oversight

The Loan Origination Process and Quality Control Plan of American Mortgage, Inc., Cherry Hill, New Jersey, Did Not Comply with HUD Regulations and Requirements

Published by the Department of Housing and Urban Development, Office of Inspector General on 2006-02-15.

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

                                                                        Issue Date
                                                                              February 15, 2006
                                                                        Audit Report Number
                                                                              2006-PH-1007




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



FROM:

SUBJECT: The Loan Origination Process and Quality Control Plan of American Mortgage,
          Inc., Cherry Hill, New Jersey, Did Not Comply with HUD Regulations and
          Requirements


                                          HIGHLIGHTS

    What We Audited and Why


                    We audited American Mortgage, Inc. (American), a nonsupervised lender
                    approved to originate Federal Housing Administration single-family mortgage
                    loans, because it had a high default rate and the Quality Assurance Division
                    recommended we audit this lender. Our objectives were to determine whether
                    American complied with the U.S. Department of Housing and Urban
                    Development’s (HUD) regulations, procedures, and instructions in the origination
                    of Federal Housing Administration loans and whether American’s quality control
                    plan, as implemented, met HUD requirements.


    What We Found

                    American did not originate all Federal Housing Administration loans in accordance
                    with HUD’s loan origination requirements. Of the 23 loans we selected for review,1

1
    Originally valued at $2,598,937
         American did not fully comply with Federal Housing Administration requirements
         for 15 of the loans originally valued at $1,672,584 and could not locate three of the
         23 case files. American did not exercise due diligence in the review of assets and
         liabilities; and did not resolve inconsistencies in calculations, signatures, and Social
         Security numbers. These deficiencies were caused by a lack of written procedures
         and a lack of due diligence by its employees, which contributed to an increased risk
         to the Federal Housing Administration insurance fund.

         American charged ineligible fees totaling $4,589 on nine loans. American charged
         these fees due to confusion over eligibility for document preparation, warehousing,
         commitment, expediting, and express mail fees.

         Finally, American’s quality control plan and the corresponding contractor
         agreement for quality control reviews did not contain requirements to identify
         patterns of early defaults and commonalities among loan origination participants.
         Also, the quality control plan required on-site branch reviews, but the contractor
         did not perform the on-site reviews. American was not aware of the requirement
         to identify patterns of early defaults and thought it was exempt from the on-site
         review requirement because it had recently established the branches.


What We Recommend

         We recommend that the assistant secretary for housing-federal housing
         commissioner

             •   Determine whether American’s deficiencies in the loan origination process
                 warrant administrative action, including indemnification from American on
                 15 Federal Housing Administration loans valued at $1,632,468, which it
                 issued contrary to HUD’s loan origination procedures;

             •   Require American to develop written internal loan origination procedures to
                 more closely monitor its loan origination process;

             •   Require American to refund ineligible fees collected totaling $4,589; and

             •   Require American to revise its quality control plan to include reviews for
                 patterns and commonalities among the loan origination participants and
                 ensure the contractor performs on-site branch reviews.

         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.




                                            2
Auditee’s Response


           We requested American’s response on December 15, 2005. We received
           American’s written response, including comments on 14 of the 17 loans and 23 of
           the 40 issues, on January 25, 2006. American did not agree with specific issues
           concerning loan underwriting and did not address the recommendation to develop
           written policies and procedures. American generally agreed with the findings and
           recommendations concerning ineligible fees and its quality assurance plan. The
           text of American’s written response, along with our evaluation of that response,
           can be found in appendix B of this report. With its response, American provided
           18 exhibits, which we did not include in the report because they were too
           voluminous.




                                           3
                              TABLE OF CONTENTS

Background and Objectives                                                           5

Results of Audit
        Finding 1: American Did Not Fully Comply with HUD/Federal Housing           6
        Administration Requirements
        Finding 2: American Charged Ineligible Fees                                 10
        Finding 3: American’s Quality Control Plan and Its Implementation Did Not   12
        Comply with HUD Requirements

Scope and Methodology                                                               14

Internal Controls                                                                   15

Appendixes
   A.   Schedule of Questioned Costs and Funds to Be Put to Better Use              16
   B.   Auditee Comments and OIG’s Evaluation                                       17
   C.   Schedule of Case File Discrepancies                                         43
   D.   Schedule of Ineligible Fees                                                 44
   E.   Narrative Case Presentations                                                45




                                              4
                    BACKGROUND AND OBJECTIVES


The U.S. Department of Housing and Urban Development’s (HUD) strategic plan states that
part of its mission is to increase homeownership, support community development, and
increase access to affordable housing free from discrimination.

The National Housing Act, as amended, established the Federal Housing Administration, an
organizational unit within HUD. The Federal Housing Administration provides insurance for
lenders against loss on single family home mortgages.

Beginning in 1983, HUD implemented the direct endorsement program, which authorized
approved mortgagees to underwrite loans without HUD’s prior review and approval. HUD
can place them on credit watch status or terminate their approval if their rate of defaults and
claims exceeds the normal rate for the area. Many sanctions are available for taking actions
against lenders or others who abuse the program.

American Mortgage Inc.’s (American) main office is located in Cherry Hill, New Jersey.
American operates nine branch offices in three states. American issued 856 Federal Housing
Administration loans worth $104,505,615 between January 1, 2003, and December 31, 2004.
The main office issued 787 loans valued at $95,493,574, of which 46 with a value of $5,294,023
were in default. Of the 46 loans, we reviewed 23 loans worth $2,598,937 that were in default
status less than three years after closing.

Our audit objectives were to determine whether American originated Federal Housing
Administration-insured loans in accordance with prudent lending practices and HUD
requirements and whether American’s quality control plan met HUD requirements. We
reviewed case files from both the Homeownership Center and the lender and reviewed
American’s oversight of its branches.




                                             5
                                   RESULTS OF AUDIT

Finding 1: American Did Not Fully Comply with HUD/Federal Housing
Administration Requirements

American did not always originate Federal Housing Administration-insured loans in accordance
with HUD requirements. It did not exercise due diligence in the review of assets and liabilities; and
did not resolve inconsistencies in calculations, signatures, and Social Security numbers for 15 loans
originally valued at $1,672,584. Further, American could not locate three of the 23 case files we
requested for review. These deficiencies stem from a lack of written policies and procedures and a
lack of due diligence by its employees. The deficiencies contributed to an increased risk to the
Federal Housing Administration insurance fund. Therefore, American should indemnify the 15
loans with remaining balances of $1,632,468.



 American Did Not Verify
 Borrowers’ Assets


               American did not adequately verify the assets stated on the uniform residential loan
               application for 12 of the 23 cases reviewed. It did not verify the source of deposits
               for 10 cases. For example, American did not verify the source of deposits totaling
               $5,516 for case 351-4462312 and $15,000 for case 351-7188300. HUD requires the
               lender to verify savings and checking accounts. A verification of deposit, along with
               the most recent bank statement, may be used to accomplish this. If there is a large
               increase in an account or the account was opened recently, the lender must obtain a
               credible explanation of the source of those funds.

               American did not obtain the required bank statements in support of assets for four
               cases. For case 351-4408689, American did not obtain a verification of deposit and
               provided only one bank statement. As an alternative to obtaining a verification of
               deposit, HUD requires the lender to obtain bank statements covering the most recent
               three-month period.

               American did not adequately identify the source of gift funds for four cases. For
               cases 351-4555825 and 351-4477678, American did not verify the funds came from
               the donor’s account. American did not obtain the check copy for case 351-4608117
               and failed to investigate two deposits made to the donor’s account on the day before
               and the day the borrower deposited the gift to his account for case 351-4626705.
               HUD requires that the donor provide a withdrawal document or cancelled check for
               the amount of the gift. The homebuyer’s deposit slip and bank statement are also
               required. The lender must be able to determine that the gift funds were not provided
               from an unacceptable source.



                                                  6
           American did not verify the source of earnest money for case 351-4462312. If the
           earnest money deposit exceeds 2 percent, the lender must verify the deposit amount
           and source of funds with documentation.

American Did Not Resolve
Problems with Borrower Credit


           American did not verify that all delinquent accounts were adequately resolved (two
           cases). For example, for case 351-4316649, the credit report listed three delinquent
           accounts totaling $1,042. There was no evidence American researched the debt.
           HUD requires that when delinquent accounts are revealed, the lender must
           determine whether late payments were based on a disregard for financial obligations,
           an inability to manage debt, or factors beyond the control of the borrower.

           American did not obtain explanations for excessive inquiries on the credit reports
           (one case). For 351-4608117, American did not obtain an explanation for four
           inquiries on the credit report from March through May 2004. HUD requires written
           explanation from the borrower for all inquiries shown on the credit report in the last
           90 days.

           American did not verify the borrower’s rental payment history for case 441-
           7188300. The loan application listed a rental amount of $750, but there were
           inconsistencies in the borrower’s addresses. There is no indication that American
           investigated this issue. The lender must include a determination of the borrower’s
           payment history of housing obligations through the credit report, directly from a
           landlord, or through cancelled checks covering the most recent 12-month period.

American Issued Loans with
Incorrect Calculations


           American issued two loans after making calculation errors. For case 351-4498468,
           American added the bank balance from two separate months for the same account to
           show funds to close. The second month’s balance listed a different institution and
           the borrower’s Social Security number on the loan application in place of the
           account number. Further, American calculated the mortgage payment-to-income
           and total fixed-payment-to-income ratios using overtime that was unlikely to
           continue. Without the overtime, the ratios were 41 and 58 percent, far exceeding
           HUD maximums of 29 and 51 percent. HUD allows use of overtime when the
           borrower has received overtime for the past two years and it is likely to continue.

           American incorrectly calculated the loan-to-value ratio for case 351-4567347.
           Although, the borrower purchased the property from his employer, American used a
           loan-to-value ratio of 97.75 percent, instead of the 85 percent required by HUD. As
           a result, the mortgage was over-insured by $14,428. HUD restricts identity-of-



                                             7
             interest transactions on principal residences to a maximum loan-to-value ratio of 85
             percent.

American Issued Loans When
Problems with Signatures and
Social Security Numbers
Existed


             American issued three loans in which required signatures did not match signatures
             on other documents. For case 351-4462312, the underwriter’s signature on the Form
             HUD-92900-A, “Direct Endorsement Approval for a HUD/FHA-Insured
             Mortgage,” did not match the signature on the mortgage credit analysis worksheet.
             The closing officer often signed the underwriter’s name on the form when the
             underwriter was not available. The underwriter’s signature certifies that the
             underwriter reviewed all pertinent documents, used due diligence in underwriting
             the loan, and approved the loan as eligible for HUD mortgage insurance under the
             direct endorsement program. HUD requires the uniform residential loan application
             and its addendum be signed and dated by all borrowers and the lender for mortgage
             credit analysis in all transactions.

             American issued one loan (case 351-4487731) which had unresolved Social Security
             number issues. The credit report listed four Social Security numbers for the
             borrower. There was no evidence that American tried to resolve this issue. HUD
             requires the lender to resolve any inconsistencies or multiple Social Security
             numbers for individual borrowers.

American Did Not Retain Three
Loan Case Files


             American could not locate case numbers 351-4381382, 351-4555825, and 441-
             7188300. It stated it was in the process of reboxing its files, which could have
             caused them to be misplaced. HUD requires originating lenders to retain the entire
             case file pertaining to the loan origination.


Conclusion


             The above discrepancies represent material deficiencies that require administrative
             action up to and including indemnification. The cases illustrate that HUD assumed
             unnecessarily high risk when insuring the loans originated by American. The
             deficiencies associated with American’s loan origination activities stem from its lack
             of written procedures and the lack of due diligence by its employees. Therefore,
             American should indemnify the 15 loans with remaining balances of $1,632,468.



                                               8
          Appendix C contains a table summarizing discrepancies for each of the 15 loans.
          Specific HUD regulations are contained in the narrative case presentations
          contained in appendix E.

Recommendations


          We recommend that the assistant secretary for housing – federal housing
          commissioner

          1A.     Take appropriate administrative action up to and including indemnification
                  for the 15 loans with unpaid balances of $1,632,468 that did not comply with
                  HUD requirements.

          1B.     Require American to develop and implement written internal control
                  procedures that provide assurance that its employees follow proper
                  procedures to satisfy HUD’s requirements for loan origination.




                                            9
Finding 2: American Charged Ineligible Fees
American charged ineligible fees totaling $4,589 on 9 of the 23 loans we reviewed. It charged
these fees due to confusion over eligibility for document preparation, warehousing, commitment,
expediting, and express mail fees. As a result, American overcharged borrowers and needs to
refund these fees totaling $4,589.




 American Charged Ineligible
 Document Preparation and
 Warehousing Fees


              American charged ineligible document preparation and warehouse fees payable to
              TLC, Inc., totaling $1,800 on nine loans. As a result of a Quality Assurance
              Division review conducted the week of April 19, 2004, HUD determined that
              document preparation and warehouse fees paid to TLC, Inc. were unallowable.
              American refunded the fees for the loans identified in the Quality Assurance
              Division review. However, the Quality Assurance Division review did not
              include the 23 loans that we reviewed and American did not refund fees for the
              nine loans, totaling $1,800. These fees are unallowable and should be refunded.
              American believed that the fees were allowable.

 American Charged Ineligible
 Commitment Fees


              American charged ineligible commitment fees totaling $2,624 on 9 of the 23
              loans we reviewed. It believed commitment fees were chargeable as long as it
              included a letter stating that it committed to the loan and locked in the interest rate
              10 days before closing. Of the nine loans, five, totaling $1,500, lacked
              documentation to substantiate that the borrowers agreed to lock in their loans and
              four, totaling $1,124, contained lock-in agreements signed by the borrowers, but
              the agreement stated that the borrower did not want to lock in the interest rate.
              HUD Handbook 4000.2, paragraph 1-9A, allows lenders to charge a commitment
              fee to guarantee, in writing, the interest rate and discount points for a specific
              period or to limit the extent to which they may change. The minimum time for
              lock-ins or rate locks is 15 days. The loan may close in less than 15 days at the
              convenience of the borrower, and the lock-in fees may still be earned. Lenders
              are expected to honor all such commitments.




                                                10
American Charged Ineligible
Expediting and Express Mail
Fees


           American charged ineligible expediting and express mail fees, totaling $165, on
           two loans. At the time it charged the fees, it believed they were allowable.
           However, HUD Handbook 4000.2, paragraph 5-2O, allows courier fees and wire
           fees to be charged only on refinances and only for delivery of the mortgage payoff
           statement to the lien holder and for closing documents to the settlement agent.
           The borrower must agree in writing to pay for the courier and wire fees before
           loan closing.

Recommendations


           We recommend that the assistant secretary for housing – federal housing
           commissioner

           2A.    Require American to refund the $4,589 in ineligible fees collected.




                                           11
Finding 3: American’s Quality Control Plan and Its Implementation Did
Not Comply with HUD Requirements
American’s quality control plan and its implementation did not fully comply with HUD
requirements. Its quality control plan and its corresponding contractor agreement did not require
American or the contractor to identify patterns in defaulted loans and commonalities among loan
origination participants. Further, the plan required the contractor to visit the branch offices
annually when performing on-site reviews, but the contractor did not do so, and American did
not enforce the requirement. American was not aware of the requirement to identify early
default patterns and thought it was exempt from the annual on-site visit requirement because it
had established its branches recently. As a result, we have limited assurance that American
adequately protected HUD from unacceptable risk.




 American’s Quality Control
 Plan Did Not Contain a
 Required Process to Identify
 Early Default Patterns


               American’s quality control plan and its corresponding agreement with an
               independent contractor did not contain a requirement to identify patterns of early
               default and commonalities among the loan officers, processors, underwriters,
               appraisers, and realtors as required by HUD Handbook 4060.1, paragraph 6-5C.
               American stated that it was not aware of this requirement. However, American’s
               president stated that during the audit, he informed the quality control officer to
               perform these reviews. Detection of patterns and commonalities among loan
               origination participants can identify personnel not complying with HUD
               requirements as well as possible fraudulent activities.


 American’s Contractor Did Not
 Perform Required On-Site
 Quality Control Reviews


               American’s quality control plan required on-site branch reviews, but American
               did not require the quality control contractor to perform the on-site branch
               reviews. It believed review of the case files, maintained at the corporate office,
               satisfied the on-site review requirement and thought it was exempt from the
               physical visit requirement as it had established its branches within the last 17
               months. Further, we found that, in 2003, 2004, and 2005, American terminated
               368 employees and hired 196 of its current staff of 227. With this much turnover
               and, as noted in Finding 1, no written policies and procedures, on-site branch


                                               12
          visits are that much more important. Although HUD Handbook 4060.1,
          paragraph 6-3G.2, allows electronic branch reviews, annual visits are mandatory
          for offices meeting certain higher risk criteria such as new branches and new key
          personnel. Therefore, American was not exempt from the annual on-site
          requirement.

          Because American’s quality control process did not comply with HUD
          requirements, we have limited assurance that HUD was protected from
          unacceptable risk and guarded against errors, omissions, and fraud; and that swift
          and appropriate corrective action would be taken when necessary in the
          origination and servicing of Federal Housing Administration loans.

Recommendations


          We recommend that the assistant secretary for housing – federal housing
          commissioner

          3A.     Require American to revise and implement its quality control plan to comply
                  with HUD requirements.




                                           13
                        SCOPE AND METHODOLOGY

To accomplish our objectives, we

 •   Reviewed Federal Housing Administration-insured loans (23 cases) originated by
     American’s main office between January 1, 2003, and December 31, 2004, that had gone
     into default at least once. The 23 loans were part of a universe of 787 loans originated by
     American’s main office during that time. The results of the detailed testing apply only to
     the 23 loans reviewed and cannot be projected to the universe of Federal Housing
     Administration-insured loans.

 •   Examined records and related documents of American.

 •   Reviewed applicable HUD handbooks and mortgagee letters.

 •   Conducted interviews with officials and employees of American and the HUD Quality
     Assurance Division.

In addition, we relied, in part, on data maintained by HUD in the Single Family Data Warehouse
and Neighborhood Watch systems. We did not perform a detailed analysis of the reliability of
these programs.

The audit generally covered the period from January 1, 2003, to December 31, 2004. We
expanded this period to include the most current data while performing our audit. Therefore,
when applicable, the audit period was expanded to include current data through
November 30, 2005. We conducted our audit from March through December 2005.

We performed our review in accordance with generally accepted government auditing standards.




                                               14
                             INTERNAL CONTROLS

Internal control is an integral component of an organization’s management that provides
reasonable assurance that the following objectives are being achieved:

   •   Effectiveness and efficiency of operations,
   •   Reliability of financial reporting, and
   •   Compliance with applicable laws and regulations.

Internal controls relate to management’s plans, methods, and procedures used to meet its
mission, goals, and objectives. Internal controls include the processes and procedures for
planning, organizing, directing, and controlling program operations. They include the systems
for measuring, reporting, and monitoring program performance.



 Relevant Internal Controls


              We determined the following internal controls were relevant to our audit
              objectives:

                  •   Loan origination process – Policies and procedures that management has in
                      place to reasonably ensure that the loan origination process complies with
                      HUD program requirements.

                  •   Quality control plan – Policies and procedures that management has in place
                      to reasonably ensure implementation of HUD quality control requirements.

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

 Significant Weaknesses


              Based on our review, we believe American did not operate in accordance with
              HUD requirements as they relate to loan issuance and quality control.

              The deficiencies are discussed in detail in the Results of Audit section of this
              report.




                                               15
                                    APPENDIXES


Appendix A


               SCHEDULE OF QUESTIONED COSTS
              AND FUNDS TO BE PUT TO BETTER USE

                  Recommendation                            Funds to be put
                  number               Ineligible 1/        to better use 2/

                          1A                                   $1,632,468
                          2A                 $4,589



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.




                                              16
Appendix B

        AUDITEE COMMENTS AND OIG’S EVALUATION


Ref to OIG Evaluation   Auditee Comments




                         17
Comment 1




            18
Comment 2

Comment 3




Comment 4




Comment 5




            19
Comment 6




Comment 7




Comment 8




            20
Comment 8




Comment 8




            21
Comment 9




Comment 10




             22
Comment 11




Comment 11




Comment 12




             23
Comment 13




Comment 13




             24
Comment 14




             25
Comment 15




Comment 15




Comment 15




             26
Comment 16




Comment 16




             27
Comment 16



Comment 16




Comment 17




             28
Comment 17




Comment 18




             29
Comment 18




Comment 18




             30
Comment 19




Comment 20




             31
Comment 20




Comment 21




             32
Comment 22




Comment 22




             33
Comment 22




Comment 23




             34
Comment 24




Comment 25




             35
Comment 26




    36
                         OIG Evaluation of Auditee Comments


Comment 1   American’s assertions that many of the findings are at variance with the facts, do
            not constitute violations of HUD/FHA requirements, or do not affect loan
            insurability are incorrect. We identified 40 issues with 17 of the 23 loans that we
            reviewed, of which 15 cases remain in the report. American only addressed 23 of
            the 40 issues noted, which involved 14 of the 17 cases in Finding 1. We removed
            two cases and five other issues from the report based on subsequent information
            that American provided. The other 32 issues remain discrepancies. For the 17
            issues that American did not address, we assume American concurred with our
            conclusions. Further, American agreed with the facts in Findings 2 and 3 and is
            taking corrective action or already has taken action. Finally, in its comments,
            American repeatedly stated its policies and procedures conformed to HUD
            regulations, and it had directed its personnel to adhere to its policies and
            procedures. However, we stated in the report that one of the main causes of the
            problems noted was that American did not have written policies and procedures.
            To date, American has not addressed this issue.

Comment 2   As discussed at the exit conference, we removed case 351-4548348 from the
            report prior to receiving American’s comments. We found problems with 17 other
            loans of the 23 loans that we reviewed, of which 15 remain in the report.

Comment 3   American acknowledged it was not able to locate three case files. As noted in the
            report, HUD regulations require that the originating lender retain the entire case
            file pertaining to loan origination. The fact that American could not locate the
            case files does not absolve it of the responsibility to properly underwrite its loans
            or relieve it of indemnification liability.

Comment 4   Although American stated it has strengthened its policies and procedures where
            deficiencies existed, it has not addressed our recommendation to develop written
            policies and procedures. Further, American stated it refunded approximately
            $4,500 in fees, but has not provided sufficient documentation to support this
            statement. In addition, American stated it amended its quality control procedures
            to comply with FHA guidelines, but American only provided documentation that
            pertained to identifying early default patterns. American stated later in its
            comments that it is in the process of amending procedures for performing on-site
            quality control reviews. As noted below, although American generally complied
            with HUD’s requirements, there are several areas that need correction.

Comment 5   See Comment 3 concerning missing case files.

Comment 6   See Comment 2 concerning the case removed prior to receiving American’s
            comments.

Comment 7   Based on the information that American provided, we removed this case from the
            report.


                                             37
Comment 8     American noted that the earnest money deposit of $10,110 came from the sale of
              a prior property on June 27, 2003. However, we noted that the borrower had
              debts to pay including a $10,894 auto loan, which he paid off on July 18, 2003,
              five days before closing on the subject property. The source of the earnest money
              remains in question.

              We reviewed the only available bank statements, which covered the months of
              March and April 2003. Payroll deposits were clearly indicated on the bank
              statements. However, as American noted, the borrower often made cash deposits,
              but there was no documentation as to the source of these deposits. The eight
              deposits in question, totaling $5,516, ranged in amounts from $300 to $1,200.
              During the audit, American stated that it generally does not investigate deposits
              under $1,000, but it agreed it should have investigated the two deposits of $1,200
              and $1,132. HUD Handbook 4155.1 does not define “large deposits”. However,
              discussion with the Philadelphia Quality Assurance Division disclosed that $1,000
              was a high threshold and large aggregate amounts should be verified as well as
              large individual deposits. As a result, it is not apparent that the borrower had the
              funds to close.

              In summary, American did not comply with HUD requirements in underwriting
              the loan. It did not properly document the source of the borrower’s earnest
              money deposit and did not comply with FHA guidelines concerning the
              borrower’s assets.

              Based on the above, the case remains in the report.

Comment 9     The statement provided appeared to be a typed report listing account activity
              between March 31 and May 1, 2003, rather than a normal bank statement. The
              document stated it was a report of transactions posted to the account as of
              May 27, 2003, although there was no activity listed for May 2003. Further, the
              financial institution was not indicated and the statement was not certified or
              signed by a bank official. During the audit, American agreed that it should have
              had the statement certified and obtained an additional bank statement.

              Based on the above and another issue discussed below (Comment 22), the case
              remains in the report.

Comment 10 The deposits in question, totaling $2,738, were in amounts from $100 to $708 and
           all but one were transferred from the borrower’s savings account. Savings
           account bank statements were not provided, so the source of funds remained in
           question. However, due to the fact the deposits occurred early in the process and
           there were no questionable deposits in the last two months, we removed this issue
           from the report.

              Based on another issue discussed below (Comment 18), the case remains in the
              report.



                                               38
Comment 11 American noted that HUD Handbook 4155.1, REV-4, CHG-1 and Mortgagee
           Letter 00-28 require the borrower’s deposit slip or bank statement to document
           the gift deposit. On October 20, 2003, HUD revised this requirement to read the
           borrower’s deposit slip and bank statement. However, the revision occurred after
           the closing date of October 9, 2003, so the revision did not apply in this case.

              Based on the above, this issue was removed from the report. However, based on
              two other issues American did not address, the case remains in the report.

Comment 12 According to the settlement document, cash required from the borrower at closing
           totaled $5,400, which is contrary to American’s assertion that the borrowers were
           not required to bring any funds to closing. As noted, there were two deposits of
           $950 and $1,075, totaling $2,025, which American did not investigate. However,
           based on the fact that there was no questionable activity within the two months
           prior to settlement, this issue was removed from the report.

              Based on another issue discussed below (Comment 20), the case remains in the
              report.

Comment 13 American acknowledged that it did not obtain the required documentation of a
           cancelled check or withdrawal document. The receipt, indicating payment of the
           borrower’s debt, noted payment received from the borrower, but does not prove
           the gift funds were used for this purpose. Based on the findings in our report,
           American’s assertion that this was an anomaly appears to be unsupported.

              Further, the gift letter and notarized letter do not prove the donor provided the gift
              from her own funds. Without the required cancelled check or withdrawal
              document, the source of funds remains in question. As a result, American did not
              perform due diligence to determine that the funds came from a legitimate source.

              Based on the above, the case remains in the report.

Comment 14 American incorrectly stated that the only deposits other than payroll deposits were
           two gift deposits. Payroll deposits were clearly indicated on the bank statements.
           However, we noted three deposits of $200, $500, and $750, totaling $1,450, as
           well as a $7,000 deposit, which were not payroll deposits and were not
           investigated.

              Since the deposits were not needed to close, the case was removed from the
              report.

Comment 15 The five deposits ranged in amount from $291 to $500, totaling $1,891. HUD
           Handbook 4155.1 does not define “large deposits”. However, discussion with the
           Philadelphia Quality Assurance Division disclosed that $1,000 was a high
           threshold and large aggregate amounts should be verified as well as large
           individual deposits.



                                                39
              During the audit and in its comments, American agreed it should have obtained a
              deposit slip to properly document the gift. Further, as noted in the report,
              although American provided a withdrawal slip for $2,700 in May 2004, there was
              also a withdrawal for the same amount in April 2004, which American did not
              investigate. In its response, American agreed it did not provide the deposit slip or
              a copy of the check for the gift funds.

              In summary, American did not comply with HUD requirements. It failed to
              obtain explanations for deposits totaling $1,891 and failed to obtain a copy of the
              deposit slip for the gift funds.

              Based on the above, the case remains in the report as American did not comply
              with HUD documentation requirements.

Comment 16 As American stated, we did not question the documentation provided to show the
           funds came from the donor’s account.

              However, as noted in the report, there were two deposits in the amounts of $1,900
              on June 3, 2004, and $2,595 on June 4, 2004. American stated it was not required
              to investigate the source of these funds. However, the donor’s bank balance was
              $9.20 prior to these deposits and was $4.20 on June 4, 2004, after the gift
              withdrawal was made. As American noted, HUD Handbook 4155.1, paragraph 2-
              10C states that as a rule HUD is not concerned with how the donor obtains the gift
              funds provided they are not derived from a party to the sales transaction.
              Considering the dates of the deposits to the donor account, the donor account
              balances before and after the transaction, and the fact that the total of the deposits
              was $5 less than the amount of the gift, American should have investigated the
              source of the deposits to the donor’s account.

              Further, American did not adequately document the gift, as it did not provide a
              deposit slip to the borrower’s account.

              In summary, American did not comply with HUD requirements.

              Based on the above, the case remains in the report.

Comment 17 See Comment 3 concerning missing files. Further, as shown below and contrary
           to American’s assertions, it did not reasonably determine or document that late
           payments were not due to borrower’s disregard for financial obligations.

Comment 18 We acknowledge that American obtained two letters from the borrower.
           However, in the letter dated December 13, 2002, he stated that the accounts in
           question do not pertain to his social security number. There was no evidence that
           American investigated this situation.

              Further, the note on the MCAW stated that the borrower’s attorney provided
              statements that showed no further obligations by the borrower. Although


                                               40
               American documented the attorney’s letter, it did not provide copies of the
               supporting statements.

               Based on the above, this case remains in the report.

Comment 19 Based on the information American provided, we agree that explanations for
           credit inquiries and verifications of rental history were not required and we
           removed the issues from the report.

               Based on two other issues that American did not address, the case remains in the
               report.

Comment 20 Contrary to American’s statement, the file did not contain an explanation for
           every credit account on the credit report. It appeared the borrowers selectively
           addressed specific delinquent accounts from 1999 through 2003 and did not
           address the accounts we noted in the report. American admitted it did not pursue
           the matter further.

               Based on the above, this case remains in the report.

Comment 21 There was no documentation in the file that American, as stated in its response,
           had determined that the recent inquiries were a result of the borrower’s attempts
           to obtain mortgage financing. The inquiries were not addressed at all. As noted
           in the report, HUD Handbook 4155.1, paragraph 2-3B requires that the borrower
           explain in writing all inquiries on the credit report in the last 90 days.

               Based on the above and two other issues discussed previously (Comment 15), this
               case remains in the report.

Comment 22 American cites its policy for automated underwriting, allowing the post-closing
           staff to sign for the underwriter if it is an accept or approve rating, noting the staff
           must sign their own name, not the underwriter’s name. Although, case 351-
           4471386 was rated accept/approve, the post-closer apparently signed the
           underwriter’s name, which American, in its response, admitted was not permitted.
           Further, the automated underwriting software rated cases 351-4462312 and 351-
           4408689 as refer/caution, so the above procedure does not apply to them. In both
           instances, the post-closer signed the underwriter’s name, although, according to
           American, the underwriter was required to sign for these cases. Although
           American stated these are isolated cases, it should be noted that the three cases
           noted comprise 13 percent of the 23 cases reviewed. Further, American noted
           that the underwriter signed an internal approval sheet. We believe that since the
           underwriter was able to sign the internal approval sheet and both the underwriter
           and the post-closing staff are located in the same building, the underwriter should
           have signed the Direct Endorsement Approval form.

               Based on the above, other issues discussed previously (Comments 8 and 9), and
               another issue that American did not address, these cases remain in the report.


                                                41
Comment 23 American provided copies of letters and the front of checks written to the
           servicers or borrower for the ineligible fees. However, the recommendation
           remains open, pending documentation that the funds were removed from
           American’s account.

Comment 24 American provided a copy of an excerpt from its revised quality control plan,
           which included a process to identify patterns of early default and commonalities
           among loan origination participants. Because American is in the process of
           amending the quality control procedures to include regular on-site reviews of
           branch offices, the recommendation remains open.

Comment 25 American’s assertions that many of the findings are at variance with the facts, do
           not constitute violations of HUD/FHA requirements, or do not affect loan
           insurability are incorrect. First, only two cases and five other issues were
           removed from the report based on subsequent information that American
           provided. The other 32 issues remain discrepancies. Further, American only
           addressed 23 of the 40 issues noted, which involved 14 of the 17 cases in Finding
           1. For the 17 issues that American did not address, we assume American agreed
           with our conclusions. Finally, in its comments, American constantly stated its
           policies and procedures conform to HUD regulations, and it had directed its
           personnel to adhere to its policies and procedures. However, we stated in the
           report, and American agreed at the exit conference, that one of the main causes of
           the problems noted was that American did not have written policies and
           procedures. To date, American has not addressed this issue.

Comment 26 We removed 2 cases and 5 other issues of the 23 issues that American addressed
           in its comments from the report. The remaining 32 issues of the 40 reported
           remain in question.




                                             42
Appendix C

              SCHEDULE OF CASE FILE DISCREPANCIES



                                                                                    Signatures
                             Unpaid                                                 and Social
    Case       Mortgage     Principle    Claim                                       Security
  Number       Amount       Balance      Paid      Assets   Credit   Calculations    Numbers
351-4462312    $187,064      $182,356    $1,175      X                                  X
351-4498468    $123,068      $120,297                X                   X
351-4567347    $110,625      $108,629                                    X
351-4381382     $98,455       $95,430     $7,495     X
351-4555825     $64,488       $63,260       $200     X
351-4408689     $94,613       $91,914     $7,456     X                                 X
351-4487731     $92,547       $90,314                X                                 X
351-4316649     $98,223       $95,234                         X
351-4525586    $142,871      $139,717      $200      X        X
351-4345198    $177,219      $172,203                         X
351-4471386     $79,540       $77,791                X                                 X
351-4477678     $96,485       $93,694      $950      X
351-4608117     $93,821       $92,499                X        X
351-4626705    $130,224      $128,390                X
441-7188300     $83,341       $80,740                X        X


               $1,672,584   $1,632,468   $17,476    12        5          2              4




                                            43
Appendix D

              SCHEDULE OF INELIGIBLE FEES


                                        Breakdown of Ineligible Fees
                                        Doc                      Express
                     Ineligible   Prep/Warehouse Commitment      Mail/Rush
       Case Number     Fees             Fee         Fee            Fee
       351-4516295    $525.00          $200         $325
       351-4498468    $675.00          $200         $325               $150
       351-4527751    $540.00          $200         $325               $15
       351-4567347    $349.00          $200         $149
       351-4391163    $400.00          $200         $200
       351-4438622    $525.00          $200         $325
       351-4471386    $525.00          $200         $325
       351-4548348    $525.00          $200         $325
       351-4602931    $525.00          $200         $325

                      $4,589          $1,800         $2,624            $165




                                       44
Appendix E

                     NARRATIVE CASE PRESENTATIONS


Case number: 351-4462312

Mortgage amount: $187,064

Date of loan closing: July 23, 2003

Status: Reinstated by mortgagor who retains ownership

Payments before first default reported: Three

Claims paid: $1,175

Unpaid principal balance: $182,356

Summary:

       American did not (1) properly verify the borrower’s funds to close and (2) obtain
       required signatures.

Pertinent Details:

       American Did Not Properly Verify Funds to Close

       American failed to verify the source of the borrower’s funds to close. It failed to obtain
       explanations for eight deposits totaling $5,516. HUD Handbook 4155.1, paragraph 2-
       10B, states that a verification of deposit, along with the most recent bank statement, may
       be used to verify savings and checking accounts. If there is a large increase in the
       account or the account was opened recently, the lender must obtain a credible explanation
       of the source of those funds.

       American failed to determine the source of $5,750 in earnest money held by the
       borrower’s attorney. HUD Handbook 4155.1, paragraph 2-10A, requires that if the
       earnest money deposit exceeds 2 percent of the sale price, the lender must verify with
       documentation the deposit amount and source of funds.

       American Did Not Obtain Required Signatures

       The underwriter’s signature on the Form HUD-92900-A, “Direct Endorsement Approval
       for a HUD/FHA-Insured Mortgage,” was not his. The underwriter stated that the closing
       officer will sign his name for him if he is not available. The underwriter’s signature



                                                45
certifies that the underwriter reviewed all pertinent documents, used due diligence in
underwriting the loan, and approved the loan as eligible for HUD mortgage insurance
under the direct endorsement program. HUD Handbook 4155.1, paragraph 3-1, states
that the application package must contain all documentation supporting the lender’s
decision to approve the mortgage loan. The uniform residential loan application and the
addendum, signed and dated by all borrowers and the lender, are required for mortgage
credit analysis in all transactions.




                                       46
Case number: 351-4498468

Mortgage amount: $123,068

Date of loan closing: August 28, 2003

Status: Reinstated by mortgagor who retains ownership

Payments before first default reported: Six

Unpaid principal balance: $120,297

Summary:

       American did not (1) properly verify the borrower’s funds to close and (2) correctly
       calculate assets available and mortgage payment-to-income and total fixed-payment-to-
       income ratios.

Pertinent Details:

       American Did Not Properly Verify Funds to Close

       American failed to obtain explanations for four deposits totaling $1,910. HUD
       Handbook 4155.1, paragraph 2-10B, states that a verification of deposit, along with the
       most recent bank statement, may be used to verify savings and checking accounts. If
       there is a large increase in the account or the account was opened recently, the lender
       must obtain a credible explanation of the source of those funds.

       American Incorrectly Calculated Available Assets and Mortgage Payment-to-Income and
       Total Fixed-Payment-to-Income Ratios

       American added the bank balance of $1,002 as of June 12, 2003, to the bank balance of
       $5,050 as of August 13, 2003 (same account), to show assets available of $6,052. On the
       loan application, American showed the proper bank and account number for the $1,002
       balance, but showed a different institution and the borrower’s Social Security number for
       the $5,050 balance. Without the $1,002, the borrower only had $5,050 of the $6,568
       funds required on the loan application.

       American calculated the mortgage payment-to-income and total fixed-payment-to-
       income ratios using overtime that was unlikely to continue. The verbal verification of
       employment indicated overtime was unlikely to continue, but American used overtime in
       the calculation with no explanation. Without the overtime, the mortgage payment-to-
       income ratio changed from 28 to 41 percent and the total fixed-payment-to-income ratio
       changed from 39 to 58 percent, both of which significantly exceed HUD’s allowable
       ratios of 29 and 51 percent, respectively. HUD Handbook 4155.1, paragraph 2-7A, states
       that HUD allows the use of overtime when the borrower has received such income for the
       past two years and it is likely to continue.


                                              47
Case number: 351-4567347

Mortgage amount: $110,625

Date of loan closing: February 17, 2004

Status: Reinstated by mortgagor who retains ownership

Payments before first default reported: Six

Unpaid principal balance: $108,629

Summary:

       American incorrectly calculated the loan-to-value ratio.

Pertinent Details:

       American Incorrectly Calculated the Loan-to-Value Ratio

       Although the borrower was purchasing the property from his employer, American
       calculated the loan-to-value ratio at 97.75 percent, rather than the required 85 percent.
       As a result, the mortgage amount was over-insured by $14,428. HUD Handbook 4155.1,
       paragraph 1-8, states identity-of-interest transactions on principal residences are restricted
       to a maximum loan-to-value ratio of 85 percent. “Identity-of-interest” is defined as a
       sales transaction between parties with family relationships or business relationships.




                                                48
Case number: 351-4381382

Mortgage amount: $98,455

Date of loan closing: March 31, 2003

Status: Default – First Legal Action to Commence Foreclosure

Payments before first default reported: Seven

Claims paid: $7,494.58

Unpaid principal balance: $95,430

Summary:

       American did not (1) retain the case file and (2) properly verify the borrower’s funds to
       close.

Pertinent Details:

       American Did Not Retain the Case File

       American could not locate this case file and no longer employs the underwriter for this
       case. HUD Handbook 4000.2, paragraph 5-8, stipulates that the originating lender must
       retain the entire case file pertaining to loan origination.

       American Failed to Verify the Source of the Borrower’s Funds to Close

       American failed to obtain explanations for nine deposits totaling $3,373. HUD
       Handbook 4155.1, paragraph 2-10B, states that a verification of deposit, along with the
       most recent bank statement, may be used to verify savings and checking accounts. If
       there is a large increase in the account or the account was opened recently, the lender
       must obtain a credible explanation of the source of those funds.

       American did not obtain any bank statements from the borrower and only obtained one
       bank statement from the co-borrower, rather than the required two statements showing
       balances for three months. HUD Handbook 4155.1, paragraph 3-1F, states the
       verification of deposit and most recent bank statements are to be provided. “Most recent”
       means at the time the initial loan application is made. As an alternative to obtaining a
       verification of deposit, the lender may obtain from the borrower original bank statements
       covering the most recent three-month period. Provided the bank statement shows the
       previous month's balance, this requirement is met by obtaining the two most recent,
       consecutive statements.




                                                49
Case number: 351-4555825

Mortgage amount: $64,488

Date of loan closing: January 16, 2004

Status: Delinquent

Payments before first default reported: Seven

Claims paid: $200

Unpaid principal balance: $63,260

Summary:

       American did not (1) retain the case file and (2) properly verify the borrower’s funds to
       close.

Pertinent Details:

       American Did Not Retain the Case File

       American could not locate this case file and no longer employs the underwriter for this
       case. HUD Handbook 4000.2, paragraph 5-8, stipulates that the originating lender must
       retain the entire case file pertaining to loan origination.

       American Failed to Verify the Source of the Borrower’s Funds to Close

       American did not obtain verifications of deposit, but provided two bank statements, dated
       December 16, 2003, and January 7, 2004. The borrower’s account balance was $487 as
       of January 7, 2004, which was not enough to close. In addition, the loan application
       listed the borrower’s father’s account balance of $3,579 but listed the borrower’s account
       number. HUD Handbook 4155.1, paragraph 2-10, states the cash investment in the
       property must equal the difference between the amount of the insured mortgage,
       excluding any upfront MIP, and the total cost to acquire the property including prepaid
       expenses and closing costs. All funds for the borrower's investment in the property must
       be verified and documented.

       American did not adequately identify the source of gift funds. The borrower’s father
       signed a gift letter for $2,300, and American included in the file an undated cashier’s
       check, made out to the borrower. However, there was no documentation confirming that
       the funds were provided by the donor. HUD Handbook 4155-1, paragraph 2-10C, states
       that if the donor purchased a cashier's check, money order, official check, or any other
       type of bank check as a means of transferring the gift funds, the donor must provide a
       withdrawal document or canceled check for the amount of the gift, showing that the
       funds came from the donor's personal account.


                                                50
Case number: 351-4408689

Mortgage amount: $94,613

Date of loan closing: May 30, 2003

Status: Repayment

Payments before first default reported: Eight

Claims paid: $7,455.51

Unpaid principal balance: $91,914

Summary:

       American did not (1) properly verify the borrower’s funds to close and (2) obtain
       required signatures.

Pertinent Details:

       American Failed to Verify the Source of the Borrower’s Funds to Close

       American did not obtain a verification of deposit and provided only one bank statement.
       HUD Handbook 4155.1, paragraph 3-1F, states the verification of deposit and most
       recent bank statements are to be provided. As an alternative to obtaining a verification of
       deposit, the lender may obtain from the borrower original bank statements covering the
       most recent three-month period. Provided the bank statement shows the previous month's
       balance, this requirement is met by obtaining the two most recent, consecutive
       statements.

       American Did Not Obtain Required Signatures

       The underwriter’s signature on the Form HUD-92900-A, “Direct Endorsement Approval
       for a HUD/FHA-Insured Mortgage,” was not his. The underwriter stated that the closing
       officer will sign his name for him if he is not available. The underwriter’s signature
       certifies that the underwriter reviewed all pertinent documents, used due diligence in
       underwriting the loan, and approved the loan as eligible for HUD mortgage insurance
       under the direct endorsement program. HUD Handbook 4155.1, paragraph 3-1, states
       that the application package must contain all documentation supporting the lender’s
       decision to approve the mortgage loan. The uniform residential loan application and the
       addendum, signed and dated by all borrowers and the lender, are required for mortgage
       credit analysis in all transactions.




                                                51
Case number: 351-4487731

Mortgage amount: $92,547

Date of loan closing: August 29, 2003

Status: Repayment

Payments before first default reported: Eight

Unpaid principal balance: $90,314

Summary:

       American did not (1) properly verify the borrower’s funds to close and (2) investigate
       multiple Social Security numbers.

Pertinent Details:

       American Failed to Verify the Source of the Borrower’s Funds to Close

       American failed to obtain explanations for six deposits in two accounts totaling $4,276.
       HUD Handbook 4155.1, paragraph 2-10B, states that a verification of deposit, along with
       the most recent bank statement, may be used to verify savings and checking accounts. If
       there is a large increase in the account or the account was opened recently, the lender
       must obtain a credible explanation of the source of those funds.

       American Did Not Investigate Multiple Social Security Numbers

       The credit report listed four Social Security numbers for the borrower. There was no
       documentation in the file confirming that American tried to resolve the multiple Social
       Security number issue. HUD Handbook 4155.1, paragraph 3-1C, requires the lender to
       resolve any inconsistencies or multiple Social Security numbers for individual borrowers.




                                                52
Case number: 351-4316649

Mortgage amount: $98,223

Date of loan closing: February 6, 2003

Status: First Legal Action to Commence Foreclosure

Payments before first default reported: Nine

Unpaid principal balance: $95,234

Summary:

       American did not evaluate credit history or explain negative credit information.

Pertinent Details:

       American Did Not Evaluate Credit History or Explain Negative Credit Information

       American did not ensure that all credit problems were adequately resolved. The credit
       report listed three delinquent accounts totaling $1,042. There was no evidence that
       American researched the debt. The underwriter stated that American, according to HUD
       regulations, does not require clearing collection accounts. HUD Handbook 4155.1,
       paragraph 2-3, states when delinquent accounts are revealed, the lender must determine
       whether late payments were based on a disregard for financial obligations, an inability to
       manage debt, or factors beyond the control of the borrower.




                                               53
Case number: 351-4525586

Mortgage amount: $142,871

Date of loan closing: October 9, 2003

Status: Partial reinstatement

Payments before first default reported: 10

Claims paid: $200

Unpaid principal balance: $139,717

Summary:

       American did not (1) properly verify the borrower’s funds to close and (2) evaluate credit
       history or explain negative credit information.

Pertinent Details:

       American Failed to Verify the Source of the Borrower’s Funds to Close

       American failed to obtain explanations for six deposits totaling $3,403. HUD Handbook
       4155.1, paragraph 2-10B, states that a verification of deposit, along with the most recent
       bank statement, may be used to verify savings and checking accounts. If there is a large
       increase in the account or the account was opened recently, the lender must obtain a
       credible explanation of the source of those funds.

       American Did Not Evaluate Credit History or Explain Negative Credit Information

       American did not obtain an explanation for derogatory credit. The credit report listed
       two collection accounts totaling $1,031. One account for $729 was not listed on the loan
       application or mortgage credit analysis worksheet, and there is no evidence that
       American researched this debt. HUD Handbook 4155.1, paragraph 2-3, states when
       delinquent accounts are revealed, the lender must document its analysis as to whether the
       late payments were based on a disregard for financial obligations, an inability to manage
       debt, or factors beyond the control of the borrower. While minor derogatory information
       occurring two or more years in the past does not require explanation, major indications of
       derogatory credit (including judgments, collections, and any other recent credit problems)
       require sufficient written explanation from the borrower. The borrower must provide a
       satisfactory explanation for any significant debt that is shown on the credit report but not
       listed on the loan application.




                                               54
Case number: 351-4345198

Mortgage amount: $177,219

Date of loan closing: April 30, 2003

Status: Reinstated by mortgagor who retains ownership

Payments before first default reported: N/A

Unpaid principal balance: $172,203

Summary:

       American did not evaluate credit history or explain negative credit information.

Pertinent Details:

       American Did Not Evaluate Credit History or Explain Negative Credit Information

       American did not ensure that all credit problems were resolved. The credit report listed
       two credit accounts in March and April 2003 that were up to 90 days delinquent, between
       two and six times, and four collection accounts from February 2002 through March 2003,
       all of which were paid off. Although the delinquencies and collection accounts indicated
       the borrowers had a difficult time paying bills on time, there was no explanation for the
       delinquencies. HUD Handbook 4155.1, paragraph 2-3, states when delinquent accounts
       are revealed, the lender must document its analysis as to whether the late payments were
       based on a disregard for financial obligations, an inability to manage debt, or factors
       beyond the control of the borrower. While minor derogatory information occurring two
       or more years in the past does not require explanation, major indications of derogatory
       credit (including judgments, collections, and any other recent credit problems) require
       sufficient written explanation from the borrower.




                                               55
Case number: 351-4471386

Mortgage amount: $79,540

Date of loan closing: August 5, 2003

Status: Repayment

Payments before first default reported: N/A

Unpaid principal balance: $77,791

Summary:

       American did not (1) properly verify the borrower’s funds to close and (2) obtain
       required signatures.

Pertinent Details:

       American Failed to Verify the Source of the Borrower’s Funds to Close

       American failed to obtain an explanation for one deposit totaling $2,200. HUD
       Handbook 4155.1, paragraph 2-10B, states that a verification of deposit, along with the
       most recent bank statement, may be used to verify savings and checking accounts. If
       there is a large increase in the account or the account was opened recently, the lender
       must obtain a credible explanation of the source of those funds.

       American Did Not Obtain Required Signatures

       The underwriter’s signature on the Form HUD-92900-A, “Direct Endorsement Approval
       for a HUD/FHA-Insured Mortgage,” was not his. The underwriter stated that the closing
       officer will sign his name for him if he is not available. The underwriter’s signature
       certifies that the underwriter reviewed all pertinent documents, used due diligence in
       underwriting the loan, and approved the loan as eligible for HUD mortgage insurance
       under the direct endorsement program. HUD Handbook 4155.1, paragraph 3-1, states
       that the application package must contain all documentation supporting the lender’s
       decision to approve the mortgage loan. The uniform residential loan application and the
       addendum, signed and dated by all borrowers and the lender, are required for mortgage
       credit analysis in all transactions.




                                              56
Case number: 351-4477678

Mortgage amount: $96,485

Date of loan closing: August 20, 2003

Status: Reinstated by mortgagor who retains ownership

Payments before first default reported: N/A

Claims paid: $950

Unpaid principal balance: $93,694


Summary:

       American did not properly verify the borrower’s funds to close.

Pertinent Details:

       American Failed to Verify the Source of the Borrower’s Funds to Close

       American did not adequately identify the source of gift funds. It did not determine that
       the borrower’s sister-in-law provided the cash gift of $1,300 to pay off one of the
       borrower’s debts. HUD Handbook 4155-1, paragraph 2-10C, states if the gift funds are
       in the homebuyer’s bank account, the lender must document the transfer of the funds
       from the donor to the homebuyer by obtaining a copy of the canceled check or other
       withdrawal document showing that the withdrawal is from the donor’s account. The
       homebuyer’s deposit slip and bank statement that shows the deposit are also required.
       Regardless of when the gift funds are made available to the homebuyer, the lender must
       be able to determine that the gift funds ultimately were not provided from an
       unacceptable source and were the donor’s own funds.




                                               57
Case number: 351-4608117

Mortgage amount: $93,821

Date of loan closing: June 2, 2004

Status: Repayment

Payments before first default reported: N/A

Unpaid principal balance: $92,499

Summary:

       American did not (1) properly verify borrower’s funds to close and (2) evaluate credit
       history or explain negative credit information.

Pertinent Details:

       American Failed to Verify the Source of the Borrower’s Funds to Close

       American failed to obtain an explanation for five deposits totaling $1,891. HUD
       Handbook 4155.1, paragraph 2-10B, states that a verification of deposit, along with the
       most recent bank statement, may be used to verify savings and checking accounts. If
       there is a large increase in the account or the account was opened recently, the lender
       must obtain a credible explanation of the source of those funds.

       American did not adequately identify the source of gift funds. We noted some
       inconsistencies in the gift process. The gift letter for $2,700 is dated May 25, 2004, but
       the donor’s bank statement shows a withdrawal for that amount on April 30, 2004, and
       again on May 25, 2004. The borrower’s account shows a deposit of $2,700 on May 25,
       2004, but American did not include a copy of a check or deposit slip. HUD Handbook
       4155-1, paragraph 2-10C, states if the gift funds are in the homebuyer’s bank account, the
       lender must document the transfer of the funds from the donor to the homebuyer by
       obtaining a copy of the canceled check or other withdrawal document showing that the
       withdrawal is from the donor’s account. The homebuyer’s deposit slip and bank
       statement that shows the deposit are also required. Regardless of when the gift funds are
       made available to the homebuyer, the lender must be able to determine that the gift funds
       ultimately were not provided from an unacceptable source and were the donor’s own
       funds.

       American Did Not Evaluate Credit History or Explain Negative Credit Information

       American did not obtain an explanation for four inquiries on the credit report from March
       through May 2004. There was no indication that American investigated this issue. HUD
       Handbook 4155.1, paragraph 2-3B, states the borrower must explain in writing all
       inquiries shown on the credit report in the last 90 days.


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Case number: 351-4626705

Mortgage amount: $130,224

Date of loan closing: June 15, 2004

Status: Modification

Payments before first default reported: Three

Unpaid principal balance: $128,390

Summary:

       American did not properly verify the borrower’s funds to close.

Pertinent Details:

       American Failed to Verify the Source of the Borrower’s Funds to Close

       American did not adequately identify the source of gift funds. We noted some
       inconsistencies in the gift process. The borrower’s wife provided a gift of $4,500 via a
       check, dated June 4, 2003. We noted deposits to the wife’s account on June 3, 2004 for
       $1,900 and June 4, 2004, for $2,595. American did not investigate the source of these
       funds. Further, American did not document the borrower’s deposit slip for the $4,500
       gift. HUD Handbook 4155-1, paragraph 2-10C, states if the gift funds are in the
       homebuyer’s bank account, the lender must document the transfer of the funds from the
       donor to the homebuyer by obtaining a copy of the canceled check or other withdrawal
       document showing that the withdrawal is from the donor’s account. The homebuyer’s
       deposit slip and bank statement that shows the deposit are also required. Regardless of
       when the gift funds are made available to the homebuyer, the lender must be able to
       determine that the gift funds ultimately were not provided from an unacceptable source
       and were the donor’s own funds.




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Case number: 441-7188300

Mortgage amount: $83,341

Date of loan closing: May 22, 2003

Status: Repayment

Payments before first default reported: N/A

Unpaid principal balance: $80,740

Summary:

       American did not (1) retain the case file, (2) properly verify the borrower’s funds to
       close, and (3) evaluate credit history or explain negative credit information.

Pertinent Details:

       American Did Not Retain the Case File

       American could not locate this case file. HUD Handbook 4000.2, paragraph 5-8,
       stipulates that the originating lender must retain the entire case file pertaining to loan
       origination.

       American Failed to Verify the Source of the Borrower’s Funds to Close

       American failed to obtain an explanation for one deposit totaling $15,000. HUD
       Handbook 4155.1, paragraph 2-10B, states that a verification of deposit, along with the
       most recent bank statement, may be used to verify savings and checking accounts. If
       there is a large increase in the account or the account was opened recently, the lender
       must obtain a credible explanation of the source of those funds.

       American only obtained one checking account statement inquiry, which was missing two
       pages, rather than the required two statements showing balances for three months. HUD
       Handbook 4155.1, paragraph 3-1F, states the verification of deposit and most recent bank
       statements are to be provided. “Most recent” means at the time the initial loan
       application is made. As an alternative to obtaining a verification of deposit, the lender
       may obtain from the borrower original bank statements covering the most recent three-
       month period. Provided the bank statement shows the previous month’s balance, this
       requirement is met by obtaining the two most recent, consecutive statements.

       American Did Not Evaluate Credit History or Explain Negative Credit Information

       American did not verify the borrower’s rental payment history. The loan application
       shows a monthly rental of $750. We noted inconsistencies in the borrower’s address on
       various documents. The borrower’s driver’s license, earnings statements, and W-2 forms


                                                 60
show an address other than the subject property. However, the loan application and
credit report list the subject property as the borrower’s address. There is no indication
that American investigated this issue or verified the borrower’s rental payment history.
HUD Handbook 4155.1, paragraph 2-3A, requires that the lender include in its loan
origination file or case binder a determination of the borrower’s payment history of
housing obligations through the credit report, directly from the landlord or mortgage
servicer, or through canceled checks covering the most recent 12-month period.




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