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We reviewed 20 Federal Housing Administration (FHA) loans Alethes, LLC (Alethes), underwrote as a FHA direct endorser. Our review objective was to determine whether Alethes underwrote the 20 loans in accordance with FHA requirements. This review was part of Operation Watchdog, an Office of Inspector General (OIG) initiative to review the underwriting of 15 direct endorsement lenders, at the suggestion of the FHA Commissioner. The Commissioner expressed concern regarding the increasing claim rates against the FHA insurance fund for failed loans. Alethes did not properly underwrite 19 of the 20 loans reviewed because its underwriters did not follow FHA’s requirements. As a result, the FHA insurance fund suffered actual losses of more than $1 million, as shown by the following table.

We recommend that HUD’s Associate General Counsel for Program Enforcement determine legal sufficiency and if legally sufficient, pursue remedies under the Program Fraud Civil Remedies Act against Alethes and/or its principals for incorrectly certifying to the integrity of the data or that due diligence was exercised during the underwriting of 19 loans that resulted in losses to HUD totaling $1,056,447, which could result in affirmative civil enforcement action of approximately $2,255,394. We also recommend that HUD’s Deputy Assistant Secretary for Single Family take appropriate administrative action against Alethes and/or its principals for the material underwriting deficiencies cited in this report once the affirmative civil enforcement action cited in recommendation 1A is completed.