oversight

HUD's Quality Assurance Division Did Not Always Resolve Materially Deficient or Potentially Fraudulent Loans Consistently

Published by the Department of Housing and Urban Development, Office of Inspector General on 2008-01-14.

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

                                                                   Issue Date
                                                                            January 14, 2008
                                                                   Audit Report Number
                                                                                2008-KC-0001




TO:        Brian D. Montgomery, Assistant Secretary for Housing – Federal Housing
              Commissioner, H

           //signed//
FROM:      Ronald J. Hosking, Regional Inspector General for Audit, 7AGA

SUBJECT: HUD’s Quality Assurance Division Did Not Always Resolve Materially
           Deficient or Potentially Fraudulent Loans Consistently


                                    HIGHLIGHTS

 What We Audited and Why

             We audited the U.S. Department of Housing and Urban Development’s (HUD)
             Quality Assurance Division because the results of some previous Office of
             Inspector General (OIG) audits indicated that the Quality Assurance Division
             might not have consistently followed its requirements.

             Our objective was to determine whether HUD’s Quality Assurance Division
             consistently required Federal Housing Administration (FHA)-approved lenders to
             indemnify loans with similar material deficiencies and whether it appropriately
             handled potentially fraudulent loans.

 What We Found

             HUD’s Quality Assurance Division did not always resolve materially deficient or
             potentially fraudulent loans consistently. As a result, HUD increased its risk of
             treating lenders differently in similar situations. In addition, OIG did not have the
             opportunity to pursue actions against parties responsible for fraudulent loans, and
             the FHA insurance fund incurred unnecessary losses and remains at risk for
             additional losses on fraudulent loans.
What We Recommend

           We recommend that HUD develop and implement effective policies and
           procedures to ensure uniform resolutions to loan underwriting deficiencies and
           handling potentially fraudulent loans. We also recommend that HUD coordinate
           with OIG to reevaluate the agreement between HUD and OIG regarding referring
           potentially fraudulent loans to OIG. Further, we recommend that HUD require
           lenders to indemnify 16 insured loans that contained evidence of fraud.

           For each recommendation without a management decision, please respond and
           provide status reports in accordance with HUD Handbook 2000.06, REV-3.
           Please furnish us copies of any correspondence or directives issued because of the
           audit.

Auditee’s Response

           We provided the report to HUD on November 19, 2007, and requested a response
           by December 14, 2007. HUD provided written comments on December 19, 2007.

           HUD disagreed with our conclusion that it needed to formalize instructions to
           Quality Assurance Division staff responsible for lender oversight. However, as
           we recommended, HUD recently met with OIG to reevaluate and refine the
           referral process for potentially fraudulent loans. HUD also agreed to review and
           consider indemnification for 16 potentially fraudulent loans.

           The complete text of the auditee’s response, along with our evaluation of that
           response, can be found in appendix B of this report.




                                        2
                              TABLE OF CONTENTS

Background and Objectives                                                               4

Results of Audit
        Finding: HUD’s Quality Assurance Division Did Not Always Resolve
                   Materially Deficient or Potentially Fraudulent Loans Consistently    5

Scope and Methodology                                                                  11

Internal Controls                                                                      13

Appendixes
   A.   Schedule of Questioned Costs and Funds to Be Put to Better Use                 14
   B.   Auditee Comments and OIG’s Evaluation                                          15
   C.   HUD Requirements For Referring and Indemnifying Fraudulent Loans               19
   D.   Potentially Fraudulent Loans for Which HUD Did Not Follow Requirements         20
   E.   Potentially Fraudulent Loans without Indemnifications                          21




                                           3
                     BACKGROUND AND OBJECTIVES

As part of the U.S. Department of Housing and Urban Development (HUD), the Federal Housing
Administration (FHA) provides mortgage insurance on loans made by approved lenders
throughout the United States and its territories. FHA mortgage insurance provides lenders with
protection against losses as the result of homeowners’ defaulting on their mortgage loans. The
lenders bear less risk because FHA will pay a claim to the lender in the event of a homeowner’s
default. Loans must meet established FHA requirements to qualify for insurance. FHA currently
has 4.8 million insured single-family mortgages.

HUD’s Office of Single Family Housing is responsible for the overall management and
administration of FHA single-family mortgage insurance programs. The mission of the Office of
Single Family Housing is to expand and maintain affordable homeownership opportunities for
those that are not served or are underserved by the private market and to provide a consistent,
stabilizing force in the home financing market.

Within the Office of Single Family Housing, the Office of Lender Activities and Program
Compliance, Quality Assurance Division, is responsible for monitoring FHA-approved lenders.
In performing its monitoring duties, the Quality Assurance Division is to assess lender
performance, internal controls, and compliance with HUD origination and servicing
requirements, largely through on-site reviews of lender practices, but also through off-site
evaluations and analyses.

The Quality Assurance Division performs lender oversight functions at HUD headquarters in
Washington, DC, and at the four homeownership centers located in Atlanta, Georgia; Denver,
Colorado; Philadelphia, Pennsylvania; and Santa Ana, California. In addition to overseeing
lenders, the headquarters staff is responsible for overseeing the work of the Quality Assurance
Division staff in the four homeownership centers. This internal quality control function is
intended to ensure that

   •   Monitoring reviews of lenders are conducted in a consistent manner and of the same
       quality throughout each homeownership center;
   •   Monitoring review letters identifying loan deficiencies noted during lender reviews are
       consistent with regard to form, content, policies, findings, and outcomes across each
       homeownership center and within branches of regional and national lenders; and
   •   Data in HUD’s lender review tracking database are accurate.

Our objective was to determine whether HUD’s Quality Assurance Division consistently
required FHA-approved lenders to indemnify loans with similar material deficiencies and
whether it appropriately handled potentially fraudulent loans.




                                            4
                                 RESULTS OF AUDIT

Finding: HUD’s Quality Assurance Division Did Not Always Resolve
           Materially Deficient or Potentially Fraudulent Loans
           Consistently

HUD’s Quality Assurance Division did not always resolve materially deficient or potentially
fraudulent loans consistently. The inconsistencies happened because the Quality Assurance
Division did not establish organized, formal instructions for its managers in the homeownership
centers to follow when making decisions on pursuing indemnifications from lenders for material
underwriting deficiencies. Additionally, for various reasons, the local Quality Assurance
Division staff decided not to follow requirements for resolving potentially fraudulent loans. As a
result, HUD increased its risk of treating lenders differently in similar situations and of causing
unnecessary losses to the Insurance Fund.



 Loan Indemnifications on
 Materially Deficient Loans Not
 Consistently Required


               HUD’s Quality Assurance Division units in the four homeownership centers were
               generally consistent in resolving material underwriting deficiencies but sometimes
               had different approaches for resolving the deficiencies. The Quality Assurance
               Division guide, effective in 2001, states that FHA program requirements are
               essentially uniform throughout the country and the Quality Assurance Division is
               to uniformly apply lender monitoring and review procedures, findings, and
               actions.

               We analyzed more than 800 loan deficiencies identified by the homeownership
               centers while conducting 48 lender monitoring reviews from December 2003
               through September 2006. The homeownership centers identified 235 of the 800
               deficiencies as material because these deficiencies presented a significant risk of
               loss to the FHA insurance fund. The 235 material deficiencies represented 190
               FHA loans.

               The Quality Assurance Division units in the homeownership center sometimes
               took different approaches when resolving loan deficiencies. As an example, the
               homeownership centers differed regarding the materiality of loan underwriting
               deficiencies that warranted indemnifications from lenders. For example,

                   •   The Philadelphia homeownership center obtained indemnifications on
                       FHA case numbers 061-2532902, 374-3814858, and 374-3842967 when


                                             5
       the borrower’s and/or coborrower’s verifications of employment were
       either missing from the loan file submitted to HUD or illegible.
       Conversely, the Santa Ana homeownership center did not pursue
       indemnification of FHA case number 332-4306607 in which the lender
       could not provide evidence that it had verified the borrower’s current
       employment. According to HUD’s letter to the lender, the
       homeownership center accepted two prior year Internal Revenue Service
       W-2 forms (showing past employment) in place of a current verification of
       employment. A quality assurance manager told us that she did not
       consider a missing verification of current employment a material
       deficiency if the lender submitted other employment documentation.

Another difference was that the Santa Ana homeownership center did not pursue
indemnifications if the loan had an acceptable payment history and was currently
performing. A quality assurance manager told us that if the loan was performing,
the loan deficiencies were probably not relevant to the borrower’s ability to pay.
For example,

   •   In FHA case number 561-7935351, the borrower needed nearly $3,000 to
       close the loan, but the lender did not verify the borrower’s assets. The
       lender agreed that it did not follow FHA requirements in underwriting the
       loan. However, the homeownership center closed the review with a letter
       to the lender stating that the loan had remained current since endorsement
       and, therefore, HUD did not require the lender to indemnify the loan.

An additional difference was that the Atlanta and Santa Ana homeownership
centers did not pursue indemnifications when lenders promised to do a better job
of following FHA requirements in the future. For example,

   •   In nine cases, the lenders were not able to provide additional
       documentation to resolve material loan deficiencies but promised to
       provide training to staff to prevent the same problem in the future.


                      FHA case number
                        201-3305349
                        201-3357107
                        201-3384160
                        201-3386887
                        201-3402921
                        332-4233611
                        332-4391555
                        561-9209251
                        569-0615746




                             6
            According to correspondence with the lender, the homeownership centers closed
            the reviews without requiring indemnifications, based on the lenders’
            commitments to provide additional FHA underwriting guidance to their staff.
            However, lender correspondence from the Philadelphia and Denver
            homeownership centers showed that these units required lenders to indemnify
            deficient loans even when the lenders promised to improve their underwriting on
            future loans.

Potentially Fraudulent Loans
Not Consistently Referred or
Indemnified


            Quality Assurance Division staff in the homeownership centers did not
            consistently refer potentially fraudulent loans to OIG or require indemnifications
            from the lenders when appropriate. Two homeownership centers referred fraud
            but did not obtain indemnification agreements. One homeownership center
            obtained indemnification agreements for fraudulent loans but did not refer them to
            OIG. The other homeownership center did not refer fraud, and it did not obtain
            indemnification agreements.

            HUD has instituted multiple instructions that require its staff to refer evidence of
            fraudulent loans to OIG. HUD Handbook 4060.1, the Quality Assurance Division
            guide, and a July 2003 memorandum of understanding between HUD and OIG
            require HUD staff to refer potentially fraudulent loans to OIG. The Office of
            Single Family Housing also issued a November 2005 policy statement outlining
            when HUD should require lenders to indemnify materially deficient loans,
            including loans that contain evidence of fraud. Appendix C provides details of
            the HUD instructions.

            None of the HUD guidance or agreements limit the Quality Assurance Division’s
            referral responsibility based on severity of fraud, whether the lender was a party
            to the fraud, or whether OIG may pursue cases against parties committing the
            fraud.

            We noted 34 potentially fraudulent loans that Quality Assurance Division staff
            did not properly process: 32 loans reported to HUD by lenders and two loans
            identified by HUD staff during their monitoring reviews. Of the 34 loans, the
            homeownership centers did not refer 25 loans to OIG and did not obtain
            indemnifications on 16 loans.

               •   The Philadelphia homeownership center referred all five potentially
                   fraudulent loans identified to OIG but did not require indemnification
                   from the lenders on any of the loans.




                                         7
               •   The Denver homeownership center referred all four potentially fraudulent
                   loans identified to OIG but did not require indemnification from the
                   lenders on any of the loans.

               •   The Atlanta homeownership center did not refer any of the three
                   potentially fraudulent loans identified to OIG, nor did it require
                   indemnification from the lenders.

               •   The Santa Ana homeownership center did not refer any of the 22
                   potentially fraudulent loans identified to OIG but required indemnification
                   from the lenders on 13 of the loans.

            Appendix D provides details on the 34 loans.

Adequate Indemnification
Instructions Not Provided

            HUD did not establish organized, formal instructions for homeownership center
            Quality Assurance Division managers to follow when making decisions on
            pursuing loan indemnifications on loans with material underwriting deficiencies.
            The Quality Assurance Division guide does not provide standards that would
            better ensure consistent decisions among the homeownership centers.

            In addition, HUD headquarters provided homeownership center managers
            informal guidance through e-mails and group discussions. The guidance was not
            organized, nor was it formalized and distributed to homeownership center Quality
            Assurance Division managers as policy. However, homeownership managers told
            us that they referred to the miscellaneous, informal guidance when making
            decisions on whether to require lenders to indemnify materially deficient loans.

Local Staff Made Decisions Not
to Follow Requirements

            Quality Assurance Division staff at the homeownership centers were aware of the
            requirements to refer loans with evidence of fraud to OIG. They were also aware
            that HUD considered loans with evidence of fraud sufficiently deficient to justify
            a need for lenders to indemnify these loans. However, for various reasons, they
            decided not to follow the requirements. One homeownership center Quality
            Assurance Division manager did not consistently refer potentially fraudulent
            loans to OIG based on the belief that OIG did not want referrals of individual
            loans. This manager also believed that OIG would not prosecute parties involved
            in frauds on individual loans; therefore, the manager did not see a need to refer
            individual loans to OIG.




                                         8
            Other Quality Assurance Division managers at the homeownership centers said
            that they did not consistently pursue indemnifications for potentially fraudulent
            loans because they could not hold the lenders responsible for loans with evidence
            of fraud if they were not certain that the lender knew or should have known about
            the fraud when it submitted the loan for FHA insurance. Another Quality
            Assurance Division homeownership center manager said that indemnifications
            were not meant to be punitive. The manager considered it unjustified punishment
            against the lender when HUD required indemnifications on potentially fraudulent
            loans.

Increased Risk of Not Treating
Lenders Uniformly

            Lack of uniformity among homeownership centers when resolving material loan
            deficiencies increases HUD’s risk of treating lenders inconsistently. By
            inconsistently requiring loan indemnifications, the homeownership centers held
            some lenders financially liable for potential defaults and related losses on loans
            that FHA should not have insured but did not hold other lenders responsible for
            the same loan deficiencies. Further, the FHA insurance fund incurs unnecessary
            losses when HUD does not obtain loan indemnifications when warranted.

            In addition, if the homeownership centers are not uniform in resolving loan
            underwriting deficiencies and potentially fraudulent loans, lenders can receive
            conflicting and contradictory information regarding FHA requirements, causing
            confusion about FHA requirements and how HUD will enforce them. Further,
            lenders may seek underwriting guidance from the homeownership center that
            lenders have learned from past experience provides the most favorable outcome to
            the lender.

Insurance Fund Put at
Unnecessary Risk of Loss

            Because Quality Assurance Division staff did not refer loans with indications of
            fraud to OIG, OIG did not have the opportunity to pursue actions against the
            parties responsible for the fraudulent loans. In addition, failure to refer potentially
            fraudulent loans to OIG deprives OIG of important information needed to identify
            patterns of fraud that could lead to more significant fraudulent activity and much
            larger risks and losses to the FHA insurance fund.

            Further, Quality Assurance Division staff placed the FHA insurance fund at
            unnecessary risk when they did not pursue indemnification agreements with the
            lenders submitting the potentially fraudulent loans. Of the 34 potentially
            fraudulent loans that HUD did not process according to its requirements, HUD
            did not obtain indemnifications on 16 loans. Eleven of the loans, with original
            mortgage amounts totaling more than $2 million, currently pose a risk of loss of



                                          9
          more than $670,000 to the FHA insurance fund. The remaining five loans
          resulted in foreclosures, four of which caused losses to the insurance fund of more
          than $230,000 when HUD sold the properties. HUD has not yet sold the
          remaining property, but the loan poses a risk to the insurance fund of about
          $52,000. Appendix E shows details of the loans that have caused or could cause
          losses to the FHA insurance fund.

Recommendations


          We recommend that HUD’s Assistant Secretary for Housing – Federal Housing
          Commissioner

          1A. Develop and implement effective policies and procedures to ensure uniform
              resolutions to loan underwriting deficiencies and handling potentially
              fraudulent loans.

          1B. Coordinate with OIG to reevaluate the July 2003 memorandum of
              understanding between HUD and OIG regarding referring loans with
              evidence of fraud to OIG. HUD should ensure that its staff follow the
              resulting agreement.

          1C. Require lenders to indemnify HUD for 11 actively insured loans with
              original mortgage amounts totaling more than $2.3 million. The projected
              loss is $670,113, based on the FHA insurance fund average loss rate of 29
              percent for fiscal year 2005 (see appendix E).

          1D. Require lenders to reimburse HUD for four loans for which HUD has
              already incurred losses totaling $233,351 (see appendix E).

          1E. Require the lender to indemnify HUD for one loan for which HUD has paid
              a $181,168 claim but not yet sold the property. The projected loss is
              $52,539, based on the FHA insurance fund average loss rate of 29 percent
              for fiscal year 2005 (see appendix E).




                                      10
                         SCOPE AND METHODOLOGY

Our review covered the period from January 1, 2004, through the present and was expanded as
necessary. We accomplished our objective by conducting interviews with HUD headquarters
staff and staff at the four homeownership centers: Atlanta, Georgia; Denver, Colorado;
Philadelphia, Pennsylvania; and Santa Ana, California. We reviewed federal regulations, HUD
handbooks and guidebooks, policies and procedures at each homeownership center, and informal
guidance on the lender monitoring processes–including matrices, memorandums, e-mails, and
internal policies. In addition, we reviewed prior Government Accountability Office reports
applicable to HUD’s oversight of FHA-approved lender oversight.

We also reviewed the following reports and records at the homeownership centers for HUD’s
fiscal years 2004 through 2006:

   •   Files of 48 lender monitoring reviews conducted by Quality Assurance Division staff,
       including initial findings letters, loan origination documents, and all related
       correspondence between Quality Assurance staff and the lender;
   •   Files for 70 loans that lenders self-reported as containing material deficiencies, including
       loan origination documents and all related correspondence between Quality Assurance
       Division staff and the lender;
   •   Summary reports of lender monitoring reviews;
   •   Summary reports of loans that lenders self-reported; and
   •   Quality Assurance Division internal quality control review records.

We relied on computer-processed data contained in HUD’s Single Family Data Warehouse and
Neighborhood Watch systems. We assessed the reliability of the data and found the data
adequate to meet our audit objective. We also relied on computer-processed data contained in
HUD’s Approval/Recertification/Review Tracking System. We used these data for background
purposes only and did not use the data to support our audit conclusions.

We assigned a value to the potential savings to HUD if it implements our recommendations for
lenders to indemnify loans for which the homeownership centers referred loans to OIG but did
not require indemnifications from the lenders. For those loans in which HUD has not yet
incurred a loss, we applied FHA’s average loss experience for fiscal year 2005 provided by
HUD. We calculated the savings value at $670,113 for those properties currently actively
insured, which is 29 percent of the original mortgage amount of $2,310,733. For the loan for
which HUD has paid a claim but not yet sold the related property, we calculated the savings
value at $52,539, or 29 percent of $181,168 in claims paid.

This report details HUD’s noncompliance with a memorandum of agreement between HUD and
OIG. The finding includes a recommendation for HUD to coordinate with OIG’s Office of
Investigation to reevaluate the agreement. Because the Office of Investigation is another office
within the OIG, we are not independent with respect to that organization. Moreover, the scope
of our review did not include an assessment of the Office of Investigation’s compliance with the
above referenced memorandum of agreement.


                                            11
We performed the audit in accordance with generally accepted government auditing standards,
except for the independence impairment and scope limitation described above.

We performed our audit from August 2006 through June 2007, including on-site work at the
Atlanta, Georgia; Denver, Colorado; Philadelphia, Pennsylvania; and Santa Ana, California
homeownership centers and at HUD headquarters in Washington, DC.




                                          12
                             INTERNAL CONTROLS

Internal control is an integral component of an organization’s management that provides
reasonable assurance that the following objectives are being achieved:

   •   Effectiveness and efficiency of operations,
   •   Reliability of financial reporting, and
   •   Compliance with applicable laws and regulations.

Internal controls relate to management’s plans, methods, and procedures used to meet its
mission, goals, and objectives. Internal controls include the processes and procedures for
planning, organizing, directing, and controlling program operations. They include the systems
for measuring, reporting, and monitoring program performance.



 Relevant Internal Controls
              We determined the following internal controls were relevant to our audit objectives:

              •       Policies and procedures – Controls designed to ensure that FHA-approved
                      lenders only submit loans for insurance that meet federal regulations.

              We assessed the relevant controls identified above.

              A significant weakness exists if management controls do not provide reasonable
              assurance that the process for planning, organizing, directing, and controlling
              program operations will meet the organization’s objectives.


 Significant Weaknesses


              We did not identify any significant weaknesses.




                                           13
                                   APPENDIXES

Appendix A

              SCHEDULE OF QUESTIONED COSTS
             AND FUNDS TO BE PUT TO BETTER USE

                 Recommendation              Ineligible 1/   Funds to be put
                        number                                to better use 2/

                        1C                                         $670,113
                        1D                     $233,351
                        1E                                           $52,539


1/   Ineligible costs are costs charged to a HUD-financed or HUD-insured program or activity
     that the auditor believes are not allowable by law; contract; or federal, state, or local
     polices or regulations.

2/   Recommendations that funds be put to better use are estimates of amounts that could be
     used more efficiently if an OIG recommendation is implemented. This includes
     reductions in outlays, deobligation of funds, withdrawal of interest subsidy costs not
     incurred by implementing recommended improvements, avoidance of unnecessary
     expenditures noted in preaward reviews, and any other savings which are specifically
     identified.

     Implementation of our recommendations to require lenders to indemnify loans that were
     referred to OIG for fraud will reduce the risk of loss to the FHA insurance fund. The
     amounts above reflect that, upon sale of the mortgaged property, FHA’s average loss
     experience is about 29 percent of the claim amount based upon statistics provided by
     HUD.




                                        14
Appendix B

        AUDITEE COMMENTS AND OIG’S EVALUATION


Ref to OIG Evaluation    Auditee Comments




Comment 1




                        15
Comment 2




Comment 3




Comment 4




Comment 5



Comment 6




            16
Comment 7




            17
                         OIG Evaluation of Auditee Comments

Comment 1   Our report concludes that although the homeownership centers were generally
            consistent in resolving loan deficiencies, HUD should take additional action to
            reduce inconsistencies. We provided examples in the report to show how
            homeownership centers took inconsistent approaches to similar underwriting
            deficiencies and in resolving loan deficiencies. We maintain that HUD should
            take additional action to more uniformly apply lender monitoring and review
            procedures, findings, and actions.

Comment 2   We maintain that HUD should develop and implement effective policies and
            procedures to ensure uniform resolutions to loan underwriting deficiencies and
            handling potentially fraudulent loans. We believe that formalized instructions for
            evaluating and resolving similar loan-level scenarios would ensure more uniform
            treatment of loan deficiencies and the lenders causing the deficiencies.

Comment 3   We appreciate the Office of Single Family Housing’s willingness to work with
            OIG regarding referrals of potential fraud. The Office of Single Family Housing
            should continue to coordinate with OIG and refer FHA loans with indications of
            fraud, using the parameters that HUD and OIG agree is appropriate.

Comment 4   To ensure that we did not mischaracterize HUD’s internal policy statement, we
            revised appendix C to include more detail from the policy.

Comment 5   HUD’s internal policy statement lists a potentially fraudulent loan as an example
            of a loan that presents a material risk to FHA and therefore, likely rises to the
            level of indemnification. We agree that generally potentially fraudulent loans
            likely rise to the level of indemnification. Therefore, we believe that absent an
            extraordinary reason to do otherwise, HUD should require the lender to indemnify
            a loan with evidence of fraud.

Comment 6   We continue to believe that the homeownership centers should refer potentially
            fraudulent loans to OIG and allow OIG to decide what actions are warranted.
            HUD should not refrain from referring loans that it believes OIG may decline to
            accept as a potential fraud case simply because OIG may have declined a similar
            referral in the past. While OIG evaluates the merit of referrals and takes actions it
            deems appropriate, OIG can make these decisions only if HUD refers potential
            fraud to OIG for consideration. As stated in comment 3, HUD should continue to
            coordinate with OIG and refer FHA loans with indications of fraud, using the
            parameters that HUD and OIG agree is appropriate.

Comment 7   We appreciate that HUD agrees it should require lenders to indemnify materially
            deficient loans even when the loan is current or the lender agrees to provide
            training to prevent future loan deficiencies. We encourage HUD to ensure that it
            pursues indemnifications when these situations exist.




                                         18
Appendix C

            HUD REQUIREMENTS FOR REFERRING AND
              INDEMNIFYING FRAUDULENT LOANS



HUD Handbook 4060.1, REV-2, paragraph 8-3, provides that fraud and suspected illegal
activities are to be referred to OIG.


The Quality Assurance Division guide requires staff to always refer fraud issues to OIG.


A July 2003 memorandum of understanding between HUD and OIG states that the
homeownership centers should immediately refer evidence of fraud to OIG. This agreement
requires that if HUD staff disclose evidence of fraud during a lender monitoring review, they
should immediately refer the loan to OIG. OIG has 15 days from its receipt of the referral to
notify the homeownership center of OIG’s request to withhold a findings letter to the lender and
the basis for the request.


A November 2005 Office of Single Family Housing internal policy statement provides examples
of unacceptable loan deficiencies that HUD determined present a material risk to FHA. The
policy states that the examples provided, which include potentially fraudulent loans, likely rise to
the level that HUD should require the lender to indemnify the loan. The policy describes
potential fraud issues as discrepancies in income, assets, Social Security number, and property
that are so great that the lender should have questioned the employment, asset/gift donor,
borrower, or appraisal information further as their falsification was evident prior to loan closing.




                                            19
Appendix D

          POTENTIALLY FRAUDULENT LOANS
    FOR WHICH HUD DID NOT FOLLOW REQUIREMENTS


                                   Referred     Not referred   Not referred   Not referred
                                    to OIG        to OIG         to OIG         to OIG

Homeownership                         Not           Not
     center     FHA case number   indemnified   indemnified    Indemnified    Paid in full
Denver            052-3259485          x
Denver            052-3472629          x
Denver            052-3495688          x
Philadelphia      261-8250199          x
Philadelphia      261-8495860          x
Philadelphia      261-8942016          x
Philadelphia      352-5334703          x
Philadelphia      352-5414984          x
Denver            491-8542532          x
Santa Ana         023-2281607                        x
Atlanta           105-1700716                        x
Atlanta           105-2095993                        x
Santa Ana         431-4026298                        x
Santa Ana         561-7278627                        x
Santa Ana         561-7975685                        x
Santa Ana         561-8245677                        x
Santa Ana         023-0931922                                       x
Santa Ana         023-1181861                                       x
Santa Ana         048-2501803                                       x
Santa Ana         048-2736718                                       x
Santa Ana         048-4238622                                       x
Santa Ana         121-2148756                                       x
Santa Ana         121-2270946                                       x
Santa Ana         332-3952378                                       x
Santa Ana         332-4187463                                       x
Santa Ana         332-4396076                                       x
Santa Ana         491-7872340                                       x
Santa Ana         561-7791027                                       x
Santa Ana         561-8071652                                       x
Santa Ana         023-2101144                                                      x
Atlanta           092-9187016                                                      x
Santa Ana         332-4138541                                                      x
Santa Ana         431-3886018                                                      x
Santa Ana         431-3927850                                                      x




                                      20
Appendix E

                   POTENTIALLY FRAUDULENT LOANS
                     WITHOUT INDEMNIFICATIONS



          FHA loan information                              Potential monetary savings
                                                      Original
                                                     mortgage                                 Amount of
     Homeownership              FHA case             amount of             Amount of            losses
          center                 number             active loans           claim paid          incurred
  Santa Ana                   023-2281607          $        63,995
  Santa Ana                   431-4026298          $      180,172
  Santa Ana                   561-7278627          $      221,523
  Santa Ana                   561-8245677          $      214,582
  Santa Ana                   561-7975685                                                 $        38,155
  Philadelphia                261-8250199          $       72,758
  Philadelphia                261-8495860          $      172,788
  Philadelphia                261-8942016          $      167,044
  Philadelphia                352-5414984          $      392,800
  Philadelphia                352-5334703          $      455,836
  Atlanta                     105-1700716          $      165,434
  Atlanta                     105-2095993          $      203,801
  Denver                      491-8542532                              $       181,168
  Denver                      052-3495688                                                 $        58,793
  Denver                      052-3472629                                                 $        62,241
  Denver                      052-3259485                                                 $        74,162
  Totals                                           $    2,310,733      $       181,168    $       233,351

  Potential loss = 29%*                            $      670,113      $        52,539

  Total potential monetary savings                 $      670,113      $        52,539    $       233,351

  * Estimated future losses are based on HUD’s average loss rate of 29 percent of claims paid from the FHA
         insurance fund for fiscal year 2005.




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