oversight

loanDepot's FHA-Insured Loans With Downpayment Assistance Funds Did Not Always Meet HUD Requirements

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

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

    loanDepot LLC, Foothill Ranch, CA
      Federal Housing Administration Single-Family
                   Mortgage Insurance
     Housing Finance Agency Downpayment Assistance




Office of Audit, Region 9    Audit Report Number: 2015-LA-1009
Los Angeles, CA                              September 30, 2015
To:            Kathleen A. Zadareky
               Deputy Assistant Secretary for Single Family Housing, HU
               Dane M. Narode
               Associate General Counsel for Program Enforcement, CACC

               //SIGNED//
From:          Tanya E. Schulze, Regional Inspector General for Audit, 9DGA
Subject:       loanDepot’s FHA-Insured Loans With Downpayment Assistance Funds Did Not
               Always Meet HUD Requirements


Attached is the U.S. Department of Housing and Urban Development (HUD), Office of Inspector
General’s (OIG) final results of our review of loanDepot’s use of downpayment assistance
programs in conjunction with Federal Housing Administration (FHA)-insured loans.
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-1009
                    Date: September 30, 2015

                    loanDepot’s FHA-Insured Loans With Downpayment Assistance Did Not
                    Always Meet HUD Requirements




Highlights

What We Audited and Why
We audited loanDepot based on a referral from the U.S. Department of Housing and Urban
Development’s (HUD) Quality Assurance Division detailing a separate lender that originated
Federal Housing Administration (FHA)-insured loans containing ineligible downpayment
assistance gifts. We selected loanDepot due to its high volume of loans with downpayment
assistance funds. Our objective was to determine whether loanDepot originated FHA loans
containing downpayment assistance gift funds and secondary financing in accordance with HUD
FHA requirements.

What We Found
loanDepot’s FHA-insured loans with downpayment assistance gift funds and secondary
financing did not always comply with HUD requirements, putting the FHA insurance fund at
unnecessary risk, including potential losses of $4.7 million for 53 loans with ineligible assistance
and $29.9 million for a projected 339 loans that likely contained ineligible assistance. Looking
forward 1 year, this is equivalent to at least $25.4 million in potential losses for loans that could
contain ineligible assistance and have a higher risk of loss in the first year. Also, loanDepot
inappropriately charged borrowers $25,700 in fees that were not customary or reasonable and $
46,510 in discount fees that did not represent the purpose of the fee. The ineligible loans put
borrowers at a disadvantage due to higher monthly mortgage payments imposed on them
resulting from a premium interest rate.

What We Recommend
We recommend that HUD determine legal sufficiency to pursue civil and administrative
remedies against loanDepot for incorrectly certifying that mortgages were eligible for FHA
mortgage insurance. We also recommend that HUD require loanDepot to (1) stop originating
FHA loans with the ineligible assistance; (2) indemnify HUD for the 53 loans with ineligible
assistance; (3) indemnify HUD for loans that likely contain ineligible assistance; (4) reimburse
borrowers for $25,700 in fees that were not customary or reasonable and $ 46,510 in discount
fees that did not represent the purpose of the fee; (5) reduce the interest rate for borrowers who
received ineligible assistance; (6) reimburse borrowers for overpaid interest as a result of the
premium interest rate; and (7) update all internal control checklists to include specific HUD
requirements on gifts, secondary financing, premium rates, and allowable fees.
Table of Contents
Background and Objective......................................................................................3

Results of Audit ........................................................................................................5
         Finding 1: loanDepot’s FHA-Insured Loans With Downpayment Assistance Did
         Not Always Meet HUD Requirements ............................................................................ 5

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

Internal Controls ....................................................................................................13

Appendixes ..............................................................................................................14
         A. Schedule of Questioned Costs and Funds To Be Put to Better Use ...................... 14
         B. Auditee Comments and OIG’s Evaluation ............................................................. 16
         C. Criteria ....................................................................................................................... 78
         D. Summary of Loans With Ineligible Downpayment Assistance ............................ 81
         E. Summary of Loans With Fees That Were Not Customary or Reasonable ......... 87




                                                                     2
Background and Objective
The Federal Housing Administration (FHA) was created by Congress in 1934 and provides
mortgage insurance on loans made by FHA-approved lenders throughout the United States and
its territories. FHA is the largest insurer of mortgages in the world, having insured more than 34
million properties since its inception. FHA’s Mutual Mortgage Insurance Fund provides lenders
with protection against losses as a result of homeowners defaulting on their mortgage loans.
Lenders bear less risk because FHA will pay a claim to the lender in the event of a homeowner’s
default. Loans must meet certain requirements established by FHA to qualify for insurance.
FHA generally operates from self-generated income and only recently began receiving part of its
funding from taxpayers.

Under most FHA programs, the borrower is required to make a minimum downpayment of at
least 3.5 percent of the lesser of the appraised value of the property or the sales price.
Additionally, the borrower must have sufficient funds to cover borrower-paid closing costs and
fees at the time of settlement. State housing finance agencies are significant sources of home-
ownership assistance programs, such as assistance with closing costs or rehabilitation. A
majority of these programs include providing funding to borrowers for the FHA minimum cash
investment. Although the U.S. Department of Housing and Urban Development (HUD) does not
approve downpayment assistance programs, the lenders using the programs must ensure that
funds provided comply with HUD FHA requirements.

On July 9, 2009, loanDepot, LLC, a nonsupervised lender, was approved to originate FHA-
insured loans. It received direct endorsement 1 authority on May 3, 2010. The lender serves
consumers across the Nation under the names loanDepot.com, imortgage, Mortgage Master, and
LDWholesale. It is licensed in all 50 States and operates four online direct-lending business
centers, with dual headquarters located at 26642 Town Centre Drive, Foothills Ranch, CA, and
5465 Legacy Drive, Suite 400, Plano, TX. The lender also operates 130-plus retail branch
locations under imortgage and Mortgage Master.

Between October 1, 2013, and January 31, 2015, loanDepot identified 764 FHA-insured
mortgage loans that included downpayment assistance from the downpayment assistance
programs of seven 2 housing finance agencies. The downpayment assistance programs from these
seven agencies help low- to moderate-income home buyers purchase a home through
participating lenders. Five of the seven agencies provided the downpayment assistance as a
nonrepayable grant. Two of the seven agencies provided the downpayment assistance as a




1
  Under FHA’s Direct Endorsement program, approved lenders may underwrite and close mortgage loans without
FHA’s prior review or approval.
2
  Arizona Housing Finance Authority, Industrial Development Authority-City of Phoenix & County of Maricopa,
Industrial Development Authority of Pima County-City of Tucson, California Housing Finance Agency, Southern
California Home Financing Authority, Nevada Housing Division, and Nevada Rural Housing Authority.



                                                      3
subordinate loan or secondary financing, with repayment deferred until the home was sold or
refinanced or the first loan was fully repaid. In both cases, the assistance was to be used to help
borrowers meet the cash contribution requirement and pay closing costs.

Our objective was to determine whether loanDepot originated loans containing downpayment
assistance grants in accordance with HUD FHA requirements.




                                                  4
Results of Audit

Finding 1: loanDepot’s FHA-Insured Loans With Downpayment
Assistance Did Not Always Meet HUD Requirements
loanDepot’s FHA-insured loans that included downpayment assistance gift funds and secondary
financing funds did not always comply with HUD FHA requirements. In addition, loanDepot
improperly charged fees that were not customary or reasonable. A review of 90 loans endorsed
from October 1, 2013, to January 31, 2015, determined that 53 loans included ineligible
downpayment assistance. This condition occurred because loanDepot relied on the programs of
the seven housing finance agencies; accepted their program structure; and did not conduct its due
diligence with regard to premium pricing, minimum cash investment, gifts, secondary financing,
and fees. As a result, loanDepot put the FHA insurance fund at unnecessary risk, including
potential losses of $4.7 million for the 53 loans with ineligible assistance and $29.9 million for a
projected 339 of the remaining loans that likely contained ineligible assistance. Looking forward
1 year, this is equivalent to at least $25.4 million in potential losses for loans that have a higher
risk of loss in the first year. FHA borrowers were also charged $25,700 in fees that were not
customary or reasonable and $ 46,510 in discount fees that did not represent the purpose of the
fee. Additionally, the ineligible loans put borrowers at a disadvantage due to higher monthly
mortgage payments imposed on them resulting from a premium interest rate.

The Lender Allowed Downpayment Assistance That Was Not Eligible
The lender inappropriately originated FHA loans with ineligible downpayment assistance gifts
and secondary financing provided through seven housing finance agencies’ downpayment
assistance programs. It allowed premium pricing to be used as a source of funds for borrowers’
downpayment and allowed gifts and secondary financing that did not meet HUD requirements.
Using data obtained from loanDepot, we identified 764 FHA-insured loans endorsed from
October 1, 2013, through January 31, 2015, that contained gifts and secondary financing from
the seven housing finance agencies. Our review of 90 3 statistically sampled FHA loans
identified 53 4 loans with a combined unpaid principal loan balance of $9.5 million that contained
ineligible downpayment assistance. Extrapolating the sample results to the audit universe of 764
loans resulted in a projection that loanDepot originated 384 loans totaling $67.8 million that
contained ineligible downpayment assistance. On an annualized basis, looking forward 1 full
year, this is equivalent to at least $50.8 million. We predict that if a review was conducted of the




3
  See the Scope and Methodology section for details on the statistical sample.
4
  Of the 90 loans reviewed, 10 contained downpayment assistance from the seven downpayment assistance finance
agencies; however, the borrowers provided enough funds to cover the required 3.5 percent minimum cash
investment. Also, loanDepot determined the interest rate on an additional 27 “non-CalHFA” first mortgages instead
of the housing finance agency, and there was no indication CalHFA influenced the interest rate or that it was
otherwise increased to fund the secondary financing funds.



                                                        5
674 remaining loan records in the audit universe (764 less the 90 sampled loans), there would be
at least 339 loans, or $59.8 million, that would contain ineligible downpayment assistance, and it
could be more.

         Statistical sample              Total      Ineligible     Unpaid principal      Estimated loss
            projections 5                loans        loans            balance           to HUD (risk)
                                                                     $    9,533,786
        Audit sample of loans              90           53                               $   4,766,893 6

    Extrapolated to audit universe        764          384           $      67,752,938 $     33,876,469 7
    Potential review of remaining
                                          674          339          $       59,771,572   $   29,885,786 8
                 loans
                        1 year forward                             $        50,814,704   $   25,407,352 9

As a requirement for program participation with the seven housing finance agencies, borrowers
were given predetermined mortgage interest rates (premium rate) that were above the prevailing
market rate of interest for mortgages without downpayment assistance, equating to premium
pricing. Although the interest rates were set by the seven program finance agencies, loanDepot
accepted the rates and applied them to the FHA loans. As the lender, loanDepot was obligated to
conduct its due diligence and ensure that planned downpayment assistance met the requirements
described in HUD Handbook 4155.1. The downpayment assistance gifts and secondary
financing allowed by loanDepot did not comply with HUD’s requirements for premium pricing.
In addition the description of acceptable gifts made the FHA loans ineligible for mortgage
insurance.

According to HUD Handbook 4155.1, paragraph 5.A.2.i, the funds derived from a premium-
priced mortgage may not be used to pay any portion of the borrower’s downpayment. Each loan
with the downpayment assistance gift and secondary financing from the seven program finance
agencies was given a higher than market interest rate (premium rate) as a part of program
participation. The FHA loans’ premium prices were used to fund the program by recapturing the
downpayment assistance and the programs’ operating costs and to fund future downpayment
assistance through the sale of the increased market value bundled loans. When the premium
pricing was used to pay any portion of the borrower’s downpayment, the loan would be
ineligible, even when the source of the downpayment, such as a housing finance agency, was
considered acceptable to HUD. Premium pricing is permitted by HUD only to allow lenders to
pay a borrower’s closing costs, prepaid items, or both. In this case, the premium pricing was
used to increase the market value of the bundled loans (mortgage-backed securities) when sold to



5
  See the Scope and Methodology section for details on the sample and projections.
6
  See audit recommendation 1C.
7
  See audit recommendation 1A.
8
  See audit recommendation 1D.
9
  See audit recommendation 1B.



                                                         6
recapture the downpayment assistance and the programs’ operating costs and fund future
downpayment assistance. This is an ineligible use. In addition, loanDepot failed to disclose the
premium pricing on both the settlement statement and the good faith estimate as required by
FHA and the Real Estate Settlement Procedures Act.

•          Ineligible Gift Funds
           Five of the housing finance agencies provided the downpayment assistance in the form of
           a gift. To be considered a gift, HUD Handbook 4155.1, paragraph 5.B.4.a, states that
           there must be no expected or implied repayment of the funds to the donor by the
           borrower. The downpayment assistance gifts were not true gifts as defined by HUD.
           The lender did not ensure that the downpayment assistance gifts were true gifts by not
           being repaid, directly or indirectly. The downpayment assistance gifts were indirectly
           repaid by the borrowers through the premium rate in conjunction with the seven program
           finance agencies’ funding mechanism. To receive downpayment assistance, borrowers
           had to agree to mortgage interest rates (premium rates) that were above the prevailing
           market rate of interest for mortgages without downpayment assistance. The borrowers
           would pay back a substantial portion of the downpayment assistance gifts through higher
           mortgage payments over the life of the loans. In addition, the required premium interest
           rate enabled the seven program finance agencies to be reimbursed from the bundled
           mortgage-backed security sale. Therefore, repayment was expected or implied.

•          Ineligible Secondary Financing
           Two of the downpayment assistance programs used by loanDepot structured the
           downpayment assistance as “secondary financing.” The Nevada Housing Division and
           the California Housing Finance Agency structured their downpayment assistance
           programs using subordinate loans, or silent seconds, so that repayment was deferred until
           the home was sold or refinanced or the loan was fully repaid. The secondary financing
           also included a simple interest rate that was serviced by the two housing finance
           agencies. Secondary financing is allowable as part of the borrower’s minimum cash
           investment (less than 3.5 percent) necessary for closing under FHA requirements unless
           the “minimum cash investment is provided by the seller of the property or any other
           person or entity who financially benefits from the transaction or prohibited source.” 10
           The lender did not ensure that the amount provided did not come from a person or entity
           that financially benefited from the transaction. In addition, HUD Handbook 4155.1,
           paragraph 5.C.1.b, states that the costs for participating in a downpayment assistance
           secondary financing program may only be included in the amount of the second lien. The
           secondary financing was indirectly repaid by the borrower through the premium interest
           rate and when the deferred repayment was made.

The lender did not ensure that loans containing downpayment assistance gift funds and
secondary financing were always documented appropriately (see appendix D). In our review of



10
     Mortgagee Letter 2013-14, Minimum Cash Investment and Secondary Financing Requirements



                                                       7
the 90 loans, we identified 5 loans in which the gift letter was not signed by the borrower and 53
loans in which the fund transfers were not documented appropriately.

FHA Borrowers Receiving Downpayment Assistance Paid More
The ineligible loans with the required premium interest rates imposed on FHA borrowers
resulted in higher monthly mortgage payments, compared to qualified FHA borrowers not
receiving downpayment assistance. In addition, the premium interest rates placed the burden of
funding the downpayment assistance program on the borrower.

This practice put an unnecessary burden on borrowers who otherwise would not have been
eligible for an FHA mortgage loan. Neither loanDepot nor the seven program finance agencies
required disclosure to borrowers that the downpayment assistance received came with a higher
than market interest rate (premium rate). Although a borrower may have discussed the premium
rate with the lender during the origination process, there was no assurance that borrowers were
fully aware of the premium rate and its impact on their FHA mortgage loan.

The Lender Collected Inappropriate Bond and Discount Fees
For 56 loan files reviewed, loanDepot charged and collected $25,700 in fees that were not
customary or reasonable to close FHA mortgage loans (see appendix E). These fees were
charged in association with the downpayment assistance programs and were not reasonable or
customary for closing an FHA mortgage loan. Fees identified as not customary or unreasonable
were listed as bond program settlement fees on the HUD-1 settlement statements. For example,
we identified funding fees ranging from $325 to $525.

For 29 loan files reviewed, loanDepot charged and collected $46,510 in discount fees that were
not used for their intended purpose (see appendix E). HUD defines discount points as fees paid
to reduce the interest rate on a loan (see appendix C). The misrepresented discount fees were a
portion of loanDepot’s compensation for originating loans under the downpayment assistance
programs and not intended to reduce the interest rate of the loans.

Conclusion
loanDepot’s FHA-insured loans with downpayment assistance from the seven housing finance
agencies did not always comply with HUD requirements, putting the FHA insurance fund at
unnecessary risk, including potential losses of $4.7 million for 53 loans with ineligible gifts and
$29.9 million for 339 loans that likely contained ineligible assistance. Looking forward 1 year,
this is equivalent to at least $25.4 million in potential losses for loans that could contain
ineligible down payment assistance and have a higher risk of loss in the first year. Also,
loanDepot inappropriately charged borrowers $25,700 in fees that were not customary or
reasonable and $ 46,510 in discount fees that did not represent the purpose of the fee. This
condition occurred because loanDepot relied on the seven housing finance agencies; accepted
their program structure; and did not conduct its own due diligence on gifts, secondary financing,
minimum cash investment, premium pricing, and fees. The ineligible loans put borrowers at a
disadvantage due to higher monthly mortgage payments imposed, including the burden of
funding the downpayment assistance program through the premium interest rate.




                                                 8
Recommendations
We recommend that HUD’s Associate General Counsel for Program Enforcement

           1A.      Determine legal sufficiency and if legally sufficient, pursue civil and
                    administrative remedies (31 U.S.C. (United States Code) 3801-3812, 3729, or
                    both), civil money penalties (24 CFR (Code of Federal Regulations) 30.35), or
                    both against loanDepot, its principals, or both for incorrectly certifying to the
                    integrity of the data, the eligibility for FHA mortgage insurance, or that due
                    diligence was exercised during the origination of 384 loans with potential losses
                    of $33 million.

We recommend 11 that HUD’s Deputy Assistant Secretary for Single Family Housing require
loanDepot to

           1B.      Immediately stop originating FHA loans with ineligible gifts and secondary
                    financing funds as part of downpayment assistance programs that result in a
                    premium interest rate for the borrower, resulting in funds to be put to better use of
                    $25,407,352.

           1C.      Indemnify HUD for 53 FHA loans with ineligible downpayment assistance gifts
                    and secondary financing, resulting in funds to be put to better use of $4,766,893.

           1D.      Indemnify HUD for FHA loans from the remaining 674 loans in the audit
                    universe, which likely contain ineligible downpayment assistance, resulting in
                    funds to be put to better use of $29,885,786. HUD must review the 674 loans to
                    determine whether they were insurable without the ineligible downpayment
                    assistance.

           1E.      Reimburse FHA borrowers $25,700 for fees that were not customary or
                    reasonable and $46,510 in discount fees that did not represent their intended
                    purpose.

           1F.      Work with the applicable loan servicers to reduce interest rates for FHA
                    borrowers that received downpayment assistance, were charged a premium
                    interest rate, and have not refinanced or terminated their original FHA loan.

           1G.      Reimburse FHA borrowers for overpaid interest payments as a result of the
                    premium interest rate for those that received downpayment assistance, were
                    charged a premium interest rate, and have refinanced or terminated their original
                    FHA loan.




11
     See appendix A for an explanation of funds to be put to better use.



                                                             9
1H.   Update all internal control (e.g. policies and procedures, checklists, etc.) to
      include specific guidance on HUD FHA rules and regulations governing
      downpayment assistance, premium interest rates, and allowable fees.




                                         10
Scope and Methodology
We performed our onsite audit work at loanDepot’s main office in Foothill Ranch, CA, and
Region 9’s main office in Los Angeles from March 5 to August 14, 2015. Our review generally
covered the period October 1, 2013, to January 31, 2015, and was expanded as necessary.
To accomplish our objective, we performed the following,
•   Reviewed HUD regulations and reference materials related to single-family requirements,
•   Interviewed appropriate loanDepot management and staff personnel,
•   Interviewed parties involved with the downpayment assistance programs,
•   Reviewed documentation for the seven downpayment assistance program finance agencies,
•   Reviewed loans that contained in ineligible downpayment assistance gifts and secondary
    financing,
•   Reviewed relevant financial and accounting procedures and records,
•   Reviewed loanDepot’s organizational charts, and
•   Reviewed loanDepot’s audited financial statements for fiscal years 2013 and 2014.

We obtained from loanDepot a list of FHA loans that contained downpayment assistance from
seven downpayment assistance program finance agencies during our audit period. During our
audit period, there were 764 loans that totaled $67.8 million. We selected a stratified,
systematic, statistical sample of 90 loans to determine whether loanDepot originated FHA loans
containing downpayment assistance gifts and secondary financing funds in accordance with
HUD FHA requirements. The sample was designed to detect ineligible loans 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 dollar amount of loans affected in a 1-year
period following the audit universe timeframe, along with the predicted dollar amount if a review
was conducted of the 674 remaining loan records in the audit universe.

Based on a stratified, systematic sample of 90 loan records designed to minimize error, we can
make the following statements:

       We found that 53 of the 90 loan files reviewed contained ineligible downpayment
       assistance from the seven program finance agencies in which (1) each loan with a
       downpayment assistance gift was given a higher than market premium rate as a part of
       program participation and (2) the downpayment assistance gifts were indirectly repaid by
       the borrower through the premium interest rate and program fees. This is equivalent to a
       weighted average of 58.8 percent of the loans that met these criteria and a weighted
       unpaid balance average of $105,753 per loan. Deducting for statistical variance to
       accommodate the uncertainties inherent in statistical sampling, we can say – with a one-



                                                11
         sided confidence interval of 95 percent – that 50.3 percent of the loans met these criteria
         and the weighted unpaid balance per loan was $88,681, and it could be more.
                  Per loan:                            $105,753.48 –1.68 12 * $10,161.68 ≈ $88,681.86
                  Audit universe projection:           $80,795,661.78 –1.6813 * $7,763,525.81 ≈
                                                       $67,752,938.42
                  Audit universe projection:           764 loans * 50.3% = 384 ineligible loans
                  Annualized projection:               $67,752,938.42 / 16 13) * 12 = $50,814,704

         Extrapolating this projection to the 764 audit universe, this is equivalent to at least $67.8
         million in loans that meet this standard, and it could be more. On an annualized basis,
         looking forward 1 full year, this is equivalent to at least $50.8 million in loans that would
         contain ineligible downpayment assistance, and it could be more. We predict that if a
         review was conducted of the 674 remaining loan records in the audit universe (those
         loans not in the sample of 90), there would be at least 339 loans, or $59.8 million in
         loans, that would contain ineligible downpayment assistance, and it could be more.
                  Remainder of universe:               (764 – 90) * $88,681 14 ≈ $59,771,572 15
                  Remainder of universe:               (764 – 90) * 50.3% = 339 potentially ineligible
                                                       loans
We used data maintained by loanDepot to determine the audit universe of 764 loans. We
validated the data using the HUD Single Family Data Warehouse 16 to ensure that the 764 loans
were all valid FHA loans. We determined that the computer-processed data provided by
loanDepot 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(s). We believe that the evidence obtained provides a reasonable basis for our findings
and conclusions based on our audit objective.




12
   One-sided confidence interval
13
   Represents the number of months in the audit period
14
   The weighted average monthly unpaid balance of $88,681was applied to the entire remaining 674 loans (764 – 90)
as it incorporated potential errors; therefore, there was no need to reduce the 674 to 339 before calculating the dollar
amount.
15
   See Appendix A
16
   Single Family Data Warehouse is a large collection of database tables dedicated to supporting the analysis,
verification, and publication of FHA single-family housing data.



                                                           12
Internal Controls
Internal control is a process adopted by those charged with governance and management,
designed to provide reasonable assurance about the achievement of the organization’s mission,
goals, and objectives with regard to

•   Effectiveness and efficiency of operations,
•   Reliability of financial reporting, and
•   Compliance with applicable laws and regulations.
Internal controls comprise the plans, policies, methods, and procedures used to meet the
organization’s mission, goals, and objectives. Internal controls include the processes and
procedures for planning, organizing, directing, and controlling program operations as well as the
systems for measuring, reporting, and monitoring program performance.

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

•   Controls intended to ensure that FHA loans originated with the downpayment assistance met
    HUD FHA’s requirements.
•   Controls intended to ensure that fees paid by FHA borrowers were properly disclosed,
    accurately represented, reasonable, and customary.
We assessed the relevant controls identified above.
A deficiency in internal control exists when the design or operation of a control does not allow
management or employees, in the normal course of performing their assigned functions, the
reasonable opportunity to prevent, detect, or correct (1) impairments to effectiveness or
efficiency of operations, (2) misstatements in financial or performance information, or (3)
violations of laws and regulations on a timely basis.
Significant Deficiencies
Based on our review, we believe that the following items are significant deficiencies:

•   The lender did not have adequate controls to ensure that FHA lonas originated with
    downpayment assistance met HUD FHA’s requriements (finding).
•   The lender did not have adequate controls to ensure that fees paid by FHA borrowers were
    disclosed and reasonable in accordance with HUD FHA’s requirments (finding).




                                                  13
Appendixes

Appendix A


               Schedule of Questioned Costs and Funds To Be Put to Better Use
             Recommendation         Unreasonable or         Funds to be put to
                 number              unnecessary 1/            better use 2/

                      1B                                                         $25,407,352
                      1C                                                         $ 4,766,893
                      1D                                                         $29,885,786
                      1E                         $ 72,210
                    Totals                       $ 72,210                        $60,060,031


1/       Unreasonable or unnecessary costs are those costs not generally recognized as ordinary,
         prudent, relevant, or necessary within established practices. Unreasonable costs exceed
         the costs that would be incurred by a prudent person in conducting a competitive
         business. In this instance, the unreasonable costs were those fees that were charged to
         FHA borrowers that were not customary or reasonable, such as bond program and
         discount fees (see appendix E).
2/       Recommendations that funds be put to better use are estimates of amounts that could be
         used more efficiently if an Office of Inspector General (OIG) recommendation is
         implemented. These amounts include reductions in outlays, deobligation of funds,
         withdrawal of interest, costs not incurred by implementing recommended improvements,
         avoidance of unnecessary expenditures noted in pre-award reviews, and any other savings
         that are specifically identified. In this instance, implementation of recommendations 1B,
         1C, and 1D will reduce FHA’s risk of loss to the insurance fund. The amount noted for
         recommendation 1B reflects the statistical sample projection results annualized
         ($50,814,704), looking forward 1 full year, multiplied by the 50 percent FHA loss
         severity rate. 17 The amount noted for recommendation 1C was calculated as follows:



17
  The 50 percent loss rate is based on HUD’s Single Family Acquired Asset Management System’s “case
management profit and loss by acquisition” computation for the first quarter of fiscal year 2015, based on actual
sales.



                                                          14
           unpaid principal for 53 loans with ineligible down payment assistance ($9,533,786)
           multiplied by the 50 percent FHA loss severity rate. The amount noted for
           recommendation 1D was calculated as follows: $88,681 (average unpaid balance per loan
           with ineligible assistance) multiplied by 674 loans (764 loan universe minus 90 sample
           loans) equals $59,771,572 divided by the 50 percent FHA loss severity rate. 18




18
     See the Scope and Methodology section for details on the sample projection and calculations.



                                                            15
Appendix B
             Auditee Comments and OIG’s Evaluation



Ref to OIG    Auditee Comments
Evaluation




Comment 1
Comment 2
Comment 3




                               16
             Auditee Comments and OIG’s Evaluation




Ref to OIG    Auditee Comments
Evaluation




Comment 4


Comment 4




Comment 5




Comment 6




                               17
             Auditee Comments and OIG’s Evaluation




Ref to OIG    Auditee Comments
Evaluation




                               18
             Auditee Comments and OIG’s Evaluation




Ref to OIG    Auditee Comments
Evaluation




                               19
             Auditee Comments and OIG’s Evaluation




Ref to OIG    Auditee Comments
Evaluation




                               20
             Auditee Comments and OIG’s Evaluation




Ref to OIG    Auditee Comments
Evaluation




                               21
             Auditee Comments and OIG’s Evaluation




Ref to OIG    Auditee Comments
Evaluation




Comment 2


Comment 4




                               22
             Auditee Comments and OIG’s Evaluation




Ref to OIG    Auditee Comments
Evaluation




Comment 4




Comment 2


Comment 4


Comment 7


Comment 8




                               23
             Auditee Comments and OIG’s Evaluation




Ref to OIG    Auditee Comments
Evaluation




                               24
             Auditee Comments and OIG’s Evaluation




Ref to OIG    Auditee Comments
Evaluation




Comment 5




                               25
             Auditee Comments and OIG’s Evaluation




Ref to OIG    Auditee Comments
Evaluation




Comment 4




Comment 4




                               26
             Auditee Comments and OIG’s Evaluation




Ref to OIG    Auditee Comments
Evaluation




Comment 1
Comment 2
Comment 3

Comment 4




                               27
             Auditee Comments and OIG’s Evaluation




Ref to OIG    Auditee Comments
Evaluation




Comment 1




Comment 1




Comment 9




                               28
             Auditee Comments and OIG’s Evaluation




Ref to OIG    Auditee Comments
Evaluation




Comment 2
Comment 1



Comment 2




                               29
             Auditee Comments and OIG’s Evaluation




Ref to OIG    Auditee Comments
Evaluation




Comment 2
Comment 1


Comment 1




Comment 10




                               30
             Auditee Comments and OIG’s Evaluation




Ref to OIG    Auditee Comments
Evaluation




Comment 10




Comment 11




                               31
             Auditee Comments and OIG’s Evaluation




Ref to OIG    Auditee Comments
Evaluation




Comment 11




Comment 2




Comment 1




                               32
             Auditee Comments and OIG’s Evaluation




Ref to OIG    Auditee Comments
Evaluation




Comment 1




Comment 1




                               33
             Auditee Comments and OIG’s Evaluation




Ref to OIG    Auditee Comments
Evaluation




Comment 1




Comment 9


Comment 2




                               34
             Auditee Comments and OIG’s Evaluation




Ref to OIG    Auditee Comments
Evaluation




Comment 2




                               35
             Auditee Comments and OIG’s Evaluation




Ref to OIG    Auditee Comments
Evaluation




Comment 2



Comment 2




                               36
             Auditee Comments and OIG’s Evaluation




Ref to OIG    Auditee Comments
Evaluation




Comment 2




                               37
             Auditee Comments and OIG’s Evaluation




Ref to OIG    Auditee Comments
Evaluation




Comment 1




Comment 1




Comment 12




                               38
             Auditee Comments and OIG’s Evaluation




Ref to OIG    Auditee Comments
Evaluation




Comment 4




Comment 3




                               39
             Auditee Comments and OIG’s Evaluation




Ref to OIG    Auditee Comments
Evaluation




Comment 3




Comment 3




                               40
             Auditee Comments and OIG’s Evaluation




Ref to OIG    Auditee Comments
Evaluation




Comment 3




Comment 3




                               41
             Auditee Comments and OIG’s Evaluation




Ref to OIG    Auditee Comments
Evaluation




Comment 3




                               42
             Auditee Comments and OIG’s Evaluation




Ref to OIG    Auditee Comments
Evaluation




Comment 3




Comment 13




                               43
             Auditee Comments and OIG’s Evaluation




Ref to OIG    Auditee Comments
Evaluation




Comment 1


Comment 1




Comment 1




                               44
             Auditee Comments and OIG’s Evaluation




Ref to OIG    Auditee Comments
Evaluation




Comment 1




Comment 1




Comment 1




                               45
             Auditee Comments and OIG’s Evaluation




Ref to OIG    Auditee Comments
Evaluation




Comment 1




Comment 1




Comment 1




                               46
             Auditee Comments and OIG’s Evaluation




Ref to OIG    Auditee Comments
Evaluation




Comment 1




Comment 4




                               47
             Auditee Comments and OIG’s Evaluation




Ref to OIG    Auditee Comments
Evaluation




Comment 4




                               48
             Auditee Comments and OIG’s Evaluation




Ref to OIG    Auditee Comments
Evaluation




Comment 4




Comment 4




                               49
             Auditee Comments and OIG’s Evaluation




Ref to OIG    Auditee Comments
Evaluation




Comment 14




Comment 3


Comment 4




                               50
             Auditee Comments and OIG’s Evaluation




Ref to OIG    Auditee Comments
Evaluation




Comment 4




Comment 4




Comment 5




                               51
             Auditee Comments and OIG’s Evaluation




Ref to OIG    Auditee Comments
Evaluation




Comment 8




Comment 5




Comment 15




                               52
             Auditee Comments and OIG’s Evaluation




Ref to OIG    Auditee Comments
Evaluation




Comment 15




Comment 4




                               53
             Auditee Comments and OIG’s Evaluation




Ref to OIG    Auditee Comments
Evaluation




Comment 4




Comment 6
Comment 7




                               54
             Auditee Comments and OIG’s Evaluation




Ref to OIG    Auditee Comments
Evaluation




                               55
             Auditee Comments and OIG’s Evaluation




Ref to OIG    Auditee Comments
Evaluation




                               56
             Auditee Comments and OIG’s Evaluation




Ref to OIG    Auditee Comments
Evaluation




                               57
             Auditee Comments and OIG’s Evaluation




Ref to OIG    Auditee Comments
Evaluation




                               58
             Auditee Comments and OIG’s Evaluation




Ref to OIG    Auditee Comments
Evaluation




                               59
             Auditee Comments and OIG’s Evaluation




Ref to OIG    Auditee Comments
Evaluation




                               60
             Auditee Comments and OIG’s Evaluation




Ref to OIG    Auditee Comments
Evaluation




                               61
             Auditee Comments and OIG’s Evaluation




Ref to OIG    Auditee Comments
Evaluation




                               62
             Auditee Comments and OIG’s Evaluation




Ref to OIG    Auditee Comments
Evaluation




                               63
             Auditee Comments and OIG’s Evaluation




Ref to OIG    Auditee Comments
Evaluation




                               64
             Auditee Comments and OIG’s Evaluation




Ref to OIG    Auditee Comments
Evaluation




                               65
                        Auditee Comments and OIG’s Evaluation




Ref to OIG Evaluation    Auditee Comments




                            * Names redacted for privacy reasons




                                            66
                        Auditee Comments and OIG’s Evaluation




Ref to OIG Evaluation    Auditee Comments




                           * Names redacted for privacy reasons




                                           67
             Auditee Comments and OIG’s Evaluation




Ref to OIG    Auditee Comments
Evaluation




                               68
             Auditee Comments and OIG’s Evaluation




Ref to OIG    Auditee Comments
Evaluation




                               69
             Auditee Comments and OIG’s Evaluation




Ref to OIG    Auditee Comments
Evaluation




                               70
                         OIG Evaluation of Auditee Comments


Comment 1   OIG disagrees with loanDepot’s conclusion that the audit report reached incorrect
            findings, based on flawed analyses, or that loanDepot conducted its due diligence
            when originating FHA loans with downpayment assistance. The report findings
            were based on a thorough analysis of available loan documents, agreements, and
            interviews. A determination was made, based on the plain writing of HUD
            requirements, that loans originated by loanDepot containing downpayment
            assistance provided by the housing finance agencies were not eligible for FHA
            mortgage insurance. loanDepot was obligated as the lender to conduct its due
            diligence to ensure that planned downpayment assistance gifts met the
            requirements described in HUD Handbook 4155.1.

            •      OIG disagrees with loanDepot’s assertion that the audit report relies on an
                   incorrect definition of premium pricing. OIG relied on the plain language
                   writing of the requirements on premium pricing. HUD Handbook 4155.1
                   5.A.2.i does define premium pricing and does not specify that the
                   premium pricing be initiated through the lender; it simply states that a
                   premium priced mortgage may never be used to pay any portion of the
                   borrower’s downpayment. In this manner, OIG is not reinterpreting the
                   requirement, only applying it as it is written.
            •      As discussed in the audit report, OIG determined that premium pricing did
                   exist when the borrower was given a premium interest rate in exchange for
                   downpayment assistance. The funds derived from a premium priced
                   mortgage may never be used to pay any portion of the borrower’s
                   downpayment (HUD Handbook 4155.1 5.A.2.i). Where premium pricing
                   is used to pay any portion of the borrower’s downpayment, the loan would
                   be ineligible even where the source of the downpayment is considered
                   acceptable to HUD, such as a housing finance agency. Premium pricing is
                   only permitted by HUD to allow lenders to pay a borrower’s closing costs,
                   and/or prepaid items. In this case, the premium pricing was solely to
                   enable the sale of the increased market value bundled loans (mortgage
                   backed securities) to recapture the downpayment assistance and the
                   programs’ operating costs and to fund future downpayment assistance.
                   This is an ineligible use.

            •      In order for funds to be considered a gift, there must be no expected or
                   implied repayment of the funds to the donor by the borrower (HUD
                   Handbook 4155.1 5.B.4.a). To receive downpayment assistance,
                   borrowers had to agree to mortgage interest rates (premium rates) that
                   were above the prevailing market rate of interest for FHA mortgages
                   without downpayment assistance. The borrowers will pay back a
                   substantial portion of the downpayment assistance through higher
                   mortgage payments over the life of the loan and the required premium



                                             71
                          interest rate enabled housing finance agency reimbursement upon the
                          subsequent bundled mortgage backed security sale. Therefore, repayment
                          was expected and/or implied. In its response, loanDepot cites HUD’s
                          legal opinion (exhibit B of their response) as evidence the gifts met HUD
                          requirements. However, the legal opinion failed to address HUD’s
                          requirements on what constitutes a gift.

                 •        loanDepot argues the interest rate is based on various factors, including
                          borrower risk and HUD’s tiered pricing rule. While OIG agrees mortgage
                          interest rates involve various factors and do fluctuate, we disagree
                          borrower risk explains the higher interest rates in this circumstance. The
                          premium rates in the loans identified in the audit report were the direct
                          result of borrower participation in the housing finance agencies’
                          downpayment assistance programs, as loanDepot did not determine the
                          rates in question, they were determined by the housing finance agencies.
                          loanDepot is incorrect in asserting that borrowers could forego the
                          downpayment assistance to obtain a lower rate. As admitted by
                          loanDepot, borrowers receiving downpayment assistance would not
                          otherwise qualify for an FHA loan. Therefore, borrowers did not have the
                          option to forego the downpayment assistance to obtain a rate closer to the
                          market rate. loanDepot’s statements on tiered pricing do not allow a
                          lender to bypass HUD requirements on premium pricing, gift funds, and
                          secondary financing. The audit report does not state that the premium
                          pricing itself is a violation of HUD requirements simply because there is a
                          variance in the interest rate. In this case, premium pricing is in violation
                          of HUD requirements as it is used to indirectly pay for a borrower’s
                          downpayment assistance.
Comment 2        Like loanDepot, OIG recognizes housing finance agencies provide
                 homeownership opportunities to low and moderate income families. However,
                 OIG disagrees with the assertion that the audit report is not consistent with,
                 reinterprets and contradicts clear and binding HUD guidance related to housing
                 finance agencies and downpayment assistance programs. OIG does not disagree
                 with Interpretative Rule Docket No. FR-5679-N-01 and Mortgagee Letter 2013-
                 14 that housing finance agencies, as instrumentalities of State or local
                 governments, may provide downpayment assistance. The audit report did not
                 dispute housing finance agencies are an acceptable source of funds. In fact, the
                 OIG determined that one of the housing finance agencies’ DPA programs
                 provided down payment assistance in accordance with HUD requirements 19.




19
   One of CalHFA’s two DPA programs considered the loans to be “non-CalHFA.” Under this program loanDepot
determined the interest rate on the first mortgages instead of the housing finance agency. There was no indication
that CalFHA influenced the interest rate or that it was otherwise increased to indirectly fund the secondary
financing. Therefore, the OIG determined these loans to be eligible.



                                                         72
            However, FHA loans that contain downpayment assistance from a housing
            finance agency must meet all HUD requirements, including those on premium
            pricing and the definition of gift funds.
            Neither HUD’s interpretive ruling nor its related Mortgagee Letter 2013-14
            contemplate the use of premium pricing by a lender to reimburse the housing
            finance agency. The Housing and Economic Recovery Act of 2008 amended
            Section 203(b)(9)(C) of the National Housing Act to preclude the abuse of the
            program where a seller (or other interested or related party) funded the
            homebuyer’s cash investment after the closing by reimbursing third-party entities,
            including, specifically, private non-profit charities. Similarly, it would be
            contrary to the intended purpose of the Housing and Economic Recovery Act to
            allow a local governmental entity to do the very same thing.
Comment 3   OIG disagrees with loanDepot’s assertion that the bond-funding fee and bond
            settlement fee are legitimate fees imposed as part of the downpayment assistance
            programs. In its analysis, loanDepot incorrectly compares the fees of the FHA
            loans in the audit report to other loans with downpayment assistance. The fees
            must be reasonable and customary for FHA loans, independent of other programs
            used by the lender; the fact that the loans contain downpayment assistance is not
            relevant. HUD Handbook 4155.2 6.A.3.d states that the appropriate HUD
            Homeownership Center may reject charges, based on what is reasonable. The
            Santa Ana HUD Homeownership Center issued a referral of a separate lender to
            OIG on April 18, 2014. In that referral, HUD determined that bond commitment
            fees and transfer fees were not usual and customary. Similarly, OIG determined
            the bond funding fees charged to FHA borrowers were not reasonable or
            customary, see appendix E of the audit report. Although loanDepot states that the
            combined fees ranged from $200 to $525 on page 20 of its response, the
            combined questioned fees pertaining to the 7 housing finance agencies in this
            report actually ranged from $325 to $525 (see appendix E).
            Comment 4 OIG strongly disagrees with loanDepot when it states OIG cannot
            disagree with HUD, the audit process and audit report violate Government Audit
            Standards, and the OIG has omitted relevant facts. The audit report details OIG’s
            review of loanDepot, not of HUD or its policies. As such, OIG determined the
            audit report was not the proper forum to discuss HUD’s disagreement or legal
            opinion. The audit report did not reach questionable results and was written based
            on facts, documentation, analyses, and interviews of loanDepot and housing
            finance agency employees. OIG has also had numerous discussions with HUD
            regarding the issues raised in the audit report. Up to this point, OIG has not been
            provided compelling evidence to change the substance of the audit report. Where
            HUD disagrees with OIG’s findings, there is a clear and specific audit resolution
            process. OIG cannot control HUD’s premature publication of a letter and a legal
            opinion (see exhibits A and B of loanDepot’s response) that publicly disagrees
            with OIG’s findings before the audit resolution process has been completed. OIG
            believes HUD’s legal opinion does not fully address the downpayment assistance


                                             73
            issue related to gifts. In addition, HUD’s July 2015 statement only reaffirms
            HUD’s position that housing finance agencies can provide downpayment
            assistance; a position OIG has never disputed. However, it does not provide
            specific guidance or directly address the issues in question.
            OIG also disagrees with loanDepot’s assertion that OIG exceeds its mandated
            authority. The Inspector General Act of 1978 does not state that OIG cannot
            disagree with and must adhere to all HUD interpretations. Doing so would
            severely limit and minimize OIG’s independence and duty to the United States
            Congress and other key stakeholders. The Act was created to provide Inspector
            General’s the authority to conduct and supervise audits relating to the programs
            and operations of HUD. This authority also includes providing leadership and
            coordination and recommending policies for activities designed (A) to promote
            economy, efficiency, and effectiveness in the administration of, and (B) to prevent
            and detect fraud and abuse in such programs and operations. To that end, OIG is
            well within its authority to make recommendations to HUD based on the findings
            as detailed in the audit report, including recommendations for indemnification and
            a review for potential civil and/or administrative remedies.
Comment 5   OIG disagrees with loanDepot’s statement that it was not provided due process
            and was not given adequate time to review and respond to the audit report. It is
            OIG’s standard practice to provide auditees 10 to 15 days to respond to a
            discussion draft audit report. Extensions are granted at the discretion of the
            Regional Audit Manager; however, loanDepot did not provide a compelling
            reason for a significant extension. loanDepot was aware of the downpayment
            assistance issues identified in the audit report well before they were required to
            provide comments on September 23, 2015. As early as July 17, 2015, loanDepot
            became aware of an OIG audit report, 2015-LA-1005 issued July 9, 2015, that had
            a similar finding related to housing finance agency downpayment assistance
            programs. That audit report discussed premium pricing, the definition of gift
            funds, and housing finance agency funding structures. In addition, OIG provided
            a finding outline to loanDepot on August 14, 2015 (August 11, 2015 for the spin
            off audit focusing on the Golden State HFA referenced in loanDepot’s response)
            that contained language similar to what appears in the audit report. The
            discussion draft report was provided to loanDepot on September 10, 2015.
            loanDepot was therefore aware of the issues for over 2 months before the due date
            for comments. Finally, the due date for loanDepot’s response was maintained for
            this report to coincide with the extension granted for its response to the spin off
            audit report. As the issues identified in the two reports were nearly identical, and
            the two reports could therefore be jointly addressed by loanDepot, we determine
            no further extensions were necessary.
Comment 6   loanDepot requested that OIG withhold publication of the audit report based on
            the seriousness of the findings and reasoning set forth in its response. OIG has
            determined not to withhold publication of the audit report as the response
            provided by loanDepot did not contain sufficient mitigating factors or supporting


                                              74
             documents that would significantly change the facts of the findings. OIG
             included loanDepot’s response in its entirety in appendix B of the report,
             including exhibits.
Comment 7    loanDepot argues that the audit does not support monetary penalties. OIG
             disagrees with this assessment. The audit report is supported by facts and
             documented evidence. The recommendations, including indemnification, are
             appropriate given the material nature of the finding that FHA loans were not
             eligible for mortgage insurance. We accept loanDepot’s position that claim rates
             are not at issue. However, the monetary values associated with the
             recommendations stem from material deficiencies and as such, OIG has
             responsibly illustrated the potential risk to the FHA Single Family Mortgage
             Insurance program.
Comment 8    OIG disagrees with loanDepot’s statement that OIG is rewriting HUD guidance or
             applies a retroactive enforcement process. As previously stated, OIG used the
             plain language of HUD requirements on premium pricing and gift funds to make
             audit conclusions. These requirements were in effect at the time the loans in
             question were originated. The report’s recommendations are not enforcement, but
             recommendations to HUD to take appropriate corrective action on loan
             deficiencies that occurred and minimize future risk. See comments 2 and 4.
Comment 9    loanDepot’s statement that borrowers do not have any obligation to repay the
             downpayment assistance funds to the housing finance agency is not correct. The
             borrowers will pay back the downpayment assistance, in whole or in part, through
             higher mortgage payments over the life of the loan and the required premium
             interest rate which enabled housing finance agency reimbursement upon the
             subsequent bundled mortgage backed security sale. Therefore, repayment was
             expected and/or implied. Further, loanDepot admits that the downpayment
             assistance programs are funded in whole or in part from the capital markets
             through the sale of mortgage backed securities that are backed by the program
             loans. The premium interest rate is the instrument that allows the program to be
             funded and structured as is. The premium interest rate, allows the housing
             finance agencies to sell bundled mortgage backed securities at a higher price. See
             comment 1.
Comment 10 loanDepot states it located supporting documents to evidence gift funds were
           documented appropriately, however, that supporting documentation was not
           provided to OIG. Therefore, loanDepot should provide the supporting documents
           to HUD for review during audit resolution.
Comment 11 The OIG disagrees with loanDepot’s comment that the DPA programs that
           provided “Secondary Funding” were compliant with applicable rules and
           guidance. The assertion made by loanDepot that the secondary financing was not
           indirectly repaid through the premium interest rate is incorrect. The secondary
           financing assistance was tied in with the first mortgage as part of the DPA
           programs in question. To receive downpayment assistance under the programs in


                                              75
              question, borrowers must agree to mortgage interest rates (premium rate) above
              the prevailing market rate of interest for mortgages without downpayment
              assistance. These premium rates were not used to finance the borrower’s closing
              costs or prepaid items. Instead, the inflated premium mortgage interest rates
              enabled higher sales prices of the pooled mortgage-backed securities to
              investment banks, which were used to refund a portion of the borrower’s
              downpayment back to the DPA program. The DPA programs were reimbursed
              for the assistance provided after the loan sale by entities that financially benefit
              from the transactions. However, under no circumstances may the borrower’s
              minimum required investment be provided, before, during or after closing by any
              party reimbursed, directly or indirectly, by any entity that financially benefits
              from the transaction.
              In addition, the higher mortgage interest rate required to participate in the DPA
              programs represented an additional cost to the borrower, violating HUD
              handbook requirements that the costs incurred for participating in a downpayment
              assistance secondary financing program may only be included in the amount of
              the second lien.
Comment 12 OIG disagrees with loanDepot’s characterization of a 2004 letter to HUD from the
           National Association of Local Housing Finance Agencies (included as exhibit E
           in its response). The letter in no way indicated support from HUD and only
           discussed mortgage revenue bonds, not mortgage backed securities that are
           discussed in the audit report. Absent from the letter is any type of guidance,
           approval, or regulations from HUD specifically indicating that premium pricing
           in relation to downpayment assistance is acceptable. In fact, the letter begins by
           stating that HUD has had concerns about this type of program, which also
           included a premium rate, dating back to at least 2004.
Comment 13 The OIG disagrees with loanDepot’s assessment that the discount fees stated in
           the Draft Report were not misrepresented and charged consistently with HUD
           guidelines. We cited instances where borrowers were charged fees by loanDepot
           for discount points; however, the points were not given or the interest rates were
           not lowered for the borrower. Documentation in many of the borrower files in
           question specifically show that the borrower’s interest rate was not lowered or
           adjusted based on the discount points. In fact, since the interest rates were
           determined by the housing finance agencies independent of loanDepot’s input,
           any discount points charged to the borrower could not have been applied to
           reduce the borrower’s interest rate. The argument that discount points/fees can be
           paid by the borrower as part of the total cash required to close is not in question.
           loanDepot asserts that the borrowers can also choose another loan provider if the
           fee is too high, but when borrowers pay for discount points which conversely did
           not lower their interest rates, then such fees were not charged by loanDepot
           appropriately. The OIG maintains its position that discount fees charged to
           borrowers were not used for the intended purpose of the fees.




                                                76
Comment 14 OIG disagrees with loanDepot’s assertion that OIG’s statistical sample is not
           sufficient when making audit projections and conclusions. OIG is an independent
           audit and investigative agency and as such has the authority to determine the most
           appropriate method to review FHA loans, including utilizing a statistical sample.
           Audits conducted by OIG are very different than those conducted by HUD;
           comparing the two is not relevant. OIG has no obligation to use the
           methodologies used by HUD when selecting samples to review FHA loans. In
           fact, where HUD is limited to single, loan level reviews, OIG uses a methodology
           that allows for conclusions that cover a wider spectrum of a lender’s activities.
           As stated in the audit report, OIG selected a stratified, systematic, statistical
           sample of loans to determine whether loanDepot originated FHA loans containing
           Golden State downpayment assistance gifts in accordance with HUD FHA
           requirements. The sample was designed to detect ineligible loans 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 dollar
           amount of loans affected in a 1-year period following the audit universe
           timeframe, along with the dollar amount predicted if a review of the remaining
           loan records in the audit universe was conducted. See comment 4.
              With regard to recommendation 1C, the audit report recommends indemnification
              for those loans that are determined to contain ineligible downpayment assistance;
              rendering the loans ineligible for FHA mortgage insurance. The recommendation
              asks HUD to review the loans to make that determination.
Comment 15 OIG disagrees with loanDepot’s statement that the recommendations are
           unfounded. OIG’s recommendations are fully supported by documents, analyses,
           and interviews. As stated earlier, the audit recommendations are not enforcement.
           The recommendations are addressed to HUD and must go through a well-
           established audit resolution process. With regard to recommendation 1A, it asks
           HUD’s Associate General Counsel for Program Enforcement to review the facts
           as stated in OIG’s report to make a determination whether civil and/or
           administrative remedies should be pursued. See comments 1 and 8.




                                               77
Appendix C
                                             Criteria


HUD Handbook 4155.1
     Paragraph 2.A.2.a. Maximum Mortgage Amount for a Purchase
     In order for FHA to insure this maximum loan amount, the borrower must make a
     required investment of at least 3.5% of the less of the appraised value or the sales price of
     the property.

       Paragraph 2.A.2.c. Closing Costs as Required Investment
       Closing costs (non-recurring closing costs, pre-paid expenses, and discount point) may
       not be used to help meet the borrower’s minimum required investment.

       Paragraph 5.A.1.a. Lender Responsibility for Estimating Settlement Requirements
       For each transaction, the lender must provide the initial Good Faith Estimate, all revised
       Good Faith Estimates and a final HUD-1 Settlement Statement, consistent with the Real
       Estate Settlement Procedures Act, to determine the cash required to close the mortgage
       transaction.

       In addition to the minimum downpayment requirement described in HUD Handbook
       4155.1 5.B.1.a, additional borrower expenses must be included in the total amount of
       cash that the borrower must provide at mortgage settlement. Such additional expenses
       include, but are not limited to closing costs, such as those customary and reasonable costs
       necessary to close the mortgage loan, discount points, and premium pricing on FHA-
       insured mortgages.

       Paragraph 5.A.2.a. Origination Fee, Unallowable Fees, and Other Closing Costs
       Lenders may charge and collect from borrowers those customary and reasonable costs
       necessary to close the mortgage loan.

       Paragraph 5.A.2.c. Discount Points
       Discount points paid by the borrower become part of the total cash required to close and
       are not eligible for meeting the minimum down payment requirement.

       Paragraph 5.A.2.i. Premium Pricing on FHA-Insured Mortgages
       The funds derived from a premium priced mortgage may never be used to pay any
       portion of the borrower’s downpayment and must be disclosed on the GFE [good faith
       estimate] and HUD-1 Settlement Statement

       Paragraph 5.B.1.a. Closing Cost and Minimum Cash Investment Requirements
       Under most FHA programs, the borrower is required to make a minimum downpayment
       into the transaction of at least 3.5% of the lesser of the appraised value of the property or
       the sales price.



                                                 78
       Paragraph 5.B.4.a. Description of Gift Funds
       In order for funds to be considered a gift, there must be no expected or implied
       repayment of the funds to the donor by the borrower.

       Paragraph 5.B.5.b. Documenting the Transfer of Gift Funds
       The lender must document the transfer of the gift funds from the donor to the borrower.

       Paragraph 5.B.4.d. Lender Responsibility for Verifying the Acceptability of Gift
       Fund Sources
       Regardless of when gift funds are made available to a borrower, the lender must be able
       to determine that the gift funds were not provided by an unacceptable source, and were
       the donor’s own funds.

       Paragraph 5.C.1.b. Secondary Financing Documentation Requirements
       Costs incurred for participating in a downpayment assistance secondary financing
       program may only be included in the amount of the second lien.

HUD Handbook 4155.2
     Paragraph 6.A.3.a. Collecting Customary and Reasonable Fees
     The lender may only collect fair, reasonable, and customary fees and charges from the
     borrower for all origination services. FHA will monitor to ensure that borrowers are not
     overcharged. Furthermore, the FHA Commissioner retains the authority to set limits on
     the amount of any fees that a lender may charge a borrower(s) for obtaining an FHA loan.

12 U.S.C. 1709(b)(9)(C)
In no case shall the funds required by subparagraph (A) consist, in whole or in part, of funds
provided by any of the following parties before, during, or after closing of the property sale: (i)
The seller or any other person or entity that financially benefits from the transaction. (ii) Any
third party or entity that is reimbursed, directly or indirectly, by any of the parties described in
clause (i).

24 CFR Part 203, Docket No. FR-5679-N-01
An interpretive rule to clarify the scope of the provision in the National Housing Act that
prohibits certain sources of home buyer funds for the required minimum cash investment.

Section 203(b)(9)(C) of the National Housing Act does not prohibit FHA from insuring
mortgages originated as part of the homeownership programs of Federal, State, or local
government or their agencies or instrumentalities when the Government Entities also directly
provide funds toward the required minimum cash investment.

Mortgage Letter 2013-14
This Mortgagee Letter sets forth the documentation mortgagees must provide to demonstrate
eligibility for FHA mortgage insurance of loans when a Federal, State, or local government, its
agency or instrumentality directly provides the borrower’s required Minimum Cash Investment



                                                  79
in accordance with the principles set forth in the December 5, 2012 Interpretive Rule
(“Interpretive Rule”), Docket No. FR-5679-N-01. Also, FHA will permit the secondary
financing component to be made by an FHA-approved mortgagee or FHA-approved non-profit
on behalf of the Governmental Entity provided the mortgagee or non-profit is not a prohibited
source and the Government Entity holds the secondary financing prior to endorsement of the first
mortgage for FHA insurance until further notice. Mortgagees must document that the secondary
financing is held by the Government Entity prior to submission of the mortgage to HUD via the
Direct Endorsement process for insurance, or the endorsement of the mortgage for insurance
through the Lender Insurance process.




                                               80
 Appendix D
                      Summary of Loans With Ineligible Downpayment Assistance


                  FHA loan information                          Items not         Funds derived from
                                                               documented          premium-priced
                                                                properly            mortgage not
                                                                                      disclosed
Case number            Original        Status       Unpaid     Gift      Gift     HUD-1       Good
                                          20
                       mortgage                      loan     letter   transfer                faith
                       amount                      balance                                   estimate
023-5812431            $154,057           A        $152,485     -         -         X            X

023-5761743            $223,870           A        $220,872     -         -          X          X

023-5833947            $121,655           A        $120,495     -         X          X          X

023-5532903            $ 140,409          A        $136,930     -         -          X          X

023-5825219            $139,820           A        $138,487     -         -          X          X

023-5639948            $152,192           R        $151,263     -         -          X          X

023-5809432            $156,120           A        $154,490     -         -          X          X

023-5593511            $190,486           R        $190,179     -         -          X          X

023-5734009            $230,743           A        $228,335     -         -          X          X

023-5883943            $103,098           A        $102,257     -         -          X          X

023-5841307            $127,546           A        $126,330     -         -          X          X

023-5879071            $116,844           A        $115,891     -         -          X          X

023-5574036            $127,645           A        $124,827     -         X          X          X

023-5713804            $153,664           A        $151,185     -         -          X          X

023-5728316            $145,319           A        $143,174     -         -          X          X



 20
      A = active, R = refinanced, T = terminated



                                                         81
              FHA loan information                 Items not         Funds derived from
                                                  documented          premium-priced
                                                   properly            mortgage not
                                                                         disclosed
Case number      Original    Status   Unpaid      Gift      Gift     HUD-1       Good
                               20
                 mortgage              loan      letter   transfer                faith
                 amount               balance                                   estimate

023-5735448      $147,184      A      $144,963     -         -          X          X

023-5472300      $147,283      A      $143,518     -         -          X          X

023-5557333      $155,235      R      $153,704     -         -          X          X

023-5607350      $171,775      A      $169,065     -         X          X          X

023-5703661      $169,375      A      $166,582     -         X          X          X

023-5739404      $159,065      A      $156,717     -         X          X          X

023-5770529      $154,156      A      $152,301     -         X          X          X

023-5507603      $194,969      R      $192,847     -         X          X          X

023-5514997      $202,268      A      $196,918     -         -          X          X

023-5709402      $195,296      R      $194,379     -         X          X          X

023-5737511      $196,278      R      $195,125     -         X          X          X

023-5755249      $202,268      A      $199,498     -         X          X          X

023-5716715      $241,172      A      $237,367     -         X          X          X

022-2464263      $109,971      A      $107,596     -         X          X          X

022-2469181      $ 93,279      A      $91,429      -         X          X          X

022-2477028      $112,917      A      $111,250     -         X          X          X

022-2501191      $136,955      A      $135,557     -         X          X          X

045-8088765      $ 54,003      A      $52,673      -         X          X          X




                                            82
              FHA loan information                 Items not         Funds derived from
                                                  documented          premium-priced
                                                   properly            mortgage not
                                                                         disclosed
Case number      Original    Status   Unpaid      Gift      Gift     HUD-1       Good
                               20
                 mortgage              loan      letter   transfer                faith
                 amount               balance                                   estimate
048-8161506      $ 73,641      A      $72,970      -         X         X            X

043-9390699      $138,003      R      $137,308     -         X          X          X

043-9461188      $128,627      A      $127,160     -         X          X          X

197-6809180      $122,735      A      $121,017     -         X          X          X

043-9304961      $147,283      A      $143,949     -         X          X          X

043-9410577      $146,301      A      $143,994     -         X          X          X

045-8088584      $163,975      A      $159,937     -         X          X          X

045-8118838      $146,301      A      $143,537     -         X          X          X

045-8131312      $147,283      A      $144,501     -         X          X          X

048-7909696      $155,628      A      $152,402     -         X          X          X

197-6607072      $163,975      A      $159,543     -         X          X          X

043-9421029      $171,830      A      $169,371     -         X          X          X

043-9473656      $196,377      A      $194,420     -         X          X          X

045-7967954      $186,558      A      $181,623     -         X          X          X

045-8114314      $171,338      A      $167,786     -         X          X          X

045-8123135      $177,721      R      $176,969     -         X          X          X

197-6668380      $176,739      A      $172,572     -         X          X          X

043-9460748      $225,735      A      $223,160     -         X          X          X

045-8115825      $235,653      A      $230,318     -         X          X          X



                                            83
              FHA loan information                 Items not         Funds derived from
                                                  documented          premium-priced
                                                   properly            mortgage not
                                                                         disclosed
Case number      Original    Status   Unpaid      Gift      Gift     HUD-1       Good
                               20
                 mortgage              loan      letter   transfer                faith
                 amount               balance                                   estimate

045-8122730      $218,469      R      $217,965     -         X          X          X

045-8198705      $215,033      R      $212,446     -         X          X          X

045-8234526      $229,761      A      $227,471     -         X          X          X

197-6711443      $189,504      A      $185,844     -         X          X          X

043-9468997      $293,968      A      $290,907     -         X          X          X

048-7846987      $269,920      R      $271,720     -         X          X          X

048-8082353      $284,648      A      $281,541     -         X          X          X

197-6825784      $274,928      A      $271,620     -         X          X          X

048-8149505      $284,747      A      $282,476     -         X          X          X

197-6775782      $378,026      A      $372,194     -         X          X          X

198-0254409      $583,923      A      $574,716     -         X          X          X

197-6924688      $397,664      A      $394,347     -         -          X          X

197-6777410      $333,841      A      $328,455     -         -          X          X

332-5871828      $205,765      R      $205,379     X         -          X          X

332-5888041      $137,464      A      $134,377     X         X          X          X

332-5901075      $192,083      A      $188,084     X         X          X          X

332-5901227      $241,049      A      $236,423     X         X          X          X

331-1648531      $132,554      A      $130,554     -         X          X          X




                                            84
              FHA loan information                 Items not         Funds derived from
                                                  documented          premium-priced
                                                   properly            mortgage not
                                                                         disclosed
Case number      Original    Status    Unpaid     Gift      Gift     HUD-1       Good
                               20
                 mortgage               loan     letter   transfer                faith
                 amount               balance                                   estimate
332-5956056      $227,797      A      $225,117     -         X         X            X

332-5875996      $221,497      R      $220,439     -         X          X          X

332-5931480      $224,360      A      $221,355     -         X          X          X

331-1634337      $135,500      A      $132,627     -         X          X          X

332-5828133      $296,965      R      $291,468     -         X          X          X

332-5968740      $273,258      A      $270,341     -         X          X          X

332-5895801      $206,196      R      $206,844     -         X          X          X

332-5864891      $238,203      R      $237,819     -         X          X          X

331-1645188      $161,029      A      $158,373     -         X          X          X

332-5824125      $275,469      A      $268,644     -         X          X          X

045-8062751      $102,116      A      $99,329      -         X          X          X

023-5722047       $98,188      A      $96,604      X         X          X          X

023-5511167       $62,840      A      $61,368      X         X          X          X

023-5528569      $201,777      A      $196,555     X         X          X          X

022-2497210       $73,107      A      $72,227      X         X          X          X

198-0196495      $422,160      A      $408,927     X         X          X          X

197-6719867      $299,475      A      $293,817     -         -          X          X

331-1654275      $184,103      A      $181,350     X         X          X          X

332-5976009      $137,464      A      $136,154     X         X          X          X



                                            85
                FHA loan information                                   Items not             Funds derived from
                                                                      documented              premium-priced
                                                                       properly                mortgage not
                                                                                                 disclosed
Case number          Original         Status        Unpaid           Gift        Gift        HUD-1       Good
                                         20
                     mortgage                        loan           letter     transfer                   faith
                     amount                         balance                                             estimate

 332-5875270          $265,611           A         $259,647            X           X             X              X

   Ineligible       $17,173,082           -      $16,926,750           5          32            53             53
     loans 21
   Minimum                                -
   required         $ 1,686,351                  $ 1,650,158           7          10            10             10
  investment
      met 22
 Interest rate
not determined      $ 5,822,858                  $ 5,742,806           -          27            27             27
  by housing
    finance
    agency 23
      Totals        $24,682,291           -      $24,319,714          12          69            90             90




  21
     These loans include one loan (highlighted in red) that was not provided by loanDepot and was, therefore, counted
  as an error.
  22
     The 10 loans (highlighted in blue) contained ineligible downpayment assistance; however, the loans had enough
  funds to meet the minimum cash investment without the downpayment assistance.
  23
     For 27 loans (highlighted in green), loanDepot determined the interest rate on non-CalHFA first mortgages
  instead of the housing finance agency, and there was no indication CalHFA influenced the interest rate or that it was
  otherwise increased to fund the secondary financing funds.




                                                            86
Appendix E
      Summary of Loans With Fees That Were Not Customary or Reasonable

                          Recommendation 1E
           FHA case number      Discount fees      Noncustomary
                                  charged         or unreasonable
                                                    fees charged
             023-5812431             $    -             $525
             023-5761743             $    -             $525
             023-5511167             $ 628              $375
             023-5833947             $1,217             $525
             023-5532903             $1,404             $400
             023-5825219             $1,398             $525
             023-5639948             $1,522             $375
             023-5809432             $1,561             $525
             023-5593511             $1,905             $375
             023-5734009             $2,307             $525
             023-5883943             $1,031             $525
             023-5841307             $1,275             $525
             023-5879071             $1,168             $525
             023-5574036             $1,276             $375
             023-5713804             $1,537             $475
             023-5728316             $1,453             $525
             023-5735448             $1,472             $525
             023-5472300             $1,473             $375
             023-5557333             $1,552             $375
             023-5607350             $1,718             $375
             023-5703661             $1,694             $475
             023-5739404             $1,591             $525
             023-5770529             $1,542             $525
             023-5507603             $1,950             $372
             023-5514997             $2,023             $375
             023-5528569             $2,018             $375
             023-5709402             $1,953             $475
             023-5737511             $1,963             $525
             023-5755249             $2,023             $525
             023-5716715             $2,412             $525
             022-2469181             $    -             $375
             022-2497210             $    -             $525
             022-2464263             $    -             $375
             022-2477028             $    -             $525
             022-2501191             $    -             $525
             045-8118838             $ 732               $ -


                                     87
               Recommendation 1E
FHA case number      Discount fees       Noncustomary
                       charged          or unreasonable
                                          fees charged
  048-8082353           $ 712
  197-6719867           $      -               $375
  197-6777410           $      -               $525
  197-6924688           $      -               $525
  332-5888041           $      -               $325
  331-1654275           $      -               $375
  332-5901075           $      -               $325
  332-5976009           $      -               $525
  332-5871828           $      -               $325
  332-5901227           $      -               $375
  332-5875270           $      -               $325
  331-1634337           $      -               $475
  331-1648531           $      -               $525
  331-1645188           $      -               $525
  332-5875996           $      -               $475
  332-5895801           $      -               $475
  332-5931480           $      -               $525
  332-5864891           $      -               $475
  332-5956056           $      -               $525
  332-5968740           $      -               $525
  332-5824125           $      -               $500
  332-5828133           $      -               $375
   Subtotals            $ 46,510              $25,700
     Total                         $ 72,210




                         88