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)