We recommend that the Deputy Assistant Secretary for Single Family Housing require MB Financial to update its policies and procedures to ensure that its staff understands underwriting requirements and the requirement that loans be manually underwritten when a refer decision is received from automated underwriting systems or when a loan is downgraded to a manual underwrite.

We recommend that the Deputy Assistant Secretary for Single Family Housing require MB Financial to update its quality control plan to include the specific procedures to be used when reviewing rejected loan applications.

Revise servicing review and monitoring policies and procedures to emphasize increased controls on reviewing claim loans showing that no loss mitigation evaluation occurred. Revising the policies and procedures would reduce the risk to HUD and result in a projected $120,902,564 in funds to be put to better use (appendix A).

Develop and implement policies and procedures to ensure that the Office of Single Family Asset Management and Office of Lender Activities and Program Compliance communicate the results of their servicing reviews to each other.

Update and revise policies and procedures, including reinforcement of guidance (for example, mortgagee letters, notifications to servicers, or training) to ensure that servicers accurately report the status of delinquent loans to HUD.

Require indemnification for the 26 loans that had significant servicing deficiencies. In these cases, the loss to HUD was $1,673,117 (appendixes A and D).

Reinforce existing guidance (such as mortgagee letters, notifications to servicers, and training) to servicers to ensure that they engage in required loss mitigation.

Require that the servicers with significant and other deficiencies revise and update their policies and procedures, as necessary, to ensure that they comply with HUD requirements and guidance on loss mitigation evaluation.

Finalize and implement monitoring procedures to ensure that $6,324,625 in flat rents are appropriately charged to tenants over the next year.

Follow up with the housing authorities in our sample, identified as noncompliant with flat rent requirements, to ensure that their rents are properly adjusted.

Clarify guidance to better enhance housing authority understanding of the requirement, including explaining that housing authorities must code ceiling rent tenants as flat rents and explaining what housing authorities should do when maximum rents for low-income housing tax credit properties are lower than the minimum flat rent amounts required by HUD.

Implement adequate procedures and controls to ensure that memberships are sold at or below the fair market value and HUD’s secured interest in the memberships is appropriately valued.

Have a representative of HUD at the closing for membership sales to sign the HUD notes.

Develop and maintain a waiting list for rental units that meets the requirements of the resident home-ownership plan and considers the tenant profile.

Implement adequate procedures and controls to ensure that any rental units vacated by current households or units associated with memberships which were repurchased by the Cooperative and then remained vacant more than 6 months, are rented to very low-, low-, or moderate-income households selected from a waiting list for rental units that meets the requirements of the resident homeownership plan and considers the tenant profile.

For the two units for which the Cooperative acquired the memberships associated with the units from members and which had been vacant for more than 6 months, rent the units to households that meet the tenant income profile.

Provide sufficient documentation to support that HUD had received 50 percent of the proceeds from initial membership sales as of May 2017. If the Cooperative cannot do this, it should pay HUD half of the principal on the promissory notes payable to the Cooperative for all of the membership sales less the amount the Cooperative can support that it paid HUD for initial membership sales.

Implement adequate procedures and controls to ensure that HUD receives its full share of the proceeds from future initial membership sales.

Provide sufficient documentation to support that the Cooperative used its share of the proceeds from initial membership sales in accordance with the grant agreement. If the Cooperative cannot do this, it should transfer funds from its operating account, in an amount equal to half of the principal on the mortgages to the Cooperative for all membership sales less the amount the Cooperative can support that it used for eligible purposes, to a reserve account to be used in accordance with the grant agreement.

Implement adequate procedures and controls to ensure that its share of the proceeds from initial membership sales is used in accordance with the grant agreement.