Issue Date July 29, 2009 Audit Report Number 2009-FW-1013 TO: David Stevens Assistant Secretary for Housing—Federal Housing Commissioner, H //signed// FROM: Gerald R. Kirkland Regional Inspector General for Audit, Fort Worth Region, 6AGA SUBJECT: Bank of America, Seattle, Washington, Needs to Improve Its Compliance with HUD Requirements HIGHLIGHTS What We Audited and Why We reviewed Bank of America’s (servicer) home equity conversion mortgage (HECM)1 servicing division located in Seattle, Washington. Bank of America is one of the largest lenders of HECM mortgages for properties located in the five southwest states in the U. S. Department of Housing and Urban Development’s (HUD) Region VI jurisdiction. 2 Our objective was to determine whether the servicer complied with HUD regulations, specifically, whether it verified that the properties remained the borrowers’ primary residence, ensured maintenance of the properties, and processed HUD claims or property foreclosures in a timely manner. 1 Also known as reverse mortgages. 2 Arkansas, Louisiana, New Mexico, Oklahoma, and Texas. What We Found The servicer did not comply with two HUD requirements in its administration of HECM loans. It did not maintain annual certifications of residency3 and did not notify HUD in a timely manner of the due and payable status of the mortgages of deceased borrowers.4 Both weaknesses could result in the properties remaining vacant longer, increased property deterioration, the need for additional maintenance, and potential decline in property value. What We Recommend We recommend that the Assistant Secretary for Housing−Federal Housing Commissioner require the servicer to implement procedures to ensure that it completes the annual certifications of residency and notifies HUD of the due and payable status of mortgages within 60 days after a borrower’s death. 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 draft report to the servicer on June 22, 2009, and requested a written response by July 20, 2009. We held an exit conference on June 30, 2009. In its July 20, 2009 response, the servicer believed they met HUD requirements and disagreed with the report. The complete text of the auditee’s response, along with our evaluation of that response, can be found in appendix A of this report. 3 24 CFR (Code of Federal Regulations) 206.211. 4 24 CFR 206.125. 2 TABLE OF CONTENTS Background and Objective 4 Results of Audit 5 Finding: The Servicer Did Not Always Comply with HUD Requirements Scope and Methodology 8 Internal Controls 9 Appendixes A. Auditee Comments and OIG’s Evaluation 10 3 BACKGROUND AND OBJECTIVE We reviewed Bank of America’s (servicer)5 home equity conversion mortgage (HECM)6 servicing division located at 190 Queen Anne Avenue, North, #400, Seattle, Washington. Over the last 10 years, the servicer has serviced more than 4,000 HECM loans in the five southwest states in the U. S. Department of Housing and Urban Development’s (HUD) Region VI jurisdiction. For the 4,000 loans, HUD has paid claims for 61 loans, with 60 claims being paid during calendar years 2007 and 2008. The 61 claims paid amounted to more than $5 million or 103 percent of the total loan value of more than $4.9 million. The average loan term was a little more than five years. The servicer, with HUD’s permission, services approximately 2,000 deferred foreclosure mortgages due to missed payments of property taxes or homeowners’ insurance premiums7 nationwide. The servicer acquired, through an asset purchase and liability assumption, various entities including Seattle Mortgage Company in April 2007. Its Seattle office also obtained a portion of Countrywide Financial Corporation’s HECM loan portfolio and services Fannie Mae’s equivalent to HECM loans. All servicing was performed in Queen Anne, Washington, and Tempe, Arizona. The purpose of our audit was to determine whether the servicer verified that the properties remained the borrowers’ primary residence, ensured maintenance of the properties, and processed HUD claims or property foreclosures in a timely manner. For our audit, we reviewed 13 of the 60 claims paid by HUD during calendar years 2007 and 2008. 5 Mortgagee servicer ID #1306500001. 6 Also known as reverse mortgages. 7 According to HUD, it grants approval for deferred foreclosure due to unpaid property taxes or insurance premiums. The servicer stated that delays at HUD caused untimely HUD approval. 4 RESULTS OF AUDIT Finding: The Servicer Did Not Always Comply with HUD Requirements The servicer did not have controls in place to ensure that it maintained annual certifications of residency8 and notified HUD in a timely manner of the due and payable status of the mortgages of deceased borrowers.9 Both weaknesses could result in the properties remaining vacant longer, increased property deterioration, the need for additional maintenance, and potential decline in property value. Also, in one instance, the servicer did not maintain a required appraisal in the loan file. Files were Missing Annual Certifications of Residency Nine of thirteen HECM loan files reviewed did not contain required annual certifications that the property remained the borrower’s principal residence. Three of the thirteen loan files did not need the certification because the borrowers died during the first year of the loan. HUD required the servicer to obtain a certification that the property remained the principal residence of the borrower each year.10 Mitigating the effect of the lack of compliance, the servicer had controls to determine whether the borrowers died or did not pay taxes or insurance premiums. However, if the borrower moved from the property, the move could remain undiscovered for years without the annual certification of residency, especially if the borrower met other requirements such as payment of taxes and insurance premiums. HECM loans were designed to allow borrowers to borrow against their home equity and remain in their home. However, if the borrower moves for a period greater than one year, the loan becomes due and payable. The longer a property remains unoccupied, the greater the potential for deterioration, neglect, or vandalism, resulting in a larger insurance claim for HUD to pay. 8 24 CFR 206.211. 9 24 CFR 206.125. 10 24 CFR 206.211. 5 HUD was Not Notified in a Timely Manner When Mortgages were Due and Payable In all of the six instances reviewed, the servicer did not notify HUD within 60 days11 when the borrower died. The delay in notification to HUD and subsequent foreclosure on property varied from one to eleven months. The foreclosure delays subjected the properties to additional deterioration or vandalism. The servicer contracted for the maintenance and repair of properties subject to foreclosure; however, the delay in the foreclosure time increased these costs as well as property taxes and insurance premiums that became due. The servicer must have controls to ensure that it notifies HUD of the death of a borrower and ensures that it quickly and expeditiously processes the due and payable loans to limit holding costs and maintain the property’s value. One File Did Not Contain an Appraisal The servicer stated that HUD would not process a loan or claim without required documents; however, in one instance, the servicer and HUD processed a file without a required appraisal.12 The servicer should not rely on HUD to notify it of missing or incomplete documents. The servicer said its procedure was to send documents related to a loan to the document management team for scanning into the loan file. This procedure did not ensure the annual certifications of residency were completed on time each year or that other required documents were obtained and maintained. Conclusion The servicer had not implemented procedures to ensure borrowers maintained their properties as their principal residence and that HUD was notified of the due and payable status of a loan within 60 days of a borrower’s death. Implementing procedures to comply with HUD requirements will minimize the time during which properties remain vacant and minimize HUD claim amounts. 11 Mortgagee Letter 2003-22 12 We reviewed the reasonableness of the servicer’s appraised value using a third-party source and did not notice a material difference. 6 Recommendation We recommend that the Assistant Secretary for Housing−Federal Housing Commissioner require the servicer to 1A. Implement procedures to ensure that it obtains and maintains annual certifications of residency from borrowers, notifies HUD of the due and payable status of mortgages within 60 days after a borrower’s death, and completes foreclosures within required timeframes. 7 SCOPE AND METHODOLOGY To meet our objective, we Obtained knowledge of the relevant HUD regulations and requirements. Obtained knowledge of and evaluated the servicer’s procedures and internal controls. Inspected nine properties. Reviewed the documentation of 13 loan recipients. Interviewed HUD employees at the HUD National Servicing Center and headquarters employees Our review was conducted between January and May 2009. Our audit period was January 1, 2007, through December 31, 2008. We limited our review to loans endorsed within the five southwest states within HUD’s Region VI jurisdiction. The audit work was performed at the servicer’s Seattle, Washington office and at the Office of Inspector General (OIG) offices in Seattle, Washington, and Fort Worth, Texas. We also inspected nine properties in the Dallas/Fort Worth, Texas area. We did not select a statistical sample as we limited our review to loans based on the proximity of the mortgaged properties to the Dallas/Fort Worth area. We obtained the servicer loans using HUD’s Single Family Data Warehouse database. We did not use the servicer’s computer- processed data in meeting our objective; instead, we based our conclusions on information in the hard-copy files, on-site interviews, and procedures provided by the servicer. We conducted the audit in accordance with generally accepted government auditing standards. Those standards require that we plan and perform the audit to obtain sufficient, appropriate evidence to provide a reasonable basis for our findings and conclusions based on our audit objective. We believe that the evidence obtained provides a reasonable basis for our findings and conclusions based on our audit objective. 8 INTERNAL CONTROLS Internal control is an integral component of an organization’s management that provides reasonable assurance that the following controls are achieved: Program operations, Relevance and reliability of information, Compliance with applicable laws and regulations, and Safeguarding of assets and resources. Internal controls relate to management’s plans, methods, and procedures used to meet its mission, goals, and objectives. They include the processes and procedures for planning, organizing, directing, and controlling program operations as well as the systems for measuring, reporting, and monitoring program performance. Relevant Internal Controls We determined that the following internal control was relevant to our audit objective: Compliance with laws and regulations—policies and procedures that management has implemented to reasonably ensure that resource use is consistent with laws and regulations. We assessed the relevant controls identified above. A significant weakness exists if management controls do not provide reasonable assurance that the process for planning, organizing, directing, and controlling program operations will meet the organization’s objectives. Significant Weaknesses Based on our review, we believe that the following item is a significant weakness: The servicer did not have controls to ensure that it obtained and maintained annual certifications of residency from borrowers and notified HUD of the due and payable status of mortgages within 60 days as required. 9 Appendix A AUDITEE COMMENTS AND OIG’S EVALUATION Ref to OIG Evaluation Auditee Comments 10 Comment 1 Comment 2 Comment 3 11 Comment 4 12 Comment 5 Comment 6 13 14 OIG Evaluation of Auditee Comments Comment 1 We clarified in the report. Comment 2 We agree the servicer had written procedures to obtain an annual certification. However, the report concluded that the servicer did not always comply with its procedure and therefore, we made the recommendation. Comment 3 We disagree with the servicer’s opinion that the regulations did not “clearly state that a servicer must” retain documentation of its annual certification. Further, HUD required all servicing files to be retained for a minimum of the life of the mortgage plus three years.13 Comment 4 The servicer provided sufficient evidence to clear one of the exceptions reported.14 We made necessary changes to the body of the report. The remaining documentation submitted still contained omissions. In response to the servicer’s statement that certifications were due before the acquisition of the servicing of the loans, HUD requirements hold the acquiring mortgagee responsible for obtaining the complete file including origination as well as servicing record from the selling mortgagee or its servicer.15 Comment 5 We disagree with the servicer’s statement that the initiation of foreclosures was timely because they were within with six to twelve months. The foreclosure proceedings were to be initiated within 6 months of the date of death. The servicer was late by one to eleven months in the initiation of foreclosures after any extension found in the file. Comment 6 As we stated above, HUD holds the acquiring servicer responsible for obtaining the complete file including origination as well as servicing record from the selling mortgagee or its servicer. 13 HUD Handbook 4330.1 Rev. 5, 1-4, E 14 Loan number 422-2308197 15 HUD Handbook 4330.1 Rev. 5, 1-4, F 15
Bank of America, Seattle, Washington, Needs to Improve Its Compliance with HUD Requirements
Published by the Department of Housing and Urban Development, Office of Inspector General on 2009-07-29.
Below is a raw (and likely hideous) rendition of the original report. (PDF)