We audited J&M Mortgage Brokers, Ltd., dba Mortgages USA, a Dallas, TX-based nonsupervised direct endorsement lender. We selected J&M because it had a high rate of defaults and claims within the first year. Our audit objectives were to determine whether J&M originated Federal Housing Administration (FHA)-insured single family mortgages in accordance with U. S. Department of Housing and Urban Development (HUD) regulations, procedures, and instructions and implemented a quality control plan that met HUD and FHA requirements.

J&M did not originate 6 of 20 loans reviewed in accordance with HUD and FHA requirements. Of the six loans, five had significant underwriting deficiencies and did not qualify for FHA insurance, and one had minor deficiencies. As a result, J&M exposed HUD to unnecessary insurance risks totaling more than $327,000 and caused HUD to incur losses of more than $65,000.

J&M violated the HUD and FHA requirements because it did not have adequate controls in place to ensure that it understood and complied with those requirements. Further, it lacked a compliant quality control plan and process, which may have prevented it from detecting or correcting some of the errors.

We recommend that the Deputy Assistant Secretary for Single Family Housing require J&M to (1) buy down one loan by $1,750 due to overinsurance, (2) indemnify HUD for three loans with an estimated potential loss of $325,482,[1] (3) reimburse the FHA insurance fund $65,559 for actual losses on one loan, and (4) ensure that its quality control plan and loan origination practices comply with HUD requirements. We also recommend that HUD refer J&M to the Mortgagee Review Board for administrative actions for failure to implement a quality control program in compliance with HUD requirements.