We audited the Newark, Delaware, branch office (branch office) of J.P. Morgan Chase bank (J.P. Morgan Chase), a supervised direct endorsement lender approved to originate Federal Housing Administration (FHA) single-family mortgage loans. We selected the branch office because its default rate was above the state’s average default rate. Our objective was to determine whether J.P. Morgan Chase complied with U.S. Department of Housing and Urban Development (HUD) requirements in the origination and quality control review of FHA-insured single-family loans.

J.P. Morgan Chase generally complied with HUD requirements in the origination and quality control review of FHA-insured single-family loans. However, a review of eight sample loans valued at approximately $1.3 million showed that its branch office did not underwrite one of the loans originally valued at more than $157,000 in accordance with HUD requirements. The branch office approved the loan based on incorrect qualifying ratios. In addition, J.P. Morgan Chase did not fully implement quality control procedures as required for one improperly underwritten loan out of five it reviewed as part of its quality control process. These deficiencies occurred because the branch office did not exercise due care in the underwriting the deficient loans and J.P. Morgan Chase did not always implement quality control procedures as required. As a result, the FHA insurance fund was exposed to an unnecessarily increased risk.

We recommend that HUD’s Assistant Secretary for Housing – Federal Housing Commissioner require J.P. Morgan Chase to indemnify $193,949 for one loan it issued contrary to HUD’s loan origination requirements, reimburse $26,352 for a loss from claim incurred by HUD on another loan; and fully enforce its policies, procedures and controls to ensure that its staff consistently follows HUD requirements.