oversight

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)

                                                                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