We audited the Fairfax, VA, branch office (branch office) of Prospect Mortgage, LLC (Prospect Mortgage), because it had one of the highest default rates for U.S. Department of Housing and Urban Development (HUD)-approved lenders for loans issued in the State of Maryland. Our objective was to determine whether Prospect Mortgage and its branch office complied with HUD regulations, procedures, and instructions in the origination and quality control review of single-family mortgage loans insured by the Federal Housing Administration (FHA).

Prospect Mortgage generally complied with HUD requirements in its origination and quality control review of FHA loans. However, its branch office did not underwrite one of five defaulted loans reviewed in accordance with HUD requirements. In addition, Prospect Mortgage did not always perform quality control reviews of its FHA-insured loans in a reasonably timely manner. These deficiencies were caused by a misinterpretation of HUD guidance at the branch office and Prospect Mortgage’s failure to consistently be prudent in the implementation of its quality control process. As a result, the FHA insurance fund was exposed to an unnecessarily increased risk, and the effectiveness of Prospect Mortgage’s quality control process was lessened.

We recommend that HUD’s Deputy Assistant Secretary for Single Family Housing require Prospect Mortgage to indemnify $193,357. This amount is the unpaid principal balance for the loan. The projected loss to HUD is $116,014 for the loan, which it issued contrary to HUD’s loan origination requirements. We also recommend that HUD’s Deputy Assistant Secretary for Single Family Housing direct Prospect Mortgage to improve its quality control process and follow up in 6 months to ensure the lender’s compliance.