Issue Date January 20, 2006 Audit Report Number 2006-KC-1004 TO: Brian D. Montgomery, Assistant Secretary for Housing - Federal Housing Commissioner and Chairman, Mortgagee Review Board, H \\signed\\ FROM: Ronald J. Hosking, Regional Inspector General for Audit, 7AGA SUBJECT: Major Mortgage, Cheyenne, Wyoming, Improperly Submitted Late Requests for Endorsement of Federal Housing Administration Loans HIGHLIGHTS What We Audited and Why We audited Major Mortgage because of its high rate of late requests for endorsement. For loans closed between November 2002 and October 2004, the U.S. Department of Housing and Urban Development (HUD) endorsed 57 percent of these loans more than 66 days after closing, indicating the lender submitted many late requests. Our objective was to determine whether Major Mortgage met HUD requirements when submitting the late requests. What We Found Major Mortgage submitted 51 loans that did not comply with HUD requirements for late requests. As a result, these loans increased the risk to the Federal Housing Administration insurance fund $5.6 million. 1 What We Recommend We recommend that the assistant secretary for housing - federal housing commissioner take appropriate administrative action against Major Mortgage for not following HUD requirements and placing the insurance fund at unnecessary risk. This action should at a minimum include requiring Major Mortgage to indemnify improperly submitted loans currently insured and reimburse HUD for losses already incurred and future losses on foreclosed properties HUD has not yet sold. 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 Major Mortgage agreed with our findings, with one exception. We reevaluated the exception and made appropriate changes to this report. We provided the draft report to Major Mortgage on January 13, 2006, and requested a response by January 19, 2006. Major Mortgage provided written comments on January 19, 2006. The complete text of the auditee’s response, along with our evaluation of that response, can be found in appendix B of this report. 2 TABLE OF CONTENTS Background and Objectives 4 Results of Audit Finding: Major Mortgage Improperly Submitted Late Requests for Endorsement 5 of Federal Housing Administration Loans Scope and Methodology 7 Internal Controls 9 Appendixes A. Schedule of Questioned Costs and Funds to Be Put to Better Use 10 B. Auditee Comments and OIG’s Evaluation 11 C. Federal Requirements 14 D. Improperly Submitted Loans 18 3 BACKGROUND AND OBJECTIVES Major Mortgage is primarily a residential home lender participating in a variety of loan programs. It incorporated in March 1996 as a subsidiary of Wyoming Employee Resource Capital and Services. Major Mortgage conducts operations from 53 offices in 11 states and maintains its home office in Cheyenne, Wyoming. It produces first mortgage loans for sale to investors and does not retain the servicing rights to most of these loans. CitiMortgage is the largest loan servicer for Major Mortgage. Major Mortgage became an approved nonsupervised lender for the Federal Housing Administration on May 17, 1996. The Federal Housing Administration provides mortgage insurance on loans made by approved lenders. The mortgage insurance protects lenders such as Major Mortgage against losses when homeowners default on their mortgage loan. Major Mortgage submitted 2,747 loans (from 4,791 loans it closed between November 2002 and October 2004) that were endorsed more than 66 days after closing. The U.S. Department of Housing and Urban Development (HUD) requires lenders to submit loans for endorsement within 60 days of loan closing. For our audit purposes, we added six days to allow for HUD processing and potential mail delays in HUD receiving the loan case binders to consider for endorsement. Our objective was to determine whether Major Mortgage met HUD requirements when submitting the late requests. 4 RESULTS OF AUDIT Finding: Major Mortgage Improperly Submitted Late Requests for Endorsement of Federal Housing Administration Loans Major Mortgage improperly submitted late requests for insurance endorsement of 51 loans. This occurred because it did not have an internal quality control function to identify and mitigate improper late requests, nor did it adequately staff its operations when its loan volume significantly increased. As a result, the 51 loans placed the insurance fund at risk for $5.6 million and caused HUD to incur related claims and losses. Loans Did Not Comply with HUD Requirements Major Mortgage submitted 51 loans that did not meet applicable HUD requirements. When lenders submit loans for insurance endorsement that HUD considers late requests, the lender must meet certain conditions for HUD to endorse the loans. For the 51 loans, HUD regulations required a payment history showing the borrower made all payments in or before the month due. If the borrower made any payments after the month due, the loan was not eligible for endorsement until the borrower made six consecutive payments before or within the calendar month due. The 51 loans did not meet these conditions. Major Mortgage did not have adequate controls to ensure its employees followed HUD requirements when submitting late requests. It did not have an internal quality control function to monitor late requests for compliance with HUD requirements. In addition, our audit period coincided with an unprecedented increase in refinance loans that tripled Major Mortgage’s workload. At the same time, Major Mortgage experienced significant employee turnover and did not hire additional staff quickly enough to handle the increased loan volume. Since October 2004, Major Mortgage has reduced late requests from 57 percent of loans closed in the previous two years to less than 6 percent since October 2004, significantly reducing the risk to the insurance fund. According to Major Mortgage management, it recently implemented a quality control plan that improved its controls over late requests. Management also indicated it now has adequate staffing levels to process Federal Housing Administration loans. Due to the reduced risk to the insurance fund, we did not assess Major Mortgage’s current controls over late requests. 5 New HUD Requirements - Mortgagee Letter 2005-23 On May 17, 2005, HUD issued new requirements to reduce the administrative burden on lenders submitting late requests. Mortgagee Letter 2005-23 eliminated the requirement that the borrower make six consecutive payments when due before the loan was eligible for insurance. Under the new requirements, lenders need only ensure that all payments due were made before submitting the loan for endorsement. Of the 51 improperly submitted loans, 11 violated the newest requirement. As of November 3, 2005, nine loans hold active insurance and two defaulted and went into foreclosure. Our recommendations reflect HUD’s effort to reduce the administrative burden on lenders. Appendix C provides the federal requirements regarding late requests for insurance endorsement. Appendix D provides a list of the improperly submitted loans, excluding 17 loans that are no longer insured. Recommendations We recommend that the assistant secretary for housing - federal housing commissioner 1A. Take appropriate administrative action against Major Mortgage for not complying with HUD requirements, including requiring it to indemnify nine loans totaling $1,098,180 that it improperly submitted for endorsement. 1B. Take appropriate administrative action against Major Mortgage, including requiring it to reimburse HUD for the $35,492 loss incurred for one loan for which HUD paid a claim and sold the property. 1C. Take appropriate administrative action against Major Mortgage, including requiring it to reimburse HUD for any future loss from $132,562 in claims paid once the property is sold for one loan that went into foreclosure. 1D. Take appropriate administrative action against Major Mortgage for violating HUD requirements in effect at the time it submitted 23 loans totaling $2,239,043 without showing the borrowers met the six consecutive monthly payment requirement. 6 SCOPE AND METHODOLOGY To achieve our objectives, we reviewed electronic and hard-copy payment histories obtained from Major Mortgage and CitiMortgage. Multiple lenders service Major Mortgage’s loans, but CitiMortgage services a majority of the loans. Therefore, we concentrated our efforts only on loans serviced by Major Mortgage or CitiMortgage. We also reviewed data from HUD’s Single Family Data Warehouse for loans originated or sponsored by Major Mortgage and closed during our review period. We performed automated testing on the HUD data and the electronic payment histories. We also reviewed HUD regulations and sought guidance from HUD Quality Assurance Division staff regarding HUD’s application of pertinent HUD requirements. We reviewed policies and procedures of Major Mortgage and interviewed Major Mortgage and CitiMortgage staff at their offices in Cheyenne, Wyoming, and O’Fallon, Missouri, respectively. We also reviewed financial audit reports and other reviews associated with Major Mortgage and CitiMortgage operations. We relied on computer-processed and hard-copy payment histories from Major Mortgage and CitiMortgage. We relied on the loan payment histories in the loan files Major Mortgage submitted to HUD. We also relied on the various dates in Major Mortgage and HUD data systems. We assessed the reliability of these data, including relevant general and application controls, and found them adequate. We performed tests of the data and based on the assessments and testing, concluded that the data were sufficiently reliable to use in meeting our objectives. We used the original mortgage amount and claim status from HUD’s systems for informational purposes only. Major Mortgage closed 4,791 Federal Housing Administration-insured loans between November 2002 and October 2004. Of the 4,791 loans, Major Mortgage submitted 2,747 that were endorsed more than 66 days after closing. HUD requires lenders to submit loans for endorsement within 60 days of loan closing. To identify the potential universe of late requests, we used HUD data and allowed six additional days for processing by HUD’s mailroom and endorsement contractor and for weekend mail delays. Using the loan submission dates provided by Major Mortgage, we identified 2,675 loans that were subject to the late request for endorsement rules. Of the 2,675 loans, Major Mortgage and CitiMortgage serviced 1,819. The following table explains the adjustments made to the universe of loans to identify the loans tested. Appendix C provides the federal requirements regarding late requests for insurance endorsement. 7 Original Number mortgage Description of loans of loans amount Originated or sponsored by Major Mortgage and closed between November 2002 and October 2004 4,791 $ 512,498,244 Endorsed more than 66 days after closing 2,747 $ 298,327,743 Total loans subject to the late request for endorsement rules (late requests) 2,675 $ 223,149,902 Late requests serviced by Major Mortgage or CitiMortgage 1,819 $ 205,983,024 Electronic payment histories tested 1,810 $ 204,804,550 Hardcopy payment histories tested - electronic histories were incomplete 4 $ 499,038 Did not test - no longer hold Federal Housing Administration insurance 5 $ 679,436 Loans tested 1,814 $ 205,303,588 We performed audit work from April through November 2005. The audit was conducted in accordance with generally accepted government auditing standards. 8 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: • Controls over submitting late requests for insurance endorsement of Federal Housing Administration loans. 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: • Major Mortgage did not have adequate controls to ensure that its employees followed HUD requirements when submitting late requests for insurance endorsement (see finding). 9 APPENDIXES Appendix A SCHEDULE OF QUESTIONED COSTS AND FUNDS TO BE PUT TO BETTER USE Recommendation Funds to be put to number Ineligible 1/ Unsupported 2/ better use 3/ 1A $1,098,180 1B $35,492 1C $132,562 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/ Unsupported costs are those costs charged to a HUD-financed or HUD-insured program or activity when we cannot determine eligibility at the time of audit. Unsupported costs require a decision by HUD program officials. This decision, in addition to obtaining supporting documentation, might involve a legal interpretation or clarification of departmental policies and procedures. 3/ “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. 10 Appendix B AUDITEE COMMENTS AND OIG’S EVALUATION Ref to OIG Evaluation Auditee Comments Comment 1 11 12 OIG Evaluation of Auditee Comments Comment 1 We reevaluated Federal Housing Administration case number 521-5217745. We agree that HUD’s most recent regulations (Mortgagee Letter 2005-23) did not apply to this loan. However, the loan was subject to late endorsement procedures under HUD Handbook 4161.1, REV-1, chapter 3. Under the HUD regulations in effect when Major Mortgage submitted the loan for insurance, it should have included a payment history showing the borrower made the January 2002 payment within the month due. The HUD case binder contained two payment histories, dated January 23, 2002, and February 25, 2002. Neither showed the borrower made the January payment. The February payment history showed the borrower made the February payment on time. Because Major Mortgage was unable to show that the borrower made the January payment on time, it should have monitored the loan until six consecutive, on time payments were made before submitting the loan for endorsement. We reassigned this loan from recommendation 1A to recommendation 1D and made the appropriate changes to this report. 13 Appendix C FEDERAL REQUIREMENTS Code of Federal Regulations According to 24 CFR [Code of Federal Regulations] part 203.255(b), for applications for insurance involving mortgages originated under the direct endorsement program, the lender shall submit to the secretary of HUD, within 60 days after the date of closing of the loan or such additional time as permitted by the secretary, properly completed documentation and certifications. HUD Handbooks HUD Handbook 4165.1, REV-1, “Endorsement for Insurance for Home Mortgage Programs (Single Family),” chapter 3, section 3-1(A), states late requests for endorsement procedures apply if • The loan is closed after the firm commitment, • Direct endorsement underwriter’s approval expires, and/or • The mortgage is submitted to HUD for endorsement more than 60 days after closing. Section 3-1(B) states that a late request for endorsement from the lender must include (3) A payment ledger that reflects the payment received, including the payment due for the month in which the case is submitted if the case is submitted after the 15th of the month. For example, if the case closed February 3 and the case is submitted April 16, the payment ledger must reflect receipt of the April payment even though the payment is not considered delinquent until May 1. Payment under the mortgage must not be delinquent when submitted for endorsement. (a) The lender must submit a payment ledger for the entire period from the first payment due date to the date of the submission for endorsement. Each payment must be made in the calendar month due. (b) If a payment is made outside the calendar month due, the lender cannot submit the case for endorsement until six consecutive payments have been made within the calendar month due. (4) A certification that the lender did not provide the funds to bring the loan current or to affect the appearance of an acceptable payment history. 14 HUD Mortgagee Letters Mortgagee Letter 2004-14, “Late Request for Endorsement Procedures,” clarifies procedures for mortgage lenders when submitting mortgage insurance case binders to the Federal Housing Administration for endorsement beyond the 60-day limit following closing. It replaces the instructions found in the section, “Late Request for Endorsement,” in chapter 3 of HUD Handbook 4165.1, REV-3. A request for insurance is considered “late” and triggers additional documentation when the binder is received by HUD more than 60 days after the mortgagee loan settlement or funds disbursement, whichever is later. If HUD returns the case binder to the lender by issuing a notice of rejection (or a subsequent notice of rejection), HUD’s Homeownership Center must receive the reconsideration request for insurance endorsement within the original 60-day window or 30 days from the date of issuance of the original notice of rejection, whichever is greater. When submitting a late request for endorsement, in addition to including a payment history or ledger, the mortgage lender is required to include a certification that (1) All mortgage payments due have been made by the mortgagor before or within the month due. If any payments have been made after the month due, the loan is not eligible for endorsement until six consecutive payments have been made before and/or within the calendar month due. (3) The mortgage lender did not provide the funds to bring and/or keep the loan current or to bring about the appearance of an acceptable payment history. Mortgagee Letter 2005-23, “Amended Late Request for Endorsement Procedures,” supersedes Mortgagee Letter 2004-14 and amends procedures for late submission of mortgage insurance case binders to the Federal Housing Administration for endorsement. The new instructions are designed to reduce the administrative burden on lenders that are unable to submit applications for mortgage insurance to the Federal Housing Administration within 60 days of closing. It also replaces the instructions in the section, “Late Request for Endorsement,” in chapter 3 of HUD Handbook 4165.1, REV-3. These procedures will provide an assurance that the loan was current at the time it was submitted by the lender for insurance endorsement. The lender will be required to certify that no payment is more than 30 days overdue as of the date of the certification. In assessing whether any payment is more than 30 days overdue, the lender is required to ensure that all payments up to the payment due for the current month have been paid. Since mortgage servicers are required to report defaults on mortgages, the Federal Housing Administration intends to use this information to help confirm the accuracy of the lender’s certification. 15 Highlights of Major Changes • Certification requirements clarified: The lender needs to only certify that the most recent payment that came due was made within that month. • Payment history or ledger eliminated: The Federal Housing Administration will no longer require a payment history or ledger to be submitted with the case binder. Rather, it will rely on the certification provided by the lender. As a quality control measure, the Federal Housing Administration will increase the selection of such mortgages for postendorsement technical reviews and may use mortgage servicer reports to make certain that the lender did not incorrectly certify that the loan submitted for insurance endorsement was not in default at the time of the certification. • Six consecutive payment history eliminated: The requirement that if any payments have been made after the month due, the loan is not eligible for endorsement until six consecutive payments have been made before and/or within the calendar month due is eliminated. The Federal Housing Administration believes its risk at insurance endorsement is based on the status of the mortgage at the time of endorsement and is, therefore, eliminating this requirement in the late endorsement request. Late Request for Endorsement Certification by the Lender When submitting a late request for endorsement under the circumstances described below, the lender is required to include a dated certification that states • At the time of this certification, no mortgage payment is currently unpaid more than 30 days, and • The lender or its agents did not provide the funds to bring and/or keep the loan current or to bring about the appearance of an acceptable payment history. If the payment due for the month before the lender submitted the loan for endorsement has not been received, that mortgage is not eligible for endorsement. Examples of Late Endorsement Processing and Requirements The following examples illustrate the procedures for late request for mortgage insurance endorsement: Mortgage closed June 4 with first payment due August 1. • No certification is required if the mortgage insurance application is received for endorsement on or before August 31. However, if the mortgage case binder is sent back to the lender due to a notice of return and the lender is not able to respond correctly before the later of 30 days or when the certification period begins (September 1 in this example), the certification will be required. • If the mortgage is received for endorsement in the Homeownership Center on or after September 1 (or first business day after that date), the lender must provide the endorsement certification. The Federal Housing Administration determines whether a mortgage is received late based upon the date the Homeownership Center receives the case binder. Lenders must consider mailing and 16 processing times when submitting case binders to the Homeownership Center. They may determine the date the case binder was received and logged in by the Homeownership Center by reviewing the case status screen using the FHA Connection. 17 Appendix D IMPROPERLY SUBMITTED LOANS Federal Housing Indemnify - Claims paid - Late or missed Administration holding active Claims paid - property not Administrative monthly case number insurance property sold yet sold action Endorsement date payments Recommendation Recommendation Recommendation Recommendation 1A 1B 1C 1D August 2003 September 2003 October 2003 November 2003 052-2745297 $ 134,545 December 3, 2003 December 2003 February 2004 052-2770244 $ 139,795 April 12, 2004 March 2004 September 2003 October 2003 052-2973645 $ 79,525 November 17, 2003 November 2003 August 2003 332-4198574 $ 111,244 October 2, 2003 September 2003 December 2003 January 2004 332-4281738 $ 130,161 March 1, 2004 February 2004 July 2003 521-5512287 $ 145,713 September 8, 2003 August 2003 December 2003 562-1887341 $ 127,351 February 9, 2004 January 2004 July 2003 591-0931940 $ 116,725 September 25, 2003 August 2003 591-0932526 $ 113,121 November 18, 2003 September 2003 $ 1,098,180 495-6750016 $ 35,492 January 2, 2004 December 2003 $ 35,492 July 2003 052-2827288 $ 132,562 September 8, 2003 August 2003 $ 132,562 September 2003 052-2930433 $ 93,532 January 20, 2004 October 2003 052-3044227 $ 177,914 November 7, 2003 October 2003 052-3199332 $ 84,606 April 6, 2004 February 2004 321-2328701 $ 121,950 April 1, 2004 February 2004 April 2003 May 2003 September 2003 421-3909830 $ 56,434 November 24, 2003 October 2003 491-7989239 $ 69,426 January 20, 2004 November 2003 495-6492672 $ 86,356 July 11, 2003 June 2003 495-6506503 $ 51,562 August 6, 2003 June 2003 495-6544973 $ 121,439 September 11, 2003 August 2003 521-5217745 $ 112,922 February 28, 2003 January 2003 521-5494624 $ 114,686 September 8, 2003 July 2003 18 Federal Housing Indemnify - Claims paid - Late or missed Administration holding active Claims paid - property not Administrative monthly case number insurance property sold yet sold action Endorsement date payments Recommendation Recommendation Recommendation Recommendation 1A 1B 1C 1D May 2003 June 2003 July 2003 August 2003 September 2003 521-5512337 $ 125,352 November 17, 2003 October 2003 August 2003 October 2003 521-5538305 $ 63,723 November 4, 2003 November 2003 October 2003 521-5775503 $ 74,054 December 15, 2003 November 2003 561-7777258 $ 148,174 November 26, 2003 November 2003 561-7909158 $ 118,146 April 16, 2004 January 2004 562-1905468 $ 91,045 October 30, 2003 September 2003 562-1911854 $ 71,379 December 11, 2003 November 2003 June 2003 August 2003 562-1877712 $ 64,424 March 2, 2004 October 2003 562-1912084 $ 97,884 March 3, 2004 December 2003 562-1918137 $ 110,169 May 5, 2004 April 2004 591-0928001 $ 116,572 December 10, 2003 October 2003 591-0943183 $ 67,294 March 10, 2004 February 2004 $ 2,239,043 19
Major Mortgage, Cheyenne, Wymoing, Improperly Submitted Late Requests for Endorsement of Federal Housing Administration Loans
Published by the Department of Housing and Urban Development, Office of Inspector General on 2006-01-20.
Below is a raw (and likely hideous) rendition of the original report. (PDF)