Issue Date January 26, 2006 Audit Report Number 2006-FW-1004 TO: Brian D. Montgomery Assistant Secretary for Housing – Federal Housing Commissioner, H FROM: Frank E. Baca Regional Inspector General for Audit, 6AGA SUBJECT: K Hovnanian American Mortgage, LLC, Plano, Texas, Violated Underwriting Requirements and Did Not Meet All Quality Control or Branch Requirements HIGHLIGHTS What We Audited and Why We audited the Plano, Texas, branch office of K Hovnanian American Mortgage Company, LLC (K Hov), part of Hovnanian Enterprises, Inc. We selected K Hov because of its high defaults, specifically defaults involving loans with one underwriter 1 and one appraiser. K Hov is a nonsupervised mortgage company. Our audit objectives were to determine whether K Hov: (1) followed U.S. Department of Housing and Urban Development (HUD) origination requirements (2) complied with HUD branch requirements in its Plano office; and (3) implemented a quality control plan according to HUD requirements. What We Found K Hov violated HUD underwriting, quality control, and branch requirements. As a result, K Hov increased the risk to the insurance fund by more than $1.3 million 1 Although this was the case during the survey stage of the audit, we later reviewed loans originated by another underwriter and the automated underwriting system. and overcharged borrowers $31,711. This occurred because K Hov ignored or misunderstood HUD regulations including meeting all quality control and branch requirements. What We Recommend We recommend that HUD’s assistant secretary for housing – federal housing commissioner and chairman of the Mortgagee Review Board require K Hov to: • Indemnify the five loans that had significant underwriting deficiencies. • Reimburse HUD for the four loans with significant underwriting deficiencies that HUD paid off due to default. • Reimburse borrowers or HUD, as appropriate, for unallowable closing costs. • Meet HUD’s quality control and branch requirements. 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 a draft report to K Hov on October 27, 2005, with an expected written response from K Hov due on November 14, 2005. Due to Hurricane Wilma and its impact on K Hov's West Palm Beach, Florida office, we agreed to an extension and held an exit conference on December 1, 2005. K Hov provided written comments on December 5, 2005. K Hov disagreed with the issues regarding down payment assistance and underwriting deficiencies but agreed to return fees that it improperly charged to borrowers and to address branch deficiencies. Based on K Hov’s comments we revised the report to remove discussion of the down payment assistance issue. K Hov’s response along with our evaluation is included in Appendix B of this report. We redacted names of borrowers and did not include the attachments due to the volume. 2 TABLE OF CONTENTS Background and Objectives 4 Results of Audit Finding 1: K Hov Violated HUD Underwriting Requirements and Charged Unallowed 5 Closing Costs Finding 2: K Hov Did Not Meet All Quality Control or Branch Requirements 9 Scope and Methodology 12 Internal Controls 13 Appendixes A. Schedule of Questioned Costs and Funds to be Put to Better Use 15 B. Auditee Comments and OIG’s Evaluation 16 C. Questioned Closing Costs by Loan 46 D. Underwriting Deficiencies by Loan 47 E. Case Narratives 48 3 BACKGROUND AND OBJECTIVES The National Housing Act, as amended, authorizes the U. S. Department of Housing and Urban Development (HUD) to provide mortgage insurance for single family homes. HUD must approve a lender that originates, purchases, holds, or sells Federal Housing Administration- insured loans. Lenders must follow the statutory and regulatory requirements of the National Housing Act and HUD’s instructions, guidelines, and regulations when originating insured loans. Lenders that do not follow these requirements are subject to administrative sanctions. We audited the Plano, Texas, branch office of K Hovnanian American Mortgage Company, LLC (K Hov), part of Hovnanian Enterprises, Inc., located at 5808 West Plano Parkway in Plano, Texas. K Hov is a nonsupervised mortgage company. HUD approved the branch office on March 15, 2001, to originate single family loans under Section 203(b)(1) of the National Housing Act. As a condition of approval, HUD requires K Hov to maintain a quality control plan for the origination and servicing of insured loans. The quality control plan must meet HUD’s requirements, as well as be a prescribed function of K Hov’s policies, procedures, and operations. Hovnanian Enterprises, Inc.’s 2 subsidiaries include K Hov, Goodman Family of Builders (Goodman Homes), and Fair Land Title, the mortgage company, builder, and title company, respectively, for the loans reviewed. Founded in 1959, Hovnanian Enterprises, Inc., designs, constructs, and markets a variety of for-sale houses in 275 residential communities in 13 states. Further, in the markets in which its mortgage subsidiaries originated loans, a majority of the mortgages obtained were from its wholly owned mortgage subsidiary. In turn, those mortgages were sold in the secondary markets. During our audit scope of January 1, 2003, through December 31, 2004, K Hov originated 197 loans within the Fort Worth and Dallas HUD offices’ jurisdiction. Of those 197 loans, the same underwriter originated 63 loans with K Hov. Thirteen of the seventy-one loans defaulted during the audit scope. As part of our 2005 annual audit plan, we selected K Hov because of its high default rate, specifically defaults involving loans with one underwriter and one appraiser. According to HUD’s Neighborhood Watch System, K Hov’s default rate was 7.5 percent. Our audit objectives were to determine whether K Hov: (1) followed HUD origination requirements including underwriting and use of gifts; (2) complied with HUD branch requirements in its Plano office; and (3) implemented a quality control plan according to HUD requirements. 2 A Fortune 500 company. 4 RESULTS OF AUDIT Finding 1: K Hov Violated HUD Underwriting Requirements and Charged Unallowed Closing Costs K Hov did not follow underwriting requirements for 17 of 19 loans reviewed and charged the borrowers $31,711 in 18 of 19 loans reviewed for unallowable closing costs. This occurred because K Hov ignored or misunderstood HUD regulations and because it did not adhere to HUD’s quality control and branch requirements as discussed in Finding 2. As a result, K Hov increased the risk to the insurance fund by more than $1.3 million and overcharged borrowers by $31,711. K Hov Loans Contained Underwriting Deficiencies K Hov loans contained underwriting deficiencies in 17 of the 19 loans reviewed. As a result, K Hov increased the risk to the insurance fund. The loan amounts for the 17 loans totaled $2,425,300. These underwriting deficiencies occurred because K Hov employees did not follow HUD requirements. K Hov: • Rolled outstanding debt into the mortgage; • Did not include compensating factors or debt on the mortgage credit analysis worksheet; • Did not reduce the sales price by a sales incentive; • Did not require a written explanation for inquiries regarding a credit report; • Did not document the gift transfer; • Allowed interested third parties to fax financial documents; and • Originated a loan with a bankruptcy and poor borrower financial management. For three loans, K Hov rolled outstanding debt into the mortgage. HUD regulations state that it is unacceptable underwriting to allow payment of consumer debt. 3 For two loans, K Hov did not include the compensating factors when required or all of the outstanding debt on the mortgage credit analysis worksheet. HUD 3 Mortgagee Letter 2002-02. 5 regulations require that the lender must include supported compensating factors 4 when liability ratios exceeded HUD benchmark guidelines and counting all debts lasting longer than 10 months toward a borrower’s liabilities. 5 For one loan, the borrower received a 51-inch screen television as a sales incentive. Goodman Homes documented this sales incentive on the real estate purchase agreement, but K Hov did not require Goodman Homes to reduce the sales price by the incentive as required by HUD regulations. 6 K Hov did not require written explanations for recent inquires regarding the credit report for three loans. HUD regulations require that borrowers must provide sufficient and rational explanation of derogatory credit. 7 K Hov did not document the transfer for the 16 loans that received gift funds. HUD regulations state that the lender must document the transfer of funds from the donor to the borrower. 8 For three loans, K Hov received financial documentation faxed from an interested third party. HUD regulations require that lenders may not accept or use documents relating to credit, employment, or income by, from, or through an interested third party. 9 Lastly, one loan contained a bankruptcy that the borrower did not show was caused by extenuating circumstances beyond their control and the borrower did not exhibit the ability to manage their financial affairs in a responsible manner. HUD regulations 10 allow a borrower to have a bankruptcy on their credit if the borrower can show that the bankruptcy was caused by extenuating circumstances beyond their control and has since exhibited an ability to manage financial affairs. The borrower quit their job without having another job, which is not beyond the borrower’s control. Further, two months' worth of bank statements, provided by the borrower, contained numerous overdraft and advance fees, showing that the borrower did not manage their financial affairs in a responsible manner. The loan defaulted within 15 months of closing. 4 HUD Handbook 4155.1, REV-4 CHG-1 and REV-5, “Mortgage Credit Analysis for Mortgage Insurance, One to Four Family Properties,” paragraph 2-13. 5 HUD Handbook 4155.1, REV-4 CHG-1 and REV-5, “Mortgage Credit Analysis for Mortgage Insurance, One to Four Family Properties,” paragraph 2-11. 6 HUD Handbook 4155.1, REV-5, “Mortgage Credit Analysis for Mortgage Insurance, One to Four Family Properties” paragraph 1-7B. 7 HUD Handbook 4155.1, REV-4 CHG-1 and REV-5, “Mortgage Credit Analysis for Mortgage Insurance, One to Four Family Properties,” paragraph 2-3B. 8 HUD Handbook 4155.1, REV-4 CHG-1 and REV-5, “Mortgage Credit Analysis for Mortgage Insurance, One to Four Family Properties,” paragraph 2-10C. 9 HUD Handbook 4155.1, REV-4 CHG-1 and REV-5, “Mortgage Credit Analysis for Mortgage Insurance, One to Four Family Properties,” paragraph 3-1. 10 HUD Handbook 4155.1, REV-4 CHG-1, “Mortgage Credit Analysis for Mortgage Insurance, One to Four Family Properties,” paragraph 2-3E. 6 In our opinion, deficiencies on 9 of the 17 loans were significant enough to warrant indemnification or reimbursement of claims paid (see Appendix D). We recommend indemnification on five loans totaling $737,850 for significant underwriting deficiencies. Further, K Hov should reimburse HUD $577,865 for the claims on four loans with significant underwriting deficiencies. 11 K Hov Charged Unallowable Fees K Hov charged borrowers $5,619 unallowable closing costs in 18 of the 19 loans reviewed. 12 We also reviewed an additional 133 loans for gift processing fees and found $26,092 in unallowable closing costs. Consequently, borrowers paid $31,711 in unallowable closing costs because K Hov did not follow HUD requirements and/or guidelines. The unallowable closing costs included: $28,612 in HUD-prohibited gift-processing fees. 13 $869 in tax service fees on 11 of the 19 loans. 14 $370 in inspection fees on 6 of 19 loans when the appraisal showed the property 100 percent complete. 15 K Hov should reimburse the borrowers or HUD, as appropriate, 16 for the $31,711 for the unallowable closing costs. K Hov’s Participation in Down Payment Assistance Program Our October 27, 2005 draft report included a discussion of K Hov’s activities as participants in a down payment assistance program that involved K Hov, Goodman Homes, and a nonprofit entity. However, during the exit conference and in its response, K Hov cited HUD's response to a recent GAO report 17 and a HUD legal opinion as support for K Hov's position that HUD allowed these 11 See the case narratives in Appendix E for the specific loans to be indemnified or claim reimbursed. 12 See Appendix C for specifics. 13 According to HUD’s Quality Assurance Division, any closing costs not specifically addressed in HUD’s guidance are considered unallowable. 14 HUD Homeownership Center Reference Guide, chapter 2, “Mortgage Credit Guide,” paragraph 2-15. 15 Ibid. 16 K Hov should reimburse the borrowers on current loans and HUD on claims paid. 17 Mortgage Financing: Additional Action Needed to Manage Risks of FHA-Insured Loans with Down Payment Assistance GAO-06-24, November 9, 2005 7 activities if the timing of the gift funds was appropriate. Based on K Hov's comments, we decided to address the issue with HUD and accordingly removed discussion of this issue from the final report. Conclusion Seventeen of the nineteen loans reviewed totaling $2,425,300 contained several underwriting deficiencies including charging borrowers $31,711 in unallowable closing costs. We are recommending indemnification on five loans totaling $737,850 and repayment of $577,865 on four loans for which HUD paid a claim that contained underwriting deficiencies. Recommendations We recommend that HUD’s assistant secretary for housing – federal housing commissioner and chairman of the Mortgage Review Board require K Hov to: 1A. Indemnify five loans totaling $737,850 for underwriting deficiencies. 1B. Repay $577,865 to HUD for claims paid on four loans with underwriting deficiencies. 1C. Reimburse borrowers or HUD, as appropriate, 18 $31,711 for unallowable closing costs. 1D. Ensure K Hov complies with HUD’s underwriting requirements, including charging only allowable closing costs. 18 K Hov should reimburse the borrowers on current loans and HUD on claims paid. 8 Finding 2: K Hov Did Not Meet All Quality Control or Branch Requirements K Hov did not meet all quality control or branch requirements. Specifically, K Hov’s quality control plan lacked requirements regarding on-site reviews and review of loans that defaulted within the first six payments. Further, K Hov’s part-time Plano branch manager also was a full- time employee of Goodman Homes, which like K Hov is a subsidiary of Hovnanian Enterprises, Inc. Lastly, the space occupied by K Hov’s Plano branch office did not distinguish to the public that they entered into a mortgage company. These conditions were contrary to Federal Housing Administration underwriting requirements and were contributing factors to the underwriting problems as discussed in Finding 1. K Hov officials indicated that they were unaware of the requirements. In response to the audit, K Hov has updated its quality control plan and moved to a separate office. K Hov’s Quality Control Plan Did Not Contain All HUD Requirements K Hov’s quality control plan did not contain all HUD requirements regarding on- site reviews and reviews of loans that defaulted within the first six payments. Although HUD requires annual on-site reviews, K Hov did not conduct any on- site reviews that met HUD branch requirements. After we brought this issue to K Hov’s quality manager’s attention, K Hov revised its quality control plan to include steps for an annual on-site visit to all branches. Before our audit, K Hov performed no annual on-site visits to its branches. HUD requirements 19 required annual visits for offices meeting certain higher risk criteria such as high early default rates, new branches or new key personnel, sudden increases in volume, and past problems. Although K Hov had a procedure in its quality control plan to review early defaults, it did not. Further, its contractor did not implement this procedure as part of its contractual obligations during K Hov’s quality assurance review. HUD requirements 20 state that, in addition to the loans selected for routine quality control reviews, lenders must review all loans going into default within the first six payments. According to K Hov’s quality manager, until a review of the North Carolina branch by HUD’s Quality Assurance Division, K Hov was not aware of the early 19 HUD Handbook 4060.1, REV-1, CHG-1, “Mortgagee Approval Handbook,” paragraph 6-3G2. 20 HUD Handbook 4060.1, REV-1, CHG-1, “Mortgagee Approval Handbook,” paragraph 6-6D. 9 default review requirement. However, the quality manager stated that since November 2004, the contractor had accomplished the early default step. Without the loan reviews, K Hov could not ensure it was protecting HUD and itself from unacceptable risk. Also, K Hov could not swiftly identify, address, and correct anomalies or problems that occurred. K Hov’s Branch Manager Was an Employee of Goodman Homes K Hov’s Plano branch manager was a part-time K Hov employee and a full-time employee of Goodman Homes. HUD regulations 21 require K Hov employees, whether full- or part-time, to be exclusively employed by K Hov. Also, contrary to HUD regulations requiring a branch to have at least three employees, K Hov’s Plano office only employed one part-time branch manager. HUD regulations require that only lender employees conduct the business affairs of the lender. As shown in the following e-mail, the Plano branch manager made business decisions for Goodman Homes on loans originated by K Hov. In the e- mail, the K Hov branch manager tells an identity-of-interest title company (Fair Land Title) employee that adding a gift to the sales price is the only way a house will sell. At this point the branch manager is acting in the interests of the builder, her full-time employer. April 2003 E-mail from Goodman Family of Builders (GFB)/K Hov employee to Fair Land Title employee Entrance to K Hov’s Plano Branch Was Not Clearly Identified K Hov did not clearly identify itself; thus, the borrowers and the public may not have known whether they were in the offices of K Hov or its identity-of-interest 21 HUD Handbook 4060.1, REV-1, “Mortgagee Approval Handbook,” paragraph 2-14. 10 company, Goodman Homes. From outside the building, it appeared that Goodman Homes was the only occupant. Additionally, o K Hov located its office on the second floor within space used by Goodman Homes’ administrative personnel. o K Hov conducted its loan originations out of its home office in West Palm Beach, Florida. The Plano office only took applications for and provided information to Goodman Homes’ buyers. K Hov maintained all Plano branch origination files at its home office. o K Hov believed it met HUD’s requirements because it only originated loans for Goodman Homes. Further, it did not believe that it needed to place its name on the door because its offices were located within the Goodman Homes offices. o HUD regulations require K Hov to clearly identify itself so people would know with whom they were doing business. 22 Recommendation We recommend that HUD’s assistant secretary for housing to: 2A. Ensure K Hov initiated corrective actions that comply with HUD’s quality control and branch requirements. 22 HUD Handbook 4060.1, REV-1, “Mortgagee Approval Handbook,” paragraph 2-16A4. 11 SCOPE AND METHODOLOGY To accomplish our objectives, we: ¾ Reviewed applicable HUD handbooks and mortgagee letters. ¾ Reviewed 19 insured loans originated by K Hov between January 1, 2003, and December 31, 2004. The 19 loans were part of a universe of 197 loans from the Fort Worth and Dallas HUD offices originated by K Hov during the audit period. The results of the detailed testing apply to the 19 reviewed loans only and cannot be projected to the universe of the other insured loans ¾ Expanded our audit scope to include 133 insured loans that received gift funds to determine whether the sales price increased by the gift and whether K Hov charged borrowers gift processing fees. ¾ Examined closing documentation including sales contracts, appraisals, and loan applications. ¾ Conducted interviews with officials and employees of K Hov, K Hov’s quality assurance contractor, Fair Land Title Company, and the HUD Quality Assurance Division. ¾ Contacted borrowers by mail, telephone, or in-person interviews. ¾ Performed site visits to several properties. In addition, we relied in part on data maintained by HUD in its Neighborhood Watch system. We did not perform a detailed analysis of the reliability of this computer database. The audit covered the period from January 1, 2003, through December 31, 2004. We conducted our fieldwork from March 14 through September 30, 2005. We performed our fieldwork at the offices of Goodman Homes and Fair Land Title, both located in Plano, Texas. We reviewed the loans at our Fort Worth, Texas, office. We performed the audit in accordance with generally accepted government auditing standards. 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; 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: • Branch requirements—Policies and procedures to ensure that K Hov conducts reviews of its branch activities. • Loan origination process—Policies and procedures that management requires to reasonably ensure that the loan origination process complies with HUD program requirements. • Quality control plan—Policies and procedures that management requires to reasonably ensure implementation of HUD quality control requirements. 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. 13 Significant Weakness Based on our review, we believe the following item is a significant weakness: • K Hov did not operate in accordance with HUD requirements as they relate to branch, loan origination, and quality control requirements. 14 APPENDIXES Appendix A SCHEDULE OF QUESTIONED COSTS AND FUNDS TO BE PUT TO BETTER USE Recommendation Funds to be put numbers Ineligible 1/ to better use 2/ 1A $736,517 23 1B $576,622 24 1C 31,711 Totals $608,333 $736,517 1/ Ineligible costs are costs charged to a HUD-financed or HUD-insured program or activity that the auditor believes are not allowable by law; contract; or federal, state, or local policies or regulations. 2/ “Funds to be put to better use” are quantifiable savings that are anticipated to occur if an Office of Inspector General (OIG) recommendation is implemented, resulting in reduced expenditures at a later time for the activities in question. This includes costs not incurred, deobligation of funds, withdrawal of interest, reductions in outlays, avoidance of unnecessary expenditures, loans and guarantees not made, and other savings. 23 Represents the $737,850 total loan amount less $1,333 questioned in recommendation 1C. 24 Represents the $577,865 total loan amount less $1,243 questioned in recommendation 1C. 15 Appendix B AUDITEE COMMENTS AND OIG’S EVALUATION Ref to OIG Evaluation Auditee Comments 16 Comment 1 17 18 19 20 21 22 Comment 2 23 Comment 3 24 Comment 4 25 Comment 4 26 Comment 1 Comment 2 Comment 5 27 Comment 5 Comment 1 Comment 2 28 Comment 5 Comment 1 Comment 2 Comment 5 29 Comment 1 Comment 2 30 Comment 1 Comment 2 Comment 6 Comment 5 31 Comment 1 Comment 2 Comment 6 32 Comment 5 Comment 1 Comment 2 33 Comment 1 Comment 2 Comment 1 34 Comment 2 Comment 5 Comment 5 Comment 5 Comment 1 35 Comment 2 Comment 5 Comment 1 36 Comment 2 Comment 5 Comment 5 Comment 5 37 Comment 1 Comment 2 Comment 1 Comment 2 38 Comment 1 Comment 2 39 Comment 2 Comment 2 Comment 1 40 Comment 2 Comment 1 Comment 2 41 42 43 OIG Evaluation of Auditee Comments Comment 1 Our October 27, 2005 draft report included discussion of K Hov’s activities as participants in a down payment assistance program that involved K Hov, Goodman Homes, and a nonprofit entity. However, during the exit conference and in its response, K Hov cited HUD's response to a recent GAO report 25 and a HUD legal opinion as support for K Hov's position that HUD allowed these activities if the timing of the gift funds was appropriate. Based on K Hov's comments, we decided to address the issue with HUD and accordingly removed discussion of this issue from the final report. With respect to the wire transfers, we only noted K Hov did not have the wire transfer documentation in the files as required. K Hov agreed that the wire transfer documentation should be in their files and added policies to implement. We commend K Hov for taking the actions to comply with requirements. Comment 2 K Hov agreed that unallowable closing costs were charged on the settlement statements. K Hov promised to take actions to ensure these types of closing costs are not charged to the borrower on future closings. We commend K Hov for addressing the issue. Comment 3 K Hov agreed that in the 22 instances when it charged gift processing fees to the borrower and listed the fee on the settlement statement that it was wrong and violated HUD requirements. K Hov agreed to repay these funds. However, K Hov did not agree that it was wrong in the other instances cited in the report where K Hov added the gift processing fees to the sales price. We do not accept K Hov’s distinction that the fee can be charged to the borrower by raising the sales price, but the same fee could not be shown on the settlement statement as a charge to the borrower. We maintain HUD prohibited K Hov from charging borrowers a gift-processing fee irrespective of how K Hov lists it on the settlement statement. Comment 4 We commend K Hov for taking action to correct deficiencies cited in the report. Comment 5 In one instance, we revised our case narrative where K Hov provided additional information. In three instances, K Hov attributed the deficiencies in its underwriting as “aberrations” and will address these with the responsible associate. Further, K Hov believes there are no circumstances 25 Mortgage Financing: Additional Action Needed to Manage Risks of FHA-Insured Loans with Down Payment Assistance GAO-06-24, November 9, 2005. 44 under which it should be required to indemnify poorly underwritten loans and these instances should only be used for training purposes. OIG disagrees and maintains these loans showed poor underwriting. Thus, we did not change the recommendation requiring indemnifications or repayment of claim amounts. Comment 6 In two instances, K Hov’s response confirmed that it violated Mortgagee Letter 2002-02 by allowing gift funds to pay consumer debt. In the draft, we did not report that the gift funds paid the consumer debt; only that K Hov included the consumer debt in the mortgage. K Hov responded that the borrower had adequate funds to pay the debts if gift funds could be used. However, Mortgagee Letter 2002-02 specifically states that it is unacceptable underwriting to allow payment of consumer debt and that payment of consumer debt should be a dollar-for-dollar reduction in sales price. Therefore, we disagree with K Hov and maintain that the two loans contained underwriting deficiencies and the sales price should be reduced dollar for dollar for the payment of consumer debt. Thus, we did not change the recommendation of indemnifying or repayment to HUD for claim amounts. 45 Appendix C QUESTIONED CLOSING COSTS BY LOAN Tax Wire Gift- Loan Inspection Service Transfer Commitment Processing Underwriter Processing Number Fee Fee Fee Fee Fee * Fee Fee Totals 492-6943572 $79 $350 $429 492-7312005 $79 $50 $129 492-7048388 $79 $79 492-7272944 $350 $350 492-6783078 $79 $79 492-6896014 $79 $350 $385 $814 492-7020820 $75 $79 $154 492-7028013 ** ** ** $350 $350 492-7247559 $350 $350 492-6688777 $40 $385 $425 491-8226744 $79 $350 $429 492-6623146 $75 $10 $85 492-6679168 $40 $40 492-6724976 $200 $200 $400 492-6788329 $100 $79 $350 $529 492-6909226 $79 $350 $429 492-6995236 $40 $79 $119 492-7071238 $79 $350 $429 Totals $370 $869 $60 $1,400 $2,520 $200 $200 $5,619 * We reviewed 133 additional loans that contained $26,092 in unallowable gift processing fees, resulting in $28,612 total questioned gift processing fees and $31,711 total questioned closing costs. ** HUD questioned these closing costs during a loan review. 46 Appendix D UNDERWRITING DEFICIENCIES BY LOAN No Explanation Sales Debt of Inquiries Docs Incentive Rolled All Debt Bankruptcy to Credit No thru No Gift Price Not Into Not On Not Beyond Report/Bad Compensating Third Docs in Loan Number Reduced Loan MCAW Control Debts Factors Party File 492-6943572 X X X 492-7312005 X X 492-7048388 X X 492-7272944 X X 492-6783078 X X X 492-6896014 X X 492-7020820 X 492-7028013 X 492-7247559 X X X X 492-6688777 X X 491-8226744 X X X 492-6623146 X 492-6679168 X 492-6724976 X 492-6788329 X 492-6995236 X 492-7071238 X Total 1 3 2 1 3 2 3 16 Notes: Italicized loan number indicates loans that had significant underwriting deficiencies that HUD paid a claim. K Hov should reimburse HUD for these payments. Bolded loan numbers indicate loans that had significant underwriting deficiencies. K Hov should indemnify. Unallowable Closing Costs are listed in Appendix C. 47 Appendix E CASE NARRATIVES Case Narrative—Loan Number 492-6943572 Mortgage amount: $156,750 Date of loan closing: August 8, 2003 Unallowable closing costs: $429 - $350 commitment fee and $79 tax service fee Underwriting Deficiencies • Gift transfer not documented by lender, • Unallowable closing costs charged, • No compensating factors when back-end ratio exceeded HUD guidelines, and • Financial documents sent through interested third parties. Summary: No Documentation of Gift Funds Transfer K Hov did not document the transfer of the gift funds as required by HUD. HUD requirements 26 state the lender must document the transfer of the funds from the donor to the borrower. Unallowable Closing Costs K Hov charged the borrower $429 in unallowable closing costs, $350 for an unallowable commitment fee and $79 for a tax service fee. According to HUD’s Homeownership Center Reference Guide, commitment fees and tax service fees are unallowable. Required Compensating Factors Not Provided K Hov did not provide compensating factors for the borrower exceeding the back-end ratio. HUD Handbook 4551.1 requires K Hov to obtain supporting documentation from the borrower and record the compensating factor(s) when borrowers exceed mortgage and debt repayments-to- income ratios to justify mortgage repayment. Financial Documents Sent through Interested Third Party Diamond Homes, a subsidiary of Goodman Homes, faxed credit, employment, and financial documentation to K Hov. HUD Handbook 4155.1, REV-4, CHG-1, paragraph 3-1, states lenders may not accept or use documents relating to the credit, employment, or income of borrowers that 26 HUD Handbook 4155.1, REV-4, CHG-1, paragraph 2-10C. 48 are handled by or transmitted from or through interested third parties (e.g., real estate agents, builders, sellers) or by using their equipment. Recommendations: We recommend that the assistant secretary for housing – federal housing commissioner require K Hov to: • Reimburse HUD $429 for allowable closing costs paid. • Reimburse HUD $156,376 for the amount of the claim paid on this loan. 49 Case Narrative—Loan Number 492-7312005 Mortgage amount: $163,550 Date of loan closing: October 20, 2004 Unallowable closing costs: $129--$79 for tax service fee and $50 for rush wire transfer fee Underwriting Deficiencies • Gift transaction not documented by lender, • Unallowable closing costs charged, and • Financial documents through interested third party (real estate agent). Summary: No Documentation of Gift Funds Transfer K Hov did not document the transfer of the gift funds as required by HUD. HUD requirements 27 state the lender must document the transfer of the funds from the donor to the borrower. Unallowable Closing Costs K Hov charged the borrower $129 in unallowable closing costs; it charged $79 for a tax service fee and $50 for a wire fee. The borrower paid a $79 tax service fee outside of closing to K Hov. In addition, K Hov charged the borrower a $50 rush wire fee. Based on an e-mail, K Hov did not order the gift funds in a timely manner, which resulted in the wire fee. These were unallowable closing costs per HUD guidelines. Financial Documents Sent through Interested Third Party The borrower’s real estate agent faxed credit, employment, and financial documentation to K Hov. HUD Handbook 4155.1, REV-5, paragraph 3-1, state lenders may not accept or use documents relating to the credit, employment, or income of borrowers that are handled by or transmitted from or through interested third parties (e.g., real estate agents, builders, sellers) or by using their equipment. Recommendations: We recommend that the assistant secretary for housing – federal housing commissioner require K Hov to: • Reimburse the borrower $129 for unallowable closing costs. • Indemnify HUD for $163,550 against loss for this loan’s underwriting deficiencies. 27 HUD Handbook 4155.1, REV-5, paragraph 2-10C. 50 Case Narrative—Loan Number 492-7048388 Mortgage amount: $148,800 Date of loan closing: January 28, 2004 Gift amount: $8,743 Unallowable closing costs: $79 tax service fee Underwriting Deficiencies • Gift transfer transaction not documented by lender, • Unallowable closing costs charged, and • Borrower not required to explain derogatory credit. Summary: No Documentation of Gift Funds Transfer K Hov did not document the transfer of the gift funds as required by HUD. HUD requirements 28 state the lender must document the transfer of the funds from the donor to the borrower. Unallowable Closing Costs K Hov charged the borrower $79 in an unallowable tax service fee closing cost. This was an unallowable closing cost according to HUD guidelines. Derogatory Credit Information Not Explained The borrowers’ did not provide an explanation of a spouse’s derogatory credit information. Texas is a community property state. HUD Handbook 4155.1, REV-5, paragraph 2-3 requires the borrower to provide sufficient and rational explanation of the derogatory credit. Also, HUD Handbook 4155.1, REV-5, paragraph states, “Except for the obligations specifically excluded by state law, the debts of the non-purchasing spouse must be included in the borrower’s qualifying ratios if the borrower resides in a community property state or the property to be insured is located in a community property state. Although the non-purchasing spouse’s credit history is not to be considered a reason for credit denial, a credit report that complies with the requirements of paragraph 2-4 must be obtained for the non-purchasing spouse in order to determine the debt- to-income ratio.” HUD Handbook 4155.1, REV-5, paragraph 2-3C, states that collections and judgments indicate a borrower’s regard for credit obligations and must be considered in the analysis of creditworthiness with the lender documenting its reasons for approving a mortgage when the borrower has collection accounts or judgments. The borrower must explain in writing all collections and judgments. 28 HUD Handbook 4155.1, REV-5, paragraph 2-10C. 51 Recommendations: We recommend that the assistant secretary for housing – federal housing commissioner require K Hov to: • Reimburse the borrower $79 for the unallowable closing costs. • Indemnify HUD for $148,800 against loss for this loan’s underwriting deficiencies. 52 Case Narrative—Loan Number 492-7272944 Mortgage amount: $135,100 Date of loan closing: September 10, 2004 Unallowable closing costs: $350 gift processing fee Underwriting Deficiencies • Gift transfer transaction not documented by lender, • Unallowable closing costs charged, and • Installment loan included in the mortgage. Summary: No Documentation of Gift Funds Transfer K Hov did not document the transfer of the gift funds as required by HUD. HUD requirements 29 state the lender must document the transfer of the funds from the donor to the borrower. Unallowable Closing Costs K Hov did not require Goodman Homes to reduce the sales price of the house by the unallowable fee. Goodman Homes charged the borrower an unallowable $350 Home Gift USA gift- processing fee in the calculation of the mortgage amount. As discussed above, Goodman Homes added the gift-processing fee to the sales price of the home. Installment Loan Included in Mortgage The settlement statement showed that an installment loan to Capitol One in the amount of $338 was rolled into the purchase price of the property. Total closing costs of $9,856 were added to the contract sales price of $136,244. Of the $9,856, $338 of debt was rolled into the mortgage. Mortgagee Letter 2002-02 states that it is unacceptable underwriting to allow payment of consumer debt and that payment of consumer debt should be a dollar-for-dollar reduction in price. Recommendations: We recommend that the assistant secretary for housing – federal housing commissioner require K Hov to: • Reimburse the borrower $350 for the gift processing fee. • Indemnify HUD for $135,100 against loss for this loan’s underwriting deficiencies. 29 HUD Handbook 4155.1, REV-5, paragraph 2-10C. 53 Case Narrative—Loan Number 492-6783078 Mortgage amount: $145,700 Date of loan closing: April 29, 2003 Gift amount: $4,197 Unallowable closing costs: $79 tax service fee Underwriting Deficiencies • Gift transaction not documented by lender, • Unallowable closing costs charged, • Installment loans included in the mortgage, and • Explanation regarding derogatory credit not required. Summary: No Documentation of Gift Funds Transfer K Hov did not document the transfer of the gift funds as required by HUD. HUD requirements 30 state the lender must document the transfer of the funds from the donor to the borrower. Unallowable Closing Costs K Hov charged the borrower $79 in unallowable tax service fee closing costs. This is an unallowable closing cost according to HUD guidelines. Installment Loans Included in Mortgage The settlement statement showed that $253 outstanding debt was included in the $3,479 closing costs. The $3,479 in total closing costs was added to the contract sales price of $148,000. Mortgagee Letter 2002-02 states that it is unacceptable underwriting to allow payment of consumer debt and that payment of consumer debt should be a dollar-for-dollar reduction in price. One of the compensating factors included in the file was that the borrower’s “High total debt to income ratio is offset by excellent credit with no lates on current housing for 48 months.” However, K Hov did not address any outstanding debt issues. K Hov responded that the “borrower had adequate funds in the account to pay debts as long as the gift funds were acceptable which, respectfully, they were.” K Hov did not reduce the price dollar- for-dollar as required by HUD. 30 HUD Handbook 4155.1, REV-4, CHG-1, paragraph 2-10C. 54 Derogatory Credit Information Not Explained The borrowers did not provide an explanation of derogatory credit information. HUD Handbook 4155.1, REV-4, CHG-1, paragraph 2-3, requires the borrower to provide sufficient and rational explanation of the derogatory credit. This loan went into default, resulting in HUD paying a $146,352 claim on the loan. Recommendations: We recommend that the assistant secretary for housing – federal housing commissioner require K Hov to: • Reimburse HUD $79 in unallowable closing costs. • Reimburse HUD $146,352 for the claim paid. 55 Case Narrative—Loan Number 492-6896014 Mortgage amount: $127,550 Date of loan closing: July 15, 2003 Unallowable closing costs: $814--This amount includes $79 tax service fee, $385 gift- processing fee, and $350 commitment fee paid outside of closing. Underwriting Deficiencies: • Gift transaction not documented by lender, • Unallowable closing costs charged, and • Three installment loans on settlement statement. Summary: No Documentation of Gift Funds Transfer K Hov did not document the transfer of the gift funds as required by HUD. HUD requirements 31 state the lender must document the transfer of the funds from the donor to the borrower. Unallowable Closing Costs K Hov charged the borrower $814 in unallowable closing costs. It charged a $350 commitment fee, $385 gift-service fee that it included in the sale price, and $79 for a tax service fee. HUD’s Homeownership Center Reference Guide states that it only allows commitment fees to nonprofits or governmental entities. According to the settlement statement, the borrower paid this commitment fee to K Hov; thus, the $350 commitment fee was unallowable. Goodman Homes charged the borrower an unallowable $385 Nehemiah gift-processing fee in the calculation of the mortgage amount. As discussed above, Goodman Homes added the gift and the processing fee to the sales price of the home. The borrower paid a $79 tax service fee outside of closing to K Hov. This is an unallowable closing cost according to HUD guidelines. Installment Loans Included in Mortgage The settlement statement showed that three installment loans totaling $336 32 were included in the closing cost and subsequently rolled into the mortgage. Mortgagee Letter 2002-02 states that it is unacceptable underwriting to allow payment of consumer debt and that payment of consumer debt should be a dollar-for-dollar reduction in price. 31 HUD Handbook 4155.1, REV-4, CHG-1, paragraph 2-10C. 32 (Nationwide Recovery $171.78, Credit Management $103, and Park Dansan $61). 56 K Hov provided the following compensating factor for the borrower: “made a diligent effort to clean up all credit issues.” However, K Hov’s closing instructions included payment of these three outstanding installment loans. In its response, K Hov stated the “borrower had adequate funds in the account to pay debts as long as the gift funds were acceptable which, respectfully, they were.” K Hov did not reduce the price dollar-for-dollar as required by HUD. Loan Defaulted within Six Months But Not Reviewed in Quality Control Plan The borrower made three payments, and the loan went into claim in July 2004. K Hov did not review this loan as required by HUD Handbook 4060.1. REV-1. CHG-1, paragraph 6-6D. This regulation states that in addition to the loans selected for routine quality control reviews, lenders must review all loans going into default within the first six payments. Recommendations: We recommend that the assistant secretary for housing – federal housing commissioner require K Hov to: • Reimburse HUD $814 for unallowable closing costs. • Reimburse HUD for $128,402, the amount of the claim paid, against loss for this loan’s underwriting deficiencies. 57 Case Narrative—Loan Number 492-7020820 Mortgage amount: $103,500 Date of loan closing: October 30, 2003 Unallowable closing costs $154--$79 in tax service fees paid outside of closing and $75 for a final inspection when the house was 100 percent complete at appraisal Underwriting Deficiencies • Gift transaction not documented by lender and • Unallowable closing costs charged. Summary: No Documentation of Gift Funds Transfer K Hov did not document the transfer of the gift funds as required by HUD. HUD requirements 33 state the lender must document the transfer of the funds from the donor to the borrower. Unallowable Closing Costs K Hov charged the borrower $154 in unallowable closing costs. It charged $79 for a tax service fee and $75 for an inspection fee when the house was 100 percent complete. The borrower paid a $79 tax service fee outside of closing to K Hov. This is an unallowable closing cost according to HUD guidelines. The borrower paid $75 for an inspection fee when the house was 100 percent complete at appraisal. HUD Handbook 4145.1, REV-2, CHG-1. Chapter 1, paragraph 6-3A3, states that the appraisal serves as the final inspection on properties “under construction” if the home is 100 percent complete and the appraiser completed the uniform residential appraisal report and all necessary exhibits. In this instance, the appraisal served as the final inspection. Recommendation: We recommend that the assistant secretary for housing – federal housing commissioner require K Hov to: • Reimburse HUD for $154 in unallowable closing costs. 33 HUD Handbook 4155.1, REV-4, CHG-1, paragraph 2-10C. 58 Case Narrative—Loan Number 492-7028013 Mortgage amount: $156,100 Date of loan closing: November 21, 2003 Unallowable closing costs: $350 Underwriting Deficiencies • Gift transfer transaction not documented by lender and • Unallowable closing costs charged. Summary: No Documentation of Gift Funds Transfer K Hov did not document the transfer of the gift funds as required by HUD. HUD requirements 34 state the lender must document the transfer of the funds from the donor to the borrower. Unallowable Closing Costs K Hov charged the borrower a $350 unallowable gift-processing fee. According HUD’s Homeownership Center Reference Guide, processing fees are unallowable. Recommendation: We recommend that the assistant secretary for housing – federal housing commissioner require K Hov to: • Reimburse the borrower $350 for the unallowable closing costs. 34 HUD Handbook 4155.1, REV-5, paragraph 2-10C. 59 Case Narrative—Loan Number 492-7247559 Mortgage amount: $118,800 Date of loan closing: July 29, 2004 Unallowable closing costs: $350 gift-processing fee Underwriting Deficiencies • Gift transfer of funds not documented by lender, • Unallowable closing costs charged, • No compensating factors on mortgage credit analysis worksheet when front/back-end ratio exceeded, and • Borrower received inducement to purchase without a sales reduction. Summary: No Documentation of Gift Funds Transfer K Hov did not document the transfer of the gift funds as required by HUD. HUD requirements 35 state the lender must document the transfer of the funds from the donor to the borrower. Unallowable Closing Costs K Hov charged the borrower $350 in unallowable closing costs for a gift-processing fee. HUD’s Homeownership Center Reference Guide lists all the allowable fees, and gift-processing fee is not on that list. Mortgage Credit Analysis Worksheet Lacked Compensating Factors K Hov did not provide compensating factors for the borrower exceeding the back-end ratio. HUD Handbook 4155.1 REV-5, paragraphs 2-12 and 2-13 requires K Hov to obtain supporting documentation from the borrower and record the compensating factor(s) when borrowers exceed mortgage and debt repayments-to-income ratios to justify mortgage repayment. Sales Price Not Reduced by Purchase Inducement The borrower received a 51-inch Sony television promotion, which was an inducement to purchase and should reduce the sales price, dollar for dollar per HUD Handbook 4155.1, REV-5, paragraph 1-7B. Personal property items such as cars, boats, riding lawn mowers, furniture, televisions, etc., given by the seller to consummate the sale result in a reduction to the mortgage. The value of the item(s) must be deducted from the sales price and the appraised value of the property (if not already done so by the appraiser) before applying the loan to value ratio. 35 HUD Handbook 4155.1, REV-5, paragraph 2-10C. 60 Recommendations: We recommend that the assistant secretary for housing – federal housing commissioner require K Hov to: • Reimburse the borrower the $350 for the unallowable closing cost. • Indemnify HUD for $118,800 against loss for this loan’s underwriting deficiencies. 61 Case Narrative—Loan Number 492-6688777 Mortgage amount: $171,600 Date of loan closing: March 21, 2003 Unallowable closing costs: $425 -- $385 gift-processing fee and $40 overcharge of appraisal Underwriting Deficiencies • Gift transaction not documented by lender, • Unallowable closing costs charged, and • Credit, employment, and financial documents sent to lender through interested third party. Summary: No Documentation of Gift Funds Transfer K Hov did not document the transfer of the gift funds as required by HUD. HUD requirements 36 state the lender must document the transfer of the funds from the donor to the borrower. Unallowable Closing Costs K Hov charged the borrower $425 in unallowable closing costs. It charged a $385 gift- processing fee that it included in the sale price and overcharged $40 for the final inspection fee. Goodman Homes charged the borrower an unallowable $385 Nehemiah gift-processing fee in the calculation of the mortgage amount. As discussed above, Goodman Homes added the gift- processing fee to the sales price of the home. Exceeding the HUD maximum of $60 for a final inspection fee, K Hov charged the borrower $100 for the final inspection fee; thus overcharging the borrower $40. Credit, Employment, and Financial Documents Sent through Interested Third Party Goodman Homes, an identity of interest of K Hov, faxed credit, employment, and financial documentation to K Hov. HUD Handbook 4155.1, REV-4, CHG-1, paragraph 3-1, states, “[l]enders may not accept or use documents relating to the credit, employment or income of borrowers that are handled by or transmitted from or through interested third parties (e.g., real estate agents, builders, sellers) or by using their equipment.” 36 HUD Handbook 4155.1, REV-4, CHG-1, paragraph 2-10C. 62 Recommendations: We recommend that the assistant secretary for housing – federal housing commissioner require K Hov to: • Reimburse the borrowers $425 in unallowable closing costs. • Indemnify HUD for $171,600 against loss for this loan’s underwriting deficiencies. 63 Case Narrative—Loan Number 491-8226744 Mortgage amount: $164,400 Date of loan closing: October 17, 2003 Gift amount: $9,103 Unallowable closing costs: $79 tax service fee Underwriting Deficiencies • Gift transaction not documented by lender, • Unallowable closing costs charged, • All debt not included on mortgage credit analysis worksheet, • Bankruptcy not beyond the control of the borrower, and • No explanation for inquiries on credit report within the last 90 days. Summary: No Documentation of Gift Funds Transfer K Hov did not document the transfer of the gift funds as required by HUD. HUD requirements 37 state the lender must document the transfer of the funds from the donor to the borrower. Unallowable Closing Costs K Hov charged $79 in unallowable closing costs for a tax service fee. HUD’s Homeownership Center Reference Guide states that it does not allow tax service fees. All Debt Not Included on Mortgage Credit Analysis Worksheet K Hov did not include all the debt on the mortgage credit analysis worksheet. Two of the borrowers’ accounts went into collection in July and September 2003. Neither of these accounts was included in the total installment debt amount on the mortgage credit analysis worksheet. The borrower had additional outstanding debt of $620. The mortgage credit analysis worksheet only showed $750. This would have changed the back-end ratio to more than 51 percent. Also, both of the uniform residential loan applications show that the borrowers had negative assets. Even without considering all of the non-reported debt, the borrowers had more than $33,000 in outstanding debts and obligations on the mortgage credit analysis worksheet. 37 HUD Handbook 4155.1, REV-4, CHG-1, paragraph 2-10C. 64 Bankruptcy Not Beyond Control of Borrower One of the borrowers had a bankruptcy with more than one and less than two elapsed years. According to HUD Handbook 4155.1, REV-4, CHG-1, paragraph 2-3E, an elapsed period of less than two years (but not less than 12 months) may be acceptable if the borrower can show that the bankruptcy was caused by extenuating circumstances beyond his or her control and has since exhibited an ability to manage financial affairs and the borrower’s current situation is such that the events leading to the bankruptcy are not likely to recur. The borrower needed to show that the bankruptcy was cause by extenuating circumstances beyond her control and she has exhibited the ability to manage her financial affairs in a responsible manner. The borrower quit her job without having another job, which is not beyond her control; the change in jobs caused the bankruptcy. Also, two months' worth of bank statements that the borrower provided contained numerous overdraft and advance fees, showing that the borrower not managing her financial affairs in a responsible manner. The loan defaulted within 15 months of closing. Recent Credit Inquiries Not Explained There were multiple inquiries regarding the borrower’s credit report, which K Hov did not require the borrower to explain. HUD Handbook 4155.1, REV-4, CHG-1, paragraph 2-3B, states that a satisfactory explanation must be provided by the borrower to account for the omission of any significant debt shown on the credit report but not listed on the loan application. The borrower must explain all inquiries shown on the credit report. The loan went into default, resulting in HUD paying a $167,116 claim on the loan. Recommendations: We recommend that the assistant secretary for housing –federal housing commissioner require K Hov to: • Reimburse HUD $79 for the unallowable closing costs. • Reimburse HUD for the $167,116 claim paid on this loan. 65 Case Narrative—Loan Number 492-6623146 Mortgage amount: $141,450 Date of loan closing: January 9, 2003 Unallowable closing costs: $85 -- $75 for an inspection fee when appraisal showed house was 100 percent complete and $10 wire transfer fee Underwriting Deficiencies • Gift transfer transaction not documented by lender and • Unallowable closing costs charged. Summary: No Documentation of Gift Funds Transfer K Hov did not document the transfer of the gift funds as required by HUD. HUD requirements 38 state the lender must document the transfer of the funds from the donor to the borrower. Unallowable Closing Costs K Hov charged $85 in unallowable closing costs. It charged $75 for an inspection fee when the appraisal showed the house was 100 percent complete and $10 for a wire transfer fee. K Hov charged unallowable closing costs of $75 inspection fee when appraisal showed the house was 100 percent complete. HUD Handbook 4145.1, REV-2, CHG-1, chapter 1, paragraph 6- 3A3, states that the appraisal serves as the final inspection on properties if the home is 100 percent complete and the appraiser performs the appraisal and completes the uniform residential appraisal report and all necessary exhibits. In this instance, the appraisal serves as the final inspection. K Hov charged the borrower $10 for a wire transfer. This is an unallowable closing cost according to HUD guidelines. This loan went into default, resulting in HUD paying a $146,631 claim on the loan. Recommendation: We recommend that the assistant secretary for housing – federal housing commissioner require K Hov to: • Reimburse HUD $85 in unallowable closing costs. 38 HUD Handbook 4155.1, REV-4, CHG-1, paragraph 2-10C. 66 Case Narrative—Loan Number 492-6679168 Mortgage amount: $152,450 Date of loan closing: February 14, 2003 Unallowable closing costs: $40 Overcharged in inspection fee. Underwriting Deficiencies • Gift transaction not documented by lender and • Unallowable closing costs charged. Summary: No Documentation of Gift Funds Transfer K Hov did not document the transfer of the gift funds as required by HUD. HUD requirements 39 state the lender must document the transfer of the funds from the donor to the borrower. Unallowable Closing Costs K Hov charged the borrower $100 for a final inspection fee when the appraisal showed the house was 100 percent complete; thus, no final inspection was needed. HUD does not allow the lender to charge more than $60 for an inspection fee if the house was 100 percent complete at the time of appraisal. Recommendation: We recommend that the assistant secretary for housing – federal housing commissioner require K Hov to: • Reimburse the borrower $100 for the unallowable closing cost. 39 HUD Handbook 4155.1, REV-4, CHG-1, paragraph 2-10C. 67 Case Narrative—Loan Number 492-6724976 Mortgage amount: $143,150 Date of loan closing: March 21, 2003 Unallowable closing costs: $400 -- $200 underwriting fee and a $200 processing fee Underwriting Deficiencies • Gift transaction not documented by lender and • Unallowable closing costs charged. Summary: No Documentation of Gift Funds Transfer K Hov did not document the transfer of the gift funds as required by HUD. HUD requirements 40 state the lender must document the transfer of the funds from the donor to the borrower. Unallowable Closing Costs K Hov charged the borrower $400 for unallowed costs, a $200 underwriting fee, and a $200 processing fee. According to the HUD Homeownership Reference Guide on Closing Costs and Other Fees, both underwriting fees and processing fees are unallowable. Recommendation: We recommend that the assistant secretary for housing – federal housing commissioner require K Hov to: • Reimburse the borrower $400 for unallowable closing costs. 40 HUD Handbook 4155.1, REV-4, CHG-1, paragraph 2-10C. 68 Case Narrative—Loan Number 492-6788329 Mortgage amount: $155,700 Date of loan closing: May 9, 2003 Unallowable closing costs: $529 -- $350 for a commitment fee, $100 for an inspection fee, and $79 for a tax service fee Summary: Unallowable Closing Costs K Hov charged the borrower $529 in unallowable closing costs, $350 for a commitment fee, $100 for an inspection fee, and $79 for a tax service fee. The borrower paid a commitment fee of $350 to K Hov outside of closing. A commitment fee has to be by a nonprofit or the instrumentality of a government to be allowed. K Hov is not a nonprofit or an instrumentality of a government. Thus, this is an unallowable closing cost. K Hov charged unallowable closing costs of a $100 inspection fee when the appraisal showed the house was 100 percent complete. HUD Handbook 4145.1. REV-2, CHG-1, chapter 1, paragraph 6-3A3, states that the final inspection on properties “under construction” serves as the final inspection if the home is 100 percent complete and the appraiser performs the appraisal and completes the uniform residential appraisal report and all necessary exhibits. In this instance, the appraisal served as the final inspection. The borrower paid a $79 tax service fee outside of closing to K Hov. This is an unallowable closing cost according to HUD guidelines. Recommendation: We recommend that the assistant secretary for housing – federal housing commissioner require K Hov to: • Reimburse the borrower $529 for the unallowable closing fees. 69 Case Narrative—Loan Number 492-6909226 Mortgage amount: $125,750 Date of loan closing: July 28, 2003 Unallowable closing costs: $429 -- $350 for a commitment fee and $79 for a tax service fee Summary: Unallowable Closing Costs K Hov charged the borrower $429 in unallowable closing costs; the borrower paid $350 for a commitment fee and $79 for a tax service fee. The borrower paid a commitment fee of $350 to K Hov outside of closing. A commitment fee has to be by a nonprofit or the instrumentality of a government to be allowed. K Hov is not a nonprofit or an instrumentality of a government. Thus, this is an unallowable closing cost. The borrower paid a $79 tax service fee outside of closing to K Hov. This is an unallowable closing cost according to HUD guidelines. Recommendation: We recommend that the assistant secretary for housing – federal housing commissioner require K Hov to: • Reimburse the borrower $429 for the unallowable closing fees. 70 Case Narrative—Loan Number 492-6995236 Mortgage amount: $123,000 Date of loan closing: October 8, 2003 Unallowable Closing Costs: $119 -- $79 tax service fee and overcharged $40 for an inspection Underwriting Deficiencies • Gift transaction not documented by lender and • Unallowable closing costs charged. Summary: No Documentation of Gift Funds Transfer K Hov did not document the transfer of the gift funds as required by HUD. HUD requirements 41 state the lender must document the transfer of the funds from the donor to the borrower. Unallowable Closing Costs K Hov charged the borrower $119 for unallowed costs, $79 for a tax service fee and an overcharge of $40 for a final inspection. According to the HUD Homeownership Reference Guide on Closing Costs and Other Fees, tax service fees are unallowable. Further, a final inspection fee should not exceed $60. K Hov charged $100. Recommendation: We recommend that the assistant secretary for housing – federal housing commissioner require K Hov to: • Reimburse the borrower $119 for unallowable closing costs. 41 HUD Handbook 4155.1, REV-4, CHG-1, paragraph 2-10C. 71 Case Narrative—Loan Number 492-7071238 Mortgage amount: $117,700 Date of loan closing: January 29, 2004 Unallowable closing costs: $429 ($350 gift processing fee and $79 tax service fee) Underwriting Deficiencies • Gift transaction not documented by lender and • Unallowable closing costs charged. Summary: No Documentation of Gift Funds Transfer K Hov did not document the transfer of the gift funds as required by HUD. HUD requirements 42 state the lender must document the transfer of the funds from the donor to the borrower. Unallowable Closing Costs K Hov charged the borrower $429 in unallowable closing costs. It charged $350 in gift- processing fees and a $79 tax service fee. According to the HUD Homeownership Reference Guide on Closing Costs and Other Fees, both processing fees and tax service fees are unallowable. This loan is currently in default. Recommendation: We recommend that the assistant secretary for housing – federal housing commissioner require K Hov to: • Reimburse the borrower for the $429 in unallowable fees. 42 HUD Handbook 4155.1, REV-5, paragraph 2-10C. 72
K Hovnanian American Mortgage, LLC, Plano, Texas, Violated Underwriting Requirements and Did Not Meet All Quality Control or Branch Requirements
Published by the Department of Housing and Urban Development, Office of Inspector General on 2006-01-26.
Below is a raw (and likely hideous) rendition of the original report. (PDF)