OFFICE OF AUDIT REGION 9 LOS ANGELES, CA The Lending Company, Inc. Phoenix, AZ Single Family Housing Mortgage Insurance Program 2013-LA-1008 AUGUST 20, 2013 Issue Date: August 20, 2013 Audit Report Number: 2013-LA-1008 TO: Charles S. Coulter Deputy Assistant Secretary for Single Family Housing, HU Dane Narode Associate General Counsel for Program Enforcement, CACC FROM: Tanya E. Schulze Regional Inspector General for Audit, Los Angeles Region, 9DGA SUBJECT: The Lending Company, Inc., Phoenix, AZ, Did Not Always Comply With FHA Underwriting and Quality Control Program Requirements Attached is the U.S. Department of Housing and Urban Development (HUD), Office of Inspector General’s (OIG) final results of our review of The Lending Company, Inc.’s loan origination, underwriting, and quality control program policies and procedures. 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 213-894-8016. August 20, 2013 The Lending Company, Inc., Phoenix, AZ, Did Not Always Comply With FHA Underwriting and Quality Control Program Requirements Highlights Audit Report 2013-LA-1008 What We Audited and Why What We Found We audited The Lending Company, The hotline complaint alleged various lending Inc., based on a hotline complaint, violations. Our review substantiated the portion of the previous U.S. Department of Housing hotline complaint concerning violations of the Housing and Urban Development (HUD) and Economic Recovery Act of 2008. The Lending reviews, and our goal to improve the Company used gift programs through two nonprofit integrity of the Federal Housing organizations that did not comply with HUD’s Administration (FHA) single-family requirements. It approved 789 FHA-insured loans that insurance programs. Our objectives contained unallowable gifts. This occurred because were to determine whether The Lending The Lending Company was initially unaware of the Company complied with HUD HUD requirements, was notified of the requirements, requirements when it used gift and then structured a second gift program that programs, originated and underwrote disregarded those same HUD requirements. As a FHA loans, and implemented its quality result, 725 loans put the FHA mortgage insurance fund control functions. at risk for losses of $55.4 million, and has already incurred losses of $284,412 for 7 loans. What We Recommend Further, The Lending Company did not always originate and approve FHA-insured loans in We recommend that HUD determine accordance with HUD requirements. Specifically, 28 legal sufficiency to pursue civil of the 31 loans reviewed contained underwriting remedies, civil money penalties, or both deficiencies, with 9 containing material underwriting against The Lending Company for deficiencies that impacted the insurability of the loans. incorrectly certifying that mortgages This occurred because The Lending Company did not were eligible for FHA mortgage exercise due diligence in underwriting the loans and insurance. We also recommend that disregarded HUD’s underwriting requirements. As a HUD require the lender to (1) result, HUD incurred losses of $421,630 for five loans. indemnify HUD against losses for 725 The remaining four loans with material underwriting FHA-insured loans with unallowable deficiencies also had an unallowable gift. gifts, (2) reimburse the FHA insurance fund for $706,042 in actual losses, (3) Lastly, The Lending Company did not always follow support or repay loss mitigation claims HUD quality control requirements. This occurred paid, (4) pay down the principal balance because The Lending Company disregarded HUD for 1 overinsured loan, (5) implement requirements, although a prior HUD review identified its quality control plan, and (6) provide similar deficiencies. As a result, the FHA mortgage training to its staff on HUD quality insurance fund was placed at an increased risk for control requirements. losses. TABLE OF CONTENTS Background and Objectives 3 Results of Audit Finding 1: The Lending Company Used Two Gift Programs That Did Not Comply With HUD Requirements 5 Finding 2: The Lending Company Did Not Always Approve FHA-Insured Loans in Accordance With HUD Requirements 13 Finding 3: The Lending Company Did Not Always Comply With HUD Quality Control Requirements 18 Scope and Methodology 21 Internal Controls 24 Appendixes A. Schedule of Questioned Costs and Funds To Be Put to Better Use 26 B. Auditee Comments and OIG’s Evaluation 27 C. Criteria 44 D. List of Loans With an Unallowable Gift From Family Housing Resources 48 E. List of Loans With an Unallowable Gift From Affordable Housing Partners 54 F. Schedule of Losses for Loans With Material Underwriting Deficiencies 64 G. Loan Summaries for Material Underwriting Deficiencies 65 2 BACKGROUND AND OBJECTIVES The Federal Housing Administration (FHA) was created by Congress in 1934 and provides mortgage insurance on loans made by FHA-approved lenders throughout the United States and its territories. FHA is the largest insurer of mortgages in the world, having insured more than 34 million properties since its inception. The U.S. Department of Housing and Urban Development’s (HUD) direct endorsement program simplified the process for obtaining FHA mortgage insurance by allowing lenders to underwrite and close mortgage loans without prior HUD review or approval. FHA’s Mutual Mortgage Insurance Fund provides lenders with protection against losses as a result of homeowners defaulting on their mortgage loans. 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. FHA operates entirely from self-generated income and is not funded by taxpayers. The proceeds from the mortgage insurance premiums paid by homeowners are maintained in an account that is used to operate and sustain the program. All FHA lenders must follow all applicable statutes, regulations, and HUD’s written instructions, including program handbooks and mortgagee letters. Various sanctions exist that allow the HUD Homeownership Centers 1 and FHA the flexibility to respond appropriately to any noncompliant action by a direct endorsement lender or other program participant. The Homeownership Centers and the Mortgagee Review Board may impose the following sanctions: lender probation, withdrawal of direct endorsement status, withdrawal of FHA approval, indemnification agreements, civil money penalties, and sanctions against individual program participants. The Lending Company, Inc. is a nonsupervised lender that was approved on July 22, 1996 to originate FHA-insured loans and received direct endorsement authority on March 10, 2008. The Lending Company’s home office address is 6910 East Chauncey Lane, Phoenix, AZ, and it has 14 FHA-approved active branches in Arizona, California, and Connecticut. From September 1, 2008, to August 31, 2012, The Lending Company originated or underwrote 4,297 FHA-insured loans. We selected The Lending Company for review based on a hotline complaint and previous reviews conducted by HUD’s Quality Assurance Division (QAD). The hotline complaint alleged that The Lending Company (1) violated Section 2113 of the Housing and Economic Recovery Act of 2008, (2) violated loan originator compensation laws, (3) manipulated appraisals, (4) provided false and misleading information on quarterly and annual recertifications, and (5) abused its lender insuring privileges. We were able to substantiate the allegations related to violations of Section 2113 of the Housing and Economic Recovery Act of 2008 (see finding 1). The audit was also part of our goal to improve the integrity of the FHA single-family insurance programs. Our objectives were to determine whether The Lending Company used two unallowable nonprofit gift programs, complied with HUD’s requirements in 1 The Homeownership Center’s objectives include (1) reducing the risk of defaults and claims to FHA, (2) improving lender performance, and (3) removing noncomplying lenders from the program. 3 the underwriting of FHA-insured loans, and implemented its quality control functions in accordance with HUD’s requirements. 4 RESULTS OF AUDIT Finding 1: The Lending Company Used Two Gift Programs That Did Not Comply With HUD Requirements The Lending Company used gift programs through two nonprofit organizations that did not comply with HUD requirements. These gift programs did not comply with HUD requirements because The Lending Company reimbursed the nonprofit organizations, directly and indirectly, the amount of the gifts that were provided. We identified 789 FHA-insured loans that closed from April 1, 2009, to May 18, 2012, that contained unallowable gifts. This occurred because for the first gift program, The Lending Company was unaware of the HUD requirements regarding allowable sources of gift funds. With the second gift program, The Lending Company, already aware of the applicable HUD requirements, structured the program in a similar manner that disregarded the same HUD requirements. As a result, 2 the 789 loans with unallowable gifts placed the FHA insurance fund at greater risk and caused HUD to incur losses. Prohibited Seller-Funded Downpayment Assistance Programs Before October 1, 2008, sellers and lenders could fund the buyer’s downpayment assistance that was provided by nonprofit organizations. However, Section 2113 of the Housing and Economic Recovery Act of 2008 3 prohibited seller-funded downpayment assistance for loans insured by FHA. This law was effective on October 1, 2008. The Recovery Act and 12 U.S.C (United States Code) 1709 state that in no case may the funds required for the cash investment consist of funds provided by • The seller or any other person that financially benefits from the transaction or • Any third party or entity that is reimbursed, directly or indirectly, by any of the parties above. HUD Handbook 4155.1, Chapter 5, Section B, provides HUD’s requirements regarding gifts. It states that a gift donor may not be a person or entity with an interest in the sale of the property. It further states that, as a general rule, FHA is not concerned with how a donor obtains gift funds, provided that the funds are not derived in any manner from a party to the sales transaction. 2 See the table in the conclusion of this finding for the summary table. 3 See appendix C for all criteria references found in the audit report. 5 First Prohibited Gift Program: Family Housing Resources On January 28, 2009, The Lending Company entered into an agreement with Family Housing Resources (FHR), a nonprofit organization, in which FHR provided downpayment assistance in the form of gifts to FHA borrowers. We identified 323 FHA-insured loans that closed from April 1, 2009, to September 22, 2010, that were originated by The Lending Company and received gifts from FHR. However, 320 of these gifts did not comply with HUD requirements because FHR submitted invoices to The Lending Company and was directly reimbursed for the amount of each of the gifts in addition to a fee. Written Agreement According to the written agreement, qualified borrowers would receive a gift from FHR for 2.5 percent of the sales price, reducing the borrowers’ required downpayment to 1 percent of the sales price to meet the 3.5 percent downpayment required by HUD Handbook 4155.1, paragraph 2.A.2.a. This gift program was marketed as a 1 percent down purchase loan. The Lending Company would then pay fees to FHR that were specified in the agreement and consisted of the following: • 1 percent of the loan amount as a marketing fee for the services performed in promotion of the program, • 1.5 percent of the loan amount as an administration fee for overhead expenses incurred in support of the program, and • 45 basis points (0.45 percent) of the loan amount as a processing and underwriting fee in support of the program. These fees totaled 2.95 percent of the loan amount; however, The Lending Company reimbursed FHR based on the sales price for the marketing and administration fee and not the loan amount stated in the written agreement. The marketing and administration fee did not always total the percentage stated in the agreement (2.5 percent) but was based on the amount of the gift that was provided. The table below lists two examples of loans in which the gifts provided by FHR were 2.5 and 2.0 percent of the sales price and the amount reimbursed by The Lending Company was based on the gift amount and not the marketing and administration fees stated in the written agreement. 6 023-3356651 023-3536461 Sales price $170,000 $132,945 Amount of gift from FHR $4,250 $2,659 Percentage of gift to sales price 2.50% 2.00% FHR invoice – “gift amount” 4 $4,250 $2,659 FHR invoice – “fees” $751 $587 Invoices After gifts were provided to borrowers, FHR submitted invoices to The Lending Company that detailed the names of the borrowers who received a gift, the amount of the gift, and the amount of the associated fees. The invoices were dated from May 2009 to October 2010 and totaled $1.23 million. We traced and matched the names of the borrowers for the 320 unallowable gifts to the FHR invoices. 5 A review of The Lending Company’s general ledger indicated that it paid FHR for all of the invoices. The total payments to FHR were $1.23 million from June 1, 2009, to October 19, 2010. The Lending Company Was Informed That the First Gift Program Was Prohibited On October 4, 2010, a large lender informed The Lending Company that approval for the gift program with FHR was withdrawn because the funds for the program were ultimately paid by The Lending Company and was not an allowable source of funds (see excerpt below). Subsequently, HUD’s QAD conducted a review of The Lending Company on October 13, 2010 and determined that it had entered into an unallowable contract with FHR. The Lending Company responded to HUD’s finding and stated that it had already discontinued the program in September 2010. 4 The invoices from FHR to the lender did not break out the marketing and administration fees. They listed only the following: gift amount, fees, and amount [total]. It appeared that the “fee” listed was the processing and underwriting fee. 5 The invoices for the payments on September 18 and December 16, 2009, were not received; however, we were able to determine the names of the borrowers who received gifts from a spreadsheet provided by FHR. There was also one name of a borrower that was not listed on the invoices, but the November 16, 2009, invoice was revised to include the amount of the gift and fee for the borrower. We were able to determine the name of the borrower from the spreadsheet provided by FHR. 7 Second Prohibited Gift Program: Affordable Housing Partners One month before The Lending Company decided to terminate its gift program with FHR, it entered into an agreement with Affordable Housing Partners (AHP) on August 20, 2010. The agreement was similar to the agreement with FHR, in that downpayment assistance would be provided to borrowers in the form of a gift, but did not specify fees that The Lending Company would pay to AHP. The Lending Company’s chief executive officer stated that donations were provided to Mission of Grace as a way of thanking AHP for providing the gifts. AHP is a subordinate organization under the umbrella of Partners in Action and although Mission of Grace is a separate organization, it is under Partners in Action’s administrative umbrella. The Lending Company started closing loans under the gift program with AHP on September 10, 2010, which was prior to the review by HUD’s QAD. Initially, the AHP gift program was structured in the same manner as the FHR program. The Lending Company directly funded the gifts provided by AHP 6 by wiring funds to Partners in Action. The first wire from The Lending Company to Partners in Action occurred on September 28, 2010 for $100,000. It appeared that after The Lending Company was made aware for the first gift program by FHR that it, as the lender, could not be the source of gift funds, it restructured the gift program. The Lending Company then started providing funds to Mission of Grace. The first deposit of funds to Mission of Grace occurred on October 11, 2010, just prior to the review by HUD’s QAD. In its response to the audit report 7, The Lending Company stated it conferred with a HUD QAD official regarding the AHP gift program in October of 2010. However, this discussion occurred after the AHP gift program was implemented 6 As stated earlier in the report, AHP is a subordinate organization of Partners in Action. 7 See appendix B. 8 and restructured. Also, the details of the conversation were not documented, so there is no assurance that what the Lending Company told the HUD QAD official was a complete and accurate reflection of how the gift program was structured and implemented. Regardless of the singular conversation, The Lending Company had a number of regulatory resources 8 available to it that specifically stated the source of funds requirements and it also had an obligation to conduct due diligence to ensure its program was compliant with HUD regulations. The Lending Company informed the HUD QAD official that, in addition to receiving gifts from AHP, it would donate funds to a charity; however, the funds paid to Mission of Grace were classified on its general ledger as advertising and marketing expenses and not donations. This was the same classification as the payments made to FHR for the first gift program. Although The Lending Company considered the funds provided to Mission of Grace to be donations, The Lending Company maintained a spreadsheet that tracked all of the gifts provided by AHP, the associated fees, 9 and the amounts of donations. It appeared that the spreadsheet was maintained to ensure that The Lending Company donated enough funds to cover the amount of the gifts, as there was a running balance subtracting the two amounts. Below is an excerpt from the spreadsheet to illustrate the running balance. We identified 469 FHA-insured loans that closed from September 10, 2010, to May 18, 2012, that were approved by The Lending Company and received an unallowable gift from AHP. The Lending Company’s general ledger indicated that it donated $1.86 million to Mission of Grace 10 from September 28, 2010, to April 2, 2012. These donations were typically made in increments of $50,000, and the timeframe during which these donations were made coincided with the dates of the gift program. The spreadsheet that tracked the gifts indicated that the amount of the gifts in addition to the fee totaled $1.83 million. The remaining balance (approximately $23,000) was not returned to The Lending Company. 8 The Housing and Economic Recovery Act of 2008, 12 U.S.C. 1709(b)(9)(c), and HUD Handbook 4155.1, chapter 5, section B. 9 The spreadsheet showed that the fee paid to Mission of Grace was 0.35 percent of the loan amount, and an official from Partners in Action stated that the fee was for the education course provided to the home buyers. 10 Of this amount, $100,000 was provided to Partners in Action and not Mission of Grace. 9 The Lending Company stated that it thought there was no problem with the gift program because it made donations to a company other than the nonprofit organization providing the gift. Also, officials from Partners in Action stated that the donations provided by The Lending Company to Mission of Grace were not commingled with the gifts provided by AHP. However, the official stated that the gift account was tracked closely and a request for more donations would be made if funds were running low and that AHP would not have been able to provide the amount of gifts that were given without the donations provided by The Lending Company. Therefore, without the donations from The Lending Company to Mission of Grace, AHP would not have provided gifts to borrower and the AHP gift program would not have existed. The Lending Company was only providing funds to Mission of Grace because it was receiving a benefit in return, in the form of gifts provided by AHP to borrowers. Ultimately, this resulted in The Lending Company indirectly being the source of funds for each gift. Conclusion Because The Lending Company was unaware of HUD requirements regarding allowable sources of gift funds for the first gift program and disregarded HUD requirements for the second gift program, it inappropriately approved 789 FHA- insured loans (320 FHR + 469 AHP) that had unallowable gifts, exposing HUD to unnecessary insurance risks, and caused HUD to incur losses. Of the 789 loans, 57 were refinanced (not a streamline refinance) 11 or paid in full, resulting in 732 loans remaining that suffered or could suffer losses to HUD. Of the 732 loans, 725 had a total unpaid mortgage balance of $97.3 million with an estimated loss to HUD of $55.4 million, 12 with 26 of these loans 3 or more months delinquent. 13 HUD also paid claims of $612,114 for seven loans with an actual loss 14 of $284,412. In addition, HUD paid loss mitigation claims 15 of $5,450 for seven loans. 11 We are not seeking indemnification or reimbursement for loans that were refinanced (not a streamline refinance). 12 The estimated loss amount is based on FHA’s 57 percent loss severity rate, multiplied by the unpaid principal balance. The 57 percent loss rate was the average loss on FHA-insured foreclosed-upon properties based on HUD’s Single Family Acquired Asset Management System’s “case management profit and loss by acquisition” as of December 2012. 13 See appendixes D and E. 14 The losses resulted when the properties that secured these loans were sold and the insurance claims and other expenses incurred by HUD exceeded the sales proceeds. 15 FHA offers a number of loss mitigation programs to assist FHA-insured homeowners facing financial hardship, and whose mortgage is either in default or at risk of default. Such programs result in claims paid to lenders for participation. 10 Loss summary for loans with unallowable gifts Estimated Number Unpaid Claim Loss to Nonprofit loss to HUD of loans balance amount HUD (57%) $ FHR – active loans 16 292 $ 38,669,742 $ - $ - 22,041,754 17 16 FHR – claim loans 6 - 602,379 274,677 - AHP – active loans 18 433 58,593,224 33,398,142 19 18 AHP – claim loans 1 - 9,735 9,735 - Totals 732 $ 97,262,966 $ 612,114 $ 284,412 $ 55,439,896 Recommendations We recommend that HUD’s Associate General Counsel for Program Enforcement 1A. Determine legal sufficiency and if legally sufficient, pursue civil and administrative remedies (31 U.S.C. 3801-3812, 3729, or both), civil money penalties (24 CFR (Code of Federal Regulations) 30.35), or both against The Lending Company, its principals, or both for incorrectly certifying to the integrity of the data, the mortgage eligibility for FHA mortgage insurance, or that due diligence was exercised during the origination of 732 loans that resulted in actual losses of $284,412 on 7 loans and potential losses of $55.4 million on 725 loans for a total loss of $55.7 million, which could result in affirmative civil enforcement action of approximately $116.9 million.20 We recommend that HUD’s Deputy Assistant Secretary for Single Family Housing require The Lending Company, after completion of action under recommendation 1A, to 1B. Indemnify HUD against losses for the 725 FHA-insured loans with an unallowable gift in the amount of $97.3 million, thereby putting an estimated loss to HUD of $55.4 million to better use. 21 16 See appendix D. 17 The amount does not equal the unpaid balance multiplied by the estimated loss because of rounding. See appendix D for the estimated loss for the 292 loans that total this amount. 18 See appendix E. 19 The amount does not equal the unpaid balance multiplied by the estimated loss because of rounding. See appendix E for the estimated loss for the 433 loans that total this amount. 20 Double damages for actual loss amounts related to 7 loans and potential losses to 725 loans ($284,412 + $55,439,896) plus a fine of $7,500 each for the 725 loans with unallowable gifts (($55,724,308 x 2) + ($7,500 x 732) = $116,938,616) 21 See appendixes D and E. 11 1C. Reimburse the FHA insurance fund for the $284,412 in actual losses resulting from the amount of claims and associated expenses paid on seven loans that contained an unallowable gift. 22 1D. Support or repay the FHA insurance fund $5,450 for the loss mitigation claims15 paid as of April 30, 2013, on seven loans 23 that contained an unallowable gift. 24 22 See appendixes D and E. 23 022-2192845, 023-3720644, 023-3766993, 023-4010358, 023-4081269, 023-4135502, and 023-4485740 24 See appendix E. 12 Finding 2: The Lending Company Did Not Always Approve FHA- Insured Loans in Accordance With HUD Requirements The Lending Company did not always originate and underwrite FHA-insured loans in accordance with HUD requirements. Specifically, 28 of the 31 loans reviewed contained underwriting deficiencies, with 9 containing material underwriting deficiencies that impacted the insurability of the loan and 19 containing technical underwriting deficiencies. Also, The Lending Company did not properly assess the funds a seller contributed to close one loan. This noncompliance occurred because The Lending Company did not exercise due diligence in underwriting FHA loans and disregarded HUD’s underwriting requirements. As a result, The Lending Company exposed HUD to unnecessary insurance risks and caused HUD to pay $500,058 in claims and incur losses14 of more than $421,630 for five loans that contained material underwriting deficiencies. The remaining four loans with material underwriting deficiencies either had an unallowable gift (three loans) and the impact is included under finding 1 or was terminated and paid in full (one loan). Nine FHA Loans With Material Underwriting Deficiencies Our detailed review of 31 FHA-insured loans identified 9 with material underwriting deficiencies that included inadequate determination or documentation of income, determination or documentation of credit, and review of an appraisal report. HUD Handbook 4155.1 provides the requirements for underwriting FHA-insured loans, including the evaluation of the borrower’s capacity to repay the loan (income), credit history, and assets available to close the loan (see appendix C). The Lending Company inappropriately approved nine loans 25 based on inadequate determination and documentation of these factors. The table below summarizes the loan deficiencies identified. 25 Appendix G contains detailed loan summaries for the nine loans with material underwriting deficiencies. 13 FHA loan Underwriting deficiencies Deficiency type number Income Credit Assets Other None Technical Material 022-2192845 – – – – – 023-2914717 – – – 023-2971333 – – – 023-3046385 – – – 023-3077216 – – – – – 023-3096448 – – – – 023-3110658 – – – 023-3149318 – – – 023-3167827 – – – – 023-3184101 – – – – – 023-3219159 – – – – – 023-3283224 – – – – 023-3288489 – – – – – 023-3295473 – – – – – 023-3440596 – – – 023-3502416 – – – – 023-3518179 – – – – 023-3555323 – – – – – 023-3610521 – – – – – 023-3629846 – – – – – 023-3661762 – – – – – 023-3681607 – – – – – – 023-4002794 – – – – 023-4075444 – – – – 023-4096995 – – – – – 023-4168762 – – – – 023-4296610 – – – – – – 023-4443133 – – – – – – 023-4449250 – – – – – 023-4485740 – – – – – 023-4507773 – – – – Totals 12 7 10 20 3 19 9 Income Six of the nine loans with material underwriting deficiencies included The Lending Company (1) improperly calculating monthly income, (2) not obtaining the most recent 2 years’ tax returns to support commission income, (3) not verifying employment for 2 years, (4) not conducting a verification of employment before the loan closed, (5) not justifying the use of bonus income 14 that was earned for less than 2 years, and (6) not documenting or supporting “other” income that was used in qualifying the borrower. Credit Three of the nine loans with material underwriting deficiencies included The Lending Company improperly omitting liability accounts that were listed on the credit report and not documenting the monthly payment amount for a student loan that had a balance but no monthly payment amount on the credit report. Other One 26 of the nine loans with material underwriting deficiencies included The Lending Company not adequately reviewing the appraisal report. The Lending Company did not ensure that the appraisal report followed FHA’s antiflipping waiver because the second appraisal did not verify or explain the increase in value required by the waiver. 19 FHA Loans With Technical Underwriting Deficiencies In addition to the nine loans that contained material underwriting deficiencies, we identified 19 FHA loans that contained technical underwriting deficiencies that did not comply with HUD requirements. The technical underwriting deficiencies were minor underwriting deficiencies that, even if corrected, would not result in a significant increase in mortgage risk and did not impact the insurability of the loan. We did not recommend indemnification or reimbursement for loans that contained only technical underwriting deficiencies. Examples of these technical underwriting deficiencies included loan files that did not contain the deposit slips or wire transfers for gifts as required by HUD Handbook 4155.1, paragraph 5.B.5.b, and explanation of credit inquiries that were within 90 days of the completed credit report as required by HUD Handbook 4155.1, paragraph 4C(2)(c). Other examples included income and liabilities that were improperly determined; however, the revised total fixed payment-to-income ratios did not increase to a level that impacted the insurability of the loan. The table in the previous section identifies the 19 loans that contained only technical underwriting deficiencies. 26 FHA loan number 022-2192845. See appendix G for the loan summary. 15 More Than 6 Percent of the Sales Price Contributed by Seller The Lending Company did not properly assess the funds a seller contributed to close one loan. As a result, it allowed the seller to contribute more than the 6 percent allowed by HUD Handbook 4155.1, REV-5, paragraph 1-7A. For FHA case number 023-3149318, the sales price of the property was $130,000 so the maximum amount the seller could contribute was $7,800. However, the HUD-1 settlement statement indicated that the seller contributed $8,901, which exceeded the 6 percent limit by $1,101. HUD Exposed to Unnecessary Risks and Losses Because The Lending Company did not follow HUD requirements when underwriting FHA loans for mortgage insurance, it inappropriately approved nine loans that had material underwriting deficiencies. The Lending Company did not exercise sound judgment and due diligence when it submitted these loans for FHA insurance. The Lending Company’s underwriters were aware of HUD’s requirements; however, they did not follow the requirements when they approved the nine loans that had material underwriting deficiencies. The underwriters incorrectly certified that nine loans were eligible for HUD mortgage insurance under the direct endorsement program. Regulations at 24 CFR 203.255 require a direct endorsement lender to certify that the proposed loan complies with HUD’s underwriting requirements. Conclusion Because The Lending Company did not comply with HUD requirements, it originated nine loans with material underwriting deficiencies and 19 loans with technical underwriting deficiencies. As a result, the nine loans exposed HUD to unnecessary insurance risks and caused HUD to pay $500,058 in claims and incur losses of $421,630 for five loans that contained material underwriting deficiencies. The remaining four loans that contained material underwriting deficiencies also contained an unallowable gift, and the losses are included under finding 1. 16 Recommendations We recommend that HUD’s Associate General Counsel for Program Enforcement 2A. Determine legal sufficiency and if legally sufficient, pursue civil and administrative remedies (31 U.S.C. 3801-3812, 3729, or both), civil money penalties (24 CFR 30.35), or both against The Lending Company, its principals, or both for incorrectly certifying to the integrity of the data or that due diligence was exercised during the origination of five loans that resulted in actual losses of $421,630, which could result in affirmative civil enforcement action of approximately $880,760. 27 We recommend that HUD’s Deputy Assistant Secretary for Single Family Housing require The Lending Company, after completion of action under recommendation 2A, to 2B. Reimburse the FHA insurance fund for the $421,630 28 in actual losses resulting from the amount of claims and associated expenses paid on five loans with material underwriting deficiencies. 2C. Pay down the principal balance by $1,101 for the one overinsured loan as a result of an excessive seller contribution. 27 Double damages for actual loss amounts related to five loans ($421,630) plus a fine of $7,500 each for the five loans with material underwriting deficiencies (($421,630 x 2) + ($7,500 x 5) = $880,760) 28 See appendix F. 17 Finding 3: The Lending Company Did Not Always Comply With HUD Quality Control Requirements The Lending Company did not always follow HUD quality control requirements when reviewing FHA-insured loan files. Specifically, The Lending Company did not always review at least 10 percent of the loans it originated, did not adequately perform the quality control review of loans, and did not always review all of its loans that went into default within the first six payments. These deficiencies occurred because The Lending Company disregarded HUD’s quality control requirements, although a prior review by HUD’s QAD identified similar deficiencies in The Lending Company’s quality control functions. As a result, the FHA insurance fund was placed at an unnecessarily increased risk of loss. Also, without an adequate quality control function, there was an increased risk of waste, fraud, and abuse. Minimum Number of Loans Not Always Reviewed HUD Handbook 4060.1, REV-2, paragraph 7-6C, requires the lender to review 10 percent of the FHA loans it originated. However, The Lending Company did not review at least 10 percent of the loans originated for 3 months from September 1, 2008, to August 31, 2012. The table below illustrates the 3 months without the minimum required reviews. Number of FHA 10 percent Loans Month-year Difference loans closed of loans reviewed Nov. 2009 109 11 4 7 Jan. 2011 86 9 6 3 Aug. 2011 80 8 5 3 Early Payment Defaults Not Always Reviewed HUD Handbook 4060.1, REV-2, paragraph 7-6D, requires the lender to review all loans going into default within the first six payments (early payment defaults) in addition to the loans selected for routine quality control reviews. HUD’s QAD conducted a review of The Lending Company in December 2009 and determined that it failed to conduct quality control reviews of early payment defaults. The Lending Company responded that the quality control review of all early payment defaults was incorporated into its quality control plan. Although The Lending Company incorporated early payment defaults into its quality control plan, from 18 November 1, 2010, to August 31, 2012, 29 it did not review 5 of 12 loans that were early payment defaults. Quality Control Reviews Not Adequate HUD Handbook 4060.1, REV-2, paragraph 7-6E, requires that a new credit report be obtained for each borrower whose loan is included in a quality control review. It further requires that documents contained in the loan file be checked for sufficiency and be subject to written verification. Examples of items that must be reverified include the borrower’s employment or other income, deposits, gift letters, alternate credit sources, and other sources of funds. If the written verification is not returned to the lender, a documented attempt must be made to conduct a telephone verification. The Lending Company did not adequately perform quality control reviews for 11 of the 15 loans reviewed. Specifically, • Three did not have a reverification of employment (one had no response to the written attempt and no documented attempt at a telephone verification, and one had a telephone verification but no written attempt), • Nine did not have a new credit report, • Two did not have a reverification of assets, • Three of the four loans that had a gift did not have a reverification of those gifts, and • One did not have an appraisal desk review. Conclusion The Lending Company did not always follow HUD quality control requirements when reviewing FHA-insured loan files because it disregarded HUD quality control requirements, although a prior review by HUD identified deficiencies in The Lending Company’s quality control functions. As a result, the FHA insurance fund was placed at an unnecessarily increased risk of loss and increased risk of waste, fraud, and abuse. 29 The early payment defaults were not reviewed for the entire audit scope because the lender did not maintain the records beyond the required 2-year timeframe. 19 Recommendations We recommend that the Deputy Assistant Secretary for Single Family Housing require The Lending Company to 3A. Fully implement its quality control plan and provide HUD with periodic reports for 12 months to ensure that its quality control reviews, to include early payment defaults, are conducted in accordance with HUD requirements. 3B. Provide training to ensure that its quality control staff is aware of HUD’s quality control program requirements. 20 SCOPE AND METHODOLOGY We selected The Lending Company based on a hotline complaint and previous reviews conducted by HUD’s QAD. Our audit period covered loans with beginning amortization dates from September 1, 2008, to August 31, 2012. We conducted our fieldwork at The Lending Company’s office located in Phoenix, AZ, between October 2012 and May 2013. We used HUD’s Single Family Data Warehouse 30 to identify all FHA-insured loans that were originated or underwritten by The Lending Company. During the audit period, The Lending Company originated or underwrote 4,297 FHA-insured loans. For our review of The Lending Company’s underwriting, we selected a sample of 31 FHA-insured loans selected nonstatistically based on the following factors: • Loans that were in claim status (16 loans), • Loans that were seriously delinquent 31 (14 loans), • Loans that were terminated and streamline refinanced and then went into claim status (1 loan), • Properties located in Arizona, and • Loans that had not been reviewed by HUD’s QAD or selected for a post-endorsement review. For our review of The Lending Company’s use of nonprofit gift programs, we reviewed all loans that had a gift from FHR or AHP. The loans were identified by the tax identification number in Single Family Data Warehouse for the two nonprofit organizations, the invoices from FHR, and the spreadsheet maintained by The Lending Company of gifts from AHP. To perform our quality control file review, we requested a listing from The Lending Company of all quality control reviews performed during our audit period. There were a total of 432 quality control reviews of FHA-insured loans during this period. We selected a nonstatistical sample of 15 quality control reviews to examine. We selected the quality control reviews that were part of our audit sample, which resulted in one quality control review. We then selected 14 quality control reviews based on auditor judgment that covered the entire audit scope (2 to 4 files from each year). 30 Single Family Data Warehouse is a large collection of database tables organized and dedicated to support analysis, verification, and publication of FHA single-family housing data. 31 Seriously delinquent loans are loans that are 90 days or more delinquent. 21 To accomplish our objective, we • Reviewed applicable HUD and FHA regulations, requirements, mortgagee letters, and reference materials; • Interviewed appropriate management and staff; • Interviewed staff from the nonprofit organizations that were involved in the gift programs; • Obtained documentation from the nonprofit organizations for the gift programs; • Reviewed all of the loans that had an unallowable gift (789 loans); • Reviewed 31 of The Lending Company’s FHA-insured loan files; • Interviewed borrowers; • Performed employment reverifications; • Reviewed the quality control plan; and • Reviewed 15 of The Lending Company’s quality control reviews. We used the source documents in the loan origination files to determine whether a gift was provided by one of the nonprofit organizations and to review the income, assets, and liabilities of the borrower(s). For our review of the gift programs, we also reviewed the FHR invoices, the spreadsheet of gifts maintained by FHR, the spreadsheet of AHP gifts maintained by The Lending Company, The Lending Company’s general ledger, bank statements from Partners in Action, and documents obtained through title companies. For our appraisal review, a HUD Office of Inspector General (OIG) appraiser performed a detailed review of a nonstatistical sample of 16 appraisals. We selected the appraisals based on data maintained by HUD in Single Family Data Warehouse. However, due to the subjectivity involved in the appraisal process, we did not report on potential deficiencies. We used the data maintained by HUD in Single Family Data Warehouse to obtain the unpaid mortgage balances and claims paid for each of the loans (as of May 29, 2013). HUD paid claims on 12 of the loans that we determined had an unallowable gift or material underwriting deficiencies and incurred actual losses on all of those loans. 32 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 32 See appendixes D, E, and F. 22 objectives. We believe that the evidence obtained provides a reasonable basis for our findings and conclusions based on our audit objectives. 23 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: • Controls intended to ensure that the lender uses gift programs in accordance with HUD’s requirements (finding 1). • Controls intended to ensure that the lender underwrites (approves) FHA- insured loans in accordance with HUD’s requirements (finding 2). • Controls intended to ensure that the lender implements a quality control program that complies with HUD’s requirements (finding 3). 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: • The Lending Company did not have adequate controls to ensure that gifts from nonprofit organizations complied with HUD requirements (finding 1). 24 • The Lending Company did not have adequate controls to reasonably ensure that loans were originated and underwritten in accordance with HUD requirements (finding 2). • The Lending Company did not have adequate controls to ensure that its quality control program was implemented and complied with HUD quality control requirements (finding 3). 25 APPENDIXES Appendix A SCHEDULE OF QUESTIONED COSTS AND FUNDS TO BE PUT TO BETTER USE Recommendation Funds to be put to Ineligible 1/ Unsupported 2/ number better use 3/ 1B $55,439,896 1C $284,412 1D $5,450 2B 421,630 2C 1,101 $707,143 $5,450 $55,439,896 1/ Ineligible costs are costs charged to a HUD-financed or HUD-insured program or activity that the auditor believes are not allowable by law; contract; or Federal, State, or local policies or regulations. In this instance, the ineligible costs are HUD’s actual losses for seven loans that contained an unallowable gift (see appendixes D and E) and five loans that had material underwriting deficiencies (see appendix F). The losses resulted when the properties that secured these loans were sold and the insurance claims and other expenses incurred by HUD exceeded the sales proceeds. 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. In this instance, the unsupported costs are the loss mitigation claims15 paid by HUD for seven loans that contained an unallowable gift. 3/ Recommendations that funds be put to better use are estimates of amounts that could be used more efficiently if an 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, implementation of recommendation 1B to indemnify loans not approved in accordance with HUD’s requirements will reduce FHA’s risk of loss to the insurance fund. The amount noted reflects HUD’s calculation that FHA loses an average of 57 percent of the unpaid principal balance when it sells a foreclosed-upon property (see the estimated loss to HUD in appendixes D and E). The 57 percent loss rate is based on HUD’s Single Family Acquired Asset Management System’s “case management profit and loss by acquisition” computation for the first quarter of fiscal year 2013 based on actual sales. 26 Appendix B AUDITEE COMMENTS AND OIG’S EVALUATION Ref to OIG Evaluation Auditee Comments OIG Evaluation of Auditee Comments 27 Comment 1 Comment 2 * Names redacted for privacy reasons. 28 Comment 3 29 Comment 3 30 Comment 2 Comment 2 Comment 3 Comment 4 31 Comment 5 Comment 6 Comment 7 Comment 1 Comment 4 Comment 8 Comment 4 Comment 7 32 Comment 2 Comment 8 Comment 8 33 Comment 8 34 Comment 8 Comment 9 35 Comment 9 Comment 9 Comment 10 36 Comment 11 Comment 12 Comment 2 Comment 9 Comment 10 *Names redacted for privacy reasons. 37 Comment 1 We acknowledge that HUD reviewed The Lending Company in October 2010 and determined that the gift program agreement with Family Housing Resources (FHR) was unallowable, and closed their finding after The Lending Company stated it discontinued the agreement. However, this does not preclude the OIG from reporting on and making appropriate recommendations to HUD. OIG reviews are independent of HUD reviews and generally involve a larger scope. In this case, we determined the extent in which The Lending Company utilized two prohibited nonprofit downpayment assistance programs. The findings and recommendations of this audit report were made based on the independent analysis conducted by the OIG. With regard to the FHR program, The Lending Company was unaware that lender funded downpayment assistance was not allowable. As an FHA direct endorsement lender, The Lending Company has the significant responsibility to be aware of HUD requirements and changes in those requirements. The Housing and Economic Recovery Act of 2008 (Recovery Act) ended all seller and interested third party funded down payment assistance programs on October 1, 2008. The Recovery Act received national attention as it strengthened restrictions on mortgage practices to alleviate the mortgage crisis at the time. However, presentation material from a loan officer of The Lending Company clearly identifies that seller funded downpayment assistance was taken away in 2008, a reference to the Recovery Act. The presentation material indicated that The Lending Company was aware of the HUD regulations concerning the allowable source of funds for downpayment assistance. Comment 2 Regarding finding 1, The Lending Company placed a strong emphasis on its statement that it conferred with one HUD QAD official regarding the second gift program with Affordable Housing Partners (AHP). However, this emphasis is subordinate to the more significant issue that The Lending Company executed two prohibited nonprofit gift programs. The Lending Company requested that finding 1 be dismissed and removed from the final report based on information it provided in its response. For the reasons cited in audit report and these comments, the report remains unchanged. Our own review of the AHP gift program, independent of any prior review conducted by HUD, determined that it was structured in a manner that did not adhere to HUD regulations and was therefore, unallowable. We determined, by nature of the structure of the AHP gift program, that The Lending Company indirectly provided the gift funds to FHA borrowers. As stated in the audit report, The Lending Company maintained a spreadsheet to ensure that enough funds were provided to Mission of Grace to cover the amount of the gifts provided by AHP. The spreadsheet tracked the funds provided to Mission of Grace in relation to the gifts provided by AHP and the associated fee (0.35 percent of the loan amount), indicating a quid pro quo relationship. Without the donations to Mission of Grace, AHP would not have provided gifts to borrowers and the AHP gift program would not have existed. The Lending Company was only providing 38 funds to Mission of Grace because it was receiving a benefit in return, in the form of gifts provided by AHP to FHA borrowers. We do acknowledge that The Lending Company conferred with a HUD QAD official, around October 2010, on the AHP down payment assistance gift program. However, The Lending Company was not able to provide any written documentation evidencing the details of the discussion and what was presented to the HUD QAD official. Our interview with the HUD QAD official indicated The Lending Company may not have provided all the significant details when it explained its second gift program with AHP. Specifically, it appeared the HUD QAD official was not aware that the funds provided by The Lending Company to Mission of Grace were a direct result of the gifts provided by AHP and that the amount of funds to be donated were directly linked to the amount of the gifts provided by AHP. The Lending Company informed the HUD QAD official that it would donate funds to Mission of Grace; however, the funds paid to Mission of Grace were classified on its general ledger as advertising and marketing expenses and not donations. Also, according to the HUD QAD official, of particular significance, The Lending Company failed to mention that they were directed to check with HUD’s lender approval division to ensure the program, as it was set up, was in compliance with HUD’s regulations. Regardless of any discussion with a single HUD QAD official, it is the lender’s responsibility to be knowledgeable of all HUD requirements and to ensure that the FHA loans it approves adheres to those requirements. The Lending Company had access to the same information and resources as all FHA lenders. The regulations concerning the source of funds were available in a number of citations: the Housing and Economic Recovery Act of 2008, 12 U.S.C. 1709(b)(9)(C), and HUD Handbook 4155.1, chapter 5, section B. Additionally, HUD has made available to all FHA lenders a number of resources, including the FHA Resource Center 33 and the lender section 34 of the HUD.gov website. Given that The Lending Company was already made aware that its first gift program was unallowable, it should have conducted better due diligence to ensure, without any ambiguity, that its second gift program was in compliance with HUD regulations. At no time did The Lending Company present the OIG any written evidence that it received approval from HUD, other than its assertion that it relied on a single conversation with this single HUD QAD official who gave verbal approval. An internal email on April 1, 2011, from a minority owner of The Lending Company to the chief executive officer, indicated that The Lending Company was aware that the AHP gift program was in violation of HUD requirements. The email stated “Technically we fall into the ‘or any party that financially benefits from the transactions.’ Maybe we should consider getting rid of the gift program after all…” 33 http://portal.hud.gov/hudportal/HUD?src=/program_offices/housing/sfh/fharesourcectr 34 http://portal.hud.gov/hudportal/HUD?src=/groups/lenders 39 Comment 3 We acknowledge the signed statement from the AHP chief operating officer obtained by The Lending Company. While most of the signed statement appears to be accurate in comparison with the other information we gathered during our audit fieldwork, key components were missing, and thus, indicates that it was not explained to the HUD QAD official. Not present in the signed statement is information explaining that the gift program was set up as a quid pro quo relationship. Also missing was guidance provided by the HUD QAD official to The Lending Company to obtain additional direction from HUD to determine whether the second gift program was in compliance with HUD regulations. During an interview conducted by OIG on February 5, 2013, the AHP chief operating officer stated that the AHP gift account was tracked closely, with a request for more donations from The Lending Company if gift funds were running low. He also stated that the start and end dates of the AHP gift program and the donations to Mission of Grace were tied together, indicating a cause and effect relationship. He stated, in his opinion, the donations were related to the gift program. He also stated that AHP would not have been able to provide the amount of gifts that were given without the donations provided by The Lending Company. Without providing these full details to HUD at the time of the discussion that The Lending Company had, it was not possible for HUD to provide an accurate and reasonable determination of program compliance. Comment 4 We strongly disagree with The Lending Company’s references to counsel, instruction, or direction by a HUD QAD official as these references appear to overstate the amount of information that was provided by HUD. At no time did the HUD QAD official provide detailed counsel, instruction, or direction on how to set up the program or what elements the prohibited gift program should contain, other than stating that gift funds and donations should not be commingled. The HUD QAD official also provided additional guidance to The Lending Company advising it to obtain additional direction from HUD’s lender approval division to determine whether the second gift program was in compliance with HUD regulations. To our knowledge The Lending Company did not do that. Comment 5 We disagree with The Lending Company’s assertion that the audit report is inaccurate in stating that Mission of Grace is under Partners in Action’s administrative umbrella. The chief executive officer of Partners in Action also stated that “Partners in Action helped [Mission of Grace] get back on their feet both financially and administratively when they had no financial support and no proper leadership. Partners in Action temporarily provided financial support and administrative support to help them get back on their feet. They are still under our administrative umbrella…” Also, while Partners in Action and Mission of Grace have separate accounts and funds, they have a group banking arrangement with Bank of America so both of its names appear on the Mission of Grace’s bank statements. 40 We agree that Partners in Action is not the parent organization of AHP and Mission of Grace is a separate entity from Partners in Action; however, there is an affiliation between Partners in Action, Mission of Grace, and AHP as demonstrated by their Web sites and officers listed for each organization. • The Web sites for AHP and Mission of Grace state that AHP is a subordinate organization under the umbrella of Partners in Action and Mission of Grace is an affiliate of Partners in Action. • The chief operating officer of AHP is also the president of both Partners in Action and Mission of Grace 35. • Both AHP and the statutory agent for Mission of Grace have the same mailing address as Partners in Action35. Comment 6 We disagree with The Lending Company’s statement that the audit report makes suggestions that AHP owns or controls Mission of Grace. There are no statements in the audit report with such suggestions. Rather, the audit report states that Partners in Action was the parent organization of AHP and Mission of Grace was under Partners in Action’s administrative umbrella. However, the audit report has been updated to reflect that AHP is a subordinate organization under the umbrella of Partners in Action. See also comment 5. Comment 7 The Lending Company took exception to the audit report statement that it took steps to circumvent HUD requirements. As stated in comment 2, OIG acknowledges that The Lending Company conferred with a HUD QAD official regarding the AHP gift program. However, the details of the conversation are in question as there is no documented evidence of the complete details of that conversation. As discussed in comment 2, there is no way to determine if The Lending Company presented all the facts and relevant details of its second gift program when it discussed the issue with HUD. At the very least, it appears The Lending Company structured its second gift program in a manner to work around HUD regulations. We obtained a letter dated October 4, 2010 from a lender to The Lending Company stating the gift program with FHR was not appropriate. We believe The Lending Company restructured its second gift program with AHP based on this correspondence and not because of discussion with a HUD QAD official. Finding 1 of the audit report has been revised to reflect this information. In consideration of The Lending Company’s comments, the audit report has also been updated and the statement that The Lending Company took steps to circumvent HUD requirements was revised. Comment 8 The Lending Company’s response states that a HUD QAD official communicated with both The Lending Company and its investors regarding the AHP gift program and its compliance with HUD regulations. However, The Lending 35 According to public filings with the Arizona Corporation Commission. 41 Company did not provide any documentation, email communication, or other evidence during the audit fieldwork to support this statement. The seven emails provided as part of its response to the draft audit report between The Lending Company CEO and the HUD QAD official, appear to be mostly out of context, do not relate to the AHP gift program and do not evidence any type of HUD approval. Specifically: • The emails dated November 12, 2010 related to the first gift program with FHR and do not reference the second gift program with AHP. According to the HUD QAD official, the emails reference to a “2nd program” refers to a secondary financing Native American program. • The emails dated March 8 and March 9, 2010 occurred well before HUD’s review in October 2010, when it notified The Lending Company of the unallowable FHR gift program. • The email dated March 28, 2012 informed The Lending Company that gifts from a nonprofit organization do not require HUD approval. However, this is in regard to an outright gift and not one where the lender reimburses (plus a fee) the nonprofit or related entity. Comment 9 The Lending Company provided explanations for four of the nine loans identified in the audit report with material underwriting deficiencies. However, The Lending Company’s response does not directly address any of the underwriting deficiencies that were detailed in the audit report. Therefore, the report remains unchanged. The underwriting deficiencies that were considered to be technical were not detailed in the audit report because they did not result in a significant increase in mortgage risk and did not impact the insurability of the loan. However, such technical deficiencies in conjunction with the material deficiencies were indicative of significant control weaknesses. Comment 10 We agree with The Lending Company that there is a two year retention requirement for quality control files. However, this requirement does not prevent the OIG from requesting and reviewing records it deems significantly relevant to an audit objective. The nine FHA loans that were required to be reviewed for September (five loans) and October 2008 (four loans) were outside the two year retention requirement. We requested the monthly quality control logs that identified the FHA loans for September and October 2008 but none were provided. Because 9 of the 22 loans did predate the two year retention requirement and the records were not maintained, the audit report has been amended and the nine loans were removed from the report. However, the remaining details of finding 3 remain unchanged. Although it was beyond the two year retention requirement, the November 2009 quality control log that identified the number of FHA loans reviewed was provided by The Lending Company and therefore, was reviewed. The remaining two months, January and 42 August 2011, were within the two year retention requirement because the documentation was received on October 23, 2012. Comment 11 We disagree with The Lending Company’s statement that its internal quality control practices meet or exceed HUD quality control regulations and guidelines. Our audit determined that The Lending Company did not always comply with HUD quality control requirements. As stated in the audit report, The Lending Company did not always review at least 10 percent of the loans it originated, did not adequately perform the quality control review of loans, and did not always review its loans that went into default within the first six payments. Comment 12 We disagree with The Lending Company’s statement that its internal quality control practices do not place the FHA insurance fund at an unnecessarily increased risk of loss and FHA experiencing an increased risk of waste, fraud, or abuse. The audit identified weaknesses in The Lending Company’s quality control function, which is in place to minimize the risk of waste, fraud, and abuse and ensure FHA loans adhere to HUD regulations. An effective quality control function that adheres to HUD requirements would help identify weaknesses in The Lending Company’s operations, including the underwriting of FHA loans, so they could be corrected. 43 Appendix C CRITERIA HUD Handbook 4060.1, REV-2, Paragraph 7-6C A mortgagee who originates and/or underwrites 3,500 or fewer FHA loans per year must review 10 percent of the FHA loans it originates. HUD Handbook 4060.1, REV-2, Paragraph 7-6D In addition to the loans selected for routine reviews, mortgagees must review all loans going into default within the first six payments. As defined here, early payment defaults are loans that become 60 days past due. HUD Handbook 4060.1, REV-2, Paragraph 7-6E The quality control program must provide for the review and confirmation of information on all loans selected for review. 1. A new credit report must be obtained for each borrower whose loan is included in a quality control review; unless the loan was a streamline refinance or was processed using a FHA approved automated underwriting system exempted from this requirement. 2. Documents contained in the loan file should be checked for sufficiency and subjected to written reverification. Example of items that must be reverified include, but are not limited to, the mortgagors employment or other income, deposits, gift letters, alternate credit sources, and other sources of funds. Sources of funds must be acceptable as well as verified. Other items that may be reverified include mortgage or rent payments. If the written reverification is not returned to the mortgagee, a documented attempt must be made to conduct a telephone reverification. If the original information was obtained electronically or involved alternative documents, a written reverification must still be attempted. 3. A desk review of the property appraisal must be performed on all loans chosen for a quality control review except streamline refinances and HUD Real Estate Owned sales. HUD Handbook 4155.1, Paragraph 1.3.f If the borrower was not employed with the same employer for the previous two years, and has an employment gap of 60 days or greater, the borrower must provide a written explanation for the employment gap. HUD Handbook 4155.1, REV-5, Paragraph 1-7A The seller (or other interested third parties such as real estate agents, builders, developers, etc., or a combination of parties) may contribute up to 6% of the property’s sales price toward the buyers actual closing costs, prepaid expenses, discount points, and other financing concessions. Contributions exceeding 6% of the sales price or exceeding the actual costs of prepaid expenses, discount points, and other financing concessions will be treated as inducements to purchase, thereby reducing the amount of the mortgage. 44 HUD Handbook 4155.1, Paragraph 2.A.2.a In order for FHA to insure this maximum loan amount, the borrower must make a down payment of at least 3.5 percent of the lesser of the appraised value of the property or the sales price. HUD Handbook 4155.1, REV-5, Paragraph 2-7D Commission income must be averaged over the previous two years. The borrower must provide copies of signed tax returns for the last two years, along with the most recent pay stub. (Unreimbursed business expenses must be subtracted from gross income.) Individuals whose commission income shows a decrease from one year to the next require significant compensating factors to allow for loan approval. HUD Handbook 4155.1, REV-5, Paragraph 2-7M The gross rental amount must be reduced for vacancies and maintenance by 25 percent (or the percentage developed by the jurisdictional HOC [Homeownership Center]), before subtracting PITI [principal, interest, taxes, and insurance] and any homeowner’s association dues, etc., and applying the remainder to income (or recurring debts, if negative). HUD Handbook 4155.1, REV-5, Paragraph 2-11C If a debt payment, such as a student loan, is scheduled to begin within twelve months of the mortgage loan closing, the lender must include the anticipated monthly obligation in the underwriting analysis, unless the borrower provides written evidence that the debt will be deferred to a period outside the timeframe. HUD Handbook 4155.1, REV-5, Paragraph 3-1 The following documents are generally required for mortgage credit analysis in all transactions except for streamline cases “E. VOE [verification of employment] and the borrower’s most recent pay stub are to be provided.” HUD Handbook 4155.1, Paragraph 4.D.2.b (HUD Handbook 4155.1, REV-5, Paragraph 2-7A) Overtime and bonus income can be used to qualify the borrower for a mortgage if he/she has received this income for the past two years, and it will likely continue. If the employment verification states that this income is unlikely to continue, it may not be used in qualifying. The lender must develop an average of bonus or overtime income for the past two years. Periods of overtime income and bonus income less than two years may be acceptable, provided the lender can justify and document in writing the reason for using the income for qualifying purposes. 45 HUD Handbook 4155.1, Paragraph 4.C.4.c (HUD Handbook 4155.1, REV-5, Paragraph 2-11A) If the credit report shows any revolving accounts with an outstanding balance but no specific minimum monthly payment, the payment must be calculated at the greater of 5 percent of the balance or $10, unless there is a specific monthly payment for the account. HUD Handbook 4155.1, Paragraph 5.B.4.c The gift donor may not be a person or entity with an interest in the sale of the property, such as the seller, the real estate agent or broker, the builder, or an associated entity. Gifts from these sources are considered inducements to purchase, and must be subtracted from the sales price. HUD Handbook 4155, Paragraph 5.B.4.e As a general rule, FHA is not concerned with how a donor obtains gift funds, provided that the funds are not derived in any manner from a party to the sales transaction. Mortgagee Letter 2004-47 Employment/Income For loan applications rated as “Accept/Approve,” the lender must obtain the single most recent pay stub (showing year-to-date earnings of at least one month) and any one of the following to verify current employment: written verification of employment, verbal verification of employment, electronic verification acceptable to FHA. Commissioned Individuals A commissioned applicant is defined as one who receives more than 25 percent of his or her annual income from commissions. For these individuals, obtain and analyze signed federal income tax returns, including all schedules, for the most recent two years and subtract unreimbursed business expenses in underwriting. 24 CFR 203.37a(b)(2), Waiver Requirements The regulations at 24 CFR 203.37a(b)(2) provide that a mortgage for a property will not be eligible for FHA insurance if the contract of sale for the purchase of the property is executed within 90 days of the prior acquisition by the seller and the seller does not come under any of the specific exemptions that apply to the 90-day rule. This waiver, which took effect on February 1, 2010, is limited to those sales meeting the following conditions: 2. In cases in which the sales price of the property is 20 percent or more over and above the seller’s acquisition cost, the waiver will only apply if the lender: a. Justifies the increase in value by retaining in the loan file supporting documentation and/or a second appraisal which verifies that the seller has completed sufficient legitimate renovation, repair, and rehabilitation work on the subject property to substantiate the increase in value or, in cases where no such work is performed, the appraiser provides appropriate explanation of the increase in property value since the prior title transfer. 46 12 U.S.C. 1709(b)(9)(C) In no case shall the funds required by subparagraph (A) consist, in whole or part, of funds provided by any of the following parties before, during, or after closing of the property sale: (i) The seller or any other person or entity that financially benefits from the transaction. (ii) Any third party or entity that is reimbursed, directly or indirectly, by any of the parties described in clause (i). This subparagraph shall apply only to mortgages for which the mortgagee has issued credit approval for the borrower on or after October 1, 2008. 47 Appendix D LIST OF LOANS WITH AN UNALLOWABLE GIFT FROM FAMILY HOUSING RESOURCES Seriously Estimated Closing Gift Loan Refinanced delinquent Unpaid Claim Loss to Case number loss to HUD date amount status 36 case number 31 balance amount HUD (57%) 37 022-2117219 05/07/10 $ 3,913 A - - $ 147,566 $ - $ - $ 84,113 022-2145436 04/30/10 2,260 A - - 106,211 - - 60,540 022-2147907 12/11/09 3,318 A - - 123,804 - - 70,568 022-2160961 03/03/10 4,375 A - - 164,042 - - 93,504 022-2166363 03/10/10 3,600 A - - 135,166 - - 77,045 022-2173653 04/08/10 3,500 A - - 131,589 - - 75,006 022-2174353 04/08/10 2,300 A - - 108,091 - - 61,612 022-2175575 04/09/10 2,400 A - - 112,791 - - 64,291 022-2187471 05/25/10 3,700 A - - 140,110 - - 79,863 022-2191946 06/04/10 3,280 A - - 155,031 - - 88,368 022-2192845 07/02/10 1,630 A - - 77,042 875 38 - 43,914 022-2200873 07/28/10 3,000 A - - 142,122 - - 81,010 022-2201255 06/30/10 2,660 A - - 125,845 - - 71,732 022-2202483 07/09/10 5,125 A - - 194,234 - - 110,713 022-2208904 08/23/10 3,038 A - - 114,965 - - 65,530 023-3033510 05/08/09 3,250 A - - 120,040 - - 68,423 023-3205484 05/29/09 2,356 A - - 109,021 - - 62,142 023-3356668 04/15/09 3,250 A - 6 months 120,609 - - 68,747 023-3389751 04/16/09 3,330 A - - 153,900 - - 87,723 023-3430145 05/15/09 3,500 A - - 130,234 - - 74,233 023-3446156 05/07/09 5,425 A - 21 months 200,869 - - 114,495 023-3461652 05/27/09 4,175 A - - 151,809 - - 86,531 023-3468910 01/21/10 3,256 A - - 122,179 - - 69,642 023-3497447 06/11/09 2,850 A - - 105,677 - - 60,236 023-3508209 06/04/09 1,960 A - - 91,163 - - 51,963 023-3512584 09/11/09 2,050 A - - 76,843 - - 43,801 023-3552776 06/25/09 2,718 A - - 126,587 - - 72,155 023-3580305 10/09/09 3,669 A - - 137,110 - - 78,153 023-3611171 12/23/09 4,338 A - - 161,467 - - 92,036 023-3637779 09/09/09 4,120 A - - 192,842 - - 109,920 023-3661762 08/31/09 2,486 A - 9 months 115,806 - - 66,009 023-3683512 05/28/10 3,748 A - - 140,950 - - 80,342 023-3690201 10/08/09 2,075 A - - 77,715 - - 44,298 - - 38 023-3720644 10/30/09 3,700 A 173,221 875 - 98,736 023-3732557 10/15/09 4,500 A - - 167,216 - - 95,313 023-3745488 10/16/09 1,800 A - - 84,179 - - 47,982 - - 38 023-3766993 11/09/09 2,225 A 83,264 875 - 47,460 023-3779128 06/10/10 3,375 A - - 127,568 - - 72,714 023-3779945 11/25/09 2,788 A - - 104,202 - - 59,395 36 A = active; T = terminated; C = claim 37 The estimated loss amount is based on FHA’s 57 percent loss severity rate, multiplied by the unpaid principal balance. 38 Loss mitigation claim 48 Seriously Estimated Closing Gift Loan Refinanced delinquent Unpaid Claim Loss to Case number loss to HUD date amount status 36 case number 31 balance amount HUD (57%) 37 023-3787442 11/25/09 2,300 A - - 107,356 - - 61,193 023-3787596 11/16/09 4,248 A - - 158,952 - - 90,603 023-3800158 12/02/09 4,248 A - - 158,606 - - 90,405 023-3813174 12/23/09 3,000 A - 3 months 112,056 - - 63,872 023-3819539 12/18/09 4,623 A - - 172,660 - - 98,416 023-3820198 12/21/09 3,488 A - - 130,407 - - 74,332 023-3837873 12/23/09 1,800 A - - 84,133 - - 47,956 023-3845718 12/31/09 7,150 A - 10 months 267,359 - - 152,395 023-3863339 01/22/10 2,245 A - - 83,883 - - 47,813 023-3863809 06/30/10 2,908 A - - 136,785 - - 77,967 023-3866358 01/19/10 2,940 A - - 137,607 - - 78,436 023-3867411 01/13/10 2,425 A - - 90,990 - - 51,864 023-3867837 12/30/09 6,123 A - - 228,937 - - 130,494 023-3871285 01/13/10 2,375 A - - 88,930 - - 50,690 023-3871312 12/30/09 2,000 A - - 93,482 - - 53,285 023-3875480 01/13/10 4,925 A - - 184,412 - - 105,115 023-3877049 06/22/10 2,727 A - - 102,612 - - 58,489 023-3877242 01/19/10 1,425 A - - 53,468 - - 30,477 023-3887522 01/27/10 2,498 A - - 93,710 - - 53,415 023-3888093 01/29/10 1,750 A - - 65,663 - - 37,428 023-3890039 02/05/10 2,000 A - - 93,803 - - 53,468 023-3890284 02/16/10 2,875 A - - 107,799 - - 61,445 023-3892618 03/02/10 2,622 A - - 123,029 - - 70,127 023-3892942 02/09/10 2,500 A - - 94,018 - - 53,590 023-3893064 01/29/10 2,625 A - - 98,291 - - 56,026 023-3893575 01/29/10 2,650 A - 5 months 99,631 - - 56,790 023-3906985 02/16/10 1,600 A - - 74,991 - - 42,745 023-3907583 02/09/10 1,800 A - - 84,616 - - 48,231 023-3912922 02/22/10 2,750 A - - 103,617 - - 59,062 023-3913379 02/12/10 3,200 A - - 150,430 - - 85,745 023-3926372 02/26/10 3,064 A - - 115,126 - - 65,622 023-3932201 03/16/10 3,322 A - - 124,734 - - 71,098 023-3942822 03/31/10 2,440 A - 4 months 114,516 - - 65,274 023-3946774 08/03/10 1,610 A - - 75,830 - - 43,223 023-3949837 03/22/10 3,200 A - - 120,383 - - 68,618 023-3951768 03/31/10 4,150 A - - 155,817 - - 88,816 023-3963687 03/30/10 1,380 A - - 64,894 - - 36,990 023-3964805 03/26/10 2,985 A - - 139,811 - - 79,692 023-3965455 04/24/10 2,126 A - - 79,940 - - 45,566 023-3967961 04/16/10 3,058 A - - 143,714 - - 81,917 023-3968626 04/01/10 4,479 A - - 168,172 - - 95,858 023-3970919 04/01/10 1,998 A - - 93,772 - - 53,450 023-3972433 05/19/10 2,500 A - - 94,292 - - 53,746 023-3973372 04/09/10 1,700 A - - 79,893 - - 45,539 023-3977605 04/21/10 2,973 A - - 111,968 - - 63,822 023-3978754 06/11/10 2,625 A - - 98,773 - - 56,301 023-3978891 04/15/10 2,776 A - - 130,461 - - 74,363 023-3980980 04/09/10 2,840 A - - 133,469 - - 76,077 023-3981379 04/09/10 2,363 A - - 88,647 - - 50,529 023-3983124 06/09/10 4,053 A - - 152,804 - - 87,098 023-3983804 04/09/10 2,900 A - - 109,031 - - 62,148 023-3983964 05/03/10 2,125 A - - 80,045 - - 45,626 023-3985834 04/07/10 2,255 A - - 84,786 - - 48,328 023-3986216 04/08/10 3,625 A - - 136,289 - - 77,685 023-3988109 04/23/10 1,820 A - - 85,695 - - 48,846 49 Seriously Estimated Closing Gift Loan Refinanced delinquent Unpaid Claim Loss to Case number loss to HUD date amount status 36 case number 31 balance amount HUD (57%) 37 023-3993302 04/14/10 2,700 A - - 126,640 - - 72,185 023-4002634 04/30/10 2,260 A - - 106,211 - - 60,540 023-4002657 04/26/10 3,375 A - - 126,889 - - 72,327 023-4004092 04/23/10 3,122 A - - 117,359 - - 66,895 023-4008949 04/14/10 4,350 A - 12 months 164,009 - - 93,485 023-4009777 05/07/10 1,600 A - - 75,434 - - 42,997 - - 38 023-4010358 05/04/10 1,910 A 89,932 875 - 51,261 023-4015253 08/31/10 3,258 A - - 122,712 - - 69,946 023-4015723 06/28/10 4,320 A - - 203,567 - - 116,033 023-4018482 05/28/10 3,345 A - - 125,703 - - 71,651 023-4020486 05/21/10 2,125 A - - 80,000 - - 45,600 023-4021016 06/08/10 2,325 A - - 87,955 - - 50,134 023-4022175 05/25/10 2,320 A - - 109,073 - - 62,172 023-4023467 06/04/10 1,560 A - - 73,510 - - 41,901 023-4026177 04/30/10 3,375 A - - 127,248 - - 72,531 023-4029780 05/03/10 2,800 A - 4 months 105,471 - - 60,118 023-4034377 04/30/10 3,499 A - - 132,572 - - 75,566 023-4036933 05/27/10 1,825 A - - 69,172 - - 39,428 023-4037350 05/04/10 1,800 A - - 82,174 - - 46,839 023-4042111 05/25/10 4,825 A - - 182,541 - - 104,048 023-4050833 06/24/10 2,680 A - - 126,791 - - 72,271 023-4051398 06/10/10 4,358 A - - 206,737 - - 117,840 023-4052450 06/02/10 2,450 A - - 92,860 - - 52,930 023-4053172 06/07/10 1,975 A - - 74,819 - - 42,647 023-4053206 05/28/10 3,700 A - - 174,809 - - 99,641 023-4056191 05/26/10 5,800 A - - 219,428 - - 125,074 023-4058502 05/27/10 1,875 A - - 71,193 - - 40,580 023-4059015 05/18/10 5,875 A - - 221,841 - - 126,449 023-4060903 05/21/10 3,625 A - - 137,143 - - 78,172 023-4060961 05/19/10 2,250 A - - 85,042 - - 48,474 023-4061967 05/28/10 2,366 A - - 112,202 - - 63,955 023-4064884 05/21/10 2,680 A - - 126,972 - - 72,374 023-4066118 06/02/10 2,010 A - - 94,964 - - 54,129 023-4068017 06/30/10 3,457 A - - 163,409 - - 93,143 023-4068183 05/27/10 1,325 A - - 50,265 - - 28,651 023-4070368 06/04/10 3,500 A - - 132,468 - - 75,507 023-4075467 06/09/10 2,350 A - - 89,024 - - 50,744 023-4075569 06/10/10 2,869 A - - 108,676 - - 61,945 023-4076269 06/10/10 1,720 A - - 81,448 - - 46,425 023-4077501 06/23/10 3,200 A - - 151,803 - - 86,528 023-4077603 06/15/10 2,975 A - - 113,001 - - 64,411 023-4077836 06/16/10 4,044 A - - 153,196 - - 87,322 023-4079084 06/18/10 2,875 A - - 108,912 - - 62,080 023-4080228 08/11/10 1,488 A - - 49,766 - - 28,367 023-4080286 06/22/10 3,500 A - - 132,590 - - 75,576 023-4081027 06/10/10 3,000 A - - 113,544 - - 64,720 - - 38 023-4081269 06/14/10 2,125 A 80,501 200 - 45,886 023-4084032 06/15/10 2,320 A - 6 months 109,860 - - 62,620 023-4085884 06/23/10 2,980 A - - 112,893 - - 64,349 023-4091033 06/30/10 3,420 A - - 161,649 - - 92,140 023-4091424 06/30/10 2,900 A - 16 months 137,326 - - 78,276 023-4094131 06/25/10 2,039 A - - 96,481 - - 54,994 023-4095058 06/02/10 2,000 A - - 94,491 - - 53,860 023-4096995 06/28/10 2,800 A - 15 months 105,974 - - 60,405 50 Seriously Estimated Closing Gift Loan Refinanced delinquent Unpaid Claim Loss to Case number loss to HUD date amount status 36 case number 31 balance amount HUD (57%) 37 023-4098077 06/28/10 2,781 A - - 131,431 - - 74,916 023-4098142 06/11/10 3,522 A - - 166,628 - - 94,978 023-4098241 07/02/10 3,000 A - - 113,595 - - 64,749 023-4099122 06/25/10 3,975 A - - 150,584 - - 85,833 023-4100713 06/30/10 3,000 A - - 141,797 - - 80,824 023-4105972 07/30/10 3,998 A - - 189,230 - - 107,861 023-4106196 07/01/10 2,748 A - - 103,987 - - 59,273 023-4107264 06/24/10 2,520 A - - 119,331 - - 68,019 023-4108854 06/28/10 3,900 A - - 184,679 - - 105,267 023-4109758 06/25/10 4,200 A - - 198,516 - - 113,154 023-4110500 07/14/10 6,100 A - - 288,721 - - 164,571 023-4111121 06/28/10 3,626 A - 4 months 137,220 - - 78,215 023-4112293 06/30/10 2,720 A - - 128,801 - - 73,417 023-4114111 06/30/10 3,243 A - - 122,835 - - 70,016 023-4116401 08/19/10 4,125 A - - 156,407 - - 89,152 023-4118194 08/27/10 1,960 A - - 92,813 - - 52,903 023-4118425 06/30/10 2,998 A - - 113,449 - - 64,666 023-4118720 07/13/10 3,563 A - - 134,894 - - 76,890 023-4119551 07/29/10 3,225 A - - 122,114 - - 69,605 023-4120458 07/14/10 2,040 A - - 77,314 - - 44,069 023-4121794 06/30/10 3,375 A - - 127,737 - - 72,810 023-4122045 08/03/10 2,943 A - - 110,856 - - 63,188 023-4122226 06/30/10 1,723 A - - 65,252 - - 37,194 023-4122538 07/20/10 2,498 A - - 94,653 - - 53,952 023-4124580 08/31/10 1,750 A - - 82,942 - - 47,277 023-4126473 08/25/10 2,360 A - - 111,445 - - 63,524 023-4126523 07/20/10 3,290 A - - 155,883 - - 88,853 023-4126756 07/15/10 2,200 A - - 104,223 - - 59,407 023-4127071 07/15/10 2,000 A - - 94,748 - - 54,006 023-4127231 07/09/10 2,800 A - - 132,527 - - 75,540 023-4128792 07/23/10 2,463 A - - 93,241 - - 53,147 023-4133372 08/06/10 3,775 A - - 142,089 - - 80,991 - - 38 023-4135502 07/22/10 3,300 A 156,193 875 - 89,030 023-4136356 07/30/10 1,600 A - - 75,730 - - 43,166 023-4137981 08/09/10 5,725 A - - 217,075 - - 123,733 023-4139011 07/29/10 6,300 A - - 298,187 - - 169,967 023-4140656 08/20/10 3,750 A - - 142,189 - - 81,048 023-4141015 07/21/10 2,800 A - - 106,021 - - 60,432 023-4143386 07/26/10 7,250 A - - 274,521 - - 156,477 023-4144527 07/30/10 2,748 A - - 104,034 - - 59,299 023-4147693 07/28/10 2,000 A - - 75,730 - - 43,166 023-4148824 08/04/10 2,300 A - - 87,209 - - 49,709 023-4151490 08/20/10 1,625 A - - 61,615 - - 35,121 023-4152893 07/30/10 2,713 A - - 102,708 - - 58,544 023-4153036 08/09/10 3,350 A - - 127,022 - - 72,403 023-4153377 07/26/10 4,375 A - - 165,193 - - 94,160 023-4155247 08/03/10 8,400 A - - 317,773 - - 181,131 023-4158510 08/12/10 2,550 A - - 96,688 - - 55,112 023-4159935 08/13/10 2,850 A - - 108,063 - - 61,596 023-4164255 08/26/10 2,200 A - - 104,084 - - 59,328 023-4164471 08/20/10 6,125 A - - 231,823 - - 132,139 023-4164652 08/17/10 5,200 A - - 246,461 - - 140,483 023-4166387 08/27/10 3,200 A - - 151,395 - - 86,295 023-4166828 08/20/10 2,280 A - - 107,869 - - 61,485 51 Seriously Estimated Closing Gift Loan Refinanced delinquent Unpaid Claim Loss to Case number loss to HUD date amount status 36 case number 31 balance amount HUD (57%) 37 023-4166857 08/13/10 2,913 A - - 110,625 - - 63,056 023-4172120 08/31/10 2,400 A - - 113,751 - - 64,838 023-4175343 08/27/10 1,625 A - 4 months 61,504 - - 35,057 023-4175582 08/20/10 4,313 A - - 163,222 - - 93,037 023-4177049 08/25/10 3,475 A - - 131,762 - - 75,104 023-4177577 08/27/10 2,700 A - - 127,970 - - 72,943 023-4178429 09/10/10 2,980 A - - 141,188 - - 80,477 023-4182706 08/31/10 2,918 A - - 138,052 - - 78,690 023-4186714 08/30/10 2,960 A - - 140,293 - - 79,967 023-4191063 09/09/10 3,125 A - - 118,446 - - 67,514 023-4191976 09/03/10 3,450 A - - 130,929 - - 74,630 023-4192119 09/03/10 2,250 A - - 106,877 - - 60,920 023-4198820 09/03/10 3,450 A - - 130,578 - - 74,429 023-4201522 09/07/10 4,873 A - - 184,679 - - 105,267 023-3405043 05/01/09 4,187 C - - - 172,554 90,630 - 023-3610521 8/10/2009 5,000 C - - - 203,707 57,293 - 023-3738123 11/03/09 3,780 C - - - 33,738 33,738 - 023-3980729 04/16/10 3,123 C - - - 26,198 26,198 - 023-4157135 08/27/10 2,660 C - - - 46,725 46,725 - 022-2119213 10/05/09 2,500 T 022-2261945 - 120,092 - - 68,452 022-2152052 01/11/10 4,550 T 022-2222465 - 173,262 - - 98,759 022-2161258 02/05/10 3,598 T 022-2382512 - 137,400 - - 78,318 022-2182445 06/10/10 4,889 T 022-2287256 - 186,827 - - 106,491 023-3175274 06/11/09 3,593 T 023-4303973 - 136,120 - - 77,588 023-3356198 05/20/09 2,913 T 023-4112002 - - 119,457 20,093 - 023-3356651 04/01/09 4,250 T 023-3837952 - 160,888 - - 91,706 023-3441693 12/01/09 2,500 T 023-4808112 - 94,895 - - 54,090 023-3499816 06/15/09 2,198 T 023-3929009 - 102,968 - - 58,692 023-3524486 10/08/09 3,518 T 023-5219775 - 168,242 - - 95,898 023-3536461 07/01/09 2,659 T 023-3982046 - 124,537 - - 70,986 023-3542438 10/05/09 3,575 T 023-4782021 - 134,281 - - 76,540 023-3594514 06/29/10 5,500 T 023-4741723 - 208,488 - - 118,838 023-3595062 08/31/09 2,248 T 023-4179056 - 84,638 - - 48,244 023-3606579 8/12/2009 7,950 T 023-3986800 - 298,792 - - 170,311 023-3623078 08/21/09 5,000 T 023-4242352 - 160,862 - - 91,691 023-3635531 08/28/09 4,980 T 023-4206066 - 235,756 - - 134,381 023-3643095 08/31/09 3,000 T 023-4182157 - 113,507 - - 64,699 023-3645260 09/02/09 3,350 T 023-4304349 - 126,100 - - 71,877 023-3645310 09/04/09 3,700 T 023-4097059 - 176,558 - - 100,638 023-3648510 09/25/09 4,125 T 023-4118483 - 155,792 - - 88,801 023-3655954 11/12/09 3,825 T 023-4271683 - 145,400 - - 82,878 023-3656893 09/15/09 4,050 T 023-4074715 - 154,072 - - 87,821 023-3657325 01/15/10 2,780 T 023-4303792 - 132,615 - - 75,591 023-3660490 08/28/09 3,900 T 023-4180054 - 184,219 - - 105,005 023-3682342 10/09/09 5,125 T 023-4165999 - 194,223 - - 110,707 023-3683722 10/14/09 2,900 T 023-4294711 - 137,333 - - 78,280 023-3704664 10/26/09 3,800 T 023-4166863 - 178,985 - - 102,021 023-3710942 10/13/09 2,860 T 023-4178493 - 136,524 - - 77,819 023-3726154 01/26/10 3,570 T 023-4301496 - 135,526 - - 77,250 023-3738520 10/20/09 3,175 T 023-4967758 - 120,807 - - 68,860 023-3761740 11/06/09 2,575 T 023-5223582 - 98,182 - - 55,964 023-3770308 11/17/09 2,900 T 023-4289562 - 137,642 - - 78,456 023-3778609 11/25/09 4,600 T 023-4099349 - 219,544 - - 125,140 023-3787675 11/17/09 1,380 T 023-5131588 - 87,962 - - 50,138 023-3801777 11/20/09 2,100 T 023-4665550 - 98,846 - - 56,342 52 Seriously Estimated Closing Gift Loan Refinanced delinquent Unpaid Claim Loss to Case number loss to HUD date amount status 36 case number 31 balance amount HUD (57%) 37 023-3804455 11/30/09 2,480 T 023-4223511 - 117,503 - - 66,977 023-3812553 11/24/09 3,250 T 023-4298578 - 122,974 - - 70,095 023-3831710 06/01/10 2,780 T 023-4818394 - 131,565 - - 74,992 023-3855781 12/15/09 4,473 T 023-5176873 - 172,012 - - 98,047 023-3884237 01/26/10 3,125 T 023-4931391 - 118,880 - - 67,762 023-3887437 04/13/10 5,807 T 023-5114290 - 220,835 - - 125,876 023-3903082 02/04/10 2,600 T 023-4935312 - 122,284 - - 69,702 023-3929464 03/03/10 2,600 T 023-4299760 - 123,351 - - 70,310 023-3930246 03/03/10 1,758 T 023-4835748 - 83,139 - - 47,389 023-3943370 03/03/10 3,200 T 023-4298380 - 122,335 - - 69,731 023-3947156 03/12/10 4,975 T 023-4751069 - 188,691 - - 107,554 023-3948644 03/12/10 3,281 T 023-4374767 - 157,865 - - 89,983 023-3951882 03/25/10 6,430 T 023-4738338 - 303,738 - - 173,131 023-3961027 03/16/10 6,130 T 023-5044098 - 220,558 - - 125,718 023-3968212 04/05/10 3,525 T 023-4772870 - 133,593 - - 76,148 023-3977187 04/13/10 2,998 T 023-4990485 - 143,341 - - 81,704 023-3981181 04/06/10 1,373 T 023-5012819 - 52,882 - - 30,143 023-3992257 05/13/10 3,538 T 023-4634104 - 168,455 - - 96,019 023-4006189 04/30/10 3,188 T 023-4792222 - 120,364 - - 68,607 023-4015933 06/24/10 3,498 T 023-4749910 - 132,473 - - 75,510 023-4018578 05/28/10 2,521 T 023-5098117 - 120,861 - - 68,891 023-4018640 06/28/10 3,594 T 023-4622266 - 169,757 - - 96,761 023-4020798 04/20/10 6,155 T 023-4820165 - 233,276 - - 132,967 023-4031233 05/04/10 4,748 T 023-5040202 - 183,365 - - 104,518 023-4053382 06/16/10 6,799 T 023-4895633 - 260,809 - - 148,661 023-4056054 06/11/10 3,150 T 023-4875747 - 151,130 - - 86,144 023-4056474 05/28/10 3,125 T 023-4660813 - 124,461 - - 70,943 023-4061944 06/14/10 2,238 T 023-5098123 - 108,244 - - 61,699 023-4072579 05/27/10 4,576 T 023-4796355 - 174,311 - - 99,357 023-4078910 05/25/10 3,375 T 023-4477137 - 127,858 - - 72,879 023-4087176 06/04/10 5,125 T 023-4652575 - 195,468 - - 111,417 023-4090928 06/30/10 1,875 T 023-5116749 - 71,739 - - 40,891 023-4102092 06/25/10 3,248 T 023-4743477 - 123,151 - - 70,196 023-4105581 06/29/10 2,150 T 023-5137703 - 103,428 - - 58,954 023-4112191 06/18/10 3,270 T 023-4839943 - 155,202 - - 88,465 023-4112212 07/13/10 2,125 T 023-4796883 - 80,868 - - 46,095 023-4115181 06/30/10 4,890 T 023-5051835 - 188,561 - - 107,480 023-4155542 08/10/10 3,960 T 023-4724607 - 188,976 - - 107,716 023-4185249 08/31/10 5,675 T 023-4819150 - 210,065 - - 119,737 023-4190958 09/22/10 2,460 T 023-4879863 - 117,185 - - 66,795 023-4207481 09/10/10 5,125 T 023-4857845 - 196,478 - - 111,992 Totals 14 $ 38,669,742 $ 602,379 39 $ 274,677 $ 22,041,754 39 Loss mitigation claims are not included in the total. 53 Appendix E LIST OF LOANS WITH AN UNALLOWABLE GIFT FROM AFFORDABLE HOUSING PARTNERS Seriously Estimated loss Closing Gift Loan Refinanced delinquent Unpaid Claim Loss to to HUD Case number date amount status 40 case number 31 balance amount HUD 37 (57%) 022-2218918 09/30/10 $ 2,638 A - - $ 99,967 $ - $ - $ 56,981 022-2219624 10/01/10 1,980 A - - 93,809 - - 53,471 022-2285698 08/31/11 2,440 A - - 115,661 - - 65,927 022-2286300 09/02/11 2,800 A - - 106,273 - - 60,576 022-2298980 11/18/11 5,372 A - - 204,404 - - 116,510 022-2305104 12/23/11 2,950 A - - 112,460 - - 64,102 022-2305474 03/05/12 2,425 A - - 92,675 - - 52,825 022-2305599 12/16/11 2,200 A - - 83,827 - - 47,781 022-2306507 02/29/12 2,087 A - - 79,776 - - 45,472 022-2308310 01/06/12 1,625 A - - 62,010 - - 35,346 022-2312945 02/10/12 3,747 A - - 143,204 - - 81,626 022-2317437 03/06/12 3,347 A - - 127,929 - - 72,920 022-2321159 03/22/12 5,500 A - - 210,500 - - 119,985 023-3953116 11/19/10 4,425 A - - 167,231 - - 95,322 023-4014372 09/22/10 3,047 A - - 143,683 - - 81,899 023-4018526 10/12/10 3,064 A - - 115,755 - - 65,980 023-4029479 11/22/10 1,720 A - - 81,184 - - 46,275 023-4090021 11/03/10 2,640 A - 5 months 125,256 - - 71,396 023-4109907 10/13/10 6,875 A - - 260,949 - - 148,741 023-4134020 10/28/10 2,313 A - - 87,773 - - 50,031 023-4154690 11/05/10 4,100 A - - 194,638 - - 110,944 023-4189184 10/08/10 1,980 A - - 93,942 - - 53,547 023-4189517 09/17/10 8,850 A - - 334,832 - - 190,854 023-4191238 09/16/10 3,475 A - - 131,712 - - 75,076 023-4193786 09/24/10 2,618 A - - 95,597 - - 54,490 023-4195427 09/28/10 1,960 A - - 92,861 - - 52,931 023-4199096 09/15/10 4,000 A - - 189,170 - - 107,827 023-4200381 10/28/10 2,000 A - 7 months 75,913 - - 43,270 023-4214004 09/22/10 2,250 A - - 85,430 - - 48,695 023-4214765 09/21/10 3,798 A - - 179,781 - - 102,475 023-4218925 09/23/10 6,250 A - - 236,892 - - 135,028 023-4221562 09/22/10 3,750 A - - 142,007 - - 80,944 023-4226792 10/08/10 3,322 A - - 157,068 - - 89,529 023-4227066 09/28/10 5,628 A - - 213,702 - - 121,810 023-4230404 10/14/10 2,250 A - - 85,402 - - 48,679 023-4231813 09/30/10 3,250 A - - 123,183 - - 70,214 40 A = active; T = terminated; C = claim 54 Seriously Estimated loss Closing Gift Loan Refinanced delinquent Unpaid Claim Loss to to HUD Case number date amount status 40 case number 31 balance amount HUD 37 (57%) 023-4231915 09/10/10 2,125 A - - 80,684 - - 45,990 023-4232457 09/21/10 1,320 A - - 62,539 - - 35,647 023-4237381 10/06/10 2,500 A - - 94,756 - - 54,011 023-4238329 09/28/10 5,500 A - - 208,464 - - 118,824 023-4240339 12/28/10 3,212 A - - 122,110 - - 69,603 023-4241203 09/27/10 4,475 A - - 169,614 - - 96,680 023-4241827 09/29/10 3,873 A - - 141,188 - - 80,477 023-4242300 10/08/10 4,050 A - - 153,723 - - 87,622 023-4248486 10/27/10 2,580 A - - 118,814 - - 67,724 023-4250473 10/07/10 2,000 A - - 86,291 - - 49,186 023-4250966 10/25/10 2,998 A - - 113,675 - - 64,795 023-4251302 10/28/10 3,054 A - - 115,946 - - 66,089 023-4256549 10/13/10 2,375 A - - 90,146 - - 51,383 023-4257567 10/22/10 2,770 A - - 131,424 - - 74,912 023-4264971 12/21/10 4,500 A - - 171,146 - - 97,553 023-4267269 11/02/10 7,424 A - - 281,530 - - 160,472 023-4268048 10/25/10 2,375 A - - 90,298 - - 51,470 023-4269282 03/22/11 1,697 A - - 81,238 - - 46,306 023-4270274 10/28/10 2,348 A - - 90,068 - - 51,339 023-4270715 12/07/10 6,345 A - - 241,319 - - 137,552 023-4272302 10/27/10 1,970 A - - 93,385 - - 53,229 023-4274898 04/08/11 2,902 A - - 139,070 - - 79,270 023-4276928 10/22/10 3,850 A - - 145,612 - - 82,999 023-4284543 11/18/10 4,274 A - - 202,756 - - 115,571 023-4287523 10/21/10 2,800 A - - 132,732 - - 75,657 023-4289110 11/12/10 3,247 A - - 123,228 - - 70,240 023-4294416 10/29/10 3,749 A - - 142,203 - - 81,056 023-4295860 11/04/10 1,600 A - - 75,956 - - 43,295 023-4296481 11/01/10 3,568 A - - 168,989 - - 96,324 023-4296610 10/26/10 4,200 A - 10 months 159,278 - - 90,788 023-4296649 11/02/10 2,918 A - 4 months 138,203 - - 78,776 023-4296656 11/23/10 2,925 A - - 111,179 - - 63,372 023-4298765 11/29/10 4,050 A - - 153,680 - - 87,598 023-4305583 10/28/10 3,100 A - - 146,558 - - 83,538 023-4310793 11/02/10 4,464 A - - 169,318 - - 96,511 023-4311391 11/18/10 2,575 A - - 97,793 - - 55,742 023-4313804 04/11/11 3,100 A - - 119,236 - - 67,965 023-4317893 11/08/10 3,358 A - - 157,329 - - 89,678 023-4324104 11/03/10 2,550 A - - 98,575 - - 56,188 023-4324547 11/12/10 3,687 A - - 138,213 - - 78,781 023-4325457 11/17/10 1,998 A - - 93,690 - - 53,403 023-4330355 11/17/10 1,458 A - - 68,368 - - 38,970 023-4331213 11/18/10 2,238 A - - 104,854 - - 59,767 023-4331350 11/12/10 4,738 A - - 177,569 - - 101,214 023-4332940 11/19/10 5,820 A - - 267,972 - - 152,744 55 Seriously Estimated loss Closing Gift Loan Refinanced delinquent Unpaid Claim Loss to to HUD Case number date amount status 40 case number 31 balance amount HUD 37 (57%) 023-4333742 11/19/10 4,748 A - - 177,944 - - 101,428 023-4334600 11/30/10 2,122 A - - 79,554 - - 45,346 023-4334840 11/22/10 2,660 A - - 124,409 - - 70,913 023-4335641 11/17/10 3,050 A - - 114,319 - - 65,162 023-4339007 12/07/10 3,225 A - - 121,154 - - 69,058 023-4340352 12/06/10 2,120 A - - 99,471 - - 56,698 023-4340542 11/24/10 1,675 A - - 62,782 - - 35,786 023-4341098 11/30/10 3,725 A - - 139,619 - - 79,583 023-4341160 12/07/10 2,300 A - - 86,333 - - 49,210 023-4342143 11/30/10 2,380 A - - 111,508 - - 63,560 023-4342330 11/23/10 2,080 A - 4 months 97,535 - - 55,595 023-4343920 11/24/10 2,247 A - - 84,239 - - 48,016 023-4347820 11/18/10 2,475 A - - 92,846 - - 52,922 023-4349027 12/22/10 1,598 A - - 71,548 - - 40,782 023-4349220 12/03/10 2,422 A - - 91,007 - - 51,874 023-4351180 12/17/10 2,212 A - - 83,185 - - 47,415 023-4351197 12/02/10 4,250 A - - 159,530 - - 90,932 023-4351700 12/20/10 2,140 A - - 100,492 - - 57,280 023-4353832 12/22/10 1,180 A - - 55,362 - - 31,556 023-4354401 12/16/10 1,930 A - - 90,704 - - 51,701 023-4357125 12/09/10 2,200 A - - 84,526 - - 48,180 023-4357393 12/07/10 4,125 A - - 154,838 - - 88,258 023-4357618 12/28/10 2,475 A - - 93,272 - - 53,165 023-4361845 01/27/11 2,200 A - - 82,956 - - 47,285 023-4361851 01/11/11 4,225 A - - 159,313 - - 90,808 023-4362755 12/15/10 3,820 A - - 179,385 - - 102,249 023-4365360 12/14/10 3,373 A - - 126,638 - - 72,184 023-4367276 12/17/10 2,680 A - - 125,851 - - 71,735 023-4370745 01/05/11 3,147 A - - 147,682 - - 84,179 023-4372247 12/20/10 2,250 A - - 84,728 - - 48,295 023-4374441 01/05/11 3,975 A - - 149,687 - - 85,322 023-4374595 12/29/10 3,375 A - - 127,189 - - 72,498 023-4374616 12/23/10 1,450 A - - 68,336 - - 38,952 023-4375640 12/21/10 2,500 A - - 93,919 - - 53,534 023-4379796 01/26/11 2,500 A - - 94,126 - - 53,652 023-4380900 01/10/11 3,422 A - - 129,053 - - 73,560 023-4382300 12/30/10 3,750 A - - 141,213 - - 80,491 023-4382556 01/07/11 2,498 A - - 94,103 - - 53,639 023-4384245 12/30/10 2,875 A - - 108,346 - - 61,757 023-4387497 01/19/11 2,200 A - - 103,771 - - 59,149 023-4388962 02/11/11 1,340 A - - 63,332 - - 36,099 023-4389344 01/19/11 1,425 A - - 53,733 - - 30,628 023-4390450 01/20/11 3,475 A - - 131,033 - - 74,689 023-4392480 01/25/11 1,725 A - - 65,044 - - 37,075 023-4392807 01/21/11 2,275 A - 3 months 85,784 - - 48,897 56 Seriously Estimated loss Closing Gift Loan Refinanced delinquent Unpaid Claim Loss to to HUD Case number date amount status 40 case number 31 balance amount HUD 37 (57%) 023-4394105 01/20/11 2,300 A - - 108,488 - - 61,838 023-4395304 01/31/11 2,183 A - - 102,932 - - 58,671 023-4396886 01/28/11 3,625 A - - 136,689 - - 77,913 023-4399959 01/28/11 2,172 A - - 81,918 - - 46,693 023-4403373 02/09/11 1,800 A - - 84,954 - - 48,424 023-4406958 03/04/11 2,120 A - - 100,056 - - 57,032 023-4407034 02/03/11 2,700 A - - 127,431 - - 72,636 023-4410634 02/11/11 2,075 A - - 78,346 - - 44,657 023-4412317 03/14/11 1,800 A - - 68,053 - - 38,790 023-4413755 03/10/11 2,320 A - - 99,244 - - 56,569 023-4419423 03/15/11 2,800 A - - 132,326 - - 75,426 023-4419691 03/29/11 1,935 A - - 73,156 - - 41,699 023-4420190 03/22/11 2,375 A - - 89,792 - - 51,181 023-4427494 03/08/11 7,125 A - - 269,561 - - 153,650 023-4430254 05/16/11 2,340 A - - 88,701 - - 50,560 023-4431503 02/22/11 2,300 A - - 86,963 - - 49,569 023-4434965 03/11/11 1,862 A - - 70,463 - - 40,164 023-4436864 03/08/11 2,497 A - - 94,423 - - 53,821 023-4439168 03/10/11 2,135 A - - 80,828 - - 46,072 023-4441937 03/22/11 2,625 A - - 99,312 - - 56,608 023-4443156 05/04/11 2,027 A - - 76,752 - - 43,749 023-4445128 03/28/11 1,155 A - - 72,779 - - 41,484 023-4446554 03/30/11 2,000 A - - 75,615 - - 43,101 023-4448617 05/31/11 3,140 A - - 118,948 - - 67,800 023-4452187 03/22/11 2,000 A - - 75,615 - - 43,101 023-4453022 03/24/11 2,738 A - - 103,496 - - 58,993 023-4454339 03/29/11 1,600 A - - 75,615 - - 43,101 023-4455601 04/08/11 2,300 A - - 87,070 - - 49,630 023-4461784 03/31/11 2,450 A - - 92,627 - - 52,797 023-4464270 04/14/11 3,150 A - - 119,249 - - 67,972 023-4465043 04/15/11 2,860 A - 3 months 135,338 - - 77,143 023-4467429 04/15/11 2,310 A - - 87,543 - - 49,900 023-4468418 04/11/11 2,160 A - - 102,214 - - 58,262 023-4469363 05/04/11 3,858 A - - 182,320 - - 103,922 023-4472152 04/15/11 2,425 A - - 91,803 - - 52,328 023-4474363 11/10/11 2,996 A - - 114,141 - - 65,060 023-4474681 04/28/11 2,500 A - - 94,642 - - 53,946 023-4481495 04/20/11 1,200 A - - 56,786 - - 32,368 023-4484144 04/28/11 1,710 A - - 64,717 - - 36,889 38 023-4485740 04/22/11 4,262 A - - 161,037 875 - 91,791 023-4486638 06/17/11 2,043 A - - 77,230 - - 44,021 023-4486781 06/14/11 2,497 A - - 94,677 - - 53,966 023-4490031 05/16/11 3,600 A - - 170,579 - - 97,230 023-4490229 05/09/11 1,580 A - - 74,865 - - 42,673 023-4490915 05/06/11 2,260 A - - 107,085 - - 61,038 57 Seriously Estimated loss Closing Gift Loan Refinanced delinquent Unpaid Claim Loss to to HUD Case number date amount status 40 case number 31 balance amount HUD 37 (57%) 023-4492084 04/27/11 2,375 A - - 89,020 - - 50,741 023-4492843 04/29/11 2,625 A - - 99,374 - - 56,643 023-4494815 04/27/11 3,334 A - - 157,768 - - 89,928 023-4496005 05/20/11 2,000 A - - 75,813 - - 43,213 023-4499546 05/05/11 3,550 A - - 134,568 - - 76,704 023-4501084 05/12/11 1,600 A - - 60,650 - - 34,571 023-4501633 04/28/11 1,380 A - - 65,302 - - 37,222 023-4507800 05/24/11 2,638 A - - 124,839 - - 71,158 023-4508660 10/05/11 4,762 A - - 180,936 - - 103,134 023-4508858 05/10/11 1,822 A - - 69,083 - - 39,377 023-4516122 05/10/11 1,350 A - - 63,965 - - 36,460 023-4518406 05/17/11 3,748 A - - 142,053 - - 80,970 023-4522163 07/29/11 2,999 A - - 113,801 - - 64,867 023-4523537 06/13/11 3,200 A - - 121,458 - - 69,231 023-4527886 06/24/11 1,900 A - - 75,854 - - 43,237 023-4530471 06/01/11 2,575 A - - 97,483 - - 55,565 023-4532790 06/01/11 2,625 A - - 99,441 - - 56,681 023-4533330 06/22/11 1,625 A - - 61,779 - - 35,214 023-4534190 10/05/11 3,302 A - - 125,601 - - 71,593 023-4537139 07/11/11 3,240 A - - 153,739 - - 87,631 023-4538288 06/06/11 2,800 A - - 106,078 - - 60,464 023-4539412 06/17/11 2,498 A - - 94,618 - - 53,932 023-4539957 06/20/11 1,980 A - - 93,705 - - 53,412 023-4540196 06/24/11 3,447 A - 4 months 130,690 - - 74,493 023-4544137 06/17/11 4,398 A - - 208,140 - - 118,640 023-4545476 06/10/11 4,905 A - - 232,134 - - 132,316 023-4547352 06/22/11 3,300 A - - 125,020 - - 71,261 023-4548922 06/20/11 2,070 A - - 78,372 - - 44,672 023-4553699 07/05/11 2,140 A - - 101,277 - - 57,728 023-4554166 07/01/11 2,125 A - - 80,454 - - 45,859 023-4555190 06/27/11 5,122 A - - 193,941 - - 110,546 023-4556620 06/30/11 4,475 A - - 169,427 - - 96,573 023-4558638 06/29/11 2,750 A - - 104,117 - - 59,347 023-4559026 07/27/11 2,600 A - - 98,576 - - 56,188 023-4560286 07/06/11 2,750 A - - 104,184 - - 59,385 023-4560371 06/30/11 3,300 A - - 125,020 - - 71,261 023-4560625 07/06/11 5,323 A - - 201,643 - - 114,937 023-4560654 07/12/11 6,247 A - - 236,867 - - 135,014 023-4564951 07/29/11 2,475 A - - 93,895 - - 53,520 023-4568281 06/30/11 3,160 A - - 149,646 - - 85,298 023-4569312 07/20/11 1,720 A - - 81,614 - - 46,520 023-4570911 08/02/11 3,180 A - - 150,708 - - 85,904 023-4571158 07/25/11 2,080 A - - 99,555 - - 56,746 023-4572311 07/26/11 2,980 A - - 141,401 - - 80,599 023-4574551 07/19/11 1,658 A - - 78,669 - - 44,841 58 Seriously Estimated loss Closing Gift Loan Refinanced delinquent Unpaid Claim Loss to to HUD Case number date amount status 40 case number 31 balance amount HUD 37 (57%) 023-4575087 08/04/11 2,600 A - - 98,576 - - 56,188 023-4577990 07/22/11 2,100 A - - 99,524 - - 56,729 023-4581240 08/29/11 2,900 A - - 110,105 - - 62,760 023-4592079 08/05/11 2,200 A - - 104,409 - - 59,513 023-4592339 07/28/11 3,875 A - - 146,917 - - 83,743 023-4592969 08/03/11 2,400 A - - 113,880 - - 64,912 023-4594483 08/10/11 4,125 A - - 156,614 - - 89,270 023-4595732 07/29/11 4,338 A - - 164,452 - - 93,738 023-4597690 08/05/11 2,000 A - - 75,828 - - 43,222 023-4600487 08/12/11 2,912 A - - 110,579 - - 63,030 023-4613772 04/03/12 3,802 A - - 145,518 - - 82,945 023-4614072 08/25/11 2,750 A - - 104,414 - - 59,516 023-4614609 08/31/11 2,920 A - - 138,497 - - 78,943 023-4615061 08/31/11 2,375 A - - 90,171 - - 51,397 023-4618101 08/26/11 3,486 A - - 132,373 - - 75,453 023-4619579 09/16/11 5,425 A - 3 months 205,905 - - 117,366 023-4620939 08/31/11 6,000 A - - 227,668 - - 129,771 023-4622532 11/18/11 2,125 A - - 80,934 - - 46,132 023-4626852 11/02/11 3,875 A - - 147,373 - - 84,003 023-4629110 09/19/11 4,375 A - - 166,148 - - 94,704 023-4629468 11/04/11 2,472 A - - 94,168 - - 53,676 023-4631093 09/29/11 3,500 A - - 132,842 - - 75,720 023-4631114 09/16/11 2,138 A - - 81,222 - - 46,297 023-4631222 09/27/11 3,372 A - - 127,925 - - 72,917 023-4637905 10/06/11 2,875 A - - 109,219 - - 62,255 023-4638424 11/08/11 2,050 A - - 77,995 - - 44,457 023-4638453 09/29/11 2,875 A - - 109,183 - - 62,234 023-4639101 09/29/11 3,725 A - - 139,982 - - 79,790 023-4639494 09/30/11 3,347 A - - 127,123 - - 72,460 023-4640644 10/28/11 3,500 A - - 133,111 - - 75,873 023-4644118 09/26/11 4,200 A - - 159,503 - - 90,917 023-4646285 09/21/11 2,400 A - - 113,931 - - 64,941 023-4647484 11/28/11 3,550 A - - 135,065 - - 76,987 023-4647528 09/29/11 2,837 A - - 107,821 - - 61,458 023-4647902 09/29/11 3,725 A - - 141,297 - - 80,539 023-4648211 09/29/11 2,750 A - - 104,250 - - 59,423 023-4651703 09/29/11 3,497 A - - 132,668 - - 75,621 023-4656492 10/07/11 3,750 A - - 142,460 - - 81,202 023-4657793 10/28/11 2,590 A - - 123,134 - - 70,186 023-4657951 10/13/11 3,175 A - - 120,684 - - 68,790 023-4661457 10/05/11 3,750 A - - 142,479 - - 81,213 023-4663832 10/17/11 2,450 A - - 93,074 - - 53,052 023-4666250 01/31/12 4,120 A - - 157,243 - - 89,629 023-4666845 10/24/11 3,062 A - - 116,408 - - 66,353 023-4670847 10/21/11 2,750 A - - 104,529 - - 59,582 59 Seriously Estimated loss Closing Gift Loan Refinanced delinquent Unpaid Claim Loss to to HUD Case number date amount status 40 case number 31 balance amount HUD 37 (57%) 023-4671874 11/02/11 2,675 A - - 101,679 - - 57,957 023-4677463 12/21/11 3,125 A - - 119,073 - - 67,872 023-4681031 11/10/11 1,500 A - - 71,337 - - 40,662 023-4684304 02/24/12 4,761 A - - 181,976 - - 103,726 023-4685555 11/04/11 2,700 A - - 102,833 - - 58,615 023-4689189 11/17/11 2,250 A - - 85,694 - - 48,846 023-4697308 11/08/11 2,706 A - - 102,963 - - 58,689 023-4702098 11/21/11 2,297 A - - 87,411 - - 49,824 023-4702183 12/02/11 2,750 A - - 104,628 - - 59,638 023-4706626 11/29/11 4,620 A - - 219,719 - - 125,240 023-4709067 12/14/11 2,750 A - - 104,836 - - 59,757 023-4714231 12/15/11 3,775 A - - 143,912 - - 82,030 023-4721748 02/29/12 3,274 A - - 125,141 - - 71,330 023-4725625 01/19/12 4,372 A - - 166,853 - - 95,106 023-4726614 12/29/11 4,058 A - - 154,647 - - 88,149 023-4728696 02/03/12 4,525 A - - 173,004 - - 98,612 023-4730076 12/22/11 2,740 A - - 130,504 - - 74,387 023-4730654 02/03/12 2,612 A - - 99,692 - - 56,824 023-4730733 12/30/11 3,050 A - - 116,215 - - 66,243 023-4732110 12/30/11 1,625 A - - 61,918 - - 35,293 023-4734017 01/09/12 2,689 A - - 128,300 - - 73,131 023-4735009 12/30/11 2,925 A - - 110,007 - - 62,704 023-4736671 01/19/12 2,247 A - - 85,804 - - 48,908 023-4742929 01/30/12 5,083 A - - 193,977 - - 110,567 023-4747167 01/18/12 3,875 A - - 147,869 - - 84,285 023-4749405 01/23/12 2,200 A - - 83,952 - - 47,853 023-4749848 01/20/12 2,300 A - - 87,767 - - 50,027 023-4751149 01/27/12 4,323 A - - 164,969 - - 94,032 023-4751631 01/24/12 2,140 A - - 102,078 - - 58,184 023-4754723 02/01/12 3,300 A - - 125,927 - - 71,778 023-4755294 01/25/12 4,420 A - - 168,677 - - 96,146 023-4759460 01/27/12 5,003 A - 13 months 190,940 - - 108,836 023-4763328 02/01/12 2,487 A - - 94,922 - - 54,106 023-4763833 02/24/12 5,137 A - - 196,336 - - 111,912 023-4764966 02/02/12 2,600 A - - 99,216 - - 56,553 023-4769842 02/03/12 3,250 A - - 124,020 - - 70,691 023-4772394 02/24/12 5,000 A - - 191,082 - - 108,917 023-4772552 03/20/12 4,409 A - - 168,754 - - 96,190 023-4773377 03/08/12 3,300 A - - 126,299 - - 71,990 023-4773830 02/10/12 3,500 A - - 133,758 - - 76,242 023-4777044 02/29/12 4,050 A - - 154,799 - - 88,235 023-4777905 02/22/12 3,617 A - - 138,234 - - 78,793 023-4777963 02/23/12 5,175 A - - 197,770 - - 112,729 023-4778634 03/06/12 3,537 A - - 135,389 - - 77,172 023-4778736 02/27/12 4,025 A - - 153,821 - - 87,678 60 Seriously Estimated loss Closing Gift Loan Refinanced delinquent Unpaid Claim Loss to to HUD Case number date amount status 40 case number 31 balance amount HUD 37 (57%) 023-4779386 03/05/12 $4,958 A - - $189,756 - - 108,161 023-4781224 02/29/12 2,875 A - - 109,872 - - 62,627 023-4782622 03/08/12 2,440 A - - 116,731 - - 66,537 023-4789065 03/07/12 2,825 A - - 108,120 - - 61,628 023-4790238 03/30/12 2,725 A - - 104,292 - - 59,446 023-4792189 03/01/12 2,625 A - - 91,584 - - 52,203 023-4792297 04/05/12 3,714 A - - 142,383 - - 81,158 023-4792330 03/23/12 2,815 A - - 107,746 - - 61,415 023-4792540 03/30/12 3,500 A - - 133,816 - - 76,275 023-4794036 03/02/12 5,475 A - - 209,235 - - 119,264 023-4799692 03/15/12 3,217 A - - 123,136 - - 70,188 023-4800242 03/23/12 3,400 A - - 130,127 - - 74,172 023-4803065 03/26/12 3,450 A - - 132,040 - - 75,263 023-4804480 03/28/12 2,625 A - - 100,424 - - 57,242 023-4805948 04/02/12 4,200 A - - 160,745 - - 91,625 023-4806242 04/03/12 3,497 A - - 133,858 - - 76,299 023-4806265 03/19/12 2,875 A - - 110,033 - - 62,719 023-4809166 03/22/12 3,450 A - - 132,040 - - 75,263 023-4810507 03/21/12 5,375 A - - 205,631 - - 117,210 023-4810894 03/27/12 3,225 A - - 123,429 - - 70,355 023-4811373 03/23/12 3,700 A - - 141,609 - - 80,717 023-4811814 03/16/12 4,412 A - - 168,878 - - 96,260 023-4821682 03/28/12 2,900 A - - 110,991 - - 63,265 023-4823581 04/02/12 4,675 A - - 178,997 - - 102,028 023-4824231 03/29/12 5,250 A - - 200,931 - - 114,531 023-4825711 03/26/12 3,225 A - - 123,429 - - 70,355 023-4829584 04/05/12 5,853 A - - 224,281 - - 127,840 023-4830422 04/04/12 2,125 A - - 81,329 - - 46,358 023-4848163 03/30/12 4,375 A - - 167,442 - - 95,442 023-4875595 05/18/12 3,550 A - - 136,170 - - 77,617 042-9347345 02/23/12 4,000 A - - 152,866 - - 87,134 043-8781461 03/30/12 4,125 A - - 157,875 - - 89,989 044-4851940 12/30/10 3,800 A - - 178,870 - - 101,956 044-4886990 05/04/11 3,875 A - - 146,695 - - 83,616 044-4958593 11/14/11 6,597 A - - 251,011 - - 143,076 045-7332342 11/18/10 3,300 A - - 156,526 - - 89,220 045-7391217 01/07/11 4,075 A - - 153,657 - - 87,584 048-6307011 10/25/10 17,250 A - - 644,444 - - 367,333 048-6317649 11/30/10 2,500 A - - 117,393 - - 66,914 048-6830554 01/31/12 3,650 A - - 139,283 - - 79,391 048-6887145 03/27/12 9,875 A - - 377,942 - - 215,427 052-6313419 04/28/11 1,900 A - - 72,820 - - 41,507 052-6358286 05/27/11 4,725 A - - 179,107 - - 102,091 052-6411267 07/22/11 2,597 A - - 98,481 - - 56,134 052-6439315 08/25/11 2,938 A - - 111,394 - - 63,495 61 Seriously Estimated loss Closing Gift Loan Refinanced delinquent Unpaid Claim Loss to to HUD Case number date amount status 40 case number 31 balance amount HUD 37 (57%) 052-6472946 02/24/12 1,998 A - - 76,337 - - 43,512 052-6501021 11/30/11 4,200 A - - 159,795 - - 91,083 052-6540372 12/05/11 2,750 A - - 104,836 - - 59,757 052-6541684 12/15/11 4,265 A - - 176,228 - - 100,450 052-6566386 12/29/11 2,500 A - - 95,306 - - 54,324 061-4027289 03/30/11 9,047 A - - 342,061 - - 194,975 061-4163468 12/23/11 3,300 A - - 157,255 - - 89,635 061-4208916 03/16/12 3,660 A - - 174,952 - - 99,723 197-5202052 11/16/10 5,380 A - - 251,624 - - 143,426 197-5416928 06/03/11 7,262 A - - 274,941 - - 156,716 197-5421385 07/21/11 8,725 A - - 330,800 - - 188,556 197-5510614 12/23/11 6,325 A - 4 months 241,004 - - 137,372 197-5751787 02/28/12 3,000 A - - 114,649 - - 65,350 361-3758729 10/12/11 4,187 A - - 159,080 - - 90,676 492-8980692 12/16/10 2,950 A - - 110,732 - - 63,117 492-9010884 01/26/11 5,250 A - - 197,963 - - 112,839 492-9025741 02/25/11 2,997 A - - 113,177 - - 64,511 492-9048112 05/24/11 2,000 A - - 75,813 - - 43,213 023-4439700 05/06/11 2,700 C - - - 9,735 9,735 - 022-2215464 10/01/10 4,790 T 022-2302721 - 183,007 - - 104,314 022-2242106 01/07/11 5,522 T 022-2399669 - 212,109 - - 120,902 022-2260927 04/21/11 4,247 T 022-2381680 - 162,787 - - 92,789 022-2271370 05/31/11 3,750 T 022-2330745 - 143,189 - - 81,618 023-3929697 02/03/11 3,812 T 023-5163545 - 147,285 - - 83,952 023-3977981 09/30/10 3,500 T 023-4793552 - 132,856 - - 75,728 023-4004244 12/28/10 3,575 T 023-4800000 - 136,063 - - 77,556 023-4244626 10/05/10 3,580 T 023-5301781 - 171,663 - - 97,848 023-4254633 10/18/10 3,100 T 023-5086551 - 149,530 - - 85,232 023-4278777 01/12/11 5,048 T 023-4759670 - 193,086 - - 110,059 023-4286478 11/12/10 1,700 T 023-5093024 - 82,311 - - 46,917 023-4287937 10/28/10 3,618 T 023-4798038 - 136,840 - - 77,999 023-4317024 03/02/11 8,957 T 023-5143875 - 335,198 - - 191,063 023-4349345 11/29/10 8,750 T 023-4796349 - 330,813 - - 188,563 023-4349397 12/02/10 3,575 T 023-4766902 - 132,822 - - 75,709 023-4369639 12/20/10 2,940 T 023-4744046 7 months 137,355 - - 78,292 023-4375193 01/07/11 1,987 T 023-4870575 - 75,916 - - 43,272 023-4378210 02/16/11 4,625 T 023-4993591 - 178,417 - - 101,698 023-4399863 01/31/11 4,000 T 023-5179069 - 152,921 - - 87,165 023-4409750 02/10/11 3,250 T 023-5006661 - 121,242 - - 69,108 023-4410873 02/14/11 3,750 T 023-4730914 - 142,645 - - 81,308 023-4415082 04/01/11 3,075 T 023-5293554 - 118,533 - - 67,564 023-4424554 03/04/11 4,250 T 023-4766919 - 161,321 - - 91,953 023-4432827 03/07/11 3,200 T 023-4742363 - 152,105 - - 86,700 023-4441047 03/11/11 3,040 T 023-5319362 - 145,291 - - 82,816 023-4442138 05/10/11 2,650 T 023-4774859 - 101,541 - - 57,878 62 Seriously Estimated loss Closing Gift Loan Refinanced delinquent Unpaid Claim Loss to to HUD Case number date amount status 40 case number 31 balance amount HUD 37 (57%) 023-4444014 03/31/11 1,540 T 023-5011308 - 75,017 - - 42,760 023-4446651 04/01/11 5,731 T 023-4745093 - 274,453 - - 156,438 023-4453521 03/24/11 2,925 T 023-4799056 - 112,161 - - 63,932 023-4453987 06/03/11 5,900 T 023-4830212 - 280,703 - - 160,001 023-4454194 03/29/11 3,642 T 023-4703528 - 138,544 - - 78,970 023-4461592 03/30/11 3,025 T 023-4715079 - 115,000 - - 65,550 023-4466851 04/18/11 3,075 T 023-4794404 - 117,377 - - 66,905 023-4468794 05/23/11 3,001 T 023-5066330 - 116,516 - - 66,414 023-4469328 04/08/11 2,750 T 023-4775253 - 105,389 - - 60,072 023-4470559 04/26/11 3,000 T 023-4804661 - 115,177 - - 65,651 023-4473880 04/28/11 2,650 T 023-5022431 - 101,454 - - 57,829 023-4474760 04/25/11 3,612 T 023-4766925 - 137,917 - - 78,613 023-4480028 04/25/11 5,430 T 023-4863676 - 208,608 - - 118,907 023-4497834 05/18/11 3,000 T 023-5047558 - 115,013 - - 65,557 023-4528041 06/03/11 4,425 T 023-4979746 - 170,468 - - 97,167 023-4540269 06/13/11 3,375 T 023-5052196 - 130,632 - - 74,460 023-4563513 06/30/11 5,050 T 023-4784176 - 193,223 - - 110,137 023-4586073 07/28/11 2,912 T 023-5242575 - 112,141 - - 63,920 023-4610788 08/24/11 4,785 T 023-4872366 - 183,062 - - 104,345 023-4610881 08/25/11 6,000 T 023-5248634 - 231,625 - - 132,026 023-4663310 10/04/11 4,012 T 023-4928494 - 155,611 - - 88,698 023-4677059 10/31/11 5,625 T 023-5151104 - 217,388 - - 123,911 023-4682089 11/01/11 4,825 T 023-5066137 - 185,932 - - 105,981 023-4701556 11/22/11 4,500 T 023-5129674 - 175,103 - - 99,809 023-4713902 12/15/11 5,147 T 023-5117528 - 199,445 - - 113,684 023-4735131 02/09/12 4,325 T 023-5173355 - 167,459 - - 95,452 023-4752955 01/26/12 5,690 T 023-5132916 - 222,048 - - 126,567 042-9130716 02/11/11 5,800 T 042-9377659 - 279,839 - - 159,508 043-8575589 06/20/11 5,250 T 043-8837916 - 202,129 - - 115,214 044-4851020 12/28/10 9,125 T 044-5029346 - 347,968 - - 198,342 045-7381894 03/15/11 3,250 T 045-7810000 - 125,273 - - 71,406 048-6369827 01/07/11 4,800 T 048-6792479 - 183,372 - - 104,522 048-6575768 06/30/11 6,500 T 048-7436009 - 251,945 - - 143,609 048-6787869 12/21/11 4,100 T 048-7372273 - 198,303 - - 113,033 052-6455347 08/26/11 4,748 T 052-7191570 - 183,657 - - 104,684 052-6547805 11/29/11 7,775 T 052-7099681 - 302,082 - - 172,187 052-6582632 01/24/12 3,675 T 052-7067705 - 142,872 - - 81,437 566-0243387 01/31/11 5,125 T 566-0490366 - 194,366 - - 110,789 Totals 12 $58,593,224 $9,73539 $ 9,735 $ 33,398,142 63 Appendix F SCHEDULE OF LOSSES FOR LOANS WITH MATERIAL UNDERWRITING DEFICIENCIES FHA loan Unpaid mortgage Actual loss to Estimated loss Claim paid number balance HUD to HUD (57%) 022-2192845 N/A 41 $ – $ – $ – 023-2971333 – 74,033 74,033 – 023-3046385 – 136,594 136,594 – 023-3167827 – 38,930 38,930 – 023-3295473 – 121,047 121,047 – 023-3502416 – 129,454 51,026 41 023-3661762 N/A – – – 023-4002794 N/A 42 – – – 023-4485740 N/A41 – – – Totals $ – $ 500,058 $ 421,630 $ – 41 Included under finding 1. 42 Loan was terminated (paid in full). 64 Appendix G LOAN SUMMARIES FOR MATERIAL UNDERWRITING DEFICIENCIES The following summaries provide details for each loan containing material underwriting deficiencies noted in finding 2. 1. FHA loan number: 022-2192845 Loan status: Active Default status: Reinstated after loss mitigation intervention This loan contains material underwriting deficiencies (violation of antiflipping waiver) that warrant indemnification; however, we are seeking indemnification based on the unallowable gift (see finding 1). Appraisal The Lending Company did not ensure that FHA’s antiflipping waiver was followed. The property was acquired on April 27, 2010, for $59,744, and the borrower’s contract for the property was signed on May 5, 2010, for $81,500, a 36 percent increase, only 1 week later. The loan closed on July 2, 2010 (66 days after the previous sale). Regulations at 24 CFR 203.37a(b)(2) state that a property is not eligible for a mortgage to be insured by FHA if the resale date is 90 days or less following the date of acquisition by the seller. However, if the sales price was 20 percent or more above the seller’s acquisition cost, the regulation was waived if the lender justified the increase in value or a second appraisal verified that the seller completed sufficient rehabilitation work to substantiate the increase in value or the appraiser provided an appropriate explanation of the increase in value. The Lending Company ordered a second appraisal; however, it showed that the cost of renovations was only $1,845, and the appraiser did not explain the increase in value. 2. FHA loan number: 023-2971333 Loan status: Claim Default status: Preforeclosure sale completed We are seeking reimbursement for the losses incurred by HUD based on The Lending Company’s not properly supporting the borrower’s commission income. Income The Lending Company did not properly support the borrower’s commission income because it was 47 percent of the borrower’s annual income for the previous year and The Lending Company did not obtain any of the borrower’s tax returns. The Lending Company determined the borrower’s monthly income using regular pay ($1,629), commission pay ($1,596), and other pay ($79); however, since the commission income was more than 25 percent of the borrower’s annual income (approximately 47 percent), The Lending Company 65 was required to obtain and analyze the most recent 2 years’ tax returns and consider business expenses in underwriting. Mortgagee Letter 2004-47 requires lenders to obtain and analyze the most recent 2 years of tax returns to consider business expenses in underwriting when the commission income exceeds 25 percent of the annual income. If the commission income was not used in qualifying the borrower, the total fixed payment-to-income ratio would have increased from 46.45 to 89.84 percent. 3. FHA loan number: 023-3046385 Loan status: Claim Default status: Preforeclosure sale completed We are seeking reimbursement for the losses incurred by HUD based on The Lending Company’s not conducting a verification of employment before the loan closed. Income The Lending Company did not verify the borrower’s current employment as required by Mortgagee Letter 2004-47. The Lending Company conducted a verification of employment on October 2, 2008; however, it was 2 days after the loan closed on September 30, 2008. 4. FHA loan number: 023-3167827 Loan status: Claim Default status: Preforeclosure sale completed We are seeking reimbursement for the losses incurred by HUD based on the revised total fixed payment-to-income ratio, which reflects the allowable qualifying income as calculated by the OIG in accordance with HUD’s requirements. After considering the overstated income and recalculation of the qualifying ratios, the total fixed payment-to-income ratio increased from 56.69 to 62.17 percent. Income The Lending Company overstated the borrower’s monthly income by $183. The Lending Company determined the borrower’s monthly base income based on the borrower’s averaging 40 hours per week ($1,886); however, the verification of employment stated that the borrower averaged 35-40 hours per week. The most recent pay stub obtained by The Lending Company covered only 30 days of the current year, and the base income for the previous year did not support that the borrower averaged 40 hours per week. Therefore, we calculated the borrower’s monthly income based on the previous 25 months. 43 43 ($19,224 [2007] + $21,617 [2008] + $1,738 [2009]) / 25 months = $1,703 66 5. FHA loan number: 023-3295473 Loan status: Claim Default status: Preforeclosure sale completed We are seeking reimbursement for the losses incurred by HUD based on the revised total fixed payment-to-income ratio, which reflects the allowable qualifying income as calculated by the OIG in accordance with HUD’s requirements. After considering the overstated income and recalculation of the qualifying ratios, the total fixed payment-to-income ratio increased from 41.03 to 53.08 percent. Income The Lending Company overstated the borrower’s monthly income by $3,291 because it did not support the “other type of income” that was used in qualifying the borrower and overstated the base income by $117. • The Lending Company determined the borrower’s total monthly income based in part on “other type of income” ($3,174); however, it was not supported or documented. The borrower’s pay stubs for the current year showed that overtime income was earned so the “other type of income” may have been for overtime. If this was the case, The Lending Company did not verify that the overtime income was received for the past 2 years and was likely to continue as required by HUD Handbook 4155.1, REV-5, paragraph 2-7A. Also, The Lending Company did not develop an earnings trend to determine whether the overtime showed a continual decline. • The Lending Company determined the borrower’s base monthly income at $6,296; however, it did not document how this amount was calculated, and we were not able to determine how it was calculated. Therefore, we calculated the base income at $6,179, 44 which is based on the average hours worked, from the three pay stubs in the loan file (76.6 hours per 2-week pay period). 6. FHA loan number: 023-3502416 Loan status: Claim Default status: N/A We are seeking reimbursement for the losses incurred by HUD based on The Lending Company’s not verifying the borrower’s employment history for the previous 2 years. Income The Lending Company did not verify the borrower’s employment history for the previous 2 years as required. HUD Handbook 4155.1, paragraph 1.3.f, states that for Technology Open to Approved Lenders accept recommendations, if the borrower was not employed with the same employer for the previous 2 years and has an employment gap of 60 days or greater, the borrower must provide a written explanation for the employment gap. The borrower was not employed with same employer for the previous 2 years. The Lending Company verified the borrower’s employment history from August 20, 2007, to May 4, 2009, and June 18 to July 44 ([$37.23 hourly rate x 76.6 hours per 2-week pay period] x 26 pay periods) / 12 months = $6,179 67 28, 2009 (the date of the verification of employment). The Lending Company did not obtain an explanation for the borrower’s unemployment from July 29 to August 19, 2007 (23 days), and the gap in employment from May 5 to June 17, 2009 (43 days), a total of 66 days. 7. FHA loan number: 023-3661762 Loan status: Active Default status: First legal action to commence foreclosure This loan had material underwriting deficiencies (understated liabilities) that warrant indemnification; however, we are seeking indemnification based on the unallowable gift (see finding 1). After considering the understated liabilities and recalculation of the qualifying ratios, the total fixed payment-to-income ratio increased from 52.52 to 56.27 percent. Credit The Lending Company understated the borrower’s monthly liabilities by $116 because it incorrectly omitted an account in qualifying the borrower. The borrower had three separate accounts for Macy’s listed on her initial credit report with different opening dates and account numbers. The three accounts had monthly payments of $33, $43, and $159. An updated credit report showed that the account with a monthly payment of $43 had been paid in full; however, The Lending Company incorrectly included this account as a liability and omitted the account with a term of $159 from the automated underwriting system. 8. FHA loan number: 023-4002794 Loan status: Terminated (paid in full) Default status: N/A This loan had material underwriting deficiencies (overstated income) that warrant indemnification; however, it was terminated (paid in full) during the audit. This loan also had an unallowable gift (see finding 1). After considering the overstated income and recalculation of the qualifying ratios, the total fixed payment-to-income ratio increased from 50.13 to 59.45 percent. Income The Lending Company overstated the borrower’s monthly income by $127. The Lending Company determined the borrower’s monthly income based in part on bonus income ($127); however, the borrower received the bonus for only approximately 18 months and did not justify and document in writing the reason for using the income as required by HUD Handbook 4155.1, paragraph 4.D.2.b. Credit The Lending Company understated the borrower’s monthly liabilities by $211 because it omitted a liability account in qualifying the borrower. The borrower’s credit report listed an account for Toyota Motor Credit with a monthly payment of $211 and a balance of $8,199. The Lending Company did not document the reasons why the account was omitted as required by the desktop underwriter underwriting findings. 68 9. FHA loan number: 023-4485740 Loan status: Active Default status: Reinstated after loss mitigation intervention This loan had material underwriting deficiencies (understated liabilities) that warrant indemnification; however, we are seeking indemnification based on the unallowable gift (see finding 1). After considering the understated liabilities and recalculation of the qualifying ratios, the total fixed payment-to-income ratio increased from 50.92 to 62.13 percent. Credit The Lending Company understated the borrower’s monthly liabilities by $447 because it determined the monthly payment for a student loan at $73; however, it did not document or support how the monthly payment was determined. The credit report listed a student loan with a balance of $10,399 and no monthly payment. The credit report stated that the repayment was deferred but did not specify the timeframe of the deferment. We were not able to determine how The Lending Company determined the monthly payment of $73, therefore; we determined the monthly payment at $520, 5 percent of the outstanding balance, which is $447 more than the monthly payment calculated by The Lending Company. HUD Handbook 4155.1, paragraph 4.C.4.c, requires the monthly payment to be calculated at 5 percent of the balance if an account has an outstanding balance but no monthly payment. 69
The Lending Company, Inc., Phoenix, AZ, Did Not Always Comply With FHA Underwriting and Quality Control Program Requirements
Published by the Department of Housing and Urban Development, Office of Inspector General on 2013-08-20.
Below is a raw (and likely hideous) rendition of the original report. (PDF)