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We audited Cornerstone Home Lending, formerly known as Cornerstone Mortgage Company.  We selected Cornerstone based upon a high default rate at Cornerstone’s Branch 87 in 2007 through 2009.  Our audit objectives were to determine whether Cornerstone (1) complied with HUD and Federal Housing Administration (FHA) regulations when originating and underwriting FHA-insured mortgages and (2) implemented a quality control plan that met requirements. 

During the review period, Cornerstone (1) did not comply with HUD and FHA requirements when underwriting 16 of 34 loans, (2) violated RESPA when it paid marketing fees in exchange for the referral of FHA mortgage business, and (3) failed to properly implement a quality control plan.  As a result, HUD paid claims for 13 of the loans, incurring losses of more than $981,000 upon sale of the properties.  Further, Cornerstone placed the FHA insurance fund at an increased risk of loss of almost $154,000 if the three remaining loans are foreclosed upon and the properties are sold.  In addition, Cornerstone could not ensure that its customers were able to shop for other lenders with better mortgage rates or that referral fees did not unnecessarily increase the costs of mortgage services.  Lastly, Cornerstone was unable to ensure the accuracy, validity, and completeness of its loan origination operations, resulting in an increased risk to the FHA insurance fund.  The findings in this report reflect Cornerstone’s performance during 2007 through 2009, and may not reflect current performance. 

We recommend that the U.S. Department of Housing and Urban Development (HUD) require Cornerstone to (1) reimburse HUD for 13 loans for which HUD has sold the properties and incurred losses totaling $981,574 and (2) indemnify HUD for 3 actively insured loans which would cause additional losses of $153,856 if they are foreclosed upon and resold.  We also recommend that HUD pursue administrative actions against the owners and management of Cornerstone for the violations cited in the report.