James S. Wood/Arizona Daily Star

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Defunct mortgage lender First Magnus Financial Corp. violated federal law by providing incentive payments to mortgage brokers, according to a report by the U.S. Department of Housing and Urban Development.

The report, issued July 14, says First Magnus violated the Real Estate Settlement Procedures Act by providing volume-based incentives for Federal Housing Administration-insured loans.

HUD found that First Magnus paid $58,571 in incentives from Jan. 1, 2003 to Dec. 31, 2005 to seven brokers for the origination of 169 FHA-insured mortgages totaling more than $24 million, according to the report.

Among the report's conclusions: "We recommend that HUD pursue administrative actions against the principal owners and management of First Magnus for allowing the improper practice of issuing incentive payments to brokers for originating and processing FHA mortgages."

First Magnus collapsed and filed for bankruptcy during the credit crunch last August. It is currently being liquidated.

Company executives have founded a new company, Stonewater Mortgage Corp., that is operating out of First Magnus' old headquarters at 603 N. Wilmot Road.