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We audited the U.S. Department of Housing and Urban Development’s (HUD) Federal Housing Administration’s (FHA) preforeclosure sale claim process based on an internal Office of Inspector General audit suggestion noting that existing regulations may allow excessive preforeclosure claim interest costs.  Our audit objective was to determine the amount of unnecessary preforeclosure claim interest and other costs that resulted from lender noncompliance with HUD’s loan-servicing timeframe requirements.

HUD paid an estimated $413 million in unnecessary interest and other costs for 27,634 preforeclosure claims because lenders failed to complete servicing actions for defaulted loans within established timeframes.  Although the unnecessary amounts were caused by lenders’ inaction, HUD reimbursed lenders for these added costs through FHA insurance claims.  This condition occurred because HUD’s requirements and procedures do not limit unnecessary preforeclosure claim interest and other costs that result from lenders’ servicing delays.  As a result, the FHA insurance fund incurred unnecessary and unreasonable costs and fewer funds were available to pay other claims or apply toward reducing FHA borrower mortgage insurance premiums.

We recommend that HUD’s Office of Single Family Housing implement a change to regulations at 24 Code of Federal Regulations Part 203, to require curtailment of preforeclosure interest and other costs that are caused by lender servicing delays, resulting in $413 million in in funds to be put to better use..  This should include updating or seeking statutory authority to update HUD’s regulations as necessary and coordinating with HUD’s Office of Finance and Budget, well before any changes go through departmental clearance, to ensure that planned curtailment requirements can be consistently enforced through the claims process.