Issue Date October 31, 2005 Audit Report Number 2006-LA-1001 TO: Brian D. Montgomery, Assistant Secretary for Housing-Federal Housing Commissioner, H FROM: Joan S. Hobbs, Regional Inspector General for Audit, Region IX, 9DGA SUBJECT: Ryland Mortgage Company, Tempe Arizona, Did Not Follow HUD Requirements in the Origination of Insured Loans HIGHLIGHTS What We Audited and Why In response to a recommendation from the Department of Housing and Urban Development’s (HUD) Santa Ana Homeownership Center Quality Assurance Division and Ryland Mortgage Company’s (Ryland) high default rate for its branch office, we audited Ryland’s loan origination activities for its Tempe, Arizona, branch office. The audit objectives were to determine whether Ryland acted in a prudent manner and complied with HUD regulations, procedures, and instructions in its approval of Federal Housing Administration-insured mortgages and whether it adequately implemented its quality control plan. What We Found Although most of Ryland’s loans are performing, Ryland failed to originate 23 of the 24 loans in our sample in compliance with HUD requirements and regulations. All 23 loans involved multiple origination deficiencies that should have precluded their approval. The deficiencies included false employment data; questionable/ false Social Security numbers; improper treatment of downpayment gifts, service fees, and/or buydowns, resulting in inflated sales prices; unsupported/overstated income; insufficient income and employment documentation; an understated liability; an unacceptable credit history; inaccurate or excessive qualifying ratios without adequate compensating factors; an unallowable fee; and unsupported sources of deposits. In addition, Ryland did not adequately implement its quality control plan. We attribute these problems to Ryland’s failure to fully implement its quality control plan and its aggressive position on approving loans over more prudent lending practices. As a result, Ryland placed HUD’s single-family insurance fund at risk for 23 unacceptable loans with original mortgages totaling $3,085,094. HUD remains at risk of losses totaling $2,730,099 related to 20 of the 24 loans. What We Recommend We recommend that HUD take appropriate administrative action against Ryland by seeking recovery for 14 of the loans totaling $85,741 in partial claims, loan modification, special forbearance, and inflated sales prices; indemnification of $2,730,099 against future losses on 20 of the loans; and requiring Ryland to reimburse the borrowers for $4,000 in unallowable fees on one of the 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 Ryland the draft report on September 20, 2005, and held an exit conference with Ryland officials on September 27, 2005. Ryland provided written comments on October 14, 2005. Ryland generally disagreed with our report findings. 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 1: Ryland Did Not Originate Insured Loans in Accordance with HUD 5 Requirements and Prudent Lending Practices Finding 2: Ryland Did Not Adequately Implement Its Quality Control Plan as 15 Required Scope and Methodology 19 Internal Controls 21 Appendixes A. Schedule of Questioned Costs and Funds to Be Put to Better Use 22 B. Auditee Comments and OIG’s Evaluation 23 C. Schedule of Loan Deficiencies 106 D. Narrative Case Summaries 107 E. Criteria 138 3 BACKGROUND AND OBJECTIVES The National Housing Act, as amended, established the Federal Housing Administration, an organizational unit within the Department of Housing and Urban Development (HUD). The Federal Housing Administration provides insurance to private borrowers against loss on mortgages financing homes. The basic home borrower insurance program is authorized under title II, section 203(b) of the National Housing Act and governed by regulations in 24 CFR [Code of Federal Regulations] Part 203. Before 1983, HUD performed most underwriting of Federal Housing Administration-insured loans. In 1983, HUD implemented the direct endorsement program, which authorized approved lenders to underwrite loans without HUD’s prior review and approval. Regulations governing this program are contained in 24 CFR [Code of Federal Regulations] Parts 202 and 203. The vast majority of Federal Housing Administration-insured single-family loans are processed through the direct endorsement program. Ryland was approved in 1979 as a nonsupervised lender, with its home office headquartered in Woodland Hills, California. According to HUD’s Neighborhood Watch system, Ryland has 24 active branches throughout the country, including the Tempe, Arizona, branch office. Ryland is an authorized agent for two principal lenders: Coastal Mortgage Services Inc., and Virginia Housing Development. Ryland’s primary business is to originate loans for new homes built by its parent company, Ryland Group, Inc. All loan applications are initially received at the branch offices or online through Ryland’s Web site and then routed to the Ryland Operations Center in Scottsdale, Arizona, for underwriting and closing. The loans are initially underwritten by Loan Prospector, a software program which evaluates the borrowers’ creditworthiness and indicates the level of underwriting and documentation that is necessary to determine the loan’s eligibility for insurance by Federal Housing Administration. If Loan Prospector gives an accept status on the loan, then the loan officer underwrites the loan. However, if the loan is given a refer status, then it is routed to the Ryland Operations Center for a more thorough review and underwriting. Pursuant to a written agreement, Ryland sells Federal Housing Administration loans to Countrywide Funding Corporation shortly after closing, if the loans meet Countrywide’s contract requirements. The audit objectives were to determine whether Ryland acted in a prudent manner and complied with HUD regulations, procedures, and instructions in its approval of the Federal Housing Administration-insured mortgages and whether it adequately implemented its quality control plan. 4 RESULTS OF AUDIT Finding 1: Ryland Did Not Originate Insured Loans in Accordance with HUD Requirements and Prudent Lending Practices Ryland did not comply with HUD’s requirements for prudent lending practices in the origination and underwriting of the 23 loans we reviewed in our sample totaling $3,085,094. It did not exercise due diligence in (1) detecting false employment data and invalid Social Security numbers, (2) identifying inflated sales prices and inappropriate use of gift funds and buydowns, (3) verifying borrowers’ income and employment, (4) assessing borrowers’ ability to pay through meticulous evaluation of liabilities and credit deficiencies, (5) precluding charging unearned or unallowable fees, and (6) verifying borrowers’ source of funds for deposits. We attribute this problem to Ryland’s disregard for HUD requirements and in the failure to adequately implement its quality control plan. As a result, HUD remains at a risk of loss on 20 of the loans, valued at $2,730,099, and incurred other actual losses of $85,741. In addition, one borrower was charged an unallowable fee of $4,000. HUD Handbook and Requirements Lenders must follow the statutory and regulatory requirements of the National Housing Act and HUD requirements, instructions, guidelines, and regulations when originating insured loans. HUD Handbook 4060.1, REV-1, “Mortgagee Approval Handbook,” requires that lenders conform to generally accepted practices of prudent lenders and demonstrate responsibility to maintain approval for participation in Federal Housing Administration insurance programs. HUD Handbook 4155.1, REV-4, CHG-1, and REV-5, “Mortgagee Credit Analysis for Mortgagee Insurance,” describes the basic mortgage credit underwriting requirements for single-family mortgage loans insured under the National Housing Act. The lender must establish the ability and willingness of the borrower to repay the mortgage debt. This decision must be predicated on sound underwriting principles consistent with the guidelines, rules, and regulations described throughout the handbook and must be supported by sufficient documentation. Summary of Findings We reviewed 24 Federal Housing Administration-insured loans originated between November 30, 2001, and November 30, 2004, and found that Ryland did not comply with HUD requirements and prudent lending practices in 23 of 24 loans totaling $3.1 million. All 23 loans contained multiple loan origination 5 deficiencies that should have precluded their approval. During the audit, 3 of the 24 loans were sold without a loss to HUD, while 21 of the 24 loans equaling $2.8 million are still active and 20 of those loans continue to be a risk to HUD. We identified the following loan deficiencies during our review (see appendix C): Questionable Documentation Deficiencies • False or altered Internal Revenue Service W-2 forms, pay stubs, and verification of employment forms and false loan officer cerification (3 of 24 loans) and • Questionable/false borrowers’ Social Security numbers (3 of 24 loans). Loan Origination Deficiencies • Inflated sales prices without justification (13 of 24 loans); and • Improper use of buydown rate (8 of 24 loans). Income Deficiencies • Unsupported/overstated income (7 of 24 loans); and • Insufficient employment documentation (14 of 24 loans). Debt or Credit Deficiencies • Understated liabilities (1 of 24 loans); • Unacceptable credit history (1 of 24 loans); and • Inaccurate or excessive qualifying ratios without adequate compensating factors (5 of 24 loans). Unallowable Fees • Unallowable fees (1 of 24 loans). Inadequate Documentation • Unsupported sources of deposits (8 of 24 loans). Details of deficiencies are discussed separately below. In addition, narrative case summaries for each of the cases are in appendix D. False Employment Data and False Loan Officer Certifications (3 of 24 Cases) We determined that 3 of the 24 cases contained false employment documents that should have been detected by Ryland. These documents included fabricated or altered Internal Revenue Service W-2 forms, borrower pay stubs, and verification of employment forms. We confirmed the false employment data by reviewing the documents in the file, interviewing the borrower and employer, and obtaining supplemental verification documentation from the borrower’s employer. 6 In one case (023-0990733), the borrower’s employer, G-Unlimited, did not exist. We visited the address listed on the loan application to conduct an interview with the employer. The lot the employer purportedly occupied belonged to another business, Grand Canyon Pump and Supply Company, which has operated at that location for more than 15 years without affiliation with G-Unlimited. We contacted the property owner of the area, who confirmed that G-Unlimited has never operated at the address, nor has it ever occupied any of its properties. It appears that the business is fictitious, and income earned by the borrower while supposedly working there is false. The borrower’s pay stubs and W-2 form appear to have been fabricated. We noticed that the Social Security insurance tax and healthcare tax amounts were incorrectly presented on both pay stubs and the W-2 form. Contrary to HUD Handbook 4000.4, REV-1, CHG-2, paragraph 3-16, the loan officer certified the faxed copies of the borrower’s W-2 form and pay stubs as true and correct copies of the originals without noticing the discrepancy of the tax withholding calculations. The W-2 form calculated a 9 percent Social Security tax (a variance of 2.8 percent from the standard 6.2 percent), and a 2 percent Medicare tax (a variance of 0.65 percent from the standard 1.45 percent). All four pay stubs calculated a 4.84 percent Social Security tax (a variance of 1.36 percent), and a 1.60 percent Medicare tax (a variance of 0.15 percent). When we questioned the borrower about these inconsistencies, she could not verify her employment at G- Unlimited, yet Ryland’s telephone verification of employment showed that the borrower’s employment was verified for two years. In another case (023-1451488), false employment documents included faxed copies of the W-2 form and pay stubs, contrary to HUD Handbook 4155.1, REV- 4, CHG-1, paragraph 3-1 F. The W-2 form, shown in figure 1 below, shows the type set was printed outside of the text box margins. Additionally, a handwritten number was superimposed on the first number of the Social Security prefix on the pay stub (see figure 2 below). The borrower was able to verify the employer’s name; however, she could not explain the altered state of her pay stubs, furnish supportive documentation to corroborate the pay stubs’ authenticity, or contact her former employer since it had gone out of business. The Department of Economic Security wage reports did not show the borrower ever worked for Muebleria Imperial, which signifies that either the employment was false or the borrower’s income was unreported, yet the telephone verification of employment confirmed borrower’s two years of service at Muebleria. 7 Figure 1: W-2 form, case 023-1451488 Figure 2: Pay stub, case 023-1451488 In the third case (023-1932092), three of the most recent pay stubs in the loan file were manufactured and altered to increase the borrower’s monthly income. We were able to contact the borrower’s employer, Pioneer Ford, which provided the borrower’s payment history for the period of April through September 2003. The two pay stubs coinciding with the payment history showed a deviation of $2,000 and $1,300 from the amount reported on Pioneer Ford’s records. In addition, one of the pay stubs was missing a check number, and the font sizes on all three pay stubs were different. Ryland failed to detect this violation and approved the loan. Questionable/False Social Security Numbers (3 of 24 Cases) We tested the validity of all borrowers’ and coborrowers’ Social Security numbers by querying Lexis Nexis and performing a Social Security number validity test from an in-house database. We determined that 3 of the 24 cases contained invalid Social Security numbers that went unnoticed by Ryland. These borrowers’ Social Security numbers were issued within two years of the application-received date. 8 • Our Lexis Nexis query showed one borrower had more than one Social Security number (see appendix D, case 023-1073648). Ryland’s only documentation of verification of the borrower’s Social Security number was the individual’s tax returns (1999-2001), which appeared questionable since they lacked the borrower’s signature, and his name was misspelled. The credit report for the borrower showed no activity. However, the accounts that were used to analyze his liabilities were listed under his spouse’s Social Security number. • Lexis Nexis reported that the second borrower’s Social Security number belonged to another individual (see appendix D, case 023-1932092). Moreover, Ryland required that the borrower provide a clearer copy of his Social Security card; however, the loan was underwritten without either the card or a documented explanation in the Ryland case file. • The third borrower’s Social Security number was altered on the pay stubs to show “765” rather than the printed “665” (see appendix D, case 023- 1451488). Inflated Sales Prices and Improper Treatment of Downpayment Gifts and Buydowns (13 of 24 Cases) Ryland generally offers an incentive to new home buyers if they use Ryland as their lender to finance the purchase of a home. Through the Nehemiah or OWN program, the buyer is offered gift funds, which go toward financing the downpayment and closing costs. In exchange for supplying the homebuyers with this gift, Ryland agrees to make a contribution in the amount of the gift, along with a $300, $385, $500, or $800 service fee to the gift provider (Nehemiah or OWN). We found that 13 of the 21 cases we reviewed included this type of situation. While this is an accepted practice, Ryland inappropriately made price adjustments to the original base sales price to recover part or all of the amount it provided to the Nehemiah or OWN program, service fees, and buydown. Contrary to HUD Handbook 4155.1, REV-4, CHG-1, and REV-5, paragraph 2-10 C, the borrowers were essentially unaware that they were repaying the gift funds through their monthly mortgage payments. The increase in sales price caused the payments to be inflated for 13 of the 24 cases by part or all of the amount of the gift, service fee, and/or buydown. A former Ryland loan officer claimed that Ryland management’s aggressive position on approving loans led its employees to circumvent more prudent loan approval practices. For instance, if the borrower’s income was insufficient to qualify for a loan, the two-to-one buydown would be offered to the borrower to 9 bypass the qualification cap. The Nehemiah program was offered in the event that the borrower had no funds saved for closing. In the scenario in which the borrower receives the gift fund, the operations manager would instruct the loan processor to increase the sales price of the home to cover the expense of funding the gift. The manager would also request this transaction’s anonymity by making sure that the contract addendums did not state “sales price increase.” A Ryland underwriter confirmed these practices. Figure 3 below shows two examples of documents which a Ryland employee had written, illustrating the increase in sales price due to the Nehemiah gift fund, service fee, and buydown. Figure 3: Sales price increase, cases 023-1293230 and 023-1449064 Sales price increased by $8,000 in the first case and $5,500 in the second. Inappropriate Use of Buydown Rate (8 of 24 Cases) Contrary to HUD Handbook 4155.1, REV-4, CHG-1, paragraph 2-14, and REV- 5, paragraph 3-1 C, Ryland qualified 8 of the 24 loans with a buydown rate but failed to document that the eventual increase in mortgage payments would not adversely affect the borrower or increase the chance of default. On seven of the eight loans, the borrowers defaulted after making from 3 to 15 payments. Two Ryland homebuyers attested that Ryland offered them the two-to-one buydown without adequately explaining the process or warning them of the eventual monthly mortgage payment increase. One of the borrowers believed she was offered the buydown because her income would not qualify her for the loan. 10 A former Ryland loan officer indicated that this was common practice when the borrower did not have sufficient income to qualify. As a result, both borrowers struggled in meeting their payments, which could have resulted in the loss of their homes. Overstated Income (7 of 24 Cases) Contrary to HUD Handbook 4155.1, REV-4, CHG-1, and REV-5, paragraphs 2-7 and 2-7 A, Ryland overstated the borrowers’ income in 7 of the 24 cases. This problem is attributable to the inclusion of false or discrepant employment income and unsupported/incorrect calculations of income. Third-Party Verifications Not Conducted (14 of 24 Cases) Ryland failed to obtain adequate employment documentation as required by HUD Handbook 4155.1, REV-4, paragraph 4-4, and REV-5, paragraphs 2-6 and 3-1 E, in 14 of 24 cases. Ryland failed to verify borrower’s employment for two years, obtain a copy of the borrowers’ pay stubs covering the most recent 30-day period, and/or obtain a copy of the previous two years’ Internal Revenue Service W-2 forms. Details are contained in the individual narrative case summaries (appendix D) and in finding 2. Understated Liabilities (1 of 24 Cases) Ryland did not include all outstanding liabilities as required by HUD Handbook 4155.1, REV-4, CHG-1, paragraphs 2-3 and 2-4, and REV-5, paragraph 2-11 in 1 of the 24 loans. In case 023-1073648, Ryland understated the borrower’s liabilities by not including a personal line of credit account that held a balance of $184 Unacceptable Credit History (1 of 24 Cases) In 1 of 24 cases (023-1493862) , the borrower’s credit history was unsatisfactory and did not meet the provisions stated in HUD Handbook 4155.1, REV-4, CHG- 11 1, paragraph 2-3. The credit report indicated collection and charge-off accounts older than two years. Ryland obtained explanation letters from the borrower regarding the charge-offs but not the collection accounts. Inaccurate/Excessive Qualifying Ratios without Adequate Compensating Factors (5 of 24 Cases) Ryland’s calculated borrower debt-to-income ratios as required by HUD Handbook 4155.1, REV-4, CHG-1, and REV-5, paragraph 2-12 exceeded guidelines in 4 of the 24 case files. Yet, Ryland approved the loans and submitted them for insurance endorsement without acceptable compensating factors. After we adjusted the calculations for unsupported/overstated income and understated liabilities that Ryland should have included, the ratios exceeded HUD guidelines for 5 of the 24 cases. The ratios calculated for the 5 loans are shown below in figure 4. Figure 4: Qualifying ratios Ryland calculated OIG calculated Mortgage Total fixed Mortgage Total fixed payment-to- payment-to- payment-to- payment-to- income ratio income ratio income ratio income ratio HUD case number 29% 41% 29% 41% 1 023-1057152 26.75% 46.25% 26.94% 46.43% 2 023-1129379 28.77% 43.26% 30.96% 46.56% 3 023-1592011 18.59% 46.53% 18.82% 47.11% 4 023-1653270 35.79% 40.17% 37.38% 41.76% 5 023-1932092 22.65% 35.42% 48.99% 76.60% Cases with excessive debt-to- 2 4 4 5 income ratios 12 Unallowable Fee (1 of 24 Cases) In 1 of the 24 loans (023-1493852), we determined that the borrower was charged an unallowable fee. The borrower’s accrued rent equity with her stay at an Equity Residential apartment was used to offset an unjustified adjustment in the sales price of her home. Ryland allowed a total of $4,000 in unallowable fees to be charged to the borrower. Inadequate Documentation for Verification of Deposit (8 of 24 Cases) Ryland failed to obtain a standard verification of deposit or original bank statements for the most recent three-month period for 8 of the 24 cases as required by HUD Handbook 4155.1, REV-4, CHG-1 and REV-5, paragraph 3-1 F. If the document itself is not more than 180 days old when the loan closes, there is no need to acquire an updated application or original bank statements. Prudent Underwriting and Required Quality Control Practices Circumvented According to a former Ryland national underwriting manager, Ryland’s upper management circumvented underwriting policies and procedures to increase loan approval turnovers. This included allowing branch managers to underwrite refer1 loans and then instructing direct endorsement underwriters to sign off on the mortgage credit analysis worksheets and certifications. She also claimed many of the loan processors were not properly trained and were heavily dependent on the instruction of the senior managers, whose primary goal was to increase loan approvals as quickly as possible. A former loan officer confirmed those facts. She stated that “she had no formal Federal Housing Administration training and received assistance with completing her duties from an operations manager, who stressed quantity rather than quality. The same operations manager allegedly pressured other loan officers to falsify borrower income in order to meet requirements. If the loan officers did not comply, their continued employment at Ryland was doubtful.” 1 Refer loans are those that were not initially qualified to be approved in Loan Prospector. 13 Another former underwriter stated that the managers did everything possible to ensure a loan was not rejected. This notion, she stated, was what Ryland headquarters dictated to the Ryland Operations Center. Conclusion Based on our review and discussions with borrowers, their employers, and former Ryland employees, we believe that Ryland upper management’s failure to fully implement its quality control plan (see finding 2 below) and its aggressive philosophy on approving loans over adhering to more prudent lending practices caused the improper loan approvals. Consequently, Ryland unnecessarily increased the risk to the Federal Housing Administration insurance fund by approving loans that did not comply with HUD requirements and remains at risk of losses on 20 of the loans totaling $2,730,099. Recommendations We recommend that HUD’s assistant secretary for housing-federal housing commissioner require Ryland to 1A. Indemnify HUD’s Federal Housing Administration against future losses on the 20 active loans totaling $2,730,099 and reimburse HUD for losses already incurred of $85,741 (see appendix A). 1B. Reimburse the borrower $4,000 for an unallowable fee. 1C. Contact the servicing lenders regarding the inflated sales prices and pay the increased amounts to reduce the corresponding loan amounts. 14 RESULTS OF AUDIT Finding 2: Ryland Did Not Adequately Implement Its Quality Control Plan as Required Contrary to HUD requirements, Ryland did not fully implement its quality control plan as required. Our review disclosed that while Ryland had established a written quality control plan that met HUD requirements, it failed to conduct the required quality control and early payment default reviews. Ryland also neglected to follow established quality control plan procedures relating to third-party verifications of income and employment. We attribute these deficiencies to Ryland’s disregard of its responsibilities to assure the reviews were conducted in a timely manner and that deficiencies were promptly addressed. This unnecessarily increased the risk to the Federal Housing Administration insurance fund. HUD Requirements HUD Handbook 4060.1, REV-1, “Mortgagee Approval Handbook,” chapter 6, provides that as a condition of HUD-Federal Housing Administration approval, lenders, including loan correspondents, must have and maintain a quality control plan for the origination and servicing of insured mortgages. The quality control plan must be a prescribed function of the lender’s operations and assure that the lender maintains compliance with HUD-Federal Housing Administration requirements and its own policies and procedures. It must be sufficient in scope to enable the lender to evaluate the accuracy, validity, and completeness of its loan origination and servicing operations. It must provide for independent evaluation of the significant information gathered for use in the mortgage credit decision making and loan servicing process for all loans originated or serviced by the lender. The quality control plan must enable the lender to initiate immediate corrective action where discrepancies are found. Quality Control Plan Reviews Not Conducted Ryland’s quality control plan states that quality control reviews will be conducted on 10 percent of its loans within 90 days of closing. However, we found that did not occur. 15 As of January 2005, • Ryland’s November 2003 to July 2004 monthly audit reviews were complete but were done late. According to Ryland’s vice president of the Quality Assurance Division, these were late because of the extended leave of one of its auditors beginning in June 2004 and the retirement of another senior auditor on December 31, 2003. • Although the November 2003 to July 2004 reviews were performed and completed, they were conducted over 90 days after closing and occurred before Ryland’s auditor took leave, indicating that the work was not completed in a timely manner with a full staff on board. • Our review of the November 2003 report showed about 70 percent of the reviews (or 71 of the 103 loans) were completed after the 90-day period. This delayed Ryland from notifying senior and middle management personnel to promptly initiate remedial action and from directing corrective measures to all loan origination, underwriting, and service personnel. As of May 2005, • Ryland’s August 2004 to November 2004 monthly audit reviews were complete but late. • Ryland anticipated it would catch up with its reviews by the end of July 2005. • Our review of Ryland’s November 2004 report showed 100 percent of its 110 reviews were conducted and completed after the required timeframe, which contributed in the delay of management’s actions and notification of remedial action to loan origination, underwriting, and service personnel. • A few of the deficiencies identified in Ryland’s November 2004 review reflected what we found during ours and mirrored findings in HUD’s August 2003 monitoring. Those deficiencies included the following: 1. The qualifying ratios were not calculated correctly; 2. Some of the income used to qualify was unstable and/or not properly identified; 3. All underwriting requirements were not met; 4. The qualifying ratios were not always acceptable, and the underwriter did not always state the compensating factors on the mortgage credit analysis worksheet; 16 5. A pay stub covering the most recent 30-day period was not found in the file and/or did not meet all of the requirements for this type of loan; and Early Payment Default Reviews Not Conducted Our evaluation of Ryland’s early payment default reviews was inconsistent with the work completed by one of Ryland’s internal auditors. When we discussed the reviews with her, she assured us that all defaults with six payments or fewer were conducted monthly. We recreated her selection procedures by obtaining a hard copy of her Neighborhood Watch default list for the periods between December 1, 2002, and March 31, 2005. We determined that 122 loans went into default, with 66 (more than 50 percent) defaulting in six payments or fewer. Only 32 (48 percent) of the 66 loans were properly reviewed, while the remaining 34 were not. We also noted that several reviews were conducted for loans that went into default with more than six payments. The time expended for these reviews should have been allocated to those loans that defaulted in fewer than six payments. Third-Party Verifications Not Conducted (14 of 24 Cases) In our review of 24 loans, we found 14 instances in which Ryland did not follow the established quality control plan procedures and HUD Handbook 4155.1, REV- 4, CHG-1, and REV-5, paragraphs 2-6 and 3-1 E, relating to third-party verifications of income and employment used as a basis for approving the loans. Ryland’s quality control plan provides that employment documents, such as verification of employment, pay stubs, Internal Revenue Service W-2 forms, tax returns, and bank statements, will be reviewed for accuracy and completeness. HUD Handbook 4155.1, REV-4, CHG-1, and REV-5, paragraphs 2-6 and 3-1 E, provides more stringent requirements for verifying employment; as an alternative to obtaining a written verification of employment, the lender may choose to obtain from the borrower original pay stubs covering the most recent 30-day period, along with original copies of the previous two years’ Internal Revenue Service W-2 forms. The lender must also verify by telephone all employment for the past two years. One case (023-1188456) did not contain a written or telephone verification of employment, indicating that no verification of the borrower’s employment was performed for the past two years. Another case (023-1592011) did not contain the borrower’s and coborrower’s original pay stubs covering the most recent 30-day 17 period, while the telephone verification of employment verified only one year and five months of the borrower’s employment and one year and six months of the coborrower’s employment. Conclusion We attribute these deficiencies to Ryland management’s disregard of its responsibilities to assure the reviews were conducted and in a timely manner. Ryland’s vice president of quality assurance explained that there was insufficient staff to perform the work. We believe Ryland’s disregard stems from management’s aggressive position on approving loans as quickly as possible over more prudent lending practices. As a result, as discussed in finding 1, Ryland unnecessarily increased the risk to the Federal Housing Administration insurance fund by approving loans that did not comply with HUD requirements. Recommendations We recommend that HUD’s assistant secretary for housing-federal housing commissioner 2A. Require Ryland to take the necessary actions to ensure that the required quality control plan and early payment default reviews are conducted in a timely manner and that corrective action is taken and documented for all reported deficiencies. 2B. Require Ryland to take the necessary actions to ensure that it complies with HUD’s Federal Housing Administration requirements relating to third-party verifications of income and employment. 18 SCOPE AND METHODOLOGY Our review generally covered the period from November 30, 2001, through November 30, 2004. We made a nonrepresentative selection of 24 loan files originated by Ryland’s Tempe, Arizona, branch office from a population of 390 loans. We made our selection based on the number of payments before first default; loans in claim; and several risk factors, including miscellaneous “price adjustments” found in the agreement of sale, questionable Social Security numbers, inadequate qualifying ratios, unsupported income, unsupported assets, understated liabilities, inadequate documentation, and questionable/unearned fees. To accomplish our objectives, we • Reviewed relevant HUD rules, regulations, and guidance regarding mortgage underwriting and quality assurance. • Reviewed Ryland and HUD case files for the 24 sample loans, 12 LandAmerica Transnation escrow files, and 7 Ryland title escrow files. • Obtained Arizona Department of Economic Security wage reports on borrowers and coborrowers for all 24 loans. • Distributed postal tracers to verify borrowers’ home/mailing addresses. • Reviewed Ryland’s fiscal year end 2003 quality control plan to determine whether the plan complied with HUD requirements and whether Ryland fully implemented the plan. • Queried the Social Security numbers for the 390 borrowers and 214 coborrowers in our audit universe to determine their validity. • Queried electronic/Internet database systems, including Lexis Nexis, Real Quest, Neighborhood Watch, and Single Family Data Warehouse to determine the validity of loan information. • Interviewed 10 borrowers and 10 current or former borrowers’ employers. • Interviewed former Ryland employees: national underwriting manager, underwriter, and loan officer. • Interviewed current Ryland employees, including the vice president of the Quality Assurance Division and vice president of production. 19 The audit fieldwork was performed during the period January through July 2005. We performed our review in accordance with generally accepted government auditing standards. 20 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 control was relevant to our audit objectives: • Policies and procedures that management has in place to reasonably ensure that the loan underwriting process complies with HUD program requirements. We assessed the relevant control 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: • Ryland did not have adequate internal controls to reasonably ensure that originations complied with all applicable HUD requirements (see findings 1 and 2). 21 APPENDIXES Appendix A SCHEDULE OF QUESTIONED COSTS AND FUNDS TO BE PUT TO BETTER USE Recommendation Ineligible 1/ Funds to be put to better use 2/ number 1A (see below) $85,741 $2,730,099 1B (finding 1) $4,000 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 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. Indemnification Recovered Mortgage Claim Partial Loan Special Inflated sales Net loss amount (funds HUD case no. amount amount amount claim modification forebearance price (ineligible) put to (resale) better use) 1 023-0990733 $ 100,261 $ - $ - $ - $ - $ 2,264 $ - $ 2,264 $ 100,261 2 023-1057152 95,460 95,460 - - - 2,363 95,460 $ 2,363 - 3 023-1073648 137,857 - - - - - - $ - 137,857 4 023-1113543 134,995 - - - - 3,352 - $ 3,352 134,995 5 023-1129379 123,068 - - - - 4,696 - $ 4,696 123,068 6 023-1188456 143,470 - - 650 - 985 - $ 1,635 143,470 7 023-1293230 132,457 132,457 26,216 650 - 7,876 132,457 $ 34,742 - 8 023-1318434 107,488 - - - 100 3,136 - $ 3,236 107,488 9 023-1449064 131,239 - - 650 - 5,413 - $ 6,063 131,239 10 023-1451488 150,575 - - - - - - $ - 150,575 11 023-1453913 151,265 - - - - - - $ - 151,265 12 023-1487584 127,078 127,078 - 650 - 5,270 127,078 $ 5,920 - 13 023-1493862 118,805 - 6,170 - - 2,985 - $ 2,985 118,805 14 023-1576678 128,905 - 9,145 - - 5,907 - $ 5,907 128,905 15 023-1592011 153,772 - 1,300 100 - - $ 1,400 153,772 16 023-1646394 130,833 - - - - - - $ - 130,833 17 023-1646660 148,291 - - - - - - $ - 148,291 18 023-1653270 136,010 - - - - 3,150 - $ 3,150 136,010 19 023-1736086 140,628 - 5,094 - - 2,934 - $ 8,028 140,628 20 023-1811657 155,173 - - - - - - $ - 155,173 21 023-1932092 119,516 - - - - - - $ - 119,516 22 023-1965223 157,172 - - - - - - $ - 157,172 23 023-2133833 137,025 - - - - - - $ - 24 023-2177719 160,776 - - - - - - $ - 160,776 Subtotal (without $ 3,085,094 $354,995 $46,625 $ 3,900 $ 200 $ 50,331 $ 354,995 $ 85,741 $ 2,730,099 Total $ 3,222,119 Recommendation 1A sanction total $ 2,815,840 Loans are still active. We are requesting indemnification for amount not partial claims amount 22 Appendix B AUDITEE COMMENTS AND OIG’S EVALUATION Ref to OIG Evaluation Auditee Comments 23 24 Comment 1 25 26 Comment 2 27 28 29 30 31 Comment 3 32 33 34 35 36 Comment 4 Comment 5 37 Comment 6 38 Comment 7 Comment 8 Comment 9 39 Comment 10 Comment 11 40 Comment 12 Comment 13 41 Comment 14 Comment 15 42 Comment 16 43 44 45 Comment 17 Comment 18 46 Comment 19 47 Names redacted for privacy 48 Comment 20 49 50 Comment 21 51 52 Comment 22 53 Comment 23 54 Comment 24 55 56 Comment 25 57 58 Comment 26 59 60 Comment 27 61 62 Comment 28 63 Comment 29 64 65 Comment 30 66 Comment 31 67 68 Comment 32 69 Comment 33 70 71 Comment 34 72 73 Comment 35 74 Comment 36 75 Comment 37 76 77 Comment 38 78 79 Comment 39 80 81 Comment 40 82 83 OIG Evaluation of Auditee Comments Comment 1 OIG has the authority to audit any HUD-funded program activities and does not need a specific justification for its selection. Nevertheless, as previously discussed with Ryland at the exit conference, OIG initiated the audit of Ryland based on the fact that the Tempe branch office’s three year default rate of 9.2 percent for loans closed during the audit period (November 1, 2001 and November 30, 2004) was significantly high. The confusion in Ryland’s comments lies in the time period, loans that were in default for the two year performance period ending November 30, 2004, used when querying Neighborhood Watch. Further, we felt an audit of Ryland was warranted based on a HUD recommendation stemming from concerns outlined in a November 2003 monitoring report. Comment 2 We interviewed the former Ryland employees to obtain a better understanding of the loan process and origination practices that occurred at the time the sampled loan transactions took place. Subsequent to the interviews, we discussed the results with Ryland’s vice president of production in order to ensure accuracy and fairness in our audit report conclusions. The vice president was unable to provide us with any evidence to dispute the statements and claims by the former Ryland employees. Our interpretations of former Ryland employee allegations are addressed below: • The former Ryland national underwriting manager’s contention does not question the branch manager’s authority to underwrite loans, but questions whether the branch manager acted in accordance with underwriting policies and procedures. Ryland’s response stated “a phone survey of these seven management employees reveals that only one branch manager has used such authority on approximately four loans and only after discussion, and with the approval and concurrence of the national underwriting manager, who ultimately approved the loans.” The former national underwriting manager’s claim implies she did not concur with the approval of the loans, yet the loans were approved based on the sole authority of the branch manager. As a result, we feel that Ryland did not successfully invalidate the former employee’s allegation. • The former loan officer was not speaking about loan processors; she was speaking about other loan officers. Further, she did not state that loan processors were pressured to approve loans. She stated that loan officers were pressured to falsify borrower income in order to meet requirements. There is a great distinction between falsifying borrower income and approving loans. As a result, we feel that Ryland did not successfully invalidate the former employee’s allegation. 84 • The former Ryland employees did not assert that all of its employees lacked training. The underwriting manager stated that many of the loan processors were not properly trained, not that they were not trained at all. And, because they were not properly trained, they relied heavily on the assistance of higher managers. Similarly, the former loan officer stated that she had no formal Federal Housing Administration training and as a result, relied heavily on the assistance of someone above her. As a result, we feel that Ryland did not successfully invalidate the former employees’ allegation. Comment 3 We agree with Ryland’s assertion found two paragraphs down after the section “Ryland Also Objects to the Misrepresentation Regarding Changes in Sales Pricing and Treatment of Downpayment Gift.” and understand how the message was misconstrued. We revised the section to clarify the statement. We also agree with the contention that Ryland employees do not have the ability to “increase” the sales price. We are fully aware that Ryland is a separate entity from any of The Ryland Group’s home selling subsidiaries and Ryland receives its mortgage loans from the home sales division. It is, however, apparent that both entities have business associations with each other. We believe that the decisions to “increase” the sales price of homes are made at Ryland Mortgage and communicated and directed to The Ryland Group’s home selling subsidiary. This assertion is evidenced by an email we obtained from a Ryland Mortgage file between a Ryland Mortgage loan processor and a Ryland Home employee, who we presume to be the seller since her name appears on the Rider to Agreement of Sale as the document’s preparer. The email requests a price adjustment be made to cover the cost of a buydown and to adjust what is reported on the finance addendum by a proportionate amount. The email continues to say “put in the comments in clear ‘price adjustment’ cause we’ve had people put in other things like – to cover buy down or for Nehemiah – and we don’t want the appraiser to know that.” The message alludes that this procedure of increasing the sales price to conceal the recovery of Nehemiah fund, service fee, and buydown is not an isolated occurrence, but is common and accepted at Ryland Mortgage. Furthermore, we recently received a memo directing Ryland managers and their respective departments to cease increasing sales prices when offering downpayment assistance. The memo went on to state that if there was any resistance, contact the Regional President or the writer of the memo. This suggests that prior to its dissemination in December of 2002, increasing the sales price to regain the downpayment assistance funds was commonly exercised. We reviewed the 24 borrower contracts, included in that number are the three cases that were omitted from the narrative case summary, and determined that 13 cases contained unjustified price adjustments. Of the 13 cases, nine were in effect and dated before Ryland sent out the directive (see chart below). It is safe to say that these nine cases had inflated sales prices. We believe the four remaining cases, signed by buyer between January 11, 2003 and April 17, 2003, were 85 handled the same way and no changes to cease this practice were ever implemented. Price Price adjustment Case Settlement adjustment date based on number date amount buyer's signature 1 023-0990733 12/14/01 $ 2,300 12/5/2001 2 023-1113543 04/30/02 3,400 3/2/2002 3 023-1057152 05/16/02 2,400 4/2/2002 4 023-1188456 06/14/02 1,000 6/5/2002 5 023-1129379 07/30/02 4,770 7/14/2002 6 023-1293230 09/27/02 8,000 8/23/2002 8/31/02 & 7 023-1449064 12/27/02 5,500 10/10/02 8 023-1318434 09/25/02 3,200 9/8/2002 9 023-1576678 03/26/03 6,000 11/11/2002 10 023-1487584 02/12/03 5,277 1/11/2003 11 023-1493862 01/28/03 3,032 1/11/2003 12 023-1736086 06/24/03 2,980 2/6/2003 13 023-1653270 04/30/03 3,200 4/17/2003 Not signed by borrower, date of fax 3 loans not included in draft report Mortgagee Letter 96-18 states “the source of funds for a gift to the borrower must be totally unrelated to the loan transaction.” HUD Handbook 4155.1, REV-4, CHG-1, and REV-5, paragraph 2-10 C, states that “no repayment of the gift may be expected or implied.” Therefore, if the sales price of the homes were increased to recoup the gift, there is a violation of both Mortgagee Letter 96-18 and HUD Handbook, regardless of whether this increase in sales price is below the market value of the house. Other than briefly mentioning that the terminated loan officer wrote the two notes appearing on page 10 of the report, Ryland did not provide any documentation or support to negate these notes. Nor did Ryland sufficiently explain the option identification numbers attached to these sales price increases during our audit. Therefore, we did not make any changes to the report relating to the inflated sales prices. Comment 4 We reviewed the loan file documentation again, but stand by our conclusion that all three cases contained false employment data that should have been detected by Ryland and/or false loan officer certification. It appears that Ryland may have confused the facts between two cases. The first two paragraphs on page 15 of their comments seem to refer to case number 023-0990733, while the third paragraph seems to refer to case number 023-1451488. However, we never mentioned that a loan officer certified the pay stubs and W-2 from a fax source for case number 023-1451488, but rather directed that deficiency to case number 023-0990733. In light of Ryland’s observation, we noticed that we overlooked 86 the fact that the pay stubs and W-2s were also falsely certified for case number 023-1451488. As a result, we have included that deficiency in the narrative case summary and will appear on the final version of the report. In order to reduce redundancy, we chose to direct Ryland to the comments of the narrative case summaries, unless Ryland agrees with a deficiency but chose to comment on it. Please see comment 20 for our response. • Case No. 023-1451488 HUD Handbook 4000.4, REV-1, CHG-2, paragraph 3- 16 states when a duly designated official of a mortgage certifies a document, they are endorsing that the document is accurate and complete to the best of their knowledge. The text typewritten on the year 2001 W-2 form overlaps the surrounding textbox and text descriptions, while the Social Security numbers on two pay stubs were altered; before the change, the Social Security prefix showed “665,” and after the change, it showed “765.” The loan officer certified W-2 statements for the years 2000 and 2001, as well as the two altered pay stubs for the periods August 24 to September 6, 2002 and September 7 to 20, 2002. Clearly, this loan officer acted in violation of the HUD Handbook. Also, these items contained the fax header from “PM Home Buyer Connection In,” with the fax number 623-846-6660. HUD Handbook 4155.1 REV-4, CHG-1, paragraph 3-1 E requires that the original pay stubs be obtained. Further, there were also pay stubs for the borrower’s husband included in the file, which were faxed by Ryland; however, because the husband is not a borrower those items are irrelevant. The bank statement certification bears no consequence to false employment. • Case No. 023-1932092 OIG agrees that Ryland verified employment using an acceptable alternative method. However, employment verification is not in question for this borrower. Moreover, we do not believe substituting signed tax returns for the missing W-2 form added significant risk to the loan. The issue at hand concerns false pay stubs. The most recent pay stubs in the loan file were fabricated and altered to increase the borrower's monthly income. One of the pay stubs was missing a check number and the font size on all three pay stubs was different. This was very apparent at first inspection of the documents. Ryland failed to detect this discrepancy. We noted that Ryland agreed with the OIG to indemnify this loan; their statement can be found on page 20 and 55 of their comments. Comment 5 We reviewed the loan file documentation again but stand by our position that all three cases contained false Social Security numbers that should have been detected by Ryland. Ryland found one case in which they believe the underwriter should have detected the false Social Security numbers (case number 023- 1451488) and they chose to indemnify another case (023-1932092), but disagreed with OIG’s evaluation. Our response is shown below. Please see comment 21 for our response on the third case (023-1073648). 87 • Case No. 023-1932092 Even though borrower’s Social Security number was the same on pay stubs, W-2 forms, tax returns, application, and credit report, there was still an issue with the number. As noted on the file, a Ryland employee wanted a clearer copy of the Social Security card. This is not necessary; however, due diligence should have dictated. We feel that the employee who noted the request was unsure of the validity of the Social Security number. As discussed in the exit conference, Ryland has access to Lexis Nexis, a research database where the OIG found other names associated with the Social Security number in question. We noted that Ryland agreed with the OIG to indemnify this loan; their statement can be found on page 20 and 55 of their comments. Comment 6 Our contention in the ‘inappropriate use of buydown’ section was twofold; one, to satisfy the documentation requirement mandated by HUD Handbook 4155.1, REV-4, CHG-1, paragraph 2-14 and two, to show the improper use of the buydown. This is illustrated by the statement concerning borrowers who defaulted in 3 to 15 payments. We are suggesting that these borrowers should not have received a loan because their incomes were insufficient to handle the monthly mortgage payments, yet Ryland qualified them by offering the two to one buydown. We stand by our position that all six cases contained inappropriate use of a buydown. Also, we included in the total count the three other cases we did not include in the narrative case summaries; note that we cite two of those cases contained inappropriate use of buydown. Please see comments 23, 26, 29, 30, and 33 for our response. Comment 7 We agree to remove two deficiencies with regard to overstated income for case numbers 023-1188456 and 023-2133833 from the report, but maintain that the other five cases are valid and remain deficient. Please see comments 20, 21, 31, 32, and 40 for our response. Comment 8 We agree to remove one deficiency concerning case number 023-1965223 from the report, but maintain that the remaining twelve are valid and remain deficient. Included in our total count are the three cases we did not include in the narrative case summaries; note that we cite two of those cases contained a third party verification deficiency. In addition, we added in the criteria HUD Handbook 4155.1, REV-4, CHG-1, and REV-5, paragraph 2-6, which requires that the borrower must explain any gaps in employment spanning one month or more. Additionally, the lender must verify the borrower’s employment for the most recent two years. Please see comments 24, 25, 29, 31, 33, 35, 36, & 40 for our response. Comment 9 We agree to remove two deficiencies with regard to understated liabilities for case numbers 023-1965223 and 023-2133833 from the report, but maintain that the other one case is valid and remains deficient. Please see comment 21 for our response. 88 Comment 10 We stand by our position that this one case has an unacceptable credit history. Please see comment 29 for our response. Comment 11 We agree to remove eight deficiencies with regard to inaccurate/excessive qualifying ratios without adequate compensating factors for case numbers 023- 0990733, 023-1188456, 023-1449064, 023-1493862, 023-1646394, 023-1811657, 023-1965223, and 023-2133833 from the report, but maintain that the remaining four were valid and remain deficient. Included in our total count are the three other cases we did not include in the narrative case summaries; note that we cite one other case that contained inaccurate/excessive qualifying ratios without adequate compensating factors. Please see comments 23 and 31 for our response. Comment 12 We agreed not to pursue the home ownership association fees as improper charges. However, we stand by our position that the $4,000 in rent equity be refunded as an overcharge to the borrower in case number 023-1493862. Comment 13 We agree to remove five deficiencies with regard to inadequate documentation for verification of deposit for case numbers 023-118456, 023-1451488, 023- 1646660, 023-2133833, and 023-2177719 from the report, but maintain that the remaining five were valid and remain deficient. Please see comments 20, 29, 34, 36, and 38 for our responses. Comment 14 The missing three loans are also included in the narrative case summaries of appendix D. In addition, we readjusted our case totals to include the three loans, bringing us up to 24 instead of the original 21 we had reported in the draft. Comment 15 Ryland agrees to indemnify loans relating to case numbers 023-1932092 and 023-1451488. We agree not to pursue indemnification for case number 023- 2133833; however, we believe that Ryland did not originate insured loans in accordance with HUD requirements and prudent lending practices in the other 23 cases. We believe that Ryland should reimburse HUD for losses, partial claims, or forbearance relating to 23 cases. In addition, we believe that Ryland should reimburse the servicing lender to pay down the loan amounts and refund any overcharges to the borrowers. Comment 16 Contrary to Ryland’s claim, failing to perform timely audit reviews for a period of about a year and a half clearly shows that Ryland disregarded its responsibilities. Considering the importance of these monthly audit reviews to internal controls, this relatively long instance was not rectified immediately thereby delaying corrective action by middle and upper management. Comment 17 According to HUD Handbook 4060.1 REV-1 & REV-1 CHG-1, Chapter 6, an analysis of all loans which go into default within the first six months are required to be conducted as part of the lender’s quality control. We took a conservative approach to testing early payment defaults. Rather than relying on data that we 89 directly pulled from Neighborhood Watch, we opted on reproducing a Ryland auditor’s work to understand the series of actions or events leading to her results. As stated in the report, 66 or over 50% of the 122 defaulted loans between December 1, 2002 and March 31, 2005 were not properly reviewed; i.e., no documentation was in the binders to substantiate that a review was done. While we acknowledge that the department is current with its early payment default files; at the time of our review in May of 2005, we found several instances when the files were still not reviewed. Between September 2004 and March 2005, 28 loans defaulted within six payments or less. While 21 of the required reviews were conducted, seven or 25 percent were not; disproving Ryland’s statement that ‘all files since August 2004 have been completed monthly.’ Comment 18 The purpose of third-party verifications is to evaluate the stability of the borrower’s income. According to HUD Handbook 4155.l, REV-4, CHG-1, and REV-5, paragraph 2-6, the lender must verify the borrower’s employment for the most recent two full years. If the borrower indicates he or she was in school or in military during any of this time, the borrower must provide evidence supporting this. The borrower must also explain any gaps in employment of a month or more. This criterion indicates that two years of employment must be verified and not just current employment. We will include this Handbook citation in the main body, criteria, and narrative case summaries of the report for clarification. Comment 19 While Ryland may have intended to comply with agency, state, and federal regulations, our review shows otherwise. For the reasons stated above, we maintain our position that Ryland did not adequately implement its quality control plan as required and unnecessarily increased the risk to the Federal Housing Administration insurance fund. Comment 20 Based on the underwriting deficiencies found in the file we recommend that Ryland indemnify this loan. We agree to remove one deficiency relating to case number 023-0990733. • False Employment We are unsure whether Ryland agrees or disagrees with this deficiency. On page 15 of the report, Ryland found one case in which they believe that the underwriter should have detected fraud; however, in the narrative case summary on page 27, Ryland stated that it was not reasonable to detect this fraud. Nonetheless we wanted to make clear that the address listed on the loan application for borrower’s employer actually belonged to Grand Canyon Pump and Supply Company, which has operated at that location for over 15 years without any affiliations with G-Limited. Further, no wages from the employer in question appeared for the borrower’s Social Security number with the Arizona Department of Economic Security. • Inflated Sales Price The original purchase price was listed as $99,540 on the Sales Agreement signed on October 19, 2001 by the borrower. This amount included options with a total of $6,500, a lot premium of $1,500, and a base 90 price of $91,490. On a December 5, 2001 faxed copy of a rider to Agreement of Sale, $2,300 was added to the final sales price as a 'Price Adjustment.' The final sales price as a result of this adjustment was $101,840. There was no description or explanation of the $2,300. Moreover, the original agreement states that the appraised value of the property will not be less than $99,540. There was an additional rider included in the file that states the appraised value of the property will not be less than $101, 840. However, after the price adjustment of $2,300 was added to the sales price. • Overstated Income The borrower’s monthly income of $2,600 earned at G- Unlimited on the mortgage credit analysis worksheet was overstated. Since the borrower’s place of employment was false, the purported income from this employment must be deducted. We do not know whether the borrower had any income at all. Aside from her bank statement, covering a two-week period, there was no evidence in the file that leads us to believe that borrower has a stable income and can afford to pay her monthly premiums. • Inaccurate/Excessive Debt-to-Income Ratios We agree to remove this deficiency from the report. • Unallowable Fees As discussed, we agreed to remove this deficiency from the report. • Unverified Sources of Deposit While we agree that borrower is not required to have a bank account, HUD Handbook 4155.1 REV-4, CHG-1, paragraph 2-10 B states that if the account was recently opened an explanation and evidence of source of funds must be obtained by the lender. Other than the letter explaining her lack of a bank account, no evidence of source of funds was ever provided. • Recommendations Indemnify HUD the mortgage amount of $100,261. Pay the servicing lender $2,264 to reduce the loan amount. Comment 21 Based on the underwriting deficiencies found in the file we recommend that Ryland indemnify this loan. We do not agree on removing any deficiencies relating to case number 023-1073648. • Questionable/False Social Security number We reviewed Ryland’s objections and do not concur with Ryland’s assessment. The tax records may have had the Social Security number listed, but with all the discrepancies on the forms; i.e., forms not signed, misspelled name, multiple year filings, and the tax preparer did not submit the tax return to the Internal Revenue Service, (he turned them over to the filer for him to submit to the Internal Revenue Service) we have considerable doubt whether the records were actually used to declare the individual’s income and tax liability, in-turn have not been 91 validated by the IRS. We reviewed the borrower’s Arizona Federal Credit Union bank statements and found no reference to the borrower’s Social Security number other than the words “on file.” The document Ryland speaks of which indicates the borrower’s Social Security number and “N” under “Foreign Status” does not appear authentic and does not contain the Arizona Federal Credit Union’s header. The borrower’s file did not have a verification of deposit for the Arizona Federal Credit Union so it is assumed the statement was used as an alternative to the standard verification of deposit sheet. No documentation was in the file to show that a contact was ever made with the bank concerning the borrower. Therefore, we cannot see how the statement can validate the borrower’s Social Security number. We agree that the Landsafe Credit report does show the same Social Security number; however, the credit report also generated more than one variation of the borrower’s name attached to that same Social Security number. Trans Union credit bureau indicated the one variation to the borrower’s name was 0 years old, while Experian credit bureau indicated the other name variation to be 21 years of age, yet both hold the same Social Security number. This should have raised a red flag towards the borrower’s identity/Social Security number. When we interviewed the borrower, he stated that the last name listed on the loan application was not his surname, but was the variant that was reported on the credit report. Further, the Landsafe credit report does not show any activity for the borrower. All activity is for the borrower’s wife, who is not a borrower/co-borrower. As stated at the exit conference by both the Vice President of Quality Assurance and Ryland’s Assistant General Counsel, this is a red flag and further verification is required. • Overstated Income The borrower’s monthly income of $4,518 on the mortgage credit analysis worksheet was overstated by $293 per month. Assuming that the borrower’s self-employed income was appropriate, Ryland improperly calculated the income by using business income rather than adjusted gross income as required by HUD Handbook 4155.1 REV-4, CHG-1, paragraph 2-9 C. 1. • Understated Liability We agree that this liability would not have increased the debt to income ratios; however, it was not appropriate to omit it from the loan application. Also as a debt management tool for an individual, who has approximately 16 overdrafts in one month, this paints a poor picture of the borrower’s ability to live within his income. • Unallowable Fees As discussed, we agreed to remove this deficiency from the report. • Recommendations Indemnify HUD for the mortgage amount of $137,857. 92 Comment 22 There was no finding of fraud found in this case and no such claim is made on the report. Based on the underwriting deficiencies found in the file we recommend that Ryland indemnify this loan. We do not agree on removing any deficiencies relating to case number 023-1113543. • Inflated Sales Price The original purchase price was listed as $131,640 on the Sales Agreement signed on October 27, 2001 by the borrower. This amount included options with totaling negative $10, a lot premium of $750, and a base price of $130,900. On a Rider to Agreement of Sale, signed by the borrower on October 27, 2001, $1,796 worth of options was added to the final sales price, increasing it to $133,436. Additionally, a second Rider to Agreement of sale, signed by the borrower on October 27, 2001, shows an option of $95.00 added to the final sales price, increasing it to $133,531. On a Rider to Agreement of Sale, signed by the borrower on March 2, 2002, $3,400 was added to the final sales price as a 'Price Adjustment.' The final sales price as a result of this adjustment was $136,931. There was no description or explanation of the $3,400. • Unallowable Fees As discussed, we agreed to remove this deficiency from the report. • Recommendations Indemnify HUD the mortgage amount of $134,995. Pay the servicing lender $3,352 to reduce the loan amount. Comment 23 There was no finding of fraud found in this case and no such claim is made on the report. Based on the underwriting deficiencies found in the file we recommend that Ryland indemnify this loan. We do not agree on removing any deficiencies relating to case number 023-1129379. • Inflated Sales Price The original purchase price was listed as $120,230 on the Sales Agreement signed on May 25, 2002 by the borrower. This amount included options with a total of $1,740, a lot premium of $1,000, and a base price of $117,490. On July 14, 2002, the borrower signed an amendment to agreement of sale, which added $4,770 to the final sales price. The description of this transaction was listed as a "Price Adjustment." The final sales price as a result of this adjustment was $125,000. There was no description or explanation of the $4,770. • Inappropriate Use of Buydown Rate HUD Handbook 4155.1 REV-4, CHG-1, paragraph 2-14 requires that the underwriter specifically state which four criteria the borrower meets and documentation of job training or education in the borrower’s profession or a history of the borrower’s career advancement along with increases in earnings, all of which Ryland failed to do. Also, note that one pay stub included in the file for the period ended May 19, 2002, the 93 year to date overtime hours were 44. These hours are a significant difference from the prior year’s, which was stated on the verification of employment as 191.50 hours. HUD Handbook 4155.1, REV-4, CHG-1, chapter 2, section, 2-7 requires that “an earnings trend must be also established” for overtime income. In addition, if this type of income shows a continual decline, the lender must provide rationalization for inclusion of such income, where none was provided. Therefore, we disagree with Ryland’s evaluation of the borrower’s potential for increased earnings and feel that this borrower was inappropriately given a buydown to qualify for the loan. Interestingly enough, Ryland did not notice that the verifier of the employment verification form was signed by someone holding a position as ‘foreman.’ When we spoke to the employer, they notified us that this person was not authorized to verify employment. • Inaccurate/Excessive Debt-to-Income Ratios The recalculated overtime income is incorrect and therefore cannot be included as income in the calculation of qualifying ratios. Further, the Debt-to-Income ratio remains at 46.6 percent, which is considerably higher than the 43 percent benchmark for Energy Efficient Mortgage Standards. • Unallowable Fees As discussed, we agreed to remove this deficiency from the report. • Recommendations Indemnify HUD the mortgage amount of $123,068. Pay the servicing lender $4,696 to reduce the loan amount. Comment 24 There was no finding of fraud found in this case and no such claim is made on the report. Based on the underwriting deficiencies found in the file we recommend that Ryland indemnify this loan. We agree to remove three deficiencies relating to case number 023-1188456. • Inflated Sales Price The $1,000 price adjustment was listed on the Rider to the Agreement contract with an unidentifiable code beside it, not indicating what the legitimate purpose was for the adjustment. When we asked Ryland what it was for (i.e. additional options), we did not get a straight answer. Further, when we interviewed the borrower, they could not verify what it was for, yet they were able to name the option upgrades they requested and an approximate price they were charged. • Unsupported Source of Income We agree to remove this deficiency from the report. • Insufficient Employment Documentation HUD Handbook 4155.1, REV-4, CHG-1, paragraph 2-6 states that the borrower must explain any gaps in 94 employment spanning one month or more. Additionally, the lender must verify the borrower’s employment for the most recent two years. The telephone verification of employment was scarcely complete when verifying borrower’s employment at On Semiconductor. The years of employment of January 1, 1992 thru December 30, 2001were written on the sheet; however, no name, phone number, or date of verification was filled out. "W-2's" was handwritten on the verification of employment, possibly indicating that the loan processor did not contact anyone to verify this income and merely relied on the paper document for verification. • Inaccurate/Excessive Debt-to-Income Ratios We agree to remove this deficiency from the report. • Unallowable Fees As discussed, we agreed to remove this deficiency from the report. • Unverified Source of Deposit We agree to remove this deficiency from the report. • Recommendations Indemnify HUD the mortgage amount of $143,470. Reimburse HUD for the loan modification amount of $650. Pay the servicing lender $985 to reduce the loan amount. Comment 25 There was no finding of fraud found in this case and no such claim is made on the report. Based on the underwriting deficiencies found in the file we recommend that Ryland indemnify this loan. We disagree with removing any deficiencies relating to case number 023-1318434. • Inflated Sales Price The original purchase price was listed as $105,990 on the Sales Agreement signed on August 9, 2002 by the borrowers. This amount included no options, no lot premium, and a base price of $105,990. On September 8, 2002, the borrowers signed an amendment to agreement of sale, which added $3,200 to the final sales price. The description of this transaction was listed as a "Price Adjustment." The final sales price as a result of this adjustment was $109,190. There was no description or explanation of the $3,200. • Insufficient Employment Documentation We understand that one pay stub is sufficient to satisfy this requirement, so long as it covers the most recent 30- day period, i.e., one month’s worth of income prior to the signing of the initial/final application. Ryland did not obtain the original pay stubs covering the most recent 30-day period from both borrowers. The last pay stub included in the file for borrower and coborrower were for the periods ended August 3, 2002 and August 10, 2002, respectively. We presumed that the application signed by both borrowers on September 10, 2002 is the initial 95 application since no other applications preceded it on file. Therefore, the necessary most recent 30-day pay stubs must cover the date August 10 thru September 10, 2002 because Ryland chose to verify the borrowers’ employment via telephone. HUD Handbook 4155.1, REV-4, CHG-1, paragraph 3-1 E states “verification of employment (VOE) and most recent pay stub” are required for each borrower. Additionally, the lender may choose an alternate form of verification where they must “obtain from the borrower original pay stub(s) covering the most recent thirty-day period, along with original copies of the previous two years’ IRS W-2 forms.” • Recommendations Indemnify HUD the mortgage amount of $107,488. Reimburse HUD for the special forbearance of $100. Pay the servicing lender $3,136 to reduce the loan amount. Comment 26 There was no finding of fraud found in this case and no such claim is made on the report. Based on the underwriting deficiencies found in the file we recommend that Ryland indemnify this loan. We agree on removing one deficiency relating to case number 023-1449064. • Inflated Sales Price On October 10, 2002, the borrower signed an amendment to agreement of sale included in the file that adds $7,856 in options and $5,500 to the final sales price. The description of this transaction was listed as an ‘incentive.’ The final sales price as a result of this adjustment was $133,346. There was no description or explanation for the $5,500. • Inappropriate Use of Buydown Rate HUD Handbook 4155.1, REV-4, CHG-1, paragraph 2-14 requires the lender must establish and document that the eventual increase in mortgage payments will not adversely affect the borrower and likely lead to default. This requirement was not met. We disagree with Ryland’s evaluation of the borrower’s potential for increased earnings. When we interviewed the borrower, she claimed that she was unaware of how the buydown worked and that Ryland failed to explain the eventual increase in her mortgage payment. The last we heard, this borrower not only defaulted on her payments again, but she’s had to sell her home. Clearly, the borrower defaulted after three payments, yet Ryland provided her with a buydown to meet the qualification requirement, Ryland improperly assessed the borrower’s ability to pay and improperly used the buydown. • Inaccurate/Excessive Debt-to-Income Ratios We agree to remove this deficiency from the report. • Unallowable Fees As discussed, we agreed to remove this deficiency from the report. 96 • Recommendations Indemnify HUD the mortgage amount of $131,239. Reimburse HUD for the loan modification amount of $650. Pay the servicing lender $5,413 to reduce the loan amount. Comment 27 Ryland agreed to indemnify HUD for any and all actual costs incurred due to any default, forbearance or modification of this loan. We agree on removing one deficiency relating to case number 023-1451488. • Unallowable Fees As discussed, we agreed to remove this deficiency from the report. • Unverified Source of Deposit We agree to remove this deficiency from the report. • Recommendations Indemnify HUD the mortgage amount of $150,575. Comment 28 There was no finding of fraud found in this case and no such claim is made on the report. Based on the underwriting deficiencies found in the file we recommend that Ryland indemnify case number 023-1453913. • Recommendations Indemnify HUD the mortgage amount of $151,265. Comment 29 There was no finding of fraud found in this case and no such claim is made on the report. Based on the underwriting deficiencies found in the file we recommend that Ryland indemnify this loan. We agree on removing one deficiency relating to case number 023-1493862. • Inflated Sales Price On January 11, 2003, the borrower signed an amendment to agreement of sale, which reduced the sales price by $3,968. The description of this transaction was listed as a "Price Adjustment Rent w/ equity per xxxx."2 There was an additional amendment to agreement of sale not signed by the borrower, which added $7,000 to the sales price with the description "Correcting Price Adjustment and Adding Additional Financing." There was no other description or explanation of the $7,000 increase. • Inappropriate Use of Buydown HUD Handbook 4155.1, REV-4, CHG-1, paragraph 2-14 requires the lender must establish and document that the eventual increase in mortgage payments will not adversely affect the borrower and likely lead to default. This requirement was not met. We disagree with Ryland’s evaluation of the borrower’s potential for increased earnings. 2 Name redacted for privacy. 97 While the borrower’s W-2 earnings show a $3,000 increase from 2000 to 2001 and an increase in annualized pay in 2002, the borrower’s January 2003 credit report shows several deferments of educational loans amounting to approximately over $60,000. Payments are to begin between June and December of 2004, which is one year into the buydown. In addition, borrower has several pending liabilities that were deferred to June of 2004, amounting to approximately $18,000. Clearly, her income would not be sufficient to pay the monthly payments of a home and pay for student loans as well as other liabilities. Therefore, we believe Ryland inappropriately used the buydown. • Insufficient Employment Verification HUD Handbook 4155.1, REV-4, CHG- 1, paragraph 2-6 states that the borrower must explain any gaps in employment spanning one month or more. Additionally, the lender must verify the borrower’s employment for the most recent two years. The VOE was done by telephone and employment was only verified for four months. Therefore, the lender failed to verify the most recent two full years of employment. • Unacceptable Credit History HUD Handbook 4155.1, REV-4, CHG-1, paragraph 2-3 & 2-5 states the lender is required to examine the overall pattern of credit behavior, which it failed to do. Moreover, they also failed to explain numerous returned checks on the bank statement, which leads us to believe the borrower to be a high credit risk. • Inaccurate/Excessive Debt-to-Income Ratios We agree to remove this deficiency from the report. • Unverified Source of Deposit HUD Handbook 4155.1, REV-4, CHG-1, paragraph 3-1 F requires original bank statements covering the most recent three-month period where two must be consecutive statements if no verification of deposit is done by the lender. Only one applicable bank statement was found in the file. • Recommendations Indemnify HUD for the mortgage amount of $118,805. Reimburse HUD for partial claims paid of $6,170. Refund $4,000 in overcharges to the borrower. Pay the servicing lender $2,985 to reduce the loan amount. Comment 30 There was no finding of fraud found in this case and no such claim is made on the report. Based on the underwriting deficiencies found in the file we recommend that Ryland indemnify this loan. We do not agree on removing any deficiencies relating to case number 023-1576678. 98 • Inflated Sales Price The original purchase price was listed as $120,555 on the Sales Agreement signed on September 29, 2002 by the borrower. This amount included options with a total of $5,565, no lot premium, and a base price of $114,990. On an amendment to agreement of sale, signed by the borrower on October 12, 2002, added additional options of $505, which increased the sales price to $121,060. On an amendment to agreement of sale dated November 1, 2002, signed by the borrower on November 02, 2002, options of $3,870 were added and increased the sales price to $124,930. On November 11, 2002, the borrower signed an amendment to agreement of sale, which added $6,000 to the final sales price. The description of this transaction was listed as a "Financing." The final sales price as a result of this adjustment was $130,930. There was no description or explanation of the $6,000. • Inappropriate Use of Buydown To use the buydown interest rate to qualify, the underwriter must document the borrower’s ability to handle the scheduled mortgage payment increase as required by HUD Handbook 4155.1, REV-4, CHG-1, paragraph 2-14, which Ryland failed to do. In addition, we noted that the borrower defaulted after making seven payments. Therefore, a buydown was used to initially qualify the borrower. Further, Ryland claims borrower’s income could go up $145 per month; however, the mortgage payment will increase $157. • Unallowable Fees As discussed, we agreed to remove this deficiency from the report. • Recommendations Indemnify HUD the mortgage amount of $128,905. Reimburse HUD for partial claims paid of $9,145. Pay the servicing lender $5,907 to reduce the loan amount. Comment 31 There was no finding of fraud found in this case and no such claim is made on the report. Based on the underwriting deficiencies found in the file we recommend that Ryland indemnify this loan. We do not agree on removing any deficiencies relating to case number 023-1592011. • Overstated Income The coborrower’s monthly income of $2,462 on the loan application and mortgage credit analysis worksheet is overstated by $70 per month. We were unable to determine the basis of $70 listed as other income. There was no evidence in the file to support the continuance of this income as required in HUD Handbook 4155.1, REV-4, CHG-1, paragraph 2-7 & 2-7 A. Further, no faxed paycheck from the borrower was found in the file documenting the additional $70 in monthly income. • Insufficient Employment Documentation HUD Handbook 4155.1, REV-4, CHG-1, paragraph 2-6 states that the borrower must explain any gaps in 99 employment spanning one month or more. Additionally, the lender must verify the borrower’s employment for the most recent two years. The VOE was done by telephone and borrower’s employment was only verified for one year and five months. Coborrower’s employment was verified for one year and six months, also done by telephone. Therefore, the lender failed to verify the most recent two full years of employment for both borrowers. HUD Handbook 4155.1, REV-4, CHG-1, paragraph 3-1 E states “verification of employment (VOE) and most recent pay stub” are required for each borrower. Additionally, the lender may choose an alternate form of verification where they must “obtain from the borrower original pay stub(s) covering the most recent thirty-day period, along with original copies of the previous two years’ IRS W-2 forms.” Ryland did not obtain an original pay stub covering the most recent 30-day period from both borrower and coborrower. The last pay stub included in the file for the borrower was for the period ended March 7, 2003. However, the pay stub was faxed from the coborrower's place of employment. Additionally, there is a stamp bearing “certified to be a true and correct copy of the original” signed by a Ryland employee. The only original copies of pay stubs found in the file for the borrower were for the periods ended August 9, 2002, August 2, 2002, July 26, 2002, and July 19, 2002. The last pay stub included in the file for the coborrower was for the period ended March 14, 2003. This pay stub was also faxed from the coborrower's place of employment and bears the stamp “certified to be a true and correct copy of the original” signed by a Ryland employee. Without actually examining the original the Ryland employee is unable to certify that the document at hand is true and correct. • Inaccurate/Excessive Debt-to-Income Ratios HUD Handbook 4155.1, REV-4, CHG-1, paragraph 2-12 requires lenders to list compensating factors that justify qualifying ratios that exceed guidelines. The only compensating factors listed on the Mortgage Credit Analysis Worksheet were “minimal increase in housing.” Where the borrower’s verification of rent shows a monthly rent payment of $659, whereas the estimated mortgage payment is $1,062. This increased monthly home payment expenditures by $403. Additional compensating factors assured that “both borrowers have been in the same line of work for 5 and 2 yrs, borrower's have paid off some credit,” yet borrowers defaulted their loans after three payments. We agree that borrower’s had approx. 4.70 months reserves during loan process; nonetheless, was not listed as a compensating factor. • Unallowable Fees As discussed, we agreed to remove this deficiency from the report. • Recommendations Indemnify HUD the mortgage amount of $153,772. Reimburse HUD for the special forbearance ($100) and loan modification ($1,300) paid of $1,400. 100 Comment 32 There was no finding of fraud found in this case and no such claim is made on the report. Based on the underwriting deficiencies found in the file we recommend that Ryland indemnify this loan. We agree on removing one deficiency relating to case number 023-1646394. • Overstated Income The borrower’s monthly income of $2,523 on the mortgage credit analysis worksheet was overstated by $178 per month. Assuming that the borrower’s self-employed income was appropriate, Ryland improperly calculated the income by using business income rather than adjusted gross income as required by HUD Handbook 4155.1 REV-4, CHG-1, paragraph 2-9 C,1. We disagree with your analysis on the grounds that first, the mortgage was executed April 2003 and required the use of 4155.1 REV-4, CHG-1. Second, Ryland’s interpretation of REV-5 appears flawed; the paragraph quoted intended the analyzer not to deduct these taxes from gross income, and third, this is in the liability section of the HUD Handbook regulation allowing these debts not to be used as a liability against the borrower, not gross income analysis. • Inaccurate/Excessive Debt-to-Income Ratios We agree to remove this deficiency from the report. • Recommendations Indemnify HUD the mortgage amount of $130,833. Comment 33 There was no finding of fraud found in this case and no such claim is made on the report. Based on the underwriting deficiencies found in the file we recommend that Ryland indemnify this loan. We agree on removing one deficiency relating to case number 023-1646660. • Inappropriate Use of Buydown HUD Handbook 4155.1, REV-4, CHG-1, paragraph 2-14 requires the lender must establish and document that the eventual increase in mortgage payments will not adversely affect the borrower and likely lead to default. This requirement was not met. • Unsupported Source of Income Income from any source that cannot be verified, is not stable, or will not continue may not be used in calculating the borrower’s income ratios as stated in HUD Handbook 4155.1, REV-4, CHG- 1, paragraph 3-1 E. Borrower’s verification of employment reported gross income earned through April 24, 2003 of $5,374. Borrower’s hourly pay prior to his May 9, 2003 pay raise of $10.11 per hour was $9.82. The combined income of $5,374 and calculated hourly income of $10.11 per hour, equaled a monthly income of $1,526, resulting in an overstatement and deviance from the $1,684 income reported on the MCAW of $158. 101 • Insufficient Employment Documentation HUD Handbook 4155.1, REV-4, CHG-1, paragraph 3-1 E states “verification of employment (VOE) and most recent pay stub” are required for each borrower. Additionally, the lender may choose an alternate form of verification where they must “obtain from the borrower original pay stub(s) covering the most recent thirty-day period, along with original copies of the previous two years’ IRS W-2 forms.” Ryland did not obtain the original pay stubs covering the most recent 30-day period from coborrower, yet coborrower’s income was incorporated in the calculation of income. Only one pay stub was included in file for the pay period ending March 21, 2003, showing a gross amount of $964. The most recent 30-day period pay stub is required because Ryland chose to verify the coborrower’s employment via telephone. • Unverified Source of Deposit We agree to remove this deficiency from the report. • Recommendation Indemnify HUD the mortgage amount of $148,291. Comment 34 There was no finding of fraud found in this case and no such claim is made on the report. Based on the underwriting deficiencies found in the file we recommend that Ryland indemnify this loan. We do not agree to remove any deficiencies relating to case number 023-1653270. • Inflated Sales Price There is only one amendment to Agreement of Sale included in the file that adds $3,200 to the final sales price. The description of this transaction was listed as an "Incentive to be used towards closing". Yet an incentive to be used towards closing would not increase the sales price. There was no other explanation or description in the file to support the increase. • Unallowable Fees As discussed, we agreed to remove this deficiency from the report. • Unverified Sources of Deposit HUD Handbook 4155.1 REV-4, CHG-1, paragraph 2-10 B states a verification of deposit or copies of the most recent bank statements must be included in the file. If the account was recently opened, an explanation and evidence of source of funds must be obtained by the lender. There was no such explanation found in the file. • Recommendations Indemnify HUD the mortgage amount of $136,010. Pay the servicing lender $3,150 to reduce the loan amount. Comment 35 There was no finding of fraud found in this case and no such claim is made on the report. Based on the underwriting deficiencies found in the file we 102 recommend that Ryland indemnify this loan. We do not agree to remove any deficiencies relating to case number 023-1736086. • Inflated Sales Price We agree that there were two riders and contract amendments that document changes in the original sales price due to added options. However, there is a third amendment to agreement of sale signed by the borrower on February 6, 2003, which added $2,980 to the sales price. The description of this transaction was listed as an "off base price off house/options." This increase was not substantiated by any documentation or explanation. • Insufficient Employment Documentation HUD Handbook 4155.1, REV-4, CHG-1, paragraph 2-6 states that the borrower must explain any gaps in employment spanning one month or more. Additionally, the lender must verify the borrower’s employment for the most recent two years. The VOE was done by telephone and borrower’s employment was only verified for one year. • Recommendations Indemnify HUD the mortgage amount of $140,628. Reimburse HUD for a claim paid of $5,094. Pay the servicing lender $2,934 to reduce the loan amount. Comment 36 There was no finding of fraud found in this case and no such claim is made on the report. Based on the underwriting deficiencies found in the file we recommend that Ryland indemnify this loan. We agree on removing one deficiency relating to case number 023-1811657. • Insufficient Employment Documentation HUD Handbook 4155.1, REV-4, CHG-1, paragraph 2-6 states that the borrower must explain any gaps in employment spanning one month or more. Additionally, the lender must verify the borrower’s employment for the most recent two years. The VOE only verified borrower’s employment for one year and seven months. • Inaccurate/Excessive Debt-to-Income Ratios We agree to remove this deficiency from the report. • Unallowable Fees As discussed, we agreed to remove this deficiency from the report. • Unverified Source of Deposit We do not contest the dates of the bank statements provided in the file. The issue we found is there are several copies of online bank account statements - each corresponding to the account numbers provided on the URLA. However, we cannot be sure that these accounts belong to the borrower and co-borrower since the statements do not have names of the account holders. Therefore, HUD Handbook 4155.1, REV- 103 4, CHG-1, paragraph 3-1 F requirement that original bank statements covering the most recent three-month period are required where two must be consecutive statements if no verification of deposit is done by the lender was not met. • Recommendations Indemnify HUD the mortgage amount of $155,173. Comment 37 Ryland agreed to indemnify HUD for any and all actual costs incurred due to any default, forbearance or modification of this loan. We do not agree on removing any deficiencies relating to case number 023-1932092. • Recommendation Indemnify HUD the mortgage amount of $119,516. Comment 38 There was no finding of fraud found in this case and no such claim is made on the report. Based on the underwriting deficiencies found in the file we recommend that Ryland indemnify this loan. We agree on removing three deficiencies relating to case number 023-1965223. • Insufficient Employment Documentation We agree to remove this deficiency from the report. • Understated Liabilities We agree to remove this deficiency from the report. • Inaccurate/Excessive Debt-to-Income Ratios We agree to remove this deficiency from the report. • Unverified Source of Deposit Ryland contends that the statement meets the 180-day requirement for new construction. OIG agrees with this part, but the bank statements failed to meet the rule concerning three consecutive bank statements, two if beginning and ending balance are listed. Our file showed two different bank accounts for the period June 6 through July 8 and September 24 through October 24; these documents have a gap between July 9 and September 23. • Recommendation Indemnify HUD the mortgage amount of $157,172. Comment 39 There was no finding of fraud found in this case and therefore, no such claim is made on the report. In addition, we agree with Ryland this loan did not create any greater risk to HUD. For that reason, we will not recommend that case number 023-2133833 to be indemnified. • Overstated Income We agree to remove this deficiency from the report. 104 • Understated Liabilities We agree to remove this deficiency from the report. • Inaccurate/Excessive Debt-to-Income Ratios We agree to remove this deficiency from the report. • Unverified Source of Deposit We agree to remove this deficiency from the report. Comment 40 There was no finding of fraud found in this case and no such claim is made on the report. Based on the underwriting deficiencies found in the file we recommend that Ryland indemnify this loan. We agree on removing one deficiency relating to case number 023-2177719. • Unsupported Source of Income A copy of the borrower’s 2004 W-2 was not in file; therefore, we cannot verify the YTD earnings of $13,128. Our position still remains that Ryland failed to authenticate the borrower’s source of $813 overtime income as required in HUD Handbook 4155.1, REV-5, paragraph 2- 7. We could not determine the basis for borrower’s income through recalculation. Additional documentation to support the $813 on MCAW was not available in file. • Insufficient Employment Verification HUD Handbook 4155.1, REV-5, paragraph 2-6 states that the borrower must explain any gaps in employment spanning one month or more. Additionally, the lender must verify the borrower’s employment for the most recent two years. The VOE was done by telephone and borrower’s employment was only verified for one year and ten months. • Unallowable Fees As discussed, we agreed to remove this deficiency from the report. • Unverified Source of Deposit We agree to remove this deficiency from the report. • Recommendations Indemnify HUD the mortgage amount of $160,766. 105 Appendix C SCHEDULE OF LOAN DEFICIENCIES To Pe loan ncie ta 02 02 02 02 02 02 02 02 02 02 0 73 02 02 02 02 02 02 02 02 02 02 02 02 02 02 rc s s ld en 3- 3- 3- 3- 3- 3- 3- 3- 3- 3- 3- 3- 3- 3- 3- 3- 3- 3- 3- 3- 3- 3- 3- 3- ef 11 9 13 0 15 8 16 4 19 7 19 21 21 09 10 10 11 11 12 14 14 14 14 14 15 16 16 17 18 ta ici 88 18 92 46 32 65 33 77 ge 9 57 73 13 29 93 49 51 53 87 93 76 46 53 36 11 e 45 43 01 66 09 2 83 71 15 64 54 37 23 06 48 91 58 86 67 39 27 08 65 of 23 6 4 1 0 2 3 9 3 2 8 3 4 8 3 4 2 0 6 24 Questionable documentation indicators False loan officer certification X X 2 8% False employment X X X 3 13% Questionable/false Social Security number X X X 3 13% Loan origination Inflated sales prices X X X X X X X X X X X X X 13 54% Inappropriate use of buydown rate X X X X X X X X 8 33% Income Unsupported/overstated income X X X X X X X 7 29% Missing verification of employment, written or telephonic; employment of 2 years not X X X X X X X X 8 33% verified Missing W2 forms X X X X X 5 21% Missing paystubs covering most recent 30- X X X X X 5 21% day period Debt/credit Understated liabilities X 1 4% Unacceptable credit history X 1 4% Inaccurate/excessive qualifying ratios X X X X X 5 21% without inadequate compensating factors Unearned/unallowable fees Rent equity X 1 4% Inadequate documentation Missing verification of deposit/ X X X X X X X X 8 33% 3 months of bank statements Total deficiencies per loan 6 5 4 1 3 2 2 3 3 4 2 3 6 2 4 2 3 4 2 2 4 1 0 2 70 Loan files that were paid in full and sold by borrower as of end of fieldwork, July of 2005 106 Appendix D NARRATIVE CASE SUMMARIES HUD case number: 023-0990733 Loan amount: $100,261 Settlement date: December 14, 2001 Status: Mortgage payments current Indemnification: $100,261 Ryland underwrote and approved the loan based on false employment, overstated income, insufficient employment documentation, excessive debt-to-income ratio without adequate compensating factors, and an unverified source of deposit. Therefore, HUD insured the loan based on Ryland’s inaccurate representation that the borrower met HUD qualifying guidelines. Moreover, Ryland inflated the sales price by $2,264. A. False Employment HUD Handbook 4000.4, REV-1, CHG-2, paragraph 5-3; HUD Handbook 4155.1, REV-4, CHG-1, paragraph 3-1 E; HUD Handbook 4000.4, REV-1, CHG-2, paragraph 3-16. Ryland used falsified employment documents to qualify the borrower for the loan. The false documents include a verification of employment, a W-2 form, and four pay stubs. During the audit, we established that the borrower’s place of employment, G-Unlimited, does not exist, yet the telephone verification of employment, dated December 14, 2001, falsely confirmed two years with the fictitious employer. Also, the recalculated Social Security and Medicare taxes on both the W-2 form and pay stubs do not compute to the appropriate 6.2 and 1.45 percent, respectively. The W-2 form calculated a 9 percent Social Security tax (a variance of 2.8 percent) and a 2 percent Medicare tax (a variance of about .55 percent). All four pay stubs calculated a 4.84 percent Social Security tax (variance of 1.36 percent) and a 1.60 percent Medicare tax (variance of .15 percent). Ryland’s loan officer falsely certified that all supporting documents were accurate and complete to the best of the signer’s knowledge. In light of the miscalculations, the W-2 form and four pay stubs were not adequately reviewed for their authenticity, yet the loan officer certified the documents to be a true and correct copy of the originals. We noted that the W-2 form and pay stubs were faxed in, but we could not determine the source since the header was unreadable. This loan was underwritten, approved, and insured without the underwriter’s due diligence. B. Inflated Sales Price HUD Handbook 4155.1, REV-4, CHG-1, paragraphs 1-6 and 1-7; HUD Handbook 4155.1, REV-4, CHG-1, paragraph 2-10 C. Ryland inflated the sales price by $2,264. Ryland increased the sales price from $99,540 to $101,840, a difference of $2,300, without documentation or justification to substantiate the increase. When we asked the 107 borrower about the increase, she stated that she was unsure what the price adjustment represented and that Ryland told her no downpayment was necessary if it increased the price of the property. We believe the adjustment was made to cover part or all of the Nehemiah gift of $3,055 and/or a service fee of $800. C. Overstated Income HUD Handbook 4155.1, REV-4, CHG-1, paragraphs 2-7 and 2-7 A; HUD Handbook 4000.4, REV-1, CHG-2, paragraph 5-3. The borrower’s monthly income of $2,600 earned at G-Unlimited on the mortgage credit analysis worksheet was overstated. Since the borrower’s place of employment was false, the purported income from this employment must be deducted. We do not know whether the borrower had any income. Aside from her bank statement, covering a two-week period, there was no evidence in the file that leads us to believe the borrower has a stable income and can afford to pay her monthly premiums. D. Insufficient Employment Documentation HUD Handbook 4155.1, REV-4, CHG-1, paragraphs 2-6 and 3-1 E. Ryland failed to obtain original copies of the previous year’s W-2 forms. Only the W-2 form for 2000 was in the file. The last two years’ W-2 forms are required because Ryland chose to verify the borrower’s employment via telephone. G. Unverified Source of Deposit HUD Handbook 4155.1, REV-4, CHG-1, paragraph 3-1 F. The borrower provided a one-month bank statement, covering the two-week period of November 30, 2001, through December 12, 2001. Original bank statements covering the most recent three-month period are required, two of which must be consecutive statements, if the lender does not obtain a verification of deposit. Recommendations Indemnify HUD the mortgage amount of $100,261. Pay the servicing lender $2,264 to reduce the loan amount. 108 HUD case number: 023-1057152 Loan amount: $95,460 Settlement date: May 16, 2002 Status: Paid in full on March 01, 2005; property sold by borrower Indemnification: None Ryland underwrote and approved the loan based on inappropriate use of buydown rate, insufficient employment documentation, and excessive debt-to-income ratio without adequate compensating factors. Therefore, HUD insured the loan based on Ryland’s inaccurate representation that the borrower met HUD qualifying guidelines. Moreover, Ryland inflated the sales price by $2,363. A. Inflated Sales Price HUD Handbook 4155.1, REV-4, CHG-1, paragraphs 1-6, 1-7, and 1-7 C. Ryland inflated the sales price by $2,363. Ryland increased the sales price from $94,562 to $96,962, a difference of $2,400, without any documentation or justification to substantiate the increase. According to a note found in the Ryland file, this amount was used to cover the buydown agreement of $2,322. B. Inappropriate Use of Buydown Rate HUD Handbook 4155.1, REV-4, CHG-1, paragraph 2-14. The borrower agreed to a buydown agreement for $2,322. Ryland qualified the borrower using the buydown interest rate; however, they failed to show that the scheduled mortgage payment increase would not adversely affect the borrower and likely lead to default. To use the buydown interest rate to qualify, the underwriter must document the borrower’s ability to handle the scheduled mortgage payment increase. We noted that the borrower defaulted after making seven payments. C. Insufficient Employment Documentation HUD Handbook 4155.1, REV-4, CHG-1, paragraphs 2-6 and 3-1 E. Ryland did not obtain the original pay stubs covering the most recent 30-day period from borrower. We found a loan application signed by borrower on May 2, 2001, which we presume to be the initial application, and the final application signed on May 16, 2002, coinciding with the loan settlement date. According to the Handbook, if the initial application lapsed 180 days before the loan closes, it and its supporting documentation must be updated. Since no other applications were found in the file, we relied on the date of the final application and expected to find the April 16 through May 16, 2002 pay stubs. However, the last pay stub included in file was for March 24, 2002. Additionally, Ryland failed to obtain original copies of the previous two years’ W-2 forms. There was only a W-2 form for the year 2001 in the file. Both a most recent 30-day period pay stub and the last two years’ W-2 forms are required because Ryland chose to verify the borrower’s employment via telephone. 109 D. Inaccurate/Excessive Debt-to-Income Ratios HUD Handbook 4155.1, REV-4, CHG-1, paragraph 2-12. We recalculated the qualifying ratios using the correct monthly hazard insurance premium. Our ratios were very close to those calculated by Ryland. The recalculated mortgage payment-to-income ratio of 26.94 percent does not exceed the HUD requirement; however, the total fixed payments-to-income ratio of 46.43 percent exceeds the HUD requirement by 5.43 percentage points. The compensating factor listed by Ryland was "buydown offers payments less than rent." However, there was no verification of rent included in the loan file. The loan application lists $0 for present monthly housing expense. The total increase in the monthly housing payment was $687. Therefore, the compensating factor did not make sense and was unacceptable in explaining the high ratio. Recommendations Pay the servicing lender $2,363 to reduce the loan amount. 110 HUD case number: 023-1073648 Loan amount: $137,857 Settlement date: June 28, 2002 Status: Mortgage payments current Indemnification: $137,857 Ryland underwrote and approved the mortgage based on a questionable/false Social Security number, an unsupported source of income, overstated income, understated liability, and an unverified source of deposit. Therefore, HUD insured the loan based on Ryland’s inaccurate representation that the borrower met HUD qualifying guidelines. A. Questionable/False Social Security Number HUD Handbook 4155.1, REV-4, CHG-1, paragraph 3-2 C. We performed a Social Security number query of our in-house database and determined that the borrower was using a Social Security number issued within two years of the application-received date. In addition, Lexis Nexis reported that the borrower’s name was associated with a second Social Security number. Based on our interview with the borrower, we determined there was an immigration issue with the borrower. Ryland’s only documentation of verification of borrower’s Social Security number was the individual’s tax returns (1999- 2000), which appear questionable since they were without the borrower’s signature and his name was misspelled. The credit report for the borrower showed no activity. However, the accounts that were used to analyze his liabilities were listed under his spouse’s Social Security number. B. Unsupported Source of Income HUD Handbook 4155.1, REV-4, CHG-1, paragraph 2-9 C. Ryland failed to authenticate the borrower’s self-employed source of income. During our interview with the borrower’s tax preparer, we determined that the borrower filed his 1999 and 2000 tax returns in January of 2002, while his 2001 tax return was filed later in the year (March 2002) and used to substantiate his income. No additional documents or information was obtained to explain why all three individual tax returns were filed or received in 2002. Additionally, these income tax documents showed the borrower’s name was misspelled. C. Overstated Income HUD Handbook 4155.1, REV-4, CHG-1, paragraph 2-9 C. The borrower’s monthly income of $4,518 on the mortgage credit analysis worksheet was overstated by $293 per month. Assuming that the borrower’s self-employed income was appropriate, Ryland improperly calculated the income by using business income rather than adjusted gross income. D. Understated Liability HUD Handbook 4155.1, REV-4, CHG-1, paragraphs 2-3 and 2-4. Ryland failed to list an overdraft protection (loan) account for $184 that was established by the bank for the borrower to cover the excessive nonsufficient funds checks the borrower wrote. 111 E. Unverified Source of Deposit HUD Handbook 4155.1, REV-4, CHG-1, paragraph 3-1 F. The borrower provided one bank statement covering only the month of May. Since the lender did not obtain a verification of deposit, original bank statements covering the most recent three-month period are required, two of which must be consecutive statements. Recommendations Indemnify HUD for the mortgage amount of $137,857. 112 HUD case number: 023-1113543 Loan amount: $134,995 Settlement date: April 30, 2002 Status: Borrower retains ownership; not currently in default (partial reinstatement) Indemnification: $134,995 HUD insured the loan based on Ryland’s inaccurate representation that the borrower met HUD qualifying guidelines. Moreover, Ryland inflated the sales price by $3,352. A. Inflated Sales Price HUD Handbook 4155.1, REV-4, CHG-1, paragraphs 1-6 and 1-7; HUD Handbook 4155.1, REV-4, CHG-1, paragraph 2-10 C. Ryland inflated the sales price by $3,352. It increased the sales price from $133,531 to $136,931, a difference of $3,400, without documentation or justification to substantiate the increase. This adjustment was made to cover part of the Nehemiah gift of $4,108 and a service fee of $500. Recommendations Indemnify HUD the mortgage amount of $134,995. Pay the servicing lender $3,352 to reduce the loan amount. 113 HUD case number: 023-1129379 Loan amount: $123,068 Settlement date: July 30, 2002 Status: Borrower retains ownership; not currently in default Indemnification: $123,068 Ryland underwrote and approved the loan based on inappropriate use of a buydown rate and an excessive debt-to-income ratio without adequate compensating factors. Therefore, HUD insured the loan based on Ryland’s inaccurate representation that the borrower met HUD qualifying guidelines. Moreover, Ryland inflated the sales by $4,696. A. Inflated Sales Price HUD Handbook 4155.1, REV-4, CHG-1, paragraphs 1-6, 1-7, and 1-7 C; HUD Handbook 4155.1, REV-4, CHG-1, paragraph 2-10 C. Ryland inflated the sales price by $4,696. It increased the sales price from $120,230 to $125,000, a difference of $4,770, without documentation or justification to substantiate the increase. By increasing the sales price, Ryland recouped part or all of the $3,750 Nehemiah gift, a $500 service fee, and/or a $2,852 buydown at the expense of the borrower. B. Inappropriate Use of Buydown Rate HUD Handbook 4155.1, REV-4, CHG-1, paragraph 2-14. The borrower agreed to a buydown of $2,852. Ryland qualified the borrower using the buydown interest rate but failed to show that the scheduled mortgage payment increase would not adversely affect the borrower and likely lead to default. To use the buydown interest rate to qualify, the underwriter must document the borrower’s ability to handle the scheduled mortgage payment increase. The borrower defaulted after making five payments. C. Inaccurate/Excessive Debt-to-Income Ratios HUD Handbook 4155.1, REV-4, CHG-1, paragraph 2-12. We recalculated the qualifying ratios using the correct monthly income. The recalculated mortgage payment- to-income ratio of 30.96 percent exceeds the HUD requirement by 1.96 percentage points; the total fixed payments-to-income ratio of 46.56 percent exceeds the HUD requirement by 5.56 percentage points. Compensating factors listed by Ryland were “minimal increase in housing/borrower in the same line of work for 5 years/the collection accounts are old.” The difference between the rental payment of $639 listed on loan application and estimated mortgage payment with buydown interest of $778 on the mortgage credit analysis worksheet was $139. Without the buydown agreement, the increase would have been from $639 to $935, constituting a significant $296 difference. Therefore, the compensating factor was insufficient to explain the high ratios. Recommendations Indemnify HUD the mortgage amount of $123,068. Pay the servicing lender $4,696 to reduce the loan amount. 114 HUD case number: 023-1188456 Loan amount: $143,470 Settlement date: June 14, 2002 Status: Mortgage payments current Indemnification: $144,400 ($143,470 + $650 loan modification) Ryland underwrote and approved the loan based on an unsupported source of income, insufficient employment documentation, and an unverified source of deposit. Therefore, HUD insured the loan based on Ryland’s inaccurate representation that the borrower met HUD qualifying guidelines. Moreover, Ryland inflated the sales price by $985. A. Inflated Sales Price HUD Handbook 4155.1, REV-4, CHG-1, paragraphs 1-6 and 1-7. Ryland inflated the sales price by $985. It increased the sales price from $144,765 to $145,765, a difference of $1,000, without documentation or justification to substantiate the increase. When we questioned the borrowers about the price adjustment, they stated that they were unaware of the increase and what it could possibly have gone toward. B. Insufficient Employment Documentation HUD Handbook 4155.1, REV-4, CHG-1, paragraphs 2-6 and 3-1 E. Ryland failed to verify the borrower’s employment for the past two years. The telephone verification of employment was not complete when verifying borrower’s employment at On Semiconductor. The years of employment of January 1, 1992, through December 30, 2001, were written on the sheet; however, no name, telephone number, or date of verification was filled out. “W-2’s” was handwritten on the verification of employment, possibly indicating that the loan processor did not contact anyone to verify this income and merely relied on the paper document for verification. Recommendations Indemnify HUD the mortgage amount of $143,470. Reimburse HUD for the loan modification amount of $650. Pay the servicing lender $985 to reduce the loan amount. 115 HUD case number: 023-1293230 Loan amount: $132,457 Settlement date: September 27, 2002 Status: Preforeclosure sale completed, January 21, 2005 Indemnification: $26,866 ($26,216 partial claims + $650 loan modification) Ryland underwrote and approved the mortgage based on inappropriate use of buydown rate and excessive debt-to-income ratio without adequate compensating factors. Additionally, Ryland failed to verify the borrower’s verification of deposit. Therefore, HUD insured the loan based on Ryland’s inaccurate representation that the borrower met HUD qualifying guidelines. Moreover, Ryland inflated the sales price by $7,876. A. Inflated Sales Price HUD Handbook 4155.1, REV-4, CHG-1, paragraphs 1-6, 1-7 and 1-7 C; HUD Handbook 4155.1, REV-4, CHG-1, paragraph 2-10 C. Ryland inflated the sales price by $7,876. Ryland increased the sales price from $126,542 to $134,542, a difference of $8,000, without any documentation or justification to substantiate the increase. This adjustment was made to cover the $4,036 Nehemiah gift, a $500 service fee, and a $3,033 buydown agreement. B. Inappropriate Use of Buydown Rate HUD Handbook 4155.1, REV-4, CHG-1, paragraph 2-14. The borrower agreed to a buydown agreement in the amount of $3,033. Ryland qualified the borrower using the buydown interest rate; however, failed to show that the scheduled mortgage payment increase would not adversely affect the borrower and likely lead to default. To use the buydown interest rate to qualify, the underwriter must document the borrower’s ability to handle the scheduled mortgage payment increase. We noted that the borrower defaulted after making six payments. Recommendations Reimburse HUD for partial claims paid of $26,216. Reimburse HUD for loan modification amount of $650. Pay the servicing lender $7,876 to reduce the loan amount. 116 HUD case number: 023-1318434 Loan amount: $107,488 Settlement date: September 25, 2002 Status: In default as of June 30, 2005 Indemnification: $107,588 ($107,488 + $100 special forbearance) Ryland underwrote and approved the mortgage based on insufficient employment documentation. In addition, it failed to verify the borrowers’ deposit came from a legitimate source. Therefore, HUD insured the loan based on Ryland’s inaccurate representation that the borrower met HUD qualifying guidelines. Moreover, Ryland inflated the sales price by $3,136. A. Inflated Sales Price HUD Handbook 4155.1, REV-4, CHG-1, paragraphs 1-6, 1-7, and 1-7 C; HUD Handbook 4155.1, REV-4, CHG-1, paragraph 2-10 C. Ryland inflated the sales price by $3,136. It increased the sales price from $105,990 to $109,190, a difference of $3,200, without documentation or justification to substantiate the increase. This adjustment was made to cover part or all of the Nehemiah gift of $3,276 and/or a $500 service fee. B. Insufficient Employment Documentation HUD Handbook 4155.1, REV-4, CHG-1, paragraphs 2-6 and 3-1 E. Ryland did not obtain the original pay stubs covering the most recent 30-day period from both borrowers. The last pay stub included in the file for the borrower and coborrower were for the periods ending August 3, 2002, and August 10, 2002, respectively. We presumed that the application signed by the borrower on September 10, 2002, was the initial application since no other applications preceded it on file and, therefore, was based on the most recent 30-day pay stub on that date. The necessary pay stubs should cover the dates August 10 through September 10, 2002, because Ryland chose to verify the borrowers’ employment via telephone. C. Unverified Source of Deposit HUD Handbook 4155.1, REV-4, CHG-1, paragraph 3-1 F. Original bank statements covering the most recent three-month period are required, two of which must be consecutive statements, if no verification of deposit is done by the lender. The borrowers signed the presumed initial loan application on September 10, 2002; therefore, the bank statements should generally cover the period June 10 through September 10, 2002. The bank statement provided was a printout from the borrower’s financial institution’s Web site only covering the period between August 2 through August 23, 2002. Therefore, the handbook requirement was not met. Recommendations Indemnify HUD the mortgage amount of $107,488. Reimburse HUD for the special forbearance of $100. Pay the servicing lender $3,136 to reduce the loan amount. 117 HUD case number: 023-1449064 Loan amount: $131,239 Settlement date: December 27, 2002 Status: Borrower retains ownership; not currently in default Indemnification: $131,889 ($131,239 + $650 loan modification) Ryland underwrote and approved the mortgage based on an inappropriate use of a buydown rate, insufficient employment documentation, and excessive qualifying ratios. Therefore, HUD insured the loan based on Ryland’s inaccurate representation that the borrower met HUD qualifying guidelines. Moreover, Ryland inflated the sales price by $5,413. A. Inflated Sales Price HUD Handbook 4155.1, REV-4, CHG-1, paragraphs 1-6, 1-7, and 1-7 C; HUD Handbook 4155.1, REV-4, CHG-1, paragraph 2-10 C. Ryland inflated the sales price by $5,413. It increased the sales price from $127,846 to $133,346, a difference of $5,500, without documentation or justification to substantiate the increase. When we questioned the borrower concerning this price adjustment, she stated that she was not aware of the increase and did not know what costs it went toward. This adjustment was made to cover part or all of the Nehemiah gift of $4,000, a service fee of $500, and/or a buydown of $3,023. B. Inappropriate Use of Buydown Rate HUD Handbook 4155.1, REV-4, CHG-1, paragraph 2-14. The borrower agreed to a buydown agreement in the amount of $3,023. Ryland qualified the borrower using the buydown interest rate but failed to show that the scheduled mortgage payment increase would not adversely affect the borrower and likely lead to default. To use the buydown interest rate to qualify, the underwriter must document the borrower’s ability to handle the scheduled mortgage payment increase. We noted that the borrower defaulted after making three payments. C. Insufficient Employment Documentation HUD Handbook 4155.1, REV-4, CHG-1, paragraphs 2-6 and 3-1 E. Ryland failed to obtain original copies of the previous two years’ W-2 forms for the borrower. Only a W- 2 form for year 2000 was included in the file. The last two years’ W-2 forms are required because Ryland chose to verify the borrower’s employment via telephone. Recommendations Indemnify HUD the mortgage amount of $131,239. Reimburse HUD for the loan modification amount of $650. Pay the servicing lender $5,413 to reduce the loan amount. 118 HUD case number: 023-1451488 Loan amount: $150,575 Settlement date: December 19, 2002 Status: Mortgage payments current Indemnification: $150,575 Ryland underwrote and approved the loan based on false employment, a questionable/false Social Security number, insufficient employment documentation, and an unverified source of deposit. Therefore, HUD insured the loan based on Ryland’s inaccurate representation that the borrower met HUD qualifying guidelines. A. False Employment HUD Handbook 4000.4, REV-1, CHG-2, paragraph 5-3; HUD Handbook 4155.1, REV-4, CHG-1, paragraph 3-1 E; HUD Handbook 4000.4, REV-1, CHG-2, paragraph 3-16. Ryland used falsified employment documents to qualify the borrower for the loan. The false documents include a faxed copy of the W-2 form and two pay stubs from employer Muebleria Imperial Furniture. The text typewritten on the year 2001 W-2 form overlaps the surrounding textbox and text descriptions, while the Social Security numbers on two pay stubs were altered; before the change, the Social Security prefix showed “665,” and after the change, it showed “765.” The discrepancies should have alerted Ryland that there was a problem with the purported employment. Also, the loan officer certified W-2 statements for the years 2000 and 2001, as well as the two altered pay stubs for the periods August 24 to September 6, 2002 and September 7 to 20, 2002. Clearly, this loan officer acted in violation of the HUD Handbook. B. Questionable/False Social Security Number HUD Handbook 4155.1, REV-4, CHG-1, paragraph 3-2 C; 24 Code of Federal Regulations 202.5(j)(4). We performed a Social Security number query of our in-house database and determined that Ryland qualified the borrower using a Social Security number that was issued within two years of the application-received date. Also, as shown in section A, the Social Security number on two of borrower pay stubs were altered to show “765,” rather than the printed “665.” The discrepancies should have alerted Ryland that there was a problem with the Social Security number. C. Insufficient Employment Documentation HUD Handbook 4155.1, REV-4, CHG-1, paragraphs 2-6 and 3-1 E. Ryland did not obtain the original pay stubs covering the most recent 30-day period from borrower. The last pay stub was sent to Ryland via fax and covered the period ending September 20, 2002. Since the only loan application in the file is dated December 19, 2002, pay stubs covering November 19 through December 19, 2002, must be in the file. The original pay stub covering the most recent 30-day period was required because Ryland chose to verify the borrower’s employment via telephone. Recommendations Indemnify HUD the mortgage amount of $150,575. 119 HUD case number: 023-1453913 Loan amount: $151,265 Settlement date: December 27, 2002 Status: Mortgage payments current Indemnification: $151,265 Ryland underwrote and approved the loan based on insufficient employment documentation. Therefore, HUD insured the loan based on Ryland’s inaccurate representation that the borrower met HUD qualifying guidelines. A. Insufficient Employment Documentation HUD Handbook 4155.1, REV-4, CHG-1, paragraphs 2-6 and 3-1 E. Ryland did not obtain a standard or telephone verification of employment for both the borrower and coborrower. Additionally, a year of the borrower’s and coborrower’s W-2 forms were missing from the file. Because the borrower provided sufficient pay stubs, it appeared that Ryland was verifying employment through the alternative method; i.e., telephone verification of employment. Recommendation Indemnify HUD the mortgage amount of $151,265. 120 HUD case number: 023-1487584 Loan amount: $127,078 Settlement date: February 12, 2003 Status: Paid in full on March 31, 2005; property sold by borrowers Indemnification: $650 loan modification Ryland underwrote and approved the mortgage based on insufficient employment documentation. Therefore, HUD insured the loan based on Ryland’s inaccurate representation that the borrowers met HUD qualifying guidelines. Moreover, Ryland inflated the sales price by $5,270. A. Inflated Sales Price HUD Handbook 4155.1, REV-4, CHG-1, paragraphs 1-6, 1-7 and 1-7 C; HUD Handbook 4155.1, REV-4, CHG-1, paragraph 2-10 C. Ryland inflated the sales price by $5,270. Ryland increased the sales price from $123,723 to $129,000, a difference of $5,277, without any documentation or justification to substantiate the increase. This adjustment was made to cover the Nehemiah gift of $3,870 and a service fee of $500 B. Insufficient Employment Documentation HUD Handbook 4155.1, REV-4, CHG-1, paragraphs 2-6 and 3-1 E. Ryland failed to obtain original copies of the previous two years’ W-2 forms for borrower and coborrower. Included in the file were the year 2001 W-2 forms for borrower and coborrower. Furthermore, Ryland failed to verify employment for the coborrower. A most recent 30-day period pay stub, last two years’ W-2 forms, and verification of employment are required. Without the required documentation, Ryland would not have been able to determine the income stability and/or likelihood of income continuance. Recommendations Reimburse HUD for loan modification paid of $650. Pay the servicing lender $5,270 to reduce the loan amount. 121 HUD case number: 023-1493862 Loan amount: $118,805 Settlement date: January 28, 2003 Status: Borrower retains ownership; not currently in default; partial claim Indemnification: $124,975 ($118,805 + $6,170 partial claim) Ryland underwrote and approved the mortgage based on inappropriate use of a buydown rate and insufficient employment documentation, unacceptable credit history, and excessive debt-to- income ratio. In addition, Ryland failed to verify that the borrower’s deposit came from a legitimate source. Therefore, HUD insured the loan based on Ryland’s inaccurate representation that the borrower met HUD qualifying guidelines. Moreover, Ryland overcharged the borrower $4,000 in equity credits and inflated the sales price by $2,985. A. Inflated Sales Price HUD Handbook 4155.1, REV-4, CHG-1, paragraphs 1-6, 1-7, and 1-7 C; HUD Handbook 4155.1, REV-4, CHG-1, paragraphs 2-10 C. Ryland inflated the sales price by $2,985. It increased the sales price from $117,643 to $120,675, a difference of $3,032, without documentation or justification to substantiate the increase. The borrower also accrued $4,000 from her participation in a program enabling renters to earn credits toward the purchase of a new home. Initially, Ryland adjusted the property sales price by $7,000, but the $4,000 in equity credits had offset that amount and reduced it to $3,032. When we questioned the borrower concerning this price adjustment, she stated that she was not aware of the increase and did not know what cost it went toward. We believe the after-equity difference was made to cover part or all of the Nehemiah gift of $3,620, a service fee of $500, and/or a buydown of $2,704. B. Inappropriate Use of Buydown Rate HUD Handbook 4155.1, REV-4, CHG-1, paragraph 2-14. The borrower agreed to a buydown in the amount of $2,704. Ryland qualified the borrower using the buydown interest rate but failed to show that the scheduled mortgage payment increase would not adversely affect the borrower and likely lead to default. To use the buydown interest rate to qualify, the underwriter must document the borrower’s ability to handle the scheduled mortgage payment increase. The borrower defaulted after making 15 payments. C. Insufficient Employment Documentation HUD Handbook 4155.1, REV-4, CHG-1, paragraphs 2-6 and 3-1 E. Ryland did not verify all of the borrower’s employment for the past two years. Ryland verified, via telephone, employment for only four months. D. Unacceptable Credit History HUD Handbook 4155.1, REV-4, CHG-1, paragraph 2-3. The borrower’s credit history was unsatisfactory. The credit report indicated six collection accounts and two charge-offs, which are older than two years, for a balance of $902. However, the lender 122 was required to examine the overall pattern of credit behavior. The lender failed to document in the file whether these items were “based on a disregard for financial obligations, an inability to manage debt, or factors beyond the control of the borrower,” as stated in the HUD handbook. There was only an explanation included in the file by the borrower regarding one charge-off account and a judgment. The remaining six items are unaccounted for by both the borrower and the lender. F. Unverified Source of Deposit HUD Handbook 4155.1, REV-4, CHG-1, paragraph 3-1 F. Original bank statements covering the most recent three-month period are required, two of which must be consecutive statements, if no verification of deposit is done by the lender. The borrower signed the initial loan application on September 3, 2002, and handbook requires that the application be updated so it was not more than 180 days old when the loan closes. The loan should have been updated in February 3, 2002; however, no document found in file was signed by borrower around that date. Instead, a January 21, 2003, application was on file, on which we relied; therefore, the bank statements should cover the period October 21, 2002, through January 21, 2003. The loan file contained more than one bank statement from three different banks; five of the seven provided were not submitted within the acceptable three-month period. The two statements fell within the required timeframe but covered generally the same period. Two more statements were necessary so the handbook requirement was not met. Recommendations Indemnify HUD the mortgage amount of $118,805. Reimburse HUD for partial claims paid of $6,170. Refund $4,000 in overcharges to the borrower. Pay the servicing lender $2,985 to reduce the loan amount. 123 HUD case number: 023-1576678 Loan amount: $128,905 Settlement date: March 26, 2003 Status: In default as of June 30, 2005; partial claim Indemnification: $138,050 ($128,905 + $9,145 partial claim) Ryland underwrote and approved the mortgage based on inappropriate use of a buydown rate. Therefore, HUD insured the loan based on Ryland’s inaccurate representation that the borrower met HUD qualifying guidelines. Moreover, Ryland inflated the sales price by $5,907. A. Inflated Sales Price HUD Handbook 4155.1, REV-4, CHG-1, paragraphs 1-6, 1-7, and 1-7 C; HUD Handbook 4155.1, REV-4, CHG-1, paragraph 2-10 C. Ryland inflated the sales price by $5,907. It increased the sales price from $124,930 to $130,930, a difference of $6,000, without documentation or justification to substantiate the increase. This adjustment was made to cover part or all of the Nehemiah gift of $3,928, a service fee of $385, and/or a buydown of $2,860. B. Inappropriate Use of Buydown Rate HUD Handbook 4155.1, REV-4, CHG-1, paragraph 2-14. The borrower agreed to a buydown in the amount of $2,860. Ryland qualified the borrower using the buydown interest rate but failed to show that the scheduled mortgage payment increase would not adversely affect the borrower and likely lead to default. To use the buydown interest rate to qualify, the underwriter must document the borrower’s ability to handle the scheduled mortgage payment increase. The borrower defaulted after making seven payments. Recommendations Indemnify HUD the mortgage amount of $128,905. Reimburse HUD for partial claims paid of $9,145. Pay the servicing lender $5,907 to reduce the loan amount. 124 HUD case number: 023-1592011 Loan amount: $153,772 Settlement date: March 31, 2003 Status: Borrower retains ownership; not currently in default Indemnification: $155,172 ($153,772 + $100 special forbearance + $1,300 loan modification) Ryland underwrote and approved the mortgage based on overstated income, insufficient employment documentation, and excessive debt-to-income ratio without adequate compensating factors. Therefore, HUD insured the loan based on Ryland’s inaccurate representation that the borrower met HUD qualifying guidelines. A. Overstated Income HUD Handbook 4155.1, REV-4, CHG-1, paragraphs 2-7 and 2-7 A. The coborrower’s monthly income of $2,462 on the loan application and mortgage credit analysis worksheet was overstated by $70 per month. Ryland failed to verify and provide documentation to substantiate this amount. B. Insufficient Employment Documentation HUD Handbook 4155.1, REV-4, CHG-1, paragraphs 2-6 and 3-1 E. Ryland did not obtain an original pay stub covering the most recent 30-day period from either the borrower or coborrower. The last pay stub included in the file for the borrower was for the period ending March 7, 2003. However, the pay stub was faxed from the coborrower’s place of employment. Additionally, there was a stamp bearing “certified to be a true and correct copy of the original” signed by a Ryland employee. The only original copies of pay stubs found in the file for the borrower were for the periods ending August 9, August 2, July 26, and July 19, 2002. The last pay stub included in the file for the coborrower was for the period ending March 14, 2003. This pay stub was also faxed from the coborrower’s place of employment and bears the stamp “certified to be a true and correct copy of the original” signed by a Ryland employee. The only original copies of pay stubs found in the file for the coborrower were for periods ending August 15, July 31, and July 15, 2002, and were not the most updated documents in the file. Additionally, Ryland failed to verify employment for two full years for either the borrower or coborrower. Ryland verified the borrower’s employment for one year and five months and verified the coborrower’s employment for one year and six months. A most recent 30-day period pay stub and verification of employment for two full years are required. Without the required documentation, Ryland would not have been able to determine the income stability and/or likelihood of income continuance. C. Inaccurate/Excessive Debt-to-Income Ratios HUD Handbook 4155.1, REV-4, CHG-1, paragraph 2-12. The calculated total fixed payments-to-income ratio of 47.11 percent exceeds the HUD requirement by 6.11 percentage points. The compensating factor listed by Ryland stated “minimal increase in housing.” This was not adequate justification for approving the loan with excessive 125 ratios. The borrower’s verification of rent shows a monthly rent payment of $659, whereas the estimated mortgage payment was $1,062. This increased monthly home payment expenditures by $403. Additional compensating factors assured that “both borrowers have been in the same line of work for 5 and 2 years, borrowers have paid off some credit,” yet the borrowers defaulted on their loans after three payments. Recommendations Indemnify HUD the mortgage amount of $153,772. Reimburse HUD for the special forbearance ($100) and loan modification ($1,300) paid of $1,400. 126 HUD case number: 023-1646394 Loan amount: $130,833 Settlement date: April 30, 2003 Status: Mortgage payments current Indemnification: $130,833 Ryland underwrote and approved the loan based on overstated income, an excessive debt-to- income ratio without adequate compensating factors, and an unverified source of deposit. Therefore, HUD insured the loan based on Ryland’s inaccurate representation that the borrower met HUD qualifying guidelines. A. Overstated Income HUD Handbook 4155.1, REV-4, CHG-1, paragraph 2-9 C; HUD Handbook 4000.4, REV-1, CHG-2, paragraph 5-3. The borrower’s monthly income of $2,523 on the mortgage credit analysis worksheet was overstated by $178 per month. Based on the borrower’s self-employed income on the 2001 and 2002 tax returns, Ryland improperly calculated the income by using business income rather than adjusted gross income. B. Unverified Source of Deposit HUD Handbook 4155.1, REV-4, CHG-1, paragraph 3-1 F. The borrower provided a one-month bank statement, covering the period December 20, 2002, through January 22, 2003. Original bank statements covering the most recent three-month period are required, two of which must be consecutive statements, if the lender does not obtain a verification of deposit. Recommendation Indemnify HUD the mortgage amount of $130,833. 127 HUD case number: 023-1646660 Loan amount: $148,291 Settlement date: May 13, 2003 Status: Mortgage payments current Indemnification: $148,291 Ryland underwrote and approved the loan based on unsupported income, insufficient employment documentation, and an unverified source of deposit. Therefore, HUD insured the loan based on Ryland’s inaccurate representation that the borrower met HUD qualifying guidelines. A. Inappropriate Use of Buydown Rate HUD Handbook 4155.1, REV-4, CHG-1, paragraph 2-14. The borrower agreed to a buydown agreement in the amount of $3,290. Ryland qualified the borrower using the buydown interest rate but failed to show that the scheduled mortgage payment increase would not adversely affect the borrower and likely lead to default. To use the buydown interest rate to qualify, the underwriter must document the borrower’s ability to handle the scheduled mortgage payment increase. B. Unsupported Source of Income HUD Handbook 4155.1, REV-4, CHG-1, paragraph 3-1 E. Income from any source that cannot be verified, is not stable, or will not continue may not be used in calculating the borrower’s income ratios. The borrower’s verification of employment reported gross income earned through April 24, 2003, of $5,374. The borrower’s hourly pay before his May 9, 2003, pay raise of $10.11 per hour was $9.82. The combined income of $5,374 and calculated hourly income of $10.11 per hour equaled a monthly income of $1,526, resulting in an overstatement and deviation from the $1,684 income reported on the mortgage credit analysis worksheet of $158. C. Insufficient Employment Documentation HUD Handbook 4155.1, REV-4, CHG-1, paragraphs 2-6 and 3-1 E. Ryland did not obtain the original pay stubs covering the most recent 30-day period from the coborrower, yet the coborrower’s income was incorporated in the calculation of income. Only one pay stub was included in the file for the pay period ending March 21, 2003, showing a gross amount of $964. The most recent 30-day period pay stub was required because Ryland chose to verify the borrower’s employment via telephone. Recommendation Indemnify HUD the mortgage amount of $148,291. 128 HUD case number: 023-1653270 Loan amount: $136,010 Settlement date: April 30, 2003 Status: In default as of June 30, 2005 Indemnification: $136,010 Ryland underwrote and approved the mortgage based on inappropriate use of a buydown rate and excessive qualifying ratios. In addition, Ryland failed to verify that the borrower’s deposit came from a legitimate source. Therefore, HUD insured the loan based on Ryland’s inaccurate representation that the borrower met HUD qualifying guidelines. Moreover, Ryland inflated the sales price by $3,150. A. Inflated Sales Price HUD Handbook 4155.1, REV-4, CHG-1, paragraphs 1-6, 1-7, and 1-7 C; HUD Handbook 4155.1, REV-4, CHG-1, paragraph 2-10 C. Ryland inflated the sales price by $3,150. It increased the sales price from $134,953 to $138,153, a difference of $3,200, without documentation or justification to substantiate the increase. When we questioned the borrower, he stated that he was shocked to see the price increase at closing because he did not know what it went toward. He further stated that he was overwhelmed with the paper work, and the closer assured him that he would be receiving an incentive; therefore, he did not question the increase. We believe this adjustment was made to cover part or all of the OWN gift of $4,145, a service fee of $300, and/or a buydown agreement of $3,017. B. Inappropriate Use of Buydown Rate HUD Handbook 4155.1, REV-4, CHG-1, paragraph 2-14. The borrower agreed to a buydown of $3,017. Ryland qualified the borrower using the buydown interest rate but failed to show that the scheduled mortgage payment increase would not adversely affect the borrower and likely lead to default. To use the buydown interest rate to qualify, the underwriter must document the borrower’s ability to handle the scheduled mortgage payment increase. The borrower defaulted after making seven payments. C. Inaccurate/Excessive Debt-to-Income Ratios HUD Handbook 4155.1, REV-4, CHG-1, paragraph 2-12. The mortgage payment-to- income ratio of 37.38 percent exceeds HUD guidelines by 8.38 percentage points; the total fixed payments-to-income ratio of 41.76 percent exceeds the HUD requirement by 0.76 percentage points. The compensating factor on the mortgage credit analysis worksheet stated “borrower paying the same in housing as rent.” However, the borrower’s rent, according to the verification of rent, was $646, and the new mortgage payment was $778, including the buydown of $166. The total increase in the monthly housing payment was $131, which was not the same amount as rent payment. Therefore, the compensating factor does not justify excessive ratio. 129 D. Unverified Source of Deposit HUD Handbook 4155.1, REV-4, CHG-1, paragraph 3-1 F. Original bank statements covering the most recent three-month period are required, two of which must be consecutive statements, if no verification of deposit is done by the lender. The borrower signed the initial loan application on April 10, 2003, and the final application on April 29, 2003; since no more than 180 days had lapsed since the settlement date of April 30, 2003, bank statements should generally cover the period January 10 through April 10, 2003. The two bank statements provided covered February 17 through March 25, 2003. As a result, the HUD handbook requirement was not met. Recommendations Indemnify HUD the mortgage amount of $136,010. Pay the servicing lender $3,150 to reduce the loan amount. 130 HUD case number: 023-1736086 Loan amount: $140,628 Settlement date: June 24, 2003 Status: Borrower retains ownership; not currently in default; partial claim Indemnification: $145,722 ($140,628 + $5,094 partial claim) Ryland underwrote and approved the mortgage based on insufficient verification of employment. Therefore, HUD insured the loan based on Ryland’s inaccurate representation that the borrower met HUD qualifying guidelines. Moreover, Ryland inflated the sales price by $2,934. A. Inflated Sales Price HUD Handbook 4155.1, REV-4, CHG-1, paragraphs 1-6, 1-7, and 1-7 C; HUD Handbook 4155.1, REV-4, CHG-1, paragraph 2-10 C. Ryland inflated the sales price by $2,934. It increased the sales price from $139,861 to $142,841, a difference of $2,980, without documentation or justification to substantiate the increase. This adjustment was made to cover part or all of the OWN gift of $4,285 and/or a service fee of $300. B. Insufficient Employment Documentation HUD Handbook 4155.1, REV-4, CHG-1, paragraphs 2-6 and 3-1 E. Ryland did not verify all of the borrower’s employment for the past two years. It verified employment for only one year. Recommendations Indemnify HUD the mortgage amount of $140,628. Reimburse HUD for a claim paid of $5,094. Pay the servicing lender $2,934 to reduce the loan amount. 131 HUD case number: 023-1811657 Loan amount: $155,173 Settlement date: August 13, 2003 Status: Borrower retains ownership; not currently in default Indemnification: $155,173 Ryland underwrote and approved the mortgage based on insufficient verification of employment, excessive debt-to-income ratio without adequate compensating factors, and insufficient verification of deposit. Therefore, HUD insured the loan based on Ryland’s inaccurate representation that the borrowers met HUD qualifying guidelines. A. Insufficient Employment Documentation HUD Handbook 4155.1, REV-4, CHG-1, paragraphs 2-6 and 3-1 E. Ryland did not verify all of borrowers’ employment for the past two years. It verified employment for only one year and seven months. B. Unverified Source of Deposit HUD Handbook 4155.1, REV-4, CHG-1, paragraph 3-1 F. Original bank statements covering the most recent three-month period are required, two of which must be consecutive statements, if no verification of deposit is done by the lender. The borrowers signed the initial loan application on March 30, 2003, and the handbook requires that the application be updated so as not to be more than 180 days old when the loan closes. The loan should have been updated September 30, 2003; however, no document on file was signed by the borrowers around that date. We relied on the final application, dated August 12, 2003; therefore, the bank statements should cover the period May 12 through August 12, 2003. There were four deposit accounts, as well as an investment account, listed on the loan application. The account statements included in the file were copies of statements downloaded from the borrowers’ financial institution’s Web site. There were eight statements included in the file: • Account 5318, February 5 through March 28, 2003, and May 27 through July 18, 2003. • Account 0372, January 22 through March 20, 2003, and April 21 through July 17, 2003. • Account 9984, January 16 through March 28, 2003, and May 15 through July 18, 2003. • Account 3967, the two statements provided do not contain date coverage. 132 None of these statements contained account holder names. There was no statement found for the investment account listed on the loan application. Ryland would not have been able to verify that these accounts belonged to the borrowers. As a result, the HUD handbook requirement was not met. Recommendations Indemnify HUD the mortgage amount of $155,173. 133 HUD case number: 023-1932092 Loan amount: $119,516 Settlement date: November 4, 2003 Status: Mortgage payments current Indemnification: $119,516 Ryland underwrote and approved the loan based on false employment, a questionable/false Social Security number, an unsupported source of income, and an excessive debt-to-income ratio without adequate compensating factors. Therefore, HUD insured the loan based on Ryland’s inaccurate representation that the borrower met HUD qualifying guidelines. A. False Employment HUD Handbook 4000.4, REV-1, CHG-2, paragraph 5-3; HUD Handbook 4155.1, REV-4, CHG-1, paragraph 3-1 E. Ryland used falsified employment documents to qualify the borrower for the loan. The false documents include two pay stubs (April through May 2003) from employer Pioneer Ford. The following deficiencies were found: • Social Security and Medicare taxes did not calculate to 6.2 percent and 1.45 percent, respectively; rather, Social Security calculated to 5.45 percent and Medicare to 0.58 percent on April 2003 pay stub and Social Security calculated to 5.87 percent and Medicare to .92 percent on May 2003 pay stub. • The April 2003 pay stubs did not have a check number printed on the top right hand corner, as did the May 2003 pay stub. • We requested a wage history for borrower from Pioneer Ford and found inconsistent wage information. The April 2003 wages were inflated by $2,000, and the May 2003 wages were inflated by $1,300. The borrower was unaware of the inflation or other inconsistencies found on the pay stubs. B. Questionable/False Social Security Number HUD Handbook 4155.1, REV-5, paragraph 3-1 C; 24 Code of Federal Regulations 202.5(j)(4). We performed a Social Security number query of our in-house database and determined that Ryland qualified the borrower using a Social Security number that was issued before the borrower’s birthdate. Lexis Nexis reported that the Social Security number belonged to another individual. Moreover, Ryland required that the borrower provide a clearer copy of his Social Security card; however, the loan was underwritten without the card or a documented explanation in the Ryland case file. C. Unsupported Source of Income HUD Handbook 4155.1, REV-5, paragraph 2-7 C. Ryland failed to authenticate the borrower’s source of income. We could not determine the basis for borrower’s income of $3,876 through recalculation. Instead, we recalculated the borrower’s income based on the amount reported on the Department of Economic Security wage reports. Monthly income based on our calculation was $1,792, an overstatement of $2,084 from the income reported on the mortgage credit analysis worksheet. 134 D. Inaccurate/Excessive Debt-to-Income Ratios HUD Handbook 4155.1, REV-5, paragraph 2-12. We recalculated the qualifying ratios using the income based on the figure reported on the Department of Economic Security wage statements. The recalculated mortgage payment-to-income ratio was 48.99 percent and exceeds HUD requirements by 19.99 percentage points, while the total fixed payments- to-income ratio of 76.60 percent exceeds the HUD requirements by 35.60 percentage points. Compensating factors stated the borrower had worked in the same line for three years, ratios were in line, and maximum loan to value was 90 percent. Due to the large variance of these ratios, the compensating factors were not adequate to justify approving the loan. Recommendation Indemnify HUD the mortgage amount of $119,516. 135 HUD case number: 023-1965223 Loan amount: $157,172 Settlement date: December 22, 2003 Status: In default; first legal action to commence foreclosure on January 1, 2005 Indemnification: $157,172 Ryland underwrote and approved the mortgage based on insufficient employment documentation, understated liabilities, excessive debt-to-income ratios without adequate compensating factors, and an unverified source of deposit. Therefore, HUD insured the loan based on Ryland’s inaccurate representation that the borrowers met HUD qualifying guidelines. A. Unverified Source of Deposit HUD Handbook 4155.1, REV-5, paragraph 3-1 F. Original bank statements covering the most recent three-month period are required, two of which must be consecutive statements, if no verification of deposit is done by the lender. The borrowers signed the initial loan application on June 10, 2003, and the handbook requires that the application be updated so as not to be more than 180 days old when the loan closes. The loan should have been updated December 10, 2003. We relied on the final application, dated December 15, 2003; therefore, the bank statements should cover the period September 15 through December 15, 2003. The two bank statements provided covered June 6 through July 8, 2003, and September 24 through October 24, 2003. As a result, the HUD handbook requirement was not met. Recommendation Indemnify HUD the mortgage amount of $157,172. 136 HUD case number: 023-2177719 Loan amount: $160,766 Settlement date: October 19, 2004 Status: Mortgage payments current Indemnification: $160,766 Ryland underwrote and approved the loan based on an unsupported source of income, insufficient employment documentation, and an unverified source of deposit. Therefore, HUD insured the loan based on Ryland’s inaccurate representation that the borrower met HUD qualifying guidelines. A. Unsupported Source of Income HUD Handbook 4155.1, REV-5, paragraph 2-7. Ryland failed to authenticate the borrower’s source of $813 in overtime income. We could not determine the basis for borrower’s income through recalculation. Additional documentation to support the $813 on the mortgage credit analysis worksheet was not available in file. B. Insufficient Employment Documentation HUD Handbook 4155.1, REV-5, paragraphs 2-6 and 3-1 E. Ryland failed to verify the borrower’s employment for two years. A telephone verification of employment was on file, which verified employment for one year and ten months. Recommendations Indemnify HUD the mortgage amount of $160,766. 137 Appendix E Criteria A. HUD Handbook 4000.4, REV-1, CHG-2, paragraph 5-3, defines a level three deficiency as one, which involves an action by the lender to misrepresent the financial capacity either of the applicant-borrower or the condition of the property offered as security for the mortgage. B. HUD Handbook 4000.4, REV-1, CHG-2, paragraph 3-16, states the underwriter should certify the legitimacy of the insurance application and all supporting documents are accurate and complete to the best of the signer’s knowledge. C. HUD Handbook 4155.1, REV-4, CHG-1, paragraph 3-1 F, requires the lender to obtain original and not faxed pay stubs from the borrower covering the most recent 30- day period. In addition, lenders should obtain original copies of the previous two years’ Internal Revenue Service W-2 forms in the event that a telephone verification of employment is used, which is concurrent with this situation. D. HUD Handbook 4155.1, REV-4, CHG-1, and REV-5, paragraph 2-10 C, state that no repayment of the gift may be expected or implied. E. HUD Handbook 4155.1, REV-4, CHG-1, and REV-5, paragraph 2-14, state that the lender must establish that the eventual increase in mortgage payments after the buydown term ends will not adversely affect the borrower and likely lead to default. The underwriter must document which of the following criteria the borrower meets: (a) Potential for increased income that would offset the scheduled payment increases, as indicated by job training or education in the borrower's profession or by a history of advancement in the borrower's career with attendant increases in earnings. (b) A demonstrated ability to manage financial obligations in such a way that a greater portion of income may be devoted to housing expense. This may also include borrowers whose long-term debt, if any, will not extend beyond the term of the buydown agreement. (c) The borrowers have substantial assets available to cushion the effect of the increased payments. (d) The cash investment made by the borrower substantially exceeds the minimum required. 138 F. HUD Handbook 4155.1, REV-4, CHG-1, and REV-5, paragraphs 2-7 and 2-7 A, provide that the income of each borrower to be obligated for the mortgage debt must be analyzed to determine whether it can reasonably be expected to continue through at least the first three years of the mortgage loan. In most cases, borrower income will be limited to salaries or wages. Income from most other sources, provided it is properly verified by the lender, can be included as effective income. G. HUD Handbook 4155.1, REV-4, CHG-1 and REV-5, paragraphs 2-6 and 3-1 E, require that in lieu of obtaining a standard verification of employment, the lender may obtain the borrower’s original pay stubs covering the most recent 30-day period, along with the original copies of the previous two years’ Internal Revenue Service W-2 forms. The lender must also verify employment by telephone for the past two years. Ryland failed to verify borrower’s employment for two years, obtain a copy of the borrowers’ pay stubs covering the most recent 30-day period, and/or obtain a copy of the previous two years’ Internal Revenue Service W-2 forms. Moreover, the borrower must explain any gaps in employment spanning one month or more. The lender must verify the borrower’s employment for the most recent two years. H. HUD Handbook 4155.1, REV-4, CHG-1, paragraphs 2-3 and 2-4, and REV-5, paragraph 2-11, require lenders to consider all installment loans, contingent liabilities, and projected obligations when assessing the loan application. In computing the debt-to- income ratios, the lender must include the monthly housing expense and all other recurring charges, including payments on installment accounts, child support or separate maintenance payments, revolving accounts and alimony, etc., extending 10 months or more. Debts lasting less than 10 months must be counted if the amount of the debt affects the borrower’s ability to make the mortgage payment during the months immediately after loan closing; this is especially true if the borrower will have limited or no cash assets after loan closing. I. HUD Handbook 4155.1, REV-4, CHG-1, paragraph 2-3, serves as a guide in determining the attitude toward credit obligations that will govern the borrower’s future actions. A borrower who has made payments on previous or current obligations in a timely manner represents reduced risk. Conversely, if the credit history, despite adequate income to support obligations, reflects continuous slow payments, judgments, and delinquent accounts, strong offsetting factors will be necessary to approve the loan. J. HUD Handbook 4155.1, REV-4, CHG-1, and REV-5, paragraph 2-12, state that ratios are used to determine whether the borrower can reasonably be expected to meet the expenses involved in homeownership and otherwise provide for the family. The mortgage payment expense to effective income (front ratio) may not exceed 29 percent of gross effective income, and the total fixed payment to effective income (back ratio) may not exceed 41 percent of gross effective income, unless significant compensating factors are presented. 139 K. Chapter 2, page 2-15, of the HUD Homeownership Guide lists a group of closing costs and fees that can be collected by the lender from the borrower, subject to a maximum limitation. Whenever “actual costs” are permitted, it is expected that they do not exceed what is reasonable and customary for the area. An unallowable fee is one that has been identified by the local HUD office as not being a necessary/normal part of the loan origination process. An unearned fee is a closing cost that does not have an actual service or thing of value attached to it. An excessive fee is a closing cost charged to the borrower beyond the amount allowed by HUD. L. HUD Handbook 4155.1, REV-4, CHG-1, and REV-5, paragraph 3-1 F, requires the lender to obtain the borrower’s verification of deposit. As an alternate to obtaining a verification of deposit, the lender may choose to obtain from the borrower original bank statements for the most recent three-month period, two of which must be consecutive statements. Provided the bank statement shows the previous month's balance, this requirement is met by obtaining the two most recent consecutive statements. M. HUD Handbook 4155.1, REV-4, CHG-1, paragraph 2-9 C & C, 1, requires the lender must establish the borrower's earnings trend over the previous two years, but may average the income over three years if all three years' tax returns are provided. If the borrower provides quarterly tax returns, then the analysis can include income through the period covered by the tax filings. If the borrower is not subject to quarterly tax filings or does not file quarterly returns (form IRS 1040 ES), the income shown on the P&L may be included in the analysis provided the income stream based on the P&L is consistent with the previous years' earnings. If the P&L statements submitted for the current year show an income stream considerably greater than what is supported by the previous years' tax returns, the analysis of income must be predicated solely on the income verified through the tax returns. Lenders must carefully analyze the individual business's financial strength, the source of its income, and the general economic outlook for similar businesses in that area to determine if the business can be expected to continue to generate sufficient income for the borrower's needs. Annual earnings that are stable or increasing are acceptable. Conversely, a borrower whose business shows a significant decline in income over the period analyzed may not be acceptable even if current income and debt ratios meet our guidelines. Business income or loss (from Schedule C). The sole proprietorship income calculated on Schedule C is business income. Depreciation or depletion may be added back to adjusted gross income. N. HUD Handbook 4155.1, REV-4, CHG-1, and REV-5, paragraph 2-10 B states that a verification of deposit (VOD) may be used to verify these accounts, along with the most recent bank statement. If there is a large increase in an account, or the account was opened recently, an explanation and evidence of source of funds must be obtained by the lender. 140
Ryland Mortgage Company, Tempe, Arizona, Did Not Follow HUD Requirements in the Origination of Insured Loans
Published by the Department of Housing and Urban Development, Office of Inspector General on 2005-10-31.
Below is a raw (and likely hideous) rendition of the original report. (PDF)