OFFICE OF AUDIT
REGION 5
CHICAGO, IL
Independent Bank, Ionia, MI
Single-Family Housing Mortgage Insurance
Program
2013-CH-1007 SEPTEMBER 17, 2013
Issue Date: September 17, 2013
Audit Report Number: 2013-CH-1007
TO: Charles S. Coulter, Deputy Assistant Secretary for Single Family Housing, HU
FROM: Kelly Anderson, Regional Inspector General for Audit, 5AGA
SUBJECT: Independent Bank, Ionia, MI, Generally Complied With HUD’s Quality Control
and Underwriting Requirements
Attached is the U.S. Department of Housing and Urban Development (HUD), Office of
Inspector General (OIG), final report of our audit of Independent Bank’s quality control and
underwriting of Federal Housing Administration-insured loans.
HUD Handbook 2000.06, REV-4, sets specific timeframes for management decisions on
recommended corrective actions. For each recommendation without a management decision,
please respond and provide status reports in accordance with the HUD Handbook. Please furnish
us copies of any correspondence or directives issued because of the audit.
The Inspector General Act, Title 5 United States Code, section 8M, requires that OIG post its
publicly available reports on the OIG Web site. Accordingly, this report will be posted at
http://www.hudoig.gov.
If you have any questions or comments about this report, please do not hesitate to call me at
312-353-7832.
September 17, 2013
Independent Bank, Ionia, MI, Generally Complied With
HUD’s Quality Control and Underwriting Requirements
Highlights
Audit Report 2013-CH-1007
What We Audited and Why What We Found
We audited Independent Bank, a Independent Bank’s quality control plan, as
Federal Housing Administration (FHA) implemented, generally complied with HUD’s
supervised direct endorsement lender. requirements. Further, Independent Bank generally
We selected Independent Bank for complied with HUD’s regulations, procedures, and
review based on its overall compare instructions for underwriting FHA-insured loans with
ratio of nearly 200 percent for loans the exception of 1 of the 11 loans reviewed.
originated in our jurisdiction1 for a 2- Specifically, it did not ensure that the borrowers’
year FHA performance period.2 The payoff statements were maintained in the FHA case
audit was part of the activities in our binder and provided to the servicer upon transfer or
fiscal year 2013 audit plan. Our audit sale of servicing. Independent Bank was later able to
objectives were to determine whether obtain the payoff statements from the settlement agent,
(1) Independent Bank’s quality control and we determined that the loan did not contain
plan, as implemented, met HUD’s material underwriting deficiencies.
requirements and (2) Independent Bank
complied with HUD’s regulations,
procedures, and instructions in the
underwriting of FHA-insured loans.
What We Recommend
This report does not contain
recommendations; therefore, no action
is needed.
1
For Michigan only. The lender did not
originate loans in Illinois, Indiana, Ohio,
Minnesota, and Wisconsin during the selected
performance period.
2
Period ending November 30, 2012
TABLE OF CONTENTS
Background and Objectives 3
Results of Audit
Finding: Independent Bank Generally Complied With HUD’s Quality Control
and Underwriting Requirements 4
Scope and Methodology 6
Internal Controls 8
Appendixes
A. Auditee Comments and OIG’s Evaluation 10
2
BACKGROUND AND OBJECTIVES
The National Housing Act, as amended, established the Federal Housing Administration (FHA),
an organizational unit within the U.S. Department of Housing and Urban Development (HUD).
FHA provides insurance to private lenders against loss on buyers financing homes. The basic
home mortgage insurance program is authorized under Title II, section 203(b), of the National
Housing Act and governed by regulations in 24 CFR (Code of Federal Regulations) Part 203. In
1983, HUD implemented the direct endorsement program, which authorizes approved lenders to
underwrite FHA loans without HUD’s prior review and approval.
Independent Bank, founded as the First National Bank of Ionia in 1864, received approval as an
FHA lender on June 2, 1952. In 1973, HUD approved Independent Bank as an FHA-approved
supervised direct endorsement lender. On March 11, 1993, Independent Bank became an
unconditional direct endorsement lender, which also originates U.S. Department of Veterans
Affairs, conventional, and construction loans. Independent Bank also provides financial
services, such as retail and commercial banking, investment, and title services.
As an unconditional direct endorsement lender, Independent Bank determines that a proposed
mortgage loan is eligible for insurance under applicable programs’ regulations and submits the
required documents to HUD without its prior review of the origination and closing of the loan.
Independent Bank is responsible for complying with all applicable HUD regulations and
handbook instructions regarding the late endorsement and underwriting of FHA loans.
According to HUD’s Neighborhood Watch Early Warning System,3 as of January 30, 2013,
Independent Bank had originated 1,601 FHA-insured loans with beginning amortization dates
between December 1, 2010, and November 30, 2012. Of the 1,601 loans, 27 were seriously
delinquent or had claim insurance status. In addition, Independent Bank had a compare ratio4 of
nearly 200 percent for loans originated in the State of Michigan for the 2-year performance
period of December 1, 2010, through November 30, 2012.
Our audit objectives were to determine whether (1) Independent Bank’s quality control plan, as
implemented, met HUD’s requirements and (2) Independent Bank complied with HUD’s
regulations, procedures, and instructions in the underwriting of FHA-insured loans.
3
Neighborhood Watch refers to a Web-based software application that displays loan performance data for lenders
and appraisers using FHA-insured single-family loan information. The system is designed to highlight exceptions
so that potential problems are readily identifiable.
4
Compare ratio is the value that reveals the largest discrepancies between the subject’s default percentage and the
default percentage to which it is being compared. The percentages being compared are the percentages of
originations that first defaulted during a selected period.
3
RESULTS OF AUDIT
Finding: Independent Bank Generally Complied With HUD’s Quality
Control and Underwriting Requirements
Independent Bank’s quality control plan, as implemented, generally complied with HUD’s
requirements. Further, Independent Bank generally complied with HUD’s regulations,
procedures, and instructions for underwriting the FHA-insured loans reviewed with the exception
of 1 of the 11 loans reviewed. Specifically, it did not ensure that the borrowers’ payoff
statements were maintained in the FHA case binder and provided to the servicer upon transfer or
sale of servicing. This condition occurred because Independent Bank needed to improve its
procedures and controls to ensure compliance with HUD’s requirements. It was later able to
obtain the payoff statements from the settlement agent, and we determined that the loan did not
contain material underwriting deficiencies.
Independent Bank Generally
Complied With HUD’s
Requirements
Independent Bank’s quality control plan, as implemented, generally complied
with HUD’s requirements. Further, Independent Bank generally complied with
HUD’s regulations, procedures, and instructions for underwriting FHA-insured
loans with the exception of 1 of the 11 loans reviewed.
Independent Bank Did Not
Ensure That Borrowers’ Payoff
Statements Were Maintained
The borrowers’ loan payoff statements for FHA case number 262-1705986 were
not in the FHA case binder or included in the servicer’s file. Further,
Independent Bank did not maintain a copy of the loan origination file due to its
file retention policy. HUD Handbook 4155.1, REV-5, section 3-1, states that the
application package for FHA insurance must contain all documentation that
supports the lender’s decision to approve the mortgage loan. Further, HUD
Handbook 4000.2, REV-3 paragraph 5-8.B, states that upon sale or transfer of
servicing, the entire origination file must accompany the transfer.
This condition occurred because Independent Bank needed to improve its
procedures and controls to ensure compliance with HUD’s requirements.
However, this loan closed in 2008, and Independent Bank’s current procedures
for FHA loans require that payoff letters be included in the binder for refinance
loans. As a result of our audit, Independent Bank contacted the settlement agent
4
to obtain the payoff statements, and we determined that the loan did not contain
material underwriting deficiencies.
Recommendations
This report does not contain recommendations; therefore, no action is needed.
5
SCOPE AND METHODOLOGY
We performed our audit work from February through June 2013 at Independent Bank’s main
office in Ionia, MI, its branch office in Grand Rapids, MI, and our offices located in Chicago, IL,
and Detroit, MI. The audit covered the period January 1, 2010, through December 31, 2012, and
was adjusted as necessary.
To accomplish our objectives, we reviewed applicable HUD handbooks, regulations, mortgagee
letters, and other reports and policies related to the FHA mortgage insurance programs. Further,
we reviewed Independent Bank’s loan origination and closing files, quality control plan, and
quality control documentation. We also reviewed the organization charts, a list of fees, and
financial audits for prior years’ information. We interviewed Independent Bank’s employees.
Underwriting Review
Using HUD’s data maintained in its Single Family Data Warehouse system,5 we determined that
HUD paid claims on 61 loans during the period January 1, 2010, to December 31, 2012, that
were originated or sponsored by Independent Bank. These 61 loans closed between September
28, 2007, and February 28, 2011. Of the 61 loans, 34 went into default within the first 12
payments after the loans closed. HUD’s Quality Assurance Division selected and reviewed three
of the loans, and a postendorsement technical review was completed for one loan. Therefore, we
reduced our claims sample to 30. We judgmentally selected 7 of the 30 loans to review for
compliance with HUD’s underwriting requirements.
Using HUD’s data maintained in the Single Family Data Warehouse system, we also determined
that 2,465 loans were originated or sponsored by Independent Bank during the period January 1,
2010, to December 31, 2012. Of the 2,465 loans, we excluded 19 home equity conversion
mortgage loans and 134 loans that were no longer FHA insured. For the remaining 2,312 loans
((2,465-19)-134), we identified 282 loans that defaulted during our audit period. Of the 282
defaulted loans, the borrowers for 40 loans defaulted on their loans within the first 6 mortgage
payments. For the 40 loans, we determined that (1) 3 were included in our sample of loans that
went to claim, (2) 2 were under indemnification agreements with HUD, (3) 19 were subjected to
a postendorsement technical review, and (4) 2 were reviewed by HUD’s Quality Assurance
Division. These adjustments reduced our default sample of 40 loans to 14 (40-3-2-19-2). We
judgmentally selected 4 of the 14 loans to review for compliance with HUD’s underwriting
requirements.
In summary, we reviewed 7 loans where HUD paid claims during the audit period and 4 loans
that were originated and sponsored by Independent Bank that went into default during the audit
period. The conclusion in this audit report is limited to the 11 (7 + 4) loans reviewed. We did
5
HUD’s Single Family Data Warehouse is a collection of database tables structured to provide HUD users easy and
efficient access to single-family housing case-level data on properties and associated loans, insurance, claims,
defaults, and demographics.
6
not conclude on Independent Bank’s compliance with HUD’s underwriting requirements on its
entire portfolio of originated and sponsored FHA-insured loans.
Quality Control Review
For our review of Independent Bank’s quality control program, we obtained Independent Bank’s
quality control review reports that were completed during our audit period of January 1, 2010, to
December 31, 2012. We performed analyses to determine whether Independent Bank complied
with HUD regulations for quality control reviews of the following: early payment defaults,
frequency of reviews, timeliness of routine quality control reviews, and exception or deficiency
follow-up. We identified minor deficiencies in its process that were not included in this report.
However, the deficiences were discussed with Independent Bank during the audit.
We relied on information maintained in HUD’s Neighborhood Watch and Single Family Data
Warehouse Systems for informational and sampling purposes only. We also relied on data
maintained in Independent Bank’s system, such as electronic loan files. Although we did not
perform a detailed assessment of the reliability of the data, we performed a minimal level of
testing and found the data to be adequately reliable for our purposes. The testing consisted of
comparing data in the electronic files to the FHA case binders. The audit results were based on
our review of electronic and supporting hardcopy documentation maintained by Independent
Bank.
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
objectives. We believe that the evidence obtained provides a reasonable basis for our findings
and conclusions based on our audit objectives.
7
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:
Effectiveness and efficiency of operations – Policies and procedures that
management has implemented to reasonably ensure that a program meets its
objectives.
Reliability of financial reporting – Policies and procedures that management
has implemented to reasonably ensure that valid and reliable data are
obtained, maintained, and fairly disclosed in reports.
Compliance with applicable laws and regulations – Policies and procedures
that management has implemented to reasonably ensure that resource use is
consistent with laws and regulations.
We assessed the relevant controls identified above.
A deficiency in internal control exists when the design or operation of a control does
not allow management or employees, in the normal course of performing their
assigned functions, the reasonable opportunity to prevent, detect, or correct (1)
impairments to effectiveness or efficiency of operations, (2) misstatements in
financial or performance information, or (3) violations of laws and regulations on a
timely basis.
8
Significant Deficiencies
We evaluated internal controls related to the audit objectives in accordance with
generally accepted government auditing standards. Our evaluation of internal
controls was not designed to provide assurance regarding the effectiveness of the
internal control structure as a whole. Accordingly, we do not express an opinion on
the effectiveness of Independent Bank’s internal controls.
9
APPENDIXES
Appendix A
AUDITEE COMMENTS AND OIG’S EVALUATION
Ref to OIG Evaluation Auditee Comments
August 08, 2013
Anthony Smith, Assistant Regional Inspector General for Audit
U.S. Department of Housing and Urban Development
Office of Inspector General
477 Michigan Ave., Room 1780
Patrick McNamara Federal Bldg.
Detroit, MI 48226-2592
Dear Mr. Smith:
We would first like to express our appreciation to the Office of Inspector General
for the comprehensive review that was completed of our FHA underwriting and
quality control plan. This letter is in response to the findings contained in the OIG
Exit Conference presentation dated August 6, 2013. The findings state:
lA. Provide sufficient documentation to show that the loan was current at the time
the loan closed or reimburse HUD $79,581 for the loss incurred on the sale of the
associated property.
lB. Implement adequate procedures and controls to ensure that documentation
supporting underwriting decisions is maintained.
Comment 1 IB Response: I have attached payoff statements from Countrywide Home Loans
dated January 16, 2008 and the cover letters from Able Title that accompanied the
payoff remittances. The payoff statements show the following:
a. First Mortgage: The payoff calculation shows Principal Balance as of
January 1, 2008 with interest payable from 01-01-08 through 01-31-08.
b. Second Mortgage: The payoff calculation shows Principal Balance as of
January 1, 2008 with interest payable from 01-01-08 through 01-31-08.
10
Ref to OIG Evaluation Auditee Comments
IB closed the FHA refinance loan on January 25, 2008. The payoff statements
document that the borrower was current through January 1, 2008 at the time of
closing.
Comment 2 Independent Bank procedures require that all files must contain evidence that the
borrower was current at time of refinance. I have reviewed our current FHA case
binder stacking list and confirmed that the case binder list requires payoff letters
to be in the binder for refinance loans.
August 8, 2013
Page 2
We respectfully request that you accept this letter and the attached documentation
to clear the audit findings. If additional information or documentation is necessary
please contact me at 616-522-1754 or dcampbel @ibcp.com. Thank you.
Sincerely,
Deborah Campbell
Vice President
Independent Bank
230 West Main Street
Ionia, MI 48846
11
OIG Evaluation of Auditee Comments
Comment 1 We reviewed the loan’s payoff statements for the borrowers’ previous first and
second mortgages and revised the audit report accordingly.
Comment 2 We commend Independent Bank for reviewing its procedures to ensure (1) the
requirement for all files to contain evidence that the loan was current at the time
of refinance and (2) that its current FHA case binders’ stacking list requires
payoff letters to be included in the binder for refinance loans. This requirement
should mitigate future documentation deficiencies in regard to payoff statements.
12
Independent Bank, Ionia, MI, Generally Complied With HUD's Quality Control and Underwriting Requirements
Published by the Department of Housing and Urban Development, Office of Inspector General on 2013-09-17.
Below is a raw (and likely hideous) rendition of the original report. (PDF)