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. 27
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)