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We reviewed 12 Federal Housing Administration (FHA) loans that American Sterling Bank (American) underwrote as an FHA direct endorsement lender. Our review objective was to determine whether American underwrote the 12 loans in accordance with FHA requirements. This review is 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 concerns regarding the increasing claim rates against the FHA insurance fund for failed loans. American did not properly underwrite 9 of the 12 loans reviewed because its underwriters did not follow FHA’s requirements. As a result, FHA’s insurance fund suffered actual losses totaling $369,555 for eight loans and an estimated potential loss of $122,684 for one loan, totaling $492,239.

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 American and/or its principals for incorrectly certifying to the integrity of the data or that due diligence was exercised during the underwriting of nine loans that resulted in losses to HUD totaling $492,239, which could result in affirmative civil enforcement action of approximately $1,051,978. We also recommend that HUD’s Deputy Assistant Secretary for Single Family take appropriate administrative action against American 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.