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We audited the Milford, Connecticut, branch office of Countrywide Bank, FSB (Countrywide), which is a supervised national bank approved by the U.S. Department of Housing and Urban Development (HUD) to originate, underwrite, and service Federal Housing Administration (FHA) single-family insured loans. We selected the Milford, Connecticut, branch office largely based on a lender risk analysis, which showed that the loans it originated had a higher default percentage than the Connecticut state average. We expanded the audit to cover the Madison, Connecticut, branch office, which used the same FHA identification number. Our objectives were to determine whether the lender acted in a prudent manner and complied with HUD regulations, procedures, and instructions in the origination of the FHA-insured single-family mortgages selected for review; and whether its quality control plan as implemented met HUD requirements.

Countrywide did not fully comply with HUD regulations, procedures, and instructions in the origination of FHA-insured single-family mortgages. However, the lender's quality control plan and implementation was adequate. Specifically, Countrywide allowed some borrowers utilizing secondary financing from an agency acting as an instrumentality of government to incorrectly receive cash back at closing in excess of their total cash deposit totaling $5,767. This occurred because Countrywide did not follow proper HUD underwriting guidelines, which resulted in the loans being overinsured and a minimal increased risk to the FHA insurance fund. Countrywide also did not properly notify HUD upon the sale and/or transfer of FHA-insured loans. This condition occurred because Countrywide was not fully aware of the HUD requirements regarding mortgage record changes.

We recommend that HUD's Assistant Secretary for Housing-Federal Housing Commissioner require Countrywide to (1) pay down the principal by $5,767 for the five overinsured loans and implement controls to prevent cash back when secondary financing is used; and (2) update their mortgage records in HUD's system to reflect the appropriate mortgage holder and implement procedures to ensure the timely submission of mortgage record changes for future loans assigned or sold.