oversight

HUD Did Not Provide Adequate Oversight of the Section 184 Indian Home Loan Guarantee Program

Published by the Department of Housing and Urban Development, Office of Inspector General on 2015-07-06.

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

   Office of Native American Programs,
             Washington, DC
     Section 184 Indian Home Loan Guarantee Program




Office of Audit, Region 9     Audit Report Number: 2015-LA-0002
Los Angeles, CA                                      July 6, 2015
To:            Rodger J. Boyd, Deputy Assistant Secretary, Office of Native American
               Programs, PN

               //SIGNED//
From:          Tanya E. Schulze, Regional Inspector General for Audit, 9DGA
Subject:       HUD Did Not Provide Adequate Oversight of the Section 184 Indian Home Loan
               Guarantee 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 the Office of Native American Programs’ Section
184 Indian Home Loan Guarantee program.
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
213-534-2471.
                     Audit Report Number: 2015-LA-0002
                     Date: July 6, 2015
                     HUD Did Not Provide Adequate Oversight of the Section 184 Indian
                     Home Loan Guarantee Program



Highlights

What We Audited and Why
We audited the Section 184 Indian Home Loan Guarantee program based on the U.S.
Department Housing and Urban Development (HUD), Office of Inspector General’s (OIG)
research, analysis, and information provided by the Office of Investigation, detailing potential
weaknesses in the program’s controls. The audit supports our goal of strengthening the
soundness of public and Indian housing. Our objective was to determine whether HUD had
adequate controls in place to provide oversight of the Section 184 program.

What We Found
The Office of Loan Guarantee (OLG) did not provide adequate oversight of the Section 184
program, resulting in an increased overall risk to the program, including guaranteeing 3,845
loans totaling more than $705 million that were not underwritten in accordance with program
guidelines. On an annualized basis looking forward, this is equivalent to $77 million in loans
that have a higher risk of loss in the first year. The projections are based on a statistical sample
of loans guaranteed from January 1, 2010, to July 31, 2014, that determined 32 of 95 loans had
material underwriting deficiencies that should not have been approved for Section 184 loan
guarantees. More specifically, the OLG did not adequately monitor, track, and evaluate
participating lenders to ensure that loans were underwritten in accordance with the Section 184
processing guidelines. This lack of oversight and high incidence of poorly underwritten loans
has the potential to negatively impact the financial standing of Native American communities.

What We Recommend
We recommend that the Deputy Assistant Secretary for Native American Programs develop and
implement policies and procedures (1) for monitoring, tracking, underwriting, and evaluating the
Section 184 program, resulting in nearly $77 million in funds to be put to better use; (2) for
standardized monthly delinquency reports; (3) to deny payments to lenders for claims on loans
that have material underwriting deficiencies; and (4) to ensure that OLG uses enforcement
actions available under 12 U.S.C. (United States Code) 1715z-13a(g). HUD should also (5)
request indemnification for the loans that had material underwriting deficiencies, resulting in
$2.5 million in funds to be put to better use, (6) request statutory authority to indemnify poorly
underwritten loans, (7) obtain support for one loan, which lacked documentation required for
loan approval, and (8) ensure that only underwriters that are approved by OLG are underwriting
Section 184 loans.
Table of Contents
Background and Objective......................................................................................3

Results of Audit ........................................................................................................4
         Finding: HUD Did Not Provide Adequate Oversight of the Section 184 Program ... 4

Scope and Methodology .........................................................................................11

Internal Controls ....................................................................................................14

Appendixes ..............................................................................................................15
         A. Schedule of Funds To Be Put to Better Use ............................................................ 15

         B. Auditee Comments and OIG’s Evaluation ............................................................. 16

         C. Criteria ....................................................................................................................... 21

         D. Schedule of Losses for Loans With Material Underwriting Deficiencies ............ 25

         E. Loans Reviewed and Deficiencies Identified .......................................................... 26

         F. Summaries for Loans With Material Underwriting Deficiencies......................... 29




                                                                     2
Background and Objective
Under the provisions of Section 184 of the Housing and Community Development Act of 1992
and as amended by the Native American Housing Assistance and Self-Determination Act of
1996, HUD was authorized to guarantee loans made by private lenders to Native Americans,
Indian housing authorities or tribally designated housing entities, and tribes. Much of the land in
Indian country is held in trust by the United States Government for the benefit of a particular
tribe or individual Native Americans and has restrictions. As a result, Native American families
have historically had limited access to private mortgage capital. The Section 184 Indian Home
Loan Guarantee program was designed for American Indian and Alaska Native families, Alaska
villages, tribes, or tribally designated housing entities. Section 184 home mortgage loans may be
used, both on and off native lands, for new construction, rehabilitation, purchase of an existing
home, or refinance.

The Office of Loan Guarantee (OLG) within the Office of Native American Programs guarantees
Section 184 loans and is responsible for monitoring, quality control, loan underwriting, and
program training. Under the Section 184 direct guarantee program, similar to the Federal
Housing Administration’s (FHA) direct endorsement program, approved lenders may underwrite
and close loans before OLG issues the loan guarantee certificate. Previously, loans could be
underwritten by OLG staff or direct guarantee lenders; however, as of October 1, 2014, all loans
are required to be underwritten by direct guarantee lenders except for loans held in trust by the
Federal Government, which made up approximately 10 percent of all loans guaranteed during
our audit period.

Participating lenders are entitled to a guarantee covering 100 percent of the outstanding
principal, interest, and reasonable fees on loans made. The Indian Housing Loan Guarantee
Fund was established for the purpose of providing loan guarantees and is funded in part by
annual appropriations from Congress, unlike FHA, and through a fee paid by borrowers. Since
the program began guaranteeing loans in 1995, the Section 184 program has guaranteed more
than 26,000 loans (more than $4 billion in guaranteed funds). The program guaranteed an
average of 147 loans per year in the first 9 years; however, it has experienced recent significant
growth. In the past 5 years, the program has guaranteed an average of 3,444 loans per year.

       Fiscal year range      Loans guaranteed        Average loans guaranteed per year
         1995 to 2003               1,319                            147
         2004 to 2005               1,256                            628
         2006 to 2009               6,453                           1,613
         2010 to 2014              17,219                           3,444
            Totals                 26,247                           1,312

Our objective was to determine whether HUD had adequate controls in place to provide
oversight of the Section 184 program.



                                                 3
Results of Audit

Finding 1: HUD Did Not Provide Adequate Oversight of the Section
184 Program
OLG did not provide adequate oversight of the Section 184 program. Specifically, it did not
adequately monitor, track, and evaluate participating lenders to ensure that loans were
underwritten in accordance with the Section 184 processing guidelines. A review of 95
statistically sampled loans guaranteed from January 1, 2010, to July 31, 2014, determined that 32
of 95 loans had material underwriting deficiencies. The OLG also did not have specific policies
and procedures for enforcement actions specific to poorly underwritten loans and did not always
properly retain Section 184 loan files. This condition occurred because OLG did not place
enough emphasis on controls or resources to ensure adequate oversight of the program. As a
result, there was increased overall risk to the Section 184 program, including guaranteeing 3,845
loans totaling more than $705 million that were not underwritten in accordance with program
guidelines. On an annualized basis looking forward one full year, this is equivalent to $77
million in loans that have a higher risk of loss. Additionally, the increased risk and high
incidence of poorly underwritten loans could negatively impact the financial standing of Native
American communities.

Monitoring, Tracking, and Evaluation of Lenders and Loans Were Inadequate
OLG did not adequately or consistently monitor lenders or loans that were underwritten.
Specifically, OLG did not have policies or procedure for selecting and monitoring lenders.
During fiscal year 2012, OLG conducted monitoring reviews of 5 lenders and reviewed only 26
loans, while there were 3,945 loans
guaranteed by 110 lenders. One of the          In fiscal year 2014, the Office of Loan
HUD officials responsible for these
reviews left OLG, resulting in monitoring      Guarantee reviewed only 8 of 3,447
reviews of only 1 lender and 2 total loans     guaranteed loans.
of 3,585 loans originated by 120 lenders
for fiscal year 2013. For fiscal year 2014, OLG conducted monitoring reviews of 3 lenders, but
only 8 loans were reviewed of 3,447 loans originated by 128 lenders. The table below identifies
the number of loans reviewed and the loans guaranteed for fiscal years 2012 to 2014. OLG did
not have policies and procedures in place to assess the risks of lenders or loans. At the time of
our audit, only one individual was responsible for conducting monitoring reviews; however,
OLG planned to assign more staff members to this area.

        Fiscal year   Monitoring reviews      Loans reviewed      Loans guaranteed
           2012                5                    26                  3,945
           2013                1                     2                  3,585
           2014                3                     8                  3,447
          Totals               9                    36                 10,977



                                                4
Further, OLG was not able to determine track and evaluate the performance of lenders and loans
because the monthly and quarterly delinquency reports received from servicing lenders were not
in a standardized format and most contained incorrect case numbers or did not have a Section
184 case number field. According to OLG, servicing lenders are required to report information
for delinquent loans monthly and report their entire loan portfolio every quarter. We could not
determine whether all of the servicing lenders submitted the monthly and quarterly delinquency
reports to OLG. According to OLG, there were 43 servicing lenders of Section 184 loans;
however, it provided only 31 quarterly reports for December 2014. 1 Also, it appeared that eight
of the servicing lenders did not report on their entire loan portfolio, reporting delinquent loans
only on the December 2014 quarterly report.

OLG needs to be able to identify loans that are delinquent to identify high-risk lenders that could
be targeted for a monitoring review and also identify loans that should be considered for review
(for example, early payment defaults). Although the claims paid for the Section 184 program
from fiscal year 1995 to 2015 was only approximately $114.7 million 2 while the total amount of
loans guaranteed during this timeframe was approximately $4.6 billion, according to its records,
the December 2014 quarterly reports indicated that approximately 12 percent of loans serviced
were delinquent as of December 2014. 3

Guaranteed Loans Had Material Underwriting Deficiencies
Our detailed review of 95 statistically sampled Section 184 loans 4 guaranteed by OLG identified
32 loans 5 with material underwriting deficiencies, which included inadequate determination or
documentation of income, credit, and
assets. Material deficiencies were also
identified in the appraisal reports. There       HUD guaranteed more than $705
was one incomplete loan file provide by          million for Section 184 loans that
OLG that did not contain the income,             contained material underwriting
credit, and asset documents that were used deficiencies.
for loan approval. Extrapolating the 32
loans to the audit universe of 15,124 loans
resulted in a projection that OLG guaranteed 3,845 loans totaling at least $705 million that
contained material underwriting deficiencies. On an annualized basis looking forward 1 full
year, this is equivalent to at least $153 million in loans that would not be underwritten in
accordance with the Section 184 loan processing guidelines.

Although both direct guarantee lenders and OLG underwriters approved loans that were not
underwritten in accordance with the Section 184 processing guidelines, 6 most of the loans with


1
  Two servicers provided OLG December 2014 quarterly reports but were not on their list of servicing lenders.
2
  As of March 31, 2015.
3
  Based on 31 quarterly reports received, OLG identified 43 loan servicers. Some of the reports received listed only
delinquent loans; however, the number of loans on these reports was not material to the total number of loans.
4
  See the Scope and Methodology section for details on the statistical sample.
5
  See appendixes D and E for details on material underwriting deficiencies.
6
  See appendix C.



                                                          5
material underwriting deficiencies were underwritten by direct guarantee lenders. 7 Of the 3,845
projected materially deficient loans totaling $705 million, direct guarantee lenders were
responsible for underwriting 3,095 loans totaling at least $566 million. In addition, two loans in
the sample were underwritten by underwriters that were not on OLG’s approved underwriter list.
The table below identifies the number of loans with underwriting deficiencies by underwriter
(direct guarantee lender or HUD); see appendixes E and F for more details.

                   Loans                   Underwriting deficiencies                         Deficiency type 8
    Underwriter
                  reviewed    Income     Credit     Assets     Appraisal    Other     None     Technical    Material
    Direct
                     78          31         32        24           9          21       21          30            26
    guarantee
    HUD              17           8         8         3            2           4        4          6             6
       Totals        95          39         40        27          11          25       25          36            32


           Income
           The material underwriting deficiencies related to income included (1) improper
           calculation or documentation of monthly income, (2) no verification of employment, and
           (3) improper determination of the probability of continued employment or income. For
           example, for loan 022-101850, the lender included overtime income in the borrower’s
           total monthly income; however, it had not been earned for the past 2 years as required by
           the Section 184 processing guidelines. The verification of employment documented the
           overtime income for only about 13 months. As a result, the borrower’s income was
           overstated by $1,707, and the debt-to-income ratio increased from 35.96 to 88.04
           percent 9, which exceeded the required limit of 41 percent.

           Credit
           The material underwriting deficiencies related to credit included (1) improper exclusion
           of liability accounts of borrowers and nonpurchasing spouses, (2) improper calculation of
           the monthly payments of liability accounts, (3) no explanation of derogatory credit that
           had occurred in the past 2 years, (4) late payments occurring in the past 12 months, (5)
           accounts converted to collection in the past 12 months, (6) unpaid collection accounts,
           and (7) no verification of the previous housing payment history. For example, for loan
           225-100004, the lender improperly excluded the debts of the nonpurchasing spouse, and
           the borrower resided in a community property State. The Section 184 processing
           guidelines state that the debts of the nonpurchasing spouse must be included in the
           borrower’s qualifying ratios if the borrower resides in a community property State. As a




7
  As of October 1, 2014, all loans are required to be underwritten by direct guarantee lenders except loans for lands
held in trust by the Federal Government, which made up approximately 10 percent of all loans guaranteed during
our audit period.
8
  The number of loans in the deficiency type columns add to a total of only 93 loans because 1 loan was unsupported
and there were no requirements for the other loan (housing authority was the borrower).
9
  The borrower’s liabilities were also overstated by $2,007.



                                                           6
           result, the borrower’s liabilities were understated by $123, and the debt-to-income ratio
           increased from 35.97 to 63.58 percent, 10 which exceeded the required limit of 41 percent.

           Assets
           The material underwriting deficiencies related to assets included (1) improper verification
           of the source of the borrower’s funds for the required investment and (2) no explanation
           for large deposits in the borrower’s bank statements. For example, for loan 405-104624,
           the lender did not verify the source of funds paid at closing as required by the Section
           184 processing guidelines. The loan file did not contain a bank statements or a
           verification of deposit.

           Appraisal
           The material underwriting deficiencies related to appraisals included (1) appraisal reports
           that were more than 120 days from the date of closing and (2) no verification that
           conditions listed on the appraisal report had been completed. For example, for case
           number 411-100219, the appraisal report was more than 120 days old. The loan closed
           on February 3, 2014, and the effective date of the appraisal report was July 16, 2013,
           which was 202 days from the date of closing. According to the Section 184 processing
           guidelines, the appraisal report is valid for 120 days.

           Other
           The material underwriting deficiencies related to other included (1) underwriters that
           were not approved by OLG underwriting loans, (2) no verification of the previous
           mortgage history (for refinance loan transactions), (3) borrowers receiving more than
           $250 at closing (for no-cash-out refinances), and (4) borrowers not making the required
           investment. For example, for loan 405-024492, the borrower received $5,786 at closing
           for a no-cash-out refinance transaction, which exceeded the maximum limit of $250 as
           required by the Section 184 processing guidelines.

There was one loan (405-107185) for which the borrower was a housing authority. The Section
184 processing guidelines do not address requirements when the borrower is a housing authority.
The loan file did not contain income or credit documentation for the housing authority. Further,
the loan transaction was a cash-out refinance, and the housing authority received $61,632, which
was more than the required limit of $25,000. The loan was underwritten by OLG, and the
mortgage credit analysis worksheet stated that the $25,000 limit was not applicable to housing
authorities; however, this deviation from the requirement was not included in the Section 184
processing guidelines.

Guaranteed Loans Also Had Technical Underwriting Deficiencies
In addition to the 32 loans that contained material underwriting deficiencies, we identified 36
Section 184 loans 11 with technical underwriting deficiencies that did not comply with the Section
184 processing guidelines. The technical underwriting deficiencies were underwriting

10
     The borrower’s income was also overstated by $1,787.
11
     See appendix D for details on technical underwriting deficiencies.



                                                             7
deficiencies that, even if corrected, would not result in a material increase in mortgage risk and
did not affect the eligibility of the loan. Although the technical deficiencies did not impact loan
eligibility and we did not recommend that OLG pursue indemnification of these loans, they
provide another example of why more controls and oversight are needed. Examples of the
technical underwriting deficiencies identified include the following

       •       No explanation of credit inquiries shown on the credit report for the last 90 days,

       •       Income or liabilities that were improperly determined but the revised debt-to-
               income ratio did not exceed the required limit of 41 percent,

       •       No proper verification of the earnest money deposit, and

       •       No verification of reported income by the Internal Revenue Service.

OLG Lacked Procedures for Enforcement Actions
OLG did not have specific policies and procedures relating to enforcement actions applied to
direct guarantee lenders that originated poorly underwritten loans. More specifically, Section
184 regulations do not specifically outline indemnification authority, similar to what is available
to FHA; preventing OLG from requesting indemnification agreements. Although lacking
specific indemnification authority, Section
184 statutes do not prohibit OLG from
requesting an indemnification agreement         The Office of Loan Guarantee
from direct guarantee lenders that              regulations do not specifically detail
originated a loan with material                 indemnification authority, similar to
underwriting deficiencies. Requirements         FHA.
at 12 U.S.C. (United States Code) 1715z-
13a(c)(4) state that HUD may establish
defenses against the originating lender in cases of fraud and misrepresentation and establish
regulations creating partial defenses to amounts payable on the loan guarantee. In 2014, OLG
denied the claim payment for one loan because the loan contained material underwriting
deficiencies. In this case, the lender submitting the request for claim payment was also the
originating lender of the loan. While the denial of payment appeared to be appropriate, there
were no specific policies and procedures in place on the process for denial.

Records Were Not Always Retained or Readily Available
OLG was not able to locate 23 loan files in its offsite storage facility, which resulted in the need
to request replacement loans multiple times throughout the audit to review a total of 95 loan files
and maintain the integrity of the statistical sample. OLG stated that the contractor hired to obtain
information from all of the loan files in its storage facility did not replace the loan files in the
correct location. Therefore, some of the loan files requested could not be found. However,
based on the list of loans reviewed by the contractor and the log of loans at the storage facility, it
appeared that some of the loan files were missing.




                                                  8
Conclusion
OLG did not provide adequate oversight of the Section 184 program, resulting in an increased
overall risk to the program, including guaranteeing 3,845 loans totaling more than $705 million
that were not underwritten in accordance with program guidelines. On an annualized basis
looking forward, this is equivalent to $77 million12 in loans that have a higher risk of loss in the
first year. This condition occurred because OLG did not place enough emphasis on controls or
resources to ensure adequate oversight of the program. One of the Section 184 program goals is
to increase the marketability and value of Native American assets and strengthen the financial
standing of Native American communities. However, the lack of oversight and high incidence of
poorly underwritten loans has resulted in borrowers who obtained mortgage loans that would not
have otherwise qualified. If HUD does not strengthen its oversight, there will continue to be an
increased risk of default and foreclosure which has the potential of negatively impacting the
financial standing of Native American communities.

Recommendations
We recommend that HUD’s Deputy Assistant Secretary for the Office of Native American
Programs

        1A.      Develop and implement written policies and procedures with an emphasis on
                 increased controls toward the monitoring, tracking, underwriting, and evaluating
                 of the Section 184 program. Implementing these controls would reduce the
                 current high level of risk in the program and result in potentially $76,967,618 in
                 funds to be put to better use (see appendix A).

        1B.      Develop and implement policies and procedures for a standardized monthly
                 delinquency report format that lenders must follow when submitting information
                 to OLG.

        1C.      Develop and implement policies and procedures to deny payments to direct
                 guarantee lenders for claims on loans that have material underwriting
                 deficiencies.
        1D.      Develop and implement policies and procedures to ensure that OLG uses
                 enforcement actions available under 12 U.S.C. 1715z-3a(g) for lenders that do not
                 underwrite loans according to the Section 184 processing guidelines.

        1E.      Request indemnification for the 26 loans that were underwritten by direct
                 guarantee lenders and had material underwriting deficiencies 13. The estimated
                 loss to HUD is $2,456,818. 14

12
   This amount was calculated based on a projection of the material underwriting deficiencies and the FHA 50
percent loss severity rate. The FHA loss rate was used as the best estimate available, considering FHA has recently
taken over the disposition of Section 184 real estate owned properties. See also the Scope and Methodology section
for additional details.
13
   We did not recommend indemnification for the remaining 6 loans that had material underwriting deficiencies as
they were underwritten by OLG.
14
   See appendix D.



                                                         9
           1F.     Request specific statutory authority to indemnify loans that are not underwritten
                   in accordance with the Section 184 processing guidelines.

           1G.     Obtain support for one loan (405-021297) for which the loan file was missing
                   documentation required for loan approval (for example, income, credit, and
                   assets) 15.

           1H.     Ensure that only underwriters that are approved by OLG are underwriting Section
                   184 loans.

           1I.     Develop and implement written policies and procedures for situations in which
                   the borrower for a Section 184 loan is an Indian housing authority, a tribally
                   designated housing entity, or an Indian tribe.

           1J.     Reconcile the total list of guaranteed Section 184 loans to the complete loan file
                   storage list and identify and locate any missing loan files.

           1K.     Determine whether any of the loan files were missing as a result of the contracts
                   for loan file storage or data recording and if so, seek monetary or administrative
                   recourse for any contract nonperformance.




15
     We did not recommend indemnification from the direct guarantee lender as the loan was underwritten by OLG.



                                                          10
Scope and Methodology
We performed our audit fieldwork from August 2014 to April 2015 at OLG in Washington, DC,
and remotely at the Office of Inspector General (OIG), Office of Audit, in Phoenix, AZ. Our
audit period covered loans that were guaranteed from January 1, 2010, to July 31, 2014.

To accomplish our objective, we

•   Reviewed applicable HUD regulations, requirements, and guidelines;

•   Interviewed appropriate OLG management and staff;

•   Reviewed monthly and quarterly lender servicing reports;

•   Reviewed OLG monitoring reports;

•   Reviewed source documents in the loan files related to income, liabilities, and assets of the
    borrower(s); and

•   Reviewed a stratified, systematic, statistical sample of 95 Section 184 loans guaranteed by
    OLG.

We selected a stratified, systematic, statistical sample to determine whether Section 184 loans
were underwritten in accordance with the Section 184 processing guidelines. The sample was
designed to detect material underwriting deficiencies and estimate the total number of loans and
the associated dollar amount of loans with the same deficiencies in the audit universe. In
addition, the sample projected the number of loans affected in a 1-year period following the audit
universe timeframe, along with the amount of funds to be put to better use if material
deficiencies are not addressed.

We obtained from OLG a list of Section 184 loans guaranteed during our audit period. During
our audit period, there were 15,456 loans that totaled $2.638 billion in loan guarantees.
However, for the selection of our stratified, systematic, statistical sample we eliminated 332
loans that were considered to be outliers.

The final universe consisted of 15,124 loans that totaled $2.495 billion in Section 184 loan
guarantees. We identified a stratified, systematic, statistical sample of 95 loans for auditing from
the audit universe. We used a systematic approach to help control for potential differences that
may occur between loan underwriting reviews by HUD and reviews by the direct guarantee
lender. After strata boundaries were determined, the data were sorted by whether HUD or a
direct guarantee lender reviewed the underwriting within each stratum for the systematic sample
pull. The data were sampled using a computer program written in SAS, using the survey select



                                                 11
procedure with a random-number seed value of 7. Spares were used for this audit because
physical loan records were not available upon request. However, all spares were taken from
their respective strata so there was no need to recalculate sampling weights. Of the 95 loans in
our statistical sample, 73 were current and 4 were delinquent according to the December 2014
quarterly reports. We could not determine the status of the remaining 18 loans because we did
not receive a quarterly report from all of the servicing lenders or could not find the loans on the
reports received.

Based on a stratified, systematic sample of 95 loan records designed to minimize error, we can
make the following statements:

       Of the 95 loans reviewed, 32 materially failed a weighted average amount of $62,803 per
       loan. Deducting for statistical variance to accommodate the uncertainties inherent in
       statistical sampling, we can say – with a one-sided confidence interval of 95 percent –
       that the average amount per underwritten loan that materially failed in our review was
       $46,650. Extrapolating this amount to the audit universe of 15,124 loans and deducting
       for the margin of error, we can say – with a one-sided confidence interval of 95 percent –
       that this amounts to at least $705 million, and it could be more. On an annualized basis
       looking forward 1 full year, this is equivalent to at least $153 million in loans that would
       be underwritten for the objectives of the Section 184 loan program that that would not be
       underwritten in accordance with the Section 184 loan processing guidelines, and it could
       be more.

       FHA has recently taken over the disposition of Section 184 real estate owned properties.
       Because of this, we determined it was appropriate to use the FHA loss severity rate, the
       best estimate available, to calculate the potential risk of loss from the $153 million
       annualized projection. Therefore, we determined the potential risk of loss on an
       annualized bases looking forward 1 full year is the projection results annualized ($153.9
       million) multiplied by the 50 percent FHA loss severity rate. Projection results
       annualized = $153,935,235 x 50 percent FHA loss severity rate = $76,967,618.

       Of the 95 loans reviewed, 32 materially failed a weighted average of 33.57 percent.
       Deducting for statistical variance to accommodate the uncertainties inherent in statistical
       sampling, we can say – with a one-sided confidence interval of 95 percent– that 25.43
       percent of the loans met this criterion. Extrapolating this number to the audit universe of
       15,124 loans and deducting for the margin of error, we can say– with a one-sided
       confidence interval of 95 percent– that this amounts to at least 3,845 loans, and it could
       be more.

We used data maintained by OLG to obtain the universe of loans. HUD’s Real Estate
Assessment Center conducted a review of the Section 184 program before the start of our audit
and identified weaknesses in the program. It issued a report on August 7, 2013, which, among
other issues, determined that (1) the systems in the program were insufficient to handle the
volume of loan transactions, (2) the budget and accounting applications did not interface with
HUD’s general ledger system, (3) the accounting records were not reliable or complete, (4) OLG



                                                  12
underwriters did not follow a standardized process for underwriting loans, and (5) OLG could
not generate a comprehensive list of properties owned by HUD. Therefore, we did not focus our
review on the adequacy of systems used by OLG. We determined that the computer-processed
data provided by OLG were reliable for the purpose of the audit.

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




                                               13
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 intended to ensure that Section 184 loans are underwritten in accordance with the
    Section 184 processing guidelines.

•   Controls intended to ensure that HUD adequately monitors, tracks, and evaluates
    participating lenders.

We assessed the relevant controls identified above.

A deficiency in internal controls 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.

Material Deficiencies
Based on our review, we believe that the following items are material deficiencies

•   HUD did not have adequate controls to ensure that loans were underwritten in accordance
    with the Section 184 processing guidelines (finding).

•   HUD did not have adequate controls to ensure that participating lenders were monitored,
    tracked, and evaluated (finding).



                                                  14
Appendixes

Appendix A
                       Schedule of Funds To Be Put to Better Use


                       Recommendation              Funds to be put to
                           number                    better use 1/
                               1A                   $76,967,618
                               1E                    $2,456,818

                             Totals                 $79,424,436



1/   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 recommendations 1A and 1E will reduce the risk of loss to
     HUD if OLG implements controls to improve the oversight of lenders and loans that were
     guaranteed and seeks indemnification for loans identified with material underwriting
     deficiencies. The amount noted for recommendation 1A reflects the projection results
     annualized ($153.9 million), looking forward 1 full year, multiplied by the 50 percent
     FHA loss severity rate. Projection results annualized = $153,935,235 x 50 percent FHA
     loss severity rate = $76,967,618. The amount noted for recommendation 1E reflects the
     principal balance for the 26 loans by the FHA 50 percent loss severity rate. See appendix
     D for the calculation of the estimated loss. The FHA loss severity rate was used because
     FHA has taken over the sale of Section 184 real estate-owned properties and the data for
     the Section 184 loss severity rate were not reliable.




                                              15
Appendix B
             Auditee Comments and OIG’s Evaluation



Ref to OIG    Auditee Comments
Evaluation




Comment 1

Comment 2




                               16
Comment 3




            17
18
19
                         OIG Evaluation of Auditee Comments


Comment 1   We disagree with HUD’s assertion that there is insufficient evidence to support
            the monetary assumptions in recommendation 1A. That recommendation states
            that the implementation of increased controls would result in nearly $77 million in
            projected funds to be put to better use. The projections are based on material
            underwriting deficiencies, not claims. The projected amount refers to the higher
            claim risk associated with loans that have material underwriting deficiencies. It is
            not a projection on the amount of claims. Loans not underwritten in accordance
            with the Section 184 processing guidelines have a higher risk of loss even though
            the program has historically experienced low claim amounts.
            As stated in the Scope and Methodology section of the audit report, we used a
            stratified, systematic, statistical sample to determine whether Section 184 loans
            were underwritten in accordance with the Section 184 processing guidelines. The
            sample was designed to detect material underwriting deficiencies, not claims, and
            estimate the total number of loans and the associated dollar amount of loans with
            the same deficiencies in the audit universe. In addition, the sample projected the
            number of loans affected in a 1-year period following the audit universe
            timeframe, along with the dollar amount of the materially deficient loans. A
            stratified, systematic, statistical sample of 95 loans was identified for auditing
            from the audit universe of 15,124 loans for the time period of January 1, 2010 to
            July 31, 2014. If a larger sample had been statistically selected, the related
            margin of error would have been reduced which would have resulted in a higher
            projection of deficient loans and the related dollar amounts.
            Our review of the sample of 95 loans determined that 32 contained material
            underwriting deficiencies. Extrapolating the 32 loans to the audit universe of
            15,124 loans resulted in a projection that OLG guaranteed 3,845 loans totaling at
            least $705 million that contained material underwriting deficiencies. On an
            annualized basis looking forward 1 full year, this is equivalent to at least $153
            million in loans that would not be underwritten in accordance with the Section
            184 processing guidelines. Applying the FHA loss severity rate of 50 percent
            results in the nearly $77 million of funds to be put to better use.
Comment 2   As stated in comment 1, the monetary loss projections were not intended to
            correlate with the total amount of claims in the program. The monetary
            projections in the audit report are based on material underwriting deficiencies and
            as such, present the potential risk to the program if the recommendations are not
            implemented. Implementation of the recommendations will reduce this risk.
Comment 3   We appreciate HUD’s acknowledgement of the finding and its plans to take
            necessary actions to address the audit report. However, HUD did not provide
            details on specific actions to address the recommendations. Any planned actions
            to resolve the audit recommendations will be evaluated during audit resolution.



                                              20
Appendix C
                                                    Criteria


12 U.S.C. 1715z-13a, Loan guarantees for Indian housing
        (c)(4), Fraud and misrepresentation – This subsection may not be construed to
        preclude the [HUD] Secretary from establishing defenses against the original lender
        based on fraud or material misrepresentation or to bar the Secretary from establishing by
        regulations in effect on the date of issuance or disbursement, whichever is earlier, partial
        defenses to the amount payable on the guarantee.
        (g)(1), In general – If the Secretary determines that any lender or holder of a guarantee
        certificate under subsection (c) of this section has failed to maintain adequate accounting
        records, to adequately service loans guaranteed under this section, to exercise proper
        credit or underwriting judgment, or has engaged in practices otherwise detrimental to the
        interest of a borrower or the United States, the Secretary may (A) refuse, either
        temporarily or permanently, to guarantee any further loans made by such lender or
        holder; (B) bar such lender or holder from acquiring additional loans guaranteed under
        this section; and (C) require that such lender or holder assume not less than 10 percent of
        any loss on further loans made or held by the lender or holder that are guaranteed under
        this section.
        (g)(2), Civil money penalties for intentional violations – If the Secretary determines
        that any lender or holder of a guarantee certificate under subsection (c) of this section has
        intentionally failed to maintain adequate accounting records, to adequately service loans
        guaranteed under this section, or to exercise proper credit or underwriting judgment, the
        Secretary may impose a civil money penalty on such lender or holder in the manner and
        amount provided under section 536 of the National Housing Act (12 USC 1735f-14) with
        respect to the mortgages and lenders under such Act.

Section 184, processing guidelines (effective January 2013 16)
        Section 5.2 (Verifications) – Credit, income and valuation information may not exceed
        60 days at underwriting and may not exceed 120 days when the loan closes.
        Section 5.2 (Non-Purchasing Spouse) – Except for the obligations specifically excluded
        by state law, the debts of the non-purchasing spouse must be included in the borrower’s
        qualifying ratios if the borrower resides in a community property state or the property to
        be insured is located in a community property state…The community property states
        include: Arizona, California, Idaho, Louisiana, Nevada, New Mexico, Texas,
        Washington, and Wisconsin.


16
  We included the most recent version of the Section 184 processing guidelines that applied to the loans reviewed;
however, we identified multiple previous versions that were too large to present.



                                                         21
Section 5.3 – Lenders must investigate all derogatory credit during the past two years and
require the borrower to explain in writing the reason(s) for the derogatory
information…Borrower must meet the following credit requirements:

   •   No late payments in the past 12 months on all accounts.
   •   No bankruptcy, judgment, or liens in the past 24 months.
   •   No foreclosures within the last 36 months.
   •   No accounts converted to collection in the past 12 months.
   •   All collections must have been paid in full 12 months prior the date of
       application.
…Requests for exceptions to any of the above must be reviewed by the Office of Loan
Guarantee underwriter and approval is on a case by case basis. Lenders must fully
document an exception request with supporting evidence and/or show evidence the
“credit issue” was a circumstance beyond the control of the borrowers.
Section 5.5 (Payment History on Previous Mortgagees or Rental/Residence) – The lender
must include a recent 24 month history of mortgage, rental, or residence. Verifications
can include: credit report, mortgage payment information from the financial institution,
verification of rent from landlord and/or other alternative documents to support
residency. All documentation must cover a 24 month payment history; identify the
address and amount of monthly payment.
Section 5.5 (Revolving Accounts) – When revolving accounts with outstanding balances
do not have stated minimum payments, payments should be calculated at the greatest of
5% of the outstanding balance or $10 per month.
Section 5.5 (Judgments, Garnishments, or Liens) – All judgments, garnishments, or liens
must show evidence of payment in full for at least 12 months prior to the date of
application.
Section 5.5 (Collections) – All collections must show evidence of payment in full at least
12 months prior to the date of application. In addition, the applicant must furnish a
written letter of explanation and must have good credit. An exception if applicant can
provide evidence they were not aware of the collection prior to the date of loan
application, or they have an accepted repayment plan and 12 month of timely payments
made between the applicant and the entity owed; or the collection is for medical and
evidence of third party responsibility.
Section 5.6 (Salaries, Wages, and Other Forms of Income) – The income of each
borrower who is obligated by the mortgage debt must be analyzed to determine whether it
can be expected to continue through the first 3 years of the mortgage loan.
Section 5.6 (Overtime and Bonus Income) – Overtime and bonus income may be counted
as effective income if the borrower has received such income for the past 2 years.




                                         22
Section 5.6 (Retirement and Social Security Income) – Income from retirement or social
security is acceptable with verification of the award/approval letter, documentation
supporting amount of monthly income and evidence it is expected to continue.

Section 5.6 (Alimony, Child Support, or Maintenance Payments) – Income in this
category may be considered if such payments are likely to be received for the first 3 years
of the mortgage. The borrower must provide a copy of the divorce decree or legal
separation and evidence that payments have been made during the past 12 months.

Section 5.6 (Tribal Distribution) – If a borrower receives per capita income from their
tribe, and this income can reasonably be expected to continue for the first 3 years of the
mortgage, it can be used as qualifying income. The borrower must provide 1099’s or W-
2’s to document a two year history. If the borrower has not received tribal distribution
for two consecutive years the file must include a current per capita income statement and
an executed statement from the tribe that verifies payments have been made to tribal
members for a minimum of two years and is expected to continue. The lesser of the
current per capita payment or two-year average will be used for income purposes.

Section 5.7 (Recurring Obligations) – The borrower’s liabilities include all installment
loans, revolving charge accounts, real estate loans, alimony, child support, and all other
continuing obligations. In computing the debt-to-income ratios, the lender must include
the monthly housing expense and all other additional recurring charges, including
payments on installment and revolving accounts extending 6 months or more. Debts of
less than 6 months’ duration may be eliminated; unless the underwriter determines that
the amount of the debt affects the borrower’s ability to pay the mortgage.

Section 5.8 (Debt to Income Ratio) – The Office of Loan Guarantee uses a 41% debt to
income ratio when seeking to qualify applications for a Section 184 loan. However, a
debt to income ratio (without a co-borrower or co-signor) shall not exceed 45%.

Section 5.8 (Compensating Factors) – A debt to income ratio exceeding 41% may be
acceptable if significant compensating factors are presented. Compensating factors
include:

   •   The borrower has successfully demonstrated the ability to pay housing expenses
       equal to or greater than the proposed monthly housing expenses for the new
       mortgage.
   •   The borrower makes a large down payment (from their own funds) toward the
       purchase of the property (at least 10%).
   •   The borrower has documented substantial non-taxable income that has not been
       included as qualifying income.
   •   The borrower has substantial cash reserves after closing.
   •   Other reasonable and documented compensating factors will be considered based
       on supporting evidence.




                                         23
       Section 5.9 (Verification) – The source and adequacy of all funds used for the borrower’s
       investment in the property must be verified.

       Section 5.9 (Funds to Close) – Acceptable sources of the borrower’s funds to close
       include savings and checking accounts. A verification of deposit and two months bank
       statements must be provided, or three consecutive months recent bank statements…If
       there is a large increase in an account, or the account was opened recently, an explanation
       and evidence of source of funds must be obtained by the lender.
       Section 5.21 (Appraised Value) – The appraised value is the value as determined by a
       certified Federal Housing Administration approved appraiser. The loans final value must
       be based on either market or cost approach. The appraisal is valid for 120 days. To
       extend value for an additional 30 days, the request for recertification of value must be
       requested prior to the expiration of the appraisal.

Section 184 processing guidelines (effective April 2011)

       Section 11.3 (No Cash-Out Refinance) – Borrowers are not permitted to receive cash
       back at closing. The maximum tolerance for minor adjustments at closing is $250.

       Section 11.5 (Credit and Non-Credit Qualifying Streamline Refinances) – Delinquent
       mortgages are not eligible for a streamline refinance. The lender must verify and
       document the payment history on the existing mortgage.

       Section11.5 (Credit and Non-Credit Qualifying Streamline Refinances) – The lender
       must include a signed and dated verification of employment (written or verbal).




                                                24
  Appendix D
                 Schedule of Losses for Loans With Material Underwriting Deficiencies


                            Loan guarantee amount            Loan guarantee amount
Section 184 loan                                                                      Estimated loss to HUD
                              – underwritten by              – underwritten by direct
    number                                                                                   (50%)
                                   OLG 17                        guarantee lender
  022-026921                $                    -           $                169,680 $                84,840
  022-028084                               221,920                                  -                       -
  022-101088                                                                  411,537                 205,769
  022-101850                                                                  267,551                 133,776
  044-100087                                                                   67,735                  33,868
  064-100040                                                                  335,673                 167,837
  064-100125                                                                  340,609                 170,305
  064-100930                                                                  321,851                 160,926
  126-100102                                     244,834                      244,834                 122,417
  225-100004                                                                  144,430                  72,215
  265-100067                                                                  105,754                  52,877
  405-023843                                     135,307                            -                       -
  405-024492                                                                  262,909                 131,455
  405-028159                                     175,740                            -                       -
  405-100430                                                                  256,691                 128,346
  405-101340                                     144,142                            -                       -
  405-101606                                                                  135,905                  67,953
  405-101633                                                                  190,222                  95,111
  405-102830                                                                  191,900                  95,950
  405-103402                                                                  129,078                  64,539
  405-104230                                                                  134,734                  67,367
  405-104624                                                                   95,765                  47,883
  405-105016                                                                  167,306                  83,653
  405-105277                                                                  150,065                  75,033
  405-105282                                                                  224,573                 112,287
  405-106247                                                                  163,694                  81,847
  405-107259                                                                  149,530                  74,765
  411-100219                                     204,020                            -                       -
  531-028239                                                                  116,301                  58,151
  531-100538                                                                  217,430                 108,715
  556-100375                                                                  105,100                  52,550
  556-100523                                                                   57,600                  28,800
    Totals                  $                  1,125,963     $              4,913,623 $            2,456,818


  17
       Loans were underwritten by OLG, therefore, there is no recommendation for indemnification.



                                                            25
     Appendix E
                                      Loans Reviewed and Deficiencies Identified


 Section 184                        Underwriting deficiencies                                    Deficiency type
loan number         Income        Credit   Assets     Appraisal               Other         None   Technical Material
 022-026483            -            -         -            -                    -            X          -        -
 022-026921            X            X         -            -                   X             -          -        X
 022-028084            X            X         -            -                   X             -          -        X
 022-100304            -            -         -            -                    -            X          -        -
 022-100454            -            -         -            -                    -            X          -        -
 022-100728            X            X         -            -                    -            -         X         -
 022-101028            -            -         -            -                    -            X          -        -
 022-101088            -            X         -            -                    -            -          -        X
 022-101311            -            X         -           X                    X             -         X         -
 022-101720            -            -         -            -                    -            X          -        -
 022-101850            X            X         X            -                   X             -          -        X
 044-100087            -            X         -            -                    -            -          -        X
 044-100415            -            -         -            -                    -            X          -        -
 044-100428            X            -         X            -                    -            -         X         -
 044-100494            -            -         -            -                    -            X          -        -
 044-101173            X            -         X            -                    -            -         X         -
 064-100040            -            -         -            -                   X             -          -        X
 064-100125            X            X         X            -                   X             -          -        X
 064-100495            -            -         -            -                    -            X          -        -
 064-100612            -            -         -            -                    -            X          -        -
 064-100818            -            -         X           X                    X             -         X         -
 064-100930            -            X         -            -                   X             -          -        X
 126-100102            -            X         X            -                    -            -          -        X
 181-100003            X                      -            -                    -            -         X         -
 225-100004            X            X         -            -                   X             -          -        X
 265-100067            X            X         -            -                   X             -          -        X
 265-100084            X            -         -            -                    -            -         X         -
 276-100073            -            -         -            -                    -            X          -        -
 276-100108            -            X         X            -                    -            -         X         -
 354-100138            X            X         -            -                    -            -         X         -
 354-100515            -            X         -           X                     -            -         X         -
 376-026433            -            -         X            -                    -            -         X         -
 401-026947            -            -         -            -                    -            X          -        -
 405-021297           * 18          *         *           *                     *            *          *        *


     18
          This loan did not contain the required income, credit, and asset documents for loan approval.



                                                                  26
 Section 184              Underwriting deficiencies                  Deficiency type
loan number    Income   Credit   Assets     Appraisal   Other   None   Technical Material
 405-023843       X       X         X            -       X       -          -        X
 405-024492       X       X         -            -       X       -          -        X
 405-024646       -       X         X            -        -      -         X         -
 405-024772       X       X         X            -        -      -         X         -
 405-027459       X       -         -            -        -      -         X         -
 405-027725       X       -         -           X         -      -         X         -
 405-027920       X       -         -            -        -      -         X         -
 405-028159       X       X         -            -       X       -          -        X
 405-100053       -       X         -            -        -      -         X         -
 405-100397       X       -         -            -        -      -         X         -
 405-100430       X       X         X            -        -      -          -        X
 405-100494       -       -         -            -        -      X          -        -
 405-100688       -       X         X            -       X       -         X         -
 405-100752       X       -         X            -        -      -         X         -
 405-101005       -       -         -            -       X       -         X         -
 405-101340       X       X         -            -       X       -          -        X
 405-101606       X       X         -           X        X       -          -        X
 405-101633       X       -         -            -        -      -          -        X
 405-101730       -       X         -           X         -      -         X         -
 405-101739       -       -         -            -        -      X          -        -
 405-102209       X       X         -           X         -      -         X         -
 405-102506       X       X         -            -        -      -         X         -
 405-102717       -       -         -            -        -      X          -        -
 405-102830       X       -         -            -       X       -          -        X
 405-103373       -       -         X            -        -      -         X         -
 405-103402       X       -         -            -        -      -          -        X
 405-103606       -       -         -            -        -      X          -        -
 405-103613       -       -         -            -        -      X          -        -
 405-103629       -       -         X            -        -      -         X         -
 405-103658       -       -         X            -        -      -         X         -
 405-103976       -       X         -            -       X       -         X         -
 405-104230       -       X         X            -       X       -          -        X
 405-104411       X       -         -            -        -      -         X         -
 405-104624       X       X         X            -        -      -          -        X
 405-105016       -       -         X           X         -      -          -        X
 405-105050       -       -         -            -        -      X          -        -
 405-105277       X       -         -            -       X       -          -        X
 405-105282       X       -         X           X        X       -          -        X
 405-105546       X       -         X            -        -      -         X         -
 405-105726       -       -         -            -        -      X          -        -
 405-106209       -       -         X            -        -      -         X         -



                                              27
 Section 184                     Underwriting deficiencies                                  Deficiency type
loan number      Income        Credit   Assets     Appraisal              Other        None   Technical Material
 405-106247         -            X         X            -                   -           -          -        X
 405-106488         -            -         -            -                   -           X          -        -
 405-106554         X            X         -            -                   -           -         X         -
 405-106890         -            -         X            -                  X            -         X         -
 405-107090         -            X         -            -                   -           -         X         -
 405-107185        * 19          *         *           *                    *           *          *        *
 405-107259         -            X         X            -                   -           -          -        X
 405-107534         -            -         -            -                   -           X          -        -
 411-027452         -            X         -           X                    -           -         X         -
 411-100219         -            -         -           X                    -           -          -        X
 463-100075         X            X         -            -                   -           -         X         -
 531-028239         X            -         -            -                  X            -          -        X
 531-100349         -            -         -            -                   -           X          -        -
 531-100538         -            X         X            -                   -           -          -        X
 531-100677         -            -         -            -                   -           X          -        -
 556-027729         -            -         -            -                   -           X          -        -
 556-100117         -            -         -            -                   -           X          -        -
 556-100375         X            X         -            -                   -           -          -        X
 556-100420         -            -         -            -                   -           X          -        -
 556-100523         X            X         -            -                  X            -          -        X
   Totals           39           40            27             11            25           25             36        32




     19
       The borrower of this loan was a housing authority. The Section 184 processing guidelines did not address
     requirements when the borrower was a housing authority.



                                                             28
Appendix F
              Summaries for Loans With Material Underwriting Deficiencies


The following summaries provide details for each loan containing material underwriting
deficiencies noted in the finding.
1. Case number:              022-026921
   Loan type:                Refinance (no cash out)
   Closing date:             08/23/2010
   Underwriter:              Direct guarantee lender
   Originating lender:       Alaska USA Mortgage Company

   We are seeking indemnification of this loan because (1) the lender did not obtain an
   explanation from the borrower for the derogatory credit that had occurred in the past 2 years,
   (2) the lender did not verify that there had been no late mortgage payments in the past 36
   months, and (3) the underwriter was not on OLG’s list of approved direct guarantee
   underwriters.

   Credit
   The lender did not obtain a letter of explanation from the borrower for the derogatory credit
   that had occurred in the past 2 years. The borrower’s credit report showed that one account
   had seven late payments (60 days late) within 2 years of the closing date, and the loan file did
   not contain an explanation from the borrower as required by section 5.3 of the Section 184
   processing guidelines (dated September 2009).
   In addition, the loan file did not contain verification that the borrower had no late mortgage
   payments in the past 36 months as required by section 11.3 of the Section 184 processing
   guidelines (dated September 2009). The borrower’s credit report was dated May 10, 2010,
   and did not show late mortgage payments; however, the loan closed approximately 3 months
   later (August 23, 2010). The only other documentation in the loan file that related to the
   previous mortgage was a monthly mortgage statement that was dated March 25, 2010.
   Therefore, the lender did not verify that the mortgage payments for June through August
   2010 were timely.
   Other
   The loan was underwritten by a direct guarantee lender; however, the underwriter was not on
   the list of approved underwriters. Section 10.3 of the Section 184 processing guidelines
   (dated February 2008) requires underwriters to complete the Section 184 direct guarantee
   training.




                                                29
2. Case number:               022-028084
   Loan type:                 Refinance (no cash out)
   Closing date:              12/27/2010
   Underwriter:               HUD
   Originating lender:        Alaska USA Mortgage Company

   We are not seeking indemnification of this loan because HUD was the underwriter; however,
   we identified material underwriting deficiencies, which included that (1) documents used for
   income determination were more than 120 days old and (2) a collection account that was not
   paid.

   Income
   The loan file properly contained a copy of the borrower’s pay stub as required by section
   5.23 of the Section 184 processing guidelines (dated October 2010); however, it was more
   than 120 days old when the loan closed. Section 5.2 of the Section 184 processing guidelines
   (dated October 2010) states that income information may not exceed 120 days when the loan
   closes and that OLG’s loan approvals are conditioned upon this requirement. The pay stub
   was for the period ending August 28, 2010, which was 121 days before the loan closed on
   December 27, 2010.

   Credit
   The borrower’s credit report showed a collection account with a balance of $8,919, and the
   loan file did not contain verification that it had been paid in full as required by section 5.3 of
   the Section 184 processing guidelines (dated October 2010). The guidelines state that an
   exception could be approved by OLG on a case-by-case basis and lenders must show
   evidence that the credit issue was a circumstance beyond the control of the borrowers. A
   letter from the borrower stated that the collection account was for a court fine; however, there
   was no evidence that the collection account was a circumstance beyond the control of the
   borrower.

3. Case number:               022-101088
   Loan type:                 Streamline refinance
   Closing date:              09/23/2012
   Underwriter:               Direct guarantee lender
   Originating lender:        Alaska USA Mortgage Company

   We are seeking indemnification of this loan because the lender did not verify that the
   borrower’s mortgage that was refinanced was current when the loan closed.

   Credit
   The lender did not verify that the mortgage being refinanced was current as required by
   section 11.5 of the Section 184 processing guidelines (dated April 2011). The credit report
   was dated August 1, 2012, and did not show late payments for the mortgage being
   refinanced. It was current as of July 2012; however, there was no verification in the loan file
   that the borrowers made the August and September 2012 mortgage payments.



                                                 30
4. Case number:               022-101850
   Loan type:                 Purchase
   Closing date:              03/21/2014
   Underwriter:               Direct guarantee lender
   Originating lender:        Alaska USA Mortgage Company

   We are seeking indemnification of this loan because the revised debt-to-income ratio had
   increased from 35.96 to 88.04 percent, which exceeded the required limit of 41 percent. The
   increase was a result of the improper support of overtime income and understated liabilities.

   Income
   The lender determined the borrower’s total monthly income based in part on overtime
   income; however, the lender did not verify that the borrower had received the overtime
   income for the past 2 years as required by section 5.6 of the Section 184 processing
   guidelines (dated January 2013). The verification of employment (dated February 9, 2014)
   documented overtime income for only approximately 13 months (from March 2013 to
   February 2014). As a result, the borrower’s monthly income was overstated by $1,707.

   Credit
   The lender understated the borrower’s liabilities by $2,007 because all of the liability
   accounts on the credit report were not included in the debt-to-income ratio. We could not
   determine how the lender calculated the total liabilities because the liabilities on the loan
   application totaled $2,888 and the liabilities on the mortgage credit analysis worksheet
   totaled $881. It appeared that the lender did not include three accounts (or part of three
   accounts) listed on the credit report.

      •   The lender did not include a mortgage with a payment of $1,772 because the
          mortgage credit analysis worksheet stated that the borrower’s ex-spouse was
          refinancing the mortgage in his name; however, there was no documentation in the
          loan file to support this statement. Also, the loan application noted that page four of
          the dissolution of marriage stated that the ex-husband was the sole debtor of the
          mortgage; however, the divorce decree in the loan file was only two pages, and it did
          not state anything about the mortgage.

      •   It appeared that the lender did not include two accounts with payments of $163 and
          $134 because the loan application stated “ex-husbands” for one account and “paid
          off” for the other account; however, there was no documentation in the loan file to
          support this statement.




                                                 31
5. Case number:              044-100087
   Loan type:                Streamline refinance
   Closing date:             03/17/2011
   Underwriter:              Direct guarantee lender
   Originating lender:       Wells Fargo

   We are seeking indemnification of this loan because the lender did not verify and document
   the payment history on the mortgage that was refinanced.

   Credit
   The loan file did not contain documentation to verify the payment history of the mortgage
   being refinanced as required by section 11.5 of the Section 184 processing guidelines (dated
   October 2010). The guidelines state that there must not be more than one mortgage payment
   30 or more days late in the preceding 12 months and all mortgage payments must have been
   made in the month due for a minimum of 3 months before loan application.

6. Case number:              064-100040
   Loan type:                Purchase
   Closing date:             02/08/2011
   Underwriter:              Direct guarantee lender
   Originating lender:       Gateway Mortgage

   We are seeking indemnification of this loan because the debt-to-income ratio of 44.33
   percent exceeded the required limit of 41 percent and the borrower did not have significant
   compensating factors.

   Other
   The debt-to-income ratio was 44.33 percent, exceeding the limit of 41 percent as required by
   Section 5.8 of the Section 184 processing guidelines (dated October 2010). The lender did
   not list compensating factors on the mortgage credit analysis worksheet, and we did not
   identify significant compensating factors for loan approval.

7. Case number:              064-100125
   Loan type:                Purchase
   Closing date:             08/18/2011
   Underwriter:              Direct guarantee lender
   Originating lender:       Wells Fargo

   We are seeking indemnification of this loan because (1) one account that was converted to
   collection within 12 months of closing and was not paid and (2) the underwriter was not on
   OLG’s list of approved direct guarantee underwriters.

   Credit
   The borrower’s credit report showed that the borrower had a liability account that was
   submitted to collection in March 2011 and had an outstanding balance of $684. The loan file



                                               32
   did not contain evidence that the collection was paid in full and that an exception was
   approved by OLG. Section 5.5 of the Section 184 processing guidelines (dated April 2011)
   states that the borrower must not have had any accounts converted to collection in the past 12
   months and all collections must have been paid in full 12 months before the date of
   application. The guidelines further state that requests for exceptions must be reviewed by the
   OLG underwriter and lenders must fully document an exception request.

   Other
   The loan was underwritten by a direct guarantee lender; however, the underwriter was not on
   the list of approved underwriters. Section 10.3 of the Section 184 processing guidelines
   (dated April 2011) requires underwriters to complete the Section 184 direct guarantee
   training.

8. Case number:              064-100930
   Loan type:                Purchase
   Closing date:             02/14/2014
   Underwriter:              Direct guarantee lender
   Originating lender:       Mid America Mortgage

   We are seeking indemnification of this loan because the revised debt-to-income ratio had
   increased from 35.23 to 103.17 percent, which exceeded the required limit of 41 percent.
   The increase was a result of the understated liabilities.

   Credit
   The lender did not include the student loan debt of the borrower’s nonpurchasing spouse.
   The loan file contained several documents to justify the exclusion of the student loan debts;
   however, the situations described in the documents were not applicable to the borrower’s
   current situation. The documents described situations of responsibility for the spouse’s debt,
   including the spouse’s death and the dissolution of debt in the event of a divorce. The
   student loan debt payments were set to begin within 12 months of closing; however, the
   credit report did not list monthly payments. Therefore, the monthly payments were
   calculated at 5 percent of the balance as required by section 5.5 of the Section 184 processing
   guidelines. As a result, the borrower’s liabilities were understated by $6,151.

9. Case number:              126-100102
   Loan type:                Purchase
   Closing date:             05/31/2012
   Underwriter:              HUD
   Originating lender:       Wells Fargo

   We are not seeking indemnification of this loan because HUD was the underwriter; however,
   we identified material underwriting deficiencies, which included (1) one account that was
   converted to collection within 12 months of closing and was not paid and (2) no verification
   of the previous housing payments.




                                                33
   Credit
   The borrower’s credit report showed that the borrower had a liability account that was
   submitted to collection in May 2011 and had an outstanding balance of $142. The loan file
   did not contain an explanation from the borrower or evidence that an exception was approved
   by OLG staff that underwrote the loan. Section 5.3 of the Section 184 processing guidelines
   (dated April 2011) states that as part of the credit requirements, the borrower must not have
   had any accounts converted to collection in the past 12 months and all collections must have
   been paid in full 12 months before the date of application. The guidelines further state that
   requests for exceptions must be reviewed by the OLG underwriter and lenders must fully
   document an exception request.

   In addition, the loan file did not contain a 12-month verification of the borrower’s housing
   payment as required by section 5.23 of the Section 184 processing guidelines (dated April
   2011).

10. Case number:             225-100004
    Loan type:               Purchase
    Closing date:            03/28/2011
    Underwriter:             Direct guarantee lender
    Originating lender:      First United Bank and Trust

   We are seeking indemnification of this loan because (1) one collection account was not paid
   and (2) the revised debt-to-income ratio had increased from 35.97 to 63.58 percent, which
   exceeded the required limit of 41 percent. The increase was a result of overstated income
   and understated liabilities.

   Income
   It appeared that the lender determined the borrower’s total monthly income based in part on
   overtime income; however, the lender did not verify that the borrower had received the
   overtime income for the past 2 years as required by section 5.6 of the Section 184 processing
   guidelines (dated October 2010). The verification of employment documented the overtime
   income only from November 2010 to March 2011 (approximately 4 months). The
   verification of employment noted that the borrower’s employment start date was in
   September 2009 and the company was acquired by another company in September 2010.
   When the company was acquired, the payroll from the new company did not start until
   November 2010, and the lender did not obtain the prior payroll records. The lender stated
   that it was not able to find the contact information for the prior company. However, the
   lender was not able to verify and document 2 years of overtime income. As a result, the
   borrower’s monthly income was overstated by $1,787.

   Credit
   The borrower’s liabilities were understated by $123 because the debts of the nonpurchasing
   spouse were not included as required by section 5.2 of the Section 184 processing guidelines,
   which states that the debts of the nonpurchasing spouse must be included in the borrower’s




                                                34
   qualifying ratios if the borrower resides in a community property State or the property to be
   insured is located in a community property State.

   In addition, the borrower’s credit report showed that the borrower had a collection account
   with an outstanding balance of $44, and the loan file did not contain evidence that the
   account was paid in full before closing. Also, there was no documentation showing that an
   exception was approved by OLG. Section 5.3 of the Section 184 processing guidelines
   (dated October 2010) states that as part of the credit requirements, all collections must have
   been paid in full 12 months before the date of application. The guidelines further state that
   requests for exceptions must be reviewed by the OLG underwriter and lenders must fully
   document an exception request.

11. Case number:             265-100067
    Loan type:               Purchase
    Closing date:            09/16/2011
    Underwriter:             Direct guarantee lender
    Originating lender:      Chippewa Valley Bank

   We are seeking indemnification of this loan because the debt-to-income ratio had increased
   from 44.53 to 68.26 percent, which exceeded the required limit of 41 percent. The increase
   was a result of overstated income and understated liabilities.

   Income
   The coborrower’s income was overstated by $1,286 because the lender did not determine
   whether the Social Security Income (for a disability) and the child support payments would
   be received for the first 3 years of the mortgage as required by section 5.6 of the Section 184
   processing guidelines (dated April 2011).

   Credit
   The borrower’s liabilities were understated by $290 because the lender excluded two
   liabilities without appropriate supporting documentation. For the first liability, the lender
   excluded a rental property because the loan file stated that the daughter made the monthly
   payments. However, the loan file did not contain a lease agreement (if treated as rental
   property) as required by section 5.6 of the Section 184 processing guidelines (dated April
   2011) or evidence that the daughter had made 12 consecutive payments (if the borrower was
   a cosignor) as required by section 5.7 of the Section 184 processing guidelines (dated April
   2011). As a result, the borrower’s liabilities were understated by $184.

   The lender excluded the second liability account because there were less than 10 payments
   remaining. However, there were 7.5 monthly payments remaining, and section 5.7 of the
   Section 184 processing guidelines (dated April 2011) states that debt of less than 6 months’
   duration may be eliminated unless that underwriter determines that the amount of the debt
   affects the borrower’s ability to pay the mortgage. As a result, the borrower’s liabilities were
   understated by $106.




                                                 35
12. Case number:             405-023843
    Loan type:               Purchase
    Closing date:            11/16/2009
    Underwriter:             HUD
    Originating lender:      Gateway Mortgage

   We are not seeking indemnification of this loan because HUD was the underwriter; however,
   we identified material underwriting deficiencies, which included (1) no explanation for
   derogatory credit that had occurred in the past 2 years and (2) an increase in the revised debt-
   to-income ratio from 36.22 to 43.36 percent, which exceeded the required limit of 41 percent,
   without significant compensating factors. The increase was a result of overstated income.

   Income
   The lender overstated the borrower’s other income by $1,138. The loan file did not contain
   an explanation of what the other income listed on the mortgage credit analysis worksheet
   entailed or how it was calculated. It appeared that the income was based on overtime,
   commission, and other income listed on the verification of employment. However, the
   overtime and commission income had not been earned for 2 years, and there was no
   justification documented in the loan file for using these incomes for qualifying purposes.
   Also, it appeared that the other income listed on the verification of employment included
   base pay categories, such as holiday and paid time off, which were included in the
   borrower’s base monthly income because the base pay on the verification of employment
   averaged $2,619 per month and the base pay using the pay stubs and hourly rate averaged
   $3,149 per month.

   Credit
   The underwriter did not obtain a letter of explanation from the borrower for the derogatory
   credit (two accounts with 30- to 90-day late payments) that had occurred within the past 2
   years as required by section 5.3 of the Section 184 processing guidelines (dated February
   2008).

   In addition, the projected increase in the borrowers’ housing expense significantly exceeded
   the prior housing expense (from $639 to $1,013), and the borrowers did not exhibit an ability
   to accumulate savings or manage their financial affairs as required by section 5.5 of the
   Section 184 processing guidelines (dated February 2008). The borrowers did not have
   compensating factors as required by section 5.5 of the Section 184 processing guidelines
   (dated February 2008).




                                                36
13. Case number:             405-024492
    Loan type:               Refinance (no cash out)
    Closing date:            02/04/2010
    Underwriter:             Direct guarantee lender
    Originating lender:      Bank 2

   We are seeking indemnification of this loan because (1) the borrower received more than the
   maximum amount at closing and (2) the revised debt-to-income ratio had increased from
   41.89 to 170.97 percent, which exceeded the required limit of 41 percent. The increase was a
   result of overstated income and understated liabilities.

   Income
   The lender did not properly support or verify the coborrower’s income. There were two pay
   stubs in the loan file for the periods October 1 to November 3, 2009, and October 1 to
   November 2, 2009. The lender determined that the coborrower’s monthly income was
   $3,879 because this amount was stated as the pay rate; however, the first pay stub did not
   show gross earnings, and the second pay stub showed gross earnings of only $112 for
   overtime. As a result, the coborrower’s income was overstated by $3,879.

   Credit
   The lender calculated the monthly payments for one of the borrower’s liability accounts as
   $450; however, it was understated by $2,649. The credit report showed that the borrower
   had a liability account with a balance of $61,978 and monthly payments of $3,099.
   However, the lender obtained a letter from the creditor stating that there were no required
   payments on the note, but it came due on January 15, 2011 (within 1 year of the closing
   date). The letter stated that the borrower paid the note down from cattle sales and had agreed
   to purchase insurance on the cattle and in case of a loss, the borrower’s monthly payments
   would be $450 per month or less. The lender should have calculated the monthly payments
   for this account based on 5 percent of the outstanding balance as required for accounts that
   have no specific monthly payments, which is $3,099. As a result, the liabilities were
   understated by $2,649.

   Other
   The borrower received $5,786 at closing, which exceeded the maximum amount of $250 as
   required by section 11.3 of the Section 184 processing guidelines (dated September 2009).

14. Case number:             405-028159
    Loan type:               Refinance (cash out)
    Closing date:            Could not determine (no HUD-1 settlement statement in loan file)
    Underwriter:             HUD
    Originating lender:      Bank of Oklahoma

   We are not seeking indemnification of this loan because HUD was the underwriter; however,
   we identified material underwriting deficiencies, which included (1) no net benefit to the
   borrower as a result of the refinance and (2) in increase in the revised debt-to-income ratio



                                                37
   from 42.50 to 57.20 percent, which exceeded the required limit of 41 percent. The increase
   was a result of overstated income and understated liabilities.

   Income
   The underwriter overstated the borrower’s other income by $202. The loan file did not
   contain an explanation of what the other income listed on the mortgage credit analysis
   worksheet entailed or how it was calculated. Based on the loan application, it appeared that
   the income was based on overtime and net rental income. The underwriter documented that
   the borrower had received the overtime for the past 2 years; however, there was a significant
   decline from 2009 to 2010, and the underwriter did not provide a sound rationale for
   including the income as required by the Section 184 processing guidelines. Therefore, we
   calculated the overtime income based on the most recent year (2010), which was $205 per
   month.

   For the net rental income, the borrower’s tax return showed two rental properties; however,
   the first rental property had a loss, and the second rental property had been sold.

   Credit
   The underwriter understated the borrower’s liabilities by $650 because at least one account
   listed on the credit report was not included in the total debt. We could not determine how the
   underwriter calculated the borrower’s liabilities; however, we determined the borrower’s
   total debt based on the accounts listed on the credit report. It appeared that at least one
   account with a monthly payment of $507 was not included in the borrower’s total debt.

   Other
   The underwriter did not determine that there was a net benefit to the borrower as a result of
   the cash-out refinance as required by the Section 184 processing guidelines. The borrower’s
   housing payment increased, and the new loan term was 30 years.

15. Case number:             405-100430
    Loan type:               Purchase
    Closing date:            04/29/2011
    Underwriter:             Direct guarantee lender
    Originating lender:      Gateway Mortgage

   We are seeking indemnification of this loan because (1) one account was converted to
   collection within 12 months of closing and (2) one collection account was not paid.

   Credit
   The borrower’s credit report showed that the borrower had a liability account that was
   submitted to collection in March 2011, which was within 12 months of closing. The loan file
   did not contain an explanation from the borrower or evidence that an exception was approved
   by OLG. Section 5.3 of the Section 184 processing guidelines (dated October 2010) states
   that the borrower must not have had any accounts converted to collection in the past 12




                                                38
   months. The guidelines further state that requests for exceptions must be reviewed by the
   OLG underwriter and lenders must fully document an exception request.

   In addition, the borrower’s credit report showed a collection account with a balance of $569,
   and the loan file did not contain verification that it had been paid in full as required by
   section 5.3 of the Section 184 processing guidelines (dated October 2010). The guidelines
   state that an exception could be approved by OLG on a case-by-case basis. The loan file did
   not contain evidence that an exception was approved by OLG.

16. Case number:              405-101340
    Loan type:                Purchase
    Closing date:             09/21/2011
    Underwriter:              HUD
    Originating lender:       Bank 2

   We are not seeking indemnification of this loan because HUD was the underwriter; however,
   we identified material underwriting deficiencies, which included that the revised debt-to-
   income ratio had increased from 43.50 to 47.81 percent, which exceeded the required limit of
   41 percent, without significant compensating factors. The increase was a result of
   understated liabilities.

   Credit
   The borrower’s liabilities were understated by $396 because the underwriter excluded a
   student loan debt and the monthly payment amount for another student loan debt was not
   supported. For the first student loan debt (excluded by the underwriter), a letter from the
   creditor stated that the loan was in forbearance until July 17, 2012, which was within 12
   months of closing and was required to be included in the borrower’s liabilities as required by
   section 5.7 of the Section 184 processing guidelines (dated April 2011). The letter also
   stated that the borrower had used 22 months of the maximum amount of forbearance, which
   was up to 60 months, subject to eligibility. However, there was no documentation in the loan
   file showing that the borrower elected to extend the forbearance or was eligible to do so. In
   addition, a note in the loan file stated that the loan was included in the borrower’s total debt.

   For the second student loan debt, the credit report stated that it was deferred but did not state
   how long the deferment period was or the monthly payment amount. We could not
   determine how the underwriter calculated the monthly payment of $218 that was used. We
   calculated the monthly payment based on 5 percent of the balance (5% × $10,090 = $505) as
   required by section 5.7 of the Section 184 processing guidelines (dated April 2011).




                                                 39
17. Case number:             405-101606
    Loan type:               Refinance (no cash out)
    Closing date:            10/26/2011
    Underwriter:             Direct guarantee lender
    Originating lender:      First United Bank and Trust

   We are seeking indemnification of this loan because the borrower received more than the
   maximum amount at closing.

   Other
   The borrower received $739 at closing, which exceeded the maximum amount of $250 as
   required by section 11.3 of the Section 184 processing guidelines (dated April 2011).

18. Case number:             405-101633
    Loan type:               Streamline refinance
    Closing date:            11/09/2011
    Underwriter:             Direct guarantee lender
    Originating lender:      Arvest Bank

   We are seeking indemnification of this loan because there was no verification of
   employment.

   Income
   The lender did not conduct a verification of employment for the borrower or coborrower as
   required by section 11.5 of the Section 184 processing guidelines (dated April 2011). A
   cursory review of the file by OLG indicated that the verification of employment was not
   performed and stated that the borrowers were retired and only one award letter was received
   annually from the Social Security Administration. However, the loan application stated that
   the borrowers were not retired. In addition, there was no award letter from the Social
   Security Administration in the loan file or other documentation indicating that the borrowers
   were retired and were receiving Social Security benefits. When the loan closed, the
   borrowers were only 46 and 48 years of age and, therefore, were not eligible to receive Social
   Security benefits for retirement.




                                               40
19. Case number:             405-102830
    Loan type:               Refinance (no cash out)
    Closing date:            04/20/2012
    Underwriter:             Direct guarantee lender
    Originating lender:      Mortgage Broker Network

   We are seeking indemnification of this loan because there were no pay stubs for the borrower
   and coborrower.


   Income
   The lender did not obtain the pay stubs for the borrower or coborrower as required by section
   5.23 of the Section 184 processing guidelines (dated April 2011). Also, the verification of
   employment did not contain income information. Therefore, we were not able to determine
   the borrower’s or coborrower’s monthly income.

20. Case number:             405-103402
    Loan type:               Streamline refinance
    Closing date:            08/31/2012
    Underwriter:             Direct guarantee lender
    Originating lender:      Bank of Oklahoma

   We are seeking indemnification of this loan because the lender did not conduct a verification
   of employment.

   Income
   The lender did not conduct a verification of employment for the borrower or coborrower as
   required by section 11.5 of the Section 184 processing guidelines (dated April 2011).
   According to the loan application, the borrower was retired, and the coborrower was
   disabled; however, the lender did not verify that the borrowers received Social Security
   benefits. The only documentation in the loan file indicating that the coborrower received
   Social Security benefits was a form SSA-1099 for 2007, which was received 4 years before
   the loan closed in 2012.




                                               41
21. Case number:             405-104230
    Loan type:               Purchase
    Closing date:            09/28/2012
    Underwriter:             Direct guarantee lender
    Originating lender:      Citywide Mortgage

   We are seeking indemnification of this loan because (1) there were no significant
   compensating factors for the debt-to-income ratio that exceeded 41 percent and (2) there was
   no verification of the borrower’s previous housing payments.

   Credit
   The lender did not conduct a 12-month verification of the borrower’s housing payments as
   required by section 5.23 of the Section 184 processing guidelines (dated April 2011).

   Other
   The borrower’s debt-to-income ratio exceeded the required limit of 41 percent, and the lender
   did not document significant compensating factors as required by section 5.8 of the Section
   184 processing guidelines. The borrower’s debt-to-income ratio was 44.89 percent, and the
   only compensating factor listed in the loan file was the loan-to-value ratio of 92.26 percent.
   We did not identify any other compensating factors.

22. Case number:             405-104624
    Loan type:               Purchase
    Closing date:            11/19/2012
    Underwriter:             Direct guarantee lender
    Originating lender:      Gateway Mortgage

   We are seeking indemnification of this loan because (1) there was no verification of the
   borrower’s previous housing payments and (2) there was no verification of the required funds
   to close the loan.

   Credit
   The lender did not conduct a 12-month verification of the borrower’s housing payments as
   required by section 5.23 of the Section 184 processing guidelines (dated April 2011).

   Assets
   The borrower paid $1,683 at closing; however, the lender did not verify the source of these
   funds as required by section 5.9 of the Section 184 processing guidelines (dated April 2011).
   The loan file did not contain bank statements or a verification of deposit.




                                               42
23. Case number:             405-105016
    Loan type:               Purchase
    Closing date:            11/19/2012
    Underwriter:             Direct guarantee lender
    Originating lender:      First American Mortgage

   We are seeking indemnification of this loan because there was no verification that the
   conditions listed on the appraisal report had been completed.

   Appraisal
   The appraisal report stated that the appraisal was made subject to the completion of four
   items (touchup painting and installation of the fence, stove, and garage door opener). There
   was no confirmation in the loan file that the conditions listed on the appraisal report had been
   completed.

24. Case number:             405-105277
    Loan type:               Purchase
    Closing date:            04/26/2013
    Underwriter:             Direct guarantee lender
    Originating lender:      Gateway Mortgage

   We are seeking indemnification of this loan because the probability of continued
   employment was not properly analyzed.

   Income
   The lender conducted a verification of employment for the borrower; however, the
   verification of employment stated that the borrower was a teacher on a temporary contract.
   The lender did not follow up with the employer to determine whether the borrower’s
   employment could be expected to continue through the first 3 years of the mortgage loan as
   required by section 5.6 of the Section 184 processing guidelines (dated January 2013).

25. Case number:             405-105282
    Loan type:               Purchase
    Closing date:            04/15/2013
    Underwriter:             Direct guarantee lender
    Originating lender:      Leader Mortgage

   We are seeking indemnification of this loan because (1) the source of large increases in the
   bank statements was not verified and (2) the required downpayment was not made.

   Assets
   The borrower had two large deposits totaling $12,500 that were not explained as required by
   section 5.9 of the Section 184 processing guidelines (dated January 2013). The borrower’s
   assets totaled $13,157, and according to the mortgage credit analysis worksheet, the required
   investment was $5,150.



                                                 43
   Other
   The borrower did not make the required downpayment of $5,150, according to the mortgage
   credit analysis worksheet. The borrower paid $8,525 at closing (including the earnest money
   deposit); however, one of the borrower’s liability accounts was paid at closing and totaled
   $3,550. Therefore, the borrower’s downpayment totaled $4,975 ($8,525 - $3,550), which
   was $175 lower than the required investment.

26. Case number:             405-106247
    Loan type:               Purchase
    Closing date:            08/20/2013
    Underwriter:             Direct guarantee lender
    Originating lender:      First Commercial Bank

   We are seeking indemnification of this loan because (1) there were two accounts with late
   payments within 12 months of closing, (2) there was no explanation of the derogatory credit
   that had occurred in the past 2 years, (3) there was no verification of the previous housing
   payments, and (4) there was no verification of the borrower’s source of funds for the required
   investment.

   Credit
   The borrower’s credit report showed that the borrower had two liability accounts that had late
   payments within 12 months of closing. The loan file did not contain evidence that an
   exception was approved by OLG. Each account had one “90 day” late payment reported in
   September 2012, which were within 12 months of the loan closing. Section 5.3 of the
   Section 184 processing guidelines (dated January 2013) states the borrower must not have
   had any late payments in the past 12 months. The guidelines further state that requests for
   exceptions must be reviewed by the OLG underwriter and lenders must fully document an
   exception request.

   Also, the lender did not obtain a letter of explanation from the borrower for the derogatory
   credit (two accounts with 30- to 90-day late payments) that had occurred within the past 2
   years as required by section 5.3 of the Section 184 processing guidelines (dated January
   2013).

   In addition, the lender did not conduct a 24-month verification of the borrower’s housing
   payment as required by section 5.5 of the Section 184 processing guidelines (dated January
   2013).

   Assets
   The borrower made a downpayment of $5,063 at closing; however, the lender did not
   properly verify the source of the funds used for the borrower’s investment in the property as
   required by section 5.9 of the Section 184 processing guidelines (dated January 2013). The
   lender obtained only one of the three required bank statements, and it did not list beginning
   or ending balance.



                                                44
27. Case number:             405-107259
    Loan type:               Purchase
    Closing date:            02/21/2014
    Underwriter:             Direct guarantee lender
    Originating lender:      Armstrong Bank

   We are seeking indemnification of this loan because there was no verification of the
   borrower’s source of funds for the required investment.

   Assets
   The borrower paid $3,497 at closing; however, the lender did not verify the source of these
   funds as required by section 5.9 of the Section 184 processing guidelines (dated January
   2013). The lender listed assets totaling $30,039 on the borrower’s loan application, which
   consisted of a checking account, a savings account, and proceeds from the sale of a previous
   home. However, the loan file contained documentation for only the checking account, which
   had a balance of $648. Therefore, the lender did not properly verify $2,849 of the $3,497
   that the borrower paid at closing.

28. Case number:             411-100219
    Loan type:               Purchase
    Closing date:            02/03/2014
    Underwriter:             HUD
    Originating lender:      Wells Fargo

   We are not seeking indemnification of this loan because HUD was the underwriter; however,
   we identified a material underwriting deficiency, which was the appraisal report was more
   than 120 days old.

   Appraisal
   The effective date of the appraisal report was July 16, 2013, which was 202 days before the
   loan closed on February 3, 2014. Section 5.21 of the Section 184 processing guidelines
   (dated January 2013) states that appraisals are valid for 120 days. An email from the
   underwriter, documented in the loan file, stated that the appraisal had expired on November
   16, 2013, and it needed to be updated. The firm commitment states that a policy directive
   issued in 2011 allows for a 6-month seasoning period for new construction appraisals;
   however, the appraisal was more than 6 months old when the loan closed.




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29. Case number:             531-028239
    Loan type:               Purchase
    Closing date:            01/10/2011
    Underwriter:             Direct guarantee lender
    Originating lender:      Guild Mortgage

   We are seeking indemnification of this loan because the revised debt-to-income ratio had
   increased from 41.14 to 46.42 percent, which exceeded the required limit of 41 percent,
   without significant compensating factors. The increase was a result of overstated income.

   Income
   The lender calculated the borrower’s other income to be $1,225 per month; however, we
   were not able to determine how it was calculated. The loan file documented three types of
   other income, which included per capita from the borrower’s tribe ($840 per month), elderly
   assistance from the borrower’s tribe ($200 per month), and income from the State of
   Washington Employment Security Department ($1,686 per month). The only income that
   should have been used in the borrower’s debt-to-income ratio was the per capita income from
   the borrower’s tribe. The per capita income was calculated based on the average of the past 2
   years using the form 1099-MISC as required by section 5.6 of the Section 184 processing
   guidelines. Therefore, the lender overstated the borrower’s other income by $386.

   The elderly assistance received from the borrower’s tribe did not qualify because we could
   not determine whether this assistance was included with the per capita income on the form
   1099-MISC. Also, the lender did not verify a 2-year history or average of this income as
   required with other types of income. The loan file documented only a 2-month history of
   payments.

   The income from the State of Washington Employment Security Department did not qualify
   because the lender did not determine whether this income would continue through the first 3
   years of the mortgage. The statements showed that the gross amounts were $389 per week,
   and there was a field for the balance, which was decreased by the amount paid each week.
   The balance as of November 7, 2010, was $8,947, which indicated that there were 23 more
   weekly payments (approximately 5-6 months). Also, the lender did not verify a 2-year
   history or average of this income as required with other types of income. The lender
   documented only a 4-week history of payments.




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30. Case number:              531-100538
    Loan type:                Purchase
    Closing date:             07/31/2013
    Underwriter:              Direct guarantee lender
    Originating lender:       Sterling Savings Bank

   We are seeking indemnification of this loan because there was (1) no verification that a lien
   was paid in full and (2) no verification of the source of large deposits in the bank statements.

   Credit
   The title policy showed a claim for $2,591 against the borrower, which would attach to the
   property. The borrower provided an explanation for the lien and stated that the remaining
   balance would be paid; however, the loan file did not verify that the lien had been paid in full
   as required by section 5.5 of the Section 184 processing guidelines (dated January 2013).

   Assets
   The borrower had several large deposits and explained most of them but did not explain five
   deposits that totaled $3,404 as required by section 5.9 of the Section 184 processing
   guidelines (dated January 2013). The borrower’s assets totaled $4,221, and she paid $3,546
   at closing.

31. Case number:              556-100375
    Loan type:                Streamline refinance
    Closing date:             01/11/2013
    Underwriter:              Direct guarantee lender
    Originating lender:       Bay Bank

   We are seeking indemnification of this loan because there was no verification that the
   borrower’s mortgage being refinanced was current when the loan closed.

   Credit
   The lender did not verify that the mortgage being refinanced was current or that the borrower
   did not have more than one mortgage payment 30 or more days late in the past 12 months.
   The loan file did not contain documentation relating to the mortgage’s having been
   refinanced.




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32. Case number:              556-100523
    Loan type:                Purchase
    Closing date:             12/27/2013
    Underwriter:              Direct guarantee lender
    Originating lender:       Bay Bank

   We are seeking indemnification of this loan because (1) there was a collection account that
   was not paid, (2) there was no verification of the previous housing payments, and (3) the
   revised debt-to-income ratio had increased from 27.14 to 47.64 percent, which exceeded the
   required limit of 41 percent, without significant compensating factors. The increase was a
   result of overstated income and understated liabilities.

   Income
   The lender overstated the borrower’s income because it did not obtain a 2-year history of the
   borrower’s other income (per capita) as required by the Section 184 processing guidelines.
   The loan file contained only a 1-year history of the other income. As a result, the borrower’s
   other income was overstated by $100.

   The lender also overstated the coborrower’s income by $308 because the documentation in
   the loan file did not support the amount calculated. The lender calculated the borrower’s
   monthly income as $2,253, which was based on the pay rate and 40 hours per week;
   however, the verification of employment supported only $1,945 per month ($14,529 base pay
   divided by 7.47 months). Also, the pay stubs in the loan file were not adequate because they
   did not show pay information other than the net amount paid.

   Credit
   The borrower’s credit report showed a collection account with a balance of $541, and the
   loan file did not contain verification that it had been paid in full as required by section 5.3 of
   the Section 184 processing guidelines (dated January 2013). The loan file also did not
   contain documentation showing that an exception was provided by OLG.

   In addition, the loan file did not contain a 24-month verification of the borrower’s housing
   payment as required by section 5.5 of the Section 184 processing guidelines (dated January
   2013).




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