We audited MB Financial Bank, a Federal Housing Administration (FHA)-approved direct endorsement lender, as part of our efforts to protect the integrity of the U.S. Department of Housing and Urban Development’s (HUD) single-family housing mortgage insurance programs.  We selected MB Financial for review based on an analysis of underwriting and default data maintained by HUD.  Our objective was to determine whether MB Financial followed HUD and Federal requirements when underwriting loans and implementing its quality control plan.

MB Financial did not always follow HUD’s underwriting requirements when rejecting and approving loans.  Specifically, it did not (1) ensure that five loan applications were manually underwritten before rejecting these loans and (2) follow underwriting requirements for four loans it approved.  This condition occurred because MB Financial did not understand HUD requirements for approving and rejecting loans.  Because MB Financial did not ensure that loan applications were manually underwritten before rejecting the loans, there was an increased risk of eligible applicants being rejected.  Further, the significant underwriting deficiencies identified in the four loans approved by MB Financial placed the FHA insurance fund at an increased risk of loss of approximately $179,000.

MB Financial generally complied with applicable requirements when implementing its quality control program.  However, its written quality control plan did not include the specific procedures used to review rejected loan applications.  This condition occurred because the lender was not aware of the requirement.  As a result, HUD did not have assurance that MB Financial used a consistent practice when reviewing rejected loan applications.

We recommend that HUD require MB Financial to (1) indemnify HUD for the four loans that did not comply with underwriting requirements, (2) provide training to its underwriters on HUD’s underwriting requirements for approving and rejecting loans, (3) update its policies and procedures to ensure that its staff understands applicable underwriting requirements, and (4) update its quality control plan to include the specific procedures used to review rejected loan applications.