We performed an audit of CMG Mortgage, Inc., to evaluate its quality control (QC) program for originating and underwriting Single Family Federal Housing Administration (FHA)-insured loans.  We selected CMG for review based on its loan volume and delinquency rate and because its rate of self-reporting loans to HUD when it identified fraud, material misrepresentations, and other material findings that it could not mitigate was below average for more than a 5-year period.

We found that CMG’s QC program for originating and underwriting FHA-insured loans was not sufficient.  Specifically, CMG (1) did not select the proper number of loans for review and maintain complete and accurate data to document its loan selection process; (2) did not always complete key review steps and sometimes missed material deficiencies; and (3) did not adequately mitigate and report loan review findings, which included self-reporting loans to HUD when required.  These issues occurred because CMG had insufficient controls over its QC program and was not always familiar with HUD requirements.  As a result, HUD did not have assurance that CMG’s QC program fully achieved its intended purposes, which include, among other things, protecting the FHA insurance fund and lender from unacceptable risk, guarding against fraud, and ensuring timely and appropriate corrective action.

We recommended that HUD require CMG to (1) update its QC plan and related procedures to align with HUD requirements; (2) demonstrate that its training for staff and management has been updated to reflect changes to its QC plan and related procedures, and to cover the underlying requirements for lender QC programs; (3) review the loans that it had not selected and take appropriate actions when applicable; (4) evaluate its QC files for the loans in which it identified material findings to confirm whether it self-reported to HUD all findings of fraud or material misrepresentation, along with any other material findings that it did not acceptably mitigate.