oversight

Residential Home Funding Corporation, Gaithersburg, MD, Did not Always Comply With HUD Requirements in Origination FHA-Insured Single-Family Loans

Published by the Department of Housing and Urban Development, Office of Inspector General on 2010-01-21.

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

                                                                                  Issue Date
                                                                                       January 21, 2010
                                                                                  Audit Report Number
                                                                                       2010-PH-1004




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

                  //signed//
FROM:             John P. Buck, Regional Inspector General for Audit, Philadelphia Region,
                   3AGA

SUBJECT:          Residential Home Funding Corporation, Gaithersburg, MD, Did Not
                   Always Comply With HUD Requirements in Originating FHA-Insured
                   Single-Family Loans


                                              HIGHLIGHTS

    What We Audited and Why

                  We audited Residential Home Funding Corporation, a nonsupervised1 lender
                  approved to originate Federal Housing Administration (FHA) single-family
                  mortgage loans. Residential Home Funding Corporation has one office located in
                  Gaithersburg, Maryland. We selected Residential Home Funding Corporation
                  because its default rate was significantly higher than the average default rate for
                  the State of Maryland. Our objective was to determine whether Residential Home
                  Funding Corporation complied with U.S. Department of Housing and Urban
                  Development (HUD) regulations, procedures, and instructions in the origination
                  of FHA loans.


    What We Found

                  Residential Home Funding Corporation did not always comply with HUD
                  requirements in its origination of FHA loans. For five loans reviewed, Residential

1
  A nonsupervised lender is an FHA-approved lending institution that has as its principal activity the lending or
investing of funds in real estate mortgages.
                 Home Funding Corporation did not properly verify or support the borrowers’
                 income. These deficiencies stemmed from Residential Home Funding
                 Corporation’s misinterpretation of HUD requirements related to verification of
                 employment/income. As a result, the FHA insurance fund was exposed to an
                 unnecessarily increased risk.

    What We Recommend

                 We recommend that HUD’s Deputy Assistant Secretary for Single Family
                 Housing require Residential Home Funding Corporation to indemnify more than
                 $1.6 million2 for five loans, which it issued contrary to HUD’s loan origination
                 requirements and refer Residential Home Funding Corporation’s principals and
                 underwriting staff to HUD’s Mortgagee Review Board for administrative
                 sanctions as appropriate.

                 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 a draft report to Residential Home Funding Corporation on
                 December 9, 2009. We discussed the audit results with Residential Home
                 Funding Corporation during the audit and at an exit conference on December 17,
                 2009. We requested a written response by December 29. Residential Home
                 Funding Corporation provided written comments to our draft report on
                 December 27, 2009. It generally disagreed with our report. The complete text of
                 its response, along with our evaluation of that response, can be found in appendix
                 B of this report.




2
  This amount is the unpaid principal balance. The projected loss to HUD is $997,291 based on HUD’s insurance
fund average loss rate of 60 percent.


                                                       2
                             TABLE OF CONTENTS


Background and Objective                                                           4

Results of Audit
        Finding: Residential Home Funding Corporation Did Not Always Comply With   5
        HUD Requirements in the Origination of FHA-Insured Single-Family Loans

Scope and Methodology                                                              8

Internal Controls                                                                  10

Appendixes
   A.   Schedule of Funds To Be Put to Better Use                                  11
   B.   Auditee Comments and OIG’s Evaluation                                      12
   C.   Schedule of Case File Discrepancies                                        22
   D.   Narrative Case Presentations                                               23




                                             3
                      BACKGROUND AND OBJECTIVE

The U.S. Department of Housing and Urban Development’s (HUD) strategic plan states that part
of its mission is to increase homeownership, support community development, and increase
access to affordable housing free from discrimination.

The National Housing Act, as amended, established the Federal Housing Administration (FHA),
an organizational unit within HUD. FHA provides insurance for lenders against loss on single-
family home mortgages.

In 1983, HUD implemented the direct endorsement program, which authorized approved lenders
to underwrite loans without HUD’s prior review and approval. There are two types of approved
direct endorsement mortgagees - supervised and nonsupervised. A supervised mortgagee is an
FHA-approved financial institution that is a member of the Federal Reserve System or an
institution whose accounts are insured by the Federal Deposit Insurance Corporation or the
National Credit Union Administration. A nonsupervised lender is an FHA-approved lending
institution that has as its principal activity the lending or investing of funds in real estate
mortgages. HUD requires lenders to use its Neighborhood Watch system to monitor and
evaluate their performance, and has many sanctions available for taking actions against lenders
or others who abuse the direct endorsement program.

Residential Home Funding Corporation is a nonsupervised direct endorsement lender for FHA
loans and is located in Gaithersburg, MD. This is the only active office for the lender.
Residential Home Funding Corporation issued 40 FHA loans valued at $11.6 million between
April 2007 and March 2009 that defaulted within the first 2 years. Of the 40 loans, 22 that had
not been terminated or refinanced defaulted with 12 payments or fewer. These loans were
valued at more than $6.2 million. We reviewed five of the loans valued at approximately $1.7
million.

On September 30, 2009, HUD terminated Residential Home Funding Corporation’s FHA loan
origination approval agreement for the Washington, DC, jurisdiction because of its relatively
high default and claim rate. As stipulated by this termination HUD will no longer insure loans
originated in the Washington, DC, jurisdiction by Residential Home Funding Corporation.

Our objective was to determine whether Residential Home Funding Corporation complied with
HUD regulations, procedures, and instructions in the origination of FHA-insured single-family
loans.




                                                4
                                    RESULTS OF AUDIT

Finding: Residential Home Funding Corporation Did Not Always
Comply With HUD Requirements in the Origination of FHA-Insured
Single-Family Loans
Residential Home Funding Corporation did not verify borrowers’ income in accordance with
HUD requirements for five loans reviewed, originally valued at more than $1.6 million. It could
not provide adequate supporting documentation to show that it established that the borrowers had
the capacity to repay their mortgage debts. The deficiencies occurred because Residential Home
Funding Corporation misinterpreted HUD requirements related to verification of
employment/income. As a result, the FHA insurance fund was exposed to an unnecessarily
increased risk. Therefore, Residential Home Funding Corporation should indemnify more than
$1.6 million3 for the five defaulted loans.




    The Lender Did Not Properly
    Verify or Support Borrowers’
    Income

                According to HUD requirements,4 the anticipated amount of income and the
                likelihood of its continuance must be established to determine a borrower’s
                capacity to repay mortgage debt. In this regard, HUD requires5 the lender to
                obtain and document verification of employment and the borrower’s most recent
                pay stub. As an alternative to obtaining verification of employment, the lender
                may obtain the borrower’s original pay stub(s) covering the most recent 30-day
                period, along with original Internal Revenue Service (IRS) W-2 forms from the
                previous 2 years.

                For the five sample loans reviewed, we did not find sufficient evidence to support
                the borrowers’ income. In three cases, Residential Home Funding Corporation
                used verification of employment forms and the borrowers’ paychecks to support
                the borrowers’ income. No pay stubs were provided. In another case, verification
                of employment forms were provided for the borrower and a coborrower.
                However, a pay stub was only provided for the coborrower, whose income
                represented less than half of the total income used to qualify the borrowers for the
                loan. The borrower’s income was only supported by a paycheck. In the
                remaining case reviewed, verification of employment forms and the borrowers’
                pay stubs and paychecks were provided as proof of income. The pay stubs did not
3
  See footnote 2.
4
  HUD Handbook 4155.1, REV-5, chapter 2, section 2
5
  HUD Handbook 4155.1, REV-5, section 3.1E

                                                     5
             show the year-to-date earnings, only the gross pay and taxes for the pay period.
             Furthermore, one of the pay stubs did not show the company name and Social
             Security number for one of the borrowers.

             In four of the cases in which paychecks were provided, the checks were
             handwritten checks from the borrowers’ employers. Copies of the back of the
             checks were not documented or provided; therefore, we could not determine
             whether the checks had been cashed. Also, for one of the five loans, the employer
             was the seller of the property being purchased by the borrower. In four of the five
             cases, the employees’ payroll taxes were written in the memo area of the
             paycheck. There were no W-2 forms, tax returns, or documents requesting tax
             returns documented in any of the case files.

             Residential Home Funding Corporation did not obtain or provide sufficient
             evidence to validate the borrowers’ income and, therefore, failed to demonstrate
             that it ensured that the borrowers had the capacity to repay their mortgage debts.

The Lender Misinterpreted
HUD Requirements

             The loan origination deficiencies noted occurred because Residential Home
             Funding Corporation erroneously believed that paychecks could be substituted for
             pay stubs in the employment/income verification process. The lender indicated
             that it accepted paychecks instead of pay stubs because it primarily did business
             with small business owners. In four of the cases reviewed, the borrowers received
             gift funds and seller assistance and in two of the cases the borrowers had no prior
             history of making rent or mortgage payments because they previously lived with
             relatives. Also, no tax returns were documented in their files. In light of these
             factors and given the HUD requirements for employment/income verification,
             Residential Home Funding Corporation should have been more diligent in
             verifying the borrowers’ income to ensure that they had the capacity to repay their
             mortgage debts.

Conclusion

             Residential Home Funding Corporation did not always comply with HUD
             requirements in its origination of FHA-insured loans. It did not properly verify or
             support the borrowers’ income for the five cases reviewed and, therefore, failed to
             demonstrate that it determined the borrowers’ capacity to meet their mortgage
             obligations. The deficiencies occurred because Residential Home Funding
             Corporation misinterpreted HUD requirements related to verification of
             employment/income. As a result, FHA’s insurance fund was exposed to an
             unnecessarily increased risk. Therefore, Residential Home Funding Corporation



                                              6
                      should indemnify more than $1.6 million6 for the five defaulted loans (see
                      appendixes C and D for more detail).

    Recommendations



                      We recommend that the Deputy Assistant Secretary for Single Family Housing

                      1A.    Require Residential Home Funding Corporation to indemnify $1,662,1527
                             for five loans, which it issued contrary to HUD requirements.

                      1B.    Refer Residential Home Funding Corporation’s principals and
                             underwriting staff to HUD’s Mortgagee Review Board for administrative
                             sanctions as appropriate.




6
    See footnote 2.
7
    See footnote 2.

                                                       7
                        SCOPE AND METHODOLOGY

We performed our on-site audit work between June and August 2009 at Residential Home
Funding Corporation’s office located at 704 Quince Orchard Road, Gaithersburg, MD. Our
review period was from April 2007 through March 2009 but was expanded when necessary to
include current data through October 2009.

We queried HUD’s Neighborhood Watch system for information on lenders’ default rates.
HUD’s Neighborhood Watch system is a Web-based software application that displays loan
performance data for lenders and appraisers by loan types and geographic areas, using FHA-
insured single-family loan information. The loan information is displayed for a 2-year
origination period and is updated on a monthly basis. HUD requires lenders to use the
Neighborhood Watch system to monitor and evaluate their performance.

Based on the Neighborhood Watch query results, we identified and selected Residential Home
Funding Corporation located in Gaithersburg, MD, for review because its percentage of defaults
by 2 years was 19.61 percent compared with the Maryland State average of 6.79 percent. This is
the only active office for the lender.

Residential Home Funding Corporation originated 40 FHA loans, valued at approximately $11.6
million, between April 2007 and March 2009 that defaulted within the first 2 years. After
eliminating refinanced loans, terminated loans, and loans with more than 12 payments before
default, 22 defaulted loans remained. The 22 loans, valued at more than $6.2 million, defaulted
with 12 payments or fewer. We originally selected eight of those loans, valued at approximately
$2.7 million, for review; however, due to Residential Home Funding Corporation’s indication
that the company would probably be dissolved in the near future (due to losing its approval to
originate FHA loans), we reduced our sample size to five loans valued at approximately $1.7
million. The original sample selection was based on the eight loans with the highest mortgage
amounts. To determine whether Residential Home Funding Corporation complied with HUD
regulations, procedures, and instructions in its origination of FHA loans, we performed the
following:

       Reviewed applicable HUD handbooks and mortgagee letters,

       Reviewed case files for the five sample loans,

       Examined records and related documents of Residential Home Funding Corporation, and

       Conducted interviews with officials and employees of Residential Home Funding
       Corporation as well as HUD employees.

In addition, we relied in part on data maintained by HUD in the Neighborhood Watch system.
Although we did not perform a detailed assessment of the reliability of the data, we performed a
minimal level of testing and found the data adequately reliable for our purposes.


                                                8
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.




                                               9
                              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 Control


              We determined that the following internal control was relevant to our audit
              objective:

                      Loan origination process – Policies and procedures that management has in
                      place to reasonably ensure that the loan origination process complies with
                      HUD program requirements

              We assessed the relevant control identified above.

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


 Significant Weakness


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

                      Residential Home Funding Corporation did not operate in accordance with
                      HUD requirements as they relate to loan origination.




                                               10
                                   APPENDIXES


Appendix A

     SCHEDULE OF FUNDS TO BE PUT TO BETTER USE

                           Recommendation        Funds to be put
                                  number         to better use 1/

                                          1A           $997,291



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. In this instance, implementation of our recommendation
     to indemnify loans that were not originated in accordance with HUD requirements will
     reduce the risk of loss to the FHA insurance fund. The above amount reflects HUD
     statistics, which show that FHA, on average, lost 60 percent of the claim paid on each
     property during 2009 (see appendix C).




                                            11
Appendix B

        AUDITEE COMMENTS AND OIG’S EVALUATION


Ref to OIG Evaluation   Auditee Comments




Comment 1




Comment 2




                         12
Comment 3




Comment 2




Comment 3




            13
Comment 4




Comment 4




Comment 4




            14
Comment 2




Comment 5




Comment 5




            15
Comment 3




Comment 6




Comment 7




            16
Comment 2


Comment 6



Comment 8




Comment 8




            17
18
                          OIG Evaluation of Auditee Comments

Comment 1    We appreciate the courtesy and cooperation demonstrated by Residential Home
             Funding Corporation throughout the audit process.

Comment 2    Our audit conclusion is supported by audit work performed in accordance with
             generally accepted government auditing standards. According to HUD
             requirements, the anticipated amount of income and the likelihood of its
             continuance must be established to determine a borrower’s capacity to repay
             mortgage debt. Further, HUD expects lenders to exercise sound judgment and
             due diligence in underwriting FHA loans. As discussed in the report, Residential
             Home Funding Corporation did not provide sufficient evidence to support the
             borrowers’ income in the cases we reviewed. Based on HUD’s written
             guidelines, Residential Home Funding Corporation should have obtained
             verifications from the borrowers’ employers as well as the borrowers’ most recent
             pay stubs. Residential Home Funding Corporation obtained verifications from the
             borrowers’ employers but in most cases only had handwritten personal checks to
             fulfill the requirement for the pay stubs. We assessed the paychecks provided and
             concluded that they did not constitute sufficient evidence of the borrowers’
             income, and that the support provided as a whole was not sufficient to provide
             assurance that the borrowers had the capacity to repay their debts. Also,
             Residential Home Funding Corporation could not provide any evidence to show
             that HUD confirmed the permissibility of the kind of checks it relied on in place
             of the required pay stubs.

Comment 3    We agree that all eligible individuals should be given an opportunity to own their
             home without intentional or unintentional discrimination based on underwriting
             procedures. However, all prospective borrowers for FHA loans must be carefully
             evaluated in a manner consistent with HUD guidelines and with prudence to
             ensure that they will have the ability to repay their mortgage debts. HUD expects
             lenders to exercise both sound judgment and due diligence in the underwriting of
             loans to be insured by FHA. The documentation provided for the cases we
             reviewed was not sufficient to support the borrowers’ income and provide
             assurance that they had the capacity to repay their mortgage debts. As a note,
             when HUD terminated Residential Home Funding Corporation’s FHA loan
             origination approval agreement for the Washington, DC, jurisdiction because of
             its relatively high default and claim rate, HUD noted that other lenders serving the
             same area originated loans to similarly employed borrowers under identical
             market conditions but maintained acceptable default and claim rates.

Comment 4 We recognize that HUD guidelines award lenders the flexibility to exercise
          discretion in the underwriting of home mortgages. However, as stated above,
          HUD also expects lenders to exercise both sound judgment and due diligence.
          Residential Home Funding Corporation could not provide documentation to show
          that the personal handwritten checks accepted in lieu of the required pay stubs
          were cashed by the borrowers. As discussed in the report, in one of the cases, the

                                              19
            employer was the seller of the property being purchased by the borrower.
            Residential Home Funding Corporation stated that it took extra steps to verify the
            legitimacy of the borrowers’ employers. In the same manner, it should have been
            prudent and taken extra steps to verify the borrowers’ income. Based on our
            assessment of the documentation provided for the cases we reviewed, Residential
            Home Funding Corporation failed to demonstrate that it ensured that the
            borrowers had the capacity to repay their mortgage debts.

Comment 5   Our audit conclusions are supported by work performed in accordance with
            generally accepted government auditing standards, and were discussed with HUD
            officials. We do not know the scope of FHA’s reviews of Residential Home
            Funding Corporation, and our review was conducted independently, therefore, we
            cannot comment on the results of other reviews. Also, Residential Home Funding
            Corporation could not substantiate that HUD authorized it to rely on the checks it
            accepted in lieu of the required pay stubs. Further, the statement that OIG
            indicated that Regional Office staff has frequently provided incorrect interpretive
            advice is incorrect. OIG indicated that the audit results had been discussed with
            HUD and that the final decision on the audit recommendations would be made by
            the appropriate HUD headquarters officials.

Comment 6   Residential Home Funding Corporation’s efforts to revise its underwriting
            procedures and impose stronger requirements would be a positive step going
            forward. However, it should have been prudent and taken extra measures to
            verify the income of the borrowers in the cases reviewed.

Comment 7   Our position is specifically based on the paychecks that Residential Home
            Funding Corporation provided as support of the borrowers’ income for the
            specific cases we reviewed. The issue with the particular checks provided is that
            they did not constitute sufficient evidence of the borrowers’ receipt of the income.
            Although the backs of the paychecks were not required, if furnished, they would
            have provided some assurance that the borrowers actually received the claimed
            net pay. Residential Home Funding Corporation contends that it would have been
            impractical to obtain copies of the backs of the personal checks because they
            would have been returned to the employers after they were cashed. However,
            since the employers were generally small businesses, the copies may not have
            been as impractical to obtain as stated by Residential Home Funding Corporation.
            While not required, obtaining this information and/or the borrowers’ tax
            information would have provided a little more assurance of the borrowers’ receipt
            of the income. Since Residential Home Funding Corporation appropriately took
            additional measures to verify the legitimacy of the employers due to the unique
            circumstances of these cases, it should, in the same manner, have been prudent
            and taken extra steps to verify the borrowers’ receipt of income and their ability to
            repay their mortgage debts.

Comment 8   The conclusions in the audit report are supported by audit work performed in
            accordance with generally accepted government auditing standards. Residential

                                             20
Home Funding Corporation’s underwriting should have been based on HUD
guidance as well as prudence. The evidence contained in the borrowers’ files was
not sufficient to provide assurance that the borrowers had the ability to repay their
debts. We maintain our position with regards to our conclusion and
recommendations.




                                 21
Appendix C

             SCHEDULE OF CASE FILE DISCREPANCIES



                           Income not properly verified/supported
                                     Mortgage       Unpaid         60% loss
                  Case number        amount         balance         rate *
                    249-5073588       $352,217       $350,623        $210,374
                    249-5091677        347,256        346,478         207,887
                    249-5091704        347,256        345,417         207,250
                    249-5093678        322,452        319,990         191,994
                    241-7897975        301,405        299,644         179,786
                       TOTALS        1,670,586      1,662,152         997,291

* This amount was calculated by taking 60 percent of the unpaid principal balance as of
October 31, 2009, for the loans. HUD statistics show that FHA, on average, lost 60 percent of
the claim paid on each property during 2009.




                                              22
Appendix D

                     NARRATIVE CASE PRESENTATIONS

Case number: 249-5073588                     Payments before first default reported: Six

Mortgage amount: $352,217                    Unpaid principal balance: $350,623

Date of loan closing: May 17, 2007           Claims paid to loan servicer: $381,036

Status: Property conveyed to insurer


Summary:

The lender did not properly verify or support the borrowers’ income.

Pertinent Details:

According to HUD Handbook 4155.1, REV-5, 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. Chapter 3-1E further states that a verification of employment
and the borrower’s most recent pay stub are to be provided. “Most recent” means at the time the
initial loan application is made. As an alternative to obtaining a verification of employment, the
lender may obtain the borrower’s original pay stub(s) covering the most recent 30-day period,
along with original IRS W-2 forms from the previous 2 years.

In this case, there was a borrower and a coborrower. The lender only verified the coborrower’s
income in accordance with HUD requirements. Request for verification of employment forms
were on file for both borrowers, and pay stubs were provided for the coborrower. However, only
a handwritten paycheck was provided for the borrower. The coborrower’s income represented
less than half of the total income used to qualify the borrowers for the loan. The borrower’s
paycheck does not fulfill the HUD requirement and does not constitute sufficient evidence of
income. There were no W-2 forms, tax returns, or documents requesting tax returns in the loan
case file.

The borrowers received $10,650 in gift funds from AmeriDream, Inc., and $10,150 in seller
assistance closing costs.




                                                23
Case number: 249-5091677                     Payments before first default reported: Two

Mortgage amount: $347,256                    Unpaid principal balance: $346,478

Date of loan closing: October 5, 2007        Claim paid to loan servicer: $352,591

Status: Property conveyed to insurer


Summary:

The lender did not properly verify or support the borrower’s income.

Pertinent Details:

According to HUD Handbook 4155.1, REV-5, 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. Chapter 3-1E further states that a verification of employment
and the borrower’s most recent pay stub are to be provided. “Most recent” means at the time the
initial loan application is made. As an alternative to obtaining a verification of employment, the
lender may obtain the borrower’s original pay stub(s) covering the most recent 30-day period,
along with original IRS W-2 forms from the previous 2 years.

The lender only had a request for verification of employment form and copies of the front of
handwritten paychecks from two employers in the borrower’s file. The borrower’s paychecks do
not fulfill the HUD requirement and do not constitute sufficient evidence of income. There were
no W-2 forms, tax returns, or documents requesting tax returns in the loan case file. In addition,
the seller was the borrower’s employer. The seller purchased the property for $255,000 16
months before selling it to his employee. The borrower/employee purchased the property for
$350,000 from the employer.

The borrower received $10,500 in gift funds from AmeriDream, Inc., and $10,452 in seller
assistance closing costs.




                                                24
Case number: 249-5091704                     Status: Repayment

Mortgage amount: $347,256                    Payments before first default reported: Three

Date of loan closing: November 30, 2007      Unpaid principal balance: $345,417


Summary:

The lender did not properly verify or support the borrower’s income.

Pertinent Details:

According to HUD Handbook 4155.1, REV-5, 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. Chapter 3-1E further states that a verification of employment
and the borrower’s most recent pay stub are to be provided. “Most recent” means at the time the
initial loan application is made. As an alternative to obtaining a verification of employment, the
lender may obtain the borrower’s original pay stub(s) covering the most recent 30-day period,
along with original IRS W-2 forms from the previous 2 years. The pay stub(s) must show the
borrower’s name, Social Security number, and year-to-date earnings.

The lender provided verification of employment forms, and the borrowers’ pay stubs and
paychecks as proof of income. However the pay stubs provided were not sufficient. The pay
stubs provided did not show the year-to-date earnings, only the gross pay and taxes for the pay
period. Furthermore the coborrower’s pay stub did not show the company name and borrower’s
Social Security number. With the paychecks that were provided, copies of the back of the
checks were not documented or provided; therefore, we could not determine whether the checks
had been cashed. There were no W-2 forms, tax returns, or documents requesting tax returns in
the loan case file.

The borrower received $10,500 in seller assistance closing costs.




                                                25
Case number: 249-5093678                     Status: First legal action to commence foreclosure

Mortgage amount: $322,452                    Payments before first default reported: Four

Date of loan closing: September 6, 2007      Unpaid principal balance: $319,990


Summary:

The lender did not properly verify or support the borrower’s income.

Pertinent Details:

       According to HUD Handbook 4155.1, REV-5, 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. Chapter 3-1E further states that a
       verification of employment and the borrower’s most recent pay stub are to be provided.
       “Most recent” means at the time the initial loan application is made. As an alternative to
       obtaining a verification of employment, the lender may obtain the borrower’s original
       pay stub(s) covering the most recent 30-day period, along with original IRS W-2 forms
       from the previous 2 years.

       The lender only had a request for verification of employment form and a copy of the front
       of a handwritten paycheck in the borrower’s file. The borrower’s paycheck does not
       fulfill the HUD requirement and does not constitute sufficient evidence of income. There
       were no W-2 forms, tax returns, or documents requesting tax returns in the loan case file.

       The borrower received $9,750 in gift funds from AmeriDream, Inc., and $9,750 in seller
       assistance closing costs.




                                               26
Case number: 241-7897975                     Status: First legal action to commence foreclosure

Mortgage amount: $301,405                    Payments before first default reported: Seven

Date of loan closing: October 4, 2007        Unpaid principal balance: $299,644


Summary:

The lender did not properly verify or support the borrower’s income.

Pertinent Details:

       According to HUD Handbook 4155.1, REV-5, 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. Chapter 3-1E further states that a
       verification of employment and the borrower’s most recent pay stub are to be provided.
       “Most recent” means at the time the initial loan application is made. As an alternative to
       obtaining a verification of employment, the lender may obtain the borrower’s original
       pay stub(s) covering the most recent 30-day period, along with original IRS W-2 forms
       from the previous 2 years.

       The lender only had a request for verification of employment form and a copy of the front
       of a handwritten paycheck in the borrower’s file. The borrower’s paycheck does not
       fulfill the HUD requirement and does not constitute sufficient evidence of income. There
       were no W-2 forms, tax returns, or documents requesting tax returns in the loan case file.

       The borrower received $9,114 in gift funds from the Nehemiah Down Payment
       Assistance Program and $14,452 in seller assistance closing costs.




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