oversight

GMAC Mortgage

Published by the Department of Housing and Urban Development, Office of Inspector General on 2009-04-30.

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

                                                                   Issue Date
                                                                            April 30, 2009
                                                                   Audit Report Number
                                                                                2009-BO-1007




TO:        Brian Montgomery, Assistant Secretary for Housing - Federal Housing
              Commissioner, H


FROM:      John Dvorak, Regional Inspector General for Audit, Boston Region, 1AGA


SUBJECT: GMAC Mortgage, Fort Washington, Pennsylvania, Allowed Borrowers to
           Receive Cash Back In Excess of Their Cash Investment at Closing on FHA
           Loans with Secondary Financing from the Connecticut Housing Finance
           Authority


                                    HIGHLIGHTS

 What We Audited and Why


             We reviewed lenders in the State of Connecticut that had Federal Housing
             Administration (FHA) loans with secondary financing from the Connecticut
             Housing Finance Authority as part of our annual audit plan. The objective was to
             determine whether the lenders inappropriately gave borrowers using secondary
             financing from the Connecticut Housing Finance Authority cash back at closing
             in excess of their total cash deposit and other closing costs paid outside of closing.


 What We Found


             In general, the lenders reviewed, with one exception, did not give borrowers using
             secondary financing from the Connecticut Housing Finance Authority cash back
             at closing in excess of their total cash deposit and other costs paid outside of
             closing. However, we did find seven loans originated by GMAC Mortgage in
           which the borrowers received excess cash back at closing totaling $1,471. This
           practice resulted in the U.S. Department of Housing and Urban Development’s
           (HUD) over insuring the loans.


What We Recommend


           We recommend that HUD’s Assistant Secretary for Housing - Federal Housing
           Commissioner require GMAC Mortgage to pay down the principal balances of
           the over insured loans by the amounts of excess cash back paid to the borrowers
           at closing. We also recommend that GMAC Mortgage implement controls in its
           loan closing policies and procedures to ensure that it follows HUD’s requirements
           regarding cash back to the borrower.

           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 GMAC Mortgage officials draft finding details throughout the
           course of the audit. We also provided GMAC Mortgage officials with a draft
           audit report on April 15, 2009. We discussed the draft report at an exit
           conference on April 23, 2009, and received their written comments on April 27,
           2009. GMAC Mortgage generally agreed with the facts, conclusions, and
           recommendations in this report.

           The complete text of the auditee’s response, along with our evaluation of that
           response, can be found in appendix B of this report.




                                            2
                           TABLE OF CONTENTS

Background and Objective                                                            4

Results of Audit
      Finding: Borrowers Received Cash Back In Excess of Their Cash Investment at   5
      Closing on FHA Loans

Scope and Methodology                                                               7

Internal Controls                                                                   8

Appendixes
   A. Schedule of Questioned Costs                                                  10
   B. Auditee Comments and OIG’s Evaluation                                         11
   C. Schedule of Loans with Excess Cash Back to Borrowers                          13




                                           3
                           BACKGROUND AND OBJECTIVE

The National Housing Act, as amended, established the Federal Housing Administration (FHA),
an organizational unit within the U.S. Department of Housing and Urban Development (HUD).
FHA1 provides insurance to private lenders against losses on mortgages financing homes. The
basic single-family mortgage insurance program is authorized under Title II, Section 203(b) of
the National Housing Act and is governed by regulations in 24 CFR [Code of Federal
Regulations] Part 203. The single-family programs are generally limited to dwellings with one-
to four-family units. HUD handbooks and mortgagee letters provide detailed processing
instructions and advise the mortgage industry of major changes to FHA programs and
procedures.

During a recent audit of two lender branch offices of Countrywide Bank, FSB, we found that the
lender allowed some borrowers using secondary financing from the Connecticut Housing
Finance Authority, acting as an instrumentality of government, to incorrectly receive cash back
at closing in excess of their total cash deposit (Office of Inspector General (OIG) Audit Report
Number 2008-BO-1007). Therefore, these borrowers had no financial investment in the
property, and the loans were over insured. Borrowers may use secondary financing to finance
the down payment and all of their closing costs. Secondary financing from the Connecticut
Housing Finance Authority can only be used in conjunction with a first mortgage from the
Connecticut Housing Finance Authority (assigned to the Connecticut Housing Finance Authority
from the various lenders participating in the program), which carries a below-market interest
rate.

According to our analysis, loans with secondary financing from federal, state, and local
government agencies, as well as nonprofit agencies considered instrumentalities of government,
had a higher early payment default percentage than loans without this type of secondary
financing. This analysis included loans originated in the state of Connecticut with beginning
amortization dates between January 1, 2006, and July 31, 2008. The percentage of originations
with the secondary financing that had first defaults (i.e., became 90 days delinquent) during this
period was 6.43 percent. The percentage of originations without the secondary financing that
had first defaults during this period was 4.17 percent.

The audit objective was to determine whether the lenders acted in a prudent manner and
complied with HUD regulations, procedures, and instructions in the origination of FHA-insured
single-family mortgages. Specifically, we wanted to determine whether lenders allowed
borrowers using secondary financing from the Connecticut Housing Finance Authority to receive
cash back at closing in excess of their total cash deposit and other costs paid outside of closing.




1
    The acronyms HUD and FHA are often used interchangeably.


                                                      4
                                   RESULTS OF AUDIT

Finding: Borrowers Received Cash Back In Excess of Their Cash
Investment at Closing on FHA Loans
We found seven loans in which the borrowers received excess cash back from GMAC Mortgage
at closing totaling $1,471. Federal, state, and local government agencies, as well as nonprofit
agencies considered instrumentalities of government, may provide secondary financing for the
borrower’s entire cash investment. However, FHA-insured first mortgage rules prohibit excess
cash back to the borrower. The borrowers received excess cash back because GMAC Mortgage
did not ensure that FHA loan closing guidelines governing the use of secondary financing from
an agency acting as an instrumentality of government were followed. Borrowers receiving this
excess cash resulted in HUD over insuring the loans.



    Borrowers Received Cash Back
    In Excess of Their Cash
    Investment

                Federal, state, and local government agencies, as well as nonprofit agencies
                considered instrumentalities of government, may provide secondary financing for
                the borrower’s entire cash investment in the FHA-insured property so long as it does
                not result in excess cash back to the borrower.2 From our sample of FHA loans with
                secondary financing from Connecticut Housing Finance Authority, we determined
                that GMAC Mortgage originated loans in which the borrowers received cash back at
                closing in excess of their earnest money deposit or other upfront costs paid outside
                of closing. Based on the results of the review, we expanded our scope to review all
                loans originated by GMAC Mortgage during our audit period that had secondary
                financing from Connecticut Housing Finance Authority. GMAC Mortgage
                originated 566 of 3,315 (17 percent) loans with secondary financing from
                Connecticut Housing Finance Authority, more than any other lender, representing
                the greatest risk to the FHA insurance fund.

                Our review identified seven instances in which the HUD-1 settlement statements
                indicated that the borrowers received cash back at closing in excess of their earnest
                money deposit and/or other upfront costs paid outside of closing. These borrowers
                had received down payment assistance from the Connecticut Housing Finance
                Authority, which is considered an instrumentality of government. As a result, these
                borrowers had no financial investment in the property, and the loans were over
                insured. The total cash incorrectly received by the seven borrowers totaled $1,471


2
 HUD Handbook 4155.1, REV-5, “Mortgage Credit Analysis for Mortgage Insurance on One- to Four-Unit
Mortgage Loans,” chapter 1, section 5.


                                                    5
             (see appendix C). This condition occurred because GMAC Mortgage did not ensure
             that FHA loan closing guidelines were followed.



Conclusion


             Borrowers incorrectly received cash back at closing, resulting in over insured FHA
             loans. This condition occurred because the lender did not follow prudent FHA loan
             closing responsibilities. Although GMAC Mortgage did not follow proper FHA
             loan closing guidelines, there was no indication of an egregious pattern of
             noncompliance. Nonetheless, HUD over insured the seven loans by a total of
             $1,471, representing increased risk to the FHA insurance fund, and GMAC
             Mortgage needs to be more vigilant with its loan closing responsibilites.


Recommendations



             We recommend that HUD’s Assistant Secretary for Housing - Federal Housing
             Commissioner require GMAC Mortgage

             1A.    To pay down the principal balances of the over insured loans by the amount
                    of excess cash back paid to the borrowers at closing totaling $1,471 (see
                    appendix C). If HUD has paid a claim on any of these loans, the lender
                    should remit the payment to HUD.

             1B.    To implement controls in its loan closing policies and procedures to ensure
                    that it follows HUD’s requirements regarding cash back to the borrower.




                                              6
                          SCOPE AND METHODOLOGY

Our audit generally covered the period January 1, 2006, through July 31, 2008. We conducted our
audit work from September 2008 through March 2009. We primarily carried out our audit work at
the HUD field office in Hartford, Connecticut. We focused the audit on the lenders’ loan
origination, underwriting, and quality control operations.

To achieve our objectives, we identified, obtained, and reviewed relevant rules, regulations, and
guidance pertaining to the origination of single-family mortgages, including the Code of Federal
Regulations, HUD handbooks, mortgagee letters, and the United States Code. We also obtained
and analyzed critical documents from the loan origination files maintained by selected lenders and
HUD. We interviewed appropriate lenders, the Connecticut Housing Finance Authority, and HUD
officials as necessary. In addition, we obtained an understanding of controls significant to the audit
objective and considered whether the lender had designed specific control procedures and placed
them into operation.

We relied on information from systems used by HUD and the Connecticut Housing Finance
Authority. Other evidence supported the information obtained; therefore, we determined that the
data were sufficiently reliable for our purposes. The corroborating evidence independently supports
our conclusions.

We initially selected during our survey a statistical sample of 162 FHA-insured loans from various
lenders that had secondary financing from the Connecticut Housing Finance Authority, and were
originated during our audit period. There were 3,315 FHA loans originated during our audit period
that had secondary financing from Connecticut Housing Finance Authority. We obtained the
sample based on a confidence level of 95 percent, a precision range of 10 percent, and an
anticipated error rate of 11 percent. Based on the results of the survey, we then selected 100 percent
of the loans originated by GMAC Mortgage (566 loans) during the audit verification that had
secondary financing from the Connecticut Housing Finance Authority. The results of our detailed
testing only relate to the loans reviewed. This sampling method allowed us to focus on loans that
had a greater inherent risk to the FHA insurance fund and/or of noncompliance or abuse.

We conducted the audit in accordance with generally accepted government auditing standards.
Those standards require that we plan and perform the audit to obtain sufficient, appropriate
evidence to provide a reasonable basis for our findings and conclusions based on our audit
objective. We believe that the evidence obtained provides a reasonable basis for our findings
and conclusions based on our audit objective.




                                                  7
                              INTERNAL CONTROLS

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

   •   Program operations,
   •   Relevance and reliability of information,
   •   Compliance with applicable laws and regulations, and
   •   Safeguarding of assets and resources.

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




 Relevant Internal Controls


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

              •       Controls over program operations - Policies and procedures that
                      management has implemented to reasonably ensure that the HUD single-
                      family insurance programs meet their objectives and that unintended actions
                      do not result.
              •       Controls over the validity and reliability of data - Policies and procedures
                      that management has implemented to reasonably ensure that valid and
                      reliable data (including computer-processed data) are obtained, maintained,
                      and fairly disclosed in reports and HUD computer systems.
              •       Controls over compliance with laws and regulations - Policies and
                      procedures that management has implemented to reasonably ensure that the
                      implementation of the HUD single-family programs is consistent with laws,
                      regulations, and provisions of contracts or grant agreements.

              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.




                                                8
Significant Weaknesses


           GMAC Mortgage allowed borrowers with secondary financing from the
           Connecticut Housing Finance Authority to receive cash back in excess of their own
           cash investment in seven cases. However, we do not believe this condition to be a
           significant control weakness because there was no indication of an egregious pattern
           of noncompliance.




                                            9
                                   APPENDIXES

Appendix A

                SCHEDULE OF QUESTIONED COSTS

                           Recommendation            Ineligible 1/
                                  number
                                         1A               $1,471



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.




                                            10
Appendix B

        AUDITEE COMMENTS AND OIG’S EVALUATION


Ref to OIG Evaluation   Auditee Comments




Comment 1




Comment 2




Comment 3




                         11
OIG Evaluation of Auditee Comments

Comment 1   We agree that the errors identified during our audit occurred at the time the lender
            closed the loans and it does not necessarily indicate underwriting deficiencies, and
            made changes in the report to say that the errors occurred during the loan closing
            process.

Comment 2   The use of a pre-funding checklist that includes a review to ensure that a borrower
            does not receive excess cash back at closing is appropriate. However, HUD has
            to review the lender’s implementation in regards to recommendation 1B.

Comment 3   We acknowledge the lender’s action to initiate the curtailments on the loans in
            question. HUD will have to verify the curtailments.




                                             12
Appendix C

                                             SCHEDULE OF LOANS WITH EXCESS
                                                CASH BACK TO BORROWERS


                                                                                                                                  Adjustments for
                                                                                                    Hazard/flood                  items unpaid by
                                        Cash paid to   Deposit or                        Credit      insurance        Home        seller/aggregate
                           FHA case     borrower at      earnest      Appraisal          report      premium        inspection    escrow account      Excess cash back to
#        Lender             number        closing        money         (POC)3            (POC)         (POC)          (POC)          adjustments          borrower
1     GMAC Mortgage       061-2923174    $ 3,346.15    $ (2,000.00)   $ (350.00)        $ (48.00)     $ (509.00)              -                   -              $ 439.15
2     GMAC Mortgage       061-2927334    $ 436.35                 -   $ (350.00)        $ (48.00)               -             -                   -              $ 38.35
3     GMAC Mortgage       061-2941546    $ 1,051.68               -   $ (250.00)                -     $ (368.00)              -         $ (92.02)                $ 341.66
4     GMAC Mortgage       061-2954300    $ 2,036.00    $ (1,000.00)   $ (400.00)                -               -    $ (250.00)                   -              $ 386.00
5     GMAC Mortgage       061-2970066    $ 1,481.02    $ (1,000.00)   $ (375.00)        $ (23.00)               -             -                   -              $ 83.02
6     GMAC Mortgage       061-3028186    $ 430.81                 -   $ (400.00)                -               -             -                   -              $ 30.81
7     GMAC Mortgage       061-3194032    $ 3,488.86    $ (500.00)     $ (400.00)                -     $ (501.00)              -        $ (1,935.86)              $ 152.00
                                                                                                                         Total excess cash back:               $ 1,470.99




3
    POC – paid outside of closing.


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