We evaluated HUD’s Credit Watch Termination Initiative (Credit Watch) to determine whether it was used effectively to deter deficiencies and substandard performance in Federal Housing Administration (FHA) single-family lending.  We also sought to determine whether Credit Watch could be manipulated, allowing lenders to avoid HUD’s scrutiny and program sanctions.  While we noted a past instance in which a lender manipulated the Credit Watch program to avoid HUD scrutiny (i.e., closing an “at-risk” branch office approaching the 200 percent termination threshold and then opening a new branch office in the same lending area to originate loans), our review did not disclose a systemic problem.

Credit Watch statistical reports effectively identified lender branch offices with unacceptable high default and claim rates. However, we observed that historically Credit Watch analyses and sanctions were narrower in scope than permitted by Federal regulations; results of the analyses were not routinely shared or coordinated with other departmental oversight efforts; and procedures for proposed termination actions were not available and records were incomplete.  We noted one other matter concerning procedures for determining and supporting the de minimis amount used to identify lenders that are subject to the Credit Watch process.

OIG recommended that HUD’s Office of Single Family Housing (Single Family) establish a formal process to better coordinate the Credit Watch results with other departmental oversight efforts.  Further, Single Family needs to formally document its procedures for postponing and withdrawing proposed Credit Watch terminations and establish a uniform record keeping system for the process and results.  We also recommended that Single Family formally document its procedures for the de minimis amount and ensure the basis for the amount is supported.