We audited the Federal Housing Administration (FHA)-insured loan process at MetLife Bank’s (lender) branch in Scottsdale, AZ, to determine whether the lender underwrote FHA-insured loans and implemented a quality control plan in accordance with U.S. Department of Housing and Urban Development (HUD) requirements. We selected the lender because it had an FHA default rate of 7.41 percent for loans underwritten in Arizona between April 1, 2009, and March 31, 2011, more than double the average for Arizona (3.47 percent). The majority of the lender’s loans that were in default for Arizona were underwritten through its Scottsdale branch.

The lender did not follow HUD regulations and requirements when underwriting FHA-insured loans. Specifically, 24 of the 30 loans reviewed contained underwriting deficiencies, with 14 of the 24 containing significant underwriting deficiencies that impacted the insurability of the loan. In addition, the lender did not follow HUD’s quality control requirements when performing site reviews and reviewing loan files.

We recommend that the Deputy Assistant Secretary for Single Family Housing require the lender to (1) indemnify HUD for 12 FHA-insured loans with an estimated potential loss of more than $1 million, (2) reimburse the FHA insurance fund $101,555 for actual losses on 2 loans, and (3) support or repay the FHA insurance fund $16,490 for claims paid as of September 30, 2011, on 2 loans.

We also recommend that HUD’s Associate General Counsel for Program Enforcement determine legal sufficiency and if legally sufficient, pursue remedies under the Program Fraud Civil Remedies Act, civil money penalties, or both against the lender, its principals, or both for incorrectly certifying to the integrity of the data or that due diligence was not exercised during the underwriting of 14 loans that resulted in actual losses of $101,555 on 2 loans, partial claims of $16,490 on 2 loans, and potential losses of more than $1 million on 12 loans.