Issue Date
April 18, 2011
Audit Report Number
2011-LA-0002
TO: Vicki B. Bott, Deputy Assistant Secretary for Single Family Housing, HU
FROM: Tanya E. Schulze, Regional Inspector General for Audit, Region IX, 9DGA
SUBJECT: HUD Did Not Always Follow its Requirements for the Preclosing and
Postclosing Review of Mortgage Files Submitted by New Direct Endorsement
Lenders
HIGHLIGHTS
What We Audited and Why
We audited the U.S. Department of Housing and Urban Development’s (HUD)
preclosing and postclosing loan review of new Federal Housing Administration (FHA)
direct endorsement lenders. This audit was conducted as part of the HUD Office of
Inspector General’s (OIG) fiscal year 2010 annual audit plan and was designed to follow
up on selected findings in the Government Accountability Office’s November 2004 audit
report on HUD’s oversight of FHA lenders. Our audit objectives were to determine
whether HUD followed its guidance when (1) reviewing the initial loans underwritten by
new FHA direct endorsement lenders and (2) performing the postendorsement technical
review of all of the initial loans endorsed by newly approved direct endorsement lenders.
What We Found
Although improvements had been made, HUD continued to grant unconditional direct
endorsement authority to some new FHA direct endorsement lenders (new lenders) that
did not successfully complete HUD’s requirements for unconditional direct endorsement
authority. Specifically, 7 of the 155 lenders reviewed did not successfully complete the
15 required test cases but, nevertheless, were granted unconditional direct endorsement
authority. These lenders generally submitted 15 or more test cases; however, some of
these cases did not count toward HUD’s requirements because they were sponsored (i.e.,
underwritten) by other lenders. In other instances, lenders did not complete the required
number of manually underwritten test cases. FHA could incur unnecessary risk if HUD
continues to approve new lenders that did not fully complete the minimum test case
requirements. Direct endorsement lenders with unconditional authority can underwrite
and close loans without prior approval from HUD. Therefore, FHA is committed to
insure these loans, whether or not the lender has demonstrated the capacity to comply
with FHA underwriting requirements.
Also, HUD did not follow its guidance for the postendorsement technical review of all
loans initially endorsed by new lenders that were approved for unconditional direct
endorsement authority (newly approved lenders). HUD only performed the required
reviews on approximately half of the initial loans endorsed. This condition occurred in
part because the computerized system HUD used to select loans for review was
improperly programmed. HUD officials have taken steps to address the issue. Also,
there was no single report available to properly monitor newly approved lenders, but
officials were working to create one. As a result, HUD’s monitoring of its newly
approved lenders’ performance was weakened.
What We Recommend
We recommend that the Deputy Assistant Secretary for Single Family Housing require
HUD’s Homeownership Centers to improve controls to ensure that they follow the
guidance for granting new lenders unconditional direct endorsement authority.
Additionally, we recommend that the Deputy Assistant Secretary for Single Family
Housing ensure that the required number of cases endorsed by newly approved lenders is
selected for review and establish a report that could be used by the Homeownership
Centers to properly monitor the performance of these lenders.
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 discussed our results with the Homeownership Centers and HUD headquarters during
the audit and at the exit conference on March 25, 2011. HUD provided written
comments to our draft report on April 12, 2011. HUD generally agreed with the findings
and recommendations. The complete text of HUD’s response, along with our evaluation
of that response, can be found in appendix A of this report.
2
TABLE OF CONTENTS
Background and Objectives 4
Results of Audit
Finding 1: Lenders Were Not Always Granted Unconditional Direct Endorsement 6
Authority in Accordance With HUD’s Requirements
Finding 2: HUD Did Not Perform the Postendorsement Technical Reviews for Newly 10
Approved Lenders in Accordance With Its Requirements
Scope and Methodology 15
Internal Controls 17
Appendix
A. Auditee Comments and OIG’s Evaluation 18
3
BACKGROUND AND OBJECTIVES
The Federal Housing Administration (FHA) was created by Congress in 1934 and is the largest
insurer of mortgages in the world, insuring more than 34 million properties since its inception.
FHA’s mortgage insurance programs help low- and moderate-income families become
homeowners by lowering some of the costs of their mortgage loans. FHA mortgage insurance
also encourages lenders to make loans to otherwise creditworthy borrowers that might not be
able to meet conventional underwriting requirements by protecting the lender against default.
The U.S. Department of Housing and Urban Development (HUD) oversees FHA and
participating lenders.
Direct endorsement is authorized under Section 203(b) of the National Housing Act and allows
FHA-approved lenders to underwrite and close loans without prior approval from HUD.
Virtually all single-family FHA mortgage lending is done through direct endorsement. This
process makes it easier and quicker for people to buy homes by allowing them to get mortgage
insurance directly with an FHA-approved lender. To obtain unconditional direct endorsement
authority, lenders must first receive approval from HUD’s Office of Single Family Housing to
become an FHA direct endorsement lender. The new FHA direct endorsement lender (new
lender) must then submit a written request to the appropriate HUD Homeownership Center to be
placed in the preclosing review test phase. The purpose of the preclosing review test phase is to
ensure that the lender’s underwriting complies with FHA requirements. Upon satisfactory
completion of the preclosing review test phase (preclosing phase), the lender receives
unconditional approval to directly endorse FHA loans (newly approved lender). The four
Homeownership Centers, located in Atlanta, GA, Denver, CO, Philadelphia, PA, and Santa Ana,
CA, are responsible for overseeing lenders and insuring single-family FHA mortgages for their
designated geographic areas.
HUD’s Office of Single Family Housing established specific guidelines for approval of
unconditional direct endorsement authority. While in the preclosing phase for purchase forward
mortgages, new lenders must submit a minimum of 15 acceptable mortgage loan application
―test cases‖ for review by the Homeownership Center within a 12 month period.
Homeownership Center underwriters perform a detailed review of each loan application to
determine whether it is underwritten in compliance with FHA requirements. If the loan
application demonstrates acceptable underwriting, the Homeownership Center issues a firm
commitment to the new lender.
After new lenders complete the preclosing phase and are granted unconditional direct
endorsement authority, they enter the 100 percent postendorsement technical review (PETR)
phase. During this phase, the appropriate Homeownership Center performs an underwriting
review of 100 percent of the first 30 loans submitted and endorsed by the newly approved lender.
HUD changed the requirements to the first 10 loans, effective February 15, 2010. This
monitoring ensures that newly approved lenders continue to successfully underwrite acceptable
mortgages.
4
Our objectives were to determine whether HUD followed its guidance when reviewing the initial
loans underwritten by new lenders and when performing the PETR of all of the initial loans
endorsed by newly approved lenders.
5
RESULTS OF AUDIT
Finding 1: Lenders Were Not Always Granted Unconditional Direct
Endorsement Authority in Accordance With HUD’s
Requirements
Although improvements had been made, HUD continued to grant unconditional direct
endorsement authority (unconditional authority) to some new lenders that did not successfully
complete the requirements for the preclosing phase. In 2004, the Government Accountability
Office (GAO) reported that 7 of the 49 lenders it reviewed did not submit the required number of
test cases. In response, HUD updated its guidance; however, our follow-up review of 155 newly
approved lenders determined that 7 were granted unconditional authority without successfully
completing the required number of preclosing test cases. Some of the test cases submitted by
these lenders did not qualify for the preclosing phase because they were sponsored
(underwritten) by other lenders. In other instances, lenders did not complete the required number
of manually underwritten test cases. This condition occurred because the Homeownership
Centers did not consistently monitor all lenders and ensure that they complied with HUD’s
preclosing test case requirements. Since direct endorsement lenders with unconditional authority
underwrite and close mortgage loans without prior HUD review or approval, FHA could incur
unnecessary risk if HUD continues to approve new direct endorsement lenders that did not
complete the minimum test case requirements.
GAO Reported That HUD Did
Not Always Follow Its Guidance
In its November 2004 audit report on HUD’s oversight of FHA lenders,1 GAO reported that
HUD deviated from its guidance when granting direct endorsement authority to some of the
49 lenders that were approved between October 1, 2002, and April 30, 2004. Specifically,
GAO determined the following:
7 of the lenders did not submit at least 15 mortgage loans that were rated ―good‖ or
―fair‖;2
2 lenders were granted direct endorsement authority, although the last 5 consecutive
loans they submitted were not rated ―good‖ or ―fair‖; and3
1 lender exceeded the allowed 1-year probationary period, and 8 lenders submitted
more than the 30 loans allowed before being granted direct endorsement authority.
1
GAO audit report 05-13, ―Progress Made, but Opportunities Exist to Improve HUD’s Oversight of FHA Lenders‖
2
HUD changed the ratings of test cases to ―conforming,‖ ―deficient,‖ and ―unacceptable,‖ effective January 23,
2007.
3
This was no longer a requirement for the preclosing phase during the scope of our audit.
6
In response to the audit report, HUD issued updated instructions in May 2005 for the
Homeownership Centers to use when granting unconditional authority to new lenders.
Seven Lenders Did Not
Successfully Complete the
Required Number of Test Cases
The Homeownership Centers generally had controls in place to track lenders in the
preclosing phase but inconsistently monitored compliance with specific test case
standards. Our review of 155 lenders determined that 7 did not complete the required
number of test cases in accordance with the standards; however, the Homeownership
Centers granted these lenders unconditional authority. In 2010, these seven lenders
endorsed 1,408 FHA loans with mortgages totaling $276.2 million.
Homeownership Lenders Lenders that did not submit the
Centers reviewed required number of test cases
Atlanta 40 5
Denver 36 0
Philadelphia 40 2
Santa Ana 39 0
Total 155 7
According to HUD’s May 31, 2005, memorandum to the Homeownership Centers that set
forth the standards for the preclosing review phase4, lenders were required to submit a
minimum of 15 preclosing test cases that had been successfully underwritten and processed.
The memorandum further stated that 10 of the 15 preclosing test cases were required to be
manually underwritten and 5 could be a combination of automated underwriting and
streamline refinance loans. However, as of March 25, 2009, HUD had changed the
requirements to state that 5 of the required 15 preclosing test cases are required to be
manually underwritten and 10 may be a combination of automated underwriting and a
maximum of 2 streamline refinance loans. For lenders requesting direct endorsement
authority to underwrite home equity conversion mortgage (HECM) loans, lenders must
submit a minimum of five eligible HECM test cases for review.
The lenders that were inappropriately granted unconditional authority generally
submitted 15 or more preclosing test cases; however, Homeownership Center officials
apparently failed to note that in some instances, the test cases should not have been
counted toward the 15 test case requirement. For example, some cases were counted,
although they were sponsored by other lenders5. In other instances, the lenders did not
4
The subject of the memo was ―Standards for Granting Unconditional [Direct Endorsement] Authority and
Monitoring Mortgagee Performance.‖
5
Lenders that originate loans but have a sponsor do not perform the underwriting for those loans. Among other
responsibilities for the loan, the originator takes the initial application from the borrower(s), closes the loan after it
has been underwritten, and submits the loan package to HUD for insurance endorsement. However, the sponsor
performs the underwriting.
7
submit the required number of manually underwritten test cases. One lender, which was
granted unconditional authority on January 8, 2009, submitted a total of 13
preclosing test cases; however, it only completed 6 of the 10 required manually
underwritten test cases.
The Homeownership Centers’
Controls Were Not Always
Effective
The Homeownership Centers followed similar processes to track and monitor the lenders
in the preclosing phase. The Denver and Santa Ana Homeownership Centers created
internal databases that tracked the number of test cases submitted by each lender, while
the Atlanta and Philadelphia Homeownership Centers used manual tracking logs. In
general, the Homeownership Centers assigned each lender a HUD underwriter as the
point of contact but assigned the test cases to anyone on the preclosing team of
underwriters. In addition, most of the Homeownership Centers relied on the lenders to
alert the point of contact when the required number of cases was completed. After
lenders submitted the 15 required test cases, each Homeownership Center had designated
officials to be responsible for verifying the test cases listed on the tracking logs. The
supervisors then reviewed the tracking logs and approved lenders for unconditional
authority.
The Homeownership Centers’ process controls were not always effective. For example,
the tracking logs were not always properly maintained. In some instances, they did not
contain all of the test cases that were submitted by lenders, had incorrect loan types (i.e.,
manual or automated underwriting) entered, and did not indicate whether a firm
commitment had been issued. Therefore, it was difficult to verify that lenders
successfully completed the 15 required test cases. In addition, officials sometimes
reviewed an excessive number of extra test cases before granting lenders unconditional
authority. Specifically, for 8 of the 155 lenders reviewed, officials reviewed an average
of 10 to 11 extra test cases.6 Without controls in place to prevent processing so many
extra test cases, HUD may cause avoidable delays to granting lenders unconditional
authority.
Conclusion
HUD established a preclosing review test phase that new lenders must succesfully
complete before they can underwrite and close FHA-insured mortgage loans without
prior HUD review or approval. Although HUD’s implementation of its preclosing phase
improved after it issued updated instructions to address the issues reported by GAO in
2004, HUD continued to grant unconditional authority to some lenders that did not
6
HUD officials noted that lenders can submit multiple test cases at one time. Therefore, our results excluded
lenders with up to four extra cases.
8
successfully complete the preclosing phase. This condition occurred because the
Homeownership Centers did not consistently monitor the lenders in the preclosing phase.
Because FHA is committed to insure loans endorsed by all newly approved lenders, HUD
could incur unnecessary risk if it continues to approve some lenders that did not meet the
minimum test case requirements to demonstrate their capacity to comply with FHA
underwriting requirements.
Recommendation
We recommend that the Deputy Assistant Secretary for Single Family Housing
1A. Require the Homeownership Centers to improve controls to ensure that they follow
the guidance for granting unconditional authority, thus ensuring that lenders are not
approved without meeting the required preclosing phase requirements.
9
Finding 2: HUD Did Not Perform the Postendorsement Technical
Reviews for Newly Approved Lenders in Accordance With
Its Requirements
In response to GAO’s 2004 audit report showing that the Homeownership Centers only reviewed
about 7 percent of the lenders’ initial 30 FHA-insured loans, HUD made changes to its FHA loan
activity tracking systems7 to ensure that the initial loans endorsed by newly approved lenders
were reviewed. However, our follow-up review determined that the Homeownership Centers
only reviewed approximately half of the required number of initial loans for newly approved
lenders. This condition occurred because the system was not properly programmed to
automatically select for review the initial loans endorsed by newly approved lenders. Further,
the Homeownership Centers did not properly monitor the performance of newly approved
lenders because they used automated reports that did not contain all of the information necessary
to do so. Although HUD continually monitored all FHA lenders by reviewing endorsed loans
that met certain criteria, it did not ensure that newly approved lenders continued to underwrite all
of their initial loans8 in an acceptable manner. As a result, HUD’s monitoring of its newly
approved lenders’ performance was weakened.
GAO Reported That HUD Did
Not Always Follow Its Guidance
In its November 2004 audit report on HUD’s oversight of FHA lenders, GAO reported
that the Homeownership Centers did not follow HUD’s guidance stating that HUD
underwriters should perform [post-endorsement] technical reviews on 100 percent of at
least the first 30 FHA-insured loans made by newly approved lenders—the underwriters
had reviewed only about 7 percent of the required initial 30 loans. According to
Homeownership Center officials, they did not always select the first 30 loans to review
because some of a lender’s early loans may have been made by a new branch office of
which they were unaware. Also, the FHA loan activity tracking system did not
automatically maintain the 100 percent designation used to flag a newly approved
lender’s early loans for review.
In response to GAO’s audit report, HUD published release notes outlining changes to
FHA’s loan activity tracking systems in April 2006 that allowed the Homeownership
Centers to establish a review rate of 100 percent through a ―review rules‖ function. This
measure helped to ensure that the first 30 loans made [endorsed] by new direct
endorsement lenders were reviewed as required.
7
Computerized Homes Underwriting Management System (CHUMS) and FHA Connection
8
Streamline refinances were omitted from the 100 percent review requirement.
10
Initial Loans Endorsed by
Newly Approved Lenders Were
Not Always Reviewed
According to HUD’s requirements, newly approved lenders were automatically placed
into 100 percent PETR status for a minimum of the first 30 loans endorsed (the 100
percent PETR phase). Through the release notes for HUD’s Computerized Homes
Underwriting Management System (CHUMS), HUD changed the requirements to the
first 10 loans, effective February 15, 2010. After Homeownership Center officials
granted a lender unconditional authority, they entered the date into CHUMS, which was
programmed to automatically select the initial endorsed loans to undergo PETRs.
However, for 120 of the 125 lenders reviewed for the 100 percent PETR phase, some of
the initial loans were skipped and/or the required number of initial loans (30 or 10) did
not undergo a PETR as required. We estimated that the Homeownership Centers only
performed PETRs on about half of the required initial loans. For example, a HUD
Neighborhood Watch system report showed that in one case, the Homeownership Center
only reviewed 3 of the required initial 10 loans endorsed by a newly approved lender.
During the audit, HUD officials reviewed the reasons why all of the initial loans were not
reviewed for this lender and stated that CHUMS had counted some loans for the 100
percent PETR phase that had already been reviewed as test cases in the preclosing phase.
Also, the Homeownership Center official likely did not enter the date of unconditional
authority into CHUMS until 11 days after the authority had been granted. Therefore,
loans were only selected for review after the date was entered into CHUMS. In addition,
the Homeownership Center did not review one loan that was selected by CHUMS.
HUD Was Taking Corrective
Action
HUD had already modified CHUMS to address one of the reasons why initial loans were
not reviewed for the 100 percent PETR phase. During the audit, HUD modified or
started the process to modify CHUMS to resolve the other issues that were identified.
On May 3, 2010, the system was modified to prevent Homeownership Center
officials from removing cases from the list to be reviewed.
On January 28, 2011, the system was modified to prevent the selection of cases
that were reviewed for the preclosing phase from counting toward the 100 percent
PETR phase.
The system will be modified to require Homeownership Center officials to enter
the current date as the date of unconditional authority.
11
The system will be modified to select cases based on the underwriting lender
(retail, sponsor, authorized agent). Currently, the system selects the underwriting
lender in a retail and sponsor transaction but selects the originator in a
principal/authorized agent transaction.
These corrective actions should strengthen HUD’s monitoring of its newly approved
lenders.
The Homeownership Centers
Used Reports That Were
Insufficient
All of the Homeownership Centers tracked and monitored newly approved lenders for the
100 percent PETR phase; however, some of them used reports that were not sufficient to
properly monitor the lenders. Officials at the Atlanta Homeownership Center used
reports obtained from Neighborhood Watch that only listed loans originated by the lender
under review. Therefore, these reports did not contain loans that had been underwritten
by the lender under review but were originated by other lenders. Also, these reports did
not identify whether loans that had initially been rated unacceptable were later mitigated.
In addition, the reports from FHA Connection that were used by the Denver and
Philadelphia Homeownership Centers did not contain loans that were in other
jurisdictions. For example, lenders that had a home office in the Denver Homeownership
Center jurisdiction may also have had a branch office that underwrote loans in another
Homeownership Center’s jurisdiction.
HUD officials stated there was no single report that provided all of the information
necessary to properly monitor newly approved lenders for the 100 percent PETR phase.
During the audit, HUD officials acknowledged that the method of tracking lenders for the
100 percent PETR phase needed improvement and stated that they were working to
create a report for the Homeownership Centers to use that would contain all of the
required information.
Other Issues Were Noted
One lender was inappropriately returned to preclosing status, and another lender with
unacceptable performance was not returned.
The lender file for one lender showed that HUD granted it unconditional authority
on August 28, 2009, and returned it to preclosing status on May 24, 2010, because
9 of 27 loans reviewed for the 100 percent PETR phase were rated unacceptable.
The requirements state if the lender’s performance is unacceptable (i.e., 20 percent
of the files are rated unacceptable) under the 100 percent PETR phase, the lender
will be returned to preclosing status. We reviewed the lender file maintained by
12
the Homeownership Center and determined that a report listing all of the loans
included in the 100 percent PETR phase showed that the total number of loans
reviewed was 20, with only 3 rated unacceptable. When loans were rated
unacceptable and, upon HUD’s review, were changed to mitigated, this report
listed the same loan multiple times. Apparently Homeownership Center officials
mistakenly counted the duplicates as separate loans. Since the lender only had 3 of
20 unique loans that were rated unacceptable, it should not have been returned to
preclosing status.
The tracking report maintained in the lender file showed that another lender had an
unacceptable performance for the 100 percent PETR phase; however, the
Homeownership Center did not perform additional follow-up with the lender.
Officials had incorrectly determined that this lender’s performance was acceptable
for the 100 percent PETR because they had mistakenly counted loans that were
sponsored by other lenders. If these loans had been omitted as they should have
been, the lender’s performance would have been unacceptable for the 100 percent
PETR phase. Therefore, Homeownership Center officials should have continued
to monitor this lender to determine whether either of the loans rated unacceptable
was later mitigated or whether the lender should have been returned to preclosing
status.
The Homeownership Centers continually monitored the performance of all FHA direct
endorsement lenders, including the newly approved lenders, under HUD’s regular PETR
program. However, by failing to review approximately half of the initial loans endorsed
by newly approved lenders as required, HUD did not provide the oversight intended
under its 100 percent PETR requirement for newly approved lenders.
Conclusion
Although HUD addressed the issues reported by GAO in 2004 by making changes to
CHUMS and FHA Connection to ensure that the initial loans endorsed by newly
approved lenders were reviewed, the Homeownership Centers continued to review
significantly less than the required 100 percent. This condition occurred because
CHUMS was not programmed to properly to select all of the required loans. The
Homeownership Centers relied upon the system to select all of the required initial loans
for review, and, therefore, loans skipped by the CHUMS program were not reviewed.
Also, there was no single report that contained all of the necessary information for the
Homeownership Centers to use in monitoring newly approved lenders for the 100 percent
PETR phase. As a result, Homeownership Centers did not provide the underwriting
oversight for newly approved lenders as intended by the 100 percent PETR phase.
13
Recommendations
We recommend that the Deputy Assistant Secretary for Single Family Housing
2A. Establish controls to ensure that the required number of initial cases endorsed by
newly approved lenders is selected to be reviewed for the 100 percent PETR phase.
2B. Establish a report to be used by the Homeownership Centers that contains all of
the required information necessary to properly monitor the performance of newly
approved lenders in the 100 percent PETR phase.
14
SCOPE AND METHODOLOGY
We performed an audit of HUD’s preclosing and postclosing reviews of new direct endorsement
lenders. Our audit period covered lenders that entered and completed the preclosing phase from
July 1, 2008, to June 30, 2010. We conducted our fieldwork at the Atlanta, Denver, Philadelphia,
and Santa Ana Homeownership Centers from August to December 2010.
The Homeownership Centers provided a list of lenders that entered the preclosing phase from
July 1, 2008, to June 30, 2010. The list identified which lenders also completed the preclosing
phase during this timeframe. There were 287 lenders that entered and completed the preclosing
phase within our audit scope.
Lenders Lenders Lenders that Lenders
Homeownership
that that were suspended still in
Centers
entered completed /terminated preclosing
Atlanta 163 89 9 65
Denver 86 36 10 40
Philadelphia 198 100 25 73
Santa Ana 132 62 32 38
Total 579 287 76 216
Our initial survey scope focused only on HUD’s preclosing phase; however, based on the survey
results, we expanded our audit scope to include the 100 percent PETR phase. Our audit scope
did not include an evaluation of the quality of underwriting reviews performed by
Homeownership Center officials. For the preclosing phase, we reviewed the Homeownership
Center files for lenders participating in the preclosing review phase (lender files). We randomly
selected a nonstatistical sample of 40 lenders that entered and completed the preclosing phase
from July 1, 2008, to June 30, 2010, at each Homeownership Center9. Because the Denver
Homeownership Center only had 36 lenders that entered and completed the preclosing phase in
our audit scope, we reviewed a total of 155 lender files. We did not conduct any performance
reviews for the lenders selected in our sample.
For the 100 percent PETR phase, we reviewed the 36 lenders at the Denver Homeownership
Center in addition to a randomly selected nonstatistical sample of 30 lenders at each of the
remaining Homeownership Centers. The lenders were selected based on the list of lenders
provided by the Homeownership Centers that entered and completed the preclosing phase from
July 1, 2008, to June 30, 2010. In total, we reviewed 125 lenders for the 100 percent PETR
phase.
To estimate the number of initial loans endorsed by newly approved lenders that did not undergo
a PETR, we randomly selected a nonstatistical sample of 25 lenders from the universe of 125.
9
One lender that was selected in our nonstatistical sample for the Santa Ana Homeownership was returned to
preclosing status due to not paying the upfront mortgage insurance premiums. Therefore, we did not review this
lender for the preclosing or the 100 percent PETR requirements.
15
To accomplish our objective, we
Reviewed the prior GAO report relating to HUD’s preclosing and postclosing phases,
Reviewed HUD’s guidance for the preclosing and postclosing phases,
Reviewed the tracking logs and underwriting reports contained in the lender files for
lenders in the preclosing phase,
Reviewed PETR reports used by the Homeownership Centers for lenders in the 100
percent PETR phase,
Interviewed Homeownership Center officials to determine the process for the preclosing
and postclosing phases, and
Interviewed HUD headquarters officials to determine the process for the 100 percent
PETR phase.
We used computer-processed data maintained by HUD in its information systems for FHA loans
(Neighborhood Watch) to obtain the list of loans endorsed by newly approved lenders to
determine whether all of the required initial loans were reviewed. The data were supported by
reports that were used by the Homeownership Centers to determine the loans reviewed for the
100 percent PETR phase. We considered the data to be sufficiently reliable for our purpose.
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
objectives. We believe that the evidence obtained provides a reasonable basis for our findings
and conclusions based on our audit objectives.
16
INTERNAL CONTROLS
Internal control is a process adopted 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 objectives:
Program operations – Policies and procedures that management has
implemented to reasonably ensure that the program meets it objective.
Compliance with applicable laws and regulations – Compliance with
applicable internal and regulatory requirements.
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.
Significant Deficiencies
Based on our review, we believe that the following items are significant deficiencies:
HUD did not have effective controls in place to ensure that lenders were granted
unconditional authority in accordance with its requirements for the preclosing phase.
HUD did not have controls in place to ensure that PETRs were performed on all of
the initial loans submitted by newly approved lenders.
17
APPENDIX
Appendix A
AUDITEE COMMENTS AND OIG’S EVALUATION
Ref to OIG Evaluation Auditee Comments
Comment 1
18
Comment 2
19
Comment 3
Comment 4
20
Comment 5
21
OIG Evaluation of Auditee Comments
Comment 1 We agree with the auditee’s response that it is conceivable that the reduced
review of manually underwritten cases for three lenders was the result of an
anticipated release of revised guidance. However, the OIG reviewed these
lenders based on the guidance that was effective at the time they were granted
unconditional authority.
Comment 2 We acknowledge the auditee’s response that the seven lenders which were
improperly approved for direct endorsement authority have not put the FHA
insurance fund at risk; however, it is impossible to know if future applicants for
direct endorsement authority will be similarly qualified. We believe there is
increased risk in the future if HUD continues to grant unconditional authority to
lenders that do not successfully complete the minimum test case requirements,
because FHA will be committed to insure their loans whether or not the lenders
demonstrated their capacity to comply with FHA underwriting requirements. The
report has been modified to reflect this.
Comment 3 We disagree with the auditee’s response that the monitoring of newly approved
lenders’ performance was not weakened. While the preclosing phase does review
various types of test cases to ensure that lenders underwrite loans in accordance
with FHA requirements, the 100 percent PETR phase provided an additional level
of assurance that newly approved lenders would continue to follow the
requirements. The auditee’s response notes several major accomplishments that
enhance the monitoring of newly approved lenders; however, these occurred at
the end of our audit scope.
Comment 4 We acknowledge the auditee’s response that the lenders under finding 2 did not
pose uncertain risk to the FHA insurance fund. We deleted this language from the
report.
Comment 5 We acknowledge the auditee’s response that they question whether the 100
percent PETR phase is still a necessary oversight tool based on enhanced
monitoring tools they implemented.However, we did not review the new
monitoring tools, and cannot conclude on the continued utility of the 100 percent
PETR phase.
22
HUD Did Not Always Follow its Requirements for the Preclosing and Postclosing Review of Mortgage Files Submitted by New Direct Endorsement Lenders
Published by the Department of Housing and Urban Development, Office of Inspector General on 2011-04-18.
Below is a raw (and likely hideous) rendition of the original report. (PDF)