Issue Date July 31, 2006 Audit Report Number: 2006-CH-1014 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: National City Mortgage Company, Nonsupervised Lender, Miamisburg, Ohio, Did Not Comply with HUD’s Requirements Regarding Underwriting of Loans and Quality Control Reviews HIGHLIGHTS What We Audited and Why We audited National City Mortgage Company (National City), a nonsupervised lender approved to originate, underwrite, and submit insurance endorsement requests under the U.S. Department of Housing and Urban Development’s (HUD) single family-direct endorsement program. The audit was part of the activities in our fiscal year 2005 annual audit plan. We selected National City for audit as a continuation to our previous audit of its late requests for endorsement (see audit report 2005-CH-1015, dated August 23, 2005). Our objectives were to determine whether (1) National City complied with HUD’s regulations, procedures, and instructions for underwriting Federal Housing Administration loans and (2) its quality control plan met HUD’s requirements and was properly implemented. What We Found National City approved 20 of 41 Federal Housing Administration loans in our statistical sample that did not fully meet HUD’s requirements. The 20 loans defaulted early and/or went to claim between February 1, 2004, and August 31, 2005. The underwriting deficiencies were material as well as technical and included errors and documentation omissions clearly contrary to prudent lending practices. Further, National City incorrectly certified to the integrity of the data supporting the underwriting deficiencies and to the due diligence used in underwriting the 20 loans. While National City’s Federal Housing Administration lending decisions overall have proved well within acceptable risk levels, its quality control plan was not fully implemented during our audit period and may have contributed to the underwriting deficiencies. For the loans in question, the risk to the Federal Housing Administration fund was increased as HUD paid more than $94,000 in claims for two loans and incurred a loss of nearly $48,000 for another two loans. What We Recommend We recommend that HUD’s assistant secretary for housing-federal housing commissioner require National City to indemnify HUD for any future losses on nine loans with a total mortgage value of more than $1 million, reimburse HUD more than $94,000 for the claims paid on two loans once the associated properties are sold, reimburse HUD nearly $48,000 for the loss incurred on two loans since the properties were already sold, buy down two active loans by $2,900, improve its existing procedures and controls to ensure its underwriters follow HUD’s underwriting requirements, implement its quality control plan for reviewing loans with early payment defaults, and ensure that quality control reviews under its quality control plan are timely, accurate, and properly documented. We also 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 National City and/or its principals for the 20 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. Auditee’s Response We provided the results of our underwriting and quality control reviews to National City’s management during the audit. We also provided our discussion draft audit report to National City’s president, senior vice president, and vice president of operations risk asset management and HUD’s staff during the audit. We conducted an exit conference with National City’s management on June 1, 2006. 2 We asked National City’s president to provide written comments on our discussion draft audit report by July 3, 2006. National City’s president provided written comments to the discussion draft report dated June 30, 2006. National City generally disagreed with our findings, but agreed with finding 2’s recommendations. The complete text of the written comments, except for four attachments that were not necessary to understand the comments, along with our evaluation of that response, can be found in appendix B of this report. We provided HUD’s director of quality assurance division with a complete copy of National City’s written comments plus the four attachments. 3 TABLE OF CONTENTS Background and Objectives 5 Results of Audit Finding 1: National City’s Underwriting of 20 Federal Housing Administration Loans Contained Deficiencies 6 Finding 2: National City Did Not Always Perform Adequate Quality Control 12 Reviews on Early Payment Defaulted Loans Scope and Methodology 15 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 21 C. Federal Requirements and National City’s Requirements 30 D. Summary of Underwriting Deficiencies 33 E. Summary of Quality Control Deficiencies Using HUD’s Requirements 34 F. Summary of Quality Control Deficiencies Using National City’s Requirements 35 G. Narrative Case Presentations 36 4 BACKGROUND AND OBJECTIVES National City Mortgage Company (National City), a division of National City Bank of Indiana, is headquartered in Miamisburg, Ohio. In May 1955, the Federal Housing Administration approved National City as a nonsupervised direct endorsement lender to originate Federal Housing Administration-insured loans. As a direct endorsement lender, National City determines that the proposed mortgage is eligible for insurance under the applicable program regulations and submits the required documents to U.S. Department of Housing and Urban Development (HUD) without its prior review of the origination and closing of the mortgage loan. National City is responsible for complying with all applicable HUD regulations and handbook instructions. As of July 24, 2006, National City had 113 loan correspondents, 314 principals, and 138 authorized agents. National City is a full service mortgage company, originating, marketing, and servicing loans. National City has 300 mortgage offices in 37 states as of July 2006. It also services the continental United States through its direct-to-consumer telephone and Internet preferred lending centers in Ohio and California. We audited National City as part of the activities in our fiscal year 2005 annual audit plan. We selected National City for audit as a continuation to our previous audit of its late requests for endorsement (see audit report 2005-CH-1015, dated August 23, 2005). Between February 1, 2004, and August 31, 2005, National City originated/sponsored 34,838 Federal Housing Administration loans totaling more than $4.5 billion in original mortgage amounts. Of these, 1,476 loans totaling more than $190 million in original mortgage amounts went to claim and/or the borrowers defaulted on their mortgage payments within the first six payments. National City’s default to claim rate was 2.18 percent for February 2004 through August 2005. Our objectives were to determine whether (1) National City complied with HUD’s regulations, procedures, and instructions in underwriting Federal Housing Administration loans and (2) its quality control plan met HUD’s requirements and was properly implemented. 5 RESULTS OF AUDIT Finding 1: National City’s Underwriting of 20 Federal Housing Administration Loans Contained Deficiencies National City approved 20 of 41 Federal Housing Administration loans in our statistical sample that did not fully meet HUD’s requirements. The 20 loans defaulted early and/or went to claim between February 1, 2004, and August 31, 2005. The underwriting deficiencies were material as well as technical and included errors and documentation omissions clearly contrary to prudent lending practices. Further, National City incorrectly certified to the integrity of the data supporting the underwriting deficiencies and to the due diligence used in underwriting the 20 loans. The problems occurred because National City lacked adequate procedures and controls over its underwriting of Federal Housing Administration-insured loans, and failed to implement its HUD-approved quality control plan. As a result of the improperly underwritten loans, the risk to the Federal Housing Administration fund was increased, and HUD paid more than $94,000 in claims for two loans and incurred a loss of nearly $48,000 for another two loans. Underwriting Deficiencies of Federal Housing Administration Loans National City sponsored and closed 34,838 Federal Housing Administration- insured loans totaling more than $4.5 billion between February 1, 2004, and August 31, 2005. Of these, 1,476 loans totaling more than $190 million in original mortgage amounts went to claim and/or the borrowers defaulted on their mortgage payments within the first six payments. Of the 1,476 loans, we statistically selected using EZ-Quant computer software 41 to review for compliance with HUD’s underwriting requirements. National City improperly underwrote 20 of the 41 loans reviewed with a total mortgage value of more than $2.6 million. Of the 20 loans, 10 were refinances and 10 were purchase loans. As of July 24, 2006, HUD had paid $94,372 in claims on two loans with underwriting violations, HUD lost $47,829 on two other loans since the properties were already sold, and five loans were paid in full. The remaining 11 loans hold active Federal Housing Administration insurance as of July 24, 2006. Excessive Debt-to-Income Ratios National City improperly approved two loans (case numbers 492-7198799 and 137-2892405) when the borrowers’ debt-to-income ratios exceeded HUD’s requirements and submitted them for insurance endorsement without valid 6 compensating factors. 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. However, National City approved the loans when the borrowers’ mortgage payments to effective income were 31.6 and 31.5 percent, respectively, without valid compensating factors. Delinquent Mortgage Accounts and Related Expenses For six refinanced loans (case numbers 381-7487573, 151-7563379, 261- 8815770, 023-1991951,483-3481641, and 292-4480217), National City included mortgage payments due and/or delinquent expenses when calculating the mortgage amounts for their new Federal Housing Administration loans. Although the borrowers had the current month’s mortgage payment due, there was no documentation in the loans’ casebinders or National City’s files to support that the payments or delinquent expenses were made before or at settlement. The mortgage payments, ranging from $485 to $1,583, were refinanced into the new loans. Credit Discrepancies National City did not comply with HUD’s credit report requirements. For two loans (case numbers 151-7671875 and 201-3401739), the borrowers did not provide adequate written explanations for the derogatory accounts identified on their credit reports. For one loan (case numbers 492-7198799), the casebinder contained a residential merged credit report that did not (1) include a detailed account of the borrowers’ employment history or a statement attesting to the certification of employment and date verified, and (2) verify the borrowers’ current employment and income. Underwriting Approval Conditions National City did not ensure that the borrowers satisfied their underwriting approval conditions. For six loans (561-8087045, 483-3481641, 561-8072040, 381-7487573, 031-3181600, and 023-1991951), the liabilities required to be paid and/or required documentation for loan approval were not documented in the loans’ casebinders or National City’s loan files. Inaccurate Documentation National City did not verify that a borrower provided accurate information before approving the loan. For loan number 492-7198799, the borrower’s prior address, the verification of employment form, and the utility company credit reference in 7 the borrower’s loan file were not accurate. When we contacted the borrower’s employer and the utility company, we were informed that the borrower was never employed by the company and utility service was never provided to the borrower’s residence. Also, the borrower’s prior address listed on such documentation as the uniform residential loan application and the verification of employment in the loan’s casebinder does not exist. Overstated/Unsupported Assets or Income National City did not properly assess income or employment history for two loans. For loan numbers 561-8072040 and 137-2892405, a two-year work history was not verified for the borrowers. For example, for loan number 137-2892405, the uniform residential loan application and the verfication of employment form showed the coborrower was employed for two years by her present employer. However, when we contacted the coborrower’s employer, we determined the coborrower was employed by the company for less than two years. Also, the coborrower’s employer reported that the coborrower’s employment information on the verification of employment form was not accurate. For loan number 151-7712123, overtime income was included in the borrower’s income calculation without National City developing an average of overtime and establishing an earnings trend. In accordance with HUD’s requirements, we excluded the income in our analysis and calculated the borrower’s debt-to-income ratio at 31.3 percent, which exceeds HUD’s requirement of 29 percent. For loan number 201-3401739, the borrower’s income was supported by a letter from the employer; however, the information reported did not correspond to the verification of employment form or the borrower’s actual earning statements obtained by National City. Using the borrower’s pay statements, we calculated the borrower’s monthly income as $3,207 which differs from the $3,791 amount listed on the mortgage credit analysis worksheet prepared by National City. Therefore, the borrower’s fixed payment-to-income ratio exceeded HUD’s requirements. Insufficient Gift Documentation For all 41 loans reviewed that received gift funds from a charitable organization, National City did not document the transfer of the funds in accordance with HUD’s requirements. We contacted the settlement/closing agents to obtain the missing documentation. For loan number 137-2900156, the borrower received an income and tax credit; however, there was no documention in the loan’s casebinder or National City’s file to support the credit. For loan number 137- 2892405, the borrower received a gift of equity without the relationship of the donor to the borrower being disclosed on the gift letter. 8 Overinsured Mortgages For six loans, National City overestimated the financing costs or unpaid principal balances, thereby exceeding HUD’s maximum insurable mortgage limit as outlined in Mortgagee Letter 2001-12 and HUD Handbook 4155.1, REV-5. These six loans were funded in the amount of $677,099 instead of the maximum amount of $671,570. Therefore, the six loans exceeded HUD’s maximum mortgage limit by $5,529. The following table identifies the overinsured loans. HUD later paid a claim from the Federal Housing Administration insurance fund for loan number 483-3481641. Mortgage Maximum Overinsured Loan number amount mortgage amount amount 483-3481641 $85,670 $85,149 $521 137-2840495 94,547 93,749 798 381-7487573 118,669 118,143 526 151-7653379 156,411 156,087 324 493-7780858 111,779 109,677 2102 261-8815770 110,023 108,765 1,258 Totals $677,099 $671,570 $5,529 Incorrect Underwriters’ Certifications Submitted to HUD Of the 20 improperly underwritten loans, 17 were underwritten manually and three were underwritten using an automated system. We reviewed the certifications for all 20 loans for accuracy. National City’s direct endorsement underwriters incorrectly certified the integrity of the data for three loans and that due diligence was used in underwriting the remaining 17 loans. After underwriting a loan using an automated underwriting system, HUD requires direct endorsement underwriters to certify the integrity of the data supplied for a lender used to determine the quality of the loans and that the loans were eligible for insurance. When underwriting a loan manually, HUD requires a direct endorsement lender to certify that it used due diligence and reviewed all assocated documents during the underwriting of a loan. Appendix C of this report provides details of federal requirements regarding the underwriting of Federal Housing Administration loans as well as a citation under the Program Fraud Civil Remedies Act. 9 National City’s Underwriting Procedures and Controls Inadequate National City needs to improve its existing procedures and controls over its underwriting of Federal Housing Administration-insured loans by implementing its HUD-approved quality control plan. Additionally, it needs to ensure that underwriters continue to receive necessary training on HUD’s underwriting requirements. Such procedures and controls should ensure the accuracy of National City’s underwriting certifications submitted to HUD. HUD’s Office of Inspector General (OIG) issued four prior audit reports on National City’s underwriting practices. The four reports were issued between August 2004 and September 2005 (see Followup on Prior Audits section in this report). The four reports include underwriting findings that are repeated in this report. Further, HUD’s Quality Assurance Division performed quality assurance reviews of National City in July 2004 and April, July, and August 2005. The reviews resulted in findings related to loan origination and underwriting. The underwriting deficiencies cited in this audit report, along with the prior OIG audits and HUD’s reviews, clearly demonstrate that National City’s existing underwriting procedures and controls need to be improved to ensure compliance with HUD’s requirements. As previously mentioned, National City incorrectly certified the integrity of the data or that due diligence was used in underwriting 20 loans. Using the 20 loans with incorrect certifications from the 41 we tested (26 active loans with $3,223,966 in outstanding mortgage amounts, four loans that HUD paid $492,466 in claims, three loans where the properties were sold and HUD lost $89,750, and eight loans paid in full as of July 24, 2006), we estimate the risk to the Federal Housing Administration to be at least $379,832 for the next year if National City does not improve its underwriting certification procedures and controls. Recommendations We recommend that HUD’s assistant secretary for housing-federal housing commissioner require National City to 1A. Indemnify HUD for any future losses on the nine loans with a total mortgage value of $1,027,177 cited in this finding. The estimated risk to the Federal Housing Administration insurance fund is $297,881. 1B. Buy down the two overinsured loans ($798 for loan number 137-2840495 and $2,102 for loan number 493-7780858) by $2,900. 10 1C. Reimburse HUD for any future losses from the $94,372 in claims paid on two loans (483-3481641 and 151-7712123) with a total mortgage value of $144,613 once the associated properties are sold. 1D. Reimburse HUD $47,829 for the actual losses it incurred on two loans (429-7198799 and 137-2900156) improperly underwritten since the associated properties were sold. 1E. Improve existing procedures and controls to ensure its underwriters follow HUD’s underwriting requirements. These procedures and controls include but should not be limited to implementing its HUD-approved quality control plan (see finding #2), continuing to provide training to its underwriters regarding HUD’s underwriting requirements to adequately resolve any discrepancies involving documentation associated with the loans, adequately supporting borrowers’ income, obtaining and reviewing documentation that adequately supports the borrowers’ income stability and expenses, including only the proper amounts when calculating the loan amounts to be funded, and providing effective oversight or monitoring of its underwriting certifications before submission to HUD. These procedures and controls should help reduce risks to the Federal Housing Administration fund by $379,832. 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 National City and/or its principals for incorrectly certifying the integrity of the data and/or that due diligence was exercised during the underwriting of the 20 loans. 11 Finding 2: National City Did Not Always Perform Adequate Quality Control Reviews on Early Payment Defaulted Loans National City did not adequately perform quality control reviews on loans that went into early payment defaults. It did not always ensure that reviews were performed accurately and in a timely manner and that review results were properly documented. The problems occurred because National City did not use its quality control plan when performing quality control reviews on the loans that defaulted within the first six payments. Further, in July 2005, when its early payment default quality control plan received HUD’s approval, National City did not monitor its staff’s quality control reviews. As a result, National City did not always minimize or prevent improper underwriting of loans, thus increasing the risk to the Federal Housing Administration insurance fund. Loan Universe and Sample Selections Using HUD’s Single Family Data Warehouse system, we identified 1,476 loans totaling more than $190 million in original mortgage amount that were sponsored or originated by National City and closed between February 1, 2004, and August 31, 2005. The loans went to claim and/or the borrowers defaulted within the first six payments. Of the 1,476 loans, we statistically selected using EZ-Quant computer software 41 loans to review National City’s compliance with HUD’s quality control requirements. Further, we obtained a listing of 399 loans from National City to identify the early payment default loans that were quality control reviewed after August 31, 2005. Of the 399 loans, we statistically selected using Audit Command Language computer software 39 loans to review National City’s compliance with its early payment default quality control plan and HUD’s quality control requirements. Inadequate Quality Control Reviews National City performed inadequate quality control reviews for loans that defaulted within the first six payments. National City uses the Loan Review System to review the underwriting performed on early payment defaulted loans. The Loan Review System checklist consists of a series of questions that require a yes, no, or not applicable answer. When we reviewed the results of National City’s quality control reviews, we determined that 33 of the 41 loans reviews (80.5 percent) were not adequately performed as follows: Thirty quality control review checklists did not contain responses to pertinent questions, 12 Six quality control reviews identified questions on the Loan Review System checklist that were incorrectly answered, and Four quality control loan reviews were not performed in a timely manner. Quality Control Reviews Performed under HUD- Approved Plan In July 2005, National City’s quality control plan for reviewing early payment defaults was approved by HUD. As previously mentioned, we statistically selected 39 loans that closed after August 31, 2005, and were reviewed after National City’s plan was approved. For the 39 loans, 27 (69.2 percent) contained deficiencies as follows: • Nine of the quality control review checklists indicate that the loans’ reviews were not performed in a timely manner, • Fourteen quality control review checklists contained discrepancies in their data, and • Fourteen quality control review checklists contained relevant questions that were marked incorrectly or not answered at all. Quality Control Process Inadequate National City did not implement its quality control plan’s procedures for reviewing loans that went to early payment default. In 2004, National City implemented the Loan Review System to efficiently review loans that defaulted within the first six payments. However, it did not use the procedures identified in its quality control plan because it believed the procedures were too stringent. In July 2005, National City established and HUD approved a supplemental plan in addition to its quality control plan for reviewing loans that defaulted within the first six months. Due to the delayed implementation of National City’s approved quality control plan, it cannot assure quality control reviews were performed in accordance with HUD’s requirements. Additionally, it did not adequately monitor the quality control reviews performed by its staff to ensure they were performed accurately and in a timely manner and were properly documented. As a result, National City did not always minimize or prevent improper underwriting of loans, thus increasing the risk to the Federal Housing Administration insurance fund. 13 Appendix E of this report provides a summary of the quality control deficiencies by National City using HUD’s requirements. Appendix F of this report provides a summary of the quality control deficiencies by National City using its requirements. Recommendations We recommend that HUD’s assistant secretary for housing-federal housing commissioner require National City to 2A. Implement its quality control plan for reviewing loans that are early payment defaults to ensure compliance with HUD’s requirements and the HUD-approved plan. 2B. Implement procedures and controls to ensure that reviews performed under its quality control plan are timely, accurate, and properly documented. 14 SCOPE AND METHODOLOGY We performed our audit work between August 2005 and March 2006. We conducted the fieldwork at National City’s Miamisburg, Ohio, office and HUD’s Chicago Regional Office. The audit covered the period of February 1, 2004, through August 31, 2005. We extended this period as necessary. We conducted the audit in accordance with generally accepted government auditing standards. To achieve our objectives, we relied on computer-processed data contained in HUD’s Single Family Data Warehouse and National City’s electronic data files. In addition, we interviewed HUD’s and National City’s management and staff, borrower’s employers. Further, we reviewed HUD’s rules, regulations, and guidance for the underwriting and quality control review of Federal Housing Administration loans. Using HUD’s data systems, we identified that National City originated/sponsored 34,838 Federal Housing Administration loans with closing dates from February 1, 2004, to August 31, 2005. The total mortgage value of these loans is more than $4.5 billion. Of these, 1,476 loans totaling more than $190 million in original mortgage amounts went to claim and/or the borrowers defaulted on their mortgage payments within the first six payments. Of the 1,476 loans, we statistically selected using EZ-Quant computer software 41 to review for compliance with HUD’s underwriting and quality control requirements. Our sampling criteria used a 90 percent confidence level, 15 percent estimated error rate, and a precision of plus or minus 10 percent. We also reviewed the certifications for all 20 loans that were improperly underwritten for accuracy. Further, we obtained a listing of 399 loans from National City to identify early payment defaults that were quality control reviewed after August 31, 2005. Of the 399 loans, we statistically selected using Audit Command Language computer software 39 loans to review National City’s compliance with its early payment default quality control plan and HUD’s quality control requirements. 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. • 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. 16 Significant Weaknesses Based on our audit, we believe the following items are significant weaknesses: • National City needs to implement adequate procedures and controls for underwriting and quality control reviewing Federal Housing Administration loans (see findings 1 and 2). • National City needs to implement its quality control plan for reviewing loans that are early payment defaults to ensure compliance with HUD’s requirements and its HUD-approved plan (see finding 2). 17 FOLLOWUP ON PRIOR AUDITS HUD’s OIG issued four prior audit reports on National City’s underwriting practices. The four reports include findings that are repeated in this report. All of the four reports’ findings/recommendations except for one were closed as of July 25, 2006. OIG report Status of number Issue date Findings recommendations National City did not comply with HUD’s underwriting 2005-SE-1002 December 16, 2004 requirements Closed Two branch offices of National City did not fully comply with HUD’s 2005-AT-1014 September 15, 2005 underwriting requirements Open National City failed to resolve questionable credit and employment documents when underwriting Federal Housing Administration 2005-LA-1006 August 10, 2004 loans Closed Inadequate loan origination practices resulted in approval of HUD Federal Housing Administration-insured loans 2001-NY-1004 August 23, 2001 for unqualified borrowers Closed The two most recent independent auditor’s reports for National City covered the years ending December 31, 2003 and 2004. Both reports resulted in no findings. In July 2004 and April, July, and August 2005, HUD’s Quality Assurance Division performed quality assurance reviews of National City. The reviews resulted in findings related to loan origination and underwriting. All of the findings were closed as of April 5, 2006. 18 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 $297,881(A) 1B $2,900 1C $94,372 1D 47,829 1E 379,832(B) Totals $50,729 $94,372 $677,713 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(A)/ “Funds to be put to better use” are estimates of amounts that could be used more efficiently if an Office of Inspector General (OIG) recommendation is implemented. This includes reductions in outlays, deobligation of funds, withdrawal of interest subsidy costs, costs not incurred by implementing recommended improvements, avoidance of unnecessary expenditures noted in preaward reviews, and any other savings which are specifically identified. Implementation of our recommendation to indemnify loans that were not originated in accordance with Federal Housing Administration requirements will reduce the Federal Housing Administration’s risk of loss to the insurance fund. The amount above reflects that, upon sale of the mortgaged property, the Federal Housing Administration’s average loss experience is about 29 percent of the claim amount based upon statistics provided by HUD. 3(B)/ In this instance, if National City implements our recommendation, it will reduce the risk to the Federal Housing Administration insurance fund for loans that do not meet HUD’s underwriting requirements and that have an incorrect underwriting certification and, instead will make available insurance funds for loans that meet HUD’s underwriting requirements. Once National City successfully improves its controls, this will be a recurring benefit. Our estimate reflects only the initial year of these recurring benefits 19 and reflects that, upon sale of the mortgaged property, the Federal Housing Administration’s average loss experience is about 29 percent of the claim amount based upon statistics provided by HUD. 20 Appendix B AUDITEE COMMENTS AND OIG’S EVALUATION Ref to OIG Evaluation Auditee Comments Auditee Comments 21 Auditee Comments 22 Auditee Comments Comment 1 Comment 2 Comment 3 23 Auditee Comments Comment 4 Comment 5 Comment 6 Comment 7 Comment 8 24 Auditee Comments Comment 9 25 Auditee Comments Comment 10 26 OIG Evaluation of Auditee Comments Comment 1 Although loan number 137-2892405 may have only exceeded one of HUD’s qualifying ratios by 1 percent, the coborrower’s income was not verified for the required two year period. When we contacted the coborrower’s employer, we were informed that information contained on the verification of employment form in the loan file was inaccurate, in particular the coborrower’s dates of employment. Therefore, the stability of the coborrower’s income was not properly assessed, and excluding this unstable income the qualifying ratio was exceeded by a greater percentage. Additionally, the mortgage credit analysis worksheet stated stable employment as the compensating factor. This compensating factor was not justifiable considering the coborrower’s income stability was not properly verified and the borrowers’ housing expense was going to increase by more than $300 monthly. Additionally, the borrowers had two judgments on their credit report that were not explained. We also did not remove the remaining loan 492-7198799 because based on our recalculation of the borrower’s income; HUD’s qualifying ratio was exceeded by more than 3 percent. Furthermore, the borrower’s address was not consistent throughout the file, and the credit reference letters, which contained another address for the borrower, was inaccurate. Additionally, the borrower’s employment was questionable. Comment 2 We disagree with National City’s comment regarding the over insurance of loan number 381-7487573. Based on our calculations, this loan was overinsured due to the inclusion of the overdue mortgage payment as indicated on the mortgage payoff statement. Further, the amount indicated on the HUD-1 settlement statement exceeds the amount on the payoff statement, which includes the payment that was currently due on the borrower’s prior mortgage. For loan number 292-4480217, no letter was provided for our review from the borrower explaining the delinquent mortgage account in the borrower’s loan file. The mortgage account was not current and the borrower received $250 at closing, instead of paying the amount due on the mortgage. We acknowledge that HUD has since permitted this practice on loans in late 2005; however, the loans selected for review closed before HUD allowed the inclusion of delinquent expenses in the financing for the refinanced loan. Comment 3 For loan number 521-6046673, we agree that even though the lender used the used a residential merged credit report that did not (1) include a detailed account of the borrowers’ employment history or (2) a statement attesting to the certification of employment and date verified, the borrower was rated acceptable using an automated underwriting system. Therefore, we removed the loan from this audit report. 27 OIG Evaluation of Auditee Comments Comment 4 According to the Notification of Loan Action-Approval forms contained in the borrowers’ files for loan numbers 561-8087045, 483-3481641, 023-1991951, and 381-7487573, as a condition for approval, the underwriters required that the mortgage payments currently due of the borrowers’ accounts be paid at or prior to closing; however, the payments were not made (see comment 2). For loan number 561-8072040, the the feedback certificate conditioned that the underwriter verify a two-year work history; however, the loan file did not contain evidence of this documentation. In addition, National City’s Quality Control Department reviewed the loan and cited the loan for the same underwriting deficiency. Without verfication of a two-year work history, the borrower’s income/job stability was not supported. Further, the borrowers’ income and value of their assets as inputted on the automated underwriting system was overstated. For loan number 031-3181600, we agree that HUD does not require collections to be paid; however, the collections/liabilities were included on the automated feedback certification as being paid when they were not. Additionally, the certificate required that documentation be included in the file to support the omission of these liabilties in the borrower’s debt reconciliation. Comment 5 We disagree with National City that loan number 492-7198799 does not contain inaccurate information. The credit references in the borrower’s file were not accurate. For instance, one of the credit references was from a utility company; however, we confirmed with the company that service was never provided to the borrower’s address and the person never had an account. Additionally, the borrower’s documentation, such as W-2s, loan application, credit references, and credit report, which did not contain any address, contained conflicting information. We also contacted the U.S. Postal Service to verify the varying addresses and were informed the borrower’s address does not exist. Also, we contacted the borrower’s employer and were informed the borrower never worked for the company. Comment 6 We disagree that three of the loans were supported. For loan numbers 561- 8072040 and 137-2892405, the lender did not verify a two-year work hsitory for the borrowers. For loan number 151-7712123, overtime income was included in the borrower’s income calculation without the underwriter developing an average of overtime and establishing am earnings trend to determine whether this income will more than likely continue for a least three years. Therefore, excluding the overtime income, this loan exceeds one of HUD’s qualifying ratios. Comment 7 National City’s response indicated that our audit report only cited one loan for insufficient gift documentation. However, our report cites two loans. Comment 8 See comment 2. 28 OIG Evaluation of Auditee Comments Comment 9 We agree that one of the loans in our draft audit report was counted twice; therefore, the number should be 36 instead of 37. We further reduced this number based on National City’s comments. We adjusted this report and appendix accordingly. National City contends that only 21 of the 30 Loan Review Data quality control review sheets contained unanswered questions; however, we disagree. All 30 loans contained unanswered questions, majority if not all, pertained to the Uniform Residential Loan Application, which is required to be reviewed for both refinance and purchase loans. According to National City, updates made to the loan review sheets changed some of the answers on the quality control sheets. Therefore, this is a weakness in National City’s system controls. National City’s inability to maintain documentation supporting its quality control reviews and its results do not comply with HUD’s quality control requirements. All of the questions contained of the Loan Review System checklist serve as a control mechanism to ensure underwriting deficiencies are minimal. Therefore, questions answered incorrectly or not at all reduce the effectiveness of the quality control system. We agree that two of the six quality control reviews were performed timely; therefore, we removed them for this audit report. However, the remaining four remained in this report. Additionally, we also agree that the one quality control checklist was completed within acceptable timeframes. This audit report was adjusted to reflect the one checklist. Comment 10 Based on the information provided, we reduced the number of loans included in this audit report as being reviewed untimely to nine. We disagree with National City regarding the 14 quality control review sheets that contained inaccurate/data discrepancies, and the 14 loan review sheets that contained questions that were marked incorrectly or not at all. The Loan Review System, if used correctly, would prevent some of the underwriting errors; therefore, the questions contained on the sheet should all be answered. 29 Appendix C FEDERAL REQUIREMENTS AND NATIONAL CITY’S REQUIREMENTS Loan Underwriting Requirements Mortgagee Letter 2001-12, dated May 7, 2001, provides mortgage amount calculations for streamlined refinances. The mortgagee letter states that borrowers are expected to make their monthly mortgage payments when due even when refinancing, and it is not appropriate to include in the new mortgage amount the sum of any mortgage payments “skipped” by the homeowner. Borrowers are not permitted to roll payments due into the new Federal Housing Administration loan amount. Borrowers must make the payment due or bring the mortgage payment check to settlement. HUD Handbooks 4155.1, REV-4, CHG-1, chapter 1, section 1-12 (d)(7), and REV-5, section 1- 12 (d)(6), state that delinquent mortgages are generally not eligible for streamline refinancing until the loan is brought current; however, if two months or less delinquent, the lender may pay the mortgage current providing the borrower is under no obligation to repay the funds used to bring the mortgage current. Chapter 2, section 2-3, of the handbooks 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 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 explanation for all credit report inquiries. Chapter 2, section 2-7(a), of the handbooks states 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 lender must develop an average of bonus or overtime income for the past two years and the employment verification must not state that such income is unlikely to continue. Periods of less than two years may be acceptable provided the lender justifies and documents in writing the reason for using the income for qualifying purposes. Chapter 2, section 3, paragraph 2-10, of the handbooks states that all funds for the borrower’s investment in the property must be verified and documented. Paragraph 2-10c states that the lender must document the gift funds by obtaining a gift letter signed by the donor and borrower that specifies the dollar amount of the gift; states that no repayment is required; shows the donor’s name, address, and telephone number; and states the nature of the donor’s relationship to the borrower. In addition, the lender must document the transfer of funds from the donor to the borrower. 30 Chapter 2, section 5, paragraph 2-12, of the handbooks states that debt to equity ratios are used to determine whether the borrower can reasonably be expected to meet the expenses involved in homeownership. If the mortgage payment expense-to-effective income ratio exceeds 29 percent and/or the total fixed payment-to-effective income exceeds 41 percent, significant compensating factors should be documented and recorded on the mortgage credit analysis worksheet. Quality Control Requirements HUD Handbook 4060.1, REV-1, “Mortgagee Approval Handbook,” chapter 6, requires • The quality control plan to be in writing. Lenders must have fully functioning quality control programs from the date of their initial Federal Housing Administration approval until final surrender or termination of the approval. • Quality control of servicing must be an ongoing function. Due to the importance of the aspects of servicing, lenders must perform monthly reviews of delinquent loan servicing, claims, and foreclosures. • The quality control program must provide for the review and confirmation of information on all loans selected for review. • A new credit report must be obtained for each borrower whose loan is included in a quality control review unless the loan was a streamline refinance or was processed using a Federal Housing Administration-approved automated underwriting system that is exempted from this requirement. • Documents contained in the loan file should be checked for sufficiency and subjected to written reverification. Examples include the borrower’s employment or other sources of income, deposits, gift letters, alternate credit sources, rent payments, and other sources of funds. • Each direct endorsement loan selected for a quality control review must be reviewed for compliance with HUD’s underwriting requirements, sufficiency of documentation, and soundness of the underwriting. • Each loan selected for quality control review must be reviewed to determine whether required conditions were met before closing, and the quality control review report and followup, including review findings and actions taken plus procedural information, must be retained by the lender for a period of two years. National City’s Early Payment Default Quality Control Plan Requirements National City’s servicing department generates a report for the Fidelity Servicing system to identify all loans that went 60 days delinquent within the first six payments. All government loans that are 60 days delinquent are targeted for review, and the selection of the loans is based solely upon the timing of the defaults. The purpose of the review of the early payment default is 31 to evaluate the accuracy, validity, and completeness of the loan’s origination operation and note any patterns of deficiencies. The review process includes verifying the accuracy of the residential loan application as compared to the documents in the loan file; comparing the new credit report to the original credit report in the file and noting any discrepancies or additional debts to aid in the determination of the delinquency; verifying the automated underwriting system findings as compared to the documents in the file; verifying that the underwriting conditions are documented in the loan file; verifying the accuracy of the income and assets as compared to documents in the loan file; performing verbal reverification of employment for the borrower/coborrower and if unobtainable, forwarding a written verification of employment to the employer; verifying the accuracy of the purchase contract as compared to documents in the loan file; reviewing the appraisal for issues using the history pro/prefunding report and if discrepancies are noted, ordering automated value models; and verifying unallowable service fees and requesting refund to borrower if applicable. All loans are rated good, average, or poor based on the investment quality standards. The reviewer is responsible for completing the loan review detail report. This report will include results of the review and possible general comments as a result of findings. The early payment default does not seek missing documentation, which may affect the final review results. All loans suspected of possible fraud are forwarded to National City’s special investigative unit. Each early payment default review will include a Loan Review System detailed audit report, all re-verification documents, an updated credit report, and a prefunding report of automated value models if applicable. 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 UNDERWRITING DEFICIENCIES Skipped mortgage payment or Overstated/ included unsupported Determine Over- Mortgage Underwriting Insurance Amount Exceed unallowable Credit Inaccurate assets or income insured Loan number amount method status of claim ratios expenses issues documentation income stability loan 241-7423366 $69,882 Manual Paid X X 483-3481641 85,670 Manual Claim $30,103 X X 561-8072040 223,300 Automated Paid X X 492-7198799 97,470 Manual Claim 103,780 X X X 352-5189728 169,302 Manual Paid X X X 151-7671875 120,785 Manual Active X X 137-2840495 94,547 Manual Active X 381-7487573 118,669 Manual Active X X 151-7563379 156,411 Manual Active X X 137-2892405 154,812 Manual Active X X 201-3401739 103,279 Manual Active X X 493-7780858 111,779 Manual Active X 241-7453453 207,973 Manual Paid X 031-3181600 70,887 Automated Active X 561-8087045 203,453 Manual Paid X 137-2900156 89,483 Automated Claim 99,908 X 261-8815770 110,023 Manual Active X X 023-1991951 115,517 Manual Active X 151-7712123 58,943 Manual Claim 64,269 X 292-4480217 76,794 Manual Active X Totals $2,438,979 $298,060 4 7 5 1 7 1 8 33 Appendix E SUMMARY OF QUALITY CONTROL DEFICIENCIES USING HUD’S REQUIREMENTS All relevant Untimely questions Questions quality Loan were not answered control number answered incorrectly review 031-3181600 X 521-6046673 X 137-2892405 X X 261-8815770 X 493-7790021 X 151-7549007 X 241-7453453 X 137-2840495 X 151-7563379 X X 137-2900156 X X 352-5242195 X X 201-3401739 X 381-7487573 X X 151-7671875 X 493-7780858 X 151-7585368 X 105-1750980 X 581-2602152 X 461-3916389 X 352-5189728 X 271-9085200 X 249-4949210 X X 521-5939934 X 241-7423366 X 352-5214897 X 151-7712123 X 023-1947964 X 492-7198799 X X 561-8072040 X 132-1762615 X 052-3525382 X 052-3501334 X 105-1764451 X Totals 30 6 4 34 Appendix F SUMMARY OF QUALITY CONTROL DEFICIENCIES USING NATIONAL CITY’S REQUIREMENTS Untimely quality Questions answered control Data incorrectly/did not answer Loan number review discrepancies all relevant questions 052-3333828 X X 161-2119111 X 411-3852924 X 023-2155918 X X 381-7674151 X 372-3160787 X X X 095-0038635 X X 261-8890867 X 571-0731929 X 052-3619024 X X 541-7200743 X 151-7813964 X 052-3621273 X 262-1573029 X X 137-3129369 X 151-7806141 X 137-3191019 X 052-3653303 X 413-4373100 X 052-3295476 X X 031-3172065 X 561-8108066 X 261-8793357 X X 531-0221192 X X 441-7614348 X 441-3819278 X 352-5189366 X Totals 9 14 14 35 Appendix G NARRATIVE CASE PRESENTATIONS Loan number: 241-7423366 Mortgage amount: $69,882 Section of Housing Act: 203(b) Date of loan closing: May 19, 2004 Status as of April 5, 2006: Terminated, paid in full Prior status: Active Payments before first default reported: Not available Summary: National City’s underwriter (AZ97) over estimated the financing costs; therefore, the loan was overinsured by more than $856. At settlement, the borrower was provided with a credit to his escrow accounts. This credit reduced the amount of prepaid expenses due for the loan. Additionally, the borrower was not current with his prior mortgage payments. According to the payoff statement in the borrower’s loan file, the loan was current, and the May 1, 2004, payment was not due. However, at settlement, the amount due to payoff the prior mortgage included the May 1, 2004, principal and interest payments. The borrower did not pay any funds at closing and received cash back in the amount of $200. 36 Loan number: 483-3481641 Mortgage amount: $85,670 Section of Housing Act: 203(b) Date of loan closing: September 24, 2004 Status as of July 24, 2006: Claim Prior status: Active Payments before first default reported: Five Claim paid by HUD: $30,103 Summary: National City’s underwriter (O001) overestimated the financing costs; therefore, the loan was overinsured by more than $521. Additionally the payoff amount from the prior mortgage listed on the HUD-1 settlement statement included delinquent expenses and late charges. The borrower paid money at closing; however, the amount of funds was not sufficient to pay the delinquent charges from the prior mortgage. 37 Loan number: 561-8072040 Mortgage amount: $223,300 Section of Housing Act: 203(b) Date of loan closing: August 30, 2004 Status as of July 24, 2006: Terminated, paid in full Prior status: Not applicable Payments before first default reported: Not available Summary: National City underwrote this loan using Fannie Mae’s Desktop automated underwriting system. The automated feedback certificate listed conditions for approval that included providing documentation to support the borrower’s employment for the most recent full two years. However, when we reviewed the loan’s files, we determined that the underwriter did not verify or provide documentation to support the borrower’s employment history. Therefore, the lender did not verify the borrower’s income stability. Additionally, the borrower’s assets were overstated. The automated underwriting system indicated that the borrower had $1,164 in available assets; however, the borrower’s bank account in National City’s and HUD’s files listed the borrower’s assets as $615. Further, the coborrower’s income was overstated and the information entered in the automated underwriting system was not accurate. 38 Loan number: 492-7198799 Mortgage amount: $97,470 Section of Housing Act: 203(b) Date of loan closing: May 21, 2004 Status as of July 24, 2006: Claim Prior status: Active Payments before first default reported: One Claim paid by HUD: $103,780 Loss to HUD: $20,473 Summary: National City’s underwriter (AK25) approved this loan, which contained significant underwriting deficiencies. The borrower’s file contained a residential merged credit report or a factual data credit report that did not provide a detailed account of the borrower’s employment history, contain verification of the borrower’s current employment and income (if obtainable), and include a statement attesting to the certification of employment and date verified in accordance with HUD Handbook 4155.1, REV-5. Further, although the borrower’s spouse was a nonpurchaser, her liabilities must be included in the calculation of the qualifying ratios. The credit report obtained for the coborrower did not comply with the credit report requirements outlined in HUD Handbook 4155.1, REV-5. In particular, the credit report did not contain a valid Social Security number. The borrower’s qualifying ratios without the inclusion of the coborrower’s debt exceeded HUD’s effective payment-to-income ratio by 2.25 percent. Additionally, the borrower’s previous homes address was not accurate. We determined the address listed for the borrower does not exist; however, there was a verification of rental history form in the loan’s file. The borrower did not have a credit history so he provided a letter from a utility company to show he made the required payments in a timely manner; however, when we contacted the company, we were informed that service was never provided to the borrower’s address as identified on the letter. When we reverified the borrower’s employment, we were informed by the office manager that the borrower was never employed by the company. 39 Loan number: 352-5189728 Mortgage amount: $169,302 Section of Housing Act: 203(b) Date of loan closing: March 5, 2004 Status as of April 5, 2006: Terminated, paid in full Prior status: Not applicable Payments before first default reported: Five Summary: National City’s underwriter (L778) did not document compensating factors for exceeding the income ratios. Additionally, the borrower did not provide evidence that all of the collection and judgment accounts were paid off before closing. The borrower also did not provide written explanations for the judgment accounts. National City did not document the gift funds by obtaining a gift letter signed by the donor and the borrower. Additionally, the gift letter did not state that no repayment was required. Although the gift letter identified the borrower, it did not provide the borrower’s address and telephone number. Further, National City did not document the transfer of funds from the donor to the borrower. The borrower’s income was overstated, which resulted in the income ratios, which already exceeded HUD’s requirement, to be even higher. The coborrower’s income was inflated due to the inclusion of overtime income; however, National City did not develop an average of bonus or overtime income for the past two years or justify and document in writing the reason for using the income for qualifying purposes in accordance with HUD Handbook 4155.1, REV-5. 40 Loan number: 151-7671875 Mortgage amount: $120,785 Section of Housing Act: 203(b) Date of loan closing: August 18, 2004 Status as of July 24, 2006: Active Prior status: Not applicable Payments before first default reported: Four Summary: National City’s underwriter (P396) did not obtain written explanations from the borrower for the collections and judgments identified on the borrower’s credit report. According to HUD’s requirements, major indications of derogatory credit including judgments, collections, and any recent credit problems require sufficient written explanation from the borrower. The borrower must explain in writing all collections and judgments. Additionally, the verification of deposit form used to support to borrower’s downpayment was not accompanied by a bank statement. According to HUD Handbook 4155.1, REV-5, verification of deposit, along with the most recent bank statement, may be used to verify savings and checking accounts. 41 Loan number: 137-2840495 Mortgage amount: $94,547 Section of Housing Act: 203(b) Date of loan closing: February 2, 2004 Status as of July 24, 2006: Active Prior status: Not applicable Payments before first default reported: Not available Summary: National City’s underwriter (N208) included inappropriate expenses in the calculation of the mortgage amount; therefore, the inclusion of these expenses, such as commitment fees and overdue taxes, resulted in the loan being overinsured by more than $785. 42 Loan number: 381-7487573 Mortgage amount: $118,669 Section of Housing Act: 203(b) Date of loan closing: September 20, 2004 Status as of April 5, 2006: Refinanced Prior status: Active Payments before first default reported: Not available Summary: The borrower’s prior mortgage loan was due for the next payment. The payoff amount indicated on the HUD-1 settlement statement included the payment that was due on the prior loan. Instead of the borrower paying the prior mortgage payment at closing, the amount was netted against the new insured mortgage amount. Additionally, National City’s underwriter (AZ97) wrote on the notification of loan action form that the September 2004 payment must be made at/before closing. The loan file did not contain any documentation to determine that the payment was made. Also, this loan was overinsured by more than $526 due to the underwriter’s overestimation of the financing costs. 43 Loan number: 137-2892405 Mortgage amount: $154,812 Section of Housing Act: 203(b) Date of loan closing: February 24, 2004 Status as of July 24, 2006: Active Prior status: Not applicable Payments before first default reported: Not available Summary: National City’s underwriter (T398) did not provide sufficient compensating factors for exceeding one of HUD’s qualifying ratios. It stated on the mortgage credit analysis worksheet that the borrower had stable employment. Although this may have been accurate, it was not a justifiable compensating factor since the borrower’s housing expense was going to increase from the amount the borrower paid for rental expenses. When we reverified the coborrower’s employment, we were informed that some of the salary information provided on the form was not completed by her, such as the date of the coborrower’s salary increase and the coborrower’s start date. Therefore, using the employment date provided by the employer, we determined that National City did not verify a two-year period of employment history for the coborrower. The borrowers had two judgments identified on their credit report. One of the judgments was satisfied; however, there was no documentation in the loan file to determine that the other judgment was also satisfied. The borrowers did not provide written explanations for both of the judgment accounts. 44 Loan number: 201-3401739 Mortgage amount: $103,279 Section of Housing Act: 203(b) Date of loan closing: June 29, 2004 Status as of July 24, 2006: Active Prior status: Not applicable Payments before first default reported: 10* Summary: National City’s underwriter (U640) did not properly determine the borrower’s income. The underwriter used a written letter from the borrower’s employer to determine the borrower’s income. However, the borrower’s earnings statements and verification of employment form, also completed by another person at the same company, identified two different amounts. The underwriter did not resolve the inconsistencies with the borrower’s employer. Therefore, using the start date indicated on the verification of employment form and the borrower’s earnings statements, we determined the borrower’s income was overstated. The borrower’s credit report identified collection accounts and a civil judgment. However, the borrower did not provide any written documentation to explain the collections and the judgment. • - In HUD’s Neighborhood Watch system, this loan is not reported as an early payment default. However, in HUD’s Single Family Data Warehouse system and National City’s Loan Review System, the loan is reported as an early payment default. 45 Loan number: 493-7780858 Mortgage amount: $111,779 Section of Housing Act: 203(b) Date of loan closing: April 30, 2004 Status as of July 24, 2006: Active Prior status: Not Applicable Payments before first default reported: 13* Summary: The loan was overinsured by more than $2,100. At closing, National City provided the borrower with a credit to closing expenses; however, this credit was not included on the mortgage credit analysis worksheet when National City’s underwriter (7777) determined the maximum insurable mortgage amount for this loan. * - In HUD’s Neighborhood Watch system, this loan is not reported as an early payment default. However, in HUD’s Single Family Data Warehouse system and National City’s Loan Review System, the loan is reported as an early payment default. 46 Loan number: 241-7453453 Mortgage amount: $207,973 Section of Housing Act: 203(b) Date of loan closing: April 26, 2004 Status as of April 5, 2006: Terminated, paid in full Prior status: Active Payments before first default reported: Not available Summary: National City’s underwriter (AZ97) overestimated the maximum mortgage amount for this streamline refinanced loan. The principal payoff amount due on the prior mortgage was overestimated; therefore, the loan was overinsured by more than $698. The borrower received $450 cash back when the maximum amount that the borrower can receive on a streamline refinance is $250. According to HUD’s requirements, streamline refinances are designed to lower the monthly principal and interest payments on a current Federal Housing Administration-insured mortgage and must not involve cash back to the borrower, except for minor adjustment at closing not to exceed $250. 47 Loan number: 031-3181600 Mortgage amount: $70,887 Section of Housing Act: 203(b) Date of loan closing: May 28, 2004 Status as of July 24, 2006: Active Prior status: Not applicable Payments before first default reported: 12* Summary: This loan was underwritten using an automated underwriting system, Fannie Mae Desktop. All of the collections listed on the automated underwriting feedback certificate as needing to be paid were not. The borrowers received gift funds from a parent; however, the gift funds were not properly documented. For instance, the source of funds and the transfer of the funds were not disclosed. * - In HUD’s Neighborhood Watch system, this loan is not reported as an early payment default. However, in HUD’s Single Family Data Warehouse system and National City’s Loan Review System, the loan is reported as an early payment default. 48 Loan number: 561-8087045 Mortgage amount: $203,453 Section of Housing Act: 203(b) Date of loan closing: October 08, 2004 Status as of April 5, 2006: Terminated, paid in full Prior status: Active Payments before first default reported: Three Summary: National City’s underwriter (5525) underwrote the loan when one of HUD’s qualifying ratios was exceeded and did not provide compensating factors. The borrower provided bank statements for two months; however, the ending balance recorded on the first month’s statement was not the beginning balance on the next month’s statement. The verification of deposit in National City’s file was for a recently opened account. The borrower did not provide explanations for the bank statements and the source of funds for the recently opened account, which was opened four days before the loan closed. 49 Loan number: 137-2900156 Mortgage amount: $89,483 Section of Housing Act: 203(b) Date of loan closing: March 19, 2004 Status as of July 24, 2006: Claim Prior status: Active Payments before first default reported: Five Claim paid by HUD: $99,908 Loss to HUD: $27,356 Summary: This loan was underwritten using an automated underwriting system, Fannie Mae’s Loan Prospector. The borrower’s file did not contain any documentation to support the downpayment assistance provided to the borrower in the amount of $3,803 or a tax credit in the amount of $2,750. Without the supporting documentation, the borrower did not have enough funds to close. 50 Loan number: 261-8815770 Mortgage amount: $110,023 Section of Housing Act: 203(b) Date of loan closing: August 25, 2004 Status as of July 24, 2006: Active Prior status: Not applicable Payments before first default reported: Not available Summary: National City’s underwriter overestimated the financing costs; therefore, this loan exceeded HUD’s maximum mortgage amount. Due to the overestimation, this loan was overinsured by more than $1,258. The borrower did not make the prior mortgage payment that was due before or at the settlement closing. Before closing on the new mortgage, the borrower was due for the current month’s mortgage payment. The amount listed on the borrower’s payoff statement included the current month’s mortgage payment, and when the loan settled, the amount listed on the HUD-1 settlement statement included the principal and interest payment for current month. The borrower did not pay any money at closing, and the borrower’s file did not indicate that the borrower made this payment before closing. 51 Loan number: 023-1991951 Mortgage amount: $115,517 Section of Housing Act: 203(b) Date of loan closing: February 13, 2004 Status as of July 24, 2006: Active Prior status: Not applicable Payments before first default reported: Not available Summary: National City’s underwriter (O112) approved this loan without determining whether the borrower made the payment that was currently due on his previous Federal Housing Administration-insured mortgage. The payoff amount listed on the HUD-1 settlement statement included interest payments for January and February 2004; therefore, the borrower did not make his mortgage payment before closing. The borrower paid $892 and received $15 at closing as reflected on the HUD-1 settlement statement. This amount does not accurately represent the monthly mortgage payment amount of $938 as shown on the borrower’s mortgage credit report. 52 Loan number: 151-7712123 Mortgage amount: $58,943 Section of Housing Act: 203(b) Date of loan closing: August 25, 2004 Status as of July 24, 2006: Claim Prior status: Not applicable Payments before first default reported: One Claim paid by HUD: $64,269 Summary: National City’s underwriter (U674) used overtime income in the borrower’s income calculation without averaging the income over a two-year period or establishing an earnings trend for the income. Therefore, we excluded the borrower’s overtime income and determined HUD’s qualifying ratio was exceeded by 2.3 percent. 53 Loan number: 292-4480217 Mortgage amount: $76,794 Section of Housing Act: 203(b) Date of loan closing: April 20, 2004 Status as of July 24, 2006: Active Prior status: Not applicable Payments before first default reported: Not available Summary: National City’s underwriter (N748) did not ensure that the borrower made the prior mortgage payment that was due before or at the settlement. Before closing on the new mortgage, the borrower was due for the prior mortgage’s April 2004 payment. The amount listed on the borrower’s payoff statement included the April 2004 mortgage payment, and when the loan settled, the amount listed on the HUD-1 settlement statement included the principal and interest for the prior mortgage’s April 2004 payment. The borrower received cash back at closing in the amount of $250. 54 Loan number: 151-7563379 Mortgage amount: $156,411 Section of Housing Act: 203(b) Date of loan closing: April 30, 2004 Status as of July 24, 2006: Active Prior status: Not applicable Payments before first default reported: Not available Summary: National City’s underwriter (AR96) approved this loan without determining whether the borrower made the payment that was currently due on his previous Federal Housing Administration-insured mortgage. The payoff dated April 21, 2004, indicated that the loan was due for the April 1, 2004 payment. However, the payoff amount shown on the HUD-1 settlement statement included the due payment of $880 and late charges of $47. 55
National City Mortgage Company, Nonsupervised Lender, Miamisburg, Ohio, Did Not Comply with HUD's Requirements Regarding Underwriting of Loans and Quality Control Reviews
Published by the Department of Housing and Urban Development, Office of Inspector General on 2006-07-31.
Below is a raw (and likely hideous) rendition of the original report. (PDF)