oversight

Single Family Housing Guaranteed Loan Program Appraisals

Published by the Department of Agriculture, Office of Inspector General on 2020-07-30.

Below is a raw (and likely hideous) rendition of the original report. (PDF)

      United States Department of Agriculture




Single Family Housing Guaranteed
Loan Program Appraisals




Audit 04601-0001-41
June 2020
                                                OFFICE OF INSPECTOR GENERAL
                                   IMPORTANT NOTICE
This audit report contains sensitive information that has been redacted for public release, due to privacy
concerns.
Single Family Housing Guaranteed Loan
Program Appraisals

Audit Report 04601-0001-41
OIG reviewed RHS’ SFHGLP controls to determine whether it adequately ensured
lenders’ and appraisers’ compliance with agency and USPAP requirements.



OBJECTIVE                            WHAT OIG FOUND
Our objective was to determine       The Department of Agriculture’s (USDA) Single
whether RHS had adequate             Family Housing Guaranteed Loan Program (SFHGLP)
and effective controls in place to   guarantees loans made by approved lenders to eligible
ensure lenders and appraisers
                                     applicants. SFHGLP provides low- and moderate-income
complied with agency and
USPAP requirements prior to
                                     households with an opportunity to own decent, safe, and
guaranteeing a loan.                 sanitary dwellings in eligible rural areas by guaranteeing
                                     loans issued to eligible applicants through private sector
                                     lenders. USDA’s Rural Housing Service (RHS), an
                                     agency within Rural Development, administers SFHGLP
REVIEWED                             through national, State, and local area offices. SFHGLP
                                     loans require no down payment and have low up-front
We reviewed relevant laws,           costs. In fiscal years 2016–2018, SFHGLP provided
regulations, policies, and           366,619 loan guarantees valued at over $52.5 billion.
procedures; interviewed key
personnel from the national
                                     RHS had controls in place to assess whether appraisals
and State offices and approved
                                     met agency and Uniform Standards of Professional
lenders; and selected and
reviewed a non-statistical           Appraisal Practice (USPAP) requirements prior to
sample of appraisals and             guaranteeing a SFHGLP loan. However, we determined
appraisal review documents for       that additional controls were needed to enhance
completeness and compliance          the quality of appraisals the agency receives. We
with USPAP, RHS policy, and          assessed 44 administrative appraisal reviews and
Federal regulations.                 found 22 (50 percent) reviews in which administrative
                                     reviewers selected inaccurate or questionable responses
                                     for appraisal reviews and/or did not complete the
                                     appropriate version of the form. Additionally, we found
                                     that RHS issued four conditional commitments for over
RECOMMENDS                           $814,000 in SFHGLP loan guarantees for properties
                                     that did not have SFHGLP-compliant appraisals. We
We recommend that RHS
develop and implement:               also found that RHS did not effectively communicate
(1) an oversight function for        the results of its pre-closing technical appraisal reviews
administrative appraisal             and quality control reviews (QCRs) to help ensure RHS
reviews; (2) additional controls     receives SFHGLP-compliant appraisal reports. As a
for pre-closing technical            result, RHS may continue to risk accepting appraisals
appraisal reviews; (3) a formal      that may not be suitable for the agency’s use and issuing
process to identify common           conditional commitments for those properties.
deficiencies found during
technical appraisal reviews; and
                                     We accepted management decision on 3 of the
(4) processes to communicate
                                     5 recommendations. Further action from the agency is
deficiencies found during
technical appraisal reviews.         needed before management decision can be reached on
                                     the remaining recommendations.
                           United States Department of Agriculture
                                  Office of Inspector General
                                   Washington, D.C. 20250


DATE:          June 24, 2020

AUDIT
NUMBER:        04601-0001-41

TO:            Bruce W. Lammers
               Administrator
               Rural Housing Service

ATTN:          Gary Bojes
               Acting Chief Risk Officer
               Rural Development

FROM:          Gil H. Harden
               Assistant Inspector General for Audit

SUBJECT:       RHS’ Single Family Housing Guaranteed Loan Program Appraisals


This report presents the results of the subject review. Your written response to the official draft
is included in its entirety at the end of the report. We have incorporated excerpts from your
response, and the Office of Inspector General’s (OIG) position, into the relevant sections of the
report. Based on your written response, we are accepting management decision on
Recommendations 3, 4, and 5. Please follow your internal agency procedures in forwarding final
action correspondence to the Office of the Chief Financial Officer (OCFO).

Based on your written response, management decision has not been reached on
Recommendations 1 and 2. The information needed to reach management decision on the
recommendations is set forth in the OIG Position section following the recommendations. In
accordance with Departmental Regulation 1720-1, please furnish a reply within 60 days
describing the corrective action taken or planned, and the timeframe for implementing the
recommendations for which management decision has not been reached. Please note that the
regulation requires management decision to be reached on all recommendations within 6 months
from report issuance, and final action to be taken within 1 year of each management decision to
prevent being listed in the Department’s annual Agency Financial Report. For agencies other
than the Office of the Chief Financial Officer (OCFO), please follow your internal agency
procedures in forwarding final action correspondence to OCFO.
Bruce W. Lammers                                                                              2


We appreciate the courtesies and cooperation extended to us by members of your staff during our
audit fieldwork and subsequent discussions. This report contains publicly available information
and will be posted in its entirety to our website (http://www.usda.gov/oig) in the near future.
Table of Contents

Background and Objectives .........................................................................1
Section 1: SFHGLP—Administrative Appraisal Reviews .............................5
Finding 1: RHS Needs an Oversight Function Over its Administrative
Appraisal Review Process ............................................................................5
        Recommendation 1.............................................................................7
Section 2: SFHGLP—Technical Appraisal Reviews .....................................8
Finding 2: RHS Needs to Strengthen Controls Over its Pre-Closing Technical
Appraisal Review Process ............................................................................8
        Recommendation 2........................................................................... 10
Finding 3: RHS Needs to Effectively Communicate its Technical Appraisal
Review Results .......................................................................................... 11
        Recommendation 3........................................................................... 13
        Recommendation 4........................................................................... 13
        Recommendation 5........................................................................... 14
Scope and Methodology............................................................................. 15
Abbreviations ........................................................................................... 18
Exhibit A: Summary of Monetary Results ................................................. 19
Exhibit B: Audit Sites Visited.................................................................... 20
Agency’s Response .................................................................................... 21
Background  and Objectives 
Background
The Department of Agriculture’s (USDA) Rural Development helps improve the economy and
quality of life in rural America by providing various financial programs. The Housing Act of
1949, as amended, authorizes USDA to guarantee loans made by approved lenders to eligible
applicants through the Single Family Housing Guaranteed Loan Program (SFHGLP).1 SFHGLP
provides low- and moderate-income households with an opportunity to own decent, safe, and
sanitary dwellings in eligible rural areas by guaranteeing loans issued to eligible applicants by
agency-approved private sector lenders. These loans require no down payment and have low up-
front costs. The program provides a 90 percent loan note guarantee to approved lenders in order
to reduce the risk to lenders of extending 100 percent loans to eligible rural homebuyers.
SFHGLP loan guarantees are available for new loans and refinancing existing loans. Eligible
applicants may build, rehabilitate, improve, or relocate a dwelling in an eligible rural area.

SFHGLP has grown from a commitment authority of approximately $3 billion in 2007 to
$24 billion in 2018. SFHGLP provided 366,619 loan guarantees valued at over
$52.5 billion in fiscal years (FYs) 2016–2018. The Rural Housing Service (RHS), an agency
within Rural Development, administers SFHGLP through its national office in Washington,
D.C., and its network of State and area offices. To qualify for a loan guarantee, approved lenders
must ensure that each borrower is income-eligible and has the ability to repay the loan.2 Lenders
are also responsible for acquiring property appraisals as well as originating, underwriting,
servicing, and liquidating the loans. RHS staff are responsible for reviewing loan applications,
including property appraisals, to verify that the proposed loan guarantees made to lenders for
eligible borrowers meet agency requirements.

Approved lenders must ensure appraisals are completed by a qualified and competent appraiser
that is independent, objective, and licensed or certified, as appropriate, in the State in which the
property is located.3 In addition, lenders are responsible for examining all appraisals for
integrity, accuracy, and thoroughness, prior to submission of a complete loan application
package to RHS.4 A high quality appraisal that is completed by a qualified, independent, and
objective appraiser is key to ensuring adequate security for the proposed loan. The appraiser
must complete appraisals that comply with the current edition of the Uniform Standards of
Professional Appraisal Practice (USPAP), including its reporting requirements, to the agency.5

1
  Section 502(h) of Housing Act of 1949, Pub. L. No. 81-171, 63 Stat., as amended by the Cranston-Gonzalez
National Affordable Housing Act, Pub. L. No. 101-625, 104 Stat. 4085.
2
  At the time of loan approval, the household’s adjusted income must not exceed the applicable moderate income
limit, which is the greater of: (1) 115 percent of the U.S median family income ; (2) the average of the State-wide
and State non-metro median family income; or (3) 115/80ths of the area low-income limit adjusted for household
size for the county or Metropolitan Statistical Area (MSA) where the property is, or will be, located.
3
  USDA-Rural Development, HB-1-3555 SFH Guaranteed Loan Program Technical Handbook, § 12.5,
“Residential Appraisal Reports” (March 2016).
4
  USDA-Rural Development, HB-1-3555 SFH Guaranteed Loan Program Technical Handbook, § 12.5,
“Residential Appraisal Reports” (March 2016).
5
  Ibid.

                                                                          AUDIT REPORT 04601-0001-41                  1
The purpose of USPAP is to promote and maintain a high level of public trust in appraisal
practices by establishing requirements for appraisers to follow. USPAP contains a set of
standards related to appraisal development, reporting, and review.6

To assess whether RHS receives acceptable appraisals from approved lenders, the agency
conducts administrative appraisal reviews and, if warranted, technical appraisal reviews. These
internal control methods assist RHS with verifying the acceptability and credibility of the
property’s appraisal.

         Administrative Appraisal Reviews

         RHS performs an administrative appraisal review on all submitted appraisals prior to the
         issuance of a conditional commitment to the lender.7 RHS administrative appraisal
         reviews are conducted by in-house RHS staff (“administrative reviewers”).
         Administrative reviewers document their opinions and conclusions for each submitted
         appraisal via Rural Development 1922-15 form entitled Administrative Appraisal Review.
         An administrative reviewer determines if there are inconsistencies in the appraisal report
         that need to be addressed or if a technical appraisal review should be completed. If there
         is a deficiency with regard to an appraisal, the administrative reviewer is required to
         communicate the deficiency to the lender. These deficiencies should include any item
         that may affect loan security, value conclusions, or unacceptable property conditions.8

         Technical Appraisal Reviews

         RHS conducts two types of technical appraisal reviews: pre-closing technical appraisal
         reviews and technical appraisal quality control reviews (QCRs).9 Both types of reviews
         are conducted by regional agency appraisers who are required to follow current USPAP
         standards. These appraisers are licensed appraisers employed by Rural Development
         who have met the required qualifications in education, training, and experience to
         estimate the value of property.10




6
  Appraisal Standards Board, Uniform Standards of Professional Appraisal Practice (2016-2017 edition and 2018–
2019 edition).
7
  A SFHGLP conditional commitment is an agreement that a proposed loan will be guaranteed if all conditions and
requirements established by Rural Development are met.
8
  Loan security is the collateral, such as the subject property, that can be used as payment to the lender if the
borrower does not pay back the loan. The value conclusion is the appraiser’s opinion of the value of the subject
property. Unacceptable property conditions include those conditions that do not meet agency guidelines, including
ensuring the property is in a properly designated rural area and that the property does not include buildings that are
designed principally to be income-producing.
9
  For the purposes of this report, a pre-closing technical appraisal review is a technical appraisal review conducted
by RHS prior to the agency issuance of a conditional commitment to guarantee the property being appraised.
10
   USDA-Rural Development, HB-1-3555 SFH Guaranteed Loan Program Technical Handbook, § 12.5,
“Residential Appraisal Reports” (March 2016).

2     AUDIT REPORT 04601-0001-41
                 Pre-closing Technical Appraisal Reviews

                 At the request of an administrative reviewer or other RHS staff, RHS performs a
                 pre-closing technical appraisal review for either of the following reasons:
                 (1) when the administrative reviewer identifies an appraisal-related concern or
                 issue during the administrative appraisal review process, or (2) when any
                 deficiency identified in the administrative appraisal review cannot or will not be
                 addressed by the submitting lender. Technical appraisal reviews are in-depth
                 reviews of whether an appraisal report is complete, the methods and techniques
                 used were appropriate, and the conclusions in the appraisal were supported and
                 credible.

                 In each pre-closing technical review, a regional agency appraiser determines if
                 there is any deficiency in the appraisal report that may affect the appraisal’s
                 compliance with USPAP and/or agency requirements. Additionally, a regional
                 agency appraiser is to determine whether this deficiency might affect the
                 appraisal’s stated property value. Regional agency appraisers document their
                 conclusions in an Appraisal Review Report.11 If a regional agency appraiser
                 determines an appraisal is not adequate, the lender is informed of needed
                 corrections prior to RHS’ issuance of the conditional commitment for loan
                 guarantee. Once informed, the lender is required to correct or complete any
                 appraisal returned by the agency for corrective action. The lender is responsible
                 for communicating and initiating corrective action with the appraiser hired by the
                 lender.

                 Technical Appraisal Quality Control Reviews

                 In addition to pre-closing technical appraisal reviews, RHS routinely conducts
                 quality control reviews (QCR) of selected appraisals. QCRs are technical
                 appraisal reviews completed by regional agency appraisers and these reviews
                 occur after loans have been closed and subsequently guaranteed by the agency.
                 Specifically, similar to a pre-closing technical appraisal review, a QCR
                 determines whether:

                 (1) the appraisal was complete based on agency requirements;
                 (2) the content, analysis, and conclusions in the report were in compliance with
                     USPAP and agency requirements;
                 (3) the methods and techniques used in the appraisal were appropriate;
                 (4) the opinions and conclusions in the appraisal were supported, credible, and
                     clearly reasoned; and
                 (5) the appraisal was acceptable for use by the agency.

                 Appraisals chosen for QCRs are randomly selected from RHS’ approved
                 obligated loans from the prior month. During our scope period, the applicable

11
  The Appraisal Review Report was developed by RHS in August 2015 to document the results of its technical
appraisal reviews.

                                                                      AUDIT REPORT 04601-0001-41             3
               version of the RHS handbook required the agency to conduct QCRs on a
               minimum of 5 percent of its approved obligated loans.12 This 5 percent threshold
               was selected to achieve a representative sample of lenders and appraisers. QCRs
               provide a method of internal control to ensure RHS receives appraisals that are in
               compliance with USPAP and agency requirements.

Objective
Our objective was to determine whether RHS had adequate and effective controls in place to
ensure lenders and appraisers complied with agency and USPAP requirements prior to
guaranteeing a loan.




12
  USDA-Rural Development, HB-1-3555 SFH Guaranteed Loan Program Technical Handbook, § 12.5,
“Residential Appraisal Reports” (March 2016).

4    AUDIT REPORT 04601-0001-41
Section 1:  SFHGLP—Administrative  Appraisal  Reviews 
Finding 1: RHS Needs an Oversight Function Over its Administrative
Appraisal Review Process
We found that RHS did not monitor the quality of its administrative appraisal reviews to detect
inconsistencies. Specifically, 22 of the 4413 (50 percent) administrative appraisal reviews we
assessed had instances where administrative reviewers selected inaccurate or questionable
responses on the administrative appraisal review form and/or did not complete the appropriate
version of the form.14 These discrepancies were not identified because RHS did not have an
oversight function to review the quality and accuracy of its administrative appraisal reviews. As
a result, the agency risks accepting SFHGLP appraisals that are not in compliance with agency
requirements. Implementing an oversight function could reduce this risk and ensure RHS
monitors the effectiveness of its administrative appraisal review process.

RHS guidance requires the agency to complete an administrative appraisal review form for all
appraisals submitted to SFHGLP.15 According to USDA’s regulation on internal controls for all
programs, all managers directing or controlling resources are responsible for establishing,
maintaining, evaluating, improving, and reporting on controls for their assigned areas.16

To determine the acceptability of an appraisal for SFHGLP and ensure compliance with agency
requirements, administrative reviewers conduct administrative appraisal reviews on all appraisals
associated with SFHGLP applications. Administrative reviewers document their analysis of each
appraisal report by selecting corresponding responses on the administrative appraisal review
form. The review form consists of appraisal related questions, such as the following:

     ·   Does the appraisal report correctly identify and describe the subject property?17
     ·   Was the sales history of the subject property reported?
     ·   Did the appraisal include three comparable properties that sold within the last
         12 months?
     ·   Do the comparable properties appear to be similar to the property being appraised and
         are from the same or lik e market?

In our review of 44 SFHGLP administrative appraisal reviews conducted by         State offices,
we found instances where administrative reviewers provided responses that were inaccurate,
questionable, and/or incomplete as a result of using the wrong administrative appraisal review
form. For example, we found the following:

13
   The applicable State office visited could not locate the administrative appraisal review completed for 1 of the
45 sample appraisals we selected. Therefore, we did not assess the responses associated with that administrative
appraisal review.
14
   The administrative reviewers completed the 2010 version (revised May 2010) of the form instead of the required
2017 version (effective August 2017).
15
   USDA-Rural Development, HB-1-3555 SFH Guaranteed Loan Program Technical Handbook, § 12.5,
“Residential Appraisal Reports” (March 2016).
16
   USDA Departmental Regulation 1110-002, Management’s Responsibility for Internal Control (June 2013).
17
   “Subject property” refers to the property being appraised.

                                                                         AUDIT REPORT 04601-0001-41              5
     (1) For almost 32 percent of the administrative appraisal reviews,18 administrative reviewers
         did not use the most current version of the administrative appraisal review form.19
         Consequently, these administrative reviewers did not provide additional appraisal-related
         information that was required in the updated form, such as whether certain adjustments20
         in the appraisal report were documented, supported, and explained. Adjustment
         explanations and support assist the reviewer in understanding the rationale for the
         adjustment and method used to calculate the adjustment amount.




     (2) Approximately 67 percent of applicable21 administrative appraisal review forms
         contained inaccurate and/or questionable responses related to (1) whether comparable
         sales concession22 adjustments, or lack of adjustments, were supported by analysis within
         the appraisal report; or (2) if adjustments were made when the appraiser indicated that
         concessions were not common.

         For example, in two appraisal reviews, the administrative reviewer selected “not
         applicable” regarding sales concession adjustments; however, we found evidence that the
         appraisal reports included comparable sales concessions with associated explanations for
         adjustments or lack of adjustments. Sales concession adjustments can impact the sales
         price of comparable properties, ultimately impacting the appraised subject property value.

A lack of oversight for RHS’ administrative appraisal review process affected the agency’s
ability to identify the issues we found in our review. During our scope period, the agency relied
on periodic administrative appraisal review training to ensure the accuracy and quality of its

18
   We identified this issue with approximately 32 percent (14 of the 44) administrative appraisal reviews we assessed
for this audit.
19
   During our scope period, FYs 2016–2018, RHS updated its administrative appraisal review form in June 2017,
effective August 2017.
20
   An appraiser develops a value indication for a property by comparing the subject property with similar properties,
called comparable sales. The sale prices of the co mparable properties indicate a range in which the subject property
value indication will fall. The appraiser applies dollar adjustments to the sale price of each comparable property for
price-influencing dissimilarities between the comparable and the subject property to derive the range. Through this
procedure, the appraiser arrives at an opinion of value.
21
   Based on information in the associated appraisals, the sales’ concession question was applicable to 12 of the
44 administrative appraisal review forms we assessed. We determined that 8 of these 12 administrative appraisal
review forms contained inaccurate and/or questionable responses.
22
   A sales concession is a cash or noncash contribution that is provided by the seller, or other third party, to th e
transaction and subsequently reduces the purchaser’s cost to acquire the property. In developing an opinion of value
for a property, an appraiser must take into consideration the effect of any sales concessions on the value of that
property.

6     AUDIT REPORT 04601-0001-41
administrative appraisal reviews. However, the agency agreed to implement oversight over its
administrative appraisal review process. In October 2019, agency officials informed us that, as
part of the agency’s restructuring, a quality assurance group will be established to include a
review of administrative appraisal reviews. An oversight function could increase RHS’
assurance that administrative reviewers accurately assess SFHGLP appraisals and accept
appraisals that comply with agency requirements. Therefore, we recommend that RHS develop
and implement an oversight function to periodically assess the quality and accuracy of its
administrative appraisal reviews and establish the frequency of its oversight activities.

Recommendation 1
Develop and implement an oversight function to assess the quality and accuracy of RHS’
administrative appraisal reviews and establish the frequency of its oversight activities.

Agency Response
In its April 24, 2020, response, RHS stated:

       The QA branch will assess the quality and accuracy of administrative appraisal reviews
       in its ongoing evaluations. The QA branch will accomplish its aim by developing an
       administrative appraisal review guide that will be used as a training tool for decision
       makers in the OPD. A SharePoint page will also be developed to track the reviews and
       gather data.

OIG Position
We do not accept management decision for this recommendation. To achieve management
decision, RHS needs to specify the frequency in which the agency plans on conducting
assessments of administrative appraisal reviews.




                                                             AUDIT REPORT 04601-0001-41           7
Section 2:  SFHGLP—Technical  Appraisal  Reviews 
Finding 2: RHS Needs to Strengthen Controls Over its Pre-Closing Technical
Appraisal Review Process
We found that RHS issued conditional commitments for SFHGLP loan guarantees on properties
that did not have appraisals that met applicable regulations and program requirements.23
Specifically, we found that RHS issued four conditional commitments, totaling over $814,000,
for SFHGLP loan guarantees on properties without acceptable appraisals. For appraisals that
underwent pre-closing technical reviews, this issue occurred because RHS did not have sufficient
controls to prevent the issuance of conditional commitments for loan guarantees with unresolved
appraisal deficiencies.24 As a result, the agency may continue to issue conditional commitments
for loan guarantees on properties for which appraisals are not acceptable for the agency’s use.
Furthermore, RHS may be vulnerable to potential loss claims due to appraisals that are not
credible, supported, or clearly reasoned.

The SFHGLP regulations require program appraisals to be conducted in accordance with
USPAP.25 The SFHGLP Technical Handbook requires the lender to correct or complete any
appraisal found deficient prior to the issuance of a conditional commitment for loan guarantee by
the agency.26 The SFHGLP Technical Handbook also states, “[e]xceptions to any requirement of
this handbook, or 7 C.F.R. Part 3555, can be approved in individual cases by the
Administrator.”27

In our evaluation of appraisal reviews at the RHS State offices, we found instances where pre-
closing technical appraisal reviews noted deficiencies with the appraisal, but administrative
reviewers had not followed agency policy and procedures to ensure noted deficiencies were
resolved prior to issuing the conditional commitment.

During our appraisal and loan file review, we found the following:

     (1) In                                       , we found two examples




23
   The conditional commitment is issued prior to the loan note guarantee. The loan note guarantee constitutes an
obligation supported by the full faith and credit of the United States. Ultimately, loan note guarantees were issued
for all four conditional commitments discussed in this finding.
24
   Our audit sample included completing analysis on 12 pre-closing technical appraisal reviews
25
   7 Code Federal of Regulations (C.F.R.) § 3555.107 (d)(1).
26
   USDA Rural Development, HB-1-3555 SFH Guaranteed Loan Program Technical Handbook, § 12.5, “Agency
Review” (March 2016).
27
   USDA Rural Development, HB-1-3555 SFH Guaranteed Loan Program Technical Handbook, § 1.9, “Exception
Authority” (March 2016).

8     AUDIT REPORT 04601-0001-41
           In the second example, an administrative reviewer similarly




       (2) In                           , we found two examples
                                 8




           In the second example, the




           During our review of loan guarantee files and appraisals at this State, we did not find any
           documentation for these two cases indicating that an exception to program requirements
           was requested by RHS staff, or granted by the Administrator.



28
     In one of these examples,


                                                                  AUDIT REPORT 04601-0001-41         9
Pre-closing technical appraisal reviews are critical to preserving the quality of the SFHGLP
portfolio and any reported deficiencies should be resolved prior to the agency issuing a
conditional commitment for loan guarantee. The agency’s completion of pre-closing technical
appraisal reviews prior to issuance of conditional commitments for loan guarantees helps ensure
that RHS identifies unsound appraisals prior to the extension of any financial commitment; and
supports the reduction of agency exposure regarding higher risk loans. In conclusion, for
appraisals that undergo pre-closing technical appraisal reviews, we recommend that RHS
develop and implement controls to prevent the issuance of conditional commitments for loan
guarantees prior to regional agency appraisers’ determinations that appraisals are acceptable.

Recommendation 2

Develop and implement controls for pre-closing technical appraisal reviews to prevent the
issuance of conditional commitments for loan guarantees prior to regional agency appraisers’
determinations that appraisals are acceptable.

Agency Response
In its April 24, 2020, response, RHS stated:

       Controls were implemented by removing loan making authority from 47 different State
       Offices and establishing the OSFHGLP. The OPD developed desk procedures designed
       to ensure that all agency guidelines are being followed when issuing conditional
       commitments and loan note guarantees. The OPD will amend its origination desk
       procedures by adding language that prohibits the issuance of conditional commitments
       prior to the resolution of an appraisal technical desk review conducted by a regional staff
       appraiser.

OIG Position
We do not accept management decision for this recommendation. Language that prohibited the
issuance of a conditional commitment prior to the resolution of a pre-closing technical appraisal
review was included in the USDA-Rural Development, HB-1-3555 SFH Guaranteed Loan
Program Technical Handbook during our scope period. However, we identified four examples
of conditional commitments that were issued by RHS despite this language. To achieve
management decision, RHS needs to develop and implement controls that would prevent the
issuance of conditional commitments, such as the examples we cited in the finding, prior to
regional agency appraisers’ determinations that appraisals are acceptable.




10     AUDIT REPORT 04601-0001-41
Finding 3: RHS Needs to Effectively Communicate its Technical Appraisal
Review Results
RHS did not effectively communicate the results of its pre-closing technical appraisal reviews
and QCRs to help ensure RHS receives SFHGLP appraisal reports that comply with agency and
USPAP requirements. This occurred because the agency had not established a formal process to:
(1) effectively identify and communicate common deficiencies found during its pre-closing
technical appraisal reviews and QCRs to all lenders and administrative reviewers; and (2) share
specific QCR results with the responsible lenders and administrative reviewers. As a result,
appraisers hired by lenders may continue to submit appraisals not acceptable for RHS’ use,
thereby potentially impacting property value determinations.29, 30

RHS program guidance states that technical appraisal reviewers “provide a method of internal
control by the appraisal review staff and ensure that appraisals received are in compliance with
USPAP and agency requirements.”31, 32

        Identification and Communication of Trends and Common Deficiencies Noted During
        Pre-closing Technical Appraisal Reviews and QCRs

        We found that RHS used an informal mechanism to compile deficiencies found during its
        QCRs, but did not similarly compile deficiencies identified during its pre-closing
        technical appraisal reviews. For example, in FY 2017, the agency developed a
        spreadsheet to document QCR results and identify common appraisal deficiencies.
        However, the agency had not established a formal process to: (1) analyze and compile the
        results of pre-closing technical appraisal reviews and QCRs; and (2) communicate
        identified trends and common deficiencies to all approved lenders and administrative
        reviewers.

        Pre-closing technical appraisal reviews and QCRs are intended to ensure that RHS
        receives appraisals that comply with USPAP and agency requirements. The compiled
        results of pre-closing technical appraisal reviews and QCRs could help the agency
        identify common deficiencies and implement actions to improve the overall quality of
        appraisals, identify deficiencies that impact property value determinations, and reduce the
        number of appraisals submitted with similar deficiencies. Agency actions could include
        periodically sharing these deficiencies with all approved lenders and administrative
        reviewers to educate them and provide an opportunity to implement corrective actions to
        prevent similar deficiencies. Therefore, we recommend that RHS develop a formal


29
   A regional agency appraiser may deem an appraisal not acceptable due to a lack of detail, explanation, or
completeness. For example, an appraisal could be deemed not acceptable for lack of support for adjustments to a
subject property value.
30
   For the purpose of this audit, the term “acceptable” appraisal means that the app raisal complied with agency
requirements, including USPAP and other agency-specific SFHGLP regulations and policies. The term “not
acceptable” indicates an appraisal did not comply with agency requirements.
31
   7 C.F.R. § 3555.107 (d)(1).
32
   USDA Rural Development, HB-1-3555 SFH Guaranteed Loan Program Technical Handbook, § 12.5, “Agency
Review” (March 2016).

                                                                     AUDIT REPORT 04601-0001-41              11
        process to (1) identify and communicate common deficiencies found during its technical
        appraisal reviews and (2) establish the frequency of communicating identified common
        deficiencies to all approved lenders and administrative reviewers.

        Communication of Specific QCR Results to the Responsible Lender and Administrative
        Reviewer

        RHS policy requires communicating specific pre-closing technical appraisal review
        concerns to the applicable lenders. However, we found that the agency had not
        established a process to share specific QCR results with responsible lenders and
        administrative reviewers.

        As part of a QCR, the regional agency appraisers must document, in an Appraisal Review
        Report, the deficiencies found and their reason(s) for determining that an appraisal was
        not acceptable.33 In our review of QCR results,34 we found that regional agency
        appraisers concluded that nearly 26 percent of appraisals were not acceptable for use by
        the agency.35 Regional agency appraisers deemed these appraisals not acceptable for
        various reasons, such as lack of support for large variances between actual and effective
        age for the subject property and inadequate explanations for comparable sales
        adjustments. Although deficiencies were documented during these QCRs, we found that
        RHS did not communicate specific QCR results to the responsible lenders and
        administrative reviewers following the completion of its monthly QCRs.

        In addition to sharing common deficiencies with all lenders and administrative reviewers,
        communicating specific deficiencies identified through QCRs to responsible lenders and
        administrative reviewers could be an important and beneficial mechanism for the agency.
        This information could provide lenders an opportunity to mitigate similar appraisal
        deficiencies in the future by sharing results with its hired appraisers. Additionally,
        communicating QCR results to the responsible administrative reviewers could assist them
        with identifying potential appraisal issues or concerns during their administrative
        appraisal review that warrant a referral to a regional agency appraiser for a pre-closing
        technical appraisal review.

        RHS officials acknowledged that QCR results were not communicated to lenders and/or
        administrative reviewers. To maximize the impact and utility of the QCR results, RHS
        should communicate the individual review results to the responsible lenders and
        administrative reviewers as part of the regional agency appraisers’ QCR process. To
        ensure success in this action, we recommend that (1) RHS develop and implement a
        process to share all “not acceptable” QCR results with the responsible lender and


33
   Standard Operating Procedure, “Single Family Housing Guaranteed Loan Program (SFHGLP) Quality Control
Appraisal Review Assignment” Revision July 2017.
34
   During our scope period (FY 2016–FY 2018), there were 12,826 QCR results that noted a determination of either
acceptable or not acceptable appraisals. Of the 12,826 QCRs, 3,311 were deemed not acceptable.
35
   An appraisal may be found not acceptable by a regional agency appraiser for many different reasons, which may
not impact the appraised value of the subject property. However, all appraisals are required to comply with agency
requirements, regardless of whether the property’s appraised value was affected.

12      AUDIT REPORT 04601-0001-41
       administrative reviewer and (2) establish the frequency of communicating all “not
       acceptable” QCR results to the responsible lender and administrative reviewer.

Technical appraisal reviews are a key internal control to ensure RHS receives the highest quality
appraisals. RHS can further strengthen its technical appraisal review processes and the quality of
appraisals it receives in the future by (1) identifying and communicating common deficiencies
found during technical appraisal reviews, and (2) communicating all “not acceptable” QCR
results to responsible lenders and administrative reviewers. In October 2019, agency officials
stated that they planned to initiate actions related to the issues noted in this finding.

Recommendation 3
Develop and implement a formal process to identify common deficiencies found during pre-
closing technical appraisal reviews and QCRs.

Agency Response
In its April 24, 2020, response, RHS stated:

       The RD Program Support Staff Appraisal team will formalize a process to identify
       common deficiencies found during the review process for both pre-closing technical
       appraisal reviews and Quality Control Reviews. The Appraisal team will formally
       develop methods for collection of data on common deficiencies for both pre-closing and
       quality control reviews. The data collection will be shared with the QA Division and
       posted on the SharePoint page referenced in the agency’s response to recommendation 1.

RHS provided an estimated completion date of September 30, 2020, for this action.

OIG Position
We accept management decision for this recommendation.

Recommendation 4
Develop and implement a process, including the frequency of communication, to share common
deficiencies found during pre-closing technical appraisal reviews and QCRs with all approved
lenders and administrative reviewers.

Agency Response
In its April 24, 2020, response, RHS stated:

       The RD Appraisal team will report quarterly the common deficiencies found during pre-
       closing and QCR technical appraisal reviews to program leadership, supervisors of
       administrative reviewers, and all approved lenders. Report will be generated from the
       data collected in Recommendation 3.

                                                            AUDIT REPORT 04601-0001-41        13
RHS provided an estimated completion date of September 30, 2020, for this action.

OIG Position
We accept management decision for this recommendation.

Recommendation 5
Develop and implement a process, including the frequency of communication, to share all “not
acceptable” QCR results with the responsible lender and administrative reviewer.

Agency Response
In its April 24, 2020, response, RHS stated:

       The RD Appraisal team will report the deficiencies found during QCR technical appraisal
       reviews of all appraisals, found to be “Not Acceptable,” to supervisors of administrative
       reviewers and the individual approved lenders. Reporting will be completed on at least a
       monthly basis.

RHS provided an estimated completion date of September 30, 2020, for this action.

OIG Position
We accept management decision for this recommendation.




14     AUDIT REPORT 04601-0001-41
Scope and  Methodology 
We conducted a nationwide audit of RHS’ controls over its SFHGLP appraisal and appraisal
review process. The scope of our audit work covered all appraisals and appraisal reviews
completed during FYs 2016–2018 for RHS’ SFHGLP. To accomplish our objectives, we
performed fieldwork at the RHS national office, located in Washington, D.C.,       State offices,
and      approved lender sites. For specific locations we visited, see Exhibit B. We performed
our audit fieldwork from December 2018 through February 2020.

We non-statistically selected          States and        approved lenders for review. 36 Our selection of
the
                                           We selected one lender from each visited State
primarily based on its high issuance of loan guarantees during the scope period. We used loan
guarantee and technical appraisal information provided by RHS to non-statistically select
appraisal reviews to review for each State.37 Specifically, we sampled 76 appraisal reviews
primarily based on the following:38, 39

    ·   highest appraised subject property values;
    ·   whether a regional agency appraiser deemed the appraisal acceptable during his/her
        QCR;
    ·   whether a regional agency appraiser deemed the appraisal not acceptable during his/her
        QCR;
    ·   appraisals that were administratively reviewed and referred to a regional agency appraiser
        for a pre-closing technical appraisal review; and
    ·   technical appraisal reviews, both pre-closing and QCR, completed by the regional agency
        appraiser assigned to the State visited.

The conditional commitments associated with these 76 appraisal reviews totaled approximately
$11.6 million.

To assess the selected appraisals and appraisal reviews, we used the USPAP and the SFHGLP
Technical Handbooks. Specifically, we used the versions of the USPAP and the SFHGLP



36
   Rural Development has 47 State offices. The         States selected for review completed      percent of the RHS
SFHGLP appraisals for FY2016–FY2018.
37
   RHS obtained this information from its SharePoint® site and the Guaranteed Loan System (GLS). RHS’
SharePoint® site contains information related to the agency’s technical appraisal reviews and includes pre -closing
technical appraisal review requests by SFHGLP staff as well as post-closing appraisal technical review results. The
Guaranteed Loan System is the agency’s automated loan accounting system for RHS guaranteed rural housing loans.
38
   We sampled 45 administrative appraisal reviews and 31 technical appraisal reviews. We analyzed 44 of
the administrative appraisal reviews and all 31 technical appraisal reviews, including their corresponding
documentation. Of the 45 administrative appraisal reviews selected in our sample, one of the completed
administrative appraisal review forms could not be located. For this administrative appraisal review, we completed
our analysis by using supporting documentation provided by RHS.
39
   The     State offices we visited,                           , had a total of       appraisals completed during
FYs 2016–2018. Those          State offices had a total of      technical appraisal reviews, including pre -closing
technical appraisal reviews and QCRs, completed during FYs 2016–2018.

                                                                      AUDIT REPORT 04601-0001-41               15
Technical Handbooks that were in effect during FYs 2016–2018, the time covered by the our
scope period.

In developing the findings for this report, we performed the following steps and procedures:

At RHS’ national office, we:

     ·   reviewed the pertinent laws, regulations, policies, and procedures related to appraisals
         and appraisal reviews;
     ·   interviewed key personnel, including the SFH Guaranteed Loan Division director and
         senior staff appraiser, to gain an understanding of their roles and responsibilities related
         to appraisals and appraisal reviews; and
     ·   ascertained the adequacy and effectiveness of RHS’ reviews, oversight, and monitoring
         related to appraisals and appraisal reviews.

At RHS’ State offices, we:

     ·   interviewed key personnel at the State office, including the SFH program director and
         regional appraiser, to determine their roles and responsibilities related to appraisals and
         appraisal reviews;
     ·   ascertained the adequacy and effectiveness of RHS’ reviews, oversight, and monitoring
         related to appraisals and appraisal reviews; and
     ·   selected and reviewed a non-statistical sample of appraisals and appraisal review
         documents for completeness and compliance with the USPAP and RHS policy and
         regulations.

At selected approved lenders, we:

     ·   reviewed policies and procedures developed by the lender to obtain appraisals and
         appraisal reviews for an SFHGLP loan guarantee; and
     ·   interviewed key personnel, including the chief operating officers and compliance staff, to
         understand the process for a lender to obtain an appraisal review for an SFHGLP loan
         guarantee.

During the course of our audit, we did not solely rely on information from any agency
information systems. While we conducted limited verification of information generated by the
agency’s Guaranteed Loan System and SharePoint® site data, we make no representation
regarding the adequacy of these systems as a whole or the information generated from them
because evaluating the effectiveness of the information systems (or information technology
controls) was not one of the audit objectives. We used data from these systems to non-
statistically select appraisals and appraisal reviews for review. However, we solely relied on
documentation, not system-generated information, to support the conclusions in this report.

We conducted this performance audit in accordance with Generally Accepted Government
Auditing Standards. Those standards require that we plan and perform the audit to obtain
sufficient, appropriate evidence to provide a reasonable basis for our findings and conclusions

16       AUDIT REPORT 04601-0001-41
based on our audit objective. We believe that the evidence obtained provides a reasonable basis
for our findings and conclusions based on our audit objective.




                                                           AUDIT REPORT 04601-0001-41        17
Abbreviations 
C.F.R. ........................ Code of Federal Regulations
FY ............................. fiscal year
OIG............................ Office of Inspector General
OMB.......................... Office of Management and Budget
QCR .......................... quality control review
RHS ........................... Rural Housing Service
SFH ........................... single family housing
SFHGLP .................... Single Family Housing Guaranteed Loan Program
USDA ........................ U.S. Department of Agriculture
USPAP ...................... Uniform Standards of Professional Appraisal Practice




18     AUDIT REPORT 04601-0001-41
Exhibit A:  Summary  of Monetary  Results 

Exhibit A summarizes the monetary results for our audit report by finding and recommendation
number.


 Finding                Recommendation               Description             Amount             Category

 2                      2                            Value of RHS            $814,604           Questioned
                                                     guaranteed                                 Costs/Loans, No
                                                     SFHGLP loans                               Recovery
                                                     issued without
                                                     ensuring
                                                     appraisals met
                                                     applicable
                                                     regulations and
                                                     program
                                                     requirements.40


 Total Monetary Results                                                      $814,604




40
 Loan note guarantees, which constitute an obligation supported by the full faith and credit o f the United States,
were issued for all four conditional commitments discussed in Finding 2.

                                                                        AUDIT REPORT 04601-0001-41                19
Exhibit  B:  Audit  Sites Visited 

This exhibit shows the name and location of all visited RHS offices and lender sites.


 SITE NAME                                        LOCATION


 RHS National Office                              Washington, D.C.




20     AUDIT REPORT 04601-0001-41
Agency’s Response 




                AGENCY’S
         RESPONSE TO AUDIT REPORT




                        AUDIT REPORT 04601-0001-41   21
Rural Development

Bruce W. Lammers
Administrator
                            TO:          Gil H. Harden
                                         Assistant Inspector General for Audit
Rural Housing Service                    Office of Inspector General
1400 Independence Ave, SW
Room 5014-S
Washington, D.C. 20250
                            FROM:        Bruce W. Lammers
                                         Administrator
Telephone: (202) 692-0268                Rural Housing Service

                            SUBJECT: OIG Audit: Official Draft Response – RHS Single Family Housing
                                     Guaranteed Loan Program Appraisals - Audit# 04601-0001-41


                            Rural Development appreciates the opportunity to submit our responses to the
                            recommendations in the subject Official Draft report dated April 14, 2020.

                            The agency recently completed a reorganization which created the Office of the
                            Single Family Housing Guaranteed Loan Program (OSFHGLP). One of the primary
                            objectives driving the creation of the OSFHGLP is to execute program operations in
                            a uniform and consistent fashion. The loan making activities, including
                            administrative appraisal reviews, were previously performed by the State Offices.
                            They are now consolidated into two Origination Processing Divisions (OPD).

                            The OSFHGLP includes an independent Quality Assurance branch (QA) which
                            reviews the production of loan originations in an ongoing sampling basis. The
                            purpose is to ensure that the decision makers in the OPD are consistently following
                            agency guidelines.

                            Recommendation 1

                            Develop and implement an oversight function to assess the quality and accuracy of
                            RHS’ administrative appraisal reviews and establish the frequency of its oversight
                            activities.

                            Agency Response:

                            The QA branch will assess the quality and accuracy of administrative appraisal
                            reviews in its ongoing evaluations. The QA branch will accomplish its aim by
                            developing an administrative appraisal review guide that will be used as a training
                            tool for decision makers in the OPD. A SharePoint page will also be developed to
                            track the reviews and gather data.




                                           USDA is an equal opportunity lender, provider, and employer.
Page 2



Estimated Completion Date:

August 30, 2020


Recommendation 2

Develop and implement controls for pre-closing technical appraisal reviews to prevent the issuance
of conditional commitments for loan guarantees prior to regional agency appraisers’
determinations that appraisals are acceptable.

Agency Response:

Controls were implemented by removing loan making authority from 47 different State Offices
and establishing the OSFHGLP. The OPD developed desk procedures designed to ensure that all
agency guidelines are being followed when issuing conditional commitments and loan note
guarantees. The OPD will amend its origination desk procedures by adding language that prohibits
the issuance of conditional commitments prior to the resolution of an appraisal technical desk
review conducted by a regional staff appraiser.

Estimated Completion Date:

September 30, 2020


Recommendation 3

Develop and implement a formal process to identify common deficiencies found during pre-
closing technical appraisal reviews and Quality Control Reviews (QCR).

Agency Response:

The RD Program Support Staff Appraisal team will formalize a process to identify common
deficiencies found during the review process for both pre-closing technical appraisal reviews and
Quality Control Reviews. The Appraisal team will formally develop methods for collection of
data on common deficiencies for both pre-closing and quality control reviews. The data collection
will be shared with the QA Division and posted on the SharePoint page referenced in the agency’s
response to recommendation 1.

Estimated Completion Date:

September 30, 2020
Page 3



Recommendation 4

Develop and implement a process, including the frequency of communication, to share common
deficiencies found during pre-closing technical appraisal reviews and QCRs with all approved
lenders and administrative reviewers.

Agency Response:

The RD Appraisal team will report quarterly the common deficiencies found during pre-closing
and QCR technical appraisal reviews to program leadership, supervisors of administrative
reviewers, and all approved lenders. Report will be generated from the data collected in
Recommendation 3.

Estimated Completion Date:

September 30, 2020


Recommendation 5

Develop and implement a process, including the frequency of communication, to share all “not
acceptable” QCR results with the responsible lender and administrative reviewer.

Agency Response:
The RD Appraisal team will report the deficiencies found during QCR technical appraisal reviews
of all appraisals, found to be “Not Acceptable”, to supervisors of administrative reviewers and the
individual approved lenders. Reporting will be completed on at least a monthly basis.

Estimated Completion Date:

September 30, 2020
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