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.
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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-
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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
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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.
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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.
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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
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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
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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
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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.
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• 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.
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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
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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.
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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-
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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.
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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.
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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.
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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.
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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)