oversight

HUD Paid Claims That Lacked Contact or Collection Activities With Coborrowers

Published by the Department of Housing and Urban Development, Office of Inspector General on 2013-09-18.

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

OFFICE OF AUDIT
REGION 7
KANSAS CITY, KS




        U.S. Department of Housing and Urban
      Development, Office of Single Family Housing

      Lender Servicing of Claims With Coborrowers




2013-KC-0004                             SEPTEMBER 18, 2013
                                                 U.S. DEPARTMENT OF
                             HOUSING AND URBAN DEVELOPMENT
                                          OFFICE OF INSPECTOR GENERAL




                                                                      Issue Date: September 18, 2013

                                                                      Audit Report Number: 2013-KC-0004


TO:            Charles Coulter, Deputy Assistant Secretary for Single Family Housing, HU

               //signed//
FROM:          Ronald J. Hosking, Regional Inspector General for Audit, 7AGA

SUBJECT:       HUD Paid Claims That Lacked Contact or Collection Activities With
               Coborrowers


    Attached is the U.S. Department of Housing and Urban Development (HUD), Office of
Inspector General’s (OIG) final results of our review of Federal Housing Administration (FHA)
claims with coborrowers.

    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 8L, 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
913-551-5870.




                                                Office of Audit Region 7
                                  400 State Avenue, Suite 501, Kansas City, KS 66101
                                      Phone (913) 551-5870, Fax (913) 551-5877
                          Visit the Office of Inspector General Web site at www.hudoig.gov.
                                           September 18, 2013
                                           HUD Paid Claims That Lacked Contact or Collection
                                           Activities With Coborrowers




Highlights
Audit Report 2013-KC-0004


 What We Audited and Why                    What We Found

We reviewed the U.S. Department of         HUD paid claims on approximately 2,109 FHA loans
Housing and Urban Development              when the lenders did not contact, attempt collection
(HUD), Office of Single Family             from, or otherwise include all borrowers during the
Housing, to determine whether lenders      loss mitigation process. The lenders did not
contacted all borrowers on each Federal    communicate with all borrowers, and sometimes the
Housing Administration (FHA) loan          lenders did not send credit information to credit
before proceeding to claim. We             reporting bureaus. Some of the coborrowers were
initiated this nationwide audit because    nonoccupying coborrowers, who were added to the
we noted instances in which the lender     loans during underwriting so the loans would meet
collected financial information from       FHA underwriting standards. Other coborrowers were
only one of the borrowers and showed       originally cooccupants, but during servicing, it was
no efforts to contact other borrowers.     revealed that one or more borrowers no longer lived in
                                           the subject property. However, the lenders showed no
                                           attempt to contact all of the borrowers regarding the
 What We Recommend
                                           mortgage debt.
We recommend that HUD (1)
strengthen monitoring to check for
proper contact with each borrower
during loan servicing, (2) enhance data
collection to begin collecting
information on whether each coborrower
will occupy the subject property as well
as the addresses and phone numbers of
each coborrower, and (3) educate
lenders and remind them of their
responsibility to contact all borrowers
during servicing.




                                                  
                            TABLE OF CONTENTS

Background and Objective                                                    3

Results of Audit
      Finding: HUD Paid Claims on Approximately 2,109 FHA Loans When the
               Lenders Did Not Contact All Borrowers                       4

Scope and Methodology                                                      7

Internal Controls                                                          10

Appendixes
A.    Schedule of Funds To Be Put to Better Use                            11
B.    Auditee Comments and OIG’s Evaluation                                12




                                            2
                       BACKGROUND AND OBJECTIVE

The Federal Housing Administration (FHA) provides mortgage insurance on loans made by
FHA-approved lenders throughout the United States and its territories, enabling those lenders to
provide credit to borrowers who might otherwise be unable to access the capital markets to purchase
or refinance a property. It is the largest insurer of mortgages in the world, having insured more
than 40 million properties since its inception in 1934. FHA mortgage insurance provides lenders
with protection against losses as a result of homeowners’ defaulting on their mortgage loans.
The lenders bear less risk because FHA will pay a claim to the lender in the event of a
homeowner’s default. Loans must meet certain requirements established by FHA to qualify for
insurance.

The U.S. Department of Housing and Urban Development’s Office of Single Family Housing is
responsible for the overall management and administration of the FHA single family mortgage
insurance programs. The National Servicing Center works with FHA homeowners and their
lenders to find creative solutions to avoid foreclosure. Its staff provides direction and training to
mortgage lenders. The Quality Assurance Division works to ensure the highest possible degree
of compliance by lenders with origination and servicing requirements. Its staff prepares lender
targeting plans and performs reviews of approved lenders.

Each lender is responsible for giving notice to each borrower in default in accordance with 24
CFR (Code of Federal Regulations) 203.602. In addition, HUD Handbook 4330.1 REV-5,
section 7-12, requires that all coborrowers be advised of a default in an attempt to avoid
foreclosure. HUD considers it prudent servicing that a notification of default be sent to
coborrowers so they may have the opportunity to salvage the mortgage. Lastly, Mortgagee
Letter 98-18 says it is mandatory that all borrowers with FHA-insured mortgages, regardless of
risk ranking, be considered for each of FHA’s loss mitigation programs before foreclosure is
initiated. HUD Handbook 4330.1 REV-5, section 9-2 C, also requires lenders to ensure that the
account has been accurately reported to the national credit information repositories.

Our audit objective was to determine whether FHA lenders contacted all borrowers on each FHA
loan before proceeding to claim.




                                                  3
                                RESULTS OF AUDIT


Finding: HUD Paid Claims on Approximately 2,109 FHA Loans When
the Lenders Did Not Contact All Borrowers

HUD paid claims on approximately 2,109 FHA loans when the lenders did not contact, attempt
collection from, or otherwise include all borrowers during the loss mitigation process. HUD’s
monitoring procedures did not include detailed steps to check for proper contact, and its data
systems did not include the necessary information to facilitate that check. As a result, HUD
could not ensure that the FHA insurance fund paid proper claims.



 Coborrowers Not Contacted

              In total, FHA paid claims on more than 160,000 loans from March 1, 2012,
              through February 28, 2013. To conduct this audit, we narrowed the universe to
              15,762 claims with coborrowers submitted by the 9 largest lenders, from which
              we selected a statistical sample of 95 claims (see Scope and Methodology for
              details of our universe and sample selection). Of the 95 claims reviewed, 19, or
              20 percent, were ineligible because the lender did not contact all of the borrowers.
              This number statistically projects to approximately 2,109 claims on which the
              lender did not contact, attempt collection from, or otherwise include all borrowers
              during the loss mitigation process.

              In some instances, the lender did not document letters or phone calls with all
              borrowers, and sometimes the lender did not send credit information to credit
              reporting bureaus. For example, in one sample item, there were three borrowers
              who declared at origination that they all planned to live in the subject property.
              The borrowers were a married couple and a brother of the husband; the brother
              had owned an additional home in the same State for the past 10 months. During
              loan servicing, the lender did not contact the brother at either the subject property
              or his other property address or via phone. This loan ended in a preforeclosure
              sale, and the lender again did not reach out to the brother and based the financial
              analysis for the preforeclosure sale only on the other borrowers. In addition, the
              lender neglected to send credit reporting information to the credit reporting
              agencies for the brother.

              Some of the coborrowers were nonoccupying coborrowers, who were added to the
              loan during underwriting so the loan would meet FHA underwriting
              standards. For example, in one loan file reviewed, the borrower was a married
              woman, who was not working and had no income, and she could not put her
              husband on the loan because of bad credit. To obtain the loan, she had her

                                                4
                                                  
           nonoccupying mother cosign for her. When the lender was processing the
           foreclosure, the daughter was not working, her husband had left her, and the
           lender did not contact her mother before the claim was filed.

           In other instances, the coborrowers were originally cooccupants, but during
           servicing, it was revealed that not all of the borrowers lived in the subject
           property. However, the lender showed no attempt to contact both borrowers
           regarding the mortgage debt. For example, one loan file indicated that two
           unmarried people both planned to live in the subject property as their primary
           residence; however, during loan servicing, the lender became aware that one of
           the borrowers had moved out of the property. The lender had an updated credit
           report in its file identifying two new addresses for him, yet the lender did not try
           to contact him at these addresses to attempt collection, gather financial
           information for the preforeclosure sale, or obtain his signature for the
           preforeclosure sale.

Inadequate Information in
HUD’s Systems

           During its servicing reviews, HUD’s Quality Assurance Division checked only
           that lenders sent notices to the borrower(s) at the property address, not necessarily
           to all borrowers on the loan. These reviews examined selected lenders for
           compliance with HUD-FHA requirements, the lender’s standard servicing
           procedures, and its loss mitigation practices. In the Division’s quality control
           plan checklist for loan servicing, one of the items checked for was whether
           “Effective collection activities are pursued in a timely fashion. Contact is
           attempted with all co-mortgagors, co-signers and former mortgagors, as
           appropriate.” In addition, the Division’s case review sheet checked a sample of
           loans to see whether contact attempts were adequate, including contacts with
           coborrowers and former borrowers. These review procedures did not explicitly
           require the Division’s reviewer to determine whether all borrowers lived in the
           subject property and whether all individuals were contacted.

           HUD’s Single Family Data Warehouse did not identify when a coborrower was
           nonoccupying or list the address or telephone number of the coborrower in such a
           case. Therefore, the Division stated that it was difficult to determine whether a
           coborrower was a nonoccupant as such information was contained only in the
           origination file, which the Division did not examine during a servicing
           review. The Division agreed that without using the origination file, it could not
           ensure that all borrowers were contacted during servicing. The Division also
           agreed that if the lenders’ notes documented a nonoccupant coborrower, the
           lender should attempt contact with all borrowers.




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Improper FHA Insurance Fund
Claims

             HUD could not ensure that the FHA insurance fund paid proper claims when the
             coborrower was not appropriately contacted. If the coborrowers had been
             contacted, some of them might have been able to cure the loan and prevent the
             claim. The loans for which coborrowers were not contacted did not qualify for a
             claim since the lender did not perform proper servicing.

             Using statistical sampling procedures to project the ineligible claims to the
             universe of 15,762 claims, we estimated that the FHA insurance fund paid claims
             on 2,109 loans, with an estimated value of $191 million, when the coborrower
             was not appropriately contacted.

Conclusion

             Lenders did not always contact all borrowers on each loan before proceeding to
             claim. Of the statistically selected claims, 20 percent were ineligible because the
             lender did not have contact with all of the borrowers. HUD could not ensure that
             the FHA insurance fund paid proper claims when the coborrower was not
             appropriately contacted. HUD needs to strengthen monitoring to check for proper
             contact with each borrower during loan servicing and enhance data collection to
             begin collecting nonoccupying coborrowers’ addresses and phone numbers.

Recommendations

             We recommend that the Deputy Assistant Secretary for Single Family Housing

             1A. Strengthen monitoring to check for proper contact with each borrower during
                 loan servicing to put $191 million to better use.

             1B. Enhance data collection to begin collecting information on whether each
                 coborrower will occupy the subject property as well as the addresses and phone
                 numbers of each coborrower.

             1C. Educate lenders and remind them of their responsibility to contact all borrowers
                 during servicing.




                                               6
                                                
                        SCOPE AND METHODOLOGY

To accomplish our objective, we

      Interviewed HUD and industry management and staff;
      Reviewed Federal regulations, HUD handbooks, and mortgagee letters;
      Reviewed the Quality Assurance Division 2009 Guidebook along with Servicing Review
       Standard Forms and Paragraphs and Quality Assurance Division servicing codes;
      Reviewed Federal Registers showing Mortgagee Review Board actions; and
      Selected and reviewed a statistical sample of claims.

We performed our audit work between March and August 2013. We conducted audit fieldwork
at HUD’s National Servicing Center in Oklahoma City, OK, and at lenders in Oklahoma City,
OK, Des Moines, IA, and O’Fallon, MO. Our audit generally covered the period March 1, 2012,
through February 28, 2013.

Using HUD’s Single Family Data Warehouse, we identified 163,223 loans with a claim
processed between March 1, 2012, and February 28, 2013. Of these, 68,935 loans had one or
more coborrowers. We used the following criteria to identify loans in which the coborrowers
may not have occupied the property.

      Loans with two or more coborrowers,
      Loans in which the primary borrower was not classified as married, and
      Loans with the highest age difference between the borrower and the first coborrower.

Of the 68,935 loans with coborrowers, 18,391 met the criteria described above. We then limited
our sample universe to the 15,762 loans that were serviced by the 9 lenders with the highest
volume of loans.

We used a seven-strata sample design to account for fluctuations in low-end and high-end
amounts that would be expected to cause large variance estimates. The variable used to stratify
the sample was the profit-loss amount for each loan. For many loans, this amount was calculated
in HUD’s system, representing the original insurance payment to the bank for the unpaid
balance, holding costs, earnings from resale of the property, and relevant administrative
transactions associated with the failure of the loan. In cases in which a profit-loss amount had
not been calculated by HUD, a typical amount was estimated for the purposes of stratification,
based on the average percentage of the unpaid balance that was lost for other loans the bank had
issued in that month.

We found a sample size of 95 to be the best size for providing meaningful audit results without
an unnecessary risk of spurious error. We used replicated sampling to proof-test the sample
design and model the true sampling distribution, thereby confirming the performance of the
sample design. To control for the possibility that FHA loans were adversely affected differently
across lenders, each strata was sorted by the lending institution. The sample design was
stratified as shown in the below table.

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                                       Strata design
Strata                  Quantity    Quantity      Profit-loss range Probability Sampling
(based on loss amount) in universe in sample                        of selection weight
Net gain                   24           2          $148 - $50,691     0.08333      12.0
0 – 10 percent loss       1,573         9           $0 - $46,869      0.00572     174.8
10 - 30 percent loss      3,149        19        $46,870 - $71,221    0.00603     165.7
30 - 50 percent loss      3,147        19        $71,222 - $92,803    0.00604     165.6
50 – 70 percent loss      3,149        19       $92,804 - $120,101    0.00603     165.7
70 - 90 percent loss      3,146        18       $120,102 - $170,775   0.00572     174.8
90 - 100 percent loss     1,574         9            > $170,776       0.00572     174.9
Total                    15,762        95                n/a             n/a        n/a

We reviewed the statistical sample of claims to evaluate whether the lender contacted, attempted
to collect from, or otherwise included all borrowers during the loss mitigation process. For the
purposes of our review, we obtained both the origination and servicing files from the lenders to
review for contact with all borrowers. We used the origination file to determine whether all
borrowers planned to occupy the property. We then used the servicing files provided to
determine whether all borrowers had been contacted either by mail, email, or telephone before
the claim was filed.

We determined that for 19 of the 95 sampled loans, or 20 percent, the lender did not have contact
with all of the borrowers. We considered these claims to be ineligible. These loans amounted to
an average of $19,667 per loan in our universe. Deducting for statistical variance, we can say
with a one-sided confidence interval of 95 percent that improper payments amounted to $12,142
per loan. Extending this to our sample universe of 15,762 loans, we can say with a one-sided
confidence of 95 percent that lenders did not contact all borrowers for at least 2,109 loans and
$191 million in claims. In projecting the findings to a dollar amount, we used the actual costs to
HUD for each loan claim, as indicated in the Single Family Data Warehouse system, effective
June, 2013. We revalidated the performance of the sample design by using the actual cost of the
claims and verified that the sample would perform as stated with no additional modifications.

We relied in part on data maintained by HUD in its Single Family Data Warehouse database.
Specifically, we relied on the data to identify loans that resulted in claims during our audit period
and met the criteria described below. We also relied on the associated claim amounts for these
loans. Although we did not perform a detailed assessment of the reliability of the data, we
corroborated the fields used to determine our sample universe against documentary evidence
supplied by the lenders for our 95 sample loans. We found that that 10 of the 95 loans in our
sample had incorrect information in the database that would have caused the loans not to be
included in our universe. In each of these cases, the marital status was incorrect when compared
against the loan origination file. However, we do not consider this issue to be significant
because the lenders contacted all borrowers in each case and the loans were projected against the
universe, which lowered the projected loss to HUD. As described above, we also performed
testing on each sampled loan to determine whether lenders contacted all borrowers before
proceeding to claim. Based on the work performed, we determined that the computer-processed
data were sufficiently reliable for the purposes of this report.


                                                 8
                                                   
We conducted the audit in accordance with generally accepted government auditing standards.
Those standards require that we plan and perform the audit to obtain sufficient, appropriate
evidence to provide a reasonable basis for our findings and conclusions based on our audit
objective. We believe that the evidence obtained provides a reasonable basis for our findings
and conclusions based on our audit objective.




                                               9
                                                
                              INTERNAL CONTROLS

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

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

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


 Relevant Internal Controls

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

                  Policies and procedures to ensure that lenders contact all borrowers on each
                   FHA loan before proceeding to claim.

               We assessed the relevant controls identified above.

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

 Significant Deficiency

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

                  HUD’s monitoring procedures did not include detailed steps to check for
                   proper contact, and its data systems did not include the necessary information
                   to facilitate that check (see finding).




                                                 10
                                                   
                                   APPENDIXES

Appendix A

                         SCHEDULE OF
                 FUNDS TO BE PUT TO BETTER USE

                           Recommendation        Funds to be put to
                               number               better use 1/
                                 1A                $191,000,000



1/   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.

     In this instance, if HUD implements our recommendations, it will ensure that claims are
     paid only for qualifying borrowers to lenders that have followed all of the program
     requirements. It will no longer pay claims for borrowers who have not been properly
     contacted during loan servicing.




                                            11
                                              
Appendix B

        AUDITEE COMMENTS AND OIG’S EVALUATION


Ref to OIG Evaluation   Auditee Comments




Comment 1




                         12
                           
                        OIG Evaluation of Auditee Comments

Comment 1   OIG will consider this to be a management decision relating to recommendation
            1C. Single Family must	fully	implement	all	recommendations	in	this	report	
            to	ensure	all	borrowers	are	contacted	on	each	FHA	loan	before	going	to	
            claim.	




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