oversight

Community Central Bank, Supervised Lender, Mount Clemens, Michigan, Generally Complied with HUD's Requirements Regarding Underwriting of Loans but Not Its Quality Control Reviews

Published by the Department of Housing and Urban Development, Office of Inspector General on 2006-09-26.

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

                                                               Issue Date
                                                                       September 26, 2006
                                                               Audit Report Number:
                                                                       2006-CH-1017




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: Community Central Bank, Supervised Lender, Mount Clemens, Michigan,
           Generally Complied with HUD’s Requirements Regarding Underwriting of
           Loans but Not Its Quality Control Reviews

                                  HIGHLIGHTS

 What We Audited and Why

            We audited Community Central Bank (Community Central), 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 2006 annual audit plan. We selected Community Central for audit
            because of its high default to claim rate. Our objectives were to determine
            whether (1) Community Central complied with HUD’s regulations, procedures,
            and instructions in the underwriting Federal Housing Administration-insured
            loans and (2) Community Central’s quality control plan, as implemented, met
            HUD’s requirements.

 What We Found

            Community Central generally complied with HUD’s requirements for underwriting
            Federal Housing Administration loans. However, it approved 3 of 29 Federal
            Housing Administration loans reviewed that did not fully meet HUD’s requirements.
            The three loans defaulted early and/or went to claim between October 1, 2003, and
           September 30, 2005. Further, Community Central incorrectly certified to the due
           diligence used in underwriting the three loans. During the audit period, Community
           Central’s quality control plan did not comply with HUD’s requirements, and quality
           control reviews were not performed in a timely manner. Its deficient quality control
           may have contributed to the underwriting deficiencies. For the loans in question, the
           risk to the Federal Housing Administration fund was increased.

What We Recommend


           We recommend that HUD’s assistant secretary for housing-federal housing
           commissioner require Community Central to indemnify HUD for any future
           losses on two loans with a total mortgage value of more than $140,000, reimburse
           HUD any future net loss once the associated property is sold, and ensure that
           quality control reviews under its quality control plan are timely 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 Community Central and/or
           its principals for the three 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
           Community Central’s management during the audit. We also provided our
           discussion draft report to Community Central’s president and chief executive
           officer and HUD’s staff during the audit. We conducted an exit conference with
           Community Central’s vice president on September 15, 2006.

           We asked Community Central’s president and chief executive officer to provide
           written comments on our discussion draft by September 27, 2006. Community
           Central’s vice president provided comments to the discussion draft dated,
           September 13, 2006. Community Central generally agreed with finding 1 and
           agreed with finding 2. The complete text of the auditee’s response, along with
           our evaluation of that response, can be found in appendix B of this report.




                                             2
                            TABLE OF CONTENTS

Background and Objectives                                                         4

Results of Audit

        Finding 1: Community Central Generally Complied with HUD’s Underwriting
                   Requirements.
                                                                                  5
        Finding 2: Community Central Did Not Fully Comply with HUD’s Quality
                   Control Requirements                                           9

Scope and Methodology                                                             12

Internal Controls                                                                 13

Followup on Prior Audits                                                          15

Appendixes
   A.   Schedule of Questioned Costs and Funds to Be Put to Better Use            16
   B.   Auditee Comments and OIG’s Evaluation                                     17
   C.   Federal Requirements and Community Central’s Requirements                 21
   D.   Summary of Quality Control Deficiencies Using HUD’s Requirements          24
   E.   Narrative Case Presentations                                              25




                                            3
                     BACKGROUND AND OBJECTIVES

Community Central Bank’s (Community Central) headquarters is located in Mount Clemens,
Michigan, and it was founded in 1996. It operates two branches serving consumers, small to
midsized businesses, and government entities in Mount Clemens and Rochester Hills, Michigan.
In February 2002, the U.S. Department of Housing and Urban Development (HUD) approved
Community Central as a supervised direct endorsement lender to originate Federal Housing
Administration-insured loans. As a direct endorsement lender, Community Central determines
that the proposed mortgage is eligible for insurance under the applicable program regulations and
submits the required documents to HUD without its prior review of the origination and closing of
the mortgage loan. Community Central is responsible for complying with all applicable HUD
regulations and handbook instructions.

As of September 25, 2006, Community Central had five loan correspondents and two authorized
agents. Community Central is primarily a retail residential lender offering Federal Housing
Administration, U.S Department of Veterans Affairs, and conventional mortgage financing. It
also sponsors the Federal Housing Administration loans that its mortgage company (Community
Central Mortgage Company) originates.

We audited Community Central as part of the activities in our fiscal year 2006 annual audit plan.
Between October 1, 2003, and September 30, 2005, Community Central originated/sponsored
754 Federal Housing Administration loans totaling more than $80 million in original mortgage
amounts. Of these, 54 loans totaling more than $5.1 million in original mortgage amounts went
to claim, and/or the borrowers defaulted on their mortgage payments within the first six
payments. Community Central’s default to claim rate was 12.53 percent for October 2003
through September 2005.

Our objectives were to determine whether (1) Community Central complied with HUD’s
regulations, procedures, and instructions in the underwriting Federal Housing Administration-
insured loans and (2) Community Central’s quality control plan, as implemented, met HUD’s
requirements.




                                                4
                                 RESULTS OF AUDIT

Finding 1: Community Central Generally Complied with HUD’s
                   Underwriting Requirements
Community Central generally complied with HUD’s underwriting requirements for Federal
Housing Administration loans. However, before Community Central improved its underwriting
procedures, it approved 3 of 29 Federal Housing Administration loans reviewed that did not fully
meet HUD’s requirements. The three loans defaulted early and/or went to claim between October
1, 2003, and September 30, 2005. The underwriting deficiencies were material as well as technical
and included errors and documentation omissions clearly contrary to prudent lending practices.
Further, Community Central incorrectly certified to the due diligence used in underwriting the three
loans. The problems occurred because Community Central lacked adequate procedures and
controls over its underwriting of Federal Housing Administration-insured loans and did not have a
quality control plan that complied with HUD’s requirements (see finding 2). As a result of the
improperly underwritten loans, the risk to the Federal Housing Administration fund was increased,
and HUD paid more than $78,000 for a claim on one loan.


 Underwriting Deficiencies of
 Federal Housing
 Administration Loans

               Using HUD’s Single Family Data Warehouse system, we determined that
               Community Central sponsored 754 Federal Housing Administration-insured loans
               totaling more than $80 million between October 1, 2003, and September 30, 2005.
               Of these, nine loans totaling more than $700,000 in original mortgage amounts
               went to claim. Further, of the 754 sponsored loans, the borrowers for 49 loans
               totaling $4.7 million in original mortgage amounts defaulted on their mortgage
               within the first six payments. Of the 49 loans, we statistically selected 21 early
               payment defaulted loans to review. One of the loans was a claim and included in
               the review of the nine loans. Therefore, we reviewed 29 loans (nine claims and
               20 early payment defaulted loans) for compliance with HUD’s underwriting
               requirements.

               Community Central improperly underwrote three of the loans reviewed with a
               total mortgage value of more than $200,000. All three loans were purchase loans.
               As of September 25, 2006, HUD paid a claim of more than $78,000 for one loan
               with underwriting deficiencies. The remaining two loans hold active Federal
               Housing Administration insurance as of September 25, 2006.




                                                 5
            Excessive Debt-to-Income Ratios

            Community Central improperly approved two loans (case numbers 261-8628398
            and 261-8597097) when the borrowers’ debt-to-income ratios exceeded HUD’s
            requirements and submitted them for insurance without valid compensating
            factors. For example, Community Central approved loan number 261-8597097
            when one of the coborrowers was no longer employed as indicated by the credit
            report in the loan file. However, the coborrower’s income was used to qualify for
            the loan.

            Paragraphs 2-12 and 2-13 of HUD Handbook 4155.1, 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, Community Central
            approved the loans when the borrowers’ mortgage payments to effective income
            for two of the loans were 39 and 41 percent, respectively.

            Overstated/Unsupported Income

            Community Central did not properly assess the borrowers’ income. For loan
            number 261-8597097, the coborrower was unemployed before the loan closed.
            The coborrower’s credit report contained in the loan file clearly indicated that he
            was no longer employed at the prior employer listed on the universal residential
            loan application. For loan number 261-8812331, commission or overtime income
            was included in the borrowers’ income calculation without Community Central
            justifying the inclusion of the income for qualifying purposes and establishing an
            earnings trend in accordance with HUD Handbook 4155.1, REV-5.

            For loan number 261-8628398, Community Central included child support
            payments in the borrower’s effective income calculation without adequate
            documentation, such as a final divorce decree, legal separation, or voluntary
            payment agreement. Also, the borrower’s loan file did not contain evidence that
            this funding would continue.

Incorrect Underwriter’s
Certifications Submitted to
HUD

            We reviewed the certifications for the three manually underwritten loans for
            accuracy. Community Central’s direct endorsement underwriter incorrectly
            certified that due diligence was used in underwriting the three loans. When
            underwriting a loan manually, HUD requires a direct endorsement lender to
            certify that it used due diligence and reviewed all associated documents during the



                                             6
           underwriting of a loan. Appendix C of this report provides details of the federal
           requirements regarding underwriting of Federal Housing Administration loans as
           well as a citation under the Program Fraud Civil Remedies Act.

Improvements Initiated in Loan
Underwriting

           Community Central’s procedures and controls for underwriting Federal Housing
           Administration-insured loans needed improvement, and it did not have a quality
           control plan that complied with HUD’s requirements (see finding 2). However, in
           November 2004, Community Central initiated improvements to its underwriting
           of Federal Housing Administration loans. It closed its Dearborn and Warren
           branch offices, which according to the president of Community Central Mortgage
           Company originated approximately 75 percent of the Federal Housing
           Administration loans during 2003 and 2004. The loans from these two branches
           presented a degree of increased risk. Further, in December 2004, Community
           Central improved its procedures for underwriting Federal Housing Administration
           loans to ensure greater compliance with HUD’s guidelines.

           During our review, we determined that eight of the nine loans on which HUD
           paid claims and 57 percent of the loans on which the borrowers defaulted within
           the first six payments were originated by Community Central’s Dearborn or
           Warren offices. Therefore, the improvements made by Community Central and
           the implementation of its revised quality control plan should protect HUD from
           unacceptable risk and guard against errors, omission, and fraud thus decreasing
           the risk to the Federal Housing Administration fund.

Recommendations

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

           1A.    Indemnify HUD for any future losses on the two loans (261-8628398 and
                  261-8812331) with a total mortgage value of $142,346 cited in this
                  finding. The estimated risk to the Federal Housing Administration
                  insurance fund is $41,280.

           1B.    Reimburse HUD for any future loss from the claim paid on loan 261-
                  8597097 once the associated property is sold. The estimated risk to the
                  Federal Housing Administration fund is $22,752.




                                            7
We recommend that HUD’s associate general counsel for program enforcement

1C.   Determine legal sufficiency and if legally sufficient, pursue remedies
      under the Program Fraud Civil Remedies Act against Community Central
      and/or its principals for incorrectly certifying that due diligence was
      exercised during the underwriting of the three loans.




                              8
Finding 2: Community Central Did Not Fully Comply with HUD’s
                  Quality Control Requirements
Community Central did not comply with HUD’s quality control requirements. During the period
of October 1, 2003, through September 30, 2005, Community Central lacked a written quality
control plan that met HUD’s requirements and quality control reviews were not performed in a
timely manner. The problems occurred because Community Central relied on its contractor to
perform quality control reviews on its Federal Housing Administration loans and it failed to
provide the loans to the contractor in a timely manner. As a result, HUD lacked assurance of the
accuracy, validity, and completeness of its loan origination files.



 Loan Universe and Sample
 Selections

              Using HUD’s Single Family Data Warehouse system and Community Central’s
              data, we identified 49 loans totaling more than $4.7 million in original mortgage
              amounts that were sponsored by Community Central and closed between October 1,
              2003, and September 30, 2005. The loans went to claim, and/or the borrowers
              defaulted within the first six payments. Of the 49 loans, Community Central only
              quality control reviewed 30. We statistically selected 21 loans totaling more than $2
              million in original mortgage amounts from the universe of 30 loans that Community
              Central quality control reviewed to determine whether the reviews complied with
              HUD’s quality control requirements.

              As of August 16, 2006, Community Central had performed quality control reviews
              on eight of the 19 loans that were not previously reviewed. The remaining 11 loans
              had not been reviewed as required.

 Community Central’s Quality
 Control Plan Deficient and
 Reviews Not Always Performed

              Community Central did not comply with HUD’s quality control requirements.
              During the period October 1, 2003, through September 30, 2005, Community
              Central did not have a written quality control plan that met HUD’s requirements.
              HUD’s Quality Assurance Division performed a quality assurance review in June
              2005 and determined that Community Central’s plan did not contain all of the
              requirements outlined in HUD Handbook 4060.1, REV-1.

              Community Central did not perform quality control reviews on 11 early payment
              defaulted loans. In accordance with HUD Handbook 4060.1, REV-1, all loans going
              into default within the first six months must be reviewed as part of HUD’s quality
              control plan requirements. We statistically selected 21 early payment defaulted


                                                9
            loans to determine whether Community Central’s quality control reviews were in
            compliance with HUD’s requirements. For the 21 loans, 12 were not quality
            control reviewed in a timely manner. The number of days ranged from 103 to 224
            days after the loans defaulted. See appendix D of this report for a listing of the 23
            (11 loans not reviewed and 12 loans not reviewed timely) loans.

Contractor Relied on to
Perform Reviews

            Since 2001, Community Central has contracted with Wetzel Trott Contract
            Mortgage Services (Wetzel Trott) to quality control review its Federal Housing
            Administration-insured loans. Wetzel Trott’s quality control plan was in
            compliance with HUD’s requirements; therefore, Community Central did not
            ensure its own plan complied with HUD’s requirements. Additionally, on a
            quarterly basis, Community Central provided its contractor a list of the early
            payment defaulted loans for quality control review. However, some of the loans
            were never reviewed. According to the vice president of compliance for
            Community Central Mortgage Company, due to management
            restructuring/reorganization in 2003, some of the early payment defaulted loans
            were overlooked, thus resulting in loans not being reviewed or reviewed in an
            untimely manner.

            As a result of Community Central’s deficient plan and untimely submissions of its
            loans for quality control reivews, underwriting errors were not always minimized
            or prevented, thus increasing the risk to the Federal Housing Administration
            insurance fund (see finding 1).

Community Central’s Quality
Control Process Improved


            Since October 2005, Community Central has improved its quality control plan to
            meet HUD’s requirements and execution of its revised plan by submitting loans to
            its contractor for review monthly instead of quarterly. According to the vice
            president of compliance for Community Central Mortgage Company, the monthly
            submission of the early payment defaulted loans to its contractor has greatly
            improved its audit compliance and timeliness.

Recommendation


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




                                             10
2A.   Ensure that quality control reviews for its early payment defaulted loans
      are timely and properly documented.




                               11
                         SCOPE AND METHODOLOGY

We performed our audit between January and August 2006. We conducted the audit at
Community Central’s Mount Clemens, Michigan, office and HUD’s Chicago regional and
Detroit field offices. The audit covered the period October 1, 2003, through September 30, 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 Community Central’s data files. In addition, we interviewed HUD’s and
Community Central’s management and staff, borrowers’ employers, and the contractor’s
management. 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 Community Central originated/sponsored 754
Federal Housing Administration loans with closing dates from October 1, 2003, to September 30,
2005. The original mortgage value of these loans totals more than $80 million. Of these, nine
loans totaling more than $739,000 in original mortgage amounts went to claim. We performed a
100 percent testing on the nine loans that went to claim.

Of the 754 loans, for 49 loans totaling more than $4.7 million in original mortgage amounts the
borrowers defaulted on their mortgage payments within the first six payments. We determined
that Community Central did not perform quality control on 19 of the early payment defaulted
loans, so we excluded these loans from our sampling universe. Of the 30 loans, we statistically
selected 21 to review for compliance with HUD’s underwriting and quality control requirements.
One of the loans was included as part of the nine claims. Our sampling criteria used a 90 percent
confidence level, 5 percent estimated error rate, and a precision of plus or minus 20 percent. We
also reviewed the certifications for the three loans that were improperly underwritten for
accuracy.




                                               12
                             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.




                                               13
Significant Weakness


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

           •      Community Central needs to implement its revised quality control plan for
                  reviewing loans that are early payment defaults to ensure compliance with
                  HUD’s requirements (see finding 2).




                                            14
                       FOLLOWUP ON PRIOR AUDITS

This is the first audit of Community Central by HUD’s Office of Inspector General (OIG). The two
most recent independent auditor’s reports for Community Central covered the years ending
December 31, 2003, and 2004. Both reports resulted in no findings. In June 2003 and 2005,
HUD’s Quality Assurance Division performed quality assurance reviews of Community Central.
The reviews resulted in findings related to underwriting and the quality control plan. All of the
findings were closed as of January 4, 2006.




                                               15
                                   APPENDIXES

Appendix A

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

                   Recommendation       Unsupported      Funds to be put
                       number               1/           to better use 2/
                          1A                                $41,280
                          1B               $22,752
                         Totals            $22,752          $41,280


1/   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 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. 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.

2/   Recommendations that funds be put to better use are estimates of amounts that could be
     used more efficiently if an OIG recommendation is implemented. This includes
     reduction in outlays, deobligation of funds, withdrawal of interest subsidy costs not
     incurred by implementing recommended improvements, avoidance of unnecessary
     expenditures noted in preaward reviews, and any other savings that 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.




                                             16
Appendix B

        AUDITEE COMMENTS AND OIG’s EVALUATION


Ref to OIG Evaluation       Auditee Comments




                        Auditee Comment


                              17
Ref to OIG Evaluation   Auditee Comments




Comment 1




Comment 2




                         18
Ref to OIG Evaluation                Auditee Comments




                        OIG Evaluation of Auditee Comments




                                        19
                        OIG Evaluation of Auditee Comments

Comment 1   Community Central disagreed that the underwriting for case number 261-8727601
            did not comply with HUD’s underwriting requirements. After we reviewed the
            supporting documentation provided by Community Central, we agree that this
            loan was properly underwritten. Therefore, this loan was removed as an
            improperly underwritten loan in this audit report.

Comment 2   Community Central claimed that the underwriting for case number 261-8812331
            complied with HUD’s underwriting requirements. However, we disagree. The
            residential mortgage credit report contained in the borrower’s loan file did not
            meet HUD’s requirements. The credit report did not identify the date the
            borrower’s employment information was verified. Further, overtime income was
            used when calculating the borrower’s effective income; however, the borrower's
            current pay documentation did not identify overtime earned. The borrower earned
            this income less than two years; therefore, the borrower’s file should have
            contained documentation justifying the inclusion of the overtime income for
            qualifying purposes, and the underwriter should have established and documented
            an earnings trend for the overtime income. Since Community Central did not
            provide documentation to support that HUD’s underwriting requirements were
            met, this loan remained as an improperly underwritten loan in this audit report.




                                           20
Appendix C

 FEDERAL REQUIREMENTS AND COMMUNITY CENTRAL’s
                REQUIREMENTS

                                Loan Underwriting Requirements

Chapter 2, section 2-3, of HUD Handbook 4155.1, REV-5, CHG-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 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 handbook 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 handbook 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.

Chapter 2, section 5, paragraph 2-12, of the handbook states that debt-to-income 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.



                                                21
   •     Quality control of servicing to 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 to provide for the review and confirmation of information on
         all loans selected for review.

   •     Each direct endorsement loan selected for a quality control review to be reviewed for
         compliance with HUD’s underwriting requirements, sufficiency of documentation, and
         soundness of the underwriting.

       Community Central’s and/or Contractor’s Early Payment Default Quality Control Plan
                                        Requirements

Community Central’s quality control department generates a report from HUD’s Neighborhood
Watch 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 to evaluate the accuracy, validity, and completeness of the loan’s origination
operation and note any patterns of deficiencies.

All early payment defaults (loans that are 60 days or more past due within the first six months)
will be chosen for a full review based upon lender notification of the default. The lender is
responsible for sending the list of rejected loans monthly so that the contractor may select 10
percent of all rejected loans for review to determine that

   *     The reasons given for rejection were valid and
   *     Each rejection has the concurrence of an officer or senior staff person of the company or
         a committee chaired by a senior staff person or officer.

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 written reverification of employment for the borrower/coborrower and if
unobtainable, verbal 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 the borrower if
applicable.




                                                 22
                          Program Fraud Civil Remedies Act Of 1986

Title 231, 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.




                                               23
Appendix D

 SUMMARY OF QUALITY CONTROL DEFICIENCIES USING
             HUD’s REQUIREMENTS

                           Quality control
                 Loan       review not       Untimely quality
                number      performed         control review
             261-8605640          X
             261-8610720          X
             261-8604572          X
             261-8600281          X
             261-8617973          X
             261-8618991          X
             261-8632804
             261-8599994          X
             261-8714768          X
             261-8710802          X
             261-8748922          X
             261-8684853                           X
             261-8628398                           X
             261-8701916                           X
             261-8812331                           X
             261-8784944                           X
             261-8769472                           X
             261-8790128                           X
             261-8693304                           X
             261-8675073                           X
             261-8703135                           X
             261-8683365                           X
             261-8831931                           X
                 Totals          11                12




                                  24
Appendix E

                   NARRATIVE CASE PRESENTATIONS


Loan number: 261-8597097

Mortgage amount: $73,915

Section of Housing Act: 203(b)

Date of loan closing: December 22, 2003

Status as of September 25, 2006: Claim

Prior status: Active

Payments before first default reported: Not available

Summary:

Community Central’s underwriter (J922) approved this loan using the coborrower’s income
although documentation in the loan file indicated that the coborrower was no longer employed as
of October 22, 2003. The loan closed December 22, 2003. Therefore, excluding the
coborrower’s income, this loan exceeded one of HUD’s qualifying ratios by 12 percent.




                                               25
Loan number: 261-8628398

Mortgage amount: $62,009

Section of Housing Act: 203(b)

Date of loan closing: December 22, 2003

Status as of September 25, 2006: Active

Prior status: Not applicable

Payments before first default reported: Five

Summary:

Community Central’s underwriter (J922) approved the loan without sufficient documentation of
the borrower’s child support payments. The payments were included in the borrower’s effective
income calculation without adequate documentation, such as a final divorce decree, legal
separation, or voluntary payment agreement. Additionally, the loan file did not contain evidence
that this funding would continue. Therefore, excluding this income the borrower exceeded
HUD’s qualifying ratios.




                                               26
Loan number: 261-8812331

Mortgage amount: $80,337

Section of Housing Act: 203(b)

Date of loan closing: August 19, 2004

Status as of September 25, 2006: Active

Prior status: Active

Payments before first default reported: Four

Summary:

Community Central’s underwriter (J922) approved the loan using a residential mortgage credit
report that did not meet HUD’s requirements. Additionally, overtime income was included in
the borrower’s income calculation without the undewriter justifying the inclusion of the income
for qualifying purposes and establishing an earnings trend in accordance with HUD Handbook
4155.1, REV-5, since the income was not earned for over a two-year period.




                                               27