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The U.S. Department of Housing and Urban Development’s (HUD) Office of Inspector General performed an audit of Leader Financial Services (Leader), a Government National Mortgage Association (Ginnie Mae) issuer servicing Federal Housing Administration (FHA)-insured loans. We initiated the audit based on the 62 percent delinquency rate of Leader’s mortgage-servicing package purchased from Fidelity Home Mortgage Corporation (Fidelity). Our objective was to determine whether Leader complied with HUD’s requirements when it purchased Fidelity’s loan-servicing portfolio (mortgage-servicing rights).

Leader complied with HUD’s requirements in the purchase and transfer of Fidelity’s loan-servicing portfolio (mortgage-servicing rights). However, it failed to perform an adequate due diligence review. The loans contained a number of unacceptable and/or compliance-related underwriting deficiencies, such as excessive borrower qualifying ratios without valid compensating factors, inaccurate borrower asset and income determinations, and/or credit deficiencies. As a result, Leader subjected itself to unnecessary risks.

In September 2009, American National Bank (Bank), Leader’s parent company, agreed to cease and desist proceedings with the U.S. Department of the Treasury’s Office of the Comptroller of the Currency for unsafe or unsound banking practices in the Bank’s mortgage-servicing program. The proceedings contain a list of provisions including that the Bank cease all residential mortgage-servicing activities, unless it follows the Office of the Comptroller of the Currency’s stipulations. The Bank agreed to exit the mortgage-servicing industry. Since Leader will no longer service mortgages, this report does not contain any recommendations regarding Leader.

We recommend that the Deputy Assistant Secretary for Single Family Housing determine the appropriate actions for the two underwriters that improperly underwrote 69 percent of the loans cited in this audit report and implement adequate procedures and controls to safeguard the FHA insurance fund.