Issue Date
April 6, 2011
Audit Report Number:
2011-CH-1007
TO: Vicki B. Bott, Deputy Assistant Secretary for Single Family Housing, HU
FROM:
Kelly Anderson, Acting Regional Inspector General for Audit, 5AGA
SUBJECT PNC Mortgage Complied With HUD’s Requirements for Loss Mitigation
HIGHLIGHTS
What We Audited and Why
We audited PNC Mortgage (PNC), a Federal Housing Administration (FHA)-
approved nonsupervised lender and servicer. We selected PNC for audit based on
a citizen’s complaint regarding National City Mortgage Corporation (National
City).1 Our objective was to determine whether PNC actively and properly
implemented the U.S. Department of Housing and Urban Development’s (HUD)
Loss Mitigation Program (program) for FHA-insured mortgages; specifically,
whether it (1) prevented eligible borrowers from participating in the program and
(2) inappropriately received loss mitigation incentive payments from HUD. The
audit was part of the activities in our fiscal year 2010 annual audit plan.
What We Found
PNC complied with HUD’s requirements for loss mitigation. It appropriately
determined borrowers’ eligibility and received loss mitigation incentive payments
from HUD for only the borrowers that participated in the program. Therefore, the
complainant’s allegations that National City prevented eligible borrowers from
participating in the program and received incentive payments from HUD for loss
mitigation services that it did not provide were unsubstantiated.
1
PNC acquired National City in December 2008. Therefore, the report will be addressed to the current entity.
What We Recommend
Since we did not identify any instances of noncompliance, this audit report
contains no recommendations.
Auditee Response
We provided our discussion draft audit report to PNC’s management on March 9,
2011. PNC did not request an exit conference.
We asked PNC to provide comments on our discussion draft audit report by
March 24, 2011. PNC provided written comments, on March 24, 2011, that
agreed with our conclusion in the report. The complete text of the auditee’s
response is provided in appendix A of this report.
2
TABLE OF CONTENTS
Background and Objective 4
Results of Audit
PNC Complied With HUD’s Requirements for Loss Mitigation 6
Scope and Methodology 8
Internal Controls 9
Appendix
A. Auditee Comments 11
3
BACKGROUND AND OBJECTIVE
The U.S. Department of Housing and Urban Development (HUD) initiated the Loss Mitigation
Program (program) in 1996 in an effort to provide maximum opportunities for Federal Housing
Administration (FHA)-insured borrowers to retain home ownership. The program allows
families to retain home ownership and significantly reduces the financial impact of foreclosure
claims against the FHA insurance fund.
The program returns responsibility for managing loan defaults to the servicing lenders and
provides financial incentives to recognize them for their efforts. The program includes five
strategies used by lenders, as deemed appropriate, based on the borrowers’ financial
circumstances. Three of the program options promote retention of borrowers’ homes
(reinstatement options), while the remaining two options (disposition options) assist in the
disposition of their homes.
The three reinstatement options are special forbearance, loan modification, and partial claim.
Special forbearance is a written repayment agreement between a lender and borrower, which
contains a plan to reinstate the mortgage loan that has been delinquent for at least 90 days. Loan
modification is a permanent change in one or more of the terms of a borrower’s loan, which if
made, allows the loan to be reinstated and results in a payment the borrower can afford. A
servicing lender can receive an incentive up to $200 for a completed special forbearance. The
request for payment must be submitted within 60 days of the date of execution of the special
forbearance agreement. Modifications may include a change in the interest rate; capitalization of
delinquent principal, interest, or escrow items; extension of the time available to repay the loan;
and/or reamortization of the balance due.
Partial claim is when a borrower’s lender advances funds on the borrower’s behalf in an amount
necessary to reinstate the delinquent loan (not to exceed the equivalent of 12 months of the
borrower’s principal, interest, tax, and insurance payments). The borrower, upon acceptance of
the advance, executes a promissory note and subordinate mortgage payable to HUD.
The FHA-Home Affordable Modification Program (HAMP) introduced a fourth FHA Loss
Mitigation option from the Helping Families Save their Homes Act of 2009. The new loss
mitigation reinstatement option effective August 15, 2009; allows the use of a partial claim of up
to 30 percent of the unpaid principal balance as of the date of default combined with a loan
modification. A three month trial period of revised payments completed by the borrowers is
required to qualify for the FHA HAMP program. The servicer can receive an incentive of up to
$1,250; $500 for the partial claim and $750 for the completed modification.
The two disposition options are preforeclosure sale and deed in lieu of foreclosure. A
preforeclosure sale allows the borrower in default to sell the home and use the sales proceeds to
satisfy the mortgage debt even if the proceeds are less than the amount owed. A servicing lender
can receive a $1,000 incentive for a completed preforeclosure sale. Deed in lieu of foreclosure is
another disposition option in which a borrower voluntarily deeds the home to HUD in exchange
for a release from all obligations under the mortgage.
4
PNC Mortgage (PNC) is an FHA nonsupervised direct endorsement lender and mortgage
servicer located in Miamisburg, OH. On December 31, 2008, PNC purchased National City
Mortgage Corporation (National City). PNC participates in HUD’s program, as did the former
National City.
Our objective was to determine whether PNC actively and properly implemented HUD’s
program for FHA-insured mortgages; specifically, whether it (1) prevented eligible homeowners
from participating in its program and (2) inappropriately received loss mitigation incentive
payments from HUD. The audit was derived from a complainant’s allegations that National City
prevented eligible borrowers from participating in the program and received incentive payments
from HUD for loss mitigation services that it did not provide.
5
RESULTS OF AUDIT
PNC Complied With HUD’s Requirements for Loss Mitigation
PNC complied with HUD’s requirements for loss mitigation. It appropriately determined
borrowers’ eligibility and received loss mitigation incentive payments from HUD for only the
borrowers that participated in the program. Therefore, the complainant’s allegations were
unsubstantiated.
PNC Adequately Determined
Borrowers’ Eligibility
Using HUD’s data maintained in its Single Family Data Warehouse system2, we
identified 23,505 loans, the borrowers of which were 90 days or more delinquent
with their mortgage payments during the period January 1, 2007, through
December 31, 2009. Of the 23,505 loans, 9,664 borrowers (41 percent)
participated in the program, and the remaining 13,841 borrowers (59 percent) did
not. Of the 13,841 borrowers, PNC determined that 55 were ineligible to
participate in the program, or the borrowers’ homes were in foreclosure.
For the 55 borrowers, we determined that
15 borrowers failed to follow through with their agreements or submit all
required documentation in a timely manner,
13 borrowers vacated their homes or were unresponsive to PNC’s attempts
to initiate contact,
11 borrowers desired to remain in their homes but did not qualify for the
program’s retention options due to inadequate income,
8 borrowers were reviewed by PNC for loss mitigation assistance but were
still going through the foreclosure process as of December 31, 2009,3
4 borrowers did not opt for the type of loss mitigation actions available,
and
4 borrowers’ delinquent mortgages were resolved without loss mitigation.
2
SFDW is a HUD data system of FHA-insured mortgages identified by individual case numbers providing
mortgage details related to the underwriting, servicing, and claims for each mortgage.
3
PNC reviewed these eight borrowers for loss mitigation actions during our audit period. The borrowers were later
approved for loss mitigation actions.
6
Therefore, for the 55 borrowers that PNC determined were ineligible or were in
foreclosure during our audit period, there was no indication that these borrowers
were unjustly prevented from participating in the program.
PNC Did Not Inappropriately
Receive Loss Mitigation
Incentive Payments From HUD
For the 13,841 borrowers that did not participate in the program, PNC did not
submit claims or receive loss mitigation incentive payments from HUD. It only
received payments for the 9,664 borrowers that participated in the program.
Conclusion
Our review disclosed that the complainant’s allegations were unsubstantiated.
7
SCOPE AND METHODOLOGY
To accomplish our objective, we researched and reviewed applicable HUD handbooks,
regulations, mortgagee letters, and other reports and policies related to the program. We also
conducted interviews with HUD’s staff.
In performing our review of the loan loss mitigation program, we
Reviewed PNC’s loss mitigation policies, loss mitigation quality control policies,
loss mitigation case files, and loss mitigation internal quality control reviews.
Interviewed PNC’s employees, which included former National City employees
that worked in its collections, claims, and loss mitigation departments.
Reviewed PNC’s internal quality control reviews of loss mitigation files.
Compared the mortgage data from PNC with data in HUD’s Single Family Data
Warehouse.
Reviewed PNC’s and HUD’s data to determine loss mitigation incentives paid per
loan loss mitigation actions completed, as applicable.
Additionally, using HUD’s data maintained in its Single Family Data Warehouse system, we
identified 23,505 loans, the borrowers of which were 90 days or more delinquent with their
mortgage payments during the period January 1, 2007, through December 31, 2009. Of the
23,505 loans, 9,664 (41 percent) borrowers participated in National City’s/PNC’s program, while
the remaining 13,841 borrowers (59 percent) did not participate in the program. Of the 13,841
borrowers, we determined that 55 were either determined to be ineligible for loss mitigation or in
foreclosure. Therefore, we selected these 55 borrowers (100 percent testing) for review.
We assessed the reliability of PNC’s and HUD’s computerized data and determined the data to
be sufficiently reliable for our purpose. Audit testing and results were limited to addressing the
complainant’s allegations. Therefore, PNC’s overall compliance with HUD’s program
requirements was not assessed during this audit.
We performed our onsite audit work at PNC’s Miamisburg, OH, office. We performed our audit
work from August to December 2010. The audit covered the period January 1, 2007, through
December 31, 2009, and was expanded as necessary.
We conducted our 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 objective.
8
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
objective:
Effectiveness and efficiency of operations – Policies and procedures that the
audited entity has implemented to provide reasonable assurance that a
program meets its objectives, while considering cost effectiveness and
efficiency.
Reliability of financial reporting – Policies and procedures that management
has implemented to provide reasonable assurance regarding the reliability of
financial reporting and the preparation of financial statements in accordance
with generally accepted accounting principles.
Compliance with applicable 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.
9
Significant Deficiency
We evaluated internal controls related to the audit objective(s) in accordance with
generally accepted government auditing standards. Our evaluation of internal
controls was not designed to provide assurance on the effectiveness of the internal
control structure as a whole. Accordingly, we do not express an opinion on the
effectiveness of PNC’s internal controls.
10
APPENDIX
Appendix A
AUDITEE COMMENTS
Ref to OIG Evaluation Auditee Comments
11
PNC Mortgage Complied With HUD's Requirements for Loss Mitigation
Published by the Department of Housing and Urban Development, Office of Inspector General on 2011-04-06.
Below is a raw (and likely hideous) rendition of the original report. (PDF)