oversight

American Title Services, Greenwood Village, Colorado, Did Not Comply with Contract Terms When Closing Sales of HUD-Owned Properties

Published by the Department of Housing and Urban Development, Office of Inspector General on 2006-02-01.

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

                                                                 Issue Date
                                                                          February 1, 2006
                                                                 Audit Report Number
                                                                              2006-DE-1002




TO:         Brian D. Montgomery, Assistant Secretary for Housing – Federal
               Housing Commissioner, H

           //signed//
FROM:      Ronald J. Hosking, Regional Inspector General for Audit, 8AGA


SUBJECT: American Title Services, Greenwood Village, Colorado, Did Not Comply with
           Contract Terms When Closing Sales of HUD-Owned Properties

                                   HIGHLIGHTS

 What We Audited and Why

             We audited American Title Services (American Title), a contractor closing sales
             of U.S. Department of Housing and Urban Development (HUD) homes in
             Colorado. We performed the audit at the request of the director of the Denver
             Homeownership Center’s Real Estate Owned Division. We wanted to determine
             whether American Title complied with contract terms for closing sales of HUD
             homes.


 What We Found

             American Title did not comply with HUD contract terms for closing sales of HUD
             homes. It did not disburse funds on time or in correct amounts, improperly
             commingled HUD funds with retail funds, earned interest on closing funds, and did
             not reimburse HUD for bank charges. American Title was not prepared to perform
             its duties when it got the contract. Its poor handling of closing funds increased
             HUD’s and homebuyers’ risk of not meeting financial obligations and not receiving
             funds to which they were entitled. However, since HUD cut back its number of
             closings in August 2005, American Title’s performance improved.
What We Recommend


           We recommend that HUD require that American Title correct the problems, improve
           controls, complete all disbursements, and pay HUD $4,380 in interest.

           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 draft audit report to American Title on January 9, 2006 and
           received their written response on January 30, 2006. American Title agreed with
           the finding and recommendations.

           The complete text of American Title’s response is in appendix B of this report.




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                            TABLE OF CONTENTS

Background and Objectives                                              4

Results of Audit
      Finding 1: American Title Did Not Comply with the HUD Contract   5

Scope and Methodology                                                  8

Internal Controls                                                      9

Appendixes
   A. Schedule of Ineligible Costs                                     10
   B. Auditee Comments                                                 11




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                     BACKGROUND AND OBJECTIVES

The Federal Housing Administration administers the single-family mortgage program. Upon
default and foreclosure of an insured loan, the lender files a claim for insurance benefits. In
exchange for payment of a claim, the lender conveys the foreclosed property to the U.S.
Department of Housing and Urban Development (HUD). The HUD homes are termed real
estate-owned properties. HUD, through a management and marketing contractor, manages and
sells these single-family homes to promote home ownership and maximize return to the
insurance fund. To sell the properties, HUD contracts with a closing agent to perform all
necessary closing activities.

On February 11, 2005, HUD contracted with American Title Services (American Title) to close
sales of HUD homes in the state of Colorado. American Title’s office is located in Greenwood
Village, Colorado.

From February 11 to August 15, 2005, American Title closed 1,102 sales of HUD homes. HUD
received $135,430,468 in net sales proceeds.

We wanted to determine whether American Title complied with HUD contract terms for closing
HUD home sales.




                                               4
                                 RESULTS OF AUDIT

Finding 1: American Title Did Not Comply with the HUD Contract
American Title did not comply with HUD contract terms for closing sales of HUD homes. It did
not disburse funds on time or in correct amounts, improperly commingled HUD funds with retail
funds, earned interest on closing funds, and did not reimburse HUD for bank charges. American
Title was not prepared to perform its duties when it got the contract. Its poor handling of closing
funds increased HUD’s and homebuyers’ risk of not meeting financial obligations and not receiving
funds to which they were entitled. However, since HUD cut back its number of closings in August
2005, American Title’s performance improved.



 Contract Violations


               American Title did not disburse funds on time or in correct amounts. Our review
               of 29 case files identified numerous deficiencies including $2,478 not disbursed
               correctly. The deficiencies included the following:

                          •   In 17 cases, American Title did not pay the homebuyer or HUD
                              refunds totaling $1,912.
                          •   In five cases, American Title did not have sufficient funds to pay
                              all expenses. The shortages totaled $319.
                          •   In four cases, American Title overpaid itself $247.
                          •   In 22 cases, American Title disbursed funds after closing although
                              the contract requires payment of any allowable expenses at closing.
                              In 14 of the 22 cases, American Title issued the last check more
                              than 30 days after closing and more than 60 days after closing in
                              12 of the 14 cases.

               We discussed the deficiencies with American Title’s president and he took
               prompt action to correct them.

               Our review of the HUD trust account and the retail money market account
               showed that American Title commingled HUD funds with retail funds and
               improperly earned $4,380 in interest on closing funds. In 36 cases, lenders
               incorrectly wired funds to American Title’s retail money market account rather
               than to the HUD trust account. In 54 cases, American Title incorrectly deposited
               funds into the retail money market account. HUD funds deposited into the wrong
               account totaled $6,486,553. These funds remained in the retail money market
               account earning interest up to 41 days before American Title transferred the funds
               to the HUD trust account.



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           In addition, American Title had not reimbursed the HUD trust account $6,400 for
           bank charges through September 2005. The most recent reimbursement was on
           September 27, 2005, when American Title reimbursed the account $4,220. This
           payment was not sufficient to cover bank charges through May 31, 2005. We
           discussed reimbursement of bank charges with American Title’s president and he
           promptly reimbursed the HUD trust account the $6,400 for bank charges.


American Title Not Prepared to Perform



           American Title was not prepared to close an estimated 200 sales per month. It did
           not have a quality control plan or written policies and procedures for closing sales
           of HUD homes. American Title did not implement a quality control plan until
           late August 2005, after HUD officials provided a cure notice for failure to
           perform. In addition, American Title had not trained employees on contract
           requirements, and its telephone system could not handle the high volume of calls.

           American Title did not have adequate controls over HUD trust account wires,
           deposits, and checks. For example, closers did not check wire confirmations to
           ensure banks wired funds to the correct bank account, did not always use the correct
           deposit slips, incorrectly used money market checks to disburse funds, and did not
           ensure the numbers of issued checks matched the check numbers in the accounting
           system.


Increased Risk for HUD and
Homebuyers

           American Title’s poor handling of closing funds increased HUD’s and homebuyers’
           risk of not meeting financial obligations and not receiving funds to which they were
           entitled. American Title did not always disburse funds at closing to pay expenses
           such as real estate taxes, utility bills, and homeowner association dues. HUD
           received numerous complaints from homebuyers concerning delayed closings,
           problems contacting American Title by telephone, and payment of expenses.
           American Title’s delay in disbursing funds increased HUD’s and the homebuyers’
           risk of not meeting their financial obligations, particularly if buyers wanted to resell
           their homes within a short time. In addition, American Title denied HUD and
           homebuyers funds to which they were entitled.

Improved Performance


           Since HUD cut back the number of closings in August 2005, American Title has
           increased its staff, provided staff training on contract requirements, and
           incorporated a new telephone system designed to handle all customer calls.


                                              6
             American Title was also in the process of reviewing closed case files to make all
             necessary disbursements and to reconcile the case files.

             American Title also implemented steps to control deposit slips and checks. Now,
             only the president and the closing supervisor have access to the money market
             account deposit slips and checks. Each closer must sign out HUD trust account
             checks that the closing supervisor secures in a locked drawer.

             In September 2005, American Title added an employee test to its quality control
             plan to make employees more aware of HUD contract terms. In addition, it
             upgraded its telephone system to handle 24 calls at a time to better serve its
             clients.

             During the review, we expanded the audit period to October 15, 2005, to determine
             whether American Title had improved its performance. We reviewed 15 additional
             case files and found performance had improved. For the 15 case files, closers had
             disbursed all funds and reconciled all case files at closing. Each of the case files for
             closings after October 1, 2005, contained completed preclosing and postclosing
             checklists, ensuring that closers properly completed all documents and processes.


Conclusion


             While American Title has made progress in implementing management controls,
             HUD must continue monitoring to ensure it corrects all of the problems. As of
             October 2005, closers were not checking wire confirmations to ensure banks wired
             funds to the correct bank account. In addition, American Title has not completed
             review of all case files to make all necessary disbursements and to reconcile the case
             files.

Recommendations



             We recommend that the Assistant Secretary for Housing – Federal Housing
             Commissioner require American Title to

                     1A.     Establish and implement management controls and a complete
                             quality control plan to meet contract terms.
                     1B.     Provide evidence that American Title has made all disbursements
                             for previous closings ($2,478) and properly reconciled all case files
                             before renewing the contract.
                     1C.     Pay $4,380, the interest earned on closing funds improperly
                             deposited into American Title’s retail money market account.



                                                7
                        SCOPE AND METHODOLOGY

Our review covered the period from February 11 to August 15, 2005. We extended the period to
October 15, 2005, to meet our objective.

To accomplish our objective, we reviewed

       •    The contract between HUD and American Title and applicable HUD requirements,
       •    HUD reviews of American Title,
       •    American Title’s quality control plan and closing process,
       •    Transactions in the HUD trust account and American Title’s money market account,
            and
       •    Case files and related documentation.

In addition, we interviewed American Title’s president and staff and HUD personnel.

We selected case files from the Closing Agent Performance Report from HUD’s Single Family
Acquired Asset Management System. We reviewed all 24 case files in which American Title
wired sales proceeds to HUD more than nine days after the closing date. We also reviewed five
case files HUD previously reviewed. We randomly selected 15 additional case files from
American Title’s closing calendars for various dates between August 19 and October 14, 2005,
to evaluate how well American Title implemented its management controls. We did not rely on
computerized data and traced all information to source documents.

We performed our audit work from September to November 2005. We conducted our fieldwork
at American Title’s office at 7935 East Prentice Avenue, Suite 101, Greenwood Village,
Colorado.

We performed our review in accordance with generally accepted government auditing standards.




                                              8
                             INTERNAL CONTROLS

Internal control is an integral component of an organization’s management that provides
reasonable assurance that the organization achieves the following objectives:

   •   Effectiveness and efficiency of operations,
   •   Reliability of financial reporting, and
   •   Compliance with applicable laws and regulations.

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:

              •       Policies and procedures to ensure the closing process complied with contract
                      requirements.
              •       Controls to ensure closing funds were safeguarded and disbursed only for
                      eligible expenses.

              We assessed the relevant controls identified above.

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


 Significant Weaknesses


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

              •       American Title did not have management controls to ensure HUD contract
                      compliance and to safeguard closing funds (finding 1).




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                                   APPENDIXES


Appendix A

                 SCHEDULE OF INELIGIBLE COSTS

               Recommendation number                    Ineligible 1/

                          1B                               $2,478
                          1C                               $4,380


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
     polices or regulations.




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Appendix B

             AUDITEE COMMENTS




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