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We audited the U.S. Department of Housing and Urban Development’s (HUD) approval of Section 232 Federal Housing Administration (FHA)-insured loans based on our initiative to focus HUD management’s attention on problems areas with the Section 232 program.  Our audit objective was to determine whether HUD approved Section 232 FHA-insured loans for projects that qualified for mortgage insurance in accordance with HUD requirements.

HUD generally approved Section 232 FHA-insured loans for projects that qualified for mortgage insurance in accordance with HUD requirements.  For the three loan files reviewed, valued at nearly $50 million, HUD maintained documentation to show that it adequately reviewed (1) loan applications for program eligibility; (2) financial operations of the operator; (3) the creditworthiness of the borrower, operator, and operator parent; (4) professional liability insurance; and (5) the project capital needs assessment.  However, it did not adequately evaluate the creditworthiness of the management agents as required.  This condition occurred because HUD’s underwriters did not follow procedures.  As a result, if HUD does not implement controls and procedures to ensure that it properly evaluates the creditworthiness of management agents, it could approve loans for projects with management agents that significantly impact the financial position of the project.

We recommended that HUD develop and implement controls and procedures to ensure that its underwriters properly evaluate the creditworthiness of management agents when underwriting future loans.  It took immediate corrective action during the audit to implement the recommendation.