and/or its
         principals for the incorrect certifications cited in this audit report.

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



                                          2
Auditee’s Response

           We provided the results of our late endorsement and underwriting reviews to US
           Bank’s management during the audit. We also provided our discussion draft audit
           report to US Bank’s president of home mortgage, executive vice president, first
           vice president, and executive vice president and manager of loan administration,
           and HUD’s staff during the audit. We conducted an exit conference with US
           Bank’s management on February 13, 2006.

           US Bank’s president of home mortgage provided written comments to our
           discussion draft audit report dated March 8, 2006, that generally agreed with our
           findings but disagreed with the number of loans improperly submitted for late
           endorsement, underwritten, and certified. With the exception of two exhibits, the
           complete text of US Bank’s written response, and our evaluation of that response,
           can be found in appendix B of this report. We provided HUD’s director of lender
           activities and program compliance with a complete copy of US Bank’s written
           comments plus the two exhibits.




                                           3
                           TABLE OF CONTENTS

Background and Objectives                                                     5

Results of Audit

      Finding 1: US Bank Substantially Complied with HUD’s Late Endorsement
                 Requirements                                                 6
      Finding 2: US Bank Inappropriately Underwrote 13 Federal Housing
                 Administration Loans                                         11

Scope and Methodology                                                         16

Internal Controls                                                             18

Followup on Prior Audits                                                      20

Appendixes
   A. Schedule of Questioned Costs and Funds to Be Put to Better Use          21
   B. Auditee Comments and OIG’s Evaluation                                   22
   C. Federal Requirements                                                    28
   D. Summary of Unallowable Amounts in Streamline Refinanced Loans           33
   E. Summary of Loans with Incorrect Underwriting Certifications             34
   F. Narrative Case Presentations                                            35




                                           4
                     BACKGROUND AND OBJECTIVES

US Bank NA (US Bank) is a wholly owned mortgage banking subsidiary of US Bancorp
Corporation, which has more than $209 billion in total assets as of September 2005. US Bancorp
Corporation is the eighth largest financial holding company in the United States and serves more
than 13 million customers.

US Bank is headquartered in Minneapolis, Minnesota. The U.S. Department of Housing and
Urban Development’s (HUD) approved US Bank to originate, purchase, and sell Federal
Housing Administration loans. US Bank also participates in HUD’s direct endorsement
program. As a direct endorsement lender, US Bank determines that a proposed mortgage loan is
eligible for insurance under applicable programs’ regulations and submits the required
documents to HUD without its prior review of the origination and closing of the loan. US Bank
is responsible for complying with all applicable HUD regulations and handbook instructions
regarding late endorsement and underwriting of Federal Housing Administration loans.

As of December 2, 2005, US Bank is the authorized agent for 33 principals as well as the acting
principal for 896 loan correspondents involved in Federal Housing Administration loans. US
Bank originated and/or sponsored 18,913 Federal Housing Administration loans totaling more
than $2 billion between January 1, 2003, and December 31, 2004.

We audited US Bank as part of the activities in our fiscal year 2005 annual audit plan. We
selected US Bank for audit because of its high late endorsement rate of 32 percent during the
period January 1, 2003, through December 31, 2004.

Our objectives were to determine whether US Bank 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: US Bank Substantially Complied with HUD’s Late
                    Endorsement Requirements
US Bank did not fully comply with HUD’s late endorsement requirements. Of the 4,406 loans
tested, US Bank improperly submitted 67 loans with mortgages totaling more than $8 million for
insurance endorsement when the borrowers did not make six monthly consecutive timely
payments after delinquency but before submission to HUD. It also incorrectly certified that both
the mortgage and escrow accounts for six loans and the escrow accounts for taxes, hazard
insurance, and mortgage insurance premiums for 14 loans were current when they were not. The
deficiencies occurred because US Bank needs to improve its existing procedures and controls
over its late endorsement process. These improperly submitted loans provided unnecessary risk
to the Federal Housing Administration fund.



 US Bank Improperly Submitted
 Late Requests for Endorsement

              Our analysis of the mortgage payment histories provided by US Bank and
              endorsement data from HUD’s systems showed that for the 4,406 loans tested, US
              Bank generally complied with HUD’s requirements regarding late requests for
              endorsement. However, US Bank submitted 67 loans for endorsement even
              though the borrowers did not make six monthly consecutive timely payments after
              delinquency but before submission to HUD.

              As of March 10, 2006, 26 of the 67 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 Mortgage Connection, a loan correspondent for US Bank, executed
              an indemnification agreement with HUD effective August 13, 2004, for one loan;
              therefore, we did not include this loan in our recommendations. The remaining
              40 loans still hold active Federal Housing Administration insurance with
              $4,561,263 in total original mortgage and pose a risk to the insurance fund as
              follows:

              •       For five loans having original mortgage amounts totaling $559,763, HUD
                      incurred a total loss of $48,428 on three loans and paid $58,132 in claims
                      on another two loans with an indeterminate loss as of March 10, 2006.
                      HUD cannot identify the loss from the two loans until the associated
                      properties are sold.




                                               6
            •      Five loans with $610,691 in total original mortgage value were streamline
                   refinanced to other Federal Housing Administration loans. Because these
                   five loans were improperly submitted for insurance endorsement, the
                   improper endorsement also applies to the refinanced loans.

            •      Thirty loans hold active Federal Housing Administration insurance with
                   $3,390,809 in total original mortgage amounts.

            According to HUD’s Neighborhood Watch system, US Bank submitted 131 out of
            2,486 loans for late endorsement from January 1 through September 30, 2005,
            which represents a 5 percent late endorsement rate. During this same period in
            2004, US Bank submitted 258 of 2,809 loans late for endorsement for a 9 percent
            late endorsement rate. We did not determine whether the 131 loans met HUD’s
            late endorsement requirements; we only used the information to determine
            whether US Bank’s late endorsement rate increased or decreased.

            Further, we also reviewed the accuracy of US Bank’s late endorsement
            certifications of 104 loans that we initially determined as improperly submitted,
            but we needed additional documentation to determine whether they met HUD’s
            late endorsement requirements. Of the 104 late endorsement certifications, US
            Bank incorrectly certified that the mortgage and/or escrow accounts for 20 loans
            were current even though they were not. For the remaining 84 late endorsement
            certifications, US Bank correctly certified with the proper certification format as
            required by HUD.

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

            US Bank’s executive vice president of Audit and Compliance provided us a letter
            dated September 19, 2005, regarding our late endorsement review results. The
            executive vice president generally agreed with our late endorsement finding.

US Bank Took Corrective
Action, but Additional Action Is
Needed

            The Federal Housing Administration loans which US Bank processes consist of
            wholesale and retail loans. US Bank sponsors wholesale loans originated by its
            loan correspondents and brokers. Wholesale loans are processed and submitted
            for endorsement by US Bank’s Wholesale Operations/Post Closing Department.
            US Bank originates and sponsors retail loans which are processed and submitted
            for late endorsement by its Retail Post Closing Department.




                                              7
US Bank lacked adequate procedures and controls when it improperly submitted
the 67 loans (54 wholesale loans and 13 retail loans) for late endorsement during
the period January 1, 2003, through December 31, 2004. However, US Bank
made improvements to its procedures and controls over the processing of Federal
Housing Administration loans for late insurance endorsement, as follows:

   •   Between February and June 2004, US Bank took corrective actions when
       it terminated its contracts with two of its lenders/brokers. The
       terminations prevented US Bank from increasing the number of loans
       which were untimely and improperly processed for late endorsement.

   •   In the summer of 2004, US Bank’s Wholesale Operations/Post Closing
       Department implemented improvements to its procedures and controls for
       processing wholesale loans. Specifically, it implemented funding
       procedures and controls for ensuring that its purchase fund reviewers
       adequately review loan documents for compliance before submitting the
       loans to HUD for late insurance endorsement. The review results by the
       purchase fund reviewers are audited by US Bank’s quality control auditors
       using:

       1. a loan tracking sheet for documenting the review results regarding the
          integrity of the data entered into US Bank’s loan system,
       2. a purchase/table funded checklist for documenting their assessment
          results regarding the adequacy of supporting loan documentation, and
       3. an audit review checklist for documenting the errors made by the
          purchase fund reviewers; the scores the auditors gave the purchase
          fund reviewers (which were based upon the purchase fund reviewers’
          errors when processing the loans for late request for endorsement); and
          any issues or findings identified. The auditors’ findings are then
          disclosed in a report provided to the supervisors of the purchase fund
          reviewers who made the errors. The supervisors then discuss the
          findings with the appropriate purchase fund reviewers and provide
          them suggestions for not making the same errors in the future.
          Further, the purchase fund reviewers use the findings disclosed in
          HUD’s Notices of Rejections as reminders to not make the same errors
          when processing wholesale loans for insurance endorsement.

   •   In August 2005, US Bank’s Retail Post Closing Department added date
       fields to its OMNI system for maintaining the date loans are resubmitted
       to HUD for insurance endorsement. US Bank resubmits loans after
       resolving deficiencies HUD cited in its Notices of Rejections. The date
       fields are used as tracking tools by US Bank’s government loan reviewers
       to efficiently and effectively resolve the deficiencies cited by HUD. The
       government loan reviewers also use HUD’s Notices of Rejections as
       reminders to not repeat the same deficiencies when submitting retail loans
       for endorsement.


                                 8
                •   US Bank’s Retail Post Closing Department implemented monthly
                    meetings in August 2005 to discuss HUD’s new late endorsement
                    requirements and the correct procedures for processing and submitting
                    Federal Housing Administration loans for insurance endorsement.

                •   In August 2005, US Bank added a new loan servicing function to its post
                    closing review process so that its reviewers (who process loans for
                    insurance endorsement) fully understand the servicing of loans. Such full
                    understanding on how the loans are serviced helps the reviewers to
                    correctly read the borrowers’ payment histories maintained in the Fidelity
                    system, which is US Bank’s servicing system.

          US Bank still needs to improve its existing procedures and controls to ensure its
          late endorsement certifications include only accurate information. As previously
          mentioned, US Bank incorrectly certified that the mortgage and/or escrow
          accounts for 20 loans were current even though they were not. Using the 20 loans
          with incorrect certifications from the 104 we tested with mortgage amounts
          totaling more than $13 million, the estimated risk to the Federal Housing
          Administration is at least $1,251,758 for the next year if US Bank does not
          improve its late endorsement certification procedures and controls (20 divided by
          104 times $13,018,280 in mortgages for two years).

Recommendations

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

          1A.       Indemnify HUD for any future losses on 14 loans (12 active loans with
                    certifications that violated the Program Fraud Civil Remedies Act and 2
                    active loans that violated HUD’s Mortgagee Letter 2005-23) with a total
                    mortgage value of $1,592,040 and take other appropriate action.

          1B.       Reimburse HUD $48,428 for the actual losses it incurred on three loans
                    (case numbers 121-2119152, 052-2742596, and 121-2083369) improperly
                    submitted since the properties associated with these loans were sold.

          1C.       Reimburse HUD for any future losses from $58,132 in claims paid on two
                    loans (case numbers 105-1233618 and 521-5690364) improperly
                    submitted with a total mortgage value of $233,675 once the associated
                    properties are sold.

          1D.       Improve its existing procedures and controls over its late endorsement
                    certifications. Such procedures and controls must include but are not
                    limited to providing adequate training to its staff regarding HUD’s late
                    endorsement certifications and adequately monitoring its late endorsement


                                             9
       certifications to ensure they are correct before submission to HUD. These
       procedures and controls should help reduce risks to the Federal Housing
       Administration fund by $1,251,758.

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

1E.    Take appropriate action against US Bank for violating the requirements in
       effect at the time when it submitted 18 loans with a total mortgage value
       of $2,030,550 without the proper six month payment histories.

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

1F.    Determine legal sufficiency and if legally sufficient, pursue remedies
       under the Program Fraud Civil Remedies Act against US Bank and/or its
       principals for incorrectly certifying that the mortgage and/or the escrow
       accounts for taxes, hazard insurance, and mortgage insurance premiums
       were current for 20 loans submitted for Federal Housing Administration
       insurance endorsement when the mortgage and/or escrow accounts were
       not current.




                                10
Finding 2: US Bank Inappropriately Underwrote 13 Federal Housing
                       Administration Loans
US Bank inappropriately underwrote 13 Federal Housing Administration loans totaling more
than $1.4 million out of 28 loans reviewed which defaulted and went to claim between January 1,
2003, and December 31, 2004. US Bank included unallowable amounts (overdue principal,
interest, and late charges) when determining the debt for six streamline refinanced loans and
therefore these loans exceeded HUD’s maximum insurable limits by $6,910; approved seven
purchase loans when required documentation was missing, out of date, or inadequate to support
the income of the borrowers; and understated the borrowers’ expenses for three loans. Of the 13
loans’ certifications reviewed, US Bank also incorrectly certified the integrity of the data
supplied by other lenders used to determine the quality and insurance eligibility of one loan, and
that due diligence was used in underwriting another 12 loans even though it was not. The
problems occurred because US Bank needs to improve its existing procedures and controls to
ensure that its underwriters followed HUD’s underwriting requirements. As a result, HUD
incurred a total loss of $416,473 on 12 loans and paid $71,554 in claims on one loan.



 Improper Underwriting of
 Federal Housing
 Administration Loans

               US Bank sponsored 18,913 Federal Housing Administration loans between
               January 1, 2003, and December 2004. Of the 18,913 loans, 28 loans defaulted
               and HUD paid nearly $3 million in claims on the loans (14 home purchases and
               14 streamline refinanced). We reviewed all 28 loans for compliance with HUD’s
               underwriting requirements.

               US Bank improperly underwrote six streamline refinanced loans with a total
               mortgage value of $672,717 and seven home purchase loans with a total mortgage
               value of $773,763. For the six streamline refinanced loans, HUD incurred a total
               loss of $138,187 on five and paid $71,554 in claims on the remaining one loan as
               of March 10, 2006. The following table shows the actual loss and claims paid for
               the six streamline refinanced loans.




                                               11
                               Mortgage HUD’s Claims paid
             Case number       amount actual loss by HUD
             121-2119152 *     $84,308  $10,335
             521-5537765       142,507   34,047
             581-2457784       144,571   32,551
             137-2415145        62,329            $71,554
             201-3227501       113,202   37,463
             521-5562435       125,800   23,791
                 Totals        $672,717    $138,187      $71,554
             * - This loan was also cited in finding #1 of this
             audit report; therefore, HUD’s loss will not be
             reflected in this finding’s recommendations.


US Bank included unallowable amounts (overdue principal, interest, and late
charges) when it funded the six streamline refinanced loans in excess of HUD’s
maximum insurable limits as required by Mortgagee Letter 2001-12 and HUD
Handbook 4155.1, REV-4. It funded the six loans for a total of $672,717. HUD’s
maximum insurable limit for the six loans totaled $665,807. Therefore, the six
loans exceeded HUD’s limit by $6,910.

For the seven home purchase loans which US Bank improperly underwrote, HUD
incurred a total loss of $278,286 as of March 10, 2006. The following table
shows the actual loss HUD incurred on the eight loans after their associated
properties were sold.

                                                      HUD’s
                                      Mortgage         actual
                    Case number       amount           losses
                  201-3157213         $ 64,490        $76,570
                  491-7920423          133,441         44,355
                  105-1094457          140,956         23,593
                  105-1171434          145,153         41,561
                  161-2019530           59,219         26,467
                  201-3197655           62,420         35,859
                  483-3412941          168,084         29,881
                          Totals      $773,763    $278,286


US Bank improperly underwrote three home purchase loans when supporting
documentation was missing, out of date, or inadequate to support the borrowers’
income as required by HUD Handbook 4155.1, REV-4. The three loans are case
numbers 201-3157213, 105-1094457, and 105-1171434.

In violation of Mortgagee Letter 1998-1 and/or HUD Handbook 4155.1, REV-4,
US Bank also understated the borrowers’ expenses for three additional home
purchase loans by improperly using the first year buy-down period principal and
interest; did not adequately determine whether a borrower’s debt was paid off; or
failed to properly compute negative rent when it excluded the property taxes in its



                                      12
           computation. The three loans are case numbers 491-7920423, 201-3197655, and
           483-3412941.

           Further, US Bank overstated borrowers’ income and/or failed to verify income or
           establish income stability for seven purchase home loans as required by HUD
           Handbook 4155.1, REV-4. The seven loans are case numbers 201-3157213, 491-
           7920423, 195-1094457, 105-1171434, 161-2019530, 201-3197655, and 483-
           3412941.

           Appendix C of this report provides details of federal requirements regarding
           underwriting of Federal Housing Administration loans as well as a citation under
           the Program Fraud Civil Remedies Act. Appendix D provides a summary of
           unallowable amounts included in streamline refinanced loans and Appendix E
           provides a detailed description of additional loans with underwriting deficiencies
           noted in this finding for which we are recommending reimbursement.

Incorrect Underwriters’
Certifications Submitted

           Of the 13 improperly underwritten loans, one was underwritten using an
           automated system and 12 were manually underwritten by US Bank. We reviewed
           the certifications for all 13 loans for accuracy. US Bank’s direct endorsement
           underwriters incorrectly certified the integrity of the data supplied by another
           lender used to determine the quality and insurance eligibility for one loan, and
           that due diligence was used in underwriting another 12 loans even though it was
           not.

           After underwriting a loan using an automated underwriting system, HUD requires
           direct endorsement underwriters to certify the integrity of the data supplied by a
           lender used to determine the quality of the loans and that the loans were eligible
           for insurance. After underwriting a loan manually, HUD requires direct
           endorsement underwriters to certify that they used due diligence and reviewed all
           associated documents during the underwriting of a loan.

           Appendix E of this report provides a summary of loans that US Bank submitted to
           HUD with incorrect underwriting certifications.

US Bank Needs to Improve
Existing Underwriting
Procedures and Controls

           Although US Bank kept current with HUD’s underwriting requirements by
           updating its Underwriting Manual, it needs to improve existing procedures and
           controls over its underwriting of Federal Housing Administration-insured loans.



                                           13
          The procedures and controls include but not limited to providing the necessary
          training to its underwriters to ensure that they follow HUD’s underwriting
          requirements, and effective oversight or monitoring of the underwriters. Such
          procedures and controls should also ensure the accuracy of US Bank’s
          underwriting certifications submitted to HUD.

          Using the total actual losses and claims paid by HUD for 13 loans improperly
          underwritten and incorrectly certified, the estimated total risk to the Federal
          Housing Administration is $113,292 (13 divided by 28, times $488,027 in actual
          losses and claims HUD incurred each year for two years) over the next year.

Recommendations

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

          2A.     Reimburse HUD $406,138 for the actual losses it incurred on 11 loans
                  (seven home purchases and four streamline refinanced) improperly
                  underwritten since the associated properties were sold.

          2B.     Reimburse HUD for any future loss from $71,554 in claims paid on one
                  loan improperly underwritten with a total mortgage value of $62,329 once
                  the associated property is sold.

          2C.     Improve its existing procedures and controls to ensure its underwriters
                  follow HUD’s underwriting requirements. These procedures and controls
                  included but are not limited to: providing adequate training to its
                  underwriters regarding HUD’s underwriting requirements of Federal
                  Housing Administration loans to ensure that the underwriters adequately
                  resolve any discrepancies shown among the documentation associated
                  with the loans; adequately verify borrowers’ income; obtain and review
                  the documents that adequately support the borrowers’ income stability and
                  expenses; and include only the proper amounts when calculating the loan
                  amounts to be funded; providing effective oversight or monitoring over its
                  underwriting of loans; and verifying the accuracy of its underwriting
                  certifications before submission to HUD. These procedures and controls
                  should help reduce risks to the Federal Housing Administration fund by
                  $113,292 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 US Bank and/or its
                  principals for incorrectly certifying the integrity of the data supplied by
                  another lender used to determine the quality and insurance eligibility of



                                           14
one loan, and due diligence was used in underwriting another 12 loans
even though it was not.




                        15
                          SCOPE AND METHODOLOGY

We performed our audit work between July and December 2005. We conducted our audit at US
Bank’s Office in Owensboro, Kentucky and HUD’s Detroit Field Office.

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

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

Using HUD’s data system, we identified that US Bank sponsored 18,913 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 $2.2 billion. The following table depicts the
adjustments made to the initial universe of 18,913 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 US Bank from January
        1, 2003, through December 31, 2004                          18,913    $2,274,294,931
        Submitted within 66 days after closing (before April 12,
        2004)                                                        12,598    1,504,787,450
        New construction                                                81        11,410,677
        Submitted before the first payment was due                     614        71,517,006
        Transferred before submission                                  997       107,476,987
        Home equity conversion                                           5           545,665
        Closed after April 12, 2004, with Notice of Rejections
        and not subject to the 90-day requirement                       212      25,827,759
                            Loans tested                              4,406    $552,729,387

For our late endorsement testing of the 18,913 loans in the initial universe, we removed 81 new
construction loans, 614 loans which were submitted before the first payment due date because
these loans were not subjected to the 60-day pre-April 2004 submission requirements, five home
equity conversion loans, and 212 loans closed after April 12, 2004, which were not subject to the



                                                   16
90-day requirement. We further limited our universe to only those loans received by HUD more
than 66 days after the loans had closed (before April 12, 2004).

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.

As a result, after removing the 12,598 loans which were submitted within 66 days after closing,
there were 5,403 loans remaining as late requests for endorsement. In evaluating the 5,403
loans, we identified 997 which US Bank transferred the loan servicing to other lenders/servicers
before submission for endorsement; therefore, we also removed these loans from our testing
universe. After removing the loans which were not subject to HUD’s late endorsement
requirements, we only tested 4,406 loans for compliance with HUD’s late endorsement
requirements.

Of the 18,913 loans sponsored by US Bank between January 1, 2003, and December 31, 2004,
28 loans defaulted and went to claim. We reviewed all 28 loans with a total mortgage value
$2,938,561 for compliance with HUD’s underwriting requirements. We also reviewed the
accuracy of US Bank’s underwriting certifications for the 13 loans inappropriately underwritten.

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.




                                               17
                              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 objective:

              •       Program operations - Policies and procedures that management has
                      implemented to reasonably ensure that a program meets its objectives.

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

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

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

              We assessed the relevant controls identified above.

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




                                                18
Significant Weakness


           Based on our audit, we noted no significant weakness.




                                           19
                        FOLLOWUP ON PRIOR AUDITS

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

In January 2005, HUD’s Quality Assurance Division performed a quality assurance review of US
Bank. The review resulted in two findings related to a deficiency in US Bank’s quality control plan
and its underwriting of Federal Housing Administration loans. Both findings were resolved and
closed as of April 2005.




                                                20
                                     APPENDIXES
Appendix A

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


             Recommendation        Ineligible    Unsupported      Funds to be put
                 number                1/            2/           to better use 3/
                    1A                                              $1,592,040
                    1B              $48,428
                    1C                               $58,132
                    1D                                               1,251,758
                    2A              406,138
                    2B                                71,554
                    2C                                               113,292
                   Totals          $454,566          $129,686       $2,957,090


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/   Unsupported costs are those costs charged to a HUD-financed or HUD-insured program
     or activity when we cannot determine eligibility at the time of the audit. Unsupported
     costs require a decision by HUD program officials. This decision, in addition to
     obtaining supporting documentation, might involve a legal interpretation or clarification
     of departmental policies and procedures.

3/   “Funds to be put to better use” are quantifiable savings that are anticipated to occur if an
     OIG recommendation is implemented, resulting in reduced expenditures at a later time
     for the activities in question. This includes costs not incurred, deobligation of funds,
     withdrawal of interest, reductions in outlays, avoidance of unnecessary expenditures,
     loans and guarantees not made, and other savings.




                                                21
Appendix B

        AUDITEE COMMENTS AND OIG'S EVALUATION


Ref to OIG Evaluation   Auditee Comments




Comment 1




                         22
Ref to OIG Evaluation   Auditee Comments




Comment 2




Comment 1




Comment 3
Comment 4




Comment 2




                         23
Ref to OIG Evaluation   Auditee Comments




Comment 2




Comment 5




Comment 6




                         24
Ref to OIG Evaluation   Auditee Comments




Comment 3




                         25
                           OIG Evaluation of Auditee Comments


Comment 1 We commend US Bank for making significant control improvements to ensure it
          complies with HUD’s late endorsement requirements. Our late endorsement
          testing showed US Bank to be in substantial compliance with rules in effect
          during our audit period.

Comment 2 US Bank disagreed with the number of Federal Housing Administration loans
          cited in our discussion draft audit report as improperly submitted for late
          endorsement. US Bank provided additional documentation such as cancelled
          checks, payment ledgers, and other documentation supporting its disagreement
          with 13 of the 76 loans that were previously cited as improperly submitted for late
          request for endorsement. The additional supporting documentation for the 13
          loans showed one loan was not submitted late for endorsement and the required
          mortgage payments were made for eight loans; however, the documentation did
          not show that the required mortgage payments were made for the remaining four
          loans. Thus, we decreased the number of Federal Housing Administration loans
          improperly submitted for late endorsement by nine loans (from 76 to 67 loans).

Comment 3 US Bank strongly disagreed that it incorrectly certified loans for late endorsement
          because such incorrect certifications were based on mistakes. US Bank believes
          the inclusion of unsubstantiated statements is unjustified, particularly when its
          overall performance is considered. We did not change our statements on US
          Bank’s incorrect certifications on late endorsement because such statements were
          appropriate based on the issues cited in this report. Violations of Federal Housing
          Administration rules are subject to administrative actions, up to and including
          remedies under the Program Fraud Civil Remedies Act.

Comment 4 We reduced the total number of incorrect certification from 24 to 20 based upon
          additional documentation such as cancelled checks, payment ledgers, and other
          supporting documentation showing that the receipt dates of the mortgage
          payments for four loans were earlier than the effective dates of the mortgage
          payments shown on US Bank’s computer system. Therefore, this made the
          certifications correct that mortgage payments and/or escrow accounts were
          current at submission. US Bank posted the mortgage payment late and therefore
          the payment data in its computer system did not show the correct payment receipt
          date.




                                             26
                       OIG Evaluation of Auditee Comments

            US Bank strongly disagreed that it incorrectly certified loans that were
Comment 5
            underwritten because it believes that the variances were primarily based upon
            differences of interpretations of judgment factors involved in the underwriting
            process and minor errors in calculations. We did not change our statements on
            US Bank’s incorrect certifications on late endorsement because such
            statements were appropriate based on the issues cited in this report. Violations
            of Federal Housing Administration rules are subject to administrative actions,
            up to and including remedies under the Program Fraud Civil Remedies Act.

            Bank provided additional documentation such as pay stubs, Wage Earnings
Comment 6
            and Statement, and other related-documents supporting its disagreement with
            five of the six streamline refinanced loans that were previously cited as
            improperly underwritten. US Bank agreed that unallowable amounts (overdue
            principal, interest, and late charges) were included when it funded the six
            streamline refinanced loans in excess of HUD’s maximum insurable limits as
            required by Mortgage Letter 2001-12 and HUD Handbook 4155.1, REV-4.
            US Bank stated that the impact of the mistakes in its calculations of allowable
            amounts is not significant due to HUD’s revised Mortgagee Letter 2005-43.
            However, we used the appropriate HUD underwriting requirements at the time
            US Bank underwrote the loans. Based on the results of our review of the
            additional supporting documentation for five of the six loans, we determined
            that US Bank properly underwrote one loan and improperly underwrote the
            remaining four. Thus, we decreased the number of Federal Housing
            Administration loans improperly underwritten by one loan (from 14 to 13
            loans).




                                           27
Appendix C

                           FEDERAL REQUIREMENTS


                            LATE ENDORSEMENT REQUIREMETS

According to 24 CFR [Code of Federal Regulations] 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,
•   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 escrows account for taxes, hazard insurance, and mortgage
        insurance premiums is current and intact except for disbursements which may have been
        made from the escrow accounts to cover payments for which the accounts were
        specifically established.

    (3) A payment ledger that reflects the payments received, including the payment due for the
        month in which the case is submitted if the case is submitted after the 15th of the month.
        For example, if the case closed February 3 and the case is submitted April 16, the
        payment ledger must reflect receipt of the April payment 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.


                                                 28
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 mortgagor 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.

Mortgagee Letter 2005-23, “Amended Late Request for Endorsement Procedures,” was issued to
reduce the administrative burden on lenders that are unable to submit applications for mortgage
insurance to Federal Housing Administration within 60 days of closing.

When submitting a late request for endorsement, under the circumstances described below, the
lender is required to include a dated certification, signed by a 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) At the time of this certification, no mortgage payment is currently unpaid more than 30
      days and;




                                                29
   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, and;
   3) The lender or its agents did not provide the funds to bring and/or keep the loan current or
      to bring about the appearance of an acceptable payment history.

If the payment due for the month before the lender submitted the loan for endorsement has not
been received, that loan is not eligible for endorsement. Individuals found making false
certifications may have administrative sanctions taken against them including, but not limited to,
debarment from participation in HUD’s and other federal agency programs, civil money
penalties, and Program Fraud Civil Remedies Act sanctions.

                         LOAN UNDERWRITING REQUIREMENTS

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

Mortgagee Letter 2001-12, “Streamline Refinances – Revised Mortgage Amount Calculations,”
requires borrowers to make their monthly mortgage payments when due even when refinancing
and they are not permitted to roll payments due into the new loan amount. It also requires that
lenders must not include in the new mortgage amount the sum of any mortgage payments
“skipped” by the borrowers.

Mortgagee Letter 98-1 , "Single Family Loan Production - Underwriting Adjustable Rate
Mortgages, Interest, Buy-downs, Homeownership Counseling, And Other Policy Issues,” states
that under buy-down agreements, borrowers must be qualified using the initial contract rate plus
1 percent (which is the anticipated second year rate under the buy-down agreement).

HUD Handbook 4155.1, REV-4, CHG-1, “Mortgage Credit Analysis for Mortgage Insurance On
One-To-Four Family Properties,”

               •   Requires sufficient documentation to support the lender's decision to approve
                   the loan. Credit documents such as credit reports and verifications of
                   employment may be up to 120 days old at the time of loan closing. When
                   these documents exceed this age limitation, then updated reports and
                   verifications must be obtained. Lenders must obtain a verification of
                   employment from the employer and the most recent pay stub or a verbal
                   verification of employment along with pay stubs covering the most recent 30
                   day period and W-2 forms covering the most recent two year period
                   (paragraph 3-1).

               •   States that when delinquent accounts are revealed, the lender must determine
                   whether late payments were due to a disregard for or inability to manage
                   financial obligations or to factors outside of the borrower's control. Major


                                                30
    indications of derogatory credit including judgments or collections, or recent
    credit problems require sufficient written explanation from the borrower.
    When reviewing the borrower's credit report, the lender must pay particular
    attention to recent and undisclosed debts. The lender must account for any
    significant debt shown on the credit report but not listed on the loan
    application and must obtain an explanation for all credit report inquiries
    (paragraph 2-3).

•   Allows inclusion of rental income for other properties owned by the borrower
    if a current signed lease is provided. The gross rental income must be reduced
    by 25 percent (or percentage established by the local HUD office) before
    subtracting the principal, interest, taxes, insurance, and homeownership
    association dues. After subtracting these expenses from the reduced gross
    income and the figure is positive, the figure may be included in income. If the
    figure is negative, it is used as a recurring monthly obligation (paragraph 2-
    7(m)).

•   Requires the inclusion of all installment loans, revolving accounts, real estate
    loans, and other continuing obligations as recurring liabilities in the analysis
    of income (paragraph 2-11).

•   States that lenders must verify the source of the borrower's earnest money
    deposit if the deposit exceeds 2 percent of the sales price or appears to be
    excessive based on the borrower's savings history. It also states that if there is
    a large increase in the borrower's savings or checking account, or the account
    was opened recently, the lender must obtain an explanation with
    documentation for the source of funds. Section 2-10(m) states that the lender
    must verify cash assets to close and get a borrower’s explanation as to their
    ability to accumulate savings for closing (paragraph 2-10(a) and (b)).

•   States that the purpose of a mortgage credit analysis is to determine the
    borrower's ability and willingness to repay the mortgage debt and limit the
    probability of collection difficulty or default. The stability and adequacy of
    income, funds to close, credit history, qualifying ratios, and compensating
    factors are typically evaluated (paragraph 2-1).

•   States that anticipated borrower income and the likelihood of continuance
    must be established to determine the borrower's capacity to repay the loan.
    Income that cannot be verified, is not stable, or will not continue, may not be
    used in calculating the borrower's income ratios. The lender must verify
    employment for the most recent two years and the borrowers must explain any
    gaps in employment of a month or more. Income may be considered stable if
    the borrower was employed for six months or more (paragraph 2-6).

•   States that income obligated for the loan debt must be analyzed to determine
    whether it can reasonably be expected to continue through at least the first


                                  31
                  three years of the loan. Income can be included in effective income if it can
                  be verified. It also states that projected income is not acceptable for
                  qualifying the borrower except for cost of living adjustments, raises, bonuses,
                  etc. that are verified by the employer and will begin within 60 days of the loan
                  closing (paragraph 2-7).

                    PROGRAM FRAUD CIVIL REMEDIES ACT OF 1986

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.




                                               32
Appendix D

SUMMARY OF UNALLOWABLE AMOUNTS IN STREAMLINE
              REFINANCED LOANS


                         Overdue
                        principal,                   Loan amount
                    interest, and late    HUD’s      per US Bank
                    charges included     maximum      (or original   Underwriting
         Loan         in refinanced      insurable     mortgage      method used
        number             loan            limit       amounts)       by US Bank
      121-2119152         $1,075           $83,233      $84,308         Manual
      521-5537765          2,623           139,884      142,507         Manual
      581-2457784          1,799           142,772      144,571         Manual
      137-2415145            157            62,172       62,329         Manual
      201-3227501            806           112,396      113,202         Manual
      521-5562435            450           125,350      125,800         Manual
        Totals           $6,910           $665,807    $672,717




                                            33
Appendix E

SUMMARY OF LOANS WITH INCORRECT UNDERWRITING
               CERTIFICATIONS


                                                                    Overdue
                                                                    principal,
                                                                  interest, and
                           Overstated                             late charges
               Original        or     Inadequate or                included in
   Loan       mortgage      unstable     lack of    Understated    refinanced     Underwriting
  number       amount        income   documentation  expenses          loan         method
201-3157213      $64,490        X           X                                       Manual
491-7920423      133,441        X                       X                           Manual
105-1094457      140,956        X           X                                       Manual
105-1171434      145,153        X           X                                       Manual
161-2019530       59,219        X                                                   Manual
201-3197655       62,420        X                       X                          Automated
483-3412941      168,084        X                       X                           Manual
121-2119152       84,308                                               X            Manual
521-5537765      142,507                                               X            Manual
581-2457784      144,571                                               X            Manual
137-2415145       62,329                                               X            Manual
201-3227501      113,202                                               X            Manual
521-5562435      125,800                                               X            Manual
   Totals     $1,446,480       7           3             3             6




                                            34
Appendix F

                   NARRATIVE CASE PRESENTATIONS


Loan number: 201-3157213

Mortgage amount: $64,490

Section of Housing Act: 203 (b)

Date of loan closing: January 3, 2003

Status as of November 28, 2005: Foreclosed - property sold by HUD on September 20, 2005

Prior status: Not Applicable

Payments before first default reported: Eight

Unpaid principal balance: $63,262

Claims paid by HUD: $70,291

Loss on sale incurred by HUD: $76,570

Summary:

US Bank’s underwriter (O831) approved this loan when income stability was not adequately
established. Payroll documentation in the loan’s file was more than 120 days old at closing.
Two verbal verifications of employment for the borrower and co-borrower did not identify when
the verifications were done, who did the verifications, and the likelihood of continued
employment. At the time of closing, the borrower was employed less than one month and the
co-borrower was only employed for six months.

Both verbal verifications of employment were called into the same phone number despite
different employers for each borrower. The phone number belonged to a job corps center where
both of the borrowers were assigned under fixed term competitive employment contracts with
their respective employers. The co-borrower’s employment term ended one month after the loan
closing and she was not selected to have her job contract renewed by her employer. These
employees had to compete with others to retain their positions at the end of each employment
contract period.




                                                35
Loan number: 491-7920423

Mortgage amount: $133,441

Section of Housing Act: 203 (b)

Date of loan closing: March 14, 2004

Status as of November 28, 2005: Foreclosed - property sold on March 14, 2005

Prior status: Not Applicable

Payments before first default reported: Ten

Unpaid principal balance: $131,839

Claims paid by HUD: $138,039

Loss on sale incurred by HUD: $44,355

Summary:

US Bank’s underwriter (Q553) overstated the borrower’s income by $154 per month by using
earnings indicated on the verification of employment form rather than the corresponding wages
shown on the W-2 and earnings statements in the loan’s file. The employer confirmed that the
verification of employment figures were established wages and did not reflect actual earnings
due to excessive workdays missed that the borrower was not paid each year.

US Bank’s underwriter understated by $79 per month the borrower’s expenses in the mortgage
credit analysis by incorrectly using the principal and interest due in the first year under a buy
down agreement.




                                                36
Loan number: 105-1094457

Mortgage amount: $140,956

Section of Housing Act: 203 (b)

Date of loan closing: February 26, 2003

Status as of November 28, 2005: Foreclosed – property sold on July 30, 2004

Prior status: Not Applicable

Payments before first default reported: Four

Unpaid principal balance: $139,064

Claims paid by HUD: $148,872

Loss on sale incurred by HUD: $23,593

Summary:

US Bank’s underwriter (Q794) did not investigate a discrepancy between the verifications of
employment and payroll documentation provided by a loan correspondent and employment data
shown on the credit report in the loan’s file. The credit report showed “not applicable” under the
employment section of the report. Had the underwriter investigated the discrepancy and re-
verified the borrower’s employment with the employer, the underwriter would have discovered
that the loan correspondent provided incorrect and invalid verifications and wage documentation.
As a result, the borrower’s income was overstated by $2,995 per month in the analysis of income
based on information obtained directly from the borrower’s employer.




                                               37
Loan number: 105-1171434

Mortgage amount: $145,153

Section of Housing Act: 203 (b)

Date of loan closing: April 11, 2003

Status as of November 28, 2005: Foreclosure – property sold on January 14, 2005

Prior status: Not Applicable

Payments before first default reported: One

Unpaid principal balance: $142,914

Claims paid by HUD: $158,619

Loss on sale incurred by HUD: $41,561

Summary:

US Bank’s underwriter (Q553) did not investigate discrepancies with the employer’s name and
periods of employment between the borrower’s credit report and the verbal verification of
employment and earnings documentation provided by a loan correspondent. The underwriter
also did not investigate discrepancies in reporting and transaction dates shown on the borrower’s
bank statements provided by the loan correspondent. If the underwriter had verified the
documentation, he would have discovered that the verification of employment, W-2 statements,
and bank statements were invalid and incorrect.

The borrower’s employer provided us with information showing that the borrower was employed
as a contract employee, paid cash, and provided 1099 forms at the end of the year. The W-2
statements provided to US Bank’s underwriter by the loan correspondent were invalid documents
and the information on the verbal verification of employment form was not correct. Therefore,
the borrower’s income was over stated by $758 per month in the analysis of income.

The borrower’s bank provided us with evidence that the bank statements provided by the loan
correspondent to US Bank’s underwriter were also not valid or correct. The documentation we
obtained from the bank also showed that the borrower was paying $300 per month more in rent
than reported on the loan applications in the loan’s file.




                                               38
Loan number: 161-2019530

Mortgage amount: $59,219

Section of Housing Act: 203 (b)

Date of loan closing: February 28, 2003

Status as of November 28, 2005: Foreclosure – property sold on January 6, 2005

Prior status: Not Applicable

Payments before first default reported: One

Unpaid principal balance: $58,240

Claims paid by HUD: $26,467

Loss on sale incurred by HUD: $26,467

Summary:

US Bank’s underwriter (P043) did not adequately establish the co-borrower’s income stability.
The co-borrower was only employed for eight months at his current job after a four month gap in
employment. The underwriter did not obtain an explanation for the gap in employment. The co-
borrower’s credit report did not show any employment information and this discrepancy was not
investigated by US Bank.

The underwriter also overstated the co-borrower’s income by $126 per month by including
unverified overtime pay. This loan was also over insured by $144 due to differences between the
borrowers’ estimated closing costs and those actually paid at closing.




                                              39
Loan number: 201-3197655

Mortgage amount: $62,420

Section of Housing Act: 203 (b)

Date of loan closing: February 10, 2003

Status as of November 28, 2005: Foreclosure – property sold on August 22, 2005

Prior status: Not Applicable

Payments before first default reported: Nine

Unpaid principal balance: $61,043

Claims paid by HUD: $68,378

Loss on sale incurred by HUD: $35,859

Summary:

US Bank underwrote this loan using the Loan Prospector automated underwriting system, but
was reviewed by US Bank’s underwriter (X376). The borrower’s income entered into the
system was not verified with his employer and was not shown on his credit report in the loan’s
file. The borrower’s wages were not supported by the latest full month of pay statements. The
only pay statements in the loan’s file was for a two week period and they showed the borrower
only worked 15 hours per week. US Bank’s underwriter did not resolve this discrepancy. Based
on the wage documentation, the borrower’s income was overstated by $1,179 per month.

The reviewing underwriter did not obtain explanations or confirmations regarding the status of a
$315 per month car loan that the borrower claimed was paid off, or explanations for inquiries
and judgments shown on the borrower’s credit report.




                                               40
Loan number: 483-3412941

Mortgage amount: $168,084

Section of Housing Act: 203 (b)

Date of loan closing: January 9, 2004

Status as of November 28, 2005: Foreclosure – property sold on June 21, 2005

Prior status: Not Applicable

Payments before first default reported: Four

Unpaid principal balance: $166,020

Claims paid by HUD: $173,767

Loss on sale incurred by HUD: $29,881

Summary:

US Bank’s underwriter (O831) overstated the borrower’s income by $447 per month by using a
projected income on a compensation projection that did not identify the borrower’s employer or
the borrower rather than income supported by wage documentation. The underwriter did not
require or obtain any verification of employment from the borrower’s employer.

The underwriter did not obtain an explanation for a gap of approximately 45 days in employment
that was indicated by the borrower’s loan applications and payroll documentation in the loan’s
file.

The underwriter understated the negative rent on the borrower’s prior residence to be leased by
not considering the property taxes. The underwriter also incorrectly understated projected
housing expense by using the principal and interest due under the first year of a buy-down
agreement. This understated housing expense by $105 per month in the analysis of income
sufficiency.

The underwriter did not obtain an explanation for two recent credit inquiries shown on the
borrower’s credit report.




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