oversight

Universal American Mortgage Company, Las Vegas, NV, Branch Did Not Comply With HUD Regulations in the Origination and Quality Control of FHA-Insured Loans

Published by the Department of Housing and Urban Development, Office of Inspector General on 2011-09-21.

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

                                                                Issue Date
                                                                         September 21, 2011
                                                                Audit Report Number
                                                                             2011-LA-1017




TO:        Deborah Holston, Acting Deputy Assistant Secretary for Single Family Housing,
           HU



FROM:      Tanya E. Schulze, Regional Inspector General for Audit, Region IX, 9DGA

SUBJECT: Universal American Mortgage Company, Las Vegas, NV, Branch Did Not
         Comply With HUD Regulations in the Origination and Quality Control of FHA-
         Insured Loans


                                  HIGHLIGHTS

 What We Audited and Why

             We audited the Federal Housing Administration (FHA)-insured loan process at
             Universal American Mortgage Company (lender) to determine whether the
             lender complied with U.S. Department of Housing and Urban Development
             (HUD) regulations, procedures, and instructions in the origination and quality
             control review of FHA-insured loans. The review was part of our efforts to
             improve the integrity of the single-family insurance programs. We selected the
             lender’s Las Vegas branch because its default rate, when compared to the
             national average, was the highest of all of its branches.

 What We Found


             The lender did not follow HUD requirements in the origination or quality
             control review of FHA-insured loans. Specifically, all 15 loans reviewed
           contained underwriting deficiencies and inappropriate restrictive covenants that
           affected the insurability of the loan. In addition, we reviewed 10 quality
           control reviews, and all 10 were in violation of HUD regulations or the
           lender’s quality control policies.

What We Recommend


           We recommend that the Acting Deputy Assistant Secretary for Single Family
           Housing require the lender to (1) indemnify HUD against losses for the 9 of 10
           FHA-insured loans with significant underwriting deficiencies and unallowable
           restrictive covenants of more than $1.1 million; (2) reimburse the FHA
           insurance fund $118,861 in losses resulting from the claims and associated
           expenses paid on 1 loan with significant underwriting deficiencies or
           unallowable restrictive covenants; (3) develop, implement, and enforce written
           controls to ensure that FHA-insured loans are originated in compliance with
           HUD regulations; and (4) fully implement its quality control plan and follow
           up to ensure that its quality control reviews are conducted in accordance with
           HUD regulations.

           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 lender a discussion draft report on August 10, 2011, and held
           an exit conference with lender officials on August 18, 2011. The lender
           provided written comments on August 25, 2011. It generally disagreed with
           the report.

           The complete text of the lender’s response, along with our evaluation of that
           response, can be found in appendix B of this report. The auditee also provided
           additional documentation related to the underwriting of the loans we
           questioned. We did not include this in the report because it was too
           voluminous; however, it is available upon request.




                                          2
                            TABLE OF CONTENTS

Background and Objective                                                        4

Results of Audit
Finding 1: Universal American Mortgage Company Did Not Comply With HUD          6
           Regulations in the Origination of FHA-Insured Loans
Finding 2: Universal American Mortgage Company’s Quality Control Reviews Were   11
           Inadequate

Scope and Methodology                                                           15

Internal Controls                                                               17

Appendixes

      A.   Schedule of Questioned Costs and Funds To Be Put to Better Use       19
      B.   Auditee Comments and OIG’s Evaluation                                20
      C.   Loan Details for Underwriting Deficiencies                           64
      D.   Criteria                                                             65
      E.   Loan Summaries for Underwriting Deficiencies for the 15 Loans        73




                                            3
                        BACKGROUND AND OBJECTIVE

The Federal Housing Administration (FHA) created by Congress in 1934 is the largest
mortgage insurer in the world. The homeowners pay into the FHA insurance fund through
mortgage insurance. The U.S. Department of Housing and Urban Development (HUD) uses
these funds to operate the FHA insurance program. The insurance provides lenders with
protection against losses as the result of homeowners defaulting on home mortgages. In fiscal
year 2010, FHA insured more than 1.75 million single-family mortgages totaling more than
$319 billion. Among all mortgage originations, FHA insured 38 percent of all home-purchase
loans and 9 percent of all refinance loans1. The enabling legislation of Title II of the National
Housing Act authorizes FHA single-family programs.

Various sanctions exist that allow the HUD Homeownership Centers2 and FHA the flexibility
to respond appropriately to any noncompliance action by a direct endorsement lender or other
program participant. The Homeownership Centers and the Mortgagee Review Board may
impose the following sanctions: lender probation, withdrawal of direct endorsement status,
withdrawal of FHA approval, indemnification agreements, civil money penalties, and
sanctions against individual program participants.

Universal American Mortgage Company, LLC (lender), is a nonsupervised lender approved
January 1, 1960, to originate FHA loans. The lender originates loans under the lender
insurance program, which enables high-performing lenders to insure FHA mortgage loans
without a pre-endorsement review by HUD. Universal American Mortgage Company, LLC,
Universal American Mortgage Company of California, and North American Title Company
are all affiliates of Lennar Financial Services, LLC. Lennar Financial Service is a wholly
owned subsidiary of Lennar Corporation, a national residential homebuilder. The lender’s
headquarters is at 700 N.W. 107th Avenue, Miami, FL, and the company has branches in 13
States. The lender provides mortgage financing services principally to purchasers of Lennar
Corporation homes.


                                   Lennar Financial Services, LLC

    Universal American                     North American                  Universal American Mortgage
    Mortgage Company, LLC                  Title Group, Inc.               Company of California


The lender has 16 FHA-approved active branch offices. Between October 1, 2008, and
September 30, 2010, it originated 8,554 FHA-insured loans totaling more than $1.61 billion.
We selected the Las Vegas, NV, branch for review because it had the highest compare ratio of

1
  FHA insurance data obtained from HUD’s annual report to Congress regarding the financial status of the FHA
Mutual Mortgage Insurance Fund, Fiscal Year 2010.
2
  The Homeownership Center’s objectives include (1) reducing the risk of defaults and claims to FHA, (2)
improve lender performance, and/or (3) remove non-complying lenders from the program.



                                                      4
all of the lender’s branches. The Las Vegas branch originated 581 FHA-insured loans totaling
more than $130 million during our audit period with more than $700,000 in claims paid by
HUD on four loans3.

The objective of the audit was to determine whether the lender’s Las Vegas branch complied
with HUD regulations in the origination and quality control review of FHA-insured loans.




3
 We used Neighborhood Watch, HUD’s online information system for FHA-insured loans, to obtain loan
origination data for the lender.


                                                   5
                               RESULTS OF AUDIT

Finding 1: Universal American Mortgage Company Did Not Comply
           With HUD Regulations in the Origination of FHA-Insured
           Loans
Universal American Mortgage Company had significant underwriting deficiencies in 10 of the
15 loan files reviewed and unallowable restrictive covenants in all 15 loan files reviewed.
This condition was caused by the underwriters’ not exercising sound judgment and due
diligence when underwriting FHA loans and the lender’s not having policies and procedures
to identify unallowable restrictive covenants. As a result, the FHA insurance portfolio
incurred losses of $118,861 and remained at risk for losses of more than $1.1 million on loans
that did not meet HUD requirements.


 Ten Loan Files Contained
 Significant Underwriting
 Deficiencies


              Our loan file review of 15 FHA-insured loans identified 10 with significant
              underwriting deficiencies that included improper calculation and inadequate
              documentation of income, inadequate documentation of credit or debt, and
              inadequate documentation of assets (see appendixes C and E). The lender did
              not underwrite the 10 loans as required by HUD Handbook 4155.1, chapter 3,
              which states that the ―lender is responsible for asking sufficient questions to
              elicit a complete picture of the borrower’s financial situation, source of funds
              for the transaction, and the intended use of the property. All information must
              be verified and documented.‖

              For example, the underwriter approved loan 332-4680917 without verifying
              that the borrower’s employment would continue when relocating to the Las
              Vegas area. This borrower defaulted after two payments, and HUD paid a
              claim in the amount of $118,861.

              In another example, the underwriter approved loan 332-4646174 using
              significant overtime income. A week before closing, the borrower quit a
              second job to work overtime at her primary job. The underwriter obtained a
              verification of income from the employer stating that the borrower would work
              25 hours of overtime per week. However, the underwriter did not establish a
              history of overtime income and did not verify with the employer that the
              overtime was likely to continue as required by HUD Handbook 4155.1, REV.
              5, Paragraph 2-7A (See appendix D). Because of the significant violation
              noted, the FHA insurance fund is at risk of a potential loss of $176,954.


                                              6
            The table below lists the 15 loan files reviewed and the deficient areas
            associated with each loan.

                         Case file review revealed underwriting        Significant
                                        deficiency                    underwriting
         FHA loan                                                     deficiencies*
          number        Income        Credit      Assets Misc.
       332-4710214                                          
       332-4711039                                           
       332-4680917                                                       
       332-4905750                                                       
       332-4646174                                                      
       331-1386377                                                        
       332-4772348                                                      
       332-4746911                                                     
       332-4705686                                                      
       331-1343149                                                      
       332-5009143                                                    
       332-5029755                                                   
       332-4657522                                                    
       332-4837072                                                  
       332-4729886                                                    
       Total                8            6           9          6          10
             *Appendix E contains details of each loan file review.

            The five loans not considered to have significant underwriting deficiencies,
            identified in the table above, also contained violations that did not comply with
            HUD regulations. In these cases, either the underwriting deficiencies were not
            significant enough to impact the insurability of the loan, or the loan would
            have been eligible based on other factors even if the underwriter had properly
            adjusted for the deficient item. However, as discussed in the next section,
            these loans contained unallowable restrictive covenants.

All Loans Contained
Unallowable Restrictive
Covenants


            The lender filed unallowable restrictive covenants. A review of the applicable
            county recorder’s records revealed legal restrictions on conveyance in all 15
            loans reviewed. As illustrated in the excerpt below, the deed restriction, called
            the occupancy and antispeculation agreement, set the occupancy period at 1
            year and restricted the borrower from selling or renting the home during the
            occupancy period. The addendum stated that any breach would entitle the
            seller, at its sole election, to receive from buyer, as liquidated damages for such
            breach, the sum of $50,000. The buyer’s obligation to pay the liquidated
            damages constituted a lien on the property. This deed restriction on
            conveyance violated HUD regulations. Specifically, 24 CFR (Code of Federal
            Regulations) 203.41(b) states that ―a mortgage shall not be eligible for


                                                  7
            insurance if the mortgaged property is subject to legal restrictions on
            conveyance.‖

            Also, a review of the final title policy revealed a recorded charitable agreement
            imposing endowment fee obligation in 2 of the 15 loans reviewed. This
            agreement established a lien, which required payment of a fee upon
            conveyance of title. This was a violation of HUD Handbook 4155.2, paragraph
            6.A.1.h (see criteria in appendix D). The endowment fee, similar to the
            occupancy and antispeculation agreement, was in violation of 24 CFR
            203.41(b).

            The table below contains the loan files that include the Lennar charitable
            agreement imposing endowment fee obligation and associate fees paid by
            borrower.

                 FHA loan        Fees on HUD-1      Recorded with final
                  number           settlement           title policy
                                   statement
                331-1386377           $101                     x
                331-1343149           $122                     x
                   Total              $223                     2

            The lender’s underwriting policies and procedures did not address unallowable
            restrictive covenants. As a result, the lender did not identify this deficiency
            before the loans’ closing. Lender officials stated that the lender designed the
            occupancy and antispeculation agreement in the purchase contract to deter
            investors from coming into the market and flipping the properties when the
            builder advertised its homes in family communities. The lender had taken
            steps to remedy this issue in future loans and current loans in which the 1-year
            agreement was still in force. It had advised its underwriters to remove the
            agreement in any future purchase contracts and created a letter to send out to
            all current borrowers that had entered the agreement within a year to void that
            part of the purchase agreement.

Lack of Due Diligence
Increased Risk of Loss to the
FHA Insurance Fund

            HUD Handbook 4155.1, REV-5, Foreward states, ―This [underwriting]
            decision must be predicated on sound underwriting principles consistent with
            the guidelines, rules, and regulations described throughout this Handbook and
            must be supported by sufficient documentation.‖ The lender did not exercise
            both sound judgment and due diligence when it submitted the 15 loans
            reviewed for FHA insurance. The lender had established underwriting policies



                                            8
             and procedures. However, two of the three responsible underwriters admitted
             to making errors when underwriting FHA loans.

             In addition, the lender’s compensation plan for its underwriters included
             compensation based on the number of underwriting decisions made. This is a
             form of commission contrary to HUD Handbook 4060.1, REV-2, paragraph 2-
             9A, which states, ―employees who perform underwriting and loan servicing
             activities may not receive commissions.‖ Commissions provide an incentive
             for underwriters to focus on quick underwriting decisions rather than
             compliance with HUD regulations.

Conclusion



             The lender’s failure to follow HUD’s FHA regulations and requirements
             placed the FHA insurance fund at additional risk for losses. As discussed, 10
             of the 15 loans reviewed had significant underwriting deficiencies, and all 15
             loans had unallowable restrictive covenants. This condition was caused by the
             underwriters’ not exercising sound judgment and due diligence when
             underwriting FHA loans and the lender’s not having policies and procedures to
             identify unallowable restrictive covenants. From the 10 loans with significant
             underwriting deficiencies, the total unpaid mortgage balance of nine of the
             loans was more than $2 million with an estimated loss to HUD of more than
             $1.1 million. The remaining loan had an actual loss to HUD of $118,861.


Recommendations


             We recommend that the HUD Acting Deputy Assistant Secretary for Single
             Family Housing

             1A.    Refer the lender to the Mortgagee Review Board to take appropriate
                    administrative action, such as imposing civil money penalties for the 15
                    loans due to the lender’s failure to underwrite loans in compliance with
                    HUD regulations and the unallowable restrictive covenants.

             We also recommend that HUD’s Acting Deputy Assistant Secretary for Single
             Family Housing require the lender to

             1B.    Indemnify HUD against any future losses on 9 of 10 loans with
                    significant underwriting deficiencies. The projected loss is $1,188,588
                    based on HUD’s loss severity rate of 59 percent of the unpaid balance
                    of $2,014,555 (see appendixes C and E).




                                            9
1C.   Reimburse HUD for $118,861 in losses resulting from the amount in
      claims and associated expenses paid on one loan with significant
      underwriting deficiencies and unallowable restrictive covenants (see
      appendixes C and E).

1D.   Discontinue the use of the restrictive covenants with FHA-insured loans
      and refrain from executing this document or filing it with the county
      recorder’s office.

1E.   Analyze all FHA loans originated by the Las Vegas branch beginning
      October 1, 2008 and nullify the charitable endowment and anti-
      speculative agreements or indemnify the loans if the agreements are not
      nullified.

1F.   Develop, implement, and enforce written controls to ensure that
      underwriting policies are followed, restrictive covenants are not
      included in the sales deed and final title policies, and quality control
      reviews of FHA-insured loans comply with HUD regulations.

1G.   Revise its underwriter’s compensation plan to adhere to HUD
      requirements and to discontinue the use of commissions.




                              10
Finding 2: Universal American Mortgage Company’s Quality Control
           Reviews Were Inadequate
Universal American Mortgage Company did not adequately perform quality control reviews
for FHA-insured loans in accordance with HUD requirements and its own quality control
plan. Deficiencies included the failure to complete (1) thorough quality control reviews, (2)
the required reverifications, and (3) the quality control reviews in a timely manner. The
lender disregarded HUD’s quality control review requirements as well as its own quality
control plan. The deficient quality control loan reviews may have prevented the lender from
correcting systemic deficiencies that could reduce unnecessary risk to HUD.



 The Lender Did Not Complete
 Thorough Quality Control
 Reviews

               We examined 10 quality control reviews and determined that all 10 of the
               lender’s reviews were inadequate and did not meet HUD requirements. HUD
               Handbook 4060.1, REV-2, paragraph 7-6F, requires the lender to perform
               quality control reviews for compliance with HUD underwriting regulations,
               sufficiency of documentation, and the soundness of underwriting judgments.
               The lender performed random monthly and early payment default quality
               control reviews; however, the reviews performed were not always thorough.

               For example, the lender performed an early payment default quality control
               review of loan 332-4905750. The reviewer noted incorrect income
               calculations and insufficient documentation for the source of funds. The lender
               had previously performed a random monthly quality control review of the same
               loan without noting the significant income and source of fund issues. In
               addition, the lender did not report the significant deficiencies to HUD as
               required by HUD Handbook 4060.1, REV-2, paragraph 7-3J.

               Further, the desk review of the appraisals did not address areas required by
               HUD Handbook 4060.1, REV-2, paragraph 7-6E(3). Specifically, it did not
               address the validity of comparables, the value conclusion, and the overall
               quality of the appraisal. The checklist was not completely filled out for three
               of the loan files reviewed, indicating that the lender did not perform a thorough
               desk review.




                                              11
The Lender Did Not Complete
the Required Reverifications



           HUD Handbook 4060.1, REV-2, paragraph 7-6E(2), requires the lender to
           reverify the employment and assets of the borrower. Also, the lender’s own
           quality control plan requires reverification of loan application information.
           The lender performed reverifications during its quality control reviews.
           However, it did not always obtain written employment reverifications or
           reverifications of assets or applications.

           For example, the lender performed an early payment default quality control
           review of loan 332-4657522. The borrower received gift funds to assist with
           closing costs, but the lender did not attempt to reverify the gift funds as
           required.

The Lender Did Not Perform
FHA-Insured Quality Control
Reviews in a Timely Manner


           HUD Handbook 4060.1, REV-2, paragraph 7-6A, requires lenders to review
           loans routinely selected for quality control review within 90 days from the end
           of the month in which the loan closed. The purpose of the requirement is to
           ensure that the lender identifies the problems left undetected before closing as
           early as possible. The lender did not always perform quality control reviews
           within the timeframes required by HUD. It did not review 8 of the 10 FHA
           loans in a timely manner. The lender stated that during the beginning of our
           audit period, it did not have sufficient quality control staff to perform the
           required reviews in a timely manner. A contractor now performs all random
           monthly quality control reviews.

           Three of the eight reviews were early payment default reviews. HUD
           regulations do not indicate a timeframe for the completion of early payment
           default reviews. However, HUD Handbook 4060.1, REV-2, paragraph 7-2,
           states that one of the basic overriding goals of quality control is to ensure swift
           and appropriate corrective action. Therefore, prudence would dictate that these
           loans be reviewed shortly after being identified as early payment defaults.
           Mortgagee Letter 2011-02 states mortgagees must perform reviews of early
           payment defaults within 45 days from the end of the month that the loan is
           reported as 60 days past due. We understand this mortgagee letter was not
           enforceable during our audit period. However, we were conservative when
           determining timeliness by using the 90 day requirement used for random
           monthly reviews. During our audit period, the lender only performed early




                                           12
               payment default reviews periodically. It has adopted new policies to ensure
               that monthly early payment default reviews are performed.

The following table outlines the deficiencies noted during our review.

                                    Quality control reviews revealed deficiencies for

 FHA loan       Timeliness  Reverification of         Reverification of     Reverification         Desk
  number                      application           funds (sources/gifts)   of employment        appraisals
332-4905750     373 days                                                                     
332-5037217     164 days                                                                      
332-5010896     110 days                                                                       
332-5183127     102 days                                                                       
332-5010952     198 days                                                                       
332-5271606                                                                                      
332-5178859                                                                                     
331-1361737     446 days
332-4657522     212 days                                                                         
332-4772348    128 days                                                                             
       Total       8                4                        9                      1                   9
               *The days listed represents the number of days it took from the beginning of the month
               following the date of closing to complete the review.


The Lender Disregarded Its
Own Policies and Procedures

               The lender disregarded HUD’s quality control review requirements as well as
               its own quality control plan. Its quality control plan stated that it would
               reverify, in writing, all original documentation used to verify employment,
               income, and credit references. When the lender did not receive the written
               verifications, it would make a documented attempt to conduct telephone
               verifications. However, its quality control staff did not always follow these
               procedures. Also, the quality control contractor stated that it did not always
               attempt to reverify bank information and or obtain written verification of
               employment.

               In addition, the checklist the lender used to perform its desk reviews of the
               appraisals did not cover all of the elements required by HUD. Specifically, the
               checklist did not address the validity of comparables, the value conclusion, and
               the overall quality of the appraisal.


 Conclusion


               The lender did not adequately perform quality control reviews for FHA-insured
               loans or report significant quality control findings to HUD. This condition


                                                   13
          occurred because the lender disregarded HUD’s quality control review
          requirements as well as its own quality control plan. The deficient quality
          control loan reviews may have prevented correction of systemic deficiencies
          that could reduce unnecessary risk to HUD.

Recommendations



          We recommend that the HUD Acting Deputy Assistant Secretary for Single
          Family Housing require the lender to

          2A.     Fully implement its quality control plan and follow up with the lender
                  to ensure that its quality control reviews are conducted in accordance
                  with HUD regulations.

          2B.     Update its quality control loan file checklist to ensure that it complies
                  with HUD regulations.




                                          14
                        SCOPE AND METHODOLOGY

Our audit period covered loans with beginning amortization dates from October 1, 2008, to
September 30, 2010. We selected the Las Vegas branch (2149000219) because its national
compare ratio (insert footnote C here) was 337 percent, which was the highest of all of its
branches. We conducted our fieldwork at the Las Vegas branch office between January and
June 2011.

We reviewed the underwriting documentation for 15 FHA-insured loans selected
nonstatistically based on the existence of loan defaults and claims. We used Neighborhood
Watch, HUD’s online information system for FHA-insured loans, to identify all loans from
the branch. During our audit period, the Las Vegas Universal American Mortgage Company
branch office originated 581 loans and had 63 seriously delinquent loans totaling more than
$15 million. HUD has paid claims totaling $716,456 on four of the loans. Using data mining
software, we selected a sample of 15 loans with the following criteria:

       All loans in claim status;
       All loans with six or fewer payments before falling into default status; and
       All loans with a default reason of ―curtailment of borrower income,‖ ―excessive
       obligations,‖ or ―other.‖

We revised our initial sample by removing a streamline refinance and replacing it with a
purchase mortgage based on its high front and back ratios.

To perform our quality control file reviews, we obtained a listing from the lender of all early
payment default loans and random quality control reviews performed on loans originated by
the Las Vegas branch during our audit period. There were a total of 38 quality control
reviews, 28 random quality control reviews, and 10 early payment default reviews. Using
auditor judgment, we reviewed 10 (26 percent) of the quality control reviews. We used
statistical software’s random number generator to select the 10 loans reviewed. We also
reviewed the onsite branch office quality control reviews covering our audit period.

To accomplish our objective, we

       Reviewed HUD regulations and reference materials on single-family requirements;
       Reviewed the lender’s processing, underwriting, and closing policies and procedures;
       Reviewed the lender’s FHA-insured loan files;
       Interviewed appropriate staff;
       Reviewed the quality control plan;
       Reviewed 10 of the quality control reviews; and
       Performed site visits to employers when available to reverify employment
       documentation.




                                               15
We used the source documents downloaded onto the lender’s online system called BlitzDocs
to determine borrower income, employment history, and debt. For loans underwritten by an
automated underwriting system, we reviewed the FHA loan file to determine whether it
contained the documentation needed to support the integrity and accuracy of the data used by
the automated underwriting system to recommend approval of the loan. For manually
underwritten loans, we reviewed the loan documents to determine whether they supported the
underwriting decision and complied with HUD Handbook 4155.1, REV-5, Mortgage Credit
Analysis.

We used Neighborhood Watch to obtain the unpaid mortgage balances and the actual losses to
HUD for each of the 15 loans reviewed. HUD paid claims on four of the loans that we
determined had significant underwriting deficiencies; however, one property was still in
HUD’s inventory or the sale information was not available. We requested that HUD
indemnify against losses for these loans because it had not realized any losses.

We also used the data maintained by HUD in its Neighborhood Watch system to obtain
background information and to identify the universe of loans. We did not rely on the data to
reach our conclusions; therefore, we did not assess the reliability of the data.

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 objective.




                                             16
                             INTERNAL CONTROLS

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

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

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



 Relevant Internal Controls


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

                      Policies and procedures intended to ensure that the lender properly
                      originates, underwrites (approves), and closes FHA-insured loans
                      (finding 1).
                      Policies and procedures intended to ensure that the quality control
                      program is an effective tool for reducing underwriting errors (finding
                      2).

               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 Weaknesses


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


                                               17
The lender did not have adequate internal controls to reasonably ensure
that loan originations complied with HUD requirements and prudent
lending practices (finding 1).
The lender did not have adequate internal controls to ensure that its
quality control personnel complied with its own quality control plan or
HUD’s quality control regulations (finding 2).




                       18
                                      APPENDIXES

Appendix A

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

                 Recommendation              Ineligible 1/   Funds to be put to
                        number                                    better use 2/
                                1B                                  $1,188,588
                                1C             $118,861
                             Totals            $118,861             $1,188,588


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. In this case, ineligible costs are HUD’s actual losses
       on FHA-insured homes sold in preforeclosure sales or by HUD (see appendix C).

2/     Recommendations that funds be put to better use are estimates of amounts that could
       be used more efficiently if an Office of Inspector General (OIG) recommendation is
       implemented. These amounts include reductions in outlays, deobligation of funds,
       withdrawal of interest, costs not incurred by implementing recommended
       improvements, avoidance of unnecessary expenditures noted in preaward reviews, and
       any other savings that are specifically identified. If HUD implements our
       recommendations to indemnify loans not originated in accordance with FHA
       requirements, it will reduce FHA’s risk of loss to the insurance fund. The amount
       noted reflects HUD’s calculation that FHA loses on average 59 percent of the claim
       amount when it sells a foreclosed-upon property (see appendix C). The 59 percent
       loss rate is based on HUD’s Single Family Acquired Asset Management System’s
       ―case management profit and loss by acquisition‖ computation for fiscal year 2010
       based on actual sales.




                                               19
Appendix B

       AUDITEE COMMENTS AND OIG’S EVALUATION


Ref to OIG Evaluation   Auditee Comments




                        20
Comment 1




Comment 2




            21
Comment 3



Comment 4




            22
Comment 5




Comment 6




            23
24
Comment 7




            Names have been redacted for privacy reasons.




                                         25
Comment 8




            26
Comment 9




            27
Comment 10




             28
Comment 11




             29
Comment 12




             30
31
Comment 13




Comment 14




             32
33
Comment 15




Comment 16




             34
35
36
Comment 17




             37
38
Comment 18




             39
40
Comment 19




             41
Comment 20




             42
Comment 21




             43
Comment 22




             44
Comment 23




             45
Comment 24




             46
Comment 25




             47
Comment 26




             48
Comment 27




Comment 8




             49
50
51
Comment 28




Comment 29




             52
Comment 30




Comment 31




             53
Comment 32




Comment 33




             54
Comment 34




Comment 35

Comment 36




             55
Comment 37



Comment 38




             56
                        OIG Evaluation of Auditee Comments

Comment 1   We reviewed the lender’s response and supporting documentation. We
            removed some deficiencies from the report; however, there is not sufficient
            documentation to clear any of the loans completely. Details of the five loans
            with technical deficiencies were included in the draft report for the lender’s
            response. However, the lender chose not to respond to the deficiencies.

Comment 2   We acknowledge that the lender is taking steps to remedy these violations.
            Any corrective actions need to be submitted to HUD for review during the
            audit resolution process.

Comment 3   These loans were selected for review because HUD’s Neighborhood Watch
            System identified these loans as being originated by the lender’s Las Vegas
            branch.

Comment 4   We reviewed the title documentation and agree that the title exception did not
            apply to this property. We updated the report accordingly.

Comment 5   We agree the lender has underwriting policies in place. However, these
            experienced underwriters allowed significant underwriting deficiencies to
            occur. We are encouraged the lender is continually striving to improve the
            quality of its processes and quality of its loans.

Comment 6   We disagree. HUD Handbook 4060.1 paragraph 2.9A states compensation of
            employees may be on a salary, salary plus commission, or commission only
            basis and includes bonuses. Employees who perform underwriting and loan
            servicing activities may not receive commissions. HUD Santa Ana
            Homeownership Center staff reviewed the lender’s underwriter compensation
            plan. HUD stated that even though compensation is not based on the approval
            of the loan, it still provides an incentive for quick underwriting rather than
            focusing on compliance with HUD regulations. As a result, this finding was
            not removed from the report.

Comment 7   The lender should have obtained verification from the employer before the loan
            closed that the borrower could telecommute on a permanent basis. HUD
            Handbook 4155.1 Rev-5 Chapter 2 states 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 any source that
            cannot be verified, is not stable, or will not continue. Without verifying the
            borrower could telecommute on a permanent basis before closing, the lender
            could not ensure income was likely to continue. As a result, this deficiency
            was not removed from the report.




                                           57
Comment 8     HUD Handbook 4155.1 Rev-5 2.10.C states when the transfer of gift funds
              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. The
              HUD-1 Certified Settlement Statement does not show the actual transfer of gift
              funds from the donor to the title company. It is the lender’s responsibility to
              obtain the transfer documentation, such as the evidence of wire transfer. As a
              result, this deficiency was not removed from the report.

Comment 9     We reviewed the documentation provided and we removed the deficiency from
              the report.

Comment 10 We disagree. HUD Handbook 4155.1 Rev-5 paragraph 2.7.A states that an
           earnings trend must be established and documented for overtime income. If
           the trend shows a continual decline, the lender must provide a sound
           rationalization in writing for including the income for borrower qualifying.
           Also, the lender’s underwriters stated that they would question significant
           declines in overtime income and be more likely to use it as a compensating
           factor. There is no evidence in this case that the underwriter questioned the
           significant decline in the overtime income and there was no written
           justification in the file as required. This deficiency was not removed from the
           report.

Comment 11 We reviewed all supporting documentation, and the attachments provided, and
           we have removed the asset deficiency from the report.

Comment 12 We disagree. The lender did not obtain any bank information showing that the
           tax refund received by the borrower was in her account and available for the
           earnest money deposit. HUD Handbook 4155.1 Rev-5 paragraph 2.4.B states
           the lender must ascertain the purpose of any recent debts, as the indebtedness
           may have been incurred to obtain part of the required cash investment on the
           property being purchased. The borrower must explain in writing all inquiries
           shown on the credit report in the last 90 days. HUD’s Total Scorecard Guide,
           under the assets section, also states that for loans that have received an accept
           status, the lender must also determine that any recent debts were not incurred
           to obtain part or all of the required cash investment on the property being
           purchased. The lender did not question a Dollar Loan Center inquiry on the
           credit report that occurred four days before the borrower made the earnest
           money deposit. As a result, this deficiency was not removed from the report.

Comment 13 We disagree. HUD Handbook 4155.1 Rev-5, paragraph 2.7.A states both
           overtime and bonus income may be used to qualify if the borrower has
           received such income for the past two years and it is likely to continue.
           Periods of less than two years may be acceptable provided the lender justifies
           and documents in writing the reason for using the income for qualifying




                                             58
               purposes. An earnings trend also must be established and documented for
               overtime and bonus income.

               We agree that the borrower worked more than 40 hours per week at multiple
               places and the borrower’s income remained relatively consistent throughout the
               32 months documented in the file. However, for the most part, income earned
               was from working non-overtime hours. Overtime is inconsistent and can be
               reduced at anytime. As a result, HUD requires a two-year history, showing
               overtime income is consistently earned. In this case, the borrower did not have
               a two-year history of working significant overtime. Also, the lender did not
               document in writing its rationale for using the income at the time of closing.
               The lender should not have used the overtime income to qualify the borrower
               and should have only used it as a compensating factor. As a result, this
               violation was not removed from the report.

Comment 14 Neighborhood Watch lists the reason for default as ―Unable to Contact.
           Borrower.‖ We are unsure of the actual reason for default. It may or may not
           be related to income issues. The documentation provided does not prove that a
           loss of income was or was not the cause of the default.

Comment 15 We reviewed the documentation and removed the violation from the report.
           The lender needs to ensure that all credit reports are maintained in its loan file
           as required by HUD regulations.

Comment 16 We disagree. The borrower was working two jobs during this time period and
           we took this into account when reviewing the bank statements. We did not
           question any deposits that were associated with employment. Also, the
           deposits in question were significant deposits all of which were $1,400 or
           higher. To ensure large deposits are not provided by interested third parties,
           HUD Handbook 4155.1 Rev-5 paragraph 2.10.B states, if there is a large
           increase in an account, or the account was opened recently, the lender must
           obtain a credible explanation of those funds. The lender did not obtain a
           credible explanation for the deposits in question. As a result the deficiency
           was not removed from the report.

Comment 17 We reviewed the documentation provided and we disagree with the lender
           attempting to calculate a payment plan without verifying the IRS established a
           payment plan in writing. According to HUD Handbook 4155.1 Rev-5
           paragraph 2.5 the borrower is not eligible until the delinquent account is
           brought current, paid, otherwise satisfied, or a satisfied repayment plan is made
           between the borrower and the federal agency owed and is verified in writing.
           In addition, in our interview with the lender’s underwriters, the underwriters
           stated they would have wanted to see a payment plan in writing prior to
           approving the loan. In the absence of a written repayment plan between the
           borrower and the IRS, this loan was not eligible for insurance. This violation
           remains as a significant violation which impacts the insurability of the loan.



                                              59
Comment 18 We disagree. HUD Handbook 4155.1 Rev-5 paragraph 2.10 states, all funds
           for the borrower's investment in the property must be verified and documented.
           Acceptable sources of these funds include the following: savings and checking
           accounts. 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.

              On December 1, 2008, a $3,000 deposit was made and the earnest money
              deposit of $2,500 was taken out of the account. The lender did not obtain the
              proper documentation to verify that the deposit was from the home equity line
              of credit. On December 8, 2008 the balance ending, after the $3,000 deposit,
              was $6,118.57. The borrower needed $3,541.13 in closing funds. Without the
              $3,000 deposit, whether it was used for the earnest money deposit or the
              closing costs, the borrower would not have had enough to pay closing costs
              because the ending balance would be $3,118.57, which is $422.56 short of
              closing costs. As a result, this deficiency remained in the report.

Comment 19 We disagree. The borrower’s income from a part time job decreased from
           $651.25 per month to $213.75 per month. Also, the Work Number indicated
           that from June 2008 through January 2009, an eight month span, there was no
           part time income earned. The significant decline in part-time income and the
           amount of time between teaching jobs indicate that the part-time income is not
           stable. As a result this income should not be included for qualifying purposes.
           HUD Handbook 4155.1 Rev 5 Section 2 states that income may not be used if
           it comes from any source that is not stable. In this case the part-time income
           does not appear to be stable. As a result, this deficiency remained in the report.

Comment 20 We reviewed the attached documentation and removed this deficiency from the
           report.

Comment 21 The lender should have obtained the transfer of funds documentation for the
           $1,800 deposit to verify it was transferred from another account. The lender
           stated the $2,000 deposit coincided with the borrower’s payroll. However, the
           paystub should have been obtained to support this amount. Without at least
           one of the two deposits the borrower would not have had enough funds to pay
           closing. As a result, this deficiency remained in the report.

Comment 22 The lender’s own policy states that the underwriter should review deductions
           on the borrower’s paystubs to ensure the borrower does not have any
           deductions for undocumented loans, or is currently having pay garnishment for
           child support, etc. Also, HUD Handbook 4155.1 Rev-5 states that lenders are
           expected to exercise both sound judgment and due diligence in the
           underwriting of loans to be insured by FHA. The lender should not have
           assumed the item has been satisfied and should have obtained documentation
           showing this. As a result, this deficiency remained in the report.



                                             60
Comment 23 We disagree. Handbook 4155.1 Rev-1 paragraph 2.7.B states part-time/second
           job income, including employment in seasonal work, may be used in qualifying
           if the lender documents that the borrower has worked the part-time job
           uninterrupted for the past two years and will continue to do so. Income from a
           part-time position that has been received for less than two years may be
           included as effective income, provided the lender justifies and documents that
           the income's continuance is likely. Income from part-time positions not
           meeting these requirements may be considered as a compensating factor only.

              The lender stated it believed the borrower had shown a history of part time
              income in other jobs. However, the lender cannot determine from the W-2’s
              that the employers in question were part time since the W-2 does not show
              dates. There is a time gap between January 2007 to August 2007 in which the
              borrower could have worked these jobs separately. In addition, it is required
              the lender determine if continuance is likely to use part time income for less
              than two years and this was not established.

Comment 24 We disagree. While the issue is technical in nature, the lender is responsible
           for following HUD regulations. Regardless of whether the funds are being
           used for closing or not, large deposits require a credible explanation for the
           source of those funds to ensure the funds were not provided by an interested
           third party to the transaction.

Comment 25 Although the lender included the tax table for 2008 showing the tax rate of
           15%, it does not take into consideration the need for conclusive evidence that a
           higher percentage of retirement assets could be withdrawn. As a result, this
           deficiency remained in the report.

Comment 26 We disagree. HUD Handbook 4155.1 Rev-5 2.10.A states if the amount of the
           earnest money deposit appears excessive based on the borrower's history of
           accumulating savings, the lender must verify with documentation the deposit
           amount and the source of funds. The borrower paid the earnest money on May
           of 2008 and closing costs and gift funds were not provided until September of
           2008. The ending balance in the borrower’s bank statement at the end of April
           only reflected $356.82 with a beginning balance of only $25. Documentation
           in the file does not support the borrower had a history of accumulated savings
           sufficient to pay the $1,500 earnest money deposit at the time it was due
           despite the amount actually used for the loan. Also, there is no evidence in the
           file that the borrower actually paid the full $1,500 earnest money deposit. The
           lender should have documented the earnest money deposit. As a result, the
           deficiency remained in the report.

Comment 27 We disagree. HUD Handbook 4155.1 Rev-5 paragraph 2.10.C.2 specifically
           states if the donor borrowed the gift funds and cannot provide documentation
           from the bank or other savings account, the donor must provide written
           evidence that those funds were borrowed from an acceptable source, i.e., not



                                             61
              from a party to the transaction, including the lender. In this instance the donor
              only had one deposit listed of $3,000, which is the exact amount provided as a
              gift. The lender should question if these funds were borrowed or provided by
              an interested third party, especially when the funds were used to pay off debt at
              closing. As a result, this deficiency remained in the report.

Comment 28 We agree with the lender’s quality control analyst that the income was not
           calculated correctly. In addition, the lender did not provide evidence that it
           disagreed with its quality control analyst on either the source of funds or
           income calculation issue at the time the review was completed. These issues
           should have been reported to HUD when the deficiency was cited by the
           lender’s quality control analyst. As a result, this deficiency remained in the
           report.

Comment 29 The lender did not provide any other documentation showing what work was
           completed on the review, except for the checklist. Without any other
           documentation, we cannot determine that a thorough review was completed
           that addressed the areas required by HUD. As a result, this deficiency
           remained in the report.

Comment 30 The desk review checklist for case numbers 332-5183127, 332-5271606, and
           332-5178859 were not completed. Not all items in the checklists were filled
           out completely indicating a full desk review was not performed. As a result,
           this deficiency remained in the report.

Comment 31 HUD Handbook 4060.1 paragraph 7.1 states all FHA approved mortgagees,
           including loan correspondents, must implement and continuously have in place
           a Quality Control Plan for the origination and/or servicing of insured
           mortgages as a condition of receiving and maintaining FHA approval. The
           lender should implement the policies created, which state the lender will send
           out verifications of application for both early payment default reviews as well
           as random monthly audits and document any follow-up requests or attempts to
           re-perform verifications. As a result, this deficiency remained in the report.

Comment 32 The lender stated that timeliness on the review of the loan file and timeliness of
           the document reverification are two separate issues. We disagree with the
           lender.

              HUD Handbook 4160.1 Rev-2 paragraph 7.6, which includes the basic
              requirements for quality control of single-family production, states that in order
              for a Quality Control Program to be useful and acceptable to FHA, there are
              several requirements that must be met. Mortgagees must adhere to each of the
              requirements below when conducting reviews. These requirements include
              reverification of credit documentation, underwriting decisions, and condition,
              clearance, and closing. The reverifications are part of the loan file review and




                                              62
              HUD regulations state that these reviews must be performed within 90 days
              from the end of the month in which the loan is closed.

              The lender’s reverification procedures in its quality control policy state that if a
              response has not been obtained after a reasonable time, a second request for
              this information will be sent. If the written reverification is not returned, a
              documented attempt to conduct a telephone reverification will be made. The
              quality control files did not contain evidence that the lender sent out second
              requests or attempted to obtain a telephone reverification to ensure this process
              was completed in a timely manner. Without the reverification data, the loan
              file review cannot be completed.

Comment 33 HUD Handbook 4060.1 Rev-2 paragraph 7.2 states that one of the overriding
           goals of a quality control plan is to assure swift and appropriate corrective
           action. Mortgagee Letter 2011-02 states mortgagees must perform reviews of
           early payment defaults within 45 days from the end of the month that the loan
           is reported as 60 days past due. We understand that this mortgagee letter is not
           enforceable at the time of our audit period. However, to be conservative we
           determined timeliness based on the 90 days used for random monthly reviews
           to ensure that HUD’s goal of swift and appropriate corrective action was met.

Comment 34 We disagree. The lender is unable to complete the file reviews without
           obtaining the reverification documentation. Also, the lender did not document
           that it made an effort to obtain the re-verifications in a timely manner. As a
           result, the calculation of timeliness will remain the same in the audit report.

Comment 35 We disagree that the lender followed HUD’s quality control requirements and
           its own quality control plan as noted in comments 28 through 35.

Comment 36 Verification of employment regarding ―The Work Number‖ has been removed
           from the report.

Comment 37 We reviewed the documentation provided and removed this issue for loan file
           332-5183127.

Comment 38 For loan file 332-4657522, attachment 16 is not sufficient documentation to
           support the lender’s attempt to send out a written re-verification. As a result,
           this deficiency remained in the report.




                                              63
Appendix C

    LOAN DETAILS FOR UNDERWRITING DEFICIENCIES
The table below contains the actual and projected losses to HUD corresponding to the loans
recommended for indemnification under finding one.


FHA loan     Significant     Unallowabl      Unpaid        Actual losses to   Indemnification
number       underwriting    e restrictive   mortgage      HUD                amount (unpaid
             deficiencies    covenants       balance                          balance x 59% loss
                                                                              rate)
332-               x               x           $170,120                                $100,371
4905750
332-               x               x                               $118,861
4680917
332-               x               x           $299,922                                $176,954
4646174
331-               x               x           $190,834                                $112,592
1386377
332-               x               x           $183,973                                $108,544
4772348
332-               x               x           $196,214                                $115,766
4746911
332-               x               x           $229,174                                $135,213
5009143
332-               x               x           $247,144                                $145,815
5029755
332-               x               x           $231,757                                $136,737
4837072
332-               x               x           $265,417                                $156,596
4657522
Totals             10             15          $2,014,555          $118,861           $1,188,588




                                              64
Appendix D

                                       CRITERIA
Income Deficiencies:

HUD Handbook 4155.1, REV-5, Paragraph 1-2
A principal residence is a property that will be occupied by the borrower for the majority of
the calendar year. At least one borrower must occupy the property and sign the security
instrument and the mortgage note for the property to be considered owner-occupied. HUD’s
security instruments require a borrower to establish bona fide occupancy in the home as the
borrower’s principal residence within 60 days after signing the security instrument with
continued occupancy for at least one year. We will not insure a mortgage if we conclude that
the transaction was designed to use FHA mortgage insurance as a vehicle for obtaining
investment properties, even if the property to be encumbered will be the only one owned
using FHA mortgage insurance.

HUD Handbook 4155.1, REV-5, Chapter 2
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 any source that cannot be verified, is
not stable, or will not continue.

HUD Handbook 4155.1, REV-5, Paragraph 2-7A
Both overtime and bonus income may be used to qualify if the borrower has received such
income for the past two years and it is likely to continue. The lender must develop an average
of bonus or overtime income for the past two years, and the employment verification must not
state that such income is unlikely to continue. Periods of less than two years may be
acceptable provided the lender justifies and documents in writing the reason for using the
income for qualifying purposes.

An earnings trend must be established and documented for overtime and bonus income. If
either type shows a continual decline, the lender must provide a sound rationalization in
writing for including the income for borrower qualifying.

HUD Handbook 4155.1, REV-5, Paragraph 2-7B
 Part-time/second job income, including employment in seasonal work, may be used in
qualifying if the lender documents that the borrower has worked the part-time job
uninterrupted for the past two years and will continue to do so. Income from a part-time
position that has been received for less than two years may be included as effective income,
provided the lender justifies and documents that the income’s continuance is likely. Income
from part-time positions not meeting these requirements may be considered as a compensating
factor only.




                                              65
For qualification purposes, part-time income refers to jobs taken to supplement the borrower’s
income from regular employment (i.e., a second job – not meaning primary jobs of less than
40 hours per week.) If a borrower’s regular employment involves less than a typical 40-hour
workweek, the stability of that income should be evaluated as any other regular, on-going
primary employment. For example, a registered nurse may have worked 24 hours per week
for the last year. Although this job requires less than 40 hours of work per week, it is the
borrower’s primary employment and is to be considered effective income.

We recognize that many low- and moderate-income families rely on part-time and seasonal
income for day-to-day needs. Lenders must not restrict the consideration of such income
sources in qualifying these borrowers.

HUD Handbook 4155.1, REV-5, Paragraph 2-7M
Rental income can be included if the lender can document that the rental income is stable.
Examples of stability may include a current lease, an agreement to lease, or a rental history
over the previous 24 months that is free of unexplained gaps greater than three months.

The following is required to verify all rental income:

1. Schedule E of IRS [Internal Revenue Service] Form 1040. Depreciation may be added back
to the net income or loss shown on Schedule E. Positive rental income is considered gross
income for qualifying purposes; negative rental income must be treated as a recurring liability.
The lender must be certain that the borrower still owns each property listed, by comparing the
Schedule E with the real estate owned section of the residential loan application. (If the
borrower in the same general area owns six or more units, a map disclosing the locations must
be submitted evidencing compliance with FHA’s seven-unit limitation. See paragraph 4-8 for
additional information.)

2. Current Leases. If a property was acquired since the last income tax filing and is not
shown on Schedule E, a current signed lease or other rental agreement must be provided. The
gross rental amount must be reduced for vacancies and maintenance by 25 percent (or the
percentage developed by the jurisdictional HOC [Homeownership Center]), before subtracting
PITI [principal, interest, taxes, and insurance] and any homeowners’ association dues, etc.,
and applying the remainder to income (or recurring debts, if negative).

HUD Handbook 4155.1, REV 5, Paragraph 2-9B
B. Documentation Requirements. The following documents are required from self-employed
borrowers:

1. Signed and dated individual tax returns, plus all applicable schedules, for the most recent
two years.

2. Signed copies of federal business income tax returns for the last two years, with all
applicable schedules, if the business is a corporation, an ―S‖ corporation, or a partnership.

3. A year-to-date profit-and-loss (P&L) statement and balance sheet.



                                               66
4. A business credit report on corporations and ―S‖ corporations.

Asset Deficiencies:

HUD Handbook 4155.1, REV-5, Paragraph 2-10
All funds for the borrower’s investment in the property must be verified and documented.

HUD Handbook 4155.1, REV-5, Paragraph 2-10A
If the amount paid for 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 the deposit amount and the source of funds. 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.

HUD Handbook 4155.1, REV-5, Paragraph 2-10B
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 2-10C(2)
If the gift funds are to be provided at closing:

a. If the transfer of the gift funds is by certified check made on the donor’s account, the lender
must obtain a bank statement showing the withdrawal from the donor’s account, as well as a
copy of the certified check.

b. If the donor purchased a cashier’s check, money order, official check, or any other type of
bank check as a means of transferring the gift funds, the donor must provide a withdrawal
document or canceled check for the amount of the gift, showing that the funds came from the
donor’s personal account. If the donor borrowed the gift funds and cannot provide
documentation from the bank or other savings account, the donor must provide written
evidence that those funds were borrowed from an acceptable source, i.e., not from a party to
the transaction, including the lender. ―Cash on hand‖ is not an acceptable source of the
donor’s gift funds.

Regardless of when the gift funds are made available to the homebuyer, the lender must be
able to determine that the gift funds ultimately were not provided from an unacceptable source
and were indeed the donor’s own funds. 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.

HUD Handbook 4155.1, REV-5, Paragraph 2-10C(1)
If the gift funds are in the homebuyer's bank account, the lender must document the transfer of
the funds from the donor to the homebuyer by obtaining a copy of the canceled check or




                                               67
other withdrawal document showing that the withdrawal is from the donor’s account. The
homebuyer's deposit slip and bank statement that shows the deposit is also required.

The Total Scorecard Report: Retirement Accounts
Obtain most recent employer, depository or brokerage statements for each account to verify
sufficient funds required to close. Document conditions under which funds may be
withdrawn or borrowed. Only 60 percent of the vested amount of the account may be used as
funds to close or cash reserves.

Credit Deficiencies:

Mortgagee Letter 2004-47: FHA Total Mortgage Scorecard User Guide – Earnest
Money and Other Large Deposits
Determine that any recent debts were not incurred to obtain part or all of the required cash
investment on the property being purchased.

Mortgagee Letter 2004-47: FHA Total Mortgage Scorecard User Guide – System
Overrides and Manual Downgrades
A system override occurs when a loan application variable triggers a requirement (a ―review
rule‖) that an underwriter review the loan file. A manual downgrade becomes necessary if
additional information, not considered in the AUS [automated underwriting system] decision,
affects the overall insurability or eligibility of a mortgage otherwise rated as an accept or
approve. Both system overrides and manual downgrades may be triggered by inaccuracies in
credit reporting, by eligibility issues, and for other reasons including the unlikely failure of the
scorecard or AUS to recognize a derogatory credit variable. Unless specifically permitted to
continue to use the Accept/Approve documentation class, such as following a favorable
resolution of a credit issue due to an error in reporting, you must document as a Refer risk
class and are accountable for the credit and ratio warranties on these loans. If the automated
underwriting system you are using does not provide for a system override for any of the
conditions shown below, then you are required to manually downgrade the loan to a refer
under any of the following conditions:

Credit Issues: Disputed Accounts

If the credit report reveals that the borrower is disputing any credit accounts or public records,
the mortgage application must be referred to an underwriter for review.

HUD Handbook 4155.1, REV-5, Paragraph 2-3
Past credit performance serves as the most useful guide in determining a borrower’s attitude
toward credit obligations and predicting a borrower’s future actions. A borrower who has
made payments on previous and current obligations in a timely manner represents reduced
risk. Conversely, if the credit history, despite adequate income to support obligations, reflects
continuous slow payments, judgments, and delinquent accounts, strong compensating factors
will be necessary to approve the loan.




                                                68
When analyzing a borrower’s credit history, examine the overall pattern of credit behavior,
rather than isolated occurrences of unsatisfactory or slow payments. A period of financial
difficulty in the past does not necessarily make the risk unacceptable if the borrower has
maintained a good payment record for a considerable time period since the difficulty. When
delinquent accounts are revealed, the lender must document their analysis as to whether the
late payments were based on a disregard for financial obligations, an inability to manage debt,
or factors beyond the control of the borrower, including delayed mail delivery or disputes with
creditors.

HUD Handbook 4155.1, REV-5, Paragraph 2-4A(2)
Lenders must retain all copies of all credit reports and document in writing an analysis of the
reasons for any discrepancies between the credit reports. If a lender receives any information
inconsistent with the information on the credit report, the lender must reconcile the
inconsistency.

HUD Handbook 4155.1, REV-5, Paragraph 2-5
A borrower must be rejected if any of the following conditions apply:

B. Delinquent Federal Debts. If the borrower, as revealed by public records, credit
information, or HUD’s Credit Alert Interactive Voice Response System (CAIVRS), is
presently delinquent on any Federal debt (e.g., VA [U.S. Department of Veterans Affairs]-
guaranteed mortgage, Title I loan, Federal student loan, Small Business Administration loan,
delinquent Federal taxes) or has a lien, including taxes, placed against his or her property for a
debt owed to the U.S., the borrower is not eligible until the delinquent account is brought
current, paid, otherwise satisfied, or a satisfactory repayment plan is made between the
borrower and the Federal agency owed and is verified in writing.

HUD Handbook 4155.1, REV-5, Paragraph 2-10C
When someone other than a family member has paid off debts, the funds used to pay off the
debt must be treated as an inducement to purchase and the sales price must be reduced by a
dollar-for-dollar amount in calculating the maximum insurable mortgage.

HUD Handbook 4155.1, REV-5, Paragraph 2-11A
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 additional
recurring charges extending ten months or more, including payments on installment accounts,
child support or separate maintenance payments, revolving accounts and alimony, etc. Debts
lasting less than ten 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.




                                               69
Miscellaneous Deficiencies:

Mortgagee Letter 2004-47
On November 20, 2003, the Federal Housing Administration (FHA) issued Notice H-2003-25,
FHA’s Technology Open To Approved Lenders (TOTAL) Mortgage Scorecard User Guide.
This Mortgagee Letter contains the User Guide in its entirety with updates to clarify policy,
provide additional guidance, and incorporate the credit policy guidance announced in
Mortgagee Letter 2004-44.

Mortgagee Letter 2004-47: FHA Total Mortgage Scorecard User Guide –
Documentation Requirements
All standard FHA documentation requirements must be met, with the exception of those
described below which may allow for reduced documentation sets based upon the risk
classification of the loan. Though fewer in numbers than on manually underwritten loans,
credit history, income and employment, and assets must still be verified. You must also
document any situation not addressed in this user guide.

―Faxed‖ Documents—If income/employment, asset, or other documents are ―faxed‖ to the
lender, the documents must clearly identify the employer, depository/investment firm’s name
and source of information. The lender is accountable for ascertaining the authenticity of the
document by examining, among other things, the information included at the top or banner
portion of the fax received by the lender. The document itself must also include a name and
telephone number of the individual with the employer or financial institution that can verify
the accuracy of the data.

Mortgagee Letter 2004-47: FHA Total Mortgage Scorecard User Guide –Employment/
Income
For loan applications rated as Accept/Approve, use the following to verify employment for
employed borrowers: Current Employment---Specific underwriting requirements for what
constitutes acceptable types and sources of income, as well as stability of income
requirements are described in Chapter 2 of HUD Handbook 4155.1. The lender is responsible
for verifying the accuracy of the amount of income being reported, and for determining if it
can be considered as effective income in determining the payment-to-income and debt-to-
income ratios.

HUD Handbook 4155.1, REV-5, Chapter 3
The lender is responsible for asking sufficient questions to elicit a complete picture of the
borrower’s financial situation, source of funds for the transaction, and the intended use of the
property. All information must be verified and documented.

HUD Handbook 4155.1, REV-5, Paragraph 3-1G, Federal Income Tax Returns
Federal income tax returns (both individual returns and business returns) for the past two
years, including all applicable schedules, for self-employed borrowers, are required.
Commissioned individuals must provide individual federal income tax returns for the past two
years. The lender must obtain signed Forms IRS 4506, IRS 8821, or whatever form or




                                               70
electronic retrieval service is appropriate for obtaining tax returns directly from the IRS for
any loan for which the borrower’s tax returns are required.

HUD Handbook 4155.1, REV-5, Paragraph 3-2C
Lenders may not have borrowers sign documents in blank, or on blank sheets of paper.

Legal Restrictions on Conveyance:

24 CFR 203.41(b)
(b) Policy of free assumability with no restrictions. A mortgage shall not be eligible for
insurance if the mortgaged property is subject to legal restrictions on conveyance, except as
permitted by this part.

HUD Handbook 4155.2, Paragraph 6.A.1.h
With respect to title objections, the lender is responsible for ensuring that FHA will accept
any conditions of title to the property.

Quality Control:

HUD Handbook 4060.1, REV-2, Paragraph 2-9A
A. Employees.
Compensation of employees may be on a salary, salary plus commission, or commission only
basis and includes bonuses. All compensation must be reported on Form W-2. Employees
who perform underwriting and loan servicing activities may not receive commissions.

HUD Handbook 4060.1, REV-2, Paragraph 7-2
The following are the overriding goals of Quality Control. Mortgagees must design programs
that meet these basic goals:
• Assure compliance with FHA’s and the mortgagee’s own origination or servicing
requirements throughout its operations;
• Protect the mortgagee and FHA from unacceptable risk;
• Guard against errors, omissions and fraud; and
• Assure swift and appropriate corrective action.
Failure to comply with specific Quality Control requirements may result in sanctions and the
imposition of Civil Money Penalties by the Mortgagee Review Board (MRB).

HUD Handbook 4060.1, REV-2, Paragraph 7-3J
J. Notification to HUD. Findings of fraud or other serious violations must be immediately
referred, in writing (along with any available supporting documentation) to the Director of the
Quality Assurance Division in the HUD Homeownership Center (HOC) having jurisdiction
(determined by the State where the property is located)

HUD Handbook 4060.1, REV-2, Paragraph 7-6A
A. Timeliness. Loans must be reviewed within 90 days from the end of the month in which
the loan closed. This requirement is intended to ensure that problems left undetected prior to
closing are identified as early after closing as possible.



                                                71
HUD Handbook 4060.1, REV-2, Paragraph 7-6E(2)
Documents contained in the loan file should be checked for sufficiency and subjected to
written re-verification. Examples of items that must be reverified include, but are not limited
to, the mortgagor's employment or other income, deposits, gift letters, alternate credit sources,
and other sources of funds. Sources of funds must be acceptable as well as verified.

HUD Handbook 4060.1, REV-2, Paragraph 7-6E(3)
3. Appraisals. A desk review of the property appraisal must be performed on all loans chosen
for a Quality Control review except streamline refinances and HUD Real Estate Owned
(REO) sales. The desk review must include a review of the appraisal data, the validity of the
comparables, the value conclusion (―as repaired‖ to meet safety and soundness requirements
in HUD Handbook 4905.1 (as revised)), any changes made by the underwriter and the overall
quality of the appraisal.

HUD Handbook 4060.1, REV-2, Paragraph 7-6F
F. Underwriting Decisions. Each Direct Endorsement loan selected for a quality control
review must be reviewed for compliance with HUD underwriting requirements, sufficiency of
documentation and the soundness of underwriting judgments.




                                               72
     Appendix E

          LOAN SUMMARIES FOR UNDERWRITING DEFICIENCIES FOR THE 15 LOANS
     The following table provides a listing of deficiencies noted in each FHA-insured loan file reviewed. However, the occupancy and
     antispeculation agreement violation noted in finding 1 is not included in the underwriting deficiencies below.

FHA case number           Violation                                                                      Finding(s)
332-4710214               Credit deficiency:              The borrower’s credit report noted one collection account under dispute. The lender did not refer the
                                                          loan to be manually underwritten or document the override of the disputed account.
                          Mortgagee Letter 2004-47: FHA
                          Total Mortgage Scorecard User
                          Guide – System Overrides and
                          Manual Downgrades

                          Asset deficiency:               The lender did not document the actual transfer of funds from the donor to the title company as required.
                                                          We verified the actual transfer with the title company; however, it is the lender’s responsibility to obtain
                          HUD Handbook 4155.1, REV-5,     the transfer documentation.
                          paragraph 2-10C


                          Asset deficiency:               The lender did not verify the earnest money deposit of $1,000 that appeared excessive based on
                                                          borrower’s history of savings.
                          HUD Handbook 4155.1, REV-5,
                          paragraph 2-10A                   Statement dates                                     Total of savings and checking accounts
                                                            Opening balance as of 07/01/2008                    $58.65
                                                            Ending balance as of 07/31/2008                     $1,341.53
                                                            Ending balance as of 08/31/2008                     $500.74
                                                            Average balance for 3 months                        $633.64

                                                          The borrowers obtained the cashier’s check for the earnest money deposit 2 days after their bank
                                                          accounts showed a balance of $500.74.

                          Miscellaneous deficiency:       The borrower signed one blank page of the uniform residential loan application. This page contains
                                                          information to determine whether the borrower had FHA loans in the past and whether the borrower
                          HUD Handbook 4155.1, REV-5,     owns any other real estate. HUD does not allow the lender to accept blank signed documents.
                          paragraph 3-2C


                                                                           73
We determined that these deficiencies were technical in nature.
FHA case number                 Violation                                                                          Finding(s)
332-4711039                     Credit deficiency:                 The borrower’s pay stub listed garnishments that were not included in the mortgage credit analysis
                                                                   worksheet. There were two payments on the pay stub titled ―Court Order Exp‖ and ―Court Charge NV.‖
                                 HUD Handbook 4155.1, REV-5,       The monthly average of these two payments was $224.24. There were no explanations in the file of how
                                 paragraph 2-11A                   long this obligation was to continue or what it was. All recurring obligations expected to last more than
                                                                   10 months are required to be included in the liabilities section of the mortgage credit analysis worksheet.


                                 Income deficiency:                One of the borrowers was a self-employed individual. The file contained a profit and loss statement for
                                                                   the year but not a balance sheet as required.
                                 HUD Handbook 4155.1, REV 5,
                                 paragraph 2-9B(3)


                                 Miscellaneous deficiency:         The fax number on the rental verification did not appear on the header. Without this information, the
                                                                   lender could not be sure that the document came directly from the landlord.
                                 Mortgagee Letter 2004-47: Total
                                 Score Card User Guide –
                                 Documentation Requirements

We determined these deficiencies were technical in nature.

FHA case number                  Violation                                                                          Findings
332-4680917                      Income deficiency:                The lender closed on a home in North Las Vegas while the borrower lived and worked in California.
                                                                   The borrower claimed that she would be able to telecommute from the home in North Las Vegas.
                                 HUD Handbook                      According to the loan notes, the lender was aware of the borrower’s work situation; however, the lender
                                 4155.1, REV-5, paragraph 1-2      closed the loan without verifying this information.

                                                                   The borrower made two payments before the loan went into default. Due to the lender’s not ensuring
                                                                   that the borrower would have employment near the new home, we are requesting indemnification of the
                                                                   loan.


                                 Asset deficiency:                 The lender did not adequately verify a large deposit in the borrower’s bank account. The lender noted a
                                                                   deposit of $5,400 in the loan notes, which the borrower verbally stated was a mistake by the bank. The
                                 HUD Handbook 4155.1, REV-5,       lender did not include that bank statement in the file and did not verify that the explanation was accurate.
                                 paragraph 2-10B




                                                                                    74
                                 Asset deficiency:                   The lender did not document the actual transfer of funds from the donor to the title company as required.
                                                                     We verified the actual transfer with the title company; however, it is the lender’s responsibility to obtain
                                 HUD Handbook 4155.1, REV-5,         the transfer documentation.
                                 paragraph 2-10C(2)

We determined that these deficiencies were significant in nature. Because of the significant underwriting deficiencies, along with the unallowable restrictive covenants, we
are seeking indemnification for this loan.

FHA case number                  Violation                                                                          Findings
332-4905750                      Income deficiency:                  The lender included overtime in the income calculation when the trend showed a significant decrease
                                                                     over the past 3 years.
                                 HUD Handbook 4155.1, REV-5,
                                 paragraph 2-7A
                                                                                            $2,500.00
                                                                                            $2,000.00
                                                                                            $1,500.00                                           Average
                                                                                            $1,000.00                                           monthly
                                                                                                                                                overtime
                                                                                              $500.00
                                                                                                 $0.00
                                                                                                          2007 2008 2009




                                                                     There was no indication in the loan file or the notes that the lender considered the declining trend in the
                                                                     borrower’s overtime income, and the lender did not provide a sound rationalization in writing for
                                                                     including the income for borrower qualification.

                                                                     Further, the lender did not obtain support showing that overtime income was likely to continue in the
                                                                     future. As a result, the lender overstated the borrower’s monthly income. This error resulted in the
                                                                     borrower’s qualifying ratios increasing from 36 and 55 percent to 40 and 62 percent, respectively. Due
                                                                     to the unstable income, we are requesting indemnification of the loan.

                                 Credit deficiency:                  The lender did not determine whether the borrower incurred recent debt to obtain part of the required



                                                                                      75
                                                                     cash investment. The lender did not obtain an explanation for a loan inquiry by Dollar Loan Center
                                 Mortgagee Letter 2004-47            made 4 days before the borrower provided the earnest money deposit.

We determined that these deficiencies were significant in nature. Because of the significant underwriting deficiencies, along with the unallowable restrictive covenants, we
are seeking indemnification for this loan.

FHA case number                  Violation                                                                          Findings
332-4646174                      Income deficiency:                  The lender did not use due care when including new overtime income in the borrower’s qualifying
                                                                     ratios.
                                 HUD Handbook 4155.1, REV-5,
                                 paragraph 2-7A                      From January 1 to October 2008, the borrower worked at two jobs. However, the borrower decided in
                                                                     October 2008, the same month the loan closed, to quit one of the jobs and work at the primary job where
                                                                     she would be able to increase her hours. The lender obtained an explanation from the primary job,
                                                                     which stated that the borrower would work an additional 25 hours per week at a rate of $49.50 per hour.
                                                                     The lender also obtained a copy of a paycheck showing the first week that the borrower worked these
                                                                     hours.

                                                                     However, overtime income is not allowable in this situation because the lender was not able to show that
                                                                     the borrower had worked overtime the past 2 years. The lender stated that it used the letter and the pay
                                                                     stub showing 1 week of overtime; however, there appeared to have been no follow-up by the lender with
                                                                     the employer to determine the likelihood or duration of the overtime. We spoke to the executive director
                                                                     of the primary employment, and he was hesitant to say that the overtime was a permanent or long-term
                                                                     arrangement.

                                                                     The borrower defaulted on her mortgage after only four payments.

                                                                     We determined that the borrower’s front and back ratios increased from 25 and 50 percent to 41 and 81
                                                                     percent, respectively. Due to this underwriting issue, we are requesting indemnification of the loan.


                                 Credit deficiency:                  The lender did not take significant overdraft and nonsufficient fund charges shown on the bank
                                                                     statements into consideration. The lender’s policy stated the following: ―Watch out for nonsufficient
                                 HUD Handbook 4155.1, REV-5,         funds and overdrafts on the bank statement since this could affect our underwriter’s credit decision.
                                 paragraph 2-3                       These issues must be addressed with Underwriting.‖ The borrower’s July to August 2008 bank
                                                                     statement showed that the year-to-date overdraft charges were $1,302 and the nonsufficient funds were
                                                                     $249 for a total of $1,551 ($1,302 + $249). This amount equates to approximately $194 in overdraft and
                                                                     nonsufficient fund charges per month ($1,551/8 months). This is an indication that the borrower was not
                                                                     financially responsible.




                                                                                      76
                                                                     There was no evidence that the underwriter considered this issue when qualifying the borrower.


                                 Asset deficiency:                   There was no evidence in the file that the lender obtained explanations for the large nonpayroll deposits
                                                                     listed below.
                                 HUD Handbook 4155.1, paragraph
                                 2-10B                                        April 17, 2008 - $5,000
                                                                              July 21, 2008 - $2,000
                                                                              August 4, 2008 - $1,600
                                                                              August 13, 2008 - $1,400
                                                                              September 2, 2008 - $1,400

                                                                     This is a violation of HUD regulations, and HUD had no assurance that these deposits did not come
                                                                     from interested parties to the sale of the home.

We determined that these deficiencies were significant in nature. Because of the significant underwriting deficiencies, along with the unallowable restrictive covenants, we
are seeking indemnification for this loan.

FHA case number                  Violation                                                                            Finding(s)
331-1386377                      Credit deficiency:                  In 2008, the borrower had a large tax liability in the amount of $13,104. The lender did not obtain
                                                                     documentation showing that the taxes were paid and did not verify that the IRS and borrower made a
                                 HUD Handbook 4155.1, REV-5,         satisfactory repayment plan in writing.
                                 paragraph 2-5
                                                                     There was no evidence in the file that the borrower applied for or was in the process of entering into a
                                                                     payment plan with the IRS. The borrower did not have enough funds in reserve to cover both the
                                                                     closing costs of the house and the tax debt that he owed.

                                                                     As a result, at the time of closing, this loan was not eligible for FHA insurance.

                                 Legal restrictions on conveyance:   The lender, through the Lennar Charitable Housing Foundation, established a lien, which required
                                 HUD Handbook 4155.2, paragraph      payment of a fee upon conveyance of title in violation of HUD regulations.
                                 6.A.1.h                             Schedule B, part I, of the final title policy reflected a recorded charitable agreement imposing
                                 24 CFR 203.41(B)                    endowments fee obligation. The document requires new owners to pay a fee upon property conveyance.
                                                                     The borrower paid a fee at closing of $101 reflected on the HUD-1 settlement statement.

We determined that this deficiency was significant in nature. Because of the significant underwriting deficiency, along with the unallowable restrictive covenants, we are
seeking indemnification for this loan.

FHA case number                  Violations                                                                          Finding(s)


                                                                                      77
332-4772348                      Income deficiency:                  The lender understated negative rent included in the qualifying ratios for one of the borrower’s rental
                                                                     properties. The lender obtained a Schedule E from the 2007 tax returns. However, the borrower did not
                                 HUD Handbook 4155.1, REV-5,         rent out the house until October 2007, according to the lender notes. The lender did not provide a lease,
                                 paragraph 2-7M                      and the tax returns did not provide a stable rental history over the previous 24 months.

                                                                     According to the final uniform residential loan application, the amount of rent received to calculate
                                                                     negative rent was $650 per month. We reviewed the bank transaction detail report over the past 3
                                                                     months and could not determine whether any of the deposits were rental income. The documentation
                                                                     provided was insufficient support of rental income and rental stability as required by HUD.

                                                                     Due to the situation described, we adjusted the qualifying ratios by removing the negative rent amount
                                                                     for the property and added the home equity line of credit debt associated with the property of $656 per
                                                                     month. This change increased the back ratio from 53 to 65 percent. Due to this issue, we are requesting
                                                                     indemnification of the loan.

                                 Asset deficiency:              The lender did not obtain documentation to verify a large deposit. The borrower received a $3,000
                                                                deposit on December 1, 2008, with a quick explanation that it was from the borrower’s home equity line
                                 HUD Handbook 4155.1, paragraph of credit. The lender did not obtain the proper documentation to verify that the deposit was from the
                                 2-10B                          home equity line of credit. Without this large deposit, the borrower would not have had enough funds to
                                                                pay the closing costs.

We determined that these deficiencies were significant in nature. Because of the significant underwriting deficiencies, along with the unallowable restrictive covenants, we
are seeking indemnification for this loan.

FHA case number                  Violation                                                                          Finding(s)
332-4746911                      Income deficiency:                  The lender did not question the borrower’s stability of income after a change in employment status the
                                                                     day of closing.
                                 HUD Handbook 4155.1, REV-5,
                                 chapter 2                           The lender received two verifications of employment for both borrowers, who worked for the same
                                                                     primary employer. The lender sent the first verification on November 12, 2008, which indicated that the
                                                                     employees were full time. The employment status for both borrowers changed to ―on-call‖ on the
                                                                     second verification received the day of closing on January 29, 2009. The wife’s verification of
                                                                     employment under the section, ―Remarks: if employee was off work for any length of time. Please
                                                                     indicate time period and reason,‖ stated, ―For your information, the employee is on an on-call status, last
                                                                     day worked on 01/13/09.‖ On January 28, 2009, the employer signed the verification of employment
                                                                     showing that the wife did not work for a period of 15 days.

                                                                     We met with a human resource representative of the employer on March 25, 2011, to determine the
                                                                     difference between the verifications. The human resource representative stated that the employees were



                                                                                      78
                                                                     full time but were essentially laid off between the first and second verification and that the hotel would
                                                                     call them if it had any work to be done on an on-call basis. As mentioned in the statement above, the
                                                                     wife did not work for 15 days before closing, showing the possible instability of the on-call income.


                                 Income deficiency:                  The lender should have excluded the part-time income of $213.75 per month due to the instability shown
                                                                     in the decline in income from 2007 to 2008, the lack of a current verification that the borrower was
                                 HUD Handbook 4155.1, REV-5,         likely to continue to work part time with the employer, and the lender’s own hesitancy in using the part-
                                 paragraph 2-7B                      time income.

                                                                     The lender took the conservative route when calculating part-time income by using the average monthly
                                                                     income for 2008 only. While the lender documented that the borrower had worked the job for the past 2
                                                                     years, it did not document the likelihood that the borrower would continue to do so. The work number
                                                                     verification stated it was current as of June 4, 2008, but the lender ran the report on January 27, 2009.
                                                                     This was not a proper verification of employment. Because the employer had not updated the system
                                                                     since June 2008 and the loan closed in January 2009, the lender should have obtained a verbal
                                                                     verification from the employer and asked about the likelihood of continued employment.

                                                                     The lender was originally hesitant on using the part-time income, as noted in the loan file notes, but
                                                                     decided to use it to maintain the borrower’s accept status. The lender’s comments are pasted below:
                                                                     ―Please note that I didn’t clear income as their YTD [year to date] is lower than the 40 hours weekly
                                                                     qualified with and had to add her 2nd substitute teaching job to keep in line ratio wise and maintain their
                                                                     accept status. Ratios are very tight, but my YTD approach on the income was the most conservative
                                                                     way to go.‖

                                                                     Due to the instability of income, we are requesting indemnification of the loan.


We determined that these deficiencies were significant in nature. Because of the significant underwriting deficiencies, along with the unallowable restrictive covenants, we
are seeking indemnification for this loan.


FHA case number                  Violation                                                                           Finding(s)
332-4705686                      Miscellaneous deficiency:           The lender did not meet the Total Score Card feedback requirements. The Total Score Card required the
                                 Mortgagee Letter 2004-47: FHA       lender to obtain pay stubs for a 30-day period and 2 years worth of IRS Forms W-2 to support the
                                 Total Mortgage Scorecard User       income for both the borrower and coborrower. However, the lender only obtained one pay stub
                                 Guide – Employment / Income         documenting 2 weeks of income for the borrower and only obtained the Form W-2 for 1 year for the
                                                                     coborrower.




                                                                                      79
We determined that these deficiencies were technical in nature.
FHA case number                 Violation                                                                             Finding(s)
331-1343149                     Miscellaneous deficiency:            The lender accepted two faxed verification of employment documents when the header did not clearly
                                                                     identify the source of the documents. To ensure that documents relating to credit, employment, or
                                 Mortgagee Letter 2004-47: FHA       income of borrowers are not handled by interested third parties, the lender should have ensured that the
                                 Total Mortgage Scorecard User       header or footer clearly identified the source of the document.
                                 Guide –Documentation
                                 Requirements

                                 Legal restrictions on conveyance:   The lender, through the Lennar Charitable Housing Foundation, established a lien, which required
                                 HUD Handbook 4155.2, paragraph      payment of a fee upon conveyance of title in violation of HUD regulations.
                                 6.A.1.h                             Schedule B, part I, of the final title policy reflected a recorded charitable agreement imposing
                                 24 CFR 203.41(B)                    endowments fee obligation. The document requires new owners to pay a fee upon property conveyance.
                                                                     The borrower paid a fee at closing of $122 reflected on the HUD-1 settlement statement.

We determined that these deficiencies were technical in nature.
FHA case number                 Violation                                                                          Finding(s)
332-5009143                     Asset deficiency:                    The lender did not determine the source of two large deposits, which affected the borrower’s ability to
                                                                     pay closing costs.
                                 HUD Handbook 4155.1, REV-5,
                                 paragraph 2-10B                     According to the lender notes, the borrower opened a new account to deposit gift funds from the 401k of
                                                                     the nonpurchasing spouse. In addition, the notes stated that the lender did not include two unverified
                                                                     deposits of $1,800 and $2,000 in the new account, making the new balance $2,052.56, to be used as the
                                                                     borrower’s depository assets. It did not appear that the lender attempted to get an explanation of the two
                                                                     deposits.

                                                                     In addition, we determined that the lender did not remove the $2,000 unverified deposit as stated in the
                                                                     notes. Without at least one of the unverified deposits, the borrower would not have had enough funds to
                                                                     close. HUD had no assurance that the funds came from an acceptable source.

                                 Credit deficiency:                  The lender did not ensure that all liabilities were included in the qualifying ratios.

                                 HUD Handbook 4155.1 REV-5,          The borrower’s pay stub listed a garnishment from a tax levy in prior pay stubs with a year-to-date
                                 paragraph 2-11A                     amount of $1,683.76. The pay stub did not show whether it was a Federal or local tax levy. The levy
                                                                     did not appear to be active, but the lender should have requested a letter from the borrower explaining
                                 HUD Handbook 4155.1, REV-5,         this matter to ensure that the borrower was not paying the tax agency through a recurring obligation.
                                 paragraph 2-5B




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We determined that these deficiencies were significant in nature. Because of the significant underwriting deficiencies, along with the unallowable restrictive covenants, we
are seeking indemnification for this loan.

FHA case number                  Violation                                                                         Finding(s)
332-5029755                      Income deficiency:                  The lender inappropriately used part-time income without a 2-year history. The borrower’s employment
                                                                     was from July 15, 2008, to October 14, 2009. The borrower only worked uninterrupted for 15 months,
                                 HUD Handbook 4155.1, REV-5,         which is short of the 2-year requirement.
                                 paragraph 2-7B
                                                                     The lender obtained a verification of employment, but it did not state whether the borrower was likely to
                                                                     continue employment, and the lender did not document justification for using part-time income for less
                                                                     than 2 years. The lender should not have included the part-time income as effective income. This error
                                                                     increased the front and back ratios from 39 and 46 percent to 50 and 58 percent, respectively.

                                 Asset deficiency:                   The lender did not obtain an explanation of unknown large deposits. The bank statement included three
                                                                     unknown deposits of $540, $700, and $200 at the end of August and early September 2009 for a total of
                                 HUD Handbook 4155.1, REV-5,         $1,440. The file did not contain an explanation of the deposits. The unknown deposits equaled 33
                                 paragraph 2-10B                     percent of the total amount of deposits for the statement. The borrower received gift funds to pay for the
                                                                     closing costs so it was not a significant issue; however, the lender should have verified all large deposits
                                                                     according to HUD regulations.

We determined that these deficiencies were significant in nature. Because of the significant underwriting deficiencies, along with the unallowable restrictive covenants, we
are seeking indemnification for this loan.

FHA case number                  Violation                                                                           Finding(s)
332-4657522                      Asset deficiency:                   The lender included an extra $2,020.71 in assets. The lender used 70 percent of the current value of a
                                                                     retirement account instead of 60 percent of the vested amount.
                                 The Total Scorecard Report:
                                 Retirement Accounts


                                 Asset deficiency:                   The lender did not determine the source of funds for the earnest money deposit, which appeared
                                                                     excessive based on the borrower’s bank statement. The HUD-1 settlement statement showed that the
                                 HUD Handbook 4155.1, REV-5,         seller received $1,500 for the earnest money deposit. However, the file only contained evidence of one
                                 paragraph 2-10A                     $500 money order for the earnest money deposit made on May 30, 2008. In addition, the bank statement
                                                                     on file ended April 30, 2008, with an ending balance of $356.82. The lender did not have any other
                                                                     documentation on file to support the $1,500 earnest money deposit.

                                 Asset deficiency:                   The lender did not properly document the source of gift funds. The borrower received gift funds from
                                                                     two parties, one from the father of the borrower for $3,000 and the rest from a nonprofit for $8,370. The



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                                 HUD Handbook 4155.1, REV-5,         borrower’s father obtained the official check the same day as a $3,000 deposit. The donor would not
                                 paragraph 2-10C(2)(b)               have had enough money to pay the gift without the $3,000 deposit, and the lender did not document
                                                                     where it came from.

                                                                     In addition, the lender obtained a gift letter from the nonprofit; however, it did not document the actual
                                                                     transfer of funds to the title company. During our visit to the title company, we found the supporting
                                                                     documentation for the wire transfer. However, the lender should have ensured that it maintained the
                                                                     supporting documentation of the wire transfer in the loan file.

We determined that these deficiencies were significant in nature. Because of the significant underwriting deficiencies, along with the unallowable restrictive covenants, we
are seeking indemnification for this loan.

FHA case number                  Violation                                                                             Finding(s)
332-4837072                      Asset deficiency:                   The lender did not obtain a credible explanation of a $2,800 unknown deposit. Because the borrower
                                                                     received gift funds to pay for closing costs, this is not a significant issue; however, the lender should
                                 HUD Handbook 4155.1, REV-5,         have followed HUD regulations and verified large deposits.
                                 paragraph 2-10B
                                 Asset deficiency:                   The borrower received a total of $11,510 in gift funds The lender’s file included the top of the donor’s
                                                                     bank statement with a total in all accounts of $12,855.01, a copy of each of the cashier’s checks, and a
                                 HUD Handbook 4155.1, REV-5,         copy of the borrower’s statement showing that the funds were received. However, none of the
                                 paragraph 2-10C(1)                  documents showed that the actual withdrawal came from the donor’s account. To ensure that the
                                                                     borrower did not receive funds from an unacceptable source, the lender should have obtained
                                                                     documentation showing the money coming from the donor’s account.

                                 Miscellaneous deficiency:      The lender could not rely on its verification of employment due to discrepancies with the IRS Forms W-
                                                                2. The income reported on the 2008 W-2 was $36,068.58, while the verification of employment stated
                                 HUD Handbook 4155.1, chapter 3 that 2008 income was $59,310.68. The lender did not question this difference. We attempted to reverify
                                                                this income, but the employer was no longer in business. The lender did not use the inflated income for
                                                                qualification purposes.

                                 Income deficiency:                  The lender obtained insufficient documentation to determine overtime according to HUD regulations.
                                                                     The lender used $396.45 per month in overtime income when qualifying the borrower. According to the
                                 HUD Handbook 4155.1, REV-5,         lender notes, the lender used a 14.5-month average to determine overtime income; however, the file
                                 paragraph 2-7A                      documentation was insufficient to support this amount. The only reliable evidence of any overtime
                                                                     income in the file was on one paycheck with an amount of $1,501.50. The decrease in income increased
                                                                     the front and back ratios from 34 and 38 percent to 37 and 53 percent, respectively.

We determined that these deficiencies were significant in nature. Because of the significant underwriting deficiencies, along with the unallowable restrictive covenants, we
are seeking indemnification for this loan.



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FHA case number                  Violation                                                                     Finding(s)
332-4729886                      Miscellaneous deficiency:      In 2007 and 2006, the IRS Form W-2 on file was higher than the verification of employment by more
                                                                than $16,000 and $1,600, respectively. The lender used a reasonable method to calculate income;
                                 HUD Handbook 4155.1, chapter 3 however, it should have questioned the significant difference in the income documentation.
                                 Asset deficiency:              The borrower received gift funds to cover the earnest money deposit and closing costs. The lender
                                                                obtained a deposit slip but did not document the donor’s deposit with the borrower’s bank statement as
                                 HUD Handbook 4155.1, REV-5, required.
                                 paragraph 2-10C(1)

We determined that these deficiencies were technical in nature.




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