oversight

All Western Mortgage, Las Vegas, NV, Did Not Fully Comply With FHA Program Requirements Concerning Outside Employment and Timeliness of Quality Control Reviews

Published by the Department of Housing and Urban Development, Office of Inspector General on 2013-05-22.

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

OFFICE OF AUDIT
REGION 9
LOS ANGELES, CA




         All Western Mortgage, Inc., Las Vegas, NV

                  FHA Loan Origination




2013-LA-1005                                  MAY 22, 2013
                                                        Issue Date:    May 22, 2013

                                                        Audit Report Number: 2013-LA-1005




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



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


SUBJECT:       All Western Mortgage, Las Vegas, NV, Did Not Fully Comply With FHA
               Program Requirements Concerning Outside Employment and Timeliness of
               Quality Control Reviews


    Attached is the U.S. Department of Housing and Urban Development (HUD), Office of
Inspector General’s (OIG) final results of our review of All Western Mortgage, Inc.

    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
213-534-2471.
                                             May 22, 2013
                                             All Western Mortgage, Las Vegas, NV, Did Not Fully
                                             Comply With FHA Program Requirements Concerning
                                             Outside Employment and Timeliness of Quality Control
                                             Reviews


Highlights
Audit Report 2013-LA-1005


 What We Audited and Why                      What We Found

We audited the Federal Housing               All Western Mortgage, as a former loan correspondent
Administration (FHA)-insured loan            and current nonsupervised lender, generally met HUD
process at All Western Mortgage’s Las        requirements for the origination of FHA-insured
Vegas, NV, home office as part of our        single-family loans. However, All Western Mortgage
efforts to improve the integrity of the      did not follow HUD requirements concerning
single-family insurance programs. We         unallowable outside employment and timely quality
selected All Western Mortgage because        control reviews.
it is one of the top 10 originators in
Nevada and the U.S. Department of
Housing and Urban Development’s
(HUD) Quality Assurance Division had
not performed a review since 2005.
The objective of our review was to
determine whether All Western
Mortgage complied with HUD’s
regulations, procedures, and instructions
in the origination of FHA-insured loans
and whether its quality control plan met
HUD’s requirements.

 What We Recommend

We recommend that HUD (1) require
All Western Mortgage to submit
updated policies and procedures related
to outside employment, and (2) review
quality control reports to ensure that All
Western Mortgage completes quality
control reviews in a timely manner.
                           TABLE OF CONTENTS

Background and Objective                                                   3

Results of Audit

      Finding:      All Western Mortgage Did Not Follow HUD Requirements
                    For Outside Employment and Quality Control Reviews     4

Scope and Methodology                                                      7

Internal Controls                                                          9

Appendixes
A.    Auditee Comments and OIG’s Evaluation                                11




                                          2
                            BACKGROUND AND OBJECTIVE

The Federal Housing Administration (FHA) is the Federal Government’s single largest program
to extend home ownership to individuals and families who lack the savings, credit history, or
income to qualify for a conventional mortgage. The homeowners pay into the FHA insurance
fund through mortgage insurance. The U.S. Department of Housing and Urban Development
(HUD) uses these funds to operate the FHA insurance program. The insurance provides lenders
with protection against losses as the result of homeowners defaulting on home mortgages. HUD
handbooks and mortgagee letters provide detailed processing instructions and advise the
mortgage industry of major changes to FHA programs and procedures.

All Western Mortgage is an FHA-approved nonsupervised 1 mortgage company. All Western
Mortgage was an FHA loan correspondent 2 before becoming an approved nonsupervised lender
on February 10, 2011. All Western Mortgage’s home office is located at 8345 West Sunset
Road, Suite 380, Las Vegas, NV.

We selected All Western Mortgage because it is one of the top 10 originators in Nevada and
HUD’s Quality Assurance Division has not performed a review since 2005. All Western
Mortgage originated 2,812 FHA-insured loans totaling more than $484 million between January
1, 2008, and December 31, 2012, with more than $7.4 million in claims paid by HUD on 33 3
loans.

The objective of our review was to determine whether All Western Mortgage complied with
HUD’s regulations, procedures, and instructions in the origination of FHA-insured loans and
whether its quality control plan met HUD’s requirements.




1
  A nonsupervised lender is a financial institution that has as its principal activity the lending or investment of funds
in real estate mortgages. A nonsupervised lender may originate, purchase, hold, and service FHA-insured loans and
submit FHA applications for insurance.
2
  A loan correspondent is a lender, which has as its principal activity the origination of FHA-insured loans for sale or
transfer to its sponsor(s) for underwriting. A loan correspondent may originate and sell FHA- insured loans and
submit applications for insurance. Mortgagee Letter 2010-20 implemented the Final Rule F.R 5356-F-02 regarding
HUD’s elimination of loan correspondent approval for single family programs as of December 31, 2010. In place of
HUD’s loan correspondent approval system, loan correspondents were permitted to continue participation in FHA
programs as sponsored third party originators by establishing a sponsorship relationship with an FHA-approved
mortgagee.
3
  All 33 claims occurred before All Western Mortgage became a nonsupervised lender.


                                                           3
                                       RESULTS OF AUDIT


Finding:           All Western Mortgage Did Not Follow HUD Requirements
                   for Outside Employment and Quality Control Reviews
We did not identify loan origination issues attributable to All Western Mortgage; 4 however, All
Western Mortgage inappropriately allowed employees involved in FHA transactions to actively
participate in real estate. This condition occurred because All Western Mortgage did not have
written policies in place concerning outside employment restrictions, increasing the possibility of
a conflict of interest, which could result in employees manipulating the loan origination process.
In addition, All Western Mortgage did not complete any of the quality control reports reviewed
in a timely manner as all nine of the reports reviewed were completed more than 90 days after
closing. This deficiency occurred because All Western Mortgage switched to a paperless system
that caused management to submit late loan listings to its quality control contractor. As a result,
All Western Mortgage could not ensure that it identified problems left undetected as early after
closing as possible, increasing the risk to the FHA insurance fund.


    All Western Mortgage Did Not
    Follow HUD Requirements for
    Unallowable Outside
    Employment

                   At least 4 of 166 All Western Mortgage loan officers participated in outside
                   employment as real estate agents. According to HUD Handbook 4060.1, REV-2,
                   paragraph 2-9(G), a lender may employ staff members full time or part time (less
                   than the normal 40-hour workweek). They may have other employment including
                   self-employment. However, such outside employment may not be in mortgage
                   lending, real estate, or a related field. According to HUD’s Frequently Asked
                   Questions, the dual employment requirement applies to all employees of FHA-
                   approved lenders who are involved in FHA transactions.

                   Two of the four All Western Mortgage loan officers worked on FHA loans while
                   also employed as real estate agents. These two loan officers originated just three
                   FHA loans, and all three were performing loans. We did not identify any
                   instances in which the loan officers represented their clients as both real estate
                   agents and loan officers for the same transaction.




4
    See Scope and Methodology Section for more details on loans reviewed.


                                                         4
All Western Mortgage’s Policies
and Procedures Were Not
Adequate

            All Western Mortgage did not have written policies and procedures concerning
            outside employment. Thus, its managers had different interpretations of outside
            employment requirements. According to All Western Mortgage’s operations
            manager, All Western Mortgage was strict on outside employment when hiring
            employees and did not allow it. However, All Western Mortgage’s vice president
            of operations stated that he thought it was okay to have a loan officer with outside
            employment who worked only on conventional loans.

            All Western Mortgage employees employed as real estate agents also provided
            different responses regarding outside employment requirements. Although three
            of four employees indicated that they were aware of the requirements, one of the
            three originated two FHA loans while employed as a real estate agent. The fourth
            employee stated that he was not informed about an outside employment
            restriction and also originated an FHA loan while employed as a real estate agent.
            Consequently, the lack of policies and procedures increased the risk that the loan
            origination process could be manipulated and create a conflict of interest with the
            loan transactions.

            Due to our review, All Western Mortgage had taken steps to address this issue
            and had developed new procedures concerning outside employment. Once
            implemented, these procedures would inform employees of HUD regulations
            regarding outside employment.

All Western Mortgage Did Not
Always Follow HUD
Requirements Concerning
Timely Quality Control
Reviews

            All Western Mortgage’s quality control plan generally met HUD requirements.
            All Western Mortgage performed a preclosing quality control review of its loans
            in house and outsourced with Mortgage Compliance Advisors (MCA) for the
            postclosing reviews required by HUD. While MCA completed the quality control
            reviews, it did not complete the reviews in a timely manner. HUD Handbook
            4060.1, REV-2, paragraph 7-6(A), states that loans must be reviewed within 90
            days from the end of the month in which the loan closed. This requirement is
            intended to ensure that problems left undetected before closing are identified as
            early after closing as possible. All nine of the monthly quality control reports
            reviewed were more than 90 days from the end of the month in which the loan
            closed. The reviews ranged from 60 to 322 days late. For example, MCA did not



                                             5
             complete the quality control report for loans closed in November 2011 until
             January 2013.

All Western Mortgage Provided
Late Loan Listings to Its
Quality Control Contractor

             The late quality control reports occurred because All Western Mortgage was
             transitioning to a paperless system, which made it difficult for All Western
             Mortgage to provide accurate and timely loan listings to its quality control
             contractor. All Western Mortgage was aware of the late reports and anticipated
             being caught up by the end of May 2013.

Conclusion

             All Western Mortgage improperly allowed two employees to originate three FHA
             loans while actively participating in outside real estate employment. This
             condition occurred because All Western Mortgage did not have written policies in
             place concerning outside employment restrictions. All Western Mortgage’s lack
             of policies and procedures regarding outside employment increased the risk that
             employees might manipulate the loan origination process and create a conflict of
             interest with the loan transaction.

             In addition, All Western Mortgage completed nine postclosing quality control
             reports more than 90 days after closing, ranging from 60 to 322 days late. This
             deficiency occurred because All Western Mortgage switched to a paperless
             system, which caused management to submit late loan listings to its quality
             control contractor. As a result, All Western Mortgage could not ensure that it
             identified problems left undetected as early after closing as possible.

Recommendations

             We recommend that HUD’s Deputy Assistant Secretary for Single Family
             Housing

             1A.    Evaluate All Western Mortgage’s updated policies and procedures and any
                    corrective action taken to ensure that its employees who are real estate
                    agents are not involved in FHA transactions as required by HUD.

             1B.    Monitor All Western Mortgage to ensure that it completes the required
                    quality control reviews in a timely manner.




                                              6
                              SCOPE AND METHODOLOGY

Our audit period covered January 1, 2008, to December 31, 2012, but was expanded when
necessary. We conducted our fieldwork at All Western Mortgage’s home office located at 8345
West Sunset Road, Suite 380, Las Vegas, NV, between January and April 2013.

To accomplish our objective, we

    •    Reviewed HUD regulations and reference materials for single-family requirements;

    •    Reviewed the lender’s processing, underwriting, and closing policies and procedures;

    •    Reviewed documentation for eight FHA-insured loans;

    •    Interviewed appropriate staff;

    •    Reviewed the quality control plan; and

    •    Reviewed nine quality control review reports.


We selected a sample of eight loans nonstatistically based on the existence of loan defaults and
claims. We used HUD’s Single Family Data Warehouse and Neighborhood Watch System 5, two
of HUD’s online information systems for FHA-insured loans, to identify all loans that were
originated from All Western Mortgage’s home office. During our audit period, 33 loans went
into claim, and 182 loans went into default. Of these loans, we reviewed six claims and two
loans in default. We selected the six claims by excluding refinance loans and selecting loans
underwritten by the two undewriters with the highest number of claims in the universe. The two
default loans were chosen based on nonrefinance loans with the most recent amortization dates.
We did not identify loan origination issues attributable to All Western Mortgage. However, we
identified potential underwriting issues with two loans underwriten by two of the sponsors; those
are addressed through two separate audit memorandum reports.

For loans underwritten by an automated underwriting system, we reviewed the FHA loan file to
determine whether it contained the documentation needed to support the integrity and accuracy
of the data used by the automated underwriting system to recommend approval of the loan. For
manually underwritten loans, we reviewed the loan documents to determine whether they
supported the underwriting decision and complied with HUD requirements.




5
  HUD’s Single Family Data Warehouse is a large and extensive collection of database tables organized and
dedicated to support the analysis, verification, and publication of Single Family Housing data. HUD’s
Neighborhood Watch System is intended to aid HUD staff in monitoring lenders and HUD programs, and to aid
lenders and the public in self-policing the industry. The system is designed to highlight exceptions, so that potential
problems are readily identifiable.


                                                           7
We relied on information from systems used by HUD (including Neighborhood Watch and
Single Family Data Warehouse) to target loans for review and verified that the information
submitted to HUD was consistent with the information in the lender’s own files.

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.




                                               8
                              INTERNAL CONTROLS

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

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

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


 Relevant Internal Controls

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

               •   Policies and procedures intended to ensure that the lender properly originates
                   FHA-insured loans in accordance with HUD requirements.
               •   Policies and procedures to ensure that All Western Mortgage employees do not
                   have unallowable outside employment.
               •   Policies and procedures established by management to ensure that the quality
                   control plan has been implemented and related reviews are performed in
                   accordance with HUD requirements.

               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 Deficiencies

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

               •   All Western Mortgage lacked policies and procedures to ensure that its
                   employees did not participate in unallowable outside employment (finding).


                                                 9
•   All Western Mortgage did not have adequate controls in place to ensure that it
    adequately implemented its quality control plan (finding).




                                 10
                        APPENDIXES

Appendix A

        AUDITEE COMMENTS AND OIG’S EVALUATION


Ref to OIG Evaluation      Auditee Comments




Comment 1




Comment 2




Comment 2




                            11
                         OIG Evaluation of Auditee Comments

Comment 1   We commend All Western Mortgage for updating its policies and procedures.
            We reviewed the documentation provided including the statement of quality
            assurance, quality control plan, and the agreement titled “acknowledgement and
            agreement regarding prohibitions relating to real estate agents and loan
            transactions,” we consider these to be sufficient once implemented. We did not
            include this in the report because it was too voluminous; however, it is available
            upon request. All Western Mortgage can provide evidence to HUD that the
            updated policies and procedures have been fully implemented, including
            documentation signed by All Western Mortgage loan officers, during the audit
            resolution process.

Comment 2   We acknowledge that All Western Mortgage was aware of the late quality control
            reports at the time of our review and is in the process of correcting this finding.
            However, we do not have evidence that the late quality control reports were a
            result of the quality control contractor not meeting its deadlines. Two employees
            directly involved in the quality control process stated that part of the reason the
            contractor fell behind on reports was due to All Western Mortgage not providing
            reports in a timely manner at the implementation of the new system. In addition,
            HUD Handbook 4060.1 Rev 2, paragraph 7-3 (B) 2 states that a mortgagee
            contracting out any part of its quality control function is responsible for ensuring
            that the outside source is meeting HUD's requirements. We did not make any
            changes to the report based on this comment.




                                             12