oversight

First Niagara Bank, Lockport, NY, Did Not Always Properly Implement HUD's Loss Mitigation Requirements in Servicing FHA-Insured Mortgages

Published by the Department of Housing and Urban Development, Office of Inspector General on 2015-05-22.

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

      First Niagara Bank, Lockport, NY
                  Single-Family Housing Servicing




Office of Audit, Region 2          Audit Report Number: 2015-NY-1006
New York-New Jersey                                      May 22, 2015
To:            Kathleen Zadareky
               Deputy Assistant Secretary for Single Family Housing, HU

               //SIGNED//
From:          Kimberly Greene
               Regional Inspector General for Audit, 2AGA
Subject:       First Niagara Bank, Lockport, NY, Did Not Always Properly Implement HUD’s
               Loss Mitigation Requirements in Servicing FHA-Insured Mortgages




Attached is the U.S. Department of Housing and Urban Development (HUD), Office of Inspector
General’s (OIG) final results of our review of First Niagara Bank’s servicing of Federal Housing
Administration (FHA)-insured mortgages.
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
(212) 264-4174.
                    Audit Report Number: 2015-NY-1006
                    Date: May 22, 2015

                    First Niagara Bank, Lockport, NY, Did Not Always Properly Implement
                    HUD’s Loss Mitigation Requirements in Servicing FHA-Insured Mortgages




Highlights

What We Audited and Why
We conducted a review of First Niagara Bank’s servicing of Federal Housing Administration
(FHA)-insured mortgages and its implementation of the U.S. Department of Housing and Urban
Development’s (HUD) Loss Mitigation program. We selected First Niagara Bank based on an
Office of Inspector General risk assessment of single-family lenders. The objective of the audit
was to determine whether First Niagara Bank properly serviced FHA-insured mortgages;
specifically, whether it (1) properly implemented HUD’s Loss Mitigation program, (2) provided
the proper reporting for the FHA-insured mortgages it serviced, and (3) established and
implemented an effective quality control program.

What We Found
There were 10 loans with a total of more than $1.65 million in unpaid principal balance, for
which HUD needs to determine whether the servicing practices were adequate. First Niagara
Bank did not always properly implement applicable procedures and requirements in servicing
FHA-insured mortgages. Specifically, they did not (1) properly implement HUD’s Loss
Mitigation program, (2) did not accurately report their servicing of FHA-insured mortgages, and
(3) did not implement an effective quality control program. The lack of adequate loss mitigation
efforts could affect the borrower’s ability to retain home ownership and have a negative impact
on the FHA insurance fund. If HUD determines that First Niagara Bank did not take the
appropriate actions, it could result in an unnecessary loss of home ownership and more than
$825,000 loss to the insurance fund. Furthermore, First Niagara Bank did not accurately report
the servicing of their FHA-insured mortgages.

What We Recommend
We recommend that HUD instruct First Niagara Bank to provide support showing that the
lender’s servicing practices for identified loans were acceptable for mortgages insured by HUD.
For any loan for which HUD determines that the servicing practices were inadequate, HUD
should take the appropriate administrative actions, including indemnifying inadequately serviced
loans. We also recommend that HUD instruct First Niagara Bank to provide evidence that 80
loans were either paid in full or closed; and remove the loans from HUD’s FHA-insured
portfolio. As such, this will result in a $4,201,504 reduction in obligations to the mortgage
insurance fund, and reinstate the 15 loans totaling $951,723 that were incorrectly terminated
from HUD’s FHA-insured portfolio.
Table of Contents
Background and Objective......................................................................................3

Results of Audit ........................................................................................................5
         Finding 1: First Niagara Bank Did Not Properly Implement HUD’s Loss Mitigation
         Program ............................................................................................................................. 5

         Finding 2: First Niagara Bank Failed To Accurately Record Its Servicing Actions
         for FHA-Insured Loans .................................................................................................. 10

         Finding 3: First Niagara Bank Did Not Follow HUD’s Requirements When
         Implementing Its Quality Control Program................................................................. 14

Scope and Methodology .........................................................................................17

Internal Controls ....................................................................................................19

Appendixes ..............................................................................................................20
         A. Schedule of Funds To Be Put to Better Use ............................................................ 20

         B. Auditee Comments and OIG’s Evaluation ............................................................. 21

         C. Schedule of Potential Loss to HUD.......................................................................... 42

         D. Loan Summaries ....................................................................................................... 43

         E. Schedule of Correct Single-Family Default Monitoring System Codes ............... 58

         F. Criteria ....................................................................................................................... 67




                                                                     2
Background and Objective
First Niagara Bank is an approved Federal Housing Administration (FHA) loan servicer located in
Lockport, NY. It services more than 1,600 FHA-insured mortgage loans.
The U.S. Department of Housing and Urban Development (HUD) established the Loss Mitigation
program in 1996 to ensure that distressed FHA-insured borrowers would have opportunities to
retain their homes and to reduce losses to FHA’s insurance fund. Loss mitigation is considered
critical to FHA because it fulfills the goal of helping borrowers in default retain home ownership
while reducing, or mitigating, the economic impact on the insurance fund.
FHA’s Loss Mitigation program returns responsibility for managing loan defaults to lenders and
provides financial incentives to recognize them for their efforts. Lenders must consider the
comparative effects of their servicing actions and take appropriate actions that can generate the
smallest financial loss to HUD. The Loss Mitigation program has reinstatement options to promote
retention of borrowers’ homes and disposition options that assist in disposing of their homes. The
lender must evaluate the borrower for both informal and formal forbearance plans 1 before
considering one of FHA’s loss mitigation home retention options. These forbearance plans are the
only options available for delinquent borrowers without verifiable losses of income or increases in
living expenses.
FHA’s loss mitigation home retention options must be considered in the following order: (1)
special forbearances, (2) loan modifications, and (3) FHA’s Home Affordable Modification
Program (HAMP). A special forbearance is a written agreement between a lender and borrower to
reduce and/or suspend mortgage payments. A special forbearance is available only to borrowers
who are unemployed. A loan modification is a permanent change to the terms of a borrower’s loan.
FHA-HAMP typically involves the combination of a loan modification and a partial claim, which
may include an amount needed to cover arrears in loan payments, and potentially, an additional
amount for principal deferment. However, it may now involve the use of one or both, of the loss
mitigation options.
The disposition options are pre-foreclosure sale and deed in lieu of foreclosure. The pre-foreclosure
sale option allows the defaulted borrower to sell their home and use the sales proceeds to satisfy the
mortgage debt, even if the proceeds are less than the amount owed. A deed in lieu of foreclosure,
allows a borrower to turn their home over to HUD in exchange for a release from all mortgage
obligations.




1
 Forbearance plans are arrangements between a lender and borrower that may allow for a period of reduced or
suspended payments; and, may provide specific terms for repayment depending on the circumstances. Informal
forbearance plans are oral agreements relating to a period of three months, or less. Formal forbearance plans are
written agreements relating to a period of greater than three months and less than six months.



                                                          3
The objective of the audit was to determine whether First Niagara Bank properly serviced FHA-
insured mortgages; specifically, whether it (1) properly implemented HUD’s Loss Mitigation
program, (2) provided the proper reporting for FHA-insured mortgages serviced, and (3) established
and implemented an effective quality control program.




                                                4
Results of Audit

Finding 1: First Niagara Bank Did Not Properly Implement HUD’s
Loss Mitigation Program
First Niagara Bank did not properly implement HUD’s Loss Mitigation program for 10 loans
totalling an unpaid principal balance of $1.65 million. This deficiency occurred because First
Niagara Bank did not provide adequate oversight to ensure that servicing procedures for FHA-
insured mortgages were properly implemented. The lack of adequate loss mitigation efforts
affects the borrower’s ability to retain home ownership and has a negative impact on the FHA
insurance fund. Therefore, HUD needs to determine whether the servicing practices were
adequately supported for these 10 loans. If First Niagara Bank did not take the appropriate
actions, this deficiency could result in unnecessary loss of home ownership and more than an
$825,000 potential loss to the insurance fund.

Ten Loans With Significant Loss Mitigation Servicing Deficiencies
First Niagara Bank failed to document significant aspects of their loss mitigation efforts for 10 of
20 loans reviewed. Summary details for these 10 loans are contained in Appendix D of this
Report. Specifically, First Niagara Bank did not:

    •   Document that borrowers qualified for the loss mitigation option.
    •   Provide evidence of the loss mitigation evaluation.
    •   Evaluate all loss mitigation options and ensure proper waterfall 2 was followed.
    •   Evaluate for loss mitigation options prior to the fourth missed installment payment.

The required servicing practices lending institutions must follow for HUD insured mortgages
are cited in 24 CFR (Code of Federal Regulations) 203(C). Additionally, HUD Handbook
4330.1, REV-5, has procedural standards and guidelines that must be followed when servicing an
FHA-insured mortgage. Further, there are several mortgagee letters containing guidance on
servicing FHA-insured mortgages. Appendix F specifies applicable excerpts from regulatory
guidance that were in effect for the loans reviewed.




2
 FHA Loss Mitigation Home Retention Option Priority Order (Waterfall), Mortgagee Letters 2012-22 and 2013-
32;provide that after evaluating a delinquent mortgagor for Informal and Formal Forbearance Plans, FHA’s Loss
Mitigation options must be considered in the following order: (1) Special Forbearances; (2) Loan Modifications; and
(3) FHA-HAMP.



                                                         5
As of December 31, 2014, these 10 loans had a total unpaid principal balance of $1,650,266.
Based on the current loss severity rate of 50 percent, if HUD determines inadequate servicing
practices existed over these loans, this could result in indemnification of $825,133 in estimated
losses. The following Table summarizes the identified loan deficiencies:

                                                                                     Lack of loss
                                         Loss mitigation          Failure to
                     Unqualified for                                                  mitigation
                                           action lacked       evaluate for all
    FHA number       loss mitigation                                                evaluation by
                                           evaluation of       loss mitigation
                          option                                                    fourth missed
                                         financial review          options
                                                                                     installment
    371-4717616           X                    X                     X                  X
    061-3259909           X                                          X                   X
    061-4177067           X                    X                     X                   X
    061-3710379           X                                          X                   X
    061-3151312           X                                          X
    061-3894372           X                                          X
    061-3904897                                X                     X                   X
    372-2302948                                X                     X
    061-3011089                                                      X
    061-3084419                                                      X                   X

      Totals               6                   4                     10                  6


.

Lack of Documentation Showing That the Borrower Qualified for the Loss Mitigation
Option
The Lender lacked the appropriate support to show that borrowers qualified, and were offered,
the loss mitigation option in 6 out of 10 loans that were already identified as having servicing
deficiencies. For these six loans, the documentation either did not support, or First Niagara Bank
had not verified, the accuracy of the information used to approve the loss mitigation option.




                                                   6
Additionally, without obtaining a waiver from HUD at the time a partial claim was approved,
one loan was provided with a HAMP stand-alone partial claim 3 when it was proven the
borrower’s interest rate was greater than the market rate.
Lack of Evidence of the Loss Mitigation Evaluation
For 4 of 10 loans that were already identified as having servicing deficiencies, First Niagara
Bank recorded that loss mitigation occurred, but did not have sufficient documentation to show
either an evaluation of loss mitigation or that a review of the borrowers’ financial information
was accomplished. Mortgagee Letter 2000-05 requires that to be considered for any of the loss
mitigation options, the borrower must provide detailed financial information to the lender. First
Niagara Bank stated this error occurred due to terminology used in the collection industry that
has different meanings in HUD’s Loss Mitigation program, such as promise to pay; and because
they did not receive financial information as requested from the borrowers. Mortgagee Letter
2013-15 states promises to pay are to be reported if the mortgagor has advised the mortgagee that
the loan will be brought current by making a one-time payment. According to the lender, if a
customer calls and promises to make a payment, it is called a promise to pay in the collection
industry. These recording errors occurred in four additional loans (see Finding 2) and impact the
actual number of loss mitigation forbearance plans the lender initiated.

Lack of Evaluation for All Loss Mitigation Options, Including Ensuring That Proper
Waterfall Priority Was Followed
For all 10 loans with servicing deficiencies, First Niagara Bank did not conduct an overall
evaluation for loss mitigation, such as (1) evaluating the borrower for all retention loss
mitigation options, (2) ensuring that the proper waterfall priority was followed, and (3)
considering property disposition options.4
A combination of the following discrepancies occurred for the 10 service deficient loans,
specifically:

    •   Six loans, did not contain documented support that all loss mitigation home retention
        options were considered.

    •   Two loans were not reviewed by First Niagara Bank for FHA-HAMP options. The
        officials stated that the holder of the loan, which is the entity that gets paid in the event of
        a claim, did not participate in HAMP. However, the holder was given a waiver to modify
        loans with a decrease in their interest rate. The waiver did not exclude the holder from
        the overall HAMP options of modification or partial claim.




3
  A stand-alone partial claim is permissible under FHA-HAMP if the borrower’s (i) current interest rate is at or
below market rate and (ii) the borrower’s current mortgage payment is at or below the targeted payment.
4
  Regulations at 24 CFR 203.605(a); HUD Handbook 4330.1, REV-5, sections 7-12 and 9-3; and Mortgagee Letters
2000-05, 2012-22, and 2013-32



                                                        7
      •    Two loans did not contain documented support that the lender used the correct waterfall
           priority options which were in effect at the time the borrower was reviewed for loss
           mitigation options.

      •    Seven loans did not contain documented support that First Niagara Bank evaluated or
           notified the borrower of the availability of property disposition options. Without
           considering property disposition options, the lender could not ensure that its servicing
           actions could generate the smallest financial loss to HUD.

Lack of Evaluation of Loss Mitigation Options Before the Fourth Missed Installment
For 6 of the 10 loans that were already identified as having servicing deficiencies, documented
evidence did not support their situation was reviewed for mitigation strategies. The lender was
required to evaluate all of the loss mitigation techniques available, to determine which options
were appropriate prior to the borrower missing four full monthly mortgage installments. 5 .
However, the files reviewed, and the lender’s reporting to HUD, did not include this timely
evaluation. For three of these loans, First Niagara Bank incorrectly reported to HUD that loss
mitigation actions were taken by the fourth missed installment; although the borrower’s financial
situation actually was not evaluated for any loss mitigation options before the fourth missed
installment.
Inadequate Oversight To Ensure That Servicing Procedures for FHA-insured Mortgages
Were Properly Implemented
First Niagara Bank did not provide adequate oversight to ensure that servicing procedures for
FHA-insured mortgages were properly implemented. Specifically, the lender did not ensure that
the loans were re-evaluated monthly and that files supported loss mitigation decisions. Lenders
are required to re-evaluate each loan on a monthly basis until reinstatement or foreclosure. In
addition, documentation must be maintained for the initial, and any subsequent evaluations and
their resulting loss mitigation actions. 6 The files provided by First Niagara Bank did not clearly
indicate that evaluations of loss mitigation actions were being taken, nor did they support that the
loans were re-evaluated monthly. Although the lender maintained daily collection notes taken by
staff, there was not a clearly defined process of steps being taken to mitigate the loss. Further,
since the loss mitigation process was not clearly documented, First Niagara Bank incorrectly
reported the status of loans to HUD systems (see Finding 2).
Additionally, in the absence of documentation to show whether initial and subsequent
evaluations were accomplished, there was no assurance that the proper loss mitigation options
were followed. Likewise, the documentation supporting the loss mitigation decisions was
inadequate. For 18 of the 20 loans reviewed, the audit team had to request documentation many
times to support the lender’s decisions. In some instances, the lender was unable to provide the
supporting documentation. For eight loans, the lender could not support whether the pamphlet,
HUD-PA-426, How To Avoid Foreclosure, was sent to the borrower. The lender maintained its



5
    Regulations at 24 CFR 203.605(a) and Mortgagee Letters 2012-22 and 2013-32
6
    Regulations at 24 CFR 203.605(a) and Mortgagee Letter 2000-05



                                                        8
files electronically and had difficulty in obtaining the requested information in a timely manner.
The lender’s lack of monthly evaluation of the borrower’s financial situation for potential loss
mitigation and its deficient maintenance of electronic documents made it difficult to ensure that
servicing procedures for FHA-insured mortgages were properly implemented.
Conclusion
First Niagara Bank failed to document significant aspects of their loss mitigation efforts for 10 of
20 loans reviewed. As a result, the lender increased the risk to the FHA insurance fund by more
than $825,000. The potential estimated loss to HUD is described in Appendix C. In the absence
of adequate support documentation to show that First Niagara Bank provided adequate servicing
for the loans identified in Appendix D, HUD should consider indemnification. Deficient
servicing impacts the borrower’s ability to retain home ownership and increases the loss to HUD.

Recommendations
We recommend that the Deputy Assistant Secretary for Single Family Housing instruct First
Niagara Bank to:
       1A.     Provide HUD evidence that the lender’s servicing practices for loans identified in
               Appendix D were acceptable for mortgages insured by HUD. In the event that
               HUD determines servicing practices were inadequate, First Niagara Bank should
               indemnify HUD for $825,133 in estimated losses for 10 loans. The estimated loss
               is based on the loss severity rate of 50 percent of the total unpaid principal
               balance of $1,650,266 as of December 31, 2014.
       1B.     Implement procedures requiring the lender to evaluate for all loss mitigation
               options, and to determine whether any are appropriate by the required time frame.
               The lender must re-evaluate monthly loss mitigation options based upon the
               borrower’s financial situation. The lender’s servicing files should include
               monthly notations and explain the analysis used to determine the appropriate loss
               mitigation option.
       1C.     Implement effective management oversight procedures for the servicing of FHA-
               insured mortgages to ensure compliance with regulatory guidance and ensure that
               files include all supporting documentation.




                                                 9
Finding 2: First Niagara Bank Failed To Accurately Record Its
Servicing Actions for FHA-Insured Loans
First Niagara Bank did not accurately report the servicing of their FHA-insured mortgages.
Specifically, officials (1) did not ensure that loans paid in full or otherwise closed were removed
from HUD systems, (2) incorrectly terminated loans from HUD systems, (3) failed to properly
report later events for loans with open delinquencies, and (4) failed to accurately report actions in
the Single Family Default Monitoring System (SFDMS). These deficiencies occurred because
First Niagara Bank did not provide adequate oversight to ensure that HUD systems were
accurately maintained. The lender’s lack of verification of the total loans serviced led to an
inaccurate account of total loans and the amount of FHA-insured mortgages outstanding. There
were 80 loans totaling more than $4.2 million in unpaid principal balance incorrectly recorded as
obligations to the mortgage insurance fund. Also, there were 15 loans totaling more than
$951,000 in unpaid principal balance that need to be added back to HUD systems. Further, the
lack of proper reporting affected HUD’s ability to collect and track the key significant events
that occur between the beginning of a default episode and its resolution.

Closed Loans Not Removed From HUD Systems
There were 80 loans recorded in HUD systems as being actively serviced that First Niagara Bank
indicated had been paid in full or closed. The total unpaid principal balance on these loans was
more than $4.2 million. First Niagara Bank believed that all of these loans had been closed and
should be removed from HUD systems. For 44 of the 80 loans, First Niagara Bank could find no
evidence that they had serviced the loans. For each of the loans, information in HUD systems
showed that servicing had been transferred from a bank that First Niagara Bank had wholly
acquired. The absence of a record in First Niagara Bank systems indicates that the loans either
had been purged from First Niagara Bank systems or were not part of the sale.

Loans Incorrectly Terminated From HUD Systems
There were 15 loans that First Niagara Bank incorrectly terminated from HUD systems. The
total unpaid principal balance on these loans was more than $951,000. First Niagara Bank stated
that each of these loans had its mortgage insurance premium canceled due to either borrower
request or automatic termination. The insurance on all of these loans was canceled, and the loans
were most likely recorded incorrectly as terminated in HUD systems. First Niagara Bank
confirmed that these loans were actively being serviced. Reinstating these loans would ensure
that the loans will be serviced in accordance with HUD regulations. 7
Loans With Open Delinquencies Not Updated
There were 18 current loans that were identified in SFDMS as delinquent. In each case, First
Niagara Bank reported a delinquency but failed to report an updated status on the loan. Lenders
are required to report the monthly status of a delinquent loan throughout the term of the
mortgage. 8 First Niagara Bank verified that each of these loans had become current after the



7
    Regulations at 24 CFR 203(C)
8
    Mortgagee Letter 2013-15



                                                  10
delinquent reporting period. Thus, the loans were incorrectly identified in HUD systems as still
delinquent.
The Table below summarizes the 18 loans identified as delinquent with no follow-up reporting.

                              Last reporting         Delinquent       Delinquent status
         FHA number
                                 period              status code          definition
          061-1595633           12/2007                 42                Delinquent
          061-1848212            1/2008                 12                Repayment
          372-2468531            1/2008                 42                Delinquent
          372-3095648            1/2008                 42                Delinquent
          372-3238058            9/2008                 42                Delinquent
                                                        10               Partial claim
          061-2514337           11/2008
                                                                            started
          061-2921830            6/2009                 42                Delinquent
          061-1757968            3/2010                 42                Delinquent
          061-1516535            4/2010                 42                Delinquent
          061-2725246           12/2010                 42                Delinquent
          372-4003228           12/2012                 42                Delinquent
          446-0308063            8/2013                 42                Delinquent
          372-3526647            8/2013                 11              Promise to pay
          372-3551641            8/2013                 42                Delinquent
          372-2877543           10/2013                 11              Promise to pay
          372-2740684           10/2013                 42                Delinquent
          372-2883815           10/2013                 42                Delinquent
          061-3770083            1/2014                 42                Delinquent


Inaccurate Reporting of Loan Actions in the Single Family Default Monitoring System
First Niagara Bank failed to accurately report actions in SFDMS for 17 of the 20 loans in our
sample. Lenders are required to accurately report data to provide HUD with an up-to-date




                                                11
account of the status and trends of FHA-insured mortgages. 9 This reporting indicates the
effectiveness of the servicing activities and the potential risk to the insurance funds. For four
loans, 10 First Niagara Bank reported loss mitigation actions on the loans, but the lender had
performed no evaluation to support loss mitigation. As a result, the level of loss mitigation
actions performed by the lender was inaccurately represented, which had a negative impact on
the evaluation of the lender’s overall performance regarding loss mitigation. Also, there were
five loans for which the loan status was listed as current when the loan was still delinquent. First
Niagara Bank stated that information in the collection notes caused data entry personnel to
incorrectly update the status. A description of the codes recorded and the correct codes for these
17 loans can be found in Appendix E.
Inadequate Oversight To Ensure That HUD Systems Were Accurately Maintained
First Niagara Bank did not ensure that HUD systems were accurately maintained. Specifically,
the lender did not accomplish reconciliations between their own internal systems to HUD
systems in order to update key significant events occurring in loss mitigation actions. First
Niagara Bank was required to complete a reconciliation of their FHA-insured portfolio. 11 First
Niagara Bank stated that the reconciliation was not done for either loss mitigation actions or their
servicing portfolio.

Conclusion
The lender’s lack of verification of the total loans serviced, overall led to an inaccurate account
of total loans and the amount of FHA-insured mortgages outstanding. Further, the lack of proper
reporting affected HUD’s ability to collect and track the key significant events that occur
between the beginning of a default episode and its resolution. Correct data is crucial for ensuring
that information used in metrics to assess servicer performance, such as tiered ranking, are
accurate.

Recommendations
We recommend that the Deputy Assistant Secretary for Single Family Housing instruct First
Niagara Bank to:

        2A.     Provide evidence that the 80 loans were paid in full or closed, and remove the
                loans from HUD’s FHA-insured portfolio, which will result in a $4,201,504
                reduction in obligations to the mortgage insurance fund.
        2B.     Reinstate the 15 loans incorrectly terminated from HUD’s FHA-insured portfolio,
                which will result in an additional $951,723 in loans recorded to ensure that the
                loan servicing actions are documented.
        2C.     Implement verification procedures to improve oversight over the maintenance of
                HUD systems to ensure that information is accurate.



9
  HUD Handbook 4330.1, REV-5, paragraph 7-8(A)
10
   The four loans in question were 061-4362753, 061-2987049, 061-3972953, and 372-4558045.
11
   Mortgagee Letter 2005-42



                                                      12
2D.   Record the proper default status code for 18 loans to show that the delinquency
      was corrected.




                                       13
Finding 3: First Niagara Bank Did Not Follow HUD’s
Requirements When Implementing Its Quality Control Program
First Niagara Bank did not adequately implement their quality control plan for the servicing of
delinquent FHA loans in accordance with HUD requirements. We attributed this deficiency to
First Niagara Bank not implementing corrective action procedures to mitigate and address the
root cause of repetitive findings in their quality control reviews. As a result, the effectiveness of
the lender’s quality control program in ensuring compliance with servicing requirements and
protecting HUD from unacceptable risk was diminished.

Inadequate Implementation of the Quality Control Plan
First Niagara Bank’s quality control plan met HUD requirements; however, it was not adequately
implemented. First Niagara Bank consistently identified repetitive findings in their quality
control reviews over the servicing of delinquent FHA loans. These findings included: missing
and untimely collection letters; occupancy and the reason for default not adequately verified;
foreclosure not initiated in a timely manner; errors entered into various claim fields; and claims
not submitted in a timely manner. These findings recurred due to (1) a lack of corrective action,
(2) inadequate implementation of corrective actions, and (3) not conducting quality control
reviews in a timely manner. One of HUD’s overriding goals of quality control is that the lender
designs a program to ensure swift and appropriate corrective action. 12
According to First Niagara Bank’s quality control reports, management was not required to
respond to findings that were determined by its quality control department to have an “acceptable
risk” level. As a result, approximately 42 percent of the findings identified by First Niagara
Bank during our sample period did not have corresponding management responses and, thus,
were not addressed. Many of these findings without responses were those that had been
identified as recurring throughout our sample period. Although First Niagara Bank considered
these deficiencies to have an “acceptable risk” level, they negatively affected the servicing
efforts for delinquent FHA loans and, thus, negatively impacted HUD. The deficiencies included
a failure to (1) adequately report information to HUD, such as the reason for default, occupancy,
and unpaid principal balance; (2) perform a timely property inspection; (3) complete the
foreclosure action within the required timeframes; and (4) document that pamphlet, HUD PA
426-H, How to Avoid Foreclosure, was mailed to the borrower timely. Therefore, the findings
were significant enough to have required a response from management and should be addressed.
HUD requirements state that quality control reviews must thoroughly evaluate the lender’s
servicing functions to determine the root cause of deficiencies. 13 First Niagara Bank should have
also considered escalating the risk level of these findings as they continued to occur. HUD
requirements state that when fraud or patterns of deficiencies are uncovered, the scope of the
review must be expanded. 14 Although these findings did not suggest that any fraudulent activity




12
   HUD Handbook 4060.1 REV-2, section 7-2
13
   HUD Handbook 4060.1, REV-2, paragraph 7-3(F)
14
   HUD Handbook 4060.1, REV-2, paragraph 7-3(F)



                                                  14
occurred, they could have resulted from a larger systemic problem requiring they be reviewed
and addressed in more detail.
First Niagara Bank proposed corrective actions to remedy some of the recurring deficiencies that
were assigned higher risk levels and identified in our audit sample. However, during subsequent
audit review, these deficiencies continued to appear on the First Niagara Bank monthly quality
control reports. Specifically, in a December 19, 2012 response to an August 2012 quality control
review, First Niagara Bank stated appropriate correction actions were implemented. However,
during this subsequent review we determined 12 of 25 quality control reports that still contained
deficiencies identified during the previous reviews. First Niagara Bank did not adequately
implement appropriate actions and was unable to provide sufficient evidence that ensure
management responses to findings and corrective actions were implemented. Unless deficiencies
are corrected, the risk of future errors still remains.
First Niagara Bank could have addressed deficiencies sooner and mitigated repetitive findings
had they conducted quality control reviews in a timely manner. HUD requirements state for
FHA loans that are in a delinquent status, lenders must conduct monthly quality control
reviews. 15 Further, these reviews are to be conducted on a regular and timely basis for as long as
these loans remain in a delinquent status. Although First Niagara Bank was performing 100
percent reviews over their monthly delinquent FHA loan reports, these were not being conducted
in a timely manner and often occurred approximately 90 days after the end of the month under
review. As a result, this delay raises concerns over potential issues not being promptly identified
and corrected.

Conclusion
First Niagara Bank did not adequately implement their quality control plan for the servicing of
delinquent FHA loans in accordance with HUD requirements. This deficiency was evidenced by
officials’ consistently identifying repetitive findings in their quality control reviews. We
attributed these deficiencies to First Niagara Bank not implementing corrective action procedures
to mitigate and address the root cause of repetitive findings in their quality control reviews. As a
result, the effectiveness of First Niagara Bank’s quality control program to ensure compliance
with servicing requirements and to protect HUD from unacceptable risk was diminished.
Recommendations
We recommend that HUD’s Deputy Assistant Secretary for Single Family Housing instruct First
Niagara Bank to:

          3A.     Establish and implement procedures in their quality control plan that will require
                  a response to findings identified during quality control reviews regardless of the
                  risk level that was determined.




15
     HUD Handbook 4060.1, REV-2, paragraph 7-3(D)



                                                    15
3B.   Implement procedures in their quality control plan to ensure that corrective action
      effectively mitigates and addresses the root causes of the identified deficiencies to
      prevent repetitive findings.
3C.   Implement procedures in their quality control plan to ensure that quality control
      reviews are performed on a more timely basis and that swift and appropriate
      corrective action is taken.




                                        16
Scope and Methodology
We performed our onsite work at First Niagara Bank’s servicing offices located at 4224 Ridge
Lea Road, Amherst, NY, from August 2014 to February 2015. Our audit generally covered the
period June 1, 2012, through June 30, 2014, and was extended when necessary to meet our audit
objective. We used computer-processed data and verified data by reviewing hardcopy
supporting documentation, reviewing data from a different source, or performing a minimal level
of testing. We found the data to be adequate for our purposes.
To accomplish our objective, we

     •   Reviewed Federal regulations, HUD handbooks, and mortgagee letters;
     •   Reviewed applicable First Niagara Bank policies and procedures relating to its servicing,
         collections, and quality control programs;
     •   Reviewed First Niagara Bank’s servicing, collection, and quality control files;
     •   Compared data maintained in First Niagara Bank systems to data reported in HUD
         systems; and
     •   Conducted discussions with HUD and First Niagara Bank officials.
As of June 30, 2014, First Niagara Bank had 245 loans listed as delinquent in Neighborhood
Watch. 16 We selected a non-statistical sample of 20 loan files to review based on each of the loss
mitigation actions identified in Neighborhood Watch, in addition to seriously delinquent loans
not in loss mitigation. The sample consisted of

     •   5 loans in forbearance,
     •   5 loans that were seriously delinquent but not in loss mitigation,
     •   3 loans listed as FHA-HAMP actions,
     •   3 loans indicated as partial claims,
     •   3 loans in which the borrower’s financial information was under review, and
     •   1 loan listed as in pre-foreclosure.
We performed a 100 percent match of the total loans serviced and delinquent loans to ensure that
the information in HUD systems was recorded accurately. The total number of loans serviced by
First Niagara Bank was more than 1,600. Also, we matched the 245 loans that were identified as
delinquent in HUD systems as of June 30, 2014, to First Niagara Bank defaulted FHA-insured
loans.




16
  Neighborhood Watch is a secure Web-based application designed to provide comprehensive data querying,
reporting, and analysis capabilities for tracking the performance of loans originated, underwritten, and serviced by
FHA-approved lending institutions.



                                                           17
We reviewed 100 percent of the servicing quality control reviews that First Niagara Bank
performed on its FHA-insured mortgages between April 2012 and April 2014. The reviews
consisted of the quarterly FHA servicing reports and the monthly FHA servicing delinquent
quality control reviews, including management’s response to those reports.
We conducted the audit in accordance with generally accepted government auditing standards.
Those standards require that we plan and perform the audit to obtain sufficient, appropriate
evidence to provide a reasonable basis for our findings and conclusions based on our audit
objectives. We believe that the evidence obtained provides a reasonable basis for our findings
and conclusions based on our audit objectives.




                                                18
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:

•   Program operations – Policies and procedures that management has implemented to
    reasonably ensure that a program meets its objectives.
•   Reliability of financial data – Policies and procedures that management has implemented to
    reasonably ensure that valid and reliable data are obtained, maintained, and fairly disclosed
    in reports.
•   Compliance with laws and regulations – Policies and procedures that management has
    implemented to reasonably ensure that resource use is consistent with laws and regulations.
We assessed the relevant controls identified above.
A deficiency in internal control exists when the design or operation of a control does not allow
management or employees, in the normal course of performing their assigned functions, the
reasonable opportunity to prevent, detect, or correct (1) impairments to effectiveness or
efficiency of operations, (2) misstatements in financial or performance information, or (3)
violations of laws and regulations on a timely basis.
Significant Deficiencies
Based on our review, we believe that the following items are significant deficiencies:

•   First Niagara Bank did not have adequate controls to ensure that the Loss Mitigation program
    met its objectives when they failed to document significant aspects of their loss mitigation
    efforts and properly implement their quality control program (see Findings 1 and 3).
•   First Niagara Bank did not have adequate controls over the reliability of financial data when
    they failed to reconcile information in their systems to data maintained in HUD systems (see
    Finding 2).


                                                  19
Appendixes

Appendix A


                    Schedule of Funds To Be Put to Better Use
                      Recommendation Funds to be put
                          number          to better use 1/
                              1A                  $825,133
                              2A                $4,201,504
                              2B                  $951,723

                             Totals             $5,978,360



    1/   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,
         de-obligation 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, if HUD determines that the servicing practices were inadequate, it would
         result in indemnification for $825,133 in estimated losses (see Appendix C) for
         the 10 loans identified in Appendix D. The estimated loss is based on the loss
         severity rate of 50 percent of the total unpaid principal balance of $1,650,266; as
         of December 31, 2014. If HUD determines that the 80 loans were paid in full or
         otherwise closed and are removed from HUD’s FHA-insured portfolio, it would
         result in a $4,201,504 reduction in obligations to the mortgage insurance fund.
         Reinstating the 15 loans that were incorrectly terminated from HUD’s FHA-
         insured portfolio will result in an additional $951,723 in loans recorded in the
         FHA system to ensure that the loan servicing actions are documented and tracked.




                                          20
Appendix B
             Auditee Comments and OIG’s Evaluation



Ref to OIG    Auditee Comments
Evaluation




Comment 1




Comment 2
Comment 3




                               21
             Auditee Comments and OIG’s Evaluation




Ref to OIG    Auditee Comments
Evaluation




Comment 4
Comment 3




Comment 5
Comment 3




Comment 6
Comment 3


Comment 7




                               22
             Auditee Comments and OIG’s Evaluation




Ref to OIG    Auditee Comments
Evaluation




Comment 8




Comment 9




Comment 10
Comment 3




Comment 11
Comment 3




                               23
             Auditee Comments and OIG’s Evaluation




Ref to OIG    Auditee Comments
Evaluation




Comment 12




                               24
             Auditee Comments and OIG’s Evaluation




Ref to OIG    Auditee Comments
Evaluation




                               25
             Auditee Comments and OIG’s Evaluation




Ref to OIG    Auditee Comments
Evaluation




Comment 13


Comment 14




Comment 15




                               26
             Auditee Comments and OIG’s Evaluation




Ref to OIG    Auditee Comments
Evaluation




Comment 16
Comment 17




                               27
             Auditee Comments and OIG’s Evaluation




Ref to OIG    Auditee Comments
Evaluation




Comment 18
Comment 3




                               28
             Auditee Comments and OIG’s Evaluation




Ref to OIG    Auditee Comments
Evaluation




Comment 19




                               29
             Auditee Comments and OIG’s Evaluation




Ref to OIG    Auditee Comments
Evaluation




Comment 18




                               30
             Auditee Comments and OIG’s Evaluation




Ref to OIG    Auditee Comments
Evaluation




Comment 18




                               31
             Auditee Comments and OIG’s Evaluation




Ref to OIG    Auditee Comments
Evaluation




Comment 18




                               32
             Auditee Comments and OIG’s Evaluation




Ref to OIG    Auditee Comments
Evaluation




Comment 20
Comment 21




                               33
             Auditee Comments and OIG’s Evaluation




Ref to OIG    Auditee Comments
Evaluation




Comment 22


Comment 23




                               34
             Auditee Comments and OIG’s Evaluation




Ref to OIG    Auditee Comments
Evaluation




Comment 18




                               35
             Auditee Comments and OIG’s Evaluation




Ref to OIG    Auditee Comments
Evaluation




Comment 24




                               36
                         OIG Evaluation of Auditee Comments



OIG Evaluation of Auditee Comments

Comment 1   First Niagara Bank provided a response to the 10 loans identified as having
            inadequate servicing in their exhibit A and our evaluation of the responses is
            listed for each loan starting with comment 13.
Comment 2   First Niagara Bank requested clarification and states that they are unable to
            evaluate a borrower without financials and contact from the borrower. They
            questioned whether the recommendation was to be interpreted to refer to those
            borrowers who respond to First Niagara Bank and provide financials. First
            Niagara Bank needs to provide evidence that it made an evaluation before the
            fourth delinquent month and that all loss mitigation options had been reviewed as
            required. If financial information had not been received from the borrower, First
            Niagara Bank needs to document and report it to HUD. We revised
            recommendation 1B based on First Niagara Bank’s comments.
Comment 3   First Niagara Bank provided updated procedures and documentation in various
            exhibits that do not by themselves constitute comments on the findings and
            recommendations and were too voluminous to include in the report. First Niagara
            Bank’s complete response including these supporting documents will be provided
            to HUD and should be evaluated as part of audit resolution process.
Comment 4   First Niagara Bank states that effective June 2015, a monthly review of loss
            mitigation efforts on HUD loans to ensure compliance will be conducted by the
            loss mitigation manager. The actions of First Niagara Bank are responsive to our
            recommendation; however, HUD will still need to verify the corrective actions
            were accomplished as part of the audit resolution process.
Comment 5   First Niagara Bank states that the 80 loans have been reviewed and removed from
            HUD’s FHA-insured portfolio. The actions of First Niagara Bank are responsive
            to our recommendation; however, HUD will still need to verify the corrective
            actions were accomplished as part of the audit resolution process.
Comment 6   First Niagara Bank determined the 15 loans were incorrectly terminated from
            HUD’s FHA-insured portfolio and have been reinstated. The actions of First
            Niagara Bank are responsive to the recommendation; however, HUD will still
            need to verify the corrective actions were accomplished as part of the audit
            resolution process.
Comment 7   First Niagara Bank indicated that effective June 2015; the Real Estate Collection
            Department’s Investor Reporting group will reconcile the delinquent loans on the
            HUD system monthly and will document the process. The actions of First



                                              37
              Niagara Bank are somewhat responsive to our recommendation. First Niagara
              Bank also needs to reconcile current FHA-insured loans on a monthly basis.
Comment 8     First Niagara Bank indicated that they have corrected the default status of 16 of
              the 18 loans. They are unable to change the delinquent status on 061-2921830
              from 2009 as the loan became delinquent again in 2014 and was reported as a
              loan status 20, reinstated by borrower without loss mitigation, on the February
              2015 cycle. Also, they could not change 372-3551641 from 2008 as the loan is
              currently delinquent and being reported as such. The actions of First Niagara
              Bank are responsive to our recommendation.
Comment 9     First Niagara Bank indicated that it has updated its Quality Control Procedures by
              incorporating recommendation 3A. The actions of First Niagara Bank are
              responsive to our recommendation. However, HUD will still need to verify the
              adequacy of the corrective actions as part of the audit resolution process.
Comment 10 First Niagara Bank indicated that it has updated its Quality Control Procedures
           incorporating recommendation 3B. The actions of First Niagara Bank are
           responsive to our recommendation. However, HUD will still need to verify the
           adequacy of the corrective actions as part of the audit resolution process.
Comment 11 First Niagara Bank states that it has updated its Quality Control Procedures
           incorporating recommendation 3C. The actions of First Niagara Bank are
           responsive to the recommendation. However, HUD will still need to verify the
           adequacy of the corrective actions as part of the audit resolution process.
Comment 12 First Niagara Bank states that it believes that they were in accordance of HUD
           guidelines on timeliness as stated in HUD’s handbook 4060.1 Chapters 7-3d and
           7-10. HUD requirements state that lenders must ensure that quality control
           reviews are performed on a regular and timely basis. First Niagara Bank’s
           delinquent loan quality control reviews were generally conducted around 3
           months after the period under review, which raised concerns over potential issues
           not being promptly identified and corrected.
Comment 13 First Niagara Bank states despite multiple efforts to solicit a loss mitigation
           package, they did not receive one before the fourth missed installment. Therefore,
           they disagree with the finding of lack of evaluation by the fourth missed
           installment. The files did not support that detailed financial information was
           received and that the lender evaluated for loss mitigation options before the fourth
           monthly installment was due. First Niagara Bank should not have reported loss
           mitigation actions prior to evaluating the borrower’s financials and should have
           reported that the borrower had not provided financials indicating that an
           evaluation of all loss mitigation options could not be performed by the fourth
           missed installment.
Comment 14 First Niagara Bank disagreed with the finding that this loan was not evaluated
           properly. The borrower made $11,600 gross per month, coupled with half of the



                                                38
              401K supported the $9600 contribution for the repayment plan. However, the
              files indicated the borrower stated that the funds would come from a 401K loan.
              Also, the hardship letter stated that only half of the 401K balance was available to
              the borrower for loans and did not support the level of funding needed to make
              the initial $8,500 payment. The borrower’s financial information did not support
              that he had the ability to make the one-time payment.
Comment 15 First Niagara Bank states a new agreement was drawn up with a contribution
           payment of $8,500 and an 8 month plan of $2,625.42, which was outside of the
           FHA guidelines. No supportive documentation that First Niagara Bank requested
           an exception approval from FHA could be located. First Niagara Bank’s response
           is in agreement with the finding.
Comment 16 First Niagara Bank states in response to the last full paragraph commentary
           regarding December 2012, the loan was due for the December 2012 payment (5
           days past due) which was below the 90 day requirement to evaluate monthly.
           First Niagara Bank reported in December 2012 that the loan was one month
           delinquent. There was no mention in the report that the evaluation was to be
           completed in December.
Comment 17 First Niagara Bank states on April 3, 2014, a request for loss mitigation was
           received from the borrower. First Niagara Bank did not review loss mitigation
           options prior to this but they did not have financials to do so. The files did not
           support that detailed financial information was received and that the lender
           evaluated for loss mitigation options before the fourth monthly installment was
           due. First Niagara Bank should not have reported loss mitigation actions prior to
           evaluating the borrower’s financials and should have reported that the borrower
           had not provided financials indicating that an evaluation of all loss mitigation
           options could not be performed by the fourth missed installment.
Comment 18 First Niagara Bank agrees with the deficiencies noted in the report. Unfortunately,
           the Connecticut Housing Finance Agency (holder) bulletins #3 and #9 were
           misconstrued which lead to the deficiency. Shortly after the closure of the
           Connecticut office these misinterpretation were discovered. This misinterpretation
           was isolated to the Connecticut office. With the closure of the Connecticut office
           the issue has been resolved. First Niagara Bank’s comments are responsive to the
           finding. HUD will need to assess First Niagara Bank’s comments as part of the
           audit resolution process for recommendation 1A.

Comment 19 First Niagara Bank states that Mortgagee Letter 2009-23 provided seasoning
           guidelines on existing mortgages; "The first payment due date must be at least 12
           months in the past, and at least 4 full mortgage payments must have been paid."
           As of April 2013, the loan was in its twelfth month from origination but not "in
           the past" as the requirement states. Therefore, it was reported as ineligible for loss
           mitigation. However, the loan was reported in HUD systems as repayment for 2
           months and promises to pay for 5 months before foreclosure too. The lender



                                                39
              indicated that it did not receive financials before foreclosure. The documentation
              indicated that the borrower was not considered for loss mitigation before
              foreclosure when the loan was 5 months delinquent. First Niagara Bank should
              not have reported loss mitigation actions prior to evaluating the borrower’s
              financials and should have reported that the borrower had not provided financials
              and indicated that an evaluation of all loss mitigation options could not be
              performed by the fourth missed installment. First Niagara Bank’s response did
              not address the conditions regarding that it could not support that the borrower
              qualified for loss mitigation and there was no evidence that the borrower was
              considered for disposition options.
Comment 20 First Niagara Bank disagreed with all three deficiencies. The customer was in the
           middle of the loss mitigation review during their fourth missed installment. First
           Niagara Bank did not determine that the loan was ineligible for loss mitigation
           based upon a financial review until May 2014 when the loan was 5 months
           delinquent. Also, the loan was reported in HUD systems as a promise to pay for
           the months of August 2013, October 2013, December 2013, and January 2014.
           First Niagara Bank should not have reported loss mitigation actions prior to
           evaluating the borrower’s financials and should have reported that the borrower
           had not provided financials indicating that an evaluation of all loss mitigation
           options could not be performed by the fourth missed installment.

Comment 21 First Niagara Bank states the proper waterfall was evaluated for all loss mitigation
           options in April and November 2014. Also, the two worksheets and packages
           support the loss mitigation evaluation. The financial analysis documentation was
           incomplete, raising questions regarding whether the borrower was adequately
           evaluated for all loss mitigation options. The loss mitigation package considered
           complete in April was missing several documents related to the borrower’s
           income. The loss mitigation package that was considered complete in November
           had 4 months of receipts related to the rental income received by the borrower.
           However, these documents were illegible and could not support the amount of
           rental income. Neither loss mitigation package submitted by the borrower
           contained supporting documentation for all of the expenses reported on both the
           uniform borrower assistance forms and monthly household expenses worksheets.

Comment 22 First Niagara Bank disagreed with the two deficiencies because they did not
           receive a loss mitigation package and the borrower was not on an informal, formal
           forbearance or repayment plan during the months of November and December.
           The loan was reported to HUD as delinquent for September 2014 but was shown
           as repayment in HUD systems for the months of November and December. First
           Niagara Bank should not have reported loss mitigation actions prior to evaluating
           the borrower’s financials.
Comment 23 First Niagara Bank indicated that borrower provided all the documents on March
           18, 2015, and that the file was approved for a FHA HAMP standalone
           modification. This occurred after our audit period and did not impact the issue of


                                               40
              reporting loss mitigation actions prior to evaluating the borrower’s financials and
              therefore no revision to the report was needed.
Comment 24 First Niagara Bank states that it disagrees with the two deficiencies because the
           borrower never submitted a complete loss mitigation package. The borrower
           became delinquent in April 2012 and was 4 months delinquent by November
           2012. There was no evaluation of loss mitigation options identified in the files.
           Also, the lender reported in HUD systems that the borrower was ineligible for loss
           mitigation in July 2012. However, First Niagara Bank stated that this information
           was incorrect and the loan should have been reported as delinquent. First Niagara
           Bank should not have reported loss mitigation actions prior to evaluating the
           borrower’s financials and should have reported that the borrower had not
           provided financials indicating that an evaluation of all loss mitigation options
           could not be performed by the fourth missed installment. In addition, the files
           showed no evidence that First Niagara Bank evaluated the loan or offered the
           borrower disposition options before proceeding to foreclosure.




                                                41
Appendix C
                                 Schedule of Potential Loss to HUD
                         Original
                                      Unpaid principal       Loss to                       Loan status as of
FHA number               mortgage
                                           balance            HUD 17                      December 31, 2014
                          amount
 371-4717616             $239,137        $231,447          $115,724                            Delinquent
                                                                                        State-mandated delay
 061-3259909             $185,200              $173,397               $86,698
                                                                                            or mediation
                                                                                           FHA-HAMP trial
 061-4177067             $136,451              $132,404               $66,202
                                                                                            payment plan
                                                                                         FHA-HAMP stand-
 061-3710379             $157,100              $145,688               $72,834            alone partial claim
                                                                                               started
                                                                                         FHA-HAMP stand-
 061-3151312             $191,800              $174,759               $87,380            alone partial claim
                                                                                               started
                                                                                         FHA-HAMP stand-
 061-3894372             $133,100              $127,803               $63,901            alone partial claim
                                                                                               started
 061-3904897             $258,900              $242,821              $121,411          Chapter 13 bankruptcy
 372-2302948              $69,731               $42,945               $21,472                  Delinquent
 061-3011089             $256,900              $236,313              $118,157           Foreclosure sale held
                                                                                        State-mandated delay
 061-3084419             $152,200              $142,709               $71,354
                                                                                            or mediation

     Totals             $1,780,519            $1,650,266             $825,133




17
  We classified $825,133 as funds to be put to better use (see appendix A). This is 50 percent of the $1,650,266 in
unpaid principal balances for the 10 loans as of December 31, 2014. The 50 percent is the estimated percentage of
loss HUD would incur when the FHA property is foreclosed upon and resold as supported by the HUD Single
Family Acquired Asset Management for the fourth quarter of fiscal year 2014 based on actual sales.



                                                          42
Appendix D
                                       Loan Summaries
FHA case number:              371-4717616
Lender loan number:           20080307
Loan amount:                  $239,137
Unpaid principal balance:     $231,447
Months delinquent:            5
Status as of 12/31/2014:      Delinquent
Servicing Deficiencies:

       •   Lack of documentation showing that the borrower qualified for the loss mitigation
           option.
       •   Lack of evidence of the loss mitigation evaluation.
       •   Lack of evaluation for all loss mitigation options, including ensuring that the proper
           waterfall priority was followed.
       •   Lack of evaluation of loss mitigation options before the fourth missed installment.
First Niagara Bank approved the borrower for a loss mitigation option outside the prescribed
regulations. Loss mitigation was conducted in May 2014 and resulted in a formal forbearance
plan that was revised and approved by the borrower in July 2014. Initially the borrower was
going to make a one-time payment of $9,600 followed by six monthly installment payments to
bring the loan current. However, the plan had to be revised because the borrower stated that he
could make only a one-time payment of $8,500, thus increasing the monthly payments needed to
approximately eight. HUD requirements state that formal forbearance plans are written
agreements with a period of greater than 3 months but not more than 6 months. Also, the
borrower’s financial information did not support that he had the ability to make the one-time
payment. The borrower stated that the funds would come from a 401K loan. However, the
hardship letter stated that only half of the 401K balance was available to the borrower for loans
and did not support the level of funding needed to make the initial $8,500 payment. First
Niagara Bank indicated a loss mitigation option failure in December 2014.
The files did not show that the borrower was evaluated for all loss mitigation options. First
Niagara Bank indicated that there was no change in income that made the housing payment
unaffordable and that it was an intentional default to pay for other items. However, the hardship
letter stated that the borrower had experienced a series of setbacks, causing him to fall behind on
the mortgage payments. In addition, the files did not show that the lender ensured that the
borrower’s surplus income would cure the arrears in 6 months. This shortcoming indicated that
the borrower had not been properly evaluated.
First Niagara Bank did not evaluate the borrower for loss mitigation options in accordance with
the time requirements after the borrower became delinquent in December 2012. First Niagara
Bank indicated that complete financial information was in review in April 2014 when the loan
was 6 months delinquent. HUD requirements state that before four full monthly installments due
on the mortgage have been unpaid, the lender must evaluate all of the loss mitigation options



                                                 43
monthly to determine which is appropriate. The lender reported the loan action as a repayment
and promise to pay for the periods June 2013 through March 2014, which indicates a type of
forbearance loss mitigation option. According to First Niagara Bank, promise to pay was
reported because, as the collection notes showed, the borrower went back and forth regarding his
verbal agreement to repay and promise to pay. However, to be considered for any of the loss
mitigation options, the borrower must provide detailed financial information to the lender. The
files did not support that detailed financial information was received and that the lender
evaluated for loss mitigation options before the fourth monthly installment was due.




                                                44
FHA case number:              061-3259909
Lender loan number:           145312907
Loan amount:                  $185,200
Unpaid principal balance:     $173,397
Months delinquent:            20
Status as of 12/31/2014       State-mandated delay or mediation
Servicing Deficiencies:

       •   Lack of documentation showing that the borrower qualified for the loss mitigation
           option.
       •   Lack of evaluation for all loss mitigation options, including ensuring that the proper
           waterfall priority was followed.
       •   Lack of evaluation of loss mitigation options before the fourth missed installment.
First Niagara Bank could not support that the borrower qualified for any loss mitigation options.
First Niagara Bank files contained discrepancies regarding various 2013 financial analyses. In
October, First Niagara Bank stated in a declination letter that a review of financial information
received found that the borrower’s mortgage payment and other financial obligations were not
affordable at the borrower’s present level of income. Then in December, a letter was sent to the
borrower that offered a payment plan followed by a more permanent loss mitigation solution
through a HUD partial claim. The files did not support either analysis. First Niagara Bank was
unable to provide their analysis to support the decisions. In 2014, the borrower was offered a
preforeclosure sale agreement. However, the evaluation at that time was based on only one of
the borrowers’ financial information. Thus, we could not determine whether the borrower
qualified for the loss mitigation option or possibly home retention options. In addition, the
collection notes were contradictory regarding the borrowers’ intentions of remaining in the
property.
First Niagara Bank failed to evaluate all of loss mitigation options. According to First Niagara
Bank, the lender holding the loan was not participating in FHA-HAMP at the time of the
submission of the loss mitigation package and evaluation. We acknowledge that the lender
holding the loan had received a waiver for reduction in interest rates regarding any type of
modification. But this waiver would not negate a review by First Niagara Bank of partial claim
or modification without interest rate reduction. First Niagara Bank should have reviewed the
loans for potential HAMP retention options.
First Niagara Bank did not evaluate the borrower for loss mitigation options in accordance with
time requirements. The documents provided did not support that a loss mitigation decision was
evaluated before four full monthly installments were due and unpaid. We concur with First
Niagara Bank that the borrower submitted a package to First Niagara Bank in July 2013.
However, there was no indication in the documentation provided of whether the package was
reviewed in a timely manner, whether the application was complete, and whether additional
information was necessary. Further, there was no indication of a review, which was reported by
First Niagara Bank in HUD’s systems, having been performed. The loss mitigation package




                                                 45
provided had a declination letter from First Niagara Bank, dated October 29, 2013, when the loan
was nearly 7 months delinquent.




                                               46
FHA case number:              061-4177067
Lender loan number:           20074700
Loan amount:                  $136,451
Unpaid principal balance:     $132,404
Months delinquent:            15
Status as of 12/31/2014       FHA-HAMP trial payment plan
Servicing Deficiencies:

       •   Lack of documentation showing that the borrower qualified for the loss mitigation
           option.
       •   Lack of evidence of the loss mitigation evaluation.
       •   Lack of evaluation for all loss mitigation options, including ensuring that the proper
           waterfall priority was followed.
       •   Lack of evaluation of loss mitigation options before the fourth missed installment.
First Niagara Bank could not support that the borrower qualified the for loss mitigation option
provided. The borrower’s financial information was reviewed in June 2014. In July 2014, First
Niagara Bank informed the borrower that they did not qualify for any home retention options. A
review of the documentation indicated several questionable items regarding expenses. The
borrower resubmitted the loss mitigation package in August 2014. However, the information
provided in the package was not supported. The monthly household expense form was a whited-
out copy of a form submitted in June 2014 and showed monthly household expenses totaling
$4,000. The numbers had been changed on the most recent submission form to total only $921
per month, or $3,079 less than that showed in the June package. First Niagara Bank stated that
the most important difference in the two packages was that the borrower obtained full-time
employment a few months after the initial review. Our analysis indicated that the additional
documentation provided by the lender did not support an FHA-HAMP partial claim due to the
lack of verification of the income increase or the decrease in expenses identified and considered
for the loss mitigation actions.
The documentation provided no evidence that the borrower was considered for disposition
options. The borrower did not provide financial information to the lender until after foreclosure
proceedings had been initiated. The loan was referred to management for foreclosure review in
February 2014 and approved. However, the files did not contain evidence that the borrower was
offered or evaluated for disposition options.
First Niagara Bank did not evaluate the borrower for loss mitigation options in accordance with
the time requirements. The borrower became delinquent in August 2012. In April 2013, the
lender reported in the HUD system that the borrower was ineligible for loss mitigation.
However, First Niagara Bank was unable to determine why this entry was coded in this manner.
First Niagara Bank indicated that loss mitigation was not considered unless they received a full
and complete loss mitigation financial package. The lender indicated that it did not receive one
before foreclosure. However, it was indicated in HUD systems as repayment for 2 months and
promises to pay for 5 months before foreclosure. The lender stated that the use of promise to pay
in the collection industry has one meaning. In the collection industry, if a customer calls and



                                                 47
promises to make a payment, whether it is one or two, it is called a promise to pay. The industry
measures a collector’s productivity by calls made, right party contacts, promises made, promises
kept, and defaults cured. However, in SFDMS, a promise to pay is a one-time payment for the
full amount. The documentation indicated that the borrower was not considered for loss
mitigation before foreclosure when the loan was 5 months delinquent.




                                                48
FHA case number:              061-3710379
Lender loan number:           145313864
Loan amount:                  $157,100
Unpaid principal balance:     $145,668
Months delinquent:            20
Status as of 12/31/2014       FHA-HAMP stand-alone partial claim started
Servicing Deficiencies:

       •   Lack of documentation showing that the borrower qualified for the loss mitigation
           option.
       •   Lack of evaluation for all loss mitigation options, including ensuring that the proper
           waterfall priority was followed.
       •   Lack of evaluation of loss mitigation options before the fourth missed installment.
First Niagara Bank could not support that they evaluated the borrower for all loss mitigation
options or that the borrower qualified for a loss mitigation option. However, the borrower was
offered a loss mitigation option in July 2013 that was not consistent with any approved option in
place at the time. An entry into the collection notes in July showed that First Niagara Bank
received a note that the holder of the loan would not participate in FHA-HAMP. The note
further stated that First Niagara Bank was preparing a letter to the borrower for a three-payment
prepartial claim trial plan and a recommendation for the borrower to apply to the lender holding
the loan for the Connecticut Emergency Mortgage Assistance Program. We acknowledge that
the lender holding the loan had received a waiver for reduction in interest rates regarding any
type of modification. However, this waiver would not negate a review by First Niagara Bank of
partial claim or modification without interest rate reduction.
The borrower was offered another loss mitigation option in June 2014. Again, the
documentation regarding what loss mitigation option was approved but what was expected of the
borrower was unclear. A June 11, 2014, letter to the borrower showed that the borrower was
approved for a trial plan to partial claim. Then, the agreement letter sent on June 14, 2014,
discussed acceptance of a forbearance plan and told the borrower to submit updated financial
information to attempt to qualify for a more permanent loss mitigation solution. In addition, the
documentation did not support a verifiable loss of income or an increase in living expenses to be
eligible for home retention loss mitigation options. During the 2013 financial analysis, there was
a notation in the collection notes that there was no hardship. First Niagara Bank’s response to
the hardship did not clearly address the details or whether it adequately evaluated the borrower’s
documentation to show that an actual hardship existed. While there was mention of child
support at the time of application, the files did not support that loss of income was due to not
receiving child support.
The documentation provided no evidence that the borrower was considered for disposition
options. The loan was referred to management for foreclosure review in September 2013 and
approved. However, the files did not have evidence that the borrower was offered or evaluated
for disposition options.




                                                 49
First Niagara Bank did not evaluate the borrower for loss mitigation options in accordance with
the time requirements when the loan became delinquent in July 2012. There were notations in
the collection notes that a financial package was received from the borrower in October 2012.
However, the files have no evidence supporting the techniques used by the lender to determine
which loss mitigation options were appropriate. The loan became 4 months delinquent in
October 2012, and First Niagara Bank should have clearly documented their loss mitigation
approach at this time. The borrower was finally approved for loss mitigation in July 2013 when
the loan was 7 months delinquent.




                                                50
FHA case number:              061-3151312
Lender loan number:           145312522
Loan amount:                  $191,800
Unpaid principal balance:     $174,759
Months delinquent:            10
Status as of 12/31/2014       FHA-HAMP stand-alone partial claim started
Servicing Deficiencies:

       •   Lack of documentation showing that the borrower qualified for the loss mitigation
           option.
       •   Lack of evaluation for all loss mitigation options, including ensuring that the proper
           waterfall priority was followed.
First Niagara Bank could not support that the borrower qualified for the loss mitigation option
that had been provided. The borrower was approved for partial claim when the borrower’s
interest rate was above the market rate. First Niagara Bank needed to ensure that the borrower’s
interest rate was at or below market rate to offer an FHA HAMP stand-alone partial claim. First
Niagara Bank could not provide an adequate reason for their approval. Before the partial claim
loss mitigation offer, First Niagara Bank attempted to enter into a loss mitigation offer that was
not consistent with approved options at the time. First Niagara Bank offered the borrower an 18-
month payment plus plan, which was not an approved home retention loss mitigation option. In
addition, First Niagara Bank was unable to support the figures that were used in the analysis that
led to the partial claim. Specifically, First Niagara Bank was unable to support that an eligible
sibling contributed to the household as part of the borrower’s income. Also, we could not find
that First Niagara Bank received the documentation it requested regarding the expenses listed on
the borrower’s financial package. Therefore, we are unsure what expenditures were used in the
analysis.
The documentation provided no evidence that the borrower was considered for disposition
options. The borrower provided no financial information to the lender until after foreclosure
proceedings had been initiated. The loan was approved for foreclosure in May 2013. However,
the files did not have evidence that the borrower was offered or evaluated for disposition options.




                                                 51
FHA case number:              061-3894372
Lender loan number:           145314458
Loan amount:                  $133,100
Unpaid principal balance:     $127,803
Months delinquent:            11
Status as of 12/31/2014       FHA-HAMP stand-alone partial claim started
Servicing Deficiencies:

       •   Lack of documentation showing that the borrower qualified for the loss mitigation
           option.
       •   Lack of evaluation for all loss mitigation options, including ensuring that the proper
           waterfall priority was followed.
First Niagara Bank could not support that the borrower qualified for the loss mitigation option
provided. In November 2012, First Niagara Bank told the borrower that the borrower had
insufficient income to qualify for a partial claim or other loss mitigation programs. First Niagara
Bank did not respond to our inquiry regarding the appearance that only a partial claim action was
followed. The loss mitigation files provided did not include any evidence that First Niagara
Bank considered the HUD waterfall priority options with supporting data indicating whether the
borrower qualified for any of the loss mitigation options.
The borrower received a partial claim without adequate supporting documentation. The
borrower submitted another financial package in July 2013. On August 1, 2013, First Niagara
Bank again told the borrower that the borrower was not eligible for any loss mitigation options at
that time due to insufficient income. The files contained an in-house form summarizing the
borrower’s income and expenses as of August 1, 2013, but the form was not consistent with the
HUD-prescribed waterfall priority. The files also included an in-house form summarizing the
borrower’s income and expenses 2 months after the previous August 1, 2013, document cited
above. Again, the form was not consistent with the HUD-prescribed waterfall priority. There
was no explanation or documentation supporting the calculation of income and expenses relating
to why the monthly income amount increased and the monthly expense amount decreased over
the course of 2 months to make the borrower eligible for a loss mitigation option. We also do
not believe that the lender considered the coborrower’s financial information in any of its
analyses.
The documentation provided no evidence that the borrower was considered for disposition
options. The borrower had been denied loss mitigation options in November 2012. The loan
was approved for foreclosure in April 2013. However, the files contained no evidence that the
borrower was offered or evaluated for disposition options.




                                                 52
FHA case number:              061-3904897
Lender loan number:           145314260
Loan amount:                  $258,900
Unpaid principal balance:     $242,821
Months delinquent:            12
Status as of 12/31/2014       Chapter 13 bankruptcy
Servicing Deficiencies:

       •   Lack of evidence of the loss mitigation evaluation.
       •   Lack of evaluation for all loss mitigation options, including ensuring that the proper
           waterfall priority was followed.
       •   Lack of evaluation of loss mitigation options before the fourth missed installment.
First Niagara Bank documented in their files and indicated on HUD systems that loss mitigation
options were offered to the borrower but without a financial review. First Niagara Bank claimed
that loss mitigation began for this loan when the borrower returned the financial information in
March 2014. However, the loan was reported in HUD systems as a promise to pay for the
months of August 2013, October 2013, December 2013, and January 2014. The collection notes
in September 2013 showed that the borrower was offered a repayment plan with a payment
amount of 1.25 times monthly until reinstatement starting in October 2013. However, there was
no documentation to support that this amount was realistic and based upon the borrower’s ability
to pay. Regarding the promise to pay, First Niagara Bank believed that during that period,
promise to pay was the correct reporting code. The officials stated that they would use
repayment plan for future entries. Delinquency status repayment plan would indicate that the
borrower had entered into an informal forbearance plan, which would require the lender to
perform financial analysis to determine the borrower’s current and future ability to meet the
monthly mortgage obligation, which did not occur.
The financial analysis documentation was incomplete, raising questions regarding whether the
borrower was adequately evaluated for all loss mitigation options. First Niagara Bank deemed
the documentation submitted to be complete and assigned the loan for review in April 2014 and
November 2014, respectively. We identified many deficiencies with the documentation.
Although two separate loss mitigation reviews were performed, the loss mitigation files provided
included only one FHA loss mitigation home retention options worksheet. This worksheet did
not include a date so it was unclear which loss mitigation review it was. The loss mitigation
package considered complete in April was missing several documents related to the borrower’s
income. Specifically, the files contained no Internal Revenue Service forms W-2 for either
borrower as well as no support related to the borrower’s rental income, support related to the
borrower’s business income, or a full month of pay stubs for the borrower.
The loss mitigation package that was considered complete in November had 4 months of receipts
related to the rental income received by the borrower. However, these documents were illegible
and could not support the amount of rental income. Neither loss mitigation package submitted
by the borrower contained supporting documentation for all of the expenses reported on both the
uniform borrower assistance forms and monthly household expenses worksheets. The borrower



                                                 53
was denied all loss mitigation options on May 20, 2014, and November 20, 2014. However,
there were inconsistencies between the two denial letters regarding what loss mitigation options
were evaluated. Specifically, the May 20, 2014, denial letter stated that only forbearance-repay
plan and modification were evaluated for, while the November 20, 2014, denial letter stated that
the borrower was evaluated for formal forbearance-repayment plan, modification, HAMP
modification, and partial claim. It was unclear why First Niagara Bank did not evaluate for
HAMP modification or partial claim during the first loss mitigation review. Also, First Niagara
Bank did not discuss disposition options with the borrower after the borrower was denied all
available loss mitigation retention options in May 2014 and before First Niagara Bank
commenced foreclosure proceedings in June 2014.
First Niagara Bank did not evaluate the borrower for loss mitigation options in accordance with
time requirements. The loan became delinquent in August 2013. There were notations in the
collection notes that a financial package was received from the borrower in March 2014 when
the loan was already 3 months delinquent. First Niagara Bank did not determine that the loan
was ineligible for loss mitigation until May 2014 when the loan was 5 months delinquent.




                                                54
FHA case number:              372-2302948
Lender loan number:           20028593
Loan amount:                  $69,731
Unpaid principal balance:     $42,945
Months delinquent:            1
Status as of 12/31/2014       Delinquent
Servicing Deficiencies:

       •   Lack of evidence of the loss mitigation evaluation.
       •   Lack of evaluation for all loss mitigation options, including ensuring that the proper
           waterfall priority was followed.
The borrower completed a modification loss mitigation option in January 2012 but a data entry
mistake changed the loan type on First Niagara Bank’s systems from FHA to conventional. As a
result, the delinquency was not reported to HUD when the loan became delinquent in April 2013
and again in June 2013 through February 2014. In addition, HUD-approved loss mitigation
options were not followed. The borrower became delinquent again in September 2014 and
notified the lender that she would like loss mitigation assistance again. It was at this point that
First Niagara Bank realized that the loan type was incorrect. The loan was reported to HUD as
delinquent for September 2014 but was shown as repayment in HUD systems for the months of
November and December. This entry indicates that an informal forbearance plan was in effect.
However, the files contained no support of a financial package provided by the borrower or a
financial review by First Niagara Bank, including evidence that waterfall priority options were
followed.




                                                 55
FHA case number:              061-3011089
Lender loan number:           145312016
Loan amount:                  $256,900
Unpaid principal balance:     $236,313
Months delinquent:            37
Status as of 12/31/2014       Foreclosure sale held
Servicing Deficiency:

       •   Lack of evaluation for all loss mitigation options, including ensuring that the proper
           waterfall priority was followed.
First Niagara Bank did not adequately document their evaluation of the borrower’s financial
information. They reported that the financial information was reviewed and the borrower was
denied loss mitigation options in February 2012 and August 2013. However, the documentation
supporting these evaluations did not support the conclusions. Loss mitigation documentation
included inconsistencies among the income, expense, and asset data provided on the various
documents; did not include support for the expenses reported; and had missing or incomplete
documentation. First Niagara Bank did not verify that the amounts reported by the borrower
were accurate. Therefore, the lender could not ensure that the financial analysis requirements
were followed. In addition, the FHA loss mitigation home retention option priority order
worksheets provided for both loss mitigation reviews were inadequate in relation to HUD’s
waterfall requirements. Specifically, the worksheets did not show that all of the loss mitigation
retention options identified in HUD’s option priority were reviewed. Further, the documentation
did not have evidence that the borrower was properly considered for disposition options. First
Niagara Bank began foreclosure procedures in April 2012. The files did not indicate an
evaluation or an offer of disposition options to the borrower. The files did show evidence that
First Niagara Bank considered disposition options after the August 2013 review. However, this
was after the borrower abandoned the property and the options were limited.




                                                 56
FHA case number:              061-3084419
Lender loan number:           145312368
Loan amount:                  $152,200
Unpaid principal balance:     $142,709
Months delinquent:            29
Status as of 12/31/2014       State-mandated delay or mediation
Servicing Deficiencies:

       •   Lack of evaluation for all loss mitigation options, including ensuring that the proper
           waterfall priority was followed.
       •   Lack of evaluation of loss mitigation options before the fourth missed installment.
First Niagara Bank’s servicing actions did not ensure the smallest potential financial loss to
HUD. The borrower became delinquent in April 2012 and was 4 months delinquent by
November 2012. There was no evaluation of loss mitigation options identified in the files. The
lender reported in HUD systems that the borrower was ineligible for loss mitigation in July 2012.
However, First Niagara Bank stated that this information was incorrect and the loan should have
been reported as delinquent. It was not until the loan was in its 15th month of delinquency that
the lender started foreclosure proceedings. In addition, the files showed no evidence that First
Niagara Bank evaluated the loan or offered the borrower disposition options before proceeding
to foreclosure.




                                                 57
   Appendix E
            Schedule of Correct Single-Family Default Monitoring System Codes
               Lender
                          Reporting
FHA number      loan                     SFDMS code reported          Correct SFDMS code
                            period
              number
371-4717616  20080307      5/2013           12 – Repayment             42 – Delinquent
                            6/2013        11 – Promise to pay            42 – Delinquent
                            7/2013        11 – Promise to pay            42 – Delinquent
                            8/2013        11 – Promise to pay            42 – Delinquent
                            9/2013        11 – Promise to pay            42 – Delinquent
                           10/2013        11 – Promise to pay            42 – Delinquent
                           11/2013        11 – Promise to pay            42 – Delinquent
                           12/2013        11 – Promise to pay            42 – Delinquent
                            1/2014        11 – Promise to pay            42 – Delinquent
                            2/2014        11 – Promise to pay            42 – Delinquent
                            3/2014        11 – Promise to pay            42 – Delinquent
                            7/2014      98 – Reinstated after loss    06 – Formal forbearance
                                         mitigation intervention
                            8/2014      09 – Special forbearance     06 – Formal forbearance
                            9/2014      09 – Special forbearance     06 – Formal forbearance
061-3259909   145312907     7/2013          42 – Delinquent          AA – Complete financials
                                                                      received and in review
                            8/2013          42 – Delinquent          AA – Complete financials
                                                                      received and in review
                            9/2013          42 – Delinquent          AA – Complete financials
                                                                      received and in review
                           11/2013          12 – Repayment           68 – First legal action to
                                                                      commence foreclosure
                           12/2013          12 – Repayment           68 – First legal action to
                                                                      commence foreclosure




                                             58
               Lender
                          Reporting
FHA number       loan                  SFDMS code reported          Correct SFDMS code
                           period
               number
061-4177067   20074700    4/2013       AO – Ineligible for loss        42 – Delinquent
                                             mitigation
                          6/2013          12 – Repayment               42 – Delinquent
                          8/2013        11 – Promise to pay            42 – Delinquent
                          9/2013        11 – Promise to pay            42 – Delinquent
                          12/2013       11 – Promise to pay            42 – Delinquent
                          1/2014        11 – Promise to pay            42 – Delinquent
                          10/2014        08 – Type II special      39 – FHA-HAMP trial
                                      forbearance-trial payment        payment plan
                                                plan
                          11/2014        08 – Type II special      39 – FHA-HAMP trial
                                      forbearance-trial payment        payment plan
                                                plan
                          12/2014        08 – Type II special      39 – FHA-HAMP trial
                                      forbearance-trial payment        payment plan
                                                plan
061-3710379   145313864   8/2013          42 – Delinquent          AP – Ineligible for loss
                                                                    mitigation due to no
                                                                          response
                          9/2013          42 – Delinquent          68 – First legal action to
                                                                    commence foreclosure
                          6/2014      10 – Partial claim started   39 – FHA-HAMP trial
                                                                       payment plan
                          7/2014      10 – Partial claim started   39 – FHA-HAMP trial
                                                                       payment plan
                          8/2014      10 – Partial claim started   39 – FHA-HAMP trial
                                                                       payment plan
                          9/2014      10 – Partial claim started   39 – FHA-HAMP trial
                                                                       payment plan
                          10/2014     10 – Partial claim started   39 – FHA-HAMP trial
                                                                       payment plan




                                            59
                Lender
                          Reporting
FHA number       loan                  SFDMS code reported           Correct SFDMS code
                           period
               number
061-3710379   145313864   11/2014     10 – Partial claim started    39 – FHA-HAMP trial
                                                                        payment plan
                          12/2014     10 – Partial claim started    39 – FHA-HAMP trial
                                                                        payment plan
061-3151312   145312522   10/2013     95 – State-mandated delay     39 – FHA-HAMP trial
                                             or mediation               payment plan
                          11/2013         12 – Repayment            39 – FHA-HAMP trial
                                                                        payment plan
                          2/2014       41 – FHA-HAMP loan              12 – Repayment
                                      modification-partial claim
                                               started
                          3/2014       41 – FHA-HAMP loan           39 – FHA-HAMP trial
                                      modification-partial claim        payment plan
                                               started
                          4/2014       41 – FHA-HAMP loan           39 – FHA-HAMP trial
                                      modification-partial claim        payment plan
                                               started
                          5/2014       41 – FHA-HAMP loan           39 – FHA-HAMP trial
                                      modification-partial claim        payment plan
                                               started
                          6/2014       41 – FHA-HAMP loan           39 – FHA-HAMP trial
                                      modification-partial claim        payment plan
                                               started
                          7/2014       41 – FHA-HAMP loan           36 – FHA-HAMP stand-
                                      modification-partial claim   alone partial claim started
                                               started
                          8/2014       41 – FHA-HAMP loan           36 – FHA-HAMP stand-
                                      modification-partial claim   alone partial claim started
                                               started




                                            60
                Lender
                          Reporting
FHA number       loan                  SFDMS code reported           Correct SFDMS code
                           period
               number
061-3151312   145312522   9/2014       41 – FHA-HAMP loan           36 – FHA-HAMP stand-
                                      modification-partial claim   alone partial claim started
                                               started
                          10/2014      41 – FHA-HAMP loan           36 – FHA-HAMP stand-
                                      modification-partial claim   alone partial claim started
                                               started
                          11/2014      41 – FHA-HAMP loan           36 – FHA-HAMP stand-
                                      modification-partial claim   alone partial claim started
                                               started
                          12/2014     10 – Partial claim started    36 – FHA-HAMP stand-
                                                                   alone partial claim started
061-3894372   145314458   10/2013     10 – Partial claim started    39 – FHA-HAMP trial
                                                                        payment plan
                          11/2013     95 – State-mandated delay     39 – FHA-HAMP trial
                                             or mediation               payment plan
                          12/2013     95 – State-mandated delay     39 – FHA-HAMP trial
                                             or mediation               payment plan
                          1/2014      95 – State-mandated delay     36 – FHA-HAMP stand-
                                             or mediation          alone partial claim started
                          2/2014       41 – FHA-HAMP loan           36 – FHA-HAMP stand-
                                      modification-partial claim   alone partial claim started
                                               started
                          3/2014       41 – FHA-HAMP loan           36 – FHA-HAMP stand-
                                      modification-partial claim   alone partial claim started
                                               started
                          4/2014       41 – FHA-HAMP loan           36 – FHA-HAMP stand-
                                      modification-partial claim   alone partial claim started
                                               started
                          5/2014       41 – FHA-HAMP loan           36 – FHA-HAMP stand-
                                      modification-partial claim   alone partial claim started
                                               started
                          6/2014       41 – FHA-HAMP loan           36 – FHA-HAMP stand-
                                      modification-partial claim   alone partial claim started
                                               started



                                            61
                Lender
                          Reporting
FHA number       loan                  SFDMS code reported           Correct SFDMS code
                           period
               number
061-3894372   145314458   7/2014       41 – FHA-HAMP loan           36 – FHA-HAMP stand-
                                      modification-partial claim   alone partial claim started
                                               started
                          8/2014       41 – FHA-HAMP loan           36 – FHA-HAMP stand-
                                      modification-partial claim   alone partial claim started
                                               started
                          9/2014       41 – FHA-HAMP loan           36 – FHA-HAMP stand-
                                      modification-partial claim   alone partial claim started
                                               started
                          10/2014      41 – FHA-HAMP loan           36 – FHA-HAMP stand-
                                      modification-partial claim   alone partial claim started
                                               started
                          11/2014      41 – FHA-HAMP loan           36 – FHA-HAMP stand-
                                      modification-partial claim   alone partial claim started
                                               started
                          12/2014           Not reported            36 – FHA-HAMP stand-
                                                                   alone partial claim started
061-3904897   145314260   3/2013            Not reported            20 – Reinstated without
                                                                        loss mitigation
                                                                          intervention
                          5/2013            Not reported                42 – Delinquent
                          6/2013            Not reported                42 – Delinquent
                          8/2013         11 – Promise to pay            42 – Delinquent
                          10/2013        11 – Promise to pay            42 – Delinquent
                          12/2013        11 – Promise to pay            42 – Delinquent
                          1/2014         11 – Promise to pay            42 – Delinquent
372-2302948   20028593    4/2013            Not reported                42 – Delinquent
                          5/2013            Not reported            20 – Reinstated without
                                                                        loss mitigation
                                                                          intervention
                          6/2013            Not reported                42 – Delinquent




                                            62
               Lender
                          Reporting
FHA number       loan                  SFDMS code reported          Correct SFDMS code
                           period
               number
372-2302948   20028593    7/2013            Not reported               42 – Delinquent
                          8/2013            Not reported               42 – Delinquent
                          9/2013            Not reported               42 – Delinquent
                          10/2013           Not reported               42 – Delinquent
                          11/2013           Not reported               42 – Delinquent
                          12/2013           Not reported               42 – Delinquent
                          1/2014            Not reported               42 – Delinquent
                          11/2014         12 – Repayment               42 – Delinquent
                          12/2014         12 – Repayment               42 – Delinquent
061-3011089   145312016   2/2012          42 – Delinquent          AO – Ineligible for loss
                                                                         mitigation
                          4/2012          42 – Delinquent          68 – First legal action to
                                                                    commence foreclosure
                          8/2013      68 – First legal action to   AO – Ineligible for loss
                                       commence foreclosure              mitigation
061-3084419   145312368   7/2012      AO – Ineligible for loss         42 – Delinquent
                                            mitigation
                          5/2013      AO – Ineligible for loss     68 – First legal action to
                                            mitigation              commence foreclosure
                          6/2013          42 – Delinquent          68 – First legal action to
                                                                    commence foreclosure
061-4362753   20084500    5/2013            Not reported               42 – Delinquent
                          6/2013            Not reported               42 – Delinquent
                          6/2014          12 – Repayment               42 – Delinquent
                          8/2014        11 – Promise to pay            42 – Delinquent
                          9/2014          12 – Repayment               42 – Delinquent
                          10/2014       11 – Promise to pay            42 – Delinquent




                                           63
                Lender
                          Reporting
FHA number       loan                 SFDMS code reported   Correct SFDMS code
                           period
               number
061-2987049   145311939   8/2013      11 – Promise to pay    42 – Delinquent
                          10/2013     11 – Promise to pay    42 – Delinquent
                          12/2013     11 – Promise to pay    42 – Delinquent
                          1/2014      11 – Promise to pay    42 – Delinquent
                          2/2014      11 – Promise to pay    42 – Delinquent
                          3/2014      11 – Promise to pay    42 – Delinquent
                          4/2014      11 – Promise to pay    42 – Delinquent
                          5/2014        12 – Repayment       42 – Delinquent
                          6/2014        12 – Repayment       42 – Delinquent
                          8/2014      11 – Promise to pay    42 – Delinquent
                          9/2014      11 – Promise to pay    42 – Delinquent
                          10/2014     11 – Promise to pay    42 – Delinquent
                          11/2014       12 – Repayment       42 – Delinquent
                          12/2014       12 – Repayment       42 – Delinquent
061-3972953   143400144   9/2013      11 – Promise to pay    42 – Delinquent
                          12/2013     11 – Promise to pay    42 – Delinquent
                          1/2014      11 – Promise to pay    42 – Delinquent
                          2/2014      11 – Promise to pay    42 – Delinquent
                          3/2014      11 – Promise to pay    42 – Delinquent
                          4/2014      11 – Promise to pay    42 – Delinquent
                          6/2014      11 – Promise to pay    42 – Delinquent
                          8/2014      11 – Promise to pay    42 – Delinquent
                          9/2014      11 – Promise to pay    42 – Delinquent
                          11/2014       12 – Repayment       42 – Delinquent
                          12/2014       12 – Repayment       42 – Delinquent




                                         64
               Lender
                          Reporting
FHA number       loan                  SFDMS code reported           Correct SFDMS code
                           period
               number
372-4558045   20083675    1/2014         11 – Promise to pay            42 – Delinquent
                          6/2014         11 – Promise to pay            42 – Delinquent
                          7/2014         11 – Promise to pay            42 – Delinquent
                          8/2014         11 – Promise to pay            42 – Delinquent
                          9/2014         11 – Promise to pay            42 – Delinquent
061-2828243   145311045   3/2014      46 – Property conveyed to    1A – Foreclosure sale held
                                               insurer
                          4/2014            Not reported           1A – Foreclosure sale held
                          5/2014            Not reported           1A – Foreclosure sale held
                          6/2014            Not reported           1A – Foreclosure sale held
                          7/2014            Not reported           1A – Foreclosure sale held
                          8/2014            Not reported           1A – Foreclosure sale held
                          9/2014            Not reported           1A – Foreclosure sale held
                          10/2014           Not reported           1A – Foreclosure sale held
                          11/2014           Not reported           1A – Foreclosure sale held
                          12/2014       1E – Eviction started      1A – Foreclosure sale held
446-0229867   20062098    11/2012         12 – Repayment                42 – Delinquent
                          12/2012         12 – Repayment                42 – Delinquent
                          1/2013          12 – Repayment                42 – Delinquent
                          2/2013          12 – Repayment                42 – Delinquent
                          3/2013          12 – Repayment                42 – Delinquent
                          4/2013          12 – Repayment                42 – Delinquent
                          6/2013      68 – First legal action to        42– Delinquent
                                       commence foreclosure
                          3/2014         08 – Type II special       39 – FHA-HAMP trial
                                      forbearance-trial payment         payment plan
                                                plan




                                           65
               Lender
                         Reporting
FHA number       loan                 SFDMS code reported           Correct SFDMS code
                          period
               number
446-0229867   20062098   4/2014      98 – Reinstated after loss    39 – FHA-HAMP trial
                                            mitigation                 payment plan
                         5/2014         08 – Type II special       39 – FHA-HAMP trial
                                     forbearance-trial payment         payment plan
                                               plan
                         6/2014      10 – Partial claim started    39 – FHA-HAMP trial
                                                                       payment plan
                         7/2014      10 – Partial claim started    41 – FHA-HAMP loan
                                                                  modification-partial claim
                                                                           started
372-4073395   20059841   10/2013       11 – Promise to pay             42 – Delinquent
                         11/2013       11 – Promise to pay             42 – Delinquent




                                          66
Appendix F
                                           Criteria
                             Finding 1, including appendix D
Loss mitigation general Regulations at 24 CFR 203.605(a) state, “Documentation must be
documentation           maintained for the initial and all subsequent evaluations and resulting
                        loss mitigation actions.”
                        HUD Handbook 4330.1, REV-5, paragraph 7-12, states,
                        “Mortgagees must assure that servicing files fully document that all
                        servicing requirements have been followed and steps have been taken
                        to save a mortgage prior to making a decision to foreclose. All
                        actions taken with respect to collection, forbearance, or other actions
                        alternative to foreclosure must be fully documented.”
                        Mortgagee Letters 2013-32 and 2012-22 state that the lender’s
                        servicing records should include monthly notations explaining the
                        lender’s analysis used to determine the appropriate loss mitigation
                        option. If there has been no change in the borrower’s circumstances,
                        the lender may simply notate this in its records.
Loss mitigation         Mortgagee Letters 2013-32 and 2012-22 state that a lender may use
qualification – FHA-    an FHA-HAMP stand-alone partial claim without an accompanying
HAMP stand-alone        loan modification if the following three conditions are met: (1) the
partial claim           borrower’s current interest rate is at or below market rate, (2) the
                        borrower’s current mortgage payment is at or below the target
                        monthly payment, and (3) the borrower otherwise qualifies for FHA-
                        HAMP.
Loss mitigation         Mortgagee Letter 2013-32 states “Formal Forbearance plans are
qualification – formal  written agreements with a period of greater than three months but, not
forbearance             more than six months. If the mortgagee determines that 85 percent of
                        the mortgagor’s surplus income is sufficient to bring the mortgage
                        current within six months, the only available loss mitigation option is
                        a Formal Forbearance plan that provides for repayment within the six
                        months.”
Loss mitigation         Mortgagee Letter 2000-05 states that regardless of how the
supporting              borrower’s financial information was secured, the lender must
documentation           independently verify the financial information by obtaining a credit
                        report and any other forms of verification the lender deems
                        appropriate.
Evaluation of financial Mortgagee Letter 2000-05 states that to be considered for any of the
information             loss mitigation options, the borrower must provide detailed financial
                        information to the lender. Regardless of the option under
                        consideration, the lender must analyze the borrower’s current and
                        future ability to meet the monthly mortgage obligation by estimating
                        the borrower’s assets and surplus income.




                                               67
Loss mitigation options Regulations at 24 CFR 203.605(a) state, “…the mortgagee shall
considered              evaluate on a monthly basis all of the loss mitigation techniques
                        provided at § 203.501 to determine which is appropriate. Based upon
                        such evaluations, the mortgagee shall take the appropriate loss
                        mitigation action.”
                        HUD Handbook 4330.1, REV-5, paragraph 9-3, states,
                        “Foreclosure should be considered only as a last resort and shall not
                        be initiated until all other relief options have been exhausted.”
Loss mitigation         Mortgagee Letters 2013-32 and 2012-22 state that after evaluating a
priority order          delinquent borrower for informal and formal forbearance plans,
(waterfall) home        FHA’s loss mitigation home retention options must be considered in
retention               the following order: (1) special forbearances, (2) loan modifications,
                        and (3) FHA-HAMP.
Loss mitigation         Regulations at 24 CFR 203.501(a) state, “Mortgagees must consider
property disposition    the comparative effects of their elective servicing actions, and must
                        take those appropriate actions which can reasonably be expected to
                        generate the smallest financial loss to the Department. Such actions
                        include, but are not limited to, deeds in lieu of foreclosure under §
                        203.357, pre-foreclosure sales under § 203.370.”
                        Mortgagee Letter 2000-05 states that when the cause of the default
                        is not curable or the borrower is not committed to remaining in the
                        home, HUD expects lenders to consider disposition options in the
                        following order: (1) preforeclosure sale and (2) deed-in-lieu.
Evaluating for loss     Regulations at 24 CFR 203.605(a) state, “Before four full monthly
mitigation in a timely  installments due on the mortgage have become unpaid, the mortgagee
manner                  shall evaluate on a monthly basis all of the loss mitigation
                        techniques….”
                        Mortgagee Letters 2013-32 and 2012-22 state that before four full
                        monthly installments due on the mortgage go unpaid, the lender must
                        evaluate a borrower’s financial situation monthly to determine the
                        appropriate loss mitigation option when the mortgage is in default or
                        imminent default.




                                              68
                                         Finding 2
Verification of data   Mortgagee Letter 2003-17 states that it is imperative that the data
                       contained in HUD’s Single Family Insurance System regarding a
                       lender’s FHA-insured portfolio are accurate. To assist lenders in
                       verifying and updating the data in HUD’s systems, this letter reviews
                       several of the current data submission requirements and processes,
                       restates existing requirements for timely and accurate data reporting,
                       and identifies the consequences of a lender’s failure to comply with
                       these requirements.
                       Mortgagee Letter 2005-42 cautions all lenders that they must
                       complete a reconciliation of their FHA-insured portfolio.
                       Explanation of Portfolio Data Reconciliation, National Servicing
                       Center letter, dated May 12, 2014, states that starting with
                       Mortgagee Letter 2003-17 and continuing with Mortgagee Letters
                       2004-34, 2005-11, and 2005-42, lenders have been on notice to
                       reconcile their portfolios. Portfolio data reconciliations consist of
                       comparing a list of FHA cases in lenders’ servicing systems with a
                       list from HUD’s system of record.
SFDMS data entry       HUD Handbook 4330.1, REV-5, paragraph 7-8(A), states, “Prompt
                       and accurate reporting by mortgagees is extremely important in
                       providing HUD with an up-to-date account of the status and trends of
                       HUD-insured mortgages. This reporting serves an indicator of the
                       effectiveness of origination and servicing activities, and the potential
                       risk to the insurance funds.”
                       Mortgagee Letter 2013-15 reminds lenders that they are required to
                       report their servicing efforts to HUD, maintain accurate data in
                       HUD’s system(s) of record, report the monthly status of a delinquent
                       loan throughout the term of the mortgage, and ensure proper
                       documentation of servicing activities with date and time notations.
Assessment of loss     Regulations at 24 CFR 203.605(b) state, “HUD will measure and
mitigation             advise mortgagees of their loss mitigation performance through the
performance            Tier Ranking System (TRS). Under the TRS, HUD will analyze each
                       mortgagee’s loss mitigation efforts portfolio wide on a quarterly
                       basis, based on 12 months of performance, by computing ratios
                       involving loss mitigation attempts, defaults, and claims. Based on the
                       ratios, HUD will group mortgagees in four tiers (Tiers 1, 2, 3, and 4),
                       with Tier 1 representing the highest or best ranking mortgagees and
                       Tier 4 representing the lowest or least satisfactory ranking
                       mortgagees.”




                                            69
                                   Finding 3
Quality control   HUD Handbook 4060.1, REV-2, paragraph 7-2, states, “The
                  following are the overriding goals of Quality Control. Mortgagees
                  must design programs that meet these basic goals:
                  * Assure compliance with FHAs and the mortgagees own origination
                  or servicing requirements throughout its operations;
                  * Protect the mortgagee and FHA from unacceptable risk;
                  * Guard against errors, omissions and fraud; and
                  * Assure swift and appropriate corrective action.”
                  HUD Handbook 4060.1, REV-2, paragraph 7-3(D), states,
                  “Mortgagees must ensure that quality control reviews are performed
                  on a regular and timely basis. Depending on a mortgagee’s
                  production volume, origination reviews may be performed weekly,
                  monthly, or quarterly. The review of a specific mortgage should be
                  completed within 90 days of closing. Reviews of different aspects of
                  servicing will vary in frequency; however, delinquent servicing and
                  loss mitigation activities should be reviewed monthly.”
                  HUD Handbook 4060.1, REV-2, paragraph 7-3(F), states, “The
                  Quality Control reviews must thoroughly evaluate the mortgagees
                  origination and/or servicing functions to determine the root cause of
                  deficiencies. The mortgagee must expand the scope of the Quality
                  Control review when fraud or patterns of deficiencies are uncovered;
                  scope means both an increased number of files as well as more in-
                  depth review.”
                  HUD Handbook 4060.1, REV-2, paragraph 7-10(B), states,
                  “Quality Control of servicing must be an ongoing function. Due to
                  the importance of these aspects of servicing, mortgagees must
                  perform monthly reviews of delinquent loan servicing, claims, and
                  foreclosures.”




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