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
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)