oversight

HUD's Written Policies and Procedures for Loan Indemnifications Were

Published by the Department of Housing and Urban Development, Office of Inspector General on 2010-09-28.

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

                                                                Issue Date
                                                                         September 28, 2010
                                                                 
                                                                Audit Report Number
                                                                             2010-KC-0003




TO:         Vicki Bott, Deputy Assistant Secretary for Single Family Housing, HU

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


SUBJECT: HUD’s Written Policies and Procedures for Loan Indemnifications Were
           Generally Adequate, But Did Not Include Procedures for Pursuing Signed
           Indemnification Agreements From Lenders


                                   HIGHLIGHTS

 What We Audited and Why

             We selected the Office of Lender Activities and Program Compliance, Quality
             Assurance Division, for review because during a prior audit, we saw instances in
             which indemnification agreements were not obtained from lenders under certain
             circumstances. Our objective was to determine whether the U.S. Department of
             Housing and Urban Development (HUD) had adequate controls to track, obtain,
             and record indemnification agreements from lenders for materially deficient
             loans.


 What We Found


             HUD’s Quality Assurance Division had written policies and procedures for
             determining when an indemnification agreement was appropriate and how to
             process a signed agreement. However, it did not have written policies and
             procedures for pursuing the signed indemnification agreement from lenders. As a
           result, HUD did not have assurance that its employees consistently and correctly
           applied its procedures to pursue signed indemnification agreements.

What We Recommend


           We recommend the Quality Assurance Division develop and implement effective
           policies and procedures to ensure that its employees consistently pursue signed
           indemnification agreements.

           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


           HUD disagreed that it did not have written policies and procedures for pursuing
           indemnification agreements. We provided the draft report to HUD on August 9,
           2010 and requested a response by September 8, 2010. It provided written
           comments on September 10, 2010.

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




                                            2
                           TABLE OF CONTENTS

Background and Objective                                                          4

Results of Audit
      Finding 1: HUD’s Quality Assurance Division Did Not Have Written Policies   5
                 and Procedures for Pursuing Signed Indemnification Agreements
                 From Lenders

Scope and Methodology                                                             7

Internal Controls                                                                 8

Appendix
   A. Auditee Comments and OIG’s Evaluation                                       9




                                           3
                      BACKGROUND AND OBJECTIVE

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.

The 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, on
an actuarially sound basis, for those that are unserved or underserved by the private market and
to provide a consistent, stabilizing force in the home financing market. One of the offices
comprising the Office of Single Family Housing is the Office of Lender Activities and Program
Compliance.

The Office of Lender Activities and Program Compliance’s Quality Assurance Division is
responsible for the oversight of FHA lenders. The Quality Assurance Division performs lender
oversight functions at U.S. Department of Housing and Urban Development (HUD) headquarters
in Washington, DC, and at the four homeownership centers located in Atlanta, GA, Denver, CO,
Philadelphia, PA, and Santa Ana, CA.

Mortgage lender violations that significantly increase FHA’s risk and were caused by fraud or
negligence on the part of the mortgage lender typically result in an indemnification agreement
between FHA and the mortgage lender. Under an indemnification agreement, the originating
mortgage lender agrees to either abstain from filing an insurance claim or reimburse FHA if a
subsequent holder of the mortgage files an insurance claim and FHA suffers a financial loss
when disposing of the property.

Our objective was to determine whether HUD had adequate controls to track, obtain, and record
indemnification agreements from lenders for materially deficient loans.




                                                4
                                RESULTS OF AUDIT

Finding 1: HUD’s Quality Assurance Division Did Not Have Written
            Policies and Procedures for Pursuing Signed
            Indemnification Agreements From Lenders
HUD’s written policies and procedures for loan indemnifications were generally adequate, but
did not include procedures for pursuing signed indemnification agreements from lenders. This
deficiency occurred because Quality Assurance Division management did not believe it was
necessary to have written policies and procedures for pursuing signed indemnification
agreements. As a result, HUD’s Quality Assurance Division did not have assurance that its
employees consistently and correctly applied its procedures to pursue signed indemnification
agreements.



 HUD Lacked Written Policies
 and Procedures


              HUD’s written policies and procedures for loan indemnifications were generally
              adequate, but did not include procedures for pursuing signed indemnification
              agreements from lenders. The written Quality Assurance Division guidance did
              not address procedures for pursuing indemnification agreements from lenders
              who:
                   refuse to sign the agreement
                   ignore the request to sign the agreement
                   repeatedly submit additional documentation to mitigate the deficiencies
                     instead of sending back the signed agreement

              Additionally, the policies and procedures did not address the types of letters to
              send in each scenario above, as well as the number of days the lenders had to
              respond to each type of letter.

              HUD handbook 1840.1 requires managers to establish and maintain a system of
              management controls to provide reasonable assurance that programs and activities
              are effectively and efficiently managed and to protect against fraud, waste, abuse,
              and mismanagement. Internal control, sometimes referred to as management
              control, includes the written policies and procedures that staff members are to use
              to perform their jobs to meet HUD’s missions, goals, and objectives.




                                                5
HUD Management Did Not
Believe That Written Policies
and Procedures Were
Necessary

            Quality Assurance Division management officials told us that they did not believe
            it was necessary to have written policies and procedures for pursuing signed
            indemnification agreements because it was part of a larger lender monitoring
            review process. The written procedures for performing the monitoring review
            process were detailed and included all aspects of performing the reviews, but they
            did not address how HUD staff should pursue an indemnification agreement after
            determining that a material violation had occurred but before the signed
            indemnification agreement was received. The procedures did not ensure that
            lenders were held responsible for loans that posed a material risk to the FHA
            insurance fund.

            The lack of policies and procedures for the pursuit of indemnification agreements
            was an internal control weakness. Employees who do not have written policies
            and procedures to follow cannot perform consistently and appropriately since they
            do not know which procedures apply in various situations. Because of this
            deficiency, HUD’s Quality Assurance Division did not have assurance that its
            employees consistently and correctly applied its procedures to obtain signed
            indemnification agreements.


Recommendations



            We recommend that the Deputy Assistant Secretary for Single Family Housing
            require the Quality Assurance Division to

            1A. Develop and implement effective policies and procedures to ensure that its
                employees consistently pursue signed indemnification agreements for loans
                that pose a material risk to the FHA insurance fund.




                                             6
                        SCOPE AND METHODOLOGY

Our review covered the period January 1, 2008, through December 31, 2009, and was expanded
as necessary. We accomplished our objective by conducting interviews with HUD headquarters
staff and staff at the four homeownership centers: Atlanta, GA, Denver, CO, Philadelphia, PA,
and Santa Ana, CA. We reviewed Federal regulations, HUD handbooks and guidebooks, and
Quality Assurance Division policies and procedures. In addition, we reviewed prior Government
Accountability Office reports applicable to HUD’s oversight of FHA-approved lenders.

We performed our audit from January through July 2010, including onsite work at the Denver,
CO, homeownership center and at HUD headquarters in Washington, DC. We did not rely on
computer-processed data for this review.

We conducted the 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 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.




                                               7
                              INTERNAL CONTROLS

Internal control is a process adapted by those charged with governance and management,
designed to provide reasonable assurance about the achievement of the organization’s mission,
goals, and objectives with regard to:

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

Internal controls comprise the plans, policies, methods, and procedures used to meet the
organization’s mission, goals and objectives. Internal controls include the processes and
procedures for planning, organizing, directing, and controlling program operations as well as the
systems for measuring, reporting, and monitoring program performance.


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

                     Policies and procedures – Controls designed to ensure that indemnification
                      agreements are obtained from lenders who originate loans that are a material
                      risk to the FHA insurance fund.

               We assessed the relevant controls identified above.

                A deficiency in internal control exists when the design or operation of a control
               does not allow management or employees, in the normal course of performing their
               assigned functions, the reasonable opportunity to prevent, detect, or correct (1)
               impairments to effectiveness or efficiency of operations, (2) misstatements in
               financial or performance information, or (3) violations of laws and regulations on a
               timely basis.

               We evaluated internal controls related to the audit objective in accordance with
               generally accepted government auditing standards. Our evaluation of internal
               controls was not designed to provide assurance on the effectiveness of the internal
               control structure as a whole. Accordingly, we do not express an opinion on the
               effectiveness of the Quality Assurance Division’s internal control.




                                                 8
                        APPENDIX

Appendix A

        AUDITEE COMMENTS AND OIG’S EVALUATION

Ref to OIG Evaluation     Auditee Comments




Comment 1




                            9
Comment 2

Comment 3




Comment 4



Comment 5




            10
                         OIG Evaluation of Auditee Comments

Comment 1   We reviewed the “Quality Assurance Division Desk Guide” and the
            “Indemnification of FHA Single Family Mortgages Policy Statement” during our
            audit, and our report conclusions and recommendations reflect that review.

Comment 2   We were unable to find in the “Quality Assurance Division Desk Guide” where it
            states the letter process is repeated until the findings are resolved or a final
            determination is made that the loan(s) do not meet FHA insurance requirements.
            Further, page 75 of the Guide states that the lender “may be” referred to the
            Mortgagee Review Board if the lender fails to take corrective actions, but the
            Guide does not provide criteria for when the lender will be referred or what
            alternative procedures are available if the lender is not referred. Finally, the
            Guide does not make reference to indemnification agreements in this section and
            it is not clear that they are part of this process.

Comment 3   The Office of Single Family Housing states that lenders who choose not to sign
            the indemnification agreement or refuse to respond to Quality Assurance Division
            letters are referred to the Mortgagee Review Board for appropriate administrative
            action. This statement conflicts with statements on page 74 of the “Quality
            Assurance Division Desk Guide” and page 3 of the “Indemnification of FHA
            Single Family Mortgages Policy Statement” which both say lenders who refuse to
            sign “may be” referred to the Mortgagee Review Board.

Comment 4   We were advised during our review that the Quality Assurance Division is in the
            process of drafting Standard Operating Procedures. It would be appropriate to
            include the written policies and procedures for pursuing indemnification
            agreements in the Standard Operating Procedures, and doing so should resolve the
            recommendation in this report.

Comment 5   We held an exit meeting with the Office of Single Family Housing to discuss the
            report. During that meeting, the Office of Single Family Housing staff made
            several suggestions for wording changes in the report, and we made significant
            changes to the report based on that feedback. An objection to this statement was
            not mentioned during the exit meeting. Further, we did not intend for this
            statement to be inflammatory. We included supporting sentences to explain why
            Quality Assurance Division staff thought written policies and procedures for
            pursuing indemnification agreements was not necessary, and we believe the
            statement is accurate and adequately supported.




                                            11