New Jersey Audit Reports

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Issue Date: October 9, 2009
Audit Report No.: 2010-NY-1002
File Size: 8.16MB

Title: Jersey Mortgage Company, Cranford, New Jersey, Did Not Always Comply with HUD/FHA Loan Underwriting Requirements

We completed an audit of Jersey Mortgage Company (Jersey Mortgage), a nonsupervised lender located in Cranford, New Jersey. The audit objectives were to determine whether Jersey Mortgage (1) approved Federal Housing Administration (FHA)-insured loans in accordance with the requirements of the U.S. Department of Housing and Urban Development (HUD)/FHA, which include adherence to prudent lending practices, and (2) developed and implemented a quality control plan in compliance with HUD/FHA requirements.

Jersey Mortgage did not always approve FHA-insured loans in accordance with the requirements of HUD/FHA. Specifically, Jersey Mortgage approved 13 loans in which there were significant underwriting deficiencies such as (1) inadequate verification of borrower's credit, (2) inadequate compensating factors for loans with high debt-to-income ratios, (3) inadequate verification of funds to close loans, and (4) improper verification of employment and income information. As a result, loans were approved for potentially ineligible borrowers, which caused HUD/FHA to incur an unnecessary insurance risk. Jersey Mortgage also did not ensure that its quality control plan was implemented in accordance with HUD/FHA's requirements. Consequently, the effectiveness of its quality control plan, which was designed to ensure accuracy, validity, and completeness in its loan underwriting process, was lessened.

We recommend that the Deputy Assistant Secretary for Single Family Housing require Jersey Mortgage to (1) indemnify HUD against future losses on 12 loans with significant underwriting deficiencies, (2) reimburse HUD for the amount of claims and associated fees paid on one loan with significant underwriting deficiencies, (3) implement quality control procedures to ensure compliance with the requirements to review early defaults and rejected loans and (4) that HUD's Homeownership Center's Quality Assurance Division follow up with Jersey Mortgage within six months to ensure that quality control review procedures were properly implemented.

Title: The Union County Consortium, Elizabeth, NJ, Had Administrative Weaknesses in its Community Development Block Grant Program

We completed an audit of the Union County Consortium's (County) administration of its Community Development Block Grant (CDBG) program to determine whether the County (1) disbursed CDBG funds efficiently and effectively in accordance with its submission to HUD and in compliance with HUD rules and regulations, (2) maintained a financial management system to adequately safeguard funds, and (3) established adequate controls to ensure that program activities were administered properly and complied with CDBG national objectives.

The County did not always disburse CDBG funds in accordance with regulations, maintain a financial management system that always safeguarded funds, or establish sufficient controls to ensure that program activities were properly administered and complied with CDBG national objectives. Specifically, weaknesses in the County's financial and monitoring controls caused the County to (1) draw down CDBG funds instead of first using available program income, (2) transfer program income and CDBG funds for non-CDBG uses, (3) use program income for unsupported items, (4) inadequately record and report program income, and (5) inadequately monitor its consultant.

We recommend that the Director of HUD's New Jersey Office of Community Planning and Development instruct the County to (1) establish controls to ensure that available program income is used before drawing down funds from HUD's line of credit, (2) reimburse the program income account $463,793 from nonfederal sources if the County cannot provide supporting documentation, (3) implement policies and procedures to ensure that the program income is accurately recorded and reported, and (4) instruct its consultant to remit $31,851 to the County to be put back into the County's line of credit since the funds were not disbursed.

Issue Date: January 30, 2009
Audit Report No.: 2009-PH-1004
File Size: 650.19KB

Title: The City of Camden, New Jersey, Did Not Always Administer Its Asset Control Area Program in Compliance with HUD Requirements

We audited the City of Camden's (City) asset control area (ACA) program following a request from the U.S. Department of Housing and Urban Development's (HUD) Office of Single Family Asset Management for a review of the City's compliance with its ACA agreement with HUD. Our objective was to determine whether the City complied with specific requirements in the ACA agreement pertaining to the resale of properties it acquired from HUD.

The City did not comply with the specific provisions in the ACA agreement pertaining to the resale of its acquired ACA properties. It did not (1) ensure that 17 (or 25 percent) of 68 properties it acquired from HUD were rehabilitated and sold within the required timeframe, (2) ensure that all expenses included in net development costs for rehabilitated properties were eligible, and (3) verify homebuyers' eligibility and maintain the appropriate related supporting documentation. As a result, the City was unable to support $441,500 in property discounts from HUD for the 17 outstanding properties. It also included more than $11,600 in ineligible expenses in the net property development costs for four properties, which increased their sales prices and, consequently, the related mortgages by more than $11,700.

We recommend that HUD direct the City to obtain and provide evidence that it has the necessary resources to complete the rehabilitation and sale of the 17 outstanding properties. If the City cannot provide evidence of its ability to rehabilitate the outstanding properties, it should pay HUD $441,500. In addition, we recommend that the City buy down the mortgages for the four properties which had more than $11,600 in ineligible expenses included as part of their net development costs, and that the City verify and document the eligibility of each homebuyer in the future. We further recommend that HUD not renew the ACA agreement with the City until it has demonstrated that it is in compliance with the requirements of the agreement.

Issue Date: December 16, 2008
Audit Report No.: 2009-NY-1005
File Size: 732.68KB

Title: The Township of South Orange Village, New Jersey, Did Not Always Disburse Community Development Block Grant Funds As Per HUD Requirements

We completed an audit the Community Development Block Grant (CDBG) program administrated by the Township of South Orange Village (Township), a subgrantee of the Essex County Consortium (County). Our audit objectives were to determine whether the Township disbursed CDBG funds efficiently and effectively in accordance with its submission to the U.S. Department of Housing and Urban Development (HUD) and with applicable rules and regulations, had a financial management system in place to adequately safeguard the funds, and used CDBG funds to meet the national objectives of the program.

The Township did not always comply with HUD's rules and regulations while disbursing CDBG funds, spent $76,168 for activities related to fundraising, and paid $7,589 in legal fees related to the Township's other general activities. The Township also did not execute a subgrantee agreement with a non-profit entity and its contracts did not include the required federal contract provisions.

We recommended that the Director of HUD's New Jersey Office of Community Planning and Development instruct the County to require the Township to repay $83,757 related to the ineligible expenses from nonfederal funds, develop and execute an adequate subgrantee agreement, and develop and implement contracts containing all mandatory provisions when using federal funds.

Issue Date: June 30, 2008
Audit Report No.: 2008-NY-1009
File Size: 941.62KB

Title: Union County, Elizabeth, New Jersey, Had Weaknesses in Its Housing Choice Voucher Program

We completed an audit of Union County's (County) Housing Choice Voucher program, which is administered by its Division of Planning and Community Development. Our audit objectives were to determine whether the County's (1) Housing Choice Voucher program units met housing quality standards; (2) costs charged to the Housing Choice Voucher program were supported and eligible; and (3) controls over the Housing Choice Voucher program, including monitoring of the consultant administering the program, were adequate.

Our inspection of 58 Section 8 units found that 42 units (72 percent) did not meet minimum housing quality standards. Of the 42 units, 21 were in material noncompliance with standards. As a result HUD made housing assistance payments for units that did not meet housing quality standards. We estimate that over the next year, HUD will make housing assistance payments of $762,000 for units in material noncompliance with the standards. In addition, the County's financial and program controls were inadequate. As a result, $83,476 in transfers of funds and salary costs charged are questioned pending an eligibility determination by HUD, while another $21,862 in transfers and salary costs are ineligible.

We recommend that the Director of HUD's New Jersey Office of Public Housing instruct the County to develop and implement procedures (1) to ensure that units meet housing quality standards to prevent an estimated $762,000 from being spent on units that are in material noncompliance, (2) for allocating and charging costs to the Housing Choice Voucher program to include developing a cost allocation plan for salaries, and (3) to ensure that transfers from the Housing Choice Voucher program to other programs are in accordance with regulations.

Issue Date: May 29, 2008
Audit Report No.: 2008-NY-1007
File Size: 1.23MB

Title: The County of Essex, Verona, New Jersey, Did Not Always Administer Its Community Block Grant Program in Accordance With HUD Requirements

We completed an audit of the County of Essex's (County) Community Development Block Grant (CDBG) program, which was administered by its Division of Housing and Community Development. Our audit objectives were to determine whether the County disbursed CDBG funds efficiently and effectively in accordance with its submission to HUD and applicable rules and regulations and had a financial management system in place to adequately safeguard the funds.

The County did not always follow applicable regulations and its submission to HUD while disbursing CDBG funds. Specifically, CDBG funds were disbursed for ineligible and defaulted float loans, the County and its subgrantees did not always comply with procurement requirements, grant agreements did not contain the required provisions to ensure compliance with HUD requirements, and substantial changes to program activities were not amended appropriately. In addition, there were control weaknesses in the County's financial management system used to safeguard funds.

We recommended that the Director of HUD's New Jersey Office of Community Planning and Development instruct the County to reimburse to the CDBG program from nonfederal funds more than $1.2 million for ineligible and defaulted float loans; provide supporting documentation for the two procurements totaling $517,125; reimburse more than $2.6 million in excess checking account funds to the CDBG program if the County does not immediately disburse the funds; remit $280,108 in bank interest; reimburse to the CDBG program $179,091 for the unnecessary drawdowns of funds; and establish procedures to ensure that CDBG funds will be disbursed in a timely manner and in accordance with program requirements.

Issue Date: May 12, 2008
Audit Report No.: 2008-NY-1005
File Size: 1.74MB

Title: Mortgage Access Corporation, Morris Plains, New Jersey, Did Not Always Comply with HUD/FHA Loan Origination Requirements

We completed an audit of Mortgage Access Corporation, doing business as Weichert Financial Services, a nonsupervised lender located in Morris Plains, New Jersey. The audit objectives were to determine whether Mortgage Access Corporation (1) approved insured loans in accordance with U.S. Department of Housing and Urban Development (HUD)/Federal Housing Administration (FHA) requirements, and (2) developed and implemented a quality control plan that complied with HUD/FHA requirements.

Mortgage Access Corporation did not always comply with HUD regulations.Seven loans exhibited significant underwriting deficiencies such as inadequate credit analysis, inadequate verification of funds to close, minimum cash investment not met, and inadequate verification of income/employment. As a result, loans were approved for potentially ineligible borrowers, which caused HUD/FHA to incur an unnecessary insurance risk. In addition, one of these seven loans was approved for a property that was not eligible for FHA insurance. These deficiencies occurred because Mortgage Access Corporation lacked adequate controls to ensure that loans were processed in accordance with HUD requirements. Mortgage Access Corporation also failed to ensure that its quality control plan was implemented in accordance with HUD's requirements. Consequently, the effectiveness of its quality control plan, which was designed to ensure accuracy, validity, and completeness in its loan underwriting process, was lessened.

We recommended that the Assistant Secretary for Housing - Federal Housing Commissioner require Mortgage Access Corporation to reimburse HUD for one ineligible loan, indemnify HUD against future losses on six loans with significant underwriting deficiencies, and implement procedures to ensure compliance with HUD's and its own quality control requirements.

Issue Date: September 12, 2007
Audit Report No.: 2007-NY-1012
File Size: 402.55KB

Title: the City of Passaic, New Jersey's Community Development Department Has Weaknesses in Its HOME Investment Partnerships Program

We completed an audit of the City of Passaic's (City) HOME Investment Partnerships Program (HOME) as a result of an October 2006 request for an audit by the director of the U.S. Department of Housing and Urban Development's (HUD) Newark Office of Community Planning and Development. Our audit objectives were to determine whether the City followed HUD and HOME regulations regarding the receipt and disbursement of program income; rehabilitation, acquisition, and new construction activities; and procurement practices. The City did not follow HUD and HOME regulations regarding the receipt and disbursement of program income.

The City also did not always document compliance with HUD and local program regulations regarding rehabilitation, acquisition, new construction, and monitoring activities. Furthermore, the City did not follow federal procurement regulations regarding a professional service contract and a funding agreement to provide rehabilitation and acquisition services, respectively.

We recommend that the director of the HUD New Jersey Office of Community Planning and Development instruct the City to record $528,974 in program income into HUD's Integrated Disbursement and Information System, provide adequate support for $53,053 in disbursements of program income, and expend the $475,921 balance in its two local accounts before making additional drawdowns from HOME funds. Also the City should reimburse the HOME program from nonfederal funds $97,500 related to the ineligible acquisition and new construction costs incurred; provide documentation for $583,602 in unsupported activities; and ensure that annual monitoring reviews are performed so that $790,441 will be put to better use. Finally the City should provide contracts/written agreements for the unsupported disbursements of $204,711, implement proper bidding procedures and obtain a current funding agreement with its community housing development organization to ensure that future expenditures of $360,280 will be put to better use, and repay the $4,127 paid for rehabilitation services incurred in excess of contract limits.

Issue Date: August 17, 2007
Audit Report No.: 2007-NY-1011
File Size: 598.66KB

Title: The Hoboken Housing Authority, Hoboken, New Jersey, Requires Improved Controls Over Its Capital Fund Program and Cash Disbursement Process

We completed an audit of the Housing Authority of the City of Hoboken, Hoboken, New Jersey. The audit objectives were to determine whether (1) the Authority administrated its capital grant program in accordance with applicable U.S. Department of Housing and Urban Development (HUD) laws and regulations and (2) payments to the City of Hoboken (City) for police services were reasonable and supported.

The Authority did not adequately administer its capital grant program. It used $818,534 of its fiscal years 2000 through 2003 capital grant funds to pay administrative and management improvement costs in excess of the limitations imposed by HUD and also transferred a total of $637,039 from its fiscal years 2003-01, 2004, and 2005 capital grants to pay operating expenses for its low-rent public housing program. These deficiencies occurred because the Authority did not have sufficient funds in the low-rent public housing program to pay the operating expenses. Further, the Authority made total payments of $333,244 to the City for police services without obtaining or maintaining adequate and complete documentation to support the payments.

We recommend that the director of the New Jersey Office of Public Housing instruct the Authority to (1) reimburse the capital fund program $818,536 , (2) reduce the Authority's future capital grants by $632,039, (3) transfer $5,000 from the low-rent public housing program to the capital fund program, (4) establish and implement internal control policies and procedures that will prevent funds allocated to site and unit improvements from being used to pay the Authority's operating expenses, (5) provide HUD with adequate and compete documents to support the total payments of $333,244 made to the City for police services and have the City reimburse the Authority or provide the Authority with comparable future services for any payments determined to be unsupported, (6) establish and implement adequate internal control procedures to ensure that contracts are conducted in compliance with HUD's requirements and federal regulations, and (7) to ensure the accuracy of financial information entered into HUD systems such as the Line of Credit Control System and Financial Assessment Submission-Public Housing Authority System.

Issue Date: June 22, 2007
Audit Report No.: 2007-NY-1008
File Size: 2.18MB

Title: The City of Newark Did Not Always Administer Its Community Development Block Grant Program in Accordance with HUD Requirements

We completed an audit of the City of Newark's (City) Community Development Block Grant (CDBG) program. Our audit objectives were to determine whether the City (1) disbursed CDBG funds efficiently and effectively in accordance with its submission to HUD and with applicable rules and regulations, (2) had a financial management system in place to adequately safeguard the funds, and (3) had program controls in place to ensure that activities were administered properly and met the CDBG national objectives.

The City did not always comply with applicable regulations and its submission to HUD while disbursing CDBG funds. Specifically, it did not (1) maintain proper supporting documents for payments made on a bond obligation, (2) report and adequately account for program income, and (3) maintain adequate supporting documents for its draw downs. As a result, more than $10 million in bond and other payments is unsupported, $261,228 in disbursements is ineligible, and the City cannot ensure that more than $9.7 million in future bond payments will be an efficient use of funds.

There were control weaknesses in the City's financial management system in that it did not ensure that (1) administrative costs were expended in proportion to delivery costs, (2) adequate time distribution records were used to allocate personnel expenses to various programs, (3) accounting records were accurate, and (4) key positions had adequate separation of duties. The City also did not implement proper program controls to adequately administer and monitor its CDBG programs.

We recommended that the director of HUD's New Jersey Office of Community Planning and Development instruct the City to (1) reimburse the CDBG program from nonfederal funds the $246,523 paid in excessive bond draw downs, (2) provide supporting documentation for more than $9.8 million in disbursements made related to bond payments or reimburse the CDBG program for any amounts not supported from nonfederal funds. In addition, we made other recommendations that when implemented will ensure the proper administration of all CDBG activities.

Issue Date: June 13, 2007
Audit Report No.: 2007-NY-1007
File Size: 988.74KB

Title: The City of Jersey, New Jersey, Did Not Always Adequately Administer Its HOME Investment Partnerships Program

We completed an audit of the City of Jersey City, New Jersey's (City) HOME Investment Partnerships Program (HOME). The objectives of the audit were to determine whether the City disbursed HOME funds efficiently and effectively in accordance with applicable rules and regulations, and had a financial management system in place to adequately safeguard the funds.

The City did not always disburse HOME funds efficiently and effectively in accordance with applicable rules and regulations, and did not have a financial management system, which adequately safeguarded the funds. Specifically, the City failed to (a) enter into a contract for new construction and ensure that financing was available before disbursing funds, (b) ensure that funds disbursed were adequately secured, (c) repay funds related to two terminated projects, and (d) enter accurate information into HUD's Integrated Disbursement and Information System (IDIS).

We recommend that the director of HUD's Office of Community Planning and Development, Newark field office, require the City to submit all supporting documentation to HUD regarding $354,581 in HOME funds disbursed without a contract so that HUD can make an eligibility determination. Any amounts determined to be ineligible should be repaid from nonfederal funds. In addition, the City should repay $267,547 plus interest for the two terminated rehabilitation projects. Lastly, the City should establish and implement controls to ensure that HOME funds are used in accordance with all program requirements and written agreements, periodic monitoring is performed on the activities so that appropriate action can be taken when performance problems arise, amounts disbursed are properly recorded on mortgage notes and agreements, and accurate information is entered into IDIS.

Issue Date: May 24, 2007
Audit Report No.: 2007-NY-1006
File Size: 751.03KB

Title: The Housing Authority of the City of Ashbury Park, Ashbury Park, New Jersey, Requires Improved Controls over Capital Funds Salaries, and Maintenance

We completed an audit of the Housing Authority of the City of Asbury Park, Asbury Park, New Jersey. The objectives of the audit were to determine whether (1) capital funds were properly expended and obligated in accordance with HUD requirements, (2) salaries and related benefits allocated to different programs were reasonable and supported, and (3) controls over maintenance and repairs were adequate.

The Authority did not adequately administer its capital grant program. It did not (1) disburse funds for administrative costs within budget limitations, (2) obligate capital grant funds in a timely manner, and (3) use prudent procurement practices. These deficiencies occurred because the Authority did not have adequate procedures in place to ensure that limits on administrative costs were not exceeded, capital grant funds were obligated within 24 months, and procurements were made in a cost-effective manner. The Authority's employee compensation cost was not always reasonable and supported. The Authority does not have adequate controls in place to ensure that its preventive maintenance program is effective. As a result, it did not operate in a manner that promoted the serviceability of the projects.

We recommend that the director, New Jersey Office of Public Housing, instruct the Authority to (1) reimburse HUD for the $692,990 in excess administrative fees charge to the capital fund grant, (2) reimburse HUD $721,701 related to the untimely obligation of capital funds, (3) comply with federal procurement requirements to ensure that the Authority procures its goods and services in the most economical manner, (4) request the Authority to repay $190,339 for excessive employee compensation from nonfederal funds, and (5) develop and implement procedures to ensure units meet uniform physical condition standards and repairs are completed and inspected before closing the work order.

Title: The Housing Authority of the City of Passaic, Passaic, New Jersey, Has Allegations of Mismanagement That Needs to Be Addressed

We completed an audit of the Housing Authority of the City of Passaic, Passaic, New Jersey. The objectives of the audit were to verify whether the allegations of a hotline complaint were valid and whether Section 8 units complied with housing quality standards.

Some complaint allegations were valid and others could not be substantiated. From 2002 through 2005, the Authority did not adequately manage its Section 8 program. Contrary to federal regulations the Authority made ineligible transfers of program funds from Section 8 administrative fee reserves to the low-rent housing program and from the capital fund to the Section 8 program. In addition, the Authority did not maintain adequate documentation for rent and employee benefits costs charged to the Section 8 program and for payments to the City of Passaic for police services. Furthermore, our inspection of 65 units revealed that 44 units failed for material noncompliance with housing quality standards. Based on results of our statistical sample at least 823 units may have been in material noncompliance with housing quality standards.

We recommend that the director, New Jersey Office of Public Housing instruct the Authority to (1) reimburse the Section 8 administrative fee reserve for the $1 million transferred to the low-rent housing program and recapture or reduce Section 8 administrative fees by $590,042, (2) reimburse the capital fund $401,046 from the Section 8 program, (3) provide additional supporting documentation for rent expenses, employee benefits costs, and payments for police services and repay any unsupported costs determined to be ineligible, and (4) develop and implement procedures to ensure that units meet housing quality standards.

Issue Date: September 20, 2006
Audit Report No.: 2006-NY-1011
File Size: 347KB

Title: Orange City Housing Authority, Low-Rent Housing Program, Orange, New Jersey, Incorrectly Paid the City's Stree Lighting Cost and Improperly Wrote-off a Receivable

We completed an audit of the Orange City Housing Authority (Authority), Orange, New Jersey, pertaining to its payments to and on behalf of the City of Orange (City) and the write-off of an account receivable from the City. Our audit objective was to determine whether payments to the City for street lighting and a write-off of an account receivable from the City were proper.

The Authority paid for street lighting expenses, which should have been furnished by the City at no cost to the Authority. The Authority also wrote off an account receivable pertaining to the cost of the lights without obtaining board approval. As a result, from April 2003 through March 2006, the Authority paid for the City's street lighting costs and was deprived of funds from a $156,409 receivable, which could be used to pay for necessary operating expenses if collected.

We recommend that the director of the U.S. Department of Housing and Urban Development's (HUD) New Jersey Office of Public Housing instruct the Authority to record an account receivable for the $156,409 due from the City and notify the City to pay for street lighting costs, which are the City's responsibility under the cooperation agreement.

Issue Date: September 20, 2006
Audit Report No.: 2006-NY-1010
File Size: 1.11MB

Title: Orange City Housing Authority, Housing Choice Voucher Program, Orange, New Jersey, Has Weaknesses in Its Housing Choice Voucher Program

We completed an audit of the Orange City Housing Authority's (Authority), Orange, New Jersey, Housing Choice Voucher program. The objectives of the audit were to determine whether (1) the Authority's Housing Choice Voucher program units met housing quality standards; (2) costs charged to the Housing Choice Voucher program were eligible and properly supported; and (3) rental assistance payments were properly calculated, and application and recertification information was properly verified.

Our inspection of 59 Section 8 units found that 55 units (93 percent) did not meet minimum housing quality standards. Of the 55 units, 37 were in material noncompliance with standards. As a result, tenants lived in units that were not decent, safe, and sanitary, and HUD made housing assistance payments for units that did not meet housing quality standards. Additionally, the Authority did not always allocate expenses accurately to the Housing Choice Voucher program and did not always correctly calculate its housing assistance payments and obtain necessary documents related to tenant recertifications.

We recommend that the director of the U.S. Department of Housing and Urban Development's (HUD) New Jersey Office of Public Housing instruct the Authority to (1) to ensure that units meet housing quality standards and that corrective action has been taken on those units that failed to meet standards, (2) develop procedures and controls for allocating and charging costs to the Housing Choice Voucher program, (3) provide documentation for all unsupported cost and reimburse any cost determined to be ineligible, and (4) establish procedures to ensure that all voucher recertification information for tenants and landlords is adequately supported and documented.

Issue Date: August 14, 2006
Audit Report No.: 2006-NY-1009
File Size: 2.08MB

Title: First Residential Mortgage Services Corporation, Englewood Cliffs, New Jersey, Did Not Always Comply with HUD/Federal Housing Administration Loan Origination Requirements

We completed an audit of First Residential Mortgage Services Corporation, a non-supervised direct endorsement lender located in Englewood Cliffs, New Jersey. The objectives of the audit were to determine whether First Residential: (1) complied with the U.S. Department of Housing and Urban Development (HUD) regulations in the origination of Federal Housing Administration loans, and (2) developed and implemented a quality control plan that complied with HUD requirements. The review generally covered the period between October 1, 2003 and September 30, 2005, and involved a review of 15 HUD/Federal Housing Administration insured loans.

First Residential did not always comply with HUD underwriting requirements. Seven of 11 loans we reviewed exhibited significant underwriting deficiencies such as inadequate credit analysis, inadequate verification of funds to close, minimum cash investment not met, and inadequate verification of income and/or employment. The remaining four loans contained technical violations. In addition, one borrower was charged a $495 ineligible commitment fee. These deficiencies occurred because First Residential lacked adequate controls to ensure that loans were processed in accordance with HUD requirements. In addition, it did not ensure that its quality control plan was implemented in accordance with both HUD and its own requirements to ensure (1) quality control reviews were conducted for all loans that defaulted within six months of closing, (2) at least ten percent of the closed and rejected loans were always selected for quality assurance reviews, (3) quality control reviews were performed timely, (4) management follow-up was provided for the quality control reviews of the loans from the wholesale division, and (5) HUD was informed of significant deficiencies that it discovered with one of its loan correspondents. Consequently, the effectiveness of First Residential's quality control plan, which is designed to ensure accuracy, validity, and completeness in its loan underwriting process, was lessened.

We recommend that the assistant secretary for housing - federal housing commissioner require First Residential to: indemnify HUD for potential losses and/or claims on loans with significant underwriting deficiencies, reimburse one borrower for an ineligible charge, and implement a quality control process in accordance with HUD requirements.

Title: The Loan Origination Process and Quality Control Plan of American Mortgage, Inc., Cherry Hill, New Jersey, Did Not Comply with HUD Regulations and Requirements

We audited American Mortgage, Inc. (American), a nonsupervised lender approved to originate Federal Housing Administration single-family mortgage loans, because it had a high default rate and the Quality Assurance Division recommended we audit this lender. Our objectives were to determine whether American complied with the U.S. Department of Housing and Urban Development’s (HUD) regulations, procedures, and instructions in the origination of Federal Housing Administration loans and whether American’s quality control plan, as implemented, met HUD requirements.

American did not originate all Federal Housing Administration loans in accordance with HUD’s loan origination requirements. Of the 23 loans we selected for review, American did not fully comply with Federal Housing Administration requirements for 15 of the loans originally valued at $1,672,584 and could not locate three of the 23 case files. American did not exercise due diligence in the review of assets and liabilities; and did not resolve inconsistencies in calculations, signatures, and Social Security numbers. These deficiencies were caused by a lack of written procedures and a lack of due diligence by its employees, which contributed to an increased risk to the Federal Housing Administration insurance fund.

American charged ineligible fees totaling $4,589 on nine loans. American charged these fees due to confusion over eligibility for document preparation, warehousing, commitment, expediting, and express mail fees. Finally, American’s quality control plan and the corresponding contractor agreement for quality control reviews did not contain requirements to identify patterns of early defaults and commonalities among loan origination participants. Also, the quality control plan required on-site branch reviews, but the contractor did not perform the on-site reviews. American was not aware of the requirement to identify patterns of early defaults and thought it was exempt from the on-site review requirement because it had recently established the branches.

We recommend that the assistant secretary for housing-federal housing commissioner determine whether American’s deficiencies in the loan origination process warrant administrative action, including indemnification from American on 15 Federal Housing Administration loans valued at $1,632,468, which it issued contrary to HUD’s loan origination procedures; require American to develop written internal loan origination procedures to more closely monitor its loan origination process; require American to refund ineligible fees collected totaling $4,589; and require American to revise its quality control plan to include reviews for patterns and commonalities among the loan origination participants and ensure the contractor performs on-site branch reviews.

Title: The Housing Authority of the City of Newark Bond Financing Activities and Section 8 Choice Voucher Administrative Fee Reserves

We completed an audit of the Housing Authority of the City of Newark, Newark, NJ (the Authority). The objectives of the audit were to determine whether the Authority (1) complied with the United States Department of Housing and Urban Development (HUD) requirements for the disposition of proceeds from the redemption of tax-exempt bond financing, and (2) properly expended its Section 8 housing choice voucher administrative fee reserves. The review generally covered the period from January 1, 2003 through December 31, 2004.

The audit disclosed that the Authority improperly (1) allowed its Housing Finance Corporation to retain more than $2.5 million in funds remaining after the redemption of the Authority's 1980 tax-exempt mortgage revenue bonds, and (2) used its Section 8 housing choice voucher administrative fee reserves for non-housing related purposes by committing over $4.4 million, of which $3.9 million was expended, to acquire properties for the construction of a hockey arena. The improper commitment of the housing choice voucher administrative fee reserves caused an underreporting of the administrative fee reserve balance as of January 31, 2003. Consequently, $729,423 in administrative fee reserves should have been subject to recapture by HUD.

Title: First United Mortgage Company, Inc., Non-Supervised Mortgagee, Cranford, New Jersey

We completed an audit of First United Mortgage Company, Inc. (First United), a non-supervised mortgagee located in Cranford, NJ. The objectives of the audit were to determine whether First United: (1) originated and underwrote loans insured by the United States Department of Housing and Urban Development/Federal Housing Administration (HUD/FHA) in accordance with HUD/FHA requirements, which require adherence to prudent lending practices, and (2) designed and implemented a quality control plan in accordance with` HUD/FHA requirements. The review generally covered the period between February 1, 2002, and January 31, 2004, and involved a review of 25 HUD/FHA insured loans with mortgage amounts totaling $3,073,370.

The audit disclosed that First United did not adhere to prudent lending practices as prescribed by HUD/FHA for the loans in our sample. We found that 23 of the 25 loans that we reviewed had at least one underwriting deficiency, such as (1) debt-to-income ratios that exceeded HUD/FHA standards, (2) inadequate documentation of deposit verification, (3) inadequate documentation of gifts, (4) inadequate credit analysis, and (5) inadequate support for income calculations and/or employment. We also found that First United charged borrowers ineligible and/or unsupported fees in 24 cases. In addition, we concluded that First United had not implemented its quality control plan in accordance with HUD/FHA requirements. Indications of this noncompliance included the failure to (1) maintain the independence of the quality control specialist, (2) select loans that defaulted within the first six months for quality control review, (3) examine gift documentation for loans selected for quality control review, and (4) properly select appraisals for quality control review. These deficiencies occurred because First United did not establish procedures to ensure that its quality control plan was properly designed and implemented.

We recommend that HUD request First United to (1) indemnify 20 of the 25 loans with significant underwriting deficiencies; (2) reimburse borrowers ineligible and unsupported fees, and (3) provide HUD a corrective action plan containing assurances that all guidelines pertaining to underwriting HUD/FHA-insured loans will be followed.