oversight

Custom Closing Services, Incorporated, Farmington Hills, Michigan, Did Not Always Comply with Its Contract When Closing Sales of HUD Real Estate-Owned Properties

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-1021




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


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

SUBJECT:        Custom Closing Services, Incorporated, Farmington Hills, Michigan, Did Not
                  Always Comply with Its Contract When Closing Sales of HUD Real Estate-
                  Owned Properties

                                               HIGHLIGHTS

    What We Audited and Why

                  We performed an audit of Custom Closing Services, Incorporated (Custom), a
                  contractor closing sales of U.S. Department of Housing and Urban Development
                  (HUD) real estate-owned properties in the state of Michigan. The audit was
                  conducted based on a complaint to our hotline alleging that Custom caused
                  significant delays in the closing of HUD homes in Michigan. Our audit objective
                  was to determine whether Custom complied with its contract for closing sales of
                  HUD real estate-owned properties.

    What We Found


                  Custom did not fully comply with its contract when closing sales of HUD homes.
                  Specifically, it did not request city presale inspections1 and contract extensions in
                  a timely manner. Additionally, Custom did not always cancel expired sales
                  contracts and submit requests for payments to the marketing and management
                  contractor for cancelled contracts in a timely manner. It also did not provide
                  required information to HUD. Custom’s delays in requesting pre-sale inspections

1
 Certain cities in Michigan require compliance inspections before the sale or transfer of single-family residential
properties. City representatives and the seller(s) arrange the inspections.
                 contributed to delays in the closings of HUD homes, which resulted in HUD
                 incurring additional holding costs2 to maintain properties in its inventory. In
                 addition, HUD lacked assurance that Custom represented HUD’s best interests
                 and upheld a positive image of HUD as required under the performance measures
                 of its contract.

    What We Recommend


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

                 •   Implement the real estate property sale closing software in accordance with its
                     contract to monitor and track the progress of its closing files,
                 •   Notify the selling brokers and buyers of the contracts’ expiration dates in
                     accordance with its contracts,
                 •   Maintain accurate accounting records to reflect cash receipts for cancelled
                     files in accordance with HUD’s requirements,
                 •   Implement adequate procedures and controls to ensure that it properly
                     administers requests for extensions to sales contracts, and
                 •   Coordinate with the marketing and management contractor in regard to
                     requesting city presale inspections.

                 We also recommend that the Deputy Assistant Secretary for Single Family
                 Housing determine whether Custom is performing satisfactorily under its current
                 contract with HUD. If the same conditions exist as identified in this audit report,
                 the Deputy Assistant Secretary should determine the appropriate course of action
                 regarding the current contract.

                 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 the results of deficient files to Custom’s management during the
                 audit. We also provided our discussion draft audit report to Custom’s president
                 and HUD’s staff during the audit. We conducted the exit conference with
                 Custom’s president on September 18, 2009.

                 We asked Custom’s president to provide written comments on our discussion
                 draft audit report by September 28, 2009. Custom’s president provided written
2
 Holding costs are the costs incurred for maintaining a property in HUD’s inventory such as, property maintenance
and upkeep, taxes, utilities, etc.


                                                        2
comments to the discussion draft report, dated September 28, 2009, that generally
disagreed with our finding and recommendations. With the exception of one
binder containing 20 exhibits, the complete text of Custom’s written response,
and our evaluation of that response, can be found in appendix A of this report.




                                3
                           TABLE OF CONTENTS

Background and Objective                                                           5

Results of Audit
      Finding: Custom Did Not Fully Comply with Its Contract When Closing Sales    6
                of HUD Homes

Scope and Methodology                                                             11

Internal Controls                                                                 13

Appendixes
   A. Auditee Comments and OIG’s Evaluation                                       15
   B. Schedules of Reviewed Files                                                 42
   C. HUD’s Requirements                                                          44




                                           4
                            BACKGROUND AND OBJECTIVE

The Federal Housing Administration (FHA) administers the single-family mortgage program.
Upon default and foreclosure of an insured mortgage loan, the lender files a claim for insurance
benefits. In exchange for payment of the claim, the lender conveys the foreclosed property to the
U.S. Department of Housing and Urban Development (HUD). The property is then deemed a
HUD real estate-owned property. HUD, through marketing and management contractors,
manages and initiates the sale of these single-family homes (HUD homes) to promote
homeownership and maximize the return to the mortgage insurance fund. HUD also contracts
with closing agents3 to close sales of HUD homes.

In March 2008, HUD awarded a sole contract, valued at more than $7 million, to Custom
Closing Services, Incorporated (Custom), to close sales of its single-family properties, consisting
of one to four units, in Michigan. Custom is located at 28275 Orchard Lake Road, Farmington
Hills, Michigan.

Under its contract, it is expected to (1) proactively represent HUD’s interests at the sales
closings, (2) close on the sales contracts as soon as possible after executing the contract (up to 60
calendar days), (3) ensure that HUD’s sales proceeds received from the settlements are accurate
and provided in a timely manner to the United States Treasury, and (4) accomplish sales closings
without documentation errors.

Our objective was to determine whether Custom complied with its contract for closing sales of
HUD real estate-owned properties in the state of Michigan.




3
 Closing agents settle real estate transactions through the preparation of the HUD-1 settlement statements and
disbursement of the sales proceeds.


                                                         5
                                          RESULTS OF AUDIT

Finding: Custom Did Not Fully Comply with Its Contract When
                   Closing Sales of HUD Homes
Custom did not fully comply with its contract when closing sales of HUD homes. Specifically, it
did not request city presale inspections and contract extensions in a timely manner. Additionally,
Custom did not always cancel expired sales contracts and submit requests for payments to the
marketing and management contractor for cancelled contracts in a timely manner. It also did not
provide required information to HUD. The problems occurred because Custom lacked adequate
procedures and controls to ensure that it complied with its contract. As a result, the sales of
HUD homes were not always closed in a timely manner, which contributed to HUD’s incurring
additional holding costs to maintain the homes in its inventory. In addition, HUD lacked
assurance that Custom represented HUD’s best interests and upheld a positive image of HUD as
required under the performance measures of its contract.


    Custom Did Not Always Order
    City Presale Inspections in a
    Timely Manner


                    Using HUD’s systems and Custom’s data, we determined that 5,339 real estate
                    sales contracts were ratified4 during our audit period of January 1, 2008, through
                    January 31, 2009. Of the 5,339 contracts, 939 sales of HUD homes took more
                    than 90 days to close. We selected 25 of the 939 closing files for review to
                    determine whether Custom performed closings on the sale of HUD homes in
                    accordance with its contract.

                    Custom did not always order city presale inspections in a timely manner. Of the
                    25 closing files reviewed, Custom was contractually obligated to order the city
                    presale inspections for seven of the files. None of the seven presale inspection
                    applications contained in the files was submitted to the appropriate cities in a
                    timely manner. According to its contract and to reduce the closing timeframe,
                    Custom would advance the inspection fees on behalf of HUD and forward the
                    applications to the various cities within one day of receipt of the closing files (see
                    appendix C). However, when Custom received the sales closing packages from
                    the marketing and management contractor, it took Custom 28 to 42 days to submit
                    the applications.

                    According to HUD, the marketing and management contractor is responsible for
                    the presale inspections. However, Custom should proactively coordinate with the
                    marketing and management contractor to ensure that preinspection applications
4
    Sales contracts that have been approved by the buyer and seller are deemed ratified.


                                                            6
           are submitted to the various cities in a timely manner to ensure that sales contracts
           close within 60 calendar days as required under its contracts.

Custom Did Not Effectively
Administer Contract Extensions

           Custom did not effectively administer requests to extend sales’ closing dates. For
           the 25 closing files reviewed, there were 112 requests for extensions to the sales
           contracts’ closing dates. Of the 112 requests, Custom submitted 40 requests after
           the previous contracts’ extensions expired. The 40 requests represent 18 of the 25
           files. Of the 40 requests to extend the closing dates, 29 were due to either delays
           with city presale inspections or lead-based paint abatements. These 29 requests
           were submitted to the marketing and management contractor 4 to 86 days after the
           previous contracts’ extensions expired. According to its contract, Custom’s
           primary objective is to perform closings of HUD homes as quickly as possible.
           Typically, a buyer is provided up to 60 calendar days to close the transaction.
           The contractor must coordinate with the marketing and management contractor to
           affect the closing within the timeframe specified in the sales contract unless an
           extension is necessary due to circumstances outside the contractor’s control (see
           appendix C).

           The remaining 11 contract extensions were due to buyer requests. Custom
           submitted these requests to the marketing and management contractor for
           approval 4 to 95 days after the previous contracts expired. Although it was the
           buyer’s responsibility to initiate a request for an extension to the date on the sales
           contracts, according to its contract, Custom is required to inform the buyers that
           their sales contract would expire and result in cancellation if they did not request
           an extension (see appendix C). Additionally, the contract states that as of the next
           business day after the closing date stated on the contract, if no closing has
           occurred, the contractor must notify the broker in writing that the sale did not
           close and the marketing and management contractor has been notified that the sale
           was canceled (see appendix C). However, Custom’s closing files did not contain
           documentation to sufficiently determine that the buyers, brokers, and marketing
           and management contractor were notified when the sales did not close. Further,
           according to HUD Handbook 4310.5, REV-2, all correspondence pertaining to
           extensions is to be included in the case file (see appendix C).

           Additionally, for one of the closing files, Custom did not file any extension
           requests when the contract expired, yet it closed the sale.

           Custom did not always schedule closings in a timely manner upon receiving the
           cities’ presale inspection reports. Of the 25 closing files reviewed, 17 were for
           properties that required city presale inspections. Of the 17, Custom did not
           proactively work with the brokers or buyers to schedule the closings for one




                                             7
           property after it received the inspection report. The sale subsequently closed 27
           days later.

           The file contained a letter from the selling broker indicating the buyer’s
           discontent with the length of time that had elapsed in closing the sale. Custom’s
           contract requires that closings be fully completed and reconciled in the shortest
           timeframe possible but no later than the date specified in the sales contract (see
           appendix C).

Custom Did Not Cancel
Expired Sales Contracts or
Submit Invoices for Payment in
Accordance with Its Contract


           Using HUD’s systems and Custom’s data, we determined that Custom cancelled
           1,312 sales contracts. Of the 1,312 cancelled contracts, 977 were ratified during
           our audit period of January 1, 2008, through January 31, 2009. We statistically
           selected 40 cancelled files to determine whether Custom complied with its
           contract in regard to cancelling sales of HUD homes. However, one of the
           cancelled sales contracts was reinstated and closed, thus reducing the number of
           files to 39.

           For the 39 cancelled files reviewed, Custom did not notify the marketing and
           management contractor and/or broker that 12 of the sales contracts had expired.
           The number of days that elapsed before the sales contracts were cancelled ranged
           from 4 to 88. According to Custom’s contract, the next business day after the
           closing date stated on the sales contract, if no closing has occurred, the contractor
           must notify the broker in writing that the sale did not close and that the marketing
           and management contractor has been notified that the sale was cancelled (see
           appendix C).

           For 5 of the 39 files, Custom did not submit invoice transmittals to the marketing
           and management contractor for closing expenses incurred in a timely manner as
           required by HUD. According to its contract, all invoices should be submitted no
           later than the 10th calendar day of the following month. According to Custom’s
           president, Custom was requesting payment for the remaining 34 files. However,
           as of July 31, 2009, these files had been cancelled for more than three months.

           Additionally, Custom did not maintain accounting records for payments from
           cancelled sales. According to HUD Handbook 4310.5, REV-2, the closing agent
           shall maintain complete and accurate accounting records (see appendix C).




                                             8
Custom Did Not Provide
Required Information to HUD


             Custom did not provide information required under its contract to HUD and the
             marketing and management contractor. According to its contract, Custom is
             required to report to HUD and the marketing and management contractor the
             current status of all cases assigned on a weekly basis. The report should also
             include an attachment summarizing the responsiveness, timeliness, and
             cooperation of the marketing and management contractor to facilitate timely
             closings (see appendix C). However, Custom did not include this attachment
             when it submitted its weekly reports to the marketing and management contractor
             and HUD.

Conclusion


             Custom did not fully comply with its contract when closing sales of HUD homes.
             The problems occurred because Custom lacked adequate policies and procedures
             to ensure that it complied with its contract. Specifically, it did not fully
             implement the real estate property closing software as required under its contract
             (see appendix C). According to the contract, the software would enable Custom
             to better manage its inventory of closing files. For instance, the software has
             timetables built into it that would automatically send the required notification to
             the seller agents and buyers. If a file did not progress to the next closing level, the
             property would be flagged for monitoring. This process would reduce the closing
             time due to title resolutions or inspection problems, as they would be monitored
             on a daily basis.

             The software also would generate required letters to the buyers and selling agents,
             notifying them of the pending expiration of sales contracts, 15 days before the
             contracts expire. If the contract expired and extensions were not filed, the
             software would notify Custom that the file had expired and print the required
             cancellation documents. Instead of using the software, Custom used a
             spreadsheet to manage sales closings. However, in reviewing the spreadsheet, we
             determined that it contained repetitive information or it did not always reflect the
             accurate status of the sales closings. According to Custom’s president, Custom
             did not use all of the functions of the software because its staff did not have time
             to learn it. However, Custom was implementing the software for its intended
             purpose.

             As a result of Custom’s contract noncompliance, the sales contracts for HUD
             homes were not always closed in a timely manner, and these closing delays
             contributed to HUD’s incurring additional holding costs to maintain the properties
             in its inventory. In addition, HUD lacked assurance that Custom represented




                                                9
          HUD’s best interests and upheld a positive image of HUD as required under the
          performance measures of its contract.

Recommendations

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

          1A.     Use the real estate property sale closing software in accordance to its
                  contract to monitor and track the progress of its closing files.

          1B.     Notify the selling brokers and buyers of the contracts’ expiration dates in
                  accordance with its contracts.

          1C.     Maintain accurate accounting records in accordance with HUD’s
                  requirements for receipts of cancelled sales.

          1D.     Implement adequate procedures and controls to ensure that it properly
                  administers requests for extensions to sales contracts.

          1E.     Coordinate with the marketing and management contractor in regard to
                  requesting city presale inspections.

          We also recommend that the Deputy Assistant Secretary for Single Family
          Housing

          1F.     Determine whether Custom is performing satisfactorily under its current
                  contract. If the same conditions exist as identified in this audit report, the
                  Deputy Assistant Secretary should determine the appropriate course of
                  action regarding the current contract.




                                            10
                           SCOPE AND METHODOLOGY

We performed the audit at Custom’s and HUD’s Chicago regional office. The review covered
the period January 1, 2008, through January 31, 2009. We expanded the audit as necessary.

To accomplish our audit, we researched and reviewed Custom’s contract and applicable HUD
regulations, mortgagee letters, and other reports and policies related to the disposition of HUD
homes. We also conducted interviews with Custom’s management and staff, HUD’s staff, the
marketing and management contractor, and the selling brokers and buyers involved in the loans
selected for review.

Sales Contracts for Closed Sales

Using HUD’s Single Family Data Warehouse system and Custom’s data, we determined that
Custom performed 6,903 closings between February 25 and May 13, 2009. Of the 6,903
closings, the sales contract for 5,339 properties was ratified within our audit period of January 1,
2008, through January 31, 2009. Of the 5,339 ratified sales contracts, 939 sales took from 90 to
464 days to close. We used unrestricted attribute sampling at a 90 percent confidence, 10
percent precision, and 25 percent expected error rate. We statistically selected 48 closed files to
review. However, we reduced the number of files reviewed to 25 (52 percent) since the delayed
files were the result of city presale inspections and/or lead-based paint abatements and their
impact on the buyers. Additionally, the review of 25 files provided us with a sufficient basis for
our finding results; thus, reviewing the remaining 23 files would not have changed the audit
results.

Cancelled Sales Contracts

Using HUD’s Single Family Data Warehouse system and Custom’s data, we determined that
Custom cancelled 1,312 sales contracts from April 19, 2007, to April 7, 2009. Of the 1,312
cancelled contracts, 977 sale contracts were ratified within our audit period of January 1, 2008,
through January 31, 2009. Using unrestricted attribute sampling at a 90 percent confidence, 10
percent precision, and 25 percent expected error rate, we statistically selected 40 cancelled files
to review. We determined that one of the cancelled sales contracts had been reinstated and
closed, thus reducing the number of files tested for compliance to 39.

To perform the audit, we

   •   Reviewed Custom’s contracts with HUD in effect during our audit period;
   •   Obtained, reviewed, and reconciled data from HUD’s systems and Custom;
   •   Reviewed Custom’s closing files for closed and cancelled sales contracts; and
   •   Verified information provided by Custom with HUD’s systems.

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


                                                 11
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 internal 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, we believe that the following item is a significant weakness:

           •      Custom lacked adequate procedures and controls to ensure that it complied
                  with its contract and/or HUD’s regulations regarding closing sales of
                  HUD-owned properties (see finding).




                                            14
                        APPENDIXES

Appendix A

        AUDITEE COMMENTS AND OIG’S EVALUATION

Ref to OIG Evaluation      Auditee Comments




Comment 1


Comment 2




                             15
Ref to OIG Evaluation   Auditee Comments




Comment 3




                          16
Ref to OIG Evaluation   Auditee Comments




Comment 4




Comment 5


Comment 6

Comment 7


Comment 8




                          17
Ref to OIG Evaluation   Auditee Comments




Comment 9




Comment 10




                          18
Comment 11




Comment 12




Comment 13




Comment 14

Comment 15


Comment 16




             19
Ref to OIG Evaluation   Auditee Comments




Comment 17




Comment 18




Comment 19




Comment 20




                          20
Ref to OIG Evaluation   Auditee Comments




Comment 21

Comment 22




Comment 23




                          21
Ref to OIG Evaluation   Auditee Comments




Comment 24




Comment 25

Comment 26

Comment 27




Comment 28




                          22
Comment 29



Comment 30




Comment 31




             23
Ref to OIG Evaluation   Auditee Comments




Comment 32




Comment 33




                          24
Ref to OIG Evaluation   Auditee Comments




Comment 34




                          25
Ref to OIG Evaluation   Auditee Comments




Comment 35


Comment 36




Comment 37




Comment 38




                          26
Ref to OIG Evaluation   Auditee Comments




Comment 39




Comment 40




Comment 41




                          27
Ref to OIG Evaluation   Auditee Comments




Comment 42




Comment 43




                          28
Ref to OIG Evaluation   Auditee Comments




Comment 44




Comment 45




                          29
Ref to OIG Evaluation   Auditee Comments




Comment 46




Comment 47




Comment 48




                          30
Ref to OIG Evaluation   Auditee Comments




                          31
Ref to OIG Evaluation   Auditee Comments




                          32
                          OIG Evaluation of Auditee Comments

Comment 1   Custom contends that the report contains one finding, alleging that it did not
            request certain information, submit certain documentation, or schedule real estate
            closings in a timely manner in connection with a handful of the 7,298 closing files
            it received during our audit period. We disagree. The finding in the report is not
            in connection with the 7,298 closing files Custom stated it received during the
            audit period. Instead, the finding in the report is based on actual ratified sales that
            closed or cancelled during the audit period, which totaled 6,316 (5339 closed files
            plus 977 cancelled files). This information can be found in the Scope and
            Methodology section of this audit report.

Comment 2   Custom contends that the violations in the report do not constitute violations of
            HUD requirements or its contract, or do not negatively impact the timely closing
            of HUD’s properties. We disagree. The report identified that Custom did not
            fully comply with its contract and HUD’s requirements. Additionally, Custom’s
            delays in requesting presale inspections, a requirement under its contract,
            contributed to delays in closing the sales of HUD properties.

Comment 3   Custom stated that HUD has ultimate authority and expertise in the sale of real
            estate-owned properties and HUD gave it a satisfactory rating in both HUD’s
            2008 and 2009 after reviewing Custom’s performance. We agree that HUD has
            the expertise in the sale of real estate-owned properties, which is why we
            consulted with HUD throughout the audit. We also agree that HUD gave Custom
            an overall satisfactory rating in 2008 and 2009; however, HUD’s review did not
            indicate a review of delinquent closing files or cancelled sales contract files as
            reported in this audit report. Therefore, HUD’s review did not cover the same
            areas.

Comment 4   Custom contends that our unfamiliarity with the real estate-owned properties
            process and procedures was clear from the many questions asked. We disagree.
            The audit was a contract performance review and the staff was well equipped to
            perform such an audit. Additionally, our audit procedures require us to conduct
            interviews to obtain a sufficient understanding of an auditee’s business
            operations, policies, and procedures to proficiently perform audits of HUD’s
            programs. We are not to assume, instead inquire about each auditee’s operations
            to provide the auditee a mechanism to explain their processes.

Comment 5   Custom contends that the footnote in the audit report was incorrect. We agree and
            adjusted the audit report. We thoroughly obtained an understanding of the
            process by contacting representatives from the various cities in regards to city
            inspections.

Comment 6   Custom’s contends that we failed to account for the fact that cities often require
            property utilities to be in working order before inspections can be completed. We
            disagree. Custom did not provide any documentation showing that for the



                                              33
              properties cited in our discussion draft audit report, the reason for Custom’s delay
              in ordering the presale inspection was due to utilities.

Comment 7     Custom contends that had we fully understood the process regarding the
              completion of city inspections and the lead based paint abatements, it would have
              made it clear that contract extensions are automatic when these issues are not
              complete and any delay in filing these extensions would not delay the closing.
              We disagree. Our draft audit report did not indicate that delayed extension
              requests results in delayed closings. However, it did mention that HUD lacks
              assurance that Custom represented HUD’s best interests and the failure to file
              contract extensions timely did not protect HUD’s interest because the sales
              contracts were no longer valid. Therefore, the buyers were not contractually
              obligated to continue the sales transaction.

Comment 8     Custom contends that our report cites requirements for payment logs that have
              nothing to do with cancelled contracts. We disagree. The report does not cite
              requirements for payment logs, but cites requirements for complete and accurate
              accounting records, which includes payment logs for receipts and disbursements.
              Therefore, Custom is required to maintain complete and accurate accounting
              records. However, Custom was unable to provide records of funds received for
              cancelled sales contracts. We adjusted the audit report to reflect this revision.

              Additionally, Custom stated that it was unable to submit invoices for closing
              expenses until it receives a cancellation letter from the marketing and
              management contractor. Although this may be true, in contacting the marketing
              and management, we were provided documentation indicating that it sent
              cancellation letters electronically to the selling brokers and copied Custom for 29
              of the 34 files identified in our draft audit report. Therefore, Custom should have
              been able to submit invoices to the marketing and management contractor for
              payment for the 29 cancelled sales contracts.

Comment 9     See comment number 2.

Comment 10 Custom contends that at no time did it intentionally disregard its responsibilities
           under the contract and HUD’s guidelines for real estate properties. Our audit
           report did not state that Custom intentionally disregarded its responsibilities under
           its contract and HUD’s guidelines. In fact, the audit report stated that Custom did
           not fully comply with its contract requirements because it lacked adequate
           procedures and controls to ensure that it complied with its contract.

Comment 11 Custom contends the report did not consider the volume of transactions it handled
           during the audit period and the resulting affects this volume had on Custom’s
           ability to close the sale of real estate-owned properties in an efficient manner. We
           agree that the audit report did not mention the volume of the sales closing that
           occurred during the audit period. However, the volume of sales closings was
           within the thresholds listed in its contract with HUD. For instance, the contract



                                               34
              identifies that the minimum quantity of closing should not be less that 260 per
              year and the maximum quantity should not exceed 7,500 per year. Additionally,
              according to the contract, Custom must furnish the necessary personnel to
              perform the activities specified in the contract.

Comment 12 Custom states that it received 7,298 closing files during the 13 month considered
           by us during the audit. As a result, Custom increased its staff to handle the
           volume. The audit report did not identify the number of files that Custom
           received during our audit period. Additionally, according to the contract, Custom
           must furnish the necessary personnel to perform the activities specified in the
           contract.

Comment 13 Custom believes that the report’s reference to its review of 52 percent of the
           company closing files is misleading and inequitable representation of the volume
           of transactions it handled during the audit period. We disagree. Although we
           reviewed 25 percent of our statistical sample of 48 closing files, if we would have
           reviewed the entire sample of closing files, the results would not change the
           finding. In fact, in briefly reviewing the files, we determined that Custom had the
           similar issues and the number of deficiencies would have increased. Additional
           information regarding the statistical sampling used during the audit can be found
           in the Scope and Methodology section of this audit report.

Comment 14 Custom contends that if we consider the3,814 closings it completed during the
           audit period, then our review of only 25 files was a mere 0.65 percent of all
           closing conducted by the company. We disagree. Of the 5,339 sales that closed
           during our audit period, we determined that 939 sales took more than 90 days to
           close. Of the 939, we statistically selected and reviewed 25 files. Of the 25 files,
           Custom ordered the inspections for seven files. All seven files were not ordered
           timely. Our results are based on the review of 25 files. Further, had we projected
           the number of deficient cases to the universe of the 939 delayed closings, the
           number of files with deficiencies would have been higher. Additional information
           regarding the statistical sampling used during the audit can be found in the Scope
           and Methodology section of this audit report.

Comment 15 Custom contends that 939 cases of the 5,339 files where closings occurred more
           than 90 days after contract ratification represents 17.5 percent of all files received
           and closed by Custom during the audit period, which means that more than 80
           percent of real estate-owned properties were closed by Custom without any
           extensions or permitted delays. We disagree. The 939 delayed closing files
           represented the closings that were delayed more than 90 days; however, according
           to Custom’s contract, closings should occur within 60 days. Therefore, using the
           time required by HUD to close a sales contract, of the 5,339 closings that
           occurred during our audit period, 2,117 closing files, which represents nearly 40
           percent, were delayed sales closings.

Comment 16 See comments 13 and 14.



                                               35
Comment 17 Custom states that it does not dispute that its contract contains the city presale
           inspection requirement, and the marketing and management contractor also
           contains this requirement, and historically the ordering of city pre-sale inspections
           was completed by the marketing and management contractor. The audit report
           clearly indicates that for seven files, in which Custom was contractually obligated
           to order the city pre-sale inspections, it did not timely submit the city presale
           inspections to appropriate cities for all seven files (100) percent. Although both
           Custom and HUD stated that it is not Custom’s responsibility to order the city
           presale inspection, the contract states otherwise. Additionally, Custom did not
           provide an amendment to its contract that retracted this responsibility.

Comment 18 Custom contends that from May through July 2008, it received a total of 624
           closing files. However, from August to December 2008, this number increased
           and Custom received 5,215 closing files, which led it to double its staff.
           Although this may be true, Custom’s contract applies to a maximum of 7,500
           closing files in a year. The 5,839 (624 plus 5,215) closing files that it received
           during the previously mentioned time period represents only 78 percent of the
           maximum quantity of files under its contract.

              Therefore, Custom should have adequate resources to meet the requirements
              specified in its contract since it was aware of the maximum closing files allowed
              under its contract.

Comment 19 Custom contends that it had a backlog of 250 files due to the marketing and
           management contractor’s failure to send the files and that we were aware of the
           backlog. We agree that Custom informed us of the 250 files; however, when we
           asked Custom to identify the files and provide us with a reconciliation that was
           done to identify the 250 files, Custom informed us that it did not maintain the
           requested records.

Comment 20 See comment 5.

Comment 21 Custom contends that it was forced to rely on the marketing and management
           contractor to order many of the city presale inspections. Therefore, it had no
           ability or authority to order many of these inspections. We disagree. The audit
           report addressed seven closing files in which Custom actually ordered the
           inspections.

Comment 22 Custom states that it eventually ceased ordering city presale inspections in
           December 2008 with the consent of its HUD contract administrator. We disagree.
           According to Custom’s contract, it was required to forward the applications for
           city presale inspections to the various cities within one day of receipt of the
           closing files. Additionally, Custom did not provide an amendment to its contract
           removing this requirement or documentation from HUD relieving it of this
           requirement.




                                              36
Comment 23 See comments 10, 11, 12, and 21.

Comment 24 See comment 7.

Comment 25 Custom states that regardless of whether it files extension requests before or after
           the contract’s expiration date, as long as the inspection or abatement remains
           outstanding, this has no impact on the scheduling or conducting of the closing.
           We disagree. Without a valid extension to the sales contract, buyers are not
           contractually obligated to continue with the purchase and can request refunds of
           earnest money deposits. Executing extensions to sales contracts in a timely
           manner protects HUD’s interest in the sale of its properties.

Comment 26 Custom contends that the inspection or abatement delays the closing and the
           timely completion of these functions was out of its control. We disagree.
           According to its contract, if Custom receives the closing file, it is required to
           order the presale inspection. However, if the inspection cannot be ordered in a
           timely manner, according to its contract, Custom must proactively work with the
           marketing and management contractor to ensure that closings are performed in a
           timely manner. Additionally, delays in ordering presale inspections contribute to
           delays in the closing of HUD’s properties.

Comment 27 See comments 7 and 26.

Comment 28 Custom contends that in March 2009 it received more than 1,700 new closing
           files for processing that the marketing and management contractor made the
           decision to issue several hundred blanket extensions on files that were near
           expiration, which the marketing and management contractor did without any input
           or filings made by Custom. We appreciate Custom providing this information.
           However, this information is not relevant since the files reviewed as a part of this
           audit was ratified during January 1, 2008, through January 31, 2009.

Comment 29 Custom contends that the marketing and management contractor created the first
           extension for FHA case number 261-849791 and subsequently cancelled the
           contract. We disagree. In reviewing the first contract extension request form for
           the file, it showed that Custom signed the request form. Additionally, the
           remaining seven requests also identified signatures by Custom. If the marketing
           and management contractor initiated and filed the extensions requests, Custom
           did not provide any documentation/evidence showing that it did not sign the
           extension requests.

Comment 30 Custom contends that for FHA case numbers 261-740221, 261-824255, and 263-
           385902 the marketing and management contractor was also responsible for these
           late extensions. We disagree. The extensions for the previously mentioned case
           numbers all contained signatures by Custom. Further, Custom did not provide us
           any documentation to determine that it did not sign these requests.




                                              37
Comment 31 See comments 12, 18, and 19.

Comment 32 Custom stated that it sent letters to buyers and their agents on the same day that it
           received a copy of the city inspection in an attempt to schedule closings as soon
           as possible for case numbers 261-887081, 261-891015, 261-822921, 261-890338,
           and 261-868064 and that the buyers requested the additional time to close. We
           agree. In reviewing the documentation provided by Custom, we adjusted the
           audit report to reflect this information.

Comment 33 See comment 32.

Comment 34 Custom contends that it was not required to maintain a log of payments received
           or disbursed for cancelled sales contracts. We partially agree. Although Custom
           was not required to maintain a log of funds received for cancelled files, it was
           required to maintain complete and accurate accounting records. We adjusted the
           audit report to reflect this information.

Comment 35 Custom contends that we failed to mention that it was unable to submit invoices
           to the marketing and management contractor for closing expenses until it received
           a letter from the marketing and management contractor cancelling the sale.
           Although this may be true, the marketing and management contractor provided
           documentation indicating that it sent cancellation letters electronically to the
           selling brokers and copied Custom for 29 of the 34 files identified in the audit
           report. However, Custom had not submitted invoices for these files.

Comment 36 Custom provided a copy of an electronic mail responding to invoices for
           cancellation fees submitted and requested a cancellation letter from the marketing
           and management contractor. We disagree. In reviewing the documentation
           provided, we determined that the case number identified in the electronic mail
           was not included in our audit report.

Comment 37 Custom contends that for FHA case numbers 261-700771 and 261-873180 it did
           not receive cancellation letters; therefore, it was forced to access the marketing
           and management contractor’s system to generate the letters. We disagree.
           Custom did not provide documentation to substantiate its claim.

Comment 38 Custom contends that for 5 of the 12 cancelled contracts, it notified the marketing
           and management contractor the next business day after each of the sales contracts
           expired and it provided notification letters as supporting documentation. We
           partially agree. In reviewing the documentation, we determined that for two of
           the five case numbers (261-831441 and 263-335035), the documentation referred
           to contract extensions that were not contained in the closing files. Therefore,
           based on the date of the previous extension or contract, the dates that Custom
           notified the marketing and management contractor that the sales cancelled were
           after the contracts and/or extensions had expired. Additionally, Custom did not
           provide documentation that it notified the brokers in writing that the sales did not



                                               38
              close and the marketing and management contractor was notified that the sales
              were cancelled for all five files. We made appropriate adjustments to the audit
              report to reflect the documentation provided by Custom.

Comment 39 Custom stated the seven delayed transactions out of 7,298 files received during
           the audit period was .10 percent of all transactions it managed and processed. We
           disagree. Custom did not provide sufficient documentation to determine that five
           of the 12 files were supported. Therefore, all 12 of the cancelled files were not in
           compliance with its contract. Additionally, to accurately determine the
           percentage of delinquent transactions, this should be compared to the number of
           files reviewed. Therefore, of the 39 files reviewed, 12 (nearly 31 percent) were
           not in compliance.

Comment 40 Custom contends that the audit report alleges it did not report to HUD and the
           marketing and management contractor the status of all cases on a weekly basis
           and did not provide HUD with an attachment to the weekly report summarizing
           the responsiveness, timeliness, and cooperation of the marketing and management
           contractor. We disagree. The report did not state that Custom did not report to
           HUD and the marketing and management contractor the status of all cases on a
           weekly basis. Instead, the audit report states that Custom did not provide required
           information to HUD. In particular, an attachment to the weekly reports
           summarizing the responsiveness, timeliness, and cooperation of the marketing and
           management contractor to facilitate timely closings as required under its contract.

Comment 41 Custom provided documentation required by its new government technical
           representative under its current contract as evidence that it began providing the
           required attachment. We commend Custom for now complying with this
           requirement. However, this requirement was also a part of the previous contract
           effective during our audit period.

Comment 42 Custom acknowledges that since April 2009 that it has fully implemented the real
           estate closing software as required under its contract. We commend Custom for
           complying with this requirement. However, this requirement was also included in
           the previous contract effective during our audit period.

Comment 43 Custom strongly disagrees with the audit report’s suggestion that the technical
           deficiencies described in the report indicates that it was performing
           unsatisfactorily and failed to uphold HUD’s best interest in closing real estate
           owned transactions in Michigan. We disagree. The report states that HUD lacked
           assurance that Custom represented HUD’s best interest and upheld a positive
           image of HUD as required under the performance measures of its contract. The
           report did not state that Custom performed unsatisfactorily and failed to uphold
           HUD’s best interests.

Comment 44 Custom contends that HUD has already determined that Custom is performing
           satisfactorily under its new contract and there was no basis for us to include a



                                              39
              recommendation that HUD actually consider the termination its contract. In
              addition to requesting that the recommendation regarding termination be removed
              from the final report, Custom also requests that the report’s suggestion that it did
              not protect HUD’s interest and uphold a positive image of HUD also be removed
              from the final report. We partially agree. However, HUD’s review did not
              include a review of delayed or cancelled sales contract files. Therefore, we
              modified the recommendation as appropriate. However, the language regarding
              HUD’s lack of assurance that Custom represented HUD’s best interest and upheld
              a positive image of HUD as required under the performance measures of its
              contract remained in the audit report.

Comment 45 Custom contends that the audit report’s recommendation regarding the
           coordination between Custom and the marketing and management contractor
           regarding the ordering of city presale inspections and monitoring the status of the
           inspection applications to ensure that closings occur as soon as possible is not in
           Custom’s authority. We disagree. Custom’s contract requires the ordering of city
           presale inspections. Therefore, when Custom receives a closing file from the
           marketing and management contractor that did not contain documentation that the
           presale inspection was ordered, it should proactively coordinate with the
           marketing and management contractor to ensure that the closing occur as soon as
           possible after the sale contract is executed. Additionally, according to Custom’s
           contract, upon receipt of the closing file, it should order the city presale
           inspection.

Comment 46 Custom contends that the audit report should include a disclosure on the first page
           that the finding represents the view of OIG and do not constitute final
           determinations. The final determination will be made HUD’s Assistant Secretary
           for Housing-Federal Housing Commissioner. We disagree. The issues identified
           in the audit report are based on Custom’s contract and HUD’s requirements.
           Further, our determination of compliance or noncompliance was based on the
           review of documentation maintained by Custom and provided upon request in
           connection with this audit.

Comment 47 Custom contends that the final determination will be made by HUD’s Assistant
           Secretary for Housing-Federal Housing Commissioner. We disagree. The
           Deputy Secretary makes the final determinations on the recommendations, if
           agreement cannot be reached. However, we reserve the right to report any
           disagreement in our semiannual reports to Congress.

Comment 48 Custom requests that it be allowed to respond to our evaluation of its comments.
           We disagree. According to our audit operating procedures, we communicated
           with Custom throughout the audit through update meetings and correspondence.
           We provided Custom with schedules and conducted update meetings on the status
           of the audit. Additionally, we provided Custom the opportunity to respond to the
           discussion draft report and provide supporting documentation. If Custom does




                                               40
not agree with our evaluation of its comments to the discussion draft report, it has
the opportunity to work with HUD to resolve the audit recommendations.




                                 41
Appendix B

       SUMMARY OF NONCOMPLIANCE CLOSING FILES

                   Delays in                        Closing not 
                    closing     Inspection not     scheduled on      Extension 
                   (91‐259        ordered in a      time (27‐31    filed late (4‐        Reason for 
FHA case number      days)      timely manner          days)          95 days)            extension 
  261‐845784           X                                                  X         City inspection 
  261‐740221           X                                                 X          Buyer request 
  261‐690439           X              X                                  X          City inspection 
  261‐845879           X                                                 X          City inspection 
  261‐880469           X                                                 X          City inspection 
                                                                                    City inspection ‐  
  261‐784538           X                                                            buyer request 
  261‐867041           X              X                                  X          City inspection 
  261‐824255           X                                                 X          Lead‐based paint 
  261‐788723           X              X                                  X          Buyer request 
  263‐268274           X              X                                  X          Lead‐based paint 
  263‐385902           X                                                 X          Lead‐based paint 
  261‐813920           X                                                 X          City inspection 
  261‐890562           X                                                 X          City inspection 
  261‐687774           X              X                                  X          City inspection 
  262‐151307           X                                                            Buyer request 
  263‐318848           X                                                 X          Lead‐based paint 
  261‐746135           X                                                            City inspection 
  261‐745773           X                                X                X          City inspection 
  261‐887081           X                                                            City inspection 
                                                                                    City inspection – 
  261‐891015           X              X                                             buyer request 
  261‐822921           X              X                                             City inspection 
  261‐890338           X                                                 X          Inspection  
  261‐868064           X                                                 X          City inspection 
  261‐840894           X                                                            Process delay 
  261‐849791           X                                                 X          Buyer request 




                                                  42
SUMMARY OF NONCOMPLIANCE CANCELLED FILES

                      Number of days            
                        delayed in      Untimely invoice 
       Case number     cancellation       submission 
       261-698703           88
       262-153107           12
       261-846701           35
       261-675159           19
       262-149122           19                 X
       261-734476            7
       261-867012           11                 X
       261-899437            5
       261-831441           16
       261-896799           18
       261-700771                              X
       263-335035           16
       261-873180                              X
       261-875924           4                  X




                                 43
Appendix C

                              HUD’S REQUIREMENTS

HUD’s Property Disposition Handbook - One to Four Family (4310.5), REV-2, chapter 11,
section 11-8, states that sales shall be closed as soon as possible after execution of the sales
contract. For all individual property sales, the sales contract should provide for a specific time
within which the sale shall be closed. Field offices shall follow up on each sale to ensure a
timely closing or a contract cancellation, as appropriate.

Section 11-12 of the handbook states that if scheduled closing dates cannot be met, buyers may
request extensions of the closing time. Such requests, as well as HUD’s decision, must be in
writing. All correspondence pertaining to extensions is to be maintained in the case file.

Section 11-16(c) of the handbook states that the closing agent shall maintain complete and
accurate accounting records.

Custom’s contract agreement with HUD, effective March 1, 2008, part C, performance work
statement, states that the primary objective is to perform closings of HUD-owned properties as
quickly as possible. Typically, a buyer is provided up to 60 calendar days to close the
transaction. However, from time to time, HUD may offer special incentive programs to home
buyers to close in a shorter period, such as 30 days after contract execution. The contractor must
coordinate with the marketing and management contractor to affect the closing within the
timeframe specified in the sales contract unless an extension is necessary due to circumstances
outside the contractor’s control.
Section B, task 2(d), states that the contractor must provide written notifications as required.

               (1) Not less than 15 calendar days before the latest possible closing date, the
               contractor must provide the broker a written warning if a firm closing date has not
               been established, that the contract may expire.

               (2) The next business day after the closing date stated on the contract, if no
               closing has occurred, the contractor must notify the broker in writing that the sale
               did not close and that the marketing and management contractor has been notified
               that the sale has been canceled. The deed shall be voided and returned to the
               marketing and management contractor if closing does not take place within seven
               calendar days of the special warranty deed.

Section C.2(l) of the contract states that to reduce the closing timeframe, Custom will advance
the inspection fees on behalf of HUD and forward the applications to the various cities within
one day of receipt of file. At settlement, Custom will show the inspection fees advanced, as a
line charge to HUD.

Section C.2(c) of the contract states that Custom’s software will have timetables built into it that
will automatically send the required notification to the selling agents and the buyers. If a file


                                                 44
does not progress to the next closing level, the property will be flagged for monitoring. This
property would show up on the end of the day report as a flagged file. This process will reduce
the closing time due to title resolutions or inspection problems, as they will be monitored on a
daily basis. Closing documents will be precise and accurate. The HUD I form would be sent to
the marketing and management contractor for preclosing approval via e-mail. Fifteen calendar
days before expiration, the software will generate required letters to the buyer and the selling
agent notifying them of the pending expiration of contract date. If the contract expires and
extensions are not filed, the software will notify Custom that this file is expired and will print the
required cancellation documents. This process will ensure prompt notification to both the selling
agent and the buyer of the closing timeframes and requirements.

Section G.2(c) of the contract states that the contractor must prepare and submit an original
single-family accounting asset management systems form 1106, invoice transmittal, with an
original signature, to the marketing and management contractor, along with appropriate
supporting documentation (e.g., tax bill and proof of payment). Except for invoices for amounts
advanced by the contractor on HUD’s behalf at closing (which are to be included as part of the
closing package), invoices may be submitted on a weekly basis; however, the contractor must
submit all invoices for expenses incurred each month no later than the tenth calendar day of the
following month.

Section C.1(b) of the contract states that the closings are fully completed and reconciled in the
shortest timeframe possible but no later than the date specified in the sales contract (unless an
extension of time to close has been approved).

           •   Section C.1(vi) of the contract states that on the first business day of each week,
               the contractor must electronically provide to the marketing and management
               contractor and government technical representative the following report:

               (A) Closing status report. The current status of all cases assigned as of the close
                   of business the previous Friday.

                    As an attachment to the closing status report, the contractor must provide a
                    narrative report to the government technical representative summarizing the
                    responsiveness, timeliness, and cooperation of the marketing and
                    management contractor to facilitate timely closings. The summary shall
                    address the marketing and management actions regarding submission of the
                    initial case assignments, responses to extension requests, preclosing approvals
                    and deed submissions, and any comments/complaints received about the
                    marketing and management contractor. Information must be substantiated
                    with specific case numbers or instances.




                                                 45