A+ Mortgage Receives an F from HUD

I spent part of last week at an FHA conference and had a chance to learn all about their upcoming changes which Rhonda blogged about here.

In the past I have been critical about the lack of HUD auditors regulating their laws.  Regulation has mostly been left up to state agencies. Personally, I’ve only seen a HUD auditor once in my career and that was back in the mid 1980s during a routine FHA audit. I will now retract my criticism of HUD. They have more than made up for it with this searing audit of mortgage broker A+ Mortgage.

As of June 6, 2008, A+ Mortgage had one main Washington State office and 44 branch offices doing business under trade names such as “Kingdom Consulting,” “Resiliant Mortgage,” “Majestic Mortgage,” and “Extreme Home Lending.” HUD audited A Plus Mortgage to find out whether FHA borrowers were being overcharged and if loan originators were W-2 employees of A Plus, which is an FHA requirement. Here is what HUD found:

“A Plus disregarded HUD FHA requirements and provisions of RESPA and engaged in deceptive lending practices to maximize profits for itself and the independent contractors that used A Plus as a conduit for submission of loans for FHA insurance. Although A+ Mortgage informed borrowers that they could receive a lower interest rate on their loans by paying up-front points and fees, A Plus charged loan discount fees to borrowers without reducing interest rates on the mortgages. This practice allowed A Plus to generate high interest rate loans for which A Plus’s sponsor lenders paid A Plus a yield spread premium when the loans closed escrow. As a result, borrowers paid excessive interest and fees for which they received no benefit. In addition, all 28 FHA-insured A Plus loans reviewed were originated by independent contractors, unapproved branches, or other non-FHA-approved mortgage broker firms…A Plus ignored FHA origination requirements and submitted FHA loans originated by unapproved entities in exchange for a percentage of the loan origination fees, loan discount fees, and YSPs.”

HUD is recommending that A+ returned unearned fees totalling $153,110 to consumers, schedule a review of ALL of their FHA loans, and return all loan origination fees totally $32,026 to consumers on all loans that were originated by independent contractors. Recall that FHA loans must be originated by W-2 employees. I’m often asked why.

FHA says that loans originated under its program must be done by people who are under the lender’s exclusive control and supervision. HUD requires FHA-approved lenders to exercise responsible management supervision over its employees, including regular, ongoing, documented performance reviews of their work. By definition, independent contractors are unsupervised. For the reference, see HUD Handbook, 4060.1, Rev-2, paragraph 2-9(D).

52 thoughts on “A+ Mortgage Receives an F from HUD

  1. Jillayne,

    Good for H.U.D.! I am glad to see them working on the problem and they need to be thinking like that because of the short falls they might be seeing. Put one up for the consumer.

  2. I am glad to see that matter cleared up.

    It became apparent a year ago that FHA was going to be the only alternative for credit and asset challenged borrowers. I could not do them at the broker I was currently with. I began to research how I might do FHA loans.

    I received conflicting answers from experienced brokers, to wit:

    1. Yes, you can remain 1099 (self-employed), but you can originate FHA loans with us as a W-2.

    2. You can straddle. Originate loans as a 1099 with one broker, and originate FHA loans as a W-2 with a separate broker.

    3. You must only be a W-2 employee to be allowed to do FHA loans.

    Since all 3 answers came from experienced and presumably credible sources, and were completely contradictory, I called HUD, and then read the appropriate passage, and concluded that only # 3 was correct.

    Fortunately, the broker I was with (and I still am with), agreed #3 was correct also, and modified their business enough to make it agreeable to me to become a W-2 employee.

    What is annoying, is that so many people, when confronted with the rather clear written evidence that only a W-2 employee could originate FHA loans, would argue to the contrary, including a nationally recognized FHA trainer.

    Lastly, I disagree with the regulation, as written. It has needlessly prevented many borrowers from getting FHA loans from mortgage professionals, who might have otherwise offered it. It should be modified, but until that happens, we must comply, or face the consequences.

  3. I was amazed by how much was reported on HUD’s site regarding investigations in WA State, including Countrywide’s Renton branch last year involving FHA loans:

    “By not establishing that the borrowers had the ability and willingness to repay the mortgage debt and that the insured property was sufficient collateral for the loan, the Renton branch exposed the Federal Housing Administration insurance fund to an unnecessary risk totaling $740,007, the total insured amount for the five loans”

    HUD’s WA State Audit Reports: http://www.hud.gov/offices/oig/reports/wa.cfm

  4. Roger…I’m not sure and I believe that some of the “players” from 2005 (when the audit was done) have since moved to other locations. This is why licensing of any and all person who originates a residiential mortgage loan including (but not limited to) mortgage brokers, correspondent lenders and mortgage bankers.

  5. Roger says, “Lastly, I disagree with the regulation, as written. It has needlessly prevented many borrowers from getting FHA loans from mortgage professionals, who might have otherwise offered it.”

    Go back through the entire HUD audit and take a look at exactly what the unsupervised LOs were doing. There are some good reasons why HUD wants LOs supervised.

    If an LO (I do not refer to all people who originate “mortgage professionals” because they are not all professionals under the classic definition) wants to originate FHA, there are choices to make.

  6. I attended an FHA seminar last week. The folks from HUD said that if during an audit, loans like the ones found at the Countrywide Renton branch are found, HUD can ask the originating lender (CWide) to indemnify HUD.

    This means if the loan defaults, it is un-insured and Countrywide would have no claim.


  7. Jillayne, it sounds to me like Countywide would own the loan?

    Also, I agree with you, there are LO’s (loan originator) which every mortgage originator is AND there are “mortgage professionals”. Two different animals.

  8. Hi Rhonda,

    Not necessarily. If it went into default, C-wide would not be able to file a claim with FHA.

    NO underwriter wants one of these associated with his/her name. Too many of these and your days of steady employment are numbered.

    C-wide could still try to sell the loan….at a reduced rate. The industry refers to those as “scratch and dent” loans.

  9. Jillayne:

    Read it! Fascinating!

    1. I’m not steeped in the finer points of FHA regs, but isn’t it obvious that you cannot have both a discount point and a YSP? That was one of the first lessons I learned when I started on the wholesale side (conventional). As these seemed to be all brokered loans, I wonder, “what bank would allow that”?

    Yet, this was present in EVERY case. The audit mentions that most of the loans went to the same (un-named) bank. Bet they are feeling the heat from FHA too!

    2. The audit consistently referenced the max allowable compensation as 1%, inclusive of the origination fee, the bogus discount point, and the YSP. I’m not sure the FHA guidelines are clear on the issue of whether YSP IS included in the 1% cap. I have not found the refernce yet that states that, and I am aware that many LO’s believe otherwise.

    Can you (or any of your brilliant readers) verify that FHA definitely includes YSP in the 1% maximum allowable fee?

    In my experience, supervised (W-2) LO’s are directed by their profit loving supervisors to make as much money as is legally possible, for the benefit of the company. If supervisors do not do that, they are replaced by supervisors that will.

    Unsupervised LO’s may also follow the gold, instead of the Golden Rule, but at least they have that choice.

    It does not necessarily follow that a W-2 employee is more moral, or better qualified to complete FHA loans than an independent 1099 contactor is, nor does it guarantee that the borrower gets a better rate/cost benefit.

    But, all LO’s are required to follow the law, and 1099’s cannot currently originate FHA, and probably will not be allowed to.

    Too bad, because it’s possible that more good FHA loans would have been originated, if they were.

    One more thing. It looks like Aplus will bear the brunt of the penalty, being required to return ALL of the earnings, yet they only received about 15% of the amount they are required to refund. The remaining 85% went to the LO’s that originated the loans.

    What chances do you suppose Aplus has of recovering those fees from the LO’s, who are probably long gone?

    Sucks to be the broker, I guess!

  10. Hi Roger,

    I’m not sure if government sends out press releases to the mainstream media unless it’s a really big case. Some government regulators send info to me and ask me to get the word out because they know that people in the industry read this blog.

  11. Roger asks an interesting question: “What chances do you suppose A Plus has of recovering those fees from the LO’s, who are probably long gone?”

    It depends on the terms of the contract between A Plus and its loan originators.

    Roger maybe you could help us out on this one: Find your LO/Broker contract and read it. What does it say?

  12. 1% Loan Origination Fee…..but maximum broker compensation, including YSP is not something that FHA gets involved with. I asked them directly at last week’s FHA seminar and they said maximum broker compensation is left up to the lender.

    In the case of this HUD audit the problem was that there were two loan originators. The consumer was charged double.

  13. “It does not necessarily follow that a W-2 employee is more moral, or better qualified to complete FHA loans than an independent 1099 contactor is”

    I agree.

    We can also look at the ethics of the supervisor, the corporate culture, and other factors.

    It still comes back to the supervision of the LOs. If they are being supervised, then the supervisor can be held accountable.

    1099 workers are unsupervised. It is possible that they could be just as morally developed as W-2 workers, but they are still unsupervised which, in HUD’s view, would typically lead to more negative consequences than positive consequences.

    There are three things to think about here:

    The borrower
    The lender’s abilitity to make sound lending decisions
    The solvency of FHA as a government insurance program.

    All three are important.

    Accountability over employees means that nobody can say, “Well they were 1099 and I can’t control what my LOs do because of labor laws.”

    What’s not as important: the possibility that some 1099 LOs are morally gifted.

  14. Re #14

    I did not see evidence that there were 2 loan originators, so I’m not sure what you mean. I see 1 originator, 1 broker, and 1 lender, which is a fairly standard arrangement on the wholesale side.

    I think we agree that it is not allowable to have both a discount point and a YSP on a loan. HUD’s (and RESPA’s) argument additionally seems to say “you cannot call a broker fee a discount point”, because a discount point can ONLY be entered into the GFE if the payment goes directly to the lender (bank), and the payment reults in a below par rate. If the lowered rate is below par, there is no YSP.

    I offer this explanation in part for the benefit of the readers that may not understand these terms (as clearly the borrowers in the cases audited did not), and in part so we waste no time arguing over differing definitions.

  15. Re #13

    I just reviewed an older 1099 contract, from a broker I no longer work with (they did not offer W-2 option, thus no FHA).

    It allows the broker to withhold “overpayment” from future commissions, but has no remedy for recovering losses from terminated contractors.

    Interestingly, there was a provision for FHA loans in the contact. Apparently, the broker had a special letter from FHA allowing them to originate FHA loans using 1099 employees, but that permission was revoked before I joined them.

    I will review my other contracts, but I would suggest in “real world” terms, that a broker has little chance of recovering monies owed from LO’s who no longer work with the broker, without expensive, and possibly fruitless court action.

    Friuitless, because even the worst attorney in the world could argue that the broker’s primary responsibility is ensure that the LO’s (whether 1099 or W-2) are in compliance with all laws and regulations. The broker could not argue that they were unaware of the violations, as the broker specifically would have had a chance to review the file for compliance before paying the LO, and there was a clear pattern of ignoring the law.

    I wonder if DFI can do their own investigation, with additional sanctions, since I see clear violations of the MBPA in the portion of the audit that we are allowed to see.

    You may see a bias in my writings. I resent the implication that loan originators are somehow “children” to the broker/employer “parent”. I believe this is how regulators see the relationship, as it fits with their worldview of a “nanny state”, instead of rational adults making clear decisions.

    Read the audit.

    Does it reference a loan originator by name or license number?

    Why does the originator get a free pass from the regulatory authorities?

    It’s not that I believe it will be a better world if it is unregulated free market capitalism. It’s just a recognition that each new law and regulation entails a limitation of an individual’s liberty to act in their own best interest, as the government gets to decide what is in the individual’s best interest.

    These limitations are generally done with good intentions, and some are certainly necessary for the public good, but before we endorse them, remember that each one lessens our abilities to act in our own best interests.

    When the “parent-child” paradigm is invoked, even implicitly, it undermines the responsibility of ALL of us (borrowers, originators, brokers, and banks) to act wisely and morally, as fully functional and literate adults.

  16. Whoops! That was an Off Topic Rant, wasn’t it?! 🙂

    My apologies, it has been a confusing week as all of the various bits of legislation kicked in June 12, with many unintended consequences.

    I’ll save it for another post.

  17. Roger, I’m amazed at all the crap, er…I mean legislation that went to effect on June 12…it still stings me remembering Deborah Boitner at a mortgage brokers commission meeting shrugging off “the law of unintended consequences is still the law” with regards to true Correspondent Lenders now having to be licensed under the CLA. From what I understand about the Distressed Property law–it seems like yet another poorly written law.

  18. Jillayne, re W2 vs 1099 loan originators…doesn’t it boil down to the W2 employer (mortgage company) having to be more responsible and accountable for their LO’s vs employers who use 1099s?

  19. From the example we see here, the accountability falls on the managing broker whether they are hiring 1099 or W-2.

    The idea behind licensing (and the reason that brokers supported it) was that the LO’s would also be accountable.

    The requirement to be licensed goes away (at least temporarily) with W-2 status under the CLA, but not with 1099.

    Weird…that cannot be the way it was planned.

  20. Pingback: HUD Audits A Plus : National Association of Mortgage Fiduciaries

  21. Roger, re: 22…what planning? Who planned anything? I believe there was little no research on how this would impact mortgage brokers and correspondent lenders in Washington State. It’s Politicians Gone Wild….let’s hope they keep their shirts on.

    (Sorry I’m just seeing your comment now, thanks to Jillayne’s new comment).

  22. Rhonda:

    I don’t think that legislators necessarily planned the sequence of events that followed their legislation. They acted according to their own agenda (self-survival, primarily), doing what they thought would be most appreciated by their constituents (voters and political donors, not necessarily in that order).

    I think it’s incorrect to assume that some evil force crafted these laws to specifically harm your business model, or mine, but it is safe to say that there are well paid, and well placed, lobbyists that prevented further harm to the varying business interests.

    WAMB (or WAMO, or WAMP), clearly failed to protect ALL of the business interests of the mortgage broker business, but they did at least amend the worst of the legislation.

    You and I are surviving, at least for now. The changes require adaptation, which comes at some cost, to all organisms and organizations.

    Adaptation favors the nimble and intelligent. You clearly have a fair measure of both qualities.

  23. Jillayne:

    Thanks for keeping the spotlight on the bad actors.

    I still cannot fathom a GFE having both a discount cost and a YSP or rebate from the lender. There should be some additional followup from DFI on that egregious practice, and if they were originated under DFI licensing, the violations should follow the brokers and originators.

    Do you suppose that Sound Mortgage is going CLA to avoid this problem?

  24. Hi Roger,

    Companies licensed under the CLA are still under the regulatory supervision of DFI.

    I honestly do not believe I personally know anyone from Sound Mortgage so I cannot speak as to their motivation.

  25. Roger, I don’t believe our legislators are evil. I do believe they are misinformed and are making uneducated decisions which greatly impacts not only our industry, but more importantly home owners who are trying to refinance to keep their homes.

    It’s reckless and irresponsible. Our elected officials are suppose to be leaders.

    To hear DB say at the DFI meeting at Bellevue City Hall earlier this year “I wish I understood the mortgage broker industry more before the (CLA) law passed”… argh!

    WAMB’s biggest mistake (of course, this is according to WAMB) was trusting DB and DFI when they assured WAMB there was nothing to worry about and that the CLA law would not impact us.

    Give me a break!

  26. WAMB should be careful not to blame DFI when they could have spent the time and resources to figure out the consequences. They have plenty of money to sink into lobbying efforts and legal counsel to read through the laws with a fine-tooth comb.

    Ask your WAMB representative how your membership money was spent last year. They made a boat load of cash selling memberships all throughout 2007……where was it spent?

  27. That is a pretty sorry litany of charges:

    As the HUD investigation showed, there was a company wide disregard for educating their LO’s in proper compliance, and making sure that completed files were compliant.

    That function is the most important thing a “broker” provides, along with maintaining lender/bank relations.

    Remember, you CANNOT charge a discount fee and earn a YSP!

    Only one person is banned from originating loans, the owner, Gregory Nick.

    However, the rest of A+ organization was absorbed into Sound Mortgage, where presumably, the uneducated and non-compliant LO’s can continue to originate loans.

    Maybe they had them pass some kind of test.

    Will the mainstream media report this one?

  28. Greg Nick is still working as V President at Sound Mortgage Inc.
    I wounder if Sound even knows about the charges filed on 07/16/08.
    They are a Banker/ Broker and I have been told they charge loan fee, disc points and make ysp on banked loans.
    This is all very interesting. Glad Im not with that company. I would be embarrassed.

  29. I feel if the whole mortgage industry was on a level playing field, That would include Banks, Banker Brokers, Lenders, Brokers, Savings and Loans, and Credit Unions all had the same rules wether we broker or bank the loans, for all 50 States, we would not have all these lawsuites and people being screwed. The rules we have, some are unrational by the people who wrote them and some are very good.

    I also feel if we all had a excellent set of rules nation wide, then our industry would not be in a mess. So if your a loan officer that does loans in all 50 states, thier is know way to know all the rules for all 50 states. NO WOUNDER LOANS ARE GETTING SCREWED UP AND COUNTRY WIDE AND OTHER LARGE COMPANIES ARE GETTING SUED BY CA,WA AND IL AND DO ON.

    Having the NMLS for all Loan officers period, will keep all the idiots out, and help make the industry a solid one. That needs to include all types of lending institutions and, processors, managers, loan officers, loan originators, mortgage consultants, underwriters etc.

    The industry should have a standard for job titles. We have tomany.


    And thats whats happening now, the indsutry is full of Fore Closures, due to laws with to many loop holes in them.

    The who industry should of united, and became one like the Realestate Industry did with the National Association of Realtors, fight for peoples rights as Home owners, and stupid gov officials try to take them away.


    When i started in 1992 we charged Loan fee and Discount fee and ysp. I was told it was correct and okay.

    6 yrs ago, I was told different, as a broker the fee had to be charged as a Loan Orgination FEE.

    Couple Yrs later new broker told me it had to be charged as a Loan Originaiton fee.

    This yr I was told if you Bank the loan then its a Loan FEE, and if your Broker it its a Broker FEE.

    All the people were my brokers and were suposidly up with the laws and new people with WA ST. DFI on first name baises.


    And they have 30 clock hours every 2 yrs to stay up with changes.
    DFI has not had any interest in that till the last couple yrs. Its still very minimal.

  31. Hi Moneyman,

    There is education available for mortgage brokers and LOs to take prior to taking the exam. I’ve been teaching these classes for many years.

    From my experience, without a state or federal mandate, LOs and brokers simply choose not to attend.

    In terms of where the broker fee goes on the GFE and HUD I, this information comes to us from RESPA, which has been around since 1974.

    The MBPA simply re-states what RESPA already gave us.

    The new mortgage licensing law that was signed by Pres Bush on July 23, 2008 will mandate that all LOs become licensed under the NMLS.

  32. Moneyman:

    My sympathies for your confusion. It has been a confusing year

    1. Laws change all the time in all professions. If we want to be professionals, we must study, and keep up with the changes. If it was easy, we would be paid like clerks at Best Buy….

    2. Many people that are in positions of responsibility (mortgage brokers that hire or supervise loan originators) are shockingly mis-informed, and have passed on that mis-information to loan originators. Whether they have done so out of ignorance, or greed is subject to debate. Your only sufficient defense is to accept the responsibility to learn the rules for yourself.

    3. The federal government has (up til this past summer) shown GREAT reluctance to establish updated and coherent lending standards (and great lobbying resistance), so it has been left to the states to make the best reforms as they see fit.

    This is similar to many of our national problem areas (health care, education, immigration, environment, energy, business regulations), that the federal government has intentionally ignored.

    I guess we should be thankful that we have strong state’s rights to innovate on behalf of their citizens.

    Stay curious, stay involved.

    Good Luck!

  33. Hi Roger,

    I just received an email from someone on the east coast who ripped me a new one regarding something else I wrote about the mis-use of yield spread premiums. She gave me the old NAMB party line about how YSPs are used for good purposes, etc. Well the link you just posted is a PERFECT example of why brokers and LOs will probably lose the ability to earn income via YSP. Thanks so much for keeping us up to date on this sorry case.

  34. Jillayne:

    Well, I certainly do not support the elimination of using YSP for brokers!

    There are many legitimate reasons for brokers using YSP, that do not involve worsening the borrowers situation. It could take an entire post.

    And remember, banks and correspondent lenders receive YSP (for rates above par), but do not have to show it to the consumer.

    The beauty of having YSP, and showing it, is that it exposes any “indirect” compensation, and possible conflicts of interest.

    Anything that weakens the wholesale channel’s ability to effectively serve borrowers, will make banks and the retail channel more profitable, and eventually cost borrowers more money, by eliminating choice and effective, efficient competition.

    Let’s continue to expose the abusers, support the honest and ethical practitioners, and maintain as great a variety of choice for consumers as can be safely managed.

    • I’ll bet you a cup of coffee he doesn’t pay a dime. I actually feel sorry for Greg as he was taken advantage of by Ryan Powell and his friends. As you correctly will tell me it is up to the Mortgage Broker to make sure all are playing by the rules. What stinks is the dirtiest of the dirty are still in business.

  35. I am so tempted to open up and tell everything I know but the dirty individuals have a lot more money than I do and would come after me with lawyers and cease & desist letters. I know that you know who I am talking about Jillayne because we have spoken of it briefly several times. One of these individuals was Greg’s ex-wife and the compliance officer during the time these infractions occurred. The City of Burien endorsed her as a Lender on their web page and I wrote a comment that they should do a back ground check into who they are aligning them selves with. I received a threatening phone call from Greg asking me how I could say such things about poor Tami? The same “poor Tami” that was just recently fired as Manager from the Tukwila office. A position she took over form her ex-husband. There were some very honest, decent, people people that worked at A+/Sound Mortgage but they have left long ago. I myself tried like heck to get changes made at what I observed was a very crooked system set up to benefit Ryan Powell and his Cronie’s from igh school. You mentioned all the companies they did business under in a previous email. Now Ryan Powell has himself down as an owner of Sound Mortgage on Linked-IN. All I have to say is WOW. That’s “OK” we know who these bad apples are and we will be watching you very closely

  36. I know this is an extremely old post, but felt compelled to, in my opinion, set the record straight. HUD issues guidance on discounts and states that a discount may be charged to: 1. lower the borrowers rate or 2. Increase the lenders yield. Pretty simple language. While I do not support the over charging of borrowers, I do understand and appreciate the guidance that HUD has issued. The states, Washington state included, has issued their own interpretation of the guidance and stated that discounts can only be used to the benefit of the borrower.

    Again, I’m not condoning any purported illegal activities and am very familiar with those listed, and those posting. A few of you have not fallen far from those you rant about now. If you post information…just make sure you complete due diligence and understand the laws as they apply- State or Federal

  37. Marc:

    “HUD issues guidance on discounts and states that a discount may be charged to: 1. lower the borrowers rate or 2. Increase the lenders yield.”

    Could you provide a reference for that statement? I don’t think it is true today, and I’m not sure if it was true then. I cannot come up with any reason a loan originator/broker should be able to charge a discount point and at the same time receive YSP. It defies common sense.

    Of course, some regulations defy common sense too.

    Additionally, I’m sure we are required to follow BOTH state and federal laws. That’s why we take the tests, and have compliance departments.

  38. Hi Marc,

    HUD audited A Plus Mortgage…and then turned their audit over to WA State DFI.

    Click through and read the PDF of HUD’s audit. The very first page of HUD’s report, under “What We Found” says: “A Plus charged discount points to borrowers without reducing interest rates on mortgages.”

  39. Well it is very disturbing to hear all this information about the lending industry.Yet it is no big shock when you really think about it, What did we all expect with little too no oversight and when it was all about profits and even more profits , no one thought about the repruccussions.
    Well lucky to say I work for a real Mortgage lender who has been in business for over 41 years and has the highest rating with Hud , given.
    If many of these so called Mortgage professionals were serious about there carrer as a mortgage orginator they would be trying to alighn them selves with a leader in the industry like our selves.
    Allot to be said to those who could not only stand the test of time but needed not change their name there business stucture or give up any kind of real integrety in this Proffession .
    I truly am grateful for the oppertunity to work for a bank who has and is always watching for our best intrerest as a whole and a company.
    I know for a fact that there is no other Lender Broker or Bank who can Say and justify the facts for wich i have seen with this lender.

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