We audited Flat Branch Mortgage, Inc., to evaluate its quality control (QC) program for originating and underwriting Single Family FHA-insured loans. Our audit covered the period October 2020 through September 2022. We selected Flat Branch 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 Flat Branch’s QC program for originating and underwriting FHA-insured loans was not sufficient. Specifically, Flat Branch (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 complete all loan reviews in a timely manner; (3) did not always complete key review steps and sometimes missed material deficiencies; and (4) did not adequately assess, mitigate, and report loan review findings, which included self-reporting loans to HUD when required. These issues occurred because Flat Branch had insufficient controls over its QC program, was not always familiar with HUD requirements, and experienced staffing constraints. As a result, HUD did not have assurance that Flat Branch’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 recommend that HUD require Flat Branch to (1) update its QC plan and related procedures to align with HUD requirements; (2) provide training to staff and management on HUD requirements for lender QC programs; (3) review the loans that it had not selected and take appropriate actions when applicable; (4) obtain credit reports and reverifications of borrower information for QC reviews in which it did not complete these steps and evaluate the risk of findings identified for these loans; and (5) 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.
Recommendations
Housing
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Status2025-NY-1003-001-AOpenClosed
Update its QC plan and related processes and procedures to align with requirements for loan selection, including maintaining data and documenting how sample sizes and loan selections were determined.
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Status2025-NY-1003-001-BOpenClosed
Update its QC plan and related processes and procedures to align with requirements for (1) loan file reviews, including requirements to obtain new credit reports, reverify borrower information, and obtain appraisal field reviews; (2) documenting review results, including maintaining data on findings; (3) assessment of findings; (4) mitigation of findings; (5) reporting findings internally to lender management; and (6) reporting findings to HUD when required.
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Status2025-NY-1003-001-COpenClosed
Provide annual training to its staff and management on HUD requirements for lender QC programs and provide proof of training to HUD.
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Status2025-NY-1003-001-DOpenClosed
Review the six EPD loans not previously selected for review and submit the results to HUD, including all findings of fraud or material misrepresentation, along with any other material findings that it is unable to mitigate. If required, Flat Branch should execute indemnification agreements or reimburse claims paid to help protect the FHA insurance fund from unacceptable risk.
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Status2025-NY-1003-001-EOpenClosed
Obtain credit reports and reverify borrower information for up to 279 EPD reviews performed and evaluate the risk of both new findings identified and existing findings contained in its QC files to confirm whether it self-reported to HUD all findings of fraud or material misrepresentation, along with any other material findings that its records did not show have been acceptably mitigated. If required, Flat Branch should execute indemnification agreements or reimburse claims paid to help protect the FHA insurance fund from unacceptable risk.
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Status2025-NY-1003-001-FOpenClosed
Evaluate its QC files for the 29 post-closing QC reviews 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 its records did not show have been acceptably mitigated. If required, Flat Branch should execute indemnification agreements or reimburse claims paid to help protect the FHA insurance fund from unacceptable risk.
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Status2025-NY-1003-001-GOpenClosed$228,793.00Funds Put to Better Use
Recommendations that funds be put to better use estimate funds that could be used more efficiently. For example, recommendations that funds be put to better use could result in reductions in spending, deobligation of funds, or avoidance of unnecessary spending.
Provide indemnification agreements or documentation to support the two loans in which it missed material deficiencies and the three loans in which it identified material findings that it did not acceptably mitigate or self-report to HUD. Implementation of this recommendation will protect the FHA insurance fund from an estimated loss of $228,793.