oversight

Crossfire Financial Network, Miami, FL, Did Not Follow HUD Requirements in Approving FHA Loans and Implementing Its Quality Control Program

Published by the Department of Housing and Urban Development, Office of Inspector General on 2011-06-24.

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

                                                                Issue Date
                                                                       June 24, 2011
                                                                Audit Report Number
                                                                       2011-AT-1010




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

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

SUBJECT: Crossfire Financial Network, Miami, FL, Did Not Follow HUD Requirements in
          Approving FHA Loans and Implementing Its Quality Control Program

                                   HIGHLIGHTS

 What We Audited and Why

             We audited Crossfire Financial Network, Inc., d/b/a CFN Mortgage Capital
             (Crossfire), a Federal Housing Administration (FHA)-approved direct
             endorsement lender located in Miami, FL. The audit objectives were to determine
             whether the lender followed U.S. Department of Housing and Urban
             Development (HUD) requirements when (1) originating and underwriting loans
             and (2) implementing its quality control program. We selected this lender
             because it underwrote more than 600 loans for a 2-year period in the HUD Miami
             area and its default rate of 6 percent was higher than the Miami HUD office area
             average default rate of 4 percent.

 What We Found

             Crossfire did not follow HUD requirements when it underwrote 10 loans for FHA
             insurance based on inaccurate and unsupported information. This condition
             occurred because the lender did not act with due care when originating and
             underwriting these loans. As a result, Crossfire approved loans that were not
             eligible for FHA insurance and increased the risk to the FHA insurance fund of
             more than $1.3 million.
           In addition, Crossfire did not implement a quality control program that complied
           with HUD requirements. It did not conduct quality control reviews in compliance
           with requirements, and its written quality control plan did not contain the required
           provisions. These conditions occurred because Crossfire disregarded HUD
           requirements. As a result, the effectiveness of Crossfire’s quality control program
           to guard against errors, omissions, and fraud and to protect HUD from
           unacceptable risk was diminished. Specifically, Crossfire increased the risk to the
           FHA insurance fund because it did not have assurance regarding the accuracy,
           validity, and completeness of its loan origination and underwriting operations.

What We Recommend

           We recommend that the Deputy Assistant Secretary for Single Family Housing
           require Crossfire to indemnify HUD for the 9 ineligible FHA loans with an
           estimated potential loss of more than $1.1 million and reimburse HUD for the
           $210,453 in claims paid on 3 of the 10 loans. In addition, we recommend that
           HUD refer Crossfire to the Mortgagee Review Board for consideration of
           administrative actions against the lender for not having a compliant quality
           control program in place. We also recommend that HUD require Crossfire to
           develop, implement, and enforce a quality control program that complies with
           HUD requirements.

           For each recommendation without a management decision, please respond and
           provide status reports in accordance with HUD Handbook 2000.06, REV-3.
           Please furnish us copies of any correspondence or directives issued because of the
           audit.

Auditee’s Response

           We discussed our review results with Crossfire and HUD officials during the
           audit. We provided a copy of the draft report to Crossfire on May 20, 2011 for its
           comment. Crossfire provided its comments on May 31, 2011. The auditee
           generally did not agree with finding 1 and its recommendations, and agreed with
           the finding 2.

           The complete text of Crossfire’s response, along with our evaluation of the
           response, can be found in appendix B of this report.




                                            2
                             TABLE OF CONTENTS

Background and Objectives                                                        4

Results of Audit
        Finding 1: Crossfire Did Not Follow HUD Requirements When Original and   5
                   Underwriting FHA Loans
        Finding 2: Crossfire Did Not Follow HUD Requirements When Implementing   10
                   Its Quality Control Program

Scope and Methodology                                                            15

Internal Controls                                                                17

Appendixes
   A.   Schedule of Questioned Costs and Funds To Be Put to Better Use           19
   B.   Auditee Comments and OIG’s Evaluation                                    20
   C.   Schedule of Indemnification and Repayment Amounts for the 10 Loans       27
   D.   Loan Details for the Seven Cash-Out Refinance Loans                      28
   E.   Loan Details for the Three Purchase Loans                                29




                                             3
                          BACKGROUND AND OBJECTIVES

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

Crossfire became an FHA-approved lender in June 1997 and currently has four active branch offices
located in California, Colorado, and Florida. The lender has sponsored 27 loan correspondents,
served as the principal for 7 authorized agents, and acted as an authorized agent for 7 other principal
lenders. A loan correspondent may process an application and submit it to one of its sponsors for
underwriting. The loan correspondent must close the loan in its own name or in the name of the
sponsor that underwrote the loan. The principal-authorized agent relationship provides the lender
the flexibility to collaborate with another FHA lender to originate FHA loans. An authorized agent
may perform any part of the loan origination process, including underwriting, on behalf of its
principal; however, the loan must be closed in the name of the principal lender. As of May 2011,
Crossfire no longer sponsors any loan correspondents, serves as the principal for six authorized
agents, and acts as an authorized agent for one other principal lender.

According to HUD’s Neighborhood Watch system1, from December 2008 through November
2010, Crossfire underwrote 657 loans in the HUD Miami office jurisdiction. As of November 30,
2010, 40 of the 657 loans (6 percent) with mortgage amounts totaling more than $7.4 million were
in default.

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




1
  The HUD Neighborhood Watch is intended to aid HUD in monitoring lenders. The system is designed to highlight
exceptions, so that potential problems are readily identifiable. In particular, the system gives the ability to identify
and analyze patterns, by geographic area or originating lender, in loans which became 90 days delinquent during the
first 2 years.

                                                           4
                                   RESULTS OF AUDIT

Finding 1: Crossfire Did Not Follow HUD Requirements When
Originating and Underwriting Loans
Crossfire did not follow HUD requirements when originating and underwriting loans for FHA
insurance. It used inaccurate and unsupported information to qualify borrowers for 10 FHA
loans. This condition occurred because the lender did not exercise due care when originating and
underwriting these loans for FHA insurance. As a result, Crossfire approved loans that did not
qualify for FHA insurance and placed the FHA insurance at risk for more than $1.3 million.


 Loans Had Significant Originating
 and Underwriting Deficiencies

              Crossfire did not follow HUD requirements when originating and underwriting 10
              loans. Specifically, it used inaccurate employment information, did not support
              the borrower’s asset information, and relied on an invalid appraisal report to
              qualify borrowers for three of the six purchase loans reviewed. In addition,
              Crossfire approved 7 of the 32 cash-out refinance loans reviewed with previous
              mortgage delinquencies occurring less than 12 months before the refinancing.

              All FHA lenders must follow all applicable statutes, regulations, and HUD’s
              written instructions, including program handbooks and mortgagee letters.
              Specifically, lenders must follow HUD Handbook 4155.1, REV-5, “Mortgage
              Credit Analysis for Mortgage Insurance on One- to Four-Unit Mortgage Loans,”
              when underwriting FHA loans. The lender is responsible for eliciting a complete
              picture of the borrower’s financial situation, source of funds for the transaction,
              and intended use of the property. Its decision to approve the loan must be
              documented, supported, and verifiable.

              The table below shows the summary of deficiencies identified for the 10 loans.
                                     Inaccurate       Unsupported    Invalid    Cash-out refinance with
                        FHA         employment         source of    appraisal     previous mortgage
              No.      case no.        income            funds       report         delinquencies
               1     095-1353467          X
               2     095-1135143                          X
               3     095-0770109        X                              X
               4     095-0932148                                                          X
               5     095-0911262                                                          X
               6     095-0937700                                                          X
               7     095-0970905                                                          X
               8     095-1002059                                                          X
               9     095-0942848                                                          X
              10     095-0973194                                                          X
             Total                      2                  1           1                  7

                                                  5
          The following two sections discuss some examples of the originating and
          underwriting deficiencies.

Loans Contained Inaccurate
Employment Income Information

          The lender did not accurately verify or support borrowers’ employment
          information for two loans. HUD Handbook 4155.1, paragraph 4.D.1.a, states that
          income may not be used in calculating the borrower’s qualifying ratios if it comes
          from any source that cannot be verified, is not stable, or will not continue.
          Qualifying debt-to-income ratios are used to determine whether the borrower can
          reasonably be expected to meet the expenses involved with homeownership. The
          lender must compute two ratios: (1) mortgage payment expense to effective
          income and (2) total fixed payment to effective income. The first ratio considers
          the total mortgage payment to the borrower’s income while the second ratio
          considers all of the borrower’s debts, including the mortgage payment, to the
          borrower’s income. According to Mortgagee Letter 2005-16, the qualifying ratios
          generally should not exceed 31 and 43 percent, respectively, without acceptable
          compensating factors for loans underwritten manually. HUD Handbook 4155.1,
          paragraph 4.F.3.a, states that loans approved using an automated underwriting
          system may be allowed to reasonably exceed the benchmarked qualifying ratios
          without compensating factors. The lender is responsible for the integrity of the
          data entered in the automated underwriting system used to approve the loan.

          For FHA case number 095-1353467, the lender used $4,767 as the borrower’s
          monthly income to qualify the borrower for an FHA-insured mortgage totaling
          $265,109. The lender used this income amount to calculate the borrower’s
          qualifying debt-to-income ratios of 47.0 and 47.4 percent, respectively. However,
          verifications with the borrower and the borrower’s employer showed that the
          borrower’s monthly income was $3,813. The borrower stated that she did not
          provide the pay stubs found in the loan file with the inaccurate employment
          income amount. The borrower’s employer stated that it did not complete or sign
          the verification of employment form with the inaccurate employment income
          amount contained in the loan file. The lender stated that it relied on the
          originating lender to process the loan and did not perform additional verifications
          of the employment income. Our recalculation of the borrower’s qualifying loan
          ratios based on the verified monthly income of $3,813 equaled 58.7 and 59.2
          percent, respectively. Given the inaccurate employment income information and
          higher loan ratios, the borrower would not have qualified for the FHA mortgage
          loan.




                                           6
Crossfire Underwrote Cash-Out
Refinance Loans with Previous
Mortgage Delinquencies

            The lender did not consider the borrowers’ payment histories with their previous
            mortgages when underwriting seven cash-out refinance loans. HUD Handbook
            4155.1, paragraph 3.B.2.b, states that borrowers who are delinquent or in arrears
            or have suffered any mortgage delinquencies within the most recent 12-month
            period under the terms and conditions of their mortgages are not eligible for cash-
            out refinance loans.

            For FHA case number 095-0911262, the lender qualified this FHA-insured cash-
            out refinance loan of $309,320 that closed in November 2008. The credit report
            and the previous mortgage transaction payment history found in the lender’s loan
            file showed that the borrower had delinquencies with the previous mortgage. The
            credit report showed that the borrower was delinquent in September 2007 and
            March 2008 on the previous mortgage. As a result, the borrower did not qualify
            for the $309,320 cash-out refinance loan, and the loan was ineligible for FHA
            insurance. This loan is now in the foreclosure process.

            From the refinanced loan, the borrower received $77,176 after paying off the
            original mortgage on the property. The borrower used $41,397 to pay off a home
            equity line of credit and $25,704 to pay off credit card accounts and received
            $10,075 in cash.

Crossfire Did Not Exercise Due
Care in Approving Loans

            Crossfire did not exercise due care when originating and underwriting these loans
            for FHA insurance to ensure compliance with HUD requirements. As a direct
            endorsement lender, Crossfire was allowed to endorse a mortgage loan for FHA
            insurance without a detailed technical underwriting review by HUD. In
            approving loans for FHA insurance, the lender certified that the mortgage loan
            documents were personally reviewed and the mortgage was found to be eligible
            for FHA insurance.

            The lender stated that it relied on the originating lenders (loan correspondents,
            authorized agent, and principals) to process the loans, which included verifying
            the employment income information. Generally, the lender would contact the
            borrowers’ employers to ensure that the borrowers were employed there;
            however, the employment income amounts were not revalidated directly with the
            employers. HUD Handbook 4060.1, paragraph 2-13, states that lenders are
            allowed to outsource the processing functions as long as it does not materially
            affect the underwriting decision or increase the risk to the FHA insurance fund.
            The lender remains responsible for the quality of the mortgage and must ensure
            compliance with program requirements.

                                             7
             Regarding the issue found with the cash-out refinance loans, the lender contended
             that it was not responsible for personally evaluating the borrowers’ credit histories
             for loans underwritten and approved by the automated underwriting system.
             HUD Handbook 4155.1, paragraph 6.A.1.b, states that regardless of the risk
             assessment provided by the automated underwriting system, the lender remains
             accountable for compliance with FHA’s eligibility requirements, as well as any
             credit, capacity, and documentation requirements not covered by the system. In
             addition, the underwriter associated with all seven loans was aware that cash-out
             refinance loans were not allowed to have any mortgage delinquencies occurring
             less than 12 months before the refinance. However, 7 of the 32 cash-out refinance
             loans reviewed had previous mortgage delinquencies. Therefore, the lender did
             not act with due care when originating and underwriting these loans for FHA
             insurance.

Conclusion

             Crossfire did not follow HUD requirements when originating and underwriting 10
             FHA loans. The deficiencies occurred because the lender did not exercise due
             care to ensure that the loans were originated and underwritten in accordance with
             HUD requirements. As a result, Crossfire approved and insured 10 loans that
             were not eligible for FHA insurance. As of March 31, 2011, three of the loans
             were in the foreclosure process, four loans were delinquent, one loan was in the
             repayment process, one loan was recently reinstated, and one loan had its property
             sold in a preforeclosure sale. The loans placed the FHA insurance fund at risk for
             more than $1.1 million in potential losses should the properties be foreclosed
             upon and resold for less than the unpaid principal balances. In addition, HUD
             paid claims totaling $210,453 on 3 of the 10 ineligible loans. Therefore, HUD
             should seek indemnification from Crossfire for the 9 loans and reimbursement for
             the claims paid on 3 of the 10 loans.

             Appendix C contains a schedule of the indemnification and repayment amounts
             required for the 10 loans. Appendix D contains information on the seven cash-out
             refinance loans, and appendix E contains the loan details for the three purchase
             loans.

Recommendations


             We recommend that the Deputy Assistant Secretary for Single Family Housing
             require Crossfire to




                                               8
                 1A. Indemnify the nine ineligible loans2 with an estimated loss of $1,142,100.
                     The estimated loss was based on the loss severity rate of 59 percent of the
                     total unpaid principal balances of $1,935,762 as of March 31, 2011.

                 1B. Reimburse HUD $210,453 for the actual loss HUD incurred on the principal
                     loan reduction and claims paid for FHA case numbers 095-0911262, 095-
                     0942848, and 095-1135143 as of March 31, 2011.




2
  We recommend indemnification for 9 of the 10 ineligible loans. One of the ten loans (FHA case number 095-
1135143) was sold in a preforeclosure sale, resulting in an actual loss and claim paid by HUD. The claim paid on
this loan, totaling $166,222, is questioned as ineligible costs in recommendation 1B. See Appendix A for further
explanation.

                                                        9
Finding 2: Crossfire Did Not Follow HUD Requirements When
Implementing Its Quality Control Program
Crossfire did not implement a quality control program that complied with HUD requirements.
Specifically, it did not conduct quality control reviews in compliance with requirements, and its
written quality control plan did not contain the required provisions. These conditions occurred
because Crossfire disregarded HUD requirements. As a result, Crossfire increased the risk to the
FHA insurance fund because it did not have assurance regarding the accuracy, validity, and
completeness of its loan origination and underwriting operations.


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

Quality Control Reviews Did Not
Comply With HUD Requirements


              Crossfire hired a quality control contractor to perform its post-quality control
              reviews from August 1997 through May 2008. Another contractor was hired to
              review the loans that closed between June and October 2008 because Crossfire’s
              audited financial statement reports cited a deficiency with its quality control
              reviews performed by the first contractor. Crossfire management stated that it
              was not satisfied with the results of the second contractor and reverted back to the
              prior contractor in the beginning of 2009. Crossfire did not maintain the quality
              control review reports performed by the second contractor to support that reviews
              were performed from June through October 2008. As a result, the lender did not
              comply with HUD requirements because it could not support that it had a quality
              control program in place for the loans that closed between June and October 2008.

              Crossfire underwrote 825 loans nationally from November 2008 through
              December 2010. The first contractor performed quality control reviews of 77
              FHA loans. We analyzed the quality control reviews performed and determined
              that Crossfire did not perform its quality control reviews according to HUD
              requirements. Our review found the following deficiencies:




                                               10
Loans Not Reviewed Within Time Limit
HUD Handbook 4060.1, REV-2, paragraph 7-6(A), states that loans must be
reviewed within 90 days from the end of the month in which the loan closed.
Quality control reviews were not performed within the 90-day limit for 57 of the
77 quality control reviews conducted. The elapsed days ranged from 91 to 207.

Frequency of Reviews Not Performed
HUD Handbook 4060.1, REV-2, paragraph 7-6(B), states that for lenders closing
more than 15 loans monthly, quality control reviews must be conducted at least
monthly and must address 1 month’s activity. Lenders closing 15 or fewer loans
monthly may perform quality control reviews quarterly. Based on the lender’s
loan activity from November 2008 through September 2010, it should have
performed monthly reviews. From October through December 2010, the lender
could have performed reviews quarterly. However, no reviews were performed
for the month of December 2008. Therefore, the lender did not perform quality
control reviews with the frequency required by HUD.

Early Payment Default Loans Not Reviewed
HUD Handbook 4060.1, REV-2, paragraph 7-6(D), states that all early payment
default loans must be reviewed. Early payment default loans are loans that have
defaulted within the first six payments and become 60 days past due. From
November 2008 through December 2010, Crossfire had at least 12 early payment
default loans. None of the 12 early payment default loans was reviewed.

Credit Reports Not Obtained
HUD Handbook 4060.1, REV-2, paragraph 7-6(E)(1), states that a new credit
report must be obtained for each borrower whose loan is included in a quality
control review unless the loan was a streamline refinance or was processed and
approved by an automated underwriting system. Two of the seventy-seven loans
reviewed were not approved by an automated underwriting system and were not
streamline refinance loans. Thus, for the two loans, new credit reports should
have been obtained for the borrowers. However, new credit reports were not
obtained.

Document Reverifications Not Performed
HUD Handbook 4060.1, REV-2, paragraph 7-6(E)(2), states that documents
contained in the loan file, such as documents relating to borrower’s income, gifts,
or sources of funds, should be checked for sufficiency and subjected to written
reverification.

We reviewed 10 of the 77 quality control reviews to determine whether
reverifications were performed for the documents in the loan files. For all 10
loans, the borrower’s employment income, sources of funds, and/or gift funds
were not properly reverified. There was no support to show that any of the
reverification documents were sent for the 10 loans reviewed. For the
reverifications of the borrowers’ sources of funds, the external contractor

                                 11
           explained that reverifications were not sent to some of the financial institutions
           because they charged a verification fee. In addition, it did not attempt to contact
           the sources by telephone if a written reverification could not be obtained.

           Field Appraisal Not Performed
           HUD Handbook 4060.1, REV-2, paragraph 7-6(E)(3), states that lenders are
           expected to perform field reviews of 10 percent of the loans selected per year
           during the sampling process. Since the lender performed quality control reviews
           of 46 FHA loans during 2009 and 30 loans in 2010, at least 4 field appraisals
           should have been performed in 2009, and 3 performed in 2010. However, there
           were no field appraisals performed in 2009, and only two field appraisals were
           performed in 2010.

           Occupancy Verification Not Performed
           HUD Handbook 4060.1, REV-2, paragraph 7-6(E)(4), states that in cases in
           which the occupancy of the subject property is suspect, the lender must attempt to
           determine whether the borrower is occupying the property. The external
           contractor stated that the verifications of property occupancy were not performed
           for any FHA-insured loans. From our review of 10 loans, at least 1 should have
           had an occupancy verification. The borrower owned a total of four real estate
           properties, which raises questions regarding whether the FHA-insured property
           was occupied by the borrower as a primary residence. No occupancy
           verifications were performed on any of the 10 quality control reviews selected for
           review.


The Written Plan Did Not
Contain Required Provisions

           Crossfire’s written quality control plan did not contain HUD-required provisions.
           HUD Handbook 4060.1, REV-2, paragraph 7-6(G), requires that each loan
           selected for a quality control review be reviewed to determine whether (1)
           conditions required for closing were met, (2) the closing and legal documents
           were accurate and complete, (3) the seller was the owner of record or was exempt,
           and (4) the loan closed and funds were disbursed according to instructions.
           Crossfire’s written quality control plan did not contain the last two provisions. In
           addition, paragraph 7-3I requires findings to be reported to lender senior
           management within 1 month of completion, and management must take prompt
           action to deal with any material findings. However, this requirement was missing
           from the written plan. Crossfire management stated that it was an oversight that
           these provisions were not included in the plan and that they could be added to the
           plan.




                                            12
The Lender Disregarded
HUD Requirements

           Crossfire disregarded the HUD requirement to implement and continuously have
           in place a compliant quality control program. The lender did not evaluate the
           work of the external contractor to ensure that the quality control reviews followed
           HUD requirements.

           Crossfire stated that it relied on the contractor and did not know that the reviews
           were not being performed in compliance with HUD requirements. The lender
           reviewed the quality control review reports but only focused on the findings cited
           in those reports. The quality control review reports were not reviewed for
           compliance with HUD requirements. Although the lender stated that it relied on
           its external quality control contractor to perform the quality control reviews in
           accordance with HUD requirements, the lender remains responsible for ensuring
           that the reviews complied with HUD requirements regardless of whether the
           reviews were performed by the lender or an external contractor.

           Although the lender stated that it was not aware that quality control reviews were
           not in compliance, its audited financial statement reports for the years 2007
           through 2010 noted that the reviews did not meet the 10 percent field appraisal
           requirement. Not only was the lender aware of at least one issue with its quality
           control reviews, but the same issue was also continuously cited for 4 consecutive
           years.

           In addition, Crossfire stated that it was not aware that quality control reviews had
           to meet certain requirements such as timeliness of the reviews, reviews of early
           payment default loans, and credit documentation reverifications. However, the
           lender prepared the written quality control plan that specifically discussed the
           quality control review requirements cited above.

           Crossfire management contended that the quality control program was a waste of
           time and resources because it did not focus reviews only on the nonperforming
           loans. However, the lender’s quality control reviews were not performed on any
           of its 12 early payment default loans (loans that defaulted within the first six
           payments).




                                            13
Conclusion


             Crossfire did not follow HUD requirements when implementing its quality control
             program. The lender disregarded HUD requirement to implement and have a
             continuous quality control program that complied with HUD requirements. As a
             result, the effectiveness of Crossfire’s quality control program to guard against
             errors, omissions, and fraud and to protect HUD from unacceptable risk was
             diminished. Specifically, Crossfire increased the risk to the FHA insurance fund
             because it did not have assurance regarding the accuracy, validity, and
             completeness of its loan origination and underwriting operations.


Recommendations


             We recommend that the Deputy Assistant Secretary for Single Family Housing

             2A. Refer Crossfire to the Mortgagee Review Board for consideration of
                 administrative actions against Crossfire for failure to implement and
                 continuously have in place a quality control program in compliance with HUD
                 requirements.

             2B. Require Crossfire to develop, implement, and enforce a quality control
                 program that complies with HUD requirements. Specifically, the lender needs
                 to establish a written plan with the required provisions, ensure that quality
                 control reviews meet HUD requirements, and enforce and maintain its quality
                 control program on a continual basis.

             2C. Review Crossfire’s quality control program within 9 months to determine
                 whether the required provisions have been included in its written plan and
                 quality control reviews are conducted in compliance with HUD
                 requirements.




                                             14
                        SCOPE AND METHODOLOGY


To accomplish the audit objectives, we

           Reviewed applicable HUD handbooks and mortgagee letters;
           Reviewed Crossfire’s written policies and procedures for originating and
           underwriting loans;
           Reviewed Crossfire’s loan files;
           Verified the accuracy of the information from the loan files with the borrowers and
           borrowers’ employers;
           Reviewed Crossfire’s written quality control plan;
           Analyzed Crossfire’s post-quality control review reports;
           Interviewed Crossfire’s employees, management, and external quality control
           contractor, and
           Reviewed new credit reports and other documentation provided by Crossfire for the
           cash-out refinance loans.

We accessed HUD’s Neighborhood Watch system to obtain information about the lender and its
loans. Crossfire underwrote 657 loans within the jurisdiction of the Miami HUD office between
the amortization dates of December 1, 2008, and November 30, 2010. As of November 30,
2010, 40 loans with mortgage amounts totaling $7.4 million were in default. We selected seven
loans for review based on various risk factors including loans (1) with mortgage amounts of
$300,000 or greater, (2) that defaulted within 6 months of closing, and (3) that recently
defaulted. The original mortgages of the seven loans totaled approximately $1.86 million, and
the unpaid principal balances totaled approximately $1.9 million. The results of our review
apply only to the loans reviewed and cannot be projected to the universe of loans.

One of the seven loans reviewed showed that the lender did not consider the previous mortgage
delinquencies of its cash-out refinance loans as required by HUD. As a result, we expanded our
review of the lender’s cash-out refinance loans to determine whether previous mortgage
delinquencies occurred less than 12 months before the refinance. A total of 51 refinance loans
were underwritten, and 47 of those loans were cash-out refinance loans. We selected an
additional 31 loans for review based on various risk factors including loans (1) with mortgage
amounts greater than $100,000, (2) that had a credit report dated 2 months or more from the
closing date and a mortgage between $100,000 and $175,000, or (3) that did not have a credit
report dated within the same month as the closing date and a mortgage greater than $175,000.
The original mortgages of the 31 loans totaled approximately $6.68 million.

Crossfire’s external contractor performed quality control reviews of 77 loans that closed between
November 2008 and December 2010. We reviewed the 77 quality control review reports for
compliance with HUD requirements related to timeliness, frequency, sample size, early payment
defaults, credit report, and field appraisals. We selected 10 of the 77 quality control review
reports based on loans (1) that were delinquent, or (2) with mortgages totaling about $300,000 or
greater. The ten loans were evaluated for compliance with credit document reverification, desk

                                               15
appraisal review, and occupancy verification requirements, as well as corrective actions taken on
material findings cited in the quality control review reports. The results of our review apply only
to the quality control reports reviewed and cannot be projected to the universe of reports.

We used data maintained on two systems-HUD’s Neighborhood Watch system and the external
contractor’s quality control system. HUD’s system is designed to highlight exceptions so that
potential problems are readily identifiable. In particular, the system provides the ability to
identify and analyze patterns, by geographic area or originating lender, in loans that became 90
days delinquent during the first 2 years. The external contractor’s quality control system
contains information from the quality control reviews and is used to track the review process.
We did not rely on the data as a basis for our conclusions.

During the course of the audit, we clarified HUD regulations and discussed potential issues with
the headquarters and the Atlanta Homeownership Center Quality Assurance Division. We also
discussed the findings with Crossfire management.

We classified more than $1.1 million as funds to be put to better use and $210,453 as questioned
costs. This is 59 percent of the total unpaid principal balances of approximately $1.9 million as
of March 31, 2011, for the nine loans. We used 59 percent because it has been determined that
upon the sale of the mortgage properties, FHA’s average loss was about 59 percent of the unpaid
principal balance. The questioned costs of $210,453 were incurred by HUD for claims paid and
the principal loan reduction for FHA case numbers 095-0911262, 095-0942848, and 095-
1135143 as of March 31, 2011. HUD paid claims on 3 of the 10 loans found to have originating
and underwriting deficiencies. FHA case number 095-0911262 had a $750 claim paid for a loan
modification. FHA case number 095-0942848 had a $750 claim paid for a loan modification and
a $42,731 claim paid to reduce the principal of the loan, which reduced the unpaid principal
balance of the loan. FHA case number 095-1135143 had a claim of $166,222 paid as a result of
a preforeclosure sale, which is the loss HUD incurred for the sale of the property.

Our review generally covered the period January 1, 2008, through December 31, 2010, and was
extended as necessary. We conducted our fieldwork from January through March 2011 at
Crossfire’s offices in Miami, FL, and at various other locations in the Miami-Dade and Broward
County areas to conduct interviews with the borrowers, employers, and the external quality
control contractor.

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.




                                                16
                              INTERNAL CONTROLS

Internal control is a process adopted by those charged with governance and management,
designed to provide reasonable assurance about the achievement of the organization’s mission,
goals, and objectives with regard to

         Effectiveness and efficiency of operations,
         Reliability of financial reporting, and
         Compliance with applicable laws and regulations.

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



 Relevant Internal Controls


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

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

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

               We assessed the relevant controls identified above.

               A deficiency in internal control exists when the design or operation of a control does
               not allow management or employees, in the normal course of performing their
               assigned functions, the reasonable opportunity to prevent, detect, or correct (1)
               impairments to effectiveness or efficiency of operations, (2) misstatements in
               financial or performance information, or (3) violations of laws and regulations on a
               timely basis.




                                                 17
Significant Deficiencies


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

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

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




                                              18
                                   APPENDIXES

Appendix A

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


                 Recommendation                              Funds to be put to
                        number            Ineligible 1/           better use 2/

                       1A                                          $ 1,142,100
                       1B                   $ 210,453             __________
                      Total                 $ 210,453              $ 1,142,100


1/   Ineligible costs are costs charged to a HUD-financed or HUD-insured program or activity
     that the auditor believes are not allowable by law; contract; or Federal, State, or local
     policies or regulations.

2/   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 recommendations to require Crossfire to indemnify HUD for the
     nine ineligible loans will reduce the risk of loss to the FHA insurance fund. The amount
     above reflects HUD’s estimated loss of 59 percent of the loans’ unpaid principal balance
     of $1,935,762 as of March 31, 2011.




                                            19
Appendix B

        AUDITEE COMMENTS AND OIG’S EVALUATION


Ref to OIG Evaluation   Auditee Comments




Comment 1




                          20
Comment 2




Comment 3


Comment 4




Comment 5




            21
Comment 6




Comment 7




            22
23
                   OIG Evaluation of Auditee Comments


Comment 1   The lender stated that it was aware of only 1 of 10 loans that used
            inaccurate employment income information to qualify the borrower for the
            loan.

            Finding 1 states that Crossfire used inaccurate employment information, did
            not support the borrower’s asset information, and relied on an invalid
            appraisal report to qualify borrowers for three of the six purchase loans
            reviewed. In addition, it approved 7 of the 32 cash-out refinance loans
            reviewed with previous mortgage delinquencies occurring less than 12
            months before the refinancing. The table in the report identifies the specific
            deficiencies found for each of the 10 loans. The deficiencies were also
            discussed with Crossfire officials throughout the audit.

Comment 2   The lender's response stated that it provided documentation to show the
            employment information for one loan in question was accurate. This
            document was provided to the auditor subsequent to the initial information
            given to the auditor.

            For FHA case #095-0770109, we served a subpoena to the borrower’s
            employer requesting specific employment documentation to verify the
            borrower’s employment information in the loan file. The employer
            responded to our subpoena with a letter stating that the company had no
            record of the borrower ever being employed at the company. On March 25,
            2011, we discussed this issue with the lender. Subsequently, on May 3,
            2011, the lender provided us with another letter from the borrower’s
            employer stating that the borrower was employed at the company.
            However, no additional documentation was provided to support this;
            specifically, none of the employment documents originally requested in the
            subpoena were included with this letter. We contacted the employer to
            confirm the authenticity of the letter provided by the lender and obtain the
            documents requested in the subpoena. The employer has not confirmed the
            authenticity of the letter or provided us with the employment documents
            requested in the subpoena. Therefore, the lender cannot support that it used
            accurate employment information to qualify the borrower for the loan.

Comment 3   The lender stated that it was not aware of any invalid appraisal reports used
            to qualify loans.

            For FHA case #095-0770109, an invalid appraisal was used to qualify the
            loan. This issue was discussed with the lender on March 25, 2011 and May
            3, 2011. At the time of our discussion, the lender acknowledged that the
            appraisal report used had exceeded its allowable validity period per HUD
            requirements. The lender stated that the appraisal should not have been
            used due to the extended amount of time that passed between the loan

                                       24
            application and the loan closing. The appraisal report was dated June 28,
            2008 and the loan closed on December 31, 2008 or over 6 months later.
            This issue was also discussed with HUD and it agreed that the appraisal
            report was not valid.

Comment 4   The lender stated it relied on the automated underwriting system to approve
            all seven of the cash-out refinance loans discussed in the report. It was not
            aware of any inaccurate or incomplete information used by the system to
            generate the approval results.

            The lender’s loan files contained credit reports for 4 of the 7 cash-out
            refinance loans that showed the borrowers had previous mortgage
            delinquencies within 12 months prior to the refinancing. Therefore, the
            lender had the mortgage delinquency information at the time the loans were
            reviewed and did not use the correct information when processing the loan
            through the automated underwriting system. As a result, the system relied
            on inaccurate information for the approval of these loans. (FHA case #
            095-0932148, #095-0911262, #095-0937700, and # 095-0973194). For the
            remaining three cash-out refinance loans, the lender did not account for
            gaps (from 3 to 8 months) between the time of the credit reviews of the
            borrowers and the refinance closing.

Comment 5   The lender stated that it verified employment information over the phone,
            but not all employers verified income amounts over the phone. Instead, it
            relied on the employment documents such as the paystubs and W-2 forms
            and believed it was adequate.

            The lender did not verify the employment income information directly with
            the employers for loans originated by another entity. The lender’s loan files
            contained the verbal employment verification form which did not have a
            section for the employment income to be verified. Therefore, the lender did
            not ensure accurate employment income was used to qualify the borrowers
            for their loans.

Comment 6   The lender generally agreed with the finding on the quality control program
            and was unaware of the specific conditions in which an occupancy review
            would be required for a loan selected for review. The lender also stated that
            it did not make a statement about the quality control program and that the
            conversation in question was understood by the lender to be outside the
            context of the audit.

            During the post quality control review, the lender is required to consider
            occupancy verifications on loans in which occupancy status is suspect.
            Although HUD requirements do not list all of the specific conditions of
            occupancy suspicion, the lender is required to consider such verifications on
            FHA insured properties, such as if a borrower owned multiple properties.
            The quality control contractor stated that occupancy verifications were not

                                       25
            performed for any FHA insured loans. Our review of all 77 quality control
            review reports found no support to show any of the loans were verified or
            questioned for occupancy. Therefore, the lender did not consider
            occupancy verifications on loans in which occupancy status is of suspect.

            We did not make any representation that discussions related directly to the
            audit findings would be outside of the audit. The discussion of the quality
            control program with the lender in this case was to determine why the
            quality control reviews did not follow HUD requirements. The lender was
            informed that its responses are directly incorporated into the audit report.

Comment 7   The lender requested not to be referred to the Mortgagee Review Board. It
            has made changes to its origination and underwriting process.

            We recognize the changes the lender has made to its origination and
            underwriting process. However, the lender is being referred to the
            Mortgagee Review Board because of the deficiencies found with its quality
            control program. Therefore, the recommendation will remain.




                                       26
    Appendix C

        SCHEDULE OF INDEMNIFICATION AND REPAYMENT
                 AMOUNTS FOR THE 10 LOANS


                           Original         Unpaid                                 Claims
                           mortgage        mortgage       Indemnification           Paid         Status of loan as of
No.    FHA case no.         amount          balance           amounta             by HUDb         March 31, 2011
 1     095-1353467        $ 265,109       $ 263,143         $ 155,254            $       -0-     Foreclosure process
 2     095-1135143        $ 264,127       $        -0-      $        -0-         $ 166,222       Preforeclosure sale
 3     095-0770109        $ 216,601       $ 216,208         $ 127,563            $       -0-         Delinquent
 4     095-0932148        $ 272,690       $ 265,827         $ 156,838            $       -0-     Repayment process
 5     095-0911262        $ 309,320       $ 362,961         $ 214,147            $     750       Foreclosure process
 6     095-0937700        $ 137,362       $ 135,479         $    79,933          $       -0-         Delinquent
 7     095-0970905        $ 189,458       $ 185,083         $ 109,199            $       -0-         Delinquent
 8     095-1002059        $ 238,095       $ 235,496         $ 138,943            $       -0-     Foreclosure process
 9     095-0942848        $ 195,868       $ 154,884         $    91,381          $ 43,481            Reinstated
10     095-0973194        $ 119,861       $ 116,681         $    68,842          $       -0-         Delinquent
          Totals          $ 2,208,491     $ 1,935,762       $ 1,142,100           $ 210,453

a
 We classified $1,142,100 as funds to be put to better use. This is 59 percent of the $1,935,762 in unpaid principal
balances for the nine loans as of March 31, 2011. The 59 percent is the estimated percentage of loss HUD would incur
when the FHA property is foreclosed upon and resold as supported by the HUD Single Family Acquired Asset
Management System’s Case Management Profit and Loss by Acquisition as of September 2010.
b
  We classified $210,453 in claims paid by HUD as ineligible costs that would be required to be repaid to HUD. The
loans were not eligible for FHA insurance and, therefore, not entitled to any claim payments. Any claims paid for the
ineligible loans are required to be repaid to HUD.




                                                          27
      Appendix D

                               LOAN DETAILS FOR THE SEVEN
                               CASH-OUT REFINANCE LOANS




                                         Previous 12-                         Cash              Cash
                                             month                         equivalent*        received       Status of loan
           FHA             Closing         mortgage         Mortgage       benefited by          by              as of
No.       case no.          date         delinquencies      amount          borrower         borrower        March 28, 2011
                                                                                             $ 3,398          Repayment
 1     095-0932148        1/14/2009         11/2008        $ 272,690         $ 19,863
                                                                                                                process
                                                                                             $ 10,075         Foreclosure
 2     095-0911262        11/7/2008          3/2008        $ 309,320         $ 67,101
                                                                                                                process
 3     095-0937700       12/22/2008         1/2008         $ 137,362          $ 4,822        $ 78,336         Delinquent
                                            1/2009,
 4     095-0970905        2/4/2009                         $ 189,458         $    1,580      $       -0-       Delinquent
                                            2/2009
                                            5/2008-                                                            Foreclosure
 5     095-1002059       12/30/2008                        $ 238,095         $ 18,952        $ 16,019
                                           12/2008                                                               process
                                           11/2008-                                          $    2,639
 6     095-0942848       12/12/2008                        $ 195,868         $      -0-                         Reinstated
                                           12/2008
 7     095-0973194        2/27/2009         4/2008         $ 119,861         $ 7,050         $ 67,264          Delinquent
                                            Totals         $ 1,462,654       $ 119,368       $ 177,731
*Cash equivalent is defined as funds obtained from the refinance loan that were used to pay for other items, such as credit
card debts, that were not directly related to the previous primary mortgage debt and general closing costs associated with a
loan.




                                                              28
Appendix E

                            LOAN DETAILS FOR THE
                           THREE PURCHASE LOANS


FHA case #: 095-1353467                   Mortgaged amount: $265,109

Date of loan closing: 9/8/2009            Unpaid principal balance: $263,143

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


Inaccurate Employment Income
The lender did not perform due diligence when verifying the borrower’s employment income.
HUD Handbook 4155.1, paragraph 4.D.1.a., states that income may not be used in calculating
the borrower’s qualifying ratios if it comes from any source that cannot be verified, is not stable,
or will not continue. Documents contained in the loan file, such as the loan application,
verification of employment, and pay stubs, indicated that the borrower earned a monthly income
of $4,766.67. Using the income amount of $4,766.67 from the loan file, the lender calculated the
housing payment-to-income and debt-to-income ratios of 47.0 and 47.4, respectively.

Our reverifications with the borrower and the borrower’s employer showed that the borrower’s
monthly income was $3,813.33. The borrower stated that she did not provide the pay stubs
found in the loan file with the inaccurate employment income amount. The borrower’s employer
stated that she did not complete or sign the verification of employment form with the inaccurate
employment income amount that was found in the loan file. Using our verified income amount
of $3,813.33, we calculated the qualifying ratios of 58.7 and 59.2 percent. Given the inaccurate
employment income and the higher ratios, the borrower would not have qualified for the FHA
mortgage loan.




                                                29
FHA case #: 095-1135143                   Mortgaged amount: $264,127

Date of loan closing: 5/21/2009           Unpaid principal balance: $ -0-

Loan purpose: Purchase - existing         Default status: Preforeclosure sale


Unsupported Source of Funds
The lender did not verify or show support that the source of funds used at closing was from an
acceptable source. The total cash investment of $9,065 was paid at closing; however, there was
no documentation in the loan file to show the source of the funds. The loan file showed that the
borrowers’ funds from their bank accounts totaled $1,597. There was also a gift letter from one
of the borrowers’ relative stating that a gift of $10,000 would be made to the borrower.
However, there was no evidence in the loan file that the gift funds had been deposited or
transferred into the borrowers’ bank accounts or that the funds provided at closing were from the
gift donor or another acceptable source.

HUD Handbook 4155.1, paragraph 5.B.4.d, states that the lender is responsible for verifying the
acceptability of the gift fund sources and that the funds were not provided by an unacceptable
source. If the funds were paid at closing, the lender is responsible for verifying that the closing
agent received the funds from the donor for the amount of the gift and that the funds were from
an acceptable source. Paragraph 5.B.4.b states that acceptable sources would include but not
limited to the borrower’s relative, employer or labor union, charitable organization, and
governmental agency that provides home ownership assistance. Paragraph 5.B.4.c states that
unacceptable sources would include but not limited to the seller, real estate agent or broker,
builder, or an associated entity. The lender was not able to provide documentation to support the
source of funds used at the loan closing. As a result, this loan was not eligible for FHA
insurance. The property was sold in a preforeclosure sale, and HUD suffered a loss of $166,222.




                                                30
FHA case #: 095-0770109                    Mortgaged amount: $216,601

Date of loan closing: 12/31/2008           Unpaid principal balance: $216,208

Loan purpose: Purchase - existing          Default status: Delinquent

Inaccurate Employment Information
The lender did not perform due diligence when verifying the borrower’s employment income.
HUD Handbook 4155.1, paragraph 4.D.1.a., states that income may not be used in calculating
the borrower’s qualifying ratios if it comes from a source that cannot be verified, is not stable, or
will not continue.

Documents contained in the loan file, such as the loan application, verification of employment,
and pay stubs, indicated that the borrower and coborrower earned a total monthly income of
$6,633.47. Using the income amount of $6,633.47 from the loan file, the lender calculated the
housing payment-to-income and debt-to-income ratios of 27.5 and 38.5, respectively.

Our verification with the borrower’s employer disclosed that the borrower had not been
employed at that company. The coborrower’s employer disclosed that the coborrower earned
$13,013 in 2008, or $1,084 per month. Using the monthly income amount of $1,084, we
calculated the qualifying ratios of 168.0 and 235.4 percent. Given the inaccurate employment
information and the resulting substantially higher ratios, the borrowers would not have qualified
for this FHA mortgage loan.

Invalid Appraisal Report
The lender did not adequately review the appraisal report used for the approval of this loan. The
lender is responsible for the integrity, accuracy, and thoroughness of the appraisal used for a
loan. Mortgagee Letter 2009-30 states that the validity period for an appraisal for the purchase
of an existing property is 6 months from the date of the appraisal for a loan that had a case
number issued before January 1, 2010. The lender acknowledged this requirement by signing the
form HUD-92800.5B, Conditional Commitment Direct Endorsement Statement of Appraised
Value. In signing this statement, the lender agreed to general commitment conditions, which
included that the validity of the appraised value would expire 6 months from the appraisal issue
date.

This loan had its case number issued in July 2008, and the appraisal report was dated June 28,
2008. Therefore, the appraisal report was valid up to December 28, 2008. The loan closed on
December 31, 2008, which was after the allowable validity date. We discussed this loan with
HUD staff members, who said that this appraisal was invalid due to the elapsed time. As a
result, the appraisal report with the value of $220,000 used to approve this loan was not valid,
and, therefore, reliance on it would have made this loan ineligible for FHA insurance.




                                                 31