oversight

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)

                                                                       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


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