We conducted a review of Federal Housing Administration (FHA) loans underwritten by First Tennessee Bank, N.A. (First Tennessee), an FHA direct endorsement lender. This review was conducted as part of our Operation Watchdog initiative to review the underwriting of 15 direct endorsement lenders at the suggestion of the FHA Commissioner. The Commissioner expressed concern regarding the increasing claim rates against the FHA insurance fund for failed loans. The objective of the review was to determine whether First Tennessee underwrote 18 loans in accordance with U.S. Department of Housing and Urban Development (HUD)/FHA requirements. First Tennessee officials did not underwrite five of the 18 loans reviewed in accordance with HUD/FHA regulations. As a result, the FHA insurance fund suffered actual losses of $435,574 on the five loans.

We recommend that HUD’s Associate General Counsel for Program Enforcement determine legal sufficiency and if legally sufficient, pursue remedies under the Program Fraud Civil Remedies Act and/or civil money penalties against First Tennessee and/or its principals for incorrectly certifying to the integrity of the data or that due diligence was exercised during the underwriting of five loans that resulted in actual losses of $435,574, which could result in affirmative civil enforcement action of approximately $908,648. We also recommend that HUD’s Deputy Assistant Secretary for Single Family take appropriate administrative action against First Tennessee and/or its principals for the material underwriting deficiencies cited in this report once the affirmative civil enforcement action is completed.