The U.S. Department of Housing and Urban Development (HUD), Office of Inspector General, audited Heartland Funding Corporation (Heartland Funding) because of its high 30-day delinquency rate. More than 23 percent of the loans that it originated from January 2006 through December 2007 had been at least 30 days delinquent (past due). Our audit objectives were to determine whether Heartland Funding followed HUD requirements for (1) borrower eligibility and creditworthiness and property eligibility when underwriting loans, (2) implementing a quality control program, and (3) compensating its loan officers.

We concluded that Heartland Funding violated the Real Estate Settlement Procedures Act (RESPA) and HUD's requirements when processing FHA loans that involved downpayment assistance. In addition, Heartland Funding did not follow HUD requirements when it underwrote 27 FHA loans, implemented its quality control plan, or reported staff compensation.

We recommended that HUD take appropriate sanctions against Heartland Funding for violating RESPA, refer Heartland Funding to HUD's Mortgagee Review Board for review and appropriate actions, and require Heartland Funding to indemnify HUD on 27 loans for which Heartland Funding did not follow HUD underwriting requirements. Further, we recommended that HUD verify that Heartland Funding fully implements a quality control program that complies with HUD requirements and has ceased reporting staff compensation improperly.