We audited the U.S. Department of Housing and Urban Development’s (HUD) temporary policy for endorsement of loans with COVID-19 forbearance activity because an analysis of data in HUD’s systems showed that there may have been loans that did not comply with the policy’s requirements. The policy was one aspect of HUD’s broader emergency response to COVID-19, which also included an eviction moratorium and loan forbearance for borrowers experiencing financial hardship. The objectives of the audit were to determine (1) whether HUD’s temporary endorsement policy related to COVID-19 forbearance activity was properly followed by lenders, (2) whether HUD monitored and enforced indemnification agreements for loans that were subject to the temporary policy, and (3) HUD’s reasons for ending the policy during the pandemic and its plans to evaluate and use such policies in the future.
HUD could improve oversight of the temporary endorsement policy. Specifically, HUD did not ensure that (1) lenders consistently followed policy requirements and (2) indemnification agreement data and records related to the policy were complete and accurate. These deficiencies occurred or went undetected due to unclear guidance and because HUD did not update its oversight strategy to specifically cover the policy and reconcile relevant data and records. As a result, the Federal Housing Administration (FHA) insurance fund was exposed to greater risk from at least $83 million in loans for which lenders did not follow requirements, and HUD’s ability to monitor and enforce indemnification agreements could be compromised until it corrects its data and records. Additionally, HUD terminated the policy due to limited use and did not have plans to further evaluate or use the policy in the future. As a result, HUD did not know whether using a similar policy during future disasters and emergencies or permanently could manage risk to the insurance fund while increasing lender participation.
We recommend that HUD (1) require lenders to execute 5-year indemnification agreements for loans that were missing required agreements or were otherwise ineligible to put up to $1.8 million to better use by avoiding potential losses; (2) request and analyze data from lenders for loans at risk of noncompliance to identify loans that should have been subject to the policy or were otherwise ineligible for insurance and require lenders to protect HUD against losses on these loans to put up to $26.8 million to better use; (3) record indemnification agreement data in its system for agreements that were executed but not recorded to put up to $3.5 million to better use; (4) review and correct indemnification agreement data as needed in its system; (5) update indemnification agreements with incorrect or missing information; and (6) consider evaluating whether and how a similar policy could be used in the future. This should include studying lenders’ use of the policy, the long-term performance of loans endorsed under it, and the compliance, guidance, and process issues discussed above to refine future policies.
Recommendations
Housing
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Status2023-NY-0002-001-AOpenClosed$1,811,238.00Funds 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.
Require lenders to execute indemnification agreements covering a period of at least 5 years for each of the 20 loans for which the lenders did not comply with the temporary endorsement policy and related instructions, including loans for which the lenders did not execute an agreement when required or that were otherwise ineligible for insurance, and properly store the agreements and record the agreement data to put up to $1,811,238 to better use by avoiding potential losses.
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Status2023-NY-0002-001-BOpenClosed
Obtain guidance from the Office of General Counsel regarding the implications of allowing lenders to retroactively apply forbearance in cases in which the borrower requests forbearance after the lender submits the loan for endorsement to ensure that it consistently handles such cases.
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Status2023-NY-0002-001-COpenClosed
Request and analyze data from lenders for the 3,024 loans at risk of noncompliance to identify loans that should have been subject to the temporary endorsement policy or were otherwise ineligible for insurance. The data requested should include but not be limited to the dates when the borrower requested forbearance, the loan became subject to forbearance, and the loan was submitted for endorsement.
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Status2023-NY-0002-001-DOpenClosed$26,840,071.00Funds 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.
For any of the 3,024 loans found to be subject to the temporary policy or otherwise ineligible for insurance, require the lenders to execute indemnification agreements covering a period of at least 5 years or reimburse HUD for any claims to put up to $26,840,071 to better use by protecting HUD against potential losses. For any indemnification agreements executed, HUD should properly store the agreements and record the agreement data.
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Status2023-NY-0002-001-EOpenClosedClosed on August 31, 2023
Update data in HUD’s system for the three cases in which the lender incorrectly reported the loans as in COVID-19 forbearance at the time of endorsement to ensure that accurate data are maintained.
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Status2023-NY-0002-001-FOpenClosedClosed on January 23, 2024
Consider implementing a policy to review any of the 292 loans not reviewed as part of this audit that result in a request for claim to ensure that the loans qualified for endorsement under the temporary endorsement policy so that HUD can avoid unnecessary payments for loans that should not have been endorsed.
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Status2023-NY-0002-001-GOpenClosed$3,493,636.00Funds 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.
Record indemnification agreement data in its system for the 34 loans for which the lender properly executed an indemnification agreement before endorsement and HUD had not recorded the agreement in its system to put up to $3,493,636 to better use by avoiding potential losses.
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Status2023-NY-0002-001-HOpenClosed
Review and correct indemnification agreement data in HUD’s computer systems as needed for all agreements currently classified as having 2-year terms and all agreements related to 2-year agreements contained on its SharePoint site to ensure that its systems contain accurate data for monitoring and enforcement of agreements. This recommendation includes but is not limited to reviewing the agreement number, agreement term, billing lender, expiration date, refinance indicator, and source indicator.
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Status2023-NY-0002-001-IOpenClosed
Update indemnification agreements or obtain updated indemnification agreements for the 30 loans for which the indemnification agreements had incorrect or missing information or were not signed by HUD and upload them to its SharePoint site so that such agreements are properly executed and can be traced to HUD’s computer systems for future use.
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Status2023-NY-0002-001-JOpenClosed
Consider evaluating whether and how a similar policy for disasters or emergencies or a permanent version of the policy could be used to manage risk to the insurance fund while increasing lender participation. This should include further studying lenders’ use of the policy and the long-term performance of loans endorsed under it. It could also include reviewing the compliance, guidance, and process issues identified during this audit and through the resolution of the other recommendations to refine any future endorsement policies related to forbearance.