RTC Mortgage Trust 1995-SN1

(Audit Report No. 98-049, June 5, 1998)

The Office of Inspector General (OIG) has completed an audit of the Resolution Trust Corporation's (RTC) Mortgage Trust 1995-SN1. The trust, created on August 23, 1995, consists of a Class A Certificate Holder, 1995-S/N Investment Limited Partnership and a Class B Certificate Holder, the RTC. The trust servicer, Trotter Kent, in addition to being the asset servicer for the trust, has a financial interest in the Class A Certificate Holder. DRR management contacted the OIG requesting audits of various trusts. We selected the 1995-SN1 trust for review because Trotter Kent was responsible for four different trusts. A review of one trust would provide information to DRR on the trust servicer's operations and of the risks involved.

The objectives of the audit were to (1) obtain an understanding of the system of internal control developed to ensure compliance with the agreements and (2) determine whether the servicer properly reported income and expenses, and made appropriate equity distributions.

We concluded that, except as noted below, Trotter Kent complied with the provisions of the deposit trust and servicing agreements and properly accounted for cash receipts and bond payments. We did not identify any material weaknesses in the internal controls. However, during the audit we identified $31,454 of unallowable expenses. Most significantly, Trotter Kent incorrectly calculated servicing fees resulting in an overpayment totaling $16,189. Trotter Kent improperly assessed an asset at a higher annual rate and included sold assets in the calculation of servicing fees. In addition, Trotter Kent overpaid the bond trustee $2,505 based on the bond trustee's invoices. Furthermore, Trotter Kent improperly incurred $4,780 in travel expenses that were not permitted by the servicing agreement. Trotter Kent received reimbursement for duplicate payments and other miscellaneous travel expenses not permitted. Lastly, Trotter Kent received $7,980 from the trust for expenses that were not permitted by the servicing agreement. These expenses related to the development of an asset database, photocopying, and training.

We recommended that the Division of Resolutions and Receiverships, Agreement Management Group, take the following actions:

Disallow questioned costs of $31,454.

Amend the servicing agreement to clarify the method of calculating servicing fees.

Require Trotter Kent to reimburse the trust $31,454 plus any amounts improperly paid after July 31, 1997. The Class B Certificate Holder's prorated share of these amounts will be reimbursed through future equity distributions.

On May 11, 1998, the Assistant Director, Agreement Management Group provided a written response to the draft report. Management agreed to disallow $28,688 of the $31,454 in questioned costs. DRR stated that because of the stringent timeframes included in the servicing agreement, they would not pursue collection of $2,766 in travel expenses incurred before the effective date of the trust. Even though DRR considers these travel expenses to be necessary and reasonable, the OIG does not agree that the servicing agreement allowed the servicer to incur expenses before the effective date of the trust. However, the OIG does not consider the disagreement to be significant. The Corporation's response provided us with the requisite elements of a management decision for all recommendations.

As a result of our audit, we will report questioned costs of $31,454 in our Semiannual Report to the Congress.