We performed an audit of PrimeLending, A PlainsCaptial Company, located in Dallas, TX, a Federal Housing Administration (FHA) direct endorsement lender. We selected PrimeLending for audit because of its high default rate in the Houston, Dallas, and Fort Worth, TX, offices as compared to the average default rate for all FHA loans in those offices. Our objective was to determine whether PrimeLending complied with U. S. Department of Housing and Urban Development (HUD) and FHA loan origination requirements for loans endorsed between April 1, 2009, and May 31, 2011.

PrimeLending did not always follow HUD-FHA underwriting requirements for 12 of 20 loans reviewed. This noncompliance occurred because PrimeLending misunderstood FHA guidance; it failed to exercise due diligence in underwriting the loans; and its internal control system did not detect or prevent the origination of those loans. As a result, PrimeLending improperly originated 2 loans that resulted in losses to FHA’s Mutual Mortgage Insurance Fund of $103,013 and 10 loans that increased the risk to the insurance fund by more than $845,000. Further, Prime Lending caused HUD-FHA to pay $110,343 in claims on eight ineligible loans.

We recommended that the Deputy Assistant Secretary for Single Family Housing require PrimeLending to (1) reimburse the FHA insurance fund $103,013 in actual losses on 2 loans; (2) indemnify 10 loans that placed the FHA insurance fund at unnecessary risk with unpaid balances of more than $1.6 million, thereby putting an estimated $845,763 in funds put to better use; (3) repay $110,343 in claims paid on 8 loans; and(4) improve its data input accuracy.