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We audited NOVA Financial & Investment Corporation based on a referral from the U.S. Department of Housing and Urban Development’s (HUD) Quality Assurance Division detailing a separate lender that originated Federal Housing Administration (FHA)-insured loans that contained ineligible downpayment assistance gifts.  The HUD Office of Inspector General’s (OIG) analysis identified NOVA as a lender with the highest origination volume in the geographic region that participated in similar downpayment assistance gift programs.  Our objective was to determine whether NOVA originated loans with downpayment assistance in accordance with HUD FHA rules and regulations.

NOVA’s FHA-insured loans with downpayment assistance gift funds did not always comply with HUD FHA rules and regulations, putting the FHA mortgage insurance fund at unnecessary risk, including potential losses of $48.5 million for 709 loans.  NOVA also inappropriately charged borrowers $376,102 in misrepresented discount fees and $7,110 in fees that were not customary or reasonable.  This condition occurred because NOVA did not do its due diligence, relied on development authorities’ program guidelines, and assumed downpayment assistance eligibility based on the reputation of the participating master loan servicer.  The premium rate attached to the ineligible loans put borrowers at a distinct disadvantage due to higher monthly mortgage payments imposed on them.

We recommend that HUD determine legal sufficiency to pursue civil and administrative remedies against NOVA for incorrectly certifying that mortgages were eligible for FHA mortgage insurance.  We also recommend HUD require NOVA to (1) stop originating FHA loans with ineligible gifts; (2) indemnify HUD for 709 FHA loans that were originated with ineligible downpayment assistance gifts, resulting in funds to be put to better use of $48.5 million; (3) reimburse borrowers for $376,102 in misrepresented discount fees and $7110 in fees that were not customary or reasonable; (4) reduce the interest rate for borrowers who received downpayment assistance; (5) reimburse borrowers for overpaid interest as a result of the premium interest rate; and (6) update all internal control checklists to include specific HUD rules and regulations governing downpayment assistance, premium interest rates, and allowable fees.