oversight

loanDepot's FHA-Insured Loans With Golden State Finance Authority Downpayment Assistance Gifts 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

        Golden State Finance Authority Downpayment
                         Assistance




Office of Audit, Region 9       Audit Report Number: 2015-LA-1010
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 Golden State Finance Authority
               Downpayment Assistance Gifts 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 audit of loanDepot, LLC’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-1010
                    Date: September 30, 2015

                    loanDepot’s FHA-Insured Loans With Golden State Finance Authority
                    Downpayment Assistance Gifts Did Not Always Meet HUD Requirements




Highlights

What We Audited and Why
We audited loanDepot, LLC, 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. The focus on loans with Golden State Finance Authority (Golden
State) gifts was a result of a separate audit (2015-LA-1009) on loanDepot’s use of downpayment
assistance. Our objective was to determine whether loanDepot originated FHA loans containing
Golden State downpayment assistance grants in accordance with HUD FHA requirements.

What We Found
loanDepot’s FHA-insured loans with Golden State downpayment assistance gifts did not always
comply with HUD requirements, putting the FHA insurance fund at unnecessary risk, including
potential losses of $5.5 million for 62 loans with ineligible gifts and $16.1 million for 178 loans
that likely contained ineligible gifts. Looking forward 1 year, this is equivalent to at least $16
million in potential losses for loans that would contain ineligible gifts and have a higher risk of
loss in the first year. Also, loanDepot inappropriately charged borrowers $13,726 in fees that
were not customary or reasonable. This condition occurred because loanDepot relied on Golden
State, accepted the Platinum Downpayment Assistance Program structure, and did not conduct
its own due diligence with regard to premium pricing, gifts, and fees. The ineligible loans put
borrowers at a disadvantage due to higher monthly mortgage payments, including the burden of
funding the downpayment assistance program through premium interest rates.

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 gifts; (2) indemnify HUD for the 62 loans with ineligible gifts; (3)
indemnify HUD for loans that likely contain ineligible gifts from the remaining 233 loans; (4)
reimburse borrowers for $13,726 in fees that were not customary or reasonable; (5) reduce the
interest rate for borrowers who received ineligible gifts; (6) reimburse borrowers for overpaid
interest as a result of the premium interest rate; and (7) update all internal controls to include
specific HUD requirements on gifts, premium rates, and allowable fees.
Table of Contents
Background and Objective......................................................................................3

Results of Audit ........................................................................................................4
         Finding: loanDepot’s FHA-Insured Loans With Golden State Finance Authority
         Downpayment Assistance Gifts Did Not Always Meet HUD Requirements ............... 4

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 ............................................................. 15

         C. Criteria ....................................................................................................................... 76

         D. Summary of Loans With Ineligible Downpayment Assistance….........................78

         E. Summary of Loans With Fees That Were Not Customary or Reasonable ......... 81




                                                                     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 authority on May 3, 2010. Under FHA’s Direct
Endorsement program, approved lenders may underwrite and close mortgage loans without
FHA’s prior review or approval. The lender serves consumers across the Nation under the
names loanDepot, 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 308 FHA-insured
mortgage loans that included downpayment assistance from the Golden State Finance Authority
(Golden State). Since 2010, Golden State 1 has administered the Platinum Downpayment
Assistance Program to help low- to moderate-income home buyers purchase a home through
participating lenders. The downpayment assistance is provided as a non-repayable grant to be
used toward a borrower’s downpayment, closing costs, or both.

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

1
    Golden State is a California housing finance agency and a duly constituted public entity and agency. It changed
    its name on January 27, 2015, and was previously known as the California Rural Home Mortgage Finance
    Authority Homebuyers Fund.


                                                          3
Results of Audit

Finding: loanDepot’s FHA-Insured Loans With Golden State
Finance Authority Downpayment Assistance Gifts Did Not Always
Meet HUD Requirements
LoanDepot’s FHA-insured loans that included Golden State Finance Authority (Golden State)
downpayment assistance gift funds did not always comply with HUD FHA requirements. In
addition, loanDepot improperly charged fees that were not customary or reasonable. A review of
75 loans endorsed from October 1, 2013, to January 31, 2015, determined that 62 loans included
ineligible downpayment assistance gifts. This condition occurred because loanDepot relied on
Golden State, accepted the Platinum program structure, and did not conduct its due diligence
with regard to premium pricing, minimum cash investment, and gifts. As a result, loanDepot put
the FHA insurance fund at unnecessary risk, including potential losses of $5.5 million for the 62
loans with ineligible gifts and $16.1 million for the 178 loans that likely contained ineligible
gifts. Looking forward 1 year, this is equivalent to at least $16 million in potential losses for
loans that have a higher risk of loss in the first year. FHA borrowers were also charged $13,726
in fees that were not customary or reasonable. Additionally, 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.

loanDepot Allowed Ineligible Downpayment Assistance
loanDepot inappropriately originated FHA loans with ineligible downpayment assistance gifts
provided through the Golden State Platinum program. It allowed premium pricing to be used as
a source of funds for borrowers’ downpayments and allowed gifts that were not gifts as defined
by HUD. Using data obtained from
loanDepot, we identified 308 FHA-insured
loans endorsed from October 1, 2013,            loanDepot allowed ineligible Golden
through January 1, 2015, that contained         State downpayment assistance gifts
gifts from Golden State. Our review of          for at least 235 loans totaling $42.6
   2                         3
75 FHA loans identified 62 loans that           million.
contained ineligible downpayment
assistance gifts. Extrapolating the 62
loans to the audit universe of 308 loans resulted in a projection that loanDepot originated 235
loans totaling $42.6 million that contained ineligible downpayment assistance gifts. On an
annualized basis looking forward 1 full year, this is equivalent to at least $31.9 million in loans
that would contain ineligible downpayment assistance. We predict that if a review was
conducted of the 233 remaining loan records in the audit universe, those loans not in the sample


2
    See the Scope and Methodology section for details on the statistical sample.
3
    Of the 75 loans reviewed, 10 contained downpayment assistance from Golden State; however, we determined
    that the borrowers provided enough funds to cover the required 3.5 percent minimum cash investment and 3
    loans did not contain ineligible downpayment assistance from Golden State.


                                                        4
of 75, there would be at least 178 loans, or $32.2 million in loans that would contain ineligible
downpayment assistance, and it could be more.

                                                                     Unpaid
          Statistical sample           Total      Ineligible                         Estimated loss
                                                                    principal
             projections 4             loans        loans                            to HUD (risk)
                                                                     balance
             Audit sample                75           62        $    11,061,603 $          5,530,801 5
         Potential review of
                                        233           178       $    32,254,273 $         16,127,137 6
          remaining loans
        Extrapolated to audit
                                        308           235       $    42,636,551 $         21,318,275 7
              universe
                         1 year forward                         $    31,977,413 $         15,988,706 8

As a requirement for Golden State Platinum program participation, 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 Golden State, 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 gifts met the requirements described in HUD
Handbook 4155.1. The Golden State downpayment assistance gifts allowed by loanDepot did
not comply with HUD’s requirements for premium pricing and the description of acceptable
gifts, making 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 never be used to pay any portion of the borrower’s
         downpayment. Each loan with a Golden State downpayment assistance gift was given a
         higher than market interest rate (premium rate) as a part of program participation. 9 The
         FHA loans’ premium prices were used to fund the program by recapturing the
         downpayment assistance and the
         programs’ operating costs and fund      FHA borrowers were given higher
         future downpayment assistance
                                                 than market interest rates in exchange
         through the sale of the increased
         market value bundled loans. When        for Golden State downpayment
         the premium pricing was used to         assistance.
         pay any portion of the borrower’s
         downpayment, the loan would be ineligible even when the source of the downpayment


4
    See the Scope and Methodology section for details on the sample and projections.
5
    Recommendation 1B
6
    Recommendation 1C
7
    Recommendation 1A
8
    Recommendation 1D
9
    Interviews with loanDepot and Golden State employees confirmed that FHA loans with downpayment assistance
    received higher than market interest rates (premium rate), compared to FHA loans without downpayment
    assistance.


                                                      5
           was considered acceptable to HUD, such as a housing finance agency. Premium pricing
           is permitted by HUD only to allow lenders to pay a borrower’s closing costs and prepaid
           items. In this case, the premium pricing was used to increase the market value of the
           bundled loans (mortgage-backed securities) when sold to 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.

•          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
           Golden State downpayment assistance gifts were not true gifts as defined by HUD. Since
           loanDepot did not ensure that the downpayment assistance gifts were repaid, either
           directly or indirectly, they were not true gifts. The downpayment assistance gifts were
           indirectly repaid by the borrowers
           through the premium rate in
           conjunction with Golden State’s          loanDepot allowed gifts that did not
           funding mechanism. To receive            meet HUD’s requirement that there be
           downpayment assistance,                  no expected or implied repayment.
           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 Golden State to be reimbursed after the bundled mortgage-backed security sale.
           Therefore, repayment was expected or implied.

•          The downpayment assistance gifts could be considered financed, again indicating that the
           gifts were not true gifts. The commitment or gift letter, signed by the borrower and
           Golden State, referred to the gifts as financed (see first excerpt below). In addition, the
           U.S. Bank 10 lender agreement, signed by loanDepot and U.S. Bank, referred to the
           downpayment assistance gift as a “loan” (see second excerpt below). Given the language
           and the funding mechanism discussed below, it can reasonable be concluded that
           borrowers financed their own downpayment assistance gifts through the premium interest
           rate.




10
     U.S. Bank was the servicer for all loans with Golden State downpayment assistance.


                                                           6
•         Golden State downpayment assistance was not always documented appropriately. 11 In
          our review of the 75 sample loans, we identified 10 loans for which the gift letters were
          not signed by the borrowers and two loans for which the gift transfers were not
          documented appropriately.

Downpayment Assistance Program Depended on a Circular Funding Mechanism
The Platinum program used by loanDepot and administered by Golden State 12 was structured
with the intention of using premium interest rates to generate revenues to perpetually fund the
downpayment assistance program. To do this, Golden State worked with U.S. Bank to raise
capital. An agreement between loanDepot and Golden State, dated September 6, 2013, stated
that loanDepot would review and process applications for potential borrowers to determine their
eligibility for the downpayment assistance program in a timely manner and in good faith and
efficiently complete the application process. There was also an agreement between loanDepot
and U.S. Bank, dated July 3, 2013, in which loanDepot agreed to sell mortgage loans to U.S.
Bank.

loanDepot qualified borrowers for both the FHA mortgage loans and downpayment assistance
gifts at the same time. Once the borrower was approved by the loan officer, he or she reserved
the downpayment assistance gift funds on behalf of Golden State through the National
Homebuyer’s Fund reservation portal. Downpayment assistance gift funds were reserved at the
same time the predetermined premium interest rate was locked, which was valid for 60 days.
The agreement to purchase the loan became an enforceable commitment between loanDepot and
U.S. Bank. At closing, loanDepot provided the downpayment assistance gift funds on behalf of
Golden State. When purchasing the servicing rights, U.S. Bank also reimbursed loanDepot for
the advanced downpayment assistance gifts. The FHA mortgage loans were then pooled into
mortgaged-backed securities by U.S. Bank on behalf of Golden State, which purchased the
pooled loans. Golden State reimbursed U.S. Bank for the payment to loanDepot of the advanced
gift funds. Finally, Golden State sold the premium-priced pooled mortgage-backed securities as
part of the “to be announced” 13 securities market. The premium interest rate attached to the FHA
loans with downpayment assistance allowed Golden State to obtain a higher selling price.




11
     See appendix D.
12
     Applicable program guidelines are published by National Homebuyers Fund, Inc., the program administrator, in
     the lender term sheet.
13
     The “to be announced” securities market is a forward, or delayed delivery, market for 30-year and 15-year fixed-
     rate single-family mortgage-related securities. A “to be announced” trade represents a forward contract for the
     purchase or sale of single-family mortgage-related securities to be delivered on a specified date. Parties to a “to
     be announced” trade agree upon the issuer, coupon, price, product type, amount of securities, and settlement date
     for delivery.


                                                            7
                                             Golden State
                                           administered the
                                         Platinum program,
                                             maintianing                        Golden State
       Golden State sold the
                                           agreements with                      calculated the
         mortgage-backed
                                         loanDepot and U.S.                premium interest rates
      securities on the open
                                                Bank.                        based on the "to be
     market. Proceeds from
                                                                            announced" market
       the sale were used to
                                                                            prevailing rates and
     reimburse Golden State,
                                                                           their expected revenue
         replenishing the
                                                                                   margin.
        Platinum program.

 Loans were bundled by                                                             The lender qualified
  U.S. Bank and sold as                                                            borrowers for both
 Government National                                                                the FHA mortgage
  Mortgage Association                                                                   loan and
   (GNMA) mortgage-                                                                   downpayment
   backed securities to                                                            assistance gift at the
      Golden State.                                                                     same time.
                          If required, loanDepot           The qualified FHA
                          advanced the gift funds          mortgage loan and
                           at closing on behalf of       downpayment gift were
                          Golden State. Servicing        reserved by loanDepot.
                          rights were sold to U.S.           At this time, the
                          Bank. If required, U.S.         premium interest rate
                             Bank reimbursed             was locked, and Golden
                           loanDepot for the gift        State committed to the
                                    funds.                         gift.


Downpayment assistance, even when provided by State and local housing finance agencies, must
meet requirements in HUD Handbook 4155.1. Neither HUD’s interpretive ruling (Federal
Register 5679-N-01) nor its related Mortgagee Letter 2013-14 contemplated the use of premium
pricing by a lender to reimburse a 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 when a seller (or other interested or related party) funded the home buyer’s
cash investment after the closing by reimbursing third-party entities, including, specifically,
private nonprofit charities. Similarly, it would be contrary to the intended purpose of the
Housing and Economic Recovery Act to allow a local government entity to do the same thing.

Fees Were Not Always Reasonable or Customary
Fees of $13,726 were charged and collected by loanDepot, which were not customary or
reasonable to close FHA mortgage loans (see appendix E). These fees were charged in
association with the Golden State Platinum program and were not required to close the FHA
mortgage loan. Fees identified as not customary or unreasonable were listed as bond-funding
fees and a lock extension on the HUD-1 settlement statements. For example, we identified
funding fees ranging from $150 to $300. In addition, we identified a lock extension fee that was
not applicable to the Platinum program as the premium rate was predetermined and
nonnegotiable.




                                                     8
FHA Borrowers Receiving Downpayment Assistance Gifts Paid More
The ineligible loans with the required premium interest rates imposed on FHA borrowers
resulted in higher monthly mortgage payments, compared to those of qualified FHA borrowers
who did not receive downpayment assistance. In addition, the premium interest rates placed the
burden of funding the downpayment assistance program squarely on the borrower, which put an
unnecessary burden on borrowers who otherwise would not have been eligible for an FHA
mortgage loan. Neither loanDepot nor Golden State required disclosure to the 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.

Conclusion
loanDepot’s FHA-insured loans with Golden State downpayment assistance gifts did not always
comply with HUD requirements, putting the FHA insurance fund at unnecessary risk, including
potential losses of $5.5 million for 62 loans with ineligible gifts and $16.1 million for 178 loans
that likely contained ineligible gifts. Looking forward 1 year, this is equivalent to at least $16
million in potential losses for loans containing ineligible gifts that would have a higher risk of
loss in the first year. Also, loanDepot inappropriately charged borrowers $13,726 in fees that
were not customary or reasonable. This condition occurred because loanDepot relied on Golden
State; accepted the Platinum program structure; and did not conduct its own due diligence on
gifts, 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.

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, to the eligibility
          for FHA mortgage insurance, or that due diligence was exercised during the origination
          of 234 loans with potential losses of $21.3 million.

We recommend 14 that HUD’s Deputy Assistant Secretary for Single Family Housing require
loanDepot to

1B.       Indemnify HUD for the 62 FHA loans with ineligible downpayment assistance gifts,
          resulting in funds to be put to better use of $5,530,801.

1C.       Indemnify HUD for FHA loans that likely contained ineligible downpayment assistance
          from the remaining 233 loans in the audit universe, resulting in funds to be put to better



14
     See appendix A for an explanation of funds to be put to better use.


                                                            9
      use of $16,127,137. HUD must review the 233 loans to determine whether they were
      insurable without the ineligible downpayment assistance gift.

1D.   Immediately stop originating FHA loans with ineligible downpayment assistance gifts
      that result in a premium interest rate for the borrower, resulting in funds to be put to
      better use of $15,988,706.

1E.   Reimburse $13,726 to FHA borrowers for the fees that were not customary or reasonable.

1F.   Collaborate with the applicable loan servicers to reduce interest rates for FHA borrowers
      who 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 as a result of the premium interest rate
      for those who received downpayment assistance, were charged a premium interest rate,
      and have refinanced or terminated their original FHA loan.

1H.   Update all internal controls (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 fieldwork from June 8 through June 23, 2015, at the loanDepot
corporate office in Foothills Ranch, CA, and the loanDepot office in Scottsdale, AZ. 15 Our audit
period covered loans endorsed from October 1, 2013, to January 1, 2015.

To accomplish our objective, we

•     Reviewed HUD regulations and reference materials related to single-family requirements;

•     Interviewed appropriate loanDepot management and staff personnel;

•     Interviewed Golden State management involved with the Platinum program;

•     Reviewed documentation, including agreements, for the Platinum program;

•     Reviewed loans that contained an ineligible downpayment assistance gift; and

•     Reviewed a stratified, systematic, statistical sample of 75 FHA loans originated with a grant
      from the Platinum program.

We obtained from loanDepot a list of FHA loans that contained Golden State Platinum
downpayment assistance during our audit period. During our audit period, there were 308 loans
totaling more than $55 million. We selected a stratified, systematic, statistical sample of 75
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 233 remaining loan records
in the audit universe was conducted.

Based on a stratified, systematic sample of 75 loan records designed to minimize error, we can
make the following statements 16:

          We found that 62 of the 75 loan files reviewed contained ineligible downpayment
          assistance from Golden State 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)


15
     The audit was conducted concurrently as part of an overall review of loanDepot’s use of downpayment
     assistance. The audit objective for the initial audit, report 2015-LA-1009, was to determine whether loanDepot
     originated FHA loans containing downpayment assistance (other than Golden State) in accordance with HUD
     FHA regulations.
16
     See appendix A for calculations on potential risk (loss) and funds to be put to better use.


                                                           11
          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 82.8
          percent of the loans that met these criteria and a weighted unpaid balance average of
          $150,903 per loan. Deducting for statistical variance to accommodate the uncertainties
          inherent in statistical sampling, we can still say – with a one-sided confidence interval of
          95 percent – that 76.4 percent of the loans met these criteria and the weighted unpaid
          balance per loan is $138,430, and it could be more.

                    Per loan average:              $150,903.26 – 1.95 17 ⨉ $6,396.36 ≈ $138,430.36
                    Audit universe projection:     $46,478,203.94 – 1.9517 ⨉ $1,970,078.63 ≈ $42,636,550.61
                    Percent of loans:              82.81% – 1.667 ⨉ 3.79% ≈ 76.49%
                    Audit universe projection:     308 loans * 76.49% = 235.58 ineligible loans
                    Annualized projection:         ($42,636,550.61 / 16 18) * 12 months = $31,977,412.96

          Extrapolating this amount to the 308 audit universe, this is equivalent to at least 235 loans
          or $42.6 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 $31.9 million in loans that
          would contain ineligible downpayment assistance, and it could be more. We predict that
          if a review was conducted of the 233 remaining loan records in the audit universe, those
          loans not in the sample of 75, there would be at least 178 loans, or $32.2 million in loans
          that would contain ineligible downpayment assistance, and it could be more.

                    Remainder of universe:        233 loans * $138,430.36 19 = $32,254,273.41
                    Remainder of universe:        233 loans * 76.49% = 178 potentially ineligible loans

We used data maintained by loanDepot to determine the audit universe of 308 loans. We
validated the data using the HUD Single Family Data Warehouse 20 to ensure that the 308 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. We believe that the evidence obtained provides a reasonable basis for our findings
and conclusions based on our audit objective.




17
     One-sided confidence interval
18
     Represents the number of months in the audit period
19
     The weighted average monthly unpaid balance of $138,283 was applied to the entire remaining 233 loans (308 –
     75) as it incorporates potential errors; therefore, there was no need to reduce the 233 to 177 before calculating the
     dollar amount.
20
     Single Family Data Warehouse is a large collection of database tables dedicated to supporting 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 downpayment assistance gifts
    met HUD FHA requirements.

•   Controls intended to ensure that fees paid by FHA borrowers were properly disclosed,
    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:

•   loanDepot did not have adequate controls to ensure that FHA loans originated with
    downpayment assistance gifts met HUD FHA requirements (finding).

•   loanDepot did not have adequate controls to ensure that fees paid by FHA borrowers were
    disclosed and reasonable in accordance with HUD FHA requirements (finding).




                                                  13
Appendixes

Appendix A
                  Schedule of Questioned Costs and Funds To Be Put to Better Use

                      Recommendation             Unreasonable or             Funds to be put
                          number                  unnecessary 1/             to better use 2/
                               1B                                               $ 5,530,801
                               1C                                               $16,127,137
                               1D                                               $15,988,706
                               1E                       $13,726

                             Totals                     $13,726                 $37,646,644



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 charged to FHA
          borrowers that were not customary or reasonable, such as bond program 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 preaward reviews, and any other savings
          that are specifically identified. In this instance, implementing recommendations 1B, 1C,
          and 1D will reduce FHA’s risk of loss to the insurance fund. The amount noted for
          recommendation 1B was calculated as follows: unpaid principal for 62 loans with
          ineligible gifts ($11,061,603) multiplied by the 50 percent FHA loss severity rate. The
          amount noted for recommendation 1C was calculated as follows: $138, 430 (average
          unpaid balance per loan with ineligible gifts) multiplied by 233 loans (308 loan universe
          minus 75 sample loans) equals $32,254,273 multiplied by the 50 percent FHA loss
          severity rate. 21 The amount noted for recommendation 1D reflects the statistical sample
          projection results annualized ($31,977,413), looking forward 1 full year, multiplied by
          the 50 percent FHA loss severity rate. 22


21
     See Scope and Methodology section for details on the sample, projection, and calculations.
22
     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
Appendix B
             Auditee Comments and OIG’s Evaluation



Ref to OIG    Auditee Comments
Evaluation




Comment 1
Comment 2
Comment 3




                               15
Comment 4


Comment 4




Comment 5



Comment 6




            16
17
18
19
20
Comment 2
Comment 4




            21
Comment 4




Comment 2



Comment 4



Comment 7



Comment 8




            22
23
Comment 5




            24
Comment 4




Comment 4




            25
Comment 1

Comment 2
Comment 3

Comment 4




            26
Comment 1




Comment 1




Comment 9




            27
Comment 2

Comment 1



Comment 2




            28
Comment 2

Comment 1


Comment 1




Comment 10




             29
Comment 10




Comment 11




             30
Comment 11




Comment 2




Comment 1




             31
Comment 1




Comment 1




            32
Comment 1




Comment 9



Comment 2




            33
Comment 2




            34
Comment 2




Comment 2




            35
Comment 2




            36
Comment 1




Comment 1




Comment 12




             37
Comment 4




Comment 3




            38
Comment 3




Comment 3




            39
Comment 3




Comment 3




            40
Comment 3




            41
Comment 3




Comment 11




             42
Comment 1




Comment 1




Comment 1




            43
Comment 1




Comment 1




Comment 1




            44
Comment 1




Comment 1




Comment 1




            45
Comment 1




Comment 4




            46
Comment 4




            47
Comment 4




Comment 4




            48
Comment 13




Comment 3



Comment 4




             49
Comment 4




Comment 4




Comment 5




            50
Comment 8




Comment 5




Comment 14




             51
Comment 14




Comment 4




             52
Comment 4




Comment 6
Comment 7




            53
54
55
56
57
58
59
60
61
62
63
64
* Names redacted for privacy reasons




                 65
* Names redacted for privacy reasons




                 66
67
68
69
                         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 it 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 gifts provided by the GSFA 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 “gift” through higher
                   mortgage payments over the life of the loan and the required premium
                   interest rate enabled housing finance agency reimbursement upon the


                                             70
                   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 a
                   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 Golden State
                   downpayment assistance program, as loanDepot did not determine the
                   rates in question; they were determined by the Golden State. 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 indicate that a lender can
                   bypass requirements on premium pricing and gift funds. The audit report
                   does not state that the premium pricing is in 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
                   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. 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



                                             71
            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, including the Golden State program. 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
            $450 in its response, the fees actually ranged from $150 to $300, however, totals
            in appendix E table were higher as some loans contained more than one ineligible
            fee. A footnote was added to the audit report for clarification.

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
            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 was
            conducted in accordance with generally accepted government auditing standards
            and was written based on facts, documentation, analyses, and interviews of
            loanDepot and Golden State 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 any audit resolution has taken
            place. The letter from HUD, dated July 20, 2015, does not provide specific
            guidance. Rather, it only reaffirms the position that housing finance agencies can
            provide downpayment assistance; a position OIG has never disputed. OIG also
            believes HUD’s legal opinion does not fully address the downpayment assistance
            issue related to gifts.

            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



                                             72
            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 11, 2015 that contained language similar
            to what appears in the audit report. The discussion draft report was provided to
            loanDepot on September 3, 2015 with a due date to comment of September 17,
            2015. loanDepot was therefore aware of the issues for over two months before
            the due date for comments. loanDepot initially requested an extension of 4
            weeks, or until October 17, 2015. During the exit conference, loanDepot reduced
            their request to two weeks, or October 1, 2015. OIG provided an extension from
            September 17, 2015 to September 23, 2015; an increase from 15 to 21 days.

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
            documents that would significantly change the facts of the findings. OIG
            included loanDepot’s response in its entirety in appendix B of the audit 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. Although loanDepot is correct with regard to the
            amount of claims, 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.



                                             73
Comment 8     OIG disagrees with loanDepot’s statement that OIG is rewriting HUD guidance
              and applies a retroactive enforcement process. 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 “gift”, 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 discussion of secondary financing and discount fees are not part of this audit
           report. Refer to audit report 2015-LA-1009 for OIG’s response.

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 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 can be very different than those conducted by HUD;



                                               74
              comparing the two is not relevant. OIG has no obligation to use the
              methodologies used by HUD when selecting samples to review FHA loans.
              Statistical sampling is a valid approach and was conducted in accordance with
              generally accepted government auditing standards. As stated in the audit report,
              OIG selected a stratified, systematic, statistical sample of 75 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 233 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 233 loans to make that determination.

Comment 14 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.




                                               75
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 lesser 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 points) 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. Borrowers may not pay a tax service fee.

       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.

       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.




                                                 76
       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.

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.

       Paragraph 6.A.3.d. Rejecting Charges and Fees
       The appropriate Homeownership Center may reject charges, based on what is reasonable
       and customary for the area.

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
The Housing and Economic Recovery Act of 2008 amended Section 203(b) to include a new
subparagraph (9)(C), which specifies prohibited sources for a mortgagor’s minimum investment.
Section 203(b)(9)(C) of the NHA states:
       Prohibited Sources. 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).

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
in accordance with the principles set forth in the December 5, 2012 Interpretive Rule
(“Interpretive Rule”), Docket No. FR-5679-N-01.




                                                  77
Appendix D
                     Summary of Loans With Ineligible Downpayment Assistance

                                                                                               Funds derived
                                                                            Items not
                                                                                              from premium-
                       FHA loan information                                documented
                                                                                              priced mortgage
                                                                            properly
                                                                                                not disclosed
                          Original                                                                     Good
                                           Status       Unpaid loan       Gift      Gift
Case number               mortgage            23                                             HUD-1      faith
                                                         balance         letter   transfer
                          amount                                                                      estimate
043-9219971           $        174,775        R     $          172,809     -         -         X         X
043-9321851                    230,743        A                225,958     X         -         X         X
043-9327979                    167,902        R                165,369     X         -         X         X
043-9397600                    164,957        A                162,628     -         -         X         X
043-9429912                    204,232        A                201,616     -         -         X         X
043-9490484                    194,904        A                193,350     -         -         X         X
043-9496079                    197,849        T                196,801     -         -         X         X
045-7994654                    233,433        A                226,780     -         X         X         X
045-8002078                    193,649        A                188,699     -         -         X         X
045-8017644                    124,913        A                121,818     -         -         X         X
045-8061211                    214,051        A                208,208     -         -         X         X
045-8061496                    132,063        A                128,612     -         -         X         X
045-8067250                    245,422        A                238,427     -         -         X         X
045-8068471                    241,544        A                234,660     -         -         X         X
045-8075017                    115,371        A                112,575     -         -         X         X
045-8080119                     93,279        A                 90,895     -         X         X         X
045-8082112                    127,645        A                124,655     -         -         X         X
045-8086192                    176,739        R                172,824     -         -         X         X
045-8088158                    257,744        T                      -     -         -         X         X
045-8090621                    263,289        A                257,256     -         -         X         X
045-8090802                    179,685        A                175,355     -         -         X         X
045-8094471                    181,649        A                177,812     X         -         X         X
045-8097280                    204,723        A                200,000     -         -         X         X
045-8103929                    116,068        A                113,661     X         -         X         X
045-8106399                    132,456        R                130,062     X         -         X         X
045-8112710                    223,349        A                219,015     -         -         X         X
045-8120492                    150,228        A                147,313     -         -         X         X



23
     A = active, R = refinanced, T = terminated


                                                          78
                                                                              Funds derived
                                                           Items not
                                                                             from premium-
              FHA loan information                        documented
                                                                             priced mortgage
                                                           properly
                                                                               not disclosed
               Original                                                               Good
                              Status   Unpaid loan       Gift      Gift
Case number    mortgage         23                                          HUD-1      faith
                                        balance         letter   transfer
               amount                                                                estimate
045-8123430         106,043     A             104,031     X         -         X         X
045-8130398         150,228     R             148,107     X         -         X         X
045-8134217         211,105     A             207,289     -         -         X         X
045-8143776         166,920     A             163,903     -         -         X         X
045-8146579         162,011     A             158,882     -         -         X         X
045-8148216         137,464     A             135,161     X         -         X         X
045-8148931         170,847     A             167,985     -         -         X         X
045-8153347         276,744     A             271,681     -         -         X         X
045-8156705         270,558     R             267,445     -         -         X         X
045-8162253         152,192     A             149,844     -         -         X         X
045-8170727          76,587     A              75,405     -         -         X         X
045-8174403         152,192     R             150,044     -         -         X         X
045-8174931         117,826     A             116,163     -         -         X         X
045-8177142         195,395     A             192,637     -         -         X         X
045-8186295         240,562     A             236,851     -         -         X         X
045-8195579         159,458     A             157,416     -         -         X         X
045-8197065         201,286     A             198,708     -         -         X         X
045-8199746         111,935     A             110,368     -         -         X         X
045-8206269         219,117     A             216,835     -         -         X         X
045-8216010         163,975     A             162,089     -         -         X         X
045-8221771         171,338     A             169,589     -         -         X         X
045-8221887         189,405     A             187,291     -         -         X         X
045-8223460         186,558     A             184,654     -         -         X         X
045-8230093         196,278     A             194,136     -         -         X         X
045-8231546         201,286     A             198,939     -         -         X         X
045-8234378         255,290     A             252,689     -         -         X         X
045-8237707         162,011     A             160,719     -         -         X         X
045-8242526         156,120     A             154,665     -         -         X         X
045-8251216         206,196     A             204,552     -         -         X         X
045-8254127         107,025     A             106,171     -         -         X         X
045-8265171         139,428     A             138,417     -         -         X         X
045-8279821         104,080     A             103,325     -         -         X         X
048-7769413         230,743     A             224,713     -         -         X         X



                                         79
                                                                                                    Funds derived
                                                                              Items not
                                                                                                   from premium-
                      FHA loan information                                   documented
                                                                                                   priced mortgage
                                                                              properly
                                                                                                     not disclosed
                        Original                                                                              Good
                                          Status         Unpaid loan        Gift       Gift
 Case number            mortgage             23                                                  HUD-1         faith
                                                          balance          letter    transfer
                        amount                                                                               estimate
  048-7941417                 162,501        A                  159,564       -          -          X            X
  048-7949768                 299,475        R                  295,247       -          -          X            X
  048-8034545                 228,779        A                  225,849       -          -          X            X
  048-8042558                 139,918        A                  138,126       -          -          X            X
  048-8096947                 296,530        R                  293,766      X           -          X            X
  197-6707636                 176,739        A                  173,545       -          -          X            X
  197-6720684                 147,283        R                  145,204       -          -          X            X
  197-6734517                 235,653        R                  232,635       -          -          X            X
  197-6738907                 220,924        A                  216,882       -          -          X            X
  197-6739668                 206,196        R                  203,824       -          -          X            X
  197-6773805                 147,283        A                  145,011       -          -          X            X
  197-6790922                 149,737        A                  147,427      X           -          X            X
  197-6822482                 151,603        A                  149,859       -          -          X            X
  331-1631642                 159,065        A                  155,553       -          -          X            X
  332-5861808                  78,551        A                   76,886       -          -          X            X
Ineligible loans 24 $     11,498,367          -      $     11,061,603        9           1          62          62
    Minimum
     required       $      1,534,195          -      $      1,506,314        1           1          10          10
investment met 25
 Loans without
ineligible Golden $          458,540          -      $        449,321        -           -          3            3
   State gifts 26
      Totals        $      13,491,102         -      $     13,017,238        10          2          75           75




  24
     These loans include one terminated loan (highlighted in red) that contained ineligible Golden State downpayment
  assistance.
  25
     The 10 loans (highlighted in blue) contained ineligible Golden State downpayment assistance; however, the loans
  had enough funds to meet the minimum cash investment without the downpayment assistance.
  26
     Loans without ineligible Golden State downpayment assistance are highlighted in green.


                                                           80
Appendix E
              Summary of Loans With Fees That Were Not Customary or Reasonable

                                               Recommendation 1D
                                                                           Noncustomary
                                                      Interest rate
                           FHA case number                                or unreasonable
                                                     lock extension
                                                                            fees charged 27
                              043-9397600           $                 -   $             450
                              043-9429912                             -                  300
                              043-9490484                             -                  300
                              043-9496079                             -                  300
                              045-8002078                         726                       -
                              045-8090621                             -                  250
                              045-8143776                             -                  200
                              045-8146579                             -                  200
                              045-8148216                             -                  350
                              045-8148931                             -                  200
                              045-8153347                             -                  200
                              045-8156705                             -                  350
                              045-8162253                             -                  350
                              045-8170727                             -                  300
                              045-8174403                             -                  450
                              045-8174931                             -                  200
                              045-8177142                             -                  300
                              045-8186295                             -                  300
                              045-8195579                             -                  300
                              045-8197065                             -                  300
                              045-8199746                             -                  300
                              045-8206269                             -                  300
                              045-8216010                             -                  300
                              045-8221771                             -                  300
                              045-8221887                             -                  300
                              045-8223460                             -                  300
                              045-8230093                             -                  300
                              045-8231546                             -                  300



27
     Page 8 of the audit report cites noncustomary or unreasonable fees ranging from $150 to $300. The totals in the
     table are combined and range from $200 to $450 due to loans sometimes containing more than one ineligible fee.


                                                           81
                Recommendation 1D
                                         Noncustomary
                    Interest rate
FHA case number                         or unreasonable
                   lock extension
                                         fees charged 27
  045-8234378                       -                300
  045-8237707                       -               450
  045-8242526                       -               300
  045-8251216                       -               300
  045-8254127                       -               300
  045-8265171                       -               300
  045-8279821                       -               300
  048-7949768                       -               200
  048-8034545                       -               300
  048-8042558                       -               300
  048-8096947                       -               300
  197-6720684                       -               200
  197-6734517                       -               200
  197-6739668                       -               350
  197-6773805                       -               300
  197-6790922                       -               300
  197-6822482                       -               300
   Subtotals      $           726       $        13,000
     Total                     $ 13,726




                        82