oversight

Clarion Mortgage Capital Did Not Fully Comply with HUD's or Its Own Quality Control Requirements

Published by the Department of Housing and Urban Development, Office of Inspector General on 2008-12-17.

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

                                                                   Issue Date
                                                                            December 17, 2008
                                                                   Audit Report Number
                                                                                2009-KC-1002




TO:        Brian D. Montgomery, Assistant Secretary for Housing – Federal Housing
              Commissioner, H

           //signed//
FROM:      Ronald J. Hosking, Regional Inspector General for Audit, 7AGA

SUBJECT: Clarion Mortgage Capital Did Not Fully Comply with HUD’s or Its Own
            Quality Control Requirements


                                    HIGHLIGHTS

 What We Audited and Why

             We reviewed the Leawood, Kansas, branch office of Clarion Mortgage Capital, a
             Federal Housing Administration (FHA)-approved loan correspondent. Our audit
             objective was to determine whether Clarion Mortgage Capital followed U.S.
             Department of Housing and Urban Development (HUD) requirements for
             implementing a quality control program.

             We audited Clarion Mortgage Capital because it had 87 percent more defaulted
             loans than the national average and a default-to-claim rate of 13.79 percent.
             Clarion Mortgage Capital’s Leawood, Kansas, branch office originated 376 FHA-
             insured loans between July 2006 and June 2008.

 What We Found
             Clarion Mortgage Capital did not fully comply with HUD’s or its own quality
             control process. It did not ensure that its quality control contractor reviewed loans
             within the proper timeframes. Also, it did not document on-site quality control
             reviews of the branch office and document corrective actions taken to address
             deficiencies identified in the quality control reports.
What We Recommend
           We recommend that the Assistant Secretary for Housing – Federal Housing
           Commissioner verify that Clarion Mortgage Capital has fully implemented a
           quality control program that complies with HUD requirements.

           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
           Clarion Mortgage Capital agreed with our conclusions and to take corrective
           actions. We provided the draft report to the lender on December 2, 2008, and
           requested a response by December 16, 2008. It provided written comments on
           December 12, 2008.

           The complete text of the auditee’s response can be found in appendix A of this
           report.




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                           TABLE OF CONTENTS

Background and Objectives                                                        4

Results of Audit
      Finding: Clarion Mortgage Capital Did Not Fully Comply with HUD’s or Its   5
                Own Quality Control Requirements

Scope and Methodology                                                            7

Internal Controls                                                                8

Appendixes
   A. Auditee Comments                                                            9
   B. Criteria                                                                   12




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                      BACKGROUND AND OBJECTIVES

Clarion Mortgage Capital was founded in 1996 as an affiliation of mortgage professionals based
in Greenwood Village, Colorado. It has branch operations in five states. The Leawood, Kansas,
branch office became a nonsupervised Federal Housing Administration (FHA)-approved lender
on June 20, 2001. Clarion Mortgage Capital is an FHA loan correspondent that performed loan
origination tasks such as taking the initial borrower application, ordering the property appraisal,
conducting asset and employment verifications, and obtaining credit reports.

The branch office originated FHA loans but various FHA-approved sponsoring lenders
underwrote the loans and submitted them to FHA for insurance. Sponsors are FHA-approved
direct endorsement lenders that underwrite loans originated by loan correspondents. Sponsors
are responsible to HUD for the loan origination actions of their loan correspondents.

From July 1, 2006, through June 30, 2008, Clarion Mortgage Capital’s branch in Leawood,
Kansas, originated 376 FHA-insured loans, totaling more than $44.27 million. During this same
period, 33 of the loans (8.78 percent) were at least 90 days delinquent.

Our audit objective was to determine whether Clarion Mortgage Capital followed HUD
requirements for implementing a quality control program.




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                                 RESULTS OF AUDIT

Finding: Clarion Mortgage Capital Did Not Fully Comply with HUD’s
or Its Own Quality Control Requirements
Clarion Mortgage Capital did not ensure that its quality control contractor reviewed loans within
the proper timeframe. Also, it did not document on-site quality control reviews of the Leawood,
Kansas, branch office or the corrective actions taken to address deficiencies in the quality control
reports. These issues occurred because Clarion Mortgage Capital did not effectively monitor its
quality control contractor. Also, the lender’s managers were not aware of all HUD quality
control requirements. As a result, Clarion Mortgage Capital could not ensure the accuracy,
validity, and completeness of its loan origination operations, resulting in an increased risk to the
FHA insurance fund.



 Quality Control Reviews Not
 Adequate and Documentation
 Not Always Accomplished


               Clarion Mortgage Capital did not fully comply with HUD’s or its own quality
               control requirements. HUD Handbook 4060.1, REV-2, establishes several basic
               elements that are required in all quality control programs. Appendix B provides
               the detailed HUD quality control requirements.

                Specifically, Clarion Mortgage Capital did not

                   •   Follow HUD’s requirements and ensure that its quality control contractor
                       reviewed loans within 90 days from the end of the month in which the
                       loan closed. The lender did not complete 8 of the 30 quality reviews
                       within this time span.

                   •   Follow its own quality control requirements and ensure that its contractor
                       reviewed loans within 90 days of closing. The contractor did not complete
                       17 the 30 quality controls reviews within the required timeframe.

                   •   Document on-site quality control reviews of the branch office.

                   •   Document corrective actions taken to address deficiencies identified in the
                       quality control reports.

               In addition, Clarion Mortgage Capital’s corporate office provided quarterly
               quality control reports to branch office managers rather than monthly reports.


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           Branch office managers could have monitored loan origination deficiencies more
           effectively if they received more frequent feedback on their loan officers’ loan-
           processing activities.

Contractor Not Monitored and
Managers Unaware of All HUD
Requirements

           Clarion Mortgage Capital’s main office, which centrally managed the quality
           control program, did not effectively monitor its quality control contractor. Senior
           management officials acknowledged their responsibility to require timely
           completion and return of quality control reviews from the contractor.

           Clarion Mortgage Capital managers were not aware of all HUD quality control
           requirements. A Clarion Mortgage Capital senior manager stated that
           management was not aware of the documentation requirements for the on-site
           branch quality control reviews and corrective actions taken to address
           deficiencies.

Clarion Mortgage Capital
Unable to Ensure Proper Loan
Originations

           The lender was unable to ensure the accuracy, validity, and completeness of its
           loan origination operations. As a result, it might not identify potential
           deficiencies and make needed corrections in a timely manner, resulting in an
           increased risk to the FHA insurance fund.

Recommendation

           We recommend that the Assistant Secretary for Housing – Federal Housing
           Commissioner

           1A. Verify that Clarion Mortgage Capital has fully implemented a quality control
               program that complies with HUD requirements.




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                         SCOPE AND METHODOLOGY

To accomplish our objective, we reviewed Clarion Mortgage Capital’s quality control plan and
quality control reports and interviewed its management officials. We also reviewed HUD’s and
Clarion Mortgage Capital’s underwriting policies and procedures.

Our audit period was July 1, 2006, through June 30, 2008. During this period, Clarion Mortgage
Capital’s quality control contractor completed quality control reviews of 30 loans. We reviewed
the quality control reports for all 30 to determine whether the quality control contractor

   •   Completed the minimum number of loan reviews required.
   •   Completed quality control reviews within 90 days from the end of the month in which the
       loan closed (HUD’s requirement) and within 90 days of closing (Clarion Mortgage
       Capital’s requirement).
   •   Completed quality control reviews on early default loans.

In addition, we determined whether Clarion Mortgage Capital’s management took prompt and
appropriate actions to deal with material findings.

During our audit period, Clarion Mortgage Capital’s Leawood, Kansas, branch office originated
376 FHA-insured loans. Of these loans, 33 loans became 90 days delinquent within the first two
years. Initially, part of our objective was to determine whether Clarion Mortgage Capital
followed HUD requirements for borrower eligibility and creditworthiness, and property
eligibility when originating FHA loans. We reviewed the FHA loan binders and/or Clarion
Mortgage Capital’s electronic loan files for 10 defaulted loans. We evaluated the loan
origination and underwriting procedures performed on each loan and identified no reportable
deficiencies.

We relied on computer-processed data contained in HUD’s Single Family Data Warehouse
system. During the audit, we assessed the reliability of the data and found it to be adequate. We
also performed sufficient tests of the data, and based on the assessments and testing, we
concluded that the data were sufficiently reliable to be used in meeting our objectives.

We performed audit work from September through November 2008 at Clarion Mortgage
Capital’s branch office at 10740 Nall Avenue, Suite 240, Leawood, Kansas.

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




                                                7
                              INTERNAL CONTROLS

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

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

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



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

              •       Controls to ensure that the lender implements a quality control program that
                      complies with HUD requirements.

              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 Weakness


              Based on our review, we believe that the following item is a significant weakness:

              •       Clarion Mortgage Capital did not have adequate controls in place to ensure
                      that it followed HUD requirements when implementing its quality control
                      program.




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Appendix A

             AUDITEE COMMENTS




                    9
10
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Appendix B

                                          CRITERIA


HUD Handbook 4060.1, REV-2, paragraph 7-6A, states that loans must be reviewed within 90
days from the end of the month in which the loan closed.

Clarion Mortgage Capital’s quality control plan states that loans must be reviewed within 90
days of the closing of the loan.

HUD Handbook 4060.1, REV-2, paragraphs 7-3G and 7-3G(1), state that lenders’ offices,
including traditional, nontraditional branch, and direct lending offices engaged in origination or
servicing of FHA-insured loans, must be reviewed to determine whether they are in compliance
with HUD’s requirements. The review must include but not necessarily be limited to
confirmation of the following items:

•   The office is properly registered with FHA, and the address is current.

•   Operations are conducted in a professional, business-like environment.

•   If the office is located in commercial space, the office is properly and clearly identified for
    walk-in customers, has adequate office space and equipment, is in a location conducive to
    mortgage lending, and is separated from any other entity by walls or partitions (entrances and
    reception areas may be shared).

•   If the office is located in noncommercial space, the office has adequate space and equipment
    and displays a fair housing poster if the public is received. If it is open to receive the public,
    it must be accessible to persons with disabilities, including those with mobility impairments.
    If it is not open to the public but used occasionally to meet with members of the public,
    alternate means of accommodation may be used to serve persons with disabilities.

•   The servicing office provides toll-free lines or accepts collect calls from borrowers.

•   The office is sufficiently staffed with trained personnel.

•   Office personnel have access to relevant statutes, regulations, and HUD issuances and
    handbooks, either in hard copy or electronically.

•   Procedures are revised to reflect changes in HUD requirements, and personnel are informed
    of the changes.

•   Personnel at the office are all employees of the lender or contract employees performing
    functions that FHA allows to be outsourced.


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•   The office does not employ or have a contract with anyone currently under debarment,
    suspension, or a limited denial of participation.

HUD Handbook 4060.1, REV-2, paragraph 7-3I, states that review findings must be reported to
the lender’s senior management within one month of completion of the initial report.
Management must take prompt action to deal appropriately with any material findings. The final
report or an addendum must identify actions being taken, the timetable for their completion, and
any planned followup activities.




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