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
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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
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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
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)