oversight

Selene Finance, LP, Houston, TX, Did Not Communicate in a Timely Manner With Delinquent Borrowers

Published by the Department of Housing and Urban Development, Office of Inspector General on 2016-07-28.

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

       Selene Finance, LP, Houston, TX
                   Servicing of FHA-Insured Loans




Office of Audit, Region 6            Audit Report Number: 2016-FW-1005
Fort Worth, TX                                             July 28, 2016
                                 2
To:            Robert Mulderig, Deputy Assistant Secretary for Housing, HU
               \\signed\\
From:          William W. Nixon, Acting Regional Inspector General for Audit, 6AGA
Subject:       Selene Finance, LP, Houston, TX, Did Not Communicate in a Timely Manner
               With Delinquent Borrowers


Attached is the U.S. Department of Housing and Urban Development (HUD), Office of Inspector
General’s (OIG) final results of our review of Selene Finance, LP’s servicing of its Federal
Housing Administration-insured loans.
HUD Handbook 2000.06, REV-4, sets specific timeframes for management decisions on
recommended corrective actions. For each recommendation without a management decision,
please respond and provide status reports in accordance with the HUD Handbook. Please furnish
us copies of any correspondence or directives issued because of the audit.
The Inspector General Act, Title 5 United States Code, section 8M, requires that OIG post its
publicly available reports on the OIG Web site. Accordingly, this report will be posted at
http://www.hudoig.gov.
If you have any questions or comments about this report, please do not hesitate to call me at
817-978-9309.
                    Audit Report Number: 2016-FW-1005
                    Date: July 28, 2016

                    Selene Finance, LP, Houston, TX, Did Not Communicate in a Timely Manner
                    With Delinquent Borrowers




Highlights

What We Audited and Why
We reviewed Selene Finance, LP’s servicing of its Federal Housing Administration-insured
loans and its implementation of the U.S. Department of Housing and Urban Development’s
(HUD) Loss Mitigation program. Our audit objective was to determine whether Selene
processed delinquent loans in accordance with HUD’s requirements, especially Loss Mitigation
program requirements.

What We Found
Except for communicating with borrowers, Selene generally complied with applicable HUD
servicing requirements. Selene did not communicate in a timely manner with delinquent
borrowers for 7 of 14 loans reviewed and did not comply with Federal bankruptcy laws for 1
additional loan. These conditions occurred because of lapses in Selene’s internal controls.
Although Selene failed to communicate in a timely manner with the seven delinquent borrowers,
the borrowers did not express an interest in participating in the Loss Mitigation program.
However, if Selene does not correct its internal controls, other delinquent borrowers could miss
the opportunity to participate in the program. Further, it improperly made repeated collections
calls to one borrower who was under bankruptcy protection.

What We Recommend
We recommend that the Deputy Assistant Secretary for Housing require Selene to evaluate and
make changes to its internal controls to ensure that it communicates with delinquent borrowers in
a timely manner and that it maintains accurate borrower account status information.
Table of Contents
Background and Objective......................................................................................3

Results of Audit ........................................................................................................4
         Finding: Selene Did Not Communincate in a Timely Manner With Delinquent
         Borrowers .......................................................................................................................... 4

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

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

Appendixes ................................................................................................................9
         A. Auditee Comments and OIG’s Evaluation ............................................................... 9
Background and Objective
Selene Finance, LP, is a residential mortgage company headquartered in Houston, TX. It is
engaged primarily in servicing residential mortgage loans. It was founded in February 2006 as
Aegis Loan Servicing, L.P. In January 2008, the partnership name was changed to Selene
Finance, LP. Selene has servicing agreements with various third parties and affiliated entities to
service residential mortgage loans. Selene refers to itself as a special servicer, providing creative
loan resolution strategies designed to preserve home ownership.

Selene was servicing 86,000 loans and 69,000 loans on December 31, 2014 and 2013,
respectively, under various servicing agreements and for which it owned mortgage servicing
rights. 1

The U.S. Department of Housing and Urban Development (HUD) established the Loss
Mitigation program in 1996 to ensure that distressed Federal Housing Administration (FHA)-
insured borrowers would have opportunities to retain their homes and 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. The Loss Mitigation program gives lenders responsibility for
managing loan defaults and provides financial incentives to recognize them for their efforts.
Lenders have a responsibility to compare the loss mitigation options and take appropriate actions
that can generate the smallest financial loss to HUD. The program consists of reinstatement
options to allow borrowers to keep their homes and disposition options that assist them in the
disposing of their homes.

Our objective was to determine whether Selene processed delinquent loans in accordance with
HUD’s requirements, especially Loss Mitigation program requirements.




1
    According to Selene’s audited financial statements, mortgage servicing rights are contractual agreements to
    service residential mortgages held in a securitization.



                                                         3
Results of Audit

Finding: Selene Did Not Communicate in a Timely Manner With
Delinquent Borrowers
Selene did not communicate in a timely manner with delinquent borrowers for 7 of 14 loans
reviewed and did not comply with Federal bankruptcy laws for 1 additional loan. These
conditions occurred because of lapses in Selene’s internal controls. Although Selene failed to
communicate in a timely manner with the delinquent borrowers, we concluded from the file
reviews that the sample borrowers did not want to participate in the Loss Mitigation program
because servicing notes showed some borrowers verbally declined to participate while the
remaining borrowers did not respond to Selene’s letters with the required documentation. Even
though the sample borrowers did not want to participate, other delinquent borrowers could miss
an opportunity to participate if Selene does not correct its internal controls. Further, Selene
improperly made numerous collection calls to one borrower who was under bankruptcy
protection.
Selene Did Not Always Communicate in a Timely Manner With Delinquent Borrowers
Selene did not always attempt initial contacts and send loss mitigation information to borrowers
who had defaulted on their mortgages as required. Mortgagee Letter 2013-39, pages 2 and 3,
required Selene to follow specific timelines and methods for communicating with delinquent
borrowers early in their delinquency. 2 In most cases, Selene attempted the contacts and sent the
information to the borrowers, but it did not do so in a timely manner as shown in the table below.

Violations of communication requirements
                                                                 Did not assign          Did not send
                        No phone              No mail
                                                                 single point of           pamphlets
FHA number            contact within       contact within
                                                                 contact 3 within       within 32 and 60
                         20 days              25 days
                                                                    45 days                   days
    261-9623657               X
    461-4203231               X                    X                                              X
    263-4088896               X                    X                      X
    221-3921179               X
    361-3728119                                                           X
    241-8222184               X                                           X
    093-7409568               X                                           X
       Totals                 6                    2                      4                       1


2
      HUD changed the phone contact and mail contact requirements to 17 and 20 days, respectively in HUD
      Handbook 4000.1 Section III, paragraph A.2.h, pages 576-577 after the audit period.
3
      The single point of contact allowed the borrower to discuss the loan with one Selene agent instead of having to
      be transferred to any available agent when the borrower contacted Selene.



                                                           4
Selene’s average delay in initiating phone contact was 12 days, and the average delay for
assigning a single point of contact was 10 days. The delay for sending required pamphlets
ranged between 6 and 30 days. According to Selene management, these errors occurred due to
lapses in Selene’s procedures, including a delay in the “onboarding,” or uploading, of loan
information into its servicing systems.

Not attempting contact or sending information to a delinquent borrower in a timely manner could
result in a borrower missing an opportunity to participate in the Loss Mitigation program and
ultimately losing a home.
Selene Did Not Comply With Bankruptcy Protection Laws
Selene made many collection phone calls to a borrower who was granted bankruptcy protection.
A court granted bankruptcy protection to the borrower and her husband in 2012, before Selene
purchased their loan. In 2013, the borrower’s husband was dismissed from the bankruptcy,
while the primary borrower was still a part of the bankruptcy and still under bankruptcy
protection. Selene’s records mistakenly reflected that both had been dismissed from the
bankruptcy, and it began making collection calls to the primary borrower. Notes in the loan file
showed that beginning in November 2014, the borrower told Selene on several occasions that she
was still under bankruptcy protection. The notes further showed that Selene discussed the matter
with the borrower’s bankruptcy trustee who confirmed that the borrower was still a part of the
bankruptcy. The file notes further show that on two occasions the Selene representative noted
that the case was being escalated to Selene’s Bankruptcy Department and the borrower’s single
point of contact. However, the matter was not resolved and Selene continued making collection
calls. Selene’s policy outlines the duties of a single point of contact, one of which is to help
clear any internal processing issues. Despite the bankruptcy protection, Selene started a
foreclosure process and continued its collection calls until April 2015, when a different Selene
collections representative researched the matter and confirmed that the primary borrower had not
been dismissed and updated Selene’s system. This condition occurred because of an apparent
breakdown in communication between Selene departments which resulted in Selene not updating
its mortgage servicing system in a timely manner. Selene needs to correct this control to avoid
violating Federal and State bankruptcy laws, including 11 U.S.C. (United States Code) 362,
which stops most collection actions, and to avoid unwarranted collection calls to borrowers who
are protected by those laws.

Conclusion
Selene did not communicate in a timely manner with delinquent borrowers for seven loans and
may have violated Federal and State bankruptcy laws for one loan. These conditions occurred
because of lapses in Selene’s internal controls and could result in borrowers’ being unable to
participate in loss mitigation efforts and ultimately losing their homes. Further, delinquent
borrowers under bankruptcy protection could receive improper collection calls.




                                                5
Recommendations
We recommend that the Deputy Assistant Secretary for Housing require Selene Finance to

       1A.    Implement procedures to ensure that it contacts delinquent borrowers and
              provides required information to them within the timeframes specified by HUD
              Handbook 4000.1.

       1B.    Implement procedures to ensure that it confirms borrower account status
              information and communicates with other departments to ensure that it takes
              proper account actions and does not make unwarranted collection calls when
              borrowers are under bankruptcy protection.




                                              6
Scope and Methodology
Our scope generally covered Selene’s servicing activities from January 1, 2013, through May 31,
2015. We performed the audit from April to December 2015 at Selene’s and our offices in
Houston, TX. We expanded the scope as necessary to accomplish our audit objective.
To accomplish our objective, we reviewed
    •    Relevant laws, regulations, HUD handbooks, and mortgagee letters.
    •    Selene’s written policies and procedures for servicing.
    •    Selene’s organizational chart.
    •    Selene’s audited financial statements.
    •    Selene’s and HUD’s data systems.
    •    HUD monitoring reports.
    •    Mortgage servicing files for the sampled loans.

We also interviewed Selene staff and one borrower. 4

As of July 2015, Selene serviced 8,516 loans in HUD’s data systems that had experienced
defaults of at least 60 days and were not reported as having loss mitigation action taken by
Selene. Of these loans, we selected a stratified systematic sample of 125 loans. We used a
stratified systematic sample that reflected the total number of months in which loans were in
default compared to the life of the loan. We used this method because we intended to project the
test results to the population of 8,516 loans and determine why Selene did not put these loans
into loss mitigation. We reviewed the electronic servicing documents for 14 loans to determine
whether Selene maintained adequate supporting documentation and complied with HUD
servicing and loss mitigation requirements. Because we did not identify any significant issues,
we did not review the remaining 111 sampled loans. Also, because we did not review the
remaining loans we did not project the results to the population. We determined that the loans
did not go through loss mitigation because the files showed that defaulted borrowers either did
not respond to Selene’s loss mitigation efforts, or the case notes showed the borrower declined
participation. Through the file reviews, we assessed the reliability of the computer-processed
data related to the loan histories and determined that the data were sufficiently reliable for our
objective.

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



4
    We attempted to contact several borrowers from our sample but were able to contact only one.



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

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

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

•   Effectiveness and efficiency of policies and procedures used to ensure compliance with
    HUD’s loan servicing requirements,
•   Relevance and reliability of information used for making decisions regarding loss mitigation,
    and
•   Compliance with applicable Federal requirements.
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.
We evaluated internal controls related to the audit objective in accordance with generally
accepted government auditing standards. Our evaluation of internal controls was not designed to
provide assurance regarding the effectiveness of the internal control structure as a whole.
Accordingly, we do not express an opinion on the effectiveness of Selene’s internal control.




                                                  8
Appendixes

Appendix A
             Auditee Comments and OIG’s Evaluation



Ref to OIG    Auditee Comments
Evaluation




Comment 1




                               9
                         OIG Evaluation of Auditee Comments


Comment 1   Selene did not disagree with our findings and said it supported our
            recommendations. Selene also said it had made changes to its processes and
            controls that would provide greater assurance of compliance with HUD
            requirements. We appreciate Selene’s commitment to improving its servicing
            operations regarding FHA loans; however, we did not evaluate these changes to
            its processes and controls as they occurred after completion of our audit
            fieldwork. Selene will need to provide evidence to HUD that it has implemented
            the controls to resolve the recommendations during the audit resolution process.




                                             10