We audited The Lending Company, Inc., based on a hotline complaint, previous U.S. Department of Housing and Urban Development (HUD) reviews, and our goal to improve the integrity of the Federal Housing Administration (FHA) single-family insurance programs.  Our objectives were to determine whether The Lending Company complied with HUD requirements when it used gift programs, originated and underwrote FHA loans, and implemented its quality control functions.

Our review substantiated the portion of the hotline complaint concerning violations of the Housing and Economic Recovery Act of 2008.  The Lending Company used gift programs through two nonprofit organizations that did not comply with HUD’s requirements.  It approved 789 FHA-insured loans that contained unallowable gifts.  This occurred because The Lending Company was initially unaware of the HUD requirements, was notified of the requirements, and then structured a second gift program that disregarded those same HUD requirements.  As a result, 725 loans put the FHA mortgage insurance fund at risk for losses of $55.4 million, and has already incurred losses of $284,412 for 7 loans.

Further, The Lending Company did not always originate and approve FHA-insured loans in accordance with HUD requirements.  Specifically, 28 of the 31 loans reviewed contained underwriting deficiencies, with 9 containing material underwriting deficiencies that impacted the insurability of the loans.  This occurred because The Lending Company did not exercise due diligence in underwriting the loans and disregarded HUD’s underwriting requirements.  As a result, HUD incurred losses of $421,630 for five loans.  The remaining four loans with material underwriting deficiencies also had an unallowable gift.  Lastly, The Lending Company did not always follow HUD quality control requirements.  This occurred because The Lending Company disregarded HUD requirements, although a prior HUD review identified similar deficiencies.  As a result, the FHA mortgage insurance fund was placed at an increased risk for losses.

We recommend that HUD’s Associate General Counsel for Program Enforcement determine legal sufficiency and if legally sufficient, pursue civil remedies, civil money penalties, or other administrative action against The Lending Company, its principals, or both for incorrectly certifying to the integrity of the data or that due diligence was exercised during the origination of FHA-insured mortgages.  We also recommend that HUD’s Deputy Assistant Secretary for Single Family Housing require The Lending Company to (1) indemnify HUD against losses for the 725 FHA-insured loans with an unallowable gift in the amount of $97.3 million, thereby putting an estimated loss to HUD of $55.4 million to better use.; (2) reimburse the FHA insurance fund for the $284,412 in actual losses resulting from the amount of claims and associated expenses paid on seven loans that contained an unallowable gift; (3) support or repay the FHA insurance fund $5,450 for the loss mitigation claims paid as of April 30, 2013, on seven loans that contained an unallowable gift; (4) reimburse the FHA insurance fund for the $421,630  in actual losses resulting from the amount of claims and associated expenses paid on five loans with material underwriting deficiencies; (5) pay down the principal balance by $1,101 for the one overinsured loan as a result of an excessive seller contribution; (6) fully implement its quality control plan and provide HUD with periodic reports for 12 months to ensure that its quality control reviews, to include early payment defaults, are conducted in accordance with HUD requirements; and (7) provide training to ensure that its quality control staff is aware of HUD’s quality control program requirements.