oversight

TXL Mortgage Corporation, Houston, TX, Did Not Comply With HUD-FHA Loan Requirements in Underwriting 16 of 20 Home Loans

Published by the Department of Housing and Urban Development, Office of Inspector General on 2011-10-06.

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

                                                               Issue Date
                                                                        October 6, 2011
                                                               Audit Report Number
                                                                            2012-FW-1001




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

           Craig T. Clemmensen
           Director, Departmental Enforcement Center, CACB

           Dane Narode
           Associate General Counsel for Program Enforcement, CACC

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

SUBJECT: TXL Mortgage Corporation, Houston, TX, Did Not Comply With HUD-FHA
           Loan Requirements in Underwriting 16 of 20 Home Loans


                                  HIGHLIGHTS

 What We Audited and Why

           We audited TXL Mortgage Corporation, a nonsupervised direct endorsement
           lender located in Houston, TX. We selected TXL due to one of its loan
           correspondents’ high default rate. Our audit objectives were to determine whether
           TXL acted in a prudent manner and complied with U. S. Department of Housing
           and Urban Development (HUD) regulations, procedures, and instructions in the
           origination and sponsoring of Federal Housing Administration (FHA)-insured
           single-family mortgages and whether TXL implemented a quality control plan that
           met HUD-FHA requirements.
    What We Found


                Sixteen of 20 loans reviewed did not comply with HUD’s requirements. Of the 16
                loans, 8 had significant underwriting deficiencies and did not qualify for FHA
                insurance, and 2 qualified but were overinsured. As a result, TXL exposed HUD
                to unnecessary insurance risks totaling more than $713,000 and caused HUD to
                pay claims and incur losses of more than $36,000. Further, borrowers were
                overcharged more than $135,000, may not have known with which mortgage
                company they were dealing, and may not have understood that their mortgage
                company had an identity-of-interest relationship with the seller. These conditions
                occurred because neither TXL’s quality control plan nor its policies and
                procedures complied with HUD-FHA requirements. Further, TXL employees
                either did not understand or disregarded HUD requirements.

    What We Recommend


                 Our recommendations include that the Acting Deputy Secretary for Single Family
                 Housing require TXL to (1) buy down eight loans by $147,289 due to
                 overinsurance; (2) indemnify HUD for seven loans with an estimated potential loss
                 of $566,0521; (3) support or repay the FHA insurance fund $900 for claims paid as
                 of July 28, 2011, on one loan; (4) reimburse the FHA insurance fund $35,595 for
                 actual losses on one loan; and (5) take other actions to ensure that its quality control
                 plan and loan origination practices are in accordance with HUD requirements. We
                 also recommend that TXL ensure that its loan correspondents stop charging buyers
                 unearned underwriting fees, reimburse the appropriate buyers $135,126, and stop
                 allowing its employees to originate loans through its loan correspondents. We
                 also recommend that HUD refer TXL to the Mortgagee Review Board for
                 administrative actions for failure to implement a quality control program in
                 compliance with HUD requirements.

                 We further recommend that the Director of the Departmental Enforcement Center
                 take appropriate administrative sanctions, including possible debarment or other
                 remedies, against TXL for erroneously certifying that neither it nor its affiliates
                 had identity-of-interest relationships with the sellers.

                 We also recommend that the Associate General Counsel for Program
                 Enforcement pursue affirmative civil enforcement action of approximately
                 $943,120 against TXL and/or its principals for incorrectly certifying to the
                 integrity of the data or that due diligence was used during the underwriting of six
                 loans that resulted in an actual loss of $35,595 on one loan and potential losses of
                 $413,465 on five loans.

1
     The amount is based on the estimated percentage of loss of 59 percent that HUD would incur when the FHA
     property is foreclosed upon and resold as supported by the HUD Single Family Acquired Asset Management
     System’s case management profit and loss by acquisition as of September 2010.


                                                       2
           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 our discussion draft to TXL on September 19, 2011, and held the
           exit conference on September 27, 2011. We requested a written response by
           September 28, but extended the due date to September 30 at TXL’s request. TXL
           agreed with some conclusions and disagreed with others. TXL provided
           explanations and some documentation in its response to support its position. We
           reviewed the explanation and documentation; however, we determined that it was
           insufficient to change the report.

           The complete text of the auditee’s response, along with our evaluation of that
           response, can be found in appendix B of this report. The addendums referred to
           in the auditee’s response are available upon request.




                                            3
                             TABLE OF CONTENTS

Background and Objectives                                                      5

Results of Audit
        Finding: TXL Did Not Comply With HUD-FHA Requirements in Originating   6
                 and Underwriting 16 of 20 Home Loans

Scope and Methodology                                                          17

Internal Controls                                                              19

Appendixes
   A.   Schedule of Questioned Costs and Funds To Be Put to Better Use         20
   B.   Auditee Comments and OIG’s Evaluation                                  21
   C.   Schedule of Indemnification and Repayment Amounts                      28
   D.   Loan Correspondents’ Status                                            29
   E.   Overinsured Identity-of-Interest Loans                                 30
   F.   Case Narratives                                                        31




                                             4
                        BACKGROUND AND OBJECTIVES

TXL Mortgage Corporation is a nonsupervised direct endorsement lender which was approved
by the U. S. Department of Housing and Urban Development (HUD) to originate Federal
Housing Administration (FHA)-approved mortgage loans on May 14, 1999. TXL’s corporate
headquarters is located at 11931 Wickchester Lane, Suite 400, Houston, TX.

The direct endorsement program simplified the process for obtaining FHA mortgage insurance
by allowing lenders to underwrite and close the mortgage loan without prior HUD review or
approval. Lenders are responsible for complying with all applicable HUD regulations and are
required to evaluate the borrower’s ability and willingness to repay the mortgage debt. Lenders
are protected against default by FHA’s Mutual Mortgage Insurance Fund, which is sustained by
borrower premiums. FHA’s mortgage insurance programs help low- and moderate-income
families become homeowners by lowering some of the costs of their mortgage loans. FHA
mortgage insurance also encourages lenders to approve mortgages for otherwise creditworthy
borrowers and projects that might not be able to meet conventional underwriting requirements by
protecting the lender against default.2

According to HUD’s Neighborhood Watch system,3 TXL originated 666 loans totaling $103.2
million in 2008. In 2009 and 2010, it originated 910 loans totaling $143.5 million and 862
totaling $134.8 million, respectively. TXL’s overall default rate was 2.55 percent for our review
period.

TXL has one FHA-approved branch office located in Austin, TX, and one terminated branch in
Irving, TX. TXL sponsored 20 loan correspondents (14 terminated and 6 active) in Texas and
had financial affiliations or partnerships with them. HUD defines a loan correspondent as a
HUD-FHA approved mortgage broker or mortgage company which, principally, originates
mortgages for sale or transfer to a sponsor. FHA eliminated the use of loan correspondents after
December 31, 2010, when it issued Mortgagee Letter 2010-20 on June 11, 2010. Appendix D is
a table of TXL’s loan correspondents and their status.

TXL operates as a mortgage banking organization but is also a private construction-lending firm.
It has partnered with more than 20 homebuilders to create mortgage companies.4

Our audit objectives were to determine whether TXL acted in a prudent manner and complied
with HUD regulations, procedures, and instructions in the origination and sponsoring of FHA-
insured single-family mortgages and whether it implemented a quality control plan that met
HUD-FHA requirements.


2
    HUD defines a default as the inability to make timely mortgage payments or otherwise comply with mortgage
    terms. A loan is considered in default when no payment has been made 30 days after the due date. Once a loan
    is in default, the lender can exercise legal rights defined in the contract to begin foreclosure proceedings.
3
    Neighborhood Watch is Web-based software that displays loan performance data for FHA-insured single-family
    loans. The system is designed to highlight exceptions so that potential problems are readily identifiable.
4
    http://www.txlmortgage.com/AboutUS.aspx.


                                                       5
                               RESULTS OF AUDIT

Finding: TXL Did Not Comply With HUD-FHA Requirements in
         Originating and Underwriting 16 of 20 Home Loans

Sixteen of 20 loans reviewed did not comply with HUD-FHA requirements. Of the 16 loans, 10
had underwriting deficiencies of which 8 had significant deficiencies and should not have been
approved for FHA insurance. Two of the 10 deficient loans qualified for insurance, but were
overinsured. One of the 10 loans had been foreclosed upon and resold. For the six remaining
loans, TXL allowed its employees to originate FHA loans for other companies at the same time
they were employed by TXL. Further, in two instances TXL did not properly handle employee
loans. This condition occurred because neither TXL’s quality control plan nor its policies and
procedures complied with HUD-FHA requirements. Further, TXL employees either did not
understand or disregarded HUD requirements. As a result, TXL caused HUD to pay claims and
incur losses totaling more than $36,000 and exposed HUD to unnecessary insurance risks
totaling more than $713,000. Further, borrowers were overcharged more than $135,000, may not
have known with which mortgage company they were dealing, and may not have understood that
their mortgage company had an identity-of-interest relationship with the seller.


 TXL Did Not Follow HUD-FHA
 Requirements


              Sixteen of twenty loans reviewed did not comply with HUD’s requirements. TXL
              allowed loan correspondents to charge borrowers unearned underwriting fees,
              allowed its employees to originate FHA loans for other companies at the same
              time they were employed by TXL, approved loans for insurance that had
              underwriting deficiencies, and did not properly handle employee loans.

              Table 1 shows the 16 loans that had violations and underwriting deficiencies. A
              HUD Quality Assurance Division (QAD) report, issued July 22, 2010, cited TXL
              for two of the deficiencies, charging unearned underwriting fees and allowing its
              employees to originate loans for its correspondents; however, TXL did not
              provide documentation to show that it had corrected the deficiencies.




                                              6
Table 1-Summary of violations
                                                                  Dual                   Under-
                Case             Mortgage         Unearned                 Related                    Employee
    File                                                         employ-                 writing
               number            company            fees                   parties5                    loans
                                                                  ment                 deficiencies

     1      493-8728615      Baymont                  x             x          x            x
                             Financial, LTD
     2      493-9082458      Baymont                  x             x          x            x
                             Financial, LTD
     3      493-9048842      Castlerock               x             x          x            x
                             Mortgage, LTD
     4      512-0024458      Castlerock               x             x          x            x
                             Mortgage, LTD
     5      493-9413444      Castlerock                             x          x            x
                             Mortgage, LTD
     6      493-9042215      Friendswood              x             x
                             Financial, LTD
     7      493-9251259      Friendswood              x             x          x            x
                             Financial, LTD
     8      493-9041043      Glenwood                               x                                     x
                             Financial, LLC
     9      493-9071846      Glenwood                 x             x
                             Financial, LLC
    10      493-9058168      Glenwood                 x             x
                             Financial, LLC
    11      493-9028752      Glenwood                 x             x
                             Financial, LLC
    12      493-8954521      Glenwood                               x                       x             x
                             Financial, LLC
    13      493-9187150      Glenwood                 x             x          x            x
                             Financial, LLC
    14      493-9289639      Glenwood                               x          x            x
                             Financial, LLC
    15      493-9330900      Glenwood                               x
                             Financial, LLC
    16      493-9577895      TXL Mortgage                                      x            x
                             Corporation
                Totals                                10           15          9           10             2



    TXL’s Loan Correspondents
    Charged Unearned
    Underwriting Fees

                      TXL’s loan correspondents charged a $285 underwriting fee for each of 10 of the
                      15 correspondent loans reviewed. HUD-1 settlement statements for the loans
                      showed that the underwriting fees were made payable to the loan correspondents.

5
         See the discussion beginning on page 10 pertaining to the identity-of-interest among TXL, loan correspondents,
         sellers, and builders.


                                                             7
                  Review of other FHA-insured loans showed that the loan correspondents charged
                  underwriting fees for 466 of 630 additional loans. The underwriting fees that
                  TXL’s loan correspondents charged for the 476 loans totaled $135,126.

                  According to HUD Handbook 4060.1, paragraph 2-29A(2), the sponsor performs
                  the loan underwriting function on behalf of the loan correspondent. Therefore,
                  loan correspondents should not charge for underwriting because they do not
                  perform the service, and the $135,126 in underwriting fees paid to the loan
                  correspondents was unearned.

                  The July 22, 2010 QAD report cited TXL for allowing its loan correspondents to
                  charge unearned fees. However, TXL continued this practice, and several
                  underwriting charges were dated well after the QAD report.

    TXL Allowed Its Employees To
    Originate Loans for
    Correspondents


                  TXL allowed its employees to originate FHA-insured loans for its loan
                  correspondents, a practice prohibited by HUD Mortgagee Letter 96-18. The
                  mortgagee letter states that lender employees may not work for more than one
                  company engaged in the real estate finance business at the same time and includes
                  working as a real estate agent or broker as well as originating or underwriting
                  loans for more than one lending institution. In 15 of the 20 loans reviewed, the
                  loan officers were listed as TXL employees and were also listed as loan officers
                  for the loan correspondents.

                  For example, in five of the loans, a TXL loan officer was listed on the loan
                  applications as an employee and loan officer for two loan correspondents,
                  Castlerock Mortgage, LTD, and Baymont Financial, LTD. Further, in eight of the
                  loans, another TXL loan officer was listed on the loan applications as an
                  employee and loan officer of Glenwood Financial, LLC, a loan correspondent.
                  Finally, in two of the loans, loan applications showed a TXL loan officer as an
                  employee and loan officer for Friendswood Financial, LTD, a loan correspondent.

                  Further review of 630 loan applications6 showed that there were at least 494
                  additional loans in which TXL’s loan officers acted for the loan correspondents.
                  In each case, the loan officer was listed as a TXL employee and was also listed as
                  the loan officer for the loan correspondents.




6
     We selected an additional 630 HUD-1 settlement statements, loan applications, and HUD Forms 92900-A from
     the loan correspondents’ origination files for further testing. We requested documents for 665 such loans, but
     TXL was only able to provide documents for 630 of them.


                                                         8
                  As a result of this practice, borrowers may not have known with which mortgage
                  company they were doing business, and it was unclear which mortgage company
                  would have been responsible for supervising the loan officers.

                  The July 22, 2010 QAD report cited TXL for allowing its loan officers to work
                  for loan correspondents at the same time that they worked for TXL. However, the
                  practice continued.

    TXL Did Not Properly
    Underwrite 10 Loans
                  TXL’s underwriters approved 10 loans with underwriting deficiencies as shown in
                  Table 2. Eight of the 10 loans had significant underwriting deficiencies and did
                  not qualify for FHA insurance, and 2 qualified but were overinsured.7 Each loan
                  had one or more of the following underwriting deficiencies: failure to show
                  evidence that the borrowers had sufficient funds to close (five loans), accepting
                  income documents that the sellers had handled or faxed (four loans), overinsuring
                  loans by disregarding the 85 percent cap on the loan-to-value ratio for identity-of-
                  interest loans (nine loans), and allowing a loan officer to process her own loan
                  (one loan).

     Table 2-Summary of underwriting deficiencies8
                                      Insufficient       Improperly                      Employee
                                                                           Overinsured
        File     Case number            funds to          handled                      processed own
                                                                              loan
                                          close          documents                          loan
        1         493-8728615                x                 x               x
        2         493-9082458                                                  x
        3         493-9048842                x                                 x
        4         512-0024458                                  x               x
        5         493-9413444                x                                 x
        6         493-9251259                                                  x
        7         493-8954521                                                                x
        8         493-9187150                x                 x               x
        9         493-9289639                                  x               x
       10         493-9577895                x                                 x
      Totals                                 5                 4               9             1




7
     Loan numbers 493-9082458 and 493-9251259.
8
     See appendix E for additional details on the underwriting deficiencies.



                                                          9
Loans Lacked Sufficient Evidence of Funds To Close
Five of the ten loans with underwriting deficiencies lacked evidence of sufficient
funds to close. Since there was no evidence that the five FHA borrowers had
sufficient funds to close, the five loans were not eligible for FHA insurance and
unnecessarily increased FHA’s insurance risk.

For example, in FHA loan 493-9187150, the borrower needed $4,788 to close
according to the HUD-1 settlement statement. The borrower’s bank statement
showed that the borrower had only $433. The underwriter certified that gift funds
were the source of funds to close and included a copy of a cashier’s check for
$4,600. However, the gift funds were not listed on the HUD-1 settlement
statement and were not properly documented. HUD Handbook 4155.1, paragraph
5.B.5.b, requires the donor to provide a withdrawal document showing that the
funds came from the donor’s personal account. There was no such evidence in
the case file. Further, the gift documents were transmitted by the seller, and the
gift amount was the same as the commission paid by the seller.

TXL’s Underwriters Inappropriately Accepted Documents From the Sellers
In 4 of the 10 loans with underwriting deficiencies, TXL’s underwriters accepted
income documents that the sellers had handled and faxed. These documents
included borrowers’ Internal Revenue Service Forms W-2, pay stubs, Federal
income tax forms, and gift documents. TXL’s use of documents provided by an
interested third party to the transaction was a serious control weakness that cast
doubt on the validity of the documents. Since TXL did not support the loans with
valid documents, it unnecessarily increased FHA’s insurance risk and should
indemnify HUD for those loans.

For example, in FHA loan 493-9289639, TXL’s underwriters accepted and used
documents relating to income and employment of the borrower that were handled
or transmitted through an interested third party. The seller, Deerwood Homes
Rayford Ridge L.P., handled the borrower’s Federal income tax returns, W-2s,
and other income documents. HUD Handbook 4155.1, paragraph 1.B.1.f.,
prohibits using documents for processing or underwriting when those documents
were handled by or transmitted through an interested third party to the transaction.

TXL, Loan Correspondents, Builders, and Sellers Were Affiliated or Had
Partnerships
In 9 of the 10 loans with underwriting deficiencies, TXL, the loan correspondents,
the builders, and the sellers were affiliated or had partnership agreements. The
underwriters for these loans certified to HUD that there were no affiliations
among the parties. The underwriters certified on Form HUD-92900-A the
following statement: “The Mortgagee, its owners, officers, employees or
directors do not have a financial interest in or a relationship, by affiliation or
ownership, with the builder or seller involved in this transaction.” As a result of
the erroneous certifications, HUD would have been unaware of these



                                 10
                  identity-of-interest transactions and the limits that they put on the maximum loan
                  amounts.

                  Because TXL had an identity-of-interest relationship with builders and sellers,
                  HUD required it to use a lower loan-to-value ratio on any of the loans in which
                  TXL or its loan correspondents and the builders or sellers were parties. Normally,
                  HUD allows a 97 percent loan-to-value ratio. The loan, less any financed
                  principal mortgage insurance, has to be equal to or less than 97 percent of the
                  appraised value of the home. However, in the case of related parties, HUD
                  Handbook 4155.1, paragraph 2.B.2.b., limits the ratio to 85 percent. Any part of
                  the loan over 85 percent would be overinsurance, and the overinsured portion of
                  the loan would be ineligible. TXL overinsured the nine loans by approving them
                  for more than the 85 percent cap; thus, increasing risk to the FHA insurance fund
                  by the portion of the loans in excess of the cap.

                  For example, in loan number 493-9082458, the loan amount, not including
                  principal mortgage insurance, was $196,734, and the appraised value of the
                  property was $204,000. Therefore, the loan-to-value ratio was 96.4 percent.9
                  However, because the builder and seller, Bayway Homes, Inc., and the lender,
                  Baymont Financial, LTD (loan correspondent), had an identity of interest, the
                  loan-to-value ratio should have been capped at 85 percent, or $173,400.10
                  Therefore, the underwriters approved a loan that was overinsured by $23,334.11

                  A review of 630 additional loans showed 588 additional instances in which TXL’s
                  underwriters erroneously certified that the identity of interest did not exist in the
                  transactions.

                  TXL Allowed Employees To Process Their Own Loans
                  TXL also violated HUD regulations by allowing employees to process their own
                  FHA loans. HUD Handbook 4155.2, paragraph 3.B.3.a, prohibits employees
                  from processing their own FHA loans. Loan documents for one of the 20 sample
                  loans showed the employee as both the loan officer and borrower. In addition, the
                  employee’s signature appeared on the document, approving and receiving 25
                  percent of the loan origination fee. Allowing the employee to process her own
                  loan cast doubt on the validity of the loan. Since TXL unnecessarily increased the
                  insurance risk by violating the prohibition against employees processing their own
                  loans, it should indemnify HUD for this loan.

                  TXL allowed at least two additional employees to process their own loans.12 The
                  additional loans were not part of our sample and we did not question them;
9
     The home portion of the loan (total loan less financed principal mortgage insurance) was $196,734. The
     appraised value was $204,000. Therefore, the loan-to-value ratio was 96.43 percent (196,734 divided by
     204,000 = 96.43 percent).
10
     The appraised value of $204,000 times the 85 percent cap equals a maximum loan-to-value of $173,400.
11
     The home portion of the loan ($196,734) less the 85 percent loan-to-value cap ($173,400) equals $23,334 of
     overinsurance.
12
     FHA case numbers 493-9591766 and 493-9480958.


                                                        11
                  however, TXL should review the two loans and if they were originated in
                  violation of HUD Handbook 4155.2, paragraph 3.B.3.a., indemnify the loans.

                  Further, TXL failed to properly flag these three loans, and one additional loan in
                  which the borrowers were TXL’s or its affiliates’ employees. HUD Handbook
                  4155.2, paragraph 3.B.3.a, requires employee case files to be clearly annotated
                  with “Employment” on both the HUD-92900-LT, FHA Loan Underwriting and
                  Transmittal Summary, and on the front of the case binder. While failure to flag
                  the loan files is not an underwriting deficiency, TXL should ensure that it
                  complies with the requirement.

                  TXL and Its Underwriters Increased the Risk to the Insurance Fund and
                  Caused HUD To Suffer Losses
                  As a result of the underwriting deficiencies, TXL unnecessarily increased the
                  insurance risks by $713,34113 for eight loans that were overinsured and seven
                  loans that should not have been approved for FHA insurance and caused HUD to
                  suffer losses and pay claims totaling $35,59514 for another loan that was both
                  overinsured and should not have been approved. See appendix C for a schedule
                  of indemnification and repayment amounts.

                  We reviewed the certifications for six manually underwritten loans with material
                  underwriting deficiencies15 for accuracy. TXL’s direct endorsement underwriters
                  incorrectly certified that due diligence was used in underwriting these six loans.
                  When underwriting a loan manually, the Code of Federal Regulations (CFR) 24,
                  Sections 203.5 and 203.255 require a direct endorsement lender to certify that it
                  used due diligence and reviewed all associated documents during the underwriting
                  of the loan.

     TXL Contributed to the
     Underwriting Deficiencies By
     Not Implementing an Adequate
     Quality Control Plan

                  TXL did not comply with HUD’s quality control requirements because it did not
                  perform reviews of all early payment default loans and rejected loans, conduct
                  onsite and affiliate reviews, or promptly report a significant quality control
                  violation to HUD.




13
      The increased insurance risks included $566,052 for seven loans that should not have been underwritten for
      FHA insurance and $147,289 for the overinsured portions of eight.
14
      Losses and claims included $35,595 for one mortgage that was foreclosed-upon and HUD subsequently sold the
      property, and a $900 claim on a second loan for total losses and claims of $36,495.
15
      FHA case numbers 512-0024458, 493-8728615, 493-8944521, 493-9251259, 493-9048842, and 493-9577895.


                                                       12
TXL Did Not Perform Early Payment Default or Rejected Loan Reviews
TXL did not review loans that defaulted within the first six payments (early
payment defaults) as required by HUD regulations. HUD Handbook 4060.1,
REV-2, paragraph 7-6D, requires lenders to review all early payment default
loans, including the loans that become 60 days or more delinquent within the first
six payments. Of the loans approved by TXL officials from November 1, 2008,
through October 31, 2010, at least 21 became 90 days or more delinquent within
the first 6 payments. TXL officials did not review any of these early payment
default loans.

Also, TXL did not review a sample of rejected loans as required by HUD
regulations. HUD Handbook 4060.1, REV-2, paragraph 7-8A(1), requires lenders
to review at least 10 percent or a statistical random sample that provides a 95
percent confidence level with 2 percent precision of rejected loans. TXL did not
conduct quality control reviews of any of the loans rejected between November 1,
2008, and October 31, 2010.

TXL Did Not Perform Onsite and Affiliate Reviews
TXL did not perform onsite and affiliate reviews as required. HUD Handbook
4060.1, REV-2, section 7-3, requires a lender’s offices, including traditional,
nontraditional branch, and direct lending offices engaged in the origination or
servicing of FHA-insured loans, to be reviewed to determine that they comply
with HUD’s requirements. In addition, HUD requires lenders to ensure that their
contractors, agents, and loan correspondents are acceptable to FHA and operate in
compliance with FHA requirements.

TXL Did Not Report a Significant Quality Control Finding
TXL did not report a significant finding contained in its quality control review to
HUD as required, despite being notified by its quality control contractor. HUD
Handbook 4060.1, REV-2, paragraph 7-3J, requires that findings of fraud or other
serious violations be immediately referred, in writing (along with any available
supporting documentation), to the director of the QAD in the HUD
Homeownership Center having jurisdiction (determined by the State where the
property is located). In lieu of submitting a paper report, lenders must use the
“lender reporting” feature in the Neighborhood Watch Early Warning System.
TXL’s quality control contractor assigned one loan an exception rating of “5” in
its August 2009 review and recommended TXL report the loan to HUD. Loans
with exception ratings of “5” are considered material and unacceptable risks.
TXL failed to comply with or act upon the quality control contractor’s
recommendation to report the loan to HUD.

Quality control is intended to guard against errors, omissions, and fraud and is
designed to protect both HUD and the lender from unacceptable risk. TXL’s lack
of complete quality control reviews did not ensure swift and appropriate
corrective action and its failure to report material violations prevented HUD from
taking action to mitigate losses.



                                13
     Conclusion

                  TXL’s loan origination and quality control practices did not comply with HUD’s
                  requirements. As a result, borrowers were overcharged more than $135,000 in
                  unearned fees, may not have known with which mortgage company they were
                  dealing, and may not have understood that their mortgage company had an
                  identity-of-interest relationship with the seller. Also, TXL’s faulty underwriting
                  practices exposed HUD to unnecessary insurance risks totaling more than
                  $713,000 and caused HUD to suffer losses and pay claims totaling more than
                  $35,000. Further, because TXL did not properly implement a quality control
                  plan, it did not ensure the accuracy, validity, and completeness of loan
                  originations.

     Recommendations

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

                  1A. Buy down $147,289 for eight overinsured loans.16

                  1B. Indemnify HUD for seven insured loans17 with unpaid principal balances of
                      $959,409 net of overinsurance18, thereby putting an estimated $566,052 to
                      better use based on the FHA insurance fund average loss rate of 59 percent of
                      the unpaid principal balances.

                  1C. Review the 588 of 630 loans in which TXL’s underwriters erroneously
                      certified that an identity-of-interest did not exist and determine the amount it
                      needs to buy down to remove the overinsured portion of the loans from the
                      FHA portfolio.

                  1D. Support or repay the FHA insurance fund $900 for claims paid as of July 28,
                      2011, on one loan.19 If HUD has subsequently taken title to the property or
                      sold it, rather than seeking repayment of the claims paid, the repayment
                      amount should be adjusted to the amount of FHA’s loss. If the property is
                      subsequently conveyed to HUD and sold, the loss amount should be adjusted
                      to reflect any amounts repaid pursuant to this recommendation.



16
      FHA case numbers 493-9082458, 493-9048842,512-0024458, 493-9413444, 493-9251259, 493-9187150, 493-
      9289639, and 493-9577895.
17
      FHA case numbers 493-9048842, 512-0024458, 493-9413444, 493-8954521, 493-9187150, 493-9289639, and
      493-9577895.
18
      We subtracted the overinsured portion of loans to determine a mortgage balance unaffected by or net of
      overinsurance.
19
      FHA case number 493-9413444.


                                                      14
                1E. Reimburse the FHA insurance fund $35,595 for actual losses incurred on one
                    loan.20

                1F. Ensure that its loan correspondents stop charging unearned underwriting
                    fees and reimburse the appropriate buyers for the $135,126 in unearned
                    underwriting fees identified in this report.

                1G. Stop allowing its employees to originate loans through its loan
                    correspondents.

                1H. Stop allowing its employees to originate their own loans.

                1I.   Review FHA case numbers 493-9591766 and 493-9480958 and if the loans
                      were originated in violation of HUD Handbook 4155.2, paragraph 3.B.3.a.,
                      indemnify the loans.

                1J.   Provide documentation to show that it has corrected the deficiencies
                      identified in the July 2010 QAD report.

                1K. Take actions to ensure that its quality control procedures comply with HUD
                    requirements and are adequate to consistently identify and correct
                    underwriting deficiencies in a timely manner and to report significant
                    quality control findings.

                1L. Ensure that its staff and loan correspondents are thoroughly trained
                    regarding HUD regulations and procedures.

                We also recommend that the Acting Deputy Assistant Secretary

                1M. Refer TXL to the Mortgagee Review Board for consideration of
                    administrative actions for failure to implement a quality control program in
                    compliance with HUD requirements and for other violations cited in this
                    report.

                We further recommend that the Director of the Departmental Enforcement Center

                1N. Take appropriate administrative sanctions, including possible debarment or
                    other remedies, against the underwriters that erroneously certified that TXL
                    and its affiliates did not have an identity-of-interest relationship with the
                    sellers.

                In addition, we recommend that HUD’s Associate General Counsel for Program
                Enforcement



20
     FHA case number 493-8728615.


                                                 15
                  1O. Determine legal sufficiency, and if legally sufficient, pursue remedies under
                      the Program Fraud Civil Remedies Act (31 U.S.C. 3801-3812) and/or civil
                      money penalties (24 CFR 30.35) against TXL and/or its principals for
                      incorrectly certifying to the integrity of the data or that due diligence was
                      exercised during the underwriting of six loans that resulted in actual losses of
                      $35,595 on one loan21 and potential losses of $413,465 on five loans,22 for a
                      total loss of $449,060, which could result in affirmative civil enforcement
                      action of approximately $943,120.23




21
     FHA case number 493-8728615.
22
     Losses include $98,778 for overinsurance and 59 percent of unpaid principal on FHA case number 493-
     9048842, $94,320 for overinsurance and 59 percent of unpaid principal on FHA case number 512-0024458,
     $30,530 for overinsurance on FHA case number 493-9251259, $100,999 for 59 percent of unpaid principal on
     FHA case number 493-8954521, $88,838 for overinsurance and 59 percent of unpaid principal on FHA case
     number 493-9577895.
23
     Double damages for actual loss amounts related to one loan and potential losses related to five loans ($35,595 +
     $413,465 = $449,060) plus fines of $7,500 each for the six loans with material underwriting deficiencies.
     ($449,060 x 2) + ($7,500 x 6) = $943,120.


                                                          16
                          SCOPE AND METHODOLOGY

We performed audit work from January through July 2011. The audit period covered
November 1, 2008, through October 31, 2010. We expanded our scope as necessary to
determine the extent of unearned fees and erroneous certifications. We performed our audit
work at TXL’s headquarters and at our office in Houston, TX.

To accomplish our objectives, we

       Reviewed 20 FHA-insured loans that were originated by TXL and its loan correspondents
       during the audit period;
       Interviewed TXL and loan correspondent officials, loan officers and processors, and
       underwriters;
       Reviewed TXL and loan correspondent financial records, independent audit reports, and
       policies and procedures;
       Reviewed public records and HUD’s Neighborhood Watch system;
       Reviewed contracts among TXL, the loan correspondents, and builders and sellers; and
       Reviewed applicable HUD regulations, requirements, mortgagee letters, and QAD
       reports.

We obtained a download of the FHA loans that TXL and its four Houston loan correspondents
originated from November 1, 2008, through October 31, 2010, from HUD’s Neighborhood
Watch system. The download showed that TXL and its Houston loan correspondents originated
1,279 FHA-insured loans valued at more than $200.1 million. We did not evaluate the reliability
of HUD’s Neighborhood Watch system because we used the data for background purposes only.

We selected a nonrepresentative sample of 20 loans with original mortgage amounts totaling
$3.1 million. We selected 20 loans which met at least one of the following criteria: (1) the loan
was delinquent; (2) the loan was a refinance; (3) the borrower received gift funds; and (4) the
underwriter’s name was on a ranking list of the highest default underwriters in the Houston area
on or about December 13, 2010. The results of our detailed testing only apply to the 20 loans
selected and cannot be projected.

We performed detailed testing and reviewed the underwriting procedures for the 20 loans. We
reviewed documentation from the HUD Homeownership Center loan endorsement files and loan
files provided by TXL. Our testing and review included: (1) analysis of borrowers’ income,
assets, and liabilities; (2) review of borrowers’ savings ability and credit history; (3) verification
of selected data on the underwriting worksheet and settlement statements; and (4) confirmation
of employment and gifts.

We obtained TXL’s quality control plan and the quality control review reports and supporting
documentation of reviews that its quality control contractor conducted during November 2008
through August 2010. We reviewed the quality control plan, reports, and supporting
documentation to determine the sufficiency and timeliness of the quality control reviews on
closed loans.


                                                  17
We determined the buy down portion of overinsured loans by calculating the difference between
the 85 percent loan-to-value limit and the initial loan amount for each of the affected loans in
appendix E. The overinsured portion of each loan is the amount by which the initial loan
exceeds 85 percent of the property value as determined by the property appraisal.

Indemnification was appropriate for some loans (see appendix C) due to faulty underwriting.
Faulty underwriting included lack of proof that the borrower had funds to close, the use of
income documents that were invalid because they passed through the sellers’ hands, and
allowing an employee to originate her own loan. The indemnification amount is 59 percent of
the unpaid mortgage balance. 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.

When loans were both overinsured and had significant underwriting deficiencies that warranted
indemnification, we performed additional calculations to avoid double counting any savings. We
subtracted the overinsured buy down amount from the unpaid mortgage balance to get a net
unpaid mortgage balance. We calculated the indemnification amount as 59 percent of the net
unpaid mortgage balance.

To determine the extent of the erroneous certifications, unearned fees, and other violations, we
conducted a limited additional review. We determined that there were 665 new construction
FHA-insured loans originated by the four Houston loan correspondents during the audit period
with loans totaling $111.5 million. We requested a Form HUD-92900-A, HUD-1 settlement
statement, and loan application for each loan, but TXL only provided documents for 630 of the
loans.

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 finding and conclusions based on our audit
objectives. We believe that the evidence obtained provides a reasonable basis for our finding
and conclusions based on our audit objectives.




                                               18
                              INTERNAL CONTROLS

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

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

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



 Relevant Internal Controls

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

                  Policies and procedures intended to ensure that FHA-insured loans are properly
                  originated, underwritten, and closed.
                  Safeguarding FHA-insured mortgages from high risk exposure.
                  Policies and procedures intended to ensure that the quality control program is an
                  effective tool in reducing underwriting errors and noncompliance.

               We assessed the relevant controls identified above.

               A deficiency in internal controls exists when the design or operation of a control
               does not allow management or employees, in the normal course of performing their
               assigned functions, the reasonable opportunity to prevent, detect, or correct (1)
               impairments to effectiveness or efficiency of operations, (2) misstatements in
               financial or performance information, or (3) violations of laws and regulations on a
               timely basis.

 Significant Deficiency
               Based on our review, we believe that the following item is a significant deficiency:

                  TXL did not have effective controls in place to ensure that FHA-insured loans
                  were originated, underwritten, and closed in accordance with HUD requirements
                  (finding).



                                                19
                                              APPENDIXES

Appendix A

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

           Recommendation                Ineligible 1/        Unsupported 2/         Funds to be put to
               number                                                                     better use 3/
                            1A                                                                 $147,289
                            1B                                                                  566,052
                            1D                                        $     900
                            1E                35,595
                            1F               135,126
                         Totals             $170,721                  $     900                $713,341


1/ Ineligible costs are costs charged to a HUD-financed or HUD-insured program or activity
   that the auditor believes are not allowable by law; contract; or Federal, State, or local policies
   or regulations.

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

3/ Recommendations that funds be put to better use are estimates of amounts that could be used
   more efficiently if an Office of Inspector General (OIG) recommendation is implemented.
   These amounts include reductions in outlays, deobligation of funds, withdrawal of interest,
   costs not incurred by implementing recommended improvements, avoidance of unnecessary
   expenditures noted in preaward reviews, and any other savings that are specifically
   identified. Implementation of recommendation 1A will reduce the risk to the insurance fund
   by the amount of overinsurance. Implementation of recommendation 1B to require TXL to
   indemnify HUD for seven loans24 that were not originated in accordance with HUD-FHA
   requirements will reduce FHA’s risk of loss to the insurance fund. The amount reflects that,
   upon the sale of the mortgaged property, FHA’s average loss experience is about 59 percent
   of the unpaid principal balance. 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.


24
     An eighth loan that should not have been originated had already been foreclosed and resold. Its actual losses
     are recorded at recommendation 1E.


                                                         20
Appendix B

        AUDITEE COMMENTS AND OIG’S EVALUATION


Ref to OIG Evaluation   Auditee Comments




Comment 1




Comment 2




                         21
Ref to OIG Evaluation   Auditee Comments




Comment 3




Comment 4

Comment 3




Comment 5




                         22
Ref to OIG Evaluation   Auditee Comments




Comment 6




Comment 7




Comment 8




                         23
Ref to OIG Evaluation   Auditee Comments




Comment 8




Comment 8

Comment 8




Comment 9




Comment 10




                         24
Ref to OIG Evaluation   Auditee Comments




                         25
                            OIG Evaluation of Auditee Comments

Comment 1: TXL agreed with part of the finding and disagreed with part of it. TXL explained
its position for the part of the finding with which it disagreed. We reviewed TXL’s explanations,
but determined that no changes to the report were warranted.

Comment 2: TXL acknowledged that it had charged unearned underwriting fees in the past and
had been cited by QAD for this practice on July 22, 2010. TXL stated it corrected the practice
on September 14, 2010, when it issued an updated corporate policy. However, we noted four
additional instances of unearned underwriting fees in late September 2010 (one on September 20,
2010, one on September 22, 2010, and two on September 24, 2010) after TXL updated its
corporate policy. Therefore, we did not change the report.

Comment 3: TXL admitted that it owned partial interests in other lenders, and that its senior
officers held a senior officer position with one of the non-TXL Lenders. This partial ownership
and shared senior officers created business affiliations and identity-of-interest when the other
lenders were themselves involved with the sellers of real estate that TXL subsequently approved
for FHA underwriting.

Comment 4: TXL stated that there could be no confusion as to with whom a customer is doing
business. TXL explained that each non-TXL lender had its own operations, and originated its
own loans, with its own funds, in its own name, for sale to investors with which it has its own
contractual relationships. TXL did not show that mortgagors would not be confused about with
whom they were doing business. During the audit, TXL was the sponsor and the other lenders
were loan correspondents. Therefore, TXL, and not the loan correspondents, underwrote all of
the loans during that period. Purchase agreements disclosed the affiliation between the sellers
and builders and the loan correspondents, but they did not disclose that the loans were
underwritten by TXL and not by the loan correspondents. Further, TXL did not address the issue
of whether TXL or the loan correspondent should be responsible for supervising an employee
who originates loans for more than one company at a time. We did not change the report.

Comment 5: TXL stated that it had ended the practice of having employees originate loans for
correspondents. TXL’s statement was unclear. It is true that HUD eliminated approvals for
correspondents effective December 31, 2010, and TXL would have had to cease this practice for
correspondents. However, TXL did not address the issue of whether it continued to allow its
employees to originate loans for non-TXL lenders who were not correspondents. We did not
change the report.

Comment 6: Regarding loans that the report questioned due to a lack of sufficient evidence of
funds to close, TXL stated it believed that they were properly underwritten. Further, TXL stated
it strengthened its corporate policy on gift documentation, and issued an updated policy on April
29, 2010. TXL did not provide support for its position that the loans were properly underwritten.
None of the loans that we questioned for lack of sufficient evidence of funds to close were




                                               26
originated after April 29, 2010; thus, we cannot attest to whether the policy is adequate to resolve
the deficiencies identified in this report. We did not change the report.

Comment 7: TXL noted that there was nothing in the report suggesting irregularities in
documentation provided by the sellers. TXL further stated that it issued a companywide
memorandum outlining its policy towards the practice on September 21, 2011. Using critical
documentation provided by the seller is a prohibited practice and casts doubt on the validity of
the documentation. TXL did not show that it verified the data from third-party sources.
Therefore, we did not change the report. We recognize that 2 days after we sent TXL the draft
report, it changed its policy which should improve its process if it is implemented and complied
with.

Comment 8: TXL disagreed with our conclusion that it had an identity-of-interest with multiple
homebuilders and concluded that OIG had misinterpreted the requirement. TXL stated that
identity-of-interest applied to buyers and sellers and not to finance companies. TXL further
stated that it did not own any interest in any builder, and that the direct endorsement
certifications denying financial interest, affiliation, or ownership were correct.
Identity-of-interest applies not only to ownership, but to affiliation. TXL partnered with
companies that were affiliated with the builders and sellers of the homes that TXL subsequently
approved for FHA financing. Disclosures in the purchase agreements showed that the loan
correspondents were affiliated with the sellers and builders. Since TXL was the underwriter for
the loan correspondents, TXL was also affiliated with the sellers and had an identity-of-interest.
Thus, the direct endorsement certifications were incorrect. We did not change the report.

Comment 9: TXL stated that it did not believe that it exposed HUD to unnecessary risk by
allowing employees to process their own loans. Two days after we sent the draft report to TXL,
it revised its policy to direct all employee loans to a designated in-house loan officer who is
physically separated from all of its other activities. However, during the audit TXL allowed
employees to process their own loans, which casts doubt on the validity of the loans. Therefore,
we did not change the report.

Comment 10: TXL recognized the need to improve the overall quality control function. TXL
stated that beginning in January 2011, it introduced a robust quality control plan with the goal of
protecting HUD, TXL, and borrowers. TXL stated it provided the information at the time of the
initial interview, and that it had been omitted from the report. We evaluated TXL’s performance
during the audit period which ended October 31, 2010. Our evaluation included TXL’s October
2010 quality control report, dated February 2011. TXL’s new quality control procedures
continued to be non-compliant with HUD requirements because TXL did not conduct early
payment default reviews on all early payment default loans in a timely manner, and did not
conduct a required on-site review of its Austin, TX branch office. Therefore, we did not change
the report.




                                                27
          Appendix C

                                        SCHEDULE OF INDEMNIFICATION
                                          AND REPAYMENT AMOUNTS
  Loan    Initial loan     Original      Unpaid      85 percent    Over-     Claims    Loss on     Net      59% of         Loan status as of
 number                    mortgage     mortgage      capped      insured    paid as   propert    unpaid    unpaid          July 28, 2011
                           amount       balance        loan to    portion    of July    y sale   mortgage   balance
                                                        value       (buy       28,               balance
                                                                   down)      2011
493-           $101,315     $104,166         N/A           N/A         N/A      N/A    $35,595       N/A       N/A        Foreclosed upon and
8728615                                                                                                                   resold

493-            196,734      200,176     $195,116      $173,400    $23,334        -       N/A        N/A              -   Delinquent
9082458
493-            159,334      162,122     $157,112       144,500     14,834        -       N/A    $142,278    $83,944      Current
9048842
512-            146,998      150,305      148,087       130,050     16,948        -       N/A     131,139     77,372      Current
0024458
493-            138,725      141,153      138,093       123,250     15,475     $900       N/A     122,618     72,345      Delinquent
9413444
493-            257,055      261,553      257,948       226,525     30,530        -       N/A        N/A              -   Refinanced
9251259
493-            176,000      178,640      171,185          N/A        N/A          -      N/A     171,185    100,999      Current
8954521
493-            152,488      155,157      150,859       136,000     16,488         -      N/A     134,371     79,279      Delinquent
9187150
493-            148,365      150,961      147,186       133,450     14,915         -      N/A     132,271     78,040      Current
9289639
493-            140,565      143,025      140,312       125,800     14,765         -      N/A     125,547     74,073      Delinquent
9577895
Totals        $1,617,579   $1,647,258   $1,505,898   $1,192,975   $147,289     $900    $35,595   $959,409   $566,052


          a
            The initial loan and original mortgage amounts are different because the initial loan is the property loan while the
          original mortgage amount includes both the property loan and any financed mortgage insurance premium.
          b
            The 85 percent capped loan to value is 85 percent of the property value based on the property appraisal. Property
          appraisal amounts are in Appendix E.
          c
            We classified $900 in claims paid by HUD as ineligible costs that would be required to be repaid to HUD. The
          loans should not have been approved for FHA insurance and, therefore, were not entitled to any claim payments.
          Any claims paid for these loans are required to be repaid to HUD. If HUD has taken title to the properties or sold the
          properties, rather than seeking repayment of the claims paid, the amount to be repaid should be adjusted to the amount of
          the actual losses to FHA.
          d
            The net unpaid mortgage balance is the difference between the unpaid mortgage balance and the overinsured
          portion.
          e
            The loss on property sale amount was obtained from HUD’s Single Family Acquired Asset Management System.
          The system tracks properties from acquisition to final sales closing and maintains all accounting data associated with
          the case records.
          f
           We classified $713,341 as funds to be put to better use. This amount includes $147,289 for the overinsured
          portions of eight loans and $566,052 for the estimated loss on seven loans. The estimated loss is 59 percent of the
          $959,409 in unpaid principal balances net of any overinsurance for the seven loans as of July 28, 2011. The 59
          percent is the estimated percentage of loss HUD would incur when the FHA property is foreclosed upon and resold
          as supported by HUD’s Single Family Acquired Asset Management System’s case management profit and loss by
          acquisition as of September 2010.




                                                                       28
Appendix D

               LOAN CORRESPONDENTS’ STATUS
                                                                  FHA
              Loan correspondents                        City   approval
                                                                 status
   Glenwood Financial, LLC                       Houston            a
   Wickchester Mortgage, LLC                     Houston            t
   Texas Paramount Lending, LLC                  Houston            t
   Texas Western Mortgage, LTD                   Houston            t
   Texana Mortgage, LTD                          Houston            t
   New Home Team Financial, LTD                  Irving             t
   Meritage Funding, LLC                         Irving             t
   Texas Heritage Mortgage, LTD                  San Antonio        a
   Northpoint Mortgage, LTD                      Houston            t
   Castlerock Mortgage, LTD                      Houston            a
   Casa Linda Mortgage, LTD                      Irving             t
   Baymont Financial, LTD                        Houston            a
   Morton Street Mortgage, LTD                   Houston            t
   Crestwood Financial, LTD                      Irving             t
   Lakeside Lending, LTD                         Waco               a
   Friendswood Financial, LTD                    Houston            a
   Webb Family Mortgage, LTD                     Irving             t
   Grace America Mortgage, LTD                   Houston            t
   Dakota Blue Mortgage, LTD                     Houston            t
   Sonoma Mortgage, LTD                          San Antonio        t
    FHA approval status = (terminated, active)




                                          29
Appendix E

              OVERINSURED IDENTITY-OF-INTEREST LOANS

                                                                        % loan-           85%
      File            Case           Initial loan       Property        to-value        capped
                                                                                                       Difference
    number           number            amount            value            ratio         loan-to-
                                                                       calculated         value

         1        493-8728615           $101,315         $108,000          93.81%         $91,800          $9,51525
         2        493-9082458            196,734          204,000          96.44%         173,400           23,334
         3        493-9048842            159,334          170,000          93.73%         144,500           14,834
         4        512-0024458            146,998          153,000          96.08%         130,050           16,948
         5        493-9413444            138,725          145,000          95.67%         123,250           15,475
         6        493-9251259            257,055          266,500          96.45%         226,525           30,530
         7        493-9187150            152,488          160,000          95.31%         136,000           16,488
         8        493-9289639            148,365          157,000          94.50%         133,450           14,915
         9        493-9577895            140,565          148,000          94.98%         125,800           14,765
                     Totals           $1,441,579       $1,511,500                                         $156,804

a
     The 85 percent capped loan to value amount is 85 percent of the property value.
b
  The difference is the initial loan amount less the 85 percent capped loan to value, and represents the amount of the
loan that should not have been underwritten.




25
       This loan was overinsured, however, it has already been foreclosed upon and resold. The loss to HUD for this
       loan was $35,595. Therefore, we did not request a buy down for the overinsurance.


                                                           30
Appendix F

                                 CASE NARRATIVES

                     Case Narrative—Loan Number 493-9187150
Mortgage amount: $155,157
Date of loan closing: July 16, 2009
Status as of July 28, 2011: 1 month delinquent
Payments before first default reported: Eleven
Payments before first 90-day delinquency reported: N/A
Underwriting deficiencies:
The underwriter did not
        Determine sufficient funds to close.
        Reject third-party handling of documents.
        Ensure that an 85 percent loan-to-value ratio was applied for an identity-of-interest
        transaction.

Summary
In FHA loan number 493-9187150, TXL did not properly document that the borrower had funds
to close and did not reject third-party handling of borrower documents. The HUD-1 settlement
statement, dated July 16, 2009, indicated that the borrower needed $4,788 in funds to close. The
underwriter on July 13, 2009, certified gift funds of $4,600 as the source of funds to close. The
gift was documented with a gift letter; a cashier’s check, dated July 15, 2009, for $4,600; and a
handwritten withdrawal slip, dated July 17, 2009. Despite HUD Handbook 4155.1, paragraph
1.B.1.f.’s prohibition against using documents for processing or underwriting when those
documents were handled by or transmitted through an interested third party to the transaction, the
seller provided the documents to TXL who used them for processing and underwriting the loan.
Additionally, the HUD-1 settlement statement made no mention of gift funds, and the withdrawal
slip had a bank-stamped date of July 15, 2009, 2 days before the handwritten date. The gift funds
were also questionable because the gift fund amount of $4,600 was the same amount as the
commission paid by the seller.

Further, there was insufficient evidence to support that the funds were withdrawn from the
donor’s personal account as required by HUD, and the borrower had only $433 in the bank
according to the bank statement. HUD Handbook 4155.1, paragraph 5.B.5.b, requires the donor
to provide a withdrawal document showing that the funds came from the donor’s personal
account. However, there were no bank statements provided to evidence the withdrawal from the
donor and arrival into the borrower’s account. The sole source of funds was from the gift, and no
other funds were verified, thus the borrower was short $4,355 in funds to close.

TXL also exceeded the loan-to-value limit for an identity-of-interest loan transaction. When the
parties to the transaction are related or have an identity of interest, HUD Handbook 4155.1,
paragraph 2.B.2.b., limits the loan-to-value ratio to 85 percent. The initial loan amount was



                                                31
$152,488,26 and the appraised value of the property was $160,000. Therefore, the loan-to-value
ratio was 95.3 percent. However, since the builder and seller, Deerwood Homes Rayford Ridge
L.P., and the lender, Glenwood Financial, LLC (loan correspondent), had an identity of interest,
the loan-to-value ratio should have been capped at 85 percent, or $136,000. As result of not
applying the cap, HUD overinsured the property by $16,488.




26
     This amount represents the total loan amount minus the financed principal mortgage insurance.


                                                        32
                        Case Narrative—Loan Number 493-9413444
Mortgage amount: $141,153
Date of loan closing: December 31, 2009
Status as of July 28, 2011: 1 month delinquent
Payments before first default reported: One
Payments before first 90-day delinquency reported: Three
Underwriting deficiencies:
The underwriter did not
        Determine sufficient funds to close.
        Ensure that an 85 percent loan-to-value ratio was applied for an identity-of-interest
        transaction.

Summary
In FHA loan number 493-9413444, TXL did not properly document that the borrower had funds
to close. According to the HUD-1 settlement statement, dated December 31, 2009, the borrower
needed $3,532 to close. On December 30, 2009, the underwriter verified that $3,800 was
available in the borrower’s checking or savings (not gift) account for closing. However, the loan
file included two gift fund letters, one from the borrower’s mother for $1,500 and another from
the borrower’s brother for $3,800.

The $1,500 in gift funds from the mother was properly supported by a bank statement included
in the file. However, the $3,800 in gift funds from the brother was not properly supported
because there were no bank statements showing the funds leaving the donor’s account or arriving
in the borrower’s account. HUD Handbook 4155.1, paragraph 5.B.5.b, requires the donor to
provide a withdrawal document showing that the funds came from the donor’s personal account.
The cashier’s check for $3,800 made payable to the title company was dated December 31, 2009.

TXL also exceeded the loan-to-value limit on an identity-of-interest loan transaction. When the
parties to the transaction are related or have an identify-of-interest, HUD Handbook 4155.1,
paragraph 2.B.2.b., limits the loan-to-value ratio to 85 percent. The initial loan amount was
$138,725,27 and the appraised value of the property was $145,000. Therefore, the loan-to-value
ratio was 95.6 percent. However, since the builder and seller, Castlerock Communities L.P., and
the lender, Castlerock Mortgage, LTD (loan correspondent), had an identity of interest, the loan-
to-value ratio should have been capped at 85 percent, or $123,250. As a result of not applying
the cap, HUD overinsured the property by $15,475.




27
     This amount represents the loan amount minus the financed principal mortgage insurance.


                                                       33
                     Case Narrative—Loan Number 493-8728615
Mortgage amount: $104,166
Date of loan closing: January 30, 2009
Status as of July 28, 2011: Title conveyed to insurer. Claims paid totaled $109,407. HUD sold
the property on April 20, 2010, for $83,000. The total loss to HUD was $26,407.
Payments before first default reported: One
Payments before first 90-day delinquency reported: Three
Underwriting deficiencies:
The underwriter did not
        Determine sufficient funds to close.
        Reject third-party handling of documents.
        Ensure that an 85 percent loan-to-value ratio was applied for an identity-of-interest
        transaction.

Summary
In FHA loan number 493-8728615, TXL did not properly document that the borrower had funds
to close. The HUD-1 settlement statement, dated January 30, 2009, indicated that the borrower
needed $3,100 to close. The underwriter certified on January 30, 2009, that the borrower would
use his own funds to close in the amount of $3,168. The file showed a $3,154 deposit made into
borrower’s account on the day of closing, January 30, 2009, but the source was not clear. A
handwritten note on a page attached to a cashier’s check said it was a “Tax Refund,” and the
cashier check appeared to be a refund anticipation loan, but there was no tax return in the file to
support a tax refund. The copy of the check was page 2 of 6 of a fax, but the other pages to the
same fax were not in the file. HUD Handbook 4155.1 requires the lender to obtain a credible
explanation for large increases in an account and allows the lender to use a verification of deposit
and bank statements to verify savings and checking accounts. However, the file did not contain
bank statements.

A bank official documented that the bank account was opened on December 4, 2008, a month
before the closing. The file included a verification of deposit, dated January 30, 2009. However,
TXL’s loan processor dated the verification of deposit request to the bank July 14, 2008, 5
months before the bank certified that the borrower opened an account. The verification of deposit
returned from the bank showed a balance of $3,874; however, the borrower included a different
bank and account in his application, with a balance of $6,000 that he claimed to be downpayment
assistance. There was no information in the file to show what might have happened to the
downpayment assistance. We determined that there were too many unresolved discrepancies to
support funds available for closing.

In addition, the seller and builder had handled the borrower’s earnings statement. TXL
improperly accepted documents relating to the borrower’s credit, employment, and income that
were handled by the seller and transmitted from or through the seller’s fax machine. Despite
HUD Handbook 4155.1, paragraph 1.B.1.f.’s prohibition against using documents for processing
or underwriting when those documents were handled by or transmitted through an interested
third party to the transaction, the seller provided the documents to TXL who used them for
processing and underwriting the loan.


                                                34
TXL also exceeded the loan-to-value limit on an identity-of-interest loan transaction. When the
parties to the transaction are related or have an identify-of-interest, HUD Handbook 4155.1,
paragraph 2.B.2.b., limits the loan-to-value ratio to 85 percent. The initial loan amount was
$101,315,28 and the appraised value of the property was $108,000. Therefore, the loan-to-value
ratio was 93.81 percent. However, since the builder and seller, Dunn & Stone Builders, LLC,
and the lender, Baymont Financial, LTD (loan correspondent), had an identity of interest, the
loan-to-value ratio should have been capped at 85 percent, or $91,800. As a result of not
applying the cap, HUD overinsured the property by $9,515.




28
     This amount represents the loan amount minus the financed mortgage insurance amount.


                                                      35
                        Case Narrative—Loan Number 493-9048842
Mortgage amount: $162,122
Date of loan closing: June 18, 2009
Status as of July 28, 2011: Current
Payments before first default reported: N/A
Payments before first 90-day delinquency reported: N/A
Underwriting deficiencies:
The underwriter did not
        Determine sufficient funds to close.
        Ensure that an 85 percent loan-to-value ratio was applied for an identity-of-interest
        transaction.

Summary
In FHA loan number 493-9048842, TXL did not properly document that the borrower had funds
to close. The HUD-1 settlement statement, dated June 18, 2009, indicated that the borrower
needed $10,893 to close; however, the HUD-1 settlement statement did not show gift funds. The
file showed a gift from the borrower’s father of $11,000. The file contained a gift letter; a copy
of a cashier’s check, dated May 29, 2009, made payable to the borrower; a deposit slip, dated
May 29, 2009; and the borrower’s May-June 2009 bank statement showing the $11,000
deposited into the borrower’s account. However, the file did not contain a withdrawal document
showing the gift funds came from the donor’s personal account as required by HUD Handbook
4155.1 paragraph 5.B.5.b.

TXL also exceeded the loan-to-value limit on an identity-of-interest loan transaction. When the
parties to the transaction are related or have an identify-of-interest, HUD Handbook 4155.1,
paragraph 2.B.2.b., limits the loan-to-value ratio to 85 percent. The initial loan amount was
$159,334,29 and the appraised value of the property was $170,000. Therefore, the loan-to-value
ratio was 93.7 percent. However, since the builder and seller, Castlerock Communities L.P., and
the lender, Castlerock Mortgage, LTD (loan correspondent), had an identity of interest, the loan-
to-value ratio should have been capped at 85 percent, or $144,500. As a result of not applying
the cap, HUD overinsured the property by $14,834.




29
     This amount represents the loan amount minus the financed mortgage insurance amount.


                                                      36
                        Case Narrative—Loan Number 493-9577895
Mortgage amount: $143,025
Date of loan closing: March 31, 2010
Status as of July 28, 2011: 1 month delinquent
Payments before first default reported: Six
Payments before first 90-day delinquency reported: N/A
Underwriting deficiencies:
The underwriter did not
        Determine sufficient funds to close.
        Ensure that an 85 percent loan-to-value ratio was applied for an identity-of-interest
        transaction.

Summary
In FHA loan number 493-9577895, TXL did not properly document that the borrower had funds
to close. According to the FHA loan underwriting and transmittal summary, the borrower
needed $5,899 to close. The sole source of funds was a gift, and the funds were not verified
because there was no documentation showing that they were withdrawn from the donor’s
personal account. HUD Handbook 4155.1, paragraph 5.B.5.b, requires the donor to provide a
withdrawal document showing that the funds came from the donor’s personal account.
According to the HUD-1 settlement statement, dated March 31, 2010, the borrower received
$4835 in gift funds from a relative. According to the file, the borrower received $6,000 in gift
funds, $4,835 for closing costs and $1,165 to pay off a debt. The file contained two cashier
checks for $4,835 and $1,165, dated March 29, 2010, that were payable to the title company and
another company, respectively.

TXL also exceeded the loan-to-value limit on an identity-of-interest loan transaction. When the
parties to the transaction are related or have an identify of interest, HUD Handbook 4155.1,
paragraph 2.B.2.b., limits the loan-to-value ratio to 85 percent. The initial loan amount was
$140,565,30 and the appraised value of the property was $148,000. Therefore, the loan-to-value
ratio was 95 percent. However, since the builder and seller, Pine Tree Building Group, and the
lender, TXL Mortgage, had an identity of interest, the loan-to-value ratio should have been
capped at 85 percent, or $125,800. As a result of not applying the cap, HUD overinsured the
property by $14,765.




30
     This amount represents the loan amount minus the financed mortgage insurance amount.


                                                      37
                        Case Narrative—Loan Number 493-9082458
Mortgage amount: $200,176
Date of loan closing: September 17, 2009
Status as of July 28, 2011: 3 months delinquent
Payments before first default reported: Six
Payments before first 90-day delinquency reported: Nine
Underwriting deficiencies:
The underwriter did not
        Ensure that an 85 percent loan-to-value ratio was applied for an identity-of-interest
        transaction.

In FHA loan number 493-9082458, TXL exceeded the loan-to-value limit on an
identity-of-interest loan transaction. When the parties to the transaction are related or have an
identify-of-interest, HUD Handbook 4155.1, paragraph 2.B.2.b., limits the loan-to-value ratio to
85 percent. The initial loan amount was $196,734,31 and the appraised value of the property was
$204,000. Therefore, the loan-to-value ratio was 96.4 percent. However, since the builder and
seller, Bayway Homes, Inc., and the lender, Baymont Financial, LTD (loan correspondent), had
an identity of interest, the loan-to-value ratio should have been capped at 85 percent, or
$173,400. As a result of not applying the cap, HUD overinsured the property by $23,334.




31
     This amount represents the loan amount minus the financed mortgage insurance amount.


                                                      38
                        Case Narrative—Loan Number 512-0024458
Mortgage amount: $150,305
Date of loan closing: September 1, 2010
Status as of July 28, 2011: Current
Payments before first default reported: N/A
Payments before first 90-day delinquency reported: N/A
Underwriting deficiencies:
The underwriter did not
        Reject third-party handling of documents.
        Ensure that an 85 percent loan-to-value ratio was applied for an identity-of-interest
        transaction.

In FHA loan number 512-0024458, TXL improperly accepted and used documents relating to the
borrower’s income tax return that were transmitted from or through the seller’s fax machine.
Despite HUD Handbook 4155.1, paragraph 1.B.1.f.’s prohibition against using documents for
processing or underwriting when those documents were handled by or transmitted through an
interested third party to the transaction, the documents were transmitted through the seller to
TXL who used them for processing and underwriting the loan.

TXL also exceeded the loan-to-value limit on an identity-of-interest loan transaction. When the
parties to the transaction are related or have an identify-of-interest, HUD Handbook 4155.1,
paragraph 2.B.2.b., limits the loan-to-value ratio to 85 percent. The initial loan amount was
$146,998,32 and the appraised value of the property was $153,000. Therefore, the loan-to-value
ratio was 96.1 percent. However, since the builder and seller, Castlerock Communities L.P., and
the lender, Castlerock Mortgage, LTD (loan correspondent), had an identity of interest, the loan-
to-value ratio should have been capped at 85 percent, or $130,050. As a result of not applying
the cap, HUD overinsured the property by $16,948.




32
     This amount represents the loan amount minus the financed mortgage insurance amount.


                                                      39
                        Case Narrative—Loan Number 493-9251259
Mortgage amount: $261,553
Date of loan closing: August 7, 2009
Status as of July 28, 2011: Refinanced, new FHA 512-0017571, current
Payments before first default reported: N/A
 N/A
Underwriting deficiencies:
The underwriter did not
        Ensure that an 85 percent loan-to-value ratio was applied for an identity-of-interest
        transaction.

In FHA loan number 493-9251259, TXL exceeded the loan-to-value limit on an
identity-of-interest loan transaction. When the parties to the transaction are related or have an
identify-of-interest, HUD Handbook 4155.1, paragraph 2.B.2.b., limits the loan-to-value ratio to
85 percent. The initial loan amount was $257,055,33 and the appraised value of the property was
$266,500. Therefore, the loan-to-value ratio was 96.5 percent. However, since the builder and
seller, Cervelle Custom Homes, LTD, and the lender, Friendswood Financial, LTD (loan
correspondent), had an identity of interest, the loan-to-value ratio should have been capped at 85
percent, or $226,525. As a result of not applying the cap, HUD overinsured the property by
$30,530.




33
     This amount represents the loan amount minus the financed mortgage insurance amount.


                                                      40
                        Case Narrative—Loan Number 493-9289639
Mortgage amount: $150,961
Date of loan closing: November 17, 2009
Status as of July 28, 2011: Current
Payments before first default reported: N/A
 N/A
Underwriting deficiencies:
The underwriter did not
        Reject third-party handling of documents.
        Ensure that an 85 percent loan-to-value ratio was applied for an identity-of-interest
        transaction.

In FHA loan number 493-9289639, TXL improperly accepted and used documents relating to the
borrower’s income and employment that were handled by the seller and transmitted from or
through the seller’s fax machine. Despite HUD Handbook 4155.1, paragraph 1.B.1.f.’s
prohibition against using documents for processing or underwriting when those documents were
handled by or transmitted through an interested third party to the transaction, the seller handled
and transmitted the borrower’s tax returns, W-2 forms, and other income documents to TXL who
used them for processing and underwriting the loan.

TXL also exceeded the loan-to-value limit on an identity-of-interest loan transaction. When the
parties to the transaction are related or have an identify-of-interest, HUD Handbook 4155.1,
paragraph 2.B.2.b., limits the loan-to-value ratio to 85 percent. The initial loan amount was
$148,365,34 and the appraised value of the property was $157,000. Therefore, the loan-to-value
ratio was 94.5 percent. However, since the builder and seller, Deerwood Homes Stonegate L.P.,
and the lender, Glenwood Financial, LLC (loan correspondent), had an identity of interest, the
loan-to-value ratio should have been capped at 85 percent, or $133,450. As a result of not
applying the cap, HUD overinsured the property by $14,915.




34
     This amount represents the loan amount minus the financed mortgage insurance amount.


                                                      41
                    Case Narrative—Loan Number 493-8954521
Mortgage amount: $178,640
Date of loan closing: January 28, 2009
Status as of July 28, 2011: Current
Payments before first default reported: N/A
 N/A
Underwriting deficiencies:
The underwriter did not
        Ensure that TXL employees did not process their own FHA loans.

In FHA loan number 493-8954521, the borrower was an employee of the lender, and the
borrower was also the loan officer for this transaction. Further, the lender did not follow HUD
Handbook 4155.2, paragraph 3.B.3.a, which prohibits employees from processing their own
FHA loans. In addition, the case file did not clearly annotate “Employment” on the Form
HUD-92900-LT and on the front of the case binder as required. HUD Handbook 4155.2,
paragraph 3.B.3.a, requires employee case files to be clearly annotated with “Employment” on
both the HUD-92900-LT, FHA Loan Underwriting and Transmittal Summary, and on the front
of the case binder.




                                               42