;cGAO Accountability * Integrity * Reliability United States General Accounting Office Accounting and Information Washington, DC 20548 Management Division B-284041 November 19, 1999 The Honorable Stephen Horn Chairman, Subcommittee on Government Management, Information and Technology Committee on Government Reform House of Representatives The Honorable Christopher Bond Chairman, Subcommittee on Veterans Affairs, HUD and Independent Agencies Committee on Appropriations United States Senate Subject: Departmentof Housing and Urban Development: Loan Originationand ForeclosedPropertyManagementProcesses This letter summarizes the information provided during October 14, 1999, and October 18, 1999, briefings to your offices. You had asked us to determine (1) the extent to which the Department of Housing and Urban Development (HUD) had established adequate loan origination procedures and consistently applied them to determine whether loan applicants comply with the program's statutory, regulatory, and eligibility requirements and have any outstanding delinquent federal debt and (2) whether HUD's Management and Marketing (M&M) contractors were adequately documenting the actions taken to preserve, protect, and maintain HUD's foreclosed properties. As agreed, we examined HUD's single-family insured loans, principally Section 203 (b) loans. Today, private sector lenders participating in HUD's Direct Endorsement lending program' process nearly all the new loans originated under this program. HUD requires these lenders to screen loan applicants for outstanding delinquent federal debt as called for by the Debt Collection Improvement Act of 1996 (DCIA). Once a loan is approved, these lenders typically service the loan, including making collection efforts in the event the loan becomes delinquent. When collection efforts fail, however, the lenders generally foreclose on the loan, file an insurance claim with 'Under HUD's Direct Endorsement lending program, approved lenders are responsible for all aspects of the loan origination and approval process, including making eligibility determinations. GAO/AIMD-00-41R HUD's Loan Origination and Foreclosed Property Management Processes B-284041 HUD, and then convey the property to HUD. HUD then assigns the foreclosed properties to its M&M contractors to manage and market. The enclosed briefing slides highlight the results of our work and the information we provided during the briefings. Results in Brief In our loan origination work, we found that HUD had established adequate policies and procedures for its Direct Endorsement (DE) lenders to follow when making loan eligibility determinations, including procedures to screen loan applicants for outstanding delinquent federal debt. Based upon our evaluation of a nationwide statistical sample of loans originated during the first 6 months of fiscal year 1999, we also found that the loan files prepared by the DE lenders to obtain HUD's insurance endorsement consistently contained all the documentation required by HUD to support their eligibility determinations 2 In addition, we found that the DE lenders consistently used both the Credit Alert Interactive Voice Response System (CA-VRS) as well as private sector credit reports to determine whether loan applicants had any outstanding delinquent federal debts. For programs like HUD's Direct Endorsement program, where lenders initiate and approve transactions that are guaranteed by the federal government, effective oversight controls must be in place. HUD has a lender oversight program in place. However, in fiscal years 1997 and 1998, auditors of HUD's consolidated financial statements identified and reported weaknesses in this program and made recommendations to HUD to improve its lender oversight. One cited weakness was HUD's failure to timely follow up on the results of its post-endorsement reviews that identified risky underwriting practices. HUD officials told us that they have taken actions they believe will address the auditor's concerns. These actions will be evaluated as part of the fiscal year 1999 financial statement audit. In our work on HUD's foreclosed properties, we found that beginning in March 1999, HUD entered into M&M contracts with private sector firms to manage and market its inventory of foreclosed properties. A key requirement of the M&M contracts is that firms take appropriate actions to preserve, maintain, and protect HUD's properties until the properties are sold. The contracts further require the M&M contractors to maintain individual property files that contain evidence of the preservation, maintenance, and protection of the properties. We found that the M&M property files we examined lacked adequate documentary evidence that the M&M contractors were fulfilling their contractual obligation to HUD to preserve, maintain, and protect HUD's properties. For example, several files 2We did not go to lender locations to review lender files or reperform the lenders' loan undermriting procedures. 3CAIVRS is an automated database maintained by HUD that identifies individuals who have delinquent federal debts. Page 2 GAO/AIMD-00-41R HUD's Loan Origination and Foreclosed Property Management Processes B-284041 did not contain the date the property was assigned to the M&M contractor making it nearly impossible for us to determine whether the contractors were performing required tasks, such as property inspections, within the time frames specified in their contracts. Also, documentation of the resolution of issues identified during property inspections was lacking. Our findings were supported by the findings of HUD's national file review contractor who reviewed more than 4,000 property files a month in July and August 1999. To HUD's credit, we found that HUD's established oversight process, which includes examining the M&M contractor property files and other tools, identified these M&M contractor documentation issues in a timely manner. Further, the department has communicated these identified deficiencies to its M&M contractors, required some contractors to prepare written recovery plans specifying how identified problems will be addressed, and recently terminated its largest M&M contractor due in part to its failure to maintain adequate property files. ScoDe and Methodology To fulfill our objective regarding HUD's loan origination processes, we obtained and reviewed applicable HUD policies and procedures, interviewed HUD officials responsible for HUD's insurance and underwriting operations, and reviewed the results of HUD's most recent financial statement audits. We also selected and evaluated a nationwide statistical sample of 99 loans originated during the first 6 months of fiscal year 1999 to determine if lenders followed HUD's requirements for documenting loan eligibility determinations, including evidence that loan applicants were screened for delinquent federal debts. We did not reperform the lenders' loan underwriting procedures. To fulfill our objective regarding HUD's M&M contractors, we reviewed the requirements of the M&M contracts as well as HUD's policies for monitoring the performance of its M&M contractors. We interviewed officials in HUD's Single Family Asset Management Division and met with HUD's national file review contractor to obtain (1) an understanding of the process used to select and review the M&M property files each month and (2) the results of the contractor's July and August 1999 property file reviews. We compared the results of these reviews to the initial results we obtained in evaluating a separate statistical sample of foreclosed properties. We ultimately terminated our review of this sample because of the documentation deficiencies that we and HUD's national fie review contractor found. We did not visit any of HUD's foreclosed properties nor did we assess the actions HUD or the M&M contractors have taken to address the identified deficiencies. We are currently performing other work on HUD's single-family property disposition program that will provide additional information about HUD's oversight of its M&M contractors and the actions HUD and its M&M contractors have taken as a result of the oversight findings. We anticipate completion of this work next year. We conducted our work from April 1999 through October 1999 in accordance with generally accepted government auditing standards. We requested comments on our Page 3 GAO/AIMD-00-41R HUD's Loan Origination and Foreclosed Property Management Processes B-284041 draft briefing slides from HUD officials, who generally agreed with the infonmation in the slides. We incorporated their comments as appropriate. We are sending copies of this letter to the Honorable Jim Turner and the Honorable Barbara A. Mikulski, Ranking Minority Members of your Committees; the Honorable Andrew Cuomo, Secretary of Housing and Urban Development; the Honorable Jacob J. Lew, Director of the Office of Management and Budget; and other interested parties. Copies will also be made available to others upon request. If you have any questions about this letter or the earlier briefings, please contact me at (202) 512-9508 or Shirley Abel, Assistant Director, at (202) 512-9516. A key contributor to this assignment was Phillip McIntyre. Linda M. 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Department of Housing and Urban Development: Loan Origination and Foreclosed Property Management Processes
Published by the Government Accountability Office on 1999-11-19.
Below is a raw (and likely hideous) rendition of the original report. (PDF)