We audited First Source Bank, a Federal Housing Administration (FHA) supervised lender located in South Bend, IN.  We selected First Source based on our analysis of risk factors of single-family loan servicers in Region 5’s jurisdiction4.   Our audit objectives were to determine whether First Source (1) consistently and appropriately applied loss mitigation options for eligible borrowers, (2) accurately reported the default and 90-day delinquency status of FHA-insured loans, and (3) performed servicing quality control reviews that met the U.S. Department of Housing and Urban Development’s (HUD) requirements.

First Source did not always (1) implement its Loss Mitigation program in accordance with HUD’s requirements and (2) accurately report borrowers’ loan default information or loss mitigation activities in FHA Connection.  These servicing deficiencies resulted in (1) HUD incurring losses of more than $105,000 and (2) an increased risk to the FHA Mutual Mortgage Insurance Fund of more than $258,000.  In addition, HUD did not always have complete and accurate information to properly assess the performance of FHA-insured loans and effectively monitor First Source’s loss mitigation efforts.

First Source did not always (1) review a sample of 10 percent of its nonperforming²  FHA-insured loans monthly and (2) maintain complete quality control records.  As a result, HUD and First Source lacked assurance that potential servicing deficiencies were identified and mitigated in a timely manner, thus potentially resulting in an increased risk to FHA’s Mutual Mortgage Insurance Fund.

We recommend that the Deputy Assistant Secretary for Single Family Housing require First Source to (1) reimburse HUD $32,885 for the one loan that did not receive active and proper loss mitigation or were improperly denied loss mitigation, (2) support or reimburse HUD $139,487 for the loans that lacked evidence that appropriate loss mitigation was applied, (3) indemnify HUD $191,074 for the active loans that did not receive proper loss mitigation, and (4) implement adequate procedures and controls to address the issues cited in this audit report.

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1 The region contains six States:  Illinois, Indiana, Michigan, Minnesota, Ohio, and Wisconsin.
² Delinquent or defaulted loans, claims, and foreclosures