Issue Date
March 28, 2006
Audit Report Number
2006-FW-1006
TO: Brain D. Montgomery
Assistant Secretary for Housing—Federal Housing Commissioner, H
Margarita Maisonet
Director Departmental Enforcement Center, CV
FROM:
Frank E. Baca
Regional Inspector General for Audit, Fort Worth Region, 6AGA
SUBJECT: America’s Mortgage Resource, Inc., Metairie, Louisiana: Branch Manager
Formed an Identity-of-Interest Entity That Provided Gift Funds; and Did Not
Always Meet HUD Loan Origination and Quality Control Plan Requirements
HIGHLIGHTS
What We Audited and Why
We audited America’s Mortgage Resource, Inc. (America’s Mortgage), located in
Metairie, Louisiana, a nonsupervised lender approved by the U. S. Department of
Housing and Urban Development (HUD) to originate Federal Housing
Administration-insured single family mortgages. We selected America’s Mortgage
for review due to its high default rate.
Our audit objectives were to determine whether America’s Mortgage (1) followed
HUD origination requirements, including the use of gifts and underwriting, and
(2) implemented a quality control plan according to HUD requirements.
What We Found
America’s Mortgage’s LaPlace branch manager 1 formed an identity-of-interest
company, Imagine Foundation that provided prohibited quid pro quo gifts to
borrowers. Imagine Foundation provided $404,997 in gift funds to 73 America’s
Mortgage borrowers. The Internal Revenue Service denied Imagine Foundation
nonprofit status because it did not meet nonprofit requirements. 2 According to
the Internal Revenue Service, America’s Mortgage’s owner served on the board
of Imagine Foundation. 3 Under the HUD requirements, the gifts should be
considered as “inducements to purchase,” and HUD regulations require the sales
price to be reduced dollar for dollar for gifts in determining the maximum
mortgage amount. Therefore, HUD unnecessarily over insured 73 Federal
Housing Administration loans totaling more than $7.6 million.
Additionally, America’s Mortgage did not originate and process loans in
accordance with HUD’s regulations, nor did its quality control plan meet HUD’s
regulations, further putting Federal Housing Administration-insured loans at risk.
What We Recommend
We recommend that HUD require America’s Mortgage to write down the loans
for the $404,997 in inappropriate gifts by Imagine Foundation, indemnify 73
loans totaling $6,904,509, and reimburse HUD $303,261 for claims paid on four
loans. Further, HUD should take administrative action as appropriate, including
debarment and civil monetary penalties, against the president and board of
Imagine Foundation. America’s Mortgage should develop and implement a
quality control plan that complies with HUD’s requirements before it is allowed
to underwrite additional loans.
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 America’s Mortgage on February 17, 2006, and
held an exit conference on March 7, 2006. America’s Mortgage provided written
1
The branch manager also served as an underwriter for America’s Mortgage.
2
26 CFR [Code of Federal Regulations] 501(c)(3).
3
According to the response, the owner asserts that although he “signed a letter of intent to serve on the board in
2003, [Imagine Foundation’s] board of directors was never ratified and I withdrew my intent to serve on the
board before ever assuming such a position.”
2
comments on March 10, 2006. America’s Mortgage disagreed with the identity-
of-interest finding and the underwriting deficiencies. Based on documentation
provided by America’s Mortgage, we revised the report for two underwriting
deficiencies. America’s Mortgage response along with our evaluation is included
in appendix B of this report. We redacted name of borrowers and did not include
attachments due to the volume.
3
TABLE OF CONTENTS
Background and Objectives 5
Results of Audit
Finding 1: A Branch Manager Formed an Identity-of-Interest Entity and 6
Provided Quid Pro Quo Gift Funds
Finding 2: America’s Mortgage Did Not Meet HUD Loan Origination or 12
Quality Control Plan Requirements
Scope and Methodology 16
Internal Controls 17
Appendixes
A. Schedule of Questioned Costs and Funds to Be Put to Better Use 18
B. Auditee Comments and OIG’s Evaluation 19
C. Listing of the 73 America’s Mortgage Loans That Received Imagine Foundation 45
Gifts
D. Underwriting Deficiency Detail 46
4
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.
America’s Mortgage Resource, Inc. (America’s Mortgage), a nonsupervised lender, was
incorporated on September 3, 1996. It is located at 3317 North I-10 Service Road, Suite 200,
Metairie, Louisiana. On May 16, 1997, HUD approved America’s Mortgage as a loan
correspondent to originate Federal Housing Administration loans. America’s Mortgage operates
four branches: Metairie and LaPlace in Louisiana and Biloxi and Ocean Springs in Mississippi.
During the period March 1, 2003, to February 28, 2005, America’s Mortgage originated and
underwrote 213 Federal Housing Administration loans totaling $21,804,459. Of the 213 loans,
the Metairie branch originated and underwrote 151 loans totaling $16,154,083. The Metairie
branch had 16 defaults, including one claim.
Due to a high default and claim rate at the Metairie branch, HUD terminated its approval to
originate Federal Housing Administration-insured single-family mortgages in HUD’s New
Orleans jurisdiction. The termination became effective on September 10, 2004. We reviewed 11
Metairie branch loans that closed before September 10, 2004. However, according to the
LaPlace branch manager, these loans were actually originated at the LaPlace branch. Thus, we
expanded our audit to include operations at the LaPlace Branch by selecting five additional loans
for review. Due to the identity of interest between America’s Mortgage and Imagine
Foundation, we performed a limited review of an additional 69 loans America’s Mortgage
originated during the audit scope that received Imagine Foundation gifts.
The audit objectives were to determine whether America’s Mortgage (1) complied with HUD
regulations, procedures, and instructions in the origination and underwriting of Federal Housing
Administration-insured single-family mortgages and (2) implemented its quality control plan as
required.
5
RESULTS OF AUDIT
Finding 1: A Branch Manager Formed an Identity-of-Interest Entity and
Provided Quid Pro Quo Gift Funds
America’s Mortgage’s LaPlace branch manager 4 formed an identity-of-interest company,
Imagine Foundation, which provided prohibited quid pro quo gifts. These gifts were used for
downpayment assistance for America’s Mortgage borrowers. According to the Internal Revenue
Service, America’s Mortgage’s owner served on the board of Imagine Foundation. 5 Although
HUD allows charitable organizations to provide downpayment assistance, Imagine Foundation did
not obtain the required Internal Revenue Service 501(c) (3) nonprofit status. To the contrary, the
Internal Revenue Service denied Imagine Foundation’s request on August 10, 2005. Without the
gifts from Imagine Foundation, America’s Mortgage borrowers did not meet the statutory 3
percent minimum downpayment. Some of the sales prices increased when the borrower received
gifts. HUD regulations require the sales price to be reduced dollar for dollar for gifts from an
unallowable source. Imagine Foundation inappropriately provided $404,997 in gift funds to
America’s Mortgage borrowers. As a result of this identity-of-interest providing gift funds to
borrowers, America’s Mortgage put at risk 73 HUD-insured loans totaling $7.6 million.
The Identity-of-Interest
Nonprofit Provided More Than
$400,000 in Gift Funds to
Borrowers
America’s Mortgage’s LaPlace branch manager created and served as president of
Imagine Foundation. The company provided downpayment gifts solely to
America’s Mortgage borrowers. Because of the branch manager’s employment at
America’s Mortgage and his interest in the company, Imagine Foundation was a
prohibited identity-of-interest entity. From January 2003 to February 2005,
Imagine Foundation provided $404,997 in gift funds without obtaining Internal
Revenue Service 501(c) (3) nonprofit status. As a result, America’s Mortgage put
$7,612,767 of HUD-insured loans at risk.
According to the branch manager, he founded Imagine Foundation as a means to
provide gifts to America’s Mortgage borrowers. Imagine Foundation provided no
documentation that it ever provided gifts to any borrowers that did not use
America’s Mortgage. The branch manager used other nonprofit downpayment
assistance providers’ business plans as a format. Further, Imagine Foundation’s
proposed board included both the branch manager’s spouse and the owner of
4
The branch manager also underwrote loans for America’s Mortgage.
5
According to the response, the owner asserts that although he “signed a letter of intent to serve on the board in
2003, [Imagine Foundation’s] board of directors was never ratified and I withdrew my intent to serve on the
board before ever assuming such a position.”
6
America’s Mortgage. Mortgagee Letter 96-18 affirms HUD’s position on the
inappropriateness of only approving assistance if the buyer obtained financing with a
specified lender.
Loans Were Closed by the
Branch Manager/President of
the Nonprofit
Of the 73 loans reviewed, the branch manger and president of Imagine
Foundation reviewed and underwrote 15 loans (21 percent) that received gift
funds from Imagine Foundation. The majority (44 loans or 60 percent) of the
other loans were closed by an automated underwriting system. The other 14 loans
(19 percent) were underwritten by underwriters who were supervised by either the
branch manager or America’s Mortgage’s president.
Because the president of Imagine Foundation was also the branch manager of
America’s Mortgage, he had an interest in the sale of the property. Further, the
owner of America’s Mortgage knew of the interest.
HUD regulations 6 state that the gift donor may not be a person or entity with an
interest in the sale of the property, such as the seller, real estate agent or broker,
builder, or any entity associated with them. Gifts from these sources are
considered inducements to purchase and must be subtracted from the sales price.
Further, no repayment of the gift may be expected or implied.
Nonprofit Status Was Denied
by the Internal Revenue Service
While trying to receive nonprofit status for at least 3 ½ years, the Internal
Revenue Service has never recognized Imagine Foundation as a nonprofit.
Mortgage’s branch manager formed Imagine Foundation on May 29, 2001, and
sought nonprofit status from the Internal Revenue Service in December 2001.
Between January 2003 and February 2005, Imagine Foundation contributed from
$1,998 to $8,700 to 73 borrowers. In March 2004, Imagine Foundation informed
the Internal Revenue Service that it had suspended operations pending a ruling
from the Internal Revenue Service; however, records show Imagine Foundation
provided 13 of the 73 gifts after March 2004.
In a letter, dated August 10, 2005, the Internal Revenue Service denied Imagine
Foundation nonprofit, tax-exempt status because its gift program
6
HUD Handbook 4155.1, REV-4, CHG-1, or REV-5, “Mortgage Credit Analysis for Mortgage Insurance, One to
Four Family Properties,” section 3, paragraph 2-10C.
7
• Involved an identity-of-interest entity,
• Did not differentiate among income levels,
• Did not provide a service, and
• Did not meet the definition of a gift.
Regarding the identity-of-interest entity, the ruling stated:
In your brochure, it states that buyers must be pre-qualified by
America’s Mortgage. A member of Imagine Foundation’s governing
board owns America’s Mortgage. Imagine Foundation’s founder and
president manages the local America’s Mortgage office.
Although Imagine Foundation reported to the Internal Revenue Service that it
provided gifts to qualified buyers, purchasing participating homes and using
eligible loan programs, the Internal Revenue Service determined that Imagine
Foundation provided gifts
• Regardless of income limits,
• Without meeting the prospective buyers or providing any homeowner
education courses, and
• To any seller willing to pay the required 1 percent fee.
The ruling further stated the following:
Almost all of your revenue comes from the sellers you serve.
That your primary activity is to promote and to further your
private business interests is reflected in the financing structure
of your downpayment assistance program.
Your grant making procedures indicate that gift funds are only
provided if a seller has paid a processing fee and made a
contribution to you. In fact, while you call the funds you will
receive from the sellers ‘contributions,’ these transactions are
not contributions because they will not ‘proceed from detached
and disinterested generosity.’ Your characterization of these
transactions as contributions ignores the business realities
surrounding the payments.
These ‘contributions’ are more appropriately characterized as
fees received in exchange for the sale of a service.
HUD regulations state that the source of the funds to close must be from the
applicant’s own assets or gifts from relatives, an employer, a long-standing friend
not involved in the transaction, a government agency, or a charitable organization.
Because Imagine Foundation did not meet the requirement of being a charitable
organization, it was an inappropriate source of gift funds. HUD considers gifts
8
from other sources as inducements to purchase and requires a reduction in the
sales price. 7
Borrowers Did Not Meet the
Minimum Downpayment
Requirement
Of the 16 loans reviewed, the 11 loans that received Imagine Foundation gifts did
not meet the statutory 3 percent minimum downpayment required by the National
Housing Act. During the audit scope, six borrowers receiving Imagine
Foundation gift funds defaulted on loans totaling $561,384.
Borrower’s downpayment versus required
downpayments for loans reviewed 8
Loan number Total Minimum Difference Gift
borrower's investment
investment required
221-3521311 $7,905 $4,650 $3,255
221-3526608 $3,954 $1,800 $2,154
221-3634657 $4,386 $3,900 $486
221-3636165 $2,225 $2,220 $5
221-3697208 $3,589 $3,585 $4
221-3486754 $1,530 $1,845 ($315) $1,845
221-3646287 $3,590 $4,200 ($610) $5,825
221-3660809 $808 $1,950 ($1,142) $3,500
221-3537459 $323 $2,250 ($1,927) $4,000
221-3685960 - $3,000 ($3,000) $6,000
221-3681056 ($123) $3,060 ($3,183) $7,000
221-3670149 $287 $3,523 ($3,236) $6,475
221-3680202 $65 $3,645 ($3,580) $7,105
221-3637539 - $3,600 ($3,600) $6,800
221-3549457 - $4,275 ($4,275) $7,000
221-3655765 $275 $4,690 ($4,416) $8,700
The Sales Price Increased
Contrary to reducing the sales price by the amount of the inappropriate gift, the
loan files showed that in 28 of the 73 loans (38 percent), the sales price increased
7
HUD Handbook 4155.1, REV-4, CHG-1, or REV 5, “Mortgage Credit Analysis for Mortgage Insurance, One to
Four Family Properties,” section 3, paragraph 2-10C.
8
Loans closed by America’s Mortgage as a loan correspondent in italics.
9
by all or part of the gift amount. As shown in the table below, the sales price
increased from $1,000 to $13,519.
Sales price increase with gifts
Original purchase HUD sales
Case number price Gift amount price Increase
221-3537459 $74,000 $4,000 $75,000 $1,000
221-3522693 $95,500 $4,500 $96,500 $1,000
221-3646468 $90,000 $5,460 $91,000 $1,000
221-3628668 $84,800 $5,240 $86,000 $1,200
221-3668319 $83,740 $4,200 $85,000 $1,260
221-3746945 $113,300 $4,200 $115,000 $1,700
221-3496440 $81,000 $4,430 $83,000 $2,000
221-3685960 $98,000 $6,000 $100,000 $2,000
221-3712363 $125,400 $6,000 $127,400 $2,000
221-3509067 $105,000 $6,050 $107,000 $2,000
221-3515838 $84,500 $6,135 $86,500 $2,000
221-3606735 $125,000 $7,000 $127,000 $2,000
221-3652043 $63,900 $1,998 $66,570 $2,670
221-3588496 $147,000 $5,876 $150,000 $3,000
221-3657165 $116,900 $4,900 $120,000 $3,100
221-3637539 $116,390 $3,610 $120,000 $3,610
221-3681056 $98,239 $3,761 $102,000 $3,761
221-3656334 $103,500 $5,500 $107,500 $4,000
221-3558016 $79,900 $4,500 $84,400 $4,500
221-3669662 $97,000 $5,000 $102,000 $5,000
221-3507349 $70,000 $3,735 $76,500 $6,500
221-3680202 $114,000 $7,105 $121,500 $7,500
221-3656386 $106,900 $6,700 $114,900 $8,000
221-3507933 $95,000 $7,050 $103,000 $8,000
221-3646287 $131,800 $5,825 $140,000 $ 8,200
221-3655765 $147,343 $8,615 $156,343 $9,000
221-3713250 $140,000 $6,000 $152,400 $12,400
221-3549457 $128,981 $7,000 $142,500 $13,519
Imagine Foundation received $14,123 in fees for providing gifts on America’s
Mortgage loans. Further, America’s Mortgage received $46,062 in origination
fees on the loans.
Conclusion
America’s Mortgage’s branch manager created Imagine Foundation, an identity-
of-interest company, with the knowledge of America’s Mortgage’s owner.
10
Because Imagine Foundation did not receive Internal Revenue Service nonprofit
status, it did not meet HUD’s definition of an allowable source of funds. Further,
loans receiving a gift from Imagine Foundation did not meet minimum investment
requirements, and in some instances, America’s Mortgage increased the sales
price of the house. As a result, America’s Mortgage put 73 loans totaling more
than $7.6 million at risk.
Recommendations
We recommend that HUD’s assistant secretary for housing require America’s
Mortgage to
1A. Write down the $404,997 in ineligible gifts for 73 loans.
1B. Indemnify HUD for $6,904,509 9 for the 73 loans that received gift funds
from Imagine Foundation.
We recommend that HUD's director of the enforcement center
1C. Take administrative action as appropriate, up to and including debarment
and civil monetary penalties, against the president and board of Imagine
Foundation.
9
Represents the $7,612,767 total loan amount for the 73 borrowers, less the $404,997 questioned in
recommendation 1A and $303,261 in recommendation 2A.
11
Finding 2: America’s Mortgage Did Not Meet HUD Loan Origination
or Quality Control Plan Requirements
America’s Mortgage’s underwriting procedures and its quality control plan did not meet HUD
requirements. America’s Mortgage did not obtain documentation required by the Loan Prospector
underwriting system, did not review loans defaulting within the first six payments, and did not
conduct on-site reviews. Also, America’s Mortgage’s loan files contained other instances of
underwriting deficiencies, and its employees input information incorrectly into HUD’s computer
systems. These deficiencies occurred because America’s Mortgage ignored or misunderstood HUD
regulations. As a result, HUD paid claims totaling $303,261.
America’s Mortgage Did Not
Obtain Required
Documentation
For five of ten loans reviewed that were underwritten using an automated
underwriting system, America’s Mortgage did not obtain the required payroll
documentation. The loan files only contained partial payroll information for the
borrowers. For these five loans, Loan Prospector 10 required one full month of
payroll stubs. Mortgagee Letter 98-14 states that Loan Prospector will determine
the level of documentation needed to determine a loan’s eligibility for Federal
Housing Administration insurance. America’s Mortgage did not meet that level
of documentation for these loans.
Three of the ten loans 11 mentioned above contained other deficiencies,12 including
o Lacking explanations for gaps in employment,
o Exceeding the 6 percent allowance for seller-paid closing costs, and
o Not obtaining a signature.
10
Loan Prospector is a Federal Housing Administration-approved automated underwriting system.
11
One of the ten loans reviewed did not contain any underwriting deficiencies.
12
See appendix D for details.
12
Underwriting deficiencies by loan
Lack of loan Loan defaulted Loan
No explanation Prospector within six Gift funds application
of gap in documentation months not exceed not
Case number employment obtained reviewed 6% submitted
221-3549457 X
221-3670149 X X
221-3634657 X X
221-3636165 X
221-3697208 X
221-3637539 X X
221-3681056 X X X
221-3526608 X
As of November 21, 2005, HUD had paid $303,261 in claims 13 on four of the ten
loans.
America’s Mortgage’s Quality
Control Plan Did Not Meet
HUD Requirements
America’s Mortgage did not have a quality control plan that met HUD
requirements. The quality control plan implemented did not require a review of
loans defaulting within the first six payments or annual site visits for new
branches.
America’s Mortgage did not review early defaults as required by HUD
regulations. America’s Mortgage’s president stated that America’s Mortgage did
not service any loans and that it sold all of its loans after closing and before the
first payment. The president went on to claim that although America’s Mortgage
can get information from HUD’s Neighborhood Watch system, its contracts
prevent it from contacting the borrower after sale of the loan. We reviewed data
provided by the president and could not find evidence to support his claim. HUD
requirements 14 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. Without the loan reviews, America’s Mortgage did not ensure that
it protected HUD and itself from unacceptable risk. Also, it could not identify,
address, and correct deficiencies or problems that occurred.
America’s Mortgage’s quality control plan read like a contract between America’s
Mortgage and its quality control contractor, the SRS Group. America’s
13
The loans with claims and underwriting deficiencies are bolded in the above table.
14
HUD Handbook 4060.1, REV-1, “Mortgagee Approval Handbook,” paragraph 6-6D.
13
Mortgage’s president stated that the quality control plan was written as it was
because “the SRS Group handles everything as a third party to ensure everything
is in accordance with HUD.” However, our review determined that the plan
lacked requirements to review loans that default within the first six payments and
to review new branches. HUD requirements 15 state that all Federal Housing
Administration-approved lenders, including loan correspondents, must implement
and continuously have in place a quality control plan for the origination and/or
servicing of insured mortgages as a condition of receiving and maintaining HUD
approval.
America’s Mortgage did not perform on-site visits of two new branches 16 it
opened in Mississippi. Its president did not believe the new branches warranted a
review since they had only recently opened. HUD regulations require 17
America’s Mortgage to perform annual site visits for new branches.
America’s Mortgage Lacked
Input Controls
America’s Mortgage incorrectly inputted gift data into HUD’s systems in 28 of 80
instances. HUD relies upon information provided by lenders for monitoring
activities. As shown in the table below, the majority of the input errors occurred
with the automated underwriting system.
Loans incorrectly input
Underwriter identification Number of loans input
incorrectly
Automated underwriting systems 20
Manual underwriters 8
Total 28
Conclusion
Because America’s Mortgage did not originate loans in accordance with HUD
regulations, it put HUD’s insurance fund at risk. America’s Mortgage should
reimburse HUD $303,261 for claims it paid on four loans. If America’s Mortgage
follows HUD’s loan origination and quality control plan requirements, its loans
will be less likely to default.
15
HUD Handbook 4060.1, REV-1, CHG-1, “Mortgagee Approval Handbook,” paragraph 6-1.
16
The Biloxi branch opened in April 2004, and the Ocean Springs branch opened in January 2005.
17
HUD Handbook 4060.1, REV-1, CHG-1, “Mortgagee Approval Handbook,” paragraph 6-3G2.
14
Recommendations
We recommend that HUD’s assistant secretary for housing require America’s
Mortgage to
2A. Repay HUD for $303,261 in claims paid on four defaulted loans.
2B. Require America’s Mortgage to comply with HUD’s underwriting
requirements.
2C. Ensure America’s Mortgage’s quality control plan incorporates all HUD
requirements, including reviewing all loans defaulting in the first six months
and procedures for annual on-site visits.
2D. Require America’s Mortgage to input information correctly into HUD’s
systems to reduce Single Family Data Warehouse data entry errors.
15
SCOPE AND METHODOLOGY
To accomplish our audit objectives, we
• Reviewed relevant statutory, regulatory, and HUD handbook requirements.
• Reviewed 16 of 151 loan files originated by America’s Mortgage between January 2003
and February 2005. Due to the identity-of-interest between America’s Mortgage and
Imagine Foundation, we performed limited procedures on an additional 69 loans
America’s Mortgage originated during the audit scope that received Imagine Foundation
gifts.
• Reviewed loan files maintained by various title companies in the New Orleans
metropolitan area and HUD’s Denver Homeownership Center.
• Obtained and reviewed Imagine Foundation gift records.
• Reviewed and analyzed America’s Mortgage’s quality control plan.
• Interviewed America’s Mortgage management and employees.
• Interviewed HUD Quality Assurance Division personnel.
• Interviewed personnel from title companies.
• Conducted site visits.
We relied on data maintained by HUD in the Single Family Data Warehouse and Neighborhood
Watch systems. We did not perform a detailed analysis of the reliability of these computer
databases, nor do we offer an opinion on these systems. As stated in finding 2, America’s
Mortgage inputted incorrect gift information into the system.
We performed our audit work between May 19 and November 22, 2005, which included
fieldwork at America’s Mortgage’s Metairie 18 and LaPlace 19 offices and five title companies
located around the metropolitan New Orleans area. The audit covered the period from March 1,
2003, through February 28, 2005.
We performed our review in accordance with generally accepted government auditing standards.
18
Located at 3317 North I-10 Service Road, Suite 200, Metairie, Louisiana 70002.
19
Located at 568 Belle Terre Boulevard, LaPlace, Louisiana 70068.
16
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:
• Loan origination process—Policies and procedures that management
requires to reasonably ensure that the loan origination process complies
with HUD program requirements and
• 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.
Significant Weaknesses
As described in the findings, we believe America’s Mortgage did not operate in
accordance with HUD requirements related to nonprofit identities of interest, loan
originations, and quality control.
17
APPENDIXES
Appendix A
SCHEDULE OF QUESTIONED COSTS
AND FUNDS TO BE PUT TO BETTER USE
Recommendation Ineligible 1/ Funds to be put
number to better use 2/
1A $404,997
1B $6,904,509 20
2A $303,261
Totals $708,258 $6,904,509
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.
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.
20
Represents the $7,612,767 total loan amount for the 73 borrowers, less the $404,997 questioned in
recommendation 1A and $303,261 in recommendation 2A.
18
Appendix B
AUDITEE COMMENTS AND OIG’S EVALUATION
Ref to OIG Evaluation Auditee Comments
19
20
Comment 1
21
Comment 1
22
23
Comment 2
24
Comment 3
Comment 4
25
Comment 5
26
Comment 6
27
Comment 7
Comment 8
Comment 9
28
Comment 7
29
Comment 10
30
Comment 11
31
Comment 7
Comment 12
32
Comment 7
Comment 13
33
Comment 14
34
Comment 15
35
Comment 16
36
Comment 17
37
Comment 18
38
Comment 19
Comment 20
39
Comment 18
40
41
OIG Evaluation of Auditee Comments
Comment 1 We appreciate America’s Mortgage’s efforts to correct deficiencies cited in
the finding and agree if corrections are implemented they should improve
America’s Mortgage Resource’s operations and decrease the risk to the
Federal Housing Administration’s loan portfolio.
Comment 2 We maintain that an identity of interest existed between America’s Mortgage
Resource and Imagine Foundation because the same person served as the
branch manager (in the response, America’s Mortgage identifies this person as
a vice president in the company) and as the president of Imagine Foundation.
The branch manager underwrote 15 loans cited in the report. As branch
manager, he would have been the supervisor of the other loans.
Comment 3 While HUD Handbook 4060.1 Rev-1 Paragraph 2-11(B) allows officers to
represent more than one company, America’s Mortgage Resource provided no
evidence that it met the HUD requirements allowing it to do so.
Comment 4 Although America’s Mortgage’s owner stated that he withdrew his intention
to serve on Imagine Foundation’s board, he did not provide documentation to
that effect, or a date when this occurred. The report did not state that
America’s Mortgage Resource maintained an ownership position in Imagine
Foundation. We clarified the role of America’s Mortgage president with
Imagine Foundation in the body of the report.
Comment 5 Although America’s Mortgage may have understood that Imagine Foundation
would help any borrower from any lender, Imagine Foundation only provided
gifts to borrowers who used America’s Mortgage.
Comment 6 America’s Mortgage response described Imagine Foundation as an
“uninterested entity’ that provide gifts. We disagree with this
characterization. Imagine Foundation’s president was the branch
manager/vice president of America’s Mortgage and in 15 instances (20.5
percent of the 73 loans cited) underwrote and approved the loans. The branch
manager/vice president received compensation from America’s Mortgage and
controlled Imagine Foundation. America’s Mortgage held the mortgage on
the loans. 21 Also, the branch manager provided closing instructions to title
companies regarding the loans that received gifts. It is unlikely that either the
seller or the borrower in most instances would have been aware of the
downpayment assistance program or Imagine Foundation without the
involvement of the branch manager.
Comment 7 America’s Mortgage contends that Imagine Foundation acted similarly as
other gift providers and the use of Imagine Foundation had no effect on the
21
According to America’s Mortgage, it sells all the mortgages in the secondary market.
42
borrower’s eligibility for Federal Housing Administration loans. However,
the Internal Revenue Service expressly denied Imagine Foundation’s
nonprofit status. As a result, Imagine Foundation’s contributions are
considered inducements to purchase and the mortgage must be reduced.
Without Imagine Foundation’s contributions, the borrowers did not make the
required downpayment on the houses.
America’s Mortgage repeatedly asserts if borrowers did not receive gifts from
Imagine Foundation that borrowers could receive similar gifts from another
downpayment assistance provider. Further, the response contends that
Imagine Foundation operated similar to these downpayment assistance
providers. However, the Internal Revenue Service denied Imagine
Foundation’s nonprofit status based upon Imagine Foundation accurately
describing the transaction. America’s Mortgage’s response did not indicate
how a different provider would nullify the Internal Revenue Service’s
objections.
Comment 8 America’s Mortgage owner did not believe the gifts to be from an interested
source. However, the same person underwrote or supervised the underwriter
for loans that he as president of Imagine Foundation wrote the checks for the
gift. Irrespective of the owner’s belief, America’s Mortgage benefited and
profited from this relationship.
Comment 9 The report accurately reflects the criteria and facts.
Comment 10 Based on documentation provided OIG changed the date to December 2001.
Comment 11 We would not expect America’s Mortgage to indemnify HUD for the amount
that it reduces the principal. HUD regulations 22 require the principal
reduction due to the contributions being inducements to purchase. Because of
the other violations including not meeting minimum investment, we are
recommending the indemnification of the remaining amount of the loan.
Comment 12 We cannot apply proposed changes to HUD requirements to existing
transactions. We relied upon requirements in place during the audit time
frame.
Comment 13 When the branch manager closed a loan or oversaw the closing of a loan, he
had influence over a loan. Further, in at least one instance the branch manager
instructed a title company to change the sales price. We reported information
obtained through file reviews. America’s Mortgage’s response did not
indicate what information was incorrect.
Comment 14 The finding accurately discloses the fees earned by America’s Mortgage and
Imagine Foundation.
22
HUD Handbook 4155.1, REV-4, CHG-1, or REV 5, “Mortgage Credit Analysis for Mortgage Insurance, One to
Four Family Properties,” section 3, paragraph 2-10C.
43
Comment 15 OIG commends America’s Mortgage for taking steps to correct its quality
control plan.
Comment 16 America’s Mortgage did not include any of the quarterly reports.
Comment 17 America’s Mortgage did not comply with Loan Prospector requirements that
required one full month’s payroll documentation. America’s Mortgage may
have complied with HUD non-Loan Prospector requirements, but Mortgagee
Letter 98-14 states Loan Prospector will determine documentation needed to
determine a loan’s eligibility.
Comment 18 Based upon documentation provided, we removed this from the report.
Comment 19 HUD regulations state an explanation of the gap in employment is required.
Although America’s Mortgage can explain this gap, the HUD maintained loan
file did not contain this information.
Comment 20 The sales addendum clearly shows that $7,000, the amount of the gift, was to
be used for closing costs. America’s Mortgage has a fiduciary responsibility
to HUD to ensure that the seller does not pay more than the 6 percent allowed
for closing costs
44
Appendix C
LISTING OF THE 73 AMERICA’S MORTGAGE LOANS
THAT RECEIVED IMAGINE FOUNDATION GIFTS
Case number Loan amount Case number Loan amount
221-3452738 $116,925 221-3600329 $94,254
221-3507349 $75,899 221-3591778 $140,887
221-3507933 $102,192 221-3606735 $126,044
221-3501947 $77,388 221-3628668 $85,325
221-3509067 $106,160 221-3608056 $140,887
221-3496440 $82,348 221-3637539 $119,059
221-3504829 $46,135 221-3602205 $62,505
221-3501540 $97,728 221-3646468 $89,594
221-3508656 $53,278 221-3647066 $126,004
221-3522693 $95,743 221-3652043 $65,540
221-3524189 $97,231 221-3642732 $80,860
221-3523892 $139,875 221-3655765 $155,117
221-3527474 $114,098 221-3656386 $113,998
221-3528197 $79,670 221-3656334 $106,657
221-3515838 $85,821 221-3646287 $138,902
221-3521783 $113,106 221-3660809 $63,995
221-3534866 $122,035 221-3668319 $84,333
221-3538664 $90,286 221-3657165 $119,059
221-3542226 $153,289 221-3670149 $116,491
221-3537459 $74,411 221-3634742 $69,451
221-3540911 $111,647 221-3660295 $90,286
221-3541838 $63,498 221-3668735 $72,318
221-3558016 $83,738 221-3674396 $64,490
221-3549457 $141,382 221-3669662 $101,200
221-3559425 $99,216 221-3681056 $101,200
221-3560242 $156,716 221-3688865 $121,043
221-3553343 $90,237 221-3683454 $137,413
221-3561283 $147,261 221-3677160 $98,719
221-3558719 $82,845 221-3685960 $99,216
221-3557380 $74,192 221-3712363 $126,401
221-3571688 $144,440 221-3713629 $120,051
221-3575979 $136,561 221-3713250 $151,205
221-3578482 $152,793 221-3706447 $61,514
221-3593762 $149,651 221-3733392 $130,965
221-3588496 $144,637 221-3746945 $114,098
221-3592557 $59,529 221-3757297 $90,241
221-3597265 $71,484
45
Appendix D
UNDERWRITING DEFICIENCY DETAIL
The Loan File Lacked
Employment Verification
For loan number 221-3670149, America’s Mortgage did not obtain an explanation
for one borrower’s gap in employment of three months from May 9 to August 19,
2002. HUD regulations 23 require the borrower to explain any gaps in
employment spanning one month or more. The LaPlace branch manager
underwrote this loan, and the loan went into default within the first four
payments.
The 6 Percent Allowance in
Closing Cost Was Exceeded
For loan number 221-3681056, the seller paid 7.3 percent of the buyer’s closing
cost. 24 HUD 25 permits sellers to contribute up to 6 percent of the property’s sales
price toward the buyer’s actual closing costs. However, any amount above 6
percent should reduce the sales price dollar for dollar. Thus, the sales price
should be reduced by the $1,405 that the seller paid over the allowed 6 percent. 26
The borrower did not make any payments on this property.
America’s Mortgage Did Not
Submit the Required Loan
Application
For loan number 221-3634657, America’s Mortgage did not submit both of the
required loan applications. HUD regulations 27 state that a copy of an initial and
final application must be submitted as part of the endorsement package. We
found the initial and final loan applications only in America’s Mortgage’s loan
file. The initial loan application was dated October 21, 2003, and the final loan
application was dated November 14, 2003. Both HUD’s and title company’s files
contained only the final loan application, dated November 14, 2003.
23
HUD Handbook 4155.1, REV-5, “Mortgage Credit Analysis for Mortgage Insurance, One to Four Family
Properties,” paragraph 2-6.
24
The amount includes the $7,000 in funding through Imagine Foundation.
25
HUD Handbook 4155.1, REV-4, CHG 1, “Mortgage Credit Analysis for Mortgage Insurance, One to Four
Family Properties,” section 1.
26
In finding 1, we are recommending that the loan be written down for the $7,000 gift.
27
HUD Handbook 4155.1, REV-5, “Mortgage Credit Analysis for Mortgage Insurance, One to Four Family
Properties,” paragraph 3 2A.
46
America's Mortgage Resource, Inc., Metairie, Louisiana: Branch Manager Formed an Identity-of-Interest Entity That Provided Gift Funds; and Did Not Always Meet HUD Loan Origination and Quality Control Plan Requirements
Published by the Department of Housing and Urban Development, Office of Inspector General on 2006-03-28.
Below is a raw (and likely hideous) rendition of the original report. (PDF)