Issue Date September 10, 2009 Audit Report Number 2009-LA-1018 TO: Phillip Murray, Deputy Assistant Secretary for Housing, HU FROM: Joan S. Hobbs, Regional Inspector General for Audit, Region IX, 9DGA SUBJECT: DHI Mortgage Company, LTD‘s Scottsdale and Tucson, Arizona, Branches Did Not Always Follow FHA-Insured Loan Underwriting and Quality Control Requirements HIGHLIGHTS What We Audited and Why We audited Federal Housing Administration (FHA)-insured loan processes at two DHI Mortgage Company, LTD (DHI Mortgage) branches in Tucson and Scottsdale, Arizona, to determine whether DHI Mortgage originated, approved, and closed FHA-insured single-family loans in accordance with U.S. Department of Housing and Urban Development (HUD) requirements. We chose DHI Mortgage because the Scottsdale, Arizona, branch had a default rate that was double the default rate for FHA-insured loans for the state of Arizona. After our audit survey, we expanded our review to include the Tucson, Arizona, branch because some loans had both branch numbers on the documentation. What We Found DHI Mortgage did not follow HUD requirements for originating, approving, or closing FHA-insured loans. Our review identified the following deficiencies: 205 loans with prohibited restrictive addendums to the purchase contracts and 24 loans with significant underwriting deficiencies. In addition, we noted that DHI Mortgage‘s quality control processes had weaknesses, including failure to determine that 19 loans were not eligible for FHA insurance because the loan officer had been debarred from participation in FHA- insured loan transactions. What We Recommend We recommend that the Assistant Secretary for Housing-Federal Housing Commissioner require DHI Mortgage to (1) indemnify HUD for more than $38 million for loans that did not meet FHA insurance requirements, (2) refund or buy down FHA-insured loans for over-insurance totaling $15,749, and (3) fully implement a quality control plan in compliance with FHA 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 We provided our discussion draft to DHI Mortgage on July 31, 2009, and held an exit conference on August 7, 2009. DHI Mortgage generally disagreed with the audit findings but acknowledged that the audit report uncovered some weaknesses in DHI Mortgage‘s operations. The auditee‘s response, along with our evaluation of that response, can be found in appendix B of this report. The auditee‘s response included an Addendum 1 that responded to Finding 2‘s specific underwriting deficiencies detailed in Appendix D of the audit report. We agreed with some of the items in this addendum and made changes to our report as appropriate. Exhibits A through F of the response were excluded from the report because it was replete with personal identifying information that would cause us to redact most of this response. The complete auditee‘s response is available upon request, as appropriate, under the Freedom of Information Act. 2 TABLE OF CONTENTS Background and Objective 4 Results of Audit Finding 1: DHI Mortgage Did Not Prevent Restrictive Covenants That Violated 5 HUD-FHA Requirements Finding 2: DHI Mortgage Failed to Underwrite FHA-insured Loans in 9 Accordance with HUD-FHA Requirements Finding 3: Quality Control Was Inadequate 13 Scope and Methodology 16 Internal Controls 18 Appendixes A. Schedules of Funds to Be Put to Better Use 20 A-1 Loan Details for Schedule A to Purchase Contracts A-2 Loan Details for Underwriting Deficiencies A-3 Loan Details for Loans Involving Debarred Employee B. Auditee Comments and OIG‘s Evaluation 29 C. Criteria 91 D. Narrative Loan Summaries for Underwriting Deficiencies 104 E. Quality Control Review Deficiencies Noted by FHA Loan Number 127 3 BACKGROUND AND OBJECTIVE DHI Mortgage Company, LTD (DHI Mortgage) is a nonsupervised lender1 approved June 8, 1981, to originate Federal Housing Administration (FHA) loans. DHI Mortgage currently originates loans under the lender insurance program.2 The company is a wholly owned subsidiary of D.R. Horton, Inc., a national residential home builder, and an affiliate of DHI Title Company (DHI Title), another wholly owned subsidiary of D.R. Horton, Inc. DHI Mortgage headquarters is at 12357 Riata Trace Parkway, Suite C-150, Austin, Texas, and the company has branches in 20 states. DHI Mortgage provides mortgage financing services principally to purchasers of D.R. Horton, Inc. homes. D.R. Horton, Inc. DHI Mortgage, DHI Title LTD DHI Mortgage‘s Scottsdale, Arizona, branch (FHA number 0542400332, now closed) was selected for review because it had a two-year default rate of 7.22 percent—double the Arizona default rate of 3.48 percent for the same period.3 We expanded our review to include FHA loans from DHI Mortgage‘s Tucson, Arizona, branch (FHA number 0542400180) because we observed this branch number on some loan applications that had closed under the Scottsdale branch. These two DHI Mortgage branches originated 481 FHA-insured loans4 totaling more than $84 million during our audit period. 5 FHA, created by Congress in 1934, is the largest mortgage insurer in the world. The cost of FHA mortgage insurance is paid by the homeowners, and the mortgage insurance fund is used to operate the program. The mortgage insurance fund pays claims to lenders in the event of a homeowner default. Between October 1, 2008, and February 28, 2009, FHA insured almost 669,000 single-family mortgages totaling more than $119 billion, or 69 percent of the single family insured mortgage market.6 Our objective was to determine whether DHI Mortgage FHA branch numbers 0542400180 and 0542400332 originated, approved, and closed FHA-insured loans in accordance with U.S. Department of Housing and Urban Development (HUD)-FHA regulations and requirements. 1 A non-supervised lender is a HUD/FHA approved lending institution that has as its principal activity the lending or investment of funds in real estate mortgages and is not a supervised mortgagee, a loan correspondent, a governmental institution, a government sponsored enterprise or a public or state housing agency, and has not applied for approval for the limited purpose of being an investing mortgagee. 2 The U.S. Department of Housing and Urban Development‘s (HUD) lender insurance program allows lenders to self-insure FHA loans and submit only those case binders (paper or electronic) requested for review by HUD. HUD requests approximately 6 percent of insured loans for review. 3 This information was obtained from the Neighborhood Watch system, which is HUD‘s Web-based software that displays loan performance data using FHA-insured single-family loan information. 4 The 481 FHA-insured loans included 479 forward (purchase) mortgages and two refinanced loans. 5 The audit period included FHA-insured loans with beginning amortization dates between October 1, 2006, and September 30, 2008. 6 HUD monthly report to the FHA Commissioner: FHA Portfolio Analysis Data as of February 28, 2009. 4 RESULTS OF AUDIT Finding 1: DHI Mortgage Did Not Prevent Restrictive Covenants That Violated HUD-FHA Requirements DHI Mortgage did not ensure that unallowable restrictive covenants were not filed against FHA- insured properties. The restrictive covenants precluded the borrowers from rental or resale of their property for one year and provided for the seller to recoup $40,000 in liquidated damages if the borrower violated the restrictive covenants. DHI Mortgage allowed the restrictive covenants, generally referred to as a schedule A to purchase contract, because officials believed it would discourage investors from purchasing their affiliate‘s (the seller‘s) properties. Because the FHA insurance program requires free assumability with no restrictions, the FHA insurance portfolio had secured more than $36 million in unpaid mortgage balances for these 205 loans that did not meet this FHA insurance requirement. Restrictive Covenants Were Applied to Almost Half of the Loans A review of the title files and the applicable county recorder‘s records revealed liens on 205 FHA-insured properties of the 481 FHA-insured loans in our audit period.7 These liens, called schedule A to purchase contracts, restricted the new owner(s) from resale or rental of the property during the first year of ownership. The execution of these contracts with the purchase agreements violated the regulations governing HUD‘s FHA-insured mortgage program, which prohibited restrictive covenants and second liens. As illustrated in the excerpt below, the contracts stated that the ―Owner hereby grants to Seller a lien against the Property (the ‗Lien‘) to secure Owner‘s obligations hereunder. Seller may promptly initiate proceedings to foreclose the Lien if Owner defaults in its obligation to pay Seller liquidated damages in the amount of $40,000 on the date that Owner or any of its successors or assigns conveys during the Restricted Period any rights, title, or interest in the Property without Seller‘s written consent.‖ Schedule A to purchase contract corresponding to FHA loan number 022-1894370 7 Our audit period was between October 1, 2006, and September 30, 2008. 5 DHI Mortgage was apparently aware that this practice was not allowed for FHA-insured mortgages because there were instances in which the occupancy/investment disclosure addendum to the purchase contract contained the following exclusion from the restrictive covenant when the buyer purchased the property using FHA. Addendum to purchase contract corresponding to FHA loan number 023-2388693 However, despite the exclusion clause number 7, to the schedule A to purchase, the contract was executed and recorded in 205 instances. Appendix A-1 contains the FHA loan numbers for which we found a schedule A to purchase contract. The schedule A to purchase contracts made the loans ineligible for FHA insurance because the contract addenda included prohibited liens against the FHA- insured property as well as restrictive covenants that prevented the borrower from rental or resale of the FHA-insured property which violated 24 CFR (Code of Federal Regulations) 203.32 and 203.41 respectively. The regulations under 24 CFR 203.32 state that after the mortgage offered for insurance has been recorded, the mortgaged property will be free and clear of all liens other than such mortgage. The regulations under 24 CFR 203.41(b) state that an FHA-insured ―mortgage shall not be eligible for insurance if the mortgaged property is subject to legal restrictions on conveyance‖ (see the criteria appendix C).8 During an interview, one of the FHA loan borrowers, whose loan contained underwriting deficiencies discussed under finding 2, informed us that although her financial situation changed shortly after purchasing the property, the restrictive covenant with the lien deterred her from trying to rent or sell the property within the first year after purchase to avoid further financial difficulty. However, after the one-year restriction period expired, the borrower decided that the housing market decline had depressed prices to the point that made it unlikely she could sell or rent the home for an amount that would cover the mortgage. As a result, the home went into foreclosure. 8 The exception to free assumability is under 24 CFR 203.41(c) ―Exception for eligible governmental or nonprofit programs.‖ 6 DHI Mortgage Officials Used the Covenants to Discourage Investment Purchasers DHI Mortgage officials stated that the schedule A to purchase contracts was a common practice designed to address a significant problem experienced by D.R. Horton, Inc. – Dietz-Crane (D.R. Horton) and other home builders when home prices were rapidly escalating. In many cases, a buyer who claimed to be purchasing a home for his or her residence was actually an investor seeking to purchase and then quickly sell the home at a profit. D.R. Horton did not consider this flipping practice to be consistent with the goal of building sustainable communities at a reasonable price. Officials stated that the ―Schedule A was not designed to prohibit or provide for liquid damages in connection with the bona fide purchase and resale of a home by the owner-occupant. Schedule A simply provides that a home may not be resold within one year of the purchase from D.R. Horton without D.R. Horton‘s consent.‖ Conclusion The schedule A to purchase contract put additional unnecessary risk on the FHA-insured loans by restricting the borrower‘s ability to rent or sell a property during the first year of the loan and by giving sole discretion to the former seller to grant a waiver of the restrictions. Therefore, the 205 loans with a total unpaid mortgage balance of more than $36 million did not meet the requirements for FHA insurance. The projected loss to HUD associated with these loans was more than $15 million9 (see appendix A-1). Recommendations We recommend that the Assistant Secretary for Housing-Federal Housing Commissioner require DHI Mortgage to 1A. Indemnify HUD against losses for the 205 FHA-insured loans with unallowable covenants and prohibited liens in the amount of $ 36,157,343. The projected loss to HUD is $15,256,783 (see appendix A-1). 9 This amount was calculated based on 42 percent of the unpaid mortgage balances or the actual loss to HUD when known (as of June 17, 2009). The 42 percent indemnification rate was the average loss on FHA-insured foreclosed properties based on an independent actuarial analysis of the economic net worth and soundness of FHA‘s Mutual Mortgage Insurance Fund. This actuarial report presents the findings with respect to the required analysis for fiscal year 2008 using data as of March 31, 2008. The fiscal year 2008 report was issued by Integrated Financial Engineering, Inc., of Rockville, Maryland. 7 1B. Discontinue the use of unallowable covenants and prohibited liens with FHA- insured loans and refrain from executing these documents or filing them with the county recorder‘s office. 1C. Develop and implement verification procedures to ensure that the unallowable restrictive covenant and the prohibited liens are not executed and/or filed with the county recorder‘s office for FHA-insured loans. 8 Finding 2: DHI Mortgage Failed to Underwrite FHA-Insured Loans in Accordance with HUD-FHA Requirements DHI Mortgage did not underwrite 24 FHA-insured loans in accordance with HUD-FHA requirements. This condition occurred because the lender failed to exercise due diligence in underwriting these loans in areas such as income verification, credit evaluation, asset verification, and contract reviews. As a result, the FHA insurance portfolio was at increased risk of loss on more than $4.1 million in unpaid mortgage balances for loans that did not meet FHA insurance requirements. Twenty-four Loan Files Contained Significant Underwriting Deficiencies The loan file reviews of 34 FHA-insured loans identified 24 that had significant underwriting deficiencies regarding the evaluation of income, credit, assets, contract, and other issues. DHI Mortgage did not underwrite the 24 loans as required by HUD Handbook 4155.1, chapter 3 which states that ―[t]he lender is responsible for asking sufficient questions to elicit a complete picture of the borrower's financial situation, source of funds for the transaction, and the intended use of the property. All information must be verified and [documented]. The lender must also verify and document the identity of the loan applicant(s).‖ The 24 loans were approved based on many factors that included the reported monthly income, debt obligations, or assets. However, DHI Mortgage closed many of the loans without obtaining the required documentation to support the amounts it used to approve the borrower. For example, the underwriter approved FHA-insured loan 022-1890152 based, in part, on the borrower‘s reported monthly overtime income of $1,084. However, the file documentation did not support the use of this amount for overtime earnings because, among other things, it failed to show a two-year trend for the overtime as required by HUD Handbook 4155.1, paragraph 2-7A (see criteria in appendix C). The types of deficiencies we identified for each approval factor are presented below. Income - Deficiencies included improperly calculated income (unqualified income or unsubstantiated income10) or lack of support to validate income contrary to HUD Handbook 4155.1, paragraph 2-7 and Mortgagee Letter 2004- 47. Additionally, this category included the failure to verify that employment was likely to continue as required by HUD Handbook 4155.1, chapter 2, section 2, as well as HUD Handbook 4155.1, paragraph 2-7 and Mortgagee Letter 2004-47. Unqualified income is income that did not meet HUD guidelines for use in the borrower‘s ratios whereas unsubstantiated income is income that 10 was not supported or verified. 9 Credit - Deficiencies for debts and liabilities included the failure to provide proof of satisfied judgments before closing as required by HUD Handbook 4155.1, paragraph 2-3C; exclusion of debts from the qualifying ratios without explanation as required by HUD Handbook 4155.1, paragraph 2-11; and failure to properly support and calculate net rental income/loss as required by HUD Handbook 4155.1, paragraph 2-7M2. Assets - Deficiencies included missing bank statements contrary to HUD Handbook 4155.1, paragraph 3-1F; failure to verify or substantiate that earnest money was paid by the borrower as required by HUD Handbook 4155.1, paragraph 2-10A; and lack of proof that retirement assets were liquid when used as available funds for qualifying purposes as required by Mortgagee Letter 2004- 47. Contract - Deficiencies included improper restrictive covenants discussed under finding 1, which violated 24 CFR 203.41 and missing addendums to the sales contract contrary to HUD Handbook 4155.1, paragraph 3-1H. Other - This category includes items found in the loan file reviews that were not in any of the above categories. For example, we identified loan files that lacked evidence that the realtor had been checked against the lists for limited denial of participation or federal excluded parties and contained loans that were originated by an employee on the federal excluded parties list contrary to HUD Handbook 4155.1, paragraph 2-5. Additionally, we identified instances where the lender financed loan discounts into the mortgage contrary to HUD Handbook 4000.2, paragraph 5-2P (see criteria in appendix C). The table below lists the 34 FHA loan numbers reviewed and the deficient areas associated with each loan. The table also identifies the 24 loans for which we concluded the underwriting was significantly deficient and therefore warrant indemnification. Appendix D provides underwriting details for each FHA loan number presented in the table below. 10 Case file review revealed underwriting deficiency for Significant FHA loan underwriting number Income Credit Assets Contract Other deficiencies 022-1864520 X X X X X 022-1874931 X X X X 022-188346311 X X 022-188378111 X X 022-1890152 X X X X 022-1892652 X X X 023-2356343 X X X X 023-2375190 X X X 023-2375473 X X X X 023-238386011 X X 023-2384380 X X X X 023-238869311 X 023-2389873 X X X 023-2391447 X X X 023-240909011 X 023-241224111 X X 023-2414288 X X X 023-2425869 X X X X 023-2426099 X X X X 023-2427150 X X X X 023-2435939 X X X 023-243808011 X X 023-2438810 X X X X 023-2442707 X X 023-244726311 X X 023-2452473 X X 023-2453167 X X 023-2458663 X X X X 023-246804711 X X 023-2482980 X X X X X X 023-2487907 X X 023-2529391 X X 023-264010711 X 023-2674566 X X X Totals 26 16 5 20 8 24 11 These loans were not counted as having significant underwriting deficiencies because the loan files either had (1) only minor deficiencies and were not considered for indemnification and/or (2) the deficiencies were addressed under findings 1 and/or 3. Specifically, we did not seek indemnification for loans with minor income or credit deficiencies and we did not seek indemnification on loans that financed discount points into the loan amount (instead we are requesting an appropriate reduction of the loan balances). 11 Lack of Due Diligence Increased Risk of Loss to the FHA Insurance Fund The foreword in HUD Handbook 4155.1 states, ―This [underwriting] decision must be predicated on sound underwriting principles consistent with the guidelines, rules, and regulations described throughout this Handbook and must be supported by sufficient documentation.‖ Because DHI Mortgage did not follow HUD-FHA requirements when underwriting it inappropriately approved the 24 loans. The lender did not exercise both sound judgment and due diligence when it submitted these loans for FHA insurance. Further, DHI Mortgage did not identify the deficiencies in its loan origination process because its quality control reviews of FHA-insured loans were not performed in accordance with HUD requirements (see finding 3). As a result, the FHA insurance fund was at increased risk for losses on the 24 loans with significant underwriting deficiencies. Conclusion DHI Mortgage‘s failure to follow HUD-FHA regulations and requirements placed the FHA insurance fund at additional risk for losses. The 24 loans that did not meet the requirements for FHA insurance have a total unpaid mortgage balance of more than $4.1 million, a projected loss to HUD of $942,818,12 and overinsurance totaling $15,749 (see appendix A-2). Recommendations We recommend that the Assistant Secretary for Housing-Federal Housing Commissioner require DHI Mortgage to 2A. Indemnify HUD against losses for the 24 FHA-insured loans with significant underwriting deficiencies in the amount of $4,114,822. The projected loss to HUD is $942,818. 2B. Refund the $15,749 in overinsurance generated from financing the loan discount into the FHA-insured loan by (1) reimbursing HUD in the amount of the loan discount for any claim paid on the loan; (2) paying down any amount of arrears, penalties, or fees owed on the loan due to delinquency; and then, if applicable, (3) applying the remaining amount of the loan discount against the principal amount owed on the FHA-insured loan. 12 This amount was calculated based on 42 percent of the unpaid mortgage balances or the actual loss to HUD when known, excluding loans requested for indemnification under finding 1. 12 Finding 3: Quality Control Was Inadequate DHI Mortgage did not adequately perform quality control reviews of FHA-insured loans and branch offices we reviewed in accordance with HUD requirements and DHI Mortgage‘s own quality control plan. Specifically, on-site quality control reviews at the branches did not cover all of the required items, and quality control reviews of loan files we examined did not conform to standards. Also, DHI Mortgage did not fully comply with quality control standards pertaining to conflicts of interest. This condition occurred because DHI Mortgage disregarded HUD‘s quality control requirements. As a result of the inadequate quality control, a debarred individual was allowed to participate in loan originations, which disqualified 19 FHA-insured loans valued more than $3.4 million. Also, quality control file reviews were not completed in a timely manner, and company officers had authority in both the lending and title functions. These and other lapses in quality control contributed to increased risk to the FHA insurance fund. On-Site Quality Control Branch Reviews Were Inadequate Our evaluation of DHI Mortgage‘s on-site quality control branch reviews that occurred from October 1, 2006, to September 30, 2008, revealed that they were not performed in accordance with HUD Handbook 4060.1, paragraph 7-3G (see criteria in appendix C), or DHI Mortgage‘s own quality control plan. Although DHI Mortgage performed on-site branch reviews, certain required items were not covered. The reviews did not effectively establish that offices did not employ or have a contract with individuals who were under debarment, suspension, or a limited denial of participation. Under HUD Handbook 4155.1, paragraph 2-5 these individuals are not eligible to participate in FHA-insured mortgage transactions. Reviewers also did not ensure that HUD was notified of a change of branch address. These branch review deficiencies unnecessarily increased the risk to the FHA insurance fund. We found 19 FHA-insured loans that DHI originated using an individual who had been debarred13 at the time of the loan originations. Therefore, the 19 loans with a total unpaid balance of more than $3.4 million did not meet requirements for FHA insurance. In addition, DHI Mortgage officials did not always notify HUD of branch changes in a timely manner. HUD relies on compiling and gathering accurate lender data from its on- line information system to monitor individuals and entities involved in FHA-insured loans.14 13 The loan officer worked for DHI Mortgage‘s FHA branch number 0542400180. The employee originated the 23 FHA-insured loans while on the General Service Administration‘s Excluded Parties List System; however, four of the loans have been paid in full. 14 Neighborhood Watch aids HUD/FHA staff in monitoring lenders and HUD programs, and assists lenders and the public in facilitating self- policing of the industry. The system is designed to highlight exceptions, so that potential problems are readily identifiable. 13 FHA-Insured Quality Control Reviews Were Inadequate We reviewed 10 quality control review files that corresponded to our underwriting reviews and determined that all 10 did not meet the requirements of HUD Handbook 4060.1, paragraph 7-6, and DHI Mortgage‘s own quality control plan. Deficiencies included failure to: complete the quality control reviews in a timely manner, obtain an appropriate credit report, reverify the earnest money deposit or gift funds, conduct a desk or field appraisal, review and document the underwriting decision, and review and document the conditional clearance and closing items. The deficient quality control loan reviews may have prevented DHI Mortgage from correcting systemic deficiencies that could reduce unnecessary future risk to HUD. Appendix E provides the FHA loan numbers and the deficiencies we noted in each quality control review. DHI Allowed Conflicts of Interest Both the president and vice president of compliance for DHI Mortgage also worked in official capacities for DHI Title. However, there was no evidence that DHI Mortgage reviewed or otherwise provided assurance that a clear and effective separation of the two entities existed and that the borrowers knew at all times exactly with which entity they were doing business—as required by HUD Handbook 4060.1, paragraph 2-9C. Such dual authority raised questions regarding the independence of the lending and closing functions. Underwriters‘ compensation agreements at DHI Mortgage included compensation based on the number of loan decisions made. This is a form of commission contrary to HUD Handbook 4060.1, paragraph 2-9A (see criteria in appendix C). Commissions provide an incentive for underwriters to focus on quick underwriting decisions rather than compliance with FHA insurance requirements. FHA Quality Control Requirements Were Disregarded The lapses in quality control occurred because DHI Mortgage disregarded HUD‘s quality control review requirements and its own quality control plan. DHI Mortgage officials informed us that they thought the quality control on-site branch review requirements had been met because the required items were reviewed at the corporate level. However, the corporate reviews did not meet HUD requirements and proved ineffective in some cases, as evidenced by DHI Mortgage‘s failure to identify a debarred employee and update branch information to HUD. DHI officials also stated that the vice president of compliance at DHI Mortgage filled two roles because his previous position at DHI Title had not been filled. DHI Mortgage‘s response to the audit report proposed improvements to address the quality control deficiencies we cited. (See appendix B.) 14 Conclusion DHI Mortgage‘s quality control failures allowed endorsements on 19 loans with a total unpaid mortgage balance of more than $3.4 million that did not meet the requirements for FHA insurance. The projected loss to HUD associated with these loans is $168,773 (see appendix A-3).15 DHI‘s disregard of HUD‘s requirements to check its employees against federal lists of ineligible individuals, as well as other quality control deficiencies, increased the likelihood of noncompliance and resulted in increased risk to FHA‘s insurance fund. Recommendations We recommend that the Assistant Secretary for Housing-Federal Housing Commissioner require DHI Mortgage to 3A. Indemnify HUD against losses for the 19 FHA-insured loans originated by a debarred employee in the amount of $3,477,875. The projected loss to HUD is $168,773. 3B. Revise and implement policies and procedures to reflect HUD requirements for updating FHA branch office changes and to ensure that offices do not employ or have a contract with individuals who are under debarment, suspension, or a limited denial of participation. 3C. Fully implement its quality control plan related to FHA-insured loan reviews and FHA branch office reviews. 3D. Discontinue or develop and implement procedures regarding officials working for DHI Mortgage and DHI Title to ensure that a clear and effective separation exists between the two entities and that borrowers know at all times exactly with which entity they are doing business. 3E. Discontinue the compensation to underwriters in the form of commissions, in appearance and in fact. 15 This amount was based on 42 percent of the unpaid mortgage balances and the actual loss to HUD if known, excluding loans requested for indemnification under findings 1 and 2. 15 SCOPE AND METHODOLOGY We selected DHI Mortgage because of a default rate16 that was double the Arizona state average. Our audit period covered loans with beginning amortization dates from October 1, 2006, to September 30, 2008. During this period DHI Mortgage FHA branch numbers 0542400180 and 0542400332 originated 481 FHA-insured mortgages, with a total unpaid mortgage balance over $84 million. Our review included title files corresponding to 468 of the 48117 FHA-insured loans. The total unpaid mortgage balance for these loans was over $80 million. The title file reviews were primarily used to determine if a schedule A to purchase contract was associated with the FHA- insured property. We also reviewed underwriting documentation in the lender/FHA loan files for 34 FHA-insured loans selected nonstatistically based on the existence of loan defaults and claims. Initially, we used HUD‘s online information system for FHA loans to obtain a sample that included all FHA loans from DHI Mortgage‘s branch number 0542400332 with beginning amortization dates between October 1, 2006, and September 30, 2008, and then selected cases that defaulted (or went into claims) within the first two years. This methodology resulted in a sample of 20 FHA loans. During file reviews we noted that some loan records had the DHI Mortgage branch number 0542400180, and so we expanded our underwriting loan reviews to include FHA loans under the 0542400180 branch using the same selection methodology. We then obtained the most up-to-date information, as of January 8, 2009, for our two-year audit period by directly querying HUD‘s Single Family Data Warehouse.18 This query identified an additional 14 loans that were in default (90 days or more delinquent) for a total sample of 34 loans. To perform our quality control file reviews, we selected all early payment default loans and all other quality control reviews from the lender‘s quality control log that pertained to our underwriting review sample. As a result, we reviewed 10 of the quality control reports that DHI Mortgage performed on the 34 loans in our underwriting review. We also reviewed DHI Mortgage‘s on-site branch office quality control reviews covering our audit period. We conducted our fieldwork at DHI Mortgage‘s Tucson and Scottsdale, Arizona, branch offices between December 2008 and March 2009. 16 Percentage of loan originations which had first defaults (i.e. became 90 days delinquent) reported by the servicing lender during the first two years of origination. 17 Although we attempted to review all 481 loans originated during our audit period, we did not receive 13 title files and, therefore, did not conduct a review of those loans. This limitation did not affect the results of our audit, because we did not project our review of the files to the entire population. Instead, we only counted deficiencies associated with the specific FHA loan numbers listed for each finding(s) as a whole; rather, we identified items by the specific FHA loan number associated with the finding(s). 18 The Single Family Housing Enterprise Data Warehouse (Single Family Data Warehouse) is a large and extensive collection of database tables organized and dedicated to support the analysis, verification, and publication of single family housing data. The warehouse consists of data marts developed to support specific business units/communities within the HUD family. Each data mart comprises one or more database tables structured to provide HUD users easy and efficient access to single family housing case-level data on properties and associated loans, insurance, claims, defaults, and demographics. The data is sourced from HUD systems, and contains more detailed information than the Neighborhood Watch system. 16 To accomplish our objective, we Reviewed HUD regulations and reference materials related to single-family requirements; Reviewed DHI Mortgage‘s processing, underwriting, and closing policies and procedures; Reviewed DHI Mortgage‘s loan files; Reviewed 468 title files corresponding to the 481 loans originated in our audit period. These were generally limited to the (1) settlement statement (Form HUD-1); (2) file balance sheet; and (3) schedule A to purchase contract, declaration of covenant restricting rental or resale of property, or equivalent; Reviewed DHI Mortgage‘s quality control plan and quality control review reports; Interviewed appropriate DHI Mortgage staff; Interviewed the branch manager of DHI Title in Scottsdale, Arizona; and Interviewed borrowers, when available, associated with the 34 FHA loans in our underwriting review. We used the source documents in the loan case file to determine borrower income, employment history, and debt. For the loans underwritten by an automated underwriting system, we reviewed the FHA loan file to determine whether it contained the documentation required to support the integrity and accuracy of the data used by the automated underwriting system to recommend approval of the loan. For the manually underwritten loans, we reviewed the loan documents to determine whether they supported the underwriting decision and complied with HUD Handbook 4155.1, Mortgage Credit Analysis.19 We used data maintained by HUD in its information systems for FHA loans to obtain background information and to select our sample of loans for testing. We did not rely on the data to reach our conclusions; therefore, we did not assess the reliability of the data. 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. 19 A manually underwritten loan must comply with HUD Handbook 4155.1. HUD‘s Mortgagee Letter 2004-47 explains that mortgage loans scored as accepted or approved through FHA‘s TOTAL Mortgage Scorecard are granted a number of credit policy revisions and documentation relief from the instructions in Handbook HUD 4155.1. However, the lenders must still comply with outstanding eligibility requirements and ensure the integrity and accuracy of the data used to render a decision. 17 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: Policies and procedures intended to ensure that FHA-insured loans are properly originated, underwritten (approved), and closed. Policies and procedures intended to ensure that the quality control program is an effective tool for reducing underwriting errors. Policies and procedures intended to ensure that the quality control program is an effective tool for reducing the lender‘s branch office noncompliance. 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. 18 Significant Weaknesses Based on our review, we believe that the following items are significant weaknesses: DHI Mortgage did not have effective controls in place to ensure that FHA-insured loans were underwritten in accordance with HUD requirements, exposing the FHA insurance fund to unnecessary risk (see findings 1 and 2). DHI Mortgage did not have effective controls in place to ensure that FHA-insured loans closed in accordance with HUD requirements, exposing the FHA insurance fund to unnecessary risk (see finding 1). DHI Mortgage did not ensure that its plan for quality control loan reviews was fully implemented and that the reviews were conducted in a timely manner (see finding 3). DHI Mortgage did not fully implement its quality control plan for on-site branch office reviews to ensure that each branch complied with eligibility and conflict-of- interest requirements for its employees (see finding 3). 19 APPENDIXES Appendix A SCHEDULE OF FUNDS TO BE PUT TO BETTER USE Recommendation Funds to be put number to better use 1/ 1A $15,256,783 2A 942,818 2B 15,749 3A 168,773 Totals $16,384,123 1/ Recommendations that funds be put to better use are estimates of amounts that could be used more efficiently if an Office of Inspector General (OIG) recommendation is implemented. These amounts include reductions in outlays, deobligation of funds, withdrawal of interest, costs not incurred by implementing recommended improvements, avoidance of unnecessary expenditures noted in preaward reviews, and any other savings that are specifically identified. See the appendixes in this section for further explanation of costs. 20 Appendix A-1: Loan Details for Schedule A to Purchase Contracts The table below contains the actual, if known, and projected losses to HUD corresponding to the loans recommended for indemnification under finding 1 resulting from FHA-insured loans with schedule A to the purchase contracts. FHA loans with schedule A to purchase contract FHA loan Unpaid mortgage Actual loss Indemnification number balance to HUD amount (42%) 022-1858519 $ 148,315 $ 62,292 022-1858889 180,288 75,721 022-1861293 173,033 72,674 022-1864520 225,103 94,543 022-1865027 156,664 65,799 022-1867629 182,726 76,745 022-1868098 183,874 77,227 022-1869977 156,459 65,713 022-1873959 215,573 90,541 022-1874931 159,147 66,842 022-1876036 178,104 74,804 022-1876348 216,503 90,931 022-1879656 224,602 94,333 022-1882077 209,753 88,096 022-1882083 206,710 86,818 022-1882314 156,588 65,767 022-1882626 213,034 89,474 022-1882973 188,988 79,375 022-1883174 177,122 74,391 022-1883378 146,337 61,462 022-1883428 210,202 88,285 022-1883463 223,321 93,795 022-1883781 195,392 82,065 022-1884236 153,653 64,534 022-1884321 170,898 71,777 022-1884475 153,495 64,468 022-1885674 154,663 64,958 022-1886056 153,587 64,506 022-1886062 149,510 62,794 022-1886374 154,787 65,010 022-1886476 172,354 72,389 21 FHA loans with schedule A to purchase contract FHA loan Unpaid mortgage Actual loss Indemnification number balance to HUD amount (42%) 022-1886555 153,978 64,671 022-1886578 204,206 85,767 022-1887101 144,200 60,564 022-1887328 188,977 79,370 022-1887538 203,103 85,303 022-1887646 174,418 73,256 022-1888188 174,277 73,196 022-1888743 184,363 77,433 022-1888874 157,541 66,167 022-1889291 168,363 70,712 022-1890152 219,081 92,014 022-1890348 158,256 66,468 022-1890589 184,345 77,425 022-1890826 183,574 77,101 022-1893107 159,150 66,843 022-1894370 144,342 60,624 022-1894522 169,015 70,986 022-1894545 147,959 62,143 022-1894618 149,699 62,874 022-1894703 144,672 60,762 022-1895166 158,675 66,644 022-1895898 179,079 75,213 022-1896024 227,919 95,726 022-1896053 186,481 78,322 022-1896103 164,141 68,939 022-1896228 198,764 83,481 022-1900289 167,463 70,335 022-1900555 143,985 60,474 022-1901617 177,357 74,490 022-1902924 192,565 80,877 022-1904035 174,363 73,233 022-1905118 168,860 70,921 022-1907740 182,083 76,475 022-1910307 149,568 62,818 022-1910575 156,298 65,645 022-1912950 177,996 74,758 22 FHA loans with schedule A to purchase contract FHA loan Unpaid mortgage Actual loss Indemnification number balance to HUD amount (42%) 022-1914090 154,912 65,063 022-1914808 165,214 69,390 022-1914939 213,251 89,565 022-1915718 203,335 85,401 022-1915973 183,960 77,263 022-1916975 199,370 83,735 022-1917051 187,794 78,873 022-1918398 207,841 87,293 022-1922051 178,684 75,047 022-1922847 203,087 85,296 022-1924102 174,040 73,097 022-1924437 205,529 86,322 022-1927042 149,806 62,919 022-1928950 131,541 55,247 022-1929405 139,208 58,467 022-1929457 207,936 87,333 022-1929860 204,970 86,087 022-1930041 158,522 66,579 022-1930058 143,547 60,290 022-1930574 150,570 63,239 022-1930881 141,896 59,596 022-1930919 185,656 77,976 022-1931030 184,370 77,436 022-1932444 150,248 63,104 022-1932689 169,848 71,336 022-1932695 196,940 82,715 022-1932830 208,721 87,663 022-1932882 150,803 63,337 022-1933439 193,418 81,236 022-1938623 184,458 77,472 022-1939498 171,567 72,058 022-1942208 188,971 79,368 022-1944868 238,969 100,367 022-1945647 136,631 57,385 022-1949095 169,161 71,048 022-1950364 189,700 79,674 23 FHA loans with schedule A to purchase contract FHA loan Unpaid mortgage Actual loss Indemnification number balance to HUD amount (42%) 022-1951268 189,629 79,644 022-1951414 173,904 73,040 022-1951852 290,505 122,012 022-1952972 172,061 72,266 022-1953689 278,540 116,987 022-1954308 140,875 59,168 022-1954314 168,235 70,659 022-1954451 160,600 67,452 022-1954501 141,341 59,363 022-1955723 168,333 70,700 022-1956895 247,904 104,120 022-1958850 209,989 88,195 022-1961446 166,560 69,955 022-1962277 219,036 91,995 022-1962514 285,068 119,729 022-1962884 187,539 78,766 022-1964719 147,468 61,937 022-1965346 218,331 91,699 022-1966017 190,743 80,112 022-1966703 223,843 94,014 022-1967324 135,395 56,866 022-1967505 151,041 63,437 022-1968053 139,424 58,558 022-1968388 138,213 58,049 022-1968421 248,174 104,233 022-1968438 170,538 71,626 022-1968444 182,274 76,555 022-1968500 243,500 102,270 022-1971233 156,844 65,875 022-1971370 189,186 79,458 022-1971472 213,542 89,688 022-1971618 169,525 71,201 022-1971755 135,410 56,872 022-1972158 175,538 73,726 022-1972216 184,052 77,302 022-1972280 188,037 78,976 24 FHA loans with schedule A to purchase contract FHA loan Unpaid mortgage Actual loss Indemnification number balance to HUD amount (42%) 022-1973473 185,964 78,105 022-1975416 162,399 68,208 022-1975422 224,563 94,317 022-1975576 161,928 68,010 022-1975865 181,417 76,195 022-1975973 224,327 94,217 022-1976463 165,103 69,343 022-1976492 167,627 70,404 022-1977049 159,953 67,180 022-1977055 181,353 76,168 022-1978362 201,876 84,788 023-2320644 169,128 71,034 023-2340287 136,585 57,366 023-2356343 192,796 80,974 023-2375388 248,968 104,567 023-2375473 161,815 67,962 023-2383860 145,298 61,025 023-2383895 161,103 67,663 023-2383979 199,019 83,588 023-2384380 192,236 80,739 023-2387278 190,701 80,094 023-2388425 133,663 56,138 023-2388693 162,073 68,071 023-2389790 164,684 69,167 023-2390356 147,826 62,087 023-2392731 158,364 66,513 023-2400628 249,580 104,824 023-2404478 158,152 66,424 023-2405211 154,805 65,018 023-2406144 138,617 58,219 023-2406167 234,825 98,627 023-2411433 166,259 69,829 023-2412241 193,271 81,174 023-2419965 200,046 84,019 023-2424227 138,773 58,285 023-2425869 139,647 58,652 25 FHA loans with schedule A to purchase contract FHA loan Unpaid mortgage Actual loss Indemnification number balance to HUD amount (42%) 023-2426099 209,080 $120,843 0 023-2435820 223,908 94,042 023-2435939 144,544 98,380 0 023-2436464 131,045 55,039 023-2438080 132,333 55,580 023-2438810 129,867 54,544 023-2438885 149,765 62,901 023-2439585 163,521 68,679 023-2444743 115,815 48,642 023-2448485 124,296 52,204 023-2450676 143,320 60,194 023-2452908 158,159 66,427 023-2454894 250,784 105,329 023-2455303 220,548 92,630 023-2457044 141,541 59,447 023-2458663 137,292 57,663 023-2468047 225,817 94,843 023-2474700 142,334 59,780 023-2478730 140,110 58,846 023-2482980 138,860 58,321 023-2487653 156,690 65,810 023-2492828 127,724 53,644 023-2497053 144,444 60,666 023-2503336 128,574 54,001 023-2504768 147,062 61,766 023-2508248 138,698 58,253 023-2515521 172,782 72,568 023-2523166 124,333 52,220 023-2528475 192,266 80,752 023-2529520 211,510 88,834 Total $36,157,343 $219,223 $15,037,560 26 Appendix A-2: Loan Details for Underwriting Deficiencies The table below contains the actual, if known, and projected losses to HUD corresponding to the loans recommended for indemnification under finding 2, excluding any loans recommended for indemnification under finding 1. FHA loan Significant underwriting Unpaid mortgage Actual loss Indemnification Overinsurance number deficiencies balance to HUD amount (42%) from loan discount 022-186452020 X $ 225,103 0 20 022-1874931 X 159,147 0 022-188346321 0 $ 3,397 022-188378121 0 022-189015220 X 219,081 0 022-1892652 X 141,144 $ 59,280 023-235634320 X 192,796 0 023-2375190 X 232,530 97,663 20 023-2375473 X 161,815 0 023-238386020 0 023-238438020 X 192,236 0 023-238869320 0 023-2389873 X 177,952 74,740 023-2391447 X 191,099 80,262 023-240909022 0 023-241224120 0 023-2414288 X 119,929 50,370 023-242586920 X 139,647 0 023-242609920 X 209,080 0 023-2427150 X 143,326 60,197 023-243593920 X 144,544 0 023-243808020 0 023-243881020 X 129,867 0 023-2442707 X 192,391 $ 126,218 0 023-244726322 0 8,298 023-2452473 X 202,755 85,157 023-2453167 X 148,277 92,232 0 023-245866320 X 137,292 0 023-246804720 0 4,054 023-248298020 X 138,860 0 023-2487907 X 151,879 63,789 023-2529391 X 162,278 68,157 023-264010722 0 023-2674566 X 201,794 84,753 Totals 24 $4,114,822 $218,450 $724,368 $15,749 20 FHA loans recommended for indemnification under finding 1; therefore, the indemnification amount was excluded from this schedule to prevent overlap. 21 FHA loans recommended for indemnification under finding 1 and finding 3; therefore, the indemnification amount was excluded from this schedule to prevent overlap. 22 Although the loan had underwriting deficiencies, they were not significant enough to seek indemnification. 27 Appendix A-3: Loan Details for Loans Involving Debarred Employee The table below contains the projected losses to HUD corresponding to the loans recommended for indemnification under finding 3 because these FHA-insured loans were originated by a debarred loan officer. Unpaid mortgage Indemnification FHA loan number balance amount (42%) 022-187634823 $ 216,503 022-188207723 209,753 022-188231423 156,588 022-188297323 188,988 022-188317423 177,122 022-188342823 210,202 022-188346324 223,321 022-188378124 195,392 022-188605623 153,587 022-188637423 154,787 022-189034823 158,256 022-189082623 183,574 022-189461823 149,699 022-1895324 198,515 $ 83,376 022-189589823 179,079 022-190028923 167,463 022-190161723 177,357 022-190403523 174,363 023-2618882 203,326 85,397 Total $3,477,875 $168,773 23 FHA loan recommended for indemnification under finding 1; therefore, the indemnification amount was excluded from this schedule to prevent overlap. 24 FHA loan recommended for indemnification under finding 1 and reported under finding 2; therefore, the indemnification amount was excluded from this schedule to prevent overlap. 28 Appendix B AUDITEE COMMENTS AND OIG’S EVALUATION Ref to OIG Evaluation Auditee Comments 29 Comment 1 Comment 2 30 Comment 3 Comment 4 Comment 5 31 Comment 5 Comment 6 Comment 7 Comment 8 32 Comment 9 Comment 10 Comment 11 Comment 12 Comment 13 Comment 14 33 Comment 15 Comment 16 Comment 17 Names were redacted on this page for privacy reasons. 34 Comment 18 Comment 19 Comment 20 35 Comment 21 Comment 22 Comment 23 36 Comment 24 Comment 25 Comment 26 Comment 27 Names were redacted on this page for privacy reasons. 37 Comment 28 Comment 29 38 Comment 30 39 40 Comment 31 Comment 32 Comment 33 41 Comment 34 Comment 35 42 Comment 36 Comment 37 43 Comment 38 Comment 39 Comment 40 Names were redacted on this page for privacy reasons. 44 Comment 41 45 Comment 42 Comment 43 46 Comment 43 47 Comment 44 Comment 45 48 49 Comment 46 Comment 47 50 Comment 48 51 Comment 49 Comment 50 52 Comment 51 Comment 52 53 Comment 53 54 Comment 54 55 56 Comment 55 Comment 56 Comment 57 57 Comment 58 Comment 59 58 Comment 60 Comment 61 59 Comment 62 60 Comment 63 61 Comment 63 Comment 64 62 Comment 65 Comment 66 Comment 67 63 Comment 68 Comment 69 64 Comment 70 65 Comment 71 Comment 72 66 Comment 73 67 Comment 74 68 Comment 75 69 Comment 76 Comment 77 70 Comment 78 71 Comment 79 Comment 80 72 73 74 Comment 81 75 Comment 82 76 Comment 83 77 OIG Evaluation of Auditee Comments Comment 1 We disagree with DHI Mortgage‘s assertion that it lacked knowledge that the restrictive covenants were recorded and therefore had no responsibility to ensure its FHA-insured loans were (1) freely assumable as required under 24 CFR (Code of Federal Regulations) 203.41, and (2) free and clear of all other liens as required under 24 CFR 203.32(a). The regulations under 24 CFR 203.32(a) state "a mortgagor must establish that, after the mortgage offered for insurance has been recorded, the mortgaged property will be free and clear of all liens other than such mortgage, and that there will not be outstanding any other unpaid obligations contracted in connection with the mortgage transaction or the purchase of the mortgaged property, except obligations that are secured by property or collateral owned by the mortgagor independently of the mortgaged property." Thus, it was DHI Mortgage's responsibility to ensure that the liens, which were included in the restrictive covenant, were not placed against the FHA-insured property. If DHI Mortgage had ensured its FHA loans were free of the improper liens, then it would have been aware that the related properties also had restrictive covenants that violated FHA‘s free assumability rule. We agree that the contractual agreement from which the schedule A to purchase contract originated provided exclusionary language for FHA and VA financed loans. Additionally, 24 CFR 203.41(b) explicitly states, "[a] mortgage shall not be eligible for insurance if the mortgaged property is subject to legal restrictions on conveyance." Because the 205 loans discussed under finding 1 of the report were subject to legal restrictions on conveyance, these loans were clearly ineligible for FHA insurance. Comment 2 We acknowledge the auditee‘s point that the first statement of finding 1 was imprecise. The original statement under finding 1 ―DHI Mortgage approved 205 FHA-insured loans with unallowable restrictive covenants‖ was intended to address the overall responsibilities of the FHA–approved lender, and not the specific underwriting function. To improve the statement‘s accuracy we changed the report wording to state DHI Mortgage did not ensure that unallowable restrictive covenants were not filed against FHA-insured properties. We did not change the statement "officials believed it would discourage investors from purchasing their affiliate's (the seller's) properties," because this was based upon the following excerpt from a letter dated June 5, 2009 provided to the OIG by DHI Mortgage‘s attorney: 78 We acknowledge that DHI Mortgage used the Schedule A to Purchase Contract with the conventional market in mind. However, 24 CFR (Code of Federal Regulations) 203.41 was clear that such a restriction on the resale of a property made the mortgage ineligible for FHA insurance. 24 CFR 203.41 Free Assumability (a)(3) Legal restrictions on conveyance means any provision in any legal instrument, law or regulation applicable to the mortgagor or the mortgaged property, including but not limited to a lease, deed, sales contract, declaration of covenants, declaration of condominium, option, right of first refusal, will, or trust agreement, that attempts to cause a conveyance (including a lease) made by the mortgagor to:… (ii) Be the basis of contractual liability of the mortgagor for breach of an agreement not to convey, including rights of first refusal, pre-emptive rights or options related to mortgagor efforts to convey; (iii) Terminate or subject to termination all or a part of the interest held by the mortgagor in the mortgaged property if a conveyance is attempted; (iv) Be subject to the consent of a third party;…. (b) Policy of free assumability with no restrictions. A mortgage shall not be eligible for insurance if the mortgaged property is subject to legal restrictions on conveyance, except as permitted by this part. The auditee‘s response notes that, for the audit time period, DHI‘s loan origination activity was primarily conventional financing, with its FHA activity averaging approximately 10 percent of its total volume. It is OIG‘s opinion that, because DHI officials were aware that the use of the Schedule A was a common practice, they should have taken extra steps to ensure that the covenant was removed once it was determined that a specific loan would be FHA-insured. Moreover, because the unallowed covenant was found on 205 FHA-insured loans, DHI Mortgage‘s failure to follow FHA‘s rule was systematic in this case, and not an isolated technical violation. 79 Comment 3 We disagree with DHI Mortgage‘s implied response that use of the restrictive covenant could not have harmed the homebuyers because it was used at a time of unprecedented growth in the homebuilding industry. The schedule A to purchase contract, as discussed under finding 1, states the "[s]eller may promptly initiate proceedings to foreclose the Lien if Owner defaults in its obligation to pay Seller liquidated damages in the amount of $40,000 on the date that Owner or any of its successors or assigns conveys during the Restricted Period any rights, title, or interest in the Property without Seller‘s written consent.‖ The prospect of the $40,000 liability could readily deter a borrower from renting or selling their property if the need arose. The notion expressed in the auditee‘s response that it is obvious that the FHA-exclusionary language in the original sales contract would likely take precedence over the recorded lien assumes the homebuyer has sophisticated legal knowledge. Finding 1 discussed the instance where a borrower informed us that, although she experienced financial difficulties after the first four month‘s mortgage payments, she believed that she could not attempt to find a renter for the property because of the restrictive covenant. However, after the one- year restriction period expired, the borrower decided that the housing market decline had depressed prices to a point that made it unlikely she could sell or rent the home for an amount that would cover the mortgage. As a result, the home went into foreclosure. The auditee‘s response asserts that it was the purchaser‘s responsibility to seek release from the lien and implies that the borrower must have been an investor. In OIG‘s opinion, there is no basis for either of these assertions. The ―life events‖ presented in the auditee response as reasons the lien would be released do not include financial difficulties alone. Comment 4 This portion of the auditee‘s response pertains to conventional loans and therefore is not relevant to the finding regarding FHA-insured loans Comment 5 See OIG responses to comments 1 and 2. Comment 6 See OIG responses to comment 3. Comment 7 See OIG responses to comments 1, 2, and 3. Comment 8 This portion of the auditee‘s response pertains to the lender's proposed corrective actions for deficiencies reported under finding 1. HUD will review adequacy and implementation of these proposed actions during the audit resolution process. Comment 9 The report does not recommend any specific procedures that DHI Mortgage should adopt to ensure that improper covenants and/or liens are not placed on FHA-insured properties. Comment 10 The OIG would like to reiterate that any FHA-insured loans with an executed schedule A to purchase contract, which contains the restrictive covenants and the lien against the FHA-insured property, violate 24 CFR 203.41(b) and 203.32(a) respectively and are therefore not FHA insurable. 80 Comment 11 OIG acknowledges that DHI Mortgage made changes as a result of HUD's March 2008 exam of DHI Mortgage's offices. Comment 12 This portion of the auditee‘s response pertains to the lender's proposed corrective actions for deficiencies reported under finding 2. HUD will review adequacy and implementation of these proposed actions during the audit resolution process. Comment 13 We excluded the auditee‘s Addendum 1 which responded to the specific underwriting deficiencies detailed in Appendix D of our report, as well as the OIG comments, due to the volume of the material. We disagreed with some of the items in the Addendum 1, but did make changes to our report for other items, as appropriate. The auditee‘s response to the underwriting narratives in Appendix D and our comments are available on request. Comment 14 This discussion addresses DHI Mortgage's commitment to compliance and does not impact the findings of the audit report. Comment 15 We agree that the auditee‘s use of the exact name search feature for screening contributed to weaknesses in its verification process to identify debarred individuals. DHI Mortgage‘s exhibit A was excluded from the auditee response section of our audit report but is available upon request. Comment 16 This portion of the auditee‘s response pertains to the lender's proposed corrective actions for deficiencies reported under finding 3. HUD will review adequacy and implementation of these proposed actions during the audit resolution process. DHI Mortgage‘s exhibit B was excluded from the auditee response section of our audit report but is available upon request. Comment 17 This portion of the auditee‘s response relates information it gathered regarding the debarred loan officer after the OIG informed DHI Mortgage of the violation. This information does not impact the report‘s finding. Comment 18 This portion of the auditee‘s response provides background information, but does not relate to the report‘s finding. Comment 19 We acknowledge that HUD provided DHI Mortgage guidance to wait until the FHA branch‘s loan pipeline had cleared before terminating the FHA branch identification with HUD. However, the auditee‘ response acknowledges it did not notify HUD of the address change for the Urban Living Branch – see comment 20. We modified the report language to state ―Reviewers also did not ensure that HUD was notified of a change of branch address.‖ DHI Mortgage‘s exhibit C was excluded from the auditee response section of our audit report but is available upon request. 81 Comment 20 We disagree with DHI Mortgage‘s position that it did not fail to notify HUD of branch changes in a timely manner because the response acknowledges that it did not update the address for the Urban Living FHA ID immediately after the branch was closed and merged. Comment 21 This portion of the auditee‘s response refers to DHI Mortgage's policies for branch office terminations and merges. The documents provided did not provide any new information that would impact the audit report finding 3. DHI Mortgage‘s exhibit D was excluded from the auditee response section of our audit report but will be made available upon request. Comment 22 This portion of the auditee‘s response pertains to the lender's proposed corrective actions for the deficiencies reported under finding 3. HUD will review the adequacy and implementation of these proposed actions during the audit resolution process. DHI Mortgage‘s exhibit E was excluded from the auditee response section of our audit report but will be made available upon request. Comment 23 We disagree with the auditee‘s response that the officials working in the capacity of both DHI Mortgage and DHI Title did not constitute a conflict of interest. During our review we found that the individuals worked in official capacity for both companies and that DHI Mortgage‘s written policies did not provide practices for keeping the official duties separate. Comment 24 The letter referred to in the auditee‘s response was not part of the audit report. We disagree with the auditee‘s response that the letter was the basis on which OIG raised its concern regarding the purported lack of clear and effective separation of the officer‘s duties. The letter was provided to DHI Mortgage officials to demonstrate OIG‘s documentation that the president of DHI Mortgage had worked in an official capacity for both DHI Mortgage and DHI Title. OIG‘s concern was based on the auditee‘s lack of written policies regarding keeping the official duties separate for each company, because we had identified two individuals with dual official functions. See OIG‘s response to comment 23. Comment 25 This portion of the auditee‘s response relates the corrective action taken to address an issue raised under finding 3. HUD will review the adequacy and implementation of the proposed corrective action during the audit resolution process. Comment 26 This portion of the auditee‘s response pertains to the lender's changed policies related to the audit report finding 3. HUD will review the adequacy and implementation of the proposed corrective action during the audit resolution process. DHI Mortgage‘s exhibit F was excluded from the auditee response section of our audit report to reduce the volume of the report. 82 Comment 27 We disagree with the auditee‘s response that the bonus compensation for underwriters did not violate HUD Handbook 4060.1, paragraph 2-9A. We acknowledge the bonus was tied to the total number of decisions made regardless of the approval outcome. However, by rewarding the quantity of underwriting actions, the bonus structure provided an incentive for quick decisions rather than compliance with FHA insurance requirements. The result was that the bonuses functioned as commissions. Comment 28 This portion of the auditee‘s response pertains to the lender's proposed corrective actions for a deficiency cited under finding 3. HUD will review the adequacy and implementation of the proposed corrective action during the audit resolution process. Comment 29 This portion of the auditee‘s response is a list of the exhibits provided as part of proposed corrective actions in response to finding 3. HUD will review the adequacy and implementation of the proposed corrective actions during the audit resolution process. Comment 30 We acknowledge the auditee‘s expressed intent to comply fully and completely with all standards set forth by HUD. We also acknowledge that DHI Mortgage has proposed corrective actions for certain deficiencies cited in the audit report. HUD will review the adequacy and implementation of the proposed corrective actions during the audit resolution process. Comment 31 We disagree with the auditee‘s response. The HUD-1 contained in the loan documents was an ―Estimated Statement‖, not a final HUD-1. Additionally, the credit report dated September 5, 2006 showed the monthly liability. Since, the monthly debt was not properly documented as paid in full prior to closing the monthly liability was to be used in the qualifying ratios as required by HUD Handbook 4155.1, paragraph 2-11 and the Fannie Mae Underwriting Findings. Comment 32 We disagree with the auditee‘s response. The HUD-1 contained in the loan documents was an ―Estimated Statement‖, not a final HUD-1. DHI Mortgage should have provided the final HUD-1 and/or a copy of the funds received. A more appropriate handbook citation would have been HUD Handbook 4155.1, paragraph 2-10E. This has been changed in the report. Comment 33 See OIG responses to comments 1 through 3. Comment 34 We disagree with the auditee‘s response. The lender did not comply with the requirements under HUD Handbook 4155.1, paragraph 2-3E, which specifically states the ―borrower also must have demonstrated a documented ability to responsibly manage his or her financial affairs.‖ Furthermore, the 10 percent down on the home loan and the cash reserves discussed on the mortgage credit analysis worksheet in the remarks section were loan funds that came from the borrower‘s 401(k). The language in the audit report was revised for clarification. 83 Comment 35 See OIG responses to comments 1 through 3. Comment 36 See OIG responses to comments 1 through 3. Comment 37 We disagree with the auditee‘s response. Regardless of what the Mortgage Credit Analysis Worksheet says, the Amount Financed Itemization clearly indicates the discount fee was financed into the FHA-insured loan. The Amount Financed Itemization, dated June 14, 2007, one day prior to closing, totals to $226,436.00. This is the same amount of the new loan balance on the HUD-1. Therefore, the loan includes the amounts listed on the Amount Financed Itemization, which includes the discount fee of $3,396.54, contrary to HUD Handbook 4000.2, paragraph 5-2P. Comment 38 We disagree with the auditee‘s response. We acknowledge that the lender ran the loan officer‘s first and last names through the General Service Administration Excluded Parties List System (Excluded Parties List), with a negative result. However, the Excluded Parties List did contain the loan officer‘s name with the middle initial, but did not return the match because the lender used the exact match function. The fact remains that the loan officer was on the Excluded Parties List and HUD Handbook 4000.2, paragraph 1-6A and HUD Handbook 4155.1, paragraph 2-5, states "If the name of any party to the transaction appears on either list, the application is not eligible for mortgage insurance." The report language in the corresponding narrative was changed to clarify that the loan was not eligible for FHA mortgage insurance because a party to the transaction appeared on a debarment list. See OIG response to comment 15. Comment 39 See OIG responses to comments 1 through 3. Comment 40 See OIG responses to comment 35. Comment 41 We disagree with the auditee‘s response because the income analysis provided was not in the lender‘s documentation at the time of the loan‘s approval. The lender must document the following: (1) the reason for including the borrower‘s overtime pay, (2) an overtime trend over a two-year period, and (3) that the amount of monthly overtime income used was based on a 24-month average of overtime earnings prior to the loan approval. Comment 42 See OIG responses to comments 1 through 3. Comment 43 We disagree with the auditee that the overtime was appropriate. The analysis and explanation for the use of the overtime was not performed at the time of the loan approval. For additional clarification on the deficiencies of the loan approval we have added an "Other" section in appendix D of the report for loan number 022- 1892652. In this section we demonstrate the lender's failure to follow proper protocol for processing an employee loan. 84 Comment 44 See OIG responses to comments 1 through 3. Comment 45 We disagree with the auditee‘s response. The response explained that the $803 discrepancy between the debt on the Mortgage Credit Analysis Worksheet and the debt listed on the automated underwriting system approval was the non occupying coborrower‘s rental obligation. However, this discrepancy was not explained in the loan documents prior to loan closing. As a result, the underwriting deficiency will remain in the audit report. Comment 46 We disagree with auditee‘s response. The lender documented two paystubs that had inconsistent pay amounts and pay periods. At a minimum, the lender should have inquired about the current pay discrepancy and pay period length discrepancy. Based on the loan documentation it appeared that some portion of the coborrower‘s income was either commission or a bonus. In either instance, additional analysis and documentation was required to conform to HUD Handbook 4155.1, paragraph 2-7D. We have updated the loan detail in appendix D to say that the qualified income contribution from the coborrower was unknown as was its impact on the qualifying ratios. Comment 47 We agree with the auditee‘s response that a supplement in the file showed the $10 monthly debt had been paid in full prior to closing. This item was removed from the loan details in appendix D for loan number 023-2375473. Comment 48 See OIG responses to comments 1 through 3. Comment 49 See OIG responses to comments 1 through 3. Comment 50 We disagree with the auditee‘s response because the overtime analysis provided was not in the lender‘s documentation at the time the borrower was qualified. Therefore, the full amount of overtime was excluded in the OIG recalculation of the ratios. Because the overtime income was in apparent decline, further justification to support its use is required by HUD Handbook 4155.1, paragraph 2- 7A. Comment 51 See OIG responses to comments 1 through 3. Comment 52 See OIG responses to comments 1 through 3. Comment 53 We partially agree with the auditee‘s response. We accepted that one of the two debts excluded from the qualifying ratios appeared to be a duplicate. The audit report has been updated to reflect only one account was excluded; however, the ratios remained the same because the OIG‘s revised ratios had only included the amount for one of the excluded accounts. Comment 54 We disagree with the auditee‘s response. As stated in the response, the overtime income was averaged over a 20.5-month period instead of a 24-month average as 85 required by HUD Handbook 4155.1, paragraph 2-7A. Further, the auditee‘s response below under ―Credit‖ agreed with OIG that the loan file contained other deficiencies related to additional borrower credit items that would have impacted the loan decision. Comment 55 We agree with the auditee‘s response that the excluded debt would not have changed the loan decision. We did not change the audit report which already stated ―The FHA-insured loan had additional minor underwriting deficiencies that did not affect the overall insurability of the loan.‖ Comment 56 See OIG responses to comments 1 through 3. Comment 57 We partially disagree with the auditee‘s response because HUD Handbook 4155.1, chapter 2 section 2, states the likelihood of its (the employment‘s) continuance must be established to determine a borrower's capacity to repay mortgage debt. We acknowledge that the earnings information was provided through a pay stub and the audit report has been updated. Comment 58 We disagree with the auditee‘s response. Although the nonpurchasing spouse provided a letter stating she did not have a Social Security number, credit history must still be provided in the loan file as required by HUD Handbook 4155.1, paragraph 2-2D. Comment 59 We disagree with the auditee‘s response because the lender did not obtain or otherwise document the likelihood of the continuance of the borrower‘s Social Security disability income as required by HUD Handbook 4155.1, paragraph 2- 7E. Further, the auditee‘s response stated that ―it was reasonable to conclude that the Social Security income would continue for the next three years.‖ However, this was an opinion not documented in the loan file as part of the underwriter‘s decision and was formed by officials in response to the report. Comment 60 We disagree with the auditee‘s response because there were additional items that would have impacted the loan decision pertaining to the borrower‘s income and contract. See response to comments 59 and 61 pertaining to these other deficiencies. Comment 61 See OIG responses to comments 1 through 3. Comment 62 See OIG responses to comments 1 through 3. Comment 63 We disagree with the auditee‘s response because the borrower‘s documented funds were limited to a downpayment assistance gift and retirement account funds, which did not support the ability to pay such an earnest money deposit. In such a case, HUD Handbook 4155.1, paragraph 2-10A requires the lender to document the deposit and the source of funds used to pay the deposit. 86 Comment 64 The auditee‘s response agreed with OIG‘s conclusion regarding the need to document the likelihood of the Social Security disability income to continue. See OIG response to comment 59. Comment 65 We disagree with the auditee‘s response and maintain that the loan documents did not support the likelihood of the coborrower‘s continued employment. The auditee‘s response to the audit report stated the ―coborrower had been employed for 3.5 years and we had no reason to question the continuance of the coborrower‘s employment.‖ However, this statement does not establish that the coborrower‘s employment was likely to continue; it simply relates the borrower‘s employment history with the company. Further, this opinion was formed in response to the audit report and was not documented by the underwriter at the time of loan approval. Comment 66 See OIG responses to comments 1 through 3. Comment 67 We partially disagree with the auditee‘s response. The underwriter was required to provide an explanation or proof of the reason for excluding the credit accounts listed on the automated approval as required by HUD Handbook 4155.1, paragraph 2-11 and the Fannie Mae Underwriting Findings. We did not change the report which already stated that this was a minor underwriting deficiency and did not affect the overall insurability of the loan. Comment 68 See OIG responses to comments 1 through 3. Comment 69 We disagree with the auditee‘s response that a demonstration of enrollment in additional classes was sufficient to show the borrower‘s student loans were deferred. The credit report listed the student loans payments to begin five months after loan closing and there was no letter in the loan file stating the loans would be deferred. Therefore, in accordance with HUD Handbook 4155.1, paragraph 2- 11C the monthly liability was to be included in the borrower‘s qualifying ratios. We disagree that the lender had no way of knowing that the borrower had taken out new debt prior to closing. It is the lender‘s responsibility to ascertain the source of funds for an earnest money deposit when the borrower does not demonstrate the ability to pay the deposit. See the discussion of assets in appendix D loan under number 023-2438810. Comment 70 See OIG responses to comments 1 through 3. Comment 71 We disagree with the auditee‘s response. The response explained how the borrower‘s income was calculated, but the loan file did not provide support to justify the use of the borrower‘s overtime pay in the income ratios as required by HUD Handbook 4155.1, paragraph 2-7A. In addition, the response states the borrower‘s length of employment and profession support the use of the average of the base plus overtime income. However, this opinion was formed in response to 87 the audit report and was not established and documented by the underwriter at the time of loan approval. Comment 72 We disagree with the auditee‘s response that there was no reason to believe the income would not continue as the employee had been with the same employer for eight years. This opinion was formed in response to the audit report and was not documented by the underwriter at the time of loan approval. Comment 73 We disagree with the auditee‘s response. Regardless of what the Mortgage Credit Analysis Worksheet says, the Amount Financed Itemization clearly indicates the discount fee was financed into the FHA-insured loan. The Amount Financed Itemization, dated March 30, 2007, the same day as closing, totals to $255,335.00. This is the same amount of the new loan balance on the HUD-1. Therefore, the loan includes the amounts listed on the Amount Financed Itemization, which includes the discount fee of $8,298.39, contrary to HUD Handbook 4000.2, paragraph 5-2P. If the discount fee was financed into the loan and the borrower paid for the discount in the form of a cashier‘s check, then the borrower paid for the fee twice. Comment 74 We disagree with the auditee‘s response and maintain that the loan documents did not support the likelihood of the borrower‘s continued employment. The response to the audit report stated the ―borrower had been employed with [the] same company since March 2005.‖ However, this statement does not establish that the borrower‘s employment was likely to continue; it simply relates the borrower‘s employment history with the company. Further, this opinion was formed in response to the audit report and was not documented by the underwriter at the time of loan approval. Comment 75 We agree with the auditee‘s response regarding the Rapid Reporting Direct Check and have removed this deficiency from the report. Comment 76 See OIG responses to comments 1 through 3. Comment 77 See OIG responses to comments 1 through 3. Comment 78 We disagree with the auditee‘s response. Regardless of what the Mortgage Credit Analysis Worksheet says, the Amount Financed Itemization clearly indicates the discount fee was financed into the FHA-insured loan. The Amount Financed Itemization, dated May 15, 2007, four days prior to closing, totals to $231,683.00. This is the same amount of the new loan balance on the HUD-1. Therefore, the loan includes the amounts listed on the Amount Financed Itemization, which includes the discount fee of $4,054.45, contrary to HUD Handbook 4000.2, paragraph 5-2P. 88 Comment 79 We disagree with the auditee‘s response. In this instance, the loan was not approved through the automated underwriting system. There was an approval from the automated underwriting system on June 13, 2007 at 12:47 p.m. However, there was an automated underwriting refer on June 13, 2007 at 1:15 p.m. Upon review of the Mortgage Credit Analysis Worksheet, dated June 17, 2007, the June 13, 2007 automated underwriting refer is more closely related based on the ratios contained in the documents. However, neither automated underwriting printout matches the Mortgage Credit Analysis Worksheet. Based on the automated underwriting this loan should have been referred for manual underwriting. Therefore, the credit deficiencies cited in the audit report were not changed. Comment 80 We disagree with the auditee‘s response because this should have been a manually underwritten loan, see response to comment 79. Therefore, the loan must contain the documentation requirements set forth in HUD Handbook 4155.1, which includes a bank statement accompanying the verification of deposit to support the borrower‘s assets under paragraph 3-1F of the handbook. Comment 81 We agree with the auditee‘s response regarding the Rapid Reporting Direct Check and have removed this deficiency from the report. Comment 82 We disagree with the auditee‘s response and maintain that the lender failed to document the following: (1) the reason for including the borrower‘s and co- borrower‘s overtime pay, (2) an overtime trend over a two-year period, and (3) that the amount of monthly overtime income used was based on a 24-month average of overtime earnings prior to the loan approval. The auditee‘s response stated the ―borrower had been on the job for eight years and received overtime for at least the past two years.‖ However, this statement does not establish that the borrower‘s employment was likely to continue; it simply relates the borrower‘s employment history with the company. Further, this opinion was formed in response to the audit report and was not documented by the underwriter at the time of loan approval. Additionally, as the lender stated the overtime income was averaged over 25.5-month period, thus overtime income was not based on a 24-month average as required by HUD Handbook 4155.1, paragraph 2-7A. The auditee‘s response stated the coborrower income verification noted ―n/a‖ under probability of continued employment and added ―This is not uncommon and many employers refuse to answer this question.‖ However, HUD Handbook 4155.1, chapter 2 section 2, states the likelihood of its continuance must be established to determine a borrower's capacity to repay mortgage debt. Although the auditee‘s response cited a two year history of employment on the coborrower‘s application, the loan file did not include supporting documentation 89 required under HUD Handbook 4155.1, paragraph 2-6 and Mortgagee Letter 2004-47. Comment 83 We disagree with auditee‘s response because the loan should have been manually underwritten when the automated underwriting system previously returned the loans as refer/eligible. 90 Appendix C CRITERIA This criteria appendix includes the referenced CFR, HUD Handbook, and Mortgagee Letter requirements discussed in the body of the report and in the underwriting narratives under appendix D. Code of Federal Regulations (CFR) 24 CFR 202.5(f) Business changes states: The lender or mortgagee shall provide prompt notification to the Secretary of all changes in its legal structure, including, but not limited to, mergers, terminations, name, location, control of ownership, and character of business. 24 CFR 203.32 Mortgage lien states: (a) …a mortgagor must establish that, after the mortgage offered for insurance has been recorded, the mortgaged property will be free and clear of all liens other than such mortgage, and that there will not be outstanding any other unpaid obligations contracted in connection with the mortgage transaction or the purchase of the mortgaged property, except obligations that are secured by property or collateral owned by the mortgagor independently of the mortgaged property. 24 CFR 203.41 free assumability; exceptions states: (a)(3) Legal restrictions on conveyance means any provision in any legal instrument, law or regulation applicable to the mortgagor or the mortgaged property, including but not limited to a lease, deed, sales contract, declaration of covenants, declaration of condominium, option, right of first refusal, will, or trust agreement, that attempts to cause a conveyance (including a lease) made by the mortgagor to:… (ii) Be the basis of contractual liability of the mortgagor for breach of an agreement not to convey, including rights of first refusal, pre-emptive rights or options related to mortgagor efforts to convey; (iii) Terminate or subject to termination all or a part of the interest held by the mortgagor in the mortgaged property if a conveyance is attempted; (iv) Be subject to the consent of a third party;…. (b) Policy of free assumability with no restrictions. A mortgage shall not be eligible for insurance if the mortgaged property is subject to legal restrictions on conveyance, except as permitted by this part. (c) Exception for eligible governmental or nonprofit programs. HUD Handbook 4000.2, Revision 3 Paragraph 1-6 91 HUD Limited Denial of Participation (LDP) and Federal Lists. A borrower suspended, debarred, or otherwise excluded from participation in the Department‘s programs is not eligible for a FHA-insured mortgage. The lender must examine HUD‘s LDP list and the government-wide General Services Administration‘s (GSA‘s) ―List of Parties Excluded from Federal Procurement or Nonprocurement Programs‖ and document this review on the HUD-92900-WS/92900-PUR. If the name of any party to the transaction appears on either list, the application is not eligible for mortgage insurance. Paragraph 5-2P Discount points charged by the lender on a purchase transaction may be charged to the buyer but may not be financed into the mortgage amount. HUD Handbook 4000.4, Revision 1, Change 1 Paragraph 1-14 If possible, the application should be processed by a different branch or the mortgagee's main office. Although the draft report did not previously address this, the case must be clearly identified in the remarks section of the Mortgage Credit Worksheet and beneath Box F, "Employment," on the front of the case binder. HUD Handbook 4060.1, Revision 2 Paragraph 2-9A Employees are those individuals who are under the direct supervision and control of an FHA approved mortgagee and where the individuals are exclusively employed by the FHA approved mortgagee in the mortgage lending and real estate fields. The mortgagee must demonstrate the essential characteristics of the employer-employee relationship upon inquiry by the Department. [See also paragraphs 2-9(D) and 2-9(G)] Compensation of employees may be on a salary, salary plus commission, or commission only basis and includes bonuses. All compensation must be reported on Form W-2. Employees who perform underwriting and loan servicing activities may not receive commissions. Paragraph 2-9C If a mortgagee has any of the same officers, stockholders, partners, or members as another entity, the officers may represent more than one entity if: 1. There is a clear and effective separation of the two entities, and mortgagors know at all times exactly with which entity they are doing business. 92 Paragraph 7-3G A mortgagees‘ offices, including traditional, nontraditional branch and direct lending offices engaged in origination or servicing of FHA-insured loans, must be reviewed to determine that they are in compliance with the Departments requirements. 1. 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;... * The office is sufficiently staffed with trained personnel; * Office personnel have access to relevant statutes, regulations, 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 mortgagee or contract employees performing functions that FHA allows to be outsourced; and * The office does not employ or have a contract with anyone currently under debarment or suspension, or a Limited Denial of Participation…. 3. When it is not feasible for Quality Control staff to visit each branch, qualified personnel from another office of the mortgagee, not involved in the day-to-day processes they are reviewing, or an outside firm may perform the review. Paragraph 7-6 In order for a Quality Control Program to be useful and acceptable to FHA, there are several requirements that must be met. Mortgagees must adhere to each of the requirements below when conducting reviews. A. Timeliness. Loans must be reviewed within 90 days from the end of the month in which the loan closed. This requirement is intended to ensure that problems left undetected prior to closing are identified as early after closing as possible. B. Frequency. For mortgagees closing more than 15 loans monthly, quality control reviews must be conducted at least monthly and must address one months activity. Mortgagees closing 15 or fewer loans monthly may perform quality control reviews on a quarterly basis…. D. Early Payment Defaults. In addition to the loans selected for routine quality control reviews, mortgagees must review all loans going into default within the first six payments. As defined here, early payment defaults are loans that become 60 days past due. E. Documentation Review and Verification. The Quality Control Program must provide for the review and confirmation of information on all loans selected for review. 1. Credit Report. A new credit report must be obtained for each borrower whose loan is included in a Quality Control Review, unless the loan was a streamline refinance or was processed using a FHA approved automated underwriting system exempted from this requirement.... A full Residential Mortgage Credit Report must be obtained from a different credit source on cases in which the in-file report reveals discrepancies with the original credit report. 93 2. Credit Document Reverification. Documents contained in the loan file should be checked for sufficiency and subjected to written reverification. Examples of items that must be reverified include, but are not limited to, the mortgagors‘ employment or other income, deposits, gift letters, alternate credit sources, and other sources of funds. Sources of funds must be acceptable as well as verified. Other items that may be reverified include mortgage or rent payments. If the written reverification is not returned to the mortgagee, a documented attempt must be made to conduct a telephone reverification. If the original information was obtained electronically or involved alternative documents, a written reverification must still be attempted. Any discrepancies must be explored to ensure that the original documents (except blanket verification releases) were completed before being signed, were as represented, were not handled by interested third parties and that all corrections were proper and initialed. All conflicting information in the original documentation should have been resolved before the complete file was submitted to the underwriter. 3. Appraisals. A desk review of the property appraisal must be performed on all loans chosen for a Quality Control review... The desk review must include a review of the appraisal data, the validity of the comparables, the value conclusion (as repaired to meet safety and soundness requirements in HUD Handbook 4905.1 (as revised)), any changes made by the underwriter and the overall quality of the appraisal. Mortgagees are expected to perform field reviews on 10 % of the loans selected during the sampling process outlined previously in paragraph 7-6 C and D. Field reviews must be performed by licensed appraisers listed on FHAs Roster of Appraisers. Mortgagees should select loans for field reviews based on factors such as those listed previously in paragraph 7 6(C)(2) and the following: * Property complaints received from mortgagors; * Discrepancies found during desk reviews; * Large adjustments to value; * Comparable sales more than six months old; * Excessive distances from comparables to the subject property; * Repetitive sales activity for the subject property; * Investor-sold properties; * Identity of interest between buyer and seller; * Seller identity differs from owner of record; and * Vacant properties. In addition, a field review should be completed on loans selected in accordance with paragraphs 7-6(C) and (D) where the desk review revealed significant problems/deficiencies with the appraisal report. If serious deficiencies or patterns are uncovered, mortgagees must report these items, in writing, to the Quality Assurance Division in the HUD Homeownership Center having jurisdiction. 4. Occupancy Reverification. In cases where the occupancy of the subject property is suspect, mortgagees must attempt to determine whether the mortgagor is occupying the property.... If it is found that the mortgagor is not occupying a property mortgaged as owner-occupied, mortgagees must report this, in writing, to the Quality Assurance Division in the HUD Homeownership Center having jurisdiction.... 94 F. Underwriting Decisions. Each Direct Endorsement loan selected for a quality control review must be reviewed for compliance with HUD underwriting requirements, sufficiency of documentation and the soundness of underwriting judgements. G. Condition Clearance and Closing. Each loan selected for a quality control review must be reviewed to determine whether: * Conditions which were required to be satisfied prior to closing were in fact met prior to closing... * The loan was closed and funds disbursed in accordance with the mortgagees underwriting and subsequent closing instructions; and * The closing and legal documents are accurate and complete. HUD Handbook 4155.1, Revision 5 Foreword This Handbook describes the basic mortgage credit underwriting requirements for single family (one to four units) mortgage loans insured under the National Housing Act. For each loan FHA insures, the lender must establish that the borrower has the ability and willingness to repay the mortgage debt. This decision must be predicated on sound underwriting principles consistent with the guidelines, rules, and regulations described throughout this Handbook and must be supported by sufficient documentation.... While it is not FHA's intent to insure mortgages that are likely to result in default, regardless of the borrower's equity, lenders may exercise some discretion in the underwriting of home mortgages where the borrower's financial and other circumstances are not specifically addressed by this Handbook. However, lenders are expected to exercise both sound judgment and due diligence in the underwriting of loans to be insured by FHA. Chapter 2, section 2 The anticipated amount of income, and the likelihood of its continuance, must be established to determine a borrower's capacity to repay mortgage debt. Income may not be used in calculating the borrower's income ratios if it comes from any source that cannot be verified, is not stable, or will not continue. This section describes acceptable types of income, procedures for calculating effective income, and requirements for establishing income stability. Paragraph 2-2 Except for the obligations specifically excluded by state law, the debts of the non- purchasing spouse must be included in the borrower‘s qualifying ratios if the borrower resides in a community property state or the property to be insured is located in a community property state. Although the nonpurchasing spouse's credit history is not to 95 be considered a reason for credit denial, a credit report that complies with the requirements of paragraph 2-4 must be obtained for the non-purchasing spouse in order to determine the debt-to-income ratio. Paragraph 2-3 …While minor derogatory information occurring two or more years in the past does not require explanation, major indications of derogatory credit–including judgments, collections, and any other recent credit problems–require sufficient written explanation from the borrower…. When reviewing the borrower's credit and credit report, the lender must pay particular attention to the following: A. Previous Rental or Mortgage Payment History. The payment history of the borrower's housing obligations holds significant importance in evaluating credit. The lender must determine the borrower's payment history of housing obligations through either the credit report, verification of rent directly from the landlord (with no identity-of- interest with the borrower) or verification of mortgage directly from the mortgage servicer, or through canceled checks covering the most recent 12-month period. B. Recent and/or Undisclosed Debts. The lender must ascertain the purpose of any recent debts, as the indebtedness may have been incurred to obtain part of the required cash investment on the property being purchased. Similarly, the borrower must provide a satisfactory explanation for any significant debt that is shown on the credit report but not listed on the loan application. The borrower must explain in writing all inquiries shown on the credit report in the last 90 days. C. Collections and Judgments. Court-ordered judgments must be paid off before the mortgage loan is eligible for FHA insurance endorsement.... FHA does not require that collection accounts be paid off as a condition of mortgage approval. Collections and judgments indicate a borrower‘s regard for credit obligations and must be considered in the analysis of creditworthiness with the lender documenting its reasons for approving a mortgage where the borrower has collection accounts or judgments. The borrower must explain in writing all collections and judgments…. E. Bankruptcy. A Chapter 7 bankruptcy (liquidation) does not disqualify a borrower from obtaining an FHA-insured mortgage if at least two years have elapsed since the date of the discharge of the bankruptcy. Additionally, the borrower must have re-established good credit or chosen not to incur new credit obligations. The borrower also must have demonstrated a documented ability to responsibly manage his or her financial affairs.... A Chapter 13 bankruptcy does not disqualify a borrower from obtaining an FHA-insured mortgage provided the lender documents that one year of the payout period under the bankruptcy has elapsed and the borrower‘s payment performance has been satisfactory (i.e., all required payments made on time). In addition, the borrower must receive permission from the court to enter into the mortgage transaction. 96 Paragraph 2-5 A borrower must be rejected if any of the following conditions apply: A. HUD Limited Denial of Participation (LDP) and the U.S. General Services Administration‘s ―List of Parties Excluded from Federal Procurement and Non- Procurement Programs‖ (GSA List) A person suspended, debarred, or otherwise excluded from participation in the Department‘s programs is not eligible to participate in FHA- insured mortgage transactions. The lender must examine HUD‘s LDP list and the government-wide General Services Administration‘s (GSA) ―List of Parties Excluded from Federal Procurement or Nonprocurement Programs‖ and document this review on the HUD 92900-WS/92900-PUR. If the name of the borrower, seller, listing or selling real estate agents, or loan officer appears on either list, the application is not eligible for mortgage insurance.... Paragraph 2-6 We do not impose a minimum length of time a borrower must have held a position of employment to be eligible. However, the lender must verify the borrower's employment for the most recent two full years.... The borrower also must explain any gaps in employment spanning one month or more. Allowances for seasonal employment, such as is typical in the building trades, etc., may be made if documented by the lender. Paragraph 2-7 The income of each borrower to be obligated for the mortgage debt must be analyzed to determine whether it can reasonably be expected to continue through at least the first three years of the mortgage loan. If the borrower intends to retire during this period, the effective income must be the amount of documented retirement benefits, social security payments, or other payments expected to be received in retirement.... In most cases, the borrower‘s income will be limited to salaries or wages. Income from other sources can be included as effective income with proper verification by the lender. Procedures for analyzing other acceptable income sources besides salaries and wages are described below: A. Overtime and Bonus Income. Both overtime and bonus income may be used to qualify if the borrower has received such income for the past two years and it is likely to continue. The lender must develop an average of bonus or overtime income for the past two years, and the employment verification must not state that such income is unlikely to continue. Periods of less than two years may be acceptable provided the lender justifies and documents in writing the reason for using the income for qualifying purposes. An earnings trend also must be established and documented for overtime and bonus income. If either type shows a continual decline, the lender must provide a sound rationalization in writing for including the income for borrower qualifying. If bonus 97 income varies significantly from year to year, a period of more than two years must be used in calculating the average income…. D. Commission Income. Commission income must be averaged over the previous two years. The borrower must provide copies of signed tax returns for the last two years, along with the most recent pay stub. (Unreimbursed business expenses must be subtracted from gross income.) Individuals whose commission income shows a decrease from one year to the next require significant compensating factors to allow for loan approval. Borrowers with commission income received for more than one but less than two years may be considered favorably provided the underwriter is able to make a sound rationalization for acceptance and can document the likelihood of continuance. Commissions earned for less than one year are not considered effective income. Exceptions may be made for situations in which the borrower's compensation was changed from a salary to commission within a similar position with the same employer. A borrower also may qualify when the portion of earnings not attributed to commissions would be sufficient to qualify the borrower for the mortgage. E. Retirement and Social Security Income. Retirement and social security income require verification from the source (former employer, Social Security Administration) or federal tax returns. If any benefits expire within the first full three years, the income source may be considered only as a compensating factor…. M…. 2. Current Leases. If a property was acquired since the last income tax filing and is not shown on Schedule E, a current signed lease or other rental agreement must be provided. The gross rental amount must be reduced for vacancies and maintenance by 25 percent (or the percentage developed by the jurisdictional HOC [homeownership center]), before subtracting PITI and any homeowners' association dues, etc., and applying the remainder to income (or recurring debts, if negative).... Paragraph 2-9 The following conditions apply to underwriting self-employed borrowers: A. Minimum Length of Self Employment. Income from self-employment is considered stable and effective if the borrower has been self-employed for two or more years. The high probability of failure during the first few years of a business makes the following requirements necessary for individuals who have been self-employed less than two years: 1. Between One and Two Years. An individual self-employed between one and two years must have at least two years of documented previous successful employment (or a combination of one year of employment and formal education or training) in the line of work in which the borrower is self-employed or in a related occupation to be eligible... B. Documentation Requirements. The following documents are required from self- employed borrowers: 1. Signed and dated individual tax returns, plus all applicable schedules, for the most recent two years. 2. Signed copies of federal business income tax returns for the last two years, with all applicable schedules, if the business is a corporation, an "S" corporation, or a partnership. 98 3. A year-to-date profit and loss (P&L) statement and balance sheet… Paragraph 2-10 The cash investment in the property must equal the difference between the amount of the insured mortgage, excluding any upfront MIP [mortgage insurance premium], and the total cost to acquire the property including prepaid expenses and closing costs as described in paragraph 1-9. All funds for the borrower's investment in the property must be verified and documented. Acceptable sources of these funds include the following: A. Earnest Money Deposit. If the amount of the earnest money deposit exceeds 2 percent of the sales price or appears excessive based on the borrower's history of accumulating savings, the lender must verify with documentation the deposit amount and the source of funds. Satisfactory documentation includes a copy of the borrower's cancelled check. A certification from the deposit-holder acknowledging receipt of funds and separate evidence of the source of funds is also acceptable. Evidence of source of funds includes a verification of deposit or bank statement showing that at the time the deposit was made the average balance was sufficient to cover the amount of the earnest money deposit…. E. Sales Proceeds. The net proceeds from an arms-length sale of a currently owned property may be used for the cash investment on a new house. A fully executed HUD-1 Settlement Statement must be provided as satisfactory evidence of the cash sales proceeds accruing to the borrower. If the property has not sold by the time of underwriting, loan approval must be conditioned upon verifying the actual proceeds received by the borrower. The lender must document both the actual sale and the sufficiency of the net proceeds required for settlement…. G. Sale of Personal Property. If the borrower intends to sell personal property items (cars, recreational vehicles, stamps, coins, baseball card collections, etc.) to obtain funds required for closing, the borrower must provide a satisfactory estimate of their worth, in addition to conclusive evidence the items have been sold. The estimated worth of the items being sold may be in the form of published value estimates, such as those issued by automobile dealers, philatelic or numismatic associations, or a separate written appraisal by a qualified appraiser with no financial interest in the loan transaction. Only the lesser of this estimate of value or the actual sales price is considered as assets to close. Paragraph 2-11 The following are types of liabilities that must be considered in qualifying borrowers: A. Recurring Obligations. The borrower's liabilities include all installment loans, revolving charge accounts, real estate loans, alimony, child support, and all other continuing obligations. In computing the debt-to-income ratios, the lender must include the monthly housing expense and all other additional recurring charges extending ten months or more, including payments on installment accounts, child support or separate maintenance payments, revolving accounts and alimony, etc. Debts lasting less than ten months must be counted if the amount of the debt affects the borrower's ability to make the mortgage payment during the months immediately after loan closing; this is especially true if the borrower will have limited or no cash assets after loan closing. 99 The following additional information deals with revolving accounts and alimony payments: 1. Revolving Accounts. If the account shown on the credit report has an outstanding balance, monthly payments for qualifying purposes must be calculated at the greater of 5 percent of the balance or $10 (unless the account shows a specific minimum monthly payment).... C. Projected Obligations. If a debt payment, such as a student loan, is scheduled to begin within twelve months of the mortgage loan closing, the lender must include the anticipated monthly obligation in the underwriting analysis, unless the borrower provides written evidence that the debt will be deferred to a period outside this timeframe. Similarly, balloon notes that come due within one year of loan closing must be considered in the underwriting analysis. D. Obligations Not Considered Debt. Obligations not to be considered debt (or subtracted from gross income) include federal, state, and local taxes; FICA or other retirement contributions such as 401(k) accounts (including repayment of debt secured by these funds); commuting costs; union dues; open accounts with zero balances; automatic deductions to savings accounts; child care; and voluntary deductions. Paragraph 2-13 Compensating factors that may be used to justify approval of mortgage loans with ratios exceeding our benchmark guidelines are those listed below. Underwriters must record on the "remarks" section of the HUD 92900-WS/HUD 92900-PUR the compensating factor(s) used to support loan approval. Any compensating factor used to justify mortgage approval must be supported by documentation. A. The borrower has successfully demonstrated the ability to pay housing expenses equal to or greater than the proposed monthly housing expense for the new mortgage over the past 12-24 months. B. The borrower makes a large downpayment (ten percent or more) toward the purchase of the property. C. The borrower has demonstrated an ability to accumulate savings and a conservative attitude toward the use of credit. D. Previous credit history shows that the borrower has the ability to devote a greater portion of income to housing expenses. E. The borrower receives documented compensation or income not reflected in effective income, but directly affecting the ability to pay the mortgage, including food stamps and similar public benefits. F. There is only a minimal increase in the borrower's housing expense. G. The borrower has substantial documented cash reserves (at least three months‘ worth) after closing. In determining if an asset can be included as cash reserves or cash to close, the lender must judge whether or not the asset is liquid or readily convertible to cash and can be done so absent retirement or job termination. Also see paragraph 2-10K. Funds borrowed against these accounts may be used for loan closing, but are not to be considered as cash reserves. ―Assets‖ such as equity in other properties and the proceeds 100 from a cash-out refinance are not to be considered as cash reserves. Similarly, funds from gifts from any source are not to be included as cash reserves. H. The borrower has substantial non-taxable income (if no adjustment was made previously in the ratio computations). I. The borrower has a potential for increased earnings, as indicated by job training or education in the borrower's profession. J. The home is being purchased as a result of relocation of the primary wage earner, and the secondary wage-earner has an established history of employment, is expected to return to work, and reasonable prospects exist for securing employment in a similar occupation in the new area. The underwriter must document the availability of such possible employment. Chapter 3 The lender is responsible for asking sufficient questions to elicit a complete picture of the borrower's financial situation, source of funds for the transaction, and the intended use of the property. All information must be verified and [documented]. The lender must also verify and document the identity of the loan applicant(s). Paragraph 3-1 … The following documents are generally required for mortgage credit analysis in all transactions except for certain streamline refinances… C. Social Security Number [SSN] Evidence. For all borrowers, including US citizens, the lender is required to document a valid SSN for each borrower, co-borrower, and co- signer on the mortgage.... Each borrower must provide the lender with evidence of his or her own valid SSN as issued by the Social Security Administration (SSA).... While the actual social security card is not required, the lender is required to validate the SSN. Lenders may use various means for validating the SSN including examining the borrower‘s pay stubs, passport, valid tax returns, and may use service providers including those with direct access to the SSA. The lender is also required to resolve any inconsistencies or multiple SSNs for individual borrowers that are revealed during loan processing and underwriting. (Also see paragraph 2-2 B)…. F. VOD. VOD and most recent bank statements are to be provided. ―Most recent‖ means at the time the initial loan application is made. Provided the document is not more than 120 days old when the loan closes (180 days old on new construction), it does not have to be updated. Alternative Documentation. As an alternative to obtaining a VOD, the lender may obtain from the borrower original bank statement(s) covering the most recent three-month period. Provided the bank statement shows the previous month's balance, this requirement is met by obtaining the two most recent, consecutive statements…. H. Sales Contract. The sales contract and any amendments or other agreements and certifications are to be included in the case binder. Either an original or a certified true copy of the sales contract received by the lender is required. 101 Mortgagee Letter 2004-47 The lender using the TOTAL Mortgage Scorecard must conduct a manual underwriting review according to FHA requirements for all loan applications that generate a ―refer‖ rating. The DE underwriter must determine if the borrower is creditworthy in accordance with FHA standard credit policies and requirements. It is FHA policy that no borrower will be denied a FHA insured mortgage loan solely on the basis of a risk assessment generated by the TOTAL Mortgage Scorecard…. Current Employment---The lender must obtain the single most recent pay stub (showing year-to-date earnings of at least one month) and any one of the following to verify current employment: Written Verification of Employment (VOE) Verbal verification of employment (Lender or service provider must document individual verifying the employment.) Electronic verification acceptable to FHA…. Employment History---The lender is required to verify the applicant‘s employment history for the previous two years. However, direct verification is not required if all of the following conditions are met: The current employer confirms a two-year employment history (this may include a paystub indicating a hiring date) Only base pay is used to qualify (no overtime or bonuses) The borrower signs form IRS 4506 or 8821 for the previous two tax years. If the applicant has not been employed with the same employer for the previous two years and/or all conditions immediately above cannot be met, then the lender must obtain one of the following for the most recent two years to verify the applicant‘s employment history: W-2(s) VOE(s) Electronic verification acceptable to FHA…. Cash reserves may include certain retirement accounts. To account for withdrawal penalties and taxes, only 60% of the vested amount of the account may be used. The lender must document the existence of the account with the most recent depository or brokerage account statement. In addition, evidence must be provided that the retirement account allows for withdrawals for conditions other than in connection with the borrower's employment termination, retirement, or death. If withdrawals can only be made under these circumstances, the retirement account may not be included as cash reserves. If any of these funds are also to be used for loan settlement, that amount must be subtracted from the amount included as cash reserves. 102 Mortgagee Letter 2005-16 [F]or manually underwritten mortgages where the Direct Endorsement (DE) underwriter must make the credit decision, the qualifying ratios are raised to 31% and 43%.... As always, if either or both ratios are exceeded on a manually underwritten mortgage, the lender must describe the compensating factors used to justify mortgage approval. 103 Appendix D NARRATIVE LOAN SUMMARIES FOR UNDERWRITING DEFICIENCIES The following narratives provide the details for the deficiencies noted in the table contained in finding 2. FHA loan number: 022-1864520 Loan status: Claim25 Requesting indemnification: Yes Default status: Preforeclosure sale completed26 We are seeking indemnification of this loan based on the lender's failure to properly determine the borrower‘s capacity to repay the mortgage debt and based on the executed schedule A to purchase contract. Income Although the lender obtained a verification of employment, the lender failed to obtain the most recent pay stub or any other current paystub for the borrower that reflected at least one month of year-to-date earnings as required by Mortgagee Letter 2004-47 to verify current employment. Thus, the lender should have obtained an additional pay stub for the borrower before closing. Since the lender could not verify the borrower‘s wages properly, the income may not be used in calculating the borrower‘s income ratios,27 as stated in HUD Handbook 4155.1, chapter 2, section 2. Accordingly, because the lender could not verify the borrower's qualifying wages, it failed to properly determine the borrower's capacity to repay the debt. Credit The lender excluded one of the borrower‘s accounts listed on the credit report without providing an explanation or proof that the account should not have been included. Thus, the additional monthly liability of $1,247 per month must be used in qualifying the borrower as required by HUD Handbook 4155.1, paragraph 2-11, and the Fannie Mae Underwriter Findings. The loan file did not contain an explanation for the three significant credit report inquiries on the borrower‘s credit report and the five significant credit report inquiries on the nonpurchasing spouse‘s credit report that were within 90 days of the credit report date as required by HUD Handbook 4155.1, paragraph 2-3B. Additionally, the lender did not determine whether the material inquiries resulted in new debts as required by the Fannie Mae Underwriting Findings. 25 A loan status of claim means the loan was conveyance claim terminated. A claim is the amount of the insurance benefit prescribed by HUD related to the default. 26 A default status of preforeclosure sale completed means that a a borrower in default sold their home and used the sale proceeds to satisfy the mortgage debt even if the proceeds were less than the amount owed. The lender can then file a claim for certain insurance benefits. 27 The mortgage payment expense-to-effective income (mortgage payment-to-income) ratio is the total mortgage payment (which includes the principal and interest, escrow deposits for real estate taxes, hazard insurance, the mortgage insurance premium, homeowners‘ association dues, ground rent, special assessments, and payments for any acceptable secondary financing) divided by the gross effective monthly income. The total fixed payment-to-effective income (total fixed payments-to-income) ratio is the total of the mortgage payment and all recurring charges (including installment debts, revolving accounts, and child support) divided by the gross effective income. 104 Assets The $11,000 in net equity assets used to qualify the borrower was not verified and documented as required by HUD Handbook 4155.1, paragraph 2-10E, and the Fannie Mae Underwriting Findings. Contract A schedule A to purchase contract was executed and contained a covenant restricting resale or rental of the property for one year, which is prohibited by 24 CFR 203.41. The schedule A included a grant of lien to the seller in the amount of $40,000, which is also prohibited by 24 CFR 203.32(a). Therefore, the schedule A to purchase contract rendered the property ineligible for FHA insurance. FHA loan number: 022-1874931 Loan status: Active28 Requesting indemnification: Yes Default status: Special forbearance29 We are seeking indemnification of this loan because a Chapter 7 bankruptcy rendered it ineligible at the time of closing and based on the executed schedule A to purchase contract. Income The borrower‘s monthly income used in the qualifying ratios was based on the annual salary. However, the borrower‘s current pay stub showed year-to-date earnings that did not reflect the entire salary. The impact on the ratios was not material. Credit The borrower had a Chapter 7 bankruptcy discharged on July 28, 2005, and the loan closed on April 6, 2007; therefore, two years did not elapse between the bankruptcy and the loan closing. The lender failed to document the borrower‘s ability to responsibly manage his or her financial affairs as required by HUD Handbook 4155.1, paragraph 2-3E. Contract A schedule A to purchase contract was executed and contained a covenant restricting resale or rental of the property for one year, which is prohibited by 24 CFR 203.41. The schedule A included a grant of lien to the seller in the amount of $40,000, which is also prohibited by 24 CFR 203.32(a). Therefore, the schedule A to purchase contract rendered the property ineligible for FHA insurance. 28 A loan status of active means that the loan is currently insured by the Federal Housing Administration (FHA) and is not conveyance claim terminated or terminated with no claim. 29 A default status of special forbearance means that the borrower has a written repayment agreement. 105 FHA loan number: 022-1883463 Loan status: Claim Requesting indemnification: Yes Default status: Property conveyed to insurer30 We are seeking indemnification of this loan based on the debarred loan officer and the executed schedule A to purchase contract. The FHA-insured loan had an additional minor underwriting deficiency that did not affect the overall insurability of the loan. Contract A schedule A to purchase contract was executed and contained a covenant restricting resale or rental of the property for one year, which is prohibited by 24 CFR 203.41. The schedule A included a grant of lien to the seller in the amount of $40,000, which is also prohibited by 24 CFR 203.32(a). Therefore, the schedule A to purchase contract rendered the property ineligible for FHA insurance. Other The lender included a loan discount fee of $3,396.54 in the loan amount financed contrary to HUD Handbook 4000.2, paragraph 5-2P, which states that ―[d]iscount points charged by the lender on a purchase transaction may be charged to the buyer but may not be financed into the mortgage amount.‖ Additionally, the loan discount fee was not included in the good faith estimate that was prepared four days before settlement. The loan was originated by a loan officer employed by DHI Mortgage who was listed on the General Services Administration Excluded Parties List System31 contrary to HUD Handbook 4000.2, paragraph 1-6A, which states "[i]f the name of any party to the transaction appears on either list, the application is not eligible for mortgage insurance." FHA loan number: 022-1883781 Loan status: Active Requesting indemnification: Yes Default status: Special forbearance We are seeking indemnification of this loan based on the debarred loan officer and the executed schedule A to purchase contract. We did not identify other underwriting deficiencies for this loan. Contract A schedule A to purchase contract was executed and contained a covenant restricting resale or rental of the property for one year, which is prohibited by 24 CFR 203.41. The schedule A included a grant of lien to the seller in the amount of $40,000, which is also prohibited by 24 CFR 203.32(a). Therefore, the schedule A to purchase contract rendered the property ineligible for FHA insurance. Other The loan was originated by a loan officer employed by DHI Mortgage who was listed on the General Services Administration Excluded Parties List System, contrary to HUD Handbook 30 This means that the property was conveyed to HUD (the insurer). 31 List of parties excluded from federal procurement or nonprocurement programs. 106 4000.2, paragraph 1-6A, which states "[i]f the name of any party to the transaction appears on either list, the application is not eligible for mortgage insurance." FHA loan number: 022-1890152 Loan status: Active Requesting indemnification: Yes Default status: Special forbearance We are seeking indemnification of this loan based on the revised mortgage payment-to- income and total fixed payments-to-income ratios, which reflect the allowable qualifying income as calculated by the OIG in accordance with HUD/FHA requirements, and based on the executed schedule A to purchase contract. After revision, the ratios were 38.52 and 58.95 percent respectively, which far exceeded HUD‘s mortgage payment-to-income and total fixed payments-to-income benchmark ratios of 31 and 43 percent as stated in Mortgagee Letter 2005-16. The lender did not document any compensating factors that could have justified the excessive ratios. Income The loan file did not contain the appropriate support to justify the overtime pay used in the ratios to qualify the borrower as required by HUD Handbook 4155.1, paragraph 2-7A. The lender did not document the following: (1) the reason for including the borrower‘s overtime pay, (2) an overtime trend over a two-year period, and (3) that the amount of monthly overtime income used was based on a 24-month average of overtime earnings. Thus, the borrower‘s overtime income was inappropriately included, resulting in an overstatement of the monthly income by $1,084.29. Credit The loan file did not contain an explanation for the 11 credit report inquiries that were within 90 days of the completed credit report, as required by HUD Handbook 4155.1, paragraph 2- 3B. Additionally, the lender did not determine whether the material inquiries resulted in new debts as required by the Fannie Mae Underwriting Findings. Contract A schedule A to purchase contract was executed and which contained a covenant restricting resale or rental of the property for one year, which is prohibited by 24 CFR 203.41. The schedule A included a grant of lien to the seller in the amount of $40,000, which is also prohibited by 24 CFR 203.32(a). Therefore, the schedule A to purchase contract rendered the property ineligible for FHA insurance. FHA loan number: 022-1892652 Loan status: Claim Requesting indemnification: Yes Default status: Foreclosure sale held32 We are seeking indemnification of this loan based on the revised mortgage payment-to- income and total fixed payments-to-income ratios, which reflect the allowable qualifying income as calculated by the OIG in accordance with HUD/FHA requirements. After revision, the ratios were 41.54 and 51.40 percent, respectively, which far exceeded HUD‘s mortgage payment-to-income and total fixed payments-to-income benchmark ratios of 31 32 A default status of foreclosure sale held means that the foreclosure sale was held. 107 and 43 percent as stated in Mortgagee Letter 2005-16. The lender did not document any compensating factors that could have justified the excessive ratios. Income The loan file did not contain the appropriate support to justify the overtime pay used in the ratios to qualify the borrower as required by HUD Handbook 4155.1, paragraph 2-7A. The lender did not document the following: (1) the reason for including the borrower‘s overtime pay, (2) an overtime trend over a two-year period, and (3) that the amount of monthly overtime income used was based on a 24-month average of overtime earnings. Thus, the borrower‘s overtime income was inappropriately included in the borrower‘s monthly income, resulting in overstating the monthly income by $557.12. Additionally, the lender did not establish that the borrower‘s overall employment would likely continue as required by HUD Handbook 4155.1, chapter 2, section 2, which requires the likelihood of its continuance be established to determine a borrower‘s capacity to repay mortgage debt. The borrower, at the time of loan approval, was employed by DHI Mortgage and was laid off shortly after the loan was approved. Therefore, the lender should have known the employment would not have lasted for at least the first three years of the loan, which is required to be established by HUD Handbook 4155.1, chapter 2, section 2, to determine a borrower‘s capacity to repay mortgage debt. Other A different branch or the main office should have processed the application because it was an employee loan. HUD Handbook 4000.4, paragraph 1-14, ―If possible, the application should be processed by a different branch or the mortgagee's main office. Although the draft report did not previously address this, the case must be clearly identified in the remarks section of the Mortgage Credit Worksheet and beneath Box F, "Employment," on the front of the case binder.‖ The processor, originator and interviewer were all from the local Tucson office. Additionally, the MCAW did not identify the loan as an employee loan. Although the underwriter may not have known about the impending borrower layoff, if the Mortgage Credit Analysis Worksheet had been properly identified, then individuals who processed the loan may have been able to halt the loan or inform the underwriter. FHA loan number: 023-2356343 Loan status: Active Requesting indemnification: Yes Default status: Special forbearance We are seeking indemnification of this loan based on the revised total fixed payments-to- income ratio, which reflects the allowable qualifying income and liabilities as calculated by the OIG in accordance with HUD/FHA requirements, and based on the executed schedule A to purchase contract. After revision, the ratio was 83.78 percent, which far exceeded HUD‘s total fixed payments-to-income benchmark ratio of 43 percent as stated in Mortgagee Letter 2005-16. The lender did not document any compensating factors that could have justified the excessive ratio. 108 Income The loan was qualified, in part, on the borrower‘s base employment income. However, the borrower received Internal Revenue Service Form 1099-MISC, showing nonemployee compensation from the company listed as his current employer, which indicated that he was a contractor rather than an employee. Therefore, the income he received should have been treated as self-employed income rather than employment income. Coborrower A‘s income also appeared to be nonemployee compensation because no taxes were withheld from the weekly checks and no pay stubs were provided. Therefore, the income coborrower A received should also have been treated as self-employment income. Neither the borrower‘s income nor coborrower A‘s income met the two-year minimum length of self-employment criteria to be included in qualifying income as required by HUD Handbook 4155.1, paragraph 2-9A. This condition resulted in the overstatement of the borrower‘s monthly income by $2,080 and coborrower A‘s monthly income by $400. Additionally, the lender failed to provide any of the required documents for self-employed income contrary to HUD Handbook 4155.1, paragraph 2-9B. Bonus income from coborrower B was used in the qualifying income. However, the file did not contain evidence of bonus income for coborrower B as required by HUD Handbook 4155.1, paragraph 2-7A. Thus, the bonus income was inappropriately included, and coborrower B‘s monthly income was overstated by $300. Contract A schedule A to purchase contract was executed and contained a covenant restricting resale or rental of the property for one year, which is prohibited by 24 CFR 203.41. The schedule A included a grant of lien to the seller in the amount of $40,000, which is also prohibited by 24 CFR 203.32(a). Therefore, the schedule A to purchase contract rendered the property ineligible for FHA insurance. Other The mortgage credit analysis worksheet provided in the file with the examiner‘s approval contained different figures than those used for approval in the Automatic Underwriting System. Further, the automated underwriting approval included an additional $803 per month liability that was not listed in the credit and liabilities section of the Fannie Mae Underwriting Findings. The lender did not explain the additional $803 debt. FHA loan number: 023-2375190 Loan status: Claim Requesting indemnification: Yes Default status: Property conveyed to insurer We are seeking indemnification of this loan based on the revised total fixed payments-to- income ratio, which reflects the allowable qualifying income as calculated by the OIG in accordance with HUD/FHA requirements. After revision, the ratio was 51.44 percent, which far exceeded HUD‘s total fixed payments-to-income benchmark ratio of 43 percent as stated in Mortgagee Letter 2005-16. The lender did not document any compensating factors that could have justified the excessive ratio. 109 Income The loan file did not contain the appropriate support to justify the overtime pay used in the ratios to qualify the borrower as required by HUD Handbook 4155.1, paragraph 2-7A. The lender failed to (1) support that the coborrower had received such income for the past two years and that it was likely to continue, (2) develop an average of overtime income for the past two years, and (3) establish and document an earnings trend for the coborrower‘s overtime income. Thus, the lender inappropriately included the coborrower‘s overtime pay in the ratios, overstating the qualifying total monthly income by $1,562.87. Assets The lender used a retirement account balance of $10,443 to assist in qualifying the borrower for the loan. However, the account statement listed only $8,702.57 in funds available to borrow against the account. Additionally, the lender did not provide evidence that the retirement account allowed for withdrawals for conditions other than in connection with the borrower‘s employment termination, retirement, or death as required by Mortgagee Letter 2004-47. Therefore, the retirement account funds of $10,443 used to assist in qualifying the borrower should not have been used as a borrower asset. FHA loan number: 023-2375473 Loan status: Active Requesting indemnification: Yes Default status: Delinquent33 We are seeking indemnification of this loan based on the revised mortgage payment-to- income and total fixed payments-to-income ratios and based on the executed schedule A to purchase contract. The qualified income contribution from the coborrower was unknown as was its impact on the qualifying ratios. The lender did not document any compensating factors that could have justified the excessive ratios. Income The lender documented two paystubs that had inconsistent pay amounts and pay periods. At a minimum, the lender should have inquired about the current pay discrepancy and pay period length discrepancy. Based on the loan documentation it appeared that some portion of the coborrower‘s income was either commission or a bonus. In either instance, additional analysis and documentation was required to conform to HUD Handbook 4155.1, paragraph 2-7D. We were unable to determine the coborrower‘s qualified income contribution, or the impact on the qualifying ratios. Credit The loan file did not contain an explanation for the 14 credit report inquiries that were within 90 days of the completed credit report as required by HUD Handbook 4155.1, paragraph 2- 3B. Additionally, the lender did not determine whether the material inquiries resulted in new debts as required by the Fannie Mae Underwriting Findings. 33 A default status of delinquent means that the account has a payment due and is unpaid, and there is no other action reportable. This code must be reported as the initial delinquency code. 110 Contract A schedule A to purchase contract was executed and contained a covenant restricting resale or rental of the property for one year, which is prohibited by 24 CFR 203.41. The schedule A included a grant of lien to the seller in the amount of $40,000, which is also prohibited by 24 CFR 203.32(a). Therefore, the schedule A to purchase contract rendered the property ineligible for FHA insurance. FHA loan number: 023-2383860 Loan status: Active Requesting indemnification: Yes Default status: Repayment34 We are seeking indemnification based on the executed schedule A to purchase contract. The FHA-insured loan had additional minor underwriting deficiencies that did not affect the overall insurability of the loan. Income The lender failed to obtain the most recent pay stub for the borrower that reflected at least one month of year-to-date earnings as required by Mortgagee Letter 2004-47. Thus, the lender should have obtained an additional pay stub for the borrower before closing to properly document the borrower‘s income. Contract A schedule A to purchase contract was executed and contained a covenant restricting resale or rental of the property for one year, which is prohibited by 24 CFR 203.41. The schedule A included a grant of lien to the seller in the amount of $40,000, which is also prohibited by 24 CFR 203.32(a). Therefore, the schedule A to purchase contract rendered the property ineligible for FHA insurance. FHA loan number: 023-2384380 Loan status: Active Requesting indemnification: Yes Default status: Special forbearance We are seeking indemnification of this loan based on the revised mortgage payment-to- income and total fixed payments-to-income ratios, which reflect the allowable qualifying income as calculated by the OIG in accordance with HUD/FHA requirements, and based on the executed schedule A to purchase contract. After revision, the ratios were 46.05 and 49.80 percent, respectively, which far exceeded HUD‘s mortgage payment-to-income and total fixed payments-to-income benchmark ratios of 31 and 43 percent as stated in Mortgagee Letter 2005-16. The lender did not document any compensating factors that could have justified the excessive ratios. Income The loan file did not contain the appropriate support to justify the overtime pay used in the ratios to qualify the borrower as required by HUD Handbook 4155.1, paragraph 2-7A. The lender did not document a two year overtime trend analysis as required by HUD Handbook 4155.1, paragraph 2-7 A. The lender also used a thirty two month average for qualifying rather than a twenty four month average as required by HUD Handbook 4155.1, paragraph 2- 34 A default status of repayment means that a repayment plan has been entered into (any repayment plan that is not a special forbearance). 111 7 A. The twenty four month average resulted in a declining overtime average which requires additional documentation. However, the lender did not provide a sound rationalization in writing for including the declining overtime income as required by HUD Handbook 4155.1, paragraph 2-7A. Thus, the borrower‘s overtime income was inappropriately included and resulted in an overstatement of the monthly income by $319.21. Credit The loan file did not contain an explanation for the seven credit report inquiries that were within 90 days of the completed credit report as required by HUD Handbook 4155.1, paragraph 2-3B. Additionally, the lender did not determine whether the material inquiries resulted in new debts as required by the Fannie Mae Underwriting Findings. Contract A schedule A to purchase contract was executed and contained a covenant restricting resale or rental of the property for one year, which is prohibited by 24 CFR 203.41. The schedule A included a grant of lien to the seller in the amount of $40,000, which is also prohibited by 24 CFR 203.32(a). Therefore, the schedule A to purchase contract rendered the property ineligible for FHA insurance. FHA loan number: 023-2388693 Loan status: Claim Requesting indemnification: No Default status: Property conveyed to insurer We are seeking indemnification based on the executed schedule A to purchase contract. Contract A schedule A to purchase contract was executed and contained a covenant restricting resale or rental of the property for one year, which is prohibited by 24 CFR 203.41. The schedule A included a grant of lien to the seller in the amount of $40,000, which is also prohibited by 24 CFR 203.32(a). Therefore, the schedule A to purchase contract rendered the property ineligible for FHA insurance. FHA loan number: 023-2389873 Loan status: Active Requesting indemnification: Yes Default status: Special forbearance We are seeking indemnification of this loan based on the revised mortgage payment-to- income and total fixed payments-to-income ratios, which reflect the allowable qualifying income and liabilities as calculated by the OIG in accordance with HUD/FHA requirements. After revision, the ratios were 42.29 and 60.49 percent, respectively, which far exceeded HUD‘s mortgage payment-to-income and total fixed payments-to-income benchmark ratios of 31 and 43 percent as stated in Mortgagee Letter 2005-16. The lender did not document any compensating factors that could have justified the excessive ratios. Income The loan file did not contain the appropriate support to justify the overtime, commission, and bonus income used in the income ratios to qualify the borrower as required by HUD Handbook 4155.1, paragraph 2-7A, when the borrower was with the employer for less than two years. Thus, the borrower‘s overtime, commission, and bonus income was 112 inappropriately included in the borrower‘s monthly income, resulting in an overstatement of the borrower‘s monthly income by $1,057.30. Credit The lender excluded one of the borrower‘s accounts listed on the credit report without providing an explanation or proof of the reason for the exclusion. Thus, the total monthly liability of $57.85 must be used in qualifying the borrower as required by HUD Handbook 4155.1, paragraph 2-11, and the Fannie Mae Underwriter Findings. FHA loan number: 023-2391447 Loan status: Claim Requesting indemnification: Yes Default status: Property conveyed to insurer We are seeking indemnification of this loan based on the revised total fixed payments-to- income ratio, which reflects the qualifying liabilities as calculated by the OIG in accordance with HUD/FHA requirements. After revision, the ratio was 47.96, which exceeded HUD‘s total fixed payments-to-income benchmark ratio of 43 percent as stated in Mortgagee Letter 2005-16. The lender did not document any compensating factors that could have justified the excessive ratio. Additionally, we were unable to calculate the true total fixed payments-to- income ratio as the details provided in the loan file did not contain the information needed to accurately calculate the borrower‘s net rental income or loss. Income The overtime income used to qualify the borrower was not based on a 24-month average of overtime earnings as required by HUD Handbook 4155.1, paragraph 2-7A. Credit The credit report contained a civil judgment with a handwritten statement which stated that it would be paid at closing. However, the lender did not provide support that the civil judgment was satisfied before closing as required by HUD Handbook 4155.1, paragraph 2- 3C. The HUD-1 settlement statement listed the judgment to be paid at closing, but the title file showed that the check to pay off the judgment was voided. The loan file contained nothing to support that the borrower received permission from the court to enter into the mortgage transaction as required by HUD Handbook 4155.1, paragraph 2-3E, after the borrower filed for Chapter 13 bankruptcy. We were unable to determine the actual net loss on the borrower‘s rental property, as the loan file did not contain enough information to determine the additional expenses associated with the rental property. The lender did not determine the amount for the fee listed as ―TRASH‖ payable by the owner on the lease agreement. Additionally, the lender did not obtain information as to whether the rental property had corresponding monthly mortgage insurance premiums or homeowners‘ association dues. Therefore, the lender did not properly calculate the net rental profit or loss in accordance with HUD Handbook 4155.1, paragraph 2-7M2, which requires that, after the gross rental amount is reduced for vacancies and maintenance, then the principal and interest, homeowners‘ association dues, etc., are to be subtracted to determine the net profit or loss on the rental property. 113 The lender excluded the borrower‘s Chevron account listed on the credit report without providing an explanation or proof of the reason for the exclusion. Thus, the total monthly liability of $10 must be used in qualifying the borrower as required by HUD Handbook 4155.1, paragraph 2-11, and the Fannie Mae Underwriter Findings. FHA loan number: 023-2409090 Loan status: Active Requesting indemnification: No Default status: Special forbearance The FHA-insured loan had minor underwriting deficiencies that did not affect the overall insurability of the loan. Contract The lender did not provide the addendum to the purchase contract for occupancy/investment disclosure in the FHA loan file as required by HUD Handbook 4155.1, paragraph 3-1H, and the Fannie Mae Underwriter Findings. FHA loan number: 023-2412241 Loan status: Active Requesting indemnification: Yes Default status: Special forbearance We are seeking indemnification of this loan based on the executed schedule A to purchase contract. The FHA-insured loan had additional minor underwriting deficiencies that did not affect the overall insurability of the loan. Credit The lender excluded the coborrower‘s auto lease listed on her pay stub without providing an explanation or proof of the reason for the exclusion. Thus, the additional monthly liability of $356.38 must be used in qualifying the borrower as required by HUD Handbook 4155.1, paragraph 2-11, and the Fannie Mae Underwriter Findings. Contract A schedule A to purchase contract was executed and contained a covenant restricting resale or rental of the property for one year, which is prohibited by 24 CFR 203.41. The schedule A included a grant of lien to the seller in the amount of $40,000, which is also prohibited by 24 CFR 203.32(a). Therefore, the schedule A to purchase contract rendered the property ineligible for FHA insurance. FHA loan number: 023-2414288 Loan status: Claim Requesting indemnification: Yes Default status: Foreclosure sale held We are seeking indemnification of this loan based on the inability to determine the borrower‘s liabilities. Income The borrower‘s income was not verified through a completed verification of employment as required by the Fannie Mae Underwriting Findings. The verification of employment did not contain the probability of continued employment and was marked ―n/a,‖ indicating nonapplicable. 114 Credit The lender did not obtain a credit history for the borrower‘s nonpurchasing spouse as required by HUD Handbook 4155.1, paragraph 2-2D, which requires a credit report for a nonpurchasing spouse in a community property state such as Arizona. Although the nonpurchasing spouse provided a letter stating that she did not have a Social Security number, it remains the lender‘s responsibility to exhaust all possible means to resolve the issue. Without obtaining the nonpurchasing spouse‘s credit report or establishing alternative credit, the lender was unable to determine the coborrower‘s liabilities. FHA loan number: 023-2425869 Loan status: Active Requesting indemnification: Yes Default status: First legal action to commence foreclosure35 We are seeking indemnification of this loan based on the revised mortgage payment-to- income and total fixed payments-to-income ratios, which reflect the allowable qualifying income and liabilities as calculated by the OIG in accordance with HUD/FHA requirements, and based on the executed schedule A to purchase contract. After revision, the ratios were 53.89 and 84.26 percent, respectively, which far exceeded HUD‘s mortgage payment-to- income and total fixed payments-to-income benchmark ratios of 31 and 43 percent as stated in Mortgagee Letter 2005-16. The lender did not document any compensating factors that could have justified the excessive ratios. Income The borrower‘s income used to qualify was based, in part, on Social Security disability income; however, the lender did not obtain supporting documents to show that this income was likely to continue for at least the first three years of the mortgage as required by HUD Handbook 4155.1, paragraph 2-7E. Therefore, the income did not meet the requirements for use in qualifying the borrower. This condition resulted in an overstatement of the borrower‘s income by $1,886.63. Credit The lender excluded one of the borrower‘s accounts listed on the credit report without providing an explanation or proof of the reason for the exclusion. Thus, the total monthly liability of $103 must be used in qualifying the borrower as required by HUD Handbook 4155.1, paragraph 2-11, and the Fannie Mae Underwriter Findings. Contract A schedule A to purchase contract was executed and contained a covenant restricting resale or rental of the property for one year, which is prohibited by 24 CFR 203.41. The schedule A included a grant of lien to the seller in the amount of $40,000, which is also prohibited by 24 CFR 203.32(a). Therefore, the schedule A to purchase contract rendered the property ineligible for FHA insurance. 35 This default status means that the first public legal action required to initiate foreclosure was completed. 115 FHA loan number: 023-2426099 Loan status: Claim Requesting indemnification: Yes Default status: Property conveyed to insurer We are seeking indemnification of this loan based on the revised mortgage payment-to- income and total fixed payments-to-income ratios, which reflect the allowable qualifying income as calculated by the OIG in accordance with HUD/FHA requirements, and based on the executed schedule A to purchase contract. After revision, the ratios were 37.35 and 71.32 percent, respectively, which far exceeded HUD‘s mortgage payment-to-income and total fixed payments-to-income benchmark ratios of 31 and 43 percent as stated in Mortgagee Letter 2005-16. The lender did not document any compensating factors that could have justified the excessive ratios. Income The loan file did not contain the appropriate support to justify the overtime pay used in the income ratios to qualify the borrower as required by HUD Handbook 4155.1, paragraph 2- 7A. The lender did not document the following: (1) the reason for including the borrower‘s overtime pay and (2) an overtime trend over a two-year period. Although the lender documented on the verification of employment that the overtime income was likely to continue and that it was based on a 24-month average, the most recent pay stub provided for the new year did not support the continuance of the overtime income. Thus, the borrower‘s overtime income was inappropriately included in the borrower‘s monthly income, resulting in an overstatement of the borrower‘s monthly income by $3,323.93. Debt The lender did not include a new debt, a timeshare that resulted from a material inquiry, ―Merchants Credit Info,‖ listed on the borrower‘s credit report as required by HUD Handbook 4155.1, paragraph 2-3B, and the Fannie Mae Underwriting Findings. The inclusion of this debt would have further increased the total fixed payments-to-income ratio. Contract A schedule A to purchase contract was executed and contained a covenant restricting resale or rental of the property for one year, which is prohibited by 24 CFR 203.41. The schedule A included a grant of lien to the seller in the amount of $40,000, which is also prohibited by 24 CFR 203.32(a). Therefore, the schedule A to purchase contract rendered the property ineligible for FHA insurance. FHA loan number: 023-2427150 Loan status: Claim Requesting indemnification: Yes Default status: Property conveyed to insurer We are seeking indemnification of this loan based on the revised mortgage payment-to- income and total fixed payments-to-income ratios, which reflect the allowable qualifying income as calculated by the OIG in accordance with HUD/FHA requirements. After revision, the ratios were 46.67 and 73.99 percent, respectively, which far exceeded HUD‘s mortgage payment-to-income and total fixed payments-to-income benchmark ratios of 31 and 43 percent as stated in Mortgagee Letter 2005-16. The lender did not document any compensating factors that could have justified the excessive ratios. 116 Income The loan file did not contain the appropriate support to justify the inclusion of bonus earnings in the qualifying ratios as required by HUD Handbook 4155.1, paragraph 2-7A. The lender did not document the following: (1) the reason for including the borrower‘s bonus pay, (2) a bonus trend over a two-year period, (3) that the amount of monthly bonus income used was based on a 24-month average, and (4) the likelihood that the bonus income would continue. Thus, the borrower‘s bonus income was inappropriately included and resulted in an overstatement of the monthly income by $1,198.68. Additionally, the lender did not establish that the borrower‘s overall employment was likely to continue as required by HUD Handbook 4155.1, chapter 2, section 2, which requires the likelihood of its continuance be established to determine a borrower‘s capacity to repay mortgage debt. Credit The lender did not provide supporting documentation of the deposit amount and the source of funds the borrower used to pay the $1,000 earnest money deposit as required by HUD Handbook 4155.1, paragraph 2-10A, when the borrower‘s documented savings does not support the ability to pay such deposit. During an interview with the borrower, we were informed that the $1,000 earnest money deposit was borrowed from family. However, we did not include this information in the revision of the borrower‘s ratios, although doing so would have further increased the borrower‘s total fixed payments-to-income ratio. Assets The $1,380 in retirement assets listed to qualify the borrower was not verified and documented as required by HUD Handbook 4155.1, paragraph 2-10, and the Fannie Mae Underwriting Findings. FHA loan number: 023-2435939 Loan status: Claim Requesting indemnification: Yes Default status: Property conveyed to insurer We are seeking indemnification of this loan based on the revised mortgage payment-to- income and total fixed payments-to-income ratios, which reflect the allowable qualifying income as calculated by the OIG in accordance with HUD/FHA requirements, and based on the executed schedule A to purchase contract. After revision, the ratios were 59.44 and 103.94 percent, respectively, which far exceeded HUD‘s mortgage payment-to-income and total fixed payments-to-income benchmark ratios of 31 and 43 percent as stated in Mortgagee Letter 2005-16. The lender did not document any compensating factors that could have justified the excessive ratios. Income The borrower‘s income used to qualify was based on Social Security disability income; however, the lender did not obtain supporting documents to show that this income was likely to continue for at least the first three years of the mortgage as required by HUD Handbook 4155.1, paragraph 2-7E. Therefore, the income did not meet the requirements for use to qualify the borrower. This condition resulted in an overstatement of the borrower‘s monthly income by $2,013.75. 117 The coborrower‘s employment was not verified as likely to continue as required by HUD Handbook 4155.1, chapter 2, section 2, which requires the likelihood of its continuance be established to determine a borrower‘s capacity to repay mortgage debt. Contract A schedule A to purchase contract was executed and contained a covenant restricting resale or rental of the property for one year, which is prohibited by 24 CFR 203.41. The schedule A included a grant of lien to the seller in the amount of $40,000, which is also prohibited by 24 CFR 203.32(a). Therefore, the schedule A to purchase contract rendered the property ineligible for FHA insurance. FHA loan number: 023-2438080 Loan status: Active Requesting indemnification: Yes Default status: Servicing transferred or sold to another lender36 We are seeking indemnification of this loan based on the executed schedule A to purchase contract. The FHA-insured loan had additional minor underwriting deficiencies that did not affect the overall insurability of the loan. Credit The lender excluded four of the borrower‘s accounts listed on the credit report without providing an explanation or proof of the reason for the exclusion as required by HUD Handbook 4155.1, paragraph 2-11, and the Fannie Mae Underwriter Findings. Contract A schedule A to purchase contract was executed and contained a covenant restricting resale or rental of the property for one year, which is prohibited by 24 CFR 203.41. The schedule A included a grant of lien to the seller in the amount of $40,000, which is also prohibited by 24 CFR 203.32(a). Therefore, the schedule A to purchase contract rendered the property ineligible for FHA insurance. FHA loan number: 023-2438810 Loan status: Claim Requesting indemnification: Yes Default status: Servicing transferred or sold to another lender We are seeking indemnification of this loan based on the revised total fixed payments-to- income ratio, which reflects the qualifying liabilities as calculated by the OIG in accordance with HUD/FHA requirements, and based on the executed schedule A to purchase contract. After revision, the ratio was 78.57 percent, which far exceeded HUD‘s total fixed payments- to-income benchmark ratio of 43 percent as stated in Mortgagee Letter 2005-16. The lender did not document an allowable compensating factor that could have justified the excessive ratio. 36 This is used to advise that the servicing was transferred to new mortgage servicer - both the losing and gaining mortgages servicers must report. 118 Credit The documentation in the loan file did not support that the six student loans were deferred or otherwise should have been excluded from the borrower‘s total fixed payments-to-income ratio. The student loan repayments, according to the borrower‘s credit report, were set to begin September 13, 2007. Since the repayment of the loans was to begin within six months of closing, the student loans were required to be included as a monthly liability as stated in HUD Handbook 4155.1, paragraph 2-11C. Additionally, debts without a monthly repayment term specified on the credit report are to be calculated at 5 percent of the balance or $10 per month, whichever is greater. Thus, the balance of the student loan accounts of $32,365 multiplied by 5 percent equates to an additional monthly debt of $1,618.25, which was not included by the lender in the total fixed payments-to-income ratio. In addition to the excluded liabilities discussed above, the borrowers informed us that they borrowed about $3,600 before closing with repayment terms of at least $150 per month. This would have increased the ratios further; however, we did not include this monthly obligation in our revision of the ratios because we did not have the exact amount of the debt or the repayment terms. Assets A recent bank statement accompanying the verification of deposit—needed to support the borrower‘s assets—was not provided as required by HUD Handbook 4155.1, paragraph 3-1F. Additionally, the lender failed to obtain documentation of the source of funds used for the earnest money deposit when the verification of deposit did not support the borrower‘s ability to fund the earnest money deposit as required by HUD Handbook 4155.1, paragraph 2-10A. Contract A schedule A to purchase contract was executed and contained a covenant restricting resale or rental of the property for one year, which is prohibited by 24 CFR 203.41. The schedule A included a grant of lien to the seller in the amount of $40,000, which is also prohibited by 24 CFR 203.32(a). Therefore, the schedule A to purchase contract rendered the property ineligible for FHA insurance. FHA loan number: 023-2442707 Loan status: Claim Requesting indemnification: Yes Default status: Property conveyed to insurer We are seeking indemnification of this loan based on the revised mortgage payment-to- income and total fixed payments-to-income ratios, which reflect the allowable qualifying income and liabilities as calculated by the OIG in accordance with HUD/FHA requirements. After revision, the ratios were 32.28 and 48.40 percent, respectively, which exceeded HUD‘s mortgage payment-to-income and total fixed payments-to-income benchmark ratios of 31 and 43 percent as stated in Mortgagee Letter 2005-16. The lender did not document any compensating factors that could have justified the excessive ratios. Income The loan file did not contain the appropriate support to justify the overtime pay used in the income ratios to qualify the borrower as required by HUD Handbook 4155.1, paragraph 2- 119 7A. Although the lender documented that the borrower had received overtime income in the past, the lender failed to support that the overtime income was likely to continue. Further, the most current pay stub used to support the borrower‘s income provided a gross pay amount for the current year that did not support the continuance of the overtime pay. Thus, the borrower‘s overtime income was inappropriately included and resulted in an overstatement of monthly income by $544.08. Additionally, the lender did not establish that the borrower‘s overall employment was likely to continue as required by HUD Handbook 4155.1, chapter 2, section 2. FHA loan number: 023-2447263 Loan status: Active Requesting indemnification: No Default status: Servicing transferred or sold to another lender The FHA-insured loan had minor underwriting deficiencies that did not affect the overall insurability of the loan. Income The loan file did not support that the bonus income used to assist in qualifying the borrower was likely to continue as required by HUD Handbook 4155.1, paragraph 2-7A. Additionally, the lender did not establish that the borrower‘s overall employment was likely to continue as required by HUD Handbook 4155.1, chapter 2, section 2. Other The lender included a loan discount fee of $8,298.39 in the loan amount financed, contrary to HUD Handbook 4000.2, paragraph 5-2P, which states that ―[d]iscount points charged by the lender on a purchase transaction may be charged to the buyer but may not be financed into the mortgage amount.‖ Additionally, the loan file demonstrated that the borrower paid the closing funds for the loan discount of $8,298.39 in the form of a cashier‘s check. Thus, the borrower paid twice for the loan discount. FHA loan number: 023-2452473 Loan status: Active Requesting indemnification: Yes Default status: Servicing transferred or sold to another lender We are seeking indemnification of this loan because the lender failed to support the use of the borrower‘s commission income, which was the sole income used to qualify the borrower. Income The borrower had been with the current employer for seven months at the time of the income verification. The employer remarks stated, ―commission paid by flag hour or per job,‖ and listed the borrower‘s year-to-date earnings under commissions as the sole income used to qualify the borrower. The borrower‘s previous employer listed income as base pay and not as commission income. Therefore, the lender failed to support the use of the borrower‘s commission income as required by HUD Handbook 4155.1, paragraph 2-7D, which requires at least one year of earned commissions with a sound rationalization for acceptance documented by the lender. 120 FHA loan number: 023-2453167 Loan status: Claim Requesting indemnification: Yes Default status: Property conveyed to insurer We are seeking indemnification of this loan based on the revised mortgage payment-to- income and total fixed payments-to-income ratios, which reflect the allowable qualifying income as calculated by the OIG in accordance with HUD/FHA requirements. After revision, the ratios were 40.18 and 63.28 percent, respectively, which far exceeded HUD‘s mortgage payment-to-income and total fixed payments-to-income benchmark ratios of 31 and 43 percent as stated in Mortgagee Letter 2005-16. The lender did not document any compensating factors that could have justified the excessive ratios. Income The loan file did not contain the appropriate support to justify the overtime pay used in the ratios to qualify the borrower as required by HUD Handbook 4155.1, paragraph 2-7A. The lender did not document the following: (1) the reason for including the borrower‘s overtime pay, (2) an overtime trend over a two-year period, (3) that the amount of monthly overtime income used was based on a 24-month average, and (4) the likelihood that the overtime income would continue. Thus, the borrower‘s overtime income was inappropriately included and resulted in an overstatement of the monthly income by $789.80. Additionally, the lender did not establish that the borrower‘s overall employment was likely to continue as required by HUD Handbook 4155.1, chapter 2, section 2. FHA loan number: 023-2458663 Loan status: Active Requesting indemnification: Yes Default status: First legal action to commence foreclosure We are seeking indemnification of this loan based on the revised mortgage payment-to- income and total fixed payments-to-income ratios, which reflect the allowable qualifying income as calculated by the OIG in accordance with HUD/FHA requirements, and based on the executed schedule A to purchase contract. After revision, the ratios were 37.04 and 59.84 percent, respectively, which far exceeded HUD‘s mortgage payment-to-income and total fixed payments-to-income benchmark ratios of 31 and 43 percent as stated in Mortgagee Letter 2005-16. The lender did not document any compensating factors that could have justified the excessive ratios. Income The loan file did not contain the appropriate support to justify the overtime, bonus, and stipend pay used in the income ratios to qualify the borrower as required by HUD Handbook 4155.1, paragraph 2-7A. The lender did not document the following: (1) the reason for including the borrower‘s overtime, bonus, and stipend pay; (2) an overtime, bonus, and stipend trend over a two-year period; (3) that the amount of monthly overtime, bonus, and stipend was based on 24-month average earnings; and (4) the likelihood that the overtime, bonus, and stipend income would continue. Thus, the borrower‘s overtime, bonus, and stipend income was inappropriately included and resulted in an overstatement of the monthly income by $3,247.01. 121 Credit The loan file did not contain an explanation for the 12 credit report inquiries that were within 90 days of the completed credit report as required by HUD Handbook 4155.1, paragraph 2- 3B. Additionally, the lender did not determine whether the material inquiries resulted in new debts as required by the Fannie Mae Underwriting Findings. Contract A schedule A to purchase contract was executed and contained a covenant restricting resale or rental of the property for one year, which is prohibited by 24 CFR 203.41. The schedule A included a grant of lien to the seller in the amount of $40,000, which is also prohibited by 24 CFR 203.32(a). Therefore, the schedule A to purchase contract rendered the property ineligible for FHA insurance. FHA loan number: 023-2468047 Loan status: Active Requesting indemnification: Yes Default status: Servicing transferred or sold to another lender We are seeking indemnification based on the executed schedule A to purchase contract. The FHA-insured loan had an additional minor underwriting deficiency that did not affect the overall insurability of the loan. Contract A schedule A to purchase contract was executed and contained a covenant restricting resale or rental of the property for one year, which is prohibited by 24 CFR 203.41. The schedule A included a grant of lien to the seller in the amount of $40,000, which is also prohibited by 24 CFR 203.32(a). Therefore, the schedule A to purchase contract rendered the property ineligible for FHA insurance. Other The lender included a loan discount fee of $4054.45 in the loan amount financed, contrary to HUD Handbook 4000.2, paragraph 5-2P, which states, ―[d]iscount points charged by the lender on a purchase transaction may be charged to the buyer but may not be financed into the mortgage amount.‖ FHA loan number: 023-2482980 Loan status: Active Requesting indemnification: Yes Default status: Delinquent We are seeking indemnification of this loan based on the revised total fixed payments-to- income ratio and the executed schedule A to purchase contract. The total fixed payments-to- income ratio was 53.76 percent which reflects allowable qualifying income as calculated by the OIG in accordance with HUD/FHA requirements. The total fixed payments-to-income ratio far exceeded HUD‘s total fixed payments-to-income benchmark ratio of 43 percent as stated in Mortgagee Letter 2005-16. The lender did not document any compensating factors that could have justified the excessive ratios. 122 Income The loan file did not contain the appropriate support to justify the monthly base pay used in the income ratios to qualify the borrower as required by HUD Handbook 4155.1, paragraph 2-7A. Thus, the borrower‘s monthly income was overstated; however, the difference was not material. Credit The borrower‘s credit report showed a late mortgage payment that would require an explanatory statement according to HUD Handbook 4155.1, paragraph 2-3, which states that major indications of derogatory credit require written sufficient explanation from the borrower. Further, according to HUD Handbook 4155.1, paragraph 2-3A, the payment history of the borrower‘s housing obligations holds significant importance in evaluating credit. However, no such information was provided. The borrower had an inquiry on the credit report that was not explained as required by HUD Handbook 4155.1, paragraph 2-3B. Additionally, three months before settlement the borrower opened a new credit card that had a balance owed of $1,339. The lender did not determine the purpose of the debt as required by HUD Handbook 4155.1, paragraph 2-3B. The lender stated on the mortgage credit analysis worksheet that ―[t]he borrower is leasing her existing [mortgaged property], however she qualified with the full mortgage payment.‖ The fixed payment-to-income ratio (53.76 percent) exceeded HUD‘s allowable limit of 43 percent without appropriate compensating factors as required by HUD Handbook 4155.1, paragraph 2-13. Assets A recent bank statement accompanying the verification of deposit—necessary to support the borrower‘s assets—was not provided as required by HUD Handbook 4155.1, paragraph 3-1F. Contract A schedule A to purchase contract was executed and contained a covenant restricting resale or rental of the property for one year, which is prohibited by 24 CFR 203.41. The schedule A included a grant of lien to the seller in the amount of $40,000, which is also prohibited by 24 CFR part 203.32(a). Therefore, the schedule A to purchase contract rendered the property ineligible for FHA insurance. Other The lender did not determine whether the real estate agent was on HUDs limited denial of participation list or the General Services Administration‘s Excluded Parties List System as required by HUD Handbook 4000.2, paragraph 1-6A. 123 FHA loan number: 023-248790737 Loan status: Claim Requesting indemnification: Yes Default status: Property conveyed to insurer We are seeking indemnification of this loan based on the revised mortgage payment-to- income and total fixed payments-to-income ratios, which reflect the allowable qualifying income as calculated by the OIG in accordance with HUD/FHA requirements. After revision, the ratios were 50.01 and 63.38 percent, respectively, which far exceeded HUD‘s mortgage payment-to-income and total fixed payments-to-income benchmark ratios of 31 and 43 percent as stated in Mortgagee Letter 2005-16. The lender did not document any compensating factors that could have justified the excessive ratios. Income The loan file did not contain the appropriate support to justify the overtime pay used in the ratios to qualify the borrower as required by HUD Handbook 4155.1, paragraph 2-7A. The lender did not document the following: (1) the reason for including the borrower‘s overtime pay, (2) an overtime trend over a two-year period, (3) that the amount of monthly overtime income used was based on a 24-month average of overtime earnings, and (4) the likelihood that the overtime income would continue. Thus, the borrower‘s overtime income was inappropriately included and resulted in an overstatement of the monthly income by $1,070.35. Additionally, the lender did not establish that the borrower‘s overall employment was likely to continue as required by HUD Handbook 4155.1, chapter 2, section 2. FHA loan number: 023-2529391 Loan status: Active Requesting indemnification: Yes Default status: Delinquent We are seeking indemnification of this loan based on the revised mortgage payment-to- income and total fixed payments-to-income ratios, which reflect the allowable qualifying income as calculated by the OIG in accordance with HUD/FHA requirements. After revision, the ratios were 62.30 and 64.84 percent, respectively, which far exceeded HUD‘s mortgage payment-to-income and total fixed payments-to-income benchmark ratios of 31 and 43 percent as stated in Mortgagee Letter 2005-16. The lender did not document an allowable compensating factor that could have justified the excessive ratios. Income The loan file did not contain the appropriate support to justify the overtime pay used in the ratios to qualify the borrower as required by HUD Handbook 4155.1, paragraph 2-7A. The lender did not document the following: (1) the reason for including the borrower‘s overtime pay, (2) an overtime trend over a two-year period, and (3) that the amount of monthly overtime income used was based on a 24-month average of overtime earnings. Thus, the borrower‘s overtime income was inappropriately included and resulted in an overstatement of the monthly income by $435. Additionally, the borrower‘s pay stubs did not support 40 hours per week of wages that were used to qualify. The borrower‘s year-to-date earnings supported a monthly income of $2,167.35, and this reduced the borrower‘s qualifying base monthly income by another $640.65. 37 DHI Mortgage had FHA loan number 023-2487907 recorded as 023-248667-0. 124 FHA loan number: 023-2640107 Loan status: Active Requesting indemnification: No Default status: Special forbearance The FHA-insured loan had minor underwriting deficiencies that did not affect the overall insurability of the loan. Income The loan file did not contain the appropriate support to justify the overtime and bonus pay used in the ratios to qualify the borrower as required by HUD Handbook 4155.1, paragraph 2-7A. The lender did not document the following: (1) the reason for including the borrower‘s overtime and bonus pay, (2) an overtime and bonus trend over a two-year period, and (3) that the amount of monthly overtime and bonus income used was based on a 24- month average of overtime and bonus earnings. Additionally, the lender did not provide a sound rationalization in writing for including the declining bonus and overtime income in qualifying income as required by HUD Handbook 4155.1, paragraph 2-7A. Thus, the borrower‘s overtime income was inappropriately included and resulted in an overstatement of the monthly income by $380.24. The resulting ratio(s) met HUD‘s threshold(s) after the correct income was applied. FHA loan number: 023-2674566 Loan status: Claim Requesting indemnification: Yes Default status: Property conveyed to insurer We are seeking indemnification of this loan based on the revised total fixed payments-to- income ratios, which reflect the allowable qualifying income as calculated by the OIG in accordance with HUD/FHA requirements. After revision, the ratio was 56.36 percent, which far exceeded HUD‘s total fixed payments-to-income benchmark ratio of 43 percent as stated in Mortgagee Letter 2005-16. The lender did not document any compensating factors that could have justified the excessive ratios. Income The loan file did not contain the appropriate support to justify the overtime pay used in the income ratios to qualify the borrower and coborrower as required by HUD Handbook 4155.1, paragraph 2-7A. The lender did not document the following: (1) the reason for including the borrower‘s and coborrower‘s overtime pay, (2) an overtime trend over a two-year period, and (3) that the amount of monthly overtime income used was based on a 24-month average of overtime earnings. Thus, the borrower‘s and coborrower‘s overtime income was inappropriately included and resulted in an overstatement of the monthly income by $457. On the mortgage credit analysis worksheet, although the underwriter‘s approval was present, the remarks section indicated that overtime income was not used to qualify the borrowers. Additionally, the lender did not establish that the borrower‘s and coborrower‘s overall employment was likely to continue as required by HUD Handbook 4155.1, chapter 2, section 2. Further, the most recent two years of employment for the coborrower were not verified as required by HUD Handbook 4155.1, paragraph 2-6, and Mortgagee Letter 2004-47. 125 Other The loan officer noted that at one time, this FHA loan was rated by the automated underwriting system as refer/eligible; however, the loan was ultimately approved/eligible through the automated underwriting system. This is contrary to the Fannie Mae Underwriting Findings and Mortgagee Letter 2004-47, which indicate that a registered direct endorsement underwriter must fully underwrite those applications in which the automated underwriting system refers the loan application to an underwriter for review and comply with the underwriting requirements described in HUD Handbook 4155.1 and applicable mortgagee letters. 126 Appendix E QUALITY CONTROL REVIEW DEFICIENCIES NOTED BY FHA LOAN NUMBER The table below contains the quality control review deficiencies noted for the 10 FHA loans reviewed, as discussed in finding 3. Were the Was a new condition credit report Were all Was a desk or clearance and Was the review pulled and required field appraisal Was the underwriting closing items FHA loan Type of quality completed in a compared with reverifications review decision reviewed and reviewed and number control review timely manner? the original? completed? conducted? documented? documented? No, lacking Early payment reverification of 022-1883463 default No, 5 months. Yes deposit and gift. No No No 022-189265238 Regular review No No No No No No No, the reviewer stated ―QC [quality control reviewer] found significant errors, but agrees with the loan No, missing decision.‖ No nonpurchasing No, lacking explanation provided spouse‘s credit reverification of for contradictory 023-2414288 Regular review Yes report. deposit and gift. No decision. No No, lacking Early payment reverification of 023-2426099 default No, 11 months. Yes deposit and gift. No No No No, lacking Early payment reverification of 023-2442707 default No, 12 months. Yes deposit and gift. No No No No, credit report No, lacking was not reverification of 023-2447263 Regular review Yes compared. deposit and gift. No No No 38 DHI Mortgage did not provide any quality control review documents for this FHA loan. 127 Were the Was a new condition credit report Were all Was a desk or clearance and Was the review pulled and required field appraisal Was the underwriting closing items FHA loan Type of quality completed in a compared with reverifications review decision reviewed and reviewed and number control review timely manner? the original? completed? conducted? documented? documented? No, lacking Early payment reverification of 023-2453167 default No, 7 months. Yes deposit and gift. No No No No, lacking reverification of deposit and gift. Verification of employment hire date differed two years from that in loan file - no Early payment discussion or 023-2458663 default No, 13 months. Yes resolution. No No No No. Discrepancy with original versus quality control credit report. Failed to pull a credit report from a No, lacking Early payment different reverification of 023-2640107 default Yes, 3 months. company. deposit and gift. No No No No. Discrepancy with original versus new credit report. Failed to pull a credit report from a No, lacking Early payment different reverification of 023-2674566 default No, 8 months. company. deposit and gift. No No No 128
DHI Mortgage Company, LTD's Scottsdale and Tucson, Arizona, Branches Did Not Always Follow FHA-Insured Loan Underwriting and Quality Control Requirements
Published by the Department of Housing and Urban Development, Office of Inspector General on 2009-09-10.
Below is a raw (and likely hideous) rendition of the original report. (PDF)