oversight

LoanCare Did Not Always File Claims for Foreclosed-Upon Properties Held on Behalf of Ginnie Mae and Convey Them to FHA in a Timely Manner

Published by the Department of Housing and Urban Development, Office of Inspector General on 2015-09-30.

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

   LoanCare, LLC, Virginia Beach, VA
                            Ginnie Mae Program




Office of Audit, Region 7              Audit Report Number: 2015-KC-1012
Kansas City, MO                                        September 30, 2015
To:            Michael Drayne, Senior Vice President, Office of Issuer and Portfolio
               Management,TS
               //signed//
From:          Ronald J. Hosking, Regional Inspector General for Audit, 7AGA
Subject:       LoanCare Did Not Always File Claims for Foreclosed-Upon Properties Held on
               Behalf of Ginnie Mae and Convey Them to FHA in a Timely Manner




Attached is the U.S. Department of Housing and Urban Development (HUD), Office of Inspector
General’s (OIG) final results of our review of LoanCare’s master subservicer responsibilities
related to foreclosed-upon properties held on behalf of the Government National Mortgage
Association (Ginnie Mae).
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
913-551-5870.
                      Audit Report Number: 2015-KC-1012
                      Date: September 30, 2015

                      LoanCare Did Not Always File Claims for Foreclosed-Upon Properties Held
                      on Behalf of Ginnie Mae and Convey Them to FHA in a Timely Manner



Highlights

What We Audited and Why
We audited LoanCare, LLC, because of concerns that the Government National Mortgage
Association’s (Ginnie Mae) single-family master subservicers did not file claims with the
Federal Housing Administration (FHA) for foreclosed-upon properties in a timely manner. Our
audit objective was to determine whether LoanCare conveyed foreclosed-upon properties held on
behalf of Ginnie Mae, filed claims with FHA, and remitted the funds to Ginnie Mae on time.

What We Found
LoanCare did not always convey properties to FHA, file claims with FHA, or remit claim funds
to Ginnie Mae on time. It did not always (1) convey foreclosed-upon properties to FHA within
30 days of acquiring possession and title, (2) file the part B portion1 of its conveyance claim
within 45 days of the date the deed was filed for record or within 15 days of the title approval
letter date, and (3) remit FHA claim funds to Ginnie Mae within 2 business days. As a result,
FHA’s insurance fund was subjected to additional costs, and Ginnie Mae was unable to recover
its costs on time.

What We Recommend
We recommend that Ginnie Mae require LoanCare to repay any additional costs associated with
the violations noted.




1
 Servicers file claims with FHA on form HUD-27011, Single-Family Application for Insurance Benefits. The
claim form has two parts: Part A: General Information and Part B: Fiscal Data.
Table of Contents
Background and Objective......................................................................................3

Results of Audit ........................................................................................................4
         Finding 1: LoanCare Did Not Always Take Timely Actions on Foreclosed-Upon
         Properties Held on Behalf of Ginnie Mae ....................................................................... 4

Scope and Methodology ...........................................................................................7

Internal Controls ......................................................................................................8

Appendixes ................................................................................................................9
         A. Auditee Comments and OIG’s Evaluation ............................................................... 9

         B. File Review Summaries ........................................................................................... 17




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Background and Objective
LoanCare is a nonsupervised mortgage company approved to operate by the U.S. Department of
Housing and Urban Development (HUD) since May 27, 1986. It is headquartered in Virginia
Beach, VA, and is a Government National Mortgage Association (Ginnie Mae) authorized issuer
of mortgage-backed securities. It was contracted with Ginnie Mae to be a single-family master
subservicer from 2009 until 2014, when its contract expired. As a Ginnie Mae single-family
master subservicer, its duties included providing services in connection with issuer defaults and
servicing current, delinquent, and defaulted loans, including foreclosure services, management
and disposition of acquired properties, and preparation and submission of insurance or guarantee
claims to the Federal Housing Administration (FHA), U.S. Department of Agriculture Rural
Development (RD), U.S. Department of Veterans Affairs (VA), and HUD’s Office of Public and
Indian Housing (PIH). Specifically, LoanCare was required to service the mortgages or the
installment loan contracts in accordance with relevant agency regulations, its contract with
Ginnie Mae, and the Ginnie Mae Mortgage-Backed Securities (MBS) Guide.

Ginnie Mae is a unique program in that it uses the explicit full faith and credit guarantee of the
U.S. Government to back its mortgage-backed securities. Ginnie Mae is authorized by Title III
of the National Housing Act, as amended, to guarantee the timely payment of principal and
interest on securities that are issued by approved entities and which are backed by FHA, VA,
RD, or PIH mortgages. It does not make or purchase mortgage loans, nor does it buy, sell, or
issue securities. Instead, private lending institutions approved by Ginnie Mae originate eligible
government loans, pool them into securities, and issue mortgage-backed securities. Ginnie Mae,
in turn, guarantees the performance of the lenders that issue the securities and that continue to
service and manage the underlying loans.

When a Ginnie Mae-approved issuer defaults, Ginnie Mae steps into the role of the issuer and
makes the timely pass-through payments to investors and then assumes the servicing rights and
obligations of the issuer’s entire Ginnie Mae-guaranteed pooled loan portfolio of mortgage-
backed securities using its master subservicer.

Our objective was to determine whether LoanCare conveyed foreclosed-upon properties held on
behalf of Ginnie Mae, filed claims with FHA, and remitted the funds to Ginnie Mae on time.




                                                 3
Results of Audit

Finding 1: LoanCare Did Not Always Take Timely Actions on
Foreclosed-Upon Properties Held on Behalf of Ginnie Mae
LoanCare did not always convey properties to FHA, file claims with FHA, or remit claim funds
to Ginnie Mae on time for 10 loans reviewed. It believed that the delays were justified and
beyond its control, and it did not understand that such delays were allowable only if it received
an extension from FHA. As a result, FHA’s insurance fund was subjected to additional costs,
and Ginnie Mae was unable to recover its costs on time.
Delayed Actions
LoanCare did not always convey foreclosed-upon properties to FHA, file claims with FHA, and
remit claim funds to Ginnie Mae on time. The table below breaks down these deficiencies.
                                     Post-foreclosure Delays

           Untimely actions                      Number of properties with delays
Conveying property to FHA                                    6 of 6
Filing part B claim with FHA                                 5 of 6
Remitting funds to Ginnie Mae                                4 of 5


Ten loans were reviewed, but not all aspects could be evaluated for each loan. See appendix B
for further details.
Delayed Conveyance
LoanCare did not always convey foreclosed-upon properties to FHA on time. Regulations at 24
CFR 203.359 require servicers to convey properties to FHA within 30 days of acquiring
possession and title. Possession is defined as when the property is vacant. LoanCare conveyed
five of the properties reviewed between 91 and 370 days after it took possession of them. It did
not convey a sixth property, instead transferring it to a new master subservicer 59 days after
acquiring possession.
In addition, LoanCare did not always remove personal property from foreclosed-upon homes
within the 30-day timeframe. HUD Handbook 4330.4, paragraph 2-2(D)(4), states that the
servicer must act promptly to ensure that all personal property has been removed within 30 days
after acquiring title and possession.
For example, on one loan, LoanCare completed the removal of personal property 140 days after
it acquired possession and conveyed the property on day 268.




                                                 4
Delayed Filing of Part B of the Claim
LoanCare did not always file the part B portion of its conveyance claim within the required
timeframe. HUD Handbook 4330.4, paragraph 2-2(H), states that the servicer must submit part
B of form HUD-27011 to FHA within 45 days of the date the deed is filed for record or submit it
within 15 calendar days of the approval letter received date, whichever is later. LoanCare filed
part B of the conveyance claim for two of the loans reviewed between 51 and 55 days after the
deed was recorded or approval letter received date. It did not file part B for three additional
properties, instead transferring them to a new master subservicer after the 45 days had passed.
Delayed Remittance of Funds
LoanCare did not always remit FHA claim funds to Ginnie Mae on time. Its contract with
Ginnie Mae required it to remit all claim funds received by the second business day following
receipt of the funds. LoanCare did not meet this requirement for four of the five loans reviewed,
remitting funds on the third to fifth business days.
Misunderstood Requirements for Delays
LoanCare believed that the delays were justified and beyond its control, and it did not understand
that such delays were allowable only if it received an extension from FHA. During the audit,
LoanCare noted that the delays in conveying the properties and filing claims were justified and
beyond its control because in many cases, the properties needed repairs before they would be in
conveyance condition and also the records needed to file the claims were often difficult to obtain.
LoanCare had inherited these loans from defaulted issuers so it had not been responsible for the
loans during all of the servicing. In several cases, property condition issues prevented timely
conveyance. However, these reasons did not fully account for the delays and in several cases,
damages or title defects occurred after the conveyance deadline. For example, in one case,
LoanCare identified roof damage 14 days after it took possession of the property but failed to
convey it for a full year. LoanCare did not understand that to exceed the established timeframes,
it needed to request and receive an extension of time from FHA. It did not request an extension
for any of the sampled items as it believed that once the prior servicer had missed the initial
deadline to file for foreclosure, an extension request was not necessary since interest was already
being curtailed. However, HUD Handbook 4330.4, section 2-3, states that if the servicer cannot
comply with the time requirements for a particular action because of circumstances beyond its
control, it should submit a form HUD-50012 to FHA to request an extension of time.
Financial Impact
As a result of LoanCare’s noncompliance, the FHA fund was subjected to additional costs, and
Ginnie Mae was unable to recover its costs on time.
The delays in conveyance caused the FHA insurance fund to pay out more claim funds for
property preservation costs, such as lawn maintenance, repairs, and inspections, as well as hazard
insurance costs and property taxes.
Also, Ginnie Mae advanced funds to LoanCare to reimburse it for property preservation costs
and the costs of eviction and repairs. When LoanCare did not convey the properties to FHA
promptly, Ginnie Mae had to continue advancing funds for property preservation costs during the
delay. Further, the delays in filing the part B claims and remitting claim funds to Ginnie Mae
resulted in Ginnie Mae’s carrying these costs longer than necessary before receiving


                                                 5
reimbursement. Ginnie Mae’s liquid assets were reduced until it could recover the costs from
FHA’s insurance fund, and it missed out on potential interest from the delayed remittances.
Conclusion
LoanCare did not take prompt actions on foreclosed-upon properties it serviced for Ginnie Mae.
These delays negatively impacted FHA’s insurance fund because of extra outflows. They also
affected Ginnie Mae due to delays in receiving claim funds and lost interest. Because LoanCare
is no longer contracted by Ginnie Mae to perform this function, we are not recommending that
Ginnie Mae require it to receive training or change its practices. However, Ginnie Mae should
require LoanCare to return any funds that it was not entitled to receive for servicing the sampled
loans.
Recommendation
We recommend that Ginnie Mae
1A. Require LoanCare to repay any additional costs associated with the violations noted.




                                                 6
Scope and Methodology
Our audit period generally covered October 1, 2013, through September 30, 2014. We
performed our audit work from May through September 2015. We conducted onsite work at
LoanCare’s home office located at 3637 Sentara Way, Virginia Beach, VA.

To accomplish our objective, we

      Reviewed the Code of Federal Regulations and HUD handbooks;
      Reviewed the contract between Ginnie Mae and LoanCare;
      Reviewed LoanCare’s audited financial statements;
      Reviewed relevant documents in the loan files, such as inspection reports, claim
       packages, reconveyance notices, case chronologies, and other legal documents;
      Reviewed information in Neighborhood Watch, a HUD system designed to provide
       comprehensive data for tracking the performance of loans originated, underwritten, and
       serviced by FHA-approved lenders;
      Reviewed claim remittances; and
      Interviewed LoanCare and HUD employees.

We selected a sample of 10 loans for review. This was a sample of five properties conveyed to
HUD and five properties transferred to another master subservicer, Selene Finance. For loans
that were conveyed to HUD, we determined the number of days between when the foreclosure
sale was completed and the date the property was conveyed to HUD. We then selected the five
properties that had the greatest number of days between the foreclosure sale completion date and
the conveyance to HUD date, which ranged between 882 and 1,491 days for the five loans
selected. For loans that were transferred to Selene Finance, we determined the number of days
between when the foreclosure sale was completed and the date the property was transferred to
Selene Finance. We then selected the five properties that had the greatest number of days
between the foreclosure sale completion date and the transfer to Selene Finance date, which
ranged between 1,178 and 1,851 days for the five loans selected. The conclusions reached on the
sampled items cannot be projected due to the selection method used.
We used LoanCare’s information system to identify properties that were conveyed to HUD and
those that were transferred to Selene Finance, as well as the time between the foreclosure sale
completion and the conveyance or transfer. We used this information to select our sample and
relied upon it for background information only as all of our conclusions were based on our
review of original source documents.
We conducted the audit in accordance with generally accepted government auditing standards.
Those standards require that we plan and perform the audit to obtain sufficient, appropriate
evidence to provide a reasonable basis for our findings and conclusions based on our audit
objective(s). We believe that the evidence obtained provides a reasonable basis for our findings
and conclusions based on our audit objective.



                                                7
Internal Controls
Internal control is a process adopted by those charged with governance and management,
designed to provide reasonable assurance about the achievement of the organization’s mission,
goals, and objectives with regard to

   Effectiveness and efficiency of operations,
   Reliability of financial reporting, and
   Compliance with applicable laws and regulations.
Internal controls comprise the plans, policies, methods, and procedures used to meet the
organization’s mission, goals, and objectives. Internal controls include the processes and
procedures for planning, organizing, directing, and controlling program operations as well as the
systems for measuring, reporting, and monitoring program performance.
Relevant Internal Controls
We determined that the following internal controls were relevant to our audit objective:

   Controls to ensure that all foreclosed-upon properties were conveyed to HUD within the
    required timelines after the foreclosure sales and evictions were completed.
We did not assess the relevant controls identified above because of the limited scope of the audit.




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Appendixes

Appendix A
             Auditee Comments and OIG’s Evaluation



Ref to OIG    Auditee Comments
Evaluation




Comment 1




                               9
             Auditee Comments and OIG’s Evaluation



Ref to OIG    Auditee Comments
Evaluation




Comment 2




                               10
             Auditee Comments and OIG’s Evaluation



Ref to OIG    Auditee Comments
Evaluation




Comment 5




                               11
             Auditee Comments and OIG’s Evaluation



Ref to OIG    Auditee Comments
Evaluation




Comment 3
( Loan 1)




Comment 4

( Loan 2)




                               12
             Auditee Comments and OIG’s Evaluation



Ref to OIG    Auditee Comments
Evaluation




Comment 5
( Loan 3)




Comment 6
( Loan 4)




Comment 7
( Loan 5)




                               13
             Auditee Comments and OIG’s Evaluation



Ref to OIG    Auditee Comments
Evaluation




Comment 8
( Loan 6)
Comment 9
( Loan 7)


Comment 10
( Loan 8)
Comment 8
( Loan 9)




Comment 10
( Loan 10)


Comment 11




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                         OIG Evaluation of Auditee Comments


Comment 1   Our audit objective was to determine whether LoanCare conveyed foreclosed-
            upon properties held on behalf of Ginnie Mae, filed claims with FHA, and
            remitted the funds to Ginnie Mae on time. This involved verifying that LoanCare
            was in compliance with all of HUD’s regulations as well as its contract. It is not
            sufficient to just notify Ginnie Mae and HUD about servicing issues but LoanCare
            also had to comply with the regulations involving timely conveyance and claim
            filing.
Comment 2   The audit focused on the conveyance and claim timelines after the foreclosure
            sales were completed, any legal challenges in eviction were resolved, and
            LoanCare had possession and title to the properties. Therefore the “robo signing”
            issues and foreclosure delays were before the part of the process our audit was
            concerned with and were not relevant to LoanCare’s ability to convey the
            properties after it had possession.

Comment 3   LoanCare did not provide any documentation to show that HUD would not grant
            an extension for the delayed conveyance or to show any attempt to obtain an
            extension of the conveyance timelines for loan 1. We have amended the table in
            appendix B to show that HUD received the part B claim within 8 days of title
            approval and revised the report with the addition of HUD criteria allowing for the
            part B claim to be filed up to 15 days after HUD approves the title.
Comment 4   For loan 2, LoanCare conveyed the property 144 days after it obtained possession,
            well beyond the 30-day limit. The title issue did not delay the conveyance as
            HUD was the one that discovered the issue after the conveyance.
Comment 5   For loan 3, LoanCare obtained possession when the property was vacated in July
            2012. LoanCare had contact with the former principal of Ironwood (Smaller) in
            January 2013, after which he deeded the property to another company. LoanCare
            was not aware of the title issues until May 2013, about two weeks after it
            conveyed the property in April 2013. LoanCare should have conveyed the
            property in August 2012, well before any title issues arose.
Comment 6   Based on the information provided for loan 4, we recalculated the number of days
            that LoanCare took to file the claim from 116 to 51. We updated the table in
            Appendix B to show the corrected number of days. However, LoanCare was still
            late in filing the claim.
Comment 7   For loan 5, LoanCare’s property preservation records show that the property was
            vacant and the locks changed on 06/06/2013 and therefore they should have
            conveyed it by 07/06/2013. Its records show that the property was vandalized
            after the required conveyance date.




                                             15
Comment 8     Our report did not include any findings for missed timeframes for these loans
              (loans 6 and 9).
Comment 9     For loan 7, LoanCare did not provide any evidence of a service release stop and
              flag before 07/27/2014, which was the required conveyance date. In addition, on
              08/01/2014, LoanCare’s system log notes stated that the property was ready to be
              conveyed and that it was awaiting recording instructions.
Comment 10 While LoanCare did document its effort with HUD to resolve the situation, it did
           not file the part B within FHA’s timeframes or submit an extension request to
           receive written approval to exceed these timeframes for these loans (loans 8 and
           10).
Comment 11 Ginnie Mae will not only consider interest but other costs when calculating the
           amount to be repaid, therefore $1.62 would be understating its potential recovery.




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Appendix B
                                      File Review Summaries
                                                      Days between                           Remittances
                                            Possession Possession Deed filing                 (business
 #                                             and         and       or title                   days to
           Loan                            conveyance   personal    approval                 remit claim
                           Disposition
          number                                        property       and                     funds to
                                                        removal    submission                Ginnie Mae)
                                                                    of part B
                                                                     claims
                                                                                             a) Same day
 1      0005182159          Conveyed              370              A              8          b) Same day
                                                                                                 c) 3
 2      0005338827          Conveyed              144             46            >45 B             3
                                                                                                 a) 3
 3      0006562177          Conveyed              268             140             52             b) 2
                                                                                                 c) 5
                                                                                                 a) 2
 4      0005192976          Conveyed              91             24 C             51
                                                                                                 b) 1
 5      0005340344         Conveyed               370              A              B               3
                         Transferred to                                                           F
 6      0005341318                                 D               D              D
                         Selene Finance
                         Transferred to                                                             F
 7      0005287669                               >30 B          >30 B             B
                         Selene Finance
                         Transferred to                                                             F
 8      0006566558                                 E               E            >45 B
                         Selene Finance
                         Transferred to                                                             F
 9      0005219985                                 D               D              D
                         Selene Finance
                         Transferred to
 10     0006559827                                 E               E            >45 B               F
                         Selene Finance
Number of delays                                6 of 6                          5 of 6            4 of 5

A – The file does not reveal the personal property removal date or has conflicting information.

B – Transferred to Selene Finance without taking the relevant action

C – Conflicting information in the file but personal property removed within 30 days

D – LoanCare never had possession of the property; it transferred the loan to Selene Finance.

E – The defaulted issuer conveyed the property before LoanCare serviced the loan.

F – LoanCare did not receive claim funds from FHA for the loan, so it had none to remit to Ginnie Mae.




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