oversight

Countrywide Bank, FSB, Calabasas, CA, Did Not Comply With HUD Requirements for Underwriting FHA Loans and Fully Implement Its Quality Control Program In Accordance With HUD's Requirements

Published by the Department of Housing and Urban Development, Office of Inspector General on 2011-09-30.

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

                                                                                Issue Date
                                                                                      September 30, 2011
                                                                                
                                                                                Audit Report Number
                                                                                       2011-CH-1016




TO:              Deborah C. Holston, Acting Deputy Assistant Secretary for Single Family, HU
                  Dane M. Narode, Associate General Counsel for Program Enforcement,
                 CACC


FROM:
                Kelly Anderson, Regional Inspector General for Audit, Region V, 5AGA

SUBJECT: Countrywide Bank, FSB, Calabasas, CA, Did Not Comply With HUD
           Requirements for Underwriting FHA Loans and Fully Implement Its Quality
           Control Program In Accordance With HUD’s Requirements


                                             HIGHLIGHTS

    What We Audited and Why

                 We audited Countrywide Bank, FSB (Countrywide),1 a Federal Housing
                 Administration (FHA) supervised lender2 approved to originate, underwrite, and
                 submit mortgages for insurance under the U.S. Department of Housing and Urban
                 Development’s (HUD) direct endorsement program. We selected Countrywide
                 based on its average default-to-claim rate of 6.76 percent for the FHA-insured
                 loans originated in our region (Illinois, Indiana, Ohio, Michigan, Minnesota, and
                 Wisconsin) during the period July 1, 2008, through June 30, 2010. The audit was
                 part of the activities in our fiscal year 2010 annual audit plan. Our audit
                 objectives were to determine whether (1) Countrywide complied with HUD's
                 regulations, procedures, and instructions in the underwriting of FHA-insured


1
  Countrywide was acquired by Bank of America in July 2008; therefore, the recommendations will be addressed to
Bank of America. The audit report represents the activities of Countrywide.
2
  A supervised lender or mortgagee is a financial institution which is a member of the Federal Reserve System or an
institution the accounts of which are insured by the Federal Deposit Insurance Corporation or the National Credit
Union Administration. A supervised lender may submit applications for mortgage insurance.
                    loans and (2) Countrywide’s quality control plan, as implemented, met HUD’s
                    requirements.

    What We Found


                    Countrywide did not comply with HUD’s regulations, procedures, and
                    instructions in the underwriting of FHA-insured loans. Specifically, the loan files
                    for 7 of the 14 loans reviewed contained material underwriting deficiencies.3 For
                    these seven loans, Countrywide did not properly verify, analyze, or support
                    borrowers’ employment and income, source of funds to close, liabilities and credit
                    information. Additionally, it allowed borrowers to skip mortgage payments for
                    refinance transactions. This noncompliance occurred because Countrywide’s
                    underwriters did not exercise due diligence in underwriting the loans. As a result
                    of the improperly underwritten loans, HUD paid more than $1 million in claims
                    and incurred losses totaling more than $720,000 on the sales of the associated
                    properties for the seven loans.

                    Additionally, Countrywide did not fully implement its quality control program in
                    accordance with HUD’s requirements. Specifically, it did not conduct quality
                    control reviews in accordance with HUD’s requirements, and its written quality
                    control plan did not contain all of the necessary provisions. The problems
                    occurred because Countrywide disregarded and misinterpreted HUD’s
                    requirements. As a result, Countrywide increased the risk to FHA’s Mutual
                    Mortgage Insurance Fund due to the lack of assurance of the accuracy, validity,
                    and completeness of its loan underwriting activities.

    What We Recommend


                    We recommend that HUD’s Acting Deputy Assistant Secretary for Single Family
                    require Bank of America to (1) reimburse HUD $720,300 for the actual losses
                    incurred on seven loans since the properties associated with these loans were sold,
                    (2) reimburse HUD or provide sufficient documentation to support that the $3,211
                    in fees charged to the four borrowers at settlement were reasonable and
                    customary, (3) implement an adequate quality control plan that complies with
                    HUD requirements, and (4) perform a 100 percent review of its early payment
                    defaulted loans. Further, we recommend that HUD perform a review of Bank of
                    America’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’s requirements.

                    We also recommend the HUD’s Associate General Counsel for Program
                    Enforcement pursue remedies under the Program Fraud Civil Remedies Act,
                    where legally sufficient, against Countrywide and/or its principals for incorrectly
3
    A deficiency is considered material when it affects the loan approval decision.


                                                            2
           certifying to the integrity of the data or that due diligence was exercised during
           the underwriting of seven loans.

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

Auditee’s Response


           We provided the results of our underwriting and quality control reviews to Bank
           of America’s management during the audit. We also provided our discussion
           draft audit report to Bank of America’s management and HUD’s staff on June 24,
           2011 and June 27, 2011, respectively. We discussed the draft report with Bank of
           America’s management at the exit conference held on July 6, 2011.

           We asked Bank of America’s management to provide written comments to the
           discussion draft audit report by July 22, 2011. Bank of America provided written
           comments to the draft report dated June 27, 2011 that generally disagreed with
           our findings and recommendations. The complete text of the auditee’s response,
           except for 146 pages of exhibits that were not necessary to understand the
           comments, along with our evaluation of that response, can be found in appendix B
           of this report.




                                             3
                            TABLE OF CONTENTS

Background and Objectives                                                          5

Results of Audit
      Finding 1: Countrywide Did Not Comply With HUD’s Underwriting                7
      Requirements
      Finding 2: Countrywide Did Not Fully Implement Its Quality Control Program   14
      in Accordance With HUD Requirements

Scope and Methodology                                                              22

Internal Controls                                                                  24

Appendixes
   A. Schedule of Questioned Costs                                                 26
      A-1 Actual Losses To HUD For Material Underwriting Deficiencies              27
      A-2 Loan Details For Unreasonable Costs Charged                              28

   B. Auditee Comments and OIG’s Evaluation                                        29
   C. Loans With Material Underwriting Deficiencies                                77
   D. Narratives of Loans With Material Underwriting Deficiencies                  78




                                            4
                          BACKGROUND AND OBJECTIVES

The National Housing Act, as amended, established the Federal Housing Administration (FHA), an
organizational unit within the U.S. Department of Housing and Urban Development (HUD).
FHA provides insurance to private lenders against loss on buyers financing homes. The basic
home mortgage insurance program is authorized under Title II, Section 203(b), of the National
Housing Act and governed by regulations in 24 CFR (Code of Federal Regulations) Part 203.

In 1983, HUD implemented the direct endorsement program, which authorizes approved lenders
to underwrite loans without HUD’s prior review and approval. On January 1, 2006, FHA
implemented the Lender Insurance program, which enables high-performing FHA-approved
direct endorsement lenders with acceptable default and claim rates4 to endorse FHA loans
without having a preendorsement review conducted by FHA.

Countrywide Bank, FSB (Countrywide), an FHA-approved supervised lender,5 was established
on August 30, 1990. Countrywide Financial Corporation acquired Countrywide through its
wholly owned subsidiary, Effinity Financial Corporation, on May 18, 2001, and converted
Countrywide to a national banking association regulated by the Office of the Comptroller of the
Currency.6 Countrywide converted its charter to a Federal savings bank regulated by the Office
of Thrift Supervision on May 12, 2007.

Countrywide was approved as an FHA lender on November 29, 1993. It became an
unconditional direct endorsement lender on September 21, 2007, and was approved to participate
in HUD’s Lender Insurance program on January 8, 2008. Countrywide originated and sponsored
loans under the Lender Insurance program.

Countrywide was bought by Bank of America, N.A., Charlotte7 in July 2008, and the merger of
Countrywide into Bank of America, N.A., was effective on April 27, 2009. Due to the merger,
Bank of America, N.A., inherited the rights, obligations, and liabilities of Countrywide as they
relate to HUD and FHA. By February 26, 2010, all mortgage loan origination and servicing
activities formerly performed by Countrywide had been fully integrated, and Bank of America
voluntarily surrendered the HUD approval of the former Countrywide, effective March 1, 2010.

As of August 5, 2010, Countrywide had a compare ratio8 of 162 percent for a 2-year FHA
performance period ending June 30, 2010. Based on data in HUD’s Single Family



4
  Acceptable default and claim rate is at or below 150 percent of national average.
5
  Countrywide’s lender identification number was 76514.
6
  The Office of the Comptroller of the Currency charters, regulates, and supervises all national banks. It also
supervises the Federal branches and agencies of foreign banks. Its goal is to ensure that the banks operate in a safe
and sound manner and comply with laws.
7
  The lender identification number for Bank of America, N.A., Charlotte is 13065.
8
  Compare ratio is the value that reveals the largest discrepancies between the subject’s default percentage and the
default percentage to which it is being compared. The percentages being compared are the percentages of
originations that first defaulted during a selected period.


                                                          5
Neighborhood Watch Early Warning System (Neighborhood Watch),9 as of September 2, 2010,
Countrywide had originated 15,801 loans, of which 1,059 were seriously delinquent or had a
claim insurance status. The table below shows all insured single-family loans originated by
Countrywide with beginning amortization dates between July 1, 2008, and June 30, 2010, for the
six States in Region V’s jurisdiction.

                                                    Total      Seriously                  State total      State
                                                  seriously   delinquent                   seriously    percentage
                          Total                  delinquent       and                     delinquent     seriously
                        compare      Total           and        claims10    State total       and       delinquent
              State       ratio   originations     claims     percentage   originations     claims      and claims

             Illinois     176        3951           332           8.4        135306          6447          4.76
            Michigan      185        2212           171           7.73       101973          4250          4.17
            Minnesota     304        1165           89            7.64        70831          1776          2.51
              Ohio        179        3495           209           5.98       139684          4659          3.34
            Wisconsin     165        1278           75            5.87        57185          2038          3.56
             Indiana      155        3700           183           4.95        96537          3090          3.2
              Totals                15,801         1,059
            Averages                                              6.76                                     3.59


We initiated the audit of Countrywide based on its average seriously delinquent (default)-to-
claim rate of 6.76 percent for the FHA-insured loans originated in our region (Illinois, Indiana,
Ohio, Michigan, Minnesota, and Wisconsin) during the period July 1, 2008, through June 30,
2010. The average seriously delinquent-to-claim rate for the States in our jurisdiction was 3.59
percent.

Our objectives were to determine whether (1) Countrywide complied with HUD’s regulations,
procedures, and instructions in the underwriting of FHA-insured loans and (2) Countrywide’s
quality control plan, as implemented, met HUD’s requirements.




9
  Neighborhood Watch enables HUD staff and lenders to monitor the default and claim rates of FHA-insured loans
for FHA-approved lenders and FHA programs. It highlights exceptions by lenders, programs, loan characteristics,
and geographic areas with unusual originations or high defaults and claims on FHA-insured loans.
10
   Percentage of originations which were currently seriously delinquent or were claim terminated. Seriously
delinquent loans were reported by the servicing lender as 90 days or more delinquent as of the last reporting cycle
updated in Neighborhood Watch.


                                                              6
                                       RESULTS OF AUDIT

Finding 1: Countrywide Did Not Comply With HUD’s Underwriting
Requirements
Countrywide did not comply with HUD’s regulations, procedures, and instructions in the
underwriting of FHA-insured loans. Specifically, for 7 of the 14 loans reviewed (50 percent), it
did not properly verify, analyze, or support borrowers’ employment and income, source of funds
to close, liabilities and credit information. It also allowed borrowers to skip mortgage payments
for refinance transactions. Further, Countrywide improperly charged borrowers unreasonable
settlement costs, and did not comply with HUD’s requirements regarding inducement to
purchase and identity of interest transactions. The noncompliance with FHA’s underwriting
requirements occurred because Countrywide’s underwriters failed to exercise due diligence in
underwriting the loans. As a result of Countrywide’s approving loans that did not qualify for
FHA mortgage insurance, HUD paid more than $1 million in claims and incurred losses on the
sales of the properties for the seven loans totaling more than $720,000.


     Countrywide Did Not Properly
     Verify, Calculate, or Support
     Borrowers’ Income

                   Countrywide did not properly verify, analyze, or document borrowers’
                   employment and income for three loans. For example, for FHA case number 263-
                   4251461, the loan file did not contain sufficient documentation to support the
                   borrower’s monthly income of $6,192. Using the borrower’s most recent pay stub
                   in the loan file, we calculated the borrower’s monthly income as $4,377, a
                   difference of $1,815. Additionally, the borrower’s yearly wages significantly
                   decreased. In 2007, the borrower earned $91,831; however, the borrower’s year-
                   to-date earnings statement as of October 19, 2008, totaled $42,061. Although the
                   year-to-date earnings statement did not represent a full year, the borrower had to
                   receive more than $49,000 from October 20 to December 31, 2008, to make the
                   wages earned in 2007.

                   According to Countrywide’s Government Technical Manual, base income
                   calculations must be compared with year-to-date figures using the verification of
                   employment or the pay stub. If there is evidence of declining income, an average
                   of the previous year’s wages may not be used unless it can be fully explained and
                   support is provided.11

                   Further, HUD requires a lender to establish a borrower’s income and the
                   likelihood of its continuance to determine a borrower’s capacity to repay the


11
     Countrywide’s Government Technical Manual, FHA: 2.3.2, effective September 30, 2008


                                                        7
                 mortgage debt. Additionally, income may not be used in calculating a borrower’s
                 income ratios if it is unverifiable, unstable, or will not continue.12

     Countrywide Did Not Verify
     and Document Sources of
     Funds


                 Countrywide did not always verify and document borrowers’ sources of funds to
                 close, including gift funds and financial institution accounts, for four loans. HUD
                 requires a lender to verify and document all funds for a borrower’s investment in
                 a property.13 For example, for FHA case number 263-4387704, the borrower was
                 expected to receive gift funds totaling $2,500 from his future father-in-law.
                 However, a copy of the cancelled check, withdrawal document, bank activity
                 statement, or deposit slip was not in the loan file to support the transfer of the gift
                 funds to the borrower. Additionally, the gift funds were not included on the
                 HUD-1 settlement statement. The borrower needed a cash investment of $2,624
                 to close the loan; however, the borrower’s bank statement, dated November 12,
                 2008, did not show that the borrower had sufficient funds.

                 Additionally, for FHA case number 261-9606137, Countrywide did not obtain a
                 credible explanation for two large deposits into the borrower’s bank account as
                 required by HUD.14

     Countrywide Did Not Properly
     Analyze or Assess Borrowers’
     Credit Histories or Liabilities


                 Countrywide did not properly analyze a borrower’s credit history for one loan.
                 For FHA case number 271-9566133, Countrywide, via Landsafe Credit, verified
                 the borrower’s rental history using cellular telephone numbers for landlords of the
                 borrower’s previous residences.

                 HUD requires a lender to verify a borrower’s nontraditional credit with credit
                 providers using a published address or telephone number. Additionally, a lender
                 is required to include the monthly housing expense and all other recurring charges
                 extending 10 months or more. Debts lasting less than 10 months must be counted
                 if the amount of the debt affects the borrower’s ability to make the mortgage
                 payment during the months immediately after loan closing.15 However,
                 Countrywide did not appropriately assess borrowers’ liabilities or financial
                 obligations for two loans. For example, for FHA case number 581-3129633,

12
   HUD Handbook 4155.1, REV-5, Chapter 2, Section 2: Effective Income
13
   HUD Handbook 4155.1, REV-5, paragraph 2-10
14
   HUD Handbook 4155.1, REV-5, paragraph 2-10(B)
15
   HUD Handbook 4155.1, REV-5, paragraphs 2-3 and 2-11(A)


                                                    8
                 Countrywide did not include the borrower’s monthly liabilities totaling $484 to a
                 utility company and credit card company that were shown on the borrower’s
                 credit report.

                 The loan was processed and approved through an automated underwriting
                 system;16 however, the two liabilities were not included in the underwriting
                 analysis. HUD requires the lender to determine the borrower’s housing payment
                 obligations.17

     Countrywide Underwrote A
     Loan With Debt-to-Income
     Ratios Exceeding Benchmark
     Ratios, Without Acceptable
     Compensating Factors


                 Countrywide underwrote one loan with debt-to-income ratios exceeding HUD’s
                 benchmarks without acceptable or significant compensating factors. HUD
                 requires the lender to provide compensating factors to justify the mortgage
                 approval when the mortgage payment-to-income ratio exceeds 31 percent and the
                 total fixed payment-to-income ratio exceeds 43 percent for manually underwritten
                 loans.18 For FHA case number 261-9606137, the mortgage credit analysis
                 worksheet showed that the borrower’s mortgage payment-to-income ratio was
                 35.9 percent and total fixed payment-to-income ratio was 47.3 percent. The
                 underwriter used cash reserves from the borrower’s retirement plan as a
                 compensating factor. However, the funds from the borrower’s retirement plan
                 were not eligible to be used as cash reserves because the borrower was unable to
                 withdraw from the retirement account until he was 55 years old and no longer
                 employed.

     Countrywide Allowed
     Borrowers To Skip Mortgage
     Payment in Refinance
     Transactions


                 Countrywide allowed borrowers to skip mortgage payments in four refinance loan
                 transactions. HUD prohibits lenders from allowing borrowers to skip payments. A
                 borrower is either to make the payment when it is due or bring the monthly
                 mortgage payment check to settlement.19 For FHA case number 263-4334310,
16
   For a manually underwritten loan, the underwriter analyzes a borrower’s loan application and related
documentation to approve the loan. Automated underwriting is the use of a computer program to analyze a loan
application to arrive at a logic-based loan underwriting decision. The automated underwriting system used by a
lender should communicate with the FHA TOTAL Scorecard.
17
   HUD Handbook, 4155.1, REV-5, paragraph 2-3(A)
18
   Mortgagee Letter 2005-16, dated April 13, 2005
19
   HUD Handbook 4155.1, REV-5, paragraph 1-10(E)


                                                        9
                 Countrywide was unable to provide documentation supporting that the borrower’s
                 mortgage payments due on October 1 and November 1, 2008, were paid before
                 closing or that the borrower made the payments at closing. The borrower’s
                 settlement statement revealed that the refinance loan closed on November 26,
                 2008.20

     Countrywide Charged
     Borrowers Unreasonable Costs


                 Countrywide charged four borrowers unreasonable costs to close their mortgages.
                 According to HUD’s requirements, a lender may charge and collect from borrowers
                 customary and reasonable costs deemed necessary to close the mortgage.21 For
                 example, for FHA case number 261-9576571, Countrywide erroneously charged the
                 borrower a loan processing fee of $500 for a streamline refinance without appraisal
                 transaction in addition to a loan origination fee in the amount of $826. The
                 borrower’s loan file did not contain documentation to determine whether the
                 processing fee was customary and reasonable; therefore, we requested
                 documentation/explanations from Bank of America. Bank of America was unable
                 to justify the charges and acknowledged that these fees should not have been
                 charged to borrowers.


     Countrywide Did Not Comply
     With HUD’s Underwriting
     Requirements Regarding
     Inducements and Identity of
     Interest, Resulting In
     Overinsured Mortgages

                 Countrywide overestimated the financing costs for two loans, thereby exceeding
                 HUD’s maximum insurable mortgage limits for those loans. HUD deems the
                 payment of consumer debt by third parties to be an inducement to purchase,
                 which must result in a dollar-for-dollar reduction to the sales price in calculating
                 the maximum insurable mortgage.22 For FHA case number 132-2111442, the gift
                 funds of $3,297 from a nonprofit organization were used, in part, to pay off the
                 borrowers’ $969.53 collection account. This was an inducement to purchase.
                 The borrowers provided an earnest money deposit of $500 and received cash of
                 $251.72 at closing. The sales price should have been reduced by $721.25 of the
                 collection amount paid off ($969.53 minus $500 earnest money plus $251.72 cash
                 back to borrower). Based on the recalculated sales price of $109,178.75, the

20
   The settlement date denoted on the HUD-1 settlement statement was November 26, 2008. However, the loan
closing date in Neighborhood Watch was December 2, 2008, which is the same as the disbursement date on the
HUD-1 settlement statement.
21
   Mortgagee Letter 2006-04
22
   HUD Handbook 4155.1, REV-5, paragraph 2-10(C)


                                                      10
                  upper limit mortgage amount would have been $105,903.39, instead of $106,603.
                  Therefore, the loan was overinsured by $700.

                  HUD requires an identity-of-interest transaction on a principal residence to be
                  restricted to a maximum loan-to-value ratio of 85 percent, except when the
                  borrower has been a tenant in the subject property for at least six months
                  immediately predating the sales contract.23 For FHA case number 263-4242692,
                  Countrywide allowed a maximum financing above 85 percent loan-to-value ratio
                  in an identity-of-interest transaction. The seller of the subject property was the
                  borrower's mother. There was no evidence in the loan file that the borrower lived
                  at the property for at least six months before the date of executed purchase
                  agreement executed. The loan documentation supports the borrower lived at
                  another property address before the loan closing. Countrywide improperly used a
                  97 percent loan-to-value ratio instead of the allowable loan-to-value ratio of 85
                  percent. The sales price and appraised value of the property was $49,000.
                  Therefore, the loan was overinsured by $5,880.

     Incorrect Underwriters’
     Certifications Were Submitted
     to HUD


                  We reviewed the certifications for the seven loans with material underwriting
                  deficiencies for accuracy. Countrywide’s direct endorsement underwriters
                  incorrectly certified that due diligence was used or to the integrity of the data in
                  underwriting the seven loans. Under HUD’s direct endorsement program, direct
                  endorsement underwriters certify to the integrity of the data for automated or
                  manually underwritten loans; the underwriter certifies that due diligence was used
                  in underwriting the loans.

                  The Program Fraud Civil Remedies Act of 1986 (231 U.S.C. (United States Code)
                  3801) provides Federal agencies, which are the victims of false, fictitious, and
                  fraudulent claims and statements, with an administrative remedy to (1)
                  recompense such agencies for losses resulting from such claims and statements;
                  (2) permit administrative proceedings to be brought against persons who make,
                  present, or submit such claims and statements; and (3) deter the making,
                  presenting, and submitting of such claims and statements in the future.


     Conclusion


                  According to FHA requirements, a lender is required to establish that a borrower
                  has the ability and the willingness to repay the mortgage debt, which should be
                  based on sound underwriting principles consistent with the guidelines, rules, and
23
     HUD Handbook 4155.1, REV-5, paragraph 1-8(A)


                                                    11
                 regulations denoted in HUD Handbook 4155.1, REV-5.24 Additionally, the lender
                 must support its decision to approve the mortgage with sufficient documentation.
                 Regulations at 24 CFR (Code of Federal Regulations) 203.5(c) require a direct
                 endorsement lender to exercise the same level of care it would exercise in
                 obtaining and verifying information for a loan in which the lender would be
                 entirely dependent on the property as security to protect its investment.

                 Countrywide failed to follow FHA requirements in underwriting 7 of the 14 loans
                 reviewed (50 percent). This noncompliance occurred because Countrywide’s
                 underwriters did not exercise due diligence in underwriting the loans. As a result,
                 the FHA insurance fund incurred losses totaling more than $720,000 for the seven
                 loans.25

                 Appendix C of this report provides a summary of the material underwriting
                 deficiencies by Countrywide. Appendix D of this report provides details of the
                 identified material underwriting deficiencies.

     Recommendations



                 We recommend that HUD’s Acting Deputy Assistant Secretary for Single Family
                 require Bank of America to

                 1A.      Reimburse the FHA insurance fund $720,300 for the actual losses incurred
                          on seven loans since the properties associated with these loans were sold.26

                 1B.      Reimburse HUD or provide sufficient documentation to support that the
                          $3,211 in fees charged to the four borrowers at settlement was reasonable
                          and customary.27

                 1C.      Remit to HUD the amount totaling $6,580 for the two overinsured loans
                          (FHA case numbers 132-2111442 and 263-4242692), since a claim has
                          already been paid on both loans.

                 1D.      Implement adequate policies and procedures to ensure that it complies
                          with HUD’s underwriting requirements.

                 We also recommend that HUD’s Associate General Counsel for Program
                 Enforcement



24
   HUD Handbook 4155.1, REV-5, Forward
25
   Appendix A-1 provides details on the actual losses to HUD for the material underwriting deficiencies.
26
   Loss on the sale of the property identified in HUD’s Single Family Acquired Asset Management System
27
   See Appendix A-2 for the details on the four loans with unreasonable costs.


                                                       12
1E.   Determine legal sufficiency and if legally sufficient, pursue remedies
      under the Program Fraud Civil Remedies Act against Countrywide and/or
      its principals for incorrectly certifying to the integrity of the data or that
      due diligence was exercised during the underwriting of the seven loans.




                                13
                                  RESULTS OF AUDIT

Finding 2: Countrywide Did Not Fully Implement Its Quality Control
Program in Accordance With HUD Requirements
Countrywide generally complied with HUD requirements, in terms of timeliness and frequency,
when performing routine quality control reviews for FHA-insured loans. However, it did not
fully implement its quality control program in accordance with HUD requirements. Specifically,
it did not conduct quality control reviews in accordance with HUD requirements, and its written
quality control plan did not contain all of the necessary provisions. The problems occurred
because Countrywide disregarded and misinterpreted HUD’s requirements. As a result,
Countrywide increased the risk to FHA’s Mutual Mortgage Insurance Fund due to the lack of
assurance of the accuracy, validity, and completeness of its loan underwriting activities.


     Routine Quality Control
     Reviews Were Generally
     Performed Frequently and in a
     Timely Manner


                Countrywide generally performed routine quality control reviews of FHA-insured
                loans frequently and in a timely manner as required by HUD. For loans that
                closed from July 2008 through April 2009, Countrywide performed 5,058 routine
                quality control reviews. Of the 5,058 reviews, only 23 reviews were completed
                more than 30 days after the required timeframe.28 Additionally, it conducted
                routine quality control reviews monthly as required.29


     All Early Payment Defaults
     Were Not Reviewed

                Countrywide did not review all early payment defaults as required by HUD. HUD
                requires lenders to review all loans going into default within the first six payments,
                in addition to the loans selected for routine quality control reviews. Early payment
                defaults are defined as loans that become 60 days past due.30

                Using HUD’s Single Family Data Warehouse system, we identified 4,050 loans
                originated or sponsored by Countrywide that were 60 days past due within the
                first six payments, which are early payment defaults. These 4,050 loans closed
                from July 1, 2008, through May 26, 2009. However, Countrywide did not review

28
   HUD Handbook 4060.1, REV-2, paragraph 7-6(A)
29
   HUD Handbook 4060.1, REV-2, paragraph 7-6(B)
30
   HUD Handbook 4060.1, REV-2, paragraph 7-6(D)


                                                  14
                    1,911 early payment defaults as required by HUD. Bank of America’s risk
                    management manager agreed that 371 of the 1,911 loans were early payment
                    defaults for which reviews were not performed. Contrary to HUD requirements,
                    she indicated that 544 of the 1,911 loans were not early payment defaults because
                    early payment defaulted loans are loans that are 60 days delinquent within the
                    first 6 months and these loans reached 60 days delinquent in the seventh month.
                    Additionally, Bank of America’s personnel explained that quality control reviews
                    were not performed for the remaining 996 loans because they were no longer
                    serviced by Countrywide or Bank of America and there was no longer a risk with
                    a servicing transfer.

                    According to HUD’s Deputy Director of Quality Assurance Division, HUD
                    requires that all early payment defaulted loans be reviewed and does not provide
                    an exception to the requirement that the lender is no longer responsible for early
                    payment defaulted loans for which the servicing has been sold.

                    Ten of the fourteen loans reviewed for compliance with underwriting
                    requirements31 were early payment defaulted loans (see finding 1). Countrywide
                    did not perform quality control reviews for 5 of those 10 loans. The table below
                    shows the five loans for which Countrywide did not perform quality control
                    reviews.

                                                                                 Material
                           FHA case           Mortgage         Amount of    deficiencies cited
                            number             amount          claim paid      in finding 1
                          132-2111442         $108,202         $121,306
                          263-4242692          $48,242          $52,371
                          263-4251461         $95,333          $101,281             X
                          271-9566133         $262,823         $278,840             X
                          581-3129633         $293,371         $313,871             X
                             Totals           $807,971         $867,669

                    Of the five early payment defaulted loans not reviewed, we identified material
                    deficiencies for three of the loans.

     Early Payment Defaults Were
     Not Reviewed in a Timely
     Manner
                    Countrywide did not always review early payment defaults in a timely manner.
                    Although HUD does not specify a timeframe within which the quality control
                    reviews for early payment defaults are to be performed, one of the basic goals for
                    a lender’s quality control program is to ensure swift and appropriate corrective
                    action. Therefore, prudent practice would warrant that early payment defaulted
                    loans be reviewed shortly after being identified as early payment defaults.


31
     See appendix C for the 14 FHA-insured loans reviewed for the audit.


                                                          15
                    From July 2008 through April 2009, Countrywide performed quality control
                    reviews of 999 early payment defaulted loans that it originated or sponsored.
                    These loans closed from October 1, 2007, through December 31, 2008. Of the
                    999 loans reviewed, Countrywide reviewed 455 loans 90 to 183 days after the
                    loans’ 60-day delinquency was reported to HUD.

     Documentation Review and
     Verification Were Not
     Consistently Performed for
     Loans Selected for Review


                    Countrywide performed 7,59932 quality control reviews during our audit period. Of
                    the 7,599 reviews, we statistically selected 75 to continue our review of
                    Countrywide’s implementation of its quality control plan. Countrywide’s quality
                    control program did not always provide for the review and confirmation of
                    information on all loans selected for review. Specifically, Countrywide did not
                    consistently perform documentation review and verification for selected loans as
                    required.

                    Credit Reports Not Obtained

                    Countrywide did not obtain required new credit reports on the borrowers for 5 of
                    10 quality control reviews. According to HUD Handbook 4060.1, REV-2,
                    paragraph 7-6(E)(1), 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 using an approved automated underwriting
                    system exempted from this requirement. Of the 75 quality control reviews
                    selected for review, 62 loans were streamline refinances or processed using an
                    FHA-approved automated underwriting system, including the Countrywide Loan
                    Underwriting Expert System, and three loans were originated under the Home
                    Equity Conversion Mortgage program. Therefore, quality control reviews for the
                    remaining 10 loans required the reordering of a new credit report. However,
                    Countrywide did not reorder new credit reports for 5 of the 10 loans.33

                    Documents Not Checked for Sufficiency or Subjected to Written
                    Reverification

                    Countrywide did not always check the documentation contained in the loan files
                    for sufficiency or subject the documentation to written reverification.
                    Specifically, for 41 loans, Countrywide did not reverify the borrowers’
                    employment or other income, deposits, gift letters, alternate credit sources, or
                    mortgage or rent payments as required. HUD requires a lender to check
                    documents contained in the loan file for sufficiency and subject the loan

32
     See the Scope and Methodology section for specific details regarding the universe for the quality control reviews.
33
     FHA case numbers 022-1984561, 045-6689763, 095-0796374, 137-4180665, and 372-3872904


                                                           16
                documents to written reverification, including employment or other income,
                deposits, gift letters, alternate credit sources, and other sources of funds. Other
                items that may be reverified include mortgage or rent payments.34 For example,
                Countrywide did not reverify the employment, income, or source of funds for at
                least 25 loans because certain entities charged fees for reverifications.
                Additionally, HUD requires a lender to make a documented attempt to conduct a
                telephone reverification, if the written reverification is not returned. Countrywide
                did not have supporting documentation that this requirement was met for at least
                six quality control reviews performed.

                Field Reviews of Appraisals Not Performed

                Countrywide did not perform the required number of field reviews of appraisals
                for its routine quality control reviews in compliance with HUD requirements and
                its quality control plan. Specifically, Countrywide did not ensure that field
                reviews were performed on 10 percent of the loans selected for routine quality
                control reviews. Of the 5,081 routine quality control reviews for loans originated
                or sponsored by Countrywide with closing dates from July 2008 through April
                2009, Countrywide only performed 344 field reviews of appraisals. HUD
                requires lenders to perform field reviews of 10 percent of the loans selected
                during the sampling process.35

                Occupancy Reverification Not Performed or Supported

                Generally, no evidence was provided to show that Countrywide performed an
                occupancy reverification for the properties. HUD requires in cases where the
                occupancy of the subject property is suspect, a lender must attempt to determine
                whether the borrower is occupying the property.36 For one loan (FHA case
                number 372-3786983), Countrywide’s Quality Control department questioned the
                occupancy of the subject property because it was about 9 blocks from the
                borrower’s current residence. However, there was no documentation showing
                that Countrywide’s quality control reviewer attempted to reverify the occupancy
                of the subject property questioned.

                According to Countrywide’s quality control plan, occupancy reviews or
                inspections will be performed for three- to four-unit properties. However, for one
                of the two three-unit properties in the selected quality control reviews,37 there was
                no evidence supporting Countrywide’s performance of an occupancy review or
                inspection as denoted in its quality control plan.

     Conditions Concerning Loan
     Clearance and Closing Were
     Not Verified
34
   HUD Handbook 4060.1, REV-2, paragraph 7-6(E)(2)
35
   HUD Handbook 4060.1, REV-2, paragraph 7-6(E)(3)
36
   HUD Handbook 4060.1, REV-2, paragraph 7-6(E)(4)
37
   For FHA case number 352-5776368


                                                     17
                     Countrywide did not verify conditions concerning loan clearance and closing as
                     required. HUD requires a lender to review each loan selected for a quality control
                     review to determine whether (1) conditions which were required to be satisfied
                     before closing were met before closing, (2) the seller was the owner of record or was
                     exempt from the owner-of-record requirement in accordance with HUD regulations,
                     (3) the loan was closed and funds were disbursed in accordance with the lender’s
                     underwriting and subsequent closing instructions, and (4) the closing and legal
                     document are accurate and complete.38 There was no support that these HUD
                     requirements were followed.

     Countrywide’s Quality Control
     Plan Did Not Meet HUD’s
     Requirements


                     Countrywide’s quality control plan, as implemented, did not meet HUD’s
                     requirements. Specifically, it did not include the requirement that Countrywide
                     perform a 100 percent review of the loans in which borrowers defaulted on their
                     mortgages within the first six payments. However, the plan provided that a
                     statistically valid sample of early payment defaulted loans with a 95 percent
                     confidence level and 2 percent sample error rate be used.

                     Additionally, in accordance with HUD Handbook 4060.1, REV-2, Countrywide’s
                     plan did not include the provisions that39

                             Its employee list should be checked concerning debarment or suspension
                              or for those subject to a limited denial of participation at least
                              semiannually (7-3G1).
                             It must report findings within 60 days of initial discovery. Further, the
                              findings should be reported via the Lender Reporting feature in
                              Neighborhood Watch (7-3J).
                             The loans involving appraisers, loan officers, processors, underwriters,
                              etc., who have been associated with problems must be included in the
                              review sample (7-5C).
                             Telephone reverification will be attempted when a written reverification is
                              not returned (7-6E2).
                             It will perform field reviews on ten percent of the loans selected during the
                              sampling process outlined in paragraphs 7-6 (C) and (D) (7-6E3).
                             Closing conditions are to be reviewed, and the review must determine that
                              the seller was the owner of record or that funds were disbursed in
                              accordance with closing instructions (7-6G).


38
     HUD Handbook 4060.1, REV-2, paragraph 7-6(G)
39
     The provisions missing from Countrywide’s quality control plan are not all listed in this report.


                                                            18
                         It will verify that the lender ensures that none of the participants in a
                          mortgage transaction (excluding the seller of a principal residence) is
                          debarred or suspended or is under limited denial of participation for the
                          program and jurisdiction. Procedures must exist that determine whether
                          the mortgage applicant is ineligible due to a delinquent Federal debt (7-
                          8C).
                         If manual overrides or downgrades are applied, no patterns of illegal
                          discrimination are revealed (7-9A5).

     Bank of America’s Quality
     Control Plan Also Did Not
     Include Key Provisions


                  As previously mentioned, Countrywide was bought by Bank of America, N.A.,
                  Charlotte, and the merger of Countrywide into Bank of America, N.A., was
                  effective on April 27, 2009. Therefore, we also reviewed Bank of America’s
                  quality control plan for compliance with HUD’s requirements.

                  Bank of America’s quality control plan as of March 8, 2011, also did not address
                  key provisions. For instance, its plan did not require a 100 percent review of
                  early payment defaulted loans as defined by HUD. HUD requires a lender to
                  review all loans going into default within the first six payments, and defines early
                  payment defaults as those loans that become 60 days past due.40 However, its
                  quality control plan states all loans with no payment in the first 60 days, and a
                  percentage of randomly selected loans that were ever 90 days delinquent within
                  12 months after closing will be reviewed.

                  Further, its quality control plan did not require the re-verification of credit reports
                  generated by LandSafe, because it is a subsidiary of Bank of America and has an
                  inherent incentive to mitigate any risk to Bank of America. HUD requires that a
                  new credit report be obtained for each borrower whose loan is included in a
                  quality control review unless the loan was a streamline refinance or was processed
                  using a FHA approved automated underwriting system exempted from the
                  requirement.41
     Conclusion


                  Countrywide did not implement its quality control program in accordance with
                  HUD’s requirements. The problems occurred because Countrywide disregarded
                  HUD requirements. Additionally, Countrywide misinterpreted HUD’s
                  requirements for determining early payment defaults. Contrary to HUD’s
                  definition, Bank of America’s personnel defined early payment defaulted loans as
40
     HUD Handbook 4060.1, REV-2, paragraph 7-6(D)
41
     HUD Handbook 4060.1, REV-2, paragraph 7-6(E)(2)


                                                       19
                 loans that are 60 days delinquent within the first six months. HUD defines early
                 payment defaulted loans as the loans that are 60 days past due (in default) within
                 the first six payments, not months. Countrywide disregarded HUD requirements
                 by not reviewing 996 early payment defaulted loans for which the servicing had
                 been sold because it was no longer a risk to it or Bank of America.

                 From 2007 through 2009, Countrywide selected early payment defaulted loans for
                 quality control reviews using statistical sampling with a 95 percent confidence
                 level and a 2 percent error rate and a rate based on the actual severely
                 unsatisfactory (bad) rate from the prior year. For 2008 and 2009, Countrywide
                 applied this sampling methodology to the past 12-month population of early
                 payment defaults, which affects the timeliness of its review of the early payment
                 defaulted loans.

                 Countrywide should have performed 508 field reviews of appraisals for the loans
                 selected for routine quality control reviews. Bank of America’s business control
                 manager for the Credit Quality Control department stated that a field review was
                 only required if the appraisal in the origination file was a non-LandSafe
                 appraisal.42 Additionally, before 2009, the field review samples excluded FHA
                 loans with LandSafe appraisals because LandSafe is a subsidiary of Bank of
                 America.

                 Countrywide erroneously applied a HUD waiver for Countrywide Home Loans,
                 Inc., an affiliate entity, to its early payment default sampling for quality control
                 reviews. HUD intended the approved waiver to apply to only Countrywide Home
                 Loans, Inc. (lender identification number 64141) and did not extend the waiver to
                 Countrywide (lender identification number 76514). Bank of America’s Credit
                 Quality Control Division believed the HUD waiver was valid until August 2009,
                 when Countrywide Financial Corporation’s Quality Control Division and Bank of
                 America Corporation’s Quality Control Division merged.

                 As a result of Countrywide’s disregard and misinterpretation of HUD’s
                 requirements, HUD lacked assurance of the accuracy, validity, and completeness
                 of Countrywide’s loan files. Additionally, Countrywide contributed to an
                 increased risk of loss to HUD’s FHA insurance fund.

     Recommendations



                 We recommend that HUD’s Deputy Assistant Secretary for Single Family require
                 Bank of America to



42
  Countrywide’s quality control plan, dated December 10, 2007, required the performance of field reviews for a 10
percent sampling of non-LandSafe appraisals.


                                                       20
2A. Implement an adequate quality control plan that complies with HUD
    requirements, which includes but is not limited to the performance of routine
    and early payment default quality control reviews.

2B. Review 100 percent of its early payment defaulted loans to ensure compliance
    with HUD’s requirements.

We also recommend that HUD’s Deputy Assistant Secretary for Single Family

2C. Perform a review of Bank of America’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’s requirements.




                                21
                              SCOPE AND METHODOLOGY

We performed our audit work between August 2010 and April 2011. We conducted our audit at
Bank of America’s office in Calabasas, CA, and HUD’s Chicago regional office. Initially, the
audit covered the period July 1, 2008, through June 30, 2010. However, we adjusted this period
as necessary due to the merger of Countrywide and Bank of America, N.A., on April 27, 2009.

To accomplish our audit, we reviewed applicable HUD handbooks, regulations, mortgagee
letters, and other reports and policies related to FHA mortgage insurance programs. Further, we
reviewed Countrywide’s quality control plan, underwriting policy manuals, and electronic loan
files and quality control documentation. We interviewed Bank of America’s employees and
HUD’s program staff.43 We also contacted borrowers’ employers to confirm employment and
income data in the loan files.

Underwriting

Using HUD’s data maintained in its Single Family Data Warehouse system, we determined that
Countrywide had 294 loans that went to claim in 30 months or less during the period July 1,
2008, to June 30, 2010. Of the 294 loans, 28 were sponsored by Countrywide and were for
properties located in Region V. We randomly selected and reviewed 14 of the 28 loans to
determine whether they were underwritten in compliance with HUD’s requirements. The 14
loans with mortgage amounts totaling more than $1.5 million were comprised of two streamline
refinances, six conventional FHA refinances, and six home purchase loans. The results of our
underwriting review apply only to the loans reviewed and cannot be projected to the entire
universe of loans.

Quality Control

For our review of Countrywide’s implementation of its quality control plan, using RAT-STATS
2007 statistical software,44 with a 90 percent confidence level, 20 percent precision level, and an
estimated error rate of 50 percent, we selected a sample of 75 of the 7,599 quality control
reviews performed by Countrywide during our audit period, with the exclusion of targeted
reviews.45 The sample of 75 quality control reviews was comprised of 54 routine reviews, 13
early payment default reviews, and 8 other46 reviews. The results of the sample testing of quality
control reviews are not projected to the population of quality control reviews performed by
Countrywide.

We relied on information maintained in HUD’s Neighborhood Watch for informational purposes
only. We also relied on data maintained in HUD’s Single Family Data Warehouse and Bank of

43
   Some Bank of America’s employees were formerly employed with Countrywide Bank, FSB.
44
   RAT-STATS is a statistical software designed for selecting a random sample and evaluating audit results.
45
   Target quality control reviews are those performed at the request of the origination channels that set the scope of
the reviews. These reviews are not (1) part of the quality control audit plan or (2) a statistically valid sample.
46
   The “other” quality control reviews include FHA loans relative to the Consumer Market Division, Correspondent
Lending Division, and a joint venture between Countrywide and KB Homes.


                                                          22
America’s systems. Although we did not perform a detailed assessment of the reliability of the
data, we performed a minimal level of testing and found the data to be adequately reliable for our
purposes. The audit results were based on our review of electronic and hardcopy documentation
maintained by Bank of America, N.A.

We conducted the audit in accordance with generally accepted government auditing standards.
Those standards require that we plan and perform the audit to obtain sufficient, appropriate
evidence to provide a reasonable basis for our findings and conclusions based on our audit
objective(s). We believe that the evidence obtained provides a reasonable basis for our findings
and conclusions based on our audit objectives.




                                               23
                              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 operations – 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.


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

                     Countrywide did not follow HUD’s requirements when underwriting 7
                      FHA-insured loans (see finding 1).


                                                 24
   Countrywide’s quality control plan did not meet HUD’s requirements (see
    finding 2).




                            25
                                   APPENDIXES

Appendix A

                 SCHEDULE OF QUESTIONED COSTS


                 Recommendation
                     number              Ineligible 1/     Unsupported 2/
                       1A                 $720,300

                        1B                                     $3,211
                        1C                 $6,580
                       Total              $726,880             $3,211

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/   Unsupported costs are those costs charged to a HUD-financed or HUD-insured program
     or activity when we cannot determine eligibility at the time of the audit. Unsupported
     costs require a decision by HUD program officials. This decision, in addition to
     obtaining supporting documentation, might involve a legal interpretation or clarification
     of departmental policies and procedures.




                                             26
Appendix A-1

ACTUAL LOSSES TO HUD FOR MATERIAL UNDERWRITING
                  DEFICIENCIES

The table below represents the actual losses to HUD for the FHA loans with material
deficiencies (Recommendations 1A).

                                                     Unpaid
                  FHA case         Mortgage         principal                       Actual loss to
       Count       number           amount          balance47       Claim paid         HUD48
         1      261-9606137        $126,327         $124,548         $142,531         $66,441
         2      263-4251461         95,333           93,963           101,281         51,197
         3      263-4334310         77,140           76,029           83,549          79,439
         4      263-4387704         50,239           49,374           56,359          24,436
         5      271-9566133         262,823          257,818          278,840         247,529
         6      581-3129633         293,371          288,079          313,871         171,463
         7      581-3168637         93,301           91,524           102,251         79,795
                Totals             $998,534         $981,335        $1,078,682       $720,300




47
     The unpaid principal balance amounts were pulled from HUD’s Single Family Data Warehouse system.
48
     Loss on the sale of the property identified in HUD’s Single Family Acquired Asset Management System.


                                                         27
 Appendix A-2

    LOAN DETAILS FOR UNREASONABLE COSTS CHARGED

 The table below represents the amounts for the unreasonable costs charged, as cited in finding 1
 (Recommendation 1B).

          FHA case                                       Application   Underwriting
Count      number         Processing fee   Lender fee       fee            fee           Total fees
  1     261-9576571           $500                                                         $500
  2     263-4270999            407                                                          407
  3     411-4176620                           $805          $314                           1,119
  4     581-3129633           685                                          $500            1,185
        Totals               $1,592           $805          $314           $500           $3,211




                                                28
Appendix B

        AUDITEE COMMENTS AND OIG’S EVALUATION


Ref to OIG Evaluation   Auditee Comments




                         29
Ref to OIG Evaluation   Auditee Comments




Comment 1




                         30
Ref to OIG Evaluation   Auditee Comments




Comment 2




                         31
Ref to OIG Evaluation   Auditee Comments




                         32
Ref to OIG Evaluation   Auditee Comments




Comment 3




                         33
Ref to OIG Evaluation   Auditee Comments




Comment 4




Comment 4




                         34
Ref to OIG Evaluation   Auditee Comments




Comment 5




                         35
Ref to OIG Evaluation   Auditee Comments




Comment 6




                         36
Ref to OIG Evaluation   Auditee Comments




Comment 7




                         37
Ref to OIG Evaluation   Auditee Comments




Comment 8




Comment 9




                         38
Ref to OIG Evaluation   Auditee Comments




Comment 10




                         39
Ref to OIG Evaluation   Auditee Comments




Comment 11




                         40
Ref to OIG Evaluation   Auditee Comments




Comment 12




                         41
Ref to OIG Evaluation   Auditee Comments




Comment 13




                         42
Ref to OIG Evaluation   Auditee Comments




Comment 14




                         43
Ref to OIG Evaluation   Auditee Comments




Comment 15




                         44
Ref to OIG Evaluation   Auditee Comments




Comment 16




                         45
Ref to OIG Evaluation   Auditee Comments




Comment 17




                         46
Ref to OIG Evaluation   Auditee Comments




Comment 18




Comment 19




                         47
Ref to OIG Evaluation   Auditee Comments




Comment 20




Comment 21




                         48
Ref to OIG Evaluation   Auditee Comments




Comment 22




Comment 23




                         49
Ref to OIG Evaluation   Auditee Comments




                         50
Ref to OIG Evaluation   Auditee Comments




Comment 24




                         51
Ref to OIG Evaluation   Auditee Comments




                         52
Ref to OIG Evaluation   Auditee Comments




Comment 25




Comment 26




                         53
Ref to OIG Evaluation   Auditee Comments




                         54
Ref to OIG Evaluation   Auditee Comments




                         55
Ref to OIG Evaluation   Auditee Comments




                         56
Ref to OIG Evaluation   Auditee Comments




Comment 27




                         57
Ref to OIG Evaluation   Auditee Comments




Comment 28




                         58
Ref to OIG Evaluation   Auditee Comments




                         59
Ref to OIG Evaluation   Auditee Comments




Comment 29




                         60
Ref to OIG Evaluation   Auditee Comments




Comment 30




                         61
Ref to OIG Evaluation   Auditee Comments




                         62
Ref to OIG Evaluation   Auditee Comments




                         63
                         OIG Evaluation of Auditee Comments

Comment 1   We provided Bank of America the opportunity to informally respond to our
            tentative findings during the audit. We considered its comments and revised our
            conclusions where appropriate. We then prepared the discussion draft audit report
            and provided Bank of America an opportunity to respond to the draft report in
            writing. We included its written response (minus supporting documentation) in
            this report along with our evaluation of the response. Bank of America will have
            further opportunity to provide comments and supporting documentation to HUD
            to resolve the recommendations.

Comment 2   Due to the merger between Bank of America and Countrywide Bank FSB
            (Countrywide), Bank of America inherited the rights, obligations, and liabilities
            of Countrywide as they relate to HUD and FHA. Thus, we have addressed the
            findings and recommendations to Bank of America.

Comment 3   Bank of America asserts the referenced deposits were directly from the employer
            and were not inconsistent with the borrower's income. We disagree that the
            referenced deposits were not inconsistent with the borrower's income. The two
            direct deposits from the borrower's employer were 2.9 and 3.43 times higher than
            his regular weekly gross pay of $863.20.

            Bank of America assumed the direct deposits represented the borrower's regular
            earnings, overtime, holiday, double time earnings, and reimbursement for travel
            expenses. However, Bank of America did not provide documentation confirming
            this assumption about the deposits. The pay stubs dated August 7 and August 14,
            2011, did not support the additional earnings deposited in the borrower's bank
            account as indicated by Bank of America. Additionally, the two deposits in
            question were not verified through the verification of employment dated July 24,
            2008. HUD requires a lender to obtain a credible explanation for the source of
            funds, if there is a large increase in an account. Countrywide did not obtain a
            credible explanation of the source of funds for the two large deposits made into
            the borrower's bank account, as required for this loan transaction.

Comment 4   Bank of America agreed the total property taxes were $396.94 ($229.65 +
            $167.29) per month, and the amounts were underestimated on the mortgage credit
            analysis worksheet. However, it disagreed with the material effect of
            Countrywide's error on this loan. Instead, Bank of America indicated the
            underwriter understated the borrower's income by $579 ($3,740 - $3,161).
            Therefore, with the correct property tax amount and the recalculated borrower's
            pay amount, the back-end ratio should have been 44.1 percent, not 52.144
            percent. We disagree with Bank of America's recalculation of the borrower's
            monthly pay amount and back-end ratio.

            Bank of America's computation of the borrower's income contradicts
            Countrywide's policy noted in the income worksheet used by Countrywide’s



                                            64
            underwriters. According to Countrywide's policy for computing the borrower's
            base pay income, the calculations for the base pay income must be compared with
            the year to date figure, and if the year to date figure is lower than the current base
            pay, then the underwriter should use the lowest of the two figures in qualifying
            the borrower if there is no reasoning or documentation to justify the difference.
            Even Countrywide's Quality Control department arrived at a lower monthly base
            pay income of $3,093, using the borrower's year to date on the pay stub dated
            August 14, 2011, excluding the overtime and holiday pay. Additionally, it was
            not adequately supported that the borrower worked an average of 40 hours per
            week.

            Bank of America did not provide additional information to support the use of the
            retirement income as cash reserves. HUD requires that if cash reserves are used
            as a compensating factor, then the borrower should have at least three months
            worth documented after closing.

            Similar to our conclusions, Countrywide's Quality Control auditor generally
            disagreed with the underwriter's decisions when evaluating and calculating the
            borrower's liability, debt to income ratios, cash reserves and funds to close. This
            loan was manually underwritten, and the CLUES accept approval did not consider
            the understated property tax amount. Therefore, our findings and
            recommendations for this loan will remain in the report.

Comment 5   Bank of America agreed the loan was over-insured by $5,880, and HUD should
            be reimbursed for the over-insured amount. However, it disagreed with the
            indemnification of the loan.

            We agree; therefore, we will remove the recommendation concerning the
            reimbursement of the FHA insurance fund for the actual loss of $44,664 on the
            sale of the subject property, and will only recommend that Bank of America
            reimburse HUD $5,880 for the overinsured loan amount.

Comment 6   Bank of America asserts Countrywide properly analyzed the borrower's income to
            ensure its stability and continuance and obtained all required documentation. We
            disagree.

            According to HUD's requirements, underwriters must exercise due diligence
            when considering borrowers for mortgage approval. Specifically, a direct
            endorsement lender shall exercise the same level of care which it would exercise
            in obtaining and verifying information for a loan in which the lender would be
            entirely dependent on the property as security to protect its investment. Further,
            HUD Handbook 4155.1 REV-5, Chapter 2, Section 5, provides that underwriting
            requires careful analysis of the many aspects of the mortgage. Each loan is a
            separate and unique transaction, and there may be other factors that demonstrate
            the borrowers' ability and willingness to make timely mortgage payments. The
            lender is responsible for adequately analyzing the probability that the borrower



                                              65
            will be able to repay the mortgage obligation in accordance with the terms of the
            loan. Although HUD allows for judgment, HUD Handbook 4155.1 REV-5,
            Chapter 2, Section 5, states that there is a danger of "layering flexibilities" in
            assessing mortgage insurance risk, and simply establishing that a loan transaction
            meets minimal standards does not necessarily constitute prudent underwriting.

            Apart from Countrywide's violation of its own internal policies and procedures (or
            guide) for underwriting loans, it materially violated HUD's requirements for
            underwriting FHA-insured loans. Countrywide did not properly establish the
            anticipated income to determine the borrower's capacity to repay the mortgage
            debt. Additionally, income may not be used in calculating a borrower's income
            ratios if it is unverifiable, unstable, or will not continue. The borrower's year-to-
            date earnings statement as of October 19, 2008, totaled $42,061. When compared
            to the borrower's 2007 earnings of $91,831, the borrower would have had to earn
            more than $49,000 in less than three months for 2008 earnings. The apparent
            decrease in the borrower's yearly wages was not addressed by Countrywide.
            HUD Handbook 4155.1 REV-5, paragraph 3-1, requires the loan application
            package to contain all supporting documentation for the lender's loan approval
            decision. When standard documentation does not provide enough information to
            support this decision, the lender must provide additional explanatory statements,
            consistent with other information in the application, to clarify or to supplement
            the documentation submitted by the borrower. The borrower's most recent pay
            stub in the loan file did not support the monthly income of $6,192. Since Bank of
            America did not provide any further documentation to resolve this issue, this
            finding item was not removed from the report.

Comment 7   Bank of America did not provide additional documentation to support that
            Countrywide obtained an explanation and documentation for the large deposit of
            $7,100 in the borrower's checking account, as required by HUD. Therefore, this
            finding item will remain in the report.

Comment 8   Bank of America provided a LandSafe credit merge report, dated May 5, 2011,
            showing the last activity in the account, which was current, was in October 2008.
            The conventional real estate mortgage account with Chase was closed in
            November 2008. Our report has been revised regarding the October 2008
            mortgage payment.

            Bank of America did not provide any evidence that the borrower also made the
            mortgage payment due on November 1, 2008. The credit report in the loan file
            showed a mortgage balance of $91,182 with Chase Manhattan. The settlement
            statement revealed that the mortgage payoff of $92,500 was made to Bayview
            Lending. The difference between the credit report mortgage balance and the
            settlement statement payoff amount was $1,318, the mortgage amount owed
            before closing but not paid by the borrower.




                                             66
              Countrywide allowed the borrower to skip the November 2008 mortgage
              payment, in violation of HUD's requirements.

Comment 9     Bank of America agreed that the loan was closed without the borrower making
              the October and November 2008 mortgage payments. It provided a loan history
              inquiry printout as of May 4, 2011, showing the payments made on December 5,
              2008, for the October and November 2008 mortgage amounts after the loan
              closed. Therefore, this loan should not have been closed because it did not
              comply with HUD’s requirements regarding skipped mortgage payments.

Comment 10 The Request for Verification of Gift/Gift Letter signed by the gift donor's
           depository was proof that the donor had the funds in his account to make a gift to
           the borrower. The verification of gift does not certify the gift funds had been
           transferred from the donor's account to the borrower's account. Further, the front
           of the gift check from the borrower's future father-in-law does not support the
           transfer of the gift funds to the borrower. The borrower needed a cash investment
           of $2,624 to close loan; however, the borrower's bank account inquiry document
           dated November 12, 2008, showed the borrower had only an available balance
           totaling $1,094.20. Without the gift funds, the borrower did not have sufficient
           funds for loan closing.

              Bank of America provided a loan application dated December 19, 2008, listing
              funds from an individual/entity other than the gift donor on the verification of gift
              document dated December 2, 2008, in the amount of $2,500. There was no
              indication of who the individual is, and this source of funds was not verified.
              HUD requires that all funds for the borrower's investment in the property must be
              verified and documented. Countrywide did not properly verify and document the
              borrower's source of funds to close, as required by HUD.

              HUD Handbook 4155.1 REV-2, paragraph 1-7, requires the borrower to make a
              cash investment at least equal to the difference between the sales price and the
              resulting maximum mortgage amount. Further, HUD Handbook 4155.1 REV-2,
              paragraph 2-10(C)(2) states when the transfer occurs at closing, the lender
              remains responsible for obtaining verification that the closing agent received
              funds from the donor for the amount of the purported gift and that those funds
              came from an acceptable source.

Comment 11 We agree the borrower's loan file contained employment and income
           documentation required by HUD. However, the verification of a borrower's
           employment and income is more than collecting the required documentation to
           include in the loan file. According to HUD's requirements, underwriters must
           exercise due diligence when considering borrowers for mortgage approval.
           Specifically, a direct endorsement lender shall exercise the same level of care
           which it would exercise in obtaining and verifying information for a loan in which
           the lender would be entirely dependent on the property as security to protect its
           investment. Further, HUD Handbook 4155.1 REV-5, Chapter 2, Section 5,



                                               67
              provides that underwriting requires careful analysis of the many aspects of the
              mortgage. Each loan is a separate and unique transaction, and there may be other
              factors that demonstrate the borrowers' ability and willingness to make timely
              mortgage payments. The lender is responsible for adequately analyzing the
              probability that the borrower will be able to repay the mortgage obligation in
              accordance with the terms of the loan. Although HUD allows for judgment, HUD
              Handbook 4155.1 REV-5, Chapter 2, Section 5, states that there is a danger of
              "layering flexibilities" in assessing mortgage insurance risk, and simply
              establishing that a loan transaction meets minimal standards does not necessarily
              constitute prudent underwriting.

              Countrywide's underwriter did not exercise due diligence when verifying the
              borrower's employment and income. The income appeared unusual for the
              borrower's age, and for the geographic location of the business. There was no
              check number or advice number included on the pay stubs, and the pay date for
              the borrower's most recent pay stub for the earnings period from June 16, 2008
              through June 30, 2008, was listed as June 3, 2008. Additionally, the borrower's
              address was not included on the pay stubs.

Comment 12 Contrary to HUD's requirements, apart from the borrower's income, the
           borrower's loan file did not address the reasonableness of the accumulated funds
           in terms of the borrower's spending habits, and the length of time it took to save
           the cash at home. The borrower's letter dated July 15, 2008, revealed the
           borrower sent all his money to his family in Puerto Rico, who managed all his
           money. Countrywide should have requested and verified additional information,
           such as a budget or schedule, to support that the borrower was able to save the
           $6,000 at home as required to HUD. According to the Countrywide’s underwriter
           for this loan, the source of this deposit should have been an underwriting
           condition. Bank of America did not provide additional documentation to resolve
           the issue with the verification of deposit. So, this finding item will remain in the
           audit report.

              Based on HUD's requirement, we agree that since the earnest money deposit was
              less than two percent of the sales price, it would have not been necessary to
              document the support for the deposit. However, since the borrower did not have a
              demonstrated history of accumulated savings, the amount of the earnest money
              deposit was considered excessive. Therefore, based the borrower’s questionable
              income, the underwriter’s improper verification of the borrower’s credit history,
              and the borrower’s insufficiently explained large deposit into a recently opened
              bank account, this loan will remain in the audit report.

Comment 13 HUD requires a lender to verify the borrower's nontraditional credit using a
           published address or telephone number to make the verification. Countrywide did
           not comply with this requirement. Additionally, concerning the borrower's utility
           payments, Countrywide did not establish that these payments were made by the
           borrower, and not the landlord.



                                              68
              HUD Handbook 4155.1 REV-2, paragraph 3-1, states that when standard
              documentation does not provide enough information to support this decision, the
              lender must provide additional explanatory statements, consistent with other
              information in the application, to clarify or to supplement the documentation
              submitted by the borrower. To the contrary, Countrywide and Bank of America
              did not provide additional documentation to address the inconsistencies and to
              support their decision regarding the borrower’s credit.

              There was a payment shock for this loan transaction. The borrower's monthly
              rent at the time of the loan application was $1,000, and his future monthly
              mortgage payment after loan closing was $2,073.16. The borrower's future
              monthly mortgage payment was more than twice the borrower's current monthly
              rental payment. According to information in HUD's Neighborhood Watch
              system, the borrower made only two payments on the mortgage before the first
              90-day delinquency was reported.

Comment 14 We agree and adjusted the audit report accordingly.

Comment 15 The settlement statement, dated July 18, 2008, revealed that the borrower was
           charged a loan origination fee of $891, lender fee of $805, and application fee of
           $314 as part of her settlement charges for this conventional refinance transaction.
           During the audit, Bank of America’s senior business control specialist explained
           to the audit team that it would be acceptable to charge a borrower these fees on a
           purchase transaction; however, not on a refinance transaction. Therefore,
           Countrywide incorrectly charged the borrower the lender and application fees
           totaling $1,119.

              Regulations at 24 CFR (Code of Federal Regulations) 3500.14(c) prohibits the
              split of charges except for actual services performed. A charge by a person for
              which no or nominal services are performed or for which duplicative fees are
              charged is an unearned fee and violates this section. We understand that
              Mortgagee Letter 2006-04 allows lenders to charge and collect customary and
              reasonable costs necessary to close the mortgage. The mortgagee letter also limits
              the origination fee to one percent on forward mortgages, and requires all fees and
              charges to comply with Federal and State disclosure laws and other applicable
              laws and regulations. Bank of America did not provide documentation to support
              that the lender and application fees charged to the borrower were customary and
              reasonable. Therefore, the loan will remain in the report.

Comment 16 We understand that the start of a new job does not negate the acceptability of the
           coborrower's income. In examining the coborrower's past employment record, we
           noted that his past jobs have not been in the same line of work. According to the
           mortgage credit analysis worksheet comments, the underwriter accepted the
           coborrower's new income based on his previous work history. However,
           Countrywide did not properly verify the coborrower's employment history for the
           previous two years, as required by HUD. FHA's TOTAL Mortgage Scorecard



                                              69
              User Guide, effective December 2004, requires a lender to verify the applicant’s
              employment history for the previous two years. However, if the applicant has not
              been employed with the same employer for the previous two years, the lender is
              required to obtain one of the following for the most recent two years to verify the
              applicant's employment history: (1) W-2(s); (2) VOEs (that is, written
              verifications of employment); or (3) Electronic verification acceptable to FHA.
              Countrywide did not obtain W-2s, VOEs or electronic verification of employment
              for the coborrower's prior employment. Only verbal verifications of employment
              were found in the loan file for the coborrower's prior employment.

              HUD requires a lender to analyze each borrower's income to be obligated for the
              mortgage debt to determine whether it can reasonably be expected to continue
              through at least the first three years of the mortgage loan. Further, HUD
              Handbook 4155.1 REV-5, Chapter 2, Section 5, provides that underwriting
              requires careful analysis of the many aspects of the mortgage. Each loan is a
              separate and unique transaction, and there may be other factors that demonstrate
              the borrowers' ability and willingness to make timely mortgage payments. The
              lender is responsible for adequately analyzing the probability that the borrower
              will be able to repay the mortgage obligation in accordance with the terms of the
              loan. Although HUD allows for judgment, there is a danger of "layering
              flexibilities" in assessing mortgage insurance risk, and simply establishing that a
              loan transaction meets minimal standards does not necessarily constitute prudent
              underwriting.

Comment 17 Bank of America is not certain why the underwriter did not include the cited
           borrower’s monthly liabilities. However, it states that the borrowers would have
           still qualified for the FHA financing with significant compensating factors
           permitted by HUD. We disagree. One automated underwriting condition for this
           loan was that the loan should be resubmitted through CLUES for an updated
           evaluation if any changes are discovered that would negatively affect the
           borrowers’ ability to repay the mortgage. With the exclusion of the coborrower's
           income from the new employment and inclusion of the previously excluded
           monthly total liability of $484, the underwriter would have had to resubmit the
           loan through CLUES for an updated evaluation.

              In assessing the borrowers’ ability to repay the loan, all factors should be
              considered including the borrowers' income and debts. Countrywide did not
              adequately support that the borrowers were able and willing to repay the mortgage
              debt. Additionally, according to information in HUD’s Neighborhood Watch
              system, the borrowers made only one payment on the mortgage before the first
              90-day delinquency was reported. Therefore, with the excluded liabilities and
              improperly verified past employment history, this loan will remain in the report.

Comment 18 Bank of America provided a landsafe credit merge report dated May 9, 2011,
           which revealed the borrowers’ previous mortgage with Citimortgage was current
           as of September 2008, the month the account was closed. The last activity for the



                                               70
              mortgage account was actually in August 2008. The credit report does not
              support that the borrowers made the mortgage payment due on September 1,
              2008. Therefore, this loan should not have been closed because it did not comply
              with HUD requirements concerning skipped mortgage payments.

Comment 19 The settlement statement, dated September 13, 2008, revealed that the borrowers
           were charged a loan origination fee of $2,897.50, processing fee of $685, and
           underwriting fee of $500 as part of the settlement charges for this conventional
           loan transaction. Bank of America’s senior business control specialist explained
           to the audit team that it would be acceptable to charge a borrower these fees on a
           purchase transaction; however, not on a refinance transaction. Therefore,
           Countrywide incorrectly charged the borrowers the processing fee and
           underwriting fee totaling $1,185.

              Regulations at 24 CFR (Code of Federal Regulations) 3500.14(c) prohibits the
              split of charges except for actual services performed. A charge by a person for
              which no or nominal services are performed or for which duplicative fees are
              charged is an unearned fee and violates this section. We understand that
              Mortgagee Letter 2006-04 allows lenders to charge and collect customary and
              reasonable costs necessary to close the mortgage. The mortgagee letter also limits
              the origination fee to one percent on forward mortgages, and requires all fees and
              charges to comply with Federal and State disclosure laws and other applicable
              laws and regulations. Bank of America did not demonstrate the cited fees were
              customary and reasonable costs necessary to close the mortgages in question.

              Bank of America did not provide documentation to support that the processing
              and underwriting fees charged to the borrower were customary and reasonable.
              Therefore, this finding item will remain in the report.

Comment 20 We disagree with Bank of America that the borrowers made all payments on the
           prior loan timely as of September 16, 2008. Bank of America provided a loan
           history inquiry printout dated May 9, 2011, revealing that the borrower’s principal
           balance of $72,501.92 and interest of $582.12 was paid on October 15, 2008.
           Therefore, this loan should not have been closed because it did not comply with
           HUD requirements concerning skipped mortgage payments. The borrower did
           not make the mortgage payment that was due before or at closing as required by
           HUD. Therefore, this loan will remain in the report.

Comment 21 Bank of America agreed that due to the Countrywide underwriter's oversight, this
           loan was overinsured but only by $700, and not the $940.44 cited in the draft
           report. We agree and reduced the reimbursable amount to HUD to $700. This
           loan was not recommended for administrative action; however, we recommended
           that Bank of America reimburse HUD the amount of the overinsurance.

Comment 22 The settlement statement, dated August 25, 2008, revealed that the borrower was
           charged a loan origination fee of $826 and loan processing fee of $500 as part of



                                              71
                 his settlement charges. During the audit, Countrywide’s Investor Audit Division49
                 agreed that the loan processing fee was charged in error. Therefore, Countrywide
                 incorrectly charged the borrower the loan processing fee of $500 for the
                 streamline refinance without appraisal transaction (FHA case number 261-
                 9576571). Additionally, the settlement statement, dated July 14, 2008, revealed
                 that the borrower was charged a loan origination fee of $486.20 and loan
                 processing fee of $406.80 as part of her settlement charges. During the audit,
                 Bank of America’s senior business control specialist explained to the audit team
                 that it would be acceptable to charge the borrower the loan processing fee on a
                 purchase transaction but not on a refinance transaction. Therefore, Countrywide
                 incorrectly charged the borrower the loan processing fee of $ 406.80 for the
                 conventional refinance transaction (FHA case number 263-4270999).

                 Regulations at 24 CFR (Code of Federal Regulations) 3500.14(c) prohibits the
                 split of charges except for actual services performed. A charge by a person for
                 which no or nominal services are performed or for which duplicative fees are
                 charged is an unearned fee and violates this section. We understand that
                 Mortgagee Letter 2006-04 allows lenders to charge and collect customary and
                 reasonable costs necessary to close the mortgage. The mortgagee letter also limits
                 the origination fee to one percent on forward mortgages, and requires all fees and
                 charges to comply with Federal and State disclosure laws and other applicable
                 laws and regulations. Bank of America did not demonstrate the cited fees were
                 customary and reasonable costs necessary to close the mortgages in question.

                 Bank of America did not provide documentation to support that the cited fees
                 charged to the borrowers were customary and reasonable. Therefore, these
                 finding items will remain in the report.

Comment 23 We disagree with Bank of America's assertion that Countrywide did not disregard
           HUD's quality control requirements. We acknowledge the tools, including
           staffing in place and reporting of quality control findings, which Bank of America
           asserts Countrywide had in place for its quality control system/program. HUD
           Handbook 4060.1 REV-2, paragraph 2-23, requires a lender to maintain a written
           Quality Control Plan for the origination and servicing of FHA insured mortgages.
           The Quality Control Plan and its implementation must meet the requirements set
           forth in chapter 7 of the handbook. Further, in paragraph 7-3(A) of the handbook,
           HUD requires all quality control programs to be in writing.

                 Our finding accurately describes the conditions found during the audit and the
                 impact associated with the violations. Additionally, Bank of America did not
                 provide adequate documentation during or after the audit report to support its
                 asserted compliance with HUD's quality control requirements. We acknowledge

49
  The Investor Audit (Claims Management) group falls within Countrywide Home Loans Inc., a surviving entity
under Bank of America, after the acquisition of Countrywide by Bank of America. Investor Audit is responsible for
evaluating, responding to and processing mortgage repurchase claims from investor. This group performs this
function for Countrywide and works as an agent on behalf of other Bank of America entities.


                                                       72
              Bank of America's commitment to institute and implement a quality control
              program that ensures its full compliance with HUD's requirements.

Comment 24 We disagree with Bank of America's assertion that our claim of Countrywide's
           disregard of HUD's requirement is unfounded and inflammatory. Contrary to
           HUD's requirements, Countrywide did not perform quality control reviews for
           almost 50 percent (47.19 percent) of identified early payment defaulted loans.
           Further, we disagree with Bank of America's assertion that Countrywide
           performed its review of the early payment defaulted loans in a reasonable
           timeframe. We acknowledge that during our audit period, HUD did not have a
           requirement for the timeframe within which Countrywide should have performed
           the quality control reviews for the early payment defaulted loans. However, in
           order for a lender to meet one of the quality control goals of making swift and
           appropriate corrective action where applicable, it would have been prudent
           practice for Countrywide to have been timely with its reviews of the early
           payment defaulted loans, as opposed to completing a quality control review six
           months after a loan's 60-delinquency was reported to HUD, for instance.

              To highlight the importance of timely reviews of the early payment defaults, in
              January 2011, HUD issued Mortgagee Letter 2011-02, which requires the quality
              control review of early payment defaults to be completed within 45 days from the
              end of the month a loan is reported as 60 days past due.

Comment 25 As previously stated in our Scope and Methodology section of the report, the
           results of the sample testing of quality control reviews were not projected to the
           population of the quality control reviews performed by Countrywide. Our
           conclusions were drawn based on our review of the selected quality control
           reviews. We disagree with Bank of America's assertion that the files were
           reviewed by Countrywide several years ago; the earliest of the sample quality
           control reviews was completed in July 2008, and the latest one in June 2009.
           Further, the quality control review documentation was maintained in an electronic
           format.

              Bank of America did not provide additional documentation to address the finding
              concerning the documentation review and verification not being consistently
              performed for selected loans reviewed. Therefore, this finding will remain in the
              report.

Comment 26 Bank of America recognized that Countrywide's most recent written quality
           control plan, dated March 10, 2009, could have been more specific in certain
           instances. However, it believed the plan substantially complied with HUD's
           requirements. As previously noted in the report, Countrywide erroneously
           applied a HUD waiver intended for an affiliate entity, Countrywide Home Loans,
           Inc., to its early payment default sampling for quality control reviews.
           Additionally, we determined the following concerning Countrywide's quality
           control plan:



                                              73
   Although it provided that before employees are hired they are checked for
    debarment, suspension, Limited Denial of Participation and checked against
    CAIVRS, the plan did not provide that Countrywide’s employee list will be
    checked against these item semi-annually.

   Although it provided that parties involved in a fraudulent loan transaction may
    be referred to a HUD Ownership Center, the plan did not specify that
    Countrywide must report the findings within 60 days of initial discovery.
    Further, it did not specify that Countrywide will report the findings via the
    Lender Reporting feature in the Neighborhood Watch Early Warning System.

   It did not provide that loans involving appraisers, loan officers, processors,
    underwriter, etc., who have been associated with problems must be included
    in the review sample.

   We acknowledge that the existing plan required the written verification of
    employment, and that the second written request be attempted if the first
    written request is not received within 21 days. However, contrary to HUD's
    requirement, the plan did not provide that a telephone reverification will be
    attempted.

   We acknowledge that the plan included a provision on the performance of
    desk reviews on all appraisals. However, HUD also requires that mortgagees
    perform field reviews on 10 percent of the loans selected during the sampling
    process outlined in paragraphs 7-6 C and D of HUD Handbook 4060.1 REV-
    2. Contrary to this requirement, Countrywide's December 2007 quality control
    plan indicated only Non-Landsafe Appraisal was part of the 10% field review
    sampling. We have modified the report accordingly.

   It did not provide for the review of closing conditions, and that the review
    must determine that the seller was the owner of record, or that funds were
    disbursed in accordance with closing instructions. Further, based on the audit
    team's review of the sample of quality control review completed by
    Countrywide, we determined that Countrywide did not verify the selected
    loans for compliance with these requirements.

   It did not specifically provide that the Countrywide would verify to ensure
    that none of the participants in the mortgage transaction is debarred or
    suspended, or is under Limited Denial of Participation for the program and
    jurisdiction.

   It does not provide that Countrywide must address any pattern of illegal
    discrimination.




                                 74
              HUD Handbook 4060.1 REV-2, paragraph 2-23, requires a lender to maintain a
              written Quality Control Plan for the origination and servicing of FHA insured
              mortgages. The Quality Control Plan and its implementation must meet the
              requirements set forth in chapter 7 of the handbook. Further, in paragraph 7-3(A)
              of the handbook, HUD requires all quality control programs to be in writing.

Comment 27 Bank of America provided a copy of the cover page for its draft quality control
           audit plan, with an approval date of July 20, 2011. However, the actual amended
           and approved quality control plan, reflecting Bank of America's current practice,
           was not provided. We are unable to confirm the revisions to the plan that Bank of
           America has indicated.

Comment 28 Bank of America took exceptions to the recommendations in the discussion draft
           audit report. Specifically, Bank of America took an exception concerning the
           nine loans containing material underwriting deficiencies, and disagreed with the
           recommendation of any penalty in connection with these loans, and the
           recommended sanctions of civil money or PFCRA penalties.

              HUD Handbook 4000.4, REV-1, CHG-2 chapter 2-4(C), requires an underwriter
              to assume the following responsibilities: (1) compliance with HUD instructions,
              the coordination of all phases of underwriting, and the quality of decisions made
              under the program, (2) the review of appraisal reports, compliance inspections
              and credit analyses performed by fee and staff personnel to ensure reasonable
              conclusions, sound reports and compliance with HUD requirements, (3) the
              decisions relating to the acceptability of the appraisal, the inspections, the buyers
              capacity to repay the mortgage and the overall acceptability of the mortgage loan
              for HUD insurance, (4) the monitoring and evaluation of the performance of fee
              and staff personnel under the Direct Endorsement program, and (5) awareness of
              the warnings signs that may indicate irregularities, and an ability to detect fraud,
              as well as the responsibility that underwriting decisions are performed with due
              diligence in a prudent manner.

              The recommendations in the report are appropriate based on the issues cited.
              Violations of FHA rules are subject to civil and administrative actions. It is at
              OIG's discretion to include or exclude recommendations to HUD's Office of
              General Counsel related to violations of the Program Fraud Civil Remedies Act in
              the audit report. We have made modifications to the report as considered
              necessary.

Comment 29 Bank of America objected to our policy of making audit reports public before
           HUD makes a final determination on the recommendations. We recognize Bank
           of America’s objection; however, we disagree with Bank of America’s
           categorization of the process and the way it suggests the process works. HUD
           management officials are responsible for initiating action to resolve reported
           findings and recommendations. Therefore, we will not include the language
           recommended by Bank of America in the audit report.



                                                75
Comment 30 The report did not state nor did it imply that Bank of America’s quality control
           program is largely deficient or noncompliant with FHA requirements. We made
           these recommendations to ensure the required provisions have been included in
           Bank of America's written quality control plan and the quality control reviews are
           conducted in compliance with HUD requirements.




                                             76
  Appendix C

    LOANS WITH MATERIAL UNDERWRITING DEFICIENCIES



                                                                    Liabilities Debt-to-
         FHA case        Underwriting    Employment     Source of   and credit   income    Skipped 
Count     number            Method        and income      funds      history      ratios  payments 
  1     261-9606137         Manual                          X           X           X
  2     263-4251461       Automated            X            X                                 X
  3     263-4334310       Automated                                                           X
  4     263-4387704       Automated                         X
  5     271-9566133         Manual             X            X           X
  6     581-3129633       Automated            X                        X                     X
  7     581-3168637       Automated                                                           X
           Totals                              3            4           3           1         4
The remaining 7 of the 14 loans reviewed are FHA case numbers 132­2111442, 261­9576571, 263­424292, 
263­4270999, 263­4351990, 411­4176620 and 413­5062810.

  See appendix D for the details on the material underwriting deficiencies found for these loans.




                                                 77
Appendix D

              NARRATIVES OF LOANS WITH MATERIAL
                  UNDERWRITING DEFICIENCIES


FHA case number:       261-9606137

Mortgage amount:       $126,327

Section of Housing Act:       203B (Mutual Mortgage)

Loan purpose: Purchase

Date of loan closing: September 26, 2008

Status:        Claim

Payments before first 90-day delinquency reported: Four

Loss to HUD: $66,441

Summary:

Assets:

Countrywide did not obtain a credible explanation of the source of funds for the large deposits
made into the borrower’s bank account. An activity printout of the borrower’s bank account as
of September 18, 2008, showed that the borrower’s current balance was $5,474.06. However,
the borrower received two direct deposits from his current employer of $2,506.81 and $2,962.50
on September 11 and September 18, 2008, respectively. The two deposits were 2.9 and 3.43
times higher than his regular earnings of $863.20 per week. There was no explanation in the
loan file for these two large deposits as required by HUD.

Criteria:

HUD Handbook 4155.1, REV-5, paragraph 2-10(B), states that a verification of deposit, along
with the most recent bank statement, may be used to verify savings and checking accounts. If
there is a large increase in an account or the account was opened recently, the lender must obtain
a credible explanation of the source of those funds.




                                                78
Liabilities:

The mortgage credit analysis worksheet, dated September 22, 2008, showed that the borrower’s
property taxes and assessment was $229.65. However, the settlement statement, dated
September 26, 2008, revealed that the borrower paid $255.89 per month in city property taxes
and $141.05 per month in county property taxes. The audit team determined that Countrywide
did not include the county property tax of $141.05 per month and understated the city property
tax by $26.24 ($255.89 - $229.65) per month in the worksheet when calculating the borrower’s
future monthly payments. As a result, Countrywide undercalculated the borrower’s liabilities by
$167.29 per month.

Criteria:

HUD Handbook 4155.1, REV-5, paragraph 2-11(A), states that the borrower’s liabilities include
all installment loans, revolving charge accounts, real estate loans, alimony, child support, and all
other continuing obligations. In computing the debt-to-income ratios, the lender must include
the monthly housing expense and all other recurring charges extending 10 months or more.

Debt-to-Income Ratios and Compensating Factors:

The mortgage credit analysis worksheet, dated September 22, 2008, indicated that the borrower’s
mortgage payment-to-income ratio was 35.9 percent and total fixed payment-to-income ratio was
47.3 percent. However, Countrywide did not include the county property tax of $141.05 per
month and understated the city property tax by $26.24 per month when calculating the
borrower’s liability (see finding above). When the debt-to-income ratios were recalculated to
include the omitted property taxes (and a higher monthly income), the mortgage payment-to-
income ratio was 40.85 percent, and the total fixed payment-to-income ratio was 52.144 percent,
exceeding HUD’s requirement by 9.85 and 9.144 percent, respectively.

To justify the mortgage approval, the underwriter indicated in the “remarks” section of the
mortgage credit analysis worksheet that the borrower had great reserves. The worksheet showed
“assets available” as $38,214 and after closing, the borrower’s “cash reserves” totaling $35,426.
However, the loan file did not contain sufficient documentation to support the cash reserves
amount presented in the worksheet. A letter, dated August 27, 2008, from National Electrical
Annuity Plan revealed that the borrower’s current balance for the retirement plan was
$25,142.44. However, the letter also stated that the borrower was not eligible to withdraw his
entire retirement account balance until he reached 55 years of age and was out of covered
employment. At the time the loan was underwritten, the borrower was approximately 40 years
old. Additionally, an activity printout of the borrower’s bank account as of September 18, 2008,
showed that the borrower’s current balance was $5,474.06. After the closing, the borrower’s
cash balance was $3,686.06 ($5,474.06 minus the $1,788 in cash required from the borrower on
the HUD-1), which equals approximately 2.22 months of cash reserves. As a result, the
borrower’s cash reserves did not meet HUD’s requirement of 3 months’ worth and, therefore,
would not qualify as great reserves, as indicated for the compensating factor.




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Criteria:

Mortgagee Letter 2005-16, dated April 13, 2005, increased the mortgage-to-payment and total
fixed payment-to-income ratios from 29 and 41 percent to 31 and 43 percent, respectively. If
either or both ratios are exceeded on a manually underwritten mortgage, the lender is required to
describe the compensating factors used to justify the mortgage approval.

HUD Handbook 4155.1, REV-5, paragraph 2-13, states that any compensating factor used to
justify mortgage approval must be supported by documentation. One compensating factor that
may be used is that the borrower has substantial documented cash reserves (at least 3 months’
worth) after closing. In determining whether an asset can be included as cash reserves or cash to
close, the lender must judge whether the asset is liquid or readily convertible to cash and can be
liquidated absent retirement or job termination.




                                                80
FHA case number:      263-4251461

Mortgage amount:      $95,333

Section of Housing Act:      234C (Condominium)

Loan purpose: Conventional refinance

Date of loan closing: November 21, 2008

Status:       Claim

Payments before first 90-day delinquency reported: Five

Loss to HUD: $51,197

Summary:

Income:

Countrywide did not properly verify, calculate, and support the borrower’s monthly income. The
CLUES loan report revealed that the borrower’s monthly income was $6,191.55. However, it is
not clear how the underwriter arrived at this amount. According to handwritten notes on the
October 19, 2008, pay stub, the underwriter may have averaged the borrower’s 2007 and 2008
year-to-date earnings to arrive at the monthly income. Using the borrower’s most recent pay
stub in the loan file, we calculated the borrower’s monthly income as $4,377, a difference of
$1,815. Additionally, the borrower’s yearly wages significantly decreased.

The borrower’s 2007 Internal Revenue Service (IRS) W-2 wage and tax statement revealed that
the borrower earned $91,831.46 in 2007. However, according to the borrower’s pay stub as of
October 19, 2008, the borrower had only earned $42,060.89, with approximately 2½ months left
in the year 2008. There was no evidence in the loan file that Countrywide verified the declining
income or obtained an explanation from the borrower or employer regarding the borrower’s 2008
declining income as required.

Countrywide’s underwriter calculated the borrower’s monthly income as $6,192, which appeared
to be based on the average of 2007 and 2008 earnings. However, due to the decline in the
borrower’s income and the lack of documentation in the loan file to determine whether
Countrywide verified the borrower’s decline in income, the underwriter should have used the
borrower’s year-to-date figure as required by Countrywide’s Government Technical Manual.

Countrywide did not perform a direct verification of the borrower’s employment history,
although it included overtime and performance bonus pay in the borrower’s monthly income
used to qualify for the loan.




                                              81
An income worksheet was not completed and documented for the income calculation and
analysis performed to determine the borrower’s income. Additionally, Countrywide did not
provide detailed information in the “underwriter comments” section of the required form HUD-
92900-LT on how the income used for qualifying was determined. Countrywide also did not
verify the likelihood that the borrower’s employment or overtime income would continue.

Criteria:

HUD Handbook 4155.1, REV-5, paragraph 2-7, states that the borrower’s income to be obligated
for the mortgage debt must be analyzed to determine whether it can reasonably be expected to
continue through at least the first 3 years of the mortgage loan.

Countrywide’s Government Technical Manual (September 30, 2008), FHA: 2.3.2, states that
base pay income calculations must be compared with year-to-date figures using the verification
of employment or pay stub. If there is evidence of declining income, an average of the previous
year’s wages may not be used unless it is able to be fully explained and support is provided.
Both overtime and bonus income may be used to qualify if such income has been received for
approximately the past 2 years and it is expected to continue. An average of bonus or overtime
income for the past 2 years must be developed.

TOTAL Mortgage Scorecard User Guide, chapter 2, states that the lender is required to verify
the applicant’s employment history for the previous 2 years. However, direct verification is not
required if certain conditions are met. One of the conditions is that only base pay (no overtime
or bonuses) is used to qualify for the loan.

Countrywide’s Government Technical Manual (September 30, 2008), FHA: 1.4.2, states that the
loan file must contain adequate documentation to support the decision to approve the specific
loan transaction. Additionally, depending on the income source,

        An income worksheet and/or a Fannie Mae Cash Flow Analysis (Form 1084) should be
         completed and documented for the income calculation and analysis performed by the
         underwriter to determine the borrower’s income. The form(s) must be placed into the
         loan file and be part of the imaged documents and should be referred to in the
         “underwriter comments” section of the form HUD-92900-LT, or

        Detailed information should be provided in the “underwriter comments” section of the
         required form HUD-92900-LT on how the income used for qualifying was determined
         and what source form(s) were used (i.e., year-to-date pay stub, verification of
         employment, etc.).

Asset:

There was an unexplained large deposit of $7,100 in the borrower’s checking account.
According to the bank statement for the period ending September 22, 2008, there was a deposit
of $7,100 into the checking account on September 9, 2008. The beginning balance for the
checking account was zero, and the ending balance was $5,746.15. There was no explanation in
the loan file for the deposit.


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Criteria:

HUD Handbook 4155.1, REV-5, paragraph 2-10B, states that a verification of deposit, along
with the most recent bank statement, may be used to verify savings and checking accounts. If
there is a large increase in an account or the account was opened recently, the lender must obtain
a credible explanation of the source of those funds.

TOTAL Mortgage Scorecard User Guide, chapter 2, requires a lender to obtain an explanation
and documentation for large deposits in excess of 2 percent of the property’s sales price,
including the earnest money deposit. Additionally, the lender is to verify that recent debts were
not incurred to obtain part or all of the required cash investment on the property being purchased.

Skipped Mortgage Payment:

The LandSafe credit report, dated October 28, 2008, showed the mortgage payment history as of
September 2008 for the borrower’s mortgage of $91,182 with Chase Manhattan. The loan closed
on November 21, 2008. The settlement statement revealed that the mortgage payoff of $92,500
was made to Bayview Lending. The payoff demand statement revealing the total payoff amount
was not in the loan file. Additionally, there was no documentation supporting the borrower’s
payment of the mortgage amounts due on October 1 and November 1, 2008.

Bank of America’s senior business control specialist was unable to locate a demand for payoff
letter or updated documentation concerning the borrower’s most recent mortgage payments as of
November 1, 2008.

Therefore, this loan should not have been closed because it did not comply with HUD
requirements concerning skipped mortgage payments.

Criteria:

HUD Handbook 4155.1, REV-5, paragraph 1-10(E), states that lenders are not permitted to allow
borrowers to skip payments. The borrower is either to make the payment when it is due or bring
the monthly mortgage payment check to settlement. When the new mortgage amount is
calculated, FHA does not permit the inclusion of mortgage payments skipped by the homeowner
in the new mortgage amount. For example, a borrower whose mortgage payment is due June 1
and who expects to close the refinance before the end of June is not permitted to roll the June
mortgage payment into the new FHA loan amount.

Regulations at 24 CFR 203.330 state that a mortgage account is delinquent any time a payment is
due and not paid.




                                                83
FHA case number:      263-4334310

Mortgage amount:      $77,140

Section of Housing Act:      203B (Mutual Mortgage)

Loan purpose: Conventional refinance

Date of loan closing: December 2, 2008

Status:       Claim

Payments before first 90-day delinquency reported: Three

Loss to HUD: $79,439

Summary:

Skipped Mortgage Payment:

For the borrower’s jumbo conventional mortgage, the Countrywide home loans amended payoff
demand statement, dated November 25, 2008, showed the principal balance ($52,143.06) as of
September 1, 2008, interest ($906.04) from September 1 through December 2, 2008, and
uncollected late charges ($36). For the borrower’s second conventional mortgage, the payoff
demand statement, dated November 25, 2008, revealed the principal balance ($13,291.33) as of
September 1, 2008, interest ($292.05) from September 1 through December 10, 2008,
uncollected late charges ($13.88), prepayment penalty ($132.91), and fees due ($15). The loan
was closed on November 26, 2008 (settlement date). However, there was no documentation in
the loan file to support the borrower’s payment of the mortgage amounts due on October 1 and
November 1, 2008.

Bank of America’s senior business control specialist agreed that the documentation in the file
revealed that the interest payments for September 1 to December 1, 2008, were not made.
Additionally, Bank of America personnel were unable to locate an updated demand for payoff or
other supporting documentation showing that the payments were current.

Therefore, this loan should not have been closed because it did not comply with HUD
requirements concerning skipped mortgage payments.

Criteria:

HUD Handbook 4155.1, REV-5, paragraph 1-10(E), states that lenders are not permitted to allow
borrowers to skip payments. The borrower is either to make the payment when it is due or bring
the monthly mortgage payment check to settlement. When the new mortgage amount is
calculated, FHA does not permit the inclusion of mortgage payments skipped by the homeowner
in the new mortgage amount. For example, a borrower whose mortgage payment is due June 1



                                              84
and who expects to close the refinance before the end of June is not permitted to roll the June
mortgage payment into the new FHA loan amount.

Regulations at 24 CFR 203.330 state that a mortgage account is delinquent any time a payment is
due and not paid.




                                                85
FHA case number:       263-4387704

Mortgage amount:       $50,239

Section of Housing Act:        203B (Mutual Mortgage)

Loan purpose: Purchase

Date of loan closing: December 19, 2008

Status:        Claim

Payments before first 90-day delinquency reported: Five

Loss to HUD: $24,436

Summary:

Gift funds:

Countrywide did not document the transfer of gift funds from the donor to the borrower, and
there was inconsistency concerning the gift funds. The CLUES report, dated December 10,
2008, revealed that the borrower had $2,500 in gift funds. The gift letter, dated December 2,
2008, indicated that the borrower would receive a gift of $2,500 from his future father-in-law.
However, a copy of the cancelled check, withdrawal documents, bank statement, or deposit slip
was not in the loan file to support the transfer of the gift funds to the borrower. Additionally, the
gift fund amount was not included on the HUD-1 settlement statement, dated December 19,
2008. The uniform residential loan application, dated November 6, 2008, showed that the gift
amount was $2,400.

Criteria:

HUD Handbook 4155.1, REV-5, paragraph 2-10 (C)(1), states that if the gift funds are in the
home buyer’s bank account, the lender must document the transfer of the funds from the donor to
the home buyer by obtaining a copy of the canceled check or other withdrawal document
showing that the withdrawal is from the donor’s account. The home buyer’s deposit slip and
bank statement that show the deposit are also required.

HUD Handbook 4155.1, REV-5, paragraph 3-1(L), states that explanatory statements or
additional documentation necessary to make a sound underwriting decision is to be included in
the case binder.




                                                 86
FHA case number:      271-9566133

Mortgage amount:      $262,823

Section of Housing Act:      203B (Mutual Mortgage)

Loan purpose: Purchase

Date of loan closing: August 26, 2008

Status:       Claim

Payments before first 90-day delinquency reported: Two

Loss to HUD: $247,529

Summary:

Employment and Income Verification:

The telephone contact certification, dated August 5, 2008, showed that the borrower had worked
for his current employer, Cristy’s Bride & Tailoring, for 2 years and 5 months; the borrower was
employed in sales and marketing. The uniform residential loan application, signed August 26,
2008, revealed that the borrower was 21 years old at the time he applied for the loan. Thus, the
borrower started working at his current employment when he was 18 years old.

The IRS W-2 wage and tax statements showed that the borrower earned $69,063.95 and
$78,217.15 in 2006 and 2007, respectively. Additionally, two pay stubs for pay periods ending
June 15 and June 30, 2008, showed that the borrower had earned regular year-to-date amounts of
$31,350 and $34,200, respectively. The borrower’s pay rate was $2,850 for 2 weeks, and he also
received a bonus of $500 each pay period. The pay stub for the period ending June 30, 2008,
showed that the pay date was June 3, 2008. Additionally, there were no check numbers included
on the pay stubs.

Countrywide did not properly verify the borrower’s income. The earnings presented for the
borrower were questionable. The borrower’s income appeared to be high related to his age, and
there was no documentation to support the borrower’s qualifications or training for the job.
According to the audit team’s Google Map search, the business appeared to be small and was not
located in a busy commercial area.

Criteria:

HUD Handbook 4155.1, REV-5, paragraph 3-1(E), states that as an alternative to obtaining a
verification of employment, the lender may obtain the borrower’s original pay stub(s) covering
the most recent 30-day period, along with original IRS W-2 forms from the previous 2 years.




                                               87
The loan file must include a certification from the lender that original documents were examined
and the name, title, and telephone number of the person with whom employment was verified.

HUD Handbook 4155.1, REV-5, paragraph 3-1(L), states that explanatory statements or
additional documentation necessary to make a sound underwriting decision are to be included in
the case binder.

Regulations at 24 CFR 203.5(c) state that a direct endorsement lender shall exercise the same
level of care that it would exercise in obtaining and verifying information for a loan in which the
lender would be entirely dependent on the property as security to protect its investment.

Verification of Deposit:

The uniform residential loan application, signed August 26, 2008, showed under the “assets”
section that the borrower had $5,025 in a savings account with Guaranty Bank. An account
activity statement, dated June 17, 2008, revealed that the borrower had an ending and average
balance of $25 in a “free & easy” checking account; activity began in this account on April 18,
2008. The checking history inquiry printout, dated July 15, 2008, showed that a teller deposit of
$6,000 was made on the same date into the borrower’s account, resulting in an ending balance of
$6,025. A letter, dated July 15, 2008, and signed by borrower indicated tht the borrower did not
make any deposits into the bank account with Guaranty Bank because he sent all of his money to
his family in Puerto Rico, who managed all of his money. However, the loan file did not contain
sufficient documentation to show how the borrower was able to accumulate the funds at home.

The audit team also noted that the bank account number listed on the loan application did not
agree with the account number on the account activity documentation.

Criteria:

HUD Handbook 4155.1, REV-5, paragraph 2-10(B), states that a verification of deposit, along
with the most recent bank statement, may be used to verify savings and checking accounts. If
there is a large increase in an account or the account was opened recently, the lender must obtain
a credible explanation of the source of those funds.

HUD Handbook 4155.1, REV-5, paragraph 2-10(M), states that borrowers who have saved cash
at home and are able to demonstrate adequately the ability to do so are permitted to have this
money included as an acceptable source of funds to close the mortgage. The lender must
determine the reasonableness of the accumulation of the funds based on the borrower’s income
stream, the period during which the funds were saved, the borrower’s spending habits,
documented expenses, and the borrower’s history of using financial institutions.

Earnest Money Deposit:

The purchase agreement, dated March 22, 2008, indicated that the borrower had provided earnest
money of $500 using a check. However, there was no supporting documentation such as a




                                                88
cancelled check for the earnest money deposit received from the borrower. The activity in the
borrower’s account with Guaranty Bank only started in April 2008.

Criteria:

HUD Handbook 4155.1, REV-5, paragraph 2-10, states that all funds for the borrower’s
investment in the property must be verified and documented. Paragraph 2-10(A) of the
handbook states that if the amount of the earnest money deposit exceeds 2 percent of the sales
price or appears excessive based on the borrower’s history of accumulating savings, the lender
must verify with documentation of the deposit amount and the source of funds. Satisfactory
documentation includes a copy of the borrower’s cancelled check. A certification from the
deposit holder acknowledging receipt of funds and separate evidence of the source of funds is
also acceptable. Evidence of source of funds includes a verification of deposit or bank statement
showing that at the time the deposit was made, the average balance was sufficient to cover the
amount of the earnest money deposit.

Credit History:

The Landsafe credit merge report, dated June 10, 2008, revealed that the borrower did not have
traditional credit. A Landsafe nontraditional credit report, completed June 13, 2008, showed that
the borrower had a utility account with Qwest, which was opened in April 2005. Additionally,
the borrower had a utility account with Xcel Energy and an insurance account with Farmers
Insurance Group, both opened in April 2006.

The nontraditional credit report indicated that Landsafe Credit verified the borrower’s rental
history with the current and previous landlords. Specifically, the borrower had been renting at
the current address since September 15, 2007 (about 8 months), for $1,000 per month. The
report also showed that the borrower previously had a monthly rent payment of $800 at another
location for a year, ending September 1, 2007. However, the report did not disclose the previous
rental address. It was also unclear how Landsafe obtained the landlords’ contact information
since the borrower’s rental history was verified using the landlords’ cell phone numbers.

There were inconsistencies regarding the borrower’s letter of credits and information on the
nontraditional credit report. A letter from Xcel Energy (utility company), dated March 20, 2008,
included both the landlord’s and the borrower’s names and showed that the customer start date
was April 27, 2006, more than a year and 4 months before the borrower started renting at the
current property address. Similarly, the residence credit certificate, dated April 20, 2008, from
Qwest (telephone company) confirmed that the landlord and borrower had established good
credit with the telephone service starting April 1, 2005, which was more than 2 years and 5
months before the borrower started renting at the current property address. The credit certificate
did not show the name of person verifying the credit. It is not clear how Countrywide verified
the authenticity of the letters of credit to ensure that the credit history was for the borrower and
not the landlord.

Criteria:




                                                 89
HUD Handbook 4155.1, REV-5, paragraph 2-3, states that the lender may elect to use a
nontraditional mortgage credit report developed by a credit-reporting agency, provided that the
credit reporting agency had verified the existence of the credit providers and the lender verifies
that the nontraditional credit was extended to the applicant. The lender must verify the credit
using a published address or telephone number to make that verification.

HUD Handbook 4155.1, REV-5, paragraph 2-3(A), states that the payment history of the
borrower’s housing obligations holds significant importance in evaluating credit. The lender
must determine the borrower’s payment history of housing obligations through either the credit
report, verification of rent directly from the landlord (with no identity of interest with the
borrower), verification of mortgage directly from the mortgage servicer, or canceled checks
covering the most recent 12-month period.




                                                90
FHA case number:       581-3129633

Mortgage amount:       $293,371

Section of Housing Act:       203B (Mutual Mortgage)

Loan purpose: Conventional refinance

Date of loan closing: September 13, 2008

Status:        Claim

Payments before first 90-day delinquency reported: One

Loss to HUD: $171,463

Summary:

Employment and Income Verification:

The verification of employment, dated August 26, 2008, revealed that the coborrower’s date of
current employment was August 26, 2008, the same date as the verification of employment.
According to the underwriter findings and comments document, as of July 29, 2008, no
information had been provided for the coborrower’s income, and the underwriter recommended
the approval of the loan “pending satisfactory AUS [automated underwriting system] with
approval at higher ratios.” However, the CLUES decision document, dated August 28, 2008,
included the coborrower’s income from his current employment, although he had only worked at
the company for 2 days. One of the CLUES underwriting conditions required Countrywide to
obtain the most recent year-to-date pay stub for 1 full month’s earnings. However, the
coborrower’s pay stub in the loan file covered his year-to-date earnings for only 6 days, for the
week ending August 31, 2008. Therefore, Countrywide did not properly verify the coborrower’s
current employment.

The verification of employment indicated that the coborrower’s probability of continued
employment was excellent. It was not clear how the coborrower’s stability of income was
determined when he had only started working at his current employment the day the verification
of employment was completed. Countrywide also did not properly verify the coborrower’s
employment history for the previous 2 years. Only verbal verifications of employment were
found in the loan file for the coborrower’s prior employment.

The underwriter findings and comments document as of September 9, 2008, required
Countrywide to obtain documentation showing that the coborrower was “a permanent employee
of Seek, and not a temporary employee farmed out to companies, who might need his services.”
A letter, dated September 9, 2008, from Seek Careers and Staffing indicated that the coborrower
was employed by Seek Careers as a delivery driver on a full-time basis and he was expected to
work for Seek indefinitely. However, it did not appear reasonable that the coborrower was



                                               91
employed permanently as a delivery driver for Seek Careers, a company that provides temporary
employment services.

Criteria:

HUD Handbook 4155-1, REV-5, chapter 2, section 2, states that the anticipated amount of
income and the likelihood of its continuance must be established to determine a borrower’s
capacity to repay mortgage debt. Income may not be used in calculating the borrower’s income
ratios if it comes from a source that cannot be verified, is not stable, or will not continue.

HUD Handbook 4155.1, REV-5, paragraph 2-6, states that to analyze and document the
probability of continued employment, lenders must examine the borrower’s past employment
record, qualifications for the position, and previous training and education and the employer’s
confirmation of continued employment.

HUD Handbook 4155.1, REV-5, paragraph 2-7, states that the income of each borrower to be
obligated for the mortgage debt must be analyzed to determine whether it can reasonably be
expected to continue through at least the first 3 years of the mortgage loan.

FHA’s TOTAL Mortgage Scorecard User Guide, effective December 2004, states that the lender
must obtain the single most recent pay stub showing year-to-date earnings of at least 1 month
and any one of the following to verify current employment: (1) written verification of
employment, (2) verbal verification of employment, or (3) electronic verification acceptable to
FHA. Additionally, the lender is required to verify the applicant’s employment history for the
previous 2 years. If the applicant has not been employed with the same employer for the
previous 2 years, the lender must obtain one of the following for the most recent 2 years to verify
the applicant’s employment history: (1) IRS forms W-2, (2) verifications of employment, or (3)
electronic verification acceptable to FHA.

Liabilities:

The Landsafe residential mortgage credit report, dated August 1, 2008, showed that the borrower
had a monthly payment of $342 to a utility company and another monthly payment of $142 for a
credit card account. However, Countrywide did not include these amounts totaling $484 when
calculating the borrower’s liability. Therefore, the borrower’s total liabilities were understated
by $484, which affected the borrower’s computed debt-to-income ratios.

Both the CLUES decision document, dated August 28, 2008, and the mortgage credit analysis
worksheet revealed the mortgage payment-to-income ratio was 39.44 percent, and the total fixed
payment-to-income ratio was 42.11 percent. The borrowers’ recomputed total fixed payment-to-
income ratio, which included the monthly total of $484, was 50.16 percent. This ratio exceeded
HUD’s allowable ratio limit by 7.16 percent.

Criteria:




                                                92
HUD Handbook 4155.1, REV-5, paragraph 2-11(A), states that the borrower’s liabilities include
all installment loans, revolving charge accounts, real estate loans, alimony, child support, and
other continuing obligations. In computing the debt-to-income ratios, the lender must include
the monthly housing expense and all other additional recurring charges extending 10 months or
more. Debts lasting less than 10 months must be counted if the amount of the debt affects the
borrower’s ability to make the mortgage payment during the months immediately after loan
closing; this is especially true if the borrower will have limited or no cash assets after loan
closing.

Mortgagee Letter 2005-16, dated April 13, 2005, increased the mortgage-to-payment and total
fixed payment-to-income ratios from 29 and 41 percent to 31 and 43 percent, respectively.

Skipped Mortgage Payment:

The Citimortgage payoff statement, dated July 24, 2008, showed that the payoff amount of
$259,300.40 was good through September 1, 2008. However, according to the settlement
statement for the loan, which closed on September 13, 2008, the payoff amount for the first
mortgage with Citimortgage was $259,004.99, which was $259.41 less than the amount on the
payoff statement. An updated payoff demand statement, revealing the correct payoff amount,
was not in the borrower’s loan file. Bank of America was unable to provide documentation to
support the borrowers’ payment of the mortgage amounts due on August 1 and September 1,
2008.

According to Bank of America’s senior business control specialist, Bank of America was unable
to provide the updated payoff demand statement and could not address this item because the loan
was originated through a correspondent lender. Bank of America personnel further explained
that it was industry practice for the total payoff to include payments to bring the loan current
because the lender for the mortgage being paid off would not accept the payoff without those
payments.

Therefore, this loan should not have been closed because it did not comply with HUD
requirements concerning skipped mortgage payments.

Criteria:

HUD Handbook 4155.1, REV-5, paragraph 1-10(E), states that lenders are not permitted to allow
borrowers to skip payments. The borrower is either to make the payment when it is due or bring
the monthly mortgage payment check to settlement. When the new mortgage amount is
calculated, FHA does not permit the inclusion of mortgage payments skipped by the homeowner
in the new mortgage amount. For example, a borrower whose mortgage payment is due June 1
and who expects to close the refinance before the end of June is not permitted to roll the June
mortgage payment into the new FHA loan amount.

Regulations at 24 CFR 203.330 state that a mortgage account is delinquent any time a payment is
due and not paid.




                                               93
Regulations at 24 CFR 202.8(b)(7) state that each sponsor shall be responsible to the HUD
Secretary for the actions of its loan correspondent lenders or mortgagees in originating loans or
mortgages, unless applicable law or regulation requires specific knowledge on the part of the
party to be held responsible. Additionally, Section 202.8(b)(9) states that for the mortgages
processed through direct endorsement under 203.5 and 203.255(b) of this chapter or through the
Lender Insurance program, underwriting shall be the responsibility of the direct endorsement or
Lender Insurance program sponsor, and the mortgage shall be closed in the loan correspondent
lender’s own name or the name of the sponsor that will purchase the loan.




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FHA case number:      581-3168637

Mortgage amount:      $93,301

Section of Housing Act:      203B (Mutual Mortgage)

Loan purpose: Conventional refinance

Date of loan closing: October 7, 2008

Status:       Claim

Payments before first 90-day delinquency reported: Seven

Loss to HUD: $79,795

Summary:

Skipped Mortgage Payment:

The Countrywide home loans amended payoff demand statement, dated October 7, 2008,
showed the principal balance ($72,501.92) as of September 1, 2008, interest ($582.12) from
September 1 through October 14, 2008, and county recording fee ($11). The loan was closed on
October 7, 2008, which was after the mortgage payment due date of October 1, 2008. However,
there was no documentation in the loan file to support that the borrowers brought a check
payment to the settlement to pay the mortgage amount due in October 2008 as required by HUD.

According to Bank of America’s senior business control specialist, the payment was due October
1, 2008, but not delinquent until October 15, 2008. The lender would have required the interest
for the 7 days past the due date at the closing. Bank of America personnel further explained that
it was not necessary for the borrower to come to the closing with cash because the payment
could be rolled into the loan amount. For this loan, which was a cash-out refinance loan, the
borrower would not need to come to the closing with funds.

Therefore, this loan should not have been closed because it did not comply with HUD
requirements concerning skipped mortgage payments.

Criteria:

HUD Handbook 4155.1, REV-5, paragraph 1-10(E), states that lenders are not permitted to allow
borrowers to skip payments. The borrower is either to make the payment when it is due or bring
the monthly mortgage payment check to settlement. When the new mortgage amount is
calculated, FHA does not permit the inclusion of mortgage payments skipped by the homeowner
in the new mortgage amount. For example, a borrower whose mortgage payment is due June 1
and who expects to close the refinance before the end of June is not permitted to roll the June
mortgage payment into the new FHA loan amount.



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Regulations at 24 CFR 203.330 state that a mortgage account is delinquent any time a payment is
due and not paid.




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