oversight

Erin Mortgage CO., Eastpointe, MI

Published by the Department of Housing and Urban Development, Office of Inspector General on 1995-10-26.

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

                                                                   Issue Date

                                                                        October 26, 1995
                                                                   Audit Case Number

                                                                        96-CH-221-1003




TO:           Nicholas P. Retsinas, Assistant Secretary for Housing - Federal Housing
               Commissioner, and Chairman, Mortgagee Review Board


FROM:         Dale L. Chouteau, District Inspector General for Audit,
              Midwest

SUBJECT:      Erin Mortgage Company
              Single Family Mortgage Insurance Program
              Eastpointe, Michigan

We completed an audit of the books and records of Erin Mortgage Company, a former loan
correspondent and a direct endorsement mortgagee since December 1994. We selected Erin
Mortgage Company for audit because of the high default rate it experienced in East Detroit. The
audit objectives were to determine whether Erin Mortgage Company originated its HUD/FHA
mortgages according to HUD's requirements and prudent lending practices.

We reviewed 15 HUD/FHA delinquent or defaulted loans that were originated by Erin Mortgage
Company. Ten of the loans were originated under HUD's section 221(d)(2) program and five
under HUD's section 203(b) program. We concluded that Erin did not originate nine loans
originated under section 221(d)(2) in accordance with HUD's requirements or prudent lending
practices. We did not find any problems with the other six loans. The nine loans were originated
by three loan officers. Erin did not properly verify: (1) the validity and reasonableness of
expenses for nine borrowers; and (2) the rental payment history for four borrowers. Proper
verifications are necessary to show the borrowers' ability to make mortgage payments,
accumulate savings and manage their financial affairs. Erin also did not always ensure that its
quality control reviews were conducted according to its quality control plan and HUD
requirements.

If you have any questions, please contact me at (312) 353-7832.
Management Memorandum




                 (THIS PAGE LEFT BLANK INTENTIONALLY)




96-CH-211-1003                   Page ii
Executive Summary
We completed an audit of the books and records of Erin Mortgage Company, a former loan
correspondent and a direct endorsement mortgagee since December 1994. We selected Erin
Mortgage Company for audit because of the high default rate it experienced in East Detroit. The
audit objectives were determine whether Erin Mortgage Company originated its HUD/FHA
mortgages according to HUD's requirements and prudent lending practices.

We concluded that Erin did not originate nine of the 15 HUD/FHA loans according to HUD's
requirements or prudent lending practices. The nine loans were originated under HUD's section
221(d)(2) program. Erin did not: (1) properly verify the validity and reasonableness of expenses
for nine borrowers; (2) properly verify the rental payment history for four borrowers; and (3)
ensure that its quality control reviews were conducted, according to its quality control plan and
HUD requirements. We did not find any problems with the other section 221(d)(2) loan or the
five section 203(b) loans.



                                     Erin Mortgage Company improperly originated nine of the
 Erin Did Not Originate
                                     15 HUD/FHA insured loans we reviewed. The nine loans
 Loans According To
                                     were originated under HUD's section 221(d)(2) program.
 HUD's Requirements and
                                     Erin did not properly verify: the validity and reasonableness
 Prudent Lending
                                     of nine borrowers' expenses; and four borrowers' rental
 Practices
                                     payment histories. Proper verifications are necessary to
                                     show the borrowers' ability to make mortgage payments,
                                     accumulate savings and manage their financial affairs.
                                     Erin's quality control procedures needed improvement.
                                     Erin did not always follow prudent lending practices and
                                     did not always follow the recommendations of its quality
                                     control review firm to improve the loan origination process.
                                     Because HUD relied on Erin's origination process, HUD
                                     assumed abnormally high risks when it insured the nine
                                     loans for $229,050.

                                     We recommend that the Mortgagee Review Board take
                                     appropriate action based on the information contained in the
                                     Finding.

                                     We presented our draft finding and narrative case
                                     presentations to Erin Mortgage Company and the Michigan
                                     State HUD Office during the audit. We held an exit
                                     conference with Erin Mortgage on October 5, 1995. Erin
                                     Mortgage Company provided written comments to our
                                     finding and narrative case presentations. We included
                                     excerpts from the comments with our finding and narrative


                                              Page iii                                96-CH-211-1003
Executive Summary



                    case presentations. Appendix C contains the complete text
                    of the Erin's written comments.




96-CH-211-1003              Page iv
Table of Contents

Management Memorandum                                          i


Executive Summary                                             iii


Introduction                                                   1


Finding

          Erin Did Not Originate Loans According
          To HUD Requirements or Prudent
          Lending Practices                                    3


Internal Controls                                            17


Follow Up On Prior Audits                                    19


Appendices

    A     Summary of Deficiencies                            21

    B     Narrative Case Presentations                       23

    C     Auditee Comments                                   53

    D     Distribution                                       71




                             Page v                96-CH-211-1003
Table of Contents




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96-CH-211-1003                      Page vi
Introduction
HUD approved Erin Mortgage Company as a loan correspondent mortgagee in June 1990. HUD
approved Erin Mortgage Company as a Direct Endorsement Mortgagee in December of 1994.
Erin originates HUD/FHA insured loans, Veterans Administration loans, and conventional loans.
The 15 loans we reviewed were underwritten by a Direct Endorsement Sponsor, Community
Mortgage Services.

Erin Mortgage Company is located in Eastpointe, Michigan. Between January 1, 1993 and
December 1994 HUD endorsed 234 loans originated by Erin. We could not determine which
program the loans were originated under without a detailed review of each case file. However,
we obtained a Lender Profile Report on Erin and found that 20 Section 221(d)(2) loans, 8 Section
203(b) loans and one Section 248 loan were delinquent or in default. We selected 15 of the
defaulted loans for review. As of July 1995, the status of the 15 loans was as follows:


                                   Status                Number of Loans
                           Current                             2
                           Delinquent                          2
                           Foreclosure                         3
                           Claim Paid                          8
                           Total                               15


Erin Mortgage Company originated HUD/FHA loans under three home mortgage insurance
programs authorized by the National Housing Act: Section 203(b), Section 221(d)(2), and
Section 248.

Under the Section 203(b) Program, one-to-four family dwellings are insured for up to 98.75
percent of their value plus a percentage of closing costs if the value is $50,000 or less, or 97.75
percent if the value is over $50,000 and less than the statutory maximum loan limits. The
borrower's minimum investment must be at least three percent of the home value unless the
occupant is 60 years or older. Occupant borrowers at least 60 years old may borrow all of the
required downpayment.

The Section 221(d)(2) Program insures mortgagees against losses on mortgage loans used to buy
low-cost, one-to four family dwellings for eligible families. Eligible families have either low or
moderate income, or have been displaced by the Government. Homes are insured up to 100
percent of their value plus closing costs or up to 97 percent of their value plus closing and prepaid
costs. The loans are restricted to the statutory maximum limits and the minimum investment must
be met. The statutory loan limit depends on the size of the family and is between $36,000 and
$42,000 for single family dwellings in high cost areas. The borrower's minimum investment must
be at least three percent of value, or $200 for displaced families.



                                                Page 1                                   96-CH-211-1003
Introduction



The Section 248 Program insures single family dwellings for Native Americans on reservations.
The Program covers one- to four-family dwellings. The Borrower must be a member of a tribe,
and the tribe must have adopted eviction procedures acceptable to HUD.

Erin Mortgage Company's books and records are located at 21011 Gratiot, Eastpointe, Michigan.
The President of Erin Mortgage Company is Richard Schneider.



                                   Our audit objective was determine whether Erin Mortgage
 Audit Objective
                                   Company originated its HUD/FHA mortgages according to
                                   HUD's requirements and prudent lending practices.

                                   Our audit included tests of compliance with HUD's
 Audit Scope and
                                   requirements for the origination of HUD/FHA insured
 Methodology
                                   loans. The purpose was to evaluate the propriety and
                                   accuracy of: (1) the borrower's income; (2) liabilities; (3)
                                   previous use of credit; and (4) occupancy certifications.
                                   We performed in-depth reviews on 15 loans. Ten of the
                                   loans were originated under HUD's section 221(d)(2)
                                   program and five were originated under section 203(b).

                                   We interviewed HUD staff and Erin Mortgage Company
                                   employees to evaluate Erin's internal controls and
                                   procedures. We reviewed HUD's and Erin's FHA case files
                                   to ensure they contained the same information. We
                                   reviewed Erin's loan origination procedures and its quality
                                   control reviews. We verified the borrowers' income,
                                   expenses, and rent histories. We interviewed nine of the 15
                                   borrowers. The other six borrowers could not be located.

                                   Our audit covered the period January 1, 1993 through
                                   March 31, 1995. We extended our audit coverage as
                                   necessary. We conducted the audit at Erin Mortgage
                                   Company between April 1995 and September 1995.

                                   The audit was conducted in accordance with generally
                                   accepted government auditing standards. We provided a
                                   copy of this report to the president of Erin Mortgage
                                   Company.




96-CH-211-1003                              Page 2
                                                                                           Finding




   Erin Did Not Originate Loans According To
     HUD Requirements Or Prudent Lending
                    Practices
Erin Mortgage Company improperly originated nine of the 15 HUD/FHA-insured loans we
reviewed. All nine loans were originated under HUD's Section 221(d)(2) program. Erin did not
properly verify: (1) the validity and reasonableness of nine borrowers' expenses; and (2) four
borrowers' rental payment histories. Proper verifications of the ability to save and to make timely
rent payments are necessary to show the borrowers' ability to make mortgage payments,
accumulate savings, and manage financial affairs. Erin's quality control procedures needed
improvement. Erin did not always follow prudent lending practices and did not always
implement the recommendations of its quality control review firm to improve the loan origination
process. Because HUD relied on Erin's origination process, HUD assumed abnormally high risks
when it insured the nine loans for $229,050.



                                      HUD Handbook 4000.4 REV-1, Single Family Direct
 HUD Requirements
                                      Endorsement Program, paragraph 2-1, requires a mortgagee
                                      to conduct its business operations according to accepted
                                      sound mortgage lending practices, ethics and standards.

                                      HUD Handbook 4155.1 REV-4, Mortgage Credit Analysis
                                      for Mortgage Insurance, paragraph 2-1 requires the
                                      mortgagee to determine the borrower's ability and
                                      willingness to repay the mortgage debt. The ability to repay
                                      the debt includes measuring the history and stability of
                                      income, the projected increase in housing costs, cash
                                      reserves after closing, and other non-mortgage obligations.
                                      Willingness to repay the debt includes measuring the
                                      history of paying debts.

                                      Paragraph 2-3(D) of the Handbook says, when new housing
                                      expenses will significantly exceed the previous housing
                                      expenses, and the borrower has not exhibited an ability to
                                      accumulate savings or otherwise manage financial affairs,
                                      strong compensating factors must be present to allow for
                                      borrower approval.

                                      Paragraph 2-3(B) of the Handbook says, for those
                                      borrowers who choose not to use credit or have not yet

                                               Page 3                                  96-CH-211-1003
Finding



                           established credit, the lender must develop a credit history
                           from rent verifications, utility payment records, or other
                           means.

                           HUD Handbook 4000.2, REV-2, Mortgagee's Handbook,
                           Application through Insurance (Single Family), paragraph
                           3-6 says verification forms must not pass through the hands
                           of the applicant, real estate agent, or other interested third
                           parties.

                           HUD Handbook 4060.1, REV-1, Mortgagee Approval
                           Handbook, Chapter 6, paragraph 6-1E requires that
                           mortgagees, using outside firms to perform required quality
                           control reviews, must carefully review and analyze the
                           results of the reviews and take prompt corrective measures
                           when specific deficiencies are noted.

                           Paragraph 6-1D(3) of Handbook 4060.1, REV-1 requires
                           that all loans which go into default within the first six
                           months must be analyzed. Paragraph 6-3 requires the
                           mortgagee's quality control plan to include a review of a
                           minimum of 10 percent of the rejected loans.

                           Erin Mortgage Company did not properly originate nine of
 Loans Were Not Properly
                           the 15 HUD/FHA-insured loans we reviewed. The nine
 Originated
                           loans were originated under HUD's Section 221(d)(2)
                           program. Erin did not properly verify the borrowers'
                           expenses to determine the borrowers' ability to save and to
                           repay the mortgage debt for all nine loans. Additionally, in
                           four of the nine loans, Erin did not obtain proper rent
                           verifications. Weak quality control procedures contributed
                           to the deficiencies and the resulting defaults. The
                           deficiencies are summarized below and discussed in more
                           detail in the Narrative Case Presentations (Appendices B-1
                           through B-9).

                           The Chief of HUD's Single Family Production Branch,
                           Office of Housing, Michigan State Office agreed with our
                           conclusions and believed the loan files required further
                           information before the loans were approved.

 Expenses Were Not         Erin did not verify nine borrowers' expenses to determine
 Verified And Were         the borrowers' abilities to save when the borrowers' new
 Unrealistic               housing expenses significantly exceeded their previous


96-CH-211-1003                      Page 4
                                                                                     Finding



housing expenses. In all nine cases, the borrowers signed undated affidavits showing their
income and expenses. Erin verified the borrowers' income but did not verify and determine
the reasonableness of the expenses. For example:

                               The borrower signed an undated affidavit for FHA Case
                               Number 261-5902870 to show the borrower's monthly
                               income and expenses. The affidavit showed an income of
                               $1,521 and expenses of $800 with a monthly savings of
                               $721. The expenses included: $300 for rent; $100 for
                               utilities; and $400 for food and clothing. The expenses did
                               not include items like telephone, transportation, and general
                               household expenses.

                               The expenses were unrealistic for a family of nine. The
                               borrower received assistance from the Michigan Aid to
                               Families with Dependent Children Program.              The
                               Department of Social Services estimated a monthly utilities
                               cost of $205, and a food cost of $501. Although the loan
                               file contained the income and expense affidavit and the
                               Social Services estimate, it did not contain an explanation
                               for the differences between the two.

                               The Michigan Aid to Families with Dependent Children
                               Program provides assistance to help families pay for living
                               expenses such as shelter, heat, utilities, clothing, food and
                               personal care items. The Program's brochure says because
                               there is a maximum amount that can be given for these
                               needs, the grant probably cannot cover all of the bills. To
                               receive aid, family assets cannot exceed $1,000. Based on
                               the program criteria, Erin should have questioned and
                               verified the expenses reported by the borrower.

                               The borrower said the affidavit showing her income and
                               expenses was blank when she signed it. The borrower said
                               she did not write the monthly expenses on the affidavit and
                               she could not save $721 per month as indicated. Her
                               statement is consistent with the fact that public assistance is
                               calculated to cover necessary expenses and not to create
                               savings. Additionally, at a savings rate of $721 a month,
                               the borrower would have been ineligible for the State aid
                               within two months.




                                        Page 5                                   96-CH-211-1003
Finding



                        Erin did not always properly establish acceptable credit for
 Rent Payment History
                        borrowers. Erin did not properly verify three borrowers'
 Was Not Properly
                        rent payment histories and did not obtain a rent verification
 Verified
                        for a fourth borrower. One rent verification was signed by
                        an unknown person and the remaining two were signed by
                        relatives. The verifications were incorrect. For example:

                        Erin Mortgage Company submitted a false rent verification
                        to HUD for FHA Case Number 261-5995026. The rent
                        verification form was signed by the borrower's child's
                        grandmother. The verification indicated that the borrower
                        resided at an address owned by the grandmother for seven
                        years and paid $200 a month for rent. The borrower said
                        she did not rent from the grandmother. She said the house
                        where she resided was owned by her parents and she did
                        not pay rent.

                        The grandmother agreed that she never rented any property
                        to the borrower and did not own the house listed on the rent
                        verification form. She said the borrower brought the form
                        to her and she signed it. She thought the form only verified
                        that she knew the borrower.

                        The borrower told us that she signed an undated blank
                        affidavit to verify the amount of rent. The borrower said
                        the statement in the affidavit that she paid $200 to her
                        grandmother was false.

                        Prudent business practices dictate that Erin Mortgage
                        Company should have had the borrower provide a copy of
                        the lease and/or rent receipts, especially when a close
                        relative was indicated to be the landlord. HUD's regulations
                        say verification forms must not pass through the hands of
                        the applicant, a real estate agent, or other interested third
                        parties.

                        Erin Mortgage did not ensure that its quality control
 Quality Control
                        reviews were conducted according to its quality control
 Procedures Were Weak
                        plan and HUD requirements. The outside firm that
                        performed the reviews for Erin did not review: loans that
                        went into default within six months of origination; and ten
                        percent of the rejected loans. Erin also did not always
                        implement its quality review firm's recommendations to
                        improve Erin's quality controls. Consequently, deficiencies


96-CH-211-1003                   Page 6
                                                      Finding



in the loan origination process were not identified and
corrected.

The President of the quality control review firm said her
firm did not review Erin's defaulted and rejected loans
because Erin did not provide her firm a list of the defaulted
and rejected loans.

Erin Mortgage Company's President and its underwriter
said they were rarely advised of early defaulted loans that
Erin originated and sold to other mortgagees. However,
since HUD requires all loans that default within the first six
months to be reviewed, it is Erin's responsibility to obtain
the information so it can be reviewed.

In October 1994, HUD's Office of Lender Activities and
Land Sales Registration cited Erin for the lack of quality
control reviews for defaulted and rejected loans. In
February 1995, Erin informed HUD that it would take
prompt corrective measures. Until the above deficiencies
are resolved, there is less assurance that Erin's loan
processing procedures meet HUD's requirements.

Erin Mortgage Company also did not always implement its
quality review firm's recommendations to improve Erin's
internal controls. For example, the quality review firm
recommended that Erin obtain additional evidence to
support rent verifications when the landlord is the seller or
a close relative. The recommendation was based on a
review of a Veterans Administration insured loan.
However, the review firm reviewed HUD/FHA and
Veterans Administration loans together and the
recommendation related to overall prudent loan procedures.
The firm suggested getting 12 months of rent receipts or
cancelled checks to verify that rent was paid.

Erin's President said, the Veterans Administration did not
require 12 months of rent receipts for rent verification;
therefore, the recommendation was not implemented.
HUD's regulations do not mandate how a verification
should be done, but require that a verification be performed.
We believe, as did the quality review firm, that sound
lending practices require a verification to include a review
of some evidence that corroborates written statements.


         Page 7                                   96-CH-211-1003
Finding




Auditee Comments    Erin Mortgage Company became a Correspondent Lender
                    in June of 1990 and a Direct Endorsement Lender in
                    December of 1994. Erin has always conducted its business
                    operations in accordance with accepted sound mortgage
                    lending practices, ethics, and standards. Erin Mortgage has
                    an established policy to promote affirmative marketing and
                    the availability of mortgage credit in low and moderate
                    income areas, including minority and other underserved
                    areas. Erin Mortgage is in full compliance with the HUD
                    regulations regarding verification forms.

OIG Evaluation of   HUD's directives do not specifically state how a verification
Auditee Comments    should be accomplished, but require a mortgagee to conduct
                    its business operations in accordance with accepted sound
                    mortgage lending practices. Since Erin Mortgage did not
                    always verify borrowers' claimed expenses and rental
                    payment histories, we believe it did not follow accepted
                    sound lending practices when it approved loans.

Auditee Comments    We have observed that in the reviewer's recitation of the
                    HUD requirements it appears to be somewhat selective in
                    it's narrative of the aforementioned requirements. For
                    example, paragraph 2-3(B) of the HUD Handbook 4155.1
                    REV-4, which if read in it's entirety states that for
                    borrowers who choose not to use credit or have not yet
                    established credit, the lender must develop a credit history
                    from rent verifications, utility payment records or other
                    means. However, neither the lack of credit history nor the
                    lifestyle of the borrowers may be used as a basis for
                    rejection. It is puzzling that the reviewer apparently failed
                    to consider the last sentence in it's finding.

OIG Evaluation of   We agree that the last sentence of paragraph 2-3 (B) of
Auditee Comments    HUD Handbook 4155.1 REV-4 does say that neither the
                    lack of credit history nor the lifestyle of the borrowers may
                    be used as a basis for rejection. We did not include this
                    sentence in our finding because we did not find a violation
                    of the reference. However, the sentence does not mean
                    that an applicant must be approved for a loan if the
                    applicant has no credit. The mortgagee must develop a
                    credit history using a method like verification of past rent
                    payments. The loan decision can then be made using this



96-CH-211-1003               Page 8
                                                                          Finding



                    information as a credit rating. Our finding shows that Erin
                    did not properly verify rent payment histories and,
                    therefore, did not satisfactorily base loan decisions on an
                    acceptable credit rating.

Auditee Comments    In an overwhelming majority of the loans reviewed there
                    was little change in housing costs, i.e. current rent amount
                    versus proposed mortgage payments. In fact, in some
                    cases, the proposed mortgage payment was less than the
                    current rent.

                    Some of HUD's typical compensating factors include: (1)
                    receipt of food stamps, or commodities which reduce the
                    outlay of food. (2) free medical services to low-income
                    families. (3) welfare cases where the welfare agency or
                    community provides services. (4) persons having living
                    needs which permit them to live on less than families whose
                    needs are expanding. (5) families not having automobiles
                    depending on public transport.

OIG Evaluation of   In eight of the nine cases we cited, the projected new
Auditee Comments    housing expenses considerably exceeded the previous
                    housing expenses. Erin's response only compared past rent
                    payments to mortgage payments. Erin did not include
                    utilities and maintenance expenses in its comparison. We
                    found that including just utilities was a significant increase
                    in expenses considering the borrowers' incomes.

                    Erin's comments list five compensating factors for
                    approving a loan when new housing expenses significantly
                    exceed previous housing expenses. We considered these
                    factors when we cited Erin for not verifying the borrowers'
                    expenses to determine their ability to save.

                    Considering factor 1, Erin added the amount of food stamps
                    to the borrower's income. However, Erin did not include an
                    amount equal to the amount of food stamps as an expense.
                    For example, in FHA Case Number 261-5902870, Erin
                    added the amount of food stamps, $501, to the borrower's
                    public assistance of $1,020 to show an income of $1,521.
                    However, on the expense side, Erin unrealistically included
                    only $400 to cover food and clothing for a family of nine.
                    Erin should have at least included a food expense of $501
                    plus an allowance for clothing.


                             Page 9                                   96-CH-211-1003
Finding



                    Considering factor 5, we believe it is appropriate to include
                    transportation costs as an expense and cited Erin for not
                    doing so. Erin's files did not demonstrate that factors 2,3
                    and 4 had any affect on the borrowers' expenses or ability
                    to meet financial obligations; and, we did not question these
                    items or include them as expenses.

Auditee Comments    All lenders must rely, in part, on the integrity of their loan
                    applicants. This is especially true at the time of the initial
                    application, when basic information is obtained from the
                    borrowers; such as, present address, employers name and
                    address, length of employment, rental information, name of
                    landlord, obligations, etc. Erin then attempts to verify the
                    information via HUD mandated requirements.

                    In the low to moderate income areas, it is not uncommon to
                    have relatives living with or renting from other relatives.
                    Erin Mortgage has always complied with HUD regulations
                    regarding rental verifications.

                    If an applicant indicates that he/she rents from a family
                    member and provides a name and address of the person to
                    whom they pay rent, we cannot arbitrarily accuse them of
                    prevarication. We make every effort to verify all the facts
                    prior to rendering a final decision.

OIG Evaluation of   We agree that all lenders must rely in part on the
Auditee Comments    information provided by loan applicants and it is not
                    uncommon for applicants to rent from family members.
                    However, HUD requires the information to be verified and
                    prudent lending practices dictate that the verification
                    involve reviewing independent information to corroborate
                    the information provided by loan applicants.

                    The purpose of a verification is to provide an independent
                    and unbiased statement on an applicant's payment history.
                    When a landlord is a close relative or a seller, it is necessary
                    and a prudent practice to ask the applicant for rent receipts,
                    a lease or some other documentation to establish that
                    payments were actually made. It is also the responsibility
                    of a lender to verify the information in accordance with
                    HUD's requirements and prudent lending practices. In not
                    a single instance did Erin provide documentation that



96-CH-211-1003               Page 10
                                                                          Finding



                   showed it even asked the applicants to provide rent receipts
                   or a lease.

Auditee Comments   Erin Mortgage Company has never engaged in lending
                   practices that were anything but prudent. Erin has always
                   made every effort to comply with what it considers to be the
                   vexing problem relating to a borrower's ability to save
                   assets needed to consummate a mortgage loan.

                   It is well known within the mortgage industry in and around
                   the city of Detroit that there is no "cookie cutter" or "one
                   size fits all" approach to an applicant's ability to save funds.
                   Every case is treated differently, but always within the
                   intent of the regulations foremost in our mind. As we have
                   previously stated, applicants have displayed an amazing
                   ability to economize their cash funds in order to purchase a
                   home.

                   We believe that the affidavit currently being used to show
                   an applicant's ability to save is a good faith attempt to
                   comply with a confusing and all but impossible
                   requirement.

                   The majority of the 15 loans, which were reviewed over a
                   6 month period, were low income applicants. A majority of
                   those loans reflected that many of the applicants did not
                   have a bank or credit union account. What this infers is that
                   these applicants have displayed an ability to manage their
                   affairs in the form of cash in the past and should be able to
                   manage their affairs in the future.

                   It should be pointed out that, while the reviewer criticized
                   Erin Mortgage for failing to properly verify the applicants
                   ability to save the necessary funds to consummate their
                   loans, there is absolutely no evidence that the applicants
                   acquired the funds from any source other than what they
                   stated on an affidavit.

                   There were no new loans reflected on the respective credit
                   reports nor were there any inquiries which would raise
                   questions regarding any possible new debts. All funds were
                   verified on deposit with the broker, per his letter and copies
                   of ledgers, deposits, etc.



                            Page 11                                   96-CH-211-1003
Finding



OIG Evaluation of   Erin Mortgage Company verified the borrowers' income but
Auditee Comments    did not establish the reasonableness of their expenses. We
                    believe if Erin had used prudent business practices, it would
                    not have overlooked expenses for items such as utilities,
                    telephone, transportation and automobiles. Erin would have
                    also included food expenses equal to at least the amount of
                    food stamps received. The finding was not developed
                    assuming Erin should have used a cookie cutter approach to
                    making loans.

                    We reviewed the ability to save affidavits to determine if
                    they showed the borrowers' had the ability to make
                    mortgage payments and manage their financial affairs, an
                    important consideration in preventing a default. Our
                    objective was not to show the source of downpayment
                    funds as Erin indicates in its comments. Our finding does
                    not address the source of downpayment funds as a problem.

                    Erin Mortgage Company says the lack of a bank or credit
                    union account and use of cash infers that loan applicants are
                    able to manage their future financial affairs. We believe
                    that the use of cash and no financial institution accounts
                    could also be an indicator of financial irresponsibility. For
                    example, a person who recently filed for bankruptcy would
                    be on a cash basis and may not have a bank account. HUD
                    requires a properly prepared and verified ability to save
                    affidavit as evidence that a borrower has the ability to make
                    payments and manage financial affairs.

Auditee Comments    In our files there are at least four references to the penalties
                    possible if an applicant provides false or fraudulent
                    information that the applicants read, sign and date. These
                    references are mentioned in detail on the following
                    documents: (1) Section IX of the 1003, (2) Paragraph 5 of
                    the Acknowledgment Statement, (3) FHA Occupancy
                    Statement, (4) Borrower's Notification and Interest Rate
                    Disclosure Statement.

                    The "1010" Warning also appears on all affidavits signed
                    by the applicants regarding any explanations.

                    Erin Mortgage Company believes if any applicant reads,
                    signs, and dates these documents, then we must accept the
                    statements made by them as correct. Again, we must state


96-CH-211-1003               Page 12
                                                                          Finding



                    our firm belief that we cannot dispute the veracity of
                    statements made by an applicant after they have been
                    advised of the possible ramifications of providing false
                    information. A review of the loans in question will result in
                    a discovery that each and every file contains the
                    aforementioned documents.

                    Erin Mortgage Company resents the accusations contained
                    in the audit findings indicating that Erin Mortgage
                    Company failed to comply with HUD's mandates. We
                    especially resent the manner in which the draft of the
                    finding enlarged the heading on page one.                 It is
                    unreasonable that the reviewers have apparently chosen to
                    accept as fact statements made by borrowers who signed the
                    documents detailing the warnings and penalties of
                    providing false information. We would hope that any
                    statements made by persons who have demonstrated an
                    inability to be forthright in their dealings in the past would,
                    at the very least, be considered suspect in their accusations
                    against Erin Mortgage Company.

OIG Evaluation of   It is true that applicants signed documents referring to
Auditee Comments    penalties for false information. Erin Mortgage Company,
                    however, is still responsible to verify that the information
                    provided by potential borrowers is correct.

                    The finding showed that not all loans were originated
                    according to HUD's requirements and prudent lending
                    practices. Our finding was based on file reviews,
                    independent verifications and interviews with borrowers
                    and Erin Mortgage personnel. Disregarding the statements
                    of the borrowers, the information obtained still shows that
                    Erin Mortgage did not follow expected procedures.

Auditee Comments    The draft of the proposed audit finding states that Erin
                    Mortgage Company's President and its Underwriter said
                    they were not aware that the company was responsible to
                    identify early defaulted loans it originated and sold to other
                    mortgagees. Erin Mortgage Company denies ever making
                    such statements. What we did say is that we are rarely
                    advised of early defaulted loans we originate and sell to
                    other mortgagees. On those occasions when we are advised
                    of a default, we have made every effort to cure the default
                    including picking up payments, interviewing the applicants


                            Page 13                                   96-CH-211-1003
Finding



                    to discover the cause, etc. In fact, in one case, we went
                    with the borrower to the Wayne County Neighborhood
                    Legal Services and she received financial assistance from
                    the Eviction Prevention Program.

OIG Evaluation of   We changed the statement in the finding to agree with the
Auditee Comments    wording in Erin's response. However, in order to satisfy
                    HUD's requirement for review of early defaulted loans, Erin
                    has the responsibility to identify early defaulted loans and
                    provide the information to its quality control review firm.

Auditee Comments    Erin Mortgage Company elected not to use an outside firm
                    to perform quality control on rejected loans. Please note
                    that the Underwriter did not state that she did not think to
                    obtain quality reviews for the rejected loans, but said our
                    outside firm was not performing the reviews.

                    All rejected loans were reviewed by myself, the underwriter
                    and our senior processor. The reasons given for the
                    rejection were reviewed and determined to be valid. We
                    ensured that the requirements of the Equal Credit
                    Opportunity Act were met and documented in each file.
                    Immediate corrective action was taken where possible
                    discrimination was noted.

                    Out of ten cases reviewed, nine were insured under HUD's
                    Low and Moderate Income Section 221(d)(2) Program.
                    Erin Mortgage Company renders a substantial service to our
                    customers, and to the Secretary, specifically, in such high
                    risk areas as Detroit where the majority of lenders
                    arbitrarily will not participate in the HUD programs.

OIG Evaluation of   During the audit, the underwriter told us that none of the
Auditee Comments    rejected loans had been subjected to quality control review
                    because Erin Mortgage Company was waiting for its quality
                    control review firm to ask for them. The underwriter never
                    indicated that the reviews were done by the President, the
                    underwriter and the senior loan processor, as reflected in
                    Erin's comments. The internal review, however, does not
                    meet HUD's requirements for an independent evaluation.
                    Paragraph 6-1 of HUD Handbook 4060.1 REV-1,
                    Mortgagee Approval Handbook, says a mortgagee's quality
                    control plan must provide for independent evaluation of the
                    significant information gathered in relation to the loans.


96-CH-211-1003              Page 14
                                                                          Finding



                    Our finding now cites nine cases with problems and all
                    were insured under HUD's Low and Moderate Income,
                    Section 221(d)(2) Program. We agree Erin Mortgage
                    Company may have provided substantial services in a high
                    risk area, like Detroit. This, however, does not release Erin
                    from its responsibilities to follow HUD's requirements and
                    prudent lending practices. Also, the value of such services
                    is questionable when the procedures Erin followed may
                    have increased the occurrence of defaulted loans.

Auditee Comments    Erin Mortgage Co. has no record of receiving a
                    recommendation from our quality control firm regarding
                    obtaining 12 months of rent receipts, cancelled checks or
                    money orders on any HUD loans. Erin did not say that
                    HUD did not require this information.

                    Erin has always responded with prompt action to our
                    quality control firm's reviews regarding any
                    recommendations that they may have had.

                    Erin Mortgage Company's actions have always been
                    consistent with conducting our operations according to
                    accepted sound mortgage lending practices, ethics and
                    standards.

OIG Evaluation of   In June 1993, based on a review of a HUD/FHA insured
Auditee Comments    loan, Erin's quality control review firm suggested to
                    strengthen the loan file, twelve months of rent checks
                    should be obtained. Erin did not comment on this
                    recommendation. In September 1994, based on a review of
                    a Veterans Administration insured loan, the quality review
                    firm suggested that there was a need to obtain twelve
                    months of cancelled checks to support a rental history when
                    the landlord was also the seller of the subject property. Erin
                    did not implement the recommendation. Erin's President
                    said the Veterans Administration did not require it.
                    However, the quality control review firm reviews
                    HUD/FHA and Veterans Administration loans together.
                    Therefore, prudent lending practices applicable to Veterans
                    Administration loans should also apply to HUD-insured
                    loans.




                            Page 15                                   96-CH-211-1003
Finding




Recommendations   We recommend that:

                  (A)   The Mortgagee Review Board take appropriate
                        action based on the information contained in the
                        Finding.




96-CH-211-1003           Page 16
Internal Controls
In planning and performing our audit, we considered the internal controls relating to Erin
Mortgage Company's HUD/FHA loan origination process to determine our auditing procedures
and not to provide assurance on internal controls. Internal controls consist of the plan of
organization, methods, and procedures adopted by management to ensure that resource use is
consistent with laws, regulations, and policies; that resources are safeguarded against waste, loss,
and misuse; and that reliable data are obtained, maintained, and fairly disclosed in reports.



                                      We determined the following internal controls applied to
 Relevant Internal
                                      our audit objectives:
 Controls
                                      •   HUD Program Regulations, Handbooks, and Directives.

                                      •   Quality Control Plan.

                                      •   Administrative controls over loan origination and loan
                                          closing.

                                      We assessed all the relevant controls identified above.

                                      It is a significant weakness if internal controls do not give
 Significant Weaknesses
                                      reasonable assurance that resource use is consistent with
                                      laws, regulations, and policies; that resources are
                                      safeguarded against waste, loss, and misuse; and that
                                      reliable data are obtained, maintained, and fairly disclosed
                                      in reports.

                                      Based on our audit, we believe that the following is a
                                      significant weakness:

                                      •   HUD/FHA Loan Origination. Erin did not properly
                                          verify borrowers expenses and rent payment histories.
                                          Erin also did not review loans that went into default
                                          within six months of origination; and ten percent of the
                                          rejected loans (See Finding 1).




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96-CH-211-1003                      Page 18
Follow Up On Prior Audits
This is the first OIG audit of Erin Mortgage Company. The mortgagee's last independent audit
report for the year ended December 31, 1994 contained one finding on its Quality Control Plan.
The finding was not related to deficiencies cited in this report.

The last monitoring review by HUD's Office of Lender Activities and Land Sales Registration
was done in September 1994. The monitoring letter, dated October 20, 1994, cited five findings
including one finding on the outside firm's contract for quality control reviews. As of September
30, 1995, all findings were closed.




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Follow Up On Prior Audits




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96-CH-211-1003                      Page 20
                              Appendix A

Summary of Deficiencies




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Summary of Deficiencies




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96-CH-211-1003                     Page 22
                                                                             Appendix B

Introduction to Narrative Case Presentations
     Appendices B-1 through B-9 represent nine case-by-case narrative
    discussions summarizing and detailing the deficiencies cited in the Finding.




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96-CH-211-1003                       Page 24
                                                                   Narrative Case Presentations



                                                                  Appendix B-1
                                                       Page 1
FHA Case No.: 261-5824607

Insured Amount: $25,000

Section of Housing Act: 221(d)(2)

Date Underwritten: September 9, 1992

Underwriting Company: Community Mortgage Services

Underwriter Number: 6602

Status: Claim Paid (One payment made)

Summary:

Erin Mortgage Company did not properly verify the borrowers' or co-borrower's ability to save.
According to the co-borrower, the borrower (her brother) never moved into the property. The
co-borrower said she could not afford to make the mortgage payments and got behind on the
payments. She said HUD would not work with her to keep the house. The co-borrower said a
HUD official told her that her income was too low to make mortgage payments. Accurate
verifications are necessary to show the borrowers' ability to make mortgage payments and
manage financial affairs.

The Chief of HUD's Single Family Production Branch, Office of Housing, Michigan State Office
agreed with the audit conclusions and believed the loan files required further information before
the loan should have been approved.

Pertinent Details:

    Ability To Save Affidavit Was Not Verified

    The borrower and co-borrower signed an undated affidavit showing their monthly income
    and expenses. Erin Mortgage verified the income but did not verify the propriety of the
    expenses.

    The borrower's affidavit showed income from work of $834 and expenses of $373 with a
    monthly savings of $491. The expenses included $60 for food and clothing, $128 for
    monthly debts, and $185 for taxes. An estimate of $60 a month for food and clothing is
    unrealistically low. The expenses also did not include items like rent, telephone,
    transportation, automobile expenses and other general household expenses. The applications
                                                               Appendix B-1


                                             Page 25                                 96-CH-211-1003
Narrative Case Presentations



                                                                                           Page 2

     showed that the borrower owned an automobile. We could not locate the borrower to
     conduct an interview. The co-borrower said the borrower lived with relatives and was
     paying rent.

     The borrower's affidavit also showed the co-borrower's monthly income from the Michigan
     Aid to Families with Dependent Children Program. The income was $954 with expenses of
     $50 for food and clothing and a monthly savings of $904. The expenses did not include
     items like utilities, telephone, transportation, and general household expenses. The expenses
     were unrealistic for a family of five. The co-borrower was on the Michigan Aid to Families
     with Dependent Children Program. The Department of Social Services estimated food costs
     of $296 and housing costs of $325. Although the loan files contained the income and
     expenses affidavit, and the Social Services estimate, it did not contain an explanation for the
     difference between the two.

     The Michigan Aid to Families Program provides assistance to help families pay for living
     expenses such as shelter, heat, utilities, clothing, food and personal care items. The
     Program's brochure says because there is a maximum amount that can be given for these
     needs, the grant probably cannot cover all of the bills. To receive aid, family assets cannot
     be more than $1,000. Based on the program criteria, Erin's acceptance of the expense
     estimates without verification was not reasonable or a prudent business practice. The amount
     of savings reported by the co-borrower would invalidate her for state aid in less than two
     months.

Auditee Comments

At the initial application on June 6, 1992, the borrower stated that he intended to occupy the
property as his primary residence. On August 5, 1992, when the borrowers signed the FHA
application for commitment for insurance, both the borrower and co-borrower signed a statement
that they would move into the home, with the understanding that the failure to do so constituted
fraud.

On September 18, 1992, at the closing, both the borrower and co-borrower again signed the
statement that they would move into the home, with the understanding that the failure to do so
constituted fraud.

The ability to save affidavit showed combined income from work and public assistance of $1,788
and expenses of $423, with a monthly savings of $1,365. The borrowers deposited $1,200 over
a two month span.

Both the borrower and co-borrower were boarding with family members.




96-CH-211-1003                                 Page 26
                                                                    Narrative Case Presentations



                                                                Appendix B-1
                                                                    Page 3
OIG Evaluation of Auditee Comments

We agree that Erin Mortgage Company was not responsible for the borrower not occupying the
residence.

Erin Mortgage did not provide comments to explain why it did not verify the expenses on the
ability to save affidavit. The affidavit did not include normal items such as; telephone,
transportation, and other general household expenses. The expenses listed on the affidavit were
also unrealistic. For example, the borrower reported it took $50 a month to feed a family of five.
We acknowledge that the borrower and co-borrower deposited $1,200 with Erin; however, proper
verification of the ability to save is necessary to show the borrower's and co-borrower's ability
to make mortgage payments when the borrowers' projected housing expenses considerably
exceed their previous housing expenses. In this case, the projected increase was approximately
$522, including utilities. The previous expense was zero.




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96-CH-211-1003                       Page 28
                                                                     Narrative Case Presentations



                                                                   Appendix B-2
                                                                     Page 1


FHA Case No.: 261-5869337

Insured Amount: $22,500

Section of Housing Act: 221(d)(2)

Date Underwritten: November 17, 1992

Underwriting Company: Community Mortgage Services

Underwriter Number: C126

Status: Claim Paid (Two payments made)

Summary:

Erin Mortgage Company did not adequately verify the borrower's ability to save or obtain a
proper rent verification. Proper verifications of the ability to save and rent are necessary to show
the borrower's ability to make mortgage payments, accumulate savings and manage financial
affairs. We could not locate the borrower to conduct an interview or determine why the default
occurred.

The Chief of HUD's Single Family Production Branch, Office of Housing, Michigan State Office
agreed with the audit conclusions and believed the loan files required further information before
the loan should have been approved.

Pertinent Details:

    Ability To Save Affidavit Was Not Verified

    The borrower signed an undated affidavit showing the borrower's monthly income and
    expenses. The affidavit showed an income of $1,077 and expenses of $750 with a monthly
    savings of $347. Erin verified the borrower's income but did not verify and determine the
    reasonableness of the expenses. The expenses included $275 for rent, $100 for utilities,
    $120 for food and clothing, and $235 for taxes. The expenses did not include items like
    telephone, transportation, automobile including insurance and general household expenses.
    The application showed that the borrower owned an automobile.




                                               Page 29                                  96-CH-211-1003
Narrative Case Presentations




                                                                    Appendix B-2
                                                Page 2
     Rent Verification Was Not Properly Reviewed

     The documents in the loan file showed the rent verification was signed by a person with the
     same last name as the borrower's girl friend. We could not locate the borrower or the person
     who signed the rent verification to conduct interviews.

     Prudent business practices dictate that Erin Mortgage Company should have had the
     borrower provide a copy of the lease and/or rent receipts. This is important when the
     landlord is unknown or may have an identity of interest relationship with the borrower.

Auditee Comments

We feel the paid satisfactory account listed on the borrower's credit report, along with no
derogatory credit showed the borrower had the ability to manage financial affairs. The borrower
deposited monies with the broker over an eight week span.

Prior to submission for underwriting, applicants are interviewed regarding, among other things,
their ability to save the required investment from their incomes. It has been noted that for
countless reasons, many people do not have a bank or credit union account. This is very
prevalent in the Detroit area, especially within the City of Detroit. A majority of persons who do
not have a bank or credit union account, save money at home. It is very difficult to verify a dollar
for dollar accounting of all funds on deposit with a broker.

Our affidavit breaking down income and expenses on a monthly basis is a good faith attempt on
Erin Mortgage Company's part to comply with the HUD mandates. It should be pointed out that
historically, potential homebuyers begin to accumulate funds well in advance of actively looking
for a home.

We believe that due to the prevalence of potential mortgagors not having a bank account in the
Detroit metro area, the affidavit used allows a realistic overview of these individuals ability to
accumulate the required funds.

OIG Evaluation of Auditee Comments

The borrower did not have a recent credit history. The one account listed on the credit report was
over five years old. It was paid off in January 1987 and the mortgage was approved in November
1992. Erin Mortgage Company needed a proper rent verification to establish a recent credit
history. Erin did not explain why they did not verify the stated rent payments with a lease or
receipts for the payments.




96-CH-211-1003                                 Page 30
                                                                 Narrative Case Presentations



Erin Mortgage Company did not provide comments to explain why the expenses on the ability
to save affidavit were not properly verified. The affidavit did not include normal items like
                                                                 Appendix B-2
                                                  Page 3

telephone, automobile expenses including insurance and other general household expenses.
Proper verification of the ability to save and the obtaining of a proper rent verification are
necessary to show the borrower's ability to make mortgage payments when the projected new
housing expenses considerably exceed previous housing expenses.




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96-CH-211-1003                       Page 32
                                                                   Narrative Case Presentations



                                                                 Appendix B-3
                                                                   Page 1

FHA Case No.: 261-5891335

Insured Amount: $28,450

Section of Housing Act: 221(d)(2)

Date Underwritten: April 16, 1993

Underwriting Company: Community Mortgage Services

Underwriter Number: K291

Status: In Foreclosure (Three payments made)

Summary:

Erin Mortgage Company did not adequately verify the borrower's ability to save. Proper
verification of the ability to save is necessary to show the borrower's ability to make mortgage
payments, accumulate savings and manage financial affairs. We could not locate the borrower
to conduct an interview and determine why the default occurred.

The Chief of HUD's Single Family Production Branch, Office of Housing, Michigan State Office
agreed with the audit conclusions and believed the loan files required further information before
the loan should have been approved.

Pertinent Details:

    Ability To Save Affidavit Was Not Verified

    The borrower signed an undated affidavit showing the borrower's monthly income and
    expenses. The affidavit showed an income of $1,430 and expenses of $992 with a monthly
    savings of $438. Erin verified the borrower's income but did not verify and determine the
    reasonableness of the expenses. The expenses included $350 for rent, $250 for food and
    clothing for a family of four, and $392 for taxes. The expenses did not include items like
    utilities, telephone, transportation, automobile including insurance and general household
    expenses. The application showed that the borrower owned an automobile.

Auditee Comments




                                             Page 33                                 96-CH-211-1003
Narrative Case Presentations



The borrower filed his 1992 income tax return on February 7, 1993. The refund was $1,717. The
borrower made deposits to the broker on March 11, 1993 in the amount of $500 and on April 2,
1993 in the amount of $900. The borrower stated in the affidavit that he did have a

                                                                   Appendix B-3
                                                                     Page 2

small savings at his credit union and the money on deposit came from household savings and a
tax refund.

The borrower worked 50 hours a week and received overtime and a shift premium, which was
not included in his monthly effective income. We feel this is adequate verification of the ability
to save.

OIG Evaluation of Auditee Comments

We did not question the borrower's ability to make the required investment for the downpayment.
We did, however, question the borrower's ability to save and make mortgage payments when the
projected new housing expenses considerably exceeded past expenses. Erin Mortgage Company
did not explain why it did not verify the expenses on the ability to save affidavit. The affidavit
did not include normal items like telephone, automobile including insurance and other general
household expenses. The ability to make a one-time downpayment does not equate to the ability
to make continual mortgage payments and maintain a house.




96-CH-211-1003                                Page 34
                                                                   Narrative Case Presentations



                                                                 Appendix B-4
                                                                   Page 1

FHA Case No.: 261-5995026

Insured Amount: $25,850

Section of Housing Act: 221(d)(2)

Date Underwritten: September 17,1993

Underwriting Company: Community Mortgage Services

Underwriter Number: C126

Status: Claim Paid (Two payments made)

Summary:

Erin Mortgage Company submitted a false rent verification to HUD to establish the borrower's
credit and did not properly verify the borrower's ability to save. Erin mishandled the rent
verification affidavit that established the amount of rent the borrower paid. The affidavit also
contained false data. Properly processed and completed affidavits and accurate verifications are
necessary to show the borrower's ability to make mortgage payments and manage financial
affairs. The borrower said she defaulted on the mortgage because she could not afford to make
required repairs.

The Chief of HUD's Single Family Production Branch, Office of Housing, Michigan State Office
agreed with the audit conclusions and believed the loan files required further information before
the loan should have been approved.

Pertinent Details:

    Rent Verification Was False

    Erin Mortgage Company submitted a false rent verification to HUD. The rent verification
    form was signed by the borrower's child's grandmother. The verification indicated that the
    borrower resided at an address owned by the grandmother for seven years and paid $200 a
    month for rent. The borrower said she did not rent from the grandmother. She said the
    house where she resided was owned by her parents and she did not pay any rent.

    The grandmother agreed that she never rented any property to the borrower and did not own
    the house listed on the rent verification form. She said the borrower brought the form to her
    and she signed it. She thought the form only verified that she knew the borrower.


                                             Page 35                                 96-CH-211-1003
Narrative Case Presentations




                                                                    Appendix B-4
                                                                      Page 2

     Prudent business practices dictate that Erin Mortgage Company should have had the
     borrower provide a copy of the lease and/or rent receipts, especially when a close relative
     is indicated to be the landlord. Additionally, HUD Handbook 4000.2 REV-2, Mortgagees'
     Handbook, Application Through Insurance (Single Family), paragraph 3-6, states that
     verification forms must not pass through the hands of the applicant, a real estate agent, or
     other interested third party.

     Ability To Save Affidavit Was Not Verified

     The borrower signed an undated affidavit showing the borrower's monthly income and
     expenses and that the borrower had the ability to save and manage her financial affairs. The
     affidavit showed income from the Michigan Aid to Families with Dependent Children
     Program of $1,193 and expenses of $500 with a monthly saving of $633. Erin Mortgage
     only verified the income and did not verify the propriety of the expenses. The expenses
     included $200 for rent and $300 for food and clothing for five persons. The expenses did
     not include items like utilities, telephone, transportation, and general household expenses.

     The Michigan Aid to Families with Dependent Children Program provides assistance to help
     families pay for living expenses such as shelter, heat, utilities, clothing, food and personal
     care items. The Program's brochure says because there is a maximum amount that can be
     given for these needs, the grant probably cannot cover all of the bills. To receive aid, family
     assets cannot be more than $1,000. Based on the program criteria, Erin's acceptance of the
     expense estimates without verification was not reasonable or a prudent business practice.

     Borrower's Affidavit Contained False Data

     The borrower told us she signed an undated blank affidavit to verify the amount of rent. The
     borrower said that the statement in the affidavit that she paid $200 to her grandmother was
     false.

Auditee Comments

Based on the information we received from the borrower at the initial application, the borrower
stated she lived at 15684 Mapleridge, Detroit, Michigan for seven years. The borrower also
stated that the home belonged to her deceased parents and that she paid rent to her grandmother
in the amount of $200. She provided us with her grandmother's name and address and we mailed
the verification of rent to the address given to us by the borrower. We would have no other
source to obtain this information from other than the borrower. The verification of rent was
completed and mailed back to our office in our return envelope. We are confused as to why



96-CH-211-1003                                 Page 36
                                                                  Narrative Case Presentations



                                                                 Appendix B-4
                                                                   Page 3

the grandmother completed and signed the form as landlord, when in fact she now states she was
not the landlord. Also, she never contacted our office concerning any questions she may have
had about why the form was mailed to her. We did overlook the fact that the borrower did not
date the affidavit when she signed it, however, it was not blank.

OIG Evaluation of Auditee Comments

We agree that Erin Mortgage Company did not have a source other than the borrower to obtain
past rental information. However, we believe Erin has an obligation under prudent business
practices to validate the information by requesting a lease and/or rent receipts when a close
relative is indicated to be the landlord.

Erin Mortgage Company did not explain why it did not verify the expenses on the ability to save
affidavit. The affidavit did not include normal items like telephone, transportation and other
general household expenses. Proper verification of ability to save and obtaining a proper rent
verification are necessary steps to show the borrower's ability to make mortgage payments when
the projected new housing expenses considerably exceed the previous housing expenses.




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96-CH-211-1003                       Page 38
                                                                   Narrative Case Presentations



                                                                  Appendix B-5
                                                                    Page 1

FHA Case No.: 261-6107014

Insured Amount: $26,500

Section of Housing Act: 221(d)(2)

Date Underwritten: March 1, 1994

Underwriting Company: Community Mortgage Services

Underwriter Number: K-291

Status: Delinquent (3 Payments Overdue at July 1, 1995)

Summary

Erin Mortgage Company did not properly verify the borrower's rent payment history to establish
credit or verify the borrower's ability to save. An accurate verification of a borrower's payment
history and ability to save is necessary to show the borrower's ability to make mortgage payments
and manage financial affairs. The borrower said she has a tendency to get behind on payments
but always gets caught up.

The Chief of HUD's Single Family Production Branch, Office of Housing, Michigan State Office
agreed with the audit conclusions and believed the loan files required further information before
the loan should have been approved.

Pertinent Details:

    Rent Verification Was Not Obtained

    Erin Mortgage did not obtain a rent verification to establish an acceptable credit history for
    the borrower. The borrower's credit report showed that the borrower did not have acceptable
    credit. The report listed five accounts. Four accounts had derogatory information and one
    account with a high balance of $100 was current. The four accounts with derogatory
    information showed: one account with a balance owing of $319 was in collection and was
    resolved; two accounts with a utility company with balances of $100 each were charged off;
    and one account with a balance of $170 was in collection and paid off.

    Erin Mortgage did not obtain a rent verification for the address where the borrower lived for
    the last 12 months before applying for the mortgage. The borrower stated in an affidavit that
    she did not get along with the landlord and had filed a harassment charge against the


                                             Page 39                                  96-CH-211-1003
Narrative Case Presentations



                                                                    Appendix B-5
                                                                      Page 2

     landlord. The borrower further stated that she doubted that the landlord would provide her
     a reference. Although the borrower told us she resided at the address in the loan file, she
     could not remember the name of her landlord or the correct address of the property. The
     address in the loan file does not exist.

     Prudent business practices would dictate Erin Mortgage Company should have had the
     borrower either provide a copy of the lease or rent receipts.

     Ability To Save Affidavit Was Not Verified

     The borrower signed an undated affidavit to show the borrower's monthly income and
     expenses and that the borrower had the ability to save and manage her financial affairs. The
     affidavit showed an income from the Michigan Aid to Families with Dependent Children
     Program of $1,205 and expenses of $350 with monthly savings of $855. The borrower had
     four children. Erin Mortgage Company verified the income but did not verify the expenses.

     The borrower's total monthly expenses included $350 for food and clothing. The affidavit
     did not show any expenses for rent, utilities, telephone, transportation, and general household
     expenses.

     The Michigan Aid to Families with Dependent Children Program provides assistance to help
     families pay for living expenses such as shelter, heat, utilities, clothing, food and personal
     care items. The Program's brochure says because there is a maximum amount that can be
     given for these needs, the grant probably cannot cover all of the bills. To receive aid, family
     assets cannot be more than $1,000. Based on the program criteria, Erin's use of the expense
     estimates without verification was not reasonable or a prudent business practice.

Auditee Comments

The credit report mentioned did, in fact, list five accounts on behalf of the borrower. Four of
these accounts were reported under a heading of "collection accounts".

The $170 collection account was paid off in November 1992, over a year prior to the borrower
applying for this mortgage.

The two collection accounts with less than $100 owing were paid in full in September 1991,
again well over two years prior to application, and in February 1994, respectively. Please note
that the second $100 collection was in the amount of $25, well below the $100. A receipt for this
account is part of our file.




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The $319 collection account was through no fault of the borrower. Documentation to this effect
is also in our file. At the time of the initial application, the borrower was living with her mother

                                                                    Appendix B-5
                                                                      Page 3


at 8300 Yolanda, Detroit, Michigan. She stated that she had lived there for approximately two
weeks. We inquired as to the borrower's previous addresses and the borrower stated they were
19300 Elmdale and 14446 Wade. We had no way of knowing that the address of 19300 Elmdale
was non-existent. The borrower stated she could not provide rent receipts for the Elmdale
property. However, she did in fact provide a print out from the Department of Social Services
verifying that the borrower had lived at 13136 Wade and that her rent was vendored by Social
Services. The previous address of 14446 Wade given to us by the borrower was an error. It is
not uncommon for applicants not to retain rent receipts. Leases and/or rental agreements are
rarely in writing. Many landlords rent on a month to month basis.

OIG Evaluation of Auditee Comments

We agree with the credit information that Erin provided. Although the accounts were paid off
or charged off, four of them contained derogatory information that should have led Erin to
question the borrowers claimed credit rating. Based on the borrower's credit history, Erin
Mortgage Company should have obtained a rent verification to further determine the borrower's
ability to make mortgage payments. If Erin had made an attempt to send a rent verification to the
borrower's landlord, Erin would have known that the address of 19300 Elmdale did not exist.

Erin did not provide comments to explain why it did not verify the expenses on the ability to save
affidavit.




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                                                                 Appendix B-6
                                                                   Page 1

FHA Case No.: 261-5882379

Insured Amount: $26,900

Section of Housing Act: 221(d)(2)

Date Underwritten: May 14, 1993

Underwriting Company: Community Mortgage Services

Underwriter Number: K291

Status: Claim Paid (Eight payments made)

Summary:

Erin Mortgage Company did not properly verify the borrowers' ability to save funds. Proper
verifications are necessary to show the borrowers' ability to make mortgage payments and
manage financial affairs. The borrower passed away after the default. The co-borrower said the
default occurred because they could not afford to maintain the property.

The Chief of HUD's Single Family Production Branch, Office of Housing, Michigan State Office
agreed with the audit conclusions and believed the loan files required further information before
the loan should have been approved.

Pertinent Details:

    Ability To Save Was Not Verified

    Erin Mortgage Company did not determine the borrower and co-borrower's ability to save
    funds for the downpayment and to make mortgage payments. The income verifications
    showed that both the borrower and co-borrower each received an income of $468 per month
    from social security.

    The borrower's rent verification showed that she was paying $400 a month for rent. As a
    result, the borrower had only $68 a month for food, clothing, utilities, transportation, and
    other expenses for a family of three. The co-borrower's rent verification showed that she was
    paying $450 a month for rent. Consequently, she had only $18 a month for food, clothing,
    utilities and other expenses. It is unrealistic to assume that the borrower and co-borrower
    could have survived and saved a downpayment on these amounts. The loan file did not
    contain any information to explain the inconsistencies. HUD requires the lender to


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                                                                Appendix B-6
                                                                  Page 2

     provide additional explanatory statements or additional documentation to make a sound
     underwriting decision when standard documentation does not provide enough information
     to support the lender's decision.

Auditee Comments

The borrower maintained three savings accounts at Comerica, as evidenced by the verification
of deposit in the file. The borrower withdrew a total of $975 from these accounts on April 12,
1993. On April 13, 1993, $930 was deposited with the broker. Based on the bank statements in
the file, we feel that this adequately verified the source of required funds.

OIG Evaluation of Auditee Comments

We did not question the source of funds for the borrowers' deposits. Our concern was that the
borrowers' did not provide realistic information to determine that they had the ability to make
mortgage payments and manage their financial affairs. Information in the file showed one
borrower had $18 left after her rent payment for food, clothing and other expenses. The other
borrower had $68 left after her rent payment for food, clothing and other expenses for a family
of three. HUD requires the lender to provide additional explanatory information when standard
documentation does not provide enough information to support the lender's decision.




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                                                                  Appendix B-7
                                                                    Page 1

FHA Case No.: 261-5894007

Insured Amount: $26,450

Section of Housing Act: 221(d)(2)

Date Underwritten: December 23, 1992

Underwriting Company: Community Mortgage Services

Underwriter Number and : K291

Status: Claim Paid (Two payments made)

Summary:

Erin Mortgage Company did not adequately verify the borrower's ability to save. Proper
verification of the ability to save is necessary to show the borrower's ability to make mortgage
payments, accumulate savings, and manage financial affairs. The borrower said she defaulted
on the mortgage because her sister for whom she bought the house could not afford to make the
mortgage payments.

The Chief of HUD's Single Family Production Branch, Office of Housing, Michigan State Office
agreed with the audit conclusions and believed the loan files required further information before
the loan should have been approved.

Pertinent Details:

    Ability To Save Affidavit Was Not Verified

    The borrower signed an undated affidavit showing the borrower's monthly income and
    expenses. The affidavit showed an income of $1,701 and expenses of $520 with a monthly
    savings of $1,181. Erin verified the borrower's income which included $829 in public
    assistance and $872 in social security benefits for two disabled children. Erin did not verify
    and determine the reasonableness of the expenses. The expenses included $350 for rent, $70
    for utilities, and $100 for food and clothing. The expenses did not include items like
    telephone, transportation, and general household expenses.

    The expenses were unrealistic for a family of seven, especially food and clothing of $100,
    and utilities of $70. The Department of Social Services estimated a monthly utilities cost of
    $205. Although the loan file contained the income and expense affidavit and the Social


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                                                                Appendix B-7
                                                                     Page 2

     Services estimate, it did not contain an explanation for the difference between the two.
     Additionally, according to the Department of Social Services' policy, a family cannot receive
     public assistance if assets including cash are over $1,000. The income and expenses
     affidavit showed the borrower was able to save more than this amount in one month.

Auditee Comments

At the initial application on December 17, 1992, the borrower stated that she would be occupying
the property as her primary residence. At the closing, the borrower signed an affidavit stating that
she would occupy the property. We had no reason to question the borrower's statements. We
relied on the information that she gave us for occupancy status.

The borrower received $659 monthly in public assistance, $872 in social security benefits for two
disabled children and food stamp benefits of $170 totaling $1,701 a month. The borrower
deposited $1,000 over a five week period and stated that it came from her savings.

The borrower had lived at her present address for three years with a satisfactory payment history.
The borrower's housing expense was decreasing.

OIG Evaluation of Auditee Comments

We agree that Erin Mortgage Company was not responsible for the borrower not occupying the
residence.

Erin did not provide an explanation why it did not verify the reasonableness of expenses to
establish the borrower's ability to save. Erin also did not explain the unrealistic expenses claimed
for a family of seven. For example, the borrower showed only $100 a month was needed to feed
and cloth the family of seven. Proper verification is necessary to show the borrower's ability to
make mortgage payments when the projected new housing expenses considerably exceed the
previous housing expenses. Erin said the housing expenses were decreasing; however, Erin did
not consider utilities and maintenance expenses in reaching that conclusion.




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                                                                 Appendix B-8
                                                                   Page 1

FHA Case No.: 261-5902870

Insured Amount: $22,400

Section of Housing Act: 221(d)(2)

Date Underwritten: April 28, 1993

Underwriting Company: Community Mortgage Services

Underwriter Number: C126

Status: Claim Paid (Two payments made)

Summary:

Erin Mortgage Company did not adequately verify the borrower's ability to save. The affidavit
showing income and expenses contained false information. Proper verification of the ability to
save and proper handling of the income and expense affidavit are necessary to show the
borrower's ability to make mortgage payments, accumulate savings and manage financial affairs.
The borrower defaulted because she became disgruntled with the house when it immediately
needed a new furnace.

The Chief of HUD's Single Family Production Branch, Office of Housing, Michigan State Office
agreed with the audit conclusions and believed the loan files required further information before
the loan should have been approved.

Pertinent Details:


    Ability To Save Affidavit Was Not Verified

    The borrower signed an undated affidavit showing the borrower's monthly income and
    expenses. The affidavit showed an income of $1,521 and expenses of $800 with a monthly
    savings of $721. Erin verified the borrower's income but did not verify and determine the
    reasonableness of the expenses. The expenses included: $300 for rent; $100 for utilities; and
    $400 for food and clothing. The expenses did not include items like telephone,
    transportation, and general household expenses.




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     The expenses were unrealistic for a family of nine. The borrower was on the Michigan Aid
     to Families with Dependent Children Program. The Department of Social Services


                                                                    Appendix B-8
                                                                      Page 2

     estimated a monthly utilities cost of $205, and a food cost of $501. Although the loan file
     contained the income and expense affidavit, and the Department of Social Services' estimate,
     it did not contain an explanation for the difference between the two.

     The Michigan Aid to Families with Dependent Children Program provides assistance to help
     families pay for living expenses such as shelter, heat, utilities, clothing, food and personal
     care items. The Program's brochure says because there is a maximum amount that can be
     given for these needs, the grant probably cannot cover all of the bills. To receive aid, family
     assets cannot be more than $1,000. Based on this program criteria, Erin's use of the expense
     estimates without verification was not reasonable or a prudent business practice.

     Affidavit Contained False Information

     The borrower said the affidavit showing income and expenses was blank when she signed
     it. The affidavit was also undated. The borrower said she did not write the monthly
     expenses on the affidavit. She said she could not save $721 per month as indicated. Her
     statement is consistent with the fact that public assistance is calculated to cover necessary
     expenses and not to create savings.

Auditee Comments

The borrower made deposits with the broker over an eight month period. The Michigan Aid to
Families with Dependent Children's brochure clearly states recipients can spend their money as
they wish or need.

The information shown on the affidavit was given to us by the borrower. We did overlook the
fact that the borrower did not date it. However, it was not blank.

OIG Evaluation of Auditee Comments

We agree that recipients of Michigan Aid to Families with Dependent Children can spend money
as they wish or need. However as stated in the case narrative, at a savings rate of $721 per
month, the borrower would have been ineligible for aid in less than two months. Therefore, Erin
should have realized that the expenses were unrealistic and should have verified the expense
items to determine the borrower's ability to manage her financial affairs.




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                                                                 Appendix B-9
                                                                   Page 1

FHA Case No.: 261-6080252

Insured Amount: $25,000

Section of Housing Act: 221(d)(2)

Date Underwritten: January 20, 1994

Underwriting Company: Community Mortgage Services

Underwriter Number: K291

Status: Claim Paid (No payments made)

Summary:

Erin Mortgage Company submitted a false rent verification to HUD to establish the borrower's
credit and did not properly verify the borrower's ability to save. Erin also mishandled the
affidavits that showed the borrower's income and expenses and her prior address. Properly
processed and completed affidavits and accurate verifications are necessary to show the
borrower's ability to make mortgage payments and manage financial affairs.

Although the borrower was present during our interview, we could not ascertain her reasons for
the default since she had a stroke and could not talk. The borrower's daughter said the default
occurred because her mother had Alzheimer Disease and stopped making mortgage payments.

The Chief of HUD's Single Family Production Branch, Office of Housing, Michigan State Office
agreed with the audit conclusions and believed the loan files required further information before
the loan should have been approved.

Pertinent Details

    Rent Verification Was false

    Erin Mortgage Company submitted a false rent verification to HUD. The borrower did not
    have a recent credit history and said in an undated, but signed affidavit that she was not a
    seeker of credit and paid cash for all purchases. Therefore, a proper rent verification was
    essential to establish the borrower's credit worthiness.

    The rent verification form was signed by the borrower's granddaughter who was acting as
    a conservator. The granddaughter said a person from the mortgage company brought the


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                                                                    Appendix B-9
                                                                      Page 2
     rent verification form to her at 4350 Buckingham, Detroit. The granddaughter said the
     person told her to write $275 per month as rent and that the borrower lived with her for six
     years. The granddaughter said the borrower lived with her for approximately 8 months prior
     to buying the house. She said she did not tell anyone that she was the landlord, but did tell
     the mortgage company that her grandmother, the borrower, lived at 1310 Pallister, Detroit.
     Prior to living with her granddaughter, the borrower lived at 1310 Pallister for 12 years and
     had an acceptable payment history.

     The actual landlord of 4350 Buckingham said the granddaughter rented the house and lived
     there for about a year before moving out in January 1994. The landlord said the rent was
     $400 per month and the granddaughter moved out owing nine months back rent.

     Prudent business practices dictate that Erin Mortgage Company should have had the
     borrower provide a copy of the lease and/or rent receipts, especially when a close relative
     is indicated to be the landlord.


     Ability To Save Affidavit Was Not Verified

     The borrower provided an undated affidavit showing the borrower's income and expenses,
     and establishing that the borrower had the ability to save and manage financial affairs. The
     affidavit showed income of $933 and expenses of $550 with monthly savings of $383. Erin
     Mortgage Company verified the income but did not verify the reasonableness of the monthly
     expenses. The expenses only included $275 for rent, $75 for utilities and $200 for food and
     clothing. The monthly expenses did not include items like telephone, transportation, and
     general household expenses.

     Signed Affidavits Were Mishandled

     The borrower's granddaughter said her grandmother signed blank affidavits showing income
     and expenses and the borrower's prior address of 4350 Buckingham. The granddaughter said
     she was present when her grandmother signed the affidavits. The granddaughter said the
     information regarding borrower's prior address was false.

Auditee Comments

At the time of the initial application, the borrower stated she currently lived at 4350 Buckingham,
Detroit, Michigan. She stated that she had lived there for six years. This information was written
in the appropriate section of the uniform residential application. Questions regarding the amount
of rent and to whom it was paid were asked and answered as indicated on the application.




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                                                                    Appendix B-9
                                                                      Page 3

The rental verification was mailed to the address provided by the borrower. The form was
completed and returned to our office in the return envelope provided and the document was
placed in our file. At no time did anyone employed by, or associated with, Erin Mortgage
Company tell anyone what to write as rent in this case or another case.Erin Mortgage Company
strictly complies with HUD requirements regarding verification forms.

The borrower had two previous satisfactory accounts at Chrysler Credit appearing on her credit
report. It is not uncommon for family members to reside with other family members and pay rent
or board. It is indeed rare that rent receipts are given in cases such as this. Erin Mortgage relied
on information provided by the borrower in order to reach its decision in this case.

It seems very suspicious that the granddaughter making these accusations is a reliable source due
to the fact that she was living with her grandmother, stated she was the landlord and moved from
the Buckingham property owing nine months rent. As a conservator she was responsible for
paying all expenses on behalf of her grandmother.

OIG Evaluation of Auditee Comments

The borrower's conservator said the mortgage company brought the rent verification form to her
and told her what to put on it. She also said the borrower signed blank affidavits showing income
and expenses. Erin Mortgage Company refuted this information; however, neither Erin Mortgage
nor the borrower had documentation to support their position. Erin Mortgage did not provide a
response to explain why it did not verify the rent information by having the borrower provide a
lease and/or rent receipts. Erin said it is rare that rent receipts are given in cases like this;
however, when a close relative is involved or an unknown landlord, prudent business practice
dictates that some form of verification be obtained.

Erin did not explain why it did not verify the reasonableness of monthly expenses when preparing
the ability to save affidavit.




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                             Appendix C

Auditee Comments




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                                                                           Appendix D

Distribution
Assistant Secretary for Housing - Federal Housing Commissioner (2)
General Counsel, G (Room 10214)
Chief Financial Officer, F (Room 10166)(2)
Secretary's Representative, Midwest
State Coordinator, Michigan State Office
Assistant General Counsel for the Midwest
Public Affairs Officer, Midwest
State Coordinator, Michigan State Office
Director, Office of Housing, Michigan State Office (2)
Assistant to the Secretary for Field Management, SC (Room 7106)
Deputy Chief Financial Officer for Operations, FO (Room 10166)(2)
Acquisitions Librarian, Library, AS (Room 8141)
Director, Office of Lender Activities and Land Sales Registration, HSL (Room 9146)(20)
Comptroller/Audit Liaison Officer, Office of Housing, HF (Room 5132)
Director, Division of Housing Finance Analysis, TEF (Room 8212)
Director, Internal Audit Division, FNMA, 3900 Wisconsin Avenue, NW,
 Washington, D.C. 20016
Assistant Director in Charge, U.S. GAO, 820 1st St. NE, Union Plaza Bldg. 2, Suite 150,
Washington, D.C. 20002 (2)
Director, Loan Guaranty Service, VA, Veterans Bldg, Room 365, 810 Vermont Avenue, NW,
 Washington, D.C. 20420
Department of Veteran Affairs, OIG (52A), 810 Vermont Avenue, NW,
 Washington, D.C. 20420




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