oversight

Legend Mortgage Company Single Family Mortgage Insurance Program Lisle, IL

Published by the Department of Housing and Urban Development, Office of Inspector General on 1998-07-09.

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

                                                                       Issue Date

                                                                            July 9, 1998
                                                                       Audit Case Number

                                                                            98-CH-221-1004




TO:            Art Agnos, Acting Assistant Secretary for Housing - Federal Housing
               Commissioner, and Chairman, Mortgagee Review Board


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

SUBJECT:       Legend Mortgage Company
               Single Family Mortgage Insurance Program
               Lisle, Illinois

We completed an audit of the books and records of Legend Mortgage Company, a loan
correspondent. We selected Legend Mortgage Company for audit based on our audit plan and
input from the HUD program staff. The audit objective was to determine if Legend Mortgage
Company originated HUD-insured 203(k) rehabilitation loans according to HUD’s requirements.

We reviewed all four HUD/FHA 203(k) loans originated by Legend Mortgage Corporation that
were in default as of April 1997. At the time we started our audit, Legend’s 203(k) default rate
was 2.21 percent; and it has risen to 5.33 percent as of April 30, 1998. We concluded that
Legend did not originate the four 203(k) loans in accordance with HUD's requirements. All four
of the loans were originated by the same loan officer, Legend's President. Strawbuyer's were
identified in all four loans. Legend Mortgage: (1) added fictitious information into loan files and
applications without the knowledge or approval of borrowers; (2) collected the fictitious
information from a contractor without the knowledge or approval of borrowers; (3) failed to
obtain evidence that 401(k) accounts were redeemed; (4) failed to consider the taxation and early
withdrawal penalties when valuing a 401(k) account; (5) failed to verify the source of partnership
assets used to qualify borrowers; and (6) failed to verify the receipt of funds by the partnership for
the borrowers. The deficiencies occurred because of Legend's poor loan origination practices.
The fictitious information added by Legend Mortgage enabled the borrowers to appear to qualify
for mortgages by improving their liquid asset and income positions. All four loans involved either
a fictitious "partnership agreement" or a fictitious residence lease. All four documents appeared
to have the forged signatures of the borrowers. Consequently, applications submitted to HUD
contained false information about the borrowers' intention to be actual borrowers, and the true
value of their assets and income. HUD relied on Legend's origination process and as a result
assumed abnormally high risks when it insured the four loans which together were valued at
$310,200.

If you have any questions, please contact me at (312) 353-7832.
Executive Summary
We completed an audit of the books and records of Legend Mortgage Company, a loan correspondent.
 We selected Legend Mortgage Company for audit based on our audit plan and input from the HUD
program staff. The audit objective was to determine if Legend Mortgage Company originated and
serviced HUD-insured 203(k) rehabilitation loans according to HUD requirements.

We concluded that Legend Mortgage Company did not originate HUD/FHA 203(k) loans in
accordance with HUD's requirements for the four loans we reviewed. Strawbuyers were identified in
all four loans.


                                     We reviewed all four HUD/FHA 203(k) loans originated by
 Legend did not originate            Legend Mortgage Company that were in default as of April
 loans in accordance with            1997. We concluded that Legend did not originate the four
 HUD requirements or                 203(k) loans in accordance with HUD's requirements. All four
 prudent lending practices           of the loans were originated by the same loan officer, Legend's
                                     President. Strawbuyer's were identified in all four loans.
                                     Legend Mortgage: (1) added fictitious information into loan
                                     files and applications without the knowledge or approval of the
                                     borrowers; (2) collected the fictitious information from a
                                     contractor without the knowledge or approval of borrowers;
                                     (3) failed to obtain evidence that 401(k) accounts used to
                                     qualify the borrowers were redeemed; (4) failed to consider
                                     the taxation and early withdrawal penalties when valuing a
                                     401(k) account; (5) failed to verify the source of partnership
                                     assets used to qualify borrowers; and (6) failed to verify the
                                     receipt of funds by the partnership for the borrowers. The
                                     deficiencies occurred because of Legend's poor loan origination
                                     practices. The fictitious information added by Legend
                                     Mortgage enabled the borrowers to appear to qualify for
                                     mortgages by improving their liquid assets and income
                                     positions.     All four loans involved either a fictitious
                                     "partnership agreement" or a fictitious residence lease. All four
                                     documents appeared to have the forged signatures of the
                                     borrowers. Consequently, applications submitted to HUD
                                     contained false information about the borrowers' intention to be
                                     actual borrowers, and the true value of their assets and income.
                                      HUD relied on Legend's origination process and assumed
                                     abnormally high risks when it insured the four loans which
                                     together were valued at $310,200.

                                     We recommend that: (1) the Mortgagee Review Board take


                                              Page iii                                   98-CH-221-1004
Executive Summary

                    appropriate action based on the information contained in the
                    Finding; and (2) the Assistant Secretary for Housing consider
                    imposing administrative sanctions on Legend's President, who
                    was responsible for all four of the improperly originated loans.

                    We presented our draft findings and narrative case
                    presentations to Legend Mortgage Company and the Illinois
                    State HUD Office during the audit. We held an exit conference
                    with Legend on May 15, 1998. Legend Mortgage Company
                    provided written comments to our finding and narrative case
                    presentations. We included excerpts from the comments with
                    the finding. Appendix C contains the complete text of the
                    comments.




98-CH-221-1004               Page iv
Table of Contents

Management Memorandum                                                  i


Executive Summary                                                   iii


Introduction                                                        1


Finding
     1  Legend Mortgage Company Did Not Originate
        Loans In Accordance With HUD Requirements
        Or Prudent Lending Practices                               3


Management Controls                                                27


Follow Up On Prior Audits                                          29




Appendices
    A    Summary of Deficiencies                                   31

    B    Introduction to Narrative Case Presentations              33

    C    Auditee Comments                                          49


    D    Distribution                                            103




                              Page v                    98-CH-221-1004
Introduction
HUD approved Legend Mortgage Company as a loan correspondent on March 29, 1995. Legend
Mortgage Company originates HUD/FHA insured loans. The HUD/FHA insured loans are
underwritten by Direct Endorsement sponsors and sold to the Direct Endorsement sponsors for
servicing. At the time we started the audit, Legend Mortgage Company had originated 181 Section
203(k) loans and four of those loans defaulted, for a 2.21 percent default rate. As of April 30, 1998,
Legend Mortgage Company has originated 244 Section 203(k) loans and 13 of those loans have
defaulted, for a 5.33 percent default rate.

Legend Mortgage Company's books and records are located at 906 Lacey Avenue, Suite 206, Lisle,
Illinois. The President of Legend Mortgage Company is David Whitacre.


                                       Our audit objectives were to determine if Legend Mortgage
 Audit Objectives                      Company originated and serviced HUD-insured section 203(k)
                                       rehabilitation home loans according to HUD’s requirements.

                                       Our audit included tests of compliance with HUD's
 Audit Scope and                       requirements for the origination of HUD/FHA 203(k) loans.
 Methodology                           The purpose was to evaluate the propriety and accuracy of: (1)
                                       the borrower's income; (2) liquid assets; (3) liabilities; and (4)
                                       previous use of credit. We performed in-depth reviews on all
                                       four loans that were in default as of April 1997.

                                       We interviewed HUD staff, all four borrowers with their
                                       attorneys, Underwriting staff, and Legend's President. We
                                       reviewed Legend's loan origination methods as they related to
                                       these four loans. We reviewed HUD's, Underwriters, and
                                       Legend's FHA case files. We received title histories from a title
                                       company. The title company also provided information related
                                       to both the 203(k) closing and the previous closings related to
                                       the strawbuyer's acquisition of the properties before the 203(k)
                                       refinancing. We also received information from a finance
                                       company that related to the notes/loans that were refinanced
                                       with 203(k) monies.

                                       Our audit included a review of all 203(k) loans that were in
                                       default as of April 1997. We conducted the audit at Legend
                                       Mortgage Company between April 1997 and September 1997.

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


                                                Page 1                                      98-CH-221-1004
Finding


 Legend Mortgage Company Did Not Originate
 Loans In Accordance With HUD Requirements
         Or Prudent Lending Practices
Legend Mortgage Company, a loan correspondent, improperly originated all four of the HUD/FHA-
insured loans reviewed. We reviewed all Section 203(k) loans originated by Legend Mortgage
Company that were in default as of April 1997. All four loans involved strawbuyers. Legend
Mortgage: (1) added fictitious information into loan files and applications without the knowledge or
approval of borrowers; (2) collected the fictitious information from a contractor without the
knowledge or approval of borrowers; (3) failed to obtain evidence that a 401(k) account used to
qualify a borrower was redeemed; (4) failed to consider the taxation and early withdrawal penalties
when valuing a 401(k) account; (5) failed to verify the source of partnership assets used to qualify the
borrowers; and (6) failed to verify the receipt of funds by the partnership for the borrowers. The
deficiencies occurred because of Legend's poor loan origination practices. The fictitious information
added by Legend Mortgage enabled the borrowers to qualify for mortgages by improving their liquid
asset and income positions. All four loans involved either a fictitious "partnership agreement" or a
fictitious residence lease. All four documents appeared to have the forged signatures of the borrowers.
 Consequently, applications submitted to HUD contained false information about the borrowers'
intention to be actual borrowers, and the true value of their assets and income. HUD relied on
Legend's origination process and as a result assumed abnormally high risks when it insured the four
loans which together were valued at $310,200. HUD has already been indemnified by the underwriter
for its losses on three of the loans.


                                       HUD Handbook 4060.1, Mortgagee Approval Handbook,
  HUD Requirements                     page 2-7, paragraph 2-20 requires mortgagees to originate
                                       HUD/FHA-insured loans in accordance HUD regulations. In
                                       this regard, loan correspondent mortgagees are required to
                                       complete Form HUD-92001-E, HUD/FHA Application
                                       Commitment for Insurance Under the National Housing Act
                                       (Application). The applicants are required to sign this form and
                                       by signing the form, they agree to a number of requirements
                                       including the requirement to comply with the provisions of the
                                       HUD Regulations and other requirements of the Secretary of
                                       HUD.

                                       24 CFR Part 25.5 allows the Mortgagee Review Board to
                                       impose administrative actions against a mortgagee, which
                                       includes the withdrawal of the HUD/FHA approval. Part
                                       25.12 states the Mortgagee Review Board is authorized to
                                       impose civil money penalties against any mortgagee or lender.

                                       Loan officers who violate HUD requirements are subject to


98-CH-221-1004                                   Page 2
                                                                                            Finding

                                administrative sanctions contained in 24 CFR Part 24, including
                                debarment, suspension, and limited denial of participation.

                                The following table summarizes the more significant violations
                                of HUD loan origination requirements for the four cases.
                                These and other deficiencies are summarized and discussed in
                                more detail in the Narrative Case Presentations (Appendices B-
                                1 through B-4):

                                               Deficiency                         No. of Loans
                           Strawbuyer/false intent to invest                            4
                           Mishandled mortgage documents                                4
                           Cash/liquid assets overstated                                4
                           Overstated income                                            1
                           401(k) funds not properly verified                           1
                           401(k) funds not properly valued                             1
                           "Partnership" funds not properly verified                    3

                                The Chief of the Single Family Production Branch, Office of
                                Housing, Illinois State HUD Office, said all four loans would
                                have been rejected had Legend submitted accurate information.

                                All four borrowers were recruited by the same Contractor to be
Borrowers were recruited        strawbuyers. The Contractor promised the borrowers that it
by a contractor                 would find properties to rehabilitate, rehabilitate the properties,
                                and sell the properties to third parties after the rehabilitation
                                was completed. The borrowers were told by the Contractor or
                                understood that they would not have to contribute any of their
                                own money.

                                All four borrowers told the auditors that they did not invest any
Borrowers acted as              money toward either the initial purchase or refinance of the
strawbuyers                     properties. All four borrowers were, in fact, strawbuyers. For
                                their participation in the Contractor's plan, the strawbuyers
                                were paid between $500 and $1,500.

                                With the aid of the Contractor, the strawbuyers purchased
                                properties at prices ranging from $3,500 to $23,000. Three of
                                the four properties were sold by the Government at Real Estate
                                Owned sales. The fourth property was acquired in a private
                                sale. The initial purchases for Borrowers A, C, and D were


                                          Page 3                                      98-CH-221-1004
Finding

                                    financed with no down-payment high-interest loans from a
                                    finance company. The loans required a six-month balloon
                                    payment in full and had net effective rates of between 22
                                    percent and 23 percent. The Contractor supplied the funds for
                                    Borrower B's purchase. The finance company loans were
                                    taken out in amounts far greater ($34,300 to $44,800) than the
                                    funds necessary to purchase the properties ($3,500 to
                                    $23,000).

                                    The Contractor and an affiliated company ("Affiliate") were
  Contractor and an affiliate       paid $110,613 from mortgage proceeds/borrowers' funds at the
  received inappropriate            loan closings for the initial purchase of the properties and the
  payments                          Section 203(k) refinancings. These payments were made for
                                    mortgages from an affiliated company, rehabilitation work that
                                    was not performed, and other unexplained reasons. For
                                    Borrower's B and C, the Affiliate filed mortgages with the
                                    County Recorder's office. Borrower’s B and C said they never
                                    took out mortgages with the Affiliate and they never signed the
                                    mortgage documents.          The improper and unexplained
                                    payments are as follows:




       Borrower      Transaction    Amount                         Description
            B        203(k)        $ 40,000     Payment to Affiliate for unexplained mortgage
                     refinance
            C        Initial        3,500       Payment to Contractor for rehabilitation work not


98-CH-221-1004                                Page 4
                                                                                          Finding

                  purchase                  performed
        C         Initial      7,095        Unexplained payment to Contractor
                  purchase
        C         Initial      5,000        Unexplained payment to Contractor
                  purchase
        C         203(k)       8,000        Payment to Affiliate for unexplained mortgage
                  purchase
        A         Initial      10,973       Unexplained payment to Contractor
                  purchase
        A         203(k)       7,902        Payment to Contractor for rehabilitation work not
                  refinance                 performed
        D         203(k)       14,095       Payment to Contractor for rehabilitation work not
                  refinance                 performed
        D         Initial      4,048        Unexplained payment to Contractor
                  purchase
        D         Initial      10,000       Unexplained payment to Affiliate
                  purchase
                              $110,613


                               In all four cases, the total assets necessary to close each
Assets necessary to close
                               transaction were not verified by Legend Mortgage. HUD
were not verified
                               Handbook 4155.1 REV-4 CHG 1 states that "[a]ll funds for
                               the borrower's investment in the property must be verified."
                               The actual assets necessary to close that were verified by
                               Legend ranged from a low of $1,457 to a high of $7,999 per
                               borrower. The amount actually needed at closing ranged from
                               a low of $12,313 to a high of $17,832 per borrower. The
                               following table shows the amount of assets verified by Legend
                               Mortgage Company and the amount of assets it was required
                               to verify for Borrowers A, B, C, and D in order for the
                               borrowers to qualify for the HUD/FHA insured loans.



                                        Borrower        Amount Verified        Amount Needed
                                           A             $3,466                 $12,313
                                           B              7,999                 15,837
                                           C              6,093                 14,531


                                          Page 5                                    98-CH-221-1004
Finding

                           D              1,457                  17,832

                 As a result, none of the borrowers qualified for the HUD/FHA
                 insured loans.

                 In three instances, a fictitious partnership agreement was placed
                 in the borrowers loan file to give the appearance that they
                 qualified.

                 There was no information in Borrower A or B's file, other than
                 a partnership agreement, to provide any verification that
                 partnership funds needed to close were available. HUD
                 Handbook 4000.2 REV-2, paragraph 3-6 mandates that
                 mortgagees obtain and verify information with great care.
                 Legend's President said the rules regarding verification of
                 partnership agreements were communicated to him by an
                 underwriter that he used to work for before he started Legend
                 Mortgage Company. Legend's President said the underwriter
                 told him that only a partnership agreement was necessary to
                 verify the existence of the entire amount of partnership liquid
                 assets. Legend's President believed the underwriter was
                 authorized to speak on behalf of HUD and that all HUD
                 required was a partnership agreement to evidence partnership
                 liquid assets. Legend's President's belief that he did not have to
                 verify the actual assets of the partnership to satisfy prudent
                 lending practices was mistaken. A loan correspondent's basic
                 duty, on HUD's behalf, is to verify the validity of information
                 that is received. Indeed, as HUD's agent, Legend had a duty to
                 verify the assets of the partnership before placing HUD at risk.

                 The Chief of HUD's Single Family Loan Production Branch
                 said HUD accepted loan packages with partnership
                 agreements. However, HUD did not approve the loan
                 packages on an as-is basis. Prudent lending practices would
                 have required the broker to verify the assets of the partnership.

                 For Borrowers A, B, and C, Legend did not verify that the
                 borrowers had the $10,000 required by the partnership
                 agreements. If a verification of the borrowers' funds had been
                 made, Legend's President would have found that the
                 partnerships were fictitious. A verification could also have
                 uncovered that the borrowers did not belong to a partnership
                 and the borrowers did not have the funds necessary to close the
                 transactions. All three borrowers said they did not belong to a
                 partnership and had never seen the partnership agreement.


98-CH-221-1004            Page 6
                                                        Finding

They said the signatures on the partnership agreements were
not their signatures.

During a phone conversation, regarding Borrower C's loan, the
underwriter's Vice-President asked the Chief of the Single
Family Production Branch about the requirements for
verification of funds to close a loan. The underwriter's Vice-
President asked whether a bank statement from the Contractor
would be a sufficient verification of assets. The Chief said the
Contractor's bank statement would be a sufficient verification
of assets. However, the Chief assumed that the underwriter
was only referring to the $5,000 the Contractor was
contributing to the partnership. The Chief reasonably assumed
that Borrower C's funds ($10,000) were being verified
independently of the Contractor's funds. The Chief had no way
of knowing that the partnership was fictitious. To satisfy
prudent lending practices, both sources of funds should have
been independently verified.

If a verification of Borrower C's funds had been made,
Legend's President would have discovered that the borrower
did not contribute any funds to the partnership and did not have
the funds necessary to close the transaction. A loan
correspondent’s basic duty, on behalf of HUD, is to verify the
validity of information received. If Legend’s President had
followed prudent lending practices, he would have verified the
underlying assets of the partnership.

A 401(k) account was used to document the majority of the
funds Borrower D needed to qualify for a 203(k) loan. There
was no evidence that Borrower D's 401(k) account was
redeemed. HUD Handbook 4155.1 REV-4 CHG 1 states that
evidence of redemption is required. Even assuming redemption
occurred, Borrower D would not have qualified. The current
value on the account was $23,132. HUD Handbook 4155.1
REV-4 CHG 1 states that only the net amount after subtracting
federal income tax and withdrawal penalties may be considered
as assets to close. Based on the monthly income shown on The
Uniform Loan Application for Borrower D, Borrower D
would be at a 28 percent tax bracket. After taxes and early
withdrawal penalties of ten percent, a $9,000 reduction would
be incurred. Additionally, a $10,315 loan had been taken out
against its current value leaving an asset of less than $4,000
when $17,832 was needed to close on the property. Thus,
Borrower D lacked the necessary funds to close.



         Page 7                                    98-CH-221-1004
Finding

                           Fictitious partnership agreements were used as evidence that
  Partnership agreements   Borrowers A, B, and C had the necessary funds to close and
  were improperly used     thus qualified for 203(k) mortgages. All three partnership
                           agreements stated that the borrower contributed $10,000 and
                           the Contractor invested $5,000 to the partnership, respectively.
                            The partnership agreements were placed in all three loan files
                           by someone at Legend Mortgage. This occurred even though
                           the borrowers: (1) were never in a partnership with the
                           Contractor; (2) did not tell Legend's President they were in a
                           partnership with the Contractor; (3) did not give Legend's
                           President a copy of the partnership agreements or direct
                           Legend's President to contact the Contractor for a copy; (4)
                           never saw the partnership agreements; and (5) told us that the
                           signatures on the partnership agreements were not their
                           signatures.

                           Information related to the partnership agreement was placed
                           into an initial loan application after Borrower A signed the
                           application. The following words were placed on her loan
                           application in the liquid assets section by Legend's President
                           without her knowledge or permission: "Gift From Partnership -
                           $15,000." There was no mention made of a partnership
                           agreement in the borrower's final application. Thus, Borrower
                           A never had the opportunity to find out that Legend's President
                           placed information into her loan file without her knowledge.

                           Borrower A's initial application was signed by her and Legend's
                           President on April 14, 1995. The Partnership Agreement itself
                           was not dated until April 15, 1995. More importantly, the
                           Partnership Agreement was not faxed to Legend's President
                           until May 5, 1995. Legend's President said he had no
                           knowledge of the Partnership Agreement's existence until it
                           was faxed to him by the Contractor on May 5, 1995. Thus,
                           Legend's President placed the information into Borrower A's
                           initial application after she signed it.

                           Borrower A signed a second and final application on June 26,
                           1995. Our review of the second signed application in
                           Borrower A’s loan file disclosed that the application did not
                           include information regarding the partnership agreement even
                           though Legend's President received the partnership agreement
                           from the Contractor on May 5, 1995. If this information had
                           been included in the second application, Borrower A would
                           have had the opportunity to inform Legend's President that she
                           was not in a partnership with the Contractor.



98-CH-221-1004                      Page 8
                                                       Finding

Borrower B's initial application was signed by him and
Legend's President on March 30, 1995. The Partnership
Agreement was dated April 15, 1995. The Partnership
Agreement was not faxed to Legend's President until May 5,
1995. Borrower B signed a second and final application on
June 2, 1995. Our review of the second signed application in
Borrower B’s loan file revealed that it did not include
information regarding the partnership agreement even though
Legend's President received the partnership agreement from the
Contractor on May 5, 1995. If this information would have
been included in the second application, Borrower B would
have had the opportunity to inform Legend's President that he
was not in a partnership with the Contractor.

Both Borrower A and Borrower B's partnership agreements
were faxed to Legend Mortgage at the same time. The
facsimile was sent by the Contractor on May 5, 1995 between
approximately 1:25 and 1:34 PM. Individual front and
signature pages were faxed for Borrower A and Borrower B.
One set of pages two through ten of the partnership agreement
were also faxed to Legend Mortgage.

Legend Mortgage photocopied all of the faxed pages of the
partnership agreement for Borrowers A and B in order to
create two separate documents. The second through tenth
pages are completely illegible in various places for both
partnership agreements. The agreements appear to have been
photocopied many times. We believe Legend Mortgage should
have investigated these documents with some suspicion
especially when the signatures on the partnership agreements
did not resemble the actual signatures of the borrowers on the
loan applications. Given the above, known signatures should
have been compared with those placed on the partnership
agreements.

Borrower C said that information related to the partnership
agreement was placed into his application after he signed it.
The following words were placed into his loan application in
the liquid assets section by someone at Legend Mortgage
without Borrower C's knowledge or permission: "Partnership
Agreement - $15,000." Thus, Borrower C did not have an
opportunity to discover that the partnership agreement was
placed in his file and application.

When interviewed, all three borrowers said they never
contributed $10,000 to a partnership. One borrower remarked


         Page 9                                   98-CH-221-1004
Finding

                             that, in fact, he "never had $10,000 in [his] life!" All three
                             borrowers said their signatures were forged to the agreements.


                             Legend's President said he told Borrowers A, B, and C that
                             they were short of the funds needed for closing. Legend's
                             President could not produce documentation, such as a letter or
                             memorandum, evidencing his alleged notice to the borrowers.
                             Legend's President said he advised the three borrowers that the
                             HUD acceptable sources of funds were either: (1) a gift from a
                             blood relative; (2) borrowed funds from a collateralized asset;
                             or (3) a partnership agreement. Legend's President said some
                             time after his notice to the borrowers, he received faxed copies
                             of the partnership agreements from the Contractor. Legend's
                             President could not identify who, at the Contractor's office,
                             faxed the agreements to him. Legend's President believed his
                             receipt of the partnership agreements from the Contractor was
                             in response to his alleged notice to the borrowers. He also
                             believed that his actions were performed in accordance with
                             prudent lending practices.

                             Legend's President's explanations do not agree with the actions
                             he took regarding the partnership agreements. Legend's
                             President accepted the partnership agreements from the
                             Contractor without the borrowers' knowledge or permission.
                             Placing key information into loan applications and files without
                             the knowledge or consent of borrowers is not a prudent
                             lending practice.

                             Legend used a fictitious residence lease to inflate Borrower D's
  Residence lease was used   income. The residence lease for a property at 227 West 108th
  improperly                 Place stated that Borrower D had a tenant that was paying
                             $1,050 per month in rent. The residence lease was placed in
                             Borrower D's loan file. This occurred even though Borrower
                             D: (1) never had a tenant at 227 W. 108th Place; (2) did not
                             tell Legend's President he had a tenant; (3) did not give
                             Legend's President a copy of the residence lease or direct
                             Legend's President to contact the Contractor for a copy; (4)
                             never saw the residence lease; and (5) told us that the signature
                             on the partnership agreement was not his signature.

                             We gave Borrower D the opportunity to review his loan
                             application. Borrower D said that when he signed the
                             application on May 5, 1995 there was no information related to
                             the residence lease in it. This information was placed in the
                             loan application without his knowledge or approval. Borrower


98-CH-221-1004                        Page 10
                                                                                    Finding

                          D said his signature was forged to the residence lease.

                          The residence lease itself supports Borrower D's version of
                          events. Borrower D's application was signed by him and
                          Legend's President on May 5, 1995. The residence lease was
                          not faxed to Legend's President until July 7, 1995. Thus,
                          Legend's President placed the information into Borrower D's
                          initial application after Borrower D signed it. Borrower D did
                          not have an opportunity to discover that the residence lease
                          was put into his file and application.

                          The borrowers described the loan application and approval
                          methods of Legend Mortgage as a rubber-stamp process.
                          Borrower C said he only met with Legend's President on one
                          occasion. This meeting took place at 10:00 on a Friday night
                          in the living room of Legend's President's home. Borrower C
                          said he "signed where [Legend's President] told me to." All
                          four borrowers described similar experiences.

                          A chain of title for the previous year was not requested by
Prior ownership was not   Legend Mortgage Company for Borrower C.                   HUD
confirmed                 Mortgagee Letter 95-40, page 6, mandated that the "[Direct
                          Endorsement] Lender must obtain evidence of prior ownership
                          when a property was sold in the last year" and "[t]he 203(k)
                          mortgage must be based on the lowest sales price in the last
                          year." Mortgagee Letter 95-40 went into effect on September
                          13, 1995. The closing did not occur until November 2, 1995.
                          Legend had an adequate amount of time to obtain a chain of
                          title report from a title company. On May 25, 1995, the
                          property sold for $23,000. Borrower C paid $55,000 on
                          November 2, 1995. The maximum mortgage amount was
                          $86,150. It was computed by the underwriter based upon
                          information received from Legend Mortgage Company. The
                          mortgage amount was based on the sum of the $55,000
                          purchase price, estimated rehabilitation costs, and estimated
                          closing costs. If a chain of title had been performed by Legend
                          Mortgage Company, the maximum mortgage amount would
                          have been computed based upon the $23,000 price instead of
                          the $55,000 price. The maximum mortgage amount would
                          have been $49,380, thus reducing HUD's exposure by $36,770.

                          Legend Mortgage earned fees totaling $26,944 at the loan
Legend Mortgage           closings as follows:
received fees
                                                Borrower               Fees Received


                                   Page 11                                    98-CH-221-1004
Finding

                                             A                $ 6,502
                                             B                 8,508
                                             C                 6,318
                                             D                 5,616
                                            Total             $26,944

                     If Legend Mortgage had submitted accurate information to
                     HUD, the borrowers would not have qualified for the 203(k)
                     loans. Therefore, Legend Mortgage would not have received
                     the loan fees.


                     Excerpts from Legend’s President’s comments on our draft
  Auditee Comments   finding follow. Appendix C contains the complete text of his
                     comments.

                     Legend Mortgage Company, and all of its employees, in no
                     way, nor at any time originated any loans without complete
                     compliance with HUD requirements. Prudent lending practices
                     were always exercised.

                     With all due respect to the auditors, who obviously did a
                     fine and thorough job with respect to what they saw and
                     understood, I feel that their findings and conclusions are
                     more a focus on the results of the Contractor's loan fraud
                     scheme then they are an accurate and realistic measurement
                     of the responsibilities, actions, and efforts of myself or
                     Legend Mortgage Company. Specific areas of the audit,
                     represent findings relating to the Contractor’s involvement
                     which was unknown to me and my company during the
                     entire period of dealings with the 203(k) loan referrals.

                     Inclusion of these findings leads to the implication that my
                     company and I had knowledge of, or participated in, his
                     practices. That is ever so far from fact and truth. It is
                     inappropriate for findings that relate to the Contractor's
                     involvement to be formally included in the scope of an audit
                     that are intended to evaluate my company and me, because
                     it is not fair to be judged for another persons actions. The
                     overall constancy of the audit findings have been corrupted
                     by a failure to properly segregate the Contractor's actions,
                     Carl I. Brown and Company's actions, and my company's
                     and my actions.


98-CH-221-1004               Page 12
                                                                           Finding


                    I did, in fact, rely on what I was being told by the
                    underwriters at Carl I. Brown and Company. The situation
                    had been fully and completely discussed with HUD. All
                    issues had been approved.



OIG Evaluation of   The audit finding discusses facts relating to the Contractor’s
                    overall loan fraud scheme, including improper or
Auditee Comments    unexplained payments to the Contractor. Although Legend
                    Mortgage Company may have had no way of knowing of
                    these payments, Legend’s failure to follow prudent lending
                    practices allowed the Contractor to perpetuate the
                    strawbuyer loan arrangement.

                    We do not believe that Legend’s alleged reliance on
                    direction from Carl I. Brown absolves it from responsibility
                    in these matters. We have never been presented with any
                    evidence that HUD communicated, either orally or in
                    writing, with Carl I. Brown about partnership asset
                    verification.


                    The Contractor suggested that the appropriate procedure
Auditee Comments    would include the Contractor or his staff filling out the loan
                    applications with the Borrowers. The Contractor suggested
                    that this was an appropriate format for business dealings
                    because the Borrowers had an established relationship with
                    the Contractor in the area of property rehabilitation that
                    predated the use of FHA 203(k) financing. The Borrowers
                    had already worked in conjunction with the Contractor, and
                    there was a well-established relationship and track record of
                    successful rehab projects. The Borrowers had also provided
                    all types of credit documents to the Contractor so as to
                    enable the Contractor to provide them to the preferred or
                    selected lender. He explained that this was how business
                    was conducted with other lenders, and wanted me to get
                    with the program.

                    There was no reason at the time for me to suspect that there
                    was fraudulent intention in the heart of the Contractor. I
                    was aware of multiple previous transactions between the
                    Contractor and Carl I. Brown and Company. The general
                    perception was that the Contractor's goal had been to
                    effectively centralize the point of contact and
                    documentation with the Contractor for the benefit of the


                            Page 13                                   98-CH-221-1004
Finding

                      Borrower, Contractor, and lender. Indeed, it appeared that
                      the Contractor's system of business was sensible and ethical,
                      especially since so many 203(k) transactions had already
                      been closed with Carl I. Brown and Company. I had always
                      thought that for development to occur efficiently and on a
                      large-impact scale, control was a central component. So
                      some of the Contractor's thinking made a lot of sense to me.

                      Notwithstanding, I took the position that a face-to-face
                      interview and application would have to occur with each of
                      the Borrowers, because such was a fundamental HUD
                      requirement. I took this position with the full knowledge
                      that the Contractor could easily have elected to simply not
                      do business with Legend, because this type of direct
                      involvement with the Borrower seemed to be at odds with
                      the     Contractor's     perspective   on      organization,
                      communication, and control. Clearly, the Borrowers had
                      given the Contractor the complete authority to select
                      lenders on their behalf. The Contractor made this decision,
                      not the Borrower.

                      To me, face-to-face applications represented not only a
                      compliance issue, but also a control issue to insure success
                      as a businessperson. It was also critical from a disclosure
                      standpoint in terms of payments, cash requirements,
                      feasibility, etc. From the outset, I would not relinquish this
                      HUD requirement. The Contractor threatened to pull this
                      new business and send it to Carl I. Brown and Company, or
                      one of the other lenders that were strongly courting his
                      favor. I basically told him to go ahead and pull it. I was
                      firm and would not move.



  OIG Evaluation of   Only a HUD approved lender can take and sign loan
                      applications. A loan correspondent should not allow others
  Auditee Comments    to fill out loan applications and then say that the practice
                      was okay because they participated in a face-to-face
                      interview with the applicant.

                      The Contractor’s demand that he or his staff fill out the loan
                      applications with the borrowers should have been taken as
                      serious “red flags” to Legend Mortgage.             Legend’s
                      President accepted what we now know to be apparently
                      false documents from the very same Contractor that asked
                      him to violate HUD’s requirements. Legend Mortgage then
                      placed the inaccurate information into the borrowers loan


98-CH-221-1004                Page 14
                                                                          Finding

                    applications and credit packages without their knowledge.


                    The Contractor acquiesced to my position on this matter,
Auditee Comments    and proceeded on the basis that the Contractor would
                    provide credit documents to Legend that had been provided
                    to the Contractor by the Borrower. In this manner, the
                    Borrower would not be asked to reproduce documents they
                    had already given. This procedure made sense to me
                    because there did not appear to be any fraudulent intent.
                    Also, the mere fact that the Contractor was in possession of
                    all of these personal, private documents obtained directly
                    from the Borrower seemed to assume permission for the
                    second party to provide them to me, something I could
                    easily confirm with the Borrower directly.

                    It would not be difficult for me to review these documents
                    and assess their validity. When I visited with the Borrower
                    directly, I could confirm that these documents were valid,
                    which is what I did. There was no reason to suspect fraud,
                    but I was generally aware that these documents were
                    coming from the Contractor. I would have to balance the
                    Contractor's (and Borrower's) desire for central control and
                    communication with the Contractor, with HUD's guidelines
                    and prudent lending practices. I did this even though I was
                    told by the Contractor this was not happening elsewhere.


                    Legend Mortgage did not confirm the validity of documents
OIG Evaluation of   received from the Contractor with the borrowers. The most
Auditee Comments    important documents in the borrowers’ loan packages,
                    namely three partnership agreements and one residence
                    lease, were not confirmed with the borrower.          The
                    borrowers had no knowledge of the existence of the
                    documents.


                    I pointed out to the Contractor that, most likely, additional
Auditee Comments    documents were going to be needed beyond the scope of
                    what was provided initially. The Contractor informed me
                    that he had informed the Borrower that he wanted
                    additional requests of the Borrower to be made through the
                    Contractor, since the Borrower would not like to be
                    assailed with requests. Matters like this would be better
                    handled through the Contractor, whom we had come to
                    believe the Borrower relied on as a central point of contact.


                            Page 15                                  98-CH-221-1004
Finding

                  Most likely, I was told, the Borrower had already provided
                 to the Contractor most items I would eventually request.

                 I felt that additional or further documents should be
                 requested directly from the Borrower, and took the position
                 that I would be able to make such requests with an attitude
                 and style that did not cause unnecessary hardship for the
                 Borrower. Again, I did not believe the Contractor to be ill-
                 intended; rather, I believed that the Contractor was
                 operating from a frame of reference that was ultimately
                 addressing a level of efficiency and control that described a
                 successful developer/rehabber. And thus, there appeared to
                 be a reasonable line of logic to it. On most occasions, the
                 requested documents would ultimately come from the
                 Contractor's office, because it had become obvious that the
                 Borrowers preferred to deal with the Contractor's office.
                 Many Borrowers simply resisted or refused giving me
                 documents directly. They always routed then through the
                 Contractor.

                 The Contractor also had a habit of contacting me when I
                 had just begun to work on a loan. Frequently, when I was
                 pressed for answers, I might thumb through my file and
                 offer opinions to the Contractor on lacking documentation.
                 Before I was able to generate a request letter to the
                 Borrower, the documents would appear on our fax.

                 There were requests for documents that were sent off to the
                 Borrowers, documents that subsequently showed up on our
                 fax machine from the Contractor's office. The Borrowers
                 would later confirm in discussions that they had gotten our
                 request and delivered the documents to the Contractor.
                 Evidently, the Contractor was also advising the Borrowers
                 to do the same. In this manner, I heard, the Contractor
                 would be able to keep files updated so that future projects
                 could be pursued without repetitive and unnecessary
                 requests of the Borrower by the (various) lender(s).

                 I observed that this circumstance was occurring not because
                 of fraudulent intent; rather, it appeared that the Borrower
                 and Contractor did in fact enjoy a solid, trusting
                 relationship. It seemed especially important that I not
                 become duplicative with requests, since it generally
                 produced a negative reaction from the Borrower, who
                 preferred their relationship with the Contractor. Duplicate
                 requests also produced a negative reaction from the


98-CH-221-1004           Page 16
                                                                          Finding

                    Contractor, who would readily point out that my insistence
                    on direct (lender) involvement was bothersome and
                    unnecessary (both of which I heard on several occasions).

                    All of the Borrowers involved with the Contractor reflected
                    an attitude towards me that spoke to: "Why are you
                    bothering me with this when I already gave it to the
                    Contractor?" "Can we just get this over with because I
                    already understand what is happening here?" and "I have
                    already discussed all of this with the Contractor, why are
                    you going over this again?"

                    My intention here is not to blame the Borrower. But I will
                    point out that the audit findings avoid completely the
                    simplest and most fundamental observation. The Borrower
                    and the Contractor had engaged in a relationship with each
                    other that entailed an agreement that resulted in deception
                    to the lender. Both Borrower and Contractor discouraged
                    lender involvement. I had to push to have a measure of
                    involvement as lender, and push carefully because both
                    Borrower and Contractor were discouraging it.



                    Legend’s President accepted documents from the
OIG Evaluation of   Contractor without the borrowers’ knowledge.            The
Auditee Comments    borrowers never confirmed the partnership agreements or
                    residence lease. In fact, the borrowers’ said that they had
                    no knowledge of the existence of the documents and the
                    signatures on the documents were not theirs. These
                    documents were used to qualify the borrowers for the
                    203(k) loans.


                    203(k) loans were, and are, a very different animal as far as
Auditee Comments    cash requirements are concerned. The loans themselves,
                    and therefore the applications, were moving constantly as
                    they unfolded. During this time, as we first began
                    performing 203(k)’s, we simply recognized that the cash
                    requirements would change, and approached the loan as a
                    changing entity.

                    The auditors seemed to have difficulty understanding this
                    phenomenon, since they have never originated 203(k) loans
                    themselves. I could tell they felt there was something
                    wrong with things being added to a loan application. They


                            Page 17                                  98-CH-221-1004
Finding

                      reflected an air of suspicion when items were added to a
                      credit package when those same items were not reflected on
                      the initial application.

                      In this area, the audit findings cast a menacing shadow over
                      differences between the initial applications and the credit
                      packages. The suggestion, both directly and indirectly, is
                      that Legend purposely and deceitfully added things to the
                      Borrower's applications without their knowledge, and
                      inserted manufactured and forged documents into their
                      credit files.

                      Simply put, those allegations and suggestions are false. I
                      did not, nor did anyone else at Legend Mortgage Company,
                      ever, at any time, intentionally add information to loan
                      applications without fully believing that the information was
                      true, and without receiving either direct, or what we
                      perceived was indirect, confirmation from the Borrower.



  OIG Evaluation of   We understand that it is appropriate, under many
                      circumstances, to add certain items to credit packages.
  Auditee Comments    However, for the four loans in question, the borrowers had
                      no knowledge of key documents that were added to their
                      credit packages, namely, the partnership agreements. In
                      fact, the borrowers had no knowledge of the documents that
                      purported to represent the vast majority of the assets that
                      were needed to close the deals.


                      With all of my years of experience in FHA lending, with all
  Auditee Comments    of my knowledge and exposure brought about by
                      overseeing the production of hundreds of millions of dollars
                      of FHA loans on a monthly basis throughout the United
                      States when I operated in the capacity as Senior Vice
                      President of Carl I. Brown and Company, with all of my
                      voracious reading of HUD guidelines, I had never been
                      involved with a loan where a partnership agreement existed.

                      From the start, I was unfamiliar with the nature and purpose
                      of the agreement. In many ways, I was unclear about
                      exactly what it was, why it was being used, what purpose it
                      was to serve, how it came about, how it should be
                      documented, and what HUD thought of all of it. There was
                      absolutely no mention of it in any of the HUD regulations.
                      There were no clear definitions in any of HUD's literature,


98-CH-221-1004                Page 18
                                                       Finding

mortgagee letters, or any other known HUD source.

No one I knew of in the entire mortgage industry had any
background or experience in this area. No associate of mine
had ever used one or seen one used. I talked to and
telephoned numerous people to determine if any had
experience with partnership agreements and came up with
nothing.

Like other new animals the 203(k) theater seemed to be
populated with, I concluded that the partnership agreement
was just another new animal. I was simply unaware of it
previously and I, along with others in my business, had not
before witnessed this animal. Well, there were a lot of new
things with 203(k). Since I couldn't get my arms around the
idea, and had no historical guidance from others in the
mortgage business, I had to rely on specific guidance from
underwriters and HUD.

It is difficult for me to both listen to and digest current
opinions about what documentation should have
accompanied the agreements in the past as far as bank
statements, initial investment verification, etc. There is no
written guidance anywhere to support any particular view.
It is obvious these opinions are both made with the benefit
of hindsight and are easily argued from one particular point
of view. Documentation requirements, in hindsight, could
be argued from a large range of perspectives, because the
partnership agreement exhibits characteristics of so many
different loan elements simultaneously.

In hindsight, one could just as easily now take the position
that a partnership tax return, an audited financial statement,
or bank account statements solely in the name of the
specific partnership were required. Conversely, one could
argue that if an FHA borrower has ownership in an S-
corporation or a partnership, then the lender is not required
to reach back in time and verify that the borrower had the
funds to initially capitalize the venture. One could point out
that if a borrower owns stock, then there is no HUD
requirement that the lender reach back in time to verify the
source of funds used to purchase the stock. None of these
recent approaches are ultimately valid because the
partnership agreements fit into no known category
comfortably.



        Page 19                                   98-CH-221-1004
Finding

                      No clear written HUD guidelines or HUD standards did
                      exist in terms of spelling out what was needed to document
                      a partnership agreement. Because of this circumstance, and
                      because the partnership agreement has no clear parallel
                      category, the possibilities are endless, and could be argued
                      and debated a whole variety of ways.


                      Legend’s President believes no clear written HUD
  OIG Evaluation of   guidelines or standards existed to guide him relating to
  Auditee Comments    partnership agreement verification. We disagree because
                      HUD Handbooks state that “all funds needed for the
                      borrower’s investment in the property must be verified.”

                      Legend Mortgage should not have accepted the partnership
                      agreements from the Contractor without the borrowers’
                      knowledge or approval.          Further, Legend Mortgage
                      accepted the partnership agreements as evidence of
                      borrowers’ liquid assets. We believe Legend should have
                      verified the liquidity in the same manner as for any other
                      assets necessary to close the transaction.



                      I made every effort to confirm the acceptability of the
  Auditee Comments    partnership agreement itself, as well as the attendant
                      required documentation, from HUD's perspective. Every
                      effort, both verbally and in writing, was made on my part to
                      proceed in accordance with what would be considered
                      normal HUD requirements with regard to partnership
                      agreements. I initially made those efforts through the
                      underwriters, both national and local, at Carl I. Brown and
                      Company. I confirmed with them many times what had
                      been discussed and verified with HUD, and was repeatedly
                      told these topics had been very specifically and carefully
                      examined and explored.

                      Partnership agreements were included in the Borrower B
                      and Borrower A files submitted to the underwriters at Carl
                      I. Brown and Company. I followed the procedural and
                      documentation requirements exactly as they defined them
                      for me. There were no underwriting conditions made as to
                      verification of initial investment.         There were no
                      underwriting conditions made as to any other required
                      documentation like bank statements, partnership tax returns,
                      or partnership financial statements, or any other attendant or


98-CH-221-1004                Page 20
                                                                           Finding

                    supporting records.

                    It is no coincidence that the initial Borrower A loan
                    application reflects the idea of a gift from a partnership. I
                    used the term gift from partnership on Borrower A's loan
                    because it was a remembrance of the earlier Borrower B
                    loan. I believe the Borrower B loan was the first loan
                    where a partnership agreement was used. Based on specific
                    underwriting requirements that were communicated to me
                    by Carl I. Brown and Company's underwriters, the only
                    documentation required by FHA, I was told at the time, for
                    the partnership agreement to work was the agreement itself.
                     There were absolutely no other documentation
                    requirements, not even bank statements from the
                    Contractor's account. I remember thinking to myself that it
                    reminded me of the old HUD requirements pertaining to
                    gifts. In earlier years, before HUD changed their guidelines,
                    gift letters themselves were the only documentation required
                    in connection with a gift. No source of funds as far as the
                    donor's account was concerned. No documentation of
                    receipt of funds to the recipient.              Because the
                    documentation requirements of the partnership agreement
                    reminded me of the old gift rules, I remember that this is the
                    reason I called it a gift from partnership. Again, no other
                    documents were needed. The partnership agreement was
                    self-defining, self-documenting, and self-verifying.

                    The whole partnership agreement issue was a new and
                    untested area for me. I left it totally to the underwriter to
                    determine what was needed.           Underwriters establish
                    guidelines. I responded to the definitions and parameters I
                    was given to the letter. I did exactly what I as told to do.
                    This was, and is, normal and prudent lending practice.

                    I believe that these circumstances help to clarify another
                    area where the audit fails to segregate findings properly.
                    Findings that should properly relate to Carl I. Brown and
                    Company are being portrayed as findings relating to Legend
                    Mortgage. Instructions, guidance, and input came from
                    Carl I. Brown and Company to its correspondent lender,
                    Legend Mortgage, and should be attributable to Carl I.
                    Brown and Company, not Legend Mortgage.


                    Legend’s President states that Carl I. Brown told him that
OIG Evaluation of   he need not verify any partnership assets. We have not seen
Auditee Comments

                            Page 21                                   98-CH-221-1004
Finding

                      any written documentation from Carl I. Brown instructing
                      Legend as to what documentation was required to verify
                      partnership assets. We have not seen any written requests
                      from Legend to either Carl I. Brown or HUD asking for
                      guidance.


                      [A] letter describes that a detailed description of the
  Auditee Comments    investment strategy had been provided to HUD by Dollars
                      Express, and that essentially, HUD was clearly defining
                      what would be required on applications taken after
                      September 1, 1995. I was relieved when I read it. HUD
                      had, in writing, reviewed and responded to the entire issue.
                      HUD had looked into everything. HUD would have had the
                      opportunity to question anything that was unclear or
                      suspect. There was no greater evidence I could ever ask for
                      to confirm that all that had been done in the past as far as
                      partnership agreements were concerned had been
                      acceptable.      Unambiguous, written definitions were
                      provided for the future.


                      This letter was addressed to the Contractor. HUD did not
  OIG Evaluation of   give any guidance related to partnership asset verification
  Auditee Comments    for loan correspondents or mortgagees in this letter. HUD
                      was unaware that Legend Mortgage was accepting
                      partnership agreements from the Contractor and placing
                      them in borrowers’ loan applications and credit packages
                      without their knowledge.


                      The Borrower C loan was sent to Malone Mortgage
  Auditee Comments    Company. I had a good working relationship with the
                      senior FHA underwriter. The senior FHA underwriter was
                      already well aware of the volume of 203(k) loans at Carl I.
                      Brown and Company with Dollars Express, an awareness
                      that most of the 203(k) lending community in the area had.
                      She was very interested in looking into the loan and the
                      issue. I spoke to senior FHA underwriter about our mutual
                      desire for her to contact the local HUD office, explain the
                      matter thoroughly, and describe exactly what
                      documentation was present so that compliance could be
                      absolutely insured.

                      The senior FHA underwriter was, as I was, extremely
                      focused on being as precise, as detailed, and as thorough as


98-CH-221-1004                Page 22
                                                       Finding

possible with her discussions with HUD. We both were
well aware of the idea that since the partnership was an
unusual matter, it was absolutely imperative to approach
this issue with 100% certainty. Neither one of us wanted to
be dealing with an insuring issue down the road (which is
precisely what I am doing now). Accordingly, we discussed
several times prior to the senior FHA underwriter making
contact with HUD, the absolute importance of being
thorough and accurate. We also discussed the absolute need
of documenting the discussion, whatever the results were.
She reviewed the recent letter from HUD regarding
partnership agreements and made the call.

I am absolutely certain that every issue regarding the
partnership agreement and required documentation was
discussed. The senior FHA underwriter and I discussed in
advance the vital importance of going over each and every
documentation issue related to partnership agreements. She
maintains that to this day that this is what she did. I am
confident there was no requirement made by HUD to verify
the initial investment made into the partnership by the
Borrower. The credit file exhibits, as well as the senior
FHA underwriter's later written confirmation, clearly speak
to the idea that the down payment was coming from the
Contractor's account. Other than what was in the credit
package, no other documents were needed. I am confident
I did everything within my abilities, and more than most
would have done or would have thought to do, to act
prudently in insisting on and directing clear communication
with HUD on these matters, and responding accordingly.

Like the partnership and lease agreements we received, I
along with everyone else, had no reason to suspect they had
been forged. You do not throw red flags up when there is
no reason to suspect anything is wrong, when there is no
inkling or likelihood that a document is not real. In the
course of processing any loan, it is common for a Realtor or
a builder to fax through documents requested from the
borrower. Real estate contracts, letters of explanation,
lease agreements, pay stubs, bank statements, and
sometimes credit reports, all would be typical examples.
Just as we would not be inclined to pick up the phone and
ask the borrower, in a situation like this, whether they
actually signed the contract, a lease, or a letter, we were not
inclined to do so on these loans. There was no reason to
even suspect the signatures were forged.


         Page 23                                  98-CH-221-1004
Finding



                      We interviewed the senior FHA underwriter from Malone
  OIG Evaluation of   Mortgage. She said that she did know: (1) the borrower
  Auditee Comments    was not in a partnership with the contractor; (2) the
                      borrowers signature on the partnership agreement was not
                      his; (3) the borrower did not tell Legend Mortgage he was
                      in a partnership; (4) Legend Mortgage received the
                      partnership agreement from the contractor and not the
                      borrower; and (5) the partnership agreement information
                      was placed in the asset section of the loan application after
                      the borrower signed it. In fact, she said that if she knew the
                      above, her firm would not have underwritten the loan and
                      would have disclosed the situation to the authorities. We
                      asked the senior FHA underwriter if she could think of any
                      situation where information about a borrowers assets did
                      not initially come from the borrower. She stated she could
                      not. We asked her if it was a prudent lending practice to
                      add information to a borrower’s loan without their
                      knowledge. She said it was not.


Recommendations       We recommend that: (1) the Mortgagee Review Board take
                      appropriate action based on the information contained in the
                      Finding; and (2) the Assistant Secretary for Housing consider
                      imposing administrative sanctions on Legend's President for all
                      four improperly originated loans.




98-CH-221-1004                 Page 24
Management Controls
In planning and performing our audit, we considered the management controls relating to Legend
Mortgage Company's HUD/FHA loan origination process in order to determine our auditing
procedures and not to provide assurance on management controls. Management controls consist of
the plan of organization, methods, and procedures adopted by management to ensure that its goals are
met. Management controls include the processes for planning, organizing, directing, and controlling
program operations. They include the systems for measuring, reporting, and monitoring program
performance adopted by management.


                                      We determined the following management controls were
 Relevant Management                  relevant to our audit objectives:
 Controls
                                      •   Program Operations - The policies and procedures that
                                          management has implemented to reasonably ensure that a
                                          program meets its objectives.

                                      •   Validity and Reliability of Data - The policies and
                                          procedures that management has implemented to
                                          reasonably ensure that valid and reliable data are obtained,
                                          maintained, and fairly disclosed in reports.

                                      •   Compliance with Laws and Regulations - The policies and
                                          procedures that management has implemented to
                                          reasonably ensure that resource use is consistent with laws
                                          and regulations.

                                      •   Safeguarding Resources - The policies and procedures that
                                          management has implemented to reasonably ensure that
                                          resources are safeguarded against waste, loss, and misuse.

                                      We assessed all relevant controls identified above.

                                      It is a significant weakness if management controls do not
                                      provide reasonable assurance that the process for planning,
                                      organizing, directing, and controlling program operations will
                                      meet an organizations objectives.




                                               Page 25                                      98-CH-221-1004
Management Controls

                           Based on our review, we believe the following items are
  Significant Weaknesses   significant weaknesses:

                           Program Operations - Legend Mortgage did not originate four
                           HUD/FHA loans in accordance with HUD's requirements or
                           prudent lending practices. Consequently, HUD relied on
                           Legend's origination process and assumed abnormally high
                           risks when it insured four loans valued at $310,220 (see
                           Finding).




98-CH-221-1004                     Page 26
Follow Up On Prior Audits
This is the first OIG audit of Legend Mortgage Corporation.




                                               Page 27        98-CH-221-1004
                                                                                  Appendix A

Summary of Deficiencies


                                                                              Narrative
                                   Mishandled    Cash/Liquid                    Case
FHA Case     Loan                  Mortgage        Assets      Overstated    Presentation
 Number     Amount    Strawbuyer   Documents     Overstated     Income      Appendix No.

131-
7937533    $78,200        X            X             X                          B-1

131-
7928583    $78,200        X            X             X                          B-2

131-
7983941    $86,150        X            X             X                          B-3

131-
7950870    $67,650        X            X             X             X            B-4

  Total    $310,200




                                           Page 29                                98-CH-221-1004
                                                                               Appendix C


Introduction to Narrative Case Presentations
        Appendices B-1 through B-4 represent four case-by-case narrative
        discussions summarizing and detailing the deficiencies in Finding 1.




                                      Page 31                                   98-CH-221-1004
                                                                                            Appendix B

                                                                                          Appendix B-1

Street Address: 10545 South State Street

FHA Case #: 131:7937533

Insured Amount: $78,200

Underwriting Company & Underwriter Number: Carl I. Brown, N745

Summary: Legend Mortgage Company improperly originated Borrower A's HUD/FHA insured loan.
The loan was originated by Legend's President. Legend Mortgage added a fictitious partnership
agreement to Borrower A's loan application and file without her knowledge or approval, and collected
fictitious information from a Contractor without Borrower A's knowledge or approval. Also, Legend
Mortgage failed to verify all of the funds necessary to close the loan. Legend Mortgage failed to verify
Borrower A's contribution to the partnership, and failed to verify the receipt of Borrower A's funds by
the partnership.

The Chief of HUD's Single Family Production Branch, Office of Housing, Illinois State Office, said
HUD would have rejected the loan had Legend submitted accurate information.

Pertinent Details:

        Borrower A Acted As A Strawbuyer

        Borrower A was recruited by the Contractor to be a strawbuyer. The Contractor promised
        Borrower A that it would find a property to rehabilitate, rehabilitate the property, and sell the
        property to a third party after the rehabilitation was completed. Borrower A was told by the
        Contractor that she would not have to contribute any money to purchase the property.

        Borrower A told us that she did not invest any money toward the purchase of 10545 South
        State Street. Borrower A was paid $1,500 to participate as a strawbuyer.

        Assets Necessary To Close Were Not Verified

        Legend Mortgage did not verify all of the funds Borrower A was required to invest in the
        property. HUD Handbook 4155.1 REV-4 CHG 1 states that "[a]ll funds for the borrower's
        investment in the property must be verified." The actual assets necessary to close that were
        verified by Legend Mortgage totaled $3,466. Borrower A needed to invest $12,313 in order
        to close on the loan. As a result, Borrower A did not qualify for the HUD/FHA insured loan.

        There was no information in Borrower A's file, other than a partnership agreement, to provide
        any verification that partnership funds needed to close were available. HUD Handbook 4000.2
        REV-2, paragraph 3-6 mandates that mortgagees obtain and verify information with great care.
         Legend's President said he believed that the HUD rules and guidelines for partnership
        agreements were made regionally. These rules were communicated to him by the underwriter.


                                                 Page 33                                    98-CH-221-1004
Appendix B

          Legend's President said the underwriter told him that only a partnership agreement was
         necessary to verify the existence of the entire amount of partnership liquid assets. The
         underwriter was recently sanctioned by the Mortgagee Review Board in this matter.
         Consequently, the underwriter's parent company agreed to indemnify HUD for any loss on this
         loan.

         Legend's President's was mistaken in his belief that he did not have to verify actual assets of the
         partnership to satisfy prudent lending practices. A loan correspondent's basic duty, on HUD's
         behalf, is to verify the validity of information that is received. Indeed, as HUD's agent, Legend
         had a duty to verify the assets of the partnership before placing HUD at risk.

         The Chief of HUD's Single Family Production Branch, Office of Housing, Illinois State Office,
         said HUD accepted loan packages with partnership agreements. However, HUD did not
         approve the loan packages on an as-is basis. Prudent lending practices require that the loan
         correspondent verify the assets of the partnership.

         There was no verification that Borrower A had the $10,000 required by the partnership
         agreement. If a verification of Borrower A's funds had been made, Legend's President would
         have discovered that the partnership was fictitious. Borrower A said that she did not belong to
         a partnership and that the signature on the partnership agreement was not her signature.
         Borrower A also did not have the funds necessary to close the transaction.

         Partnership Agreements Were Used Improperly

         A fictitious partnership agreement was used as evidence that Borrower A had the necessary
         funds to close. The partnership agreement stated that Borrower A invested $10,000 and the
         Contractor invested $5,000 to the partnership, respectively. The partnership agreement was
         placed in Borrower A's loan file by someone at Legend Mortgage. This occurred even though
         Borrower A: (1) was never in a partnership with the Contractor; (2) did not tell Legend's
         President she was in a partnership with the Contractor; (3) did not give Legend's President a
         copy of the partnership agreement or direct Legend's President to contact the Contractor for a
         copy; (4) never saw the partnership agreement; and (5) said the signature on the partnership
         agreement was not her signature.

         Information related to the partnership agreement was placed into Borrower A's initial
         application after she signed the application. The following words were placed into her loan
         application in the liquid assets section by Legend's President: "Gift From Partnership -
         $15,000." There was no mention made of a partnership agreement in Borrower A's final
         typewritten application. Thus, Legend's President did not give Borrower A an opportunity to
         discover that the partnership agreement was placed into her file and application.

         Borrower A's initial application was signed by her and Legend's President on April 14, 1995.
         The Partnership Agreement itself was not dated until April 15, 1995. More importantly, the
         Partnership Agreement was not faxed to Legend's President until May 5, 1995. Legend's
         President said he had no knowledge of the partnership agreement's existence until it was faxed
         to him by the Contractor on May 5, 1995.


98-CH-221-1004                                     Page 34
                                                                                   Appendix B


Borrower A signed a second and final application on June 26, 1995. Our review of the second
signed application in Borrower A’s loan file disclosed that the application did not include
information regarding the partnership agreement even though Legend's President received the
partnership agreement from the Contractor on May 5, 1995. If this information had been
included in the second application, Borrower A would have had the opportunity to inform
Legend's President that she was not in a partnership with the Contractor.

Both Borrower A and Borrower B's partnership agreements were faxed to Legend Mortgage
at the same time. The facsimile was sent by the Contractor on May 5, 1995 between
approximately 1:25 and 1:34 PM. Individual front and signature pages were faxed for
Borrower A and Borrower B. One set of pages two through ten of the partnership agreement
were also faxed to Legend Mortgage.

Legend Mortgage photocopied all of the faxed pages of the partnership agreement for
Borrowers A and B in order to create two separate documents. Also, the second through
tenth pages are completely illegible in various places. The agreements appear to have been
photocopied many times. We believe Legend Mortgage should have investigated these
documents with some suspicion. Finally, none of the signatures on the partnership agreements
resemble the actual signatures of the borrowers on the loan applications. Given the above,
known signatures should have been compared with those placed on the partnership
agreements.

When interviewed, Borrower A said she never contributed $10,000 to a partnership.
Borrower A also said her signature was forged to the agreement.

Legend's President said he told Borrower A that she was short the funds needed for closing.
Legend's President could not produce documentation, such as a letter or memorandum,
evidencing his alleged notice to Borrower A. Legend's President said he advised Borrower A
that the HUD acceptable sources of funds were either: (1) a gift from a blood relative; (2)
borrowed funds from a collateralized asset; or (3) a partnership agreement.

Legend's President said some time after his notice to Borrower A, he received a faxed copy of
the partnership agreement from the Contractor. Legend's President could not identify who at
the Contractor's office faxed the agreement to him. Legend's President believed that his receipt
of the partnership agreement was in response to his alleged notice to Borrower A. He also
believed that his actions were performed in accordance with prudent lending practices.

Legend's President's explanations do not agree with the actions he took regarding the
partnership agreements. Legend's President accepted the partnership agreement from the
Contractor, without Borrower A's knowledge or permission. We believe that placing key
information into a loan application and file without the knowledge or consent of the borrower
is not considered to be a prudent lending practice. Borrower A described her dealings with
Legend's President as a "rubber-stamp" process rather than a meaningful, substantive exchange
of information.



                                         Page 35                                   98-CH-221-1004
Appendix B

         Legend Mortgage was paid $6,502 in loan fees at closing.




98-CH-221-1004                                  Page 36
                                                                                              Appendix B


                                                                                            Appendix B-2

Street Address: 118 West 113th Place

FHA Case #: 131:7928583

Insured Amount: $78,200

Underwriting Company & Underwriter Number: Carl I. Brown, N745

Summary: Legend Mortgage Company improperly originated Borrower B's HUD/FHA insured loan.
The loan was originated by Legend's President. Legend Mortgage added a fictitious partnership
agreement into Borrower B's loan application and file without his knowledge or approval, and
collected the fictitious information from a Contractor without Borrower B's knowledge or approval.
Also, Legend Mortgage failed to verify all of the funds necessary to close the loan. Legend Mortgage
failed to verify Borrower B's contribution to the partnership, failed to verify the receipt of Borrower B's
funds by the partnership, and failed to properly value or determine if a 401(K) account was redeemed.

The Chief of HUD's Single Family Production Branch, Office of Housing, Illinois State Office, said
HUD would have rejected the loan had Legend submitted accurate information.

Pertinent Details:

        Borrower B Acted As A Strawbuyer

        Borrower B was recruited by the Contractor to be a strawbuyer. The Contractor promised
        Borrower B that it would find a property to rehabilitate, rehabilitate the property, and sell the
        property to a third party after the rehabilitation was completed. Borrower B understood that
        he would not have to contribute any money to purchase the property.

        Borrower B told us that he did not invest any money toward the purchase of 118 West 113th
        Place. Borrower B was paid $1,000 to participate as a strawbuyer.

        Assets Necessary To Close Were Not Verified

        Legend Mortgage did not verify all of the funds Borrower B was required to invest in the
        property. HUD Handbook 4155.1 REV-4 CHG 1 states that "[a]ll funds for the borrower's
        investment in the property must be verified." The actual assets necessary to close that were
        verified by Legend Mortgage totaled $7,999. Borrower B needed to invest $15,837 in order
        to close on the loan. As a result, Borrower B did not qualify for the HUD/FHA insured loan.

        There was no information in Borrower B's file, other than a partnership agreement, to provide
        any verification that partnership funds needed to close were available. HUD Handbook 4000.2
        REV-2, paragraph 3-6 mandates that mortgagees obtain and verify information with great care.
         Legend's President said he believed that the HUD rules and guidelines for partnership


                                                  Page 37                                     98-CH-221-1004
Appendix B

         agreements were made regionally. These rules were communicated to him by the underwriter.
          Legend's President said the underwriter told him that only a partnership agreement was
         necessary to verify the existence of the entire amount of the partnerships liquid assets. The
         underwriter was recently sanctioned by the Mortgagee Review Board in this matter.
         Consequently, the Underwriter's parent company agreed to indemnify HUD for any loss on this
         loan.

         Legend's President's was mistaken in his belief that he did not have to verify actual assets of the
         partnership to satisfy prudent lending practices. A loan correspondent's basic duty, on HUD's
         behalf, is to verify the validity of information that is received. Indeed, as HUD's agent, Legend
         had a duty to verify the assets of the partnership before placing HUD at risk.

         The Chief of HUD's Single Family Production Branch, Office of Housing, Illinois State HUD
         Office, said HUD accepted loan packages with partnership agreements. However, HUD did
         not approve the loan packages on an as-is basis. Prudent lending practices would have
         required that the loan correspondent verify the assets of the partnership.

         There was no verification that Borrower B had the $10,000 required by the partnership
         agreement. If a verification of Borrower B's funds had been made, Legend's President would
         have discovered that the partnership was fictitious. Borrower B said that he did not belong to
         a partnership and that someone else signed his signature to the partnership agreement.
         Borrower B also did not have the funds necessary to close the transaction.

         Partnership Agreements Were Used Improperly

         A fictitious partnership agreement was used as evidence that Borrower B had the necessary
         funds to close. The partnership agreement stated that Borrower B invested $10,000 and the
         Contractor invested $5,000 to the partnership, respectively. The partnership agreement was
         placed in Borrower B's loan file by someone at Legend Mortgage. This occurred even though
         Borrower B: (1) was never in a partnership with the Contractor; (2) did not tell Legend's
         President he was in a partnership with the Contractor; (3) did not give Legend's President a
         copy of the partnership agreement or direct Legend's President to contact the Contractor for a
         copy; (4) never saw the partnership agreement; and (5) said the signature on the partnership
         agreement was not his signature.
.
         There was no mention made of a partnership agreement in Borrower B's initial or final
         typewritten application. Thus, Legend's President did not give Borrower B an opportunity to
         discover that Legend's President placed the partnership agreement into his file without his
         knowledge.

         Borrower B's initial application was signed by him and Legend's President on March 30, 1995.
          The partnership agreement itself was not dated until April 15, 1995. More importantly, the
         partnership agreement was not faxed to Legend's President until May 5, 1995. Legend's
         President said he had no knowledge of the partnership agreement's existence until it was faxed
         to him by the Contractor on May 5, 1995.



98-CH-221-1004                                     Page 38
                                                                                   Appendix B

Borrower B signed a second and final application on June 2, 1995. Our review of the second
signed application in Borrower B’s loan file revealed that it did not include information
regarding the partnership agreement even though Legend's President received the partnership
agreement from the Contractor on May 5, 1995. If this information would have been included
in the second application, Borrower B would have had the opportunity to inform Legend's
President that he was not in a partnership with the Contractor.

Both Borrower A and Borrower B's partnership agreements were faxed to Legend Mortgage
at the same time. The facsimile was sent by the Contractor on May 5, 1995 between
approximately 1:25 and 1:34 PM. Individual front and signature pages were faxed for
Borrower A and Borrower B. One set of pages two through ten of the partnership agreement
were also faxed to Legend Mortgage.

Legend Mortgage photocopied all of the faxed pages of the partnership agreement for
Borrowers A and B in order to create two separate documents. Also, the second through
tenth pages are completely illegible in various places. The agreements appear to have been
photocopied many times. We believe Legend Mortgage should have investigated these
documents with some suspicion. Finally, none of the signatures on the partnership agreements
resemble the actual signatures of the borrowers on the loan applications. Given the above,
known signatures should have been compared with those placed on the partnership
agreements.

When interviewed, Borrower B said he never contributed $10,000 to a partnership. Borrower
B said his signature was forged to the agreement.

Legend's President said he told Borrower B that he was short the funds needed for closing.
Legend's President could not produce documentation, such as a letter or memorandum,
evidencing his alleged notice to Borrower B. Legend's President said he advised Borrower B
that the HUD acceptable sources of funds were either: (1) a gift from a blood relative; (2)
borrowed funds from a collateralized asset; or (3) a partnership agreement.

Legend's President said some time after his notice to Borrower B, he received a faxed copy of
the partnership agreement from the Contractor. Legend's President could not identify who at
the Contractor's office faxed the agreement to him. Legend's President believed that his receipt
of the partnership agreement was in response to his alleged notice to Borrower B. He also
believed that his actions were performed in accordance with prudent lending practices.

Legend's President's explanations do not agree to the actions he took regarding the partnership
agreements. Legend's President accepted the partnership agreement from the Contractor,
without Borrower B's knowledge or permission. We believe that placing key information into
a loan application and file without the knowledge or consent of the borrower is not considered
to be a prudent lending practice.

Borrower B described his dealings with Legend's President as a "rubber-stamp" process rather
than a meaningful, substantive exchange of information.



                                         Page 39                                   98-CH-221-1004
Appendix B

         Legend Mortgage was paid $8,508 in loan fees at closing.




98-CH-221-1004                                  Page 40
                                                                                              Appendix B

                                                                                            Appendix B-3

Street Address: 11203 South Hermosa Avenue

FHA Case #: 131:7983941-702

Insured Amount: $86,150

Underwriting Company & Underwriter Number: Malone Mortgage, G701

Summary: Legend Mortgage Company improperly originated Borrower C's HUD/FHA insured loan.
The loan was originated by Legend's President. Legend Mortgage added a fictitious partnership
agreement into Borrower C's loan application and file without his knowledge or approval and collected
the fictitious information from a Contractor without Borrower C's knowledge or approval. Also,
Legend Mortgage failed to verify all of the funds necessary to close the loan. Legend Mortgage failed
to verify Borrower C's contribution to the partnership, and failed to verify the receipt of Borrower C's
funds by the partnership.

The Chief of HUD's Single Family Production Branch, Office of Housing, Illinois State Office, said
HUD would have rejected the loan had Legend submitted accurate information.

Pertinent Details:

        Borrower C Acted As A Strawbuyer

        Borrower C was recruited by the Contractor to be a strawbuyer. The Contractor promised
        Borrower C that it would find properties to rehabilitate, rehabilitate the properties, and sell the
        properties to third parties after the rehabilitation was completed. Borrower C understood that
        he would not have to contribute any money to purchase the property.

        Borrower C told us that he did not invest any money toward the purchase of 11203 South
        Hermosa. Borrower C was paid $500 to participate as a strawbuyer.

        Assets Necessary To Close Were Not Verified

        Legend Mortgage did not verify all of the funds Borrower C was required to invest in the
        property. HUD Handbook 4155.1 REV-4 CHG 1 states that "[a]ll funds for the borrower's
        investment in the property must be verified." The actual assets necessary to close on the loan
        that were verified by Legend Mortgage totaled $6,093. Borrower C needed $14,531 in order
        to close on the loan. As a result, Borrower C did not qualify for the HUD/FHA insured loan.

        During a phone conversation regarding Borrower C's loan, the underwriter's Vice-President
        asked the Chief of HUD's Single Family Production Branch, Office of Housing, Illinois State
        Office, about the requirements for verification of funds to close a loan. The underwriter's Vice-
        President asked whether a bank statement from the Contractor would be a sufficient
        verification of assets. The Chief said the Contractor’s bank statement would be a sufficient


                                                  Page 41                                     98-CH-221-1004
Appendix B

         verification of assets. However, the Chief assumed that this underwriter was referring to the
         $5,000 the Contractor was contributing to the partnership. The Chief reasonably assumed that
         Borrower C's funds ($10,000) were being verified independently of the Contractor's funds.
         The Chief had no way of knowing that the partnership was fictitious. To satisfy prudent
         lending practices, both sources of funds should have been independently verified.

         If a verification of Borrower C's funds had been made, Legend's President would have
         discovered that Borrower C did not contribute any funds to the partnership, or have the funds
         necessary to close the transaction. A loan correspondent's basic duty, on behalf of HUD, is to
         verify the validity of information that is received. Indeed, as HUD's agent, Legend had a
         fiduciary duty to verify the assets of the partnership before putting HUD at risk. If Legend's
         President had followed prudent lending practices, he would have verified the underlying assets
         of the partnership.

         A Partnership Agreement Was Used Improperly

         A fictitious partnership agreement was used as evidence that Borrower C had the necessary
         funds to close. The partnership agreement stated that Borrower C invested $10,000 and the
         Contractor invested $5,000 to the partnership, respectively. The partnership agreement was
         placed in Borrower C's loan file by someone at Legend Mortgage. This occurred even though
         Borrower C: (1) was never in a partnership with the Contractor; (2) did not tell Legend's
         President he was in a partnership with the Contractor; (3) did not give Legend's President a
         copy of the partnership agreement or direct Legend's President to contact the Contractor for a
         copy; (4) never saw the partnership agreement; and (5) said the signature on the partnership
         agreement was not his signature.

         Borrower C said that information related to the partnership agreement was placed into his loan
         application after he signed it. The following words were placed into his loan application in the
         liquid assets section by Legend's President without Borrower C's knowledge or permission:
         "Partnership Agreement - $15,000." Thus, Borrower C did not have an opportunity to
         discover that the partnership agreement was put into his file and application.

         When interviewed, Borrower C said he never contributed $10,000 to a partnership. Borrower
         C said, in fact, that he "never had $10,000 in [his] life." Borrower C said his signature was
         forged to the agreement.

         Legend's President said he told Borrower C that he was short the funds needed for closing.
         Legend's President could not produce documentation, such as a letter or memorandum,
         evidencing his alleged notice to Borrower C. Legend's President said he advised Borrower C
         that the HUD acceptable sources of funds were either: (1) a gift from a blood relative; (2)
         borrowed funds from a collateralized asset; or (3) a partnership agreement. Legend's President
         said some time after his notice to Borrower C, he received a faxed copy of the partnership
         agreement from the Contractor. Legend's President could not identify who, at the Contractor's
         office, faxed the agreement to him. Legend's President believed that his receipt of the
         partnership agreement was in response to his alleged notice to Borrower C. He also believed
         that his actions were performed in accordance with prudent lending practices.


98-CH-221-1004                                    Page 42
                                                                                  Appendix B


Legend's President's explanations do not agree with the actions he took regarding the
partnership agreements. Legend's President accepted the partnership agreement from the
Contractor, without Borrower C's knowledge or permission. Placing key information into the
loan application and file without the knowledge or consent of the borrower is not considered to
be a prudent lending practice.

Borrower C described his dealings with Legend's President as perfunctory. Borrower C said
he "signed where [Legend's President] told me to." Borrower C only met with Legend's
President once. The meeting was held at about 10:00 p.m. on a Friday in the living room of
Legend's President's home.

Prior Ownership Not Confirmed

A chain of title for the previous year was not requested by Legend Mortgage for Borrower C
even though Borrow C purchased the property within the past year. HUD Mortgagee Letter
95-40, page 6, mandates that the "[Direct Endorsement] Lender must obtain evidence of prior
ownership when a property was sold in the last year" and "[t]he 203(k) mortgage must be
based on the lowest sales price in the last year." Mortgagee Letter 95-40 went into effect on
September 13, 1995. The closing did not occur until November 2, 1995. Legend had an
adequate amount of time to obtain a chain of title report from a title company. On May 25,
1995, the property sold for $23,000. Borrower C paid $55,000 on November 2, 1995. The
maximum mortgage amount was $86,150. It was computed by the underwriter based upon
information received from Legend Mortgage Company. The mortgage was based upon the
sum of the $55,000 purchase price, estimated rehabilitation costs, and estimated closing costs.
If a chain of title had been performed, the maximum mortgage amount would have been
computed based upon the $23,000 price instead of the $55,000 price. The maximum mortgage
amount would have been $49,380, thus reducing HUD's exposure by $36,770.

Legend Mortgage was paid $6,318 in loan fees at closing.




                                        Page 43                                   98-CH-221-1004
Appendix B

                                                                                             Appendix B-4

Street Address: 5241 South Aberdeen Street

FHA Case #: 131:7950870

Insured Amount: $67,650

Underwriting Company & Underwriter Number: Carl I. Brown, N745

Summary: Legend Mortgage Company improperly originated Borrower D's HUD/FHA insured loan.
The loan was originated by Legend's President. Legend Mortgage added a fictitious residence lease
into Borrower D's loan application and file without his knowledge or approval, and collected the
fictitious information from a Contractor without Borrower D's knowledge or approval. Also, Legend
Mortgage failed to verify all of the funds necessary to close the loan. Legend Mortgage failed to obtain
evidence that a 401(k) account was redeemed, and failed to consider the taxation and early withdrawal
penalties when valuing a 401(k) account.

The Chief of HUD's Single Family Production Branch, Office of Housing, Illinois State Office, said
HUD would have rejected the loan had Legend submitted accurate information.

Pertinent Details:

         Borrower D Acted As A Strawbuyer

         Borrower D was recruited by the Contractor to be a strawbuyer. The Contractor promised
         Borrower D that it would find properties to rehabilitate, rehabilitate the properties, and sell the
         properties to third parties after the rehabilitation was completed. Borrower D was told by the
         Contractor that he would not have to contribute any money to purchase the property.

         Borrower D told us that he did not invest any money toward the purchase of 5241 South
         Aberdeen. Borrower D was paid $1,000 to participate as a strawbuyer.

         Assets Necessary To Close Were Not Verified

         Legend Mortgage did not verify all of the funds Borrower D was required to invest in the
         property. HUD Handbook 4155.1 REV-4 CHG 1 states that "[a]ll funds for the borrower's
         investment in the property must be verified." The actual assets necessary to close that were
         verified by Legend Mortgage totaled $1,457. Borrower D needed $17,832 in order to close on
         the loan. As a result, Borrower D did not qualify for the HUD/FHA insured loan.

         A 401(k) account was used to document the majority of the funds Borrower D needed to
         qualify for a 203(k) loan. There was no evidence that Borrower D's 401(k) account was
         redeemed. HUD Handbook 4155.1 REV-4 CHG 1 states that evidence of redemption is
         required. Even assuming redemption occurred, Borrower D would not have qualified. The
         current value on the account was $23,132. HUD Handbook 4155.1 REV-4 CHG 1 states that


98-CH-221-1004                                     Page 44
                                                                                  Appendix B

only the net amount after subtracting federal income tax and withdrawal penalties may be
considered as assets to close. Based on the monthly income shown on The Uniform Loan
Application for Borrower D, Borrower D would be at a 28 percent tax bracket. After taxes
and early withdrawal penalties of ten percent, a $9,000 reduction would be incurred.
Additionally, a $10,315 loan had been taken out against its current value leaving an asset of
less than $4,000 when $17,832 was needed to close on the property. Thus, Borrower D
lacked the necessary funds to close.

A loan correspondent's basic duty, on behalf of HUD, is to verify the validity of information
that is received. Indeed, as HUD's agent, Legend had a fiduciary duty to verify the assets of
the partnership before putting HUD at risk. If Legend's President had followed prudent
lending practices, he would have verified the underlying assets of the partnership.

The underwriter was recently sanctioned by the Mortgagee Review Board in this matter.
Consequently, the underwriter's parent company agreed to indemnify HUD for any loss on this
loan.

Residence Lease Used Improperly

A fictitious residence lease was used to inflate Borrower D's income. The residence lease for a
property at 227 West 108th place stated that Borrower D had a tenant that was paying $1,050
per month in rent. The residence lease was placed in Borrower D's loan file. This occurred
even though Borrower D: (1) never had a tenant at 227 W. 108th Place; (2) did not tell
Legend's President he had a tenant; (3) did not give Legend's President a copy of the residence
lease or direct Legend's President to contact the Contractor for a copy; (4) never saw the
residence lease; and (5) said the signature on the lease was not his signature.

We gave Borrower D the opportunity to review his loan application. Borrower D said when
he signed the application on May 5, 1995 there was no information related to the residence
lease in it. This information was placed in the loan application without his knowledge or
approval. Borrower D said his signature was forged to the residence lease.

The residence lease itself supports Borrower D's version of events. Borrower D's application
was signed by him and Legend's President on May 5, 1995. The residence lease was not faxed
to Legend's President until July 7, 1995. Thus, it appears that Legend's President placed the
information into Borrower D's application after Borrower D signed it. Borrower D did not
have an opportunity to discover that the residence lease was put into his file and application.

Borrower D described his dealings with Legend's President as perfunctory. Borrower D said
he merely exchanged the same information with Legend that was used to get the initial loan
from a finance company. Legend Mortgage was paid $5,616 in loan fees at closing.




                                        Page 45                                   98-CH-221-1004
                                                                        Appendix C

Auditee Comments




          Response to Draft Audit Findings
              of the Inspector General

                                   LEGEND
                           MORTGAGE COMPANY



                              Submitted By:
                             David B. Whitacre


                                   April 24, 1998




Response to Draft Audit Findings                  Legend Mortgage Company



                                        Page 47                             98-CH-221-1004
Appendix C


Mr. Richard Urbanowski
Senior Auditor
Department of Housing and Urban Development
Office of Inspector General
77 West Jackson Blvd., Suite 2646
Chicago, Illinois 60604-3507

April 24, 1998

Mr. Urbanowski-


Introduction           I am in receipt of your audit findings dated April 1, 1998. Thank you
                       for the opportunity to respond to the finding of the Inspector General's
                       review. I will cooperate with your office fully and to the best of my
                       ability.

                       Let me make myself perfectly clear from the onset. I will show, I,
                       David Whitacre, President of Legend Mortgage Company, and all of its
                       employees, in no way, nor at any time originated any loans without
                       complete compliance with HUD requirements. Prudent lending
                       practices were always exercised.

                       While it is foreign to me to have suspicion and doubt cast upon me, my
                       business practice, and my motives for the community, I will try to
                       contain my shock and disbelief and present to you accurate and helpful
                       information. I cannot stand up to wrongdoing in this or any situation if
                       I am not aware of it. It is clearly recorded that when I sensed the
                       slightest hint of wrongdoing, I took immediate and clear action to stop
                       it.

                       The facts show that the Dollars Express scam put Borrower and
                       Contractor in partnership to defraud HUD. It is my responsibility to
                       communicate here things that were not apparent to the auditors. I will
                       present to you more proper and realistic conclusions that will confirm I
                       was not a party to any deception and should reinforce my honorable
                       reputation. To the best of my ability, I have assembled the following
                       material, which will show that this is true. The information pertains to
                       the Dollars Express scam, the Borrowers, partnerships, my association
                       with Carl I. Brown and Company, Legend Mortgage Company
                       practices, and the draft audit findings.

                       Although I admire the auditor's concern for safeguarding the integrity
                       of the FHA insurance fund, I cannot help but totally disagree with their
                       conclusions. I believe their conclusions were based on incomplete data
                       and flawed insight. While attention was drawn to my supposed lack of


98-CH-221-1004                             Page 48
                                                                           Appendix C

               thoroughness, I believe the audit demonstrated a greater lack of
               thoroughness than I was accused of. It seems as though David
               Whitacre and Legend Mortgage Company is being held to a higher
               degree of risk for verifying the accuracy of issues than others are.

               Thankfully, their audit has provided me with the opportunity to clarify
               and resolve these questions. I am encouraged to have the opportunity
               to provide the auditors with the information and insights if they had
               known they would have pursued.

Personal FHA   For all of my adult life since college graduation, I have been involved
Background     with learning the mortgage business from the ground up. I spent 11
               years developing relationships with HUD offices across the country
               when establishing new branch offices for Carl I. Brown and Company,
               my only prior employer. I was always taught to hold, and have always
               carried, the utmost respect for the Department in areas of compliance.
               I have paid careful attention to both HUD and federal regulations when
               exercising guidance of lending operations. I have both seen and
               worked in the arena of opportunities provided to individuals using
               programs designed by HUD. In short, I have made FHA loan
               origination, its management and implementation, the focus of my entire
               professional life. During my eleven-year tenure at Carl I. Brown &
               Company, I experienced nearly every function of FHA lending from
               origination through servicing.

               As Senior Vice President, I oversaw over fifty retail branch offices
               nationally, the largest ever national FHA streamline refinance effort,
               and a servicing portfolio of nearly four billion dollars comprised of
               (mostly) HUD insured loans.           My responsibilities led me to
               groundbreaking work in FHA origination areas involving adjustable-
               rate financing and streamlines, as well as FHA servicing areas involving
               assignments and special forbearance. In the area of loan servicing, I
               was asked by a staff member of Washington HUD to bring to bear
               ideas in default management which helped to shape HUD policies in
               mortgage assignments, special forbearance, and the streamlining of
               delinquent FHA mortgages.

               As a sign of my history, as a record of my awareness of the concerns
               FHA has in the lending arena, I am attaching a copy of an article I
               wrote in a national publication. During this period, I was asked by
               HUD to provide my perspectives in the area of default resolution (see
               Exhibit #1). I have not only been aware of HUD guidelines all of my
               professional life, I have explored many more subtle issues relating to
               FHA lending. In many ways, I have always been a student of FHA
               financing.



                                   Page 49                                 98-CH-221-1004
Appendix C

                 My capacity as Senior Vice President of Carl I. Brown and Company
                 also challenged me to work with the Department consistently in audits
                 involving the company on a national basis, quality control, insuring, and
                 indemnification issues involving fraud and faulty origination. I have
                 lived out experiences, which have clearly demonstrated to me the
                 negative ramifications to all parties who fail to follow prudent lending
                 practices from HUD's perspective. I have had to monitor, discipline
                 and, in some instances, terminate employees who did not comprehend
                 the importance of following HUD guidelines and demonstrating
                 prudent lending practices. For various reasons, I am acutely sensitive
                 to the nature of the mortgage business as it relates to following HUD
                 guidelines, faulty origination practices, and fraud.

                 It was an exciting decision that my family made with me in 1993 to
                 come to Chicago and try to establish a base of business. We made this
                 decision with the knowledge that I might eventually open my own
                 mortgage brokerage business and try to build it into a reputable
                 mortgage banking institution as my predecessors and teachers had
                 done. I left a well-paying salaried position to pursue a dream, and
                 selected Chicago because of the stability of the marketplace.

Incorrect        While I appreciate your staffs presence and in-depth effort at
Conclusions      attempting to look at these four loans in question, and others at our
                 firm, I was completely shocked at the audit findings and the
                 recommendations put forward. The tone of the audit, as well as the
                 factual renditions, is laced with accusatory inferences of wrongdoing
                 and ill intent. While I trust that the auditors themselves did not intend
                 any mean-spiritedness, I will say that, at least the conclusions drawn as
                 a result of the findings are inaccurate. Of all people, I know better than
                 to believe that quick profits are a lifeline in the mortgage business.

                 I would never have jeopardized a personal business venture, especially
                 one in its infancy (a business which supports my family) for the fees
                 generated by closing the loans in question. Legend Mortgage has
                 always felt to me like one of my own children. I would no sooner have
                 jeopardized Legend than I would have one of my own two flesh and
                 blood daughters.

                 Far from it. There was no financial motive here great enough, nor
                 could there ever be, to cause me to disregard my inherent respect for
                 HUD regulations, a respect which I have felt all my professional life, in
                 the first few months of my new business. I would have been nothing
                 less than stark raving mad, and believe that my reputation with HUD,
                 its staff, and its affiliate agencies and offices nationally preclude that
                 presumption.



98-CH-221-1004                       Page 50
                                                                             Appendix C

               Legend Mortgage Company was financially successful from the onset,
               because of the competence of its employees, and did not rely on fees
               from loans originated in the theater of Dollars Express for either
               survival or success, as all of our company's financial records from it's
               inception show. I do not mean to sound flippant but, simply put, the
               company was doing very well without the fees these loans brought
               forth.

               It occurs to me that the auditors present at our office for a period of
               months should have also had an opportunity to witness our company in
               action, and should have observed an atmosphere of respect for
               precision and ethics. Their observations along these lines, if any,
               obviously did not motivate a different set of conclusions based on their
               findings.

               It also occurs to me, in reviewing the audit, there appears to be
               syllogistic thinking at play. In other words, the auditors observed that
               if A equals B, and B equals C, then A must equal C. Said differently, if
               the sky is blue, and water is blue, then the sky is water. Sometimes it is
               easy to make accurate observations and consequently draw incorrect
               conclusions.

Pre-Judgment   I am also aware it has become common knowledge at HUD, and in the
               general lending community, that Dollars Express exported a loan fraud
               scheme that contributed to a national earthquake which ultimately
               affected 203(k). It may have been virtually impossible for the auditors
               not to draw conclusions prior to the audit taking place. There was
               great notoriety surrounding this scheme. Therefore, during this audit, it
               must have been difficult for the auditors to develop findings that spoke
               to prudent lending practices in the glare of the agency spotlight on the
               Dollars Express scandal.

               I am looking at the idea that, while well intended, the facts may have
               been viewed in the context of a pre-formulated conclusion or theory.
               Therefore, I feel prejudged, since the auditors themselves may have felt
               that they would look foolish if their report did not motivate a set of
               punitive conclusions, when they were aware that Dollars Express had
               already been the subject of tremendous scrutiny. The Dollars Express
               fraud scheme resulted in massive indemnification involving millions of
               dollars, and was potentially one of the most financially violent and
               visible FHA 203(k) loan schemes in the United States.

Failure to     With all due respect to the auditors, who obviously did a fine and
Segregate      thorough job with respect to what they saw and understood, I feel that
Findings
               their findings and conclusions are more a focus on the results of the
               Contractor's loan fraud scheme than they are an accurate and realistic


                                   Page 51                                   98-CH-221-1004
Appendix C

                 measurement of the responsibilities, actions, and efforts of myself or
                 Legend Mortgage Company. Page two (paragraph five) through page
                 four (paragraph one) of the audit findings, as well as other specific
                 areas of the audit, represent findings relating to the Contractor's
                 involvement which was unknown to me and my company during the
                 entire period of dealings with the 203(k) loan referrals.

                 Inclusion of these findings leads to the implication that my company
                 and I had knowledge of, or participated in, his practices. That is ever
                 so far from fact and truth. It is inappropriate for findings that relate to
                 the Contractor's involvement to be formally included in the scope of an
                 audit that are intended to evaluate my company and me, because it is
                 not fair to be judged for another's actions. The overall constancy of the
                 audit findings have been corrupted by a failure to properly segregate
                 the Contractor's actions, Carl I. Brown and Company's actions, and my
                 company's and my actions.

Guilt Through    If this audit is to be handled in a manner which is formally reasonable
Association      and factually correct, then the Contractor's actions must be properly
                 excluded, because to include Contractor findings in my audit creates
                 the inference of knowledge and participation. Failing to segregate
                 these matters also creates the false impression of fault or culpability on
                 my part for events out side of my awareness and control. It is neither
                 fair nor reasonable to imply guilt through association, or to cast a dark
                 shadow over other facts and events through this type of inclusion.

                 I say this based on the observation that a careful examination and
                 understanding of our awareness, circumstances, and efforts is crucial to
                 the heart of the matter of whether we acted in accordance with HUD
                 guidelines and in a manner consistent with prudent lending practices.
                 Including findings that properly relate to the Contractor's, or to Carl I.
                 Brown and Company‘s actions, only serves to confuse matters. It blurs
                 the lines of responsibility, and prevents a more precise, even,
                 responsible, and measured evaluation of whether or not Legend
                 Mortgage followed HUD guidelines and acted in a manner which
                 reflected prudent lending practices.

                 The audit also fails to ask some very fundamental questions of the
                 Borrowers involved, like what the Borrowers knew when, and what
                 knowledge they intentionally withheld from me. As a result, the audit
                 overlooks basic circumstances present that will confirm that Legend did
                 diligently follow HUD guidelines as they were communicated to us and
                 did faithfully illustrate prudent lending practices.

                 Clearly and unequivocally, I deny any knowledge of strawbuyer
                 relationships during the origination process and closing of the four


98-CH-221-1004                       Page 52
                                                                         Appendix C

             loans in question, nor was I, or my staff, party to any arrangement to
             procure financing (verbal, written, or implied) for any strawbuyer.

Historical   Directly prior to April of 1995, the starting point of Legend Mortgage
Context      Company, my employment with Carl I. Brown and Company consisted
             of managing a branch office based in Naperville. At this point in time,
             Carl I. Brown and Company maintained a separate retail branch office
             in Oak Brook that also housed the FHA underwriting staff.

             The Oak Brook office began originating a large volume of 203(k) loans
             with Dollars Express. Because of the volume of loans originated via
             Dollars Express, the local Carl I. Brown and Company FHA
             underwriter communicated to me both directly and indirectly that all
             pertinent FHA underwriting issues involving Dollars Express had been
             both communicated to and cleared by the local FHA office. There
             were issues such “as-is" values, payoff balances on underlying loans,
             and maximum 203(k) mortgage amounts involving properties owned
             more than, and less than one year.

             Carl I. Brown and Company's senior underwriter based at the corporate
             headquarters in Kansas City had also been involved with looking at,
             monitoring, and approving all issues relating to Dollars Express. This
             was especially true because the local underwriter who was approving
             all of the Dollars Express-related loans was relatively inexperienced at
             underwriting. She had just moved from the position of the branch
             manager’s lead processor to the position of FHA underwriter.

             Because I began witnessing a volume of loans being written, right at
             the genesis of the 203(k), I knew that the company was breaking new
             ground in terms of loan volume and use of the 203(k). I was interested
             in confirming that HUD was approving of the structure, compliance,
             and volume of the Dollars Express loans. I watched carefully, seeing
             both a flowering use of the 203(k) program, and being mindful of the
             need for HUD's involvement.

             I felt this way not because I thought something was potentially wrong,
             but because I was very interested in becoming proficient at 203(k). I
             was excited about seeing the 203(k) used liberally, and was also
             mindful that problems sometimes could occur when new programs
             came on the scene. Many times during my tenure at Carl I. Brown and
             Company, I had seen new programs arrive that later had to be modified
             based on unforeseen circumstances, much like a new car model coming
             out that ultimately needs to be recalled due to lack of testing.

FHA 203-K    This represented a timeframe where the FHA 203(k) loan was only
Emerges      beginning to become active again. The local FHA office was


                                 Page 53                                 98-CH-221-1004
Appendix C

                 expressing encouragement and motivation to lenders to participate
                 actively in the 203(k) marketplace. There was an environment of "go
                 out and write them." In retrospect, there were many issues that were
                 invisible to originators, lenders, and FHA in the 203(k) theater. None
                 involved were experienced enough with the program to even know
                 what to look for, to see warning signals, and to ward off abuse.

                 Indeed, it appeared that the 203(k) was a solution to many problems,
                 and that everyone could win through its application. In addition, it
                 appeared that HUD was really pushing the program with liberal,
                 permissive, and encouraging approaches, for all the right reasons.
                 Washington HUD set quotas or goals that geared the local HUD
                 offices for significant 203(k) volume, and the local offices seemed
                 eager to shine on the 203(k) national stage.

Communication    Washington HUD, with all the best intentions, rolled out the revised
Channels         203(k) program based on the premise that it had been completely
With HUD         refined for use. Local HUD offices all across the country were
                 encouraged to foster lender participation to facilitate 203(k) volume. It
                 was not until after abuse began to appear that the national attitude
                 changed, and Washington HUD began to solicit local HUD offices to
                 comment freely on the program, and invite input on potential revisions
                 to it.

                 It is very important to note here that, during this time, the local HUD
                 office, again for all the right reasons, strongly discouraged any
                 origination or processing staff to contact them directly for questions.
                 Because of the overwhelming volume of FHA loans, the local HUD
                 office communicated that only the FHA underwriters of the various
                 firms could ask questions. There were memorandums put out from the
                 local HUD office to that effect.

                 Being relatively gregarious in nature, I did attempt, independently, to
                 communicate with the local HUD office on various occasions when I
                 arrived in Chicago. Although I was now (only) a branch manager,
                 somewhere in my thinking was the idea that I had been very
                 accustomed to establishing relationships with HUD offices myself in my
                 previous capacity as Senior Vice President. I called HUD locally on a
                 few occasions to ask questions that were generally related to how HUD
                 approached things on a regional basis (i.e. how they looked at
                 qualifying ratios, etc.).

                 My communication attempts were not well received. The local HUD
                 office was strained, and communicated to Carl I. Brown and
                 Company's underwriter that they should be calling, not me. I was
                 cautioned by my employer not to be bothersome to the local HUD


98-CH-221-1004                       Page 54
                                                                              Appendix C

                  office. I became sensitive to the issue of not communicating directly
                  with the local office, and not over-staying my welcome there, because I
                  had been cautioned about their policies. I drew the conclusion, as
                  instructed, that I would have to communicate to HUD through the
                  underwriters.

                  I always felt that, because of this required communication channel to
                  HUD, I had to depend on and trust the FHA underwriters at Carl I.
                  Brown and Company at both local and national levels to communicate
                  203-K issues, especially those involving Dollars Express, to the
                  Department. I did, in fact, rely on what I was being told by the
                  underwriters at Carl I. Brown and Company. --------------- was the
                  local Carl I. Brown and Company FHA underwriter, ---------- the
                  senior FHA underwriter based in Kansas City, and ------------ the
                  national 203-K appraiser/coordinator also based in Kansas City. All
                  were actively engaging the various topics with the Department. The
                  situation had been fully and completely discussed with HUD. All issues
                  had been approved. Everything was okay. Don't worry about it.

                  Based on my previous experience with Carl I. Brown and Company, I
                  felt the company would always respect HUD's perspectives, since they
                  had done so in the past, through all of my eleven years with them. I
                  wholeheartedly believed communication with HUD was taking place in
                  the theater of 203(k) loans involving Dollars Express, and was told
                  repeatedly (after asking repeatedly) that it was.

The Contractor    When Dollars Express appeared on the scene, it appeared to all that the
and               Contractor was a "visionary" of sorts as far as the 203(k) was
Dollars Express
                  concerned. He seemed to be a legitimate entrepreneur who had been
                  able to create a circumstance where the program could work
                  successfully "en masse." Carl I Brown and Company's Oak Brook
                  branch office wrote scores of loans involving the Contractor, each
                  following a similar pattern.

                  During the period of time that Legend Mortgage was beginning,
                  Dollars Express approached me and complained that the Oak Brook
                  Carl I. Brown and Company office was overloaded with his files and
                  processing time was way off. He did not feel he was getting the special
                  attention a major supplier of business should get.

                  I did not solicit Dollars Express business. Dollars Express solicited me
                  using credible complaints that appeared to be predictable in some ways.
                   I began to work on these loans as a normal business practice, not as a
                  party to his later identified scheme. I had no knowledge of any scheme.




                                      Page 55                                 98-CH-221-1004
Appendix C

                 My company did not rely on this business for financial sustenance or
                 overall profitability. Legend had early on established a strong link with,
                 and a visible presence in, the rehab community. We rapidly developed
                 a community of real estate investors, contractors, Realtors, and non-
                 profit organizations who came to us because we were beginning to
                 establish ourselves as the most credible and knowledgeable lender in
                 the 203(k) marketplace. We had developed a seminar strategy early to
                 broadcast both the program and our services, which vaulted us into a
                 position of visibility and access.

                 Also, I felt like the downsides to dealing with these loans was the fact
                 that I may appear to be in competition with my previous employer. In
                 addition, there was generally a lot of pressure to perform quickly.
                 Many times, the Contractor called me to complain that things were not
                 happening quickly enough, sometimes hourly. Generally speaking, I
                 did not face this type of pressure to work at such a fast pace with other
                 clients. In the end, both these factors were not weighty enough for me
                 not to accept the business.

                 There were many 203(k) lenders soliciting the Dollars Express account.
                  From the mortgage banking community, Commonwealth and General
                 Motors Acceptance Corporation, and from the mortgage brokerage
                 community, Alliance and Anchor were among some I was aware of.
                 Their solicitation of this business confirmed the impression that there
                 was nothing foul in the air.

                 I engaged a small number of 203(k) loans with Dollars Express, some
                 of which are the focus of this audit. I observed that scores of loans had
                 been, and were being, closed through the Underwriter's Oak Brook
                 office. When I asked Carl I. Brown and Company again about
                 communication with HUD, I was told that obviously HUD was
                 informed because they had both reviewed and insured all of the 203(k)
                 loans in question. Part of the attitude I encountered was: "Why was I
                 still asking these types of questions? Why didn't I 'get it'? We have
                 already taken care of all of this."

                 In fairness, part of this attitude may have been attributable to the fact
                 that I was now leaving Carl I. Brown and Company to start Legend
                 Mortgage Company. Although it was a friendly departure and I would
                 continue to do business with Carl I. Brown and Company in the
                 wholesale arena, I was beginning to be seen as an outsider who
                 represented competition to their local retail efforts, especially with
                 respect to 203(k) lending.

                 The Borrowers I originated these loans for were referred to me by
                 Dollars Express, similar to how Realtors referred buyers for purchases.


98-CH-221-1004                       Page 56
                                                                             Appendix C

               This was a normal, accepted lending practice.

Face-to-face   The Contractor suggested that the appropriate procedure would
Applications   include the Contractor or his staff filling out the loan applications with
               the Borrowers. The Contractor suggested that this was an appropriate
               format for business dealings because the Borrowers had an established
               relationship with the Contractor in the area of property rehabilitation
               that predated the use of FHA 203(k) financing. The Borrowers had
               already worked in conjunction with the Contractor, and there was a
               well-established relationship and track record of successful rehab
               projects.

               The Borrowers had also provided all types of credit documents to the
               Contractor so as to enable the Contractor to provide them to the
               preferred or selected lender. He explained that this was how business
               was conducted with other lenders, and wanted me to get with the
               program.

               There was no reason at the time for me to suspect that there was
               fraudulent intention in the heart of the Contractor. I was aware of
               multiple previous transactions between the Contractor and Carl I.
               Brown and Company.           The general perception was that the
               Contractor's goal had been to effectively centralize the point of contact
               and documentation with the Contractor for the benefit of the Borrower,
               Contractor, and lender. Indeed, it appeared that the Contractor's
               system of business was sensible and ethical, especially since so many
               203(k) transactions had already been closed with Carl I. Brown and
               Company. I had always thought that for development to occur
               efficiently and on a large-impact scale, control was a central
               component. So some of the Contractor's thinking made a lot of sense
               to me.

               Notwithstanding, I took the position that a face-to-face interview and
               application would have to occur with each of the Borrowers, because
               such was a fundamental HUD requirement. I took this position with
               the full knowledge that the Contractor could easily have elected to
               simply not do business with Legend, because this type of direct
               involvement with the Borrower seemed to be at odds with the
               Contractor's perspective on organization, communication, and control.
               Clearly, the Borrowers had given the Contractor the complete authority
               to select lenders on their behalf. The Contractor made this decision,
               not the Borrower.

               Still, I knew that a face-to-face interview was a HUD requirement, and
               I insisted on it. I also gently informed Carl I. Brown and Company's
               corporate underwriting department that they may want to look at the


                                   Page 57                                   98-CH-221-1004
Appendix C

                 idea that face-to-face applications were required in relationship to their
                 local branch office. I did not know if face-to-face applications were in
                 fact being sidestepped elsewhere, but I knew that I would not.

                 By informing Carl I. Brown and Company of this possibility, I felt that I
                 had done the most proper and responsible thing. My impression at the
                 time was that the possible lack of face-to-face applications was a result
                 of laziness or eagerness, not subterfuge. In addition, I did not know for
                 certain that what I was being told was true. Carl I. Brown and
                 Company could look into it themselves since I had informed their
                 management.

                 To me, face-to-face applications represented not only a compliance
                 issue, but also a control issue to insure success as a businessperson. It
                 was also critical from a disclosure standpoint in terms of payments,
                 cash requirements, feasibility, etc. From the outset, I would not
                 relinquish this HUD requirement. The Contractor threatened to pull
                 this new business and send it to Carl I. Brown and Company, or one of
                 the other lenders that were strongly courting his favor. I basically told
                 him to go ahead and pull it. I was firm and would not move.

                 My impression was that the Contractor was approaching me because he
                 knew that Legend was becoming skilled in terms of the 203(k). It was
                 much more familiar to us than it was to other lenders, who were just
                 starting to get in the water. There were stories circulating about
                 inexperienced lenders trying to do 203(k) with horrific results. I
                 assumed that the Contractor wanted to do business with me because I
                 knew more about 203(k). I felt like I was a desirable commodity
                 because of my growing 203(k) exposure.

Borrowers        The Contractor acquiesced to my position on this matter, and
Provide          proceeded on the basis that the Contractor would provide credit
Documents to
Contractor       documents to Legend that had been provided to the Contractor by the
                 Borrower. In this manner, the Borrower would not be asked to
                 reproduce documents they had already given. This procedure made
                 sense to me because there did not appear to be any fraudulent intent.
                 Also, the mere fact that the Contractor was in possession of all of these
                 personal, private documents obtained directly from the Borrower
                 seemed to assume permission for the second party to provide them to
                 me, something I could easily confirm with the Borrower directly.

                 It would not be difficult for me to review these documents and assess
                 their validity. When I visited with the Borrower directly, I could
                 confirm that these documents were valid, which is what I did. There
                 was no reason to suspect fraud, but I was generally aware that these
                 documents were coming from the Contractor. I would have to balance


98-CH-221-1004                       Page 58
                                                                               Appendix C

                 the Contractor's (and Borrower's) desire for central control and
                 communication with the Contractor, with HUD's guidelines and
                 prudent lending practices. I did this even though I was told by the
                 Contractor this was not happening elsewhere.

                 In the presence of the Borrower, I could (and did) thumb through bank
Validation and
Confirmation     statements, tax returns, and paystubs and refer to them in our
                 discussions. I could (and did) confirm employers, wages, addresses,
                 telephone numbers, income, etc. This type of casual confirmation was
                 couched in language like: "Just to make sure we have the correct, most
                 current information, can you look at this address and let me know if it's
                 still accurate? Are you still married to ---------- and does she still work
                 at Ameritech?"

                 Even in the scope of the audit findings, this view is confirmed. These
                 initial packages consisted of basic credit information, which was
                 generally extremely thorough. To my knowledge, there was never an
                 instance where tax returns, paystubs, W-2’s, or bank statements were
                 either manufactured or falsified, either by the Contractor or Borrower.
                 In retrospect, this was one of the big positive credibility factors in the
                 entire landscape of Dollars Express. These investors were generally
                 very creditworthy. There were long job histories, strong incomes, low-
                 to-reasonable consumer debt loads, excellent credit records, etc.

                 The audit findings refer to documents faxed to our office from the
                 Contractor with a focus on documents that were later identified as
                 having been forged. I think the more relevant observation here is that
                 there was, in fact, a majority of documents that came through the
                 Contractor's office. One has only to look at the amount and numbers
                 of documents faxed from the Contractor's office to Legend to see the
                 overwhelming patterns of the Borrower consistently providing
                 documents to the Contractor, not the lender directly.

                 Retrospectively, the vast majority of these documents provided through
                 the Contractor were in fact, accurate. The Borrower's habit of
                 providing the requested documents through the Contractor, instead of
                 directly to me, is the strongest evidence of the Borrower's preference
                 for communication directly with the Contractor. Prior to the
                 application, at the application, and after the application, the Borrowers
                 were providing documents to the Contractor.

                 Since I took strong steps to confirm that the initial documents were
                 valid, I assumed that further documents provided were likely valid. I
                 had no evidence to the contrary. Nothing else I was seeing caused me
                 to conclude otherwise. Both my staff and myself scrutinized the
                 majority of elements in the credit package.            Moreover, the


                                     Page 59                                   98-CH-221-1004
Appendix C

                  overwhelming pattern we saw was that the information the documents
                  reflected was true. The Borrowers did work where they had reported,
                  they did bank there, they did make so-and so, they did have the loan
                  obligations presented, they did live there, their phone number was such-
                  and-such. Everything appeared to be real. In addition, we confirmed
                  these items were accurate, both directly and indirectly.

Direct Requests   I pointed out to the Contractor that, most likely, additional documents
To Borrowers      were going to be needed beyond the scope of what was provided
                  initially. The Contractor informed me that he had informed the
                  Borrower that he wanted additional requests of the Borrower to be
                  made through the Contractor, since the Borrower would not like to be
                  assailed with requests. Matters like this would be better handled
                  through the Contractor, whom we had come to believe the Borrower
                  relied on as a central point of contact. Most likely, I was told, the
                  Borrower had already provided to the Contractor most items I would
                  eventually request.

                  I felt that additional or further documents should be requested directly
                  from the Borrower, and took the position that I would be able to make
                  such requests with an attitude and style that did not cause unnecessary
                  hardship for the Borrower. Again, I did not believe the Contractor to
                  be ill-intended; rather, I believed that the Contractor was operating
                  from a frame of reference that was ultimately addressing a level of
                  efficiency and control that described a successful developer/rehabber.
                  And thusly, there appeared to be a reasonable line of logic to it.

                  The Contractor agreed to essentially let me do my business the way I
                  have always done, even though it was in direct conflict with his
                  philosophy and style. He resisted on each of these steps that involved
                  control. He maintained that other lenders did not take these measures
                  that I had insisted on. As a result, I was frequently burdened with
                  towing the line on my policies. However, the fee income that could be
                  generated through Dollars Express was not worth jeopardizing our
                  infant company, Legend Mortgage, and in that sense would not provide
                  long term stability.

                  I was well aware of these issues at the time, experienced in witnessing
                  negative consequences of other approaches, sensitive to the birth of
                  Legend Mortgage, and determined not to compromise.

                  I tested the new waters with Dollars Express, and tried to exert control
                  on every front the Borrower and Contractor would allow me. I
                  remember contacting the first Borrower about application procedures,
                  and remember being told by the Borrower that the Contractor had all of
                  these things, and that I should talk to them about it. In essence, I was


98-CH-221-1004                        Page 60
                                                                              Appendix C

                  being bothersome and repetitive. Each of the Borrowers in question
                  had the same attitude. This is what I had to work with. I was faced
                  with balancing my following HUD regulations using prudent lending
                  practices, performing 203(k) loans effectively and quickly, and serving
                  the Borrowers and the Contractor.

                  When the Contractor provided these documents to me, I reviewed them
                  and formed a skeletal loan application based on the information and
                  documents provided. Based on this review, a letter was formatted that
                  I sent directly to the Borrower (with a copy to the Contractor) for
                  additional documents needed to complete an initial credit package (i.e.
                  updated paystubs, bank statements, etc.). It is normal business practice
                  to copy requests of borrowers to all involved in the transaction as a
                  courtesy, to both help communicate more effectively, and create an air
                  of accountability.

                  This correspondence included the thought that once the Borrower had
                  gathered the documents, then a face-to-face application would be
                  scheduled at the Borrower's convenience. Face-to-face applications
                  occurred on each loan in question, as they have on all loans Legend has
                  performed where required by HUD, at the Borrower's home or office,
                  my office or home (in one instance), or the Contractor's office.

                  Each time that I began communicating with a Borrower, they were
                  always in each and every instance already aware of me and my
                  company, and the fact that we were going to be handling a loan for
                  them. This observation confirmed for me that the Borrower knew
                  exactly what was going on. No Borrower ever said something like:
                  "Why are you calling me? I have no knowledge of a loan going
                  through you." They all knew of me, of my company, the loan being
                  pursued, and the property in question.

Borrowers         On most occasions, the requested documents would ultimately come
Respond Through   from the Contractor's office, because it had become obvious that the
Contractor
                  Borrowers preferred to deal with the Contractor's office. Many
                  Borrowers simply resisted or refused giving me documents directly.
                  They always routed then through the Contractor.

                  The Contractor also had a habit of contacting me when I had just begun
                  to work on a loan. Sometimes, the Contractor would call several times
                  during the course of a day. He would ask me what was needed or
                  missing on files. I assumed this was normal for his high volume, fast-
                  paced business. This was also often the case wherein I also had
                  previously experienced the same type of attitudes from national
                  homebuilders. Frequently, when I was pressed for answers, I might
                  thumb through my file and offer opinions to the Contractor on lacking


                                      Page 61                                 98-CH-221-1004
Appendix C

                 documentation. Before I was able to generate a request letter to the
                 Borrower, the documents would appear on our fax.

                 There were requests for documents that were sent off to the
                 Borrowers, documents that subsequently showed up on our fax
                 machine from the Contractor's office. The Borrowers would later
                 confirm in discussions that they had gotten our request and delivered
                 the documents to the Contractor. Evidently, the Contractor was also
                 advising the Borrowers to do the same. In this manner, I heard, the
                 Contractor would be able to keep files updated so that future projects
                 could be pursued without repetitive and unnecessary requests of the
                 Borrower by the (various) lender(s).

                 The message I got through this was basically that the Contractor was
                 going to continuously act as the communication center for the
                 Borrower, and this was the preference of the Borrower, which the
                 Borrower confirmed to me through both speech and actions. In
                 addition, I saw the possibility that the Contractor was trying to insure
                 things were responded to correctly the first time. The Borrowers may
                 have been afraid of making mistakes. Because of the volume of
                 projects taking place, and the possibility that many lenders were
                 ultimately going to be involved, the reasoning seemed to have validity.

Contractor-      I observed that this circumstance was occurring not because of
Borrower         fraudulent intent; rather, it appeared that the Borrower and Contractor
Relationship     did in fact enjoy a solid, trusting relationship. It seemed especially
                 important that I not become duplicative with requests, since it generally
                 produced a negative reaction from the Borrower, who preferred their
                 relationship with the Contractor. Duplicate requests also produced a
                 negative reaction from the Contractor, who would readily point out
                 that my insistence on direct (lender) involvement was bothersome and
                 unnecessary (both of which I heard on several occasions).

                 I never once heard a Borrower working with Dollars Express question
                 Dollars Express. I never once heard any type of dissatisfaction or
                 expression of mistrust or abuse. I never once heard a statement that
                 reflected anything other than an attitude of confidence, and a
                 confirmation of their successful relationship and history together.

                 At the time the face-to-face application took place, there was not a
                 "rubber stamp" atmosphere, as the audit suggests the Borrowers
                 observed. This characterization is both unfair and inaccurate. There
                 was a concerted effort on my part to attempt to make the process
                 simple because of the negative reactions both Borrower and Contractor
                 exhibited when attempts were made to initiate more thorough direct
                 contact and control.


98-CH-221-1004                       Page 62
                                                                              Appendix C


               Simply put, I was not shoving documents under the Borrower's nose to
               sign for the purpose of not disclosing or explaining things accurately or
               thoroughly. I was pre-preparing as much of the application as possible
               based on documents the Borrower had already provided to the
               Contractor. I provided copies of plan reviews, maximum mortgage
               worksheets, and good faith estimates in each situation. All loans were
               disclosed thoroughly and accurately.

               All of the Borrowers involved with the Contractor reflected an attitude
               towards me that spoke to: "Why are you bothering me with this when I
               already gave it to the Contractor?" "Can we just get this over with
               because I already understand what is happening here?" and "I have
               already discussed all of this with the Contractor, why are you going
               over this again?" They were not rude to me openly, but their attitude
               was clear. I got the distinct feeling that I was out of the circle of things
               somehow.

               Again, I never believed there was a fraudulent intent here on the part of
               Borrower or Contractor, these observations brought about the
               conclusion that the Contractor's perspective had validity. There
               seemed to be a strong need and a good use for centralized
               communication and organization with the Contractor in an environment
               where a lot of rehab/203(k) volume was taking place.

Stable and     I never believed I was taking loan applications with mentally challenged
Creditworthy   or disabled adults. These were people who were consistent and stable.
Borrowers      They were professional, long-term wage earners who were both
               wellspoken and responsible. Almost without exception, their credit
               histories were virtually impeccable, which spoke directly to the idea
               that they understood what financial obligations were, and were
               concerned about meeting them.

               With the benefit of hindsight now, the historical tapestry of the Dollars
               Express loan debacle bears out the fact that many of the Borrowers did
               understand the obligations they were committing to, and the
               accompanying liability. It's unfortunate that this audit is the subject of
               loans to Borrowers who claim they thought they had no liability, or
               who claim they believed their liability had been passed to the
               Contractor, or who simply were not in a financial position to respond
               to it. But there were also evidently many Borrowers who did
               understand the possible eventual implications of their initial actions.
               After the scam collapsed, it is my understanding that many Borrowers
               met their obligations, completed the rehabilitation, or executed sales
               successfully without walking away from their liability or allowing their
               credit to be damaged. I imagine they just took the loss, because they


                                    Page 63                                   98-CH-221-1004
Appendix C

                 avoided foreclosure, and saved their credit.

                 I did not know at any time during the process that these Borrowers
                 were being specifically directed as to what to do. Surely it's obvious to
                 you as well that one of their specific directions was not to include me in
                 all the arrangements that had been made between them and the
                 Contractor. I did not see the details of their "side understandings"
                 because, by design, they were invisible to me.

                 Based on the stability, responsibility, and credit-worthiness of the
                 Borrowers, I believed that they had their eyes wide open about what
                 they were doing. There was never any pattern of fiscal irresponsibility
                 or lack of creditworthiness. After fourteen years in the mortgage
                 business, after originating hundreds of millions of dollars worth of
                 HUD-insured mortgages, I knew that ideal credit histories do not result
                 by chance. They result from a high level of awareness of financial
                 responsibility, and the actions that follow that awareness. These
                 Borrowers had all, without exception, demonstrated that.

                 I cannot be held responsible as a scapegoat for a deception that I was
                 never a party to. The bottom line is that Dollars Express perpetuated a
                 get-rich quick scheme on unsuspecting Borrowers, who obviously did
                 not know any better. Unfortunately, it appears that after the fact these
                 individuals, who were personally involved, now point fingers
                 everywhere except at themselves. Is it possible that this fraud, by the
                 Borrower and Contractor, causes them to need to paint me as a culprit?

                 In many ways, I cannot blame the Borrowers. In retrospect, I can see
                 that they believed everything that Dollars Express told them. In
                 retrospect, I wish that I could have seen through the scheme and
                 protected them from it.

                 At the time, though, things looked quite different. Scores of loans had
The Dollars
Express          already closed. Properties were being purchased and rehabbed "en
Machine          masse." A strong re-sale effort was evidenced by all of the real estate
                 salespeople working in the Contractor's theater of operations.
                 Someone was actually doing the 203(k) correctly, and doing it in a
                 manner that could be very effective on a volume basis. All of the
                 empirical results of the Contractor's thinking were positive and visible
                 for everyone to see: no defaults, rehabbed properties, happy investors,
                 busy Realtors, etc.

                 The marker boards that lined the walls of the Dollars Express office
                 space displayed scores of addresses, each marked carefully by investor,
                 with time lines and construction stages checked off in careful sequence
                 showing progress, progress, progress. It was a visual confirmation for


98-CH-221-1004                       Page 64
                                                                          Appendix C

            all to see that all of it was real, successful, and full of integrity.
            Properties were marked "sold" and "assumed" and "vandalized." There
            were twenty or thirty full-time employees there, all orbiting at different
            levels on various issues. There were sub-contractors in and out picking
            up checks, real estate salespeople responding to the "no down
            payment" radio program calls, and weathered signs stacked against the
            wall saying "Buy this fully rehabbed property with No Money Down!"

            My impression was that the Contractor was on to something really
            good, a systematic approach that was both ethical and profitable. After
            all, the south side of Chicago was the rehab Mecca for the world. How
            could he have not been legitimate to have an operation so big,
            organized, and well run?

            During the time the face-to-face application took place, if there were
            further missing documents needed, or if there appeared to be ratio or
            down payment issues, then I was sensitive to the idea that the loan had
            not yet fully unfolded. The plan review and appraisal had not yet been
            completed. I was not yet fully prepared to completely and precisely
            evaluate the transaction because all of the specifics were not yet
            known.

            I sometimes felt that it would be more appropriate to determine first
            whether or not the Borrower had provided further documentation to
            the Contractor prior to pointing out a potential issue to the Borrower
            or making any additional requests of the Borrower. They generally
            acted as if I was just bothering them, and reflected an attitude of "Why
            didn't you already know I had this other account? I already gave this
            stuff to the Contractor!"

Collusion   My intention here is not to blame the Borrower. But I will point out
            that the audit findings avoid completely the simplest and most
            fundamental observation. The Borrower and the Contractor had
            engaged in a relationship with each other that entailed an agreement
            that resulted in deception to the lender. Both Borrower and Contractor
            discouraged lender involvement. I had to push to have a measure of
            involvement as lender, and push carefully because both Borrower and
            Contractor were discouraging it.

            At no point in time did any Borrower reveal that they had no intention
            of making any payments, or that there was a side agreement with the
            Contractor to make all of the cash investment. At no point in time did
            the Contractor reveal that the inspector had been influenced or paid off
            to approve rehabilitation work never completed.

            Each Borrower clearly understood they were applying for a home loan


                                Page 65                                   98-CH-221-1004
Appendix C

                 with both financial obligations and liability. It should be evident, based
                 on the circumstances I have shared, that I clearly risked not writing any
                 loans for either Borrower or Contractor because of my insistence on
                 face-to-face applications and interviews. I risked not writing any loans
                 because of my direct contact and involvement with the Borrower,
                 which I was always told was not the custom or practice of any other
                 lender. I knew that I was HUD's gatekeeper, and whether or not I had
                 reason to believe there was foul play, I knew that I must proceed
                 prudently.

 Hypocrisy       For a Borrower to suggest that I was performing actions without their
                 approval or permission, for a Borrower to suggest that I was somehow
                 conducting an application in a "rubber stamp" atmosphere, which
                 implies ill intentions and questionable motives, is an unfortunate re-
                 writing of history, and sadly hypocritical. I wish the Borrower could
                 say more simply that they wished I could have known the ultimate
                 damage of the scheme, and so knowing, would have been able to
                 protect them. However, I cannot be blamed or held responsible for the
                 deception. A murderer cannot accuse a gun dealer of murder because
                 the gun dealer sold a gun the murderer used to kill.

                 I do know in my heart, however, that the Contractor ultimately led the
                 Borrowers to slaughter knowingly or unknowingly. I am slow to fault
                 the Borrower for the deception that the Contractor perpetrated on
                 them. In retrospect, the Contractor was a brilliant con artist, and
                 successfully fooled all those around him.

Recent Scams     Evidently, the Contractor is still at it. I saw him in a newspaper article
                 describing his indictment recently that I am attaching (see Exhibit #2).
                 The article describes how the face of Christianity was used as a mask to
                 perpetuate similar fraud. Borrowers were attracted through Christian
                 radio programs. One of the perpetrators represents himself as a
                 "Reverend." The company's goal is to give back to the community
                 through redevelopment and below-fair-market resale terms to needy
                 families. No investment required. No payments have to be made. You
                 just make money, help the community, and serve Christ in the process.

                 Nothing is sacred. There are no moral or humane boundaries in play.
                 No one suspects. Everyone is fooled. Everyone is taken. No one
                 seems to be willing to actually believe that this kind of evil is present
                 and at large. No one wants to believe that a human being would
                 deliberately set out to injure others in this manner. Is it a surprise that
                 all the victims involved in the scheme this audit addresses were duped?
                  Is it a surprise Borrowers, lenders, and HUD itself were duped? How
                 many times will this continue to happen?



98-CH-221-1004                       Page 66
                                                                                Appendix C

Dollars Express   This newly exposed scheme echoes of the past one. Affordable
and Affordable    housing was the banner Dollars Express sailed under, the headline that
Housing
                  identified what it was all about. There was a Chicago Bears football
                  player who attended and spoke at a banquet the Contractor held for the
                  scores of investors who participated in this grand rehabilitation effort.
                  The themes of his speech, and of the evening, were helping needy
                  families, rebuilding the inner city, and filling the gaps in social
                  assistance the federal government could not address. Individual
                  Borrowers received applause from hundreds when awards were given
                  to them based on completed projects that they had participated in. The
                  more you did, the more you helped needy families, the more you helped
                  the city, and the more money you made.

                  Some lender heard the Contractor speaking on a radio program on the
                  subject of his affordable housing program. He was touting all the
                  benefits of his socially-oriented entrepreneurialism. The (anonymous)
                  lender either sent the audiotape to the local HUD office, or notified
                  them of the radio show. Evidently, the Contractor had commented on
                  the idea that new investors would be able to participate with no cash
                  investment required. The local HUD office, in response, tried to
                  contact lenders who were doing business with Dollars Express, to
                  attempt to determine what he meant by his comments.

                  The local HUD office also contacted me. I contacted the Contractor,
                  who (again) reminded me that the rehabilitation efforts he was involved
                  with were very large in scale, and did not just operate within the
                  boundaries of FHA programs. His business also involved other
                  conventional and uncommon lending vehicles, some of which were
                  private sources, and did not have the same requirements as 203(k).
                  No, his comments did not pertain to FHA or 203(k). I never heard the
                  tape, and so I just passed on the explanation. I concluded that there
                  was not a real concern about all of this, because HUD had not called
                  Dollars Express on their own.

Refining          One of the thoughts that occurred to me at the time was that it might
Disclosure        be helpful to develop a disclosure that spoke to the idea of the
Efforts
                  responsibilities of the 203(k) borrower in general. The 203(k) was a
                  new and unusual lending tool, and was spawning all kinds of not-
                  before-seen collaborations, formal and informal partnerships, and
                  experimental approaches. I thought that perhaps I should look at the
                  idea of spelling out responsibilities and obligations more clearly, so that
                  lines could not be blurred in the excitement. People were testing the
                  boundaries of what was permissible, and I wanted to try to stay as clear
                  as I could in my communication.

                  I had already seen that some of the HUD disclosures produced by the


                                      Page 67                                   98-CH-221-1004
Appendix C

                 Department could be modified or improved because I was experiencing
                 where the rubber-met-the-road in terms of the loan's use. One of the
                 projects we undertook was to design a 203(k) good faith estimate (that
                 was RESPA friendly) so as to attempt to more clearly and accurately
                 delineate cost centers present inside a 203(k) loan.

                 We had found that the standard good faith estimate was not useful in
                 terms of the mechanics of the 203(k) loan. With a refined disclosure,
                 we could cause a borrower to understand more effectively what they
                 were being charged for and why. We could reveal the dynamics of the
                 rehabilitation and relate it to the project as a whole. Also, we could
                 more accurately communicate cash requirements for approval and
                 closing purposes, and elaborate on monthly payment requirements. I
                 am attaching our disclosure that resulted from that effort during that
                 time (see Exhibit #3).

                 To my knowledge, we are the only 203(k) lender that has developed, or
                 currently uses such a tool, and have found it to be very helpful to
                 borrowers and us. We make it our custom to provide a complete copy
                 of the plan review, the 203(k) maximum mortgage worksheet, and our
                 (custom) good faith estimate to each and every borrower, as was the
                 case with the Borrowers involved with Dollars Express. This way, we
                 could be assured that each Borrower had the opportunity to review the
                 specifications of repairs, cash requirements, and monthly payment
                 obligations on every 203(k).

                 In addition, and more importantly, I developed a disclosure that also
                 bore Dollars Express Borrowers in mind. I was looking for a prudent
                 and noncontroversial vehicle to remind people of a few things,
                 specifically their obligations and duties in relationship to the loan.
                 Again, when the 203(k) got fired up again, there were many different
                 people in the rehab theater trying to collaborate together: investors,
                 rehabbers, contractors, Realtors, non-profits, etc. And we wanted to
                 prudently communicate where liability ultimately rested.

                 This disclosure, titled "Notification of 203(k) Disclosures," summarized
                 relevant responsibilities in the 203(k) process. It also included sample
                 formats of documents used on a 203(k) loan that were unique. We
                 began the disclosure with an introduction, and moved to the thoughts
                 that the Borrower read the forms carefully, call the Legend originator
                 regarding any questions, and consult legal counsel of choice "as an
                 option strongly suggested by the above representative but not a
                 mandatory requirement of the program."

                 The genesis of this disclosure involved the observation that it was
                 important for borrowers to understand their obligations, and where the


98-CH-221-1004                       Page 68
                                                                           Appendix C

             contractor's role would start and stop. Although I had no reason to
             believe at the time there was any kind of malfeasance taking place, I
             was sensitive to the idea that I needed to act as a gatekeeper, both on
             my company's and HUD's behalf.

             We began using it on all 203(k) loans, and used it on all the loans in the
             theater of this audit. I recall showing and explaining it to the
             Contractor prior to its implementation. He did not appear to take issue
             with it, in light of the idea that I explained that this disclosure would
             become part of all loans at Legend as a matter of policy. His
             acceptance of this caused me to feel confidence in the Borrower's
             understandings. But that is part of the deceptive tactics for one
             involved with deceit. It did not appear to be in conflict with his
             perspective, or the Borrowers, which I felt was a good thing. I am
             enclosing it for your review (see Exhibit #4).

Borrow B’s   At this juncture, it may be helpful to bring one aspect of Borrower B’s
Loan         loan into focus. The circumstance I will address was a problem not
             mentioned in the scope of the audit, but I feel obligated to bring it to
             bear in the course of my response. I have previously made the general
             observation that, without exception, the documents initially provided by
             the Borrower through the Contractor appeared to be mechanically
             accurate. I have stated that both my staff and me were able to directly
             and indirectly verify that documents were correct as far as their validity
             was concerned.

             I clearly recall Borrower B’s loan because it was one of the first
             written. I remember that the initial package included information
             regarding an existing loan that Borrower B held on the subject property
             that was with a lender I had not heard of. Since this was a refinance
             transaction, I would need to verify the outstanding mortgage on the
             property. The underlying lender had an address on Western Avenue,
             which was the same street Dollars Express resided.

             I remember thinking that there are many businesses involving
             rehabilitation on Western Avenue, an area that I was only beginning to
             become familiar with. There were insurance companies, appraisal
             firms, contracting firms, credit repair businesses, etc. At the time I
             began developing the application, I had no reason to believe the lender
             was fictitious or affiliated with Dollars Express. The names were not
             the same either.

             I remember later seeing, during the time the loan was being processed,
             that someone who also worked with Dollars Express was handling the
             mortgage verification. I thought about it, and concluded that the
             company the loan resided with may have been affiliated with Dollars


                                 Page 69                                   98-CH-221-1004
Appendix C

                 Express indirectly. That seemed to make sense. Dollars Express was a
                 large company that was engaged in all kinds of rehabilitation efforts,
                 many of which did not pertain to 203(k), and had been engaged with
                 volume rehab on the south side of Chicago for many years.

                 I concluded I was just seeing a new animal here that I had not seen
                 before. I was learning more about the rehab theater, and expected to
                 see things I had not been exposed to before. After all, this was not
                 Realtor business, or refinance business. It was an entirely new culture
                 for me.

                 The loan in question was on the original loan application that was
                 presented to Borrower B. Borrower B saw it and signed it. He did not
                 question it, nor lead me to believe it was artificial somehow. I know
                 this is true because the loan stands out in my mind, and I remember the
                 sequence involved with it. I always enjoyed going to the fire station
                 Borrower B worked at. I ended up visiting there three or four times. I
                 looked at the fire trucks, and petted the Dalmatian on duty. I also told
                 Borrower B I needed some painting done to my personal home, and
                 asked him if he was interested because he did some painting on a
                 moonlight basis.

                 I did not believe that there was anything false, fraudulent, or
                 surreptitious about this underlying loan. It was reflected on the
                 application Borrower B saw and signed. He never questioned it during
                 my confirmation process. Also, the indebtedness appeared on his
                 copies of the good faith estimate and maximum mortgage worksheet.
                 In retrospect, this event, and this loan, stands out in my mind as a real
                 exception to the idea that the information that came to me from the
                 Borrower through the Contractor was always accurate. It also speaks
                 to the idea that it was easy for one thing to slip through the cracks
                 when everything surrounding it was powerfully factual and accurate.

  Cash           It may be purposeful to next make the observation that when the loan
  Requirements   applications were initially developed, I was aware that we were not
  Unknown at
                 dealing with final figures because the plan reviews and appraisals were
  Application
                 not completed as of the date of the application in most instances. I was
                 aware that exact figures had not yet come into focus. Also, there was
                 no chain-of title requirement that had developed yet from a regulatory
                 standpoint at the time that any of these loan applications were written.
                 As such, on refinance transactions, there was frequently little or no cash
                 investment required at closing in the absence of a chain-of-title
                 requirement.

                 Costs and cash needed could vary in large percentages when plan
                 reviews, appraisals, and actual costs were determined, and this usually


98-CH-221-1004                       Page 70
                                                                             Appendix C

                only occurred after the point of the initial loan application. Loans for
                purchase transactions on regular non 203(k) type mortgages can be
                figured very closely as far as cash requirements are concerned.
                Refinance transactions on regular non 203(k) type mortgages tend to
                begin to vary more as far as cash requirements are concerned due to
                principal balances varying from what is disclosed versus what is
                verified.

                But 203(k)’s are quite different. At application, the K funds can only
                be guess-timated at based on what would be needed predicated on
                expected amounts. Refinance 203(k)’s where the borrower purchased
                the property with one loan, and then applied for a 203(k) refinance loan
                cannot be defined tightly at loan application. Payoff figures, as-is
                values, rehabilitation costs and contingency reserves, after-improved
                values, and escrow commitment amounts cannot be known at
                application. These variables ultimately define cash requirements.

                Accordingly, I proceeded with applications with information I had
                available to me based on the initial credit package provided to me from
                the Borrower through the Contractor. I knew that I did not know
                exactly what cash was required. Once the aforementioned factors were
                present, we would know exactly what was needed and could re-visit
                the issue if necessary.

                203(k) loans were, and are, a very different animal as far as cash
                requirements are concerned. The loans themselves, and therefore the
                applications, were moving constantly as they unfolded. During this
                time, as we first began performing 203(k)’s, we simply recognized that
                the cash requirements would change, and approached the loan as a
                changing entity. In some respects, this observation is true in general of
                all types of loans, and became the topic of a few both general and
                specific discussions I had with the auditors.

Evolving Loan   The auditors seemed to have difficulty understanding this phenomenon,
Applications    since they have never originated 203(k) loans themselves. I could tell
                they felt there was something wrong with things being added to a loan
                application. They reflected an air of suspicion when items were added
                to a credit package when those same items were not reflected on the
                initial application.

                It is frequently the case that loans are, in some respects, originated in
                processing. Put differently, there are daily instances where people
                apply and information is not available to put on a loan application. For
                example, if a paystub and W-2 forms are not available, the income
                section may not be completed until receipt of those items, because a
                borrower is never able to verbally share the precise income amount an


                                    Page 71                                  98-CH-221-1004
Appendix C

                  underwriter will ultimately count towards qualifying. This requires
                  analysis.

                  If a borrower does not reflect adequate funds to close at application,
                  then sections may remain blank on the application until the borrower
                  communicates back what approach they have elected based on
                  communicated options. Would you ever see on an application: "Maybe
                  a gift, maybe a secured loan, or maybe cashing in a 401-K"? Would
                  you ever see under income: "Maybe $2,000 per month"? Are debts
                  frequently added to an application because the borrower neglected to
                  bring information at an initial face-to-face interview? Of course they
                  are. This is a daily event in mortgage originating at the street level.

                  The audit suggests that items may have been added to the loan
                  application with surreptitious intent. If you follow the line of thinking
                  to its fullest extent, there is no allowance being made for the
                  observation that things can and do change after an application takes
                  place.

                  As examples, if a borrower applies when employed in one place, then
                  changes jobs, is there a difference between the application and the
                  credit file? If a debt shows up on someone's credit that was not on the
                  initial application, is there a difference between the loan application and
                  the credit file? If a borrower ends up spending some of their funds in a
                  savings account, no longer has the balance reflected on the initial
                  application, and elects to get a gift from a relative for closing purposes,
                  is there a difference between the initial application and the credit file?
                  Would the gift have ever been shown on the initial application when the
                  decision was made after the fact to get the gift?

  The Gap Never   The credit file is the ultimate final expression of the application. The
  Disappears      credit file expands, articulates, alters, corrects, illuminates, and defines
                  the initial application. There is never a precise similarity or identical
                  relationship between an initial application and the credit file that
                  expresses it. Anyone who is involved with the actual originating
                  process understands this gap, and works to narrow it as much as
                  possible. But the gap never disappears.

                  The initial application operates within a theater of changing information
                  and circumstances. It is a changing entity in so far as the credit file will
                  ultimately speak to the facts in a way that the initial application cannot.
                  The credit file itself clarifies the borrower's credit information. The
                  entire loan process intrinsically recognizes and speaks to the idea that
                  the initial application will never be absolutely accurate. All initial
                  information given is constantly being transformed as it is understood
                  and verified.


98-CH-221-1004                         Page 72
                                                                              Appendix C


                In this area, the audit findings cast a menacing shadow over differences
                between the initial applications and the credit packages. The
                suggestion, both directly and indirectly, is that Legend purposely and
                deceitfully added things to the Borrower's applications without their
                knowledge, and inserted manufactured and forged documents into their
                credit files.

                Simply put, those allegations and suggestions are false. I did not, nor
                did anyone else at Legend Mortgage Company, ever, at any time,
                intentionally add information to loan applications without fully
                believing that the information was true, and without receiving either
                direct, or what we perceived was indirect, confirmation from the
                Borrower.

Practices and   I have tried to take great lengths in sharing the practices and customs
Customs         of the Contractor and Borrowers. If the Borrowers were to have been
Important       asked if it was their practice to furnish documents to the Contractor to
                in turn provide to me, if they were to have been asked if they generally
                tried to cause the Contractor to be the controlling agent in relationship
                to their dealings with me and my company, a different picture emerges
                than the one the audit findings portray. I can't help but believe there
                was collusion.

Suffering       I know that the Borrowers eventually suffered terribly because of the
and Anger
                scheme perpetuated by the Contractor. I do not wish to overlook the
                obvious, and I sympathize with their pain and frustration. I am certain
                all of their families, and perhaps their marriages, suffered as a result as
                well. But if the Borrowers were so terribly concerned about exactly
                what was happening in relationship to their 203(k) loan, if it was a
                priority for them to maintain involvement at every step, then why
                would they provide documents directly to the Contractor instead of us,
                and operate in a manner that let us know clearly that we should expect
                their responses to us from the Contractor? Is it reasonable for them to
                select one or two issues and demand accountability to have
                communicated with them directly for confirmation when every step of
                the way, on every other issue, they told us through speech and actions
                to look to the Contractor for confirmation?

                The answer was, and is, very simple. They are angry. They are angry
                at the Contractor for duping them in such an inhuman way, they are
                angry at themselves for believing what was too good to be true, and
                they are angry at me for not knowing better and for not saving them
                somehow. Anger is a powerful emotion, and can easily distort both
                reality and history.



                                    Page 73                                   98-CH-221-1004
Appendix C

  Distortions    How are history and reality distorted through anger? To illustrate, I
                 ask one simple question: If a Borrower maintains that they had no
                 knowledge of a partnership agreement, if they maintain that they did
                 not have the opportunity to point out that no such agreement existed,
                 then if they did, would it have made a difference?

                 Since we now know that the Borrower and Contractor had a side
                 understanding to the effect that the Contractor would make all of the
                 cash required investment, since we know that the Contractor had
                 guaranteed to the Borrower they would never have to make any
                 payments on the loan, since we know that most Borrowers already had
                 both title to the property and an existing loan on it, since we know that
                 the Borrower had a demonstrated history of trusting and relying on the
                 Contractor for direction, how could it be reasonable for a Borrower to
                 say, or even imply, that they would have pointed out the partnership
                 agreement was erroneous in nature and interrupted the loan process as
                 a result?

  Gain?          Based on our current knowledge of the side understandings that existed
                 between the Borrower and Contractor, what would the Borrower have
                 had to gain by taking the opportunity to point out that the partnership
                 agreement they allege they were not aware of, the partnership source of
                 funds they allege was not reflected on the initial application, was
                 fabricated? Based on the representations of the Contractor, they would
                 have gained absolutely nothing as a result.

  Loss?          What did the Borrower have to lose by pointing it out? They clearly
                 would have lost the ability for the rehabilitation project to progress,
                 which was intended to lead to resale of the property, and an additional
                 payment to the Borrower. The Borrower would have violated the side
                 understanding with the Contractor as well, a Contractor who had
                 guaranteed the initial cash investment as well as liability for the
                 mortgage payments. The Borrower would have jeopardized receipt of
                 the payment expected as a result of fruition of the project. The
                 Borrower, who already had ownership of the property in most
                 instances, would have been saddled with the underlying loan, which in
                 most instances was on its way to ballooning. The Borrower would
                 have been left with an incomplete project on the south side of Chicago,
                 without a partner, without a contractor, without a collaborator, without
                 the benefit of more experienced direction, and without access to the
                 visible resale machine the Contractor had built.

  Common Sense   If the Borrower had been asked by the auditor if this knowledge of the
                 partnership agreement (a knowledge the Borrower denied having)
                 would have caused them to interrupt the loan process, and the
                 Borrower answered truthfully, they would have said that it would not


98-CH-221-1004                       Page 74
                                                                           Appendix C

                have. The Borrower clearly relied on the Contractor's direction every
                step of the way based on side understandings between them. The
                partnership agreement would have only represented a vehicle to
                accomplish or implement the agreement between them that they held to
                be more consequential. Given the circumstances, the Borrower would
                have had absolutely no incentive whatsoever, everything to lose and
                nothing to gain, in pointing out that the partnership agreement was not
                real. This thinking is just common sense.

                To suggest otherwise is simply unrealistic. To suggest otherwise is to
                fly in the face of any reasonable standard of objective or rational
                thinking. The powerful and overwhelming previous history of the
                Borrower relying on and trusting the Contractor's leadership clearly
                precludes the possibility. The Borrower had ample opportunities to
                bring up a whole variety of issues that would have exposed the scheme.
                 I am aware that, at this point, I would be able to point out literally
                hundreds of opportunities the Borrower had all throughout the 203(k)
                loan process to share that there were discrepancies between what me
                and my company were communicating, and what the Contractor had
                shared with them. The entire loan process was riddled with ample
                opportunities to do so.

Selective       For the Borrower to suggest that they would have selectively taken one
Thinking
                opportunity to point out a discrepancy, for the Borrower to suggest
                that they would have expressed a questioning attitude towards the
                Contractor, for the Borrower to suggest that they would have openly
                and publicly accused the Contractor of malfeasance, when they had
                opportunities to do the same every step of the way simply does not
                hold water.

Ample           Without belaboring the point, I will just name a few. When my office
Opportunities   contacted the Borrower to inform them of the amount they needed to
                bring to closing, which was and is our custom, did the Borrower seize
                the opportunity and say "I am not supposed to bring in any money, the
                contractor is"? When the Borrower was informed of the monthly
                payment required on the loan by me, my office, or in the form of a
                payment coupon booklet at a later time, did they seize the opportunity
                and say to us "I am not supposed to be making the payments, the
                Contractor is"? Did any ever say "I want you to know that, although I
                am signing all of these documents for this loan, I actually won't be
                putting up any money or making any payments, because the Contractor
                agreed to do that"?

                There were literally scores of events all throughout the loan process
                that gave the Borrower opportunities to question things at different
                phases. No Borrower ever took any opportunity to expose the side


                                   Page 75                                 98-CH-221-1004
Appendix C

                 understandings that existed between themselves and the Contractor.
                 All of this begs the obvious question: If you are denying knowledge of
                 this agreement, would it have made a difference if you saw it? If you
                 are saying that it would have, how is that consistent with any of the
                 other actions that you took?

                 Moreover, two of the Borrowers on loans questioned in the scope of
                 the audit are of the ------ family. ------- worked for Dollars Express,
                 and obviously worked closely in partnership with the Contractor.
                 Members of the ------- family became involved as investors. I always
                 believed that -------, Borrower C, and Borrower A were brothers and
                 sisters. If they are not brothers and sisters, then they are clearly closely
                 blood-linked. Because there was a family member who worked for the
                 Contractor, does this also not speak to the assumption that their own
                 family members would have a good picture of the Contractor and his
                 practices? Would anyone not have assumed this would be true?
                 Would there have been any reason at the time, and is there any reason
                 now, to suspect or believe that family members would purposely betray
                 each other?

                 Are the auditors aware that Borrower A had begun working for Dollars
                 Express as well? My impression was that Borrower A was beginning
                 to work in the area of recruiting new investors in the Dollars Express
                 theater of operations. On occasion, I saw her in the Contractor's office
                 working in that capacity. Isn't it then somewhat of a cop-out for her to
                 allege that she was not aware of what was happening, when she
                 worked there? Would it be wise for her to acknowledge otherwise?

                 Would we not have also naturally assumed a high level of awareness
                 existed because both --------------- and Borrower A were employees?
                 Would we have assumed that they were not aware of what was
                 happening in the surroundings of their own place of employment?
                 Would it have been reasonable to assume that the documents that bore
                 Borrower C's and Borrower A's signatures, coming from Borrower A's
                 and ----------- place of employment were likely valid? Would it not
                 have been offensive for us to ask if they were real because it would
                 have implied that their own family members were criminal?

                 In fact, most of the Borrowers appeared to have some link or
                 connection to Dollars Express that transcended the boundaries of an
                 unfamiliar and cold business relationship. Some Borrowers were
                 employees, some had relatives who were employees, and some had
                 close friends who were employees. It was a community of people who
                 seemed to both have a history together in some fashion, and trust each
                 other almost implicitly. This observation, again, created the impression
                 that the Borrowers had their eyes wide open.


98-CH-221-1004                        Page 76
                                                                            Appendix C


Credibility   Adding a partnership agreement was no different than adding a gift to
              any normal purchase transaction. Adding a lease agreement to a loan
              file was no different than adding a real estate contract sent by a Realtor.
               The fact that these documents were signed by the Borrower, the fact
              that we had been trained by the Borrower and the Contractor to rely on
              the Contractor as the central contact point, the fact that we witnessed
              overwhelming credibility in terms of the documents we received from
              the Borrower through the Contractor, all told us that what we were
              looking at and experiencing was real, valid, and reflective of integrity.

              I was ever aware that the Contractor had a growing level of familiarity
              with the 203(k). He knew how the mathematics worked on a 203(k). I
              had not seen him try to approach 203(k) projects that could not be
              done. All of the 203(k) loans he was involved with worked. He had
              been a party to scores of approvals and closings with the Oak Brook
              Carl I. Brown and Company office. I generally got the impression that
              he had a very good sense of cash requirements, values, rehabilitation
              amounts, feasibility issues, and qualifying. He had the ability and
              know-how to originate loans himself. I had not heard about any of the
              loans that he was involved with being rejected.

              Every problem or obstacle was ultimately worked through. Since the
              Contractor did demonstrate these skills, and since the Borrower had
              already provided him with bank statements, I also tended to assume
              that the mechanics of the loan had already been evaluated from these
              different perspectives. This circumstance tended to make me question
              myself more closely rather than questioning the Borrower more closely.
              In short, I would operate with fewer skepticism’s about whether or not
              a loan would work, because I had clear evidence that there was a
              strong track record of every loan working.

              Again, I believed that what I was seeing was a positive. It only acted
              to confirm the impression that a volume 203(k) approach would require
              a clear and decisive mind that could evaluate all these circumstances
              and deal with them. I had no idea that there was a giant invisible wall,
              behind which lurked a dark reality of deception, collusion, and fraud.

Partnership   With all of my years of experience in FHA lending, with all of my
Agreements    knowledge and exposure brought about by overseeing the production
              of hundreds of millions of dollars of FHA loans on a monthly basis
              throughout the United States when I operated in the capacity as Senior
              Vice President of Carl I. Brown and Company, with all of my voracious
              reading of HUD guidelines, I had never been involved with a loan
              where a partnership agreement existed.



                                  Page 77                                   98-CH-221-1004
Appendix C

  No Written     From the start, I was unfamiliar with the nature and purpose of the
  HUD            agreement. In many ways, I was unclear about exactly what it was,
  Guidelines
                 why it was being used, what purpose it was to serve, how it came
                 about, how it should be documented, and what HUD thought of all of
                 it. There was absolutely no mention of it in any of the HUD
                 regulations. There were no clear definitions in any of HUD's literature,
                 mortgagee letters, or any other known HUD source.

  No Direct      The concept of the partnership agreement could be seen and looked at
  Parallels      in so many different ways, because it could be compared to so many
                 different seemingly parallel events in a loan. Was it an entity that
                 would take title? Was it formed for liability purposes? Was it an
                 income source? Was it an asset pool? Was it an entity created for tax
                 purposes? Would it reduce capital gains? Is that why it was formed?
                 Would it result in a K-1 partnership return? Would it reduce expenses
                 somehow? Was it an entity that was formed from profits of previous
                 projects the Borrowers and the Contractor were involved with? Would
                 it have it's own separate bank account? Were the amounts shown on
                 the agreement actual cash investments, or were they something else?
                 Were they payments or credits for services rendered from one to the
                 other?

                 On many occasions, especially when I was with my previous employer,
                 I was told I was too brainy somehow, and that I was not looking at
                 things in their simplest light. Since I graduated with honors in literature
                 and philosophy at an Ivy League institution on an academic scholarship,
                 I was taught to question thoroughly and analyze carefully. This
                 background had also sometimes acted as a detriment to me in the
                 business world of give and-take. So I was, and am, sensitive to the
                 idea of not over-doing it on factual, procedural, or policy matters. I am
                 aware that sometimes I can reason too much, sometimes to a fault.
                 And I learned that HUD did not want those kind of time-consuming
                 inquiries from "men-in-the-field."

  New Animal     No one I knew of in the entire mortgage industry had any background
                 or experience in this area. No associate of mine had ever used one or
                 seen one used. I talked to and telephoned numerous people to
                 determine if any had experience with partnership agreements and came
                 up with nothing.

                 Like other new animals the 203(k) theater seemed to be populated
                 with, I concluded that the partnership agreement was just another new
                 animal. I was simply unaware of it previously and I, along with others
                 in my business, had not before witnessed this animal. Well, there were
                 a lot of new things with 203(k). Since I couldn't get my arms around
                 the idea, and had no historical guidance from others in the mortgage


98-CH-221-1004                       Page 78
                                                                           Appendix C

             business, I had to rely on specific guidance from underwriters and
             HUD.

             It is difficult for me to both listen to and digest current opinions about
Easily
Debated      what documentation should have accompanied the agreements in the
One Way or   past as far as bank statements, initial investment verification, etc. There
Another      is no written guidance anywhere to support any particular view. It is
             obvious these opinions are both made with the benefit of hindsight and
             are easily argued from one particular point of view. Documentation
             requirements, in hindsight, could be argued from a large range of
             perspectives, because the partnership agreement exhibits characteristics
             of so many different loan elements simultaneously.

             In hindsight, one could just as easily now take the position that a
Hindsight
             partnership tax return, an audited financial statement, or bank account
             statements solely in the name of the specific partnership were required.
              Conversely, one could argue that if an FHA borrower has ownership in
             an S corporation or a partnership, then the lender is not required to
             reach back in time and verify that the borrower had the funds to initially
             capitalize the venture. One could point out that if a borrower owns
             stock, then there is no HUD requirement that the lender reach back in
             time to verify the source of funds used to purchase the stock. None of
             these recent approaches are ultimately valid because the partnership
             agreements fit into no known category comfortably.

             No clear written HUD guidelines or HUD standards did exist in terms
             of spelling out what was needed to document a partnership agreement.
              Because of this circumstance, and because the partnership agreement
             has no clear parallel category, the possibilities are endless, and could be
             argued and debated a whole variety of ways.

             I believe the idea of the partnership agreement had first been brought to
             the Contractor by one of the lenders soliciting his account that was not
             currently doing business with the Contractor (General Motors
             Acceptance Corporation I believe). The Contractor explained to me
             that partnership agreements were now in use on the 203(k) loans he
             was closing at Carl I. Brown and Company. By the time I was more
             involved with it, the Contractor had already discussed it and cleared it
             with Carl I. Brown & Company. All the research had evidently been
             done ahead of me before I was exposed to using the partnership
             agreements on Dollars Express 203(k) loans.

             My focus then went into identifying whether or not the agreements
             were acceptable to HUD. If they were acceptable, and the Contractor
             and Borrowers anticipated using them, I needed to know what
             documentation was required to submit for underwriting purposes. In a


                                 Page 79                                   98-CH-221-1004
Appendix C

                  gift situation, for example, the source of the funds and accompanying
                  transfer receipts were clearly defined as the process for identifying and
                  documenting funds. The partnership agreements, however, were not
                  defined anywhere in writing, so I made every reasonable effort to
                  confirm what was needed.

  Carl I. Brown   Carl I. Brown and Company's underwriters advised me that HUD
  and Company     approved of the concept, even though it did not appear anywhere in the
  Confirms HUD    regulations. Further, the local HUD office would define parameters
  Guidelines
                  and create definitions. In essence, the partnership agreements would be
                  determined by regional HUD guidance.

                  I did not just add and submit, as the tone of the audit suggests. I made
                  phone calls to the appropriate HUD designee, which in this case were
                  the local and national FHA underwriters of Carl I. Brown and
                  Company. I followed instructions carefully after being told that all of
                  the elements in terms of acceptability and documentation were
                  discussed with, and approved by the local HUD office. Who was I to
                  question them? Why would I have reason to believe what I was being
                  told was untrue?

                  All of my history at Carl I. Brown and Company confirmed the
                  observation that the company did historically communicate liberally
                  with HUD, especially in new areas of lending, and usually always
                  moved to completely and definitively clarify matters with the
                  Department where interpretation could exist. I knew this because I had
                  first-hand knowledge of this history, and I had previously been a
                  participant in it. This was the culture of the company. The senior
                  underwriter, frequently discussed issues with ---------------, -------------,
                  ------------, and, on occasion, ----------- of Washington HUD (I
                  apologize if any name spellings are inaccurate).

                  On a variety of issues, the company I was previously employed with
  Historical
  Credibility     would actively and responsibly seek guidance on subtle or ambiguous
                  issues. There was a general awareness, based on actual events in
                  previous history, that situations could arise where a local HUD office
                  offered guidance on a topic that later turned out to be at variance with
                  Washington HUD's perspective. Since the company had previously
                  suffered because of these types of misunderstandings, resulting in
                  consequences I had witnessed, the company prided itself on both its
                  access to, and focus on, Washington HUD as arbitrator. The company
                  itself was national in scope, and therefore relied heavily on nationally-
                  based HUD guidance.

                  I made every effort to confirm the acceptability of the partnership
                  agreement itself, as well as the attendant required documentation, from


98-CH-221-1004                         Page 80
                                                                             Appendix C

               HUD's perspective. Every effort, both verbally and in writing, was
               made on my part to proceed in accordance with what would be
               considered normal HUD requirements with regard to partnership
               agreements. I initially made those efforts through the underwriters,
               both national and local, at Carl I. Brown and Company. I confirmed
               with them many times what had been discussed and verified with HUD,
               and was repeatedly told these topics had been very specifically and
               carefully examined and explored. After all, the same company was
               closing scores of these types of loans themselves using the same
               agreements. If they did not know, who did? If they did not have the
               most at stake in insuring HUD had approved this, who did?

               Partnership agreements were included in the Borrower B and Borrower
               A files submitted to the underwriters at Carl I. Brown and Company. I
               followed the procedural and documentation requirements exactly as
               they defined them for me. There were no underwriting conditions
               made as to verification of initial investment. There were no
               underwriting conditions made as to any other required documentation
               like bank statements, partnership tax returns, or partnership financial
               statements, or any other attendant or supporting records.

Like the Old   It is no coincidence that the initial Borrower A loan application reflects
Gift
Requirements
               the idea of a gift from a partnership. I used the term gift from
               partnership on Borrower A's loan because it was a remembrance of the
               earlier Borrower B loan. I believe the Borrower B loan was the first
               loan where a partnership agreement was used. Based on specific
               underwriting requirements that were communicated to me by Carl I.
               Brown and Company's underwriters, the only documentation required
               by FHA, I was told at the time, for the partnership agreement to work
               was the agreement itself.            There were absolutely no other
               documentation requirements, not even bank statements from the
               Contractor's account. I remember thinking to myself that it reminded
               me of the old HUD requirements pertaining to gifts. In earlier years,
               before HUD changed their guidelines, gift letters themselves were the
               only documentation required in connection with a gift. No source of
               funds as far as the donor's account was concerned. No documentation
               of receipt of funds to the recipient. Because the documentation
               requirements of the partnership agreement reminded me of the old gift
               rules, I remember that this is the reason I called it a gift from
               partnership. Again, no other documents were needed. The partnership
               agreement was self-defining, self-documenting, and self-verifying.

               This was the underwriter's call to make, not mine. The whole
               partnership agreement issue was a new and untested area for me. I left
               it totally to the underwriter to determine what was needed.
               Underwriters establish guidelines. I responded to the definitions and


                                   Page 81                                   98-CH-221-1004
Appendix C

                 parameters I was given to the letter. I did exactly what I as told to do.
                 This was, and is, normal and prudent lending practice.

                 I believe that these circumstances help to clarify another area where the
                 audit fails to segregate findings properly. Findings that should properly
                 relate to Carl I. Brown and Company are being portrayed as findings
                 relating to Legend Mortgage. Instructions, guidance, and input came
                 from Carl I. Brown and Company to its correspondent lender, Legend
                 Mortgage, and should be attributable to Carl I. Brown and Company,
                 not Legend Mortgage.

  Contractor     After the time frame of the Borrower B and Borrower A loans,
  Complaints     circumstances seemed to begin to change with respect to the business
  Worsen         between the Contractor, the Borrowers, and Carl I. Brown and
                 Company. The Contractor, who had previously complained about
                 deteriorating performance, lack of attention, and poor service at the
                 local Carl I. Brown and Company office, now approached me with,
                 again, what appeared to be a valid complaint or concern.

  Assumptions    Now the Contractor was saying that the local branch office was not
  Collapse       handling the assumption transactions properly on the 203(k) escrow
                 commitment installment loans. Indeed, one of the oddities of the
                 203(k) program was that the originator of the initial 203(k) loan was, in
                 some ways, implicitly responsible for helping to facilitate an
                 assumption. Yet, there was basically no financial incentive to handle
                 the assumption transaction. Since no fees (other than a flat $500) were
                 charged on the assumption package, there was essentially no
                 commission to be made. Therefore, it would not be the natural priority
                 or focus of the originator, since the originator would likely tend to be
                 concerned more with income-producing projects.

                 It made sense to me that this might happen. I recognized the
                 potentially devastating shock waves of this circumstance.           If
                 assumptions were not taken seriously, then payments would continue to
                 accrue, profitability would wane, and properties could sit vacant and
                 remain vulnerable to vandalism. The Contractor expressed confidence
                 that I knew better than to allow something like this to happen, and
                 solicited me for a more volume intensive business relationship. He
                 explained that, without a strong assumption focus and effort, real
                 problems could occur. I agreed.

                 At this juncture, I began to see that Legend could become involved
  A Volume
  of Loans       with a volume of loans. We would perhaps no longer be just a minor
                 compliment to the lion's share of the business that was taking place at
                 Carl I. Brown and Company. We could potentially become the main
                 lender handling these transactions. I felt it was appropriate that I


98-CH-221-1004                       Page 82
                                                                           Appendix C

               verify, somehow on my own, that HUD had reviewed the use of
               partnership agreements. I felt the best approach was to try to break the
               circle that existed at Carl I. Brown and Company, and move new loans
               to other lenders and underwriters. I could direct those involved to
               communicate with HUD, and observed they would likely have a desire
               to do so on their own without my input, since there would be a need to
               conduct an independent HUD verification process in this unexplored
               area.

Partnership    Around this time, the underwriters at Carl I. Brown and Company had
Agreement      informed me that HUD had changed their documentation requirements
Requirements   for partnership agreements, and that HUD was now requiring bank
Change
               statements from the partnership account, which was also the general
               operating account of the Contractor. This change in procedure led me
               to believe, again, that communication was taking place with the
               Department. How else could this change have come about unless there
               was an open dialogue?

A Tight        At the same time, I saw a relatively tight circle of originators,
Circle         underwriters, plan reviewers, and appraisers at Carl I. Brown and
               Company who were involved with the Dollars Express loans. I also
               saw that almost everyone involved had a direct financial interest in the
               loans closing I discussed using other lenders with the Contractor, who
               had not appeared open to this in the past. He agreed to my approach.
               In the past, he also had insisted on using the staff appraiser and plan
               reviewer at Carl I. Brown and Company. I persuaded him to use a
               different plan reviewer and appraiser.

               There was anywhere between thirty to forty new loans that were
               referred to me during this period. It represented a lot of work, and it
               also represented a tremendous amount of income. I would guess that
               the fee income generated to my company would have been anywhere
               between $200,000 to $300,000, all in virtually one shot.

Resolve        I resolved that I would not close one of the loans that involved a
               partnership agreement until such time I had established independently,
               outside of the circle, that HUD was approving. Not one. even when I
               began Legend Mortgage Company in April 1995, Carl I. Brown and
               Company was my only wholesaler for FHA loans. I had left on good
               terms, wanted to send them all of my FHA production, and stay on
               good terms through an active, mutually profitable business relationship.
                After all, I had spent eleven years with them. There was a lot of
               history, many memories, and many deep relationships.

               By August of 1995, 1 had worked to expand my own circle. Mortgage
               Now and Malone Mortgage Company were two new wholesalers that I


                                   Page 83                                 98-CH-221-1004
Appendix C

                  had the ability to sell FHA loans to. Mortgage Now had a local office,
                  which had been formed largely by previous employees of Carl I. Brown
                  and Company. The FHA underwriter there had previously worked side
                  by side with the local Carl I. Brown and Company underwriter who
                  handled approving the Dollars Express loans.

  Direct          The first loan outside the Carl I. Brown and Company circle was
  Communication   Borrower C, one of the subjects of this audit. I brought the file over to
  with HUD        the Mortgage Now underwriter, and explained to her what it was. I
                  told her that she needed to pick up the phone and call the local HUD
                  office about the acceptability of partnership agreements in general, and
                  determine if the Contractor's bank statements were required or
                  acceptable for documentation purposes. The underwriter did not feel
                  comfortable with partnership agreements in general, which gave me
                  confidence she would really look into it.

  Verbal HUD      The Mortgage Now underwriter communicated later to me that she had
  Confirmation    contacted the local HUD office, and upon request, had faxed a copy of
                  the partnership agreement to them. Not a good sign. It seemed to say
                  that HUD had not seen or reviewed it in the past as I had been told.
                  She included her branch manager in the communication with the local
                  office. The branch manager also witnessed everything that happened at
                  this juncture. The response she got was that the partnership agreement
                  and accompanying Contractor bank statements were acceptable, and
                  that HUD would be issuing a letter forthcoming that would change the
                  requirements for partnership agreements shortly. For now, everything
                  was okay until the changes came about.

  Not Blaming     I am not suggesting here, nor would I ever suggest, that HUD
  HUD             somehow should have been able to intuit what was actually happening.
                   I am not pointing out these events to castigate HUD in general or the
                  local HUD office specifically. In retrospect they, like we, could only
                  respond to what was seen, not what was invisible. These events all go
                  to the question of whether or not I, and Legend Mortgage, followed
                  HUD regulations as we knew them, and whether or not we acted
                  prudently. But, I do wonder why I would ever be made more liable?

                  I will also point out that there are many things that have changed since
                  these past events as far as my experience with the local HUD office is
                  concerned. The staff at the local HUD office has become extremely
                  accessible to me. They are very willing to answer questions and engage
                  in a dialogue on various 203(k) (and other) issues. The office has
                  provided valuable guidance, and continues to assist in creating daily
                  definitions for our pursuits. I do not believe that the local office could
                  ever have fully known the ramifications of the use of partnership
                  agreements in conjunction with Dollars Express. All of us were duped


98-CH-221-1004                        Page 84
                                                                             Appendix C

                as a result of an extremely well hidden agenda. But, I must ask again,
                "Why would I ever be held more liable?"

                The Mortgage Now underwriter still seemed uncomfortable to me. She
                did not like partnership agreements regardless of what HUD had said.
                I was left with no formal reason to reject the loan. Neither was the
                underwriter. On one hand, HUD had said okay. On the other, the
                underwriter was not at ease. I was not about to push it, because I saw
                this. I told her to drop it. I would not ask her to approve it, even
                though there was no factual basis to deny it, and I would not hold it
                against her or Mortgage Now. This would not affect our future
                business relationship.

Written HUD     The letter, which I believe eventually resulted directly from this event,
Confirmation    is attached (see Exhibit #5). The letter describes that a detailed
                description of the investment strategy had been provided to HUD by
                Dollars Express, and that essentially, HUD was clearly defining what
                would be required on applications taken after September 1, 1995. I
                was relieved when I read it. HUD had, in writing, reviewed and
                responded to the entire issue. HUD had looked into everything. HUD
                would have had the opportunity to question anything that was unclear
                or suspect. There was no greater evidence I could ever ask for to
                confirm that all that had been done in the past as far as partnership
                agreements were concerned had been acceptable. Unambiguous,
                written definitions were provided for the future.

More Direct     The Borrower C loan was then sent to Malone Mortgage Company. I
Communication   had a good working relationship with the senior FHA underwriter. The
with HUD        senior FHA underwriter was already well aware of the volume of
                203(k) loans at Carl I. Brown and Company with Dollars Express, an
                awareness that most of the 203(k) lending community in the area had.
                She was very interested in looking into the loan and the issue. I spoke
                to her about our mutual desire for her to contact the local HUD office,
                explain the matter thoroughly, and describe exactly what
                documentation was present so that compliance could be absolutely
                insured.

 More Verbal    The senior FHA underwriter was, as I was, extremely focused on being
 HUD            as precise, as detailed, and as thorough as possible with her discussions
 Confirmation   with HUD. We both were well aware of the idea that since the
                partnership was an unusual matter, it was absolutely imperative to
                approach this issue with 100% certainty. Neither one of us wanted to
                be dealing with an insuring issue down the road (which is precisely
                what I am doing now). Accordingly, we discussed several times prior
                to her making contact with HUD, the absolute importance of being
                thorough and accurate. We also discussed the absolute need of


                                    Page 85                                  98-CH-221-1004
Appendix C

                  documenting the discussion, whatever the results were. She reviewed
                  the recent letter from HUD regarding partnership agreements and made
                  the call.

                  The results of that telephone call are attached (see Exhibit #6). There
   More Written
   HUD            really is not much to say because the documents speak for themselves.
   Confirmation   I am absolutely certain that every issue regarding the partnership
                  agreement and required documentation was discussed. The senior
                  FHA underwriter and I discussed in advance the vital importance of
                  going over each and every documentation issue related to partnership
                  agreements. She maintains that to this day that this is what she did. I
                  am confident there was no requirement made by HUD to verify the
                  initial investment made into the partnership by the Borrower. The
                  credit file exhibits, as well as her later written confirmation, clearly
                  speak to the idea that the down payment was coming from the
                  Contractor's account. Other than what was in the credit package, no
                  other documents were needed. I am confident I did everything within
                  my abilities, and more than most would have done or would have
                  thought to do, to act prudently in insisting on and directing clear
                  communication with HUD on these matters, and responding
                  accordingly.

   Clear          The questions to HUD were clear, precise, and simple. Are partnership
   Questions      agreements allowable on FHA loans? Is the form of this partnership
   Clear          agreement acceptable? What precise documentation is needed since I
   Answers        have never dealt with this before? All I have for funds verification in
                  this file is bank statements from the Contractor, is that okay? Is
                  anything else needed? Is HUD going to insure this loan? I am going to
                  make notes in our file pertaining to this discussion, etc., etc.

   Prudence in    In August of 1995, I had every financial incentive to not break the
   Lending        circle that was present at Carl I. Brown and Company. I could very
                  easily have continued closing loans there. They had not yet stopped
                  doing business with Dollars Express. I could very easily have left them
                  there, not moved outside, not made these attempts to communicate
                  with HUD, and generated a lot of fee income in the process. I sought,
                  and achieved, a meaningful dialogue with the Department through the
                  channel they had expressed a preference for, the FHA underwriter. The
                  dates, facts, circumstances, financial incentives, and records speak for
                  themselves.

                  In pursuing confirmation outside of the circle that had formed, in
                  pushing things in this direction, I believe I can say reasonably that I was
                  the only person in the entire Dollars Express fiasco that tried to break
                  up the circle at Carl I. Brown and Company, and speak to HUD
                  through other underwriters outside it. There is only one possible


98-CH-221-1004                        Page 86
                                                                             Appendix C

               conclusion that can be drawn as a result, the conclusion that also
               represents the truth. My incentive and motivation came from my desire
               to follow HUD guidelines and exercise prudent lending practices.

               I made every effort to proceed in accordance with HUD requirements
               with regards to partnership agreements. Every other incentive around
               me led in directions that did not include making the efforts I made. It
               was not financially beneficial to pursue what I felt was necessary and
               responsible. It was not comfortable procedurally to do what I did
               either.

Scam is        The Borrower C loan was closed. We kept working on the loans we
Exposed        had. Shortly after that time, I was told that the Contractor had been
               making all of the payments on the loans, which had now accumulated
               to around fifty or sixty thousand dollars a month. There may be
               coming difficulties with making the payments, because the Contractor
               did not have that kind of income stream.

               I canceled my business with the Contractor the moment I heard it. It
               was like a lightning bolt which instantly lit the landscape around me for
               an instant. It was a house of cards that was going to collapse. I knew
               it instinctively. It was a pyramid scheme with a finite end, one that
               would have many victims left in its wake. I informed the Contractor
               that our business together was over. I immediately rejected every
               Borrower's loan file that was in the theater of Dollars Express. I
               canceled loans that were already approved. I stopped closings that
               were already set up, even those that did not involve partnership
               agreements. The companies that had approved these loans were
               baffled. HUD has already checked out these loans, what's the problem?
               Let's close. What are you doing?

               I shut it all down as fast as I could make a telephone call. The invisible
               wall had come down, and I saw the beginnings of what was on the
               other side of it. I knew that scores of loans could default. I saw this as
               potentially one of the largest HUD disasters in the country. I had never
               before witnessed, or even heard of, anything of this scale. One of my
               earliest thoughts was that it was likely one of the Borrowers was going
               to kill the Contractor, or arrange for his assassination. The south side
               of Chicago can be a rough place that operates with it's own system of
               justice.
What Did
Happen
               While the audit attempts to speak to what the auditors think did
and What Did   happen, it clearly does not speak to what did not happen. The loans
Not            that did not close, the transactions I intentionally delayed so that I
Happen         could get a clear confirmation from HUD, the deals that I ultimately
               prevented from consummating, are all together as strong an indicator as


                                   Page 87                                   98-CH-221-1004
Appendix C

                 there is in illustrating that I, and my company, made every effort to act
                 prudently and on HUD's behalf as well as our own. The auditors
                 looked at what did take place, but could not see the ramifications of
                 what did not take place.

                 It is as important to evaluate the actions I did not take as it is to
                 evaluate the actions I took. I could have shuttled thirty or forty loans
                 through Carl I. Brown and Company and made a quarter of a million
                 dollars in the process. There was no evidence that anything was afoul
                 at that point. There were no defaults, no clear problems, and ample
                 and reasonable confirmation from HUD to proceed with closings.
                 There literally had not been one single complaint, ever, from any
                 Borrower on any issue. There were no complaints from any of the
                 lenders involved. There were no complaints for HUD. Had I not
                 delayed these loans, had I not taken a determined position to seek
                 further confirmation, the entire loan debacle and the resulting damage
                 would have ultimately been significantly increased. What else could I
                 have done?

   Uncompleted   Rumors began to circulate concerning the appraiser, Dollars Express,
   Rehab Work
                 and rehabilitation work that was never done. I began to see more of
                 what was on the other side of the wall. I remembered back to when I
                 had requested an opinion, at the very beginning, from the underwriting
                 department at Carl I. Brown and Company, during the time I was still
                 employed there. I asked whether or not it was appropriate for an
                 individual to function as both appraiser and plan reviewer.

                 Our parent company, via its national 203(k) coordinator, advised us
                 that there was no conflict here, and that HUD did not have a problem
                 with this. We were advised to use the company's staff appraiser for
                 plan reviews and 203(k) appraisals rather than our own selections,
                 because he was familiar with the area and was better equipped to
                 handle the volume. From a cost and profitability standpoint, use of the
                 staff appraiser would also help to defray the cost of his salary and other
                 related expenses.

                 It was rather reluctantly, one could even say under protest, that we
                 used him, since we had previously experienced problems with his lack
                 of timely and efficient performance the prior year. Since that time, we
                 had not used him on any branch appraisals. I had actually fired him at a
                 previous point in time for his incompetence and irresponsibility. But
                 the message from our corporate office was that the appraiser had
                 turned a new cheek, and had come back to life as a competent
                 appraiser/consultant because of the 203(k) program. We loyally
                 followed the corporate line of thinking, and helped them to facilitate
                 their agenda by using him again.


98-CH-221-1004                       Page 88
                                                                            Appendix C


Appraisals     If there were inflated appraisals, if the values were too high in HUD's
               eyes or the eyes of a review appraiser, then I was unaware of the
               problem. I know that different pockets in the vast inner city of Chicago
               can experience varying values based on neighborhoods and a whole
               host of various characteristics. I also saw many appraisals that came in
               below the initial target value the Contractor anticipated, which
               therefore gave the appraisals credibility in my mind. I was unaware
               appraised values were inflated from HUD's perspective, and cannot and
               will not begin to address whether this assessment is valid or not. I am
               not an appraiser, and do not have the technical ability to underwrite
               appraisals. My company, and I, relied completely on the FHA
               appraiser and the FHA underwriter to review appraisals and the values
               reflected therein. In the area of appraised values, we leave decisions
               and evaluation to more experienced minds and eyes. This is a common
               and prudent lending practice.

               When I became Legend Mortgage Company, the wholesale office
               offered their staff consultant/appraiser, to correspondents as a Service
               on 203(k)’s. The Contractor insisted he be used, since he was both
               familiar and responsive. Since no problems were perceived at that
               point, I had no reason to discourage this approach. Indeed, it appeared
               that the appraiser's work had improved dramatically. The appraiser
               was seen as an ever-present fixture at the Dollars Express office. Also,
               there were many occasions that arose when, by the time I had the loan
               referred to me, I was told that this consultant/appraiser had already
               reviewed the project because it had been previously anticipated that the
               loan would go to Carl I. Brown and Company. It was only because of
               poor service in the processing area that the decision had been later
               made to refer the loan to Legend.

Construction   My company generally handled the entire construction draw process on
Draws          all 203(k)’s we originated. We collected, forwarded, and recorded all
               attendant lien waivers, construction permits, inspections, and checks so
               that we could control and oversee the disbursements. However, on the
               loans we sold to Carl I. Brown and Company, Legend was taken out of
               the loop. Since the Contractor and the 203(k) staff at Carl I. Brown
               and Company's corporate office were accustomed to one another
               because of the vast volume of projects, the Contractor went directly to
               Carl I. Brown and Company for draws without involving me. I was
               never involved with any of these procedures on any of these loans.

               I believe this area is another example of how the audit fails to properly
               segregate findings. In the case of each loan outside of Borrower C, I
               and my company were never involved in any of the inspections or draw
               processes. Because the three loans had been assigned to Carl I. Brown


                                   Page 89                                  98-CH-221-1004
Appendix C

                 and Company as lender, and because Carl I. Brown and Company
                 entirely and fully handled the construction draw processes, Legend
                 Mortgage was not in any way, shape, or form involved with this aspect
                 of the 203(k)’s. It is inappropriate for these findings to appear in the
                 scope of an audit relating to my company and me because the presence
                 of these findings implies malfeasance on my company's part.

                 In retrospect, had the use of the staff consultant/appraiser not been
                 mandated initially, our involvement in the Contractor's deals would
                 likely have been terminated from the onset. The entire setup, as we
                 now know it, would never have worked for the Contractor. The only
                 loan where Legend was involved in the draw procedures was the only
                 transaction closed outside of the Carl I. Brown and Company circle,
                 which was Borrower C's. This fact was evidenced in our files.

                 Although the auditors could not confirm all work was completed under
                 the Borrower C 203(k) because of vandalism, they were able to
                 confirm that the property had been completed according to the 203(k)
                 specifications ultimately. I have no doubt that the property was
                 completed properly during the 203(k) inspection process because I had
                 directed use of a plan reviewer other than the appraiser. I also feel this
                 is a noteworthy illustration of my prudent attempts to break the circle
                 at Carl I. Brown and Company, which produced more positive results
                 in turn.

   Forged        Borrower C evidently shared in his interview with the auditors that he
   Signatures    had his name forged on the inspection performed, and that he himself
                 had never visited the property. Without being repetitive and belaboring
                 previous observations I have made, I will simply say that I had no
                 knowledge of any forged signatures. I also had no reason to believe
                 that signatures had been forged.

                 This is also true, obviously, of any and all forged signatures that
                 occurred in relationship to any of the Dollars Express loans. No one
                 caught them, myself or anyone else. If we had, I have no reason to
                 believe, based on all that I have shared here, that the Borrower would
                 have confirmed their signature had been forged. Based on their
                 arrangement with the Contractor, they likely would have said let me
                 call you back, and proceeded to get direction from the Contractor. The
                 agreement between the Borrower and Contractor obviously included a
                 system of checks and balances involving what was communicated to
                 whom when, which actively prevented others from seeing what was
                 behind the invisible wall.

                 Like the partnership and lease agreements we received I, along with
                 everyone else, had no reason to suspect they had been forged. You do


98-CH-221-1004                       Page 90
                                                                             Appendix C

               not throw red flags up when there is no reason to suspect anything is
               wrong, when there is no inkling or likelihood that a document is not
               real. In the course of processing any loan, it is common for a Realtor
               or a builder to fax through documents requested from the borrower.
               Real estate contracts, letters of explanation, lease agreements,
               paystubs, bank statements, and sometimes credit reports, all would be
               typical examples. Just as we would not be inclined to pick up the
               phone and ask the borrower, in a situation like this, whether they
               actually signed the contract, a lease, or a letter, we were not inclined to
               do so on these loans. There was no reason to even suspect the
               signatures were forged.

Actual         Since the partnership agreement was being provided by one of the
Partner        actual partners, there was further reason to accept it, because it no
Providing      longer was a third party document. The Contractor was a first party to
               the agreement. We also naturally assumed that the Contractor had the
               Borrower's permission to send it to us. This was true not only because
               of the Borrower's past track record of providing documents directly to
               the Contractor, but also because the Contractor was supplying an
               agreement that was his copy of an agreement that he had executed with
               the Borrower. In some ways, it was completely natural that, as a party
               to the agreement, as the partner, he could and would also be able
               provide the document to us. Similarly, if we receive a gift letter
               directly from a donor, a donor who is not our borrower, and the gift
               affidavit was signed by the borrower, we would have no reason to
               question the borrower as to the legitimacy of their signature, because
               the donor is also making a representation of their own that will be used
               in the context of the loan.

Applications   The draft of the audit findings and discussions with the auditors
and            themselves has continuously addressed the idea that the initial and/or
Partnership    final applications that the Borrowers signed did not illustrate the
Agreements
               partnership agreement as a source of funds. I have already made
               observations about circumstances where it is common for initial
               applications to reflect later additions or modifications during the
               process of originating and processing a loan, and I will not reiterate
               those thoughts here.

               The Borrower B loan does not reflect the partnership agreement under
               source of funds on the initial loan application. It is clear that when the
               initial application took place, partnership funds were not part of the
               picture. The loan was initially submitted sometime before 5-27-95 (the
               date of the underwriter's approval) because there is a processor's
               certification to the underwriter concerning Borrower B's Kemper stock
               fund that was dated 5-495 regarding an underwriting condition #59.
               Evidently, the loan was first underwritten prior to the second and final


                                   Page 91                                   98-CH-221-1004
Appendix C

                 underwriting. Neither the initial underwriter's review sheet or the initial
                 underwriting conditions appear in the file, the reason for which escapes
                 me. It appears that the initial underwriter was questioning cash needed
                 for closing, and more than likely one of the options the underwriter was
                 looking at was evidence that the stock account had been liquidated.

                 I am assuming the Borrower and/or the Contractor was advised that we
                 would need evidence that the stock account was cashed in.
                 Subsequently our office received a fax of a partnership agreement
                 between Borrower B and Dollars Express. We had no reason to
                 suspect this was at all problematic, for all the reasons I have previously
                 described. The agreement was then forwarded to the underwriter, who
                 forwarded an approval without further requirements. The underwriter
                 did not make any requirement to change the 1003, the final application,
                 which would be signed by the Borrower at closing. Neither
                 underwriter nor processor added the item to the final application.
                 Assuming that it is a requirement for the partnership agreement to
                 appear on the initial or final 1003, this circumstance was obviously a
                 last minute oversight on the part of both my office and the underwriter.
                  I do not believe it is a material oversight, based on all I have shared
                 here.

                 Both the Borrower A and the Borrower C initial applications reflect the
                 partnership agreements. There is no reason for me to engage a debate
                 on whether or not the partnership agreement appeared at the time that
                 they signed them. As matter of record, I fully believe that the initial
                 applications did contain this information at the time that they were
                 signed. I have reviewed them again and tried to put myself back at that
                 place and time in my memory. I used the term "gift from partnership"
                 on Borrower A's initial application because I remembered Borrower B's
                 partnership agreement, and the absence of any other documentation
                 requirements outside of the agreement itself. I also recall that I
                 reflected the partnership agreement and a $15,000 amount on the
                 document prior to the face-to-face applications taking place because
                 the question came to my mind as to what dollar figure would be
                 appropriate to reflect. Would I use the amount reflected on the other
                 agreements that described initial partnership investment, or would I use
                 my estimate for what was needed at closing? Believing that it would be
                 safer to use the higher amount for application purposes, I used the
                 $15,000 number. The issues I considered at the time strengthen this
                 memory.

                 The audit findings claim that, in the case of Borrower A's loan, I had
                 stated that I would have had no knowledge of the partnership
                 agreement prior to the agreement being foxed to our office. That is not
                 true in the case of Borrower A's loan, and I do not recall ever saying


98-CH-221-1004                       Page 92
                                                                             Appendix C

               that. It would have been true on Borrower B's loan though. Maybe
               the auditors and I got our wires crossed here. The probability is that,
               based on the initial review of Borrower A's credit package given to us
               from her through Dollars Express, discussions would have taken place
               regarding source of funds to close. I would have been told there was a
               partnership agreement when I pointed to a potential shortage of funds
               to close.

               In any case, the Borrower C final application that was signed at closing
               did reflect both the partnership agreement and the dollar amount, so the
               question becomes moot on that loan. Borrower C's final 1003
               application reflected the existence of the partnership agreement and the
               corresponding amount. I assume he read his closing documents. He
               did not question it or object to it. He was given the opportunity to
               speak to it if he felt compelled to. Because of the Contractor's
               fraudulent representations to the Borrowers, there would not have been
               a reason or likelihood for a Borrower C to point out something like
               this. Nor would there have been a reason or likelihood for any other
               Borrowers to do so.

               The underwriter did not require the partnership agreement to be added
               to the final 1003 on the Borrower A loan. If Borrower A maintains a
               specific recollection of the absence of the partnership agreement on her
               initial application, a recollection which I find incredible and one that I
               disagree with in terms of probability, then if the Inspector General's
               office can direct me to an appropriate forensic laboratory, I can sponsor
               an analysis of the original document. If this disagreement, or this issue,
               is central to HUD's evaluation of me and my company, then modem
               science should enable a precise determination of the matter.
               Notwithstanding, for all the reasons I have previously cited, I believe
               this question is largely irrelevant in terms of drawing the conclusion
               that my company and me acted prudently, and in accordance with HUD
               requirements.
Borrower D’s
Loan           In the case of Borrower D, the only loan examined in the audit without
               a partnership agreement, there are two central issues needing to be
               addressed. First, as to the presence of a falsified lease agreement, I had
               no reason to believe the lease was manufactured or forged. Like other
               documents, I assumed the Borrower's signature and the Contractor's
               possession of the document was adequate confirmation that the
               delivery of the lease to us from the Contractor implied the Borrower's
               permission for the Contractor to do so. This was a standard pattern all
               along. We had no reason to believe it was not valid.

               The initial signed loan application reflects the lease amount. I will not
               debate whether or not it was added at a later time and am again amazed


                                   Page 93                                   98-CH-221-1004
Appendix C

                 at the incredible memory the Borrower demonstrates in precisely
                 recalling that this section was incomplete three years later. In any
                 event, the final 1003 application did reflect the lease agreement and the
                 corresponding monthly lease amount. The Borrower did have ample
                 opportunity to review this information in connection with the loan
                 closing and point out it was in error. If the Borrower did see it, at any
                 point in the process, I will suggest again that he would not have
                 pointed it out because of the agreement between the Contractor and the
                 Borrower.

                 With respect to the issue of verifying assets to close on Borrower D's
                 loan, I share the view that the auditor's have on this loan. It clearly was
                 in error for the 401-K plan not to have been more closely scrutinized in
                 terms of its value and remaining balance. My processing staff, the
                 underwriter, and I all missed the boat. The initial application reflects a
                 larger balance in the savings plan than eventually turned out to be the
                 case. It was unclear whether or not this account was a savings account
                 or a 401-K from the onset. A pre-tax loan payment against a 401-K
                 appeared on the paystub. The proper identification of this account, as
                 well as a detailed investigation of the remaining balance, did not fully
                 take place after the loan application was taken. If income tax
                 ramifications should have been accounted for, they were not properly
                 taken into consideration.

                 Clearly, the underwriter had no issue with what was presented in the
                 file, as there were no further approval requirements made. We gave the
                 underwriter our complete credit file, knowing that her approach may or
                 may not agree with ours, aware that there could be further
                 requirements. Obviously, there were none on this loan. If there had
                 been, we would have requested more documentation or performed
                 more analysis in an attempt to comply. I do not pre-underwrite loan
                 files, nor do I re-underwrite them after an underwriter has reviewed
                 them. The file was neither processed nor underwritten as required by
                 the 4155 in the area of using 401-K funds for closing.

                 I will point out that, in retrospect, the income tax ramifications could
                 have been avoided in terms of valuing the assets needed to close. The
                 auditors point to the idea that the remaining balance in the 401-K,
                 minus resulting income taxes if cashed, did not come up to the amount
                 needed to close. If the underwriter had required that the Borrower
                 provide evidence that a loan had been taken out against the 401-K in an
                 amount needed to close, a balance that was available in the account on
                 this particular loan, then HUD requirements would have been met.
                 There would not have been income taxes due, and the resulting loan
                 obligation would not have been counted against the Borrower's
                 qualifying. Therefore, there would not have been a shortage of funds in


98-CH-221-1004                       Page 94
                                                                             Appendix C

               the account. In any case, this was not done either. It was an
               unintentional omission of unknown information. It was an honest
               mistake, both the Underwriter's and ours.

Chain of       The final mechanical issue I need to address relates to the chain-of-title
Title          requirement in relationship to the Borrower C loan. I agree with the
Requirements   auditors that Mortgagee Letter 95-40, which requires that the lowest
               sales price within the previous year be used for 203(k) maximum
               mortgage calculation purposes, went into effect on September 13,
               1995. The appraisal was completed 6-3-95. The initial loan
               application and 203(k) maximum mortgage worksheet was completed
               on 8-25-95, prior to the effective date of the Mortgagee Letter.

               The Mortgagee Letter does not speak to how the new requirement
               applies (i.e. loan application date, appraisal date, approval date, or
               closing date). I will not attempt to interpret the meaning of the
               requirement as it appears in Mortgagee Letter 95-40, I can only point
               to the idea that the timing between the application, worksheet, and
               Mortgagee Letter is significant. Malone Mortgage could well have
               referred to the date on the application, appraisal, and worksheet, and
               concluded no title search was required based on the wording of the
               Mortgagee Letter. They may not have received the Mortgagee Letter
               until some time after September 13. They may not have understood its
               contents completely, and like other lenders, needed clarification of it so
               they could implement it properly. When HUD implemented the chain-
               of-title requirement, many lenders did not understand it fully, myself
               included. But I can't speak for Malone's underwriters on these matters,
               I can only point to possibilities.

               In general, the FHA underwriter will make these requirements if
               needed, and the underwriter made no requirements in this case. Also
               wholesale lenders, like Malone Mortgage and Carl I. Brown and
               Company, perform the chain-of-title research when mortgage brokers
               submit 203(k)’s to them, since they want to insure compliance
               themselves. They do not rely on the mortgage broker in general for
               this research. This is true in the Chicago area at least. As a result,
               Legend Mortgage does not run title reports to satisfy the chain-of-title
               requirement, because we know our efforts would be duplicative.

The            One of the comments made to me by the auditors was that they were
Aftermath
               surprised that I had not called the Borrowers, or talked with them, after
               the Dollars Express fiasco became known. Once the facts of the scam
               became known, once the invisible wall had dropped, it was evident to
               me that the Borrowers had been severely wounded by the Contractor.
               I did not feel it was appropriate to point out the obvious to them and to
               share my regrets, just like I would not feel comfortable going to visit a


                                   Page 95                                   98-CH-221-1004
Appendix C

                 car wreck victim right after a crash occurred, when that victim was
                 surrounded by family and doctors. It did not seem appropriate or
                 timely for me to inject myself into the middle of it. They were in a lot
                 of pain. I felt like they were probably in shock and disbelief, were in
                 the process of trying to get their arms around the damage and the
                 ramifications of it all, and were exploring possible responses or
                 remedies.

                 What had happened was obvious. What was there to say? I was aware
                 that there were lawsuits beginning to be filed, because foreclosures
                 were rapidly approaching. I knew that a legal morass was potentially
                 underway. During this time, I did not even know if it was legally
                 appropriate for me to communicate with them. Legend Mortgage
                 Company was never, at any time, named in any suit brought by any
                 Borrower. We were never drawn into any legal conflict. I always
                 believed, and continue to believe to this day, that I and/or my company
                 were never named or brought into any suit because we acted prudently
                 and responsibly throughout. I also assumed the Borrowers saw this
                 was true, remembered my involvement and meetings with them, and
                 knew I had been duped right along side them.

                 I did communicate with the Contractor's partner, who called me a few
                 months after the train came off the tracks. He was courteous and
                 genial towards me, and shared that he was not associated with the
                 Contractor anymore. He could not believe the fraud that had been
                 perpetrated on his family members, who now nearly disowned him for
                 involving them with Dollars Express. I remember his Cadillac was
                 being repossessed the day he called. And his wife was trying to
                 communicate to their various family members and Carl I. Brown and
                 Company to look for solutions to the crisis.

                 He asked if I could speak to any of the other independent 203(k)
                 investors or non-profit organizations that my company was working
                 with, so that they could look at the idea of potentially purchasing some
                 or all of the properties involved with the scheme. I told him I felt sorry
                 for his situation with his family, and explained that I would help any
                 way I could. Over the ensuing days, I spoke with his wife because he
                 appeared to be emotionally incapacitated by it all, and was fearful of
                 answering his phone personally because so many people were
                 extremely angry. I performed a rough analysis of the property portfolio
                 she brought to me. It became very clear, almost right away, that there
                 was no possibility of selling the properties because of the outstanding
                 indebtedness that had been styled by construction draws for work that
                 was never done. She thanked me for my effort and understanding. I
                 wished her and her family well, and asked her to give my best to any ---
                 ----------- involved with all of this.


98-CH-221-1004                       Page 96
                                                                          Appendix C


Hidden Value   What value was hidden in all of these events? How did our experience
               with Dollars Express help us? We all learned: me, my company,
               various other mortgage companies, underwriters, appraisers, plan
               reviewers, HUD officials, even auditors. Since these events occurred,
               we gained invaluable understanding of things to watch out for in the
               theater of 203(k) lending. I hope we can smell a rat a mile away now,
               because we know what to look for. I hope we are more familiar with
               the subtle signals, and more attuned to the faint warning signs. We
               look beyond the apparent, beyond the obvious, and beyond
               appearances carefully and regularly. We learned new disclosure
               techniques, new origination practices, and above all, gained the
               knowledge that a mortgage company engaged in 203(k) lending must
               ultimately control every aspect of the entire project, start to finish.

Statistics     Since Legend Mortgage Company opened in April 1995, it has closed
               598 FHA loans. Over ninety five percent of our business is FHA. Out
               of those 598 loans, 278 are FHA 203(k) rehabilitation loans. 47% of
               our entire FHA loan production is 203(k). The local HUD office tells
               me that we are by far the most active 203(k) originating lender in the
               state, probably the Midwest. Based on statistics I have had glimpses
               of, we may be the most active 203(k) originating office in the United
               States. Through viewing these statistics, one can see clearly that
               Legend Mortgage Company is, at its very essence, an FHA 203(k)
               lender.

               I have also heard of general statistics concerning FHA 203(k)
               delinquencies throughout the United States when I have attended
               various FHA seminars and symposiums. If I look at the delinquency
               rates on the FHA 203(b) and FHA 203(k) loans that Legend Mortgage
               Company has produced over a three year period, then I can see that we
               are performing at a level that is significantly below the national
               averages I have heard of. Our loans are performing, and our 203(k)
               loans are faring well.

Delinquency    As part of my response to the audit findings, I am formally requesting
Evaluations
               that the most recent delinquency data available to the Department on
               Legend Mortgage Company be pulled and compared to the most recent
               delinquency data available for both FHA 203(b) and FHA 203(k) loans
               on a national basis. Based on the precise numbers and percentages I
               have provided, the Department can get a crystal clear picture of our
               overall performance as an FHA correspondent, especially with respect
               to 203(k).

               There is no better evaluation possible that will clearly speak to our
               concern for following FHA guidelines and exercising prudent lending


                                  Page 97                                 98-CH-221-1004
Appendix C

                 practices. At the risk of sounding self-congratulatory, I am both very
                 proud and humbled that Legend Mortgage has become one of the finest
                 FHA 203(k) operations in the country, if not the finest. I am very
                 proud of our work in 203(k), and have chosen to share some articles
                 that have been written which includes us (see Exhibit #7). Our
                 statistics will speak for themselves in this matter. I feel they need to be
                 seriously looked at and considered in the context of this audit, and am
                 formally requesting that this type of evaluation occur.

   Legend        I also believe that it is safe to say that our local HUD office informally
   Mortgage      recognizes Legend Mortgage as a leader in the local 203(k)
   Company       marketplace. We enjoy an excellent relationship with the local HUD
                 office, and have worked hard to earn their respect as an honest and
                 knowledgeable 203(k) lender. As only one example, when the escrow
                 commitment aspect of the 203(k) loan evaporated, and the program no
                 longer could be used to facilitate no down payment re-sales, I worked
                 closely in conjunction with the local HUD office to explore different
                 approaches that would allow us to continue effective work in the low-
                 to-moderate income community.

                 Because Legend Mortgage Company, I am told, works with more
                 nonprofit organizations, churches, towns, cities, municipalities, and
                 housing authorities than any other lender in the Illinois 203(k) theater,
                 we are also indirectly involved with the purchase of scores of HUD-
                 owned properties on an ongoing basis. Through this credibility and
                 track record, we were able to successfully seek the Department's
                 approval to allow the organizations we work with to gift all funds
                 needed to low-to-moderate income residents to purchase a Direct-Sale
                 originated, fully rehabbed property from them. We provided both the
                 necessary impetus and regulatory background needed to implement this
                 effort.

                 As a result, homeownership has been accessed by dozens of families
                 who otherwise would have been denied. I am attaching the most recent
                 listing of "zero-down" properties that our company provides to
                 hundreds of real estate organizations and non-profit groups in
                 Chicagoland on a monthly basis (see Exhibit #8). As far as we know,
                 out of the 112 properties that appear, 64 have sold and closed. Since
                 our delinquency rates generally include these "zero-down" transactions,
                 Legend's FHA portfolio performance also implicitly rejects the theories
                 of critics who argue that a cash investment from a first-time homebuyer
                 is an indispensable component of loan performance. These are the
                 same critics who preferred to see the escrow commitment feature of
                 203(k) done away with.

                 Legend Mortgage Company is a living, functioning testament to the


98-CH-221-1004                       Page 98
                                                                           Appendix C

            ideas that 203(k) can work successfully on a volume basis, that the
            203(k) loan can be properly administered and controlled by a lender,
            that non-profit groups can participate in FHA 203(k) with integrity, and
            that low-to moderate income families can realize homeownership
            without a cash investment and still perform on their mortgage loan.
            And in the process of demonstrating these ideas through our non-
            negotiable statistics, we illustrate our prudent approaches to FHA
            lending.

            With God's grace, Legend Mortgage Company has also been able to
            participate in a Christian marriage ministry based in Phoenix, Arizona
            called Life Partners. Legend has been able to share gifts of financial
            support, a computer network system, a sophisticated laptop computer
            for visual presentations, and the recent development of a Web Site for
            the ministry. The ministry focuses on men learning to become more
            understanding towards their wives and families. In the area of housing,
            Legend has been able to help stabilize families through assisting in
            creating a new physical living space, and through this ministry has been
            able to reach deeper into the hearts of families.

A Request   I would also like to be able to request that ---------- of the Chicago
            HUD office is given a copy of this audit response. She has been
            instrumental in helping to guide us. She has helped us to learn and
            grow. I would like her to share in this dialogue concerning Dollars
            Express. She is very familiar with the issues, and knows us well
            through our work. I have not enjoyed being placed in a position
            throughout this entire audit process that appears to put us at odds. I
            have the highest level of respect for her and trust that she will approach
            these matters in a balanced and even fashion. The audit findings point
            to the idea that had all been properly disclosed to her, she would have
            rejected the loans in question. I could not agree more. Had I known
            more, I would never have originated them. I do not believe we are at
            odds.

            I would also like to thank the reader of this text for bearing with me.
            These are complex matters that have required me to be lengthier than I
            anticipated. Forgive me for being long-winded.

Closing     In closing, I want to say that I hope that I have not portrayed critical or
            judgmental attitudes towards the Borrowers in the course of offering
            this historical account. I hope that I have not treated them harshly
            somehow in the course of this response. They were, and are still, the
            primary victims of the deception these loan files only begin to record.
            They will likely live out the rest of their lives with unrest because of it.
            I wish that I could have prevented this from happening to them. It is
            easy to overlook the human tragedy that has occurred here when


                                 Page 99                                   98-CH-221-1004
Appendix C

                 dealing with mechanical issues relating to loans. And it was a great
                 tragedy for all those who were touched by it.

                 I also hope that I have been helpful in terms of shedding new light on
                 the audit findings. Most of what I have shared here would not have
                 been evident to the auditors, who only had the benefit of documents in
                 a loan file and interviews that were not completely informed.

                 Thank you for the opportunity to dispel the negative conclusions of the
                 draft audit findings. Since clearly many people were involved in and
                 ultimately therefore also bear the responsibility for the types of
                 problems described in the audit findings, I hope that it will also be clear
                 that David Whitacre and Legend Mortgage Company cannot justly be
                 the focus of liability for them.

                 I, and Legend Mortgage Company, did act in accordance with HUD
                 guidelines, and demonstrated a high standard of prudent lending
                 practices all throughout the course of business involving the loans in
                 question, and in all of our dealings with Dollars Express.

                 I am hopeful that the Department will see this clearly now, and will also
                 see fit to resolve this audit in a manner that is fair, balanced, and
                 reasonable towards Legend Mortgage Company. Legend Mortgage
                 Company and I need to be able to continue what I believe is excellent
                 work in the area of FHA 203(k), and FHA lending in general.

                 Thank you for your consideration, and for the opportunity to respond.




98-CH-221-1004                       Page 100
                                                                               Appendix D

Distribution
Acting Assistant Secretary for Housing - Federal Housing Commissioner (2)
Acting Secretary’s Representative, Midwest
Director, Office of Housing, Illinois State Office (2)
General Counsel, G (Room 10214)
Field Controller, Midwest
Director, Field Accounting Division, Midwest
Assistant General Counsel for the Midwest
Director, Administrative Service Center 1
Assistant to the Secretary for Field Management, SC (Room 7106)
Chief Financial Officer, F (Room 10164) (2)
Deputy Chief Financial Officer for Finance, FF (Room 10164)(2)
Acquisitions Librarian, Library, AS (Room 8141)
Director, Office of Lender Activities and Land Sale Registration, HSL (Room 9146)(20)
Comptroller/Audit Liaison Officer, Office of Housing, HF (Room 5132)(3)
Director, Housing Finance Analysis Division, REF (Room 8204)
General Counsel, C (Room 10214)
Director, Internal Audit Division, FNMA, 3900 Wisconsin Avenue,
 NW, Washington, D.C. 20016
Director, Housing and Community Development Issue Area, U.S. GAO, 441 G Street, NW,
Room 2474, Washington, D.C. 20548 (2)
Director, Loan Guaranty Service, VA, Veterans Bldg, Room 365,
 810 Vermont Avenue, NW, Washington, D.C. 20420
Deputy Secretary (Room 10100)
Assistant Secretary for Congressional and Intergovernmental Relations, J (Room 10120)
Deputy Assistant Secretary for Public Affairs, W (Room 10220)
Deputy Assistant Secretary for Operations, A (Room 10110)
Chief of Staff, S (Room 10000)
Director, Office of Budget, ARB (Room 3270)
Counselor to the Secretary, S (Room 10234)
Senior Advisor to the Secretary, S (Room 10222)
The Honorable John Glenn, Ranking Member, Committee on Government Affairs, United States
Senate, Washington D.C. 20515-4305
The Honorable Fred Thompson, Chairman, Committee on Government Affairs, United States
Senate, Washington D.C. 20515-4305
Ms. Cindy Sprunger, Subcommittee on General Oversight and Investment, Room 212, O’Neill
House Office Bldg., Washington D.C. 20515
Mr. Pete Sessions, Government Reform and Oversight Committee, Congress of the U.S. House of
Representatives, Washington D.C. 20510-6250




                                           Page 101                              98-CH-221-1004