Introduction
1. How to spot the red flags that will ensure a HUD audit.
2. How to prepare  for the HUD audit to minimize the findings.

3. Practical steps in responding to the HUD  Findings Letter.

LAW OFFICES OF HERMAN THORDSEN

SOUTHERN CALIFORNIA NORTHERN CALIFORNIA
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6 Hutton Centre Drive, Suite 1040
Santa Ana, CA 92707-8767
Phone: (714) 662-4990 ● (310) 277-4254

Law Offices of Herman Thordsen
556 North First Street, Suite 100
San Jose, CA 95112
Toll Free: (888) 667-8529

OUT-OF-STATE Call:
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    INTRODUCTION
 

HUD investigates mortgage loan fraud very industriously. The HUD Office of Inspector General in conjunction with the FBI completed criminal investigations in Southern California.

 
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1. AUDIT TRIGGERS
 
CREDIT WATCH: A mortgagee and its branch office(s) are tracked through Neighborhood Watch. Those that have a high percentage of defaults and claims on insured mortgages are (in this attorney's opinion) scheduled for an audit by HUD and/or have their approval automatically terminated depending on the percentage of HUD loans in default and claims. The notice may be given without action by the Mortgagee Review Board. Currently checks on the past 24 months that are 90 or more days delinquent and claims paid in the same period of time. 
 
TERMINATION:    If the termination is automatic based upon the percentage of loans in default, there is a very strong probability you will be audited by HUD and they will look for fraud in the organization. 
 

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2. HOW TO PREPARE FOR A HUD AUDIT REVIEW
 
COMMON VIOLATIONS FOUND BY HUD
  1. Review your Quality Control Plan (QCP). It is generally not in compliance with HUD.

  2. Loan documents in the Origination File are not complete. 

  3. Verification of down payment was not done or gift funds not in compliance with HUD rules. 

  4. Unallowable fees charged to the borrower.

  5. Mortgagee fails to comply with Home Mortgage Disclosure Act (HMDA). You must comply even if it s a negative HMDA. 

  6. Borrower documents in file signed in blank. 

  7. Sharing office space with another business without adequate separation or identification.

  8. Failure to establish borrower's relationship with Non-occupying Co-borrower. 

These are just some of the violations that can cause you to indemnify loans or pay HUD penalties. Are you in compliance. 
 

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3. RESPONSE TO HUD'S FINDING LETTER

 
A. FORMAT OF RESPONSE
 
B. WHAT DO YOU DO IF HUD THREATENS TO TERMINATE YOUR APPROVAL?
 
C. HUD AVAILABLE PENALTIES FOR FAILURE TO COMPLY
  1. Letter of reprimand
  2. Suspension
  3. Probation
  4. Withdrawal of approval
  5. Settlement agreement with mortgagee
  6. Loan indemnification
  7. Cease and desist order
  8. Debarment of individuals as well as withdrawal of approval
  9. Civil money penalties up to $5,000 per violation to a maximum of $1 million per year in addition to suspension, withdrawal of approval
  10. Individual liability without the corporate veil to protect you pursuant to a 24 CFR §30.36
 

D. CONCLUSION

Is this a lot of trouble? You bet it is. Does it increase the overhead? You bet it does. Do you want to continue doing FHA loans? Only you can answer that. The quality control and potential liability to HUD certainly adds to the overhead. If you are doing less than 20 loans a month you may want to rethink your position.
Good luck and may you have a lot of success with all the new products that are put on the market each year
Sincerely,
Herman Thordsen, Esq.

E. PRE-AUDITS

If you would like us to conduct a pre-audit before HUD does in order to reduce your exposure to monetary penalties, buyback of loans, withdrawal of approval or criminal charges, please contact: 

Herman Thordsen, Esq.
Law Offices of Herman Thordsen
6 Hutton Centre Drive
Suite 1040
Santa Ana, CA 92707-8767

(714) 662-4990 or (310) 277-4254
If you are in Central, Northern California or out of state please call toll free: (888) 667-8529
 
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THE INFORMATION HEREIN IS NOT LEGAL ADVICE.
AN ATTORNEY SHOULD BE CONSULTED
IF YOU DESIRE LEGAL ADVICE.

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