oversight

Provident Bank, Iselin, NJ, Needs To Improve Controls Over Its Servicing of FHA-Insured Mortgages and Loss Mitigation Efforts

Published by the Department of Housing and Urban Development, Office of Inspector General on 2015-11-30.

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

               Provident Bank, Iselin, NJ

      Single-Family Housing Servicing Loss Mitigation
                         Program




Office of Audit, Region 2      Audit Report Number: 2016-NY-1001
New York - New Jersey                          November 30, 2015
To:            Kathleen Zadareky
               Deputy Assistant Secretary for Single Family Housing, HU

               //SIGNED//
From:          Kimberly Greene, Regional Inspector General for Audit, 2AGA
Subject:       Provident Bank, Iselin, NJ, Needs To Improve Controls Over Its Servicing of
               FHA-Insured Mortgages and Loss Mitigation Efforts


Attached is the U.S. Department of Housing and Urban Development (HUD), Office of Inspector
General’s (OIG) final results of our review of Provident 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: 2016-NY-1001
                   Date: November 30, 2015

                   Audit Report Title Provident Bank, Iselin, NJ, Needs To Improve Controls
                   Over Its Servicing of FHA-insured Mortgages and Loss Mitigation Efforts




Highlights

What We Audited and Why
We reviewed Provident 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 Provident Bank based on an Office of Inspector
General risk assessment of single-family lenders. The objective of the audit was to determine
whether Provident Bank properly serviced FHA-insured mortgages and specifically whether it
(1) properly implemented HUD’s Loss Mitigation program, (2) accurately reported borrower and
loan status data for FHA-insured mortgages it serviced, and (3) implemented an effective quality
control plan.

What We Found
Provident Bank did not adequately implement HUD’s Loss Mitigation program for loans that
went into default. Specifically, Provident Bank did not (1) adequately document its loss
mitigation efforts for nine loans with original mortgage amounts of more than $1.9 million (2)
accurately report default status data in HUD’s Single Family Default Monitoring System, and (3)
implement an effective quality control plan.

What We Recommend
We recommend that HUD instruct Provident Bank to provide evidence to support that its
servicing practices were acceptable for seven active loans with mortgages insured by HUD that
were identified in this audit, which could result in $696,185 in funds to be put to better use.
HUD should take appropriate administrative actions to indemnify any of these loans for which it
determines that Provident Bank’s servicing practices or forbearance procedures were inadequate.
In addition, Provident Bank should reimburse the HUD FHA insurance fund $359,514 for two
loans for which the required loss mitigation options were not made available to the borrower.
Further, Provident Bank should implement verification procedures to ensure that information in
HUD data systems is accurately reported. Additionally, Provident Bank should modify its
quality control plan to ensure that its loss mitigation policies and procedures are complete and
objectively evaluate how its policies are written and applied to FHA borrowers to ensure that
they follow HUD FHA regulations and guidelines.
Table of Contents
Background and Objectives ....................................................................................3

Results of Audit ........................................................................................................4
         Finding 1: Provident Bank Officials Did Not Adequately Document
         Implementation of the HUD Loss Mitigation Program................................................. 4

         Finding 2: Provident Bank Did Not Accurately Report Default Status Data in
         HUD’s Single Family Default Monitoring System ....................................................... 10

         Finding 3: Provident Bank Did Not Implement an Effective Quality Control
         Plan ................................................................................................................................ 12

Scope and Methodology .........................................................................................15

Internal Controls ....................................................................................................17

Appendixes ..............................................................................................................18
         A. Schedule of Questioned Costs and Funds To Be Put to Better Use ...................... 18

         B. Auditee Comments and OIG’s Evaluation ............................................................. 19

         C. Schedule of Potential and Actual Loss to HUD ...................................................... 39

         D. Loan Summaries ....................................................................................................... 40

         E. Criteria ....................................................................................................................... 57




                                                                      2
Background and Objectives
Provident Bank is an approved Federal Housing Administration (FHA) loan servicer located in
Iselin, NJ. It services more than 170 active FHA-insured mortgage loans. In 1996, the U.S.
Department of Housing and Urban Development (HUD) established the Loss Mitigation program to
ensure that distressed FHA-insured borrowers have the opportunity to retain homes and reduce loss
to the FHA insurance fund. Loss mitigation is critical to FHA as it helps borrowers in default to
retain home ownership while reducing, or mitigating, the economic impact on the insurance fund.
The Loss Mitigation program gave lenders responsibility for managing loan defaults and provided
financial incentives for their efforts. The program consists of reinstatement options to allow
borrowers to keep their homes and disposition options to assist them to give up their homes under
more favorable conditions. Lenders have a responsibility to compare the loss mitigation options and
use those with the least amount of financial loss to the government. Before a lender considers a
delinquent borrower for one of FHA’s loss mitigation home retention options, it must first evaluate
the borrower’s forbearance plans. Formal and informal forbearance plans are the only options
available to delinquent borrowers who do not have a verifiable loss of income or increase in living
expenses. Mortgage forbearance is an agreement made between a mortgage lender and delinquent
borrower in which the lender agrees to not foreclose on a mortgage and the borrower agrees to a
mortgage plan that will, over a certain time period, bring the borrower current on their payments.
A forbearance agreement, however, is not a long-term solution for delinquent borrowers. It is
designed for borrowers who have temporary financial problems caused by unforeseen problems
such as temporary unemployment or health problems.
Once forbearance plans are considered, options under FHA loss mitigation home retention 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 or suspend mortgage payments. This option is available
only to unemployed borrowers. A loan modification is a permanent change to one or more of the
terms of a borrower’s loan. FHA-HAMP usually involves a combination of loan modification and a
partial claim but may also include the loss mitigation options.
There are two disposition options: (1) a preforeclosure sale and (2) deed in lieu of foreclosure. The
preforeclosure sale option allows the defaulted borrower to sell their home and use the sales
proceeds to satisfy the mortgage debt, although the proceeds may be less than the mortgage balance.
A deed in lieu of foreclosure allows the defaulted borrower to sign home ownership over to HUD in
exchange for a release from all mortgage obligations.
The objective of this audit was to determine whether Provident Bank properly serviced FHA-
insured mortgages. Specifically, we wanted to determine whether (1) the HUD Loss Mitigation
program was properly implemented, (2) borrower and loan status data for FHA-insured
mortgages were accurately reported, and (3) an effective quality control plan was established and
implemented.



                                                  3
Results of Audit

Finding 1: Provident Bank Officials Did Not Adequately Document
Implementation of the HUD Loss Mitigation Program
Provident Bank did not adequately document its loss mitigation efforts for nine loans with
original mortgage amounts exceeding $1.9 million. Additionally, Provident Bank did not ensure
that controls are in place for servicing FHA-insured mortgages and loss mitigation efforts in
accordance with Federal guidance. Provident Bank did not adequately document implementation
of HUD’s Loss Mitigation program. Provident Bank’s inadequate implementation of HUD’s
loss mitigation efforts occurred because it did not comply with Federal regulations and its quality
control plan did not ensure that FHA servicing procedures were properly implemented. Deficient
loss mitigation practices negatively impacts a homeowner’s ability to retain homeownership and,
in the case of loans reviewed in this audit, could increase the loss to the FHA insurance fund by
$1,055,699, which includes a potential loss of $696,185 for seven loans and actual loss claims of
$359,514 paid on two loans reviewed.

Nine Loans Had Significant Loss Mitigation Servicing Deficiencies

Provident Bank did not document specific loss mitigation efforts for nine loans in default
(detailed in appendix D). Specifically, it did not
          Provide evidence to support that timely loss mitigation options were given to
             homeowners.
          Provide evidence of timely loss mitigation evaluation.
          Implement the priority order of loss mitigation options according to FHA
             regulations.
          Document that the loss mitigation actions were based on financial review
             evaluations.
Regulations at 24 CFR (Code of Federal Regulations) 203(C) state specific lending practices
required of all mortgage lenders insured by HUD. Additionally, HUD Handbook 4330.1, REV-5,
provides guidance for lenders when servicing an FHA-insured mortgage (detailed in appendix
E).




                                                 4
Loan deficiencies are summarized in the following table:

                                                                                Loss
                                        Evaluation of
                        Timely loss                        Priority order    mitigation
                                         delinquent
                        mitigation                             of loss        actions
          FHA                             loans not
                       options not                           mitigation       lacking
         number                          conducted
                       provided to                          options not     evaluations
                                          within 90
                       homeowners                          implemented      of financial
                                            days
                                                                              reviews

       351-4430918
                           X                X

       352-5091737
                           X                                   X

       352-5154843                                                             X
                           X                X

       352-5273294
                           X                                   X

       352-5288565
                           X                X                  X

       352-5447273
                           X                X                  X               X

       352-5881845
                           X                X

       352-5201415
                           X                X

          Totals            8                6                 4               2




                                                 5
Homeowners Were Not Given Timely Loss Mitigation Options
Provident Bank could not support that it provided the required Federal pamphlets outlining loss
mitigation options to eight of nine delinquent borrowers within 60 days of mortgage
delinquency. Additionally, it did not thoroughly communicate all loss mitigation options
available under FHA guidelines. Delinquent borrowers should receive the following pamphlets
from the lender: (1) PA 426-H, How To Avoid Foreclosure, and/or (2) HUD-2008-5-FHA, Save
Your Home: Tips To Avoid Foreclosure, which contain important information to prevent
mortgage foreclosure. HUD Mortgagee Letter 2000-05, Part C, Early Delinquency Servicing
Requirements, requires that within 60 days of their mortgage delinquency, lenders are required to
give delinquent borrowers these pamphlets that show loss mitigation options and the availability
of housing counseling.
Provident Bank stated that it adequately informed delinquent borrowers of all FHA Loss
Mitigation program options and that it included the required HUD publications in its
notifications. However, it was unable to provide verification of the original loss mitigation
package letters sent to borrowers and, instead, provided copies of its collection system-generated
batch letters. This included loss mitigation packages and early intervention and housing
counseling letters that were sent to both conventional and FHA delinquent borrowers. We
determined that the batch letters did not adequately inform delinquent FHA borrowers of the
options available to them for loss mitigation. Although required by HUD Handbook 4330.1,
REV-5, paragraph 7-11(A), these letters did not include the FHA-HAMP option or describe
alternatives the lender could use in lieu of foreclosure. Additionally, the batch letters did not
reference HUD publications that could assist borrowers in making an informed decision about
their mortgage delinquency. This insufficient communication of the options available for loss
mitigation contributed in the foreclosure of two homes and the unnecessary expenditure of FHA
insurance funds by paying two claims in the amount of $359,514.


Evaluation of Delinquent Loans Was Not Conducted Within the Required 90 Days
Provident Bank could not support that it performed timely evaluation for determining the most
appropriate loss mitigation option for six of nine delinquent loans within the 90-day period of
loan delinquency. The Loss Mitigation program was designed to address serious defaults that
continue for 90 days or more. Many of the most effective loss mitigation actions take place in
the early stages of collection. All efforts taken by a lender to address delinquent loans contribute
to HUD’s goal of home ownership retention and protection of the insurance funds. Mortgagee
Letter 2000-05, Part E, General Program Requirements, states that before a defaulted loan has
accumulated three full unpaid loan installments, lenders must evaluate all loss mitigation options
to determine the most appropriate alternative. Also, Mortgagee Letter 2000-05, Part C, Early
Delinquency Servicing Requirements, Default Counseling, states that borrowers who receive
counseling early have a greater chance of bringing their mortgage loans current. Without this
evaluation, financial information was not obtained in a timely manner to allow for a thorough
review of all loss mitigation options. This condition resulted in the loan’s becoming more
delinquent over time and increased the risk that HUD would be responsible for paying
unnecessary costs in the event of a claim.




                                                  6
The Priority Order of Loss Mitigation Options Was Not Implemented
Provident Bank could not support that it used the correct priority order of loss mitigation options
for four of nine loans reviewed. Mortgagee Letters 2013-32 and 2012-22 state that after
evaluating a delinquent mortgagor for Informal and Formal Forbearance Plans, HUD FHA’s
Loss Mitigation Home Retention Options must be considered in the following waterfall order:
(1) Special Forbearances; (2) Loan Modifications; and (3) FHA-HAMP. In one instance, the
financial records of one borrower verified that their income loss was due to unemployment.
However, Provident Bank’s financial analysis mistakenly concluded that the borrower was
ineligible for special forbearance or a more permanent loss mitigation option. In a separate case,
Provident Bank could not support it selected the most appropriate loss mitigation option for the
borrower during the early stages of the default in compliance with the priority order of loss
mitigation efforts. HUD Mortgage Letter 2000-05, Part F, General Program Requirements,
requires that a specific priority order be used for loss mitigation efforts. However, Provident
Bank could not support that the best loss mitigation option was selected for the borrower during
the early stages of the default. Additionally, Provident Bank could not support that financial
information was obtained in a timely manner or that the priority order of loss mitigation options
was used as required during the preliminary phases of the borrowers’ delinquency. As a result,
the borrowers’ mortgage became more delinquent over time, which decreased the likelihood that
the borrower would receive a loan modification or FHA-HAMP because arrearages were added
to the unpaid balances during Provident Bank’s financial evaluation. For example, both a partial
claim and a special forebearance will prevent a foreclosure and reduce the potential loss to the
insurance fund.


Loss Mitigation Actions Lacked Adequate Evaluations of Financial Record
Provident Bank could not support that it adequately evaluated the financial records for three of
nine borrowers reviewed. HUD Mortgagee Letter 2000-05, Part D, Special Forbeareance, and
HUD Mortgage Letter 2000-05, Part H, General Program Requirements, state that a financial
analysis is required by the lender to assess the borrower’s ability to repay the default. In all three
instances, Provident Bank did not adequately evaluate borrowers’ financial information to
determine the best loss mitigation option. In one case, financial records supported that the
borrower had a loss of income due to unemployment. However, the financial evaluation did not
include this information when the borrower’s loan modification options were assessed.
Provident Bank determined that the borrower was ineligible for a special forebearance or a more
permanent loss mitigation option such as the loan modification or FHA-HAMP, for which the
unemployment issue could have helped the borrower qualify. In another instance, Provident
Bank modified a borrower’s payments without first completing a financial analysis to determine
whether the payments were realistic. A final instance disclosed that Provident Bank received
and accepted an agreement to pay from a borrower without first determining whether the
payments were feasible in accordance with HUD according to Mortgagee Letter 2000-05, Part H,
General Program Requirements. The borrower, however, continued to be delinquent on
mortgage payments, and Provident Bank discussed a repayment agreement with the borrower for
payment of the arrearage without first conducting an evaluation of financial records, such as
bank statements, employment and tax records.




                                                  7
Conclusion

After reviewing 46 FHA loans serviced by Provident Bank, we found that a sample of nine FHA
loans had servicing deficiencies. Specifically, Provident Bank did not adequately document the
use of HUD’s Loss Mitigation program for 9 FHA loans reviewed that were in a serious default
status. Specifically, it did not have support that:

      Provide evidence that timely loss mitigation options were given to homeowners (8 loans).
      Provide evidence of timely loss mitigation evaluation (6 loans).
      Document that the priority order of loss mitigation options were implemented according
       to FHA regulations (4 loans).
      Document that the loss mitigation actions were based on financial reviews evaluations (2
       loans).

These deficiencies occurred because Provident Bank did not adequately implement its loss
mitigation efforts in accordance with HUD’s regulations and because bank officials believed
they were in compliance with the requirements when they were not. As a result, the lender
increased the risk to the FHA insurance fund by $1,055,699, which includes a potential loss of
$696,185 for seven loans and ineligible loss claims of $359,514 paid on two loans reviewed.
The potential estimated loss to HUD is described in appendix C. Inadequate loss mitigation
efforts affect the borrower’s ability to retain home ownership and have a negative impact on the
FHA insurance fund.

Recommendations
We recommend that the Deputy Assistant Secretary for Single Family Housing instruct
Provident Bank to
       1A.     Provide HUD evidence that informal, formal, and special forbearance options
               were implemented for loans identified in appendix D. For any loan for which
               HUD determines that forbearance procedures were inadequate, HUD should take
               appropriate actions, including indemnification, which could result in $696,185 in
               funds put to better use for seven loans.

       1B.     Reimburse the HUD FHA insurance fund for the claim amounts for two loans
               totaling $359,514. Specifically, for FHA case number 352-5288565, the required
               loss mitigation available options were not conducted, a foreclosure sale was held,
               and a claim in the amount of $109,234 was filed. FHA case number 352-5201415
               resulted in a property conveyance to HUD with a claim in the amount of
               $250,280.

       1C.    Implement procedures requiring Provident Bank to evaluate monthly delinquent
              borrowers’ financial situations to determine the appropriate loss mitigation option
              when the mortgage is in default or imminent default. The lender’s servicing
              records should include, at a minimum, monthly notations explaining loss
              mitigation options analyses and whether the foreclosure option is warranted. If


                                                8
      the 90-day loss mitigation evaluation is not documented or the evaluation was not
      adequate to verify the borrower’s ability to pay, HUD should take the appropriate
      action to include indemnification.

ID.   Provide documentation to HUD showing that it has revised its loss mitigation
      policy to ensure that all mitigation options are adequately communicated to
      borrowers in a timely manner.




                                       9
Finding 2: Provident Bank Did Not Accurately Report Default
Status Data in HUD’s Single Family Default Monitoring System

Provident Bank did not accurately report default status data in HUD’s Single Family Default
Monitoring System and implement an effective quality control plan. Specifically, Provident
Bank did not accurately document the loss mitigation and foreclosure activities for three of nine
loans. The lender also reported inaccurate and incomplete borrower and default status data for
two other FHA loans. These deficiencies occurred because Provident Bank did not comply with
Federal guidelines and its quality control plan was not adequate to ensure that HUD systems
were accurately maintained. Specific conditions of Provident Bank’s quality control plan are
discussed in Finding 3. The lack of proper reporting affected HUD’s ability to track significant
events that occurred between the beginning of a default episode and its resolution. Correct data
are crucial for ensuring that information used in metrics to assess servicer performance, such as
tiered ranking, is accurate.

Servicing Actions for FHA Loans Were Inaccurately Reported
Provident Bank entered inaccurate and incomplete borrower and default status data into HUD’s
Single Family Default Monitoring System for three out of nine loans reviewed and did not
perform monthly system updates as required by HUD FHA guidelines. The Single Family
Default Monitoring System enables HUD to track the key significant events that occur between
the beginning of a default episode and its resolution. This includes whether reinstatement, claim,
or prepayment, with or without loss mitigation occur.
Loan deficiencies are summarized in the following table:


                 FHA Number                       Inadequate Reporting
                                                  in HUD’s System
                 352-5273294                      X

                 352-5276791                      X

                 352-5881845                      X

                 341-4238282                      X

                 352-5779778                      X

                 Totals                           5




                                                 10
On March 31, 2006, HUD published the final rule that advised the industry of changes to HUD’s
delinquency-reporting requirement. The revised regulation requires mortgagees to report all
accounts that are 30 days delinquent as of the last day of the month. This is a change to the
previous reporting requirement that required mortgagees to wait until the mortgages become 90
days delinquent.
Provident Bank is required to promptly and accurately report default data on its lenders as
required by HUD Handbook 4330.1, REV-5, section 7-8, and HUD Mortgagee Letter 2013-15.
We identified reporting deficiencies and questionable entries in HUD FHA systems. For
example, Provident Bank reported in HUD’s system that FHA case number 341-4238282 was a
loan refinance, with the original defaulted loan paid in full. As a result, the lender erroneously
reported the HUD FHA insurance coverage status for this loan as terminated or discharged
because of the refinancing. However, public records indicated that Provident Bank foreclosed on
the property on January 6, 2014, and then sold the property “as is” to a contractor for $68,000 on
October 21, 2014. The balance on the defaulted FHA loan was $84,628. Therefore, due to the
inaccurate reporting, there was no evidence that a claim was paid as a result of this transaction.
Also, for FHA case number 352-5779778, Provident Bank listed the wrong address for a
borrower in default with 12 missed mortgage payments. As a result, both the servicer and FHA
were hindered in their ability to contact the homeowner for various servicing purposes.

Conclusion
Due to noncompliance with Federal guidelines and inadequate quality control plan functions
which will be discussed in more detail in Finding 3, Provident Bank collected and reported
incomplete and inaccurate key significant data on FHA-serviced loans that were in serious
default status. These data included default status, report of FHA-insured mortgages, loss
mitigation efforts, and foreclosure activities. Further, the lack of proper reporting affected
HUD’s ability to collect and track significant events that occurred between the beginning of a
default episode and its resolution. Correct data are crucial for ensuring that information used in
metrics to assess servicer performance, such as tiered ranking, is accurate.

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

       2A.     Implement procedures to ensure that information in HUD systems are accurate;
               the monthly status for delinquent loans throughout the mortgage term is properly
               reported; and proper documentation of service activities is complete, including
               date and time notations.

       2B.     Provide HUD evidence that reporting deficiencies identified in the audit were
               corrected.




                                                 11
Finding 3: Provident Bank Did Not Implement an Effective Quality
Control Plan
Provident Bank did not follow HUD requirements when managing the quality control plan for
servicing delinquent FHA loans. Specifically, internal and external quality control reviews did
not identify the FHA loans reviewed or did not include FHA servicing loans in their sampling.
Also, the quality control review conclusions did not address the objectives and scope of the HUD
quality control program. Additionally, Provident Bank’s internal policies on its loss mitigation
options were incomplete and not specific to FHA homeowners. We attributed this deficiency to
Provident Bank not implementing objective internal procedures to identify deficiencies in quality
control reviews. As a result, Provident Bank could not ensure that the quality control plan
complied with servicing requirements to protect HUD from unacceptable risk.

Implementation of the Quality Control Program Was Ineffective
The Provident Bank internal audit quarterly quality control reviews of the FHA-insured
mortgages, dated between January 1, 2013 and June 30, 2014, yielded no findings or reportable
conditions. The quality control reviews did not include case numbers or loan numbers to identify
which FHA loans were reviewed. Some of the quality control reviews did not include servicing
FHA loans in their sample selection.

Provident Bank’s audit summary of its quality control review program established the objectives
and scope of the review. The goals of the HUD quality control program as it relates to the Bank
are: (1) Assure compliance with FHA’s and the Bank’s servicing requirements throughout the
Bank’s operations; (2) Protect the Bank and FHA from unacceptable risk; (3) Guard against
errors, omissions, and fraud; and (4) Assure swift and appropriate corrective action.
The scope of the HUD quality control program for servicing covers all aspects of the Bank’s
servicing operations as they relate to FHA-insured mortgages, includes the following areas: (1)
Servicing delinquent accounts; (2) Mortgage Insurance Premiums billings; (3) Claims, and
claims without conveyance of title; (4) Customer service; (5) Escrow administration; (6) Home
equity conversion mortgage disbursement reporting;(7) Assumption processing; (8) Paid-in-full
mortgages; (9) Foreclosure processing; (10) Deficiency judgments; (11) New loans, servicing
transfers, acquisitions; (12) Fees and charges; (13) ARM adjustments and disclosures; (14)
Section 235 recertification’s; (15) Handling of payments; and (16) Maintenance of records.

Despite all these objectives, scope, and goals of Provident Bank’s Internal Audit Department’s
quality control program, our review disclosed that the report’s conclusion did not address the
objectives or goals of the review.

Provident Bank officials attempted to identify any noncompliance areas of their loss mitigation
policy by contracting the services of an outside consultant to review the loss mitigation function
with a primary objective of evaluating the process and significant control points for
effectiveness, adequacy, and efficiency of operations.




                                                 12
The primary area coverage of the review included reviewing bank policies and procedures
related to the loss mitigation function and assessed adequacy for compliance with regulatory
requirements. Another review objective was to determine if assigned servicer personnel to
delinquent borrowers, who are more than 45 days delinquent, provided to borrowers with
accurate information, i.e., loss mitigation options available. Despite all these review objectives,
the Compliance Review Report identified no compliance issues. The only reportable condition
was an issue with Provident Bank’s loss mitigation adverse action notice, which contained the
incorrect address of the Federal Deposit Insurance Corporation response center, which have
nothing to do with the objectives of the quality control review. The outside consultant’s
compliance report also did not identify which FHA loans were reviewed to determine Provident
Bank’s compliance with loss mitigation guidelines. Consequently, Provident Bank was not able
to identify existing deficiencies in its administration of FHA servicing loans in a timely manner.
The review period was from August 1, 2013 through July 31, 2014.

We also observed that Provident Bank’s internal policies on loss mitigation options were
incomplete and not specific to FHA homeowners. Specifically, Provident Bank’s Asset Recovery
Loss Mitigation Policy provided at the entrance conference (dated December 2013) and revised
on May of 2014 does not have a Partial Claim Loss Mitigation option and the FHA-Home
Affordable Modification Program option (FHA-HAMP). Provident Bank’s lack of internal
policy and control procedures contributes to the deficiency of their quality control program. The
incompleteness of Provident Bank’s internal policies was not identified by the internal or
external reviews. As a result, Provident Bank continued to inadequately communicate to the
borrowers all options available under FHA guidelines.
Regulations in HUD Handbook 4330.01, REV-5, paragraph 1-4(C), state that each HUD-
approved mortgagee must establish and maintain a formalized, written quality control plan for
mortgage servicing system wide, to include branch offices. Under this quality control plan, a
lender must use a program of internal and external audit or provide for a knowledgeable
independent review by the lender’s management or supervisory personnel. The plan must be
comprehensive and include all servicing issues, including equity skimming violations and loss
mitigation.
Conclusion
Provident Bank did not adequately follow HUD requirements when managing the quality control
plan for the servicing of delinquent FHA loans. Its quality control plan reviews did not identify
the loans reviewed, conclusions did not address the objectives and scope of the HUD quality
control program, had incomplete evaluations of internal policies pertaining to FHA loss
mitigation, and inadequate implementation of those policies for FHA borrowers in default. We
attributed these deficiencies to Provident Bank’s not implementing internal policy and
procedures to objectively identify deficiencies in the quality control reviews. As a result, it
could not ensure that its quality control plan complied with servicing requirements to protect
HUD from unacceptable risk.

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


                                                 13
3A.   Modify its quality control plan to ensure that the bank’s loss mitigation policies
      and procedures are complete and objectively evaluate how its policies are written
      and applied to FHA borrowers to ensure that they follow HUD FHA regulations
      and guidelines.




                                       14
Scope and Methodology
We performed our onsite work at the Provident Bank servicing office located at 100 Wood
Avenue South, Iselin, NJ, from December 2014 to March 2015. Our audit generally covered the
period June 1, 2013, through March 31, 2015, and was extended when necessary to meet our
audit objective. We used computer-processed data and verified the 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 and compared

       Federal regulations, HUD handbooks, and mortgagee letters;
       Applicable Provident Bank policies and procedures relating to its servicing, collections,
        and quality control programs;
       Provident Bank’s servicing files, collection notes, and quality control reviews;
       Data maintained in Provident Bank systems to reported data in HUD systems and New
        Jersey public property real estate records; and
       Discussions with HUD and Provident Bank officials.
We selected a random sample using Audit Command Language (ACL).1 However, ACL did not
provide a statistical sample that we could project to the population. Provident Bank had a total
of 46 loans listed as delinquent in the Neighborhood Watch2 system. We reviewed Provident
Bank’s collection and loss mitigation log for its entire population of 46 seriously delinquent
loans to obtain our sample. The total universe of FHA loans had no claims at the start of our
review.
As of March 10, 2015, Provident Bank had serviced 173 FHA loans, which included the 46 loans
in serious default. The 173 FHA loans had original mortgage amounts totaling $32.8 million and
an unpaid mortgage balance of $27.7 million. The 46 FHA loans in serious default had an
original mortgage balance of $8.6 million and an unpaid mortgage balance of $7.3 million. We
selected a random nonstatistical sample of nine loan files to review based on each of the
delinquent status and loss mitigation options identified in Neighborhood Watch.
The sample consisted of

       One loan in modification,

1
        Audit Command Language (ACL) software is one of the computer assisted audit tools that auditors,
        accountants, finance executives and other data analysts can use for independent data extraction and analysis
        for the detection and investigation of frauds in a computerized environment. ACL is an efficient tool to
        analyze voluminous electronic data to detect exceptions, and is used to view, sample, explore, and analyze
        data efficiently and cost-effectively.

2
        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.



                                                         15
      Three loans that were seriously delinquent but not in loss mitigation,
      Two loans listed as bankruptcy actions,
      Two loans listed as in preforeclosure, and
      One loan listed as sold in foreclosure and conveyance completed.
We also performed a public records search of the addresses of the FHA-insured homes belonging
to the 46 seriously delinquent borrowers serviced by Provident Bank to identify possible
improprieties and we did not identify any misconduct on the part of Provident Bank or the
related borrowers.
We reviewed the quarterly quality control reports of reviews that Provident Bank’s internal audit
department performed on its FHA-insured mortgages during the period January 1, 2013, through
June 30, 2014. The objective of those reviews was to determine whether the internal audit
department implemented Provident Bank’s HUD quality control plan for its HUD-assisted
activities. The goals of the HUD quality control plan included (1) ensuring compliance with
FHA’s and the bank’s servicing requirements throughout the bank’s operations; (2) protecting
the bank and FHA from unacceptable risk; (3) guarding against errors, omissions, and fraud; and
(4) ensuring swift and appropriate corrective action.
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(s).




                                                16
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 objectives:

   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:

   Provident Bank did not have adequate controls to ensure that its loss mitigation program met
    its objectives by not adequately documenting significant aspects of the loss mitigation efforts
    and properly implementing a quality control program (see findings 1 and 3).
   Provident Bank did not have adequate controls over the reliability of financial data by
    reconciling information in its systems to data maintained in HUD systems (see finding 2).



                                                  17
Appendixes

Appendix A


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

                          1A                                 $696,185
                          1B             $359,514

                        Totals           $359,514            $696,185



1/   Ineligible costs are costs charged to a HUD-financed or HUD-insured program or activity
     that the auditor believes are not allowable by law; contract; or Federal, State, or local
     policies or regulations. In this instance, we classified $359,514 as ineligible (see
     appendix A)—the amounts paid to Provident Bank for claim A totaling $109,234,
     associated with FHA case number 352-5288565, and claims A and B totaling $250,280,
     paid for FHA case number 352-5201415. We considered this amount ineligible because
     of Provident Bank’s inadequate loss mitigation efforts in assisting the delinquent FHA
     borrowers.
2/   Recommendations that funds be put to better use are estimates of amounts that could be
     used more efficiently if an Office of Inspector General (OIG) recommendation is
     implemented. These amounts include reductions in outlays, deobligation of funds,
     withdrawal of interest, costs not incurred by implementing recommended improvements,
     avoidance of unnecessary expenditures noted in preaward reviews, and any other savings
     that are specifically identified. In this instance, if HUD determines that the servicing
     practices were inadequate, it would result in indemnification for $696,185 in estimated
     losses (appendix C) for seven loans identified in the loan summaries in appendix D. The
     estimated loss is based on the loss severity rate of 50 percent of the total unpaid principal
     balance of $1,392,370 as of April 30, 2015.




                                               18
Appendix B
             Auditee Comments and OIG’s Evaluation



Ref to OIG    Auditee Comments
Evaluation




Comment 1




Comment 2




                               19
Appendix B
             Auditee Comments and OIG’s Evaluation



Ref to OIG    Auditee Comments
Evaluation




Comment 2




Comment 3




                               20
Appendix B
             Auditee Comments and OIG’s Evaluation



Ref to OIG    Auditee Comments
Evaluation




Comment 4




Comment 5




                               21
Appendix B
             Auditee Comments and OIG’s Evaluation



Ref to OIG    Auditee Comments
Evaluation




Comment 6




Comment 7




                               22
Appendix B
             Auditee Comments and OIG’s Evaluation



Ref to OIG    Auditee Comments
Evaluation




Comment 8




Comment 9




Comment 10




                               23
Appendix B
             Auditee Comments and OIG’s Evaluation



Ref to OIG    Auditee Comments
Evaluation


Comment 11




Comment 12




                               24
Appendix B
             Auditee Comments and OIG’s Evaluation



Ref to OIG    Auditee Comments
Evaluation


Comment 12




Comment 13




                               25
Appendix B
             Auditee Comments and OIG’s Evaluation



Ref to OIG    Auditee Comments
Evaluation




Comment 14




Comment 15




                               26
                         OIG Evaluation of Auditee Comments


Comment 1   Provident Bank officials evaluated and understand the nature of the concerns
            detailed in the draft audit report regarding its loss mitigation servicing of FHA-
            insured loans. Provident Bank officials believe that the loss mitigation practices in
            place during and prior to the audit report review period were compliant with the
            HUD’s requirements, policies and procedures. Provident Bank acknowledges that
            enhanced documentation of its loss mitigation efforts is warranted.
            We disagree with Provident Bank’s assertion that its loss mitigation practices
            were compliant with HUD’s requirements, policies and procedures. The draft
            report disclosed the deficiencies with its loss mitigation practices, reporting, and
            quality control program activities. Also, we observed that the current design of
            Provident Bank’s policies are incomplete and do not mirror HUD’s Loss
            Mitigation program guidelines. We recognize that Provident Bank acknowledges
            that enhanced documentation of its loss mitigation efforts is warranted.
Comment 2   Provident Bank officials acknowledge that enhanced documentation supporting
            their loss mitigation efforts is needed to facilitate oversight and audit functions.
            To that end management stated that it has taken immediate actions to improve its
            supporting documentation. Specifically, Provident Bank stated it revised its
            delinquency notice cover letter that accompanies HUD’s required “Save Your
            Home: Tips to Avoid Foreclosure” brochure to include a specific reference to the
            brochure sent with the letter. In addition, Provident Bank’s stated it revised cover
            letter incorporates all of the required elements discussed in Mortgagee Letter
            2014-01. Provident Bank officials stated that the revised letter was sent to all
            delinquent mortgagors of FHA-insured loans as of September 30, 2015.
            Provident Bank officials stated that it revised its Availability of Housing
            Counseling Services Notice to be in accordance with Mortgagee Letter 2015-04.
            Provident Bank officials stated that it the revised Housing Counseling Services
            letter was sent to all delinquent mortgagors of FHA-insured loans as of September
            30, 2015. Provident Bank officials stated that they conducted a full review of the
            loans reported to HUD’s Single Family Default Monitoring System to ensure the
            accuracy and completeness of all reported loans and their respective statuses.
            Provident Bank maintains that it implemented various management oversight
            processes to ensure HUD requirements are followed throughout the loss
            mitigation process for ally FHA-insured loans. Provident Bank stated that it
            improved the coordination and retention of electronic and hardcopy records
            specific to delinquency and loss mitigation effort to ensure the servicing file
            contains a complete history of each loan in lieu of retaining such records on
            different databases.
            We agree with Provident Bank’s acknowledgement that enhanced documentation
            supporting their loss mitigation efforts is warranted to facilitate oversight and
            audit functions. We acknowledge Provident Bank’s efforts in taking immediate



                                              27
            action to improve its supporting documentation. Provident Bank’s revision of its
            delinquency notice to include a reference to HUD’s required brochure “Save your
            Home: Tips to Avoid Foreclosure” was a necessary corrective action measure. We
            agree with Provident Bank’s planned measures to correct the deficiencies
            affecting its reporting process by conducting a full review of the loans reported to
            HUD’s Single Family Default Monitoring System to ensure the accuracy and
            completeness of the data. Moreover, Provident Bank’s implementation of various
            management oversight processes to ensure compliance to HUD requirements is
            also a warranted corrective action measure. We also agree that Provident Bank
            needed to implement measures to improve the coordination and retention of
            records to ensure compliance with HUD requirements throughout the loss
            mitigation process for all FHA-insured loans. We recommend that Provident
            Bank share evidence supporting its entire corrective action efforts, once complete,
            with HUD during the audit resolution process since we were not able to verify
            whether Provident Bank implemented these measures.
Comment 3   Provident Bank indicated that their responses to the draft audit report include the
            Bank’s action plans related to each HUD OIG audit recommendation in response
            to each loan discussed in the draft audit report. Provident Bank officials reminded
            that the specific loan commentary and related documentation supporting its
            rebuttal of the deficiencies disclosed in Appendix D of the draft report were
            previously provided to the HUD OIG auditors. Provident Bank officials indicated
            that their formal written response dated October 8, 2015 includes the original
            individual loan commentary with amendments and reference the additional
            supporting documentation requested in our October 1, 2015 exit conference.
            We recognize that Provident Bank’s responses to the draft audit report dated
            October 8, 2015 includes the Bank’s action plans related to each recommendation
            in response to each loan discussed in the draft report. We also acknowledge
            receipt of the specific loan commentary and related documentation submitted by
            Provident Bank supporting its rebuttal for each of the deficiencies reported in the
            loans summaries detailed in Appendix D of the draft audit report.
Comment 4   Provident Bank disagrees with HUD OIG Report Recommendation 1A which
            calls for HUD to indemnify any loan which could amount to $696,185 in funds to
            be put to better use for seven loans in our sample, if it determines that forbearance
            procedures were inadequate. Provident Bank states that it provided adequate
            evidence that it implemented informal, formal, and special forbearance options for
            seven of the nine loans identified in Appendix D of the HUD OIG audit report.
            Further, Provident Bank states that the loss mitigation options implemented for
            the loans in our sample were consistent with HUD requirements.
            We acknowledge receipt of the additional documentation previously sent by
            Provident Bank in response to the deficiencies disclosed in Appendix D of the
            draft audit report, but we disagree that the documentation represents adequate




                                              28
support of informal, formal, and special forbearance options applied on seven of
the nine loans in our sample.
The correspondence and support Provident Bank provided generally contained the
same compliance issues noted during fieldwork. For example, the communication
letters do not support whether Provident Bank adequately communicated what
loss mitigation options were available to its borrowers that are in serious default
of their mortgages. Moreover, the letters do not list all of the options available in
HUD’s loss mitigation program such as the FHA-HAMP and the collection letters
do not explain the balances in arrears adequately such as principal and interest
breakdowns. Moreover, the letters and the automated collection note system that
generates them do not support whether required correspondence such as HUD
Loss Mitigation pamphlets were delivered to the borrowers in a timely manner.
Provident Bank’s collection systems lack an adequate time stamping function for
the letters submitted to its borrowers in serious default. Also, Provident Bank’s
accounts of borrowers declining to participate in the loss mitigation process could
not be corroborated with the documentation provided during and after fieldwork.
We disagree with Provident Bank’s position of proactively requesting and
evaluating the financial position of the borrowers. Provident Bank’s collection
notes documenting verbal communication with the borrowers indicate that its staff
would not discuss any loss mitigation options or encourage them to submit
financial data to be considered for any option. In addition, we disagree with
Provident Bank’s position that their records supports that borrowers chose not to
submit their financial records to be evaluated and assisted under HUD’s Loss
Mitigation program. Instead, Provident Banks collection records support that
Provident Bank’s staff would question the veracity of the borrower’s hardship
claims such as in FHA Case number 352-5154843, thus dissuading the borrowers
from providing the financial data needed to be considered for the appropriate loss
mitigation option. Mortgagee Letter 2000-05 states that the lender must
independently verify the financial information by obtaining a credit report and
any other forms of verification the lender deems appropriate. Also, 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. In
cases where the borrowers submitted financial information for Provident Bank’s
evaluation, Provident Bank did not prudently apply the best viable option such as
in FHA Case number 352-5273294. In this case, Provident Bank decided to
modify the mortgage which increased the borrower’s current mortgage from
$1,038 to $1,450 without conducting a proper budget or financial analysis to
determine if the borrower could manage the increased mortgage payment.
Provident Bank also did not apply the priority order of loss mitigation options for
the borrowers in FHA Case number 352-5273294. Provident Bank’s servicing
records and the borrowers’ employment status documentation indicate that
borrowers would have benefitted from a special forbearance as early as February
2006 when their mortgage was four months delinquent. Lastly, we disagree with
Provident Bank’s position that it is precluded from communicating or considering


                                  29
            any loss mitigation option to borrowers who are in bankruptcy protection.
            Mortgagee Letter 2000-05 Section D states that borrowers who have filed
            bankruptcy are not eligible for any loss mitigation option except partial claim.
            Borrowers who have had a bankruptcy discharged or dismissed may be
            considered for loss mitigation options including pre-foreclosure sale. Mortgagee
            Letter 2000-05 further clarifies that a lender may consider a mortgagor who has
            filed a petition in Bankruptcy Court under Chapter 13 for a partial claim, only
            after the approval of the Bankruptcy Court. If the mortgagor has filed a
            bankruptcy petition under Chapter 7, the lender must obtain Bankruptcy Court
            approval, and in addition, the mortgagor must reaffirm the debt. In the FHA case
            number 352-5881845, Provident Bank’s records indicate that it did not make an
            effort to consider the borrower for the partial claim even though the regulations
            allowed for it.
Comment 5   Provident Bank disagrees with HUD OIG Recommendation 1B. Provident Bank
            officials maintain that the submission of FHA insurance fund claims for the cases
            identified in the audit were in accordance with HUD’s requirements. For FHA
            Case Number 352-5288565, Provident Bank maintains it provided the borrower a
            loss mitigation package on February 21, 2012 and informed the borrower of the
            FHA loss mitigation options on many occasions between February and April
            2012. Provident Bank officials state that its records indicate that the borrower
            chose not to provide the requested financial information. The borrower
            subsequently brought the loan current through August 2013. However, the loan
            became delinquent again from August 2013 through September 2014. Provident
            Bank states that it was not until September 2014 that it received requested
            financial package from the borrower at which time loss mitigation waterfall
            requirements were addressed. Provident Bank maintains that its analysis resulted
            in a reasonable determination that the borrower did not qualify for loss mitigation
            since the borrower did not qualify for any of the available waterfall options.
            Provident Bank believes that it applied all the required loss mitigation actions for
            the borrower. Accordingly, Provident Bank believes that it complied with
            established requirements and submitted an eligible claim to HUD’s for the unpaid
            principal balance and related expenses for the property
            We disagree with Provident Bank’s position on FHA case number 352-5288565.
            Provident Bank’s collection history notes and letters on FHA case number 352-
            5288565 support it issued to the loss disclosed that the notification letter
            communicating the FHA loss mitigation options to the borrowers was issued on
            August 31, 2013 and not February 21, 2012 as indicated by the Bank. Provident
            Bank’s collection history notes document that the notification letters sent during
            the period of February 2012 through April 2012 informed the borrower that the
            mortgage was delinquent and advised the borrower to seek counseling from a list
            of HUD approved nonprofit organizations. However, the notification letters do
            not adequately communicate the loss mitigation options available to the borrowers
            in the priority order established by HUD. Although Provident Bank documented
            on the collection history notes on March 7, 2012 that the borrower received a loss


                                              30
            mitigation package, the notes do not corroborate Provident Bank’s position that
            the borrower chose not to provide the requested financial information.
            Consequently, Provident Bank did not document its loss mitigation evaluation for
            the borrowers prior to the 90 days of delinquency. Provident Bank reported to
            HUD through the Single Family Default Monitoring System that the mortgage
            was three months delinquent as of March 2012 while documenting in its records
            that the borrower did not receive any mortgage assistance.
            We find that Provident Bank’s position concerning FHA Case number #352-
            5288565 is unsubstantiated since it could not provide a copy of the loss mitigation
            package letter that was provided to the borrower on February 21, 2012 and could
            not corroborate that the borrower voluntarily chose not to provide the requested
            financial information.
Comment 6   Provident Bank disagrees with the report finding’s conclusion regarding FHA
            Case Number 352-5201415. Provident Bank states its records indicate that the
            borrower was provided a loss mitigation package on October 15, 2013 and
            informed of the FHA loss mitigation options on many occasions via letters
            containing HUD’s “Save Your Home” pamphlet and telephone conversations
            from December 2013 through May 2014. Provident Bank also maintained that its
            records indicate the borrower chose not to provide the requested financial
            information, and chose to list the property for sale and seek a deed in lieu of any
            loss mitigation option. As a result, Provident Bank did not perform an evaluation
            of forbearance options. However, Provident Bank officials maintain that they
            continued to communicate and work with the borrower throughout the foreclosure
            process to ensure the borrower was fully aware of all loss mitigation options.
            Provident Bank maintains that the borrower’s election to not pursue any of
            HUD’s loss mitigation options and her failure to submit financial information, a
            financial analysis could not be performed as required for each of the HUD’s loss
            mitigation options. Accordingly, Provident Bank believes that its claim and
            HUD’s subsequent payment of the claim in the amount of the unpaid principal
            balance and related expenses for the property was in accordance with established
            requirements and therefore eligible.
            We disagree with Provident Bank’s position related to FHA case number 352-
            5201415. Provident Bank’s servicing file and collection history notes do not
            support that it adequately informed the borrower about HUD’s Loss Mitigation
            program thereby limiting the borrower’s ability to make an informed decision on
            selecting a suitable loss mitigation option and providing Provident Bank with the
            financial data to determine eligibility for the program. Additional documentation
            provided by Provident Bank in response to the Appendix D loan summary do not
            support whether required correspondence such as HUD Loss Mitigation
            pamphlets were delivered to the borrower in a timely manner. Also, the original
            notification letters sent to the borrower that Provident Bank could not provide us
            until after the end of our fieldwork; 1) do not list all of the options available under
            HUD’s Loss Mitigation program such as the FHA-HAMP or in the priority order


                                               31
            outlined in program guidelines, 2) lacked references to required HUD Loss
            Mitigation pamphlets, and 3) lacked explanations of balances in arrears with
            breakdowns of principal, interest, and late fee amounts.
            As early as September 2013, the borrower communicated to Provident Bank that
            she would have difficulty making her mortgage payments because she was on
            disability and unemployed. Provident Bank’s statement that a loss mitigation
            package was delivered on October 15, 2013 could not be corroborated with the
            documentation provided by Provident Bank during or after our audit field work.
            By December 2013, the borrower was 5 months delinquent on her mortgage
            without receiving assistance from Provident Bank or under HUD’s Loss
            Mitigation program. The documentation we evaluated during fieldwork and after
            indicates that Provident Bank did not adequately inform and ultimately did not
            grant the borrower forbearance (informal, formal, or special) so she could recover
            from her personal and financial conditions as prescribed in HUD Handbook
            4330.1, REV-5, sections 8-1 and 8-3.
            Provident Bank indicates that the borrower chose not to provide the requested
            financial information but instead listed the property for sale, seeking to pursue the
            deed in lieu loss mitigation option. According to Mortgagee Letter 2000-05 and
            subsequent guidance, disposition options (pre-foreclosure sales and deeds in lieu
            of foreclosure) are available immediately upon default, if the cause of the default
            is incurable, i.e. the borrower has no realistic opportunity to replace the lost
            income or reduce expenses sufficiently to meet the mortgage obligation. Prior to
            proceeding to foreclosure, the Mortgagee must re-examine and re-evaluate the
            borrower’s financial condition and confirm that none of FHA’s other Loss
            Mitigation options could assist the mortgagor. In this case, Provident Bank did not
            make a determination whether the cause of the default was incurable, did not re-
            evaluate the borrower’s financial condition, did not confirm that none of HUD
            FHA’s other Loss Mitigation options could assist the borrower, and continued to
            pursue foreclosure on the property.
            Since Provident Bank did not properly establish HUD FHA priority order, and
            communicate all loss mitigation options, the borrower could not have chosen the
            best loss mitigation option available at the time. We, therefore, believe Provident
            Bank’s position on the claims that were paid by HUD is unsupported.
Comment 7   Provident Bank generally agrees with the audit report recommendation 1C.
            Provident Bank officials acknowledge that some improvement to its record
            retention of the servicing files is warranted. However, Provident Bank maintains
            that it properly executed HUD’s Loss Mitigation program as required and the
            evidence includes; 1) monthly notations explaining loss mitigation options, 2) loss
            mitigation analyses and whether the foreclosure option is warranted, and 3) the
            retention of electronic records demonstrated during the audit and permitted by
            HUD.



                                              32
Also, Provident Bank maintains it provided the loss mitigation options to the
borrowers, evaluated delinquent loans within the 90 day period required, followed
the priority order of loss mitigation options according to FHA’s guidelines and
documented the loss mitigation actions based on financial information obtained
from the borrowers. Provident Bank also recognizes that enhancement to its
record retention process is warranted. Provident Bank indicated that it has begun
the process of updating and enhancing servicing procedures pertaining to FHA
loans. Provident Bank stated that its Asset Recovery department is in the process
or has implemented its process enhancements such as; 1) revising its
“delinquency notice cover letter to specifically refer to “Save Your Home: Tips to
Avoid Foreclosure” brochure which it claims always accompanied the letter, 2)
updating the records storage system to further segregate and store the loss
mitigation letters within the master servicing file, 3) implementing a checklist and
review process to help ensure compliance, 4) developing and implementing a
management oversight checklist outlining loss mitigation procedures and periodic
review, 5) developing a management oversight checklist and periodic review for
default and loss mitigation reporting into HUD’s Single Family Default
Monitoring System to ensure completeness and accuracy, 6) updating its
pertinent policies and procedures to be completed by December 31, 2015, and 7)
providing ongoing training to its Asset Recovery and Loss Mitigation department
staff members as policies and procedures continue to be revised.
We agree with Provident Bank’s acknowledgement that improvements to its
record retention of the servicing files are needed. Presently, Provident Bank’s
automated collection note system does not provide an adequate record trail
supporting that the Bank is effectively communicating the features of HUD’s
Loss Mitigation program as required by federal regulations. The collection notes
do not fully describe whether Provident Bank representatives are adequately
communicating the loss mitigation options to its FHA borrowers verbally or
through written correspondence.
Provident Bank’s collection systems lack an adequate time stamping function
substantiating that notification letters were actually submitted and in a timely
manner to its FHA borrowers in serious default. Moreover, the notification letters
that Provident Bank purportedly sends out to its troubled FHA borrowers; 1) do
not list all of the options available in HUD’s Loss Mitigation program such as the
FHA-HAMP or in the priority order outlined in program guidelines, 2) lacked
references to required HUD Loss Mitigation information pamphlets, and 3) lacked
explanations of balances in arrears with breakdowns of principle, interest, and late
fee amounts. Therefore, we concluded that Provident Bank cannot adequately
support that it communicated and provided FHA loss mitigation options to the
borrowers, evaluated delinquent loans within the 90 day period required, followed
the priority order of loss mitigation options according to FHA’s guidelines and
documented the loss mitigation actions based on financial information obtained
from informed FHA borrowers.



                                  33
              We recommend that Provident Bank share any evidence supporting its corrective
              action efforts with HUD during the audit resolution process since we were not
              able to confirm whether these corrective measures and functions were adequately
              implemented.
Comment 8     Provident Bank agrees audit report recommendation 1D. Provident Bank
              indicated that revisions to enhance its loss mitigation policy and procedures are
              currently scheduled and/or in process and are expected to be fully completed by
              December 31, 2015, which will be made available to HUD for review at that time.
              We acknowledge Provident Bank’s proactive efforts to implement
              recommendation 1D of our audit report. Provident Bank currently has an internal
              loss mitigation policy that is intended to cover all loss mitigation activities of
              various agency insured loans including FHA loans. We agree that Provident Bank
              should revise its loss mitigation policy by including FHA-specific loss mitigation
              requirements that are missing.
Comment 9     Provident Bank agrees with audit report recommendation 2A. Provident Bank
              recognizes the impact on the FHA insurance fund and the need for complete and
              accurate information. Provident Bank maintains it has taken a two-step approach
              to implementing changes to improve the accuracy of its reporting to the Single
              Family Default Monitoring System (SFDMS). Provident Bank maintains that the
              first part included conducting a full validation of data entered in the SFDMS as of
              September 30, 2015 to the Provident Bank’s system of records and reporting
              requirements. Provident Bank maintains that it documented its validation of
              SFDMS data and will continue until such time that the automated reporting
              process discussed is fully implemented. Provident Bank maintains that the second
              part of the approach included implementing an automated data transfer from its
              loan/collections/loss mitigation system to the SFDM system, which when
              operational, will eliminate the data entry function presently performed by staff
              members and subject to human input errors.

              We agree with the two-step approach implemented by Provident Bank to improve
              the accuracy of its reporting to the Single Family Default Monitoring System
              (SFDMS). Proper and accurate reporting ensures HUD’s ability to collect and
              track significant events that occurred between the beginning of a default episode
              and its resolution. Correct data are crucial for ensuring that information used in
              metrics to assess servicer performance, such as tiered ranking, is accurate. We
              recommend that Provident Bank share any evidence supporting its corrective
              actions with HUD during the audit resolution process since we were not able to
              confirm that these corrective measures and functions were implemented.

Comment 10 Provident Bank maintains that it has taken steps to facilitate the transition to the
           automated data transfer by; 1) working with its core processor to understand and
           further develop the internal process to create and submit an automated file that is
           compatible with the SFDMS, 2) inquiring and opening discussions with HUD’s


                                                34
              EDI Gateway Support Team regarding the initiation of a project to facilitate this
              transition, and 3) engaging the services of a third party consultant to help oversee
              the project so as to help ensure the integrity of the project and
              accuracy/completeness of the process.
              We agree with Provident Bank’s efforts in transitioning to an automated data
              transfer process to reduce the occurrence of reporting errors in the Single Family
              Default Monitoring (SFDM) system.
Comment 11 Provident Bank requests clarification and guidance on implementing audit report
           recommendation 2B. Provident Bank indicated that corrections to the data
           inputted into the SFDM system can only be made in the reporting period in which
           they occurred or before the next report is made. Provident Bank officials maintain
           that Mortgagee Letter 2006-15, Section 14, “Correction of a Previously Reported
           Status Code” states that if error has been discovered, Status Code 25 (cancel)
           should be reported. The status code will advise HUD that the last status code
           reported was in error should be preserved as a historical record without having an
           effect on default sequence. The correct status code should then be reported to
           ensure that HUD has the correct status of the loan. Provident Bank maintains that
           its understanding of correcting errors in the Single Family Default Monitoring
           System is based on information received at various training sessions
           sponsored/conducted by HUD and was confirmed by a Program Director, Branch
           1 Reporting & Analytics at HUD National Servicing Center. Therefore,
           Provident Bank maintains that retroactive corrections to the specific errors
           identified in the draft audit report are not possible because the SFDMS does not
           allow adjustments to data occurring in prior reporting periods.
              We acknowledge Provident Bank’s position of not being able to retroactively
              correct data errors in prior reporting periods because of HUD computer system
              checks and controls currently in place. As previously discussed in the exit
              conference, we recommend that Provident Bank consult with HUD during the
              audit resolution process for technical assistance and the best available remedy to
              address the borrower default data reporting errors identified in the draft audit
              report.
Comment 12 Provident Bank generally agreed with the draft report’s explanation of SFDMS
           reporting errors for six servicing loans identified during the fieldwork phase with
           exception of FHA case numbers 352-5154843 and 352-5273294.

              For FHA case number 352-5154843, Provident Bank maintains that it correctly
              reported the loan as 2 months delinquent as of the January 31, 2015 Single Family
              Default Monitoring system reporting deadline. Specifically, Provident Bank
              maintains that the loan was 85 days past due as of January 26, 2015. However, the
              borrower made a mortgage payment on January 26, 2015, thereby making the
              loan due for its December 1, 2014 payment or 60 days delinquent. For FHA case
              number 352-5273294, the Provident Bank agrees with incorrect default status



                                                35
              observation for October to December 2011 and January 2012. But Provident Bank
              disagrees with the portion of the finding related to inaccurately reporting in
              FHA’s Single Family Data Management System and Neighborhood Watch that an
              FHA-HAMP trial modification plan was used before November 1, 2006, when
              this loss mitigation option was introduced in July 2009. Provident Bank’s entry of
              code 39 in the Single Family Default Monitoring System occurred in June 2012
              (for the May 31, 2012 cycle date) due to the borrower being approved for an
              FHA-HAMP trial modification plan. Also, Provident Bank believes that code 39
              had a different definition prior to its reintroduction in 2009. Accordingly,
              Provident Bank believes that the description for code 39 as shown on the
              Neighborhood Watch Early Warning system “FHA-HAMP Trial Modification
              Plan-Prior to 11/1/2006 used for Pre-Claim Enrolled” as reviewed during the
              audit is a combination of both uses of this code. Provident Bank maintains that it
              used the available system status codes correctly and therefore the draft report
              finding is incorrect.

              We agree with Provident Bank’s position on FHA case numbers 352-5154843,
              but not with Provident Bank’s position with FHA case number 352-5273294. For
              FHA case file 352-5154843, we acknowledge that the borrower was 2 months
              delinquent and the bank correctly reported the loan as 2 months delinquent as of
              the January 31, 2015 Single Family Default Monitoring system reporting
              deadline. We arrived at this conclusion for FHA case number 352-5154843 after
              evaluating the additional supporting documentation provided by Provident Bank
              in response to Appendix D of the draft report. The necessary revisions were made
              to the report and to the Appendix D loan summary for FHA case number 352-
              5154843 accordingly. As for FHA case number 352-5273294, we disagree with
              Provident Bank’s claim that it used the available system status codes correctly.

              Based on an evaluation of documentation provided by Provident Bank in response
              to Appendix D and HUD system records, we observed that Provident Bank cannot
              support that it approved the borrower for a FHA-HAMP trial modification plan
              that was active during the May 2012 through August 2012 reporting cycles.
              Consequently, Provident Bank provided documentation indicating that it
              approved a loan modification that would commence on September 1, 2012, which
              was reported appropriately by Provident Bank for the September 2012 reporting
              cycle with status code 98 and a delinquent status definition of “Reinstated after
              Loss Mitigation Intervention.” Therefore, we maintain our opinion that Provident
              Bank did not accurately report the default status for the borrower associated with
              FHA Case number 352-5273294.

Comment 13 Provident Bank maintains that its HUD quality control program for servicing
           FHA loans is modeled based on the HUD’s requirements for such programs, as
           those requirements are stated in HUD Handbook 4060.1, REV-2. Provident Bank
           also maintains that the conclusions reached in their quality control audit reports
           address the objectives and scope of the HUD quality control program, as those



                                               36
              stated in HUD Handbook 4060.1, REV-2. Provident Bank added that while its
              quality control audit reports did not identify the loans reviewed during its internal
              audits by loan or case number, the number of loans reviewed was identified and
              the workpapers recorded the loan number for each loan its staff reviewed during
              each quality control audit. Provident Bank stated that moving forward it will
              revise its quality control audit reports to identify by loan or case number of the
              loans reviewed during a quality control audit. Provident Bank explained that its
              quality control audit sample is drawn from the total population of FHA loans
              serviced by Provident Bank, comprising loans from its retained portfolio and the
              serviced for others portfolio. Provident Bank acknowledges that there were some
              periods where the sample did not include loans from the serviced for others
              portfolio because the population of that category of loans is small. Provident
              Bank indicated that as of June 30, 2014, its serviced for other FHA loan portfolio
              totaled 21 loans. Provident Bank indicated that going forward it will include at
              least some loans from the serviced for others portfolio in the quality control
              sample each period.

              We agree that Provident Bank’s written policy models the HUD requirements for
              FHA servicing. However, we find that Provident Bank’s needs to improve the
              implementation of its quality control program to increase its effectiveness in
              administrating HUD’s Loss Mitigation program. Adequate implementation of
              Provident Bank’s quality control program can improve the Bank’s likelihood of
              identifying and correcting program deficiencies. We disagree with Provident
              Bank’s assertion that its quality control review conclusions adequately address the
              review objectives.

              Although the objectives and scope of Provident Bank’s quality control reviews
              are outlined, the reports do not disclose or conclude whether these objectives were
              met. We agree with Provident Bank’s plans of changing its practice of not
              disclosing the FHA case numbers of the loans sampled in the quality control
              program reviews. Disclosing the FHA Case numbers provides a competent level
              of objectivity and authenticity to the quality control program reviews completed
              by Provident Bank’s internal audit division. We agree with Provident Bank’s
              plans to include at least some servicing loans from its portfolios in the quality
              control program review sample.


Comment 14 Provident Bank maintains that it has generally not engaged outside consultants to
           review its loss mitigation practices for FHA loans. However, Provident Bank
           occasionally engages outside consultants to review various other aspects of the
           Bank’s lending activities, and certain reviews reached aspects of Provident
           Bank’s loss mitigation practices for FHA loans despite the primary focus being on
           other aspects of Provident Bank’s lending activities. Provident Bank maintains
           that its internal audit department reviews the Bank’s loss mitigation practices for
           FHA loans when it performs the quality control plan.



                                                37
              We disagree with Provident Bank’s assertion that it generally does not engage
              outside consultants to review its loss mitigation practices for FHA loans.
              Provident Bank officials provided the HUD OIG audit team a copy of a
              compliance review report dated September 2014 on Provident Bank’s home
              mortgage lending compliance for its entire loss mitigation function. The
              compliance review report was prepared by an outside consultant and the
              objectives and scope includes a comprehensive listing of the compliance areas
              that would be reviewed such as the policies and procedures related to the loss
              mitigation function and assessed adequacy for compliance with regulatory
              requirements. The outside consultant also outlines in the scope of the review that
              it determined whether Provident Bank’s collection procedures are established to
              ensure early intervention with delinquent customers and compliance with
              regulatory guidelines.

Comment 15 Provident Bank acknowledges that its written internal loss mitigation policy is not
           specific to the FHA loans it administers. Provident Bank indicated that its current
           policy is intended to cover all loss mitigation activities including for FHA loans.
           Provident Bank added that it would review its current loss mitigation policy and
           recommend revisions to the policy as necessary for the policy to address those
           need FHA-specific loss mitigation requirements not already covered by its
           existing policy. Provident Bank indicated that it would complete its review and
           issue recommendations by December 31, 2015.

              We agree with Provident Bank’s acknowledgement that its written internal loss
              mitigation policy is not specific to FHA loans. We agree with Provident Bank’s
              decision to review its current loss mitigation policy and revise the policy as
              necessary to include FHA-specific loss mitigation requirements. It is our opinion
              that Provident Bank’s current policy is missing pertinent compliance elements
              that require adequate communication and application of the available loss
              mitigation options to FHA borrowers in serious default.




                                                38
    Appendix C
                          Schedule of Potential and Actual Loss to HUD
                     Original                         Potential     Actual Loss                        Loan status as of
                                Unpaid principal
FHA number           mortgage                          Loss to       to HUD4
                                      balance                                                            April 30, 2015
                     amount                             HUD3

351-4430918          $194,400              $150,895               $75,447                                 Delinquent
                                                                                                          Chapter 13
352-5091737          $312,400              $253,888              $126,944
                                                                                                          bankruptcy
352-5154843          $249,950              $198,671               $99,335                                 Delinquent
                                                                                                     First legal action to
352-5273294          $108,300              $149,318               $74,659                                 commence
                                                                                                         foreclosure
                                                                                                       Foreclosure sale
352-5276791          $175,550              $150,694               $75,347
                                                                                                            held
                                                                                                       Foreclosure sale
352-5288565          $119,700                                                      $109,234
                                                                                                            held
                                                                                                      Reinstatement by
                                                                                                      borrower without
352-5447273          $151,500              $127,663               $63,832
                                                                                                       loss mitigation
                                                                                                            claim
                                                                                                          Chapter 13
352-5881845          $371,185              $361,241              $180,621
                                                                                                          bankruptcy
                                                                                                      Property conveyed
352-5201415          $262,850                                                      $250,280          to insurer - claims A
                                                                                                          and B paid

  Totals            $1,945,835             $1,392,370            $696,185          $359,514




    3
              We classified $696,185 as funds to be put to better use (see appendix A). This amount is 50 percent of
              the $1,392,370 in unpaid principal balances for the 7 loans as of April 30, 2015. 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 third quarter of fiscal year
              2015 based on actual sales.
    4
              We classified $359,514 as ineligible (see appendix A)—the amounts paid to Provident Bank for claim A
              totaling $109,234, associated with FHA case number 352-5288565, and claims A and B totaling
              $250,280, paid for FHA case number 352-5201415.



                                                            39
Appendix D
                                         Loan Summaries


________________________________________________________________
FHA case number:              351-4430918
Lender loan number:           0055143510
Loan amount:                  $194,400
Unpaid principal balance:     $150,895
Months delinquent:            2
Status as of 04/30/2015:      Delinquent
Servicing deficiencies:

   Lack of evidence to support that timely loss mitigation options were given to homeowners.
   Lack of evaluation of delinquent loan before the fourth missed installment.
For FHA case number 351-4430918, Provident Bank could not provide documentation
supporting that it adequately informed the borrower of all available loss mitigation options as
required by Mortgagee Letter 2000-05. Provident Bank’s servicing file and collection history
notes did not support that it provided the homeowners with the required HUD PA 426-H
Pamphlet “How to Avoid Foreclosure” by the second month of delinquency as required by 24
CFR 203.602. Further, Provident Bank’s servicing files did not support that it had evaluated the
homeowners’ financials and loan status to determine what best mitigation options to apply.
Mortgagee Letter 2000-05 also states that lenders are required to inform borrowers of available
loss mitigation options and the availability of housing counseling within the second month of
delinquency. Provident Bank stated that it adequately informed the borrowers of HUD FHA’s
Loss Mitigation program, but it could not provide copies of the original loss mitigation package
letters sent to support their position. Provident Bank instead provided copies of its collection
system-generated batch letters, such as the loss mitigation package, early intervention, and
housing counseling letters that were sent to both conventional and FHA borrowers who were
delinquent on their mortgages. These batch letters did not adequately inform FHA borrowers
who were delinquent on their mortgages of the complete listing of available loss mitigation
options and did not allow the lender and borrower to find an alternative to foreclosure as required
by HUD Handbook 4330.1, REV-5, paragraph 7-11(A). Provident Bank stated that it included
the “Save Your Home” pamphlet required by Mortgagee Letter 2014-01 dated January 10, 2014
and previously applicable pamphlets with the loss mitigation package letter, but the letter did not
reference following the advice in the pamphlet.




                                                 40
Part N of Mortgagee Letter 2000-05’s Loss Mitigation program overview section requires the
lender to maintain in the claim review file evidence of compliance with all requirements of the
Loss Mitigation program as well as supporting documentation. The lender’s regular servicing
files should also contain evidence of compliance with the counseling, 90-day review, and other
requirements of the program for those loans that do not result in a claim.
HUD Handbook 4330.1, REV-5, paragraph 1-4(E), also requires that all servicing files be
retained for a minimum of the life of the mortgage plus 3 years, including cases resulting in a
claim filed with HUD. As of April 2015, the loan was 2 months delinquent. Due to the
incomplete communication of available loss mitigation options, the borrower’s mortgage will be
more delinquent over time, thus increasing the risk of potential unnecessary costs to be paid by
HUD in the event of a claim. The unpaid principal balance of the loan was $150,895.




                                                41
________________________________________________________________
FHA case number:              352-5091737
Lender loan number:           0055144844
Loan amount:                  $312,400
Unpaid principal balance:     $253,888
Months delinquent:            7
Status as of 04/30/2015:      Chapter 13 bankruptcy
Servicing deficiencies:

   Lack of evidence to support that timely loss mitigation options were given to homeowners.
   Lack of documentation showing that FHA’s loss mitigation priority order (special
    forbearance, loan modification, FHA-HAMP) was followed.
   Lack of documentation showing that financial information was evaluated for further
    consideration of the loss mitigation option.
For FHA case number 352-5091737, Provident Bank could not support that it adequately
informed the borrower about available FHA loss mitigation options. Provident Bank maintained
that it adequately informed the borrower of FHA’s Loss Mitigation program, but it could not
provide copies of the original loss mitigation package letters sent to the borrower to verify its
claim. Provident Bank’s servicing file and collection history notes did not support that it
provided the homeowners with the required HUD PA 426-H Pamphlet “How to Avoid
Foreclosure” by the second month of delinquency as required by 24 CFR 203.602. Further,
Provident Bank’s servicing files did not support that it had evaluated the homeowners’ financials
and loan status to determine what best mitigation options to apply. Provident Bank instead
provided copies of its collection system-generated batch letters, such as the loss mitigation
package, early intervention, and housing counseling letters that were sent to both conventional
and FHA borrowers who were delinquent on their mortgages. These batch letters did not
adequately inform FHA borrowers who were delinquent on their mortgages of the complete
listing of available loss mitigation options and did not allow the lender and borrower to find an
alternative to foreclosure as required by HUD Handbook 4330.1, REV-5, paragraph 7-11(A).
Provident Bank stated that it included the Save Your Home pamphlet required by Mortgagee
Letter 2014-01 dated January 10, 2014 and previously applicable pamphlets with the loss
mitigation package letter, but the letter did not reference following the advice in the pamphlet.
Mortgagee Letter 2000-05’s Loss Mitigation program overview section states that lenders are
required to inform borrowers of available loss mitigation options and the availability of housing
counseling within the second month of delinquency.
The servicing file also indicated that Provident Bank did not adequately evaluate the financial
information obtained from the borrower to determine the best loss mitigation option as required
by HUD Handbook 4330.1, REV-5, section 7-11. Specifically, Provident Bank rejected the



                                                 42
borrower’s request for a loan modification option on June 27, 2013, because the borrower’s
husband, the coborrower, was unemployed and the borrower’s employment income was low.
The loan file also indicated that at one point, the borrower and coborrower were both
unemployed. This condition would allow the borrower a special forbearance option. Part D of
the Mortgagee Letter 2000-05 special forbearance section requires lenders to exercise good
judgment to determine the borrower’s capacity to resume full monthly payments and reinstate
the loan.
Mortgagee Letters 2013-32 and 2012-22 state that after evaluating a delinquent mortgagor for
Informal and Formal Forbearance Plans, FHA’s Loss Mitigation Home Retention Options must
be considered in the following waterfall order: (1) Special Forbearances; (2) Loan Modifications;
and (3) FHA-HAMP. Although, the borrower’s financial records supported that she had a
verifiable loss of income due to unemployment, Provident Bank’s financial analysis concluded
that the borrower was ineligible for a special forbearance or a more permanent loss mitigation
option, such as a loan modification or FHA-HAMP as described in Mortgagee Letter 2012-22.
The borrower reapplied for loss mitigation at the beginning of 2014 and Provident Bank rejected
them on March 13, 2014 for submitting an incomplete loss mitigation package. The credit denial
letter did not specify why the loss mitigation package was incomplete. The borrower was under
Chapter 13 bankruptcy protection. Mortgagee Letter 2013-32 states that borrowers with an
active Chapter 7 or Chapter 13 bankruptcy case are eligible for FHA loss mitigation options to
the extent that such loss mitigation does not violate Federal bankruptcy laws or orders. The
borrower had a tenant living in her FHA-insured multifamily home, which would complicate
Provident Bank’s ability to convey the property to HUD after foreclosure and submission of a
claim to HUD. As of April 2015, the loan was 7 months delinquent. The unpaid principal
balance of the loan was $253,888.




                                                43
________________________________________________________________
FHA case number:               352-5154843
Lender loan number:            0055145575
Loan amount:                   $249,950
Unpaid principal balance:      $198,671
Months delinquent:             1
Status as of 04/30/2015:       Delinquent
Servicing deficiencies:

   Lack of evidence to support that timely loss mitigation options were given to homeowners.
   Lack of evaluation of loss mitigation options before the fourth missed installment.
   Lack of documentation showing that financial information was evaluated for further
    consideration of the loss mitigation option.


For FHA case number 352-5154843, Provident Bank’s servicing file and collection history notes
did not support that it provided the homeowners with the required HUD PA 426-H Pamphlet
“How to Avoid Foreclosure” by the second month of delinquency as required by 24 CFR
203.602. Further, Provident Bank’s servicing files did not support that it had evaluated the
homeowners’ financials and loan status to determine what best mitigation options to apply.
Provident Bank instead provided copies of its collection system-generated batch letters, such as
the loss mitigation package, early intervention, and housing counseling letters that were sent to
both conventional and FHA borrowers who were delinquent on their mortgages. These batch
letters did not adequately inform FHA borrowers who were delinquent on their mortgages of the
complete listing of available loss mitigation options and did not allow the lender and borrower to
find an alternative to foreclosure as required by HUD Handbook 4330.1, REV-5, paragraph 7-
11(A). Provident Bank stated that it included the Save Your Home pamphlet required by
Mortgagee Letter 2014-01 dated January 10, 2014 and previously applicable pamphlets with the
loss mitigation package letter, but the letter did not reference following the advice in the
pamphlet. Provident Bank did not obtain financial information in a timely manner for further
consideration of loss mitigation options as required by part H of Mortgagee Letter 00-05’s Loss
Mitigation program overview section, allowing the mortgage to become even more delinquent
over time, thus increasing the risk of potential unnecessary costs to be paid by HUD in the event
of a claim. The borrower was 85 days past due, or delinquent, on his mortgage as of January
2015 without a loss mitigation option offer, which could lead to a partial or foreclosure claim
paid by HUD. Part E of this section states that when no more than three full monthly
installments are due and unpaid, lenders must evaluate each defaulted loan and consider all loss
mitigation techniques to determine the most appropriate option.
In addition, Provident Bank did not provide support that it sent required notification letters to the
borrower. Part C, Default Counseling, of Mortgagee letter 2000-05’s early delinquency


                                                  44
servicing requirements section states that borrowers who receive counseling early are much more
likely to bring loans current. Part N, File Documentation, of Mortgagee Letter 2000-05’s general
program requirements section requires the lender to maintain in the claim review file evidence of
compliance with all requirements of the Loss Mitigation program as well as supporting
documentation, including all communication with any HUD office. The lender’s regular
servicing files should also contain evidence of compliance with the counseling, 90-day review,
and other requirements of the program for those loans that do not result in a claim. Many of the
documents referred to in the file notes were not contained in the files provided for review. HUD
Handbook 4330.1, REV-5, paragraph 1-4(E), requires that all servicing files be retained for a
minimum of the life of the mortgage plus 3 years, including cases resulting in a claim filed with
HUD. Additionally, Provident Bank established promised payments without completing a
financial analysis to determine whether the payment arrangements were realistic.
Part D, Financial Analysis, of Mortgage Letter 2000-05’s special forbearance section requires the
lender to assess the borrower’s ability to repay the default as described in part H of the general
program requirements section. In Provident Bank’s contact sheet notes for the month of October
2014, the borrower stated that he had a financial hardship but he would pay the mortgage
anyway. There were more entries in the collection notes indicating payment arrangements but
no indication that the borrower attempted to make the payments. The pattern of late payments,
contacts made by Provident Bank, and payment agreements continued for the next 3 months
without Provident Bank obtaining financial information from the borrower, which violated the
90-day review requirements in part E of Mortgagee Letter 2000-05’s Loss Mitigation program
overview section.
As of April 2015, the loan was 1 month delinquent. The unpaid principal balance on this loan
was $198,671.




                                                45
________________________________________________________________
FHA case number:              352-5273294
Lender loan number:           0055146040
Loan amount:                  $108,300
Unpaid principal balance:     $149,318
Months delinquent:            21
Status as of 04/30/2015:      First legal action to commence foreclosure
Servicing deficiencies:

   Lack of evidence to support that timely loss mitigation options were given to homeowners.
   Lack of documentation showing that FHA’s loss mitigation priority order (special
    forbearance, loan modification, FHA-HAMP) was followed.
   Inadequate reporting in the Single Family Default Monitoring System.


For FHA case number 352-5273294, Provident Bank’s servicing file and collection history notes
did not support that it provided the homeowners with the required HUD PA 426-H Pamphlet
“How to Avoid Foreclosure” by the second month of delinquency as required by 24 CFR
203.602. Further, Provident Bank’s servicing files did not support that it had evaluated the
homeowners’ financials and loan status to determine what best mitigation options to apply.
Provident Bank instead provided copies of its collection system-generated batch letters, such as
the loss mitigation package, early intervention, and housing counseling letters that were sent to
both conventional and FHA borrowers who were delinquent on their mortgages. These batch
letters did not adequately inform FHA borrowers who were delinquent on their mortgages of the
complete listing of available loss mitigation options and did not allow the lender and borrower to
find an alternative to foreclosure as required by HUD Handbook 4330.1, REV-5, paragraph 7-
11(A). Provident Bank stated that it included the Save Your Home pamphlet required by
Mortgagee Letter 2014-01 dated January 10, 2014 and previously applicable pamphlets with the
loss mitigation package letter, but the letter did not reference following the advice in the
pamphlet.
Also, Provident Bank could not support that it followed the required loss mitigation priority
order (special forbearance, mortgage modification, partial claim, FHA-HAMP) or selected the
best loss mitigation option for the borrowers as required by part F of Mortgagee Letter 2000-05’s
early delinquency servicing requirements section during the early stages of the borrowers’
default, which went back to July 2007. Additionally, the original letters sent to the borrowers
informing them of the available loss mitigation options could not be provided. Provident Bank
instead provided copies of batch letters generated and sent automatically to both conventional
and FHA borrowers that did not provide a complete list of the available loss mitigation options
available under FHA. Part N of Mortgagee Letter 2000-05’s general program requirements
section requires the lender to maintain in the claim review file evidence of compliance with all


                                                 46
requirements of the HUD’s Loss Mitigation program as well as supporting documentation,
including all communication with any HUD office.
The lender is also required to inform borrowers of the loss mitigation options available and the
availability of housing counseling within the second month of delinquency to prevent foreclosure
of their FHA-insured home. Provident Bank inaccurately reported in HUD’s Single Family
Default Monitoring System on October 2011, November 2011, December 2011, and January
2012 that a foreclosure sale was held for the subject property. However, public records indicated
that the borrower still lived in the property. A foreclosure sale on the property was scheduled for
May 19, 2015. Provident Bank is required to promptly and accurately report default data of its
borrowers in accordance with HUD Handbook 4330.1, REV-5, paragraph 7-8(A), and
Mortgagee Letter 2013-15. As of April 2015, the loan was 21 months delinquent. Provident
Bank also inaccurately reported in FHA’s Single Family Data Management System and
Neighborhood Watch that an FHA-HAMP trial modification plan was used before November 1,
2006, when this loss mitigation option was introduced in July 2009 with Mortgagee Letter 2009-
23. The unpaid principal balance on this loan was $149,318.




                                                 47
________________________________________________________________
FHA case number:             352-5276791
Lender loan number:          0055146810
Loan amount:                 $175,550
Unpaid principal balance:    $150,694
Months delinquent:           28
Status as of 04/30/2015:     Foreclosure sale held
Servicing deficiency:

   Inadequate reporting in the Single Family Default Monitoring System.
For FHA case number 352-5276791, Provident Bank reported no delinquent status updates
between October 2010 and May 2012 in HUD FHA’s Single Family Default Monitoring System.
It also inaccurately reported for May 2012 that the borrower had missed 20 mortgage payments
and his FHA loan was reinstated without a loss mitigation claim. Its records did not support that
the borrower missed 20 mortgage payments. Provident Bank is required to promptly and
accurately report default data of its borrowers in accordance with HUD Handbook 4330.1, REV-
5, Section 7-8. As of April 2015, the loan was 28 months delinquent. The unpaid principal
balance on this loan was $150,694.




                                                48
________________________________________________________________
FHA case number:              352-5288565
Lender loan number:           0055147044
Loan amount:                  $119,700
Unpaid principal balance:     $104,846
Months delinquent:            20
Status as of 04/30/2015:      Foreclosure sale held
Servicing deficiencies:

   Lack of evidence to support that timely loss mitigation options were given to homeowners.
   Lack of evaluation of loss mitigation options before the fourth missed installment.
   Lack of documentation showing that FHA’s loss mitigation priority order (special
    forbearance, loan modification, FHA-HAMP) was followed.


For FHA case number 352-5288565, Provident Bank’s servicing file and collection history notes
did not support that it provided the homeowners with the required HUD PA 426-H Pamphlet
“How to Avoid Foreclosure” by the second month of delinquency as required by 24 CFR
203.602. Further, Provident Bank’s servicing files did not support that it had evaluated the
homeowners’ financials and loan status to determine what best mitigation options to apply.
Provident Bank instead provided copies of its collection system-generated batch letters, such as
the loss mitigation package, early intervention, and housing counseling letters that were sent to
both conventional and FHA borrowers who were delinquent on their mortgages. These batch
letters did not adequately inform FHA borrowers who were delinquent on their mortgages of the
complete listing of available loss mitigation options and did not allow the lender and borrower to
find an alternative to foreclosure as required by HUD Handbook 4330.1, REV-5, paragraph 7-
11(A). Provident Bank stated that it included the Save Your Home pamphlet required by
Mortgagee Letter 2014-01 dated January 10, 2014 and previously applicable pamphlets with the
loss mitigation package letter, but the letter did not reference following the advice in the
pamphlet.
Provident Bank did not obtain financial information in a timely manner and did not adequately
inform the borrower of all FHA loss mitigation options available. Provident Bank reported
through FHA Connection in March 2012 that the borrower was 3 months delinquent on her
mortgage without providing her with a loss mitigation option, such as special forbearance. The
borrower contacted Provident Bank on January 27, 2012, and March 20, 2012, and reported that
she had lost her job and her unemployment benefits had run out. Provident Bank’s collection
notes documented that on March 23, 2012, and June 21, 2012, it sent loss mitigation letters to the
borrower. However, it could not provide copies of the original loss mitigation package letters
sent to the borrower, and the collection history notes did not indicate that a special forbearance
option was communicated or made available to the borrower.


                                                 49
Mortgagee Letter 2000-05’s Loss Mitigation program overview section states that lenders are
required to inform borrowers of available loss mitigation options and evaluate each delinquent
loan no later than the 90 days after delinquency to determine which loss mitigation option is
appropriate. Additionally, part N of this section requires the lender to maintain in the claim
review file evidence of compliance with all requirements of the Loss Mitigation program as well
as supporting documentation, including all communication with any HUD office. The lender’s
regular servicing files should also contain evidence of compliance with the counseling, 90-day
review, and other requirements of the program for those loans that do not result in a claim. As a
result of the noncompliance, the borrower’s mortgage became more delinquent over time, thus
decreasing the likelihood that the borrower would receive a loan modification or FHA-HAMP,
since arrearages were added to the unpaid balances during Provident Bank’s evaluation, and
increasing the risk of potential unnecessary costs to be paid by HUD in the event of a claim. Part
E of Mortgagee Letter 2000-05’s general program requirements section states that when no more
than three full monthly installments are due and unpaid, lenders must evaluate each defaulted
loan and consider all loss mitigation techniques to determine the most appropriate option. Due to
the lack of communication of available loss mitigation options, as of April 2015, the loan was 20
months delinquent.
As a result, the borrower had submitted her financial information for review, and Provident Bank
had initiated foreclosure proceedings. Provident Bank rejected the borrower’s application on
September 12, 2014, on the basis that she did not qualify for a loss mitigation option and that
Provident Bank would continue with the foreclosure process. Provident Bank reported that a
foreclosure sale was held on January 2015 on the borrower’s FHA-insured home and submitted a
“claim A,” which included principal and interest until May 6, 2015. The claim was processed by
HUD through FHA Connection on May 7, 2015. HUD FHA paid Providence Bank’s claim A of
$109,234 on May 10, 2015. We considered this amount to be ineligible because a special
forbearance option was not considered or made available to the borrower and Provident Bank
could not support that it adequately attempted to assist the borrower with the most appropriate
loss mitigation option.




                                                50
________________________________________________________________
FHA case number:              352-5447273
Lender loan number:           0055148709
Loan amount:                  $151,500
Unpaid principal balance:     $127,663
Months delinquent:            0
Status as of 04/30/2015:      Reinstated by borrower without loss mitigation claim
Servicing deficiencies:

   Lack of evidence to support that timely loss mitigation options were given to homeowners.
   Lack of evaluation of loss mitigation options before the fourth missed installment.
   Lack of documentation showing that FHA’s loss mitigation priority order (special
    forbearance, loan modification, FHA-HAMP) was followed.
   Lack documentation that the loss mitigation action was based on financial reviews
    evaluation.
For FHA case number 352-5447273, Provident Bank’s servicing file and collection history notes
did not support that it provided the homeowners with the required HUD PA 426-H Pamphlet
“How to Avoid Foreclosure” by the second month of delinquency as required by 24 CFR
203.602. Provident Bank could not provide copies of the original letters it claimed were sent to
the borrower informing her of all available options. Provident Bank instead provided copies of
its collection system-generated batch letters, such as the loss mitigation package, early
intervention, and housing counseling letters that were sent to both conventional and FHA
borrowers who were delinquent on their mortgages. These batch letters do not adequately
inform FHA borrowers who were delinquent on their mortgages of the complete listing of
available loss mitigation options and did not allow the lender and borrower to find an alternative
to foreclosure as required by HUD Handbook 4330.1, REV-5, paragraph 7-11(A). Provident
Bank claimed that it included the Save Your Home pamphlet required by Mortgagee Letter
2014-01 dated January 10, 2014 and previously applicable pamphlets with the loss mitigation
package letter, but the letter did not reference following the advice in the pamphlet.
The borrower was 210 days, or 7 months, delinquent before the automated collection history
notes indicated that a notification letter was sent to the borrower. Loss mitigation options were
not offered or communicated within 2 months of the borrower’s delinquency as required by part
C of Mortgagee Letter 2000-05’s early delinquency servicing requirements section. This section
states that lenders are required to inform borrowers of available loss mitigation options and the
availability of housing counseling within the second month of delinquency. HUD Handbook
4330.1, REV-5, paragraph 1-4(E), requires that all servicing files be retained for a minimum of
the life of the mortgage plus 3 years, including cases resulting in a claim filed with HUD.
Sample letters provided by Provident Bank did not include the complete HUD loss mitigation



                                                 51
priority order (special forbearance, mortgage modification, partial claim, and FHA-HAMP)
applicable to the borrower at the time.
Part N of Mortgagee Letter 2000-05’s Loss Mitigation program overview section requires the
lender to maintain in the claim review file evidence of compliance with all requirements of the
Loss Mitigation program as well as supporting documentation. Provident Bank obtained an
agreement to pay from the borrower without determining whether the payments were feasible as
required by part H of Mortgagee Letter 2000-05’s general program requirements section. Loss
mitigation documents indicated that the borrower contacted Provident Bank on April 14, 2011,
and inquired about a loan modification. Three months later on July 13, 2011, Provident Bank
returned borrower’s call regarding the loan modification. The borrower continued to be
delinquent on her mortgage, and Provident Bank and the borrower discussed an agreement to pay
the arrearage without financial documentation.
Part D, Financial Analysis, of Mortgagee Letter 2000-05’s special forbearance section also
requires the lender to assess the borrower’s ability to repay the default as described in part H
above. The borrower did not comply with the agreement, and there was no evidence that a
financial analysis was performed. Provident Bank’s collection history note entries indicated that
Provident Bank did not implement adequate loss mitigation actions and procedures. Part H of
Mortgagee Letter 2000-05’s general program requirements section states that regardless of how
the borrower’s financial information was secured, the lender must independently verify the
financial information by obtaining a credit report and any other form of verification the lender
deems appropriate. Also, the lender must analyze the borrower’s current and future ability to
meet the monthly mortgage obligations. As of April 2015, the loan had been reinstated without a
loss mitigation option for a third time in the last 3 years. The unpaid balance on this loan was
$127,663.




                                                52
________________________________________________________________
FHA case number:              352-5881845
Lender loan number:           0055151199
Loan amount:                  $371,185
Unpaid principal balance:     $361,241
Months delinquent:            48
Status as of 04/30/2015:      Chapter 13 bankruptcy
Servicing deficiencies:

   Lack of evidence to support that timely loss mitigation options were given to homeowners.
   Lack of evaluation of loss mitigation options before the fourth missed installment.
   Inadequate reporting to the Single Family Default Monitoring System.
For FHA case number 352-5881845, Provident Bank’s servicing file and collection history notes
did not support that it provided the homeowners with the required HUD PA 426-H Pamphlet
“How to Avoid Foreclosure” by the second month of delinquency as required by 24 CFR
203.602. Provident Bank could not provide copies of the original letters it claimed were sent to
the borrower informing her of all available options. Provident Bank instead provided copies of
its collection system-generated batch letters, such as the loss mitigation package, early
intervention, and housing counseling letters that were sent to both conventional and FHA
borrowers who were delinquent on their mortgages. These batch letters did not adequately
inform FHA borrowers who were delinquent on their mortgages of the complete listing of
available loss mitigation options and did not allow the lender and borrower to find an alternative
to foreclosure as required by HUD Handbook 4330.1, REV-5, paragraph 7-11(A). Provident
Bank claimed that it included the Save Your Home pamphlet required by Mortgagee Letter
2014-01 dated January 10, 2014 and previously applicable pamphlets with the loss mitigation
package letter, but the letter did not reference following the advice in the pamphlet.
Provident Bank could not support that it informed the borrower of all available loss mitigation
options in a timely manner during 2010 when the borrower initially defaulted on three mortgage
payments. Mortgagee Letter 2000-05’s Loss Mitigation program overview section states that
lenders are required to inform borrowers of available loss mitigation options and the availability
of housing counseling within the second month of delinquency. Also, the lender must evaluate
each delinquent loan no later than 90 days after delinquency to determine which loss mitigation
option is appropriate. Part N of Mortgagee Letter 2000-05’s Loss Mitigation program overview
section requires the lender to maintain in the claim review file evidence of compliance with all
requirements of the Loss Mitigation program as well as supporting documentation, including all
communication with any HUD office. The lender’s regular servicing files should also contain
evidence of compliance with the counseling, 90-day review, and other requirements of the
program for those loans that do not result in a claim.



                                                 53
HUD Handbook 4330.1, REV-5, paragraph 1-4(E), also requires that all servicing files be
retained for a minimum of the life of the mortgage plus 3 years, including cases resulting in a
claim filed with HUD. The borrower filed for Chapter 13 bankruptcy protection and had missed
10 additional mortgage payments by October 2011. Provident Bank allowed the mortgage to fall
deeper into default without actively pursuing loss mitigation efforts in accordance with FHA
guidelines. Provident Bank did not evaluate the borrower’s financial records for loss mitigation
until early 2013. As a result, it rejected the borrower’s application because of the borrower’s
insufficient income and an additional FHA mortgage, which was also in default. Provident
Bank’s automated collection history records indicated that the bank’s foreclosure efforts were
delayed because of U.S. Bankruptcy Court proceedings. The borrower reapplied for loss
mitigation during 2014. On September 15, 2014, Provident Bank once again rejected the
borrower’s application because the loss mitigation package submitted to the bank was
incomplete. The letter did not specify why the loss mitigation package was incomplete. At this
point, the borrower had missed 44 mortgage payments.
To further delay Provident Bank’s ability to foreclose on the borrower’s FHA-insured home, the
borrower filed for Chapter 7 bankruptcy protection in October 2014 and then Chapter 13 for the
second time. Mortgagee Letter 2013-32 states that borrowers with an active Chapter 7 or
Chapter 13 bankruptcy case are eligible for FHA loss mitigation options to the extent that such
loss mitigation does not violate Federal bankruptcy laws or orders. Provident Bank also did not
report monthly default status updates for the borrower from January to October 2011 in the
Single Family Default Monitoring System. This timeframe was especially important to report
since the borrower’s missed mortgage payments accelerated from 3 to 13 missed payments
during this period. Provident Bank is required to promptly and accurately report default data on
its lenders by HUD Handbook 4330.1, REV-5, Section 7-8. As of April 2015, the loan was 48
months delinquent. The unpaid mortgage balance for this loan was $361,241.




                                                54
________________________________________________________________
FHA case number:              352-5201415
Lender loan number:           0055143510
Loan amount:                  $262,850
Unpaid principal balance:     $219,955
Months delinquent:            17
Status as of 04/30/2015:      Property conveyed to insurer


Servicing deficiencies:

      Lack of evidence to support that timely loss mitigation options were given to
       homeowners.
      Lack of evaluation of loss mitigation options before the fourth missed installment.
For FHA case number 352-5201415, Provident Bank’s servicing file and collection history notes
did not support that it provided the homeowners with the required HUD PA 426-H Pamphlet
“How to Avoid Foreclosure” by the second month of delinquency as required by 24 CFR
203.602. Provident Bank could not provide copies of the original letters it stated were sent to the
borrower informing her of all available options. Provident Bank instead provided copies of its
collection system-generated batch letters, such as the loss mitigation package, early intervention,
and housing counseling letters that were sent to both conventional and FHA borrowers who were
delinquent on their mortgages. These batch letters did not adequately inform FHA borrowers
who were delinquent on their mortgages of the complete listing of available loss mitigation
options and did not allow the lender and borrower to find an alternative to foreclosure as required
by HUD Handbook 4330.1, REV-5, paragraph 7-11(A). Provident Bank stated that it included
the Save Your Home pamphlet required by Mortgagee Letter 2014-01 dated January 10, 2014
and previously applicable pamphlets with the loss mitigation package letter, but the letter did not
reference following the advice in the pamphlet.
Provident Bank could not support that it adequately informed the borrower about available FHA
loss mitigation options. Mortgagee Letter 2000-05’s Loss Mitigation program overview section
states that lenders are required to inform borrowers of available loss mitigation options and the
availability of housing counseling within the second month of delinquency. Provident Bank
could not provide the original letters submitted to the borrower to inform her of the loss
mitigation options available to prevent foreclosure of her home. HUD Handbook 4330.1, REV-
5, paragraph 1-4(E), requires that all servicing files be retained for a minimum of the life of the
mortgage plus 3 years, including cases resulting in a claim filed with HUD. As early as
September 2013, the borrower communicated to Provident Bank that she was on disability and
would have difficulty making her mortgage payments and she had no earned income. By
December 2013, the borrower was 5 months delinquent on her mortgage without receiving



                                                 55
assistance from Provident Bank. The documentation indicated that Provident Bank did not grant
the borrower a forbearance (informal, formal, or special) so she could recover from her personal
and financial conditions as required by HUD Handbook 4330.1, REV-5, sections 8-1 and 8-3.
Also, part E of Mortgagee Letter 2000-05’s general program requirements section states that
when no more than three full monthly installments are due and unpaid, lenders must evaluate
each defaulted loan and consider all loss mitigation techniques to determine the most appropriate
option. At the beginning of August 2014, the borrower vacated or abandoned the property, and
Provident Bank continued with foreclosure proceedings.
Provident Bank reported that the foreclosure sale was held during November 2014. It submitted
a claim for the unpaid principal of the loan plus the interest, on December 26, 2014 The claim
was processed by HUD through FHA Connection on December 30, 2014. Provident Bank
submitted a second claim for escrow items such as property taxes, insurance, and other fees on
May 8, 2015, which was processed through FHA Connection on May 11, 2015.
HUD FHA paid Provident Bank’s insurance claim of $250,280. We considered this amount to
be ineligible because Provident Bank could not support that it adequately assisted the borrower
with loss mitigation options.




                                                56
Appendix E
                                        Criteria
                           Finding 1 Including Appendix D
  Loss mitigation    Regulations at 24 CFR 203.605(a) state, “Documentation must be
     general         maintained for the initial and all subsequent evaluations and resulting
  documentation      loss mitigation actions.”
                     HUD Handbook 4330.1, REV-5, section 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 notate this information in its records.
                     Mortgagee Letter 2000-05 requires the lender to maintain in the
                     claim review file evidence of compliance with all requirements of the
                     Loss Mitigation program as well as supporting documentation,
                     including all communication with any HUD office.
                     HUD Handbook 4330.1, REV-5, paragraph 1-4(E), requires that all
                     servicing files be retained for a minimum of the life of the mortgage
                     plus 3 years, including cases resulting in a claim filed with HUD.
 Early delinquency   Mortgagee Letter 2000-05 states that at a minimum, the lender must
     servicing       provide the borrower with a copy of the HUD pamphlet PA 426-H,
   requirements      May 19, 1997, How To Avoid Foreclosure, no later than the end of the
                     second month of delinquency (24 CFR 203.602). Note: As of
                     February 10, 2014, the PA-426-H pamphlet is obsolete.
                     Mortgagee Letter 2014-01. The purpose of this mortgagee letter is to
                     notify lenders that the How To Avoid Foreclosure brochure, HUD-
                     PA-426, has been replaced. The new brochure is Save Your Home:
                     Tips To Avoid Foreclosure, HUD-2008-5-FHA, which is to be sent
                     with a cover letter to delinquent borrowers no earlier than the 32nd day
                     of a delinquency but no later than the 60th day according to 24 CFR
                     203.602. This brochure includes information on the revised loss
                     mitigation tools available for delinquent homeowners with FHA-
                     insured loans.




                                           57
   Loss mitigation       Mortgagee Letters 2013-32 and 2012-22 state that after evaluating a
   priority order        delinquent borrower for informal and formal forbearance plans, FHA’s
  (waterfall) home       loss mitigation home retention options must be considered in the
     retention           following order: (1) special forbearances, (2) loan modifications, and
                         (3) 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.”

  Evaluate for loss      Regulations at 24 CFR 203.605(a) state, “Before four full monthly
mitigation on a timely   installments due on the mortgage have become unpaid, the mortgagee
         basis           shall evaluate on a monthly basis all of the loss mitigation
                         techniques.” Based upon such evaluations, the lender must take the
                         appropriate loss mitigation action.
                         Mortgagee Letter 2000-05 requires that no later than when three full
                         monthly installments are due and unpaid, lenders must evaluate each
                         defaulted loan and consider all loss mitigation techniques to determine
                         which, if any, are appropriate (24 CFR 203.605).
    Evaluation of        Mortgagee Letter 2000-05 states that regardless of how the
financial information    borrower’s financial information was secured, the lender must
                         independently verify the financial information by obtaining a credit
                         report and any other forms of verification the lender deems
                         appropriate. 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.
  Loss mitigation        HUD Handbook 4330.1, REV-5, paragraph 9-3, states,
 options considered      “Foreclosure should be considered only as a last resort and shall not be
                         initiated until all other relief options have been exhausted.”
  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: preforeclosure sale, deed-in-lieu.




                                               58
                                          Finding 2
Verification of data    Mortgagee Letter 2003-17 states that the data contained in HUD’s
                        Single Family Insurance System regarding a lender’s FHA-insured
                        portfolio must be accurate. To assist lenders in verifying and
                        updating the data in HUD’s systems, this letter reviews several of the
                        data submission requirements and processes, restates 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 states that all lenders were cautioned that
                        they must complete a reconciliation of their FHA-insured portfolio.
                        Explanation of Portfolio Data Reconciliation, National Servicing
                        Center Letter, dated 5/12/14, 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 a lender’s servicing system with a list from HUD’s
                        system of record.
Single Family Default   HUD Handbook 4330.1, REV-5, paragraph 7-8(A), states, “Prompt
 Monitoring System      and accurate reporting by mortgagees is extremely important in
     data entry         providing HUD with an up-to-date account of the status and trends of
                        HUD-insured mortgages. This reporting serves as an indicator of the
                        effectiveness of origination and servicing activities, and the potential
                        risk to the insurance funds.”
                        Mortgagee Letter 2013-15 states that lenders are reminded 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, including 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.”




                                             59
                                  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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