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We audited TXL Mortgage Corporation, a nonsupervised direct endorsement lender located in Houston, TX. We selected TXL due to one of its loan correspondents’ high default rate. Our audit objectives were to determine whether TXL acted in a prudent manner and complied with U.S. Department of Housing and Urban Development (HUD) regulations, procedures, and instructions in the origination and sponsoring of Federal Housing Administration (FHA)-insured single-family mortgages and whether TXL implemented a quality control plan that met HUD-FHA requirements.

Sixteen of 20 loans reviewed did not comply with HUD’s requirements. Of the 16 loans, 8 had significant underwriting deficiencies and did not qualify for FHA insurance, and 2 qualified but were overinsured. As a result, TXL exposed HUD to unnecessary insurance risks totaling more than $713,000 and caused HUD to pay claims and incur losses of more than $36,000. Further, borrowers were overcharged more than $135,000, may not have known with which mortgage company they were dealing, and may not have understood that their mortgage company had an identity-of-interest relationship with the seller. These conditions occurred because neither TXL’s quality control plan nor its policies and procedures complied with HUD-FHA requirements. Further, TXL employees either did not understand or disregarded HUD requirements.

Our recommendations include that the Acting Deputy Secretary for Single Family Housing require TXL to (1) buy down eight loans by $147,289 due to overinsurance; (2) indemnify HUD for seven loans with an estimated potential loss of $566,052; (3) support or repay the FHA insurance fund $900 for claims paid as of July 28, 2011, on one loan; (4) reimburse the FHA insurance fund $35,595 for actual losses on one loan; and (5) take other actions to ensure that its quality control plan and loan origination practices are in accordance with HUD requirements. We also recommend that TXL ensure that its loan correspondents stop charging buyers unearned underwriting fees, reimburse the appropriate buyers $135,126, and stop allowing its employees to originate loans through its loan correspondents. We also recommend that HUD refer TXL to the Mortgagee Review Board for administrative actions for failure to implement a quality control program in compliance with HUD requirements.

We further recommend that the Director of the Departmental Enforcement Center take appropriate administrative sanctions, including possible debarment or other remedies, against TXL for erroneously certifying that neither it nor its affiliates had identity-of-interest relationships with the sellers.

We also recommend that the Associate General Counsel for Program Enforcement pursue affirmative civil enforcement action of approximately $943,120 against TXL and/or its principals for incorrectly certifying to the integrity of the data or that due diligence was used during the underwriting of six loans that resulted in an actual loss of $35,595 on one loan and potential losses of $413,465 on five loans.