In accordance with our annual audit plan and due to concerns regarding the U.S. Department of Housing and Urban Development’s (HUD) capacity to handle the increasing demand for loans insured by the Federal Housing Administration (FHA), we initiated an audit of HUD’s Philadelphia, PA, Homeownership Center (Center). This is the first of two audit reports that we plan to issue on the Center’s capacity to process current demand for FHA loans. The audit objective addressed in this report was to determine whether the Center processed FHA loan applications in accordance with applicable policies and procedures and ensured that required background investigations were completed for its contracted employees that performed functions associated with FHA loans.

The Center generally processed FHA loans in accordance with applicable policies and procedures. However, it did not always ensure that required background investigations were completed for its contracted employees that were responsible for processing FHA loan applications and monitoring the quality of lenders’ underwriting. The Center had 29 contracted employees that were responsible for performing functions associated with FHA loans. Of the 29 contracted employees, 16, or 55 percent, had not been through minimum background investigations required by contract clauses and HUD’s policies on personnel security/suitability. HUD spent more than $5.4 million on services from contracted employees that may not have been eligible to access its computer systems and other information sources containing sensitive personally identifiable information.

We recommend that the Deputy Assistant Secretary for Single Family Housing direct the Center to (1) initiate and follow up on the required minimum background investigations for its contracted employees that have not been investigated to justify more than $5.4 million spent on the related contracts and (2) develop and implement controls to ensure that its contracted employees comply with contract terms and applicable HUD security policies.