oversight

Infinity Home Mortgage Company, Inc., Cherry Hill, NJ, Did Not Implement a Quality Control Plan in Accordance With HUD Requirements

Published by the Department of Housing and Urban Development, Office of Inspector General on 2010-03-31.

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

                                                                                  Issue Date
                                                                                       March 31, 2010
                                                                                  Audit Report Number
                                                                                       2010-PH-1005




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


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

SUBJECT:          Infinity Home Mortgage Company, Inc., Cherry Hill, NJ, Did Not
                  Implement a Quality Control Plan in Accordance With HUD Requirements


                                              HIGHLIGHTS

    What We Audited and Why

                  We audited Infinity Home Mortgage Company, Inc. (Infinity Home Mortgage), a
                  nonsupervised1 lender approved to originate Federal Housing Administration
                  (FHA) single-family mortgage loans. We selected Infinity Home Mortgage
                  because its default rate for the State of Pennsylvania was significantly higher than
                  the average default rate for the State. Our objective was to determine whether
                  Infinity Home Mortgage complied with U.S. Department of Housing and Urban
                  Development (HUD) regulations, procedures, and instructions in the origination
                  and quality control review of FHA loans.

    What We Found


                  Infinity Home Mortgage generally complied with HUD requirements, procedures,
                  and instructions in the origination of FHA loans. However, it did not implement a
                  quality control plan in accordance with HUD requirements. It did not review all
                  loans that defaulted within the first six payments as required by HUD. It also did

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.
           not follow HUD requirements related to the minimum percentage, frequency, and
           timeliness of quality control reviews. In addition, Infinity Home Mortgage was
           not able to support all of the quality control reviews that it stated it performed.
           These conditions occurred because Infinity Home Mortgage disregarded HUD
           requirements and did not adequately implement its quality control plan.
           Consequently, the effectiveness of the plan, which was designed to ensure
           accuracy, validity, and completeness in its loan underwriting process, was
           lessened.


What We Recommend


           We recommend that HUD’s Deputy Assistant Secretary for Single Family Housing
           direct Infinity Home Mortgage to implement its quality control functions as required
           and follow up in 6 months to ensure the lender’s compliance.

           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 Infinity Home Mortgage on March 4, 2010. We
           discussed the audit results with Infinity Home Mortgage during the audit and at an
           exit conference on March 17, 2010. Infinity Home Mortgage provided written
           comments to our draft report on March 25, 2010. It agreed with our report. The
           complete text of its response can be found in appendix A of this report.




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                           TABLE OF CONTENTS


Background and Objective                                                            4

Results of Audit
      Finding: Infinity Home Mortgage Did Not Implement a Quality Control Plan in   5
      Accordance With HUD Requirements

Scope and Methodology                                                               8

Internal Controls                                                                   10

Appendixes
   A. Auditee Comments                                                              11




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                       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 three types of approved
direct endorsement lenders—supervised, nonsupervised and governmental institutions. A
supervised lender is an FHA-approved financial institution that is a member of the Federal
Reserve System or an institution with accounts 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. A governmental institution includes a Federal, State or municipal
government agency, Federal Reserve Bank, Federal Home Loan Bank, Federal Home Loan
Mortgage Corporation and Federal National Mortgage Association. 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.

Infinity Home Mortgage Company, Inc. (Infinity Home Mortgage), is a nonsupervised direct
endorsement lender for FHA loans. Its main office is located in Cherry Hill, NJ. Infinity Home
Mortgage originated 29 loans between June 2007 and May 2009 that defaulted within the first 2
years. Of the 29 loans valued at about $4.4 million, 21 valued at approximately $2.8 million
defaulted after 12 payments or fewer. We reviewed 8 of the 21 loans valued at more than $1.5
million.

Infinity Home Mortgage received a termination of origination approval agreement notice, dated
December 11, 2009, because its early default and claim rate in HUD’s Philadelphia jurisdiction
exceeded the termination thresholds. The termination of origination approval agreement
precludes the office from originating single-family loans within the stated geographic area.
Infinity Home Mortgage can present an appeal to HUD regarding the termination notice. After
consideration of the material presented to HUD by Infinity Home Mortgage, and if warranted,
the termination notice may be sustained or withdrawn pursuant to 24 CFR (Code of Federal
Regulations) 202.3 (c) (2) (iii). The effect of the termination notice is not yet known.

Our objective was to determine whether Infinity Home Mortgage complied with HUD
requirements, procedures, and instructions in the origination and quality control review of FHA
loans. Minor findings noted in relation to Infinity Home Mortgage’s origination of FHA loans
were separately communicated to Infinity Home Mortgage in a letter, dated March 16, 2010.


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                                 RESULTS OF AUDIT

Finding 1: Infinity Home Mortgage Did Not Implement a Quality
Control Plan in Accordance With HUD Requirements
Infinity Home Mortgage did not review all loans that defaulted within the first six payments
(early payment defaults) as required by HUD. It also did not follow HUD requirements related
to the minimum percentage, timeliness, and frequency of quality control reviews. In addition,
Infinity Home Mortgage was not able to support all of the quality control reviews that it stated it
performed. These conditions occurred because Infinity Home Mortgage disregarded HUD
requirements and did not adequately implement its quality control plan. Consequently, the
effectiveness of the plan, which was designed to ensure accuracy, validity, and completeness in
its loan underwriting process, was lessened.



 Early Payment Default Loans
 Not Reviewed as Required

               HUD Handbook 4060.1, paragraph 7-6D, requires that lenders review all loans
               going into default within the first six payments. Also, Infinity Home Mortgage’s
               quality control plan states that all loans going into default within the first 6
               months must be reviewed. Infinity Home Mortgage did not review all early
               payment defaults as required by HUD and its own quality control plan. It did not
               conduct quality control reviews for 23 of the 38 early payment defaults. Infinity
               Home Mortgage acknowledged that it did not review early payment defaults as
               required and stated that the requirement would be enforced going forward.

 Minimum Percentage of
 Reviews Not Performed


               HUD Handbook 4060.1, paragraph 7-6C, requires lenders to perform quality
               control reviews on 10 percent of loans originated. Infinity Home Mortgage did
               not perform the minimum percentage of quality control reviews required by HUD.
               In 2008 for example, Infinity Home Mortgage originated 372 loans and, therefore,
               should have selected 10 percent or 37 of the loans for quality control reviews.
               However, it only selected 30 of the loans for reviews and could only provide
               documentation to show that 5 of the loans were reviewed. Therefore, we were
               only able to verify that it performed 5 of the 37 required reviews. Infinity Home
               Mortgage acknowledged the deficiency and                quality control software to
               ensure a sample selection process in compliance with HUD requirements and to
               improve its overall quality control process.



                                                 5
Reviews Not Within the
Required Timeframe


             HUD Handbook 4060.1, paragraph 7-6A, states that loans must be reviewed
             within 90 days from the end of the month in which the loan closed. This
             requirement is intended to ensure that problems left undetected before closing are
             identified as early after closing as possible. Infinity Home Mortgage did not
             always perform quality control reviews in a timely manner as required by HUD.
             We randomly selected 12 of 45 FHA loans, which Infinity Home Mortgage
             indicated that it had reviewed, to determine whether the quality control reviews
             were conducted in a timely manner. Infinity Home Mortgage could only provide
             documentation on reviews for 5 of the 12 loans. We determined that one of the
             five loans was not reviewed in a timely manner. The loan was reviewed 112 days
             from the end of the month in which it closed.

Reviews Not Performed
Monthly

             According to HUD Handbook 4060.1, paragraph 7-6B, lenders closing more than
             15 loans monthly must conduct quality control reviews at least monthly and must
             address 1 month’s activity. Lenders closing 15 or fewer loans monthly may
             perform quality control reviews on a quarterly basis. Also, Infinity Home
             Mortgage’s quality control plan states that the purpose of its quality control
             procedures is to ensure that all loans acquired meet the company’s standards and
             HUD guidelines. However, Infinity Home Mortgage did not conduct quality
             control reviews on a monthly basis as required by HUD and in accordance with its
             quality control plan. From July 2007 through December 2008 (with the exception
             of January 2008 when it closed only four loans), Infinity Home Mortgage closed
             more than 15 loans monthly and, therefore, should have performed quality control
             reviews on a monthly basis. However, the lender admitted that it only performed
             quality control reviews on a quarterly basis and indicated that it had not adjusted
             its process since the early 2000s when it was not closing as many loans and,
             therefore, performed quality control reviews on a quarterly basis. During the
             audit, Infinity Home Mortgage provided an updated quality control plan that
             includes a policy for performing reviews on a monthly or quarterly basis based on
             the volume of its loans closed each month.


Conclusion


             Infinity Home Mortgage officials did not ensure that (1) all early payment default
             loans were reviewed, (2) quality control reviews were conducted in a timely
             manner, (3) quality control reviews were performed on a monthly basis, and (4)

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          the minimum percentage of reviews was performed. These conditions occurred
          because Infinity Home Mortgage disregarded HUD requirements and did not
          adequately implement its quality control plan. As a result, the effectiveness of the
          plan, which was designed to ensure accuracy, validity, and completeness in its
          loan underwriting process, was lessened.

Recommendations



          We recommend that HUD’s Deputy Assistant Secretary for Single Family Housing
          direct Infinity Home Mortgage to

          1A.     Implement its quality control functions as required and follow up with the
                  lender in 6 months to ensure its compliance.




                                            7
                         SCOPE AND METHODOLOGY

We performed our audit work between August and November 2009 at Infinity Home Mortgage’s
office located at 660 North Kings Highway, Suite 203, Cherry Hill, NJ. Our review period was
from June 2007 through May 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 Infinity Home
Mortgage, located in Cherry Hill, NJ, for review because its percentage of defaults by 2 years for
the State of Pennsylvania was 9.6 percent, compared with the State average of 3.94 percent.

Infinity Home Mortgage originated 29 FHA loans, valued at approximately $4.4 million,
between June 2007 and May 2009 that defaulted within the first 2 years. After eliminating
refinanced loans, terminated loans, and loans with more than 12 payments before default, 21
defaulted loans remained. The 21 loans, valued at more than $2.8 million, defaulted after 12
payments or fewer. We selected the top eight loans with the highest mortgage amounts, valued
at approximately $1.5 million, for review. To determine whether Infinity Home Mortgage
complied with HUD regulations, procedures, and instructions in its origination and quality
control of FHA loans, we performed the following:

       Reviewed applicable HUD handbooks and mortgagee letters,

       Performed detailed testing and review of the underwriting procedures for the eight
       sample loans (our detailed testing and review included (1) analysis of borrowers’ income,
       assets, and liabilities; (2) review of borrowers’ saving abilities and credit history; (3)
       verification of selected data on the settlement statements; and (4) confirmation of
       employment and gifts),

       Examined records and related documents of Infinity Home Mortgage,

       Reviewed and tested Infinity Home Mortgage’s quality control plan, and

       Conducted interviews with officials of Infinity Home Mortgage and discussed issues with
       HUD employees.

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

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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 Controls


              We determined that the following internal controls were 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.

                      Quality control plan – Policies and procedures that management has in place
                      to reasonably ensure implementation of HUD quality control 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:

                      Infinity Home Mortgage did not adequately implement its quality control
                      plan to ensure compliance with HUD’s quality control requirements.



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Appendix A

             AUDITEE COMMENTS




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