oversight

Lendamerica Home Loans, Coral Gables, FL, Did Not Follow HUD Requirements in Originating Loans and Implementing Its Quality Control Program

Published by the Department of Housing and Urban Development, Office of Inspector General on 2010-05-20.

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

                                                                  Issue Date
                                                                        May 20, 2010
                                                                  Audit Report Number
                                                                         2010-AT-1005




TO:         Vicki B. Bott, Deputy Assistant Secretary for Single Family Housing, HU


            //signed//
FROM:       James D. McKay, Regional Inspector General for Audit, Atlanta Region, 4AGA

SUBJECT: Lendamerica Home Loans, Coral Gables, FL, Did Not Follow HUD
          Requirements in Originating Loans and Implementing Its Quality Control
          Program

                                   HIGHLIGHTS

 What We Audited and Why

             We performed an audit of Lendamerica Home Loans, Inc. (Lendamerica), a
             Federal Housing Administration (FHA)-approved direct endorsement lender,
             located in Coral Gables, FL. Our audit objectives were to determine whether the
             lender followed U.S. Department of Housing and Urban Development (HUD)
             requirements when (1) originating and underwriting loans and (2) implementing
             its quality control program. We selected Lendamerica because its 44.4 percent
             default rate significantly exceeded the local Miami HUD office default rate of
             12.5 percent.


 What We Found

             Lendamerica did not follow HUD requirements when originating and underwriting
             all five FHA loans reviewed. This noncompliance occurred because the lender did
             not have adequate controls to ensure that the loans were processed in accordance
             with HUD requirements. As a result, Lendamerica approved loans for potentially
             ineligible borrowers and unnecessarily placed the FHA insurance fund at risk for
             more than $1 million.
           In addition, Lendamerica did not implement a quality control program that
           complied with HUD requirements. It did not conduct quality control reviews in
           compliance with requirements, and its written quality control plan did not contain
           required elements. These conditions occurred because Lendamerica disregarded
           its responsibilities to ensure that its quality control reviews were conducted in
           compliance with HUD requirements and that deficiencies identified were
           corrected and documented. As a result, the effectiveness of Lendamerica’s
           quality control program to guard against errors, omissions, and fraud and to
           protect HUD from unacceptable risk was diminished.


What We Recommend

           We recommend that the Deputy Assistant Secretary for Single Family Housing
           require Lendamerica to indemnify HUD more than $1 million for the five insured
           loans with significant deficiencies, pay down the loan balance for the two
           overinsured loans, and implement and enforce controls to ensure that loans are
           processed in accordance with HUD requirements. We also recommend that HUD
           take appropriate measures to ensure that Lendamerica develops and implements a
           quality control program that complies with HUD requirements and refer it to the
           Mortgagee Review Board for consideration of taking appropriate administrative
           actions.

           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 discussed our review results with Lendamerica and HUD officials during the
           audit. We provided a copy of the draft report to Lendamerica on April 13, 2010,
           for its comments. The lender chose not to have an exit conference but provided
           its written comments on April 24, 2010. Although the lender did not disagree
           with the findings, it disagreed with the recommendations. The complete text of
           Lendamerica’s response, along with our evaluation of that response, can be found
           in appendix B of this report.




                                            2
                             TABLE OF CONTENTS

Background and Objectives                                                         4

Results of Audit
        Finding 1: Lendamerica Did Not Follow HUD Requirements When Originating   5
                   and Underwriting FHA Loans
        Finding 2: Lendamerica Did Not Follow HUD Requirements When               9
                   Implementing Its Quality Control Program

Scope and Methodology                                                             13

Internal Controls                                                                 15

Appendixes
   A.   Schedule of Questioned Costs and Funds To Be Put to Better Use            17
   B.   Auditee Comments and OIG’s Evaluation                                     18
   C.   Schedule of Indemnification Amounts                                       21
   D.   Loan Details                                                              22




                                             3
                      BACKGROUND AND OBJECTIVES

Lendamerica Home Loans, Inc. (Lendamerica) is a Federal Housing Administration (FHA)-
approved nonsupervised direct endorsement lender based in Coral Gables, FL. Under the direct
endorsement program, the U.S. Department of Housing and Urban Development (HUD) authorizes
approved lenders to underwrite FHA loans without HUD’s prior review and approval. A
nonsupervised lender is an institution which has as its principal activity the lending or investing of
funds in real estate mortgages. It may submit applications for mortgage insurance and may
originate, purchase, hold, and service insured loans or sell mortgages.

Lendamerica became an FHA-approved lender in September 1998. It does not have any active
branch offices. From November 1, 2007, through October 31, 2009, Lendamerica originated 144
loans in HUD’s Miami office jurisdiction. During the same period, 64 of the loans (44.4 percent)
went into default with mortgage amounts totaling more than $16.5 million. Of the 64 loans, 41
had 6 or fewer payments before the first 90-day default was reported. Lendamerica’s default rate
significantly exceeded the Miami office jurisdiction’s default rate of 12.5 percent and the
national default rate of 6 percent.

On September 30, 2009, HUD notified Lendamerica of its intent to terminate the lender’s
origination approval agreement because of Lendamerica’s high default and claim rate as of June
30, 2009. On January 14, 2010, after reviewing the lender’s written response and discussions,
HUD terminated Lendamerica’s origination approval agreement in HUD’s Miami office
jurisdiction for 6 months, thereby terminating the lender’s ability to originate new FHA loans.

In addition, Lendamerica is operational in name only. To conduct business, an FHA lender’s
home office must be in a location conducive to mortgage lending, be located in a commercial
space, and be clearly identified to the public. The president and former employees stated that the
business had closed. We visited Lendamerica’s address listed in the loan files and found that it
was no longer there. It had also changed its business address to the president’s residence.
Further, the president indicated plans to terminate Lendamerica’s FHA lending activity.

Our audit objectives were to determine whether the lender followed HUD requirements (1) when
originating and underwriting loans and (2) when implementing a quality control plan.




                                                  4
                                 RESULTS OF AUDIT

Finding 1: Lendamerica Did Not Follow HUD Requirements When
           Originating and Underwriting FHA Loans
Lendamerica did not follow HUD requirements when originating and underwriting all five FHA
loans reviewed. This noncompliance occurred because the lender did not have adequate controls to
ensure that loans were processed in accordance with HUD requirements. As a result, Lendamerica
approved loans for potentially ineligible borrowers and unnecessarily placed the FHA insurance
fund at risk for more than $1 million.


 Loans Had Significant
 Underwriting Deficiencies


              Lendamerica did not follow HUD requirements when originating and
              underwriting all five loans selected in our review. The five loans have original
              mortgage amounts totaling more than $1.8 million. Lenders must follow HUD
              Handbook 4155.1, REV-5, “Mortgage Credit Analysis for Mortgage Insurance on
              One- to Four-Unit Mortgage Loans,” when underwriting FHA loans. This
              handbook describes procedures for evaluating the borrower’s credit history,
              capacity to make payments, and available cash assets to close the mortgage loan.
              The lender is responsible for eliciting a complete picture of the borrower’s
              financial situation, source of funds for the transaction, and intended use of the
              property. The lender’s decision to approve the mortgage loan must be
              documented.

              The following table summarizes the deficiencies we identified for the five loans.

                                Spouse                                              Qualifying
                                  not                      Cash                       ratios     Mortgage
                               included    Inadequate   investment     Inaccurate    exceeded    amount
                 FHA case     to qualify      credit    not made or   employment      or not      over-
                  number         loan        analysis    supported    information   supported    insured
                095-0526683       X                         X
                095-0655905                   X             X                                       X
                095-0720437                   X             X             X             X
                095-0792179                   X             X             X             X
                095-0840006                   X             X             X                         X
                   Totals         1            4            5              3            2           2




                                                   5
Examples of the underwriting deficiencies include the following:

Inadequate Credit Analysis
Lendamerica did not obtain written explanations or explain why the borrowers’
credit liabilities were either not included or not consistent with the amount used in
analyzing their credit history for four loans. HUD Handbook 4155.1, REV-5,
paragraph 2-3, states that if major indications of derogatory credit exist (e.g.,
collections), the lender must require sufficient written explanation from the
borrower, and the explanation must make sense and be consistent with the other
credit information in the file.

For FHA loan 095-0840006, the lender failed to properly analyze the borrowers’
credit history. One of the borrowers had a liability of $18,605; however, the
lender did not include this debt in its calculation of the borrower’s liabilities or
explain why it omitted the liability from the qualifying ratio calculation. In
addition, the lender did not obtain a written explanation from the borrower
regarding 10 collection accounts or from the coborrower on 1 collection account.
By not obtaining a reasonable explanation, the lender did not properly examine
the borrowers’ pattern of credit behavior to understand why the accounts became
delinquent or adequately determine their ability to make mortgage payments.

Cash Investment Not Made or Supported
Lendamerica did not maintain sufficient documentation to support borrowers’
investment of funds into the property or that the borrowers invested 3 percent of the
contract sales price into the property for the five loans. HUD Handbook 4155.1,
REV-5, paragraph 2-10, states that all funds for the borrower’s investment in the
property must be verified and documented. In addition, the lender must document
the gift funds by obtaining a gift letter and must also document the transfer of
funds from the donor to the borrower.

For FHA loan 095-0526683, the HUD-1 settlement statement showed that the
borrower invested $2,925 into the property ($1,000 for the earnest money deposit,
$350 for the appraisal, and $1,575 at closing) and obtained $8,347 in gift funds.
However, the loan file contained no evidence that the borrower paid for the
appraisal or the cash at closing and no documentation to support the gift amount
or the transfer of the gift funds from the donor.

Inaccurate Employment Information
Lendamerica did not accurately verify the borrower’s employment information for
three loans. HUD Handbook 4155.1, REV-5, chapter 2, section 2, states that income
may not be used in calculating the borrower’s qualifying ratios if it comes from any
source that cannot be verified, is not stable, or will not continue. Mortgagee Letter
2005-16 raised the front and back qualifying ratios to 31 and 43 percent.




                                  6
           For FHA loan 095-0720437, the borrower did not work at the place of employment
           listed in the loan file and submitted to HUD. Based on the documents found in the
           loan file, the borrower worked at a medical center and earned a gross monthly
           income of $15,600. However, our verification of the information with the employer
           and the borrower indicated that the employment information found in the loan file
           was inaccurate. The borrower was not employed at the medical center but at a
           dental office, and the monthly gross income was estimated to be $3,000. Our
           recalculation of the qualifying ratios equaled 130.8 and 211.8 percent, respectively.
           Accordingly, the borrower would not have qualified for the FHA loan, and the
           lender submitted inaccurate employment information to HUD.

           Mortgage Amount Overinsured
           Lendamerica did not properly calculate the mortgage amount for two loans. HUD
           Handbook 4155.1, REV-5, paragraph 1-11, states that for a “no cash out” refinance,
           if the property was acquired less than 1 year before the loan application and is not
           already FHA insured, the maximum mortgage is the lower of the (1) statutory loan
           limit, (2) loan-to-value ratio applied to the appraised value, (3) loan-to-value ratio
           applied to the original sales price, and (4) existing debt.

           For FHA loan 095-0655905, the lender did not properly calculate the maximum
           allowable mortgage amount and thus overinsured the mortgage amount by $9,404.
           The borrower refinanced the property from a conventional loan to an FHA loan
           within 1 year of purchase. This was a “no cash out” refinance. The lesser of the
           four amounts is $383,180, which is the loan-to-value ratio applied to the original
           sales price. The lender calculated the maximum mortgage to be $392,585, for an
           excess of $9,405.

           Appendix D details the underwriting deficiencies for each of the five loans.

Lendamerica Lacked Controls


           Lendamerica did not have controls in place to ensure that loans were originated
           and underwritten in accordance with HUD requirements. It could not explain
           why the documentation was not in the loan files and why the underwriting
           deficiencies occurred. The president stated that the deficiencies occurred because
           during that time, one of the underwriters was under considerable stress and the
           other underwriter was inexperienced with FHA program requirements. However,
           it is the lender’s responsibility to elicit a complete picture of the borrower’s
           financial condition, source of funds for the transaction, and use of the property.
           Accordingly, we attribute the deficiencies to Lendamerica’s lack of adequate
           controls to ensure that the loans were processed in accordance with HUD
           requirements.




                                             7
Conclusion


             Lendamerica did not follow HUD requirements when originating and
             underwriting five FHA loans. The deficiencies occurred because the lender did
             not have adequate controls to ensure that the loans were processed in accordance
             with HUD requirements. As a result, Lendamerica approved and insured five
             loans for potentially ineligible borrowers. The loans unnecessarily placed the
             FHA insurance fund at risk for more than $1 million in potential losses should the
             five properties be foreclosed upon and resold for less than the unpaid principal
             balances. In addition, HUD overinsured two loans. Therefore, HUD should seek
             indemnification from Lendamerica for the five loans and should require the lender
             to pay down the loan balance for the two overinsured loans.

Recommendations



             We recommend that the Deputy Assistant Secretary for Single Family Housing

             1A. Determine whether Lendamerica will continue to operate as an FHA-approved
                 lender and require it to indemnify HUD $1,098,683 for the five insured loans
                 with unpaid principal balances totaling $1,831,140. The estimated loss is
                 based on the loss severity rate of 60 percent of the unpaid principal balance
                 amount for fiscal year 2009.

             1B. Determine the amount of the overinsured mortgage for FHA case numbers
                 095-0655905 and 095-0840006 and require the lender to pay down the loan
                 balance and provide evidence of the principal reduction.

             1C. Determine whether Lendamerica will continue to operate as an FHA-approved
                 lender and require it to implement and enforce controls to ensure that the loans
                 are processed in accordance with HUD requirements.

             1D. Refer Lendamerica to the Mortgagee Review Board for consideration of
                 taking appropriate administrative action against the lender for its
                 noncompliance in originating and underwriting FHA loans.




                                              8
Finding 2: Lendamerica Did Not Follow HUD Requirements When
           Implementing Its Quality Control Program
Lendamerica did not implement a quality control program that complied with HUD
requirements. It did not conduct quality control reviews in compliance with requirements, and
its written quality control plan did not contain required elements. These conditions occurred
because Lendamerica disregarded its responsibilities to ensure that the quality control program
followed HUD requirements and accomplished its goals. As a result, the effectiveness of
Lendamerica’s quality control plan to guard against errors, omissions, and fraud and to protect
HUD from unacceptable risk was diminished.



Lendamerica must implement and continuously have in place a quality control plan for the
origination and/or servicing of insured mortgages as a condition of receiving and maintaining
FHA approval. HUD Handbook 4060.1, REV-2, paragraph 7-2, states that lenders must design
their quality control program to meet the basic goals of ensuring compliance with FHA’s and the
lender’s origination and servicing requirements; protecting FHA and the lender from
unacceptable risk; guarding against errors, omissions, and fraud; and ensuring swift and
appropriate corrective action. Lendamerica used an external contractor to conduct its quality
control reviews. The lender’s quality control program contained deficiencies in its quality
control reviews and its written quality control plan.

Quality Control Reviews Did Not
Comply With HUD Requirements

               Lendamerica did not conduct its quality control reviews according to HUD
               requirements. We found the following seven deficiencies:

               Ten Percent of the Originated Loans Not Reviewed
               HUD Handbook 4060.1, REV-2, paragraph 7-6C, states that a lender who
               originates and or underwrites 3,500 or fewer FHA loans per year must review 10
               percent of the FHA loans it originates. Lendamerica was responsible for
               providing the external contractor with a monthly list of closed loans from which
               the contractor would select loans for review. The HUD Neighborhood Watch
               system showed that the lender originated 131 FHA loans in 2008, requiring
               quality control reviews of at least 13 loans. However, quality control reviews
               were performed on 11 loans. This noncompliance occurred because the lender
               did not provide the contractor with the list of closed loans for the months of
               August, November, and December 2008. The lender closed a total of 30 FHA
               loans during those 3 months. The lender stated that it did not know why the lists
               of closed loans were not provided to the external contractor.




                                                9
Early Payment Default Loans Not Reviewed
HUD Handbook 4060.1, REV-2, paragraph 7-6D, states that all early payment
default loans must be reviewed. Early payment default loans are loans that have
defaulted within the first six payments and become 60 days past due.
Lendamerica had 29 early payment default loans. Routine quality control reviews
were performed on 4 of the 29 early payment default loans. Thus, 25 early
payment default loans were not reviewed. This noncompliance occurred because
the lender did not identify and submit a list of early payment default loans for the
external contractor to review.

Credit Reports Not Obtained
HUD Handbook 4060.1, REV-2, paragraph 7-6E.1, states that 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 and approved
by an automated underwriting system. Of the quality control reviews performed
on 11 loans, 2 were not approved by an automated underwriting system. Thus,
for the two loans, credit reports should have been obtained for the borrowers. The
lender stated that it was unaware that new credit reports were not obtained.

Document Reverifications Not Always Performed
HUD Handbook 4060.1, REV-2, paragraph 7-6E.2, states that documents
contained in the loan file, such as documents relating to borrower’s income, gifts,
or sources of funds, should be checked for sufficiency and subjected to written
reverification. We reviewed 3 of the 11 quality control reviews to determine
whether reverification occurred on the documents in the loan files. Employment
income, other income such as rental income, and sources of funds including bank
accounts were not reverified. The lender stated that it was unaware that required
documents were not reverified.

Underwriting Decision Not Evaluated
HUD Handbook 4060.1, REV-2, paragraph 7-6F, states that each direct
endorsement loan selected for a quality control review must be reviewed for
compliance with HUD underwriting requirements, sufficiency of documentation,
and soundness of underwriting judgments. The external contractor indicated that
the quality control review did not include an evaluation of the underwriting
decision and that it relied on the reports generated from the automated
underwriting system. HUD requires the quality control review to include a
review of the underwriting decision whether the loan was approved manually or
by an automated underwriting system. The lender stated that it was unaware that
the underwriting decision was not evaluated.

Conditions Needed for Loan Clearance and Closing Not Verified
HUD Handbook 4060.1, REV-2, paragraph 7-6G, states that each loan selected
for a quality control review must be reviewed to determine whether conditions
required for closing were met, the seller was the owner of record or was exempt,
the loan closed and funds were disbursed according to instructions, and the

                                 10
           closing and legal documents were accurate and complete. The external contractor
           indicated that verifying the conditions for loan clearance and closing was not part
           of the quality control review. The lender stated that it did not know that the
           closing conditions were not verified.

           Corrective Actions Not Supported
           HUD Handbook 4060.1, REV-2, paragraph 7-3I, states that the final quality
           control review report must identify actions being taken for findings, the timetable
           for their completion, and any planned follow-up activities. The lender stated that
           it addressed all of the quality control review findings but was not sure whether it
           had documented the corrective actions taken. The lender’s loan files did not
           contain documentation or a final report that identified the corrective actions taken
           on findings from the quality control reviews.


Written Quality Control Plan
Did Not Contain Required
Elements

           Lendamerica’s written quality control plan did not contain the required elements
           prescribed by HUD Handbook 4060.1, REV-2, chapter 7. Specifically,

                Paragraph 7-3C states that lenders must properly train staff involved in
                 quality control and provide them access to current guidelines relating to the
                 operations that they review.

                Paragraph 7-3I states that findings or deficiencies need to be provided to the
                 lender management within 1 month of completion of the initial report.

                Paragraph 7-3L states that the lender must review the employee list at least
                 semiannually to determine that an employee is not restricted from
                 participating in HUD programs.

           The lender’s written plan did not clearly define these three required elements.
           The lender said that although familiar with the requirements, it did not know why
           the requirements were not included in the written plan.


Lendamerica Disregarded
Responsibilities


           The conditions described above occurred because Lendamerica disregarded its
           responsibilities to ensure that the quality control program accomplished its goals.
           Specifically, Lendamerica did not evaluate the work of staff to ensure that a list of
           closed and early payment default loans were provided to the external contractor or
           that corrective actions were made and documented. It also did not evaluate the

                                            11
             work of the external contractor to ensure that the contractor obtained credit
             reports, reverified required documents, evaluated the soundness of underwriting
             decisions, and verified the conditions for loan clearance and closing. HUD
             Handbook 4060.1, REV-2, paragraph 7-3B, states that a lender contracting out
             any part of its quality control function is responsible for ensuring that the external
             contractor meets HUD’s requirements. In addition, Lendamerica did not include
             required elements in its written quality control plan.


Conclusion


             Lendamerica did not follow HUD requirements when implementing its quality
             control program. Overall, these deficiencies occurred because the lender
             disregarded its responsibilities to ensure that the quality control program complied
             with HUD requirements and accomplished its goals. As a result, the effectiveness
             of Lendamerica’s quality control program to guard against errors, omissions, and
             fraud and to protect HUD from unacceptable risk was diminished.


Recommendations


             We recommend that the Deputy Assistant Secretary for Single Family Housing

             2A. Determine whether Lendamerica will continue to operate as an FHA-
                 approved lender and take appropriate measures to ensure that it develops
                 and implements a quality control program that complies with HUD
                 requirements.

             2B. Refer Lendamerica to the Mortgagee Review Board for consideration of
                 taking appropriate administrative actions against the lender for its
                 noncompliance with HUD requirements in implementing its quality control
                 program.




                                               12
                         SCOPE AND METHODOLOGY

Lendamerica underwrote 144 loans within the jurisdiction of the Miami HUD office between the
amortization dates of November 1, 2007, and October 31, 2009. Of the 144 loans, 64 loans with
mortgage amounts totaling $16.5 million had defaulted within the first 2 years. We did not
perform a 100 percent selection or a representative selection using statistical or nonstatistical
sampling. We selected 5 of the 64 loans that went into default based on various risk factors
including loans with a low number of payments before default, large gift amounts, high back
ratios, and high mortgage amounts. These five loans totaled more than $1.8 million.

To accomplish the audit objectives, we reviewed applicable regulations, HUD handbooks, and
mortgagee letters and obtained and reviewed Lendamerica’s 2007 and 2008 audited financial
statements. We interviewed Lendamerica’s former employees to obtain an understanding of the
procedures the lender followed to originate and underwrite FHA loans.

We reviewed FHA and Lendamerica’s loan files for the five loans to analyze the borrowers’
credit history, effective income, liabilities, and cash investment into the property. We
interviewed borrowers to confirm the information in the loan files and verified borrowers’
employment information. For the interviews, we visited borrowers’ residences and an employer
location. We also accessed the Neighborhood Watch system to obtain information about the
lender and the loan status. The results of our review apply only to the loans reviewed and cannot
be projected to the universe of loans.

We interviewed staff from the external contractor hired to perform the quality control reviews to
gain an understanding of how the reviews were conducted and documented. We also reviewed
the written quality control plan and tested the quality control reviews performed to determine
whether they complied with HUD requirements.

We used data maintained by HUD in the Neighborhood Watch system for background
information and in selecting our sample of loans for review. The system is intended to assist
HUD staff in monitoring lenders and programs and to assist lenders and the public in self-
policing the industry. The system is designed to highlight exceptions so that potential problems
are readily identifiable. In particular, the system gives the ability to identify and analyze
patterns, by geographic area or originating lender, in loans which became 90 days delinquent
during the first 2 years.

We assessed the reliability of the computer-processed data reported in the Neighborhood Watch
system related to the audit objective. To assess the reliability of the loan data reported in the
system, we (1) reviewed the loan files; (2) interviewed borrowers, employers, and lender staff;
and (3) compared the data to county public records for accuracy and completeness. We found
that the qualifying ratios and gift information reported in the system were not accurate and
supported by the loan files and interviews. Specifically, inaccurate employment information,
unsupported cash investment, and inconsistent liability information were submitted to HUD.
Therefore, we assessed that the information in HUD’s Neighborhood Watch system was
unreliable. The deficiencies found in the loan files are presented in finding 1 and appendix D.

                                                13
Further, we clarified the HUD regulations and discussed the findings with the Atlanta
Homeownership Center, Quality Assurance Division. We also discussed the findings with the
owner of Lendamerica.

We classified more than $1 million as funds to be put to better use. This is 60 percent of the $1.8
million in unpaid principal balances for the five FHA-insured loans that did not meet HUD’s
requirements. We used 60 percent because it has been determined that upon sale of the
mortgaged properties, FHA’s average loss was about 60 percent of the unpaid principal balance
for fiscal year 2009.

Our review generally covered the period November 1, 2007, through October 31, 2009, and was
extended as necessary. We performed the work at our Miami office and also conducted site
visits to borrowers and an employer. The work was performed from December 2009 through
March 2010.

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
objectives. We believe that the evidence obtained provides a reasonable basis for our findings
and conclusions based on our audit objectives.




                                                14
                              INTERNAL CONTROLS

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

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

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




 Relevant Internal Controls

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

                  Program operation – Policies and procedures that management has implemented
                  to reasonably ensure that a program meets its objectives.

                  Reliability of data – Policies and procedures that management has implemented
                  to reasonably ensure that valid and reliable data are obtained, maintained, and
                  fairly disclosed in reports.

                  Compliance with laws and regulations – Policies and procedures that
                  management has implemented to reasonably ensure that resource use is
                  consistent with laws and regulations.

                  Safeguarding of resources – Policies and procedures that management has
                  implemented to reasonably ensure that resources are safeguarded against
                  waste, loss, and misuse.

              We assessed the relevant controls identified above.

              A significant weakness exists if management controls do not provide reasonable
              assurance that the process for planning, organizing, directing, and controlling
              program operations will meet the organization’s objectives.



                                               15
Significant Weaknesses


           Based on our review, we believe that the following items are significant weaknesses:

               Lendamerica did not follow HUD requirements when originating and
               underwriting FHA loans (see finding 1).

               Lendamerica did not follow HUD requirements when implementing its quality
               control program (see finding 2).




                                            16
                                      APPENDIXES

Appendix A

               SCHEDULE OF QUESTIONED COSTS
              AND FUNDS TO BE PUT TO BETTER USE


                         Recommendation            Funds to be put to
                                number                  better use 1/

                                 1A                    $1,098,683

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.

     Implementation of our recommendation to require Lendamerica to indemnify HUD for
     the five materially deficient loans will reduce the risk of loss to the FHA insurance fund.
     The amount above reflects HUD’s estimated loss of 60 percent of the unpaid principal
     balance of the loans.




                                              17
Appendix B

        AUDITEE COMMENTS AND OIG’S EVALUATION


Ref to OIG Evaluation   Auditee Comments




Comment 1




                         18
Ref to OIG Evaluation   Auditee Comments




Comment 2




                         19
                         OIG Evaluation of Auditee Comments


Comment 1   The lender disagreed with the 44 percent rate of default. We obtained the rate of
            default from HUD's Neighborhood Watch system. The system showed that
            Lendamerica insured 144 FHA loans within the Miami HUD Office jurisdiction
            for amortization dates between November 1, 2007, and October 31, 2009. Of the
            144 loans, 64 loans had defaulted within the first two years, yielding a default rate
            of 44 percent.

Comment 2   The lender did not agree with the recommendations. However, it did not provide
            documentation or other information to refute the findings or provide alternative
            resolutions. The existing recommendations adequately address the identified
            deficiencies.




                                             20
Appendix C

      SCHEDULE OF INDEMNIFICATION AMOUNTS



                            Unpaid          Loss
              FHA case     principal     percentage      Indemnification
               number       balance         rate             amount

             095-0526683   $366,637           60             $219,982
             095-0655905   $396,652           60             $237,991
             095-0720437   $399,367           60             $239,620
             095-0792179   $380,922           60             $228,553
             095-0840006   $287,562           60             $172,537

               Totals      $1,831,140                       $1,098,683

         * We classified the $1,098,683 as funds to be put to better use.
           This is 60 percent of the $1,831,140 in unpaid principal balances
           for the five loans. The 60 percent is the estimated percentage of
           loss to HUD for fiscal year 2009 when the FHA property is resold
           for less than the unpaid principal balance.




                                         21
Appendix D

                                    LOAN DETAILS
                                                                                    Appendix D-1

FHA case #: 095-0526683                     Mortgaged amount: $368,091

Date of loan closing: 12/20/2007            Unpaid principal balance: $366,637

Loan purpose: Purchase - existing home Default status: First legal action to commence foreclosure


Spouse Not Included to Qualify Loan
The lender did not consider the spouse when qualifying the loan even though the spouse also
took title to the property. HUD Handbook 4155.1 Rev-5, paragraph 2-2, indicates that HUD
does not permit an individual to take an ownership interest in the property at settlement without
signing the mortgage note and all security instruments. In addition, the income, assets,
liabilities, and credit history of the individual who takes ownership interest in the property
should be considered in determining creditworthiness. County public records showed that both
the borrower and the spouse took title to the property. The loan file showed that both signed the
mortgage, but the spouse did not sign the note. According to the regulations, since the spouse
also took title to the property, which was made evident to the lender in the loan application, the
lender should have also considered the wife’s income, assets, liabilities, and credit history in
qualifying the loan.

Cash Investment Not Supported
The lender did not maintain sufficient documentation to support the borrower’s cash investment
in the property or that the borrower invested 3 percent of the contract sales price into the
property. HUD Handbook 4155.1, REV-5, paragraph 2-10, states that all funds for the
borrower’s investment in the property must be verified and documented. In addition, the lender
must document the gift funds by obtaining a gift letter and must also document the transfer of
funds from the donor to the borrower. The HUD-1 settlement statement showed that the
borrower invested $2,925 into the property ($1,000 for the earnest money deposit, $350 for the
appraisal, and $1,575 at closing) and obtained $8,347 in gift funds. However, the loan file
contained no evidence that the borrower paid for the appraisal or the cash at closing and no
documentation to support the gift amount or the transfer of the gift funds from the donor.




                                                22
                                                                                       Appendix D-2

FHA case #: 095-0655905                      Mortgaged amount: $398,473

Date of loan closing: 04/28/2008             Unpaid principal balance: $396,652

Loan purpose: Refinance                      Default status: Special forbearance


Inadequate Credit Analysis
The lender did not obtain written explanations about the borrower’s delinquent accounts or
bankruptcy. HUD Handbook 4155.1, REV-5, paragraph 2-3, states that past credit performance
serves as the most useful guide in determining a borrower’s attitude toward credit obligations and
predicting a borrower’s future actions. When delinquent accounts are revealed, the lender must
document its analysis as to whether the late payments were based on a disregard for financial
obligations, an inability to manage debt, or factors beyond the control of the borrower. If major
indications of derogatory credit exist (e.g., bankruptcy), the lender must require sufficient written
explanation from the borrower, and the explanation must make sense and be consistent with the
other credit information in the file. By not obtaining a reasonable explanation, the lender did not
properly examine the borrower’s pattern of credit behavior to understand why accounts became
delinquent or why the borrower filed for Chapter 13 bankruptcy.

Mortgage Amount Overinsured
The lender did not properly calculate the mortgage amount. The borrower originally purchased the
property for $392,000 through a conventional loan in September 2007. The borrower refinanced the
loan through FHA in April 2008, and the property obtained an appraised value of $405,000.

This was a “no cash out” refinance. HUD Handbook 4155.1, REV-5, paragraph 1-11, states that for
a “no cash out” refinance with an appraisal, the maximum mortgage is the lower of the loan-to-
value ratio applied to the appraised value or the existing debt and may never exceed the statutory
limit except by the amount of any new upfront mortgage insurance premium. However, if the
property was acquired less than 1 year before the loan application and is not already FHA insured,
the original sales price of the property also must be considered in determining the maximum
mortgage. In essence, the maximum allowable mortgage amount would be the lesser of the
following four amounts: (1) statutory loan limit, (2) loan-to-value ratio applied to the appraised
value, (3) loan-to-value ratio applied to the original sales price, and (4) existing debt.

The lesser of the four amounts is $383,180, which is the loan-to-value ratio applied to the original
sales price. Thus, the maximum allowable mortgage amount is $383,180. However, the lender
allowed the mortgage amount of the refinance to be set at $392,585. Thus, the mortgage amount
exceeded the maximum allowable mortgage amount, and the mortgage loan was over insured by
$9,405.




                                                  23
Cash Investment Not Made
The lender did not ensure that the borrower invested at least 3 percent toward the refinancing of the
FHA loan. Mortgagee Letter 98-29 states that HUD will insure the maximum mortgage amount
provided that the borrower makes a cash investment of at least 3 percent into the property. Based
on the review of the loan file and verification with the borrower, the borrower did not invest any
funds in refinancing the property.




                                                 24
                                                                                        Appendix D-3

FHA case #: 095-0720437                       Mortgaged amount: $403,567

Date of loan closing: 06/13/2008              Unpaid principal balance: $399,367

Loan purpose: Purchase - existing home Default status: Delinquent


Inadequate Credit Analysis
The lender did not explain why the borrower’s monthly recurring payment amount was not
consistent among the various documents contained in the loan file. The mortgage credit analysis
worksheet showed $2,428, the printout from the automated underwriting system showed $2,203,
the final loan application showed $2,087, and the borrower’s credit report showed $3,766. The
borrower’s qualifying back ratio was calculated using the monthly recurring payment amount of
$2,428, but the lender did not explain why that amount was used or how it was calculated. HUD
Handbook 4155.1, REV-5, paragraph 3-1, states that the application package must contain all
documentation supporting the lender’s decision to approve the mortgage loan. Since the
qualifying back ratio was used to support the lender’s decision to approve the loan,
documentation on how the lender calculated the ratio should be included in the loan file.

Cash Investment Not Supported
The lender did not maintain sufficient documentation to support the borrower’s investment of
funds into the property or that the borrower invested 3 percent of the contract sales price into the
property. HUD Handbook 4155.1, REV-5, paragraph 2-10, states that all funds for the
borrower’s investment in the property must be verified and documented. In addition, the lender
must document the gift funds by obtaining a gift letter, signed by the donor and borrower, which
specifies the dollar amount of the gift; states that no repayment is required; shows the donor’s
name, address, and telephone number; and states the nature of the donor’s relationship to the
borrower. The lender must also document the transfer of funds from the donor to the borrower.
The HUD-1 settlement statement showed that the borrower invested $350 for the appraisal and
obtained $12,297 in gift funds. However, there was no documentation in the loan file to support
that the borrower paid for the $350 appraisal and no documentation of the gift letter and transfer
of funds from the donor.

Inaccurate Employment Information
The lender did not accurately verify the borrower’s employment income information. HUD
Handbook 4155.1, REV-5, chapter 2, section 2, states that income may not be used in calculating
the borrower’s qualifying ratios if it comes from any source that cannot be verified, is not stable, or
will not continue. Based on the documents found in the loan file such as the verification of
employment and final loan application, the borrower worked at a medical center and earned a gross
monthly income of $15,600. However, our verification of the employment information with the
employer and the borrower indicated that the employment information found in the loan file was
inaccurate. The borrower was not employed at the medical center but at a dental office, and the
monthly gross income was estimated to be $3,000.



                                                  25
Ratios Exceeded
The lender did not properly perform the ratios analysis. As noted above, the borrower’s monthly
recurring payments amount was inconsistent among the documents in the loan file, and the
lender provided no explanation. In addition, based on our verification of the borrower’s
employment and interview with the borrower, the employment information found in the loan file
was inaccurate. Accordingly, the qualifying ratios were calculated using an unsupported
monthly recurring payment amount (used to calculate the back ratio) and an inaccurate income
amount (used to calculate the front and back ratios). Thus, the qualifying ratios calculated by the
lender were inaccurate and unsupported.

We recalculated the qualifying ratios by using the $3,000 income amount provided by the
borrower with the other amounts remaining the same. The qualifying ratios equaled 130.8 and
211.8 percent, respectively. Mortgagee Letter 2005-16 raised the front and back qualifying
ratios to 31 and 43 percent. Based on the recalculated ratios, the borrower would not have
qualified for the FHA loan. The borrower’s monthly housing payment and total debt exceeded
the borrower’s monthly income.

                                               Lender’s calculation                     Audit calculation

    Mortgage payment expense to                       25.2%                                  130.8%
    effective income (front) ratio1             ($3,925 / $15,600)                      ($3,925 / $3,000)
    Total fixed payment to effective                  40.7%                                  211.8%
    income (back) ratio2                  [($3,925 + $2,428) / $15,600]           [($3,925 + $2,428) / $3,000]




1
  The mortgage payment expense considers the principal and interest, escrow deposits for real estate taxes, hazard
   insurance, mortgage insurance premium, homeowners’ association dues, ground rent, special assessments, and
   payments for any acceptable secondary financing.
2
  The total fixed payment is the sum of the mortgage payment expense plus the monthly recurring payment.

                                                         26
                                                                                     Appendix D-4

FHA case #: 095-0792179                     Mortgaged amount: $383,028

Date of loan closing: 09/30/2008            Unpaid principal balance: $380,922

Loan purpose: Purchase - existing home Default status: First legal action to commence foreclosure


Inadequate Credit Analysis
The lender did not explain why the borrower’s monthly recurring payment amount listed on the
printout from the automated underwriting system and the final loan application was not
consistent with the amount on the borrower’s credit report. The first two documents showed
monthly recurring liabilities of $2,602; however, the borrower’s credit report showed liabilities
totaling $2,784. The borrower’s qualifying back ratio was calculated using the monthly
recurring payment amount of $2,602, but the lender did not explain why that amount was used or
how it was calculated. HUD Handbook 4155.1, REV-5, paragraph 3-1, states that the
application package must contain all documentation supporting the lender’s decision to approve
the mortgage loan. Since the qualifying back ratio was used to support the lender’s decision to
approve the loan, documentation on how the lender calculated the ratio should be included in the
loan file.

Cash Investment Not Supported
The lender did not maintain sufficient documentation to support the borrower’s investment of
funds into the property or that the borrower invested 3 percent of the contract sales price into the
property. HUD Handbook 4155.1, REV-5, paragraph 2-10, states that all funds for the
borrower’s investment in the property must be verified and documented. In addition, the lender
must document the gift funds by obtaining a gift letter, signed by the donor and borrower, which
specifies the dollar amount of the gift; states that no repayment is required; shows the donor’s
name, address, and telephone number; and states the nature of the donor’s relationship to the
borrower. The lender must also document the transfer of funds from the donor to the borrower.
The HUD 1 settlement statement showed that the borrower invested $2,044 into the property
($300 for the appraisal and $1,744 at closing) and obtained $11,700 in gift funds. However,
there was no documentation in the loan file to support that the borrower paid for the items and no
documentation of the transfer of gift funds from the donor. In addition, the borrower stated that
he did not invest any money to acquire the FHA property.

Inaccurate Employment Information
The lender did not accurately verify the borrower’s employment information. Our review
revealed that the borrower was paid commission versus a fixed salary. HUD Handbook 4155.1,
REV-5, paragraph 2-7D, states that commission income must be averaged over the previous 2
years. The borrower must provide copies of signed tax returns for the last 2 years along with the
most recent pay stub. However, the lender maintained documentation in the loan file, such as the
verification of employment and a letter from the employer, which detailed the borrower’s gross
semimonthly income less Federal, Social Security, and Medicare taxes, to support that the
borrower earned a fixed salary and calculated the borrower’s income as a fixed salary. Based on

                                                27
our verification with the employer and borrower, the verification of employment in the loan file
contained inaccurate information, and the employer did not provide the employment letter. The
letter was used to support the verification of employment and that the borrower had a fixed
salary. The loan file did not contain the borrower’s signed tax returns for the past 2 years and the
most recent pay stub.

Unsupported Qualifying Ratios
The lender’s calculated qualifying front and back ratios at 27 and 46 percent, respectively, were
unsupported. The ratios were calculated based on an unsupported monthly gross income (used to
calculate the front and back ratios) and an unsupported monthly recurring payment amount (used
to calculate the back ratio). Since the lender did not maintain the proper supporting
documentation to calculate the borrower’s commissioned income, we could not confirm the
borrower’s income to recalculate the qualifying ratios.

In addition, Mortgagee Letter 2005-16 states that for a manually underwritten loan, the
qualifying ratios should not exceed 31 and 43 percent without acceptable compensating factors.
The loan was processed and approved by an automated underwriting system, so the higher back
ratio may have been acceptable. However, we could not determine whether the automated
underwriting system would have approved the loan given the correct employment information.




                                                28
                                                                                      Appendix D-5

FHA case #: 095-0840006                     Mortgaged amount: $287,816

Date of loan closing: 09/30/2008            Unpaid principal balance: $287,562

Loan purpose: Purchase - existing home Default status: First legal action to commence foreclosure


Inadequate Credit Analysis
The lender failed to properly analyze the borrowers’ credit history. The primary borrower had a
liability of $18,605 that the lender did not include in its calculation of the borrower’s liabilities
or explain why it omitted the liability from the qualifying ratio calculation. In addition, the
lender did not obtain a written explanation from the borrower on 10 collection accounts or from
the coborrower on 1 collection account. HUD Handbook 4155.1, REV-5, paragraph 2-3, states
that past credit performance serves as the most useful guide in determining a borrower’s attitude
toward credit obligations and predicting a borrower’s future actions. When delinquent accounts
are revealed, the lender must document its analysis as to whether the late payments were based
on a disregard for financial obligations, an inability to manage debt, or factors beyond the control
of the borrower. If major indications of derogatory credit exist (like collections), the lender must
require sufficient written explanation from the borrower and the explanation must make sense
and be consistent with the other credit information in the file. The loan file contained no written
explanations about the collection accounts. By not obtaining a reasonable explanation, the
lender did not properly examine the borrower’s pattern of credit behavior to understand why the
accounts became delinquent.

Cash Investment Not Supported
The lender did not maintain sufficient documentation to support the borrower’s investment of
funds into the property or that the borrower invested 3 percent of the contract sales price into the
property. HUD Handbook 4155.1, REV-5, paragraph 2-10, states that all funds for the
borrower’s investment in the property must be verified and documented. Specifically, paragraph
2-10C of the handbook states that the lender must document the gift funds by obtaining a gift
letter, signed by the donor and borrower, which specifies the dollar amount of the gift; states that
no repayment is required; shows the donor’s name, address, and telephone number; and states the
nature of the donor’s relationship to the borrower. The lender must also document the transfer of
funds from the donor to the borrower. The HUD-1 settlement statement showed that the
borrower invested $2,338 into the property ($300 for the appraisal, $100 for the application fee,
$1,321 for the hazard insurance premium, $306 for the flood insurance premium, and $311 at
closing) and obtained $8,727 in gift funds. However, other than a gift letter, the loan file
contained no evidence that the borrower paid for the items and no documentation to support the
transfer of the gift funds from the donor.

Inaccurate Employment Information
The lender did not accurately verify the coborrower’s employment income information. Our
verification of the coborrower’s employment showed inconsistencies in the income data from the



                                                 29
pay stubs and the Internal Revenue Service W-2 forms contained in the loan file. According to
our verification, the coborrower earned more than was indicated in the loan file.

Mortgage Amount Overinsured
The lender did not properly calculate the mortgage amount. HUD Handbook 4155.1, REV-5,
paragraphs 1-7A and 1-7B, state that seller contributions exceeding 6 percent of the property’s
sales price must be subtracted dollar-for-dollar from the sales price before applying the
applicable loan-to-value ratio. The sales price of the property was $290,900 and the loan-to-
value ratio of the loan was 97.75 percent. Based on our review of the purchase and sale
agreement and HUD-1 settlement statement, the seller contributed $21,379 toward the
borrower’s closing costs, which exceeded the 6 percent limit of $17,454 by $3,925. Therefore,
the maximum allowable mortgage amount should have been $280,518 [($290,900 - $3,925) x
97.75%]. Thus, the lender’s calculated mortgage amount of $282,1733 exceeded the maximum
allowable mortgage amount of $280,518 by $1,655. In essence, the lender overinsured the
mortgage amount by $1,655.

Using the HUD-1 settlement statement, we calculated those costs that should have been paid by
the borrower, according to the purchase and sale agreement, but were paid by the seller. The
$21,379 consisted of the following costs: loan origination fee, loan discount, administration fee,
interest, settlement fee, title search, title insurance, endorsements, recording fees, city/county
tax/stamps, state tax/stamps, maintenance assessment for September 30, 2008, maintenance
assessment for October 2008 to September 2009, association initial capital contribution, seller
administration fee, survey, cancelation fee and costs regarding the prior contract, soil treatment,
and condo book.




3
    HUD insured the loan for $287,816, which consisted of the mortgage amount of $282,173 and the upfront
    mortgage insurance premium of $5,643.

                                                         30