We audited the Federal Housing Administration (FHA)-insured loan process at Universal American Mortgage Company (lender) to determine whether the lender complied with U.S. Department of Housing and Urban Development (HUD) regulations, procedures, and instructions in the origination and quality control review of FHA-insured loans. The review was part of our efforts to improve the integrity of the single-family insurance programs. We selected the lender’s Las Vegas branch because its default rate, when compared to the national average, was the highest of all of its branches.

The lender did not follow HUD requirements in the origination or quality control review of FHA-insured loans. Specifically, all 15 loans reviewed contained underwriting deficiencies and inappropriate restrictive covenants that affected the insurability of the loan. In addition, we reviewed 10 quality control reviews, and all 10 were in violation of HUD regulations or the lender’s quality control policies.

We recommend that the Acting Deputy Assistant Secretary for Single Family Housing require the lender to (1) indemnify HUD against losses for 9 of 10 FHA-insured loans with significant underwriting deficiencies and unallowable restrictive covenants of more than $1.1 million; (2) reimburse the FHA insurance fund $118,861 in losses resulting from the claims and associated expenses paid on one loan with significant underwriting deficiencies or unallowable restrictive covenants; (3) develop, implement, and enforce written controls to ensure that FHA-insured loans are originated in compliance with HUD regulations; and (4) fully implement its quality control plan and follow up to ensure that its quality control reviews are conducted in accordance with HUD regulations.