We audited the Newark, Delaware, branch office (branch office) of Wells Fargo Home Mortgage (Wells Fargo). The branch office is mainly responsible for underwriting loans for 22 Wells Fargo sales branch offices in Pennsylvania. We selected the branch office because of its relatively high default rate, compared with the average default rate for the state of Pennsylvania. Our objective was to determine whether the branch office complied with U.S. Department of Housing and Urban Development (HUD) requirements in the origination and quality control review of FHA loans.

Wells Fargo's branch office did not always comply with HUD requirements in the origination of FHA-insured single-family loans. Although Wells Fargo generally complied with HUD requirements in its quality control reviews of FHA loans, four of eight loans we selected for review were not originated in accordance with HUD requirements. The deficiencies we noted with the loan originations occurred because Wells Fargo staff did not exercise due care in the underwriting of the loans. As a result, the FHA insurance fund was exposed to an unnecessarily increased risk.

We recommend that HUD's Assistant Secretary for Housing - Federal Housing Commissioner require Wells Fargo to indemnify more than $816,000 for four loans, which it issued contrary to HUD's loan origination requirements, and enforce its policies, procedures and controls to ensure that its staff consistently follows HUD's requirements.