Issue Date July 2, 2010 Audit Report Number 2010-DE-1004 TO: Vicki Bott, Deputy Assistant Secretary for Single Family Housing, HU //signed// FROM: Ronald J. Hosking, Regional Inspector General for Audit, 8AGA SUBJECT: Access National Mortgage Corporation, Denver, CO, Did Not Follow HUD Requirements When Submitting Two of Its Loans for Endorsement HIGHLIGHTS What We Audited and Why We audited Access National Mortgage Corporation (Access National), a Federal Housing Administration (FHA)-approved direct endorsement lender. We reviewed a total of 25 loans underwritten by Access National. We reviewed 23 loans to determine whether it complied with HUD regulations, procedures, and instructions in originating, and underwriting, the FHA-insured loans selected for review. We reviewed 2 FHA-insured loans to determine whether it complied with HUD regulations, procedures, and instructions in submitting the loans for endorsement. We audited Access National because its 2-year default rate was 12.22 percent, which is higher than FHA’s national 2-year default rate of 6.04 percent. What We Found Access National generally complied with HUD regulations, procedures, and instructions in the origination and underwriting of 23 insured loans selected for review. However, it did not comply with U.S. Department of Housing and Urban Development (HUD) regulations, procedures, and instructions for two insured 1 loans it submitted to HUD for endorsement. It submitted the loans, totaling more than $410,000, for endorsement when the loan payments were not current. What We Recommend We recommend that HUD require Access National to reimburse it for the future loss on the two loans that should not have been insured because they were not current when submitted for endorsement. We also recommend that HUD ensure that Access National implements policies to ensure that loans are current when submitted to HUD for endorsement. 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 the discussion draft of the audit report to Access National on June 11, 2010, and requested its comments by June 25, 2010. Access National provided its written response on June 22, 2010. Access National generally concurred with the finding and recommendations. The complete text of the auditee’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: Access National Did Not Follow HUD Requirements When Submitting 5 Loans for Endorsement Scope and Methodology 7 Internal Controls 9 Appendixes A. Schedule of Funds To Be Put to Better Use 10 B. Auditee Comments and OIG’s Evaluation 11 C. Late Endorsement Loan Details 18 3 BACKGROUND AND OBJECTIVES Access National Mortgage Corporation’s (Access National) home office is located in Reston, VA. Access National has a number of branches including two branches located in Denver, CO. We audited the Denver branch located at West 26th Avenue (lender identification number 7729200320). The U.S. Department of Housing and Urban Development’s (HUD) Federal Housing Administration (FHA) authorized this branch as a nonsupervised mortgage company on July 11, 2006. A nonsupervised mortgage company is a nondepository financial entity the principal activity of which is the lending or investment of funds in real estate mortgages. This branch only originates loans. The home office in Reston, VA, performs the underwriting and the quality assurance reviews. From January 1, 2008, through December 31, 2009, the Denver branch office originated 5,334 FHA-insured loans, with a total original mortgage amount of more than $1 billion. Of the 5,334 loans, 652 (12.22 percent) defaulted within the first 2 years, which is higher than the Nation’s 2- year default rate of 6.04 percent. FHA mortgage insurance encourages lenders to approve borrowers with less than perfect credit because FHA insures the mortgage against default. Approved FHA lenders are responsible for complying with all applicable HUD regulations and are required to determine a borrower’s ability and willingness to repay the mortgage. Approved direct endorsement lenders may underwrite and close mortgage loans without prior FHA review or approval. To obtain direct endorsement approval, a lender must demonstrate it has the qualifications, experience, and expertise to underwrite mortgage loans that satisfy FHA requirements. To maintain approval, a lender must consistently underwrite and close loans that meet FHA requirements. The lender must submit the loan for insurance endorsement within 60 days after loan settlement or funds disbursement, whichever is later. HUD determines whether the loan is received late for endorsement based upon the date it actually receives the loan case binder. When a loan is submitted late for endorsement, the lender must certify that the mortgage was not unpaid more than 30days. The objectives of the review were to determine whether Access National complied with HUD regulations, procedures, and instructions in originating, underwriting, and submitting for endorsement the FHA-insured loans selected for review. 4 RESULTS OF AUDIT Finding 1: Access National Did Not Follow HUD Requirements When Submitting Loans for Endorsement Access National submitted two loans for endorsement when the payments on those loans were not current. This condition occurred because Access National did not have adequate written policies to ensure that loans were current when submitted to HUD for endorsement. As a result, HUD endorsed two ineligible loans for more than $410,000. Access National Submitted Loans That Were Not Current Access National submitted two loans for endorsement when the payments on those loans were not current. It submitted loan FHA case number 571-0809019 to HUD for endorsement on May 3, 2008, when the April 1, 2008, payment had not been made by the borrower. Additionally, it submitted loan FHA case number 381-8612471 to HUD for endorsement on December 8, 2008, when the November 1, 2008, payment had not been made by the borrower. Chapter 3 of HUD Handbook 4165.1, REV-2, stipulates that a loan is not eligible for endorsement if the payment due for the month before the lender submitted the loan for endorsement has not been received. Access National Had Inadequate Written Policies Access National did not have adequate written policies. Its written policies did not include procedures for ensuring that loans were current when submitted to HUD for endorsement. Based on our review, Access National developed written policies for submitting loans for endorsement to ensure that it meets HUD requirements. HUD Endorsed Two Uninsurable Loans HUD endorsed two ineligible loans for more than $410,000. The FHA insurance fund is at risk for the potential loss to HUD on the total value of the unpaid loan amounts, which was $402,441. HUD will determine the final loss when it disposes of the properties. HUD’s most recent data disclosed that the average loss 5 rate is 60 percent. Therefore, the estimated loss to HUD is $241,464. See Appendix C for late endorsement loan details. Since we only identified two loans with this deficiency during our audit period, this was not a pervasive issue. However, it is an issue that needs to be addressed to prevent future losses to the insurance fund. Recommendations We recommend that the Assistant Secretary for Housing – Federal Housing Commissioner 1A. Require Access National to indemnify HUD for the future loss on the two loans. The estimated loss to HUD is $241,464. 1B. Ensure that Access National implements policies to ensure that loans are current when submitted to HUD for endorsement. 6 SCOPE AND METHODOLOGY Our audit period was January 1, 2008, through December 31, 2009. Access National’s Denver branch office originated 5,334 FHA-insured loans with beginning amortization dates during our audit period. We did not perform a 100 percent selection or a representative selection using statistical or nonstatistical sampling. We selected 23 of the 652 loans that defaulted within the first 2 years after closing. Of the 23 loans, five were non-streamline-refinanced loans. We sorted the non- streamline-refinanced loans by the number of payments made before the lender reported the first 90- day default, and the underwriters. We selected the 4 loans that were manually underwritten and had 14 or fewer payments made before the first 90 day default was reported. Additionally, we selected the one automated underwritten loan with no payments made before the first 90 day default was reported. The remaining 18 loans were streamline-refinanced loans that had three or fewer payments before the lender reported the first 90-day default, were manually underwritten, and had a default reason of excessive obligations or unable to contact the borrower. We also noted the loan’s current status, and those in a claim status were placed higher on the list. From the list, we selected 2 loans from each of the 9 underwriters represented. When we reviewed the loan files for the 23 loans, we determined that none of the 23 loans were submitted late for endorsement. In order to determine if Access National followed HUD requirements when it submitted loans late for endorsement, we identified and reviewed the two loans with beginning amortization dates between January 1, 2008, and December 31, 2009, that were not current when they were submitted to HUD for endorsement. We did not perform a full review of these two loans. We only reviewed these loans to determine that they were not current when they were submitted for endorsement. To accomplish the audit objectives, we Reviewed HUD regulations and reference materials related to single-family requirements. Reviewed Access National’s underwriting and quality control policies and procedures. Reviewed HUD’s and Access National’s loan case files. Reviewed Access National’s quality control reports and corrective actions taken. Interviewed Access National’s management to obtain information regarding its policies and procedures. We used origination, default, claim, and current loan status data maintained by HUD in the Single Family Data Warehouse and Neighborhood Watch systems for background information and in selecting our sample of loans. We did not rely on the data to base our conclusions. Therefore, we did not assess the reliability of the data. We classified $241,464 as funds to be put to better use. This is a projected amount of loss to HUD for the two loans which we recommend that HUD require Access National to indemnify. To determine the potential loss, we used HUD’s calculation for its average loss on FHA-insured foreclosed-upon properties, which is 60 percent of the unpaid loan balance. The 60 percent is based on the Actuarial Review of the FHA Mutual Mortgage Fund for Fiscal Year 2009. 7 We performed the onsite review work from February to March 2010 at the Denver branch office located at 2420 West 26th Avenue, Denver, CO. 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. 8 INTERNAL CONTROLS Internal control is an integral component of an organization’s management that provides reasonable assurance that the following controls are achieved: Program operations, Relevance and reliability of information, Compliance with applicable laws and regulations, and Safeguarding of assets and resources. Internal controls relate to management’s plans, methods, and procedures used to meet its mission, goals, and objectives. They include the processes and procedures for planning, organizing, directing, and controlling program operations as well as the systems for measuring, reporting, and monitoring program performance. Relevant Internal Controls We determined that the following internal controls were relevant to our audit objectives: Management’s controls to ensure that FHA-insured loans are underwritten in accordance with HUD requirements. Management’s controls to ensure that loans are submitted for endorsement in accordance with HUD requirements. Management’s controls to ensure that a quality control plan is developed and implemented in accordance with HUD requirements. We assessed the relevant controls identified above. A significant weakness exists if management controls do not provide reasonable assurance that the process for planning, organizing, directing, and controlling program operations will meet the organization’s objectives. Significant Weaknesses Based on our review, we believe that the following item is a significant weakness: Controls over ensuring that loans are current when they are submitted to HUD for endorsement/insuring. 9 APPENDIXES Appendix A SCHEDULE OF FUNDS TO BE PUT TO BETTER USE Recommendation Funds to be put number to better use 1/ 1A $241,464 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 Access National to indemnify HUD for the future loss on the two loans it submitted for endorsement when the payments on those loans were not current will reduce the risk of loss to the FHA insurance fund. The amount above reflects the amount of estimated loss to HUD incurred for the two loans. To determine the estimated loss, we used HUD’s calculation for its average loss on FHA- insured foreclosed-upon properties, which is 60 percent of the unpaid loan balance. The 60 percent is based on the Actuarial Review of the FHA Mutual Mortgage Fund for Fiscal Year 2009. 10 Appendix B AUDITEE COMMENTS AND OIG’S EVALUATION Ref to OIG Evaluation Auditee Comments 11 Ref to OIG Evaluation Auditee Comments 12 Refer to OIG Evaluation Auditee Comments 13 Ref to OIG Evaluation Auditee Comments Comment 1 14 Ref to OIG Evaluation Auditee Comments 15 Ref to OIG Evaluation Auditee Comments 16 OIG Evaluation of Auditee Comments Access National generally concurs with the report and has taken action to prevent future errors. Comment 1 This report contains our audit results and final recommendations for resolving any issues identified. The facts supporting all conclusions and recommendations are clearly presented in the finding and the magnitude of any issues identified is clearly represented. Therefore, we do not believe further disclosures are warranted. 17 Appendix C LATE ENDORSEMENT LOAN DETAILS Case number Original Date Payment not Unpaid Sixty loan submitted for made principal percent amount endorsement balance as of April 30, 2010 571-0809019 $205,323 5/3/2008 4/1/2008 $201,483 $120,890 381-8612471 $205,135 12/8/2008 11/1/2008 $200,958 $120,574 Total $410,458 $402,441 $241,464 18
Access National Mortgage Corporation, Denver, CO, Did Not Follow HUD Requirements When Submitting Two of Its Loans for Endorsement
Published by the Department of Housing and Urban Development, Office of Inspector General on 2010-07-02.
Below is a raw (and likely hideous) rendition of the original report. (PDF)