oversight

Wells Fargo Home Mortgage, Fort Mill, SC, Did Not Always Approve FHA-HAMP Loans or Trial Plans in Accordance With Rules and Regulations

Published by the Department of Housing and Urban Development, Office of Inspector General on 2011-06-07.

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

                                                                             Issue Date
                                                                                      June 7, 2011
                                                                             Audit Report Number
                                                                                      2011-FW-1010




TO:             Ivery Himes, Acting Director, Office of Single Family Asset Management, HUF

                //signed//
FROM:           Gerald R. Kirkland
                Regional Inspector General for Audit, Fort Worth Region, 6AGA

SUBJECT: Wells Fargo Home Mortgage, Fort Mill, SC, Did Not Always Approve FHA-
           HAMP Loans or Trial Plans in Accordance With Rules and Regulations


                                           HIGHLIGHTS

    What We Audited and Why

                 We performed a limited review of Wells Fargo Home Mortgage (Wells Fargo) as
                 a result of our internal audit of the Federal Housing Administration’s (FHA)
                 Home Affordable Modification Program (HAMP). During the audit, we visited
                 Wells Fargo and reviewed a limited number of loans to determine whether the
                 National Servicing Center implemented and operated FHA-HAMP in accordance
                 with rules and regulations. Our objective for this limited review was to determine
                 whether Wells Fargo followed U. S. Department of Housing and Urban
                 Development (HUD) rules and regulations when processing defaulted loans for
                 the FHA-HAMP loss mitigation option.

    What We Found

                 Our limited review of 15 loans 1 showed that Wells Fargo did not always correctly
                 calculate gross income, include all necessary debts, put borrowers in proper trial
                 plans, or check for borrower eligibility. As a result, it approved more than
                 $127,000 in FHA-HAMP claims than it should have. Wells Fargo changed its
                 policy regarding gross income calculation and ensuring borrower eligibility.

1
     We reviewed 10 loans that had FHA-HAMP paid claims and 5 loans for default status code issues.
           In addition, Wells Fargo used verbal financial information to qualify four
           borrowers for the FHA-HAMP trial plan. After the borrowers completed the trial
           plans, Wells Fargo determined that the borrowers did not qualify for the FHA-
           HAMP loss mitigation option. Wells Fargo changed its policy to ensure that it
           obtains written financial documentation before considering borrowers for FHA-
           HAMP trial plans.

What We Recommend

           We recommend that the Acting Director of the Office of Single Family Asset
           Management require Wells Fargo to (1) reimburse HUD $127,853 for the FHA-
           HAMP claims it should not have approved and (2) ensure that it properly reports
           FHA-HAMP borrowers’ status in HUD’s systems.

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

Auditee’s Response

           We provided a draft report to Wells Fargo on May 12, 2011, and requested
           comments by May 31, 2011. We held an exit conference with Wells Fargo on
           May 24, 2011. Wells Fargo provided its comments on June 2, 2011. Wells Fargo
           agreed with the majority of the report and provided documentation to support the
           amount of one FHA loan. We made appropriate changes to the report. The
           complete text of the auditee’s response, along with our evaluation of that
           response, can be found in appendix B of this report.




                                            2
                          TABLE OF CONTENTS

Background and Objective                                                    4

Results of Audit
      Finding: Wells Fargo Did Not Always Approve FHA-HAMP Loans or Trial   5
      Plans in Accordance With Rules and Regulations

Scope and Methodology                                                       9

Internal Controls                                                           12

Appendixes
   A. Schedule of Questioned Costs                                          14
   B. Auditee Comments and OIG’s Evaluation                                 15
   C. Schedule of Ineligible Amounts                                        17




                                         3
                         BACKGROUND AND OBJECTIVE

Wells Fargo Home Mortgage (Wells Fargo) is a division of Wells Fargo Bank, N.A. Wells
Fargo originates and services home mortgages.

This limited review of Wells Fargo resulted from a spinoff of an internal audit of the Federal
Housing Administration’s (FHA) Home Affordable Modification Program (HAMP) loss
mitigation option. 2 Wells Fargo Bank, N.A. is an FHA-approved servicer. Therefore, Wells
Fargo can offer the FHA-HAMP loss mitigation option for FHA-insured loans either facing
imminent default or already in default.

HUD introduced the FHA-HAMP loss mitigation option on July 30, 2009, and it became effective
August 15, 2009.3 FHA-HAMP combines the already established loan modification and partial
claim loss mitigation options. The FHA-HAMP loan modification must reduce the unmodified
monthly principal and interest payment, and the servicer must reamortize the loan for 30 years. The
FHA-HAMP partial claim can be up to 30 percent of the unmodified unpaid principal balance. The
FHA-HAMP partial claim is due at the (1) maturity of the FHA-HAMP mortgage, (2) sale of the
property, or (3) payoff or refinancing of the FHA-HAMP mortgage.

As of June 7, 2010, Wells Fargo had 181 of the 731 completed FHA-HAMP claims. We chose
Wells Fargo to review during our internal audit due to the number of completed FHA-HAMP
claims.

Our objective was to determine whether Wells Fargo followed U. S. Department of Housing and
Urban Development (HUD) rules and regulations when processing defaulted loans for the FHA-
HAMP loss mitigation option.




2
    See audit report 2011-FW-0001, dated April 8, 2011, “The National Servicing Center Implemented the FHA-
    HAMP Loss Mitigation Option in Accordance With Rules and Regulations” for the results of the review.
3
    Mortgagee Letter 2009-23


                                                      4
                                       RESULTS OF AUDIT

Finding: Wells Fargo Did Not Always Approve FHA-HAMP Loans or
Trial Plans in Accordance With Rules and Regulations
Of the 10 Wells Fargo FHA-HAMP paid claim loans reviewed, 4 contained gross income, and/or
debt miscalculations. Another one did not qualify based on the type of trial plan Wells Fargo
approved for the borrower. In addition, Wells Fargo did not always check for borrower
eligibility and approved trial plans for borrowers based on verbal information that ultimately did
not qualify for the FHA-HAMP trial plan. Since this was a recently developed program, a
limited review within the first year of the program showed that some processes needed
improvement. While Wells Fargo implemented new policies to correct future occurrences, it
will need to reimburse HUD $127,853 for FHA-HAMP claims it approved but should not have.




    Wells Fargo Did Not Always
    Correctly Calculate Gross
    Income and/or Debt

                  Of the 10 Wells Fargo loans reviewed for FHA-HAMP paid claims, 4 contained
                  gross income and/or debt miscalculations. At the inception of FHA-HAMP,
                  Wells Fargo’s policy for income calculation was to use 125 percent of net income.
                  However, regulations required servicers to use gross income. 4 Wells Fargo
                  acknowledged the error and corrected its income calculation policy.

                  The four borrowers that Wells Fargo approved for FHA-HAMP claims that
                  contained miscalculations either did not qualify for the loss mitigation option or
                  qualified for a lesser claim amount. If the borrower did not qualify, Wells Fargo
                  will need to reimburse HUD for the amount of the partial claim plus any incentive
                  fees. If the borrower did qualify for the option but for a lesser claim amount,
                  Wells Fargo will need to reimburse HUD the difference between the claim filed
                  and the updated calculation with the appropriate gross income.

                  In addition to the gross income miscalculation for one borrower, Wells Fargo did
                  not include in the computation all of the borrower’s debt. If the debt had been
                  included as required, the borrower’s back ratio would have exceeded the 55
                  percent threshold. 5 Therefore, the borrower did not qualify for the FHA-HAMP
                  loss mitigation option.



4
      Mortgagee Letter 2009-23 and its attachment.
5
      Ibid


                                                     5
                  Overall, Wells Fargo incorrectly approved $77,319 6 in partial claims. Even
                  though Wells Fargo started using gross income in accordance with rules and
                  regulations, it will need to reimburse HUD for the amount it inappropriately
                  approved.

      Wells Fargo Used a Lump Sum
      Payment Trial Plan


                  In 1 of the 10 FHA-HAMP completed claim loans, Wells Fargo established a
                  lump sum payment trial plan instead of a 3- or 4-month payment trial plan as
                  regulations required. 7 This borrower had received a regular partial claim at about
                  the same time the FHA-HAMP rules and regulations became effective. However,
                  the borrower went into default again the month following the regular partial
                  claim. Wells Fargo then qualified the borrower for FHA-HAMP.

                  Wells Fargo used the lump sum payment trial plan as a way to accelerate the trial
                  payments. If the borrower was unable to qualify for at least a 3-month trial plan,
                  the borrower was not eligible for FHA-HAMP. However, the borrower made the
                  one-time lump sum payment. Wells Fargo filed the claims for FHA-HAMP in
                  April 2010, which totaled $50,534. That same month, Wells Fargo put the
                  borrower into a delinquent status again. By March 2011, Wells Fargo had
                  obtained bankruptcy court clearance for this loan. Wells Fargo will need to
                  reimburse HUD $50,534 as a result of the improper trial plan.

    Wells Fargo Did Not Ensure
    Borrower Eligibility


                  In the 10 loans reviewed for FHA-HAMP paid claims, Wells Fargo did not check to
                  ensure borrower eligibility. To participate in FHA-HAMP, regulations required
                  servicers to check HUD’s limited denial of participation list and the General
                  Services Administration’s (GSA) Excluded Parties List System to ensure borrower
                  eligibility before approving a borrower for the loss mitigation option.8 Upon request
                  for borrower eligibility documentation, Wells Fargo checked both HUD’s limited
                  denial of participation list and GSA’s Excluded Parties List System. All 10
                  borrowers were eligible. However, Wells Fargo must check borrower eligibility
                  before qualifying borrowers for FHA-HAMP. Wells Fargo implemented this
                  change, and no further action was necessary.




6
     This amount also includes any incentive fees paid for claims in which the borrowers did not qualify for FHA-
     HAMP.
7
     Mortgagee Letter 2009-23 and its attachment and Mortgagee Letter 2010-04
8
     Mortgagee Letter 2009-23 and its attachment


                                                         6
     Wells Fargo Used Verbal
     Financial Information To
     Approve FHA-HAMP Trial
     Plans

                   Of the five files reviewed for default status code issues, Wells Fargo
                   inappropriately approved four for FHA-HAMP trial plans based on verbal
                   information. HUD regulations 9 required servicers to obtain written
                   documentation to verify the borrowers’ financial information before qualifying
                   them for an FHA-HAMP trial plan. Although the borrowers completed the FHA-
                   HAMP trial plan, three borrowers (75 percent) did not qualify for the plan.
                   However, the three borrowers qualified for the regular loan modification loss
                   mitigation option. The other borrower did not return the necessary documentation
                   and Wells Fargo removed this borrower from the loss mitigation option. Wells
                   Fargo stopped its practice of obtaining verbal financial information and now
                   complies with the HUD requirement to obtain written documentation.

                   Since the borrowers completed the trial plan, they were technically disqualified
                   from future use of the FHA-HAMP loss mitigation option. However, due to
                   Wells Fargo not following the necessary rules and regulations by not obtaining
                   written financial documentation before approving the borrowers for the trial plan,
                   HUD considered the borrowers eligible for potential future use of the FHA-
                   HAMP loss mitigation option.

                   Further, this condition might be responsible for many of the 4,754 Wells Fargo-
                   serviced loans that showed a default status code 39 10 without a corresponding
                   default status code 41 11 in HUD’s system. As discussed in an internal audit
                   report, 12 Wells Fargo made up 62 percent of the 7,672 loans that had this
                   condition as of January 2011. Wells Fargo should properly report the borrowers’
                   status in HUD’s systems.




9
      Mortgagee Letter 2009-23 and its attachment
10
      Default status code 39 indicates that the servicer approved the borrower to participate in the FHA-HAMP trial
      plan.
11
      Default status code 41 indicates that the borrower completed the trial plan and the servicer was beginning the
      process of filing the partial claim and loan modification claims.
12
      See audit report 2011-FW-0001, dated April 8, 2011, “The National Servicing Center Implemented the FHA-
      HAMP Loss Mitigation Option in Accordance With Rules and Regulations” for the results of the review.


                                                           7
Conclusion


             Since FHA-HAMP was a recently developed program, a limited review showed
             that Wells Fargo needed to improve some processes. Wells Fargo implemented
             new policies concerning gross income calculation, ensuring borrower eligibility,
             and obtaining written financial information to ensure that it follows FHA-HAMP
             rules and regulations. However, it filed for $127,853 in claims and incentive fees
             that it should not have due to miscalculations and an improper trial plan.

Recommendations



             We recommend that the Acting Director of the Office of Single Family Asset
             Management require Wells Fargo to

             1A. Reimburse HUD for $127,853 in FHA-HAMP claims that it should not have
                 approved and incentive fees that it did not earn.

             1B. Ensure that it properly reports FHA-HAMP borrowers’ status in HUD’s
                 systems.




                                              8
                              SCOPE AND METHODOLOGY

To accomplish our objective, we

          •    Reviewed relevant criteria including laws and mortgagee letters,
          •    Reviewed Wells Fargo loan files,
          •    Interviewed National Servicing Center and Wells Fargo staff, and
          •    Analyzed the Single Family Data Warehouse’s loss mitigation table and default
               history table as discussed in detail below. We performed this analysis under the
               internal audit; however, we used it to select a sample of loans to review from Wells
               Fargo.

Loss Mitigation Table

The Single Family Data Warehouse’s loss mitigation table contained more than 1.1 million
records 13 as of June 7, 2010. Using ACL software, we filtered these records to show paid claims
for loan modifications and partial claims with or without an FHA-HAMP indicator. Further, we
tested for duplicate claims to determine whether HUD paid any claims twice on the same loan
that had a loan modification or partial claim with an FHA-HAMP indicator. One loan had a
duplicate claim for a loan modification with an FHA-HAMP indicator. We joined these filtered
records to determine the number of

         •    Completed FHA-HAMP claims (731),
         •    Paid claims for an FHA-HAMP loan modification without a corresponding FHA-
              HAMP partial claim (14),
         •    Paid claims for an FHA-HAMP partial claim without a corresponding FHA-HAMP
              loan modification (131),
         •    Paid claims for an FHA-HAMP partial claim that had a previous partial claim without
              an FHA-HAMP indicator (41), and
         •    Instances in which the FHA-HAMP loan modification claim process date was before
              the FHA-HAMP partial claim process date (7).

As of June 7, 2010, Wells Fargo had 181 completed FHA-HAMP claims.

We chose a total of 10 files as follows:

         •    Two loans from the completed FHA-HAMP data – one with the oldest endorsement
              date and one with the highest FHA-HAMP partial claim amount;
         •    Two loans from the paid claim data for an FHA-HAMP partial claim without a
              corresponding FHA-HAMP loan modification – one with the highest FHA-HAMP
              partial claim amount and one with the oldest process date;
         •    The first three loans listed from the paid claim data for an FHA-HAMP loan
              modification without a corresponding FHA-HAMP partial claim;
13
     The loss mitigation table included special forbearance, loan modification, and partial claim.


                                                           9
         •    The only loan from the paid claim data for an FHA-HAMP partial claim that had a
              previous partial claim without an FHA-HAMP indicator; and
         •    The two loans for which the FHA-HAMP loan modification claim process date was
              before the FHA-HAMP partial claim process date.

Default History Table

As of June 10, 2010, HUD’s data for the default history table for default status codes 39 and 41
had more than 18,800 records. Using ACL software, we filtered the records to isolate the default
status codes into individual tables: default status codes 39 had 16,662 records and default status
code 41 had 2,139 records. We then joined the default status code tables to determine how many
loans had a default status code 39 that matched or did not match default status code 41. After
eliminating any duplicate case numbers, 14 our analysis showed that 746 loans had both a default
status code of 39 and 41. Additionally, 8,848 loans had a default status code of 39 but not 41.

We chose to review a total of five loans that had a default status code of 39 but not 41. We
assigned a random number to each loan and sorted in ascending order. Before selecting the loan
to review, we reviewed Neighborhood Watch to ensure that the loan did not already have a
completed FHA-HAMP claim. 15 If the loan had a completed FHA-HAMP claim, we discarded
that loan and chose the next loan until we had five loans for each servicer.

Updated Default History Table

As of January 6, 2011, the default history table for default status codes 39 and 41 contained more
than 58,800 records. We filtered the records to isolate default status code 41, which had 5,010
records after eliminating duplicate case numbers. We compared this information with the 8,848
records from the original default history table. Of the 8,848 records that had a default status
code 39 but not a default status code 41 reported in June 2010, 7,672 records still did not have a
default status code 41 reported in January 2011. Wells Fargo was responsible for 4,754 of those
records.

We relied on the above data to select a sample of loans to review for our objective. We reviewed
the underlying documentation to form our conclusions in the finding. We do not express an
opinion on the overall reliability of the data.

We performed audit work at the National Servicing Center’s office in Oklahoma City, OK, and
at Wells Fargo’s office in Fort Mill, SC. Our audit scope for Wells Fargo was from August 2009
to June 2010, although we expanded some of the data analysis to January 6, 2011. We
performed this work from August 2010 through April 2011.



14
     Servicers would report a default status code 39 for the 3- or 4-month period the participant was in the trial plan.
15
     HUD considered the FHA-HAMP loss mitigation option failed when the servicer reported a default status code
     39 but not 41. We did not select any borrowers that had completed FHA-HAMP claims because this
     completion indicated that they did not fail the FHA-HAMP loss mitigation option.



                                                           10
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. We believe that the evidence obtained provides a reasonable basis for our findings
and conclusions based on our audit objective.




                                              11
                              INTERNAL CONTROLS

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

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

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



 Relevant Internal Controls
               We determined that the following internal controls were relevant to our audit
               objective:

                  •   Program operations – Local 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.
                  •   Validity and reliability of data – Policies and procedures that management
                      has implemented to reasonably ensure that it obtains, maintains, and fairly
                      discloses valid and reliable data in reports.

               We assessed the relevant controls identified above.

               A deficiency in internal controls 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.




                                                12
Significant Deficiency


            We evaluated internal controls related to the audit objective in accordance with
            generally accepted government auditing standards. We did not design our evaluation
            of internal controls to provide assurance regarding the effectiveness of the internal
            control structure as a whole. Accordingly, we do not express an opinion on the
            effectiveness of the Wells Fargo’s internal control.




                                             13
                                   APPENDIXES

Appendix A

                SCHEDULE OF QUESTIONED COSTS


                           Recommendation            Ineligible 1/
                                  number
                                         1A            $127,853



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.




                                            14
Appendix B

        AUDITEE COMMENTS AND OIG’S EVALUATION


Ref to OIG Evaluation   Auditee Comments




Comment 1


Comment 2




                         15
                        OIG Evaluation of Auditee Comments

Comment 1   We reviewed the documentation concerning FHA Case Number 044-4372814 and
            made appropriate changes to the report.

Comment 2   We commend Wells Fargo for implementing changes to strengthen its process
            concerning FHA-HAMP.




                                          16
Appendix C

                                Schedule of Ineligible Amounts
                          Ineligible        Ineligible
   FHA Case              FHA-HAMP           Incentive             Total                      Reason
   Number                 Amount 16            Fee
023-2869618                  $42,604                   -           $42,604      Income Calculation Error
105-3544391                     9,145             $1,250            10,395      Income Calculation Error
222-1683545                    18,444              1,250            19,694      Income and Debt Calculation Error
249-5168697                     4,626                  -             4,626      Income Calculation Error
352-5544124                    49,284              1,250            50,534      Improper Trial Plan
Total                       $124,103              $3,750          $127,853




16
     This column includes the title search and/or recording fees in relation to the loan modification when the
     borrower did not qualify for the FHA-HAMP loss mitigation option.


                                                          17