oversight

Peoples Home Equity, Inc., Brentwood, TN, Did Not Follow HUD Requirements in Approving FHA Loans and Implementing Its Quality Control Program

Published by the Department of Housing and Urban Development, Office of Inspector General on 2014-09-30.

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

OFFICE OF AUDIT
REGION 4
ATLANTA, GA




                  Peoples Home Equity, Inc.
                       Brentwood, TN

          Single-Family Housing Mortgage Insurance
                          Program




2014-AT-1013                                  SEPTEMBER 30, 2014
                                                        Issue Date: September 30, 2014

                                                        Audit Report Number: 2014-AT-1013




TO:            Kathleen Zadareky, Deputy Assistant Secretary for Single Family Housing, HU

               //signed//
FROM:          Nikita N. Irons, Regional Inspector General for Audit, Atlanta Region, 4AGA

SUBJECT:       Peoples Home Equity, Inc., Brentwood, TN, Did Not Follow HUD Requirements
               in Approving FHA Loans and Implementing Its Quality Control Program

       Attached is the U.S. Department of Housing and Urban Development (HUD), Office of
Inspector General’s (OIG) final results of our review of Peoples Home Equity’s loan origination,
underwriting, and quality control.

        HUD Handbook 2000.06, REV-4, sets specific timeframes for management decisions on
recommended corrective actions. For each recommendation without a management decision,
please respond and provide status reports in accordance with the HUD Handbook. Please furnish
us copies of any correspondence or directives issued because of the audit.

         The Inspector General Act, Title 5 United States Code, section 8M, requires that OIG
post its publicly available reports on the OIG Web site. Accordingly, this report will be posted at
http://www.hudoig.gov.

       If you have any questions or comments about this report, please do not hesitate to call me
at 404-331-3369.
                                           September 30, 2014
                                           People Home Equity Did Not Always Follow HUD
                                           Requirements in Approving FHA Loans and
                                           Implementing Its Quality Control Program



Highlights
Audit Report 2014-AT-1013


 What We Audited and Why                    What We Found

We audited Peoples Home Equity,            Peoples did not always originate and underwrite FHA
Inc.(Peoples), a Federal Housing           insured loans in accordance with HUD requirements.
Administration (FHA) approved              Specifically, 10 of 20 loans reviewed contained
nonsupervised direct endorsement           underwriting deficiencies. This occurred because
lender located in Brentwood, TN. We        Peoples’ underwriters lacked knowledge, skills, and
selected Peoples based on its high         understanding of how to properly underwrite loans. As
default rates. The audit was part of our   a result, Peoples exposed HUD to unnecessary
annual audit plan to review single         insurance risk of more than $521,000 for six loans and
family programs and lenders. Our audit     caused HUD to pay more than $971,000 in claims for
objectives were to determine whether       four loans.
Peoples complied with HUD
requirements when it originated and      Further, Peoples did not follow HUD’s requirements
underwrote FHA loans, and                when implementing its quality control program.
implemented its quality control          Peoples’ quality control reviews were not conducted in
program.                                 compliance with requirements and the quality control
                                         plan did not have the required provisions. This
  What We Recommend                      occurred because Peoples did not ensure that its quality
                                         control contractor followed HUD’s requirements.
                                         Because of Peoples’ noncompliance with HUD’s
We recommend that the Deputy             requirements and lack of due diligence, Peoples placed
Assistant Secretary for Single Family    the FHA insurance fund at risk. As a result, the
Housing require Peoples to (1) idemnify effectiveness of Peoples’ quality control program to
six loans with unpaid balances of        guard against errors, omissions, and fraud and to
$965,262, thereby putting an estimated protect HUD from unacceptable risk was diminished.
$521,242 to better use; (2) reimburse
HUD for four claims totaling $971,959;
(3) continue training staff; (4) enforce
written controls; and (5) implement and
enforce a quality control plan.
                              TABLE OF CONTENTS


Background and Objectives                                                   3

Results of Audit
      Finding 1:    Peoples Did Not Always Originate and Underwrite
                    FHA Insured Loans in Accordance With HUD Requirements   4
      Finding 2:    Peoples Did Not Follow HUD’s Requirements When
                    Implementing Its Quality Control Program                9

Scope and Methodology                                                       11

Internal Controls                                                           13

Appendixes
A.    Schedule of Questioned Costs and Funds To Be Put to Better Use        15
B.    Auditee Comments and OIG’s Evaluation                                 16
C.    Schedule of Indemnification and Claims Repayment Amounts              23
D.    Loan Summaries                                                        24
E.    Missing Quality Control Plan Elements                                 34




                                            2
                        BACKGROUND AND OBJECTIVES
Peoples Home Equity, Inc. (Peoples), is a Federal Housing Administration (FHA) approved
nonsupervised direct endorsement lender located in Brentwood, TN. Nonsupervised lenders can
submit applications for mortgage insurance and can originate, sell, purchase, hold, and service
FHA-insured mortgages. Under the direct endorsement program, the U.S. Department of
Housing and Urban Development (HUD) authorizes approved lenders to underwrite FHA loans
without HUD’s prior review and approval. Peoples was approved by HUD as an unconditional
direct endorsement lender on April 4, 2007.

All FHA approved lenders must follow applicable Federal statues and HUD regulations,
handbooks, and mortgagee letters. FHA approved lenders are also required to implement and
continuously have in place a quality control plan for the origination of insured mortgages as a
condition of receiving and maintaining FHA approval.

According to HUD’s Neighborhood Watch system 1 between January 1, 2009, to December 31,
2013, Peoples had underwritten 7,915 loans, of which 186 loans, totaling over $26 million, were
seriously delinquent.

Our audit objectives were to determine whether Peoples complied with HUD requirements when
it originated and underwrote FHA loans, and implemented its quality control program.




1
  Neighborhood Watch is Web-based software that displays loan performance data for FHA-insured single-family
loans. The system is designed to highlight exceptions so that potential problems are readily identifiable.

                                                      3
                                RESULTS OF AUDIT


Finding 1: Peoples Did Not Always Originate and Underwrite Loans in
Accordance With HUD Requirements
Peoples did not always originate and underwrite FHA insured loans in accordance with HUD
requirements. Specifically, of 20 loans reviewed, 10 contained underwriting deficiencies.
This occurred because Peoples’ underwriters lacked knowledge, skills, and understanding of how
to properly underwrite loans. As a result, Peoples exposed HUD to unnecessary insurance risk
of more than $521,000 for six loans, and caused HUD to pay more than $971,000 in claims for
four loans.


 10 Loans With Originating and
 Underwriting Deficiencies


       Our review of 20 FHA insured loans identified 10 loans with originating and
       underwriting deficiencies (see Appendix D for loan summaries). Specifically, Peoples
       did not:

              •   Verify and properly document the borrowers’ income and employment.
              •   Obtain documents to support asset accounts.
              •   Verify and properly document the borrowers’ liabilities and credit.
              •   Resolve conflicting information between the automated underwriting system
                  and the data included in the loan file.

              HUD Handbook 4155.1and HUD Handbook 4155.1, REV-5 state the
              requirements for underwriting FHA-insured loans, including the evaluation of the
              borrower’s capacity to repay the loan, assets available to close the loan, and credit
              history. Also, the lenders decision to approve the loan must be documented,
              supported, and verifiable.




                                                4
    The table below summarizes the loan deficiencies that we identified for the 10 loans.


                      Income and
                                                        Liabilities and    Conflicting
                      employment       Assets not
                                                          credit not      information
       FHA number          not         properly
                                                        documented or         not
                      documented      documented
                                                           verified         resolved
                       or verified
       137-6482287          X
       481-2885825          X
       481-2907257          X              X
       481-3003492          X
       481-3167885                                                             X
       483-4104587                         X
       483-4119683                                            X
       483-4573143                                            X
       483-4640327         X
       483-4774309         X
       Totals              6               2                  2                1

    Peoples approved mortgage loans for FHA insurance that did not meet HUD
    requirements and represented high risks of default and foreclosure. Peoples’ loan
    underwriting deficiencies for the 10 loans placed the FHA insurance at risks by more than
    $521,000 for six loans. The FHA insurance fund also paid more than $971,000 for four
    improper loan claims (see Appendix C).

Income and Employment Were
Not Properly Documented and
Verified

    Six of the 10 loans with underwriting deficiencies included Peoples’ improperly
    documenting and verifying the income and employment, such as (1) not documenting the
    tax returns to support commission and self-employment income, (2) not verifying
    employment for two full years, (3) not documenting pay stubs, and (4) not documenting
    overtime income.

    For one loan, the Director of Mortgage Compliance stated that a junior underwriter
    reviewed the file to determine whether the loan file contained all of the required
    documentation. He stated that, based on their policy, a junior underwriter should not
    have reviewed the file. Peoples’ President stated the junior underwriter overstepped her
    authority and was terminated in 2009. Peoples did not provide the policy.

    For two loans, the Director of Mortgage Compliance stated that both loans were from
    2009 and since that time, Peoples have put various controls, processes and procedures in
    place to minimize errors. He stated that an accurate income calculation and the use of an
    income calculation worksheet have become requirements for documenting income. The

                                            5
     Director also stated that Peoples has enacted a second level review of all income. He
     stated situations such as these have been used as training opportunities.

     For two other loans, Peoples did not provide adequate documentation to support the
     loans. In the first case, Peoples did not provide the missing individual and business tax
     returns to support the borrower’s self-employment income. For the second case, Peoples
     did not document the 2 year history of dividend and interest income. Peoples stated that
     they believed the documentation of the dividend/interest income for a 13 month period
     was sufficient.

     For another loan that closed in 2011, the underwriters were advised to make sure that
     income is from pay stubs independent of verification of employment forms and that all
     income must be validated using pay stubs and or tax returns.

Assets Were Not Properly
Documented

     Two of the 10 loans with underwriting deficiencies included Peoples improperly
     documenting assets. The retirement asset documentation was missing from one loan and
     information on the percentage of vested funds that can be withdrawn and the terms and
     conditions for the withdrawals, was missing for both loans. Peoples' staff was unable to
     locate the missing retirement asset documentation.

Liabilities and Credit Not
Properly Documented and
Verified

     Two of the 10 loans with underwriting deficiencies included Peoples improperly
     documenting and verifying a collection account that was in dispute and the monthly
     payment amount for a revolving account that had a balance, but without a monthly
     payment amount shown on the credit report. In both instances, Peoples’ staff
     misinterpreted FHA guidelines on supporting and verifying disputed collection and
     revolving accounts.

Conflicting Information Was
Not Resolved

     One of the 10 loans with underwriting deficiencies involved Peoples not resolving
     inconsistencies between the automated underwriting system and data in the loan file. The
     loan involved inconsistencies with the borrower’s assets and income amounts. Peoples'
     staff could not explain the reason for the conflicting information.




                                             6
Peoples Staff Lacked Skills,
Knowledge, and Understanding
of HUD Requirements

     Peoples’ staff did not have adequate skills, knowledge, and understanding in originating
     and underwriting HUD loans. The President and Director of Mortgage Compliance
     stated that they had experienced performance issues with their underwriters. The
     performance issues involved the underwriters using inaccurate and unsupported
     information and documentation in reviewing and approving loans. There were 3
     underwriters associated with the 10 deficient loans. The underwriter that approved 8 of
     the 10 loans is still employed with Peoples. Peoples attributed her performance issues to
     her lack of underwriting knowledge. In August 2009, Peoples warned the employee
     regarding her performance and she was provided online and classroom training courses
     related to mortgage underwriting during various times from 2010 through 2014.

     The other two loans were underwritten by two different underwriters that were cited for
     having loan underwriting deficiencies. Peoples provided training to the underwriters that
     included online courses, webinars, and HUD seminars related to mortgage underwriting.
     However, one underwriter received a verbal warning in May 2009 and was terminated in
     June 2009. No corrective action was taken against the second underwriter who was
     terminated in January 2013.

     The Director of Mortgage Compliance stated that controls, processes, and procedures
     were put into place in 2009 to minimize loan errors. However, we determined that
     Peoples’ quality control program was not effective in detecting underwriting deficiencies
     (see Finding 2).

Conclusion

     Since Peoples did not comply with HUD requirements, it originated 10 loans with
     underwriting deficiencies. As a result, Peoples increased the risk to the FHA insurance
     fund by more than $521,000 for 6 loans and incurred losses of more than $971,000 for 4
     claims paid.

Recommendations

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

     1A.     Indemnify HUD $521,242 in estimated losses for six loans. The estimated loss is
             based on the loss severity rate of 54 percent of the total unpaid principal balance
             of $965,262 as of June 30, 2014.

     1B.     Reimburse HUD $971,959 for four claims paid.

                                              7
1C.   Continue to provide training to its underwriters to ensure that they follow HUD’s
      requirements for obtaining and verifying information used to qualify borrowers
      for FHA insurance.

1D.   Enforce written controls to ensure that loans comply with HUD’s requirements
      and that underwriting decisions are properly documented and supported.




                                       8
Finding 2: Peoples Did Not Follow HUD’s Requirements When
Implementing Its Quality Control Program
Peoples did not follow HUD’s requirements when implementing its quality control program.
Peoples’ quality control reviews were not conducted in compliance with requirements and the
quality control plan did not have the required provisions. This occurred because Peoples did not
ensure that its quality control contractor followed HUD’s requirements. Because of Peoples’
noncompliance with HUD’s requirements and lack of due diligence, Peoples placed the FHA
insurance fund at risk. As a result, the effectiveness of Peoples’ quality control program to guard
against errors, omissions, and fraud and to protect HUD from unacceptable risk was diminished.


    Quality Control Program Did
    Not Comply with HUD
    Requirements

          Peoples’ quality control reviews were not conducted in compliance with HUD’s
          requirements and the quality control plan did not contain the required provisions.
          Peoples’ quality control review contractor performed quality control reviews for the 10
          deficient loans and identified issues with all of them. However, the quality control
          review results for 6 of the 10 deficient loans did not include the issues that we identified.
          For the remaining four deficient loans, Peoples’ quality control contractor’s review
          included the issues that we identified, but Peoples did not document corrective actions
          taken and did not follow up to ensure that the issues were resolved.

          In addition, the contractor’s quality control plan did not contain HUD’s required
          provisions. Specifically, its plan lacked five elements required by HUD (see Appendix
          E). Also, Peoples quality control review contractor did not retain the quality control
          plans for the 2 year period required by HUD Handbook 4060.1, REV. 2. 2. The quality
          control contractor provided only the quality control plan for April 15, 2013. The
          contractor stated that he was not aware that he was required to retain copies of prior
          quality control plans for 2 years. Therefore, Peoples quality control plan used in 2012
          was not available.

    Peoples Did Not Ensure That
    Its Quality Control Reviews
    Were in Compliance

          Peoples did not ensure that its quality control contractor conducted the quality control
          reviews in compliance with HUD’s requirements. The quality control contractor was not
          aware of the 2 year file retention requirements regarding the quality control plan or the
          HUD required provisions that should be included in the plan.

2
    HUD Handbook 4060.1, REV. 2, paragraph 7-3K

                                                    9
          Peoples’ assessment of the quality control contractor’s performance was lacking. The
          Director of Mortgage Compliance stated he assessed the quality control contractor’s
          performance only for the loan files that the contractor reviewed. Peoples did not review
          the loan file to assess whether the contractor followed HUD requirements. Peoples’
          President stated that he relied on the quality control vendor to perform the quality control
          reviews in accordance with HUD requirements. Regardless of whether the quality
          control reviews are performed by Peoples or its contractor, Peoples is responsible for
          ensuring that the reviews comply with HUD Handbook 4060.1, REV.2. 3

    Conclusion

          Because of Peoples’ noncompliance with HUD’s requirements and lack of due diligence,
          the mortgagee placed the FHA insurance fund at risk. In addition, the effectiveness of
          Peoples’ quality control program to guard against errors, omissions, and fraud and to
          protect HUD from unacceptable risk was diminished.

    Recommendation

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

          2A.     Implement and enforce a quality control program that complies with HUD’s
                  requirements. Specifically, Peoples needs to ensure that quality control plans and
                  quality control reviews meet HUD’s requirements.




3
    HUD Handbook 4060.1, REV.2, paragraph 7-3(B)(2)

                                                      10
                              SCOPE AND METHODOLOGY

We conducted the audit between February and August 2014 at the Peoples’ home office in
Brentwood, TN and the HUD Office of Inspector General’s (OIG) Atlanta Regional office. Our
audit period covered loans with beginning amortization dates from January 1, 2009 to December
31, 2013, and was adjusted as necessary.

We used HUD’s Neighborhood Watch system to identify FHA-insured loans that were
originated and underwritten by Peoples. During the audit period, Peoples originated and
underwrote 7,915 loans, of which 186 were in serious default. For the 186 loans in serious
default, we did a risk ranking analysis giving consideration to include the following factors:

    •    Loans that were seriously delinquent 4;
    •    Loans originated at branch offices with high default rates;
    •    Loans with high front ratios 5;
    •    Loans with high back ratios 6; and
    •    Loans that went into early payment defaults 7.

Our risk analysis yielded a total of 53 loans. We selected a nonstatistical sample of 20 of the 53
FHA insured loans for review. The mortgages for the 20 loans totaled more than $3.4 million.
The results of this audit apply only to the items reviewed and cannot be projected to the universe
of loans originated or underwritten by Peoples.

To accomplish the audit objectives, we

    •    Reviewed applicable HUD handbooks and mortgagee letters;
    •    Reviewed reports and information on HUD’s Neighborhood Watch system;
    •    Reviewed Peoples’ organization chart, , quality control plan, contracts, quality control
         review reports, and independent audit reports;
    •    Reviewed Peoples’ written policies and procedures for originating and underwriting
         loans;
    •    Reviewed Peoples’ FHA-insured loan files; and
    •    Interviewed Peoples’ management, staff, and external quality control contractor.

We used the source documents in the loan files to review the assets, income, liabilities, and
credit of the borrowers. We used the data maintained by HUD’s Single Family Insurance

4
  Seriously delinquent loans are loans that are 90 days or more delinquent.
5
  Front Ratio is 35 percent or more. The front ratio is the borrower’s total monthly mortgage payment divided by
the borrower’s gross monthly income.
6
  Back ratio is 46 percent or more. The back ratio or debt to income ratio is the borrower’s total monthly debts (i.e.,
total monthly mortgage payments and other recurring debts) divided by the borrower’s gross monthly income.
7
  Early payment default loans are loans that go into default within 0-6 payments


                                                          11
System 8 and Neighborhood Watch to obtain the unpaid mortgage balances and claims paid for
each loan as of June 30, 2014.

Peoples hired a quality control contractor to perform its post-closing quality control reviews.
For our quality control program review, we assessed Peoples quality control plan and the
quality control reviews. The 20 loans in our sample were part of the quality control reviews.

We relied on data maintained in HUD’s Neighborhood Watch and Single Family Data
Warehouse 9 systems for informational and sampling purposes only. We also relied on data
maintained by Peoples’ system, such as electronic loan files. Although we did not perform
detailed assessments of the reliability of the data, we performed minimal levels of testing and
found the data to be adequately reliable for our purposes. Testing for reliability included the
comparison of computer-processed data to loan files and other supporting documentation.

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




8
 Single Family Insurance System provides information on the loans to include the claims amounts.
9
 Single Family Data Warehouse facilitates report processing and decision making by allowing the user to run
queries and reports on the loans.


                                                       12
                              INTERNAL CONTROLS

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

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

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


 Relevant Internal Controls

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

               •      Effectiveness and efficiency of operations – Policies and procedures that the
                      management has implemented to reasonably ensure that a program meets its
                      objectives.

               •      Compliance with laws and regulations – Policies and procedures that
                      management has implemented to reasonably ensure that resource use is
                      consistent with laws and regulations.

               We assessed the relevant controls identified above.

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

 Significant Deficiencies

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

               •      Peoples did not always properly originate and underwrite loans in
                      accordance with HUD regulations (finding 1).
                                                 13
•   Peoples did not follow HUD regulations when implementing its quality
    control program (finding 2).




                            14
                                   APPENDIXES

Appendix A

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

                                                             Funds to be
                  Recommendation                             put to better
                          number            Ineligible 1/           use 2/
                       1A                                      $521,242
                       1B                        $971,959


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. The amount shown represents claims paid by HUD’s insurance
     fund.

2/   Recommendations that funds be put to better use are estimates of amounts that could be
     used more efficiently if an Office of Inspector General (OIG) recommendation is
     implemented. These amounts include reductions in outlays, deobligation of funds,
     withdrawal of interest, costs not incurred by implementing recommended improvements,
     avoidance of unnecessary expenditures noted in preaward reviews, and any other savings
     that are specifically identified. In this instance, implementation of recommendation 1A
     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 54 percent of the unpaid principal balance when it sells a
     foreclosed-upon property (see the estimated loss to HUD in Appendix C). The 54
     percent loss rate is based on HUD Single Family Acquired Asset Management System’s
     computation for the third quarter of fiscal year 2014 based on actual sales.




                                            15
Appendix B

        AUDITEE COMMENTS AND OIG’S EVALUATION


Ref to OIG Evaluation   Auditee Comments




Comment 1




Comment 2


Comment 3


Comment 4


Comment 2




                         16
Comment 5



Comment 2




Comment 6




Comment 7




Comment 8




Comment 2




            17
Comment 9




Comment 2



Comment 10




Comment 11




             18
Comment 12




             19
                          OIG Evaluation of Auditee Comments

Comment 1    For loan number 137-6482887, Peoples agrees that the income for the co-
             borrower did not support $925. We agree the borrower’s income based on the
             pay stubs was $5,000 per month and not $4,656 used by the underwriter. Peoples
             stated that the total income that was fully supported by documentation was
             $5,232, which would decrease the amount of the back end debt to income ratio
             and would not increase the loan risk level. However, Peoples did not provide
             documentation to support the negative $407 for employee business expenses and
             $639 in income for the co-borrower. Without the supporting documentation, we
             cannot determine the borrowers’ debt to income ratio. As a result, the total
             income claimed by the underwriter in the AUS could not be verified.

Comment 2    Peoples stated it has implemented a policy that requires an income calculation
             worksheet completed by the underwriter and uploaded it to the loan file for
             record retention. Since it did not complete the policies before the end of our site
             visit, HUD will be responsible for reviewing the policy.

Comment 3    For loan number 481-2885825, Peoples commented that it agreed with the
             finding as it relates to verifying the borrower’s overtime using a two year
             history. However, Peoples stated that removing the overtime would increase the
             debt to income ratio to 35.9 percent and that the loan would highly probably
             remain as approved and eligible with the increase of the debt to income ratio.
             Because Peoples did not properly document the borrower’s income in the
             automated underwriting system we do not know if the loan would have been
             approved and eligible with the increased debt to income ratio. The underwriter
             showed the borrower had a total income of $2,739 but this amount included
             overtime income of $650 which should have been listed separately. As a result,
             Peoples had income information that was inaccurate and was not properly verified
             and documented.

Comment 4    Based on additional documentation provided by Peoples regarding the
             discrepancy between the 2008 annual earnings and the December paystub has
             been resolved. We deleted the statement from the finding.

Comment 5 Peoples agreed with the finding cited for loan number 481-2907257. Peoples
          cited HUD Handbook 4155.1, Rev-5, 2-7H for retirement accounts; however,
          HUD Handbook 4155.1, Rev-5, 2-10K relates to retirement assets. HUD
          Handbook 4155.1 had been updated when the loan was underwritten on February
          27, 2009; therefore, HUD Handbook 4155.1, Rev-5 was applicable.




                                              20
Comment 6     Peoples stated that it is in agreement with the finding cited for loan number 481-
              3167885. Peoples stated it has implemented a process that it will not rerun the
              loan in the automated underwriting system once the loan has been closed.
              Peoples also stated the information in the automated underwriting system must
              match information provided to HUD through the insuring process. We also
              found inconsistencies between the automated underwriting system data and the
              data in the loan file. Peoples need to ensure that the loan information is correct
              prior to closing the loan.

Comment 7     Peoples does not agree with our finding on loan number 483-4119683. HUD
              Handbook 4155.1, Rev-5 paragraph 2-3, states that while minor derogatory
              information occurring two or more years in the past does not require
              explanation, major indications of derogatory credit-including judgments,
              collections, any other recent credit problems-require sufficient written
              explanation from the borrower. The HUD regulation considers a collection
              account as major derogatory credit that must be analyzed and documented. The
              credit report shows the collection account as in dispute and that it had not been
              resolved. The credit report did not show the balance due on the account. The
              disputed collection account may not be included in the borrower’s FICO score.
              The underwriter should have analyzed and documented its review of the
              disputed collection account to include obtaining an explanation for the disputed
              collection account and the amount in dispute. The disputed account could have
              resulted in a downgrade to manually underwrite the loan.

Comment 8     Peoples comment states that it is in agreement with the finding cited for loan
              number 483-4573143. Peoples stated it has implemented a policy that revolving
              accounts that do not display a payment must be calculated at 5 percent of the
              outstanding balance. Since it did not complete the policies before the end of our
              site visit, HUD will be responsible for reviewing the policy.

Comment 9     Peoples stated that it agreed with the finding cited for loan number 483-4774309
              and the underwriter did not obtain the required two years of business tax returns.
              However, Peoples stated it determined that the findings did not increase the risk
              level of the loan based on the information and supporting documentation. We
              disagree, the missing tax information could have increased the risk level of the
              loan due to borrower having business debts that were not analyzed by the
              underwriter. The borrower’s loan was in default due to curtailment of the
              borrower’s income

Comment 10 We acknowledge that Peoples provided training during the audit since
           performance issues were identified with the underwriters associated with the
           deficient loans. Peoples used training as a means to improve loan underwriting.
           We did not review the adequacy of the training provided and cannot attest to its
           effectiveness, but acknowledge this is a positive step to improve underwriting
           performance. Since Peoples did not complete the policies before the end of our
           site visit, HUD will be responsible for reviewing the policy.

                                              21
Comment 11 We agree that Peoples is responsible for ensuring that its quality control
           contractor meets HUD requirements. We also agree that quality control reviews
           were performed, however, Peoples did not provide documentation to support
           that it had confirmed and ensured the quality control contractor followed HUD
           requirements. People stated it completed a vendor management review of its
           quality control contractor during the first quarter of this year, but did not provide
           documentation of the review. Peoples also did not document that it had
           performed an adequate review of the contractor’s performance.

Comment 12 We agree that Peoples conducted quality control reviews. However,
           improvements are needed regarding Peoples’ quality control program. The
           quality control contractor’s plan was missing five elements and the quality
           control contractor did not always include the issues we identified. In addition,
           Peoples staff did not always document corrective actions taken or follow up to
           resolve issues with the loans. Peoples stated that it plans to implement a new
           correct action plan in the next 120 calendar days. The plan will be reviewed by
           HUD.




                                              22
Appendix C

           SCHEDULE OF INDEMNIFICATION AND CLAIMS
                    REPAYMENT AMOUNTS


                             Original mortgage




                                                   Unpaid principal




                                                                                                                      Loan status as of
                                                                                              HUD paid claim
                                                                        Loss to HUD 10




                                                                                                                       June 30, 2014
          FHA loan
           number




                                                      balance
                                  amount




     137-6482287         $ 228,285               $220,947             $119,311           $      0.00                     Reinstated
     481-2885825         $ 103,098                 $98,425            $ 53,150           $      0.00              First legal action
     481-2907257         $ 123,717               $122,050             $ 65,907           $      0.00              First legal action
     481-3003492         $ 137,362               $134,190             $ 72,463           $      0.00                     Reinstated
     481-3167885         $ 218,556               $    0.00            $   0.00           $    70,648           Preforeclosure sale
     483-4104587         $ 166,920               $    0.00            $   0.00           $   177,669                    Assignment
     483-4119683         $ 365,180               $    0.00            $   0.00           $   378,469                   Conveyance
     483-4573143         $ 208,590               $196,004             $105,842           $      0.00              First legal action
     483-4640327         $ 203,701               $193,646             $104,569           $      0.00                     Delinquent
     483-4774309         $ 326,230               $    0.00            $   0.00           $   345,173                    Assignment
        Total            $2,081,639              $965,262             $521,242           $   971,959




10
  We classified $521,242 as funds to be put to better use (see Appendix A). This is 54 percent of the $965,262 in
unpaid principal balances for the six loans as of June 30, 2014. The 54 percent is the estimated percentage of loss
HUD would incur when the FHA property is foreclosed upon and resold as supported by the HUD Single Family
Acquired Asset Management for the third quarter of fiscal year 2014 based on actual sales.


                                                                      23
Appendix D

                                   LOAN SUMMARIES
FHA case number: 137-6482287
Mortgage amount: $228,285
Date of loan closing: January 25, 2012
Payments before first default: 4
Unpaid principal balance: $220,947
Status as of June 30, 2014: Reinstated after loss mitigation intervention
Total claim paid: $0

Underwriting Deficiency:

      •   Borrower’s income was not properly supported.

Peoples did not properly document the borrowers’ income as required by HUD Handbook
4155.1. 11 There was no documentation in the loan file to support the total monthly income of
$5,098 for the borrower and base income of $925 for the co-borrower as shown in the automated
underwriting system and on the loan application. Peoples did not include documentation in the
loan file to support how the qualifying income was determined.
.




11
     HUD Handbook 4155.1 4.D.1.a




                                                24
FHA case number: 481-2885825
Mortgage amount: $103,098
Date of loan closing: February 4, 2009
Payments before first default: 10
Unpaid principal balance: $98,425
Status as of June 30, 2014: First legal action to commence foreclosure
Total claim paid: $0

Underwriting Deficiencies:

      •   Borrower’s income was not properly supported and verified.

Peoples did not properly document and verify the borrower’s income. The automated
underwriting system showed that the borrower had a total monthly base employment income of
$2,739. However, this amount included overtime income of $650. Peoples included overtime
income in the base employment amount when it should have been listed on the automated
underwriting system as a separate amount. Peoples had only 1 year of overtime documented in
the loan file. Peoples did not follow HUD Handbook 4155.1, REV-5 12 guidelines and develop a
2 year average and earnings trend for the overtime income. Although the FHA guidelines may
accept periods of less than 2 years, Peoples did not justify or document in writing the reason for
using the overtime income for qualifying purposes as required.




12
     HUD Handbook 4155.1, REV-5, paragraph 2-7 A

                                                   25
FHA case number: 481-2907257
Mortgage amount: $123,717
Date of loan closing: February 27, 2009
Payments before first default: 12
Unpaid principal balance: $122,050
Status as of June 30, 2014: First legal action to commence foreclosure
Total claim paid: $0
HUD loss: N/A

Underwriting Deficiencies:

      •   Borrower’s assets were not properly supported.
      •   Borrower’s income was not properly verified.

Peoples did not properly document the borrower’s retirement assets of $8,987 that was used as
assets counted towards available funds. Specifically, Peoples did not document the percentage
of vested funds that can be withdrawn and the terms and conditions for the withdrawals as
required by HUD Handbook 4155.1 REV-5. 13 Peoples also could not support that the borrower
had reserves after closing. Peoples automated underwriting system report showed $13,637 in
funds available, which included $4,650 in checking and $8,987 in retirement funds. The report
also showed the funds required to close as $4,357 and the reserve amount as $9,280. The
borrower’s funds totaling $4,650 were supported and verifiable. However, the portion of the
assets not used to close the loan but supported that the borrower had reserves ($8,987) was not
properly documented.

Peoples also did not properly verify the borrower’s dividend and interest income. The
borrower’s dividend and interest income should have been excluded because it did not meet
HUD Handbook 4155.1, REV-5 14 guidelines that a 2 year history of receipt is required. Peoples
could document only the receipt of dividend/interest income for a 13 month period.



.




13
     HUD Handbook 4155.1, REV-5, paragraph 2-10 K
14
     HUD Handbook 4155.1, REV-5, paragraph 2-7H

                                                    26
FHA case number: 481-3003492
Mortgage amount: $137,362
Date of loan closing: July 15, 2009
Payments before first default: 5
Unpaid principal balance: $134,190
Status as of June 30, 2014: Reinstated by mortgagor without loss mitigation claim
Total claim paid: $0

Underwriting Deficiencies:

      •   Borrower’s income and employment were not properly supported and verified.

Peoples did not properly support and verify the borrower’s income and employment. The
automated underwriting system showed that the borrower had a base employment monthly
income of $2,743. However, the pay stubs in the loan file showed that the borrower had received
commission income and tips in 2009 and not a salary. Peoples also did not document and verify
whether the borrower had received salary or commission income in 2007 and 2008. There were
no pay stubs, W-2s, or tax returns in the loan file for income received in 2007 and 2008. Peoples
did not analyze the borrower’s average commission income over the previous 2 years using tax
returns and the most recent pay stub as stipulated in HUD Handbook 4155.1 15. Peoples also did
not analyze commission income to determine whether it had decreased from one year to the next
and whether it had been received for more than one year as required. In addition, Peoples did not
properly document and verify the borrower’s employment history for the most recent2 full years
as stipulated in HUD Handbook 4155.1. 16 The loan file did not contain the required employment
history documentation for 1 of the 2 years. The loan file contained a statement from the
borrower that her former employer was no longer in business. However, there was no W-2 or
income verification from the IRS in the loan file to confirm the borrower’s previous
employment.




15
     HUD Handbook 4155.1, paragraph 4.D.2.g
16
     HUD Handbook 4155.1, paragraph 4.D.1.b

                                               27
FHA case number: 481-3167885
Mortgage amount: $218,556
Date of loan closing: May 17, 2010
Payments before first default: 7
Unpaid principal balance: N/A
Status as of June 30, 2014: Preforeclosure sale completed
Total claim paid: $70,648

Underwriting Deficiencies:

      •   Borrower’s assets and income included inconsistencies between the automated
          underwriting system and data in the loan file.

Peoples did not resolve conflicting information in the loan file regarding the borrower’s assets
and income. Peoples did not ensure that the mortgage loan application package contained all
documentation that supports the lender’s decision to approve the mortgage loan as required by
HUD Handbook 4155.1. 17 The borrower closed on May 17, 2010, but there were two automated
underwriting system reports for the borrower. The first one was completed on April 19, 2010,
prior to the loan closing, and the other one was completed on May 25, 2010, after the loan
closed. There was no other automated underwriting system report before the borrower's closing
and the loan was not manually underwritten. The asset and income information for the
automated underwriting system, dated April 19, 2010, which was the one closest to the
borrower's closing date of May 17, 2010, was inconsistent with the data included in the loan file.

The automated underwriting system, dated April 19, 2010, showed that the total assets of
$12,374 were counted towards available funds. However, the bank statements in the loan file did
not support the checking or savings balances of $1,174 and $3,700, respectively. Further, the
gift funds of $7,500 were not documented in the loan file.

The automated underwriting system also listed the total income as $3,680. However, the
documentation in the loan file did not support the social security/disability or base employment
income of $777 and $2,903, respectively. The loan file documentation supports the social
security/disability income as $1,174. Further, the borrowers’ base income was documented in
the loan file as $2,864, not $2,903. The loan defaulted due to curtailment of borrower’s income.




17
     HUD Handbook 4155.1, paragraph 1.B.1.g

                                                28
FHA case number: 483-4104587
Mortgage amount: $166,920
Date of loan closing: June 3, 2009
Payments before first default: 2
Unpaid principal balance: N/A
Status as of June 30, 2014: Assignment
Total claim paid: $177,669

Underwriting Deficiency:

       •   Borrower’s assets were not properly documented.

Peoples did not have documentation to support the retirement assets of $6,824 that were used as
assets counted towards available funds. The retirement asset documentation was not in the loan
file. Peoples was required to verify and document the most recent depository or brokerage
statement to show the percentage of vested funds that can be withdrawn and the terms and
conditions for the withdrawals as stated in HUD Handbook 4155.1. 18 Peoples also could not
support that the borrower had reserves after closing. Peoples’ automated underwriting system
report showed the total funds available as $13,195, consisting of $771 in checking, $5,600 in gift
funds, and $6,824 in retirement funds. The report showed funds required to close as $6,316 and
$6,879 in reserves. The borrower had enough funds to close and they were verifiable. However,
the portion of the assets not used to close the loan, can be counted as reserves as long as it can be
supported and verified. Therefore, $6,824 of the $6,879 reserve amount should have been
supported. The loan defaulted due to curtailment of the borrower’s income.




18
     HUD Handbook 4155.1, paragraph 5.B.3.a

                                                 29
FHA case number: 483-4119683
Mortgage amount: $365,180
Date of loan closing: March 2, 2009
Payments before first default: 2
Unpaid principal balance: N/A
Status as of June 30, 2014: Property Conveyed to HUD
Total claim paid: $378,469

Underwriting Deficiencies:

      •   Borrower’s credit and liabilities were not properly supported and verified.

Peoples did not properly document and verify a collection account that was in dispute based on
the borrower’s credit report. There was no documentation in the loan file explaining the disputed
collection account and the amount in dispute. The missing documentation is needed to
determine whether the loan should have been downgraded to manually underwrite the loan.
There was no documentation in the loan file to support that Peoples required the borrower to
explain the collection, as required by HUD Handbook 4155.1, REV-5. 19 Peoples also did not
document its reasons for approving a mortgage when the borrower had a disputed collection
account. Peoples did not determine the actual amount of the collection. The loan defaulted due
to curtailment of borrower’s income.




19
     HUD Handbook 4155.1, REV-5, paragraph 2-3

                                                  30
FHA case number: 483-4573143
Mortgage amount: $208,590
Date of loan closing: November 15, 2010
Payments before first default: 9
Unpaid principal balance: $196,004
Status as of June 30, 2014: First Legal Action to Commence Foreclosure
Total claim paid: $0

Underwriting Deficiency:

      •   Borrower’s liabilities were not properly supported and verified.

Peoples did not properly document and verify the borrower’s liabilities. Peoples did not include
documentation in the loan file to support how the borrower’s monthly payment of $496 for a
revolving account was determined. The automated underwriting system showed that the
borrower had a monthly liability of $496 for a $24,387 credit card balance. The credit report
showed that the account was a revolving account with no monthly amount shown. Based on
Handbook 4155.1, 20 the monthly amount should have been $1,219 or 5 percent of the $24,387
credit card balance, instead of the $496 shown on the automated underwriting system. The loan
file did not contain a letter from the creditor or a current statement from the creditor
documenting the monthly balance, as required by HUD Handbook 4155.1.

Based on the loan data, Peoples understated the borrower’s monthly liabilities by $723. The
automated underwriting system showed the borrower’s front ratio was 37.61 percent and back
ratio was 50.60 percent. However, if the correct calculations were done, the borrower’s front
and back ratios would be 37.61 and 69.61 percent.




20
     HUD Handbook 4155.1, paragraph 4.C.4.c

                                                  31
FHA case number: 483-4640327
Mortgage amount: $203,701
Date of loan closing: February 25, 2011
Payments before first default: 10
Unpaid principal balance: $193,646
Status as of June 30, 2014: Delinquent
Total claim paid: $0

Underwriting Deficiency:

      •   Borrower’s income was not properly supported and verified.

Peoples did not properly support and verify the borrower’s income that was used as the source of
income for the loan. There was no documentation in the loan file to support how the borrower’s
monthly income was determined. The loan file did not contain pay stubs to support the
borrower’s monthly income of $1,453, as required by HUD Handbook 4155.1. 21




21
     HUD Handbook 4155.1 paragraph 4.D.2.a


                                                32
FHA case number: 483-4774309
Mortgage amount: $326,230
Date of loan closing: November 29, 2011
Payments before first default: 3
Unpaid principal balance: N/A
Status as of June 30, 2014: Assignment
Total claim paid: $345,173

Underwriting Deficiency:

      •   Borrower’s income was not properly documented and verified.

Peoples did not properly document and verify the borrower’s income. Peoples did not have
documentation in the loan file to support how the borrower’s other income was determined.
There was no supporting documentation for the negative amount of $1,569 in other type of
income used in the underwriter’s self-employed income analysis. The loan file did not contain
the individual and self-employment income documentation for the borrower, as required by
HUD Handbook 4155.1. 22 For tax years 2009 and 2010, there were no individual tax returns,
including all of the supporting schedules, in the loan file. Also, the Federal business tax return
and schedules for tax year 2009 were not in the loan file. In addition, the loan file did not
contain a verification of the existence of the borrower’s business. The reason for the loan default
was curtailment of the borrower’s income.




22
     HUD Handbook 4155.1, paragraph 1.B.2.g and HUD Handbook 4155.1, paragraph 4.D.4.d


                                                     33
Appendix E

         MISSING QUALITY CONTROL PLAN ELEMENTS
Peoples’ contractor’s quality control plan did not contain the following five required elements
according to HUD Handbook 4060.1, REV-2:


   •   Findings of fraud or other serious violations must be immediately referred, in writing, to
       the Director of Quality Assurance Division in the HUD Homeownership Center having
       jurisdiction In lieu of submitting a paper report, mortgagees must use the Lender
       Reporting feature in the Neighborhood Watch Early Warning System. If HUD staff is
       suspected of involvement, refer to the Office of Inspector General at 451 7th Street SW,
       Room 8256, Washington, DC 20410. A mortgagee’s quality control program must
       ensure that findings discovered by employees during the normal course of business and
       by quality control staff during reviews and audits of FHA loans are reported to HUD
       within 60 days of the initial discovery.

   •   The quality control review report and follow-up, including review findings and actions
       taken, plus procedural information, such as the percentage of loans reviewed, basis for
       selecting loans, and who performed the review, must be retained by the mortgagee for a
       period of 2 years. These records must be made available to HUD upon request.

   •   Mortgagees closing more than 15 loans monthly must conduct quality reviews at least
       monthly and must address 1 month’s activity. Mortgagees closing 15 or fewer loans
       monthly may perform quality control reviews on a quarterly basis.

   •   Determine that no employee involved in HUD’s origination, processing, underwriting or
       servicing that has been debarred, suspended, subject to a Limited Denial of Participation
       or otherwise restricted from participation in HUD or FHA programs. Mortgagees must
       periodically check employee lists at least semi-annually.

   •   Mortgagees must review all loans that go into default within the first six payments.




                                                34