In response to a congressional request, we audited the Federal Housing Administration (FHA) Title II single-family lender approval process. We wanted to know whether the application process provided effective controls and procedures to ensure approval of only those lenders meeting program requirements.

Our audit found that FHA needs to improve the lender approval process. The process did not have sufficient controls and procedures to ensure that lenders met all applicable requirements for approval to participate in the FHA single-family program. In addition, FHA did not obtain or consider negative information on lenders from other HUD offices, ensure that application fees were collected, ensure that all supporting documents were obtained, or include adequate certifications on the lender application form. Further, FHA’s controls over the contractor tasked with imaging lender approval files did not ensure the proper disposition of those files, which contained personally identifiable information.

We recommend that FHA ensure that lender principals and staff are free of indictment, conviction, debarment, suspension, limited denials of participation, and unpaid federal debt before applications are approved. FHA should also consult with other HUD offices to determine whether applicants are subject to unresolved findings and ensure that application fees received are reconciled with the related applications. We also recommend that FHA include a stronger lender fraud certification on the application, and improve controls over the maintenance and disposition of electronic lender files.