oversight

City Wide Mortgage, Inc., Smyrna, GA

Published by the Department of Housing and Urban Development, Office of Inspector General on 1996-03-08.

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

                                                                              March 8, 1996
                                                                         Audit Case Number

                                                                              96-DE-221-1003




TO:            Emelda P. Johnson, Deputy Assistant Secretary for Single Family Housing, HS


FROM:          W. D. Anderson, District Inspector General for Audit, 8AGA


SUBJECT:       City Wide Mortgage, Inc.
               Limited Review of Title Insurance Charges and Related Fees
               Smyrna, Georgia


We have completed a limited review of City Wide Mortgage, Inc. located in Smyrna, Georgia. The
review was conducted in response to complaints received, as well as at the request of the Assistant
United States Attorney, District of Colorado. The objective of our review was to determine whether
mortgagors were overcharged for title insurance policies obtained as part of refinancing their federally
backed home mortgages.

We found that City Wide Mortgage did not accurately disclose to mortgagors the actual costs
associated with refinancing home mortgages. In addition, the review found that City Wide Mortgage
was, in effect, obtaining an unearned fee by inflating the title insurance charge on the HUD-1
settlement statement. The overcharge was used to cover the cost of a third party to conduct a file
review and disburse the loan proceeds. We also determined that City Wide Mortgage charged more
than the HUD authorized amount and did not follow prudent business practices in the disclosure of
the disbursement of loan proceeds.

Should you have any questions, please contact Ernest Kite, Assistant District Inspector General for
Audit, at (303) 672-5452.
Management Memorandum




                 (THIS PAGE LEFT BLANK INTENTIONALLY)




96-DE-221-1003                   Page ii
Executive Summary
City Wide Mortgage, Inc. did not accurately disclose to mortgagors (borrowers) the actual costs
associated with the settlement of refinancing their home mortgage. The settlement statement, also
commonly known as the HUD-1, was completed with information that did not represent the actual
cost of refinancing the mortgage and the related settlement charges. In addition, the charges for title
insurance that appeared on the settlement statement were higher than the actual cost of the lender's
title insurance policy. As a result, the mortgagor was overcharged for the lender's title insurance
policy and was not aware of the overcharge due to the inadequate disclosure of the actual fees and
charges on the HUD-1 settlement statement. It appears the improper charges occurred because of
City Wide Mortgage's lack of knowledge or disregard for loan settlement requirements set by HUD
and the Real Estate Settlement Procedures Act of 1974 (RESPA). The improper disclosure on the
settlement statement is a direct violation of the Real Estate Settlement Procedures Act of 1974 as
well as HUD requirements for direct endorsement mortgagee (lender) practices. City Wide Mortgage
also disregarded the maximum fees allowable, as set by the HUD State Office, for the purchase of
a home with federally related financing.



                                       Our review disclosed that City Wide Mortgage overcharged
 Improper disclosure of
                                       mortgagors for lender's title insurance policies for refinanced
 title insurance charges and
                                       federally insured mortgages. For the sample of Colorado
 related fees
                                       loans evaluated during our review, all were overcharged for
                                       lender's title insurance policies. The overcharges ranged
                                       between $12 and $370, with an average overcharge of
                                       approximately $289 per policy. In addition, other settlement
                                       fees for items such as recording, endorsements, and tax
                                       certificates were also incorrectly shown on the settlement
                                       statements.

                                       The exact reason for not disclosing the actual charge for title
                                       insurance on the HUD-1 settlement statement was unclear.
                                       Regardless, the overcharge for title insurance and the lack of
                                       proper disclosure of the charges, both are violations of HUD
                                       requirements and RESPA. Not only were the requirements of
                                       RESPA violated, but the spirit of promoting full disclosure of
                                       settlement fees and charges to borrowers was also
                                       disregarded.

                                       The practice of charging City Wide Mortgage customers
 Overcharges considered
                                       above the actual cost for a lender's title insurance policy
 unearned fees
                                       constitutes an unearned fee according to RESPA and HUD
                                       guidelines. Since City Wide Mortgage did not require a
                                       separate settlement fee on the HUD-1 for the disbursement
                                       and compliance loan review, then the cost should have been
                                       paid by the mortgagee and covered by the loan origination fee.


                                                Page iii                                  96-DE-221-1003
Executive Summary



                              In addition, the mortgagor should not be required to pay for
                              a charge that was not fully disclosed on the settlement
                              statement, as required by RESPA and HUD guidance. City
                              Wide Mortgage either was unaware of the proper procedures
                              or chose to disregard the instructions for the accurate
                              completion of the HUD-1.

                              City Wide Mortgage consistently charged above the maximum
 Fees charged above HUD
                              amount authorized for title insurance in the State of Colorado.
 authorized amount
                              The Denver HUD Field Office developed a schedule of
                              permissible closing costs and fees that are considered
                              reasonable and customary for the area. The schedule
                              stipulates that the maximum amount to be charged for a
                              lender's title policy in the State of Colorado is the actual cost
                              of the policy for refinanced loans. We found mortgagors were
                              overcharged approximately $289, on average, for each loan
                              reviewed. As can be seen, mortgagors paid fees for lender's
                              title policies in excess of the amount authorized by the HUD
                              developed schedule of permissible closing costs and fees.

                              Our review also disclosed that if the cost for the disbursement
                              of loan proceeds and compliance file review were placed on
                              the HUD-1 settlement statement, the majority of the fees
                              would have been above the HUD maximum allowable amount
                              according to the schedule of permissible closing costs and
                              fees.

                              In addition to reviewing loans originated in Colorado, we
 Settlement fees charged in
                              evaluated a sample of various loans originated from other
 other states also
                              states where City Wide Mortgage had loan origination offices.
 questionable
                              We performed a cursory review of settlement fees, specifically
                              title insurance fees, for the nationwide sample. We found the
                              same practice of overcharging mortgagors for title insurance
                              for the national sample as was found for the Colorado sample.
                              The overcharge was used to compensate a third party for
                              disbursing loan proceeds. The disburser even had detailed
                              written instructions of how to split the title insurance charge
                              on the HUD-1 settlement statement between all parties.



 The Office of Housing
 should consider              We recommend the Office of Housing consider taking
 administrative action        appropriate administrative action against City Wide Mortgage


96-DE-221-1003                         Page iv
                                                                             Executive Summary



  based upon the seriousness of the violations of HUD requirements cited in the report. The action
  should include the permanent withdrawal of City Wide Mortgage's HUD/FHA direct
  endorsement approval as well as the possible debarment of City Wide Mortgage officials from
  participating in any Federal programs.

                                    The Office of Housing should also consider taking action
                                    against the owners of City Wide Mortgage, Inc. based upon
                                    the violations of the Real Estate Settlement Procedures Act
                                    detailed in the report.

                                    The draft finding was provided to City Wide Mortgage
Auditee Comments
                                    officials and their legal representative on September 22, 1995.
                                    An exit conference was held on October 23, 1995. The
                                    comments received from Karsh & Fulton, P.C. on behalf of
                                    City Wide Mortgage have been incorporated in the report as
                                    appropriate.

                                    The response on behalf of City Wide Mortgage to the draft
                                    finding is included as Appendix B. The attachments
                                    accompanying the response have not been included but have
                                    been provided to the Office of the Deputy Assistant Secretary
                                    for Single Family Housing for their information and use.




                                             Page v                                    96-DE-221-1003
Executive Summary




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96-DE-221-1003                      Page vi
Table of Contents

Management Memorandum                                             i


Executive Summary                                                iii


Introduction                                                      1


Finding

          Improper Disclosure of Title Insurance
           Charges and Related Fees                               3


Internal Controls                                               19


Follow Up On Prior Audits                                       23


Appendices

    A     Summary Schedule of Mortgagor Overcharges             25

    A-1 Schedule of Title Insurance Charges                     27

    A-2 Schedule of Endorsement Charges                         29

    A-3 Schedule of Tax Certificate Charges                     31

    A-4 Schedule of Recording Fee Charges                       33




                              Page vii                96-DE-221-1003
Table of Contents




         B       Auditee Comments                                      35

         C       Distribution                                          47


Abbreviations
         FHA        Federal Housing Administration
         HUD        U.S. Department of Housing and Urban Development
         RESPA      Real Estate Settlement Procedures Act




96-DE-221-1003                              Page viii
(THIS PAGE LEFT BLANK INTENTIONALLY)




                Page 1                 96-DE-221-1003
Introduction
City Wide Mortgage was incorporated on March 23, 1989 under the laws of the State of Georgia.
Its principal business activity was to originate and market mortgage loans to investors. The corporate
headquarters were located in Smyrna, Georgia, a suburb of Atlanta, with satellite loan origination
offices in Arizona, Colorado, Florida, Illinois, Nevada, North Carolina, South Carolina, Virginia, and
Washington. Due to the increase of interest rates and the decrease in demand for mortgage
refinances, City Wide Mortgage closed operations in December 1994. However, according to the
Georgia Secretary of State, City Wide Mortgage, Inc. is still registered as an active going concern
corporation in the State of Georgia as of March 1995, when audit field work concluded in Atlanta,
Georgia.



                                       The objective of the review was to determine whether City
 Audit objective
                                       Wide Mortgage, Inc. properly charged mortgagors for title
                                       insurance connected with refinancing FHA backed mortgages.
                                       To accomplish this audit objective, we reviewed FHA loan
                                       case binders, documentation provided by Stewart Title and
                                       Title America of Denver. Also, audit work was conducted in
                                       Atlanta, Georgia at the offices of Charles Gallagher, Attorney
                                       at Law, and McManus & Associates (Patriot Title), both
                                       former disbursing agents for City Wide Mortgage, Inc.
                                       Preliminary review of Patriot Title's disbursement files for City
                                       Wide loans was conducted at the Law office of Kennedy and
                                       Christopher, located in Denver, Colorado. In addition, the
                                       loan files of City Wide Mortgage, Inc. were reviewed at the
                                       offices of their attorney, Mr. A. J. Block. Audit site work was
                                       conducted during the period of January through March, 1995.

                                       Our review covered loans closed by City Wide Mortgage, Inc.
 Scope
                                       during the period of January 1, 1993 to May 31, 1994. The
                                       review sample consisted of 70 loans for properties located in
                                       Colorado and an additional 40 loans for properties located in
                                       Arizona, Georgia, Illinois, Nevada, North Carolina, South
                                       Carolina and Virginia.

                                       As part of the review, we examined select FHA case binders
                                       for loans originated by City Wide Mortgage and files of
                                       Western Escrow, an associate company of City Wide
                                       Mortgage. In addition, we reviewed loan disbursement
                                       documentation for loans in the Colorado sample at the office
                                       of Charles Gallagher. Documentation for loans in the
                                       Colorado and nationwide sample were also reviewed at the


96-DE-221-1003                                  Page 2
                                          Table of Contents



offices of John J. McManus & Associates (Patriot Title) and
their Colorado based legal counsel, Kennedy and Christopher.
We concluded the review by examining files belonging to City
Wide Mortgage. City Wide Mortgage files for all loans in the
Colorado and nationwide sample could not be located;
therefore, conclusions were based upon the information
available at the time of the review.

We also conducted interviews with the owners of City Wide
Mortgage, City Wide's attorneys, employees of John J.
McManus & Associates (Patriot Title) and Charles Gallagher,
both former disbursing agents. In addition, we talked to
officials with Stewart Title of Denver, Title America of
Denver, and with various HUD Officials.

We conducted the review in accordance with generally
accepted government auditing standards.




         Page 3                                 96-DE-221-1003
Finding




 Improper Disclosure of Title Insurance Charges
               and Related Fees
City Wide Mortgage, Inc. did not accurately disclose to mortgagors (borrowers) the actual cost of
fees associated with the settlement of refinancing their home mortgage. The settlement statement,
also commonly known as the HUD-1, was completed with information that did not accurately
represent the actual cost of refinancing the mortgage and the related settlement charges. In addition,
the charges for title insurance that appeared on the settlement statement were often higher then the
actual cost of the lender's title insurance policy. As a result, the mortgagor was overcharged for the
lender's title insurance policy and was not aware of the overcharge. The overcharges ranged between
$12 and $370, with an average overcharge of approximately $289 per policy. The exact reason for
City Wide's practice of not disclosing the actual charge for title insurance on the HUD-1 settlement
statement was unclear.

Since City Wide Mortgage is no longer an active going concern, and the loan origination offices have
been closed, we could not determine the rationale for not fully disclosing all loan settlement fees and
charges. The improper disclosure on the settlement statement is a direct violation of the Real Estate
Settlement Procedures Act (RESPA) of 1974 as well as HUD requirements for direct endorsement
mortgagee (lender) practices. Not only were the requirements of the Real Estate Settlement
Procedures Act violated, but the spirit of promoting full disclosure of settlement fees and charges to
borrowers was also disregarded.

City Wide Mortgage's practice was to charge the mortgagor for the cost of a new title policy. The
amount charged to the mortgagor on the settlement statement was obtained by a City Wide Mortgage
employee from a title insurance rate schedule. However, City Wide Mortgage paid the reissue rate
for the lender's title policy obtained. The fee charged to the mortgagor, above the actual cost of the
lenders' title policy, was used to compensate the firm hired to disburse the loan proceeds and conduct
compliance file reviews.

City Wide Mortgage officials do not agree with the conclusions expressed in the report. City Wide
Mortgage asserts that the audit report mischaracterizes the business relationship between City Wide
Mortgage, Inc. and the parties who disbursed loan proceeds. City Wide officials maintain that the
third party disburser of loan proceeds was the agent of the title company who issued the title
insurance policy, not City Wide Mortgage. City Wide officials also contend mortgagors were not
overcharged for title insurance and all related charges were properly disclosed. They also insist the
HUD-1 accurately represented the actual costs of refinancing and other related settlement charges.




96-DE-221-1003                                   Page 4
                                                                                   Finding



                             City Wide Mortgage's principal business activity was to
History of City Wide
                             originate and market mortgage loans to investors. The
Mortgage's title insurance
                             Company had satellite offices in several states, with the
program
                             company's headquarters in Smryna, Georgia, a suburb of
                             Atlanta.

                             Originally, when the outlying loan origination offices opened,
                             the closing of the loans, as well as disbursement of loan
                             proceeds, were handled by a closing agent. The closing agent
                             was located in the same area as the outlying City Wide office.
                             City Wide Mortgage experienced problems with having each
                             originating office handle the closing and disbursing of loan
                             proceeds and decided to centralize the disbursement function
                             to the Atlanta area, where their headquarters were located.
                             City Wide Mortgage arranged for Mr. Charles Gallagher, an
                             attorney with whom they had worked previously, to handle the
                             function of disbursing loan proceeds. Mr. Gallagher's office
                             was at a centralized location near City Wide's main office.
                             Mr. Gallagher served in this capacity from the fall of 1992
                             until September, 1993 when Patriot Title & Abstract
                             Company took over the function of disbursing loan proceeds.
                             Disbursement of loan proceeds resulting from loans in the
                             states of Florida and Washington were not part of the
                             centralized funding mechanism.

                             Patriot Title & Abstract Company was a wholly owned
                             business of John J. McManus & Associates, an Atlanta law
                             firm. Patriot Title conducted compliance reviews of the loan
                             files and disbursed the loan proceeds. The purpose of the
                             compliance review was to evaluate the collateral documents.
                             They would then communicate back to City Wide Mortgage
                             any problems found so issuance of the final title policy, and
                             funding of the loan from the investor, would not be delayed.
                             Patriot Title ended their business relationship with City Wide
                             Mortgage and ceased operations in June, 1994.

                             The Real Estate Settlement Procedures Act of 1974, also
Disclosure requirements
                             commonly known as RESPA, was enacted to reform the real
                             estate settlement process to ensure that consumers throughout
                             the nation were provided with greater and more timely
                             information on the nature and costs of the settlement process.
                             RESPA applies to all real estate transactions secured by a
                             Federally related mortgage loan. The Act requires full
                             disclosure to borrowers by the lender of all fees and actual


                                      Page 5                                   96-DE-221-1003
Finding



                            costs associated with obtaining a Federally related mortgage
                            loan. The overall purpose for creating RESPA was to fully
                            disclose all information about the real estate transaction to the
                            uninformed mortgagor.

                            In addition, HUD Handbook 4000.2 Rev-2, Mortgagee's
                            Handbook - Application through Insurance (Single Family),
                            explains procedures and guidance on the origination and
                            closing of HUD/FHA single family mortgages. Chapter 5-3 of
                            the handbook states customary and reasonable closing costs
                            and other fees and charges may be collected from the
                            borrower by the mortgagee. This includes charges for title
                            examination and title insurance. Chapter 5-5 of the handbook
                            also states that payment for services, above that actually paid
                            for the service by the mortgagee, is prohibited and considered
                            an unearned fee. Charging above the actual amount for a
                            service is also considered a violation of the Real Estate
                            Settlement Procedures Act.

                            City Wide Mortgage, Inc. was approved and participated in
 Direct Endorsement
                            the Single Family Direct Endorsement program. The Single
 program requirements
                            Family Direct Endorsement loan program was designed to
                            give mortgagees the responsibilities involved in originating
                            and closing mortgage loans without prior HUD review.
                            Program requirements are described in HUD Single Family
                            Direct Endorsement Program Handbook 4000.4 REV-1
                            CHANGE-1.          The handbook states mortgagees are
                            responsible for complying with all applicable HUD regulations
                            and handbook instructions. It also notes authority to
                            participate in the Direct Endorsement program is a privilege
                            and a Direct Endorsement mortgagee must conduct its
                            business operations in accordance with accepted sound
                            mortgage lending practices, ethics and standards.        The
                            handbook goes on to require the mortgagee to monitor and
                            evaluate the performance of personnel used for the Direct
                            Endorsement program. All loans reviewed during the audit
                            were originated under the Direct Endorsement program and
                            should have followed all applicable guidance and rules that
                            regulate the program.

                                Our review disclosed that City Wide Mortgage
 Mortgagors charged above
                                overcharged mortgagors for lender's title insurance
 actual cost for title
                                policies for refinanced Federally insured mortgages. The
 insurance
                                sample of Colorado loans evaluated during our review


96-DE-221-1003                       Page 6
                                                       Finding



concluded that all mortgagors were overcharged for lender's
title insurance policies. The overcharges ranged between $12
and $370.         Appendix A-1 schedules the mortgagor
overcharges by loan number for the Colorado sample.

On an average each mortgagor in the review sample was
overcharged approximately $289 for lenders' title insurance
policies obtained when they refinanced their home mortgage.
The following chart compares the average amount charged to
mortgagors on the HUD-1 settlement statement for title
insurance, the average cost of a title policy, and the average
amount each mortgagor was overcharged for the title policy,
for loans included in our review sample for the State of
Colorado.




The Real Estate Settlement Procedures Act (RESPA), as well
as HUD Handbook 4000.2 Rev-2, provide guidance on the
permissible loan related fees that may be charged on a FHA
backed loan and prohibits charging the mortgagor a price
above that actually paid for the service. In addition, Title 24
of the Code of Federal Regulations, Part 203.27 states the
mortgagee may collect from the mortgagor reasonable and
customary amounts, but not more than the amount actually
paid by the mortgagee for the fee or charge. This includes
title examination, title insurance, and any related fees.




         Page 7                                   96-DE-221-1003
Finding



                 For loans originated in Colorado, employees of Western
                 Escrow of Denver, an associate company of City Wide
                 Mortgage, handled the closing of loans with the mortgagor.
                 The closing documents were prepared by City Wide Mortgage
                 employees in the Smyrna, Georgia office and sent to their
                 Colorado office. All mortgage documents were signed in
                 Colorado by the Western Escrow representative and the
                 mortgagor. The mortgage package of all executed documents
                 was then sent to City Wide Mortgage's office in Smyrna,
                 Georgia by an overnight express service.

                 Once the loan package with the executed loan documents
                 arrived at City Wide's headquarters office, it was forwarded to
                 Charles Gallagher or Patriot Title & Abstract Company for
                 disbursement of the loan proceeds. After the right of recision
                 period, the loan proceeds were disbursed. Neither Mr.
                 Gallagher nor Patriot Title could provide written
                 documentation from City Wide Mortgage informing them of
                 the way to disburse loan proceeds. Based upon our review of
                 the disbursement of loan proceeds, it was concluded that the
                 HUD-1 document was disregarded. Based upon our review,
                 we found the difference between what was charged to the
                 mortgagor for title insurance and amount paid for the reissue
                 title policy, was the compensation for the disbursement of loan
                 proceeds and the compliance file review.

                 Our review of the loans originated in the State of Colorado by
                 City Wide Mortgage, Inc. concluded that the disclosure of title
                 and settlement fees charged on the HUD-1 settlement
                 statement were improper; title fee overcharges were used to
                 compensate a third party to disburse loan proceeds; the
                 overcharges are considered unearned fees according to
                 RESPA and HUD guidelines; and the fees charged were above
                 the HUD authorized amount.

                 In addition, analysis during the audit showed in some cases,
                 City Wide Mortgage not only charged the mortgagor for the
                 full basic rate of the lender's title insurance policy, but also
                 included an additional amount for owners' extended coverage.
                 Owners' extended coverage provides for mechanic's lien
                 protection, survey protection, and gap protection which are
                 not included in a lender's title policy obtained at the basic rate.




96-DE-221-1003             Page 8
                                                                                      Finding



1.   Improper disclosure of   As part of our review of the 70 loans originated in Colorado,
     title and settlement     we compared the amount charged for title insurance (line
     charges on HUD-1         1108) on the HUD-1 settlement statement to the rate schedule
                              for the respective title company. Adequate information to
                              complete the analysis could be obtained for only 54 of the 70
                              loans. The comparison of the title insurance rate schedules
                              and the HUD-1 settlement statement revealed that the amount
                              shown on the HUD-1 settlement statement was:

                              •   below the basic rate on the title insurance rate schedule for
                                  1 loan;

                              •   equal to the basic rate for 10 loans;

                              •   between the basic rate and the owners' extended coverage
                                  rate for 3 loans;

                              •   equal to the owners' extended coverage rate for 29 loans;
                                  and

                              •   above the owners' extended coverage rate for 11 loans.

                              However, only a basic lender's title policy, obtained at a
                              reissue rate, was issued for each of the loans by the title
                              companies.

                              The reason for not disclosing the actual charge for title
                              insurance on the HUD-1 settlement statement was unclear.
                              Since City Wide Mortgage is no longer an active going
                              concern and the loan origination offices have been closed, we
                              could not interview the individuals responsible for preparing
                              the settlement statements and related documents. Not only
                              were the requirements of RESPA and HUD regulations
                              violated, but the spirit of promoting full disclosure of
                              settlement fees and charges to borrowers was also
                              disregarded.

                              City Wide officials maintain the actual costs associated with
 Auditee comment
                              refinancing loans were accurately disclosed to mortgagors.
                              City Wide asserts the title companies charged City Wide one
                              fee for title insurance based on the title company's rate
                              schedule which City Wide in turn charged to the mortgagor.
                              City Wide also contends the title companies did not itemize
                              their charges, therefore neither did City Wide. City Wide also


                                       Page 9                                     96-DE-221-1003
Finding



                             stated any mistakes made in the form of disclosure were
                             unintentional.

                             City Wide officials point out that Appendix A to the HUD-1
                             permits a single overall fee to be listed on line 1108 of the
                             HUD-1 even when title companies performed a number of
                             settlement services. City Wide maintains that they were
                             charged a single fee for title insurance, and they listed that fee
                             on line 1108 of the HUD-1. Officials admit that there may
                             have been a problem with the form of the disclosure because
                             the HUD-1 did not list on line 1108 the item numbers of
                             settlement services that might have been covered in the overall
                             fee.

                             The comparison of the HUD-1 settlement statements and title
 OIG evaluation of auditee
                             insurance commitments or, where available, itemized invoices
 comment
                             from the title insurance companies showed City Wide
                             Mortgage was charged less than the amount charged to
                             mortgagors for title insurance policies. The invoices reviewed
                             were addressed and mailed to City Wide Mortgage.
                             Therefore, City Wide was aware of the actual cost of the title
                             insurance policy. In addition, it was found that some title
                             insurance commitments had "Reissue Rate" printed next to the
                             amount charged for title insurance. For these loans, City
                             Wide should have been aware the title policy obtained was at
                             a reduced rate compared to the rate listed on the title
                             insurance company's rate schedule.

                             Appendix A to the HUD-1 settlement statement does permit
                             the total cost of title insurance to be placed on line 1108.
                             However, if the total cost of title insurance is placed on line
                             1108, a notation must be added to indicate that the cost
                             includes charges for any items on lines 1101 through 1107 of
                             the settlement statement. If no additional notations are added,
                             the amount on line 1108 represent the cost of only the title
                             insurance policy.

                             For example, the mortgagor for FHA case number 051-
                             7826342 (City Wide loan number 9360092) was charged
                             $634.00 on line 1108 of the HUD-1 settlement statement.
                             However, both the commitment for title insurance and the
                             itemized invoice from the title company show the cost of the
                             title policy was $321.00. A notation was not made on line



96-DE-221-1003                        Page 10
                                                                                       Finding



                               1108 to indicate that the $634.00 charge included any other
                               items besides title insurance.

2.   Title fee overcharge      City Wide Mortgage officials assert that charging the
     used to compensate        mortgagor to compensate Mr. Gallagher and Patriot Title for
     third party to disburse   disbursing loan proceeds and conducting a compliance file
     loan proceeds             review was an acceptable practice. The officials of City Wide
                               Mortgage said they did not receive any of the money charged
                               for title insurance and were not responsible for the way the
                               loan proceeds were disbursed since this function was handled
                               by Charles Gallagher and Patriot Title. While our review did
                               not disclose that City Wide Mortgage profited from the
                               overcharging of mortgagors for lender's title policies,
                               ultimately the mortgagee is responsible for ensuring that the
                               entire origination and settlement process follows all applicable
                               requirements and guidelines. This includes proper disclosure
                               of the actual cost of all fees and charges.

                               One aspect of the fee paid for the disbursement of loan
                               proceeds and the compliance file review, that is questionable,
                               is the variable structure of that fee. The fees received by Mr.
                               Gallagher and Patriot Title for the Colorado sample of loans
                               reviewed, ranged between $0 to $370.75. The difference in
                               fees received for the service is questionable since the amount
                               of work that a compliance file review and the disbursing
                               activity entails would change very little based upon the
                               amount of the loan. Neither Mr. Gallagher nor Patriot Title
                               could provide a logical rationale for the amount received for
                               their services. Given the fact of the large variance in fee for
                               the compliance file review and disbursement of proceeds, it
                               could be concluded that the fee was arbitrary, and would not
                               be considered a reasonable and customary closing cost as
                               permitted by HUD Handbook 4000.2 Rev-2.

                               Both Mr. Gallagher and Patriot Title explained the
                               compensation they received as the balance of what was
                               charged to the mortgagor on the HUD-1 settlement statement
                               for title insurance less the actual cost of the title policy. But
                               neither had a written agreement with City Wide Mortgage
                               stipulating the services that they were to perform nor the
                               compensation to be received.

                               City Wide officials contend there never was a separate charge
 Auditee comment
                               to, or payment by, City Wide to compensate Charles Gallagher


                                        Page 11                                    96-DE-221-1003
Finding



     or Patriot Title for any services. The disburser of loan proceeds was compensated by, and as
     agents of, their respective title company. City Wide officials acknowledged the responsibility for
     how loan proceeds were disbursed; however, City Wide asserts they are not responsible for how
     title companies and their agents split the title insurance fee.

                                       City Wide also questioned the report's conclusion that loan
                                       proceeds were not disbursed according to the HUD-1
                                       settlement statement. City Wide officials insist Charles
                                       Gallagher and Patriot Title knew how to disburse loan
                                       proceeds. City Wide officials maintain that loan proceeds
                                       were disbursed according to the HUD-1 settlement statement.

                                       A review of loan proceed disbursements showed Charles
 OIG evaluation of auditee
                                       Gallagher and Patriot Title were compensated directly from
 comment
                                       loan proceeds and not by their respective title companies, as
                                       City Wide officials have asserted. Compensating Patriot Title
                                       and Charles Gallagher directly from loan proceeds is in
                                       noncompliance with the information listed on the HUD-1
                                       settlement statement.

                                       The audit showed loan proceeds were not disbursed in
                                       accordance with the HUD-1 settlement statements. For loan
                                       proceeds to be disbursed in accordance with the HUD-1
                                       settlement statement, the amount of the disbursement should
                                       match the dollar amount listed on the settlement statement for
                                       that specific item. The disbursement would also need to be for
                                       the specific service listed on the settlement statement, such as
                                       the origination fee, an endorsement or a tax certificate. The
                                       results of audit work showed loan proceeds were not
                                       disbursed in the manner described above.

3.   Overcharge considered             The practice of charging City Wide Mortgage customers
     unearned fees                     above the actual cost for a lender's title insurance policy
                                       constitutes an unearned fee according to RESPA and HUD
                                       guidelines. Section 8(b) of the Real Estate Settlement and
                                       Procedures Act of 1974 prohibits the mortgagee from
                                       charging the mortgagor a fee for a service that was not
                                       performed. The Act goes on to say that an unearned fee is
                                       constituted when a person accepts any portion, split, or
                                       percentage, of any charge made or received, for the rendering
                                       of a real estate settlement service, in connection with a
                                       transaction involving a federally related mortgage loan, other
                                       than for services actually performed.



96-DE-221-1003                                  Page 12
                                                                                    Finding



                            Since City Wide Mortgage did not require a separate
                            settlement fee on the HUD-1 for the disbursement and
                            compliance loan review, then the cost should have been paid
                            by the mortgagee and covered by the loan origination fee. In
                            addition, the mortgagor should not be required to pay for a
                            charge that was not fully disclosed on the settlement statement
                            as required by RESPA and HUD guidance. The HUD-1
                            settlement statement provides a specific area (line 1101) for
                            settlement agent fees, which would include such services as
                            disbursing loan proceeds and conducting a compliance file
                            review. Appendix A of the settlement statement provides
                            guidance on where the specific settlement charges should be
                            placed on the statement. City Wide Mortgage either was
                            unaware of the proper procedures or chose to disregard the
                            instructions for the accurate completion of the HUD-1.

                            City Wide officials dispute the conclusion that charging the
Auditee comment
                            mortgagor above the actual cost for a lender's title insurance
                            policy constitutes an unearned fee according to RESPA and
                            HUD guidelines. City Wide contends the mortgagor was
                            charged the same fee for title insurance that City Wide was
                            charged by the title insurance company. Officials assert the
                            actual cost of title insurance was fully disclosed on the HUD-1
                            settlement statement.

                            City Wide Mortgage also pointed out that Federal Regulations
                            specifically permit title companies to pay its agents for
                            services performed. The Regulations go on to allow the
                            payment of compensation to any person for services
                            performed. City Wide officials maintain the disburser was
                            paid by their title company, not City Wide, for disbursing loan
                            proceeds and other related services.

                            City Wide Mortgage in effect did collect an unearned fee as a
OIG evaluation of auditee
                            result of not properly disclosing all title insurance and related
comment
                            fees on the HUD-1 settlement statement. Since the proper
                            disclosure of settlement costs were not made to mortgagors,
                            City Wide Mortgage would be responsible for compensating
                            the provider for the services. Therefore, City Wide Mortgage,
                            in effect, collected an unearned fee because the mortgagor
                            paid for fees that City Wide Mortgage should have paid due
                            to City Wide's inadequate disclosure on the settlement
                            statement.



                                     Page 13                                    96-DE-221-1003
Finding



                          The Office of Inspector General does not dispute that
                          compensation to a title company is allowed for services
                          performed. However, in order for the mortgagee to collect
                          from the borrower for those allowed fees, they must be fully
                          disclosed in accordance with RESPA and HUD guidelines on
                          the settlement statement.

4.   Fees charged above   City Wide Mortgage consistently charged above the maximum
     HUD authorized       amount authorized for title insurance in the State of Colorado.
     amount               The Denver HUD Field Office developed a schedule of
                          permissible closing costs and fees that are considered
                          reasonable and customary for the area. The schedule of fees
                          was developed for the area in accordance with HUD
                          Handbook 4000.2 Rev-2. The Schedule of Permissible
                          Closing Costs and Fees to be charged to mortgagors on
                          HUD/FHA insured loans, dated May 1, 1992, itemized
                          allowable charges for loans in the State of Colorado. The
                          schedule stipulates that the maximum amount to be charged
                          for a lender's title policy in the State of Colorado is the actual
                          cost of the policy for refinanced loans.

                          Our final review sample of FHA loans disclosed that
                          mortgagors were charged anywhere from $515 to $715 for
                          lender's title insurance policies. These charges did not include
                          endorsements, tax certificates, or recording fees. The actual
                          cost of lender's title policies on the sample ranged between
                          $240 and $585 resulting in an average overcharge of $289 for
                          the loans reviewed. As the above example illustrates,
                          mortgagors paid fees for lender's title policies in excess of the
                          amount authorized by the HUD developed Schedule of
                          Permissible Closing Costs and Fees.

                          Our review also disclosed that if the cost for the disbursement
                          of loan proceeds and compliance file reviews were placed on
                          the HUD-1 settlement statement, the majority of the fees
                          would have been above the HUD maximum allowable amount,
                          according to the schedule of permissible closing costs and
                          fees, dated May 1, 1992. As mentioned previously, the
                          amount the mortgagors paid for disbursing the loan proceeds
                          and the compliance file review ranged between $0 to $370.75,
                          with an average charge per loan of $252. The maximum
                          amount allowable for a loan settlement fee for the State of
                          Colorado was $100.



96-DE-221-1003                     Page 14
                                                                                       Finding



                              City Wide asserts that they did not charge mortgagors above
Auditee comment
                              the maximum amount authorized for title insurance in the
                              State of Colorado. City Wide officials maintain that they were
                              not charged a separate fee for the disbursement and
                              compliance review services, but were charged one inclusive
                              title insurance fee for all title related services. City Wide
                              contends that mortgagors were charged the same amount the
                              mortgagee paid for the title insurance policy.

                              City Wide goes on to say that neither the HUD Schedule of
                              Permissible Closing Costs and Fees nor the HUD handbook
                              address disbursement or compliance review fees. City Wide
                              officials believe that even if there had been a separate
                              disbursement or compliance review fee, neither the HUD
                              Schedule nor the HUD handbook prohibit or specifically limit
                              the amount for such a fee.

                              As stated above a comparison of the HUD-1 settlement
OIG evaluation of auditee
                              statements and title insurance commitments or, where
comment
                              available, itemized invoices from the title insurance companies
                              showed mortgagors were charged more than the amount
                              charged to City Wide Mortgage for title insurance policies.
                              The title insurance invoices were addressed and mailed to City
                              Wide Mortgage. Therefore, City Wide was aware of the
                              actual cost of the title insurance policies.

                              In addition, fees for disbursing loan proceeds and conducting
                              a compliance review should be classified as a settlement or
                              closing charge and placed on line 1101 of the settlement
                              statement. The Schedule of Permissible Closing Costs and
                              Fees for the State of Colorado, developed in accordance with
                              HUD Handbook 4000.2 REV-2, limited costs associated with
                              loan settlement to $100.

                              Based upon our review, it appears that City Wide Mortgage
Careless business practices
                              did not have an adequate system in place to ensure the correct
                              completion of the HUD-1 settlement statement prior to the
                              loan closing. As a result, the settlement statements were not
                              consistently filled out to reflect the actual charges and costs of
                              the real estate transactions. Thus, the HUD-1 settlement
                              statement did not reflect how the funds were actually
                              disbursed. For example, for the settlement statements of the
                              61 loans reviewed for properties in Colorado, all 61 had
                              charges above the actual cost for the title policy. In addition,


                                       Page 15                                     96-DE-221-1003
Finding



                              the following settlement charges were also incorrectly shown
                              on the settlement statements of the loans reviewed:

                              •   19 were incorrectly charged for recording fees;

                              •   17 were incorrectly charged for endorsements; and

                              •   6 were incorrectly charged for tax certificates.

                              A lack of oversight by City Wide management, and
                              coordination of the outlying loan origination offices and
                              associate Western Escrow offices, appears to have contributed
                              to the lack of attention to detail on preparing the settlement
                              statements. The Certified Public Accountant's report for the
                              period ending February 28, 1994, cites City Wide Mortgage
                              for not conducting annual on-site reviews at all branch offices.
                              This lack of proper oversight of the branch offices may have
                              contributed to lax procedures for communicating the correct
                              settlement figures to the home office for completing the HUD-
                              1 settlement statements. The improperly prepared settlement
                              statements resulted in mortgagors not knowing the actual cost
                              of the real estate transaction as well as how the funds from
                              their refinanced mortgage were disbursed.

                              Officials from City Wide Mortgage admit that HUD-1
 Auditee comment
                              settlement statements were incorrectly completed. However,
                              officials assert that management hired a number of qualified
                              individuals to monitor and teach RESPA compliance, as well
                              as monitor the overall compliance and quality control of the
                              loan origination process.

                              Regardless of the number of qualified individuals hired by City
 OIG evaluation of auditee
                              Wide management to monitor and teach compliance with
 comment
                              RESPA, numerous cases of noncompliance with RESPA and
                              HUD guidelines were found during the audit.

                                  In addition to reviewing loans originated in Colorado, we
 Settlement fees charged in
                                  evaluated a sample of various loans originated from other
 other states also
                                  states where City Wide Mortgage had loan origination
 questionable
                                  offices. Our evaluation determined that the settlement
                                  fees charged in the other states were also questionable.
                                  The nationwide sample consisted of 40 loans originated in
                                  Arizona, Georgia, Illinois, Nevada, North Carolina, South
                                  Carolina, and Virginia.


96-DE-221-1003                         Page 16
                                                                          Finding



                   We performed a cursory review of settlement fees, specifically
                   title insurance fees, for the nationwide sample. We found the
                   same practice of overcharging mortgagors for title insurance
                   with the national sample. The overcharge was used to
                   compensate a third party for disbursing loan proceeds. Patriot
                   Title even had detailed written instructions of how to split the
                   title insurance charge on the HUD-1 settlement statement
                   between all parties.

                   For example, in Illinois we found Intercounty Title disclosed
                   to the mortgagor that a settlement fee of $175 was charged
                   for the service of disbursing loan proceeds by Patriot Title.
                   However, Patriot Title was compensated above the $175 fee
                   disclosed to the mortgagor. Patriot Title was paid the $175
                   plus the balance of the title insurance invoice after the title
                   company was paid.



Auditee Comments   The draft finding was provided to City Wide Mortgage
                   officials and their legal representative on September 22, 1995.
                   An exit conference was held on October 23, 1995. The
                   comments received from Karsh & Fulton, P.C. on behalf of
                   City Wide Mortgage have been incorporated in the report as
                   appropriate.

                   City Wide Mortgage does not agree with the overall
                   conclusions reached in the audit report. City Wide officials
                   believe the audit report contains erroneous conclusions
                   regarding improper disclosures and overcharges to borrowers
                   by City Wide Mortgage. City Wide also feels the report
                   mischaracterizes the business relationship between City Wide
                   Mortgage and Charles Gallagher and Patriot Title, the parties
                   that disbursed loan proceeds.

                   City Wide Mortgage's response to conclusions reached in the
                   finding are presented at the end of each section of the finding.
                   City Wide Mortgage's response to the draft finding is included
                   as Appendix B in its entirety. The attachments accompanying
                   the response have not been included in Appendix B but have
                   been provided to the Office of the Deputy Assistant Secretary
                   for Single Family Housing for their information and use.




                            Page 17                                   96-DE-221-1003
Finding



OIG Evaluation of   The results of audit work show City Wide Mortgage did not
Auditee Comments    accurately disclose to mortgagors the actual cost of fees
                    associated with the settlement of refinancing their home
                    mortgage. Regardless of who disbursed loan proceeds, City
                    Wide Mortgage, as a HUD Direct Endorsement program
                    participant, was compelled to follow HUD guidelines and
                    requirements and ensure all aspects of the loan transaction
                    were completed in accordance with applicable requirements.

                    OIG's evaluation of specific auditee comments are addressed
                    after each individual section of the finding.



Recommendations     The Office of the Deputy Assistant Secretary for Single Family
                    Housing should:

                    1A.    Evaluate the conditions cited in the finding and initiate
                           debarment action against City Wide Mortgage officials
                           and related parties, as considered appropriate.

                    1B.    Refer the conditions cited in the finding to the
                           Mortgagee Review Board for their review and
                           appropriate enforcement action, as necessary, against
                           City Wide Mortgage Officials.

                    1C.    Evaluate the seriousness of the Real Estate Settlement
                           Procedures Act violations cited in the report and
                           initiate the appropriate enforcement actions, as
                           necessary.




96-DE-221-1003              Page 18
                                           Finding




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                Page 19                96-DE-221-1003
Internal Controls
Our review of the internal controls of City Wide Mortgage, Inc. was limited to the controls associated
with obtaining and disclosing the cost of the lender's title insurance policy for refinanced FHA backed
loans. Controls over the disbursing of loan proceeds in accordance with the HUD-1 settlement
statement, as required by RESPA, were also assessed. We reviewed loan records to determine
whether City Wide Mortgage, Inc. complied with laws and regulations that prescribe requirements
for internal controls over obtaining lender's title insurance and the disbursement of loan proceeds for
direct endorsement mortgagee operations. For the loans reviewed, we found noncompliance with
these laws and regulations as described in the Executive Summary and Finding. The prevelent extent
of noncompliance for loans reviewed suggested that the mortgagee also may not have fully complied
on other loans which we did not test.

In planning and doing our audit, we considered internal controls of the functions of obtaining lender's
title insurance policies and the disbursing of loan proceeds in order to determine our audit procedures
and not to provide assurance on internal controls.

Internal controls are management's adopted plans, methods; and procedures to assure resources are
used within the laws, regulations, and policies; that the resources are safeguarded against waste, loss,
and misuse; and that reliable data are obtained, maintained, and fairly disclosed in the reports.

                                       We determined that the following controls were relevant to
 Internal controls assessed
                                       our audit objective and each was assessed during our review:

                                       •   Controls to assure that the actual cost of title insurance for
                                           the lenders' policy was shown on the HUD-1 settlement
                                           statement.

                                       •   Controls to assure that loan proceeds were disbursed in
                                           accordance with the HUD-1 settlement statement.

                                       Significant weaknesses in internal controls do not give
                                       reasonable assurance that resources are used consistent with
                                       laws, regulations, and policies; that resources are safeguarded
                                       against waste, loss and misuse; and that reliable data are
                                       obtained and maintained, and fairly disclosed in the financial
                                       statements and reports.

                                       The following audit procedures were used to evaluate internal
 Assessment procedures
                                       controls:

                                       •   Review of records associated with obtaining lender's title
                                           insurance policies, including records from the applicable
                                           title insurance companies.



96-DE-221-1003                                   Page 20
                                                                      Internal Controls



                         •   Review of FHA case binders.

                         •   Review of files from Western Escrow, the associate
                             escrow company of City Wide Mortgage, Inc.

                         •   Review of records associated with the disbursement of
                             loan proceeds.

                         •   Review of City Wide Mortgage's loan origination files.

                         •   Analysis of actual cost for the lender's title insurance
                             policy compared to the amount charged to the mortgagor
                             on the HUD-1 settlement statement.

                         •   Interviews with officials from HUD, Stewart Title of
                             Denver, Title America of Denver, the law office of Charles
                             Gallagher, and McManus & Associates (Patriot Title).
                             We also interviewed the principals of City Wide
                             Mortgage: Mr. B.C. Johnson and Mr. George Jennings.

                         Based on our review, the following items are internal control
Significant weaknesses
                         weaknesses:

                         •   The amount charged to the mortgagor for the lender's title
                             insurance policy was not the actual cost or amount
                             disbursed to the title company.

                         •   The amount paid to the third party disburser was above
                             the authorized amount for settlement of a loan according
                             to the rates set by the HUD Colorado Office.

                         •   Charging mortgagors above the actual cost for a lender's
                             title insurance policy constitutes an indirect unearned fee
                             according to RESPA and HUD guidelines.

                         •   Charging the mortgagor for the full basic rate of the
                             lender's title insurance policy when the policy was
                             obtained at a reissue rate. In addition some mortgagors
                             were also charged for owner extended coverage for title
                             policies when all that was issued was a basic lender's title
                             insurance policy.

                         These significant weaknesses are discussed in the finding.



                                  Page 21                                   96-DE-221-1003
Internal Controls




96-DE-221-1003      Page 22
                                       Internal Controls




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                Page 23                     96-DE-221-1003
Follow Up On Prior Audits
This was the Office of Inspector General's first review of City Wide Mortgage, Inc.

KPMG Peat Marwick, Certified Public Accountants, prepared the most recent audit report. It
covered the 12-month period ending February 28, 1994. The Independent Auditors' Report on
Compliance With Specific Requirements Applicable to Major HUD-Assisted Programs noted the
following instances of noncompliance (findings):

•   The Quality Control Department's review of insured mortgages originated by the mortgagee was
    not conducted and results were not submitted to management within 90 days of the loan closing,
    as required by the general and specific elements included in HUD Handbook 4060.1.

•   All branch offices did not receive an annual on-site review.

•   The payoff statements in a sample of 8 of 59 files reviewed for refinanced mortgages did not
    match the payoff amount indicated on the HUD-1 settlement statement.

•   The per diem interest calculation indicated on the HUD-1 settlement statement was incorrect for
    two loans reviewed.

•   The escrow assignment letter in the loan file of a refinanced mortgage did not match the escrow
    assignment amount indicated on the HUD-1 settlement statement.

•   The monthly escrow for hazard and flood insurance indicated on the HUD-1 settlement statement
    of a loan selected for test work did not agree to the premium amounts indicated on the policies
    included in the loan file.

•   The appraisal fee charged to a borrower exceeded the maximum HUD allowable charge. The
    allowable FHA appraisal fee that can be charged to a borrower in South Carolina was $225 at the
    time of the loan closing. According to the HUD-1 settlement statement, the borrower was
    charged an appraisal fee of $250. Thus, the borrower was overcharged $25 for the appraisal.

•   Documentation in nine loan files indicated that the up-front Mortgage Insurance Premium (MIP)
    was not submitted to HUD within 15 days of the loan closing. The HUD Statement of Account
    indicated that a late charge was assessed and remitted by the investor.

•   The company did not maintain fidelity bond coverage. After January 8, 1993, all mortgagees
    must maintain fidelity bond coverage of at least $300,000.




96-DE-221-1003                                 Page 24
                                 Follow Up On Prior Audits




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                Page 25                        96-DE-221-1003
                                                                              APPENDIX C

Distribution
Deputy Assistant Secretary for Single Family Housing, HS (Rm 9282)
Director, Real Estate Settlement Procedures Act Enforcement Unit, HS (Rm 5241) (5)
Director, Office of Lender Activities and Land Sales Registration, HSL (Rm 9156)
Assistant General Counsel, Administrative Proceedings Division, CEP (Rm 10251)
Assistant General Counsel, Program Compliance Division, CFC (Rm 9253)
Comptroller/Audit Liaison Officer, Office of Housing, HF (Rm 5132) (3)
Assistant to the Deputy Secretary for Field Management, SDF (Rm 7106)
Acquisitions Librarian, Library, ARSL (Rm 8141)
Chief Financial Officer, F (Rm 10164) (2)
Deputy Chief Financial Officer for Finance, FF (Rm 10166) (2)
Assistant Director in Charge, US GAO 820 1st St. NE Union Plaza,
Bldg. 2, Suite 150, Washington, DC 20002, Attn: Cliff Fowler (2)
Louis S. Carmisciano, Regional Comptroller, 77 West Jackson Blvd.,
Chicago, Illinois 60604-3507




96-DE-221-1003                             Page 26
                                       Appendix C




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                Page 27                96-DE-221-1003
Appendix C




96-DE-221-1003   Page 28