oversight

CitiMortgage, Inc., O'Fallon, MO, Improperly Filed for FHA-HAMP Partial Claims Before Completing the Loan Modifications and Reinstating the Loans

Published by the Department of Housing and Urban Development, Office of Inspector General on 2018-03-05.

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

           CitiMortgage, O’Fallon, MO
              Partial Claims Loss Mitigation Option




Office of Audit, Region 7         Audit Report Number: 2018-KC-1001
Kansas City, KS                                        March 5, 2018
To:            Gisele Roget, Deputy Assistant Secretary for Single Family Housing, HU
               //signed//
From:          Ronald J. Hosking, Regional Inspector General for Audit, 7AGA
Subject:       CitiMortgage, Inc., O’Fallon, MO, Improperly Filed for FHA-HAMP Partial
               Claims Before Completing the Loan Modifications and Reinstating the Loans




Attached is the U.S. Department of Housing and Urban Development (HUD), Office of Inspector
General’s (OIG) final results of our review of CitiMortgage’s processing of partial claims.
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 website. 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
913-551-5870.
                      Audit Report Number: 2018-KC-1001
                      Date: March 5, 2018

                      CitiMortgage, Inc., O’Fallon, MO, Improperly Filed for FHA-HAMP Partial
                      Claims Before Completing the Loan Modifications and Reinstating the Loans



Highlights

What We Audited and Why
We selected CitiMortgage Inc. for review based on its volume of partial claims among lenders
located in the St. Louis metropolitan area. During the preliminary phase of the audit, we found
instances in which CitiMortgage improperly processed partial claims related to loan
modifications because it did not reinstate the mortgage delinquency to zero. We decided to focus
our audit on partial claims that potentially did not result in reinstating the loan delinquency. Our
audit objective was to determine whether CitiMortgage filed for partial claims only after
completing the loan modifications and reinstating the loans.

What We Found
CitiMortgage improperly filed for 66 partial claims before completing the loan modifications and
reinstating the loans. The loans remained delinquent, and CitiMortgage later foreclosed on these
properties, approved them to sell in preforeclosure sales, or assigned the loans to the U.S.
Department of Housing and Urban Development (HUD). The Federal Housing Administration
insurance fund paid out more than $1.7 million for these improper partial claims, including the
lender incentive fees. CitiMortgage had repaid $722,893 of these claims before our audit.

What We Recommend
We recommend that HUD’s Deputy Assistant Secretary for Single Family Housing require
CitiMortgage to (1) repay HUD for improperly filed partial claims and incentive fees totaling
more than $1 million, (2) work with HUD to ensure the release of the liens on the 66 properties
with improper partial claims, and (3) perform an internal review of all FHA-HAMP partial
claims that were combined with loan modifications to determine their eligibility and report the
results to HUD for the repayment of improperly filed partial claims.
Table of Contents
Background and Objective......................................................................................3

Results of Audit ........................................................................................................4
         Finding: CitiMortgage Improperly Filed for Partial Claims ...................................... 4

Scope and Methodology ...........................................................................................6

Internal Controls ......................................................................................................7

Appendixes ................................................................................................................8
         A. Schedule of Questioned Costs .................................................................................... 8

         B. Auditee Comments and OIG’s Evaluation ............................................................... 9

         C. Criteria ....................................................................................................................... 11

         D. Partial Claims Case Details ...................................................................................... 13




                                                                     2
Background and Objective
CitiMortgage is a lender located at 1000 Technology Drive in O’Fallon, MO. CitiMortgage
received approval from the Federal Housing Administration (FHA) in May 1981 and currently
operates five branch offices in five States. CitiMortgage announced in January 2017 that it
planned to stop loan servicing operations by the end of 2018.
FHA provides mortgage insurance on loans made by FHA-approved lenders throughout the
United States and its territories. It is the largest insurer of mortgages in the world, insuring more
than 41 million loans since its inception in 1934. FHA mortgage insurance provides lenders with
protection against losses as the result of homeowners defaulting on their mortgage loans. The
lenders bear less risk because FHA will pay a claim to the lender in the event of a homeowner’s
default.
The FHA-Home Affordable Modification Program (FHA-HAMP) was authorized by the Helping
Families Save Their Home Act of 2009. FHA-HAMP is a loss mitigation option, which uses a
partial insurance claim, combined or separate from a loan modification, to allow the mortgage to
be reinstated by establishing an affordable monthly payment and providing for principal
deferment as needed. A promissory note must be executed in the name of the U.S. Department
of Housing and Urban Development (HUD) Secretary, and a subordinate mortgage must be
obtained and recorded, creating a lien on the property. A partial claim is FHA’s reimbursement
of a lender advance of funds on behalf of the borrower in an amount necessary to assist in
reinstating the delinquent mortgage. The program allows lenders to receive a $500 incentive fee
for the successful completion of a partial claim. The Office of Single Family Housing
administers the FHA-HAMP program.
Between October 1, 2013, and September 30, 2017, CitiMortgage executed nearly 7,000 partial
claims totaling more than $200 million.

                                        Total amount partial          Total number of partial
        Federal fiscal year
                                               claims                         claims
                2014                         $82,124,569                         3,237
                2015                          69,412,596                         2,221
                2016                           33,368,616                         931
                2017                           19,500,468                         591

               Totals                        204,406,249                         6,980


Our audit objective was to determine whether CitiMortgage filed for partial claims only after
completing the loan modifications and reinstating the loans.



                                                  3
Results of Audit

Finding: CitiMortgage Improperly Filed for Partial Claims
CitiMortgage improperly filed for 66 partial claims before completing the loan modifications and
reinstating the loans. This condition occurred because CitiMortgage did not have adequate
policies and procedures for partial claims. As a result, the FHA insurance fund paid out more
than $1.7 million for these 66 improper partial claims, including the lender incentive fees.
Improperly Filed Partial Claims
CitiMortgage improperly filed for partial claims before completing the loan modifications and
reinstating the loans. It filed 66 improper partial claims out of a sample of 68 loans that
appeared not to have been reinstated (see Scope and Methodology). HUD requires lenders that
are implementing the partial claim option to advance funds on behalf of a borrower in an amount
necessary to reinstate a delinquent loan. After the reinstatement, the lender will file a partial
claim for the amount of the advance plus its incentive fee (see appendix C). CitiMortgage
improperly processed the partial claims before finalizing the related loan modifications for the
FHA-HAMP loans. The partial claims, in conjunction with modifications, would have cured the
delinquency. Since the loan modifications were not completed, the loans remained delinquent.
CitiMortgage later foreclosed on these properties, approved them to sell in preforeclosure sales,
or assigned the loans to HUD.
Inadequate Policies and Procedures
CitiMortgage did not have adequate policies and procedures to ensure that the FHA-HAMP
partial claims, combined with loan modifications, resulted in curing the loans’ delinquency. At
the beginning of our audit period, it had two separate processes for FHA-HAMP partial claims
and loan modifications. It would process and file for the partial claims first and then finalize the
loan modifications. This process allowed CitiMortgage to receive its insurance claims but also
allowed loans to remain delinquent if the loan modifications failed. In June 2016, CitiMortgage
updated its written policies and procedures to require parallel completion of partial claims and
loan modifications. All of the improper partial claims included in the audit sample were
processed before this policy change.
HUD Payments for Improper Partial Claims
The FHA insurance fund paid out more than $1.7 million for these 66 improper partial claims,
including the lender incentive fees. Of the 66 improperly filed partial claims, CitiMortgage had
reimbursed the FHA insurance fund for 26 partial claims totaling $722,893, including the
incentive fees, except for 2 incentive fees totaling $1,000. It had not repaid the FHA insurance
fund for 40 improperly filed partial claims and incentive fees totaling more than $1 million (see
appendix D). In addition, the properties had liens placed for these ineligible partial claims that
are the responsibility of CitiMortgage rather than the homeowners.




                                                  4
Recommendations
We recommend that the Deputy Assistant Secretary for Single Family Housing require
CitiMortgage to

       1A.    Repay HUD for improperly filed partial claims and incentive fees totaling
              $1,053,688.

       1B.    Work with HUD to ensure the release of the liens on the 66 properties with
              improper partial claims.

       1C.    Perform an internal review of all FHA-HAMP partial claims that were combined
              with loan modifications to determine their eligibility and report the results to
              HUD for repayment of improperly filed partial claims.




                                               5
Scope and Methodology
We performed our audit work between October 2017 and January 2018. We performed our
onsite work at CitiMortgage’s office located at 1000 Technology Drive, O’Fallon, MO. Our
audit period was October 1, 2013, through September 30, 2017.
To accomplish our objective, we

      reviewed applicable regulations and HUD guidance,
      reviewed CitiMortgage’s policies and procedures,
      reviewed loan documents related to partial claims and loan modifications, and
      interviewed and followed up with employees of CitiMortgage and responsible HUD
       officials.
HUD’s Single Family Data Warehouse (SFDW) is a large and extensive collection of database
tables, organized and dedicated to support the analysis, verification, and publication of single-
family housing data. Using this system, we identified 68 loans with partial claims processed
between October 1, 2013, and September 30, 2017, that CitiMortgage terminated as foreclosures,
preforeclosures, or assignments of note and had the oldest unpaid installment date before the
partial claim processed date, suggesting that the partial claims did not reinstate the loan
delinquency. The total amount of partial claims, including incentive fees, for all 68 was more
than $1.9 million. We reviewed the loan documents for these 68 partial claims to determine
whether CitiMortgage executed only partial claims that fully reinstated the loans. This
documentation included partial claim and loan modification documents, loan payment history, a
copy of the claim filed with HUD, and proof of remittance when CitiMortgage returned funds to
HUD. In order to provide context for background purposes, we determined that CitiMortgage
executed nearly 7,000 partial claims totaling more than $200 million during our audit period (see
Background). The results of the 68 loans reviewed cannot be projected to the larger group.
We relied in part on data maintained by HUD in its SFDW database and Neighborhood Watch
Early Warning System, which displays information from the SFDW databases. Specifically, we
used the systems to identify the universe of partial claims executed by CitiMortgage that did not
fully reinstate the mortgage and to help verify potential instances of noncompliance. However,
we did not rely on these data for our conclusions. All conclusions were based on additional
review performed during the audit using documentation provided by CitiMortgage.
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.




                                                6
Internal Controls
Internal control is a process adopted by those charged with governance and management,
designed to provide reasonable assurance about the achievement of the organization’s mission,
goals, and objectives with regard to

   effectiveness and efficiency of operations,
   reliability of financial reporting, and
   compliance with applicable laws and regulations.
Internal controls comprise the plans, policies, methods, and procedures used to meet the
organization’s mission, goals, and objectives. Internal controls include the processes and
procedures for planning, organizing, directing, and controlling program operations as well as the
systems for measuring, reporting, and monitoring program performance.
Relevant Internal Controls
We determined that the following internal controls were relevant to our audit objective:

   Controls to ensure that CitiMortgage filed only for partial claims, combined with loan
    modifications that reinstated the loans.
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 Deficiency
Based on our review, we believe that the following item is a significant deficiency:

   CitiMortgage did not have adequate policies and procedures to ensure that the FHA-HAMP
    partial claims, combined with loan modifications, resulted in curing the loan’s delinquency.




                                                  7
Appendixes

Appendix A


                            Schedule of Questioned Costs
                        Recommendation
                                              Ineligible 1/
                            number
                                1A               $1,053,688

                              Totals              1,053,688



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.




                                             8
Appendix B
             Auditee Comments and OIG’s Evaluation



Ref to OIG
Evaluation    Auditee Comments




Comment 1


Comment 2
Comment 3




                               9
                         OIG Evaluation of Auditee Comments


Comment 1   CitiMortgage noted that it had updated its policies and procedures related to
            potential claims which should address any issues which may have given rise to
            the findings. We acknowledged in the report that CitiMortgage updated its
            policies and procedures related to partial claims and loan modifications.
            However, we found that HUD paid for improper partial claims before
            CitiMortgage updated its processes, and we recommended these partial claims to
            be repaid to HUD.
Comment 2   CitiMortgage stated that it has begun an additional internal review of all FHA-
            HAMP partial claims it has submitted as recommended by OIG. CitiMortgage
            needs to provide the results of the internal review to HUD to resolve
            recommendation 1C of the audit report.
Comment 3   CitiMortgage noted that it is reviewing the partial claims list contained in
            Appendix D, but it disagrees with the OIG’s determination that HUD is due to
            receive an additional $1,053,688 in funds as a result of this audit. CitiMortgage
            will need to work with HUD to resolve recommendation 1A.




                                             10
Appendix C
                                               Criteria


Mortgagee Letter 2003-19
Under the partial claim option, a mortgagee [lender] will advance funds on behalf of a mortgagor
[borrower] in an amount necessary to reinstate a delinquent loan (not to exceed the equivalent of
12 months’ worth of principal, interest, taxes, and insurance (PITI)). The mortgagor, upon
acceptance of the advance, will execute a promissory note and subordinate mortgage payable to
HUD. Currently, these promissory or “partial claim” notes carry no interest and are not due and
payable until the mortgagor either pays off the first mortgage or no longer owns the property.
Following reinstatement, the mortgagee will file a partial claim for the amount of the advance
plus the mortgagee’s incentive fee, and forward a copy of the recorded documents to HUD. A
contractor retained by HUD will service the partial claim notes.
The following provisions apply to all partial claim notes:

       The partial claim must fully reinstate the loan…
A promissory note must be executed in the name of the Secretary and a subordinate mortgage
must be obtained and recorded. In accordance with 24 CFR [Code of Federal Regulations]
203.371(d) “along with the prescribed application for partial claim insurance benefits, the
mortgagee shall forward to HUD the original credit and security instruments requirements by
paragraph (c) of this section.” Provided that the mortgagee has complied with the regulations,
the mortgagee must file the claim within 60 days of the date the subordinate lien to HUD is
executed.
Mortgagee Letter 2009-23
The new FHA-HAMP authority will allow the use of a partial claim up to 30 percent of the
unpaid principal balance as of the date of default combined with a loan modification. The
objective of FHA-HAMP is to assist FHA mortgagors who are in default to modify their
mortgage to an affordable payment.
Mortgagees that utilize FHA-HAMP are eligible to receive incentive payments. Mortgagees
utilizing this initiative will be allowed to first file for a partial claim (to bring the loan current
and defer principal where appropriate), followed by a loan modification claim (claim type 32).
Under FHA-HAMP, the Mortgagee may receive an incentive fee of up to $1,250. This total
includes $500 for the partial claim and $750 for the loan modification. Mortgagees may also
claim up to $250 for reimbursement for a title search and/or recording fees.
Mortgagee Letter 2012-22
FHA-HAMP typically involves the combination of a Loan Modification and a Partial Claim.
However, FHA-HAMP may now involve the use of one or both of those Loss Mitigation
options.




                                                    11
As part of FHA-HAMP, a Partial Claim may include an amount needed to cover arrears in loan
payments and, potentially, an additional amount for principal deferment.
The total of arrearages used in calculating the FHA-HAMP Partial Claim amount is no longer
limited to 12 months PITI.
Mortgagee Letter 2016-14
The Mortgagee must ensure that the FHA-HAMP Loan Modification fully reinstates the
Mortgage and complies with the interest rate and modified principal provisions.




                                              12
Appendix D
                          Partial Claims Case Details
  FHA case    Amount paid by                     Repaid before
                                  Ineligible                      To be repaid
   number         HUD                                 audit
011-5570982        $ 8,675.92       $ 8,675.92                       $ 8,675.92
011-5605083         10,878.68        10,878.68                        10,878.68
011-5870621         27,476.35        27,476.35                        27,476.35
011-6122287         14,052.14        14,052.14                        14,052.14
031-3489431          5,706.96         5,706.96                         5,706.96
045-6417198         55,646.94        55,646.94                        55,646.94
048-4362668         17,219.98        17,219.98      $ 17,219.98
061-2761453         22,680.32        22,680.32                        22,680.32
094-5107823         14,220.87        14,220.87        14,220.87
095-0370003          1,674.02         1,674.02                         1,674.02
101-7230386          3,952.15         3,952.15                         3,952.15
105-2429578          8,293.10         8,293.10                         8,293.10
105-3023969         18,902.38        18,902.38                        18,902.38
105-3141811         11,063.20        11,063.20                        11,063.20
105-4849402          1,962.68         1,962.68         1,962.68
131-9839985          6,371.40         6,371.40         6,371.40
132-1921527         43,874.93        43,874.93        43,874.93
137-2160146         50,722.95        50,722.95        50,722.95
137-2897005         26,602.42        26,602.42                        26,602.42
137-3540815         41,631.53        41,631.53        41,131.53          500.00
137-4699065         46,001.39        46,001.39                        46,001.39
151-5217123         10,890.76        10,890.76                        10,890.76
151-8342111         36,044.06
151-8367845         18,849.00        18,849.00                        18,849.00
151-8949013         21,304.26        21,304.26                        21,304.26
151-9647731          6,743.96         6,743.96                         6,743.96
197-0296423         11,377.67        11,377.67                        11,377.67
201-3865087          4,259.12         4,259.12         4,259.12
262-1460445         32,507.27        32,507.27                        32,507.27
277-0035734         52,614.55        52,614.55                        52,614.55
292-3776175         13,362.58        13,362.58        13,362.58
292-5085745         64,112.42        64,112.42                        64,112.42
332-4683965         38,211.30        38,211.30                        38,211.30
351-4522261         31,297.68        31,297.68        30,797.68          500.00



                                       13
  FHA case    Amount paid by                   Repaid before
                                Ineligible                      To be repaid
   number         HUD                             audit
351-4941156         43,646.13      43,646.13                        43,646.13
351-5985783         43,890.93      43,890.93        43,890.93
352-5576054        105,592.85     105,592.85         5,592.85
371-3756399         66,518.60      66,518.60                        66,518.60
374-4340140         30,413.12      30,413.12                        30,413.12
374-4526808         21,730.81      21,730.81                        21,730.81
374-4533657         62,125.12      62,125.12                        62,125.12
374-5603176        138,348.46
381-5234241         16,648.80      16,648.80                        16,648.80
381-5677371         23,261.63      23,261.63        23,261.63
381-7356444         10,534.37      10,534.37        10,534.37
381-8981781         50,228.24      50,228.24                        50,228.24
411-3939562         48,889.77      48,889.77        48,889.77
411-4032127          4,662.88       4,662.88         4,662.88
412-6059963         12,473.55      12,473.55        12,473.55
412-6126365         20,231.21      20,231.21        20,231.21
413-3737379          4,606.66       4,606.66                         4,606.66
413-4110824         16,187.80      16,187.80                        16,187.80
422-2684121          4,920.86       4,920.86                         4,920.86
441-7124675         21,206.96      21,206.96        21,206.96
441-7402173          3,756.99       3,756.99                          3,756.99
461-4219724          3,248.31       3,248.31                          3,248.31
481-2779076          9,674.99       9,674.99         9,674.99
482-3564016         11,919.76      11,919.76                        11,919.76
483-2664404         27,219.43      27,219.43                        27,219.43
483-3818835         54,608.41      54,608.41        54,608.41
491-7745633          8,580.63       8,580.63         8,580.63
492-8301610         15,609.89      15,609.89                        15,609.89
494-3497797         12,945.71      12,945.71        12,945.71
521-7193005         68,696.32      68,696.32        68,696.32
541-8581952         51,275.79      51,275.79        51,275.79
541-8874744          2,442.86       2,442.86         2,442.86
561-8463512         59,983.28      59,983.28                         59,983.28
561-8844257         95,707.11      95,707.11                         95,707.11
Totals           1,950,973.17   1,776,580.65       722,892.58     1,053,688.07




                                     14