oversight

HUD's Oversight of FHA Lenders Underwriting of Home Equity Conversion Mortgages Was Generally Adequate

Published by the Department of Housing and Urban Development, Office of Inspector General on 2009-09-30.

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

                                                                                   Issue Date
                                                                                            September 30, 2009
                                                                                   Audit Report Number:
                                                                                            2009-CH-0003




TO:             Phillip A. Murray, Deputy Assistant Secretary for Single Family Housing, HU


FROM:           Heath Wolfe, Regional Inspector General for Audit, 5AGA

SUBJECT         HUD’s Oversight of FHA Lenders Underwriting of Home Equity Conversion
                  Mortgages Was Generally Adequate

                                              HIGHLIGHTS

    What We Audited and Why

                  We audited the U.S. Department of Housing and Urban Development’s (HUD)
                  oversight of the Federal Housing Administration (FHA)-insured home equity
                  conversion mortgages (HECM) program. We initiated the audit as part of the
                  activities in our 2008 annual audit plan. Our audit objective was to determine
                  whether HUD had adequate oversight of the underwriting of HECM loans. This
                  is the second of two audit reports regarding HUD’s oversight of the program.

    What We Found

                  HUD’s Processing and Underwriting and Quality Assurance Divisions generally
                  performed adequate reviews of loans insured under the program with the
                  exception of four loans reviewed. For the four loans, HUD did not identify errors
                  fully address underwriting deficiencies. Further, HUD did not maintain
                  documentation to fully determine whether the appropriate parties were checked
                  against the General Service Administration’s excluded parties’ list system.1 As a
                  result, HUD could benefit from improvements to its review processes to increase

1
  General Service Administration’s excluded parties list is a system that identifies those parties excluded from
receiving federal contracts, certain subcontracts, and certain types of federal financial and nonfinancial assistance
and benefits.
           its assurance that lenders complied with the underwriting requirements for
           program loans.

What We Recommend

           We recommend that the Deputy Assistant Secretary for Single Family Housing
           require the Office of Single Family Housing to require the lender to reduce
           payments to the borrower or seek reimbursement for case number 431-4214046
           for the $11,742 in excess of the borrower’s initial principal limit and provide
           documentation for case number 105-2935187 with maximum claim amounts
           totaling $70,000, showing that the borrower’s unacceptable rating has been
           resolved. If it is determined that the rating has not been resolved, the Office of
           Single Family Housing should seek indemnification for the life of the loan. The
           estimated risk to HUD for case number 105-2935187 is $37,294.

           We also recommend that the Deputy Assistant Secretary for Single Family
           Housing require the Office of Single Family Housing to improve its existing
           procedures and controls for performing postendorsement technical and quality
           assurance reviews of program loans, to provide reasonable assurance that
           underwriting deficiencies will be detected, and require the lenders to reimburse
           the borrowers the $650 in fees charged for case numbers 412-5484306 and 412-
           5431355 that were deemed not customary and reasonable.

           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 our discussion draft audit report to HUD’s staff during the audit.
           We conducted an exit conference with HUD’s Office of Single Family Housing
           on September 17, 2009.

           We asked HUD’s Deputy Assistant Secretary for Single Family Housing to
           provide written comments on our discussion draft audit report by noon on
           September 29, 2009. As of 10:00 a.m. eastern time on September 30, 2009,
           HUD’s Office of Single Family Housing had not provided any written comments
           to our discussion draft audit report.




                                            2
                           TABLE OF CONTENTS

Background and Objective                                                 4

Results of Audit
      Finding: HUD Generally Performed Adequate Reviews of HECM Loans   6

Scope and Methodology                                                   11

Internal Controls                                                       13

Appendixes
   A. Schedule of Questioned Costs                                      15
   B. Federal Requirements                                              16




                                        3
                      BACKGROUND AND OBJECTIVE

The Housing and Community Development Act of 1987 (1987 Act) established a federal
mortgage insurance program (Section 255 of the National Housing Act) to insure home equity
conversion mortgages (HECM) or reverse mortgages. Pursuant to the 1987 Act, the U.S.
Department of Housing and Urban Development’s (HUD) Federal Housing Administration
(FHA) was authorized to insure 2,500 HECM loans and allocate them among the 10 regional
offices in proportion to each region’s share of the nation’s elderly homeowners. In 1990, the
Omnibus Budget Reconciliation Act increased HUD’s insurance authority to 25,000 mortgages
and terminated the reservation system, allowing all FHA-approved lenders to participate in the
HECM program.

The purpose of the program is to enable elderly homeowners to stay in their homes while using
some of their accumulated equity. The program allows borrowers that are 62 years of age or
older to obtain an insured reverse mortgage (a mortgage that converts equity into income).
Because elderly homeowners can be vulnerable to fraudulent practices, the program requires that
participants receive counseling from a HUD-approved mortgage counseling agency before
applying for a HECM loan. FHA insures the HECM loans to protect lenders against a loss if
amounts withdrawn under the loan exceed the value of the property when the property is sold.

HUD’s Office of Single Family Housing provides guidance for and oversight of the lenders and
loan correspondents that participate in its mortgage insurance programs. The two main oversight
authorities are HUD’s Office of Lender Activities and Program Compliance’s Quality Assurance
and Homeownership Center’s Processing and Underwriting Divisions.

The Office of Lender Activities and Program Compliance’s Quality Assurance Division is
responsible for monitoring FHA-approved lenders. In performing its monitoring duties, the
Quality Assurance Division is to assess lenders’ performance, internal controls, and compliance
with HUD’s origination and servicing requirements through on-site reviews and off-site
evaluations and analyses. The internal quality control function is intended to ensure that reviews
are conducted and deficiencies are identified consistently and an accurate tracking database of
reviews is maintained.

HUD’s Homeownership Centers located in Philadelphia, Pennsylvania; Denver, Colorado; Santa
Ana, California; and Atlanta, Georgia, originate FHA single-family mortgage insurance and
oversee the selling of HUD homes in their respective jurisdictions. Within the Homeownership
Centers is the Processing and Underwriting Division. The Processing and Underwriting Division
performs postendorsement technical reviews to ensure that lenders understand and comply with
HUD’s requirements. Reviews of selected mortgages after endorsement are performed to
execute this function. The process includes a review of the appraisal report, mortgage credit
analysis, underwriting decisions, and the closing documents from the mortgage case
endorsement file.

Our audit objective was to determine whether HUD had adequate oversight of the underwriting
of HECM loans. This is the second of two internal audit reports regarding the HECM program


                                                4
(see report number 2008-CH-0001, issued on September 29, 2008) and focuses on HUD’s
quality assurance and postendorsement technical reviews of HECM loans.




                                            5
                                RESULTS OF AUDIT

Finding: HUD Generally Performed Adequate Reviews of HECM
                              Loans
HUD’s Processing and Underwriting and Quality Assurance Divisions generally performed
adequate reviews of HECM loans with the exception of four loans. For the four loans, HUD did
not identify errors or fully address deficiencies in FHA lenders’ underwriting of HECM loans.
Further, HUD did not maintain documentation to determine whether the appropriate parties were
checked against the General Services Administration’s excluded parties list system. The
problems occurred because of the inconsistent and/or vague review processes and procedures
used in performing reviews of HECM loans. As a result, HUD could benefit from improvements
to its existing review processes to increase its assurance that lenders complied with the
underwriting requirements for HECM loans.


 HUD’s Post Endorsement
 Technical Review Process Could
 Benefit from Improvement

              We selected 38 of 10,682 HECM loans in which HUD’s Processing and
              Underwriting Division conducted a postendorsement technical review from
              October 1, 2006, through September 30, 2008. Of the 38 loans, we identified an
              underwriting deficiency in one loan that was not identified during the
              postendorsement technical review and another loan in which a deficiency as
              identified during the review but the loan’s file did not contain sufficient
              documentation to determine whether the deficiency was resolved.

              For case number 431-4214046, the lender used the incorrect interest rate in
              determining the initial principal limit for the HECM loan. The lender used the
              interest rate in an expired lock-in agreement instead of determining whether there
              were any adjustments to the rate. This error resulted in the lender’s misapplying
              the interest rate of 6.09 percent rather than the 6.61 percent interest rate that was
              in effect at the time the loan closed. The misapplication of the interest rate added
              $11,742 to the borrower’s net principal limit amount.

              According to HUD Handbook 4235.1, Rev-1, the 10 year treasury rate is the
              index which must be used to establish the expected rated and the lender must use
              the indices in effect on the date of closing (see Appendix C). Additionally,
              according to Mortgagee Letter 2003-16, FHA allows lenders to set the expected
              interest rate for HECMs at the time the loan application is signed by the borrower
              rather than on the date of closing. However, the interest rates lock-in provision
              may be offered on each HECM application for 60 days (see appendix C).



                                                6
                    For case number 105-2935187, HUD’s postendorsement technical review
                    identified that the borrower received an unacceptable rating because of a Credit
                    Alert Interactive Voice Response System2 claim in the amount of $8,079 that
                    remained outstanding at closing. According to HUD Handbook 4235.1, Rev-1, if
                    the system indicates that the borrower is presently delinquent or has had a claim
                    paid within the previous three years on a loan made or insured by HUD on the
                    borrower’s behalf, the borrower is not eligible (see appendix B). Although there
                    are exceptions to this requirement, there was no additional documentation in the
                    loan’s file to determine whether HUD granted the borrower an exception.
                    According to HUD’s quality assurance division’s monitoring guide, the reviewer
                    should look for unusual credits, disbursements/delinquent loans being paid off,
                    undisclosed liens or related parties (see appendix B). Further, we contacted
                    HUD’s Financial Operations Center3 and determined that the borrower’s debt was
                    outstanding as of June 30, 2009.

                    In performing postendorsement technical reviews, the Santa Ana and Denver
                    homeownership centers used two different review sheets, while the Philadelphia
                    and Atlanta homeownership centers only used one. However, all of the six sheets
                    varied and only contained 15 items in common. Five of the six review sheets
                    were checklists, and the remaining sheet outlined applicable criteria, and
                    procedures.

                    Although our audit only identified two underwriting deficiencies in the 38 loan
                    files reviewed, consistency with its review process would increase HUD’s
                    assurance that lenders complied with its underwriting requirements for HECM
                    loans. For example, the review sheet that was used by the Santa Ana
                    Homeownership Center for reviewing the one loan with the interest rate
                    deficiency, as previously mentioned, did not indicate that the reviewer should
                    review and/or determine the loan’s expected interest rate. Therefore, if the
                    reviewer was only following the review sheet checklist items, this deficiency
                    would not have been captured to enable HUD to properly identify and implement
                    corrective actions. However, if the reviewer had used the other version of the
                    review sheet, also used by the Santa Ana Homeownership Center, it would have
                    guided the reviewer to determine whether the expected interest rate had been
                    correctly identified.

                    According to HUD’s Single Family Housing Director of Home Mortgage
                    Insurance, HUD was aware that there were differences among the review sheets,
                    and it expected to issue guidance regarding the postendorsement technical reviews
                    and implement a consolidated review sheet during the first quarter of fiscal year
                    2010.
2
  The Credit Alert Interactive Voice Response System was developed by HUD in 1987 as a shared database of defaulted federal
debtors, and it enables processers of applications for federal credit benefit to identify individuals who are in default or have
claims paid on direct or guaranteed federal loans or are delinquent or have other debts owed to federal agencies.
3
  The Financial Operations Center is responsible for the following Title I activities: (1) new loan manifest and loan transfer; (2)
processing, billing, and collecting insurance premiums; (3) examination and payment of Title I claims for loss; and (4)
nationwide asset recovery of Title I debts.


                                                                 7
HUD Could Benefit from
Improvements to the Quality
Assurance Review Process

           We selected 37 of 5,924 HECM loans in which HUD’s Quality Assurance
           Division conducted a quality assurance review from October 1, 2006, through
           September 30, 2008. Of the 37 loans reviewed, two loan files contained
           underwriting deficiencies that were not identified during the quality assurance
           reviews. The files for case numbers 412-5484306 and 412-5431355 identified
           that the lenders included fees in the borrowers’ closing costs that were not
           reasonable and/or customary. Both borrowers were charged $75 for negative
           amortization endorsement and $250 for reverse mortgage endorsement fees.
           According to 24 Code of Federal Regulations 203.27(a)(3), fees or discounts
           should be reasonable and customary amounts but not more than the amount
           actually paid by the mortgagee. Additionally, HUD’s Mortgagee Letter 1993-22,
           states that the HUD field office manager may authorize or reject any other charge,
           or amount of any charge, based on what is reasonable and customary in the area.

           We requested a determination from HUD’s Office of Single Family Housing
           whether the fees were reasonable and customary. HUD informed us on
           September 24, 2009, that the fees were not reasonable and customary.

           HUD’s quality assurance reviews did not always contain documentation to fully
           determine whether the reviewers determined that appropriate parties were
           checked against the excluded parties list system. HUD’s quality assurance review
           checklists used during the review only allowed for checkmarks indicating whether
           the borrowers were checked in the system. However, they did not include all
           parties involved in the origination and/or sponsoring of the loans as necessary
           review items. Therefore, it did not provide confirmation that all related parties
           were also reviewed against the system. According to HUD Handbook 4235.1,
           Revision 1, a borrower suspended or debarred, or otherwise excluded from
           participation in HUD’s programs is not eligible for a HECM. Further, if the name
           of any party to the transaction appears on the list, the application is not eligible for
           mortgage insurance (see appendix B).

           According to HUD’s Office of Single Family Housing, the quality assurance
           reviewer evaluated all parties involved in the originating and underwriting process
           against the system; however, documentation was not required to be maintained to
           support the evaluation. Although HUD’s assertion may be true, the review sheet
           only specifically indicated that the borrower(s) was verified in the system; it did
           not provide assurance that the reviewers performed checks of all parties involved
           in the loan process since this requirement was not included on the review
           checklist. Additionally, according to HUD’s quality assurance division desk
           guide, clear and accurate data must be kept in the lender review file for referral,




                                              8
                 appeal, audit, and staff evaluation purposes. The accuracy and timeliness of the
                 data is critical for reporting, analyses, and highlighting trends (see appendix B).

                 Of HUD’s four Homeownership Centers, we determined that the quality
                 assurance reviewers from the Atlanta Homeownership Center checked the
                 excluded parties’ list system for all parties involved in the HECM loan process
                 when performing its quality assurance reviews. The results of its excluded parties
                 list searches were maintained in the loans’ review files although according to
                 HUD, it was not required.

                 We attempted to verify and/or reverify that all parties involved in the origination
                 or sponsoring of the 37 loans were not excluded from participating in federal
                 programs. However, when we attempted to review the names of the lenders,
                 borrowers, loan processors, etc., against the excluded parties list system, some of
                 the names identified on the loan documents were not recognizable. Therefore, we
                 attempted to contact the 30 lenders and/or loan correspondents that sponsored the
                 37 loans to identify the names of its employees and other related parties.
                 However, of the 30 lenders and/or loan correspondents, we were unable to contact
                 two. The 28 lenders and/or loan correspondents that were contacted originated
                 and/or sponsored 35 of the 37 loans. We verified that the parties involved were
                 not excluded from participating in federal programs. However, we had been
                 unable to resolve the remaining two loans as of July 23, 2009.

    Conclusion

                 HUD could benefit from improvements to its postendorsement technical and
                 quality assurance reviews of HECM loans. The inconsistencies in the review
                 sheets used in the postendorsement technical review process hindered HUD’s
                 monitoring of lenders’ compliance with the underwriting requirements for HECM
                 loans.

                 Further, HUD’s quality assurance division desk and/or monitoring guide4 did not
                 provide clear guidance regarding the eligibility of fees in reviewing HECM loans;
                 therefore, the reviewers may have overlooked certain fees due to the uncertainty
                 of the closing costs charged to borrowers. The desk guide also stated that clear
                 and accurate data must be kept in the lender review file for referral, appeal, audit,
                 and staff evaluation purposes. However, HUD’s four Homeownership Centers
                 were not consistent regarding the documentation maintained in their files to fully
                 support the quality assurance reviews.

                 As a result, HUD could benefit from improvements to its review processes to
                 increase its assurance that lenders complied with the underwriting requirements
                 for HECM loans. It could also benefit from improvements to the monitoring and

4
 The Quality Assurance Division’s desk and monitoring guides are procedural manuals used in the performance of a
quality assurance review.


                                                       9
          oversight of lenders’ compliance with the underwriting requirements for HECM
          loans.

Recommendations

          We recommend that the Deputy Assistant Secretary for Single Family Housing
          require the Office of Single Family Housing to

          1A.     Require the lender to reduce payments to the borrower or seek
                  reimbursement for case number 431-4214046 for the $11,742 that was in
                  excess to the borrower’s initial principal limit.

          1B.     Provide documentation for case number 105-2935187 with maximum
                  claim amounts totaling $70,000 showing that the borrower’s unacceptable
                  rating was resolved. If it is determined that the rating had not been
                  resolved, the Office of Single Family Housing should seek
                  indemnification for the life of the loan. The estimated risk to HUD is
                  $37,294 based on the borrower’s line of credit drawdown and the loan’s
                  settlement costs.

          1C.     Implement adequate procedures and controls for performing post
                  endorsement technical reviews of HECM loans to provide reasonable
                  assurance that underwriting deficiencies would be detected. Such
                  procedures should include but are not limited to developing a consistent
                  post endorsement technical review sheet that addresses the relevant
                  requirements for the HECM program and ensuring that identified
                  deficiencies are adequately resolved.

          1D.     Require the lenders to reimburse the borrowers the applicable amount(s)
                  for the fees deemed not reasonable or customary totaling $650 charged for
                  case numbers 412-5484306 and 412-5431355.

          1E.     Improve its existing procedures and controls for performing quality
                  assurance reviews. These procedures and controls should include but are
                  not limited to providing adequate supervisory monitoring and oversight of
                  the quality assurance reviews and guidance and training to the staff in
                  detecting improper fees charged to borrowers.




                                           10
                         SCOPE AND METHODOLOGY

Our audit work was performed at HUD’s headquarters in Washington, DC, the Chicago regional
office, and the Detroit and Columbus field offices. The audit covered the period October 1,
2006, through September 30, 2008. We expanded the audit as necessary.

To accomplish our audit objectives, we researched and reviewed applicable HUD handbooks,
regulations, mortgagee letters, and other reports and policies related to the program. We also
conducted interviews with HUD’s staff, loan correspondents, and sponsors.

Post Endorsement Technical Review:
The sample for the postendorsement technical review was an unrestricted attribute sample to
determine whether the sampled mortgages met HUD’s requirements for the program. We used a
50 percent expected error rate with a precision of 10 percent desired with a 90 percent
confidence in the sample. The universe size was 10,182, of which 68 was the number of FHA
casebinders initially selected for review.

However, since our detailed review of the post endorsement technical reviews’ universe
identified a low number of errors, we concluded the review after evaluating 38 of the 68 sampled
cases that were originally selected in accordance with our statistical sampling plan. Based on our
revised sample, we are 95 percent confident that the number of problematic loans is at least 97
(less than 1 percent) of the 10,182 postendorsement technical reviews performed during our audit
period, based on the lower limit. While we identified some errors, the statistical estimate
indicates that HUD’s controls were generally in place, regarding the postendorsement technical
review process, to detect widespread programmatic abuse in the program.

In performing our review of the postendorsement technical reviews, we

    •   Reviewed the checklists maintained in FHA casebinders used by HUD’s
        Homeownership Centers and the criteria applicable to the program.
    •   Compared the review checklists among HUD’s Homeownership Centers and noted any
        variations.
    •   Performed our own analysis of the documentation maintained in the FHA casebinders to
        support that the borrowers met eligibility requirements and obtained counseling from
        FHA-approved counselors, accuracy of the calculations, etc.
Compared our results with the reviewer’s notations on the respective checklists and determined
whether the items identified were complete if applicable.

Quality Assurance Division Review:
The sample for the quality assurance review was an unrestricted attribute sample to determine
whether the sampled mortgages met HUD’s requirements for the program. We used a 50 percent
expected error rate with a precision of 10 percent desired with a 90 percent confidence in the
sample. The universe size was 5,924, of which 67 was the number of files were initially selected
for review.


                                               11
However, since our detailed review of the quality assurance reviews’ universe identified a low
number of errors; we concluded the review after evaluating 37 of 67 sampled cases that were
originally selected in accordance with our statistical sampling plan. Based on our revised
sample, we are 95 percent confident that the number of problematic cases was at least 58 (less
than 1 percent) of the 5,924 quality assurance reviews performed during our audit period, based
on the lower limit. While we identified some errors, the statistical estimate indicates that HUD’s
controls were generally in place, regarding the quality assurance review process, to detect
widespread programmatic abuse in the program.

In performing our review of the quality assurance review process, we

    •   Performed our own analysis of the documentation maintained in the FHA casebinders
        and quality assurance review files to support that the borrowers met eligibility
        requirements and obtained counseling from FHA-approved counselors, the accuracy of
        the calculations, etc.
    •   Obtained additional documentation from the originating and/or sponsoring lenders.
    •   Reviewed the quality assurance review sheets and other documentation maintained in the
        files used in the quality assurance review process and the criteria applicable to the
        program.
    •   Compared our results with the reviewer’s notations on the respective review sheets and
        determined whether the items identified were complete if applicable.

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 finding and conclusions based on our audit
objective. We believe that the evidence obtained provides a reasonable basis for our finding and
conclusions based on our audit objective

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 finding and conclusions based on our audit
objective. We believe that the evidence obtained provides a reasonable basis for our finding and
conclusions based on our audit objective.




                                                12
                              INTERNAL CONTROLS

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

              •   Program operations – Policies and procedures that management has
                  implemented to reasonably ensure that a program meets its objectives.

              •   Validity and reliability of data – Policies and procedures that management has
                  implemented to reasonably ensure that valid and reliable data are obtained,
                  maintained, and fairly disclosed in reports.

              •   Compliance with laws and regulations – Policies and procedures that
                  management has implemented to reasonably ensure that resource use is
                  consistent with laws and regulations.

              •   Safeguarding resources – Policies and procedures that management has
                  implemented to reasonably ensure that resources are safeguarded against
                  waste, loss, and misuse.

              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.




                                               13
Significant Weakness

           Based on our review, no significant weakness noted.




                                           14
                                   APPENDIXES

Appendix A

                 SCHEDULE OF QUESTIONED COSTS

               Recommendation          Ineligible 1/      Unsupported 2/
                   number
                     1A                  $11,742
                     1B                                       $37,294
                     1D                     650
                    Totals              $12,392              $37,294


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/   Unsupported costs are those costs charged to a HUD-financed or HUD-insured program
     or activity when we cannot determine eligibility at the time of the audit. Unsupported
     costs require a decision by HUD program officials. This decision, in addition to
     obtaining supporting documentation, might involve a legal interpretation or clarification
     of departmental policies and procedures.




                                             15
Appendix B

                           FEDERAL REQUIREMENTS

HUD’s Quality Assurance Division’s Monitoring Guide, effective 2001, states that reviewers
should look for unusual credits, disbursements/delinquent loans being paid off, undisclosed liens
or related parties.

HUD’s Quality Assurance Division Desk Guide, effective October 1, 2007, states that the
Quality Assurance Division will manage risk by ensuring that HUD-approved lenders originate
and service FHA-insured loans in compliance HUD requirements.

Chapter 1 of the guide states that to deter unacceptable behavior by lenders or individuals may
result in recommendation for one or more of the following: referral to the Mortgagee Review
Board; suspension/debarment; limited denial of participation; loan indemnification; and referrals
to the Office of Inspector General (OIG) and other state or federal regulatory agencies. The
names of individuals who are debarred or suspended are placed on the General Service
Administration’s list of parties excluded from federal procurement and non-procurement
programs, which is accessible through the Internet.

Additionally, clear and accurate data must be kept in the lender review file for referral, appeal,
audit, and staff evaluation purposes. The accuracy and timeliness of the data are critical for
reporting, analyses, and highlighting trends. The approval/recertification/review tracking system
and quality assurance document library system shall be used by quality assurance staff to
maintain file review information and monitored regularly for consistency.

Homeownership Centers of the Quality Assurance Divisions are to report to the Homeownership
Center Director. Each is responsible for evaluating and monitoring lenders to ensure that
HUD/FHA-approved lenders originate quality loans and service FHA-insured loans in
compliance with HUD requirements. The Homeownership Quality Assurance Division
         • Performs on-site reviews of lenders’ origination and servicing practices to determine
           compliance with HUD requirements and

         • Maintains lender review files and enters data into automated systems such as an
           approval recertification/review tracking system and quality assurance document
           library system.

Chapter 3 of the guide states HECM reviews shall use the HECM case file review sheet.

Chapter 12 of the guide identifies the following red flags: final lien releases missing from file,
invalid HECM counseling certificate (exceeds timeframe from date of application) without
submission of waiver by homeowner, all HECM applications and counseling completed by
telephone, net principal limit not calculated properly, incomplete HECM payment plan,
disallowable fees charged to the borrower, failure to obtain adequate title commitment (amount


                                                16
should be equal to maximum claim amount), failure to pay excess HECM funds to principal,
incomplete HECM repair rider, or cash back at closing inappropriately applied.

Mortgagee Letter 1993-22 specifies the third-party fees that can be charged. However, the HUD
field office manager may authorize or reject any other charge or the amount of any charge, based
on what is reasonable and customary in the area.

HUD Handbook 4060.1 REV-1, chapter 2 states, that an applicant is ineligible for approval if the
lender or any officer, partner, director, or principal, under a limited denial of participation or
otherwise restricted similar provisions of any federal agency.

HUD Handbook 4235.1 REV-1, chapter 4, section 4-3(a), states that a borrower suspended,
debarred, or otherwise excluded from participation in HUD’s programs is not eligible for a
HECM loan.

Chapter 4, section 4-3, of the handbook states:

       A borrower must be rejected for any of the following reasons:

          A. Delinquent Federal Debts. If the borrower is presently delinquent on any Federal
             debt (e.g., VA [U.S. Department of Veterans Affairs]-guaranteed mortgage, HUD
             Section 312 Rehabilitation loan or Title I loan, federal student loan, Small
             Business Administration loan, delinquent Federal taxes, etc.) or has a lien,
             including taxes, placed against his or her property for a debt owed to the United
             States, the borrower is not eligible until the delinquent account is brought current,
             paid or otherwise satisfied, or a satisfactory repayment plan is made between the
             borrower and the Federal agency owed and is verified in writing.


          B.   Suspensions and debarments. A borrower suspended, debarred, or otherwise
               excluded from participation in the Department’s programs is not eligible for a
               HECM. The lender must examine HUD’s Limited Denial of Participation (LDP)
               List and the governmentwide General Services Administration's (GSA) List of
               parties Excluded from Federal Procurement or Non-procurement Programs. If the
               name of any party to the transaction appears on either list, the application is not
               eligible for mortgage insurance. 


          C. Credit Alert Interactive Voice Response System (CAIVRS). Lenders must screen
             all borrowers using CAIVRS. If CAIVRS indicates the borrower is presently
             delinquent or has had a claim paid within the previous three years on a loan made
             or insured by HUD on his or her behalf, the borrower is not eligible. Exceptions
             to this policy may be granted under the following situations: If the lender has
             reason to believe the CAIVRS message is erroneous or must establish the date of
             claim payment, it must contact the local HUD office for instructions or
             documentation to support the borrower's eligibility. The local HUD Office can



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               provide information regarding when the three-year waiting period has passed or
               that the social security number in CAIVRS is an error


Chapter 6, section 6-9, of the handbook states that on the day of closing, the lender must
determine the principal limit, expected rate, mortgage interest (accrual) rate, and the margin (if
applicable). The expected rate is needed to calculate the principal limit and payment plan for all
borrowers, and is also the accrual rate for fixed-rate HECMs. The mortgage interest rate is
needed to calculate the first year accrual rate for adjustable- rate HECMs. The lender must use
the indices in effect on the date of closing. Part C, states the ten-year treasury rate is the index
which must be used to establish the expected rate, and the one-year treasury rate is the index
which must be used to establish the mortgage interest (accrual) rate for adjustable-rate HECMs.

Mortgagee Letter 2006-22 states that consistent with existing policy, the expected interest rate
and principal limit are locked when the mortgagee takes the initial application. However, the
"lock-in" period for counting the 120 days starts on the day that the FHA case number is
assigned. In addition, FHA will continue to permit the "float down" option whereby the
principal limit may be recalculated at closing if the expected interest rate has declined and is now
lower than at initial application.

Mortgagee Letter 2003-16 states the FHA will now allow for mortgage lenders to set the
expected interest rate for HECMs at the time the loan application is signed by the borrower
rather than on the date of closing. This interest rate lock-in provision, which mortgage lenders
may offer on each HECM application for 60 days, will eliminate confusion and unexpected
reductions to a HECM borrower's principal limit when market interest rates increase during the
interim between loan application and loan closing.




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