jurisdiction: US

text: b'OFFICE OF AUDIT\nREGION 5\nCHICAGO, IL\n\n\n\n\n Allen Mortgage, Limited Liability Corporation,\n Single Family Housing Mortgage Insurance Program\n\n\n Centennial Park, AZ\n\n\n\n\n2012-CH-1015 September 30, 2012\n\x0c Issue Date: September 30, 2012\n\n Audit Report Number: 2012-CH-1015\n\n\n\n\nTO: Charles S. Coulter, Deputy Assistant Secretary for Single Family Housing, HU\n\n\n\nFROM: Kelly Anderson, Regional Inspector General for Audit, 5AGA\n\nSUBJECT: Allen Mortgage, LLC, Centennial Park, AZ, Did Not Comply With HUD\n Requirements for Underwriting FHA Loans and Fully Implement Its Quality\n Control Program in Accordance With HUD\xe2\x80\x99s Requirements\n\n Enclosed is the U.S. Department of Housing and Urban Development (HUD), Office of\nInspector General\xe2\x80\x99s (OIG), final report of our audit of Allen Mortgage\xe2\x80\x99s Underwriting of FHA-\nInsured Loans.\n\n HUD Handbook 2000.06, REV-4, sets specific timeframes for management decisions on\nrecommended corrective actions. For each recommendation without a management decision,\nplease respond and provide status reports in accordance with the HUD Handbook. Please furnish\nus copies of any correspondence or directives issued because of the audit.\n\n The Inspector General Act, Title 5 United States Code, section 8L, requires that OIG post its\npublicly available reports on the OIG Web site. Accordingly, this report will be posted at\nhttp://www.hudoig.gov.\n\n If you have any questions or comments about this report, please do not hesitate to call me at\n(312) 353-7832.\n\x0c September 30, 2012\n Allen Mortgage, LLC, Centennial Park, AZ, Did Not\n Comply With HUD Requirements for Underwriting FHA\n Loans and Fully Implement Its Quality Control Program\n in Accordance With HUD\xe2\x80\x99s Requirements\n\n\nHighlights\nAudit Report 2012-CH-1015\n\n\n What We Audited and Why What We Found\n\nWe audited Allen Mortgage, Limited Allen Mortgage did not comply with HUD\xe2\x80\x99s\nLiability Company, a Federal Housing regulations, procedures, and instructions in the\nAdministration (FHA) nonsupervised underwriting of FHA-insured loans. Specifically, of\nlender. We selected Allen Mortgage for the 73 streamline refinanced loans reviewed, 23 (32\nreview based on its high default and percent) contained material underwriting deficiencies. 2\nclaim rate for the FHA-insured loans Allen Mortgage also allowed borrowers to (1) skip\nsponsored in Region 5. 1 Our objectives mortgage payments due on their previous loans and (2)\nwere to determine whether (1) Allen close their loans without paying settlement costs.\nMortgage complied with HUD\xe2\x80\x99s\nregulations, procedures, and instructions Further, Allen Mortgage (1) did not always ensure that\nin the underwriting of FHA-insured FHA case binders sent to HUD contained complete\nloans and (2) its quality control plan, as and accurate information, (2) provided mortgage\nimplemented, met HUD\xe2\x80\x99s requirements. services to borrowers, such as paying their mortgage\n payments, to prevent them from defaulting on their\n What We Recommend mortgages within the first six payments. 3 However, it\n sought reimbursement from the borrowers for the\n advanced payment, and (3) did not fully implement its\nWe recommend that HUD\xe2\x80\x99s Deputy quality control program in accordance with HUD\xe2\x80\x99s\nAssistant Secretary for Single Family requirements.\nrequire Allen Mortgage to (1) reimburse\nthe FHA insurance fund $811,163 for As a result of the improperly underwritten loans, the\nlosses incurred on eight loans, and for risk to FHA\xe2\x80\x99s Mutual Mortgage Insurance Fund was\nany future losses for $199,391 in claims increased by more than $2 million. Additionally, HUD\npaid on one loan, (2) indemnify HUD for lacked assurance that Allen Mortgage acted in the best\n11 loans with material underwriting interests of FHA borrowers. Also, the risk to the\ndeficiencies, and (3) implement adequate FHA\xe2\x80\x99s Mutual Mortgage Insurance Fund was\npolicies and procedures to address the increased due to the lack of assurance of the accuracy,\nissues cited in this audit report. validity, and completeness of its loan underwriting\n activities.\n\n\n\n\n 2\n A deficiency is considered material when it affects the loan\n1\n The region contains of five states: Illinois, approval decision.\n 3\nIndiana, Ohio, Michigan, Minnesota, and Loans that default within the first six payments are considered\nWisconsin. early payment defaults.\n\x0c TABLE OF CONTENTS\nBackground and Objectives 3\n\nResults of Audit\n Finding 1: Allen Mortgage Did Not Comply With HUD\xe2\x80\x99s Underwriting 4\n Requirements\n Finding 2: Allen Mortgage Did Not Ensure That It Provided Complete and 11\n Accurate Information to HUD and Borrowers\n Finding 3: Allen Mortgage Did Not Fully Implement Its Quality Control 15\n Program in Accordance With HUD Requirements\n\nScope and Methodology 19\n\nInternal Controls 21\n\nAppendixes\n A. Schedule of Questioned Costs and Funds To Be Put to Better Use 23\n B. Auditee Comments and OIG\xe2\x80\x99s Evaluation 24\n C. Summary of Loans With Underwriting Deficiencies 55\n D. Summary of Loans With Material Underwriting Deficiencies 56\n E. Narratives of Loans With Material Underwriting Deficiencies 57\n\n\n\n\n 2\n\x0c BACKGROUND AND OBJECTIVES\n\nThe National Housing Act, as amended, established the Federal Housing Administration (FHA), an\norganizational unit within the U.S. Department of Housing and Urban Development (HUD).\nFHA provides insurance to private lenders against loss on mortgages financing homes. The\nbasic home mortgage insurance program is authorized under Title II, section 203(b), of the\nNational Housing Act and governed by regulations in 24 CFR (Code of Federal Regulations)\nPart 203. In 1983, HUD implemented the direct endorsement program, which authorizes\napproved lenders to underwrite loans without HUD\xe2\x80\x99s prior review and approval.\n\nAllen Mortgage, Limited Liability Company, filed articles of organization pursuant to the laws\nof the State of Utah on May 23, 2001. The corporate office is located at 1675 South Berry Knoll\nBoulevard, Centennial Park, AZ. Allen Mortgage originates and underwrites loans, then sells the\nloans to lending institutions. It funds loans using a warehouse line of credit, on a short-term\nbasis, until the loans are purchased by investors. Allen Mortgage received approval as a Title II\nnonsupervised lender with HUD on August 2, 2001.\n\nFor the period October 1, 2007, through September 30, 2009, Allen Mortgage originated 2,205\nloans. Of the 2,205 loans, 960 (44 percent) were in default or claim status as of September 2010.\nOne of Allen Mortgage\xe2\x80\x99s underwriters manually underwrote 2,115 of the 2,205 loans. The\nmajority of loans originated and sponsored by Allen Mortgage were streamline refinances. 4\nAllen Mortgage outsources the quality control of loan production to its contractor, Tena\nCompanies, Inc.\n\nWe selected Allen Mortgage for review based on its high default and claim rate for the FHA-\ninsured loans sponsored in our region during the period October 1, 2007, through September 30,\n2009. For instance, its default and claim rate (the total defaults and claims as a percentage of the\ntotal loans originated for a mortgagee) for loans originated in the State of Michigan was 23.72\npercent, which was nearly four times the state average default and claim rate of 6.33 percent.\nThe audit was part of the activities in our fiscal year 2010 annual audit plan. Our objectives\nwere to determine whether (1) Allen Mortgage complied with HUD\xe2\x80\x99s regulations, procedures,\nand instructions in the underwriting of FHA-insured loans and (2) its quality control plan, as\nimplemented, met HUD\xe2\x80\x99s requirements.\n\n\n\n\n4\n A streamline refinance is a refinance of an existing FHA insured loan into a new FHA insured loan.\n\n 3\n\x0c RESULTS OF AUDIT\nFinding 1: Allen Mortgage Did Not Comply With HUD\xe2\x80\x99s Underwriting\nRequirements\nAllen Mortgage did not comply with HUD\xe2\x80\x99s regulations, procedures, and instructions in the\nunderwriting of FHA-insured loans. Specifically, for 23 of the 73 streamline refinanced loans\nreviewed (32 percent), it allowed borrowers to (1) skip mortgage payments due on their previous\nloans and (2) close on their loans without paying the amounts due at closing. It also did not always\ncorrectly calculate borrowers\xe2\x80\x99 maximum mortgage amounts or properly determine a borrower\xe2\x80\x99s\neligibility to streamline refinance an existing FHA-insured loan. This noncompliance occurred\nbecause Allen Mortgage failed to exercise due diligence in underwriting the loans and disregarded\nHUD\xe2\x80\x99s underwriting requirements. As a result of the improperly underwritten loans, the risk to\nFHA\xe2\x80\x99s Mutual Mortgage Insurance Fund was increased by more than $2 million.\n\n\n Allen Mortgage Allowed\n Borrowers To Skip Mortgage\n Payments\n\n Allen Mortgage allowed borrowers to skip mortgage payments for 17 streamline\n refinanced loans. For FHA case number 261-9338035, it was unable to provide\n documentation supporting that the borrowers\xe2\x80\x99 mortgage payments due on March 1\n and April 1, 2008, were paid before closing on the loan or that the borrower made\n the payments at closing. The borrowers\xe2\x80\x99 settlement statement revealed that the\n refinance loan closed on April 29, 2008. HUD prohibits lenders from allowing\n borrowers to skip payments. A borrower is either to make the payment when it is\n due or bring the monthly mortgage payment check to settlement.5\n\n For FHA case numbers 261-9338035 and 151-8704674, the borrowers were\n permitted to make mortgage payments that were due at or before closing, using\n personal credit cards, after their loans had closed and settled. According to HUD\xe2\x80\x99s\n requirements, delinquent mortgages are not eligible for streamline refinancing until\n the loan is brought current. 6\n\n Allen Mortgage Did Not\n Require Borrowers To Pay\n Funds Due at Settlement\n\n\n\n\n5\n HUD Handbook 4155.1, REV-5, paragraph 1-10(E)\n6\n HUD Handbook 4155.1, REV-5, paragraph 1-12(D)\n\n 4\n\x0c For nine loans reviewed, Allen Mortgage allowed the borrowers to close their\n loans without collecting the amounts that were due at settlement. 7 It allowed\n borrowers to provide personal postdated checks to close on their loans, instead of\n bringing the required funds to closing.\n\n For FHA case number 561-8818240, the borrower\xe2\x80\x99s settlement statement in the\n FHA case binder indicated that $1,927 was needed to close the loan; however, the\n loan closed without the borrower making the payment. Allen Mortgage allowed\n the borrower to provide two checks, dated November 15 and November 30, 2008,\n that totaled $3,848 to close on the loan, thus exceeding the required amount\n needed to close identified on the HUD-1 settlement statement in the FHA case\n binder by more than $1,900. However, the title company\xe2\x80\x99s settlement statement\n showed that the borrower needed $3,854 to close on the loan. The loan closed on\n October 27, 2008, and settled on October 31, 2008.\n\n Further, in reviewing Allen Mortgage\xe2\x80\x99s financial records, we determined that the\n borrower\xe2\x80\x99s bank returned the checks because the borrower did not have sufficient\n funds. Allen Mortgage did not provide additional documentation to support that\n the borrowers\xe2\x80\x99 checks had cleared for payment. The following table identifies the\n closing deficiencies for the nine loans.\n\n Loan HUD-1 Net\n Case closing settlement payment Payment Payment\n number date statement 8 amount 9 date method\n\n 151-8681596 4/23/2008 $1,219 $1,219 5/3/2008 Personal check\n\n 151-8570534 2/19/2008 $1,670 $1,670 3/29/2008 Personal check\n\n 261-9356573 2/21/2008 $1,112 $1,112 3/3/2008 Personal check\n 11/15/2008; Two personal\n 561-8818240 10/27/2008 $1,927 $3,848 11/30/2008 checks\n\n 581-3334641 2/21/2009 $803 $770 3/4/2009 Personal check\n\n 105-4322752 12/22/2008 $791 $791 1/12/2009 Personal check\n\n 493-8825894 10/25/2008 $1,263 $1,263 10/31/2008 Personal check\n Two personal\n 1/27/2009 checks (less the\n 292-5210194 1/12/2009 $403 $1,743 2/24/2009 refund)\n\n 491-9528744 5/16/2009 $586 $586 6/20/2009 Personal check\n\n\n\n7\n When loans are refinanced, the closing date is the date the borrower signs the loan documentation and the\nsettlement date is the date that the funds are disbursed to pay off the old loan and create the new loan.\n8\n In some cases, the amount collected from the borrower does not correspond with the amount due on the borrower\xe2\x80\x99s\nHUD-1 settlement statement (see finding 2).\n9\n The net payment amount equals the total amount collected from the borrower(s) minus any amount(s) refunded to\nthe borrower(s).\n\n 5\n\x0c HUD requires for each transaction that the lender estimate the settlement\n requirements to determine the cash required to close the mortgage transaction.\n The difference between the amount of the FHA-insured mortgage, excluding any\n upfront mortgage insurance premium, and the total cost to acquire the property,\n including these expenses, determines the cash needed for closing a loan eligible\n for FHA mortgage insurance. 10 Further, line 303 on the settlement statement\n must indicate either cash required from the borrower at settlement or cash payable\n to the borrower at settlement. 11 According to HUD\xe2\x80\x99s requirements, funds can be\n borrowed for the total required investment as long as satisfactory evidence is\n provided that the funds are fully secured by investment accounts or real property,\n other than the property being purchased. An independent third party must provide\n the borrowed funds. The lender or other interested third party may not provide\n such funds. 12\n\n Allen Mortgage Did Not\n Properly Determine a\n Borrower\xe2\x80\x99s Eligibility for\n Streamline Refinancing\n\n Allen Mortgage did not properly determine a borrower\xe2\x80\x99s eligibility to streamline\n refinance an FHA-insured loan. For FHA case number 151-8624264, the primary\n borrower on the previous loan died in February 2008. The coborrower refinanced\n and settled the new loan in March 2008, which was less than 1 month after the\n death of the primary borrower. HUD Handbook 4155.1, REV-5, paragraph 1-\n 12(D.9.b.), states that individuals may be deleted from the title on a streamline\n refinance only when (1) the assumption of the mortgage not containing a due-on-\n sale clause occurred more than 6 months previously and the assumptor can\n document that he or she has made the mortgage payments during this interim\n period or (2) following an assumption of a mortgage when a due-on-sale clause\n was not triggered and the assumption or quit-claim of interest occurred more than\n 6 months previously and the assumptor can document that he or she made the\n mortgage payments during this time.\n\n The coborrower did not demonstrate the ability to make mortgage payments for at\n least 6 months before the loan closed. The coborrower did not make one payment\n on the previous mortgage on her own before the loan was streamline refinanced.\n The borrower defaulted on the mortgage, and the property was sold in a\n preforeclosure sale transaction; therefore, HUD paid a claim in the amount of\n $55,296. 13\n\n\n\n10\n HUD Handbook 4155.1, REV-5, paragraph 1-9\n11\n 24 CFR Part 3500\n12\n HUD Handbook 4155.1, REV-5, paragraph 2-10(D)\n13\n A preforeclosure sale is a sale of a property in which the proceeds from selling the property will fall short of the\n balance of debts secured by liens against the property. A notice of default has been recorded against the borrower.\n\n 6\n\x0c Allen Miscalculated Borrowers\xe2\x80\x99\n Maximum Mortgage Amounts\n\n For three loans, Allen Mortgage overestimated the financing costs or included\n overdue principal and interest charges in determining borrowers\xe2\x80\x99 mortgage\n amounts. The three loans were funded in the amount of $399,958 instead of the\n maximum amount of $398,847. We calculated the maximum mortgage amount\n for each loan in accordance with HUD requirements. 14 Therefore, these loans\n exceeded HUD\xe2\x80\x99s maximum mortgage limit by $1,111. The following table\n identifies the overinsured loans.\n\n Maximum Over-\n FHA case Mortgage mortgage insured\n number amount amount amount\n 381-9331530 $166,380 $166,113 $267\n 263-4211541 96,891 96,311 580\n 263-4186532 136,687 136,423 264\n Totals $399,958 $398,847 $1,111\n\n\n An FHA Borrower Received\n More Than $500 Back at\n Settlement\n\n For FHA case number, 562-2087147, Allen Mortgage required the borrower to\n pay a medical-related judgment as a condition to close; therefore, it included the\n amount of the judgment as a settlement charge on the borrower\xe2\x80\x99s HUD-1\n settlement statement. Contrary to HUD\xe2\x80\x99s requirements, after the loan\xe2\x80\x99s\n settlement, Allen Mortgage provided the borrower with a check that exceeded the\n $500 cash-back limit to pay off the judgment. 15 The borrower received $688 back\n at loan closing, which was $188 more than the $500 limit.\n\n HUD\xe2\x80\x99s Quality Control Review\n Identified Similar Deficiencies\n\n In March 2007, HUD\xe2\x80\x99s Quality Assurance Division performed a quality control\n review of Allen Mortgage and identified similar underwriting deficiencies.\n According to a letter from HUD, Allen Mortgage loaned or advanced funds to a\n borrower for closing, as evidenced by a promissory note in the borrower\xe2\x80\x99s loan\n file. The lender or other interested party may not provide the funds to the\n\n\n14\n HUD Handbook 4155.1, REV-5, paragraph 1-12(A) and HUD Mortgagee Letter 2005-43 require the maximum\nmortgage amount to be calculated as the lesser of (1) the old original mortgage amount plus the upfront mortgage\ninsurance premium, or (2) the existing debt calculation.\n15\n HUD Handbook 4155.1, REV-5, paragraph 1-12 and HUD Mortgagee Letter 2005-43.\n\n 7\n\x0c borrower to close the loan. HUD initially sought indemnification for the loan.\n However, the identified deficiencies were resolved.\n\n Incorrect Underwriters\xe2\x80\x99\n Certifications Were Submitted\n to HUD\n\n We reviewed the certifications for the 22 loans with material underwriting\n deficiencies for accuracy. Allen Mortgage\xe2\x80\x99s direct endorsement underwriters\n incorrectly certified that due diligence was used in underwriting the loans. Under\n HUD\xe2\x80\x99s direct endorsement program, direct endorsement underwriters certify to\n the integrity of the data for automated or manually underwritten loans; the\n underwriter certifies that due diligence was used in underwriting the loans.\n\n The Program Fraud Civil Remedies Act of 1986 (31 U.S.C. (United States Code)\n 3801) provides Federal agencies, which are the victims of false, fictitious, and\n fraudulent claims and statements, with an administrative remedy to (1)\n recompense such agencies for losses resulting from such claims and statements;\n (2) permit administrative proceedings to be brought against persons who make,\n present, or submit such claims and statements; and (3) deter the making,\n presenting, and submitting of such claims and statements in the future.\n\n Conclusion\n\n According to FHA requirements, a lender is required to establish that a borrower\n has the ability and the willingness to repay the mortgage debt, which should be\n based on sound underwriting principles consistent with the guidelines, rules, and\n regulations denoted in HUD Handbook 4155.1, REV-5. Additionally, the lender\n must support its decision to approve the mortgage with sufficient documentation.\n Regulations at 24 CFR 203.5(c) require a direct endorsement lender to exercise\n the same level of care it would exercise in obtaining and verifying information for\n a loan in which the lender would be entirely dependent on the property as security\n to protect its investment.\n\n Allen Mortgage failed to follow FHA requirements in underwriting 23 of the 73\n loans reviewed (32 percent). 16 This noncompliance occurred because Allen\n Mortgage disregarded HUD\xe2\x80\x99s requirements and its underwriters did not exercise\n due diligence in underwriting the loans. According to Allen Mortgage, its loan\n officers or processors calculated borrowers\xe2\x80\x99 payoff amounts as though the\n borrowers\xe2\x80\x99 mortgage payments were up to date, including the payment due the\n month of closing. The underwriters would then review and approve the\n calculated amounts. This calculated amount would be the amount disclosed on\n borrowers\xe2\x80\x99 HUD-1 settlement statements.\n\n16\n See appendix E for narratives of loans with material deficiencies.\n\n 8\n\x0c Allen Mortgage\xe2\x80\x99s loan officers or processors obtained borrowers\xe2\x80\x99 final mortgage\n payoff amounts after the loans closed. If borrowers did not make the payments\n due on their prior mortgage, including the one due for the month of closing,\n borrowers\xe2\x80\x99 HUD-1 settlement statements and loan payoff amounts would be\n inaccurate. According to Allen Mortgage\xe2\x80\x99s president, the underwriter would\n manually calculate the maximum mortgage amount allowed on a streamline\n refinance. After the loans closed, the underwriter finalized and approved the\n borrowers\xe2\x80\x99 mortgage credit analysis worksheets and the direct endorsement\n approval.\n\n Additionally, the president said that the loan officers or processors\n mathematically calculated borrowers\xe2\x80\x99 payoff amounts as though the borrowers\n had made all payments due on their existing mortgages, including the payment\n due for the month the refinanced loan was expected to close. Allen Mortgage\n obtained updated payoff statements for the borrowers at a later time. If a\n borrower did not make the payments due on the existing loan as expected, that\n borrower\xe2\x80\x99s settlement statement and the loan payoff amount would be inaccurate.\n Consequently, Allen Mortgage would have to update the borrower\xe2\x80\x99s payoff\n amount due on the existing loan and on the settlement statement after the\n borrower\xe2\x80\x99s closing date. Allen Mortgage would then seek reimbursement from\n the borrower for the skipped mortgage payments.\n\n Allen Mortgage believed that it was helping borrowers by allowing them to skip\n mortgage payments and provide postdated checks or use credit cards to pay their\n settlement costs. However, borrowers\xe2\x80\x99 financial obligations were increased\n because the lender actively sought repayment from them after their loans closed.\n In some instances, Allen Mortgage referred borrowers that were unable to repay\n the advanced funds to collection agencies.\n\n As a result of the improperly underwritten loans, the risk to FHA\xe2\x80\x99s Mutual\n Mortgage Insurance Fund was increased by more than $2 million. See appendices\n C and D for summaries of loans\xe2\x80\x99 deficiencies and associated costs.\n\n Recommendations\n\n We recommend that HUD\xe2\x80\x99s Deputy Assistant Secretary for Single Family require\n Allen Mortgage to\n\n 1A. Reimburse the FHA insurance fund $811,163 for the losses incurred on eight\n loans since the associated properties have been sold.17\n\n 1B. Reimburse HUD for a $55,296 claim paid for FHA case number 151-8624264\n since the associated property was sold during a preforeclosure sale.\n\n17\n Loss on the sale of the property identified in HUD\xe2\x80\x99s Single Family Data Warehouse system\n\n 9\n\x0c 1C. Reimburse the FHA insurance fund for any future losses from $199,361 in\n claims paid on one loan once the associated properties have been sold.\n\n 1D. Indemnify HUD for the 11 loans with material underwriting deficiencies. The\n estimated loss to HUD, based on its default loss rate of 66 percent of the\n unpaid principal balance, is $1,000,042 This will result in funds to be put to\n better use (other savings) by the FHA insurance fund not having to pay\n future claims on the loans if the loans default.\n\n 1E. Buy down the three loans that were overinsured by $1,111 and the one loan in\n which the borrower received $188 in excess funds back from closing ($1,111 +\n $188 = $1,299).\n\n 1F. Implement adequate policies and procedures to ensure compliance with\n HUD\xe2\x80\x99s underwriting requirements.\n\n We also recommend HUD\xe2\x80\x99s Associate General Counsel for Program Enforcement\n\n 1G. Determine legal sufficiency and if legally sufficient, pursue remedies under the\n Program Fraud Civil Remedies Act against Allen Mortgage, its principals, or\n both for incorrectly certifying that due diligence was exercised during the\n underwriting of 21 loans.18\n\n\n\n\n18\n Two improperly underwritten loans were paid in full; therefore, they no longer pose a risk to FHA insurance fund.\nAs a result, the number of loans decreased from 23 to 21.\n\n 10\n\x0cFinding 2: Allen Mortgage Did Not Ensure That It Provided Complete\nand Accurate Information to HUD and Borrowers\nAllen Mortgage did not ensure that it provided complete and accurate information to HUD.\nSpecifically, it did not ensure that it included borrowers\xe2\x80\x99 final settlement statements in the FHA\ncase binders submitted to HUD. It also collected funds from borrowers that were not disclosed\non the HUD-1 settlement statements and paid borrowers\xe2\x80\x99 mortgage payments after their loans\nsettled and were sold to investors. The problems occurred because Allen Mortgage lacked\nadequate procedures and controls to ensure that it complied with HUD\xe2\x80\x99s and other Federal\nrequirements regarding loan originations. As a result, HUD lacked assurance that Allen\nMortgage acted in the best interests of FHA borrowers and did not have complete and accurate\ninformation on borrowers\xe2\x80\x99 FHA streamline refinances to aid in monitoring Allen Mortgage for\ncompliance with its requirements.\n\n\n Borrowers\xe2\x80\x99 Settlement\n Statements in the FHA Case\n Binders Were Not Final\n Documents\n\n Allen Mortgage did not always ensure that it included borrowers\xe2\x80\x99 final HUD-1\n settlement statements in the FHA case binders sent to HUD. For 6 of the 73 loans\n reviewed (8 percent), the amount of funds borrowers needed to close on the\n settlement statements in Allen Mortgage\xe2\x80\x99s files increased from the amounts\n disclosed on the settlement statements in the FHA case binders. Allen Mortgage\n changed the borrowers\xe2\x80\x99 settlement statements after the loans closed and the\n borrowers\xe2\x80\x99 rescission periods19 had expired. However, the borrowers\xe2\x80\x99 settlement\n statements in the FHA case binders did not reflect the changes. For instance, for\n FHA case number 581-2884051, the borrower\xe2\x80\x99s settlement statement in the FHA\n case binder showed that the borrower did not pay or receive funds at closing.\n However, according to the settlement statement in the borrower\xe2\x80\x99s loan file, the\n borrower needed $1,326 to close. The loan closed on October 27, 2007, yet Allen\n Mortgage collected a personal check from the borrower in the amount $1,567 on\n November 27, 2007, a month after the loan closed.\n\n We contacted one of the six borrowers and were informed that his signed settlement\n statement showed that funds were not needed to close. However, at closing, he was\n required to pay off a credit card and sign a promissory note agreeing to make the last\n payment due under his previous mortgage. He mentioned that he was unaware that\n he had to make these payments. Additionally, the borrower\xe2\x80\x99s good faith estimate in\n Allen Mortgage\xe2\x80\x99s loan files did not include these payments as part of the borrower\xe2\x80\x99s\n\n19\n Title 12, Part 226\xe2\x80\x94Truth in Lending, states that the borrower may exercise the right to cancel the refinance\ntransaction within 3 business days.\n\n 11\n\x0c settlement charges. Further, Allen Mortgage sent the borrower a letter indicating\n that it would send the borrower\xe2\x80\x99s account to a collection agency if the payments\n were not received.\n\n The borrower\xe2\x80\x99s settlement statement in Allen Mortgage\xe2\x80\x99s files showed that the\n borrower needed to pay $742 at closing, which was the amount of the borrower\xe2\x80\x99s\n mortgage payment under the streamline refinanced loan. HUD requires for each\n transaction that the lender estimate the settlement requirements to determine the\n cash required to close the mortgage transaction. 20 Further, RESPA requires that\n the HUD-1 settlement statement shows the actual settlement costs of the loan\n transaction.\n\n Allen Mortgage Collected\n Funds From Borrowers When\n Settlement Statements Did Not\n Identify That Cash Was Needed\n To Close\n\n Allen Mortgage collected cash from borrowers to close on their loans, which was\n not disclosed on the borrowers\xe2\x80\x99 settlement statements. For 7 of the 73 loans (10\n percent), the settlement statements in Allen Mortgage\xe2\x80\x99s files and the FHA case\n binder did not identify that borrowers needed cash to close. However, Allen\n Mortgage collected more than $6,100 from the borrowers as follows:\n Amount\n Loan Borrower\xe2\x80\x99s Loan collected\n FHA case closing cash due at settlement from Payment Payment\n number date settlement date borrower date method\n 262-1731385 4/14/08 ($500) 4/30/08 $820 6/22/08 Credit card\n Personal\n 292-4835727 12/20/07 $0 12/26/07 $1,149 1/3/08 check\n Personal\n 011-5930328 7/11/08 ($400) 7/31/08 $781 8/15/08 check\n Electronic\n 491-9085385 12/22/07 $0 12/31/07 $917 4/7/08 check\n Personal\n 483-4074768 3/13/09 $0 3/18/09 $887 4/10/09 check\n 291-3657749 3/18/08 $0 3/30/08 $1,004 4/7/08 Credit card\n 581-2985846 3/20/08 $0 3/31/08 $554 4/24/08 Unknown\n Total $6,112\n\n The Real Estate Settlement Procedures Act (RESPA), enacted in 24 CFR Part\n 3500, appendix A, states that the settlement agent shall complete the settlement\n statement to itemize all charges imposed upon the borrower and the seller by the\n lender and all sales commissions, whether to be paid at settlement or outside of\n\n20\n HUD Handbook 4155.1, REV-5, paragraph 1-9\n\n 12\n\x0c settlement, and any other charges which either the borrower or the seller will pay\n for at settlement. Further, RESPA requires that the HUD-1 settlement statement\n shows the actual settlement costs of the loan transaction. Where it is not the\n practice that the borrower and the seller both attend the settlement, the HUD-1\n should be mailed or delivered as soon as practicable after settlement.\n\nAllen Provided Credit\nCounseling to Borrowers After\nLoans Were Sold\n\n\n Allen Mortgage provided credit counseling services to borrowers after their loans\n were sold. In reviewing Allen Mortgage\xe2\x80\x99s loan files, we determined that its loan\n officers made monthly mortgage payments on behalf of two borrowers as follows:\n\n \xe2\x80\xa2 For FHA case number 482-3900230, the borrower\xe2\x80\x99s loan closed on March 25,\n 2008. The first payment on the loan was due May 1, 2008. The borrower\xe2\x80\x99s\n loan file contained a letter from one of Allen Mortgage\xe2\x80\x99s loan officers, stating\n that he had identified that the borrower was having difficulty making\n mortgage payments. Therefore, he made the borrower\xe2\x80\x99s July and August\n mortgage payments in accordance with Allen Mortgage\xe2\x80\x99s credit counseling\n program that lasted for 6 months after loans closed.\n\n \xe2\x80\xa2 For FHA case number 581-3168167, the borrower\xe2\x80\x99s loan closed on September\n 11, 2008. The borrower\xe2\x80\x99s first payment on the new mortgage was due\n November 1, 2008. According to documentation in the borrower\xe2\x80\x99s loan file,\n Allen Mortgage made the borrower\xe2\x80\x99s mortgage payment that was due\n December 1, 2008, on February 25, 2009. The payment prevented the\n borrower\xe2\x80\x99s mortgage from being 90 days late. We confirmed that one of\n Allen Mortgage\xe2\x80\x99s loan officers made the borrower\xe2\x80\x99s mortgage payment.\n\nConclusion\n\n\n Allen Mortgage did not ensure that it provided complete and accurate information\n to HUD. This condition occurred because Allen Mortgage lacked adequate\n procedures and controls to ensure that it complied with HUD\xe2\x80\x99s and other Federal\n requirements regarding loan originations. As previously mentioned, Allen\n Mortgage\xe2\x80\x99s underwriter finalized and approved borrowers\xe2\x80\x99 mortgage credit\n analysis worksheets and the direct endorsement approval after loans closed;\n therefore, if changes to borrowers\xe2\x80\x99 settlement charges were needed, it had to seek\n repayment from the borrowers.\n\n Additionally, Allen Mortgage\xe2\x80\x99s president acknowledged that the lender performed\n credit counseling for borrowers that were having trouble making their mortgage\n payments. It helped a lot of borrowers, but many of them were not able to repay\n\n 13\n\x0c Allen Mortgage for making mortgage payments on their behalf. According to the\n president, Allen Mortgage had discontinued its credit counseling program. He\n acknowledged that Allen Mortgage started the credit counseling program because\n its compare ratio 21 was high.\n\n As a result of the conditions described above, HUD lacked assurance that Allen\n Mortgage acted in the best interests of FHA borrowers and did not have complete\n and accurate information on borrowers\xe2\x80\x99 FHA streamline refinances to aid in\n monitoring Allen Mortgage for compliance with its requirements.\n\n Recommendations\n\n\n We recommend that HUD\xe2\x80\x99s Deputy Assistant Secretary for Single Family require\n Allen Mortgage to\n\n 2A. Provide borrowers\xe2\x80\x99 final settlement statements for inclusion in HUD\xe2\x80\x99s FHA\n case binders for HUD to effectively monitor for lender compliance.\n\n 2B. Implement adequate procedures and controls to ensure that HUD and\n borrowers receive all final documentation in connection with the loans.\n\n 2C. Discontinue advancing funds to borrowers to pay funds needed to settle their\n loans.\n\n We also recommend that HUD\xe2\x80\x99s Deputy Assistant Secretary for Single Family\n\n 2D. Take appropriate administrative action against Allen Mortgage, its\n principals, or both for the issues cited in this report once the affirmative civil\n enforcement action cited in recommendation 1G is completed.\n\n 2E. Ensure that Allen Mortgage has discontinued its credit counseling program,\n in particular making mortgage payments for FHA borrowers and then\n seeking reimbursement.\n\n\n\n\n21\n According to HUD\xe2\x80\x99s Neighborhood Watch system, the compare ratio measures the percentage of seriously\ndelinquent loans and claims divided by the percentage of seriously delinquent loans and claims for a particular area.\n\n 14\n\x0cFinding 3: Allen Mortgage Did Not Fully Implement Its Quality Control\nProgram in Accordance With HUD Requirements\nAllen Mortgage did not implement its quality control program in accordance with HUD\xe2\x80\x99s\nrequirements. Specifically, it did not conduct quality control reviews in accordance with HUD\xe2\x80\x99s\nrequirements, and its written quality control plan initially did not contain all of the necessary\nprovisions. The problems occurred because Allen Mortgage disregarded HUD\xe2\x80\x99s requirements\nand did not monitor its contractor to ensure compliance with HUD\xe2\x80\x99s requirements. As a result, it\nincreased the risk to FHA\xe2\x80\x99s Mutual Mortgage Insurance Fund due to the lack of assurance of the\naccuracy, validity, and completeness of its loan underwriting activities.\n\n\n\n Allen Mortgage Did Not Ensure\n That Its Contractor-Performed\n Routine Quality Control\n Reviews Were Performed in a\n Timely Manner\n\n Allen Mortgage did not ensure that routine quality control reviews were\n performed in a timely manner. Its contractor performed 192 routine quality\n control loan reviews during our audit period, October 1, 2007, to September 30,\n 2009. Of the 192 reviews, 147 (77 percent) were not performed in a timely\n manner. Allen Mortgage\xe2\x80\x99s contractor reviewed the loans an average of 162 days\n after the loans closed. According to HUD\xe2\x80\x99s requirements, loans must be reviewed\n within 90 days from the end of the month in which the loan closed. This\n requirement is intended to ensure that problems left undetected before closing are\n identified as early after closing as possible. 22 Further, according to Allen\n Mortgage\xe2\x80\x99s quality control plan, loans were to be reviewed and reported to its\n senior management no later than 90 days from the loans\xe2\x80\x99 origination dates and\n randomly selected by the quality control contractor for audit within 30 days after\n loan closing.\n\n According to documentation provided by the contractor, Allen Mortgage failed to\n provide the loans to the contractor in a timely manner. Of the 192 routine\n reviews, 117 were received by the contractor more than 90 days after the end of\n the month in which the loan closed. Further, a lender contracting out any part of\n its quality control function is responsible for ensuring that the outside source is\n meeting HUD\xe2\x80\x99s requirements. 23 Therefore, Allen Mortgage was responsible for\n ensuring the reviews were performed on time.\n\n22\n HUD Handbook 4060.1, REV-2, paragraph 7-6(A)\n23\n HUD Handbook 4060.1, REV-2, paragraph 7-3(B)\n\n 15\n\x0c Routine Reviews Were Not\n Always Performed for the\n Correct Period\n\n Allen Mortgage did not ensure that its contractor performed routine quality\n control reviews in accordance with HUD\xe2\x80\x99s requirements. HUD requires that\n lenders closing more than 15 loans per month perform quality control reviews at\n least monthly and address 1 month\xe2\x80\x99s activity. 24 However, Allen Mortgage\xe2\x80\x99s\n contractor performed quarterly quality control reviews on FHA-insured loans.\n Therefore, the reviews addressed loan production for each quarter instead of 1\n month\xe2\x80\x99s activity with the exception of November and December 2007.\n Additionally, the contractor did not perform quality control reviews on the loans\n that were originated during October 2007.\n\n The Sample Size of Routine\n Reviews Was Not Always\n Sufficient\n\n Allen Mortgage did not ensure that its contractor used the appropriate sample size\n in determining the number of loans for review in accordance with HUD\xe2\x80\x99s\n requirements and its own plan. The contractor failed to review 10 percent of the\n loans that were originated and as previously mentioned, did not perform quality\n control reviews on loans that were originated in October 2007. HUD requires that\n lenders that originate or underwrite 3,500 or fewer FHA loans per year review 10\n percent of the FHA loans they originate. 25\n\n Additionally, Allen Mortgage\xe2\x80\x99s contractor did not review loans that were denied.\n HUD requires lenders to review a minimum of 10 percent the total number of\n loans that were denied. 26 Further, Allen Mortgage\xe2\x80\x99s plan stated that a minimum\n of 10 percent of all rejected loans were to be reviewed and evidence that senior\n staff concurred with the rejection was to be documented in the loan file.\n\n Early Payment Defaults Were\n Not Always Reviewed\n\n Allen Mortgage did not ensure that its contractor reviewed all early payment defaults\n as required by HUD. HUD requires lenders to review all loans going into default\n within the first six payments, in addition to the loans selected for routine quality\n control reviews. Early payment defaults are defined as loans that become 60 days\n past due within the first six payments.27\n24\n HUD Handbook 4060.1, REV-2, paragraph 7-6(B)\n25\n HUD Handbook 4060.1, REV-2, paragraph 7-6(C)\n26\n HUD Handbook 4060.1, REV-2, paragraph 7-8(A)\n27\n HUD Handbook 4060.1, REV-2, paragraph 7-6(D)\n\n 16\n\x0c Using HUD\xe2\x80\x99s Single Family Data Warehouse system, we identified 212 loans that\n were originated or sponsored by Allen Mortgage that were 60 days past due within\n the first six payments, which were early payment defaults. These 212 loans closed\n from September 2007 to October 2009. However of the 212 loans, 115 (55 percent)\n had not been reviewed as of June 30, 2010.\n\n Allen Mortgage\xe2\x80\x99s Quality\n Control Plan Did Not Meet\n HUD\xe2\x80\x99s Requirements\n\n Allen Mortgage\xe2\x80\x99s quality control plan, as written, did not meet HUD\xe2\x80\x99s\n requirements. The plan was in effect during our audit period, October 1, 2007,\n through September 30, 2009. Specifically, in accordance with HUD Handbook\n 4060.1, REV-2, the plan did not include provisions that 28\n\n \xe2\x80\xa2 The office does not employ or have a contract with anyone currently under\n debarment or suspension, subject to a limited denial of participation, or\n otherwise restricted from participation in HUD-FHA programs. Lenders\n must periodically check their employee list, at least semiannually (7-3L).\n \xe2\x80\xa2 Reports, which identify deficiencies, are provided to senior management\n within 1 month of completion, and management must take prompt action\n on all material findings. The final report must identify actions taken, a\n timetable, and follow-up activities (7-3I).\n \xe2\x80\xa2 The lender reports findings of fraud or serious violations to the appropriate\n HUD Homeownership Center within 60 days of initial discovery via the\n Lender Reporting feature in the Neighborhood Watch Early Warning\n System (7-3J).\n \xe2\x80\xa2 Lenders must identify patterns of early defaults by location, program, and\n loan characteristic. Lenders must identify commonalities among\n participants in the mortgage origination process to learn the extent of their\n involvement in problem cases. Loans involving appraisers, loan officers,\n processors, underwriters, etc., who have been associated with problems,\n must be included in the review sample (7-5C).\n \xe2\x80\xa2 The quality control sample selection includes loans from all loan officers,\n loan processors, and underwriters and from roster appraisers, real estate\n agents or companies, and builders with whom they do significant business\n (7-6C).\n \xe2\x80\xa2 Loans, which go into default within the first six payments, are submitted\n for quality control review. Loans which are 60 days past due within the\n first six payments are early payment defaults (7-6D).\n During the audit, Allen Mortgage updated its quality control plan. We reviewed\n the updated plan and determined that it complied with HUD\xe2\x80\x99s requirements.\n\n28\n All of the provisions missing from Allen Mortgage\xe2\x80\x99s quality control plan are not listed in this report.\n\n 17\n\x0cConclusion\n\n\n Allen Mortgage did not fully implement its quality control program in accordance\n with HUD\xe2\x80\x99s requirements. The problems occurred because Allen Mortgage\n disregarded HUD\xe2\x80\x99s requirements for quality control. Additionally, it did not\n monitor its contractor to ensure that quality control reviews were performed in\n accordance with HUD\xe2\x80\x99s requirements. Allen Mortgage did not always provide\n loan files for quality control review in a timely manner. Consequently, the loans\n were not always reviewed in accordance HUD\xe2\x80\x99s 90-day requirement.\n\nRecommendations\n\n\n We recommend that HUD\xe2\x80\x99s Deputy Assistant Secretary for Single Family require\n Allen Mortgage to\n\n 3A. Implement policies and procedures to ensure that quality control reviews\n of FHA-insured loans are performed in accordance with HUD\xe2\x80\x99s\n requirements and its revised plan, which includes but is not limited to the\n performance of routine and early payment default quality control reviews\n and rejected or cancelled loans.\n\n\n\n\n 18\n\x0c SCOPE AND METHODOLOGY\n\nWe performed our audit work between August 2010 and April 2011. We conducted our audit\nwork at Allen Mortgage\xe2\x80\x99s office in Centennial Park, AZ, and HUD Chicago regional office. The\naudit covered the period October 1, 2007, to September 30, 2009, but was expanded as\nnecessary.\n\nTo accomplish our objectives, we reviewed applicable HUD handbooks, regulations, mortgagee\nletters, and other reports and policies related to FHA\xe2\x80\x99s mortgage insurance program. Further, we\nreviewed Allen Mortgage\xe2\x80\x99s quality control plan, electronic loan files, and quality control\ndocumentation. We interviewed Allen Mortgage\xe2\x80\x99s current and former employees, its quality\ncontrol contractor, and HUD staff. We also contacted borrowers to confirm information in their\nloan files.\n\nUsing HUD\xe2\x80\x99s data maintained in its Single Family Data Warehouse system, we determined that\nAllen Mortgage sponsored 89 loans that went to claim in 30 months or fewer during the period\nOctober 1, 2007, through September 30, 2009. Of those 89 loans, 21 were for properties located\nin Region 5. We selected all 21 for review to determine whether Allen Mortgage complied with\nHUD\xe2\x80\x99s underwriting requirements. All of the 21 loans reviewed were streamline refinances.\n\nWe assessed the reliability of the computerized data and determined that the information was\nsufficiently reliable for our purposes. For instance, in reviewing Allen Mortgage\xe2\x80\x99s quality\ncontrol program, we compared loans we identified in HUD\xe2\x80\x99s Single Family Data Warehouse\nsystem as early payment default loans to determine the universe of 212 loans that defaulted\nwithin the first six payments. We corroborated the information with other HUD systems, such as\nHUD\xe2\x80\x99s Neighborhood Watch system. Further, Allen Mortgage uses HUD\xe2\x80\x99s Neighborhood\nWatch system to determine the loans that result in early payment defaults; therefore, the same\ndata were used by both the Office of Inspector General (OIG) and Allen Mortgage. Then we\ncompared hardcopy documentation of loans reviewed by Allen Mortgage\xe2\x80\x99s contractor to the\nuniverse we determined and verified two loans reviewed were not early payment defaults in\nHUD\xe2\x80\x99s Neighborhood Watch system. As a result, only 97 of 99 reviews were completed out of\nthe 212 loans we identified as early payment default.\n\nHowever, to reach our conclusions for underwriting, we relied on hardcopy documentation\nmaintained in HUD\xe2\x80\x99s FHA case binders and imaged hardcopy documentation maintained in\nAllen Mortgage\xe2\x80\x99s electronic files.\n\nFurther, using quality control review reports provided by Allen Mortgage and its quality control\ncontractor, we identified 271 loans which were subjected to quality control reviews. Of the 271\nreviews, 183 loans 29 were routine quality control reviews, and the remaining 88 loans were early\npayment defaults. Using a stratified attribute sample, we identified the universe of 271, an\n\n29\n Allen Mortgage\xe2\x80\x99s contractor reviewed 192 loans routinely for quality control. Nine loans were reviewed as part\nof a routine and early payment default review; thus increasing the number from 183 to 192 loans reviewed routinely\nfor quality control. Although Allen Mortgage\xe2\x80\x99s contractor reviewed 271 loans, 9 loans were reviewed twice.\nTherefore, it performed 280 quality control reviews during our audit period.\n\n 19\n\x0cassumed failure rate of 50 percent, a confidence interval of 90 percent, and a precision of 10\npercent. We systematically selected a statistical sample originating from a randomly selected\nstart point generated by the RAT STATS 2007 statistical sampling software application. The\nsample consisted of 54 loans which were subjected to quality control reviews by Allen\nMortgage\xe2\x80\x99s quality control contractor. We selected this sample to review whether the quality\ncontrol reviews were conducted in accordance with HUD\xe2\x80\x99s requirements regarding the review of\nunderwriting, document reverification, and condition clearance and closing. Two of the fifty-\nfour loans were previously selected as a part of our underwriting review universe of 21 loans in\nclaim status, thus reducing the total number of loans reviewed from 75 to 73.\n\nWe conducted the audit in accordance with generally accepted government auditing standards.\nThose standards require that we plan and perform the audit to obtain sufficient, appropriate\nevidence to provide a reasonable basis for our findings and conclusions based on our audit\nobjectives. We believe that the evidence obtained provides a reasonable basis for our findings\nand conclusions based on our audit objectives.\n\n\n\n\n 20\n\x0c INTERNAL CONTROLS\n\nInternal control is a process adopted by those charged with governance and management,\ndesigned to provide reasonable assurance about the achievement of the organization\xe2\x80\x99s mission,\ngoals, and objectives with regard to\n\n \xe2\x80\xa2 Effectiveness and efficiency of operations,\n \xe2\x80\xa2 Reliability of financial reporting, and\n \xe2\x80\xa2 Compliance with applicable laws and regulations.\n\nInternal controls comprise the plans, policies, methods, and procedures used to meet the\norganization\xe2\x80\x99s mission, goals, and objectives. Internal controls include the processes and\nprocedures for planning, organizing, directing, and controlling program operations as well as the\nsystems for measuring, reporting, and monitoring program performance.\n\n\n Relevant Internal Controls\n\n We determined that the following internal controls were relevant to our audit\n objectives:\n\n \xe2\x80\xa2 Effectiveness and efficiency of operations \xe2\x80\x93 Policies and procedures that\n management has implemented to reasonably ensure that a program meets\n its objectives.\n\n \xe2\x80\xa2 Reliability of financial reporting \xe2\x80\x93 Policies and procedures that\n management has implemented to reasonably ensure that valid and reliable\n data are obtained, maintained, and fairly disclosed in reports.\n\n \xe2\x80\xa2 Compliance with applicable laws and regulations \xe2\x80\x93 Policies and\n procedures that management has implemented to reasonably ensure that\n resource use is consistent with laws and regulations.\n\n We assessed the relevant controls identified above.\n\n A deficiency in internal control exists when the design or operation of a control does\n not allow management or employees, in the normal course of performing their\n assigned functions, the reasonable opportunity to prevent, detect, or correct (1)\n impairments to effectiveness or efficiency of operations, (2) misstatements in\n financial or performance information, or (3) violations of laws and regulations on a\n timely basis.\n\n\n\n\n 21\n\x0cSignificant Deficiencies\n\n Based on our review, we believe that the following items are significant deficiencies:\n\n \xe2\x80\xa2 Allen Mortgage did not always comply with HUD\xe2\x80\x99s requirements when\n underwriting FHA-insured loans (see finding 1).\n\n \xe2\x80\xa2 Allen Mortgage did not ensure that it provided complete and accurate\n information to HUD and borrowers (see finding 2).\n\n \xe2\x80\xa2 Allen Mortgage\xe2\x80\x99s quality control program did not meet HUD\xe2\x80\x99s requirements\n (see finding 3).\n\n\n\n\n 22\n\x0c APPENDIXES\n\nAppendix A\n\n SCHEDULE OF QUESTIONED COSTS\n AND FUNDS TO BE PUT TO BETTER USE\n\n\n Recommendation Funds to be put\n number Ineligible 1/ Unsupported 2/ to better use 3/\n 1A $811,163\n 1B $55,296\n 1C $199,361\n 1D $1,000,042\n 1E $1,299\n Total $867,758 $199,361 $1,000,042\n\n\n1/ Ineligible costs are costs charged to a HUD-financed or HUD-insured program or activity\n that the auditor believes are not allowable by law; contract; or Federal, State, or local\n polices or regulations.\n\n2/ Unsupported costs are those costs charged to a HUD-financed or HUD-insured program\n or activity when we cannot determine eligibility at the time of the audit. Unsupported\n costs require a decision by HUD program officials. This decision, in addition to\n obtaining supporting documentation, might involve a legal interpretation or clarification\n of departmental policies and procedures. We classified loans in which HUD paid a claim\n and the lenders have conveyed the associated properties to HUD as unsupported costs\n since HUD would not realize a loss or gain on the sale of these properties until they are\n sold. Therefore, the costs associated with these loans are undetermined.\n\n3/ Recommendations that funds be put to better use are estimates of amounts that could be\n used more efficiently if an Office of Inspector General (OIG) recommendation is\n implemented. These amounts include reductions in outlays, deobligation of funds,\n withdrawal of interest, costs not incurred by implementing recommended improvements,\n avoidance of unnecessary expenditures noted in preaward reviews, and any other savings\n that are specifically identified. In this instance the funds to be put to better use represent\n savings by the FHA insurance fund realized by not having to pay future claims on loans\n that default.\n\n\n\n\n 23\n\x0cAppendix B\n\n AUDITEE COMMENTS AND OIG\xe2\x80\x99S EVALUATION\n\nRef to OIG Evaluation Auditee Comments\n\nComment 1\n\n\n\n\n 24\n\x0cComment 1\n\n\n\n\n 25\n\x0cComment 2\n\n\n\n\n 26\n\x0cComment 3\n\n\n\n\n 27\n\x0c28\n\x0c29\n\x0cComment 4\n\n\n\n\nComment 5\n\n\n\n\n 30\n\x0cComment 6 C\n\n\n\n\nComment 7\n\n\n\n\nComment 8\n\n\n\n\nComment 9\n\n\n\n\n 31\n\x0cComment 10\n\n\n\nComment 11\n\n\n\n\nComment 12\n\n\n\n\n 32\n\x0cComment 13\n\n\n\n\nComment 14\n\n\n\n\nComment 15\n\n\n\n\n 33\n\x0cComment 16\n\n\n\nComment 17\n\n\nComment 18\n\n\n\n\nComment 19\n\n\n\n\nComment 20\n\n\n\n\n 34\n\x0cComment 21\n\n\n\n\nComment 22\n\n\n\n\nComment 23\n\n\n\n\n 35\n\x0cComment 24\n\n\n\n\n 36\n\x0cComment 25\n\n\n\n\nComment 26\n\n\n\n\n 37\n\x0cComment 27\n\n\n\n\nComment 28\n\n\n\n\n 38\n\x0cComment 29\n\n\n\n\nComment 30\n\n\n\n\nComment 31\n\n\n\n\n 39\n\x0cComment 32\n\n\n\n\n 40\n\x0cComment 33\n\n\n\n\nComment 31\n\n\n\n\n 41\n\x0cComment 34\n\n\n\n\nComment 35\n\n\n\n\nComment 36\n\n\n\n\n 42\n\x0cComment 37\n\n\n\n\nComment 38\n\n\n\n\nComment 39\n\n\n\n\n 43\n\x0cComment 40\n\n\n\n\nComment 41\n\n\n\n\n 44\n\x0cComment 42\n\n\n\n\nComment 43\n\n\n\n\n 45\n\x0cComment 44\n\n\n\n\n 46\n\x0c OIG Evaluation of Auditee Comments\n\n\nComment 1 The audit was initiated by HUD-OIG as a result of Allen Mortgage\xe2\x80\x99s high default\n and claim rate for the FHA-insured loans sponsored in our region during the\n period October 1, 2007, through September 30, 2009. We acknowledge that as of\n November 2011, it had reduced its national compare ratio to139 percent.\n However, for the purpose of this audit, the ratio was not a factor in the decision to\n perform our audit. The audit focused on the loans sponsored only in the region.\n\nComment 2 We agree and modified the report accordingly.\n\nComment 3 We commend Allen Mortgage for taking initiatives to improve its operations, and\n reducing its compare ratio.\n\nComment 4 HUD Handbook 4155.1, REV-5, paragraph 1-10(E), states that lenders are not\n permitted to allow borrowers to skip payments. Further, paragraph 1-12 of the\n handbook addresses what is permissible to be included in the existing debt to\n determine the maximum insurable mortgage amount. The existing lien may\n include the interest charged by the servicing lender when the payoff is not\n received on the first day of the month as is typically assessed on FHA mortgages,\n but may not include delinquent interest, late charges, or escrow charges.\n Therefore, if the borrower makes a mortgage payment during the month of\n closing, the interest portion of that payment is for the month before. If the loan\n does not settle on the first day of the month (the date the borrower\xe2\x80\x99s mortgage\n payment becomes due), interest accrues per day, and that accrued interest is\n allowed to be included as part of the borrower\xe2\x80\x99s existing debt.\n\nComment 5 HUD Mortgagee Letter 2011-11 was not issued until February 14, 2011, which\n was after the scope of our audit. Further, HUD Handbook 4155.1 REV-5,\n paragraph 1-10, which was in effect during our audit period, specifically states\n that lenders are not permitted to allow borrowers to \xe2\x80\x9cskip\xe2\x80\x9d payments. The\n borrower is either to make the payment when it is due or bring the monthly\n mortgage payment check to settlement. When the new mortgage amount is\n calculated, FHA does not permit the inclusion of any mortgage payments\n "skipped" by the homeowner in the new mortgage amount. For example, a\n borrower whose mortgage payment is due June 1 and expects to close the\n refinance before the end of June is not permitted to roll the June mortgage\n payment into the new FHA loan amount.\n\n In 2008, HUD issued Mortgagee Letter 2008-40, which revised the maximum\n mortgage calculation to include, in determining of a borrower\xe2\x80\x99s existing debt,\n accrued late charges and escrow shortages. It further states that the mortgage\n being refinanced must be current for the month due. For example, a refinance of\n a mortgage anytime in November must have had the October payment made. Of\n the 32 loans that we reviewed during the audit, only four loans were closed in\n\n 47\n\x0c 2009; thus they were evaluated based on the requirements set forth in this\n mortgagee letter which became effective on January 1, 2009.\n\nComment 6 As previously mentioned in comment 5, we determined the criteria that were\n applicable for the loans reviewed during our audit period.\n\nComment 7 We acknowledge that the report makes reference to the findings letter issued to\n Allen Mortgage from HUD\xe2\x80\x99s Quality Assurance Division (QAD). Although there\n were several loans reviewed by HUD, FHA case number 105-2507386 was not\n part of that review. Further, Allen Mortgage did not provide any documentation\n or correspondence with HUD to determine if the loan it cited contained the same\n underwriting deficiencies, and if so, how the deficiencies were resolved.\n\nComment 8 We agree that the updated payoff identified that the borrower made the mortgage\n payment that was due on November 1, 2008. However, the mortgage payment\n due on December 1, 2008, was not made in accordance with HUD Handbook\n 4155.1, REV-5, which was the applicable guidance at the time this loan closed.\n We will modify the audit report accordingly.\n\nComment 9 See comment # 4. We agree that for a streamline refinance, borrowers do not\n have to provide evidence of cash to close. The report mentioned the borrowers\xe2\x80\x99\n form of payment to present the complete picture of how borrowers were settling\n their newly refinanced loans one or more months after closing. However,\n allowing borrowers to use credit cards created an additional liability and\n potentially impaired their ability to make their mortgage payments.\n\n For FHA case numbers 261-9338035 and 151-8704674, the borrowers paid the\n funds that were due at closing one and two months, respectively, after their loans\n closed. Further, since the borrowers did not pay the necessary funds to close their\n loans, Allen Mortgage paid the funds; thus creating a conflict of interest\n relationship. It also created a potential first lien or short-term loan financing\n arrangement between Allen Mortgage and the borrowers. According to HUD,\n lenders may not provide cash advances to borrowers other than those made to\n establish escrow accounts.\n\n Additionally, according to documentation maintained in the loan file for FHA\n case number 151-8704674, the borrower made two separate payments which\n totaled $696. Allen Mortgage did not provide documentation to support its\n statements regarding the collection of an additional $812.63 from the borrower as\n the first payment under their new loan or when the loan was sold. However,\n according to HUD Handbook 4155.1, REV-5, paragraph 2-21, borrowers are not\n to be required to write postdated checks, give cash, or otherwise make mortgage\n payments to the lender in advance of the borrower\xe2\x80\x99s mortgage payment required\n under the security instruments.\n\n\n\n\n 48\n\x0cComment 10 Regulations at 24 CFR Part 3500, Real Estate Settlement Procedures Act,\n appendix A, state that line 303 on the HUD-1 settlement statement must indicate\n either the cash required from the borrower at settlement (the usual case in a\n purchase transaction) or cash payable to the borrower at settlement. Therefore,\n borrowers were required to bring funds to close, if needed, on their loans at\n settlement. Further, in reviewing Mortgagee Letter 2009-32, HUD requires\n borrowers to provide evidence of cash to close for streamline refinance\n transactions. As mentioned in the report, our audit period was from October 1,\n 2007, through September 30, 2009. Therefore, only 4 of the 32 loans reviewed\n were impacted by this mortgagee letter. HUD Handbook 4155,1, REV-5, was in\n effect for the remaining 28 loans.\n\n The audit report does not question whether or not the borrowers provided\n evidence of funds to close; it addresses the fact that the borrowers provided\n postdated checks to settle their loans. Therefore the mortgagee letter did not\n change the requirement that borrowers must bring cash/funds to closing, if\n applicable. Further, since Allen Mortgage did not require borrowers to pay the\n cash required to close, it would provide the required funds then seek\n reimbursement.\n\nComment 11 During the audit, the audit team held several discussions with Allen Mortgage and\n provided applicable criteria that supported the findings cited in the audit report.\n The results of the audit were based on violations of Federal regulations or HUD\n handbooks. The HUD review was only used to disclose that HUD had identified\n similar issues when performing a review of Allen Mortgage.\n\nComment 12 The review performed by HUD\xe2\x80\x99s Quality Assurance Division reported that Allen\n Mortgage loaned or advanced funds to the borrower for closing which was\n evidenced by a promissory note in the borrower\xe2\x80\x99s loan file. The report did not\n state that the borrower provided postdated checks at settlement. It stated that\n HUD identified similar deficiencies in regards to Allen Mortgage advancing\n borrowers funds to close. We acknowledge that the loan was not indemnified and\n revised the report accordingly. However, Allen Mortgage did not provide any\n documentation to support the resolution of the deficiencies cited.\n\n Allen Mortgage asserted that it did not advance funds to borrowers for closing\n costs. However, contrary to its assertions, it did allow borrowers to close their\n loans without paying the required funds to close. Further, borrowers were\n required to execute promissory notes agreeing to repay Allen Mortgage for the\n advanced funds as discussed in the audit report. HUD Handbook 4155.1, REV-5,\n paragraph 2-10, states that an independent third party must provide the borrowed\n funds to close. The seller, real estate agent or broker, lender, or other interested\n party may not provide such funds.\n\nComment 13 An audit performed by HUD OIG is independent of the review performed by\n HUD\xe2\x80\x99s Quality Assurance Division.\n\n 49\n\x0cComment 14 The table in the audit report was provided to show that the borrowers did not pay\n cash at settlement. Further of the nine loans listed, three identified discrepancies\n between the HUD-1 settlement statements maintained in the FHA case binders\n and HUD-1 settlement statements maintained by Allen Mortgage.\n\nComment 15 For FHA case number 561-8818240, the borrower\xe2\x80\x99s HUD-1 settlement statement\n (HUD-1) referenced in the table was the statement that was received by HUD and\n maintained in the FHA case binder. The HUD-1 referred to by Allen Mortgage\n was the one it maintained in its electronic loan files. However, the information\n contained on Allen Mortgage\xe2\x80\x99s version of the HUD-1 did not contain the same\n information as the HUD-1 settlement statement in the FHA case binder (as\n discussed in finding 2). We determined during the audit that the HUD-1\n settlement statements sent to HUD were not always accurate. At closing, Allen\n Mortgage allowed borrowers to pay funds that were due at closing after their\n loans settled. However, the HUD-1 settlement statement maintained in the FHA\n case binder did not show that the borrowers needed funds to close.\n\nComment 16 For FHA case number 581-3334641, the borrower was permitted to pay the cash\n that was due at closing, after the loan settled. Further, the amount represented on\n the HUD-1 settlement statement maintained by HUD was not accurate.\n\nComment 17 For FHA case number 292-5210194, the borrower was permitted to the pay cash\n that was due at closing, after the loan settled. Further, the amount represented on\n the HUD-1 settlement statement maintained by HUD was not accurate.\n\nComment 18 See comments 15, 16, and 17.\n\nComment 19 The settlement requirements in HUD Handbook 4155.1, REV-5, are applicable to\n each transaction. Further, regulations at 24 CFR Part 3500, Real Estate\n Settlement Procedures Act, appendix A, state that line 303 on the HUD-1\n settlement statement must indicate either the cash required from the borrower at\n settlement (the usual case in a purchase transaction) or cash payable to the\n borrower at settlement. This requirement is applicable for all real estate\n settlement transactions. The audit report included the verbiage to emphasis that\n the settlement statement indicates either cash required from the borrower at\n settlement or cash payable to the borrower at settlement.\n\n Further, the lender must determine the amount of funds the borrower needs to\n close the loan. As mentioned in the audit report, one borrower was not aware that\n he needed funds to close.\n\nComment 20 We acknowledge that HUD Handbook, 4155.1, REV5, paragraph 1-12(d), for\n streamline refinance transactions states that borrowers are not required to provide\n evidence of cash-to-close. However, this does not mean that borrowers do not\n\n\n\n 50\n\x0c have to bring cash that was needed to settle the refinance transaction to closing.\n Further, see comment 10 regarding the mortgagee letter.\n\nComment 21 Allen Mortgage acknowledged that it did not properly determine a borrower\xe2\x80\x99s\n eligibility for streamline refinancing. The remaining borrower should been credit\n qualified. We commend Allen Mortgage\xe2\x80\x99s commitment to address this issue cited\n in the audit report.\n\nComment 22 Allen Mortgage acknowledged that it did not properly calculate borrowers\xe2\x80\x99\n maximum mortgage amounts. We commend Allen Mortgage\xe2\x80\x99s commitment to\n address this issue cited in the audit report.\n\nComment 23 Although Allen Mortgage did not provide documentation to support its statements,\n we commend Allen Mortgage\xe2\x80\x99s willingness to buydown the borrower\xe2\x80\x99s loan by\n $188.\n\nComment 24 See comments 12 and 13\n\nComment 25 HUD\xe2\x80\x99s regulations at 24 CFR 203.5, states that direct endorsement lenders must\n exercise the same level of care which it would exercise in obtaining and verifying\n information for a loan in which the lender would be entirely dependent on the\n property as security to protect its investment. The Secretary should publish\n guidelines for direct endorsement underwriting procedures in a handbook, which\n should be provided to all lenders approved for the direct endorsement procedure.\n Compliance with these guidelines is deemed to be the minimum standard of due\n diligence in underwriting mortgages. Further, HUD\xe2\x80\x99s Direct Endorsement\n program lenders certify that they complied with all HUD\xe2\x80\x99s regulations and that\n due diligence was used in underwriting the loans. Therefore, since HUD\xe2\x80\x99s\n handbooks and guidance sets the minimum standards for underwriting loans,\n deviations from a HUD regulations would constitute a lack of due diligence as\n cited in the audit report.\n\nComment 26 The Program Fraud Civil Remedies Act of 1986, codified at 31 U.S.C. 3801-\n 3812, established an administrative remedy against any person who makes, or\n causes to be made, a false claim or written statement to any of certain Federal\n agencies. Administrative actions recompense Federal agencies for losses, not\n necessarily to punish individuals. Regulations at title 24 CFR 25.6 list the\n violations creating grounds for administrative actions which include but are not\n limited to (1) violation of the requirements of any contract or agreement with\n (HUD), or violation of the requirements set forth in any statute, regulation,\n handbook, mortgagee letter, or other written rule or instruction, (2) submission of\n false information to HUD in connection with any HUD/FHA insured mortgage\n transaction; (3) business practices which do not conform to generally accepted\n practices of prudent mortgagees or which demonstrate irresponsibility, (4)\n violation by an approved mortgagee of the requirements or prohibitions of the\n Real Estate Settlement Procedures Act, and (5) failure to properly perform\n\n 51\n\x0c underwriting functions in accordance with instructions and standards issued by\n the (HUD).\n\n Therefore, violations of HUD\xe2\x80\x99s regulations, and mortgagee letters are subject to\n administrative actions. The appropriateness of the administrative action will be\n determined by HUD.\n\nComment 27 We agree that the loans reviewed were streamline refinances, and mortgage credit\n underwriting is not required except for credit qualifying streamline refinances. This\n sentence was included in the report due to the one loan that was streamline refinanced\n FHA case number 151-8624264 instead of being credit qualified. See comment 21.\n In performing the audit, HUD-OIG relies on laws, regulations, and written\n guidance applicable to HUD program participants.\n\nComment 28 As previously mentioned, HUD Handbook 4155.1 REV-5, paragraph 1-10, which\n was in effect during our audit period, specifically states that lenders are not\n permitted to allow borrowers to \xe2\x80\x9cskip\xe2\x80\x9d payments. The borrower is either to make\n the payment when it is due or bring the monthly mortgage payment check to\n settlement. When the new mortgage amount is calculated, FHA does not permit\n the inclusion of any mortgage payments "skipped" by the homeowner in the new\n mortgage amount. For example, a borrower whose mortgage payment is due June\n 1 and expects to close the refinance before the end of June is not permitted to roll\n the June mortgage payment into the new FHA loan amount. For 17 of the loans,\n Allen Mortgage did not require borrowers to make their mortgage payment(s)\n when they were due or bring their monthly mortgage payments to settlement.\n Therefore, all the documentation necessary to approve the loans were not\n provided.\n\nComment 29 See comment 21 and 27. Allen Mortgage acknowledged that it would be hard to\n argue that it would make this same loan without the backing of FHA insurance.\n However, HUD regulations at 24 CFR 203.5(c) require a direct endorsement\n lender to exercise the same level of care it would exercise in obtaining and\n verifying information for a loan in which the lender would be entirely dependent\n on the property as security to protect its investment.\n\nComment 30 See comments 4, 9, 19, and 21\n\n\nComment 31 Allen Mortgage acknowledged that it calculated borrowers\xe2\x80\x99 payoff amounts based\n on borrowers stating that they made all the payments due on their mortgages. It\n did not confirm this information with the borrowers\xe2\x80\x99 servicers or wait to receive\n updated payoff statements. Additionally, HUD and at least one borrower did not\n receive accurate and updated HUD-1 settlement statements. The borrower\n received a HUD-1 settlement statement that showed that he did not pay funds at\n closing, which was the same as the one submitted to HUD.\n However, based on the documentation in Allen Mortgage\xe2\x80\x99s loan files, we\n determined that the borrower actually paid funds after the loan had closed.\n 52\n\x0c Therefore, contrary to Allen Mortgage\xe2\x80\x99s statements, accurate HUD-1settlement\n statements were not always provided to all concerned parties.\n\n Allen Mortgage\xe2\x80\x99s failure to provide complete and accurate information to\n borrowers is a potential RESPA violation. RESPA requires that HUD-1\n settlement statements show the actual settlement costs of the loan transaction\n which should be provided by the borrower within 45 days after settlement.\n Further, at least seven borrowers received settlement statements that disclosed\n that no funds were due at closing. However, the settlement statements maintained\n by Allen Mortgage showed that the borrowers had to pay funds at closing.\n\nComment 32 We adjusted the report accordingly.\n\nComment 33 We adjusted the report to state that loan officers and processors calculated the\n payoff amounts, not underwriters. However, Allen Mortgage\xe2\x80\x99s underwriters are\n responsible for approving loans. Further, see comment 31\n\nComment 34 Contrary to Allen Mortgage\xe2\x80\x99s assertions, borrowers did not always benefit from\n streamline refinancing because it actively sought reimbursement from the\n borrowers to recoup the skipped payments or settlement costs. Therefore, the\n benefits that the borrowers should have received were diminished due to the\n newly acquired liability. Borrowers\xe2\x80\x99 good faith estimates did not always disclose\n that funds were needed to close. For instance, one borrower was not informed\n that funds were needed to close until settlement.\n\nComment 35 Lenders are permitted to grant interest free advances to establish new escrow\n accounts for borrowers in accordance with HUD Handbook of the 4155.1, REV-5.\n However, the handbook does not state that lenders are permitted to grant interest\n free loans to borrowers for the amount of the cash due at closing, which was often\n the case according to the documentation maintained by Allen Mortgage. The\n guidance in HUD Handbook 4155.1, REV-5, states that lenders or other interested\n third parties may not advance cash to borrowers for cash to close in paragraph 2-\n 10 (D). Further as mentioned in the audit report, one borrower informed the\n auditors that he executed a promissory note, which was included in his loan file,\n with Allen Mortgage to pay the amount due on his previous mortgage. The funds\n that the borrower had to pay were not represented on his copy of the settlement\n statement or the settlement statement maintained in the FHA case binder.\n\nComment 36 The $2 million is the estimated loss that HUD could potentially incur based on the\n 21 loans with underwriting deficiencies regardless of whether the loans were\n refinances or purchases.\n\nComment 37 Based on the deficiencies identified in this audit report, we believe our\n recommendations are appropriate. Further, see comments 5, 9, and 12.\n\n\n\n\n 53\n\x0cComment 38 We disagree. Allen Mortgage refinanced this loan after the death of the primary\n borrower. The remaining borrower should have been credit qualified. Further, see\n comment 21.\n\nComment 39 Based on the deficiencies identified in this audit report, we believe our\n recommendations are appropriate. Further, see comments 4, 10, 14, and 19.\n\nComment 40 Based on the deficiencies identified in this audit report, we believe our\n recommendations are appropriate.\n\nComment 41 We commend Allen Mortgage for agreeing to buydown the loans.\n\nComment 42 We have not evaluated Allen Mortgage\xe2\x80\x99s implementation of its changed policies\n or procedures, or its implementation of HUD Mortgagee letter 2011-11.\n\nComment 43 Based on the deficiencies identified in this audit report, we believe our\n recommendations are appropriate.\n\nComment 44 We provided our results of our underwriting and quality control reviews to Allen\n Mortgage on an ongoing basis throughout the audit. Therefore, the information\n presented in the audit report, was provided to Allen Mortgage several months\n prior to the issuance of this audit report. Further, after the issuance of the\n discussion draft audit report, we provided Allen Mortgage nearly 30 days to\n prepare its written response.\n\n\n\n\n 54\n\x0cAppendix C\n\n SUMMARY OF LOANS WITH UNDERWRITING\n DEFICIENCIES\n\n\n Borrower\n received\n Funds Settled Eligibility Miscalculated more\n not loans using not maximum than $500 Material\n FHA case Skipped paid at credit properly mortgage at underwriting\n number payment closing cards 30 determined amount settlement deficiencies\n151-8681596 X X X\n561-8818240 X X X\n261-9356573 X X X\n292-5210194 X X X 31\n263-4128155 X X\n261-9338035 X X X\n262-1731385 X X X\n581-2985846 X X\n491-9085385 X X\n292-4835727 X X\n291-3657749 X X\n151-8704674 X X X\n291-3690893 X X\n493-8933804 X X\n011-5930328 X X\n581-2884051 X X\n483-4074768 X X\n491-9528744 X X\n105-4322752 X X 32\n493-8825894 X X\n581-3334641 X X\n151-8570534 X X\n151-8624264 X X\n562-2087147 X\n263-4211541 X\n263-4186532 X\n381-9331530 X\n Total 17 9 3 1 3 1 23\n\n\n\n30\n The borrowers\xe2\x80\x99 personal credit were charged after their loans closed.\n31\n This loan was streamline refinanced.\n32\n This loan was streamline refinanced.\n\n 55\n\x0cAppendix D\n\n SUMMARY OF LOANS WITH MATERIAL UNDERWRITING\n DEFICIENCIES\n\n Estimated loss\n to HUD (66\n percent of\n Unpaid unpaid\n principal principal\n Count FHA case number Loss to HUD Claim paid balance balance)\n 1 263-4128155 $132,281\n 2 261-9338035 112,112\n 3 262-1731385 106,450\n 4 011-5930328 44,193\n 5 261-9356573 - $199,361\n 6 151-8681596 69,269\n 7 151-8704674 107,103\n 8 151-8624264 - 55,296 33\n 9 561-8818240 - - $257,525 $169,966\n 10 491-9528744 - - 196,333 129,580\n 11 581-2884051 - 156,824 103,504\n 12 581-2985846 - - 151,758 100,161\n 13 491-9085385 120,260 -\n 14 292-4835727 - - 130,084 85,855\n 15 291-3657749 - - 119,567 78,914\n 16 493-8825894 - - 117,435 77,507\n 17 483-4074768 - - 115,781 76,415\n 18 581-3334641 119,496 -\n 19 291-3690893 - - 91,713 60,531\n 20 493-8933804 - - 90,939 60,020\n 21 34 151-8570534 - - 87,256 57,589\n Totals $811,163 $199,361 35 $1,528,873 $1,000,042\n\n\n\n\n33\n The amount was a preforeclosure claim.\n34\n There were 23 loans with material underwriting deficiencies; however, FHA case numbers 105-4322752 and\n292-5210194 were paid in full. The borrowers streamline refinanced their loans.\n35\n This amount does not include the $55,296 claim paid for the property that was sold through a preforeclosure sale.\n\n 56\n\x0cAppendix E\n\n NARRATIVES OF LOANS WITH MATERIAL\n UNDERWRITING DEFICIENCIES\n\n\nFHA case number: 263-4128155\n\nMortgage amount: $168,457\n\nSection of Housing Act: 203B (Mutual Mortgage)\n\nLoan purpose: Streamline refinance\n\nDate of loan settlement January 31, 2008\n\nStatus: Claim\n\nPayments before first 90-day delinquency reported: Four\n\nLoss to HUD: $132,281\n\nArea of Noncompliance: Skipped payment\n\nSummary:\n\nThe borrower\xe2\x80\x99s mortgage payoff statement, dated January 11, 2008, indicated that the borrower\nhad not made the mortgage payment due on January 1, 2008. According to the borrower\xe2\x80\x99s\nmortgage payoff statement, the total due on the loan was $166,940, which included accrued\ninterest from December 1, 2007, to January 31, 2008. Allen Mortgage\xe2\x80\x99s loan files did not\ncontain documentation indicating that the borrower made the final mortgage payment that was\ndue on January 1, 2008, on the previous loan before or at closing as required by HUD. Further,\nAllen Mortgage paid more than $659 to assist with the settlement of this loan.\n\nCriteria\n\nHUD Handbook 4155.1, REV-5, paragraph 1-10(E), states that lenders are not permitted to allow\nborrowers to skip payments. The borrower is either to make the payment when it is due or bring\nthe monthly mortgage payment to settlement. When the new mortgage amount is calculated,\nFHA does not permit the inclusion of mortgage payments skipped by the borrower in the new\nmortgage amount. For example, a borrower whose mortgage payment is due June 1 and who\nexpects to close the refinance before the end of June is not permitted to roll the June mortgage\npayment into the new FHA loan amount.\n\n\n\n 57\n\x0cRegulations at 24 CFR 203.330 state that a mortgage account is delinquent any time a payment is\ndue and not paid.\n\n\n\n\n 58\n\x0cFHA case number: 151-8681596\n\nMortgage amount: $142,789\n\nSection of Housing Act: 203B (Mutual Mortgage)\n\nLoan purpose: Streamline refinance\n\nDate of loan settlement: April 29, 2008\n\nStatus: Claim\n\nPayments before first 90-day delinquency reported: Five\n\nLoss to HUD: $69,269\n\nAreas of noncompliance: Skipped payment, funds not paid at closing\n\nSummary:\n\nThe borrower\xe2\x80\x99s credit report indicated that the borrower\xe2\x80\x99s mortgage was current as of March\n2008. However, the borrower\xe2\x80\x99s payoff statement, dated April 22, 2008, showed that the loan\nwas due for the April 1, 2008, payment and as a result, incurred late charges. Allen Mortgage\xe2\x80\x99s\nloan files or the FHA case binder did not contain documentation to determine whether the\nborrower made the payment that was due on the previous mortgage before or at closing as\nrequired by HUD.\n\nAdditionally, the borrower\xe2\x80\x99s HUD-1 settlement statement indicated that the borrower was\nrequired to pay $1,219 to close on the new loan. However according to the Allen Mortgage\xe2\x80\x99s\nrecords, the borrower did not provide funds at closing. Instead, the borrower provided a personal\ncheck, dated May 3, 2008, made payable to Allen Mortgage after the loan had closed and settled.\nAccording to HUD\xe2\x80\x99s requirements, line 303 of the settlement statement must indicate either the\ncash required from the borrower at settlement or cash payable to the borrower at settlement.\n\nCriteria\n\nHUD Handbook 4155.1, REV-5, paragraph 1-10(E), states that lenders are not permitted to allow\nborrowers to skip payments. The borrower is either to make the payment when it is due or bring\nthe monthly mortgage payment to settlement. When the new mortgage amount is calculated,\nFHA does not permit the inclusion of mortgage payments skipped by the borrower in the new\nmortgage amount. For example, a borrower whose mortgage payment is due June 1 and who\nexpects to close the refinance before the end of June is not permitted to roll the June mortgage\npayment into the new FHA loan amount.\n\nParagraph 1-9 states that for each transaction, the lender must estimate the settlement\nrequirements to determine the cash required to close the mortgage transaction. The difference\n\n 59\n\x0cbetween the amount of the FHA-insured mortgage, excluding any upfront mortgage insurance\npremium, and the total cost to acquire the property, including these expenses, determines the\ncash needed for closing a loan eligible for FHA mortgage insurance.\n\nRegulations at 24 CFR 203.330 state that a mortgage account is delinquent any time a payment is\ndue and not paid.\n\nRegulations at 24 CFR Part 3500, Real Estate Settlement Procedures Act, appendix A, state that\nline 303 must indicate either the cash required from the borrower at settlement (the usual case in\na purchase transaction) or cash payable to the borrower at settlement.\n\n\n\n\n 60\n\x0cFHA case number: 261-9338035\n\nMortgage amount: $101,429\n\nSection of Housing Act: 203B (Mutual Mortgage)\n\nLoan purpose: Streamline refinance\n\nDate of loan settlement: April 29, 2008\n\nStatus: Claim\n\nPayments before first 90-day delinquency reported: Four\n\nLoss to HUD: $112,112\n\nArea of noncompliance: Skipped payment\n\nSummary:\n\nThe borrowers\xe2\x80\x99 mortgage payoff statement, dated April 14, 2008, indicated that the borrowers\xe2\x80\x99\nmortgage payments due on March 1 and April 1, 2008, were not paid. The borrowers\xe2\x80\x99 executed\nHUD-1 settlement statement in the FHA case binder and the HUD-1 settlement statement\nmaintained in Allen Mortgage\xe2\x80\x99s loan files did not indicate that the borrowers were required to\npay cash to close the loan. Additionally, Allen Mortgage\xe2\x80\x99s loan files and the FHA case binder\ndid not contain documentation to determine whether the borrowers made the payments due under\nthe borrowers\xe2\x80\x99 previous mortgage before or at closing as required by HUD.\n\nAccording to the borrowers\xe2\x80\x99 HUD-1 settlement statement generated by the title company, the\nborrowers were required to pay $891 at closing. According to Allen Mortgage\xe2\x80\x99s financial\ndocumentation, the borrowers were required to pay $891 to close the loan and $3,000 down to\nestablish an escrow account. The borrowers paid Allen Mortgage the $891 that was needed to\nclose the loan on May 12, 2008, using a credit card, and paid two-thirds of the escrow in two\ninstallment payments of $1,000 on May 16 and May 19, 2008, respectively, also using a credit\ncard. Therefore, the borrowers charged $2,891 to a credit card during the month of May 2008;\nhowever, the borrowers\xe2\x80\x99 loan closed and settled in April 2008. According to HUD\xe2\x80\x99s\nrequirements, funds can be borrowed for the total required investment as long as satisfactory\nevidence is provided that the funds are fully secured by investment accounts or real property.\nAdditionally, line 303 on the settlement statement must indicate either the cash required from the\nborrower at settlement or cash payable to the borrower at settlement to close the loan.\n\nCriteria:\n\nHUD Handbook 4155.1, REV-5, paragraph 1-10(E), states that lenders are not permitted to allow\nborrowers to skip payments. The borrower is either to make the payment when it is due or bring\nthe monthly mortgage payment to settlement. When the new mortgage amount is calculated,\n\n 61\n\x0cFHA does not permit the inclusion of mortgage payments skipped by the borrower in the new\nmortgage amount. For example, a borrower whose mortgage payment is due June 1 and who\nexpects to close the refinance before the end of June is not permitted to roll the June mortgage\npayment into the new FHA loan amount.\n\nParagraph 2-10(D) states that regarding collateralized loans, funds can be borrowed for the total\nrequired investment as long as satisfactory evidence is provided that the funds are fully secured\nby investment accounts or real property. Such assets may include stocks, bonds, real estate\n(other than the property being purchased), etc. An independent third party must provide the\nborrowed funds. The seller, real estate agent or broker, lender, or other interested third party\nmay not provide such funds.\n\nRegulations at 24 CFR Part 3500, Real Estate Settlement Procedures Act, appendix A, state that\nline 303 must indicate either the cash required from the borrower at settlement or cash payable to\nthe borrower at settlement.\n\n\n\n\n 62\n\x0cFHA case number: 262-1731385\n\nMortgage amount: $120,124\n\nSection of Housing Act: 203B (Mutual Mortgage)\n\nLoan purpose: Streamline refinance\n\nDate of loan settlement: April 30, 2008\n\nStatus: Claim\n\nPayments before first 90-day delinquency reported: Zero\n\nLoss to HUD $106,450\n\nArea of noncompliance: Skipped payment\n\nSummary:\n\nThe borrower\xe2\x80\x99s mortgage payoff statement included accrued interest from March 1 to May 1,\n2008, which meant that the borrower\xe2\x80\x99s April 1, 2008, mortgage payment had not been made\nbefore the loan closed. The HUD-1 settlement statement maintained in Allen Mortgage\xe2\x80\x99s loan\nfiles showed a customer deposit in the amount of $820 in the borrower financing section (section\n200). In addition, Allen Mortgage\xe2\x80\x99s wire calculation sheet showed that Allen Mortgage\ncollected $820 from the borrower to close. However, the borower\xe2\x80\x99s executed HUD-1 settlement\nstatement in the FHA case binder did not show that the borrower needed $820 to close the loan;\ninstead, it showed that the borrower received $500 cash back at closing. According to HUD\xe2\x80\x99s\nrequirements, lenders are not permitted to allow borrowers to skip payments.\n\nAccording to Allen Mortgage\xe2\x80\x99s financial reports and supporting records, the borrower paid $820\nto close the loan on June 22, 2008, using a credit card. According to HUD\xe2\x80\x99s requirements, funds\ncan be borrowed for the total required investment as long as satisfactory evidence is provided\nthat the funds are fully secured by investment accounts or real property. Additionally, line 303\non the settlement statement must indicate either the cash required from the borrower at\nsettlement or cash payable to the borrower at settlement to close the loan. The loan closed on\nApril 14, 2008, and settled on April 30, 2008.\n\nCriteria:\n\nHUD Handbook 4155.1, REV-5, paragraph 1-10E, states that skipped payments are not\nacceptable. Lenders are not permitted to allow borrowers to skip payments. The borrower is\neither to make the payment when it is due or bring the monthly mortgage payment check to\nsettlement. When the new mortgage amount is calculated, FHA does not permit the inclusion of\nany mortgage payments skipped by the homeowner in the new mortgage amount.\n\n\n\n 63\n\x0cParagraph 2-10(D), regarding collateralized loans, states that funds can be borrowed for the total\nrequired investment as long as satisfactory evidence is provided that the funds are fully secured\nby investment accounts or real property. Such assets may include stocks, bonds, real estate\n(other than the property being purchased), etc. An independent third party must provide the\nborrowed funds. The seller, real estate agent or broker, lender, or other interested third party\nmay not provide such funds.\n\n\n\n\n 64\n\x0cFHA case number: 151-8624264\n\nMortgage amount: $138,367\n\nSection of Housing Act: 203B (Mutual Mortgage)\n\nLoan purpose: Streamline refinance\n\nDate of loan settlement: March 28, 2008\n\nStatus: Claim\n\nPayments before first 90-day delinquency reported: Five\n\nClaim paid: $55,296 36\n\nArea of noncompliance: Eligibility not properly determined\n\nSummary:\n\nThe primary borrower died, and the coborrower streamlined refinanced the FHA-insured loan.\nAllen Mortgage\xe2\x80\x99s underwriter did not determine the coborrower\xe2\x80\x99s ability to repay the loan before\nrefinancing the loan. The primary borrower on the previous loan died on February 26, 2008,\naccording to a death certificate in the Allen Mortgage\xe2\x80\x99s loan file. However, the closing date of\nthe new loan was March 21, 2008, which was less than 1 month following the death of the\ncoborrower\xe2\x80\x99s spouse, the previous primary borrower. Allen Mortgage\xe2\x80\x99s underwriter did not\nshow that the coborrower could make the mortgage payments without the primary borrower for\nat least 6 months before the new loan closed in accordance with HUD\xe2\x80\x99s requirements. The\ncoborrower did not make one payment on the previous mortgage after the primary borrower\ndied, which was before the loan was streamline refinanced.\n\nCriteria:\n\nHUD Handbook 4155.1, REV-5, paragraph 1-12(D), states that individuals may be deleted from\nthe title on a streamline refinance only when (1) the assumption of the mortgage not containing a\ndue-on-sale clause occurred more than 6 months previously and the assumptor can document that\nhe or she has made the mortgage payments during this interim period or (2) following an\nassumption of a mortgage when a due-on-sale clause was not triggered and the assumption or\nquit-claim of interest occurred more than 6 months previously and the assumptor can document\nthat he or she made the mortgage payments during this time.\n\n\n\n\n36\n The claim was paid as a result of a preforeclosure sale.\n\n 65\n\x0cFHA case number: 561-8818240\n\nMortgage amount: $271,463\n\nSection of Housing Act: 203B (Mutual Mortgage)\n\nLoan purpose: Streamline refinance\n\nDate of loan settlement: October 31, 2008\n\nStatus: Active\n\nPayments before first 90-day delinquency reported: One\n\nUnpaid principal balance: $257,525\n\nAreas of noncompliance: Skipped payment, funds not paid at closing\n\nSummary:\n\nThe borrower\xe2\x80\x99s loan closed on October 27, 2008, and the loan was settled on October 31, 2008.\nAllen Mortgage\xe2\x80\x99s underwriter approved the loan on October 28, 2008. The borrower\xe2\x80\x99s HUD-1\nsettlement statement generated by the title company was different from the settlement statement\nmaintained in the FHA case binder. The title company\xe2\x80\x99s settlement statement showed that the\nmortgage payoff amount on the borrower\xe2\x80\x99s previous loan was $269,301 and the cash required\nfrom the borrower to close on the new loan was $3,854. The borrower\xe2\x80\x99s HUD-1 settlement\nstatement in the FHA case binder had a payoff amount of $267,609, and the total cash required\nfrom the borrower to close was $1,927.\n\nAllen Mortgage\xe2\x80\x99s financial records did not support that the borrower paid the $1,927 that was\ndue at closing. The borrower provided Allen Mortgage with three postdated checks after the\nloan had closed and settled. It received the first check in the amount of $1,921 on November 17,\n2008, the second check in the amount of $350 on December 2, 2008, and the last check in the\namount of $1,927 on December 2, 2008. Therefore, Allen Mortgage received a total of $4,198\nfrom the borrower after the loan closed. Additionally, according to Allen Mortgage\xe2\x80\x99s financial\nrecords, all three of the postdated checks did not clear the borrower\xe2\x80\x99s bank account because of\ninsufficient funds. According to HUD\xe2\x80\x99s requirements, line 303 on the settlement statement must\nindicate either the cash required from the borrower at settlement or cash payable to the borrower\nat settlement.\n\nThe borrower\xe2\x80\x99s mortgage payoff statement indicated that the borrower\xe2\x80\x99s loan payoff amount\nincluded accrued interest for the period September 1 to November 1, 2008. However, Allen\nMortgage\xe2\x80\x99s loan files did not contain documentation to support that the borrower made the\nmortgage payment due on October 1, 2008, under the previous loan. According to HUD\xe2\x80\x99s\nrequirements, lenders are not permitted to allow borrowers to skip payments.\n\n\n\n 66\n\x0cCriteria:\nHUD Handbook 4155.1, REV-5, paragraph 1-10E, states that skipped payments are not\nacceptable. Lenders are not permitted to allow borrowers to skip payments. The borrower is\neither to make the payment when it is due or bring the monthly mortgage payment check to\nsettlement. When the new mortgage amount is calculated, FHA does not permit the inclusion of\nany mortgage payments skipped by the homeowner in the new mortgage amount.\n\nParagraph 1-9 states that for each transaction, the lender must estimate the settlement\nrequirements to determine the cash required to close the mortgage transaction. The difference\nbetween the amount of the FHA-insured mortgage, excluding any upfront mortgage insurance\npremium, and the total cost to acquire the property, including these expenses, determines the\ncash needed for closing a loan eligible for FHA mortgage insurance.\n\nRegulations at 24 CFR Part 3500, Real Estate Settlement Procedures Act, appendix A, state that\nline 303 on the settlement statement must indicate either the cash required from the borrower at\nsettlement or cash payable to the borrower at settlement.\n\n\n\n\n 67\n\x0cFHA case number: 491-9528744\n\nMortgage amount: $206,834\n\nSection of Housing Act: 203B (Mutual Mortgage)\n\nLoan purpose: Streamline refinance\n\nDate of loan settlement: May 22, 2009\n\nStatus: Active\n\nPayments before first 90-day delinquency reported: Not applicable\n\nUnpaid principal balance: $196,333\n\nArea of noncompliance: Funds not paid at closing\n\nSummary:\n\nThe borrower\xe2\x80\x99s loan closed May 16, 2009, but was approved by Allen Mortgage\xe2\x80\x99s underwriter\non May 20, 2009, which was after the borrower signed the settlement statement. The\nunderwriter did not obtain the borrower\xe2\x80\x99s mortgage payoff statement until after the borrower\nclosed on the new loan. Additionally, the borrower\xe2\x80\x99s HUD-1 settlement statement in Allen\nMortgage\xe2\x80\x99s loan files and the FHA case binder showed that the borrower was required to pay\n$586 to close on the newly refinanced loan. However, contrary to HUD\xe2\x80\x99s requirements, the\nborrower paid Allen Mortgage the funds needed to close using a personal check, dated June 20,\n2009, in the amount of $586, after the loan had closed and settled.\n\nCriteria:\n\nRegulations at 24 CFR Part 3500, Real Estate Settlement Procedures Act, appendix A, state that\nline 303 on the settlement statement must indicate either the cash required from the borrower at\nsettlement or cash payable to the borrower at settlement.\n\nHUD Handbook 4155.1, REV-5, paragraph 1-9, states that for each transaction, the lender must\nestimate the settlement requirements to determine the cash required to close the mortgage\ntransaction. The difference between the amount of the FHA-insured mortgage, excluding any\nupfront mortgage insurance premium, and the total cost to acquire the property, including these\nexpenses, determines the cash needed for closing a loan eligible for FHA mortgage insurance.\n\n\n\n\n 68\n\x0cFHA case number: 261-9356573\n\nMortgage amount: $181,770\n\nSection of Housing Act: 203B (Mutual Mortgage)\n\nLoan purpose: Streamline refinance\n\nDate of loan settlement: February 28, 2008\n\nStatus: Active\n\nPayments before first 90-day delinquency reported: Eight\n\nClaim paid $199,361\n\nAreas of noncompliance: Skipped payment, funds not paid at closing\n\nSummary:\n\nThe borrower\xe2\x80\x99s mortgage payoff statement, dated February 13, 2008, included accrued interest\nfrom January 1 to March 1, 2008. Therefore, the borrower did not make the mortgage payment\nthat was due on February 1, 2008, before the loan was streamline refinanced. Allen Mortgage\xe2\x80\x99s\nloan files did not contain documentation to determine whether the borrower made the mortgage\npayment before or at closing. The borrower\xe2\x80\x99s HUD-1 settlement statement indicated that the\nborrower needed $1,112 to close the loan. Allen Mortgage\xe2\x80\x99s financial records, in particular its\nledger, disclosed a debit to undeposited funds and a credit to receivables on March 3, 2008, for\n$1,112, the exact amount the borrower needed to close. Therefore, Allen Mortgage\xe2\x80\x99s records did\nnot support that the borrower paid the needed funds to close the loan. The borrower\xe2\x80\x99s new loan\nclosed on February 21, 2008, and settled on February 28, 2008. HUD requires that borrowers\neither pay the mortgage payment when it is due or bring the final mortgage payment to closing.\n\nCriteria:\n\nHUD Handbook 4155.1, REV-5, paragraph 1-10(E), states that lenders are not permitted to allow\nborrowers to skip payments. The borrower is either to make the payment when it is due or bring\nthe monthly mortgage payment to settlement. When the new mortgage amount is calculated,\nFHA does not permit the inclusion of mortgage payments skipped by the borrower in the new\nmortgage amount. For example, a borrower whose mortgage payment is due June 1 and who\nexpects to close the refinance before the end of June is not permitted to roll the June mortgage\npayment into the new FHA loan amount.\n\nRegulations at 24 CFR Part 3500, Real Estate Settlement Procedures Act, appendix A, state that\nline 303 on the settlement statement must indicate either the cash required from the borrower at\nsettlement or cash payable to the borrower at settlement.\n\n\n\n 69\n\x0cHUD Handbook 4155.1, REV-5, paragraph 1-9, states that for each transaction, the lender must\nestimate the settlement requirements to determine the cash required to close the mortgage\ntransaction. The difference between the amount of the FHA-insured mortgage, excluding any\nupfront mortgage insurance premium, and the total cost to acquire the property, including these\nexpenses, determines the cash needed for closing a loan eligible for FHA mortgage insurance.\n\n\n\n\n 70\n\x0cFHA case number: 581-2985846\n\nMortgage amount: $161,487\n\nSection of Housing Act: 203B (Mutual Mortgage)\n\nLoan purpose: Streamline refinance\n\nDate of loan settlement: March 31, 2008\n\nStatus: Active\n\nPayments before first 90-day delinquency reported: Not applicable\n\nUnpaid principal balance: $151,758\n\nArea of noncompliance: Skipped payment\n\nSummary:\n\nThe borrower\xe2\x80\x99s payoff statement included interest accrued from February 1 to May 1, 2008.\nHowever, the loan was funded in March 2008. The borrower\xe2\x80\x99s payoff amount identified on the\nHUD-1 settlement statement reflected the accurate payoff amount by reducing it by the\nborrower\xe2\x80\x99s March 1, 2008, mortgage payment. However, Allen Mortgage\xe2\x80\x99s loan files did not\ncontain documentation to support whether the borrower made the mortgage payment due March\n1, 2008, before the loan closed. The title company\xe2\x80\x99s payment ledger identified that no funds\nwere collected from the borrower at closing. However, Allen Mortgage\xe2\x80\x99s financial records\nshowed that it received the borrower\xe2\x80\x99s personal check in the amount of $554 on April 24, 2008.\nHowever, the borrower\xe2\x80\x99s principal and interest mortgage payment on the new loan was $968.20.\nFurther, according to the Allen Mortgage\xe2\x80\x99s title ledger, it paid $669.90 on behalf of the borrower\nto close the mortgage transaction.\n\nAccording to Allen Mortgage\xe2\x80\x99s settlement disbursement calculation worksheet, the borrower\nneeded $1,324 to close the loan. However, the borrower\xe2\x80\x99s HUD-1 settlement statements in Allen\nMortgage\xe2\x80\x99s loan files and the FHA casebinder did not indicate that the borrower was required to\npay funds to close. According to HUD\xe2\x80\x99s requirement, lenders are not permitted to allow\nborrowers to skip payments. Additionally, line 303 on the settlement statement must indicate\neither the cash required from the borrower at settlement or cash payable to the borrower at\nsettlement.\n\nCriteria:\n\nHUD Handbook 4155.1, REV-5, paragraph 1-10E, states that skipped payments are not\nacceptable. Lenders are not permitted to allow borrowers to skip payments. The borrower is\neither to make the payment when it is due or bring the monthly mortgage payment check to\n\n\n\n 71\n\x0csettlement. When the new mortgage amount is calculated, FHA does not permit the inclusion of\nany mortgage payments skipped by the homeowner in the new mortgage amount.\n\nHUD Handbook 4155.1, REV-5, paragraph 1-9, states that for each transaction, the lender must\nestimate the settlement requirements to determine the cash required to close the mortgage\ntransaction. The difference between the amount of the FHA-insured mortgage, excluding any\nupfront mortgage insurance premium, and the total cost to acquire the property, including these\nexpenses, determines the cash needed for closing a loan eligible for FHA mortgage insurance.\n\nRegulations at 24 CFR Part 3500, Real Estate Settlement Procedures Act, appendix A, state that\nline 303 on the settlement statement must indicate either the cash required from the borrower at\nsettlement or cash payable to the borrower at settlement.\n\n\n\n\n 72\n\x0cFHA case number: 292-5210194\n\nMortgage amount: $148,210\n\nSection of Housing Act: 203B (Mutual Mortgage)\n\nLoan purpose: Streamline refinance\n\nDate of loan settlement: January 16, 2009\n\nStatus: Terminated\n\nPayments before first 90-day delinquency reported: Not applicable\n\nUnpaid principal balance: Paid in full\n\nAreas of noncompliance: Skipped payment, funds not paid at closing\n\nSummary:\n\nThe borrower\xe2\x80\x99s new loan closed January 12, 2009. However, the loan was approved by Allen\nMortgage\xe2\x80\x99s underwriter on January 26, 2009. Additionally, according to the borrower\xe2\x80\x99s HUD-1\nsettlement statement, the borrower needed $650 to close. The borrower\xe2\x80\x99s payoff statement\nshowed that the borrower\xe2\x80\x99s previous loan was due for the January 1, 2009, payment.\n\nFurther, the borrower\xe2\x80\x99s HUD-1 settlement statement contained a description, \xe2\x80\x9cJan. Pmnt Paid At\nClosing,\xe2\x80\x9d on line item 205 for $1,341. According to Allen Mortgage, this amount represented\nthe funds the borrower needed to close and should have been on line 303. Further, according to\nAllen Mortgage\xe2\x80\x99s financial records, it received two personal checks from the borrower in the\namounts of $1,341 on February 9, 2009, and $650 on February 23, 2009. However, the checks\nwere dated January 27 and February 24, 2009, respectively. On July 20, 2009, Allen Mortgage\nissued the borrower a refund of $247. Contrary to HUD\xe2\x80\x99s requirements, the lender allowed the\nborrower to skip payments and close on the loan without paying the required cash to close.\n\nCriteria:\n\nRegulations at 24 CFR Part 3500, Real Estate Settlement Procedures Act, appendix A, state that\nlines 204\xe2\x80\x93209 on the settlement statement are used for other items paid by or on behalf of the\nborrower. Lines 204\xe2\x80\x93209 should be used to indicate any financing arrangements or other new\nloan not listed in line 202. Line 303 must indicate either the cash required from the borrower at\nsettlement or cash payable to the borrower at settlement.\n\nHUD Handbook 4155.1, REV-5, paragraph 1-9, states that for each transaction, the lender must\nestimate the settlement requirements to determine the cash required to close the mortgage\ntransaction. The difference between the amount of the FHA-insured mortgage, excluding any\n\n\n\n 73\n\x0cupfront mortgage insurance premium, and the total cost to acquire the property, including these\nexpenses, determines the cash needed for closing a loan eligible for FHA mortgage insurance.\n\nHUD Handbook 4155.1, REV-5, paragraph 1-10E, states that skipped payments are not\nacceptable. Lenders are not permitted to allow borrowers to skip payments. The borrower is\neither to make the payment when it is due or bring the monthly mortgage payment to settlement.\nWhen the new mortgage amount is calculated, FHA does not permit the inclusion of any\nmortgage payments skipped by the homeowner in the new mortgage amount.\n\n\n\n\n 74\n\x0cFHA case number: 105-4322752\n\nMortgage amount: $141,903\n\nSection of Housing Act: 203B (Mutual Mortgage)\n\nLoan purpose: Streamline refinance\n\nDate of loan settlement: December 29, 2008\n\nStatus: Terminated\n\nPayments before first 90-day delinquency reported: Not applicable\n\nUnpaid principal balance: Paid in full\n\nArea of noncompliance: Funds not paid at closing\n\nSummary:\n\nAllen Mortgage\xe2\x80\x99s underwriter approved the loan on December 24, 2008. However, the new loan\nclosed on December 22, 2008. According to the borrower\xe2\x80\x99s HUD-1 settlement statement\nprepared by the title company, the borrower was required to pay $791 to close the loan.\nAccording to Allen Mortgage\xe2\x80\x99s financial records, the borrower provided a personal check, dated\nJanuary 12, 2009, in the amount of $791 to close the loan. However, the funds were provided\nafter the loan had already closed and settled. Contrary to HUD\xe2\x80\x99s requirements, line 303 on the\nsettlement statement must indicate either the cash required from the borrower at settlement or\ncash payable to the borrower at settlement.\n\nCriteria:\n\nRegulations at 24 CFR Part 3500, Real Estate Settlement Procedures Act, appendix A, state that\nline 303 on the settlement statement must indicate either the cash required from the borrower at\nsettlement or cash payable to the borrower at settlement.\n\nHUD Handbook 4155.1, REV-5, paragraph 1-9, states that for each transaction, the lender must\nestimate the settlement requirements to determine the cash required to close the mortgage\ntransaction. The difference between the amount of the FHA-insured mortgage, excluding any\nupfront mortgage insurance premium, and the total cost to acquire the property, including these\nexpenses, determines the cash needed for closing a loan eligible for FHA mortgage insurance.\n\n\n\n\n 75\n\x0cFHA case number: 491-9085385\n\nMortgage amount: $141,402\n\nSection of Housing Act: 203B (Mutual Mortgage)\n\nLoan purpose: Streamline refinance\n\nDate of loan settlement: December 27, 2007\n\nStatus: Claim\n\nPayments before first 90-day delinquency reported: Seven\n\nLoss to HUD: $120,260\n\nArea of noncompliance: Skipped payment\n\nSummary:\n\nThe borrowers\xe2\x80\x99 mortgage payoff statement, dated December 5, 2007, indicated that the\nborrowers had accrued interest from November and December 2007. Therefore, as of the date of\nthe statement, the borrowers had not paid their mortgage payment due on December 1, 2007. In\naddition, the borrowers\xe2\x80\x99 HUD-1 settlement statement signed by the borrowers on December 22,\n2007, did not require the borrowers to bring cash to close. Allen Mortgage\xe2\x80\x99s loan files did not\ncontain documentation to determine whether the borrowers made the mortgage payment due on\ntheir previous loan before or at closing. According to HUD\xe2\x80\x99s requirements, lenders are not\npermitted to allow borrowers to skip payments.\n\nCriteria:\n\nHUD Handbook 4155.1, REV-5, paragraph 1-10E, states that skipped payments are not\nacceptable. Lenders are not permitted to allow borrowers to skip payments. The borrower is\neither to make the payment when it is due or bring the monthly mortgage payment check to\nsettlement. When the new mortgage amount is calculated, FHA does not permit the inclusion of\nany mortgage payments skipped by the homeowner in the new mortgage amount.\n\n\n\n\n 76\n\x0cFHA case number: 292-4835727\n\nMortgage amount: $138,420\n\nSection of Housing Act: 203B (Mutual Mortgage)\n\nLoan purpose: Streamline refinance\n\nDate of loan settlement: December 27, 2007\n\nStatus: Active\n\nPayments before first 90-day delinquency reported: Seven\n\nUnpaid principal balance: $130,084\n\nArea of noncompliance: Skipped payment\n\nSummary:\n\nThe borrowers\xe2\x80\x99 mortgage payoff statement indicated that the borrowers did not pay their\nmortgage payments due December 1, 2007. The loan closed on December 20, 2007. According\nto the borrowers\xe2\x80\x99 HUD-1 settlement statement, the borrowers were not required to bring funds to\nclose. Additionally, Allen Mortgage\xe2\x80\x99s loan files did not contain documentation to determine\nwhether the borrowers made the payments that were due on their previous loan before or at\nclosing. According to HUD\xe2\x80\x99s requirements, lenders are not permitted to allow borrowers to skip\npayments.\n\nCriteria:\n\nHUD Handbook 4155.1, REV-5, paragraph 1-10E, states that skipped payments are not\nacceptable. Lenders are not permitted to allow borrowers to skip payments. The borrower is\neither to make the payment when it is due or bring the monthly mortgage payment check to\nsettlement. When the new mortgage amount is calculated, FHA does not permit the inclusion of\nany mortgage payments skipped by the homeowner in the new mortgage amount.\n\n\n\n\n 77\n\x0cFHA case number: 291-3657749\n\nMortgage amount: $127,232\n\nSection of Housing Act: 203B (Mutual Mortgage)\n\nLoan purpose: Streamline refinance\n\nDate of loan settlement: March 30, 2008\n\nStatus: Active\n\nPayments before first 90-day delinquency reported: 11\n\nUnpaid principal balance $119,567\n\nArea of noncompliance: Skipped payment\n\nSummary:\n\nThe borrower\xe2\x80\x99s new streamline refinanced loan closed on March 18, 2008, and was funded on\nMarch 30, 2008. The borrower\xe2\x80\x99s HUD-1 settlement statement generated by the title company\ncontained the line item description, \xe2\x80\x9cMarch Pmt Reimbursement Check,\xe2\x80\x9d for $857 on line 205.\nThis line item was not on the HUD-1 settlement statement in the FHA case binder. According to\nAllen Mortgage, the borrower\xe2\x80\x99s March reimbursement check amount was the amount of funds\nthe borrower needed to close. Therefore, it should have been on line 303 of the settlment\nstatement, representing the funds needed from the borrower to close.\n\nAccording to Allen Mortgage\xe2\x80\x99s financial records, it did not collect the $857 that was due at\nclosing from the borrower. Its ledger showed that a reimbursement payment of $1,004 was\nreceived and debited to the account, entitled \xe2\x80\x9cUndeposited Funds,\xe2\x80\x9d and credited to its accounts\nreceivable on April 7, 2008. According to the borrower\xe2\x80\x99s mortgage credit analysis worksheet,\nthe new loan\xe2\x80\x99s monthly mortgage payment was $1,004, which was the amount of the payment\nthat was debited to its undeposited funds account.\n\nAdditionally, the borrower\xe2\x80\x99s mortage payoff statement included accrued interest from February 1\nto March 31, 2008. The payoff statement was dated March 18, 2008. According to Allen\nMortgage\xe2\x80\x99s records, the borrower made a payment to Allen Mortgage using a credit card on\nApril 7, 2008, which was after the loan closed and was funded.\n\nAccording to HUD\xe2\x80\x99s requirements, borrowers are not allowed to skip payments, and lenders may\nnot advance cash to borrowers for funds to close. Also, lines 204\xe2\x80\x93209 on the HUD-1 settlement\nstatement should be used to indicate any financing arrangements or other new loan not listed in\nline 202. Line 303 must indicate either the cash required from the borrower at settlement or cash\npayable to the borrower at settlement.\n\n\n\n 78\n\x0cCriteria:\n\nRegulations at 24 CFR Part 3500, Real Estate Settlement Procedures Act, appendix A, state that\nlines 204\xe2\x80\x93209 on the settlement statement are used for other items paid by or on behalf of the\nborrower. Lines 204\xe2\x80\x93209 should be used to indicate any financing arrangements or other new\nloan not listed in line 202. Line 303 must indicate either the cash required from the borrower at\nsettlement or cash payable to the borrower at settlement.\n\nHUD Handbook 4155.1, REV-5, paragraph 1-9, states that for each transaction, the lender must\nestimate the settlement requirements to determine the cash required to close the mortgage\ntransaction. The difference between the amount of the FHA-insured mortgage, excluding any\nupfront mortgage insurance premium, and the total cost to acquire the property, including these\nexpenses, determines the cash needed for closing a loan eligible for FHA mortgage insurance.\n\nHUD Handbook 4155.1, REV-5, paragraph 1-10E, states that skipped payments are not\nacceptable. Lenders are not permitted to allow borrowers to skip payments. The borrower is\neither to make the payment when it is due or bring the monthly mortgage payment to settlement.\nWhen the new mortgage amount is calculated, FHA does not permit the inclusion of any\nmortgage payments skipped by the homeowner in the new mortgage amount.\n\nParagraph 2-10(D) states that funds can be borrowed for the total required investment as long as\nsatisfactory evidence is provided that the funds are fully secured by investment accounts or real\nproperty, other than the property being purchased. An independent third party must provide the\nborrowed funds. The lender or other interested third party may not provide such funds.\n\n\n\n\n 79\n\x0cFHA case number: 493-8825894\n\nMortgage amount: $123,791\n\nSection of Housing Act: 203B (Mutual Mortgage)\n\nLoan purpose: Streamline refinance\n\nDate of loan settlement: October 30, 2008\n\nStatus: Active\n\nPayments before first 90-day delinquency reported: Not applicable\n\nUnpaid principal balance: $117,435\n\nArea of noncompliance: Funds not paid at closing\n\nSummary:\n\nAllen Mortgage\xe2\x80\x99s underwriter approved the mortgage on October 27, 2008; however, the\nborrowers\xe2\x80\x99 loan closed on October 25, 2008. The borrowers\xe2\x80\x99 HUD-1 settlement statement\nindicated that $1,263 was due from the borrowers at closing. However, according to Allen\nMortgage\xe2\x80\x99s financial records, the borrowers paid $1,263 to Allen Mortgage with a personal\ncheck, dated October 31, 2008, which was after the loan had closed and settled. Allen Mortgage\ndid not receive the borrowers\xe2\x80\x99 check until November 3, 2008. According to HUD\xe2\x80\x99s\nrequirements, line 303 on the settlement statement must indicate either the cash required from\nthe borrower at settlement or cash payable to the borrower at settlement.\n\nCriteria:\n\nRegulations at 24 CFR Part 3500, Real Estate Settlement Procedures Act, appendix A, state that\nlines 204\xe2\x80\x93209 on the settlement statement are used for other items paid by or on behalf of the\nborrower. Lines 204\xe2\x80\x93209 should be used to indicate any financing arrangements or other new\nloan not listed in line 202. Line 303 must indicate either the cash required from the borrower at\nsettlement or cash payable to the borrower at settlement.\n\nHUD Handbook 4155.1, REV-5, paragraph 1-9, states that for each transaction, the lender must\nestimate the settlement requirements to determine the cash required to close the mortgage\ntransaction. The difference between the amount of the FHA-insured mortgage, excluding any\nupfront mortgage insurance premium, and the total cost to acquire the property, including these\nexpenses, determines the cash needed for closing a loan eligible for FHA mortgage insurance.\n\n\n\n\n 80\n\x0cFHA case number: 581-3334641\n\nMortgage amount: $114,942\n\nSection of Housing Act: 203B (Mutual Mortgage)\n\nLoan purpose: Streamline refinance\n\nDate of loan settlement: February 27, 2009\n\nStatus: Claim\n\nPayments before first 90-day delinquency reported: Four\n\nLoss to HUD: $119,496\n\nArea of noncompliance: Funds not paid at closing\n\nSummary:\n\nThe borrower\xe2\x80\x99s HUD-1 settlement statement in the FHA case binder and from the title company\nidentified that $803 was due from the borrower to close on the new refinanced loan. Allen\nMortgage\xe2\x80\x99s financial records showed that $770 was recorded as \xe2\x80\x9cBH\xe2\x80\x9d (bottom hold) 37 in Allen\nMortgage\xe2\x80\x99s undeposited funds account on March 5, 2009. Additionally, its records identified an\nadjustment on March 9, 2009, that increased the amount in its receivables account to $33. The\nincrease was called \xe2\x80\x9cunderpaid bottom hold\xe2\x80\x9d ($33 + $770 =$803).\n\nAllen Mortgage\xe2\x80\x99s financial records did not indicate that the borrower paid the funds that were\ndue at closing. However, the borrower provided Allen Mortgage with a check, dated March 4,\n2009, in the amount of $770 after the loan had closed and settled. HUD\xe2\x80\x99s requirements state that\nline 303 on the settlement statement must indicate either the cash required from the borrower at\nsettlement or cash payable to the borrower at settlement.\n\nCriteria:\n\nRegulations at 24 CFR Part 3500, Real Estate Settlement Procedures Act, appendix A, state that\nline 303 on the settlement statement must indicate either the cash required from the borrower at\nsettlement or cash payable to the borrower at settlement.\n\nHUD Handbook 4155.1, REV-5, paragraph 1-9, states that for each transaction, the lender must\nestimate the settlement requirements to determine the cash required to close the mortgage\ntransaction. The difference between the amount of the FHA-insured mortgage, excluding any\nupfront mortgage insurance premium, and the total cost to acquire the property, including these\nexpenses, determines the cash needed for closing a loan eligible for FHA mortgage insurance.\n\n\n37\n According to Allen Mortgage, a bottom hold check represents the amount that the borrower paid to close the loan.\n\n 81\n\x0cFHA case number: 151-8704674\n\nMortgage amount: $108,225\n\nSection of Housing Act: 203B (Mutual Mortgage)\n\nLoan purpose: Streamline refinance\n\nDate of loan settlement: May 31, 2008\n\nStatus: Claim\n\nPayments before first 90-day delinquency reported: 12\n\nLoss to HUD: $107,103\n\nArea of noncompliance: Skipped payment\n\nSummary:\n\nThe borrowers\xe2\x80\x99 previous loan was due for the May 1, 2008, payment at the time of refinancing.\nThe HUD-1 settlement statement in Allen Mortgage\xe2\x80\x99s loan files indentified that the borrowers\nwere required to pay $878 to close on the new loan. However, the HUD-1 settlement statement\nin the FHA case binder showed that the borrowers did not need funds to close. The borrowers\nmade two payments to Allen Mortgage, using a credit card, in the amounts of $500 on July 1,\n2008, and $196 on July 3, 2008. Thus, the borrowers charged a total of $696 to their credit card\nin July 2008 to pay a portion of the funds that were supposedly due at closing after the loan had\nclosed and settled.\n\nAccording to HUD\xe2\x80\x99s requirements, borrowers are not allowed to skip payments, and lenders may\nnot advance cash to borrowers for funds to close.\n\nCriteria:\n\nRegulations at 24 CFR Part 3500, Real Estate Settlement Procedures Act, appendix A, state that\nline 303 on the settlement statement must indicate either the cash required from the borrower at\nsettlement or cash payable to the borrower at settlement.\n\nHUD Handbook 4155.1, REV-5, paragraph 1-9, states that for each transaction, the lender must\nestimate the settlement requirements to determine the cash required to close the mortgage\ntransaction. The difference between the amount of the FHA-insured mortgage, excluding any\nupfront mortgage insurance premium, and the total cost to acquire the property, including these\nexpenses, determines the cash needed for closing a loan eligible for FHA mortgage insurance.\n\nHUD Handbook 4155.1, REV-5, paragraph 1-10E, states that skipped payments are not\nacceptable. Lenders are not permitted to allow borrowers to skip payments. The borrower is\n\n 82\n\x0ceither to make the payment when it is due or bring the monthly mortgage payment to settlement.\nWhen the new mortgage amount is calculated, FHA does not permit the inclusion of any\nmortgage payments skipped by the homeowner in the new mortgage amount.\n\nParagraph 2-10(D) states that funds can be borrowed for the total required investment as long as\nsatisfactory evidence is provided that the funds are fully secured by investment accounts or real\nproperty, other than the property being purchased. An independent third party must provide the\nborrowed funds. The lender or other interested third party may not provide such funds.\n\n\n\n\n 83\n\x0cFHA case number: 291-3690893\n\nMortgage amount: $97,459\n\nSection of Housing Act: 203B (Mutual Mortgage)\n\nLoan purpose: Streamline refinance\n\nDate of loan settlement: April 29, 2008\n\nStatus: Active\n\nPayments before first 90-day delinquency reported: 25\n\nUnpaid principal balance: $91,713\n\nArea of noncompliance: Skipped payment\n\nSummary:\n\nThe borrower\xe2\x80\x99s new loan closed April 23, 2008 and settled on April 29, 2008. However, Allen\nMortgage\xe2\x80\x99s underwriter approved the loan on April 25, 2008. The borrower\xe2\x80\x99s mortgage payoff\nstatement showed that the loan was due for the April 1, 2008, payment. The HUD-1 settlement\nstatement indicated that the borrower did not have to pay funds to close. Additionally, Allen\nMortgage\xe2\x80\x99s loan files did not contain documentation to determine whether the borrower made\nthe mortgage payment due on the previous loan at or before closing as required by HUD.\n\nCriteria:\n\nHUD Handbook 4155.1, REV-5, paragraph 1-10E, states that skipped payments are not\nacceptable. Lenders are not permitted to allow borrowers to skip payments. The borrower is\neither to make the payment when it is due or bring the monthly mortgage payment to settlement.\nWhen the new mortgage amount is calculated, FHA does not permit the inclusion of any\nmortgage payments skipped by the homeowner in the new mortgage amount.\n\n\n\n\n 84\n\x0cFHA case number: 493-8933804\n\nMortgage amount: $95,917\n\nSection of Housing Act: 203B (Mutual Mortgage)\n\nLoan purpose: Streamline refinance\n\nDate of loan settlement: January 31, 2009\n\nStatus: Active\n\nPayments before first 90-day delinquency reported: 18\n\nUnpaid principal balance: $90,939\n\nArea of noncompliance: Skipped payment\n\nSummary:\n\nThe loan closed on January 21, 2009, but was approved by the underwriter on January 27, 2009.\nThe borrower\xe2\x80\x99s HUD-1 settlement statement in the FHA case binder indicated that the borrower\ndid not need funds to close. The borrower\xe2\x80\x99s HUD-1 settlement statement in Allen Mortgage\xe2\x80\x99s\nloan files indicated that the borrower needed $742 to close on the newly refinanced loan. The\nborrower\xe2\x80\x99s signature on the HUD-1 settlement statement in Allen Mortgage\xe2\x80\x99s investor files was\nmisspelled, and this HUD-1 settlement statement also required the borrower to pay $742 at\nclosing.\n\nThe borrower\xe2\x80\x99s loan file contained a notarized promissory note executed between the borrower\nand Allen Mortgage in which the borrower promised to reimburse Allen Mortgage $742 for\npaying the borrower\xe2\x80\x99s mortgage payment due on February 1, 2009, under the previous loan.\nSince the loan closed in January 2009, the first payment would not have been due on the new\nmortgage until March 1, 2009. Further, the borrower\xe2\x80\x99s loan file contained a collection letter,\ndated December 22, 2009, stating that the borrower owed $742 for the downpayment and $160\nto start the borrower\xe2\x80\x99s escrow account. However, as of the date of the letter, the borrower had\npaid Allen Mortgage only $371 on February 27, 2009. The collection letter further stated that if\nAllen Mortgage did not hear from the borrower by January 5, 2010, the borrower\xe2\x80\x99s account\nbalance would be forwarded to a collection company, and a lien will be placed on the borrower\xe2\x80\x99s\nproperty.\n\nAccording to HUD\xe2\x80\x99s requirements, borrowers are not permitted to skip payments, lenders may\nnot provide funds to borrowers for cash to close, and borrowers may not secure funds to close\nwhen the real property being financed is used for collateral.\n\nCriteria:\n\n\n\n 85\n\x0cRegulations at 24 CFR Part 3500, Real Estate Settlement Procedures Act, appendix A, state that\nline 303 on the settlement statement must indicate either the cash required from the borrower at\nsettlement or cash payable to the borrower at settlement.\n\nHUD Handbook 4155.1, REV-5, paragraph 1-9, states that for each transaction, the lender must\nestimate the settlement requirements to determine the cash required to close the mortgage\ntransaction. The difference between the amount of the FHA-insured mortgage, excluding any\nupfront mortgage insurance premium, and the total cost to acquire the property, including these\nexpenses, determines the cash needed for closing a loan eligible for FHA mortgage insurance.\n\nHUD Handbook 4155.1, REV-5, paragraph 1-10E, states that skipped payments are not\nacceptable. Lenders are not permitted to allow borrowers to skip payments. The borrower is\neither to make the payment when it is due or bring the monthly mortgage payment to settlement.\nWhen the new mortgage amount is calculated, FHA does not permit the inclusion of any\nmortgage payments skipped by the homeowner in the new mortgage amount.\n\nHUD Handbook 4155.1, REV-5, paragraph 2-10(D), states that funds can be borrowed for the\ntotal required investment as long as satisfactory evidence is provided that the funds are fully\nsecured by investment accounts or real property, other than the property being purchased. An\nindependent third party must provide the borrowed funds. The lender or other interested third\nparty may not provide such funds.\n\n\n\n\n 86\n\x0cFHA case number: 151-8570534\n\nMortgage amount: $92,977\n\nSection of Housing Act: 203B (Mutual Mortgage)\n\nLoan purpose: Streamline refinance\n\nDate of loan settlement: February 28, 2008\n\nStatus: Active\n\nPayments before first 90-day delinquency reported: Six\n\nUnpaid principal balance: $87,256\n\nArea of noncompliance: Funds not paid at closing\n\nSummary:\n\nThe borrower\xe2\x80\x99s new streamline refinanced loan closed on February 19, 2008, and settled on\nFebruary 28, 2008. The borrower\xe2\x80\x99s mortgage payoff statement, dated February 12, 2008,\nindicated that the borrower\xe2\x80\x99s mortgage payment due on February 1, 2008, was not paid. The\nHUD-1 settlement statement identified that $737 was financed for the borrower as a \xe2\x80\x9cMarch\nPayment Hold Check\xe2\x80\x9d on line 206 of the HUD-1 settlement statement and that the borrower\nneeded $1,670 to close the loan. According to the borrower\xe2\x80\x99s mortgage payoff statement, the\nborrower\xe2\x80\x99s mortgage payment was not due since the borrower had made all payments under the\nmortgage to the previous servicer. As a result, the first payment was not due on the new loan\nuntil April 1, 2008, and there should not have been a payment due for the month of March 2008.\n\nAdditionally, according to the Allen Mortgage\xe2\x80\x99s wire calculation sheet in the borrower\xe2\x80\x99s loan\nfile, it anticipated collecting $737 to establish a new escrow account and $1,670 as the HUD-1\nbottom line 303 payment, which was due at closing from the borrower. A review of the\nborrower\xe2\x80\x99s payment documentation in the loan file showed that the borrower paid Allen\nMortgage with two personal checks. The first check for $1,670 was dated March 29, 2008, and\nthe second check for $737 was dated March 26, 2008. Therefore, the borrower did not pay the\nfunds needed to close until after the loan closed and settled.\n\nAccording to HUD\xe2\x80\x99s requirements, line 303 on the settlement statement must indicate either the\ncash required from the borrower at settlement or cash payable to the borrower at settlement.\n\nCriteria:\n\nRegulations at 24 CFR Part 3500, Real Estate Settlement Procedures Act, appendix A, state that\nlines 204\xe2\x80\x93209 on the settlement statement are used for other items paid by or on behalf of the\nborrower. Lines 204\xe2\x80\x93209 should be used to indicate any financing arrangements or other new\n\n 87\n\x0cloan not listed in line 202. Line 303 must indicate either the cash required from the borrower at\nsettlement or cash payable to the borrower at settlement.\n\nHUD Handbook 4155.1, REV-5, paragraph 1-9, states that for each transaction, the lender must\nestimate the settlement requirements to determine the cash required to close the mortgage\ntransaction. The difference between the amount of the FHA-insured mortgage, excluding any\nupfront mortgage insurance premium, and the total cost to acquire the property, including these\nexpenses, determines the cash needed for closing a loan eligible for FHA mortgage insurance.\n\n\n\n\n 88\n\x0cFHA case number: 011-5930328\n\nMortgage amount: $103,573\n\nSection of Housing Act: 203B (Mutual Mortgage)\n\nLoan purpose: Streamline refinance\n\nDate of loan settlement: July 31, 2008\n\nStatus: Claim\n\nPayments before first 90-day delinquency reported: Four\n\nLoss to HUD: $44,193\n\nArea of noncompliance: Skipped payment\n\nSummary:\n\nThe new loan closed on July 11, 2008, was approved by the underwriter on July 28, 2008, and\nsettled on July 31, 2008. The borrower\xe2\x80\x99s mortgage payoff statement, dated July 8, 2008, showed\nthat the loan was due for the July 1, 2008, payment. The borrower\xe2\x80\x99s HUD-1 settlement\nstatement showed that the borrower received $400 cash back at closing. The settlement\nstatement also contained a description of a payment in the amount of $781 (\xe2\x80\x9cAug Paycheck from\nborrower\xe2\x80\x9d) that was due from or on behalf of the borrower on line 205.\n\nAccording to Allen Mortgage, the amount on line 205 should have been on line 303 (cash to or\nfrom borrower) and netted against the $400 that was due to the borrower at closing. Allen\nMortgage\xe2\x80\x99s loan file did not contain documentation to support that the borrower made the\npayment due on July 1, 2008, before or at closing. Further, according to the title company\xe2\x80\x99s\nledger, the borrower received $400 back at closing on July 31, 2008, when the loan settled.\nHowever, in reviewing Allen Mortgage\xe2\x80\x99s financial documentation, we determined that the\nborrower paid Allen Mortgage $781 using a personal check on August 15, 2008, after the loan\nclosed and settled.\n\nAccording to HUD\xe2\x80\x99s requirements, borrowers are not permitted to skip payments when\nrefinancing, and lenders are not allowed to advance funds to borrowers for cash to close.\n\nCriteria:\n\nRegulations at 24 CFR Part 3500, Real Estate Settlement Procedures Act, appendix A, state that\nlines 204\xe2\x80\x93209 on the settlemetn statement are used for other items paid by or on behalf of the\nborrower. Lines 204\xe2\x80\x93209 should be used to indicate any financing arrangements or other new\nloan not listed in line 202. Line 303 must indicate either the cash required from the borrower at\nsettlement or cash payable to the borrower at settlement.\n\n 89\n\x0cHUD Handbook 4155.1, REV-5, paragraph 1-9, states that for each transaction, the lender must\nestimate the settlement requirements to determine the cash required to close the mortgage\ntransaction. The difference between the amount of the FHA-insured mortgage, excluding any\nupfront mortgage insurance premium, and the total cost to acquire the property, including these\nexpenses, determines the cash needed for closing a loan eligible for FHA mortgage insurance.\n\nHUD Handbook 4155.1, REV-5, paragraph 2-10(D), states that funds can be borrowed for the\ntotal required investment as long as satisfactory evidence is provided that the funds are fully\nsecured by investment accounts or real property, other than the property being purchased. An\nindependent third party must provide the borrowed funds. The lender or other interested third\nparty may not provide such funds.\n\nHUD Handbook 4155.1, REV-1 paragraph 1-10(E), states that lenders are not permitted to allow\nborrowers to skip payments. The borrower is either to make the payment when it is due or bring\nthe monthly mortgage payment to settlement. When the new mortgage amount is calculated,\nFHA does not permit the inclusion of mortgage payments skipped by the borrower in the new\nmortgage amount. For example, a borrower whose mortgage payment is due June 1 and who\nexpects to close the refinance before the end of June is not permitted to roll the June mortgage\npayment into the new FHA loan amount.\n\n\n\n\n 90\n\x0cFHA case number: 581-2884051\n\nMortgage amount: $167,084\n\nSection of Housing Act: 203B (Mutual Mortgage)\n\nLoan purpose: Streamline refinance\n\nDate of loan settlement: October 30, 2007\n\nStatus: Active\n\nPayments before first 90-day delinquency reported: Not applicable\n\nUnpaid principal balance $156,824\n\nArea of noncompliance: Skipped payment\n\nSummary:\n\nThe borrower\xe2\x80\x99s mortgage payoff statement indicated that the borrower had not met the mortgage\npayment due on October 1, 2007, as of October 31, 2007. The HUD-1 settlement statement\nprepared by the title company indicated that the borrower needed $1,326 to the close on the new\nloan. However, the HUD-1 settlement statement prepared by the closing agent did not state that\nthe borrower was required to pay funds to close the loan. The borrower signed the closing\ndocuments on October 25, 2007, and was provided a 3-day recission period. The last day the\nborrower could have withdrawn from the loan agreement was October 29, 2007. Allen Mortgage\ndid not obtain the borrower\xe2\x80\x99s mortgage payoff statement until October 31, 2007, which was after\nthe borrower\xe2\x80\x99s rescission period. The borrower\xe2\x80\x99s settlement statement was modified to include a\ndownpayment amount at that time.\n\nThe borrower\xe2\x80\x99s loan file did not contain documentation showing that the borrower brought the\nfinal payment due on the previous loan to closing. Further, Allen Mortgage\xe2\x80\x99s wire calculation\nsheet indicated a correction to the new loan\xe2\x80\x99s settlement disbursement; therefore, the borrower\nhad to pay $1,085 to close the loan. According to Allen Mortgage\xe2\x80\x99 financial records, the\nborrower paid Allen Mortgage using a personal check, dated November 26, 2007, in the amount\nof $1,567. In Allen Mortgage\xe2\x80\x99s ledger, the payment described as \xe2\x80\x9cbottom hold check\xe2\x80\x9d was\ndebited to undeposited funds and credited from the accounts receivable on January 2, 2008.\n\nAccording to HUD\xe2\x80\x99s requirements, borrowers are not permitted to skip payments when\nrefinancing, and line 303 of the settlement statement must indicate the cash required from the\nborrower at settlement.\n\nCriteria:\n\n\n\n\n 91\n\x0cRegulations at 24 CFR Part 3500, Real Estate Settlement Procedures Act, appendix A, state that\nlines 204\xe2\x80\x93209 on the settlement statement are used for other items paid by or on behalf of the\nborrower. Lines 204\xe2\x80\x93209 should be used to indicate any financing arrangements or other new\nloan not listed in line 202. Line 303 must indicate either the cash required from the borrower at\nsettlement or cash payable to the borrower at settlement.\n\nHUD Handbook 4155.1, REV-5, paragraph 1-9, states that for each transaction, the lender must\nestimate the settlement requirements to determine the cash required to close the mortgage\ntransaction. The difference between the amount of the FHA-insured mortgage, excluding any\nupfront mortgage insurance premium, and the total cost to acquire the property, including these\nexpenses, determines the cash needed for closing a loan eligible for FHA mortgage insurance.\n\nHUD Handbook 4155.1, REV-5, paragraph 1-10E, states that skipped payments are not\nacceptable. Lenders are not permitted to allow borrowers to skip payments. The borrower is\neither to make the payment when it is due or bring the monthly mortgage payment to settlement.\nWhen the new mortgage amount is calculated, FHA does not permit the inclusion of any\nmortgage payments skipped by the homeowner in the new mortgage amount.\n\nHUD Handbook 4155.1, REV-5, paragraph 2-10(D), states that funds can be borrowed for the\ntotal required investment as long as satisfactory evidence is provided that the funds are fully\nsecured by investment accounts or real property, other than the property being purchased. An\nindependent third party must provide the borrowed funds. The lender or other interested third\nparty may not provide such funds.\n\n\n\n\n 92\n\x0cFHA case number: 483-4074768\n\nMortgage amount: $122,338\n\nSection of Housing Act: 203B (Mutual Mortgage)\n\nLoan purpose: Streamline refinance\n\nDate of loan settlement: March 30, 2009\n\nStatus: Active\n\nPayments before first 90-day delinquency reported: Not applicable\n\nUnpaid principal balance: $115,781\n\nArea of noncompliance: Skipped payment\n\nSummary:\n\nAllen Mortgage\xe2\x80\x99s underwriter approved the loan on March 17, 2009. The loan closed on March\n13, 2009, and settled on March 30, 2009. Therefore, the loan was approved after it had closed.\nThe borrower\xe2\x80\x99s HUD -1 settlement statement in the FHA case binder showed on line item 205 an\nitem, described as \xe2\x80\x9cMARCH PMT REIMBURSEMENT CHECK,\xe2\x80\x9d for $877.\n\nAccording to the borrower\xe2\x80\x99s mortgage payoff statement, the borrower had made all of the\nmortgage payments due on the previous loan including the payment due March 1, 2009. Thus,\nthere was not a payment due for the month of March 2009. According to Allen Mortgage, line\nitem 205 on the settlement statement and the corresponding amount should have been on line\n303 of the statement as cash to be received from the borrower at closing.\n\nAllen Mortgage\xe2\x80\x99s loan files showed that the borrower paid $887 using a personal check, dated\nApril 10, 2009, to Allen Mortgage after the loan closed and settled. According HUD\xe2\x80\x99s\nrequirements, line 303 of the settlement statement must indicate the cash required from the\nborrower at settlement.\n\nCriteria:\n\nRegulations at 24 CFR Part 3500, Real Estate Settlement Procedures Act, appendix A, state that\nlines 204\xe2\x80\x93209 are used for other items paid by or on behalf of the borrower. Lines 204\xe2\x80\x93209\nshould be used to indicate any financing arrangements or other new loan not listed in line 202.\nLine 303 must indicate either the cash required from the borrower at settlement or cash payable\nto the borrower at settlement.\n\nHUD Handbook 4155.1, REV-5, paragraph 1-9, states that for each transaction, the lender must\nestimate the settlement requirements to determine the cash required to close the mortgage\n\n 93\n\x0ctransaction. The difference between the amount of the FHA-insured mortgage, excluding any\nupfront mortgage insurance premiums, and the total cost to acquire the property, including these\nexpenses, determines the cash needed for closing a loan eligible for FHA mortgage insurance.\n\nHUD Handbook 4155.1, REV-5, paragraph 1-10E, states that skipped payments are not\nacceptable. Lenders are not permitted to allow borrowers to skip payments. The borrower is\neither to make the payment when it is due or bring the monthly mortgage payment to settlement.\nWhen the new mortgage amount is calculated, FHA does not permit the inclusion of any\nmortgage payments skipped by the homeowner in the new mortgage amount.\n\nHUD Handbook 4155.1, REV-5, paragraph 2-10 (D), states that funds can be borrowed for the\ntotal required investment as long as satisfactory evidence is provided that the funds are fully\nsecured by investment accounts or real property, other than the property being purchased. An\nindependent third party must provide the borrowed funds. The lender or other interested third\nparty may not provide such funds.\n\n\n\n\n 94\n\x0c'