oversight

FHA Insured $1.9 Billion in Loans to Borrowers Barred by Federal Requirements

Published by the Department of Housing and Urban Development, Office of Inspector General on 2018-03-26.

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

        U.S. Department of Housing and
         Urban Development, Office of
             Single Family Housing
                  FHA Loans to Delinquent Debtors




Office of Audit, Region 7          Audit Report Number: 2018-KC-0001
Kansas City, KS                                        March 26, 2018
To:            Gisele Roget, Deputy Assistant Secretary for Single Family Housing, HU
               //signed//
From:          Ronald J. Hosking, Regional Inspector General for Audit, 7AGA
Subject:       FHA Insured $1.9 Billion in Loans to Borrowers Barred by Federal Requirements




Attached is the U.S. Department of Housing and Urban Development (HUD), Office of Inspector
General’s (OIG) final results of our review of Federal Housing Administration (FHA)-insured
loans to delinquent Federal debtors or those who were subject to Federal offset for delinquent
child support.
HUD Handbook 2000.06, REV-4, sets specific timeframes for management decisions on
recommended corrective actions. For each recommendation without a management decision,
please respond and provide status reports in accordance with the HUD Handbook. Please furnish
us copies of any correspondence or directives issued because of the audit.
The Inspector General Act, Title 5 United States Code, section 8M, requires that OIG post its
publicly available reports on the OIG website. Accordingly, this report will be posted at
http://www.hudoig.gov.
If you have any questions or comments about this report, please do not hesitate to call me at
913-551-5870.
                    Audit Report Number: 2018-KC-0001
                    Date: March 26, 2018

                    FHA Insured $1.9 Billion in Loans to Borrowers Barred by Federal
                    Requirements




Highlights

What We Audited and Why
We audited Federal Housing Administration (FHA)-insured loans from calendar year 2016. We
worked with the Bureau of the Fiscal Service’s Do Not Pay Business Center to identify
potentially ineligible borrowers. The Do Not Pay Business Center was developed to support
Federal agencies in their efforts to reduce the number of improper payments. We initiated this
audit because of the risk that FHA might insure loans to ineligible borrowers with delinquent
debt since it did not include a review of the Do Not Pay databases as part of its underwriting
process described in FHA’s Single Family Policy Handbook. Our audit objective was to
determine whether FHA insured loans to borrowers with delinquent Federal debt or who were
subject to Federal administrative offset for delinquent child support.

What We Found
FHA insured an estimated 9,507 loans worth $1.9 billion, which were not eligible for insurance
because they were made to borrowers with delinquent Federal debt or who were subject to
Federal administrative offset for delinquent child support. We reviewed a statistical sample of
60 loans from a universe of 13,927 FHA-insured loans that closed in 2016 and also had data on
their related borrowers in the U.S. Department of the Treasury’s Do Not Pay databases. We
verified that 47 of the 60 sample loans were made to borrowers who were barred by Federal
requirements. We used these results to project the total number and value of ineligible loans
insured by FHA.

What We Recommend
We recommend that FHA put $1.9 billion to better use by developing a method for using the Do
Not Pay portal to identify delinquent child support and delinquent Federal debt to prevent future
FHA loans to ineligible borrowers. We also recommend that FHA revise the single-family
handbook to comply with the regulation that prevents loans to borrowers with delinquent child
support subject to Federal offset and schedule the timely renewal of data-sharing agreements to
prevent data loss in the Credit Alert Interactive Voice Response System (CAIVRS) or
discontinue use of CAIVRS if the information duplicates the information available in the Do Not
Pay portal. CAIVRS is a shared database of defaulted Federal debtors developed by HUD to
provide information to processors of applications seeking Federal credit benefits.
Table of Contents
Background and Objective......................................................................................3

Results of Audit ........................................................................................................5
         Finding: FHA Insured $1.9 Billion in Loans to Borrowers Barred by Federal
         Requirements..................................................................................................................... 5

Scope and Methodology ...........................................................................................9

Internal Controls ....................................................................................................11

Appendixes ..............................................................................................................12
         A. Schedule of Funds To Be Put to Better Use ............................................................ 12

         B. Auditee Comments and OIG’s Evaluation ............................................................. 13

         C. Criteria ....................................................................................................................... 16

         D. Statistical Sampling With Projected Results .......................................................... 19




                                                                     2
Background and Objective
The Federal Housing Administration (FHA) provides mortgage insurance for loans made by
FHA-approved lenders throughout the United States and its territories. FHA mortgage insurance
protects lenders against losses from homeowners’ defaulting on their mortgage loans. The
lenders bear less risk because FHA will pay a claim to the lender if a homeowner defaults on his
or her loan. Loans must meet FHA requirements to qualify for insurance coverage. FHA
insured more than 1 million loans with mortgages totaling $212 billion that closed during
calendar year 2016 and were subject to FHA underwriting requirements. The overall
management and administration of the FHA single family mortgage insurance program is the
responsibility of the Office of Deputy Assistant Secretary for Single Family Housing.
FHA guidance prohibits lenders from continuing to process an application for an FHA-insured
mortgage for borrowers with delinquent Federal nontax debt. Lenders are required to determine
whether the borrowers have delinquent Federal nontax debt. Lenders may obtain information on
delinquent Federal debts from public records, credit reports, or the equivalent and must check all
borrowers against the U.S. Department of Housing and Urban Development’s (HUD) Credit
Alert Interactive Voice Response System (CAIVRS). CAIVRS was developed by HUD in June
1987 as a shared database of defaulted Federal debtors. It enables processors of applications for
Federal credit benefit to identify individuals who are in default or have had claims paid on direct
or guaranteed Federal loans or are delinquent on other debts owed to Federal agencies.
If a delinquent Federal debt is reflected in a public record, credit report, or the equivalent or
CAIVRS or an equivalent system, the lender must verify the validity and delinquency status of
the debt by contacting the creditor agency to which the debt is owed. If the creditor agency
confirms that the debt is valid and in delinquent status as defined by the Debt Collection
Improvement Act, the borrower is ineligible for an FHA-insured mortgage until the borrower
resolves the debt with the creditor agency.
The Debt Collection Improvement Act of 1996 is a Federal law, which prohibits a person from
obtaining any Federal assistance in the form of a loan, loan insurance, or guarantee if that person
has a delinquent outstanding debt with any Federal agency. Such a person may obtain additional
loans or loan guarantees only after such delinquency is resolved. Federal regulation allows
offset of Federal payments to satisfy delinquent nontax debt owed to the United States and to
collect past-due child support obligations. Agencies also must deny Federal financial assistance
to individuals who are subject to administrative offset to collect delinquent child support
payments.
The Improper Payments Elimination and Recovery Improvement Act of 2012 (IPERIA) requires
FHA to review underwriting procedures and ensure that a thorough review of available databases
with relevant information on eligibility occurs to determine eligibility. Two of the databases
listed in the Act were HUD’s CAIVRS and the Debt Check database of the U.S. Department of
the Treasury. The Act established the Do Not Pay Initiative, which includes use of these
databases to prevent improper payments before the release of any Federal funds.


                                                 3
Two U.S. Department of Treasury bureaus, the Bureau of the Public Debt and the Financial
Management Service combined in 2012 to create the Bureau of the Fiscal Service. Combining
these responsibilities transformed the way the Federal government manages its financial services.
The Bureau of the Fiscal Service partnered with the St. Louis and Kansas City Federal Reserve
Banks as Treasury’s fiscal agent to develop the Do Not Pay Business Center. The Do Not Pay
Business Center was established to help federal agencies seamlessly comply with IPERIA by
supporting their efforts to prevent and detect improper payments. This office runs the Treasury
Offset Program (TOP), a centralized offset program for collecting delinquent debts owed to
Federal agencies and States. The Do Not Pay Business Center matches a database of delinquent
debtors, known as the TOP Debt Check database, against payments Treasury disburses, then
withholds Federal payments to recipients who owe delinquent debts. In addition, it maintains its
own version of CAIVRS. The Do Not Pay Business Center also offers a portal to its databases
that agencies can use at no cost.
Our objective was to determine whether FHA insured loans to borrowers with delinquent Federal
debt or who were subject to Federal administrative offset for delinquent child support.




                                                4
Results of Audit

Finding: FHA Insured $1.9 Billion in Loans to Borrowers Barred
by Federal Requirements
Of loans closed in 2016, FHA insured more than 9,500 loans worth $1.9 billion, which were not
eligible for insurance because they were made to borrowers with delinquent Federal debt or who
were subject to Federal administrative offset for delinquent child support. This condition
occurred because the sources used by lenders to identify ineligible borrowers lacked sufficient
current information and FHA did not adequately guide lenders on reviewing child support. As a
result, the FHA insurance fund faced a higher risk of loss, and the government in general did not
realize the benefits of the Debt Collection Improvement Act.
Loans to Ineligible Borrowers
FHA insured loans to borrowers with delinquent Federal debt or who were subject to Federal
administrative offset for delinquent child support. FHA insured an estimated 9,507 loans
totaling more than $1.9 billion to these ineligible borrowers. We reviewed a statistical sample of
60 loans from a universe of 13,927 FHA-insured loans that closed in 2016 and also had data on
their related borrowers in the Bureau of the Fiscal Service’s Do Not Pay databases. The Do Not
Pay Business Center supports Federal agencies in their efforts to reduce the number of improper
payments. Do Not Pay allows agencies to check various databases before making payments or
awards to identify ineligible recipients and to prevent fraud or errors. We verified that 47 of the
60 sample loans were made to borrowers who were barred by Federal requirements. We used
these results to project the total number and value of ineligible loans insured by FHA (see
appendix D).
Federal law prohibits loans, loan guarantees, or insurance to delinquent Federal debtors. The
Debt Collection Improvement Act in 31 U.S.C. (United States Code) 3720B prevents a person
from obtaining any Federal financial assistance in the form of a loan or loan insurance or
guarantee if the person has an outstanding debt with any Federal agency, which is in a delinquent
status, until such delinquency is resolved. FHA’s Single Family Housing Policy Handbook
4000.1 states that lenders are prohibited from processing an application for an FHA-insured
mortgage for borrowers with delinquent Federal nontax debt (see appendix C). We verified that
25 loans in our sample were made to borrowers with delinquent debts owed to four Federal
agencies: the U.S. Department of Education, U.S. Department of Justice, Small Business
Administration, and Army and Air Force Exchange Service.
Federal regulation also prohibits loans, loan guarantees, or insurance to borrowers with
delinquent child support subject to administrative offset. Regulations at 5 CFR (Code of Federal
Regulations) 1310.5 reference Office of Management and Budget (OMB) Circular A-129,
Policies for Federal Credit Programs and Non-Tax Receivables. The Circular states that
agencies must deny Federal financial assistance to individuals who are subject to administrative
offset to collect delinquent child support payments. We verified that 24 loans in our sample



                                                 5
were made to borrowers subject to Federal offset for delinquent child support. These loans
included two loans counted earlier because the borrowers had both delinquent Federal debt and
delinquent child support subject to Federal offset.
Insufficient Sources and Guidance
The sources used by lenders to underwrite FHA loans lacked information critical to compliance
with Federal requirements, and FHA did not adequately guide lenders on reviewing child
support. Our testing verified that the Do Not Pay databases reported delinquent Federal debtors
and debtors subject to Federal offset for delinquent child support not identified using current
underwriting methods.
HUD’s CAIVRS was not an adequate source of information on delinquent Federal debt. HUD
developed CAIVRS to identify individuals who were in default or had claims paid on direct or
guaranteed Federal loans or who were delinquent on other debts owed to Federal agencies. FHA
required lenders to check each borrower in CAIVRS during the underwriting process. CAIVRS
provided the lenders a passing result for our sample items and failed to reveal the existence of
the Federal debt. Some of the passing results can be attributed to a lapse in data-sharing
agreements with the U.S. Department of Justice and the Small Business Administration. The Do
Not Pay databases used for our testing included information on the delinquent Federal debt that
was missing from CAIVRS.
Credit reports also were not an adequate source of information on Federal debt and delinquent
child support. FHA required lenders to verify the validity and delinquency status of any
delinquent Federal debts reflected in credit reports. However, for our sample, the delinquent
debts owed to the Small Business Administration and U.S. Department of Justice did not appear
on the associated credit reports. The delinquent student loans did not always appear on the credit
reports, and those that appeared did not specify whether they were Federal or private student
loans. While credit reports sometimes listed child support debts, the existence of a Federal offset
was not included on credit reports. All of this information was included in the Do Not Pay
databases for the loans tested; however, FHA did not yet have access to the system.
FHA’s handbook did not incorporate the Federal regulation related to delinquent child support.
The FHA Single Family Housing Policy Handbook instructed underwriters to treat child support
as a recurring liability and include the monthly obligation in the borrower’s liabilities and debt.
However, it did not include instructions to determine whether the child support was delinquent
and subject to Federal offset.
Risk From Ineligible Loans
FHA faced a higher risk due to an increased likelihood of default on the ineligible loans. The
loans to borrowers in the Do Not Pay database had 2- and 3-month delinquency rates, twice as
high as those of the general population. Failing to exclude these ineligible borrowers resulted in
increased risk to the FHA fund. Our testing did not attempt to determine whether the delinquent
Federal debt or other borrower characteristics caused these higher delinquency rates.




                                                 6
                                 Delinquency rate
 30.00%
 25.00%
 20.00%
 15.00%
 10.00%
  5.00%
  0.00%
            1 month delinquent          2 months delinquent      3 months delinquent

          Loans closed in 2016      Loans closed in 2016 with Do Not Pay match


The increased delinquency rates of the ineligible loans might subject FHA to future increased
claims. To date, the loans to borrowers in the Do Not Pay database have resulted in insurance
claims at a rate more than three times higher than those of the general population.

                                    Claim rate
 0.14%
 0.12%
 0.10%
 0.08%
 0.06%
 0.04%
 0.02%
 0.00%
                 Loans closed in 2016             Loans closed in 2016 with Do Not Pay
                                                                  match


Above charts were created using data extracted from the Single Family Data Warehouse.
Debt Collection Improvement Act
The government did not realize the benefits of the Debt Collection Improvement Act. The
purposes of the Act include collection of nontax debts owed to the Federal Government and
assistance to families in collecting past-due child support obligations.
Conclusion
FHA improperly insured loans to delinquent Federal debtors and delinquent child support
debtors subject to Federal offset. This condition occurred because the FHA underwriting process
lacked information critical to complying with Federal requirements. This information is
available in the Bureau of the Fiscal Service’s Do Not Pay databases. However, FHA did not
include a review of these databases as part of the underwriting process. During the audit, FHA
recognized the value of gaining access to the Do Not Pay portal and agreed to pursue it. By
implementing our recommendations, FHA will avoid insuring an estimated $1.9 billion in
ineligible loans each year.


                                                       7
Recommendations
We recommend that the Deputy Assistant Secretary for Single Family Housing

       1A. Develop a method for using the Do Not Pay portal during the underwriting process to
       identify delinquent child support and delinquent Federal debt to prevent future FHA loans
       to ineligible borrowers to put $1,905,340,944 to better use.
       1B. Revise the single-family handbook to comply with regulations that prevent loans to
       borrowers with delinquent child support subject to Federal offset.
       1C. Schedule the timely renewal of data-sharing agreements to prevent data loss in
       CAIVRS or discontinue use of the system if implementation of 1A makes CAIVRS
       unnecessary.




                                               8
Scope and Methodology
We performed our audit between June 2017 and January 2018 at our office in St. Louis,
Missouri. Our audit generally covered loans that were closed from January 1 through December
31, 2016.
To accomplish our objective, we

      reviewed Federal regulations, FHA Single Family Policy Handbook (Handbook 4000.1),
       OMB guidance, and an executive order;
      attended FHA underwriting training presented by underwriters from the Denver
       Homeownership Center;
      completed the authorization process to access the Do Not Pay data;
      selected and reviewed a statistical sample of loans that were closed during our audit
       period; and
      reviewed sample documentation from lenders and debt-reporting agencies.

HUD’s Single Family Data Warehouse is a large and extensive collection of database tables,
organized and dedicated to support the analysis, verification, and publication of single-family
housing data. Using this system, we identified more than 1.8 million borrowers who closed
FHA-insured mortgages during our audit period. We transferred the data for these borrowers to
the Do Not Pay Business Center to be matched against data sources contained within Do Not
Pay.
Do Not Pay is a collection of data sources established to protect the integrity of the Federal
Government’s payment processes by assisting agencies in mitigating and eliminating improper
payments. The Do Not Pay Business Center matched the borrower taxpayer identification
numbers we provided to Treasury’s CAIVRS and the TOP Debt Check system.
The Do Not Pay borrower taxpayer identification number match identified individual borrowers
who closed on FHA-insured mortgages while having owed delinquent nontax debt to the Federal
Government or delinquent child support subject to Federal offset. After receiving the data file of
matches from the Do Not Pay Business Center, we removed matches related to unendorsed loans
because unendorsed loans are not insured by FHA and streamline refinanced loans because they
are not subject to screening for Federal nontax debt. This match resulted in an audit universe of
13,927 loans with an original mortgage amount of more than $2.7 billion. The audit universe
included 12,606 loans matched to TOP Debt Check, 943 loans matched to Treasury’s CAIVRS,
and 378 loans matched to both TOP Debt Check and Treasury’s CAIVRS. From the audit
universe, we selected a statistical sample of 60 FHA-insured mortgages with original mortgage
balances totaling more than $12 million as described in appendix D. We tested these sample
items to verify that the match results were accurate. See appendix D for an explanation of the
method used to statistically project the results.




                                                 9
For each loan in our statistical sample, we requested from lenders the underwriting file to review
credit documentation. For each loan in our sample, we also requested from the debt-reporting
agency confirmation of the date on which the delinquency started, the date the debt was reported
to HUD and Treasury CAIVRS, whether the debt was currently delinquent, and the date on
which the delinquency was cured. We reviewed this information to determine whether each
sampled loan was made to a borrower who was delinquent on a nontax Federal debt or child
support at the time the FHA-insured mortgage closed and was endorsed.
We relied in part on data maintained by HUD in its Single Family Data Warehouse database to
identify loans closed during our audit period. We also relied on data maintained by Do Not Pay
to identify borrowers who owed delinquent nontax debt to the Federal Government or delinquent
child support. Although we did not perform a detailed assessment of the reliability of the data,
we verified the fields used to determine our sample against documentary evidence supplied by
the lenders and debt-reporting agencies for our 60 sampled loans. Based on the work performed,
we determined that the computer-processed data were sufficiently reliable for the purposes of
this report.
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(s). We believe that the evidence obtained provides a reasonable basis for our findings
and conclusions based on our audit objective.




                                                 10
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 objective:

   Controls to ensure compliance with applicable laws, regulations, and OMB guidance –
    Policies to prevent the issuance of FHA loan insurance to delinquent Federal debtors and
    individuals subject to Federal offset for delinquent child support.
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 Deficiency
Based on our review, we believe that the following item is a significant deficiency:

   FHA required the use of inadequate information sources during underwriting and did not
    provide lenders with adequate guidance for identifying borrowers with delinquent child
    support subject to Federal offset (finding).




                                                  11
Appendixes

Appendix A


                        Schedule of Funds To Be Put to Better Use

             Recommendation number            Funds to be put to better use 1/

                          1A                         $1,905,340,944

                        Totals                         1,905,340,944



1/   Recommendations that funds be put to better use are estimates of amounts that could be
     used more efficiently if an Office of Inspector General (OIG) recommendation is
     implemented. These amounts include reductions in outlays, deobligation of funds,
     withdrawal of interest, costs not incurred by implementing recommended improvements,
     avoidance of unnecessary expenditures noted in preaward reviews, and any other savings
     that are specifically identified. In this case, if HUD implements our recommendations, it
     will no longer provide FHA insurance to delinquent debtors reported in the Do Not Pay
     databases. When FHA successfully improves its controls, this will be a recurring benefit.
     Our estimate reflects only the initial year of this benefit, which we believe will be similar
     to the 2016 results since FHA activity is stable. These amounts do not include potential
     offsetting costs or benefits to implement our recommendations to revise the underwriting
     process.




                                               12
Appendix B
             Auditee Comments and OIG’s Evaluation



Ref to OIG
Evaluation    Auditee Comments




                               13
Comment 1




            14
                        OIG Evaluation of Auditee Comments


Comment 1   We appreciate HUD’s willingness to implement our recommendations and look
            forward to working with them to complete the corresponding management
            decisions.




                                          15
Appendix C
                                             Criteria


31 CFR 285.13
Barring delinquent debtors from obtaining Federal loans or loan insurance or guarantees.
(c) General rule. (1) As required by the provisions of 31 U.S.C. 3720B, a person owing an
outstanding nontax debt that is in delinquent status shall not be eligible for Federal financial
assistance. This eligibility requirement applies to all persons seeking Federal financial assistance
and owing an outstanding nontax debt in delinquent status, including, but not limited to,
guarantors. This eligibility requirement applies to all Federal financial assistance even if
creditworthiness or credit history is not otherwise a factor for eligibility purposes, e.g., student
loans. A person may be eligible for Federal financial assistance only after the delinquency is
resolved in accordance with this section. An agency may waive this eligibility requirement in
accordance with paragraph (g) of this section.


31 U.S.C. 3720B - Barring delinquent Federal debtors from obtaining Federal loans or loan
insurance guarantees.
(a) Unless this subsection is waived by the head of a Federal agency, a person may not obtain
any Federal financial assistance in the form of a loan (other than a disaster loan or a marketing
assistance loan or loan deficiency payment under subtitle C of the Agricultural Market Transition
Act (7 U.S.C. 7231 et seq.)) or loan insurance or guarantee administered by the agency if the
person has an outstanding debt (other than a debt under the Internal Revenue Code of 1986) with
any Federal agency which is in a delinquent status, as determined under standards prescribed by
the Secretary of the Treasury. Such a person may obtain additional loans or loan guarantees only
after such delinquency is resolved in accordance with those standards. The Secretary of the
Treasury may exempt, at the request of an agency, any class of claims.


IMPROPER PAYMENTS ELIMINATION AND RECOVERY IMPROVEMENT ACT
OF 2012
SEC. 5. DO NOT PAY INITIATIVE.
(a) PREPAYMENT AND PREAWARD PROCEDURES.—
(1) IN GENERAL.—Each agency shall review prepayment and preaward procedures and ensure
that a thorough review of available databases with relevant information on eligibility occurs to
determine program or award eligibility and prevent improper payments before the release of any
Federal funds.
(2) DATABASES.—At a minimum and before issuing any payment and award, each agency
shall review as appropriate the following databases to verify eligibility of the payment and
award:
(A) The Death Master File of the Social Security Administration.
(B) The General Services Administration’s Excluded Parties List System.
(C) The Debt Check Database of the Department of the Treasury.




                                                 16
(D) The Credit Alert System or Credit Alert Interactive Voice Response System of the
Department of Housing and Urban Development.
(E) The List of Excluded Individuals/Entities of the Office of Inspector General of the
Department of Health and Human Services.

OMB Circular No. A-129, Policies for Federal Credit Programs and Non-Tax Receivables.
1. Applicant Screening
   a. Program Eligibility. Federal credit granting agencies and private lenders in guaranteed
      loan programs shall determine whether applicants comply with statutory, regulatory, and
      administrative eligibility requirements for loan assistance.
   b. Delinquency on Federal Debt. Agencies should determine if the applicant is delinquent
      on any Federal debt, including tax debt. Agencies should include a question on loan
      application forms asking applicants if they have such delinquencies. In addition,
      agencies and guaranteed loan lenders shall use credit bureaus as a screening tool.
      Agencies are also encouraged to use other appropriate databases, such as the Department
      of Housing and Urban Development’s Credit Alert Verification Reporting System and
      Treasury’s Do Not Pay List to identify delinquencies on Federal debt.
       Processing of applications shall be suspended when applicants are delinquent on Federal
       tax or non-tax debts, including judgment liens against property for a debt to the Federal
       Government, and are therefore not eligible to receive Federal loans, loan guarantees or
       insurance. (See 31 U.S.C. § 3720B regarding non-tax debts.) This provision does not
       apply to disaster loans or a marketing assistance loan or loan deficiency payment under
       Subtitle C of the Agricultural Market Transition Act (7 U.S.C. 7231, et. seq.). Agencies
       should review and comply with 31 U.S.C. § 3720B and 31 C.F.R. 285.13 before
       extending credit. Processing should continue only when the debtor satisfactorily resolves
       the debts (e.g., pays in full or negotiates a new repayment plan).
   d. Delinquent Child Support. Agencies shall deny Federal financial assistance to
      individuals who are subject to administrative offset to collect delinquent child support
      payments. See Executive Order 13,019, 61 Federal Register 51,763 (1996).

Executive Order 13019, Supporting Families: Collecting Delinquent Child Support
Obligations.
Section 1. Administrative Offsets. (a)(1) The Secretary of the Treasury (‘‘the Secretary’’), in
accordance with the provisions of the Debt Collection Improvement Act of 1996 and to the
extent permitted by law, and in consultation with the Secretary of Health and Human Services
and other affected agencies, shall promptly develop and implement procedures necessary for the
Secretary to collect past-due child support debts by administrative offset, and shall issue such
rules, regulations, and procedures as the Secretary, in consultation with the heads of affected
agencies, deems appropriate to govern administrative offsets by the Department of the Treasury
and other executive departments and agencies that disburse Federal payments.
Sec. 2. Denial of Federal Assistance. (a) The Secretary shall, to the extent permitted by law,
ensure that information concerning individuals whose payments are subject to administrative



                                                17
offset because of delinquent child support obligations is made available to the head of each
executive department and agency that provides Federal financial assistance to individuals.
(b) In conformance with section 2(e) of this order, the head of each executive department and
agency shall, with respect to any individuals whose payments are subject to administrative offset
because of a delinquent child support obligation, promptly implement procedures to deny
Federal financial assistance to such individuals.

Handbook 4000.1, FHA Single Family Housing Policy Handbook
II. Origination Through Post-Closing/Endorsement
    A. Title II Insured Housing Programs Forward Mortgages
       1.      Origination/Processing
             (10) Borrower Ineligibility due to Delinquent Federal Non-Tax Debt
                 (a) Standard
                 Mortgagees are prohibited from processing an application for an FHA-insured
                 Mortgage for Borrowers with delinquent federal non-tax debt, including
                 deficiency Judgments and other debt associated with past FHA-insured
                 Mortgages. Mortgagees are required to determine whether the Borrowers have
                 delinquent federal non-tax debt. Mortgagees may obtain information on
                 delinquent Federal Debts from public records, credit reports or equivalent, and
                 must check all Borrowers against the Credit Alert Verification Reporting
                 System (CAIVRS).




                                                18
Appendix D
                          Statistical Sampling With Projected Results


Audit Universe
The audit universe consists of 13,927 FHA-insured loans. The total of the mortgage amounts in
this audit universe is more than $2.7 billion.
Sample Frame
The audit universe.
Sampling Unit
FHA-insured loan (case_nbr).
Sampling Unit Valuation
The total dollar amount for a given sampling unit (orig_mtg_amt).
Sample Selection Method
We used systematic random sampling to select our sample. We ordered sampling units by FHA-
insured loan amount (orig_mtg_amt) and selected a random sample of 60 records for auditing,
using systematic random sampling method with a random-number seed value of 2017 available
in SAS Proc Surveyselect procedure. SAS is a statistical software developed by SAS Institute
for advanced analytics, multivariate analyses, business intelligence, data management, and
predictive analytics.
Audit data often have a skewed distribution of amounts, and this audit universe is no exception.
To avoid the unrealistic large sample size requirement of central limit theorem for such skewed
data, we developed a subsampling approach, using the same sampling scheme that we selected
for the audit sample above, to draw 10,000 different samples (with 60 records in each sample)
for a prespecified universe error rate (and its associated error amount) to approximate the true
distribution of its corresponding sample error rates and sample error amounts.i,ii We repeated
this process for a range of potential universe error rates, typically covering from 0.01 to 95
percent. (Depending on the situation of a specific audit, the higher end might be increased.)
Thus, we generated two subsampling datasets: one for error rate and one for error amount.
Projection
For projection, we wanted to know what the distribution of universe error rates was for a given
sample error rate and what the distribution of universe error amounts was for a given sample
error amount. To answer these two questions, we reordered the two subsampling datasets by
sample error rate and sample error amount, respectively. By such reordering, we could map out
the empirical distributions of universe error rates and universe error amounts for any possible
sample error rates or sample error amounts that the selected audit sample might reveal. In other
words, we established two empirical sample-to-universe projection tables: one for error rate
projection and one for error amount projection. Once we obtained the audit sample results, we
relied on these two projection tables to make a reliable statistical inference on the universe error
rate and universe error amount. To be conservative, we reported values at a one-sided 95 percent


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confidence level as the final projected dollar amount and percentage (and number) for the
universe.
Projected Results
We implemented subsampling and projection methods (described above) in SAS. The table
below shows the projected distribution of loans – the 5th, 50th (median), and 95th percentiles of
projected error rate (in percentage); error count; and error amount for loans closed between
January and December 2016 that FHA endorsed for insurance and the corresponding review
results from the audit sample. The 5th percentile (bolded column) corresponds to the one-sided
95 percent confidence level. From the table, we can conclude that FHA had (1) improperly
insured loans to an estimated 9,507 delinquent debtors and (2) insured an estimated $1.9 billion
in loans to borrowers with delinquent debt at the time the loans closed in 2016. 
                            The projected distribution of ineligible loans
        Measure          Sample results 5th percentile 50th percentile                     95th percentile
    Error rate (%)       78.3             68.3               77.7                          85.6
    Error count          47               9,507              10,820                        11,918
    Error amount         $9,586,908       $1,905,340,944 $2,185,057,292                    $2,420,659,702

 




i
   Politis, D. N.; Romano, J. P. (1994). Large sample confidence regions based on subsamples under minimal
assumptions. Annals of Statistics, 22, 2031-2050.
ii
   Politis, D. N.; Romano, J. P.; Wolf, M. (1999). Subsampling. Springer Verlag.




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