Department of Housing and Urban Development, Office of Inspector General | Housing and Urban Development | Premier Mortgage Funding, Inc., Austin, Texas, and Its Sponsor, JPMorgan Chase, Did Not Comply With HUD Underwriting Requirements and Did Not Meet All Quality Control Requirements

Premier Mortgage Funding, Inc., Austin, Texas, and Its Sponsor, JPMorgan Chase, Did Not Comply With HUD Underwriting Requirements and Did Not Meet All Quality Control Requirements

Published by the Department of Housing and Urban Development, Office of Inspector General on 2006-06-16.

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

Issue Date
June 16, 2006
Audit Report Number
2006-FW-1011

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

FROM: Frank E. Baca
Regional Inspector General for Audit, Fort Worth Region, 6AGA

SUBJECT: Premier Mortgage Funding, Inc., Austin, Texas, and Its Sponsor, JPMorgan
Chase, Did Not Comply With HUD Underwriting Requirements and Did
Not Meet All Quality Control Requirements

HIGHLIGHTS

What We Audited and Why

We selected Premier Mortgage Funding, Inc. (Premier), a nonsupervised
loan correspondent, for audit because it’s default rate was 378 percent of
the average of all lenders in the San Antonio, Texas, U.S. Department of
Housing and Urban Development (HUD) jurisdiction. We focused on
Premier’s Austin branch because it originated 36 of 41 loans that defaulted
within the first year of origination. Our audit objectives were to determine
whether Premier and its sponsors acted in a prudent manner and complied
with HUD requirements in the origination of the Federal Housing
Administration-insured single-family mortgages selected for review and
whether their quality control plans, as implemented, met HUD
requirements.

What We Found

Premier and its sponsor, JPMorgan Chase Bank NA (JPMorgan Chase),
did not meet HUD underwriting or quality control requirements. As a
result, HUD insured 11 loans totaling $1,169,226 that the sponsor
approved with inaccurate credit information. This occurred mainly
because Premier and its sponsor did not ensure the accuracy of the
borrower’s credit information. Further, Premier and its sponsors charged
borrowers $163 in ineligible closing costs and approved 31 loans with
appraisals that did not meet HUD requirements. These deficiencies
increased the Federal Housing Administration insurance fund’s risk of
loss. As of April 28, 2006, HUD has lost $394,110 on these loans,
according to HUD’s Neighborhood Watch system.

What We Recommend

We recommend that the assistant secretary for housing – federal housing
commissioner and chairman of the Mortgagee Review Board require
JPMorgan Chase to reimburse HUD $394,110 for losses incurred on six
loans, indemnify HUD for six loans totaling $647,061, and buy down
loans or repay HUD for other deficiencies. We further recommend that
the assistant secretary require Premier and JPMorgan Chase to take action
to correct quality control deficiencies and require JPMorgan Chase to
ensure that appraisals meet HUD requirements. Finally, we recommend
that the assistant secretary take appropriate administrative sanctions
against Premier and JPMorgan Chase for entering incorrect data into the
automated underwriting system and certifying its integrity.

For each recommendation without a management decision, please respond
and provide status reports in accordance with HUD Handbook 2000.06,
REV-3. Please furnish us copies of any correspondence or directives
issued because of the audit.

Auditee’s Response

We provided the draft report to Premier and to JPMorgan Chase on
April 25, 2006, and we had an exit conference with Premier on May 8,
2006 and JPMorgan Chase on April 19, 2006. We received their written
comments. Premier said it was the sponsor’s responsibility to ensure all
underwriting standards were met and to conduct quality control reviews.
JPMorgan Chase said it acknowledged that certain deficiencies may exist
in a few instances but disagreed with most instances of noncompliance.
JPMorgan Chase took exception to any assertion that its employees
knowingly certified to the integrity of inaccurate data supplied by Premier
and said that in those cases where data entered into Loan Prospector by
Premier were inaccurate, the underwriter simply failed to spot the
inaccuracy. The complete text of their responses, without attachments,
along with our evaluation of the responses, can be found in appendix B of
this report.

2
TABLE OF CONTENTS

Background and Objectives 4

Results of Audit
Finding: Premier and JPMorgan Chase Did Not Comply with HUD 5
Underwriting Requirements and Did Not Meet All Quality Control
Requirements

Scope and Methodology 11

Internal Controls 12

Appendixes
A. Schedule of Questioned Costs and Funds to Be Put to Better Use 13
B. Auditee Comments and OIG’s Evaluation 14
C-1. Summary of Questioned Costs by Loan 42
C-2. Schedule of Loans with Questioned Data Integrity 43
D. Appraisals with Technical Deficiencies by Loan 44
E. Case Narratives 45

3
BACKGROUND AND OBJECTIVES

Section 203(b)(1) of 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 actions.

Premier Mortgage Funding, Inc. (Premier), a nonsupervised loan correspondent, had the
third highest compare ratio of defaults within the first year in the San Antonio HUD
jurisdiction as of July 12, 2005. The compare ratio for Premier was 378 percent1 of
defaults within the first year of loan origination as of July 12, 2005, the third highest
compare ratio in the San Antonio, Texas HUD jurisdiction. Premier originated 274 loans
during the two-year period from June 1, 2003, through May 31, 2005, and had 41 defaults
within the first year. Premier’s home office is located at 3001 Executive Drive, Suite
330, Clearwater, Florida.

Premier has a Web site that solicits mortgage professionals to open branch offices using
its name. The cost is $1,500 per month. The Austin branch, located at 2711 West
Anderson Lane, Suite 200, Austin, Texas, originated 36 of the 41 defaulted loans. The
branch was authorized in March 2003 and was voluntarily terminated in December 2004.
We limited our reviews to the 36 loans originated by the Austin branch.

JPMorgan Chase Bank NA (JPMorgan Chase) is the primary lender sponsor for the
defaulted loans. Sponsors underwrite loans processed by their loan correspondents.
HUD holds lender sponsors primarily responsible for loan integrity, and normally will
seek indemnification or claims recovery for improperly originated or underwritten loans
from the sponsor.

Our audit objectives were to determine whether Premier and it sponsors 1) acted in a
prudent manner and complied with HUD requirements in the origination of the Federal
Housing Administration-insured single-family mortgages selected for review and 2)
whether their quality control plans, as implemented, met HUD requirements.

1
The compare ratio is the value that reveals the largest discrepancies between the subject’s default
percentage and the default percentage to which it is being compared. The percentages being compared
are the percentages of originations that first defaulted during a selected period. A higher ratio is
indicative of a lender that has an unusually high default percentage in comparison with the lender’s
surrounding area.

4
RESULTS OF AUDIT

Finding: Premier and JPMorgan Chase Did Not Comply With
HUD Underwriting Requirements and Did Not Meet All Quality
Control Requirements
Premier materially violated HUD requirements for 11 of 36 loans reviewed totaling
$1,169,226. Premier did not enter correct data into an automated underwriting system or
perform required quality control reviews. In addition, the sponsor, JPMorgan Chase,
certified to the integrity of the data Premier entered into the system and did not perform
adequate quality control reviews. This occurred because Premier and its sponsor did not
ensure the accuracy of the borrowers’ credit information, and Premier did not have specific
processing policies and/or procedures that branch offices must follow. Premier and its
sponsor also charged borrowers unallowable closing costs on two loans. Further, the
sponsor did not ensure that appraisals for 31 loans met HUD requirements. These
deficiencies increased HUD’s risk of loss on Federal Housing Administration loans. As of
April 28, 2006, HUD had lost $394,110 on these loans.

Premier Entered Inaccurate
Credit Information into the
Automated Underwriting
System

Premier and JPMorgan Chase originated 11 of 36 loans reviewed that
were approved based on inaccurate credit information that did not meet
Federal Housing Administration standards.

On the feedback certificates, Loan Prospector provided documentation
guidelines that instructed Premier to verify the reserves reported, include
all debt, document one full month of earnings, and verify current and
previous employment. The feedback certificates stated that the lender is
responsible for documenting according to HUD requirements any situation
not addressed on the feedback certificate. Also, Loan Prospector
instructed Premier that a representative must attest to data integrity.
Premier did not follow Loan Prospector’s instructions regarding income,
debt, reserves, or documentation for 28 of the 36 loans reviewed. The
deficiencies were material enough to affect loan approval for 11 of the
loans (see appendix C-2).

For these 11 loans, Premier

• Overstated income (five loans),
• Did not verify the stability and/or history of income (two loans),

5
• Understated the borrowers’ liabilities (seven loans),
• Did not verify reserves and/or deposits (seven loans), and
• Originated loans in which the actual note terms (principal, interest, and
term) differed significantly from the terms entered into Loan
Prospector (one loan).

In addition to these deficiencies, 9 of the 11 loans had ratios that exceeded
HUD’s recently revised debt-to-income ratio guidelines. 2 Further, in one
of the loans, in addition to entering inaccurate credit information into Loan
Prospector, Premier included on the loan a borrower with a delinquent
federal debt. HUD will not insure a loan when a borrower is delinquent
on any federal debt. 3 Also in another case, in addition to inaccurate credit
information being entered into Loan Prospector, the loan was not eligible
for insurance because the seller did not own the property for the required
90 days. 4 According to the local tax appraisal district, the seller acquired
the property on or around May 29, 2003; the sales contract for the
borrower was executed on May 16, 2003.

These deficiencies occurred because Premier and JPMorgan Chase did not
ensure the accuracy of the borrower’s credit or other information. Instead,
Premier relied on JPMorgan Chase to identify and resolve underwriting
deficiencies, but JPMorgan Chase apparently accepted the data and certified
their accuracy without further examination. Also, Premier did not have
specific processing policies and/or procedures that branch offices must
follow.

Premier Did Not Perform
Quality Control Reviews

Premier did not comply with HUD’s quality control requirements. 5
Premier officials told us they never performed a quality control review of
any kind on the Austin branch, nor were they aware of any quality control
reviews by JPMorgan Chase.

2
Mortgagee Letter 05-16, dated April 13, 2005, increased the qualifying debt-to-income ratios to 31:43.
3
HUD Handbook 4155.1, REV-5, paragraph 2-5 B, states that if the borrower is delinquent on any
federal debt, the borrower is not eligible until the delinquent account is brought current or a repayment
plan is established and verified by the federal agency owed.
4
Mortgagee Letter 03-07, dated May 22, 2003, states, “If a property is resold 90 days or fewer
following acquisition by the seller, the property is not eligible for a mortgage insured by FHA [Federal
Housing Administration]. FHA defines the seller’s date of acquisition as the date of settlement on the
seller’s purchase of that property. The resale date is the date of execution of the sales contract by the
buyer that will result in a mortgage to be insured by FHA.”
5
HUD Handbook 4060.1, REV-1, chapter 6, contains the minimum requirements of a lender’s quality
control plan. Paragraph 6-1 requires all lenders to implement and continuously have in place a quality
control plan for the origination of insured mortgages as a condition of maintaining Federal Housing
Administration approval.

6
Premier’s home office officials explained that they did not have sufficient
staff to keep up with the quality control requirements, and contracted
quality control firms also could not keep up with the requirements.

In an effort to implement quality control, Premier executed a contract with
an outside company to perform most of the quality control review
functions in September 2005. It provided a copy of the contract but did
not have a copy of the quality control plan. Premier said it established a
team of 13 individuals who are responsible for office visits and “office
compliance.”

The lack of quality control placed HUD at an increased risk of loss to the
Federal Housing Administration insurance fund.

The Sponsor’s Quality Control
Reviews Needed Improvement

JPMorgan Chase conducted quality control reviews on loans originated by
Premier’s Austin branch. However, the reviews were deficient as follows:

• Reviewers only performed desk reviews of the appraisals, although
HUD required field reviews on all early payment defaults;
• Reviewers did not perform quality control reviews on 2 of 11 early
payment default loans that should have been reviewed; and
• The quality control reviews did not adequately address corrective
actions, and the sponsor did not take any corrective action. 6

We compared the 36 loans we reviewed to the reviews that JPMorgan
Chase provided. Eleven loans defaulted in six payments or fewer.
JPMorgan Chase reviewed 9 of the 11 loans but did not take corrective
action for deficiencies found. It did not review the remaining two loans.

In 2004, HUD performed a nationwide comprehensive review of JPMorgan
Chase 7 and found that it did not meet reporting and corrective action
requirements. HUD closed the finding in July 2005.

Premier Charged Ineligible
Closing Costs

6
HUD Handbook 4060.1, REV-1, paragraph 6-6 D, requires a quality control review of all loans going
into default within the first six payments. Paragraph 6-6 E (3) requires a field review of the appraisals
for those loans. Paragraph 6-3 I requires the final report of a quality control review to identify
corrective actions being taken, the timetable for their completion, and any planned follow-up activities.
7
HUD’s review was conducted during the period of our scope – June 1, 2003, through May 31, 2005.

7
Premier charged $163 in ineligible closing costs in two of the loans
reviewed. On one loan, Premier charged $79 for an inspection fee, but did
not provide support. Only the actual cost for services may be charged to the
borrower. Premier also charged $69 for an ineligible tax service fee. 8 The
sponsor needs to buy down the loan for the ineligible closing costs. For
another loan, Premier charged the borrower $19 on a streamline refinance.
HUD will not reimburse credit report charges for streamline refinances. 9
This loan has been conveyed to HUD; therefore, the sponsor should
reimburse HUD for the $19 in ineligible closing costs.

The Sponsor Approved 31
Loans with Technically
Deficient Appraisals

HUD requires the lender to ensure that the Federal Housing
Administration appraisal meets HUD’s requirements. 10 Further, on July
20, 2004, HUD issued a final rule on 24 CFR [Code of Federal
Regulations] Parts 25 and 203, regarding lender accountability for
appraisals. The final rule clarifies HUD’s position that those lenders who
submit appraisals to HUD that do not meet Federal Housing
Administration requirements are subject to sanctions by the HUD
Mortgagee Review Board. The rule applies to sponsors and
correspondents.

We found several technical deficiencies in the appraisals (see appendix D)
as follows:

• There was no evidence in the files to show that the appraiser reviewed
the subject sales contract as required in 18 of the 36 files reviewed, 11
• The pictures of the subject property did not meet HUD requirements in
18 of the 36 loans, 12 and

8
Mortgagee Letter 06-04, dated January 27, 2006, rescinds paragraph 5-2 of HUD Handbook 4000.2,
REV-3. However, only the actual cost for the service may be charged to the borrower. Tax service
fees are still ineligible.
9
HUD Handbook 4155.1, REV-5, paragraph 1-12 D 1, does not require a credit report for streamline
refinances.
10
24 CFR [Code of Federal Regulations] 203.5 (e)(1).
11
HUD Handbook 4150.2, CHG-1, paragraph 4-0, requires strict compliance with Uniform Standards of
Professional Appraisal Practice. Standards Rule 1-5 requires appraisers to analyze sales contracts,
options, and listings. Standards Rule 2-2(a)(ix) requires appraisers to document efforts undertaken to
obtain the information when the appraiser was unable to obtain the information.
12
HUD Handbook 4150.2, CHG-1, paragraph 3-1, requires the appraiser to take pictures that show the
sides, front, and rear of the subject property and all improvements on the property with any
contributory value.

8
• At least 16 of the 36 loans reviewed had Federal Housing
Administration comparables that were not adjusted downward to
reflect sales concessions as required. 13

Based on the number of technical violations found, we concluded that the
sponsor’s underwriters either were not aware of HUD’s appraisal
requirements or ignored them during the desk review of the appraisals
before loan approval. The audit did not determine whether the technical
violations affected the property values. However, the appraisals did not
meet HUD requirements; therefore, the sponsor could not assure HUD that
the appraisals were accurate.

HUD’s Risk of Loss Increased

Premier entered and JPMorgan Chase certified inaccurate credit
information and did not have adequate quality control reviews. This
caused HUD to insure 11 loans totaling $1,169,226. Further, Premier
charged two borrowers a total of $163 for ineligible closing costs. In
addition, JPMorgan Chase could not ensure the accuracy of the appraised
values of 31 properties. Because of these deficiencies, Premier and
JPMorgan Chase increased HUD’s risk of loss. As of April 28, 2006,
HUD had lost $394,110 on loans for which HUD paid claims or paid
mortgage insurance claims and sold properties at a loss. The original loan
amounts for the other active loans total $647,061. HUD has done an
analysis that indicates it loses an average of about 29 percent of the loan
amount when HUD pays a claim and the property is resold. Therefore, we
are estimating HUD’s potential loss on the six active loans to be $187,648
($647,061 * .29). JPMorgan Chase should reimburse HUD for any losses
on these loans. 14 We are classifying $187,648 as funds put to better use in
appendix A.

13
HUD Handbook 4150.2, CHG-1, paragraph 4-6 B, requires appraisers to account for and adjust the
sales price of comparable properties for any special sale or financing terms.
14
Code of Federal Regulations, Title 24, Section 202.8, paragraph (b)(7), provides that each sponsor
shall be responsible to the Secretary for the actions of its loan correspondent lenders or mortgagees in
originating loans or mortgages, unless applicable law or regulation requires specific knowledge on the
part of the party to be held responsible. If specific knowledge is required, the Secretary will presume
that a sponsor has knowledge of the actions of its loan correspondent lenders or mortgagees in
originating loans or mortgages and the sponsor is responsible for those actions unless it can rebut the
presumption with affirmative evidence.

9
Recommendations

We recommend that the assistant secretary for housing – federal housing
commissioner and chairman of the Mortgagee Review Board require
JPMorgan Chase to

1A. Reimburse HUD $394,110 for claims and losses incurred on six
loans.

1B. Indemnify HUD for future losses for six loans, amounting to
$647,061, which are still active (one loan is still active but HUD has
paid a loss mitigation claim of $875 included in recommendation
1A).

1C. Reimburse HUD $19 in ineligible closing costs for one loan that has
foreclosed and buy down one loan for $144 in ineligible closing
costs.

1D. Implement a quality control plan that conforms to all HUD quality
control requirements and contains effective corrective action.

1E. Ensure that the appraisals submitted to HUD meet all HUD
requirements.

Further, we recommend the assistant secretary for housing - federal
housing commissioner and chairman of the Mortgagee Review Board

1F. Ensure Premier’s current quality control plan meets HUD
requirements and is implemented.

1G. Consider appropriate sanctions against Premier and
JPMorgan Chase for entering incorrect data into the
automated underwriting system and certifying their integrity.

10
SCOPE AND METHODOLOGY

To accomplish our objectives, we

• Reviewed applicable handbooks and mortgagee letters;
• Interviewed HUD staff, Premier management, JPMorgan Chase staff, and nine
borrowers;
• Reviewed applicable title company records;
• Reviewed JPMorgan Chase’s quality control plan and quality control reviews;
• Performed site visits to 13 properties;
• Reviewed 36 loans originated by Premier’s Austin branch during the two-year
period from June 1, 2003, through May 31, 2005, with a first default reported
within the first year. We selected the loans originated by the Austin branch
because Premier had 41 defaults within the first year (in the San Antonio HUD
jurisdiction), and 36 of those loans were originated by the Austin branch; and
• Reviewed the appraisals of Federal Housing Administration properties that were
used as comparables for the properties we reviewed.

We relied in part on data maintained by HUD in its Neighborhood Watch system. We
did not perform a detailed analysis of the reliability of the system.

We conducted our fieldwork from September 1, 2005, through February 24, 2006. We
performed our fieldwork at the San Antonio HUD office, Premier’s main office, and
borrower homes. We performed the audit in accordance with generally accepted
government auditing standards.

11
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:

• Quality control plan as implemented and
• Loan origination process.

We assessed the relevant controls identified above.

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

Significant Weaknesses

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

• Premier and JPMorgan Chase did not comply with HUD requirements
in originating all loans. They originated loans based on inaccurate
credit information, charged two borrowers ineligible closing costs, and
did not meet HUD’s quality control or appraisal requirements (finding
1).

12
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 $394,110
1B $187,648
1C $163
Totals $394,273 $187,648

1/ Ineligible costs are costs charged to a HUD-financed or HUD-insured program or
activity that the auditor believes are not allowable by law; contract; or federal,
state, or local policies or regulations.

2/ “Funds to be put to better use” are estimates of amounts that could be used more
efficiently if an Office of Inspector General (OIG) recommendation is
implemented. This includes reductions in outlays, deobligation of funds,
withdrawal of interest subsidy costs, costs not incurred by implementing
recommended improvements, avoidance of unnecessary expenditures noted in
preaward reviews, and any other savings which are specifically identified.
Implementation of our recommendation to indemnify loans that were not
originated in accordance with FHA requirements will reduce FHA’s risk of loss to
the insurance fund. The amount above reflects that, upon sale of the mortgaged
property, FHA’s average loss experience is about 29 percent of the claim amount,
based upon statistics provided by HUD.

13
Appendix B

AUDITEE COMMENTS AND OIG’S EVALUATION

Ref to OIG Evaluation Auditee Comments

14
Comment 1

Comment 2

Comment 1

15
Comment 1

Comment 3

16
Comment 1

Comment 4

17
Comment 5

Comment 4

Comment 1

18
19
20
Comment 1

Comment 4

Comment 5

21
Comment 5

Comment 2

22
23
Comment 7

Comment 6

Comment 1

24
Comment 7

Comment 6

25
Comment 1

26
Comment 2

Comment 14

27
Comment 8

Comment 9

28
Comment 9

Comment 5

29
Comment 2

30
Comment 2

31
Comment 1

Comment 10

32
Comment 5

Comment 11

33
Comment 10

34
Comment 12

35
Comment 12

Comment 13

36
Comment 2

Comment 4

Comment 1

Comment 5

37
Comment 15

38
39
OIG Evaluation of Auditee Comments

Comment 1 As indicated in the report, we limited our review to the loans originated by
the Austin, Texas branch of Premier Mortgage Funding, Inc., Chase’s loan correspondent
for these loans. We did not review the overall underwriting operations of JPMorgan
Chase.

Comment 2 All actions by Chase, as a result of any quality control efforts, were
ineffective at its loan correspondent level. The home office officials and the branch
manager of the loan correspondent were unaware of any Chase quality control effort at
the Austin branch.

Comment 3 As indicated by our report, Premier’s Austin Branch that we reviewed was
voluntarily terminated in December 2004.

Comment 4 The report does not say that company employees “knowingly’ certified to
the integrity of inaccurate data. Our report says they did not ensure the accuracy of the
data before they certified the data. They should ensure the accuracy by examining
supporting documentation contained in the loan file and not certify based on any missing
documentation.

Comment 5 We reviewed the comments and revised or clarified our report as needed.

Comment 6 Chase did not require field reviews of any early payment default
appraisals from its loan correspondent, the Austin branch of Premier Mortgage Funding,
Inc., although its early payment default rate was significantly above average. Regardless
of any variance HUD may have approved for Chase’s routine quality control program,
HUD handbook 4060.1, Rev. 1, paragraph 6-6 D, provides that in addition to the loans
selected for routine quality control reviews, mortgagees must review all loans going into
default within the first six payments. As defined here, early payment defaults are loans
that become 60 days past due. Paragraph 6-6 E 3 provides factors for selecting loans for
appraisal reviews and states that in addition, field reviews should be performed on loans
selected in accordance with paragraph 6-6 D.

Comment 7 Subsequent to the written response, we requested payment histories for the
two early payment defaults that the response says Chase was not required to review. We
determined and Chase agreed that the two loans were delinquent 90 days or more within
the first year and met Chase’s definition of early payment defaults and were required to
be reviewed. Chase personnel said they did not review one of the loans because they
could not find the file and did not review the other because the loan became current.

Comment 8 After our draft was issued, we were able to determine the seller was
related to the borrower. Therefore, we removed this loan from the deficient loans
contained in the report.

40
Comment 9 Chase agrees that the borrower should not have been charged the fees.

Comment 10 We concluded that the Chase underwriters were either unaware of or
ignored the HUD appraisal requirements because the technical deficiencies occurred
without correction. As the report says, we did not determine the technical deficiencies
affected the property valuations.

Comment 11 Our report does not say an “express statement” is required. We believe
the language contained in the standards is clear and requires the appraiser to analyze the
sales contract and the appraisal report should describe the information analyzed. The
underwriters did not require this.

Comment 12 Every case identified in the report had one or more comparable properties
on the appraisal that were not appropriately adjusted for applicable sales concessions.
Chase may not have known this because the loan correspondent arranged for the
appraisals and the appraisal reports did not disclose the sales concessions. Further, as
mentioned earlier, Chase did not conduct field reviews of appraisals related to early
payment default loans originated by the loan correspondent.

Comment 13 As mentioned in the report, we did not determine whether the technical
deficiencies affected property values. However, the appraisals contained technical
deficiencies that were not addressed by the underwriter. Chase’s response shows that
subsequent field reviews of the appraisals did not support the original appraised values in
a few cases regardless of the matters raised by us.

Comment 14 Neighborhood Watch showed these loans as originated by Premier, not
Chase. Ten loans in our report contained violations that were material enough to affect
loan approval. Chase quality control reviewers generally had similar findings related to
the loans they reviewed but Chase was unable to provide any documentation to reflect
any type of corrective action. HUD’s 2004 comprehensive review of Chase’s quality
control program contained similar findings of lack of corrective action.

Comment 15 Premier provided us a copy of its quality control plan dated April 10,
2006, and operational policies and procedures. Premier will need to submit any revised
quality control plans, policies, and procedures to HUD for review and approval.

41
Appendix C-1

SUMMARY OF QUESTIONED COSTS
BY LOAN

INDEMNIFICATION Reimbursement to HUD Ineligible closing costs
Claims paid +
other costs
Claims to HUD/ HUD
Loan Mortgage Indemnification paid by property sale Net Reimburse
number amount requested HUD resold price loss/(gain) Buydowns to HUD
495-7010256 $115,304 $115,304
495-6738304 $109,670 $110,582
495-6900244 $102,921 $102,921
495-6696017 $141,592 $157,350 ($84,000) $73,350
495-6173073 $129,920 $129,920 $875
495-6702555 $121,394 $124,607
495-6828191 $115,151 $115,151
495-6781217 $26,948 $33,294
495-6325937 $77,292 $144
495-6794279 $45,928 $45,928
495-6973264 $137,837 $137,837
495-6490206 $122,561 $136,892 ($85,490) $51,402
495-6763242 $112,360 $19
$647,061 $269,358 $124,752 $144 $19

Indemnification requested $647,061
Reimbursement to HUD:
Reimbursement for claims $269,358
Reimbursement for net losses $124,752 subtotal losses to HUD: $394,110
Reimbursement for ineligible closing costs loan
foreclosed & HUD has paid claims $19
Total reimbursement to HUD $394,129
Loan buydowns
Ineligible closing costs $144
Total loan buydowns $144

Total amount of loans
originated based on bad
data $1,169,226

42
Appendix C-2

SCHEDULE OF LOANS WITH
QUESTIONED DATA INTEGRITY

Schedule of Questioned Loans byDeficiency
Borrower Income Liabilities Reserves &deposits Other LP* data integrity Ratios Ineligible
Income Note info in LP
Mortgage Income stability/history Liabilities Delinquent Reserves &/or deposits inconsistent with Debt-to-income ratios Seller did not own
Loan number amount overstated not verified understated federal debt not properly verified actual exceed HUDlimits the property for 90 days
495-7010256 $115,304 X X X
495-6738304 $109,670 X X X
495-6900244 $102,921 X X
495-6696017 $141,592 X X X
495-6173073 $129,920 X X X
495-6702555 $121,394 X X X
495-6828191 $115,151 X X X X
495-6781217 $26,948 X X X
495-6794279 $45,928 X X X
495-6973264 $137,837 X X X
495-6490206 $122,561 X X X
Totals $1,169,226 5 2 7 1 7 1 9 1

*LP= Loan Prospector

43
Appendix D

APPRAISALS WITH TECHNICAL DEFICIENCIES
BY LOAN

44
Appendix E

CASE NARRATIVES

Case number: 495-7010256
Lender number: 1849200674
Loan amount: $115,304
Contract sales price: $119,595
Endorsement date: August 5, 2004
Default date: October 1, 2004
Current loan status: Foreclosure started (as of March 31, 2006)
Reinstated by borrower who retains ownership (as of April 28,
2006)

Deficiencies:

1. The sponsor (JPMorgan Chase) certified to the integrity of incorrect data that
Premier entered into the automated underwriting system. The incorrect data are
material enough to affect loan approval.

2. Premier overstated the borrower’s monthly income by $102. It used monthly
income of $6,493 to approve the loan in Loan Prospector, but file documents
support monthly income of $6,391. The lower monthly income amount increased
the back-end ratio (total fixed payment to effective income) to 47 percent.
Currently, HUD’s maximum ratios are 31 percent (front-end ratio) and 43 percent
(back-end ratio).

3. Premier overstated reserves/deposits in Loan Prospector and did not identify the
source of funds. Premier reported reserves/deposits of $2,762. However, it did
not provide current bank statements for the borrower or explain a large deposit of
$2,500 on the statement date as required by HUD and Loan Prospector. HUD
Handbook 4155.1, REV-5, paragraph 2-10 B, requires the lender to obtain a
credible explanation for the source of funds when there is a large increase in an
account. Loan Prospector’s feedback certificate states that the lender is
responsible for documenting, according to HUD requirements, any situation not
addressed on the feedback certificate. Without the unexplained deposit, we
calculated reserves/deposits at $262, significantly less than the amount submitted
to Loan Prospector.

45
Case number: 495-6738304
Lender number: 1849200674
Loan amount: $109,670
Contract sales price: $115,590
Endorsement date: January 5, 2004
Default date: June 1, 2004
Current loan status: Accelerated claim disposition. Claims paid as of April 28, 2006:
$110,582

Deficiencies:

2. Premier understated liabilities by at least $294. It did not include any revolving
debt in its calculation of monthly liabilities and reported total monthly debt of
$1,140. We calculated monthly revolving debt to be $320 and total monthly debt
to be $1,434. The higher monthly liability amount changed the monthly
qualifying debt-to-income ratios to 37 percent (mortgage payment expense to
effective income) and 54 percent (total fixed payment to effective income).
Currently, HUD’s maximum ratios are 31 percent (front-end ratio) and 43 percent
(back-end ratio).

3. Premier overstated reserves/deposits in Loan Prospector and did not identify the
source of funds. It reported reserves/deposits of $2,500. However, it did not
explain a large deposit of $2,200 on the same date as the Loan Prospector
approval. HUD Handbook 4155.1, REV-5, paragraph 2-10 B, requires the lender
to obtain a credible explanation for the source of funds when there is a large
increase in an account. Loan Prospector’s feedback certificate states that the
lender is responsible for documenting, according to HUD requirements, any
situation not addressed on the feedback certificate. Without the unexplained
deposit, we calculated deposits to be $300.

4. Premier reported gift funds of $10,101 to Loan Prospector, and the amount was
credited on the HUD-1 settlement statement. However, Premier did not obtain a
gift letter as required by the Loan Prospector feedback certificate. The settlement
statement shows a $10,101 credit to the buyer from a nonprofit organization and a
$10,701 charge to the seller.

5. The loan did not close in the HUD-approved lender name. The loan closed with
AustinLoan.com as the lender rather than Premier Mortgage Funding, Inc., d/b/a
AustinLoan.com. The HUD-approved lender name is Premier Mortgage Funding,
Inc., or Premier Mortgage Funding, Inc., d/b/a AustinLoan.com. Premier used
AustinLoan.com as the lender on the mortgage note and deed of trust.

6. As of April 28, 2006, HUD had paid claims on this property totaling $110,582.

46
Case number: 495-6900244
Lender number: 1849200674
Loan amount: $102,921
Contract sales price: $106,746
Endorsement date: July 13, 2004
Default date: December 1, 2004
Current loan status: Reinstated by borrower who retains ownership (as of April 28,
2006)

Deficiencies:

2. Premier overstated monthly income by $2,333. It used monthly income of $5,491
to qualify the borrower in Loan Prospector. The loan file shows the borrower’s
self-employment income declining. Because of this, the loan file supports
monthly income of only $3,158. The lower monthly income amount increased the
monthly qualifying debt-to-income ratios to 31 percent (mortgage payment
expense to effective income) and 48 percent (total fixed payment to effective
income). The total fixed payment-to-income ratio exceeds HUD’s current
guidelines, which provide the maximum of 43 percent for loan approval.

47
Case number: 495-6696017
Lender number: 1849200674
Loan amount: $141,592
Contract sales price: $155,000
Endorsement date: February 3, 2004
Default date: October 1, 2004
Current loan status: Property conveyed to HUD. Sold on June 14, 2005

Deficiencies:

2. Premier understated monthly debt by $19. It reported the estimated principal,
interest, tax, and insurance payment of $1,301 to Loan Prospector for
underwriting. We calculated monthly payment to be $1,320. The higher monthly
liabilities increased the monthly qualifying debt-to-income ratios to 29 percent
(mortgage payment expense to effective income) and 50 percent (total fixed
payment to effective income). The total fixed payment-to-income ratio
significantly exceeds HUD’s recently revised limits of 43 percent.

3. The Loan Prospector feedback certificate instructed Premier to obtain an
explanation for employment gaps greater than 60 days. Premier did not obtain an
explanation for a 13-month gap for the borrower. The borrower had held his
current position for only six months, and there was no verification of employment
from the employer to verify his probability of continued employment. We were
not able to determine his income stability.

4. The loan did not close in the HUD-approved lender name. The loan closed with
AustinLoan.com as the lender rather than Premier Mortgage Funding, Inc., d/b/a
AustinLoan.com. The HUD-approved lender name is Premier Mortgage Funding,
Inc., or Premier Mortgage Funding, Inc., d/b/a AustinLoan.com. Premier used
AustinLoan.com as the lender name on the HUD-1 settlement statement,
mortgage note, and deed of trust.

5. HUD’s losses on the property totaled $73,350.

48
Case number: 495-6173073
Lender number: 1849200674
Loan amount: $129,920
Contract sales price: $160,000
Endorsement date: January 2, 2004
Default date: August 1, 2005
Current loan status: Reinstated by borrower who retains ownership (as of April 28,
2006)

Deficiencies:

2. The subject property is not eligible for Federal Housing Administration insurance.
The seller entered into a sales agreement with the borrower 13 days before
purchasing the subject property. HUD requires a seller to hold a property at least
90 days before it can be eligible for HUD mortgage insurance.

3. Premier entered a gift amount of $34,352 into Loan Prospector. According to the
HUD-1 settlement statement and gift letter, the actual gift was $34,423.

4. Premier reported unsupported reserves of $2,153 to Loan Prospector. Loan
Prospector instructed Premier to verify all reserves submitted. Also, HUD
requires the lender to ensure that the loan application package contains all
documents used to support its decision. Although the borrowers most recent pay
check stub identified $7402 as a pension balance, we were unable to determine
the vested amount. We were only able to verify the borrower’s bank deposits of
$761.

5. Premier did not verify the stability of borrower income. The employer described
the borrower’s probability of continued employment as “unknown.” Premier did
not document its analysis or obtain clarification of the employer’s comments.

6. Premier did not use the HUD-approved lender name on closing documents. The
loan closed with AustinLoan.com as the lender rather than Premier Mortgage
Funding, Inc., d/b/a AustinLoan.com. The HUD-approved lender name is
Premier Mortgage Funding, Inc., or Premier Mortgage Funding, Inc., d/b/a
AustinLoan.com. Premier listed AustinLoan.com as the lender on the mortgage
note, deed of trust, and the HUD-1 settlement statement.

7. As of April 28, 2006, HUD had paid claims totaling $875.

49
Case number: 495-6702555
Lender number: 1849200674
Loan amount: $121,394
Contract sales price: $127,835
Endorsement date: December 9, 2003
Default date: August 1, 2004
Current loan status: Property conveyed to HUD. Total claims paid as of April
28, 2006: $124,607

Deficiencies:

2. Premier originated the loan when the coborrower had a delinquent federal debt. The
coborrower was delinquent on debt to the Department of Veterans Affairs at the time
of application. Premier provided no evidence of repayment. HUD Handbook
4155.1, REV-5, paragraph 2-5 B, states that if the borrower is delinquent on any
federal debt, the borrower is not eligible until the delinquent account is brought
current or a repayment plan is established and verified by the federal agency owed.

3. Premier understated monthly debt by at least $211. It reported to Loan Prospector
monthly debt of $1,837. However, it did not include the monthly car payment of
$200 and understated by $11 the student loan payment that was coming due five
months after closing.

4. Premier overstated income by $73. It reported monthly income to Loan
Prospector of $4,971. We calculated the monthly income to be $4,898.

5. Premier did not use the HUD-approved lender name on closing documents. The
loan closed with AustinLoan.com as the lender rather than Premier Mortgage
Funding, Inc., d/b/a AustinLoan.com. The HUD-approved lender name is
Premier Mortgage Funding, Inc., or Premier Mortgage Funding, Inc., d/b/a
AustinLoan.com. Premier listed the lender as AustinLoan.com on the HUD-1
settlement statement, mortgage note, and deed of trust.

6. Premier did not provide a gift letter signed by the borrower. HUD Handbook
4155.1, REV-5, paragraph 2-10 C, requires the gift letter to be signed by the
donor and the borrower.

7. As of April 28, 2006, HUD had paid claims totaling $124,607.

50
Case number: 495-6828191
Lender number: 1849200674
Loan amount: $115,151
Contract sales price: $117,000
Endorsement date: January 16, 2004
Default date: Neighborhood Watch shows “N/A” in the “Number of Payments
before First Default” field.
Current loan status: Preclaim (as of April 28, 2006)

Deficiencies:

2. Premier understated debt by $139. It reported to Loan Prospector monthly debt of
$1,419. However, this loan closed with a buydown agreement. Therefore,
Premier should have used total monthly debt of $1,558, which reflects mortgage
payments at the note rate. The additional debt increased the monthly qualifying
debt-to-income ratios to 34 percent (mortgage payment expense to effective
income) and 55 percent (total fixed payment to effective income). Both ratios
exceed HUD’s recently revised limits of 31 percent and 43 percent.

3. The loan did not close as approved. We concluded that Premier did not enter the
gift and buydown information into the Loan Prospector system because the
feedback certificate does not list the buydown agreement or the gift. HUD
Handbook 4155.1, REV-5, paragraph 3-10 B, requires the lender to close the loan
in the same manner as it was underwritten and approved.

4. Premier did not properly execute and complete loan documents. It did not sign
the buydown agreement, and the buydown agreement did not include a provision
to apply unused buydown funds to the mortgage balance. HUD Handbook
4155.1, REV-5, paragraph 2-14 B 2, requires the lender to demonstrate that the
eventual increase in mortgage payments will not affect the borrower adversely
and will not likely lead to default.

6. Premier did not provide a gift letter signed by the borrower. HUD Handbook
4155.1, REV-5, paragraph 2-10 C, requires the gift letter to be signed by the
donor and the borrower.

51
Case number: 495-6781217
Lender number: 1849200674
Loan amount: $26,948
Contract sales price: $39,661
Endorsement date: December 23, 2003
Default date: June 1, 2004
Current loan status: Property conveyed to HUD. Total claims paid as of April 28,
2006: $33,294

Deficiencies:

2. Premier understated liabilities by $19. It reported to Loan Prospector monthly
debt of $293 per month. We calculated monthly debt at $312. The higher
monthly liability amount increased both of the monthly qualifying the debt-to-
income ratios to 42 percent. The mortgage payment expense-to-effective income
ratio exceeds HUD’s recently revised limit of 31 percent.

3. Premier overstated reserves/deposits in Loan Prospector and did not identify the
source of funds. It reported to Loan Prospector reserves/deposits of $572. The
borrower made two deposits on October 15, 2003, into a certificate of deposit and
his personal checking account totaling $877. This amount is higher than the
borrower’s monthly income, and there is no explanation in the loan file to support
the source of funds for the large deposits. We could only verify $50 in earnest
money. HUD Handbook 4155.1, REV-5, paragraph 2-10 B, requires the lender to
obtain a credible explanation for the source of funds when there is a large increase
in an account.

5. As of April 28, 2006, HUD had paid claims totaling $33,294.

52
Case number: 495-6325937
Lender number: 1849200674
Loan amount: $77,292
Contract sales price: $90,700
Endorsement date: January 6, 2004
Default date: June 1, 2005
Current loan status: Reinstated by borrower who retains ownership (as of April 28,
2006)

Summary:

Premier charged $144 in ineligible closing costs. The borrower paid $75 for lender
inspection fees with no support and $69 for ineligible tax service fees. Mortgagee Letter
06-04 stipulates that only the actual cost of a service may be charged to a borrower, and
tax service fees are ineligible.

53
Case number: 495-6794279
Lender number: 1849200674
Loan amount: $45,928
Contract sales price: $57,000
Endorsement date: December 8, 2003
Default date: None
Current loan status: Repayment Plan (as of April 28, 2006)

Deficiencies:

1. The sponsor (JPMorgan Chase) certified to the integrity of incorrect data Premier
entered into the automated underwriting system. The incorrect data are material
enough to affect loan approval.

2. Premier overstated the borrower’s monthly income by $66. It used monthly
income of $970 to qualify the borrower in Loan Prospector. The borrower’s
employment documentation supports monthly income of $903.

3. Premier understated the borrower’s monthly debt. It used monthly debt of $483
to qualify the borrower in the automated underwriting system. However, the
mortgage note and settlement statement support monthly debt of $489.

4. The lower monthly income and higher monthly liability amount increased both of
the monthly qualifying debt-to-income ratios to 54 percent. Both ratios exceed
HUD’s recently revised limits of 31 percent (mortgage payment expense to
effective income) and 43 percent (total fixed payment to effective income).

5. Premier did not use the HUD-approved lender name. Premier listed
AustinLoan.com as the lender on the HUD-1 settlement statement, mortgage note,
and deed of trust. The HUD-approved lender name is Premier Mortgage Funding,
Inc., or Premier Mortgage Funding, Inc., d/b/a AustinLoan.com.

54
Case number: 495-6973264
Lender number: 1849200674
Loan amount: $137,837
Contract sales price: $140,000
Endorsement date: July 20, 2004
Default date: None
Current loan status: Delinquent (as of April 28, 2006)

Deficiencies:

1. The sponsor (JPMorgan Chase) certified to the integrity of incorrect data that
Premier entered into the automated underwriting system.

2. Premier understated the borrower’s monthly debt by $117. It used monthly debt
of $342 to qualify the borrower in Loan Prospector. The loan file supports
monthly debt of $459. The additional $117 in monthly debt increased the
borrower’s monthly qualifying debt-to-income ratios to 38 percent (mortgage
payment expense to effective income) and 52 percent (total fixed payment to
effective income). Both ratios exceed HUD’s recently revised limits of 31
percent and 43 percent.

3. Premier overstated borrower deposits by $1,935 and reserves by $2,314. It
reported deposits of $2,068 and reserves of $3,037 to Loan Prospector. However,
the borrowers were overdrawn in their bank account by $213. The borrowers had
a 401K retirement account balance of $576. HUD Handbook 4155.1, REV-5,
paragraph 2-10 K, provides that assets such as 401K retirement accounts may be
included in the underwriting analysis up to only 60 percent of the value unless the
borrower provides conclusive evidence that a higher percentage may be
withdrawn after subtracting any federal income tax and any withdrawal penalties.
We calculated deposits to be $133 (60 percent of $576 = $346 – overdraft of
$213) instead of $2,068. Because of the overstated deposits, we calculated the
borrowers’ reserves to be $723 instead of $3,037 as reported to Loan Prospector.
Loan Prospector relied on the numbers reported in determining its accept rating.

4. Premier did not use the HUD-approved lender name on the HUD-1 settlement
statement. Premier listed Austin Loan Corp. as the lender on the HUD-1
settlement statement. The HUD-approved lender name is Premier Mortgage
Funding, Inc., d/b/a AustinLoan.com.

55
Case number: 495-6490206
Lender number: 1849200674
Loan amount: $122,561
Contract sales price: $124,500
Endorsement date: January 13, 2004
Default date: December 1, 2004
Current loan status: Property conveyed to HUD.
Sold April 27, 2006.

Deficiencies:

2. Premier overstated the borrower’s monthly income by $1,354. It reported to Loan
Prospector the borrower’s monthly income as $2,834. The borrower had recently
been earning overtime pay. However, the borrower’s verification of employment
stated that overtime, bonuses, etc., are not guaranteed. Therefore, in accordance
with paragraph 2-7 A of HUD Handbook 4155.1, REV-5, we included only the
borrower’s base pay in our calculation. The verification of employment shows
the borrower’s annual base pay to be $24,419. We calculated her monthly pay to
be $2,035. The borrower also had automatic deductions from her paychecks to
pay two loans from her 401K retirement account. The monthly amount of
deductions was $555. After we subtracted the 401K monthly payments to the
retirement account, we calculated monthly income to be $1,480. Premier
overstated the borrower’s income by $1,354 ($2,834 – $1,480). The lower
monthly income increased the monthly qualifying debt-to-income ratios to 77
percent (mortgage payment expense to effective income) and 83 percent (total
fixed payment to effective income). Both ratios exceed HUD’s recently revised
limits of 31 percent and 43 percent.

3. The loan did not close in the HUD-approved lender name. The loan closed with
AustinLoan.com as the lender rather than Premier Mortgage Funding, Inc., d/b/a
AustinLoan.com. The HUD-approved lender name is Premier Mortgage Funding,
Inc., or Premier Mortgage Funding, Inc., d/b/a AustinLoan.com. Premier used
AustinLoan.com on the HUD-1 settlement statement, mortgage note, and deed of
trust.

4. HUD’s loss on the property totaled $51,402.

56
Case number: 495-6763242
Lender number: 1849200674
Loan amount: $112,360
Contract sales price: Streamline refinance without an appraisal
Endorsement date: December 3, 2003
Default date: September 1, 2004
Current loan status: Property conveyed to HUD. Property sold on June 16, 2005.
Net loss to HUD: $59,675

Deficiencies:

1. Premier charged the borrower $19 in ineligible closing costs. The borrower paid
$19 for the credit report. HUD Handbook 4155.1, REV-5, paragraph 1-12 D,
states that HUD does not require a credit report for streamline refinances. If a
lender must obtain a credit report, the borrower may pay the fee out of pocket (not
financed).