We completed an audit of Wells Fargo Bank NA, Rochester, New York, Branch Office (Wells Fargo), a national bank and supervised lender. The audit objectives were to determine whether Wells Fargo (1) approved insured loans in accordance with U.S. Department of Housing and Urban Development (HUD)/Federal Housing Administration (FHA) requirements, which include following prudent lending practices, and (2) developed and implemented a quality control plan that complied with HUD requirements.

The audit disclosed that Wells Fargo did not always comply with HUD underwriting requirements. Consequently, 16 of the 20 loans reviewed exhibited significant underwriting deficiencies such as minimum cash investment not met, inaccurate calculation of income, inadequate verification of debt, inadequate review of appraisals, and over insured loans. In addition, 8 of the 16 loans contained origination deficiencies, such as inadequate gift fund verification, inadequate assets available to close, questionable clear title to the property, ineligible prior mortgage late payments, inadequate compensating factors, and various borrower credit issues. These deficiencies occurred because Wells Fargo lacked adequate controls to ensure that loans were processed in accordance with HUD requirements. As a result, mortgage loans were approved for potentially ineligible borrowers, causing the HUD/FHA insurance fund to assume an unnecessary insurance risk. Wells Fargo also failed to ensure that its quality control plan was properly implemented in accordance with HUD and its own quality control requirements. Consequently, the effectiveness of its quality plan, which was designed to ensure accuracy, validity, and completeness in its loan underwriting process, was lessened.

We recommend that the Assistant Secretary for Housing - Federal Housing Commissioner require Wells Fargo to reimburse HUD for the loss incurred on one loan with significant underwriting deficiencies, indemnify HUD against future losses on 15 active loans with significant underwriting deficiencies, establish procedures to ensure that HUD underwriting requirements are properly implemented and documented, and implement procedures to ensure compliance with HUD and its own quality control requirements.