oversight

Actions under Program Fraud Civil Remedies Act

Published by the Department of Housing and Urban Development, Office of Inspector General on 2008-09-03.

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

                                                      U.S. Department of Housing and Urban Development
                                                                    Office of Inspector General
                                                                                                 Region IX
                                                                         611 West Sixth Street, Suite 1160
                                                                       Los Angeles, California 90017-3101
                                                                                            (213) 894-8016
                                                                                      Fax (213) 894-8115


                                                                            AUDIT REPORT
                                                                         MEMORANDUM NO.
                                                                                   2008-LA-1801

September 3, 2008


MEMORANDUM FOR:              Dane M. Narode, Acting Associate General Counsel for Program
                             Enforcement, CEP


FROM:                        Joan S. Hobbs, Regional Inspector General for Audit, 9DGA

SUBJECT:                     Actions under Program Fraud Civil Remedies Act
                             First Source Financial USA
                             Henderson, Nevada


                                     INTRODUCTION

We completed a review of First Source Financial USA (First Source), a former nonsupervised
loan correspondent approved to originate Federal Housing Administration (FHA)-insured loans.
We initiated our review based on First Source’s large number of loan defaults and claims. The
review objective was to determine whether First Source originated FHA loans and had a quality
control plan that complied with U.S. Department of Housing and Urban Development (HUD)
rules and regulations.

                              METHODOLOGY AND SCOPE

We performed file reviews of 20 loans, amounting to more than $2.5 million that were in claim
status. Our review included but was not limited to interviewing borrowers, employers, First
Source independent contractor loan officers, alternate credit sources, and escrow company
employees. We also reviewed HUD’s FHA case binders and the single-family mortgage
insurance program’s loan origination procedures.

Our review covered the period January 2001 through April 2004. We conducted the review at
the main office of First Source in Henderson, Nevada, from May through October 2004.
                                       BACKGROUND

First Source was incorporated in February 1998 and received HUD approval to originate FHA
loans as a nonsupervised loan correspondent on January 10, 2001. On October 13, 2004, First
Source requested that HUD terminate its authority to originate FHA-insured loans and cited
“…limited loan amounts in our area as well as additional expenses associated with originating
Federal Housing Administration loans.” Although HUD’s Office of Inspector General requested
that First Source not be terminated until conclusion of this audit and resolution of an audit
performed by the Denver Office of Audit, HUD approved the termination on December 15,
2004.

                                   RESULTS OF REVIEW

Our review determined that First Source

   1. Allowed nonemployees and unapproved branches to originate and process FHA loans.

   2. Originated and processed FHA loans with false information and known
      misrepresentations.

   3. Allowed questionable lending practices by collecting unearned fees.

We recommended civil money penalties, debarments, and repayment of $159,663 in losses HUD
incurred on six of the loans. Based on our review, HUD’s Office of General Counsel initiated
administrative sanctions under the Program Fraud Civil Remedies Act of 1986. To date, this
action has resulted in the following:

   1. A default judgment against First Source’s president and chief executive officer, Joseph
      Giuliano, and a total penalty of $508,694, assessed by the Office of Administrative Law
      Judges.

   2. A default judgment against independent contractor loan officer, Elizabeth Cortes, for
      $126,804.

   3. A settlement with independent contractor loan officer, Miguel Vega, for $200,000.

   4. A settlement with independent contractor loan officer, Oz Carmi for $80,000

   5. A settlement with chief financial officer, Gary Stanco, for $60,000.

As there are other sanctions that remain in process at this time. We would like to have these
amounts recorded but leave the recommendation open for one year to post the remaining
sanctions.




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                               RECOMMENDATION

We recommend that HUD’s Associate General Counsel for Program Enforcement

1A. Post $635,498 in judgments and $340,000 in settlements to HUD’s Audit Resolution
    and Corrective Actions Tracking System.




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                               Schedule of Ineligible Costs
               Recommendation number                               Amount

                          1A                                       $975,498


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.

If you or your staff has any questions, please contact Helen Sparks, Assistant Regional Inspector
General for Audit, at (415) 489-6697 or me at (213) 894-8016.




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