Mortgage Daily

Published On: August 15, 2006
National City Cited for QC Deficiencies

HUD audit looked at 41 loans

August 15, 2006


photo of Patrick Crowley
National City Mortgage may have to buy back more than $1 million in loans and pay nearly $150,000 in fines for not meeting federal underwriting guidelines.A report issued by U.S. Department of Housing and Urban Development’s Office of Inspector General found that the Cleveland-based company “did not fully meet HUD’s requirements” on 20 loans out of 41 inspected during a routine audit, HUD said in the report.

“National City did not adequately perform quality control reviews on loans that went into early payment defaults,” according to the HUD report. “It did not always ensure that reviews were performed accurately and in a timely manner and that reviews results were property documented.

“The problems occurred because National City did not use its quality control plan when performing quality control reviews,” HUD said.

It is the second time in three months that HUD discovered problems with National City’s mortgage operation.

In May, National City was accused of improperly submitting 2,071 government-backed loans totaling $263 million in late mortgages for payment.

National City spokeswoman Kelly Wagner Amen told at the time that the lender “never knowingly violated the requirements or endangered the reputation of our company or employees.”

In the latest episode, HUD said National City failed on several fronts, including improperly approving two loans when the borrowers’ debt-to-income ratio exceeded government standards; failing to properly document six refinanced loans; not ensuring that borrower satisfied their underwriting approval conditions; not verifying borrowers’ employment records and credit histories; and overstating borrowers’ income.

For instance, National City submitted a loan stating that a co-borrower had worked on a job for two years.

“However, when we contacted the co-borrower’s employer, we determined the co-borrower was employed by the company for less than two years,” HUD said.

In a statement e-mailed to, National City Mortgage President and CEO Rick Smalldon said the company agreed there were seven errors on the 20 loans but the company has “a strong track record for underwriting FHA loans.

“To put that into context,” Smalldon said, “[HUD] audited only defaulted loans, and we have more than 150,000 FHA total loans in our servicing portfolio. Our total servicing portfolio contains more than 1.1 million loans.”

Smalldon said the company is “proud” to have a default rate of 12.5 percent compared to the national average of 16.4 percent.

“As the … audit report states, National City Mortgage generally complied with HUD’s underwriting requirements as most errors uncovered on the findings were oversights by the underwriter or the closing agent,” Smalldon said.

National City has taken steps to reduce future problems including monitoring broker’s performance, maintaining a central registry of approved brokers, conducting FHA underwriting training for its employees and performing quality control reviews on all loans 60 days delinquent during the first six payments.

“We continually perform internal audits to ensure compliance with the laws, regulations and policies governing this program,” he said.


Bad Loans Dumped Into FHA
Two of Ohio’s largest lenders have been accused by the federal government of improperly steering nearly $300 million in delinquent mortgages into a government-backed insurance program.

Patrick Crowley is a feature journalist and blogger for He is also a reporter, blogger and columnist for The Cincinnati Enquirer.
e-mail Patrick at: [email protected]

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