We audited Member First Mortgage, Limited Liability Company, a Federal Housing Administration (FHA) nonsupervised servicer as part of the activities in our fiscal year 2015 annual audit plan.  We selected Member First based upon our analysis of risk factors for single-family servicing lenders in Region 5’s jurisdiction.   Our audit objectives were to determine whether (1) Member First complied with the U.S. Department of Housing and Urban Development’s (HUD) loss mitigation requirements for servicing FHA-insured loans and (2) Member First’s quality control plan, as implemented, met HUD’s requirements.

Member First generally complied with HUD’s requirements for loss mitigation and the quality control program with the exception of the frequency of its quality control reviews of nonperforming FHA-insured loans.  Specifically, for the 15 FHA loans reviewed, it maintained adequate documentation of its attempts to contact borrowers to mitigate loan delinquencies.  It also appropriately determined borrowers’ (1) eligibility for loss mitigation and (2) loss mitigation options.  However, Member First did not perform or ensure that its contractor performed monthly quality control servicing reviews of its nonperforming loans.  As a result of this weakness, HUD and Member First lacked assurance that potential servicing deficiencies were identified and mitigated in a timely manner, potentially resulting in an increased risk to FHA’s Mutual Mortgage Insurance Fund.

We recommend that the Deputy Assistant Secretary for Single Family Housing require Member First to implement adequate procedures and controls to ensure that Member First and its contractor perform quality control servicing reviews of FHA-insured loans in accordance with HUD’s requirements.

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¹ The region contains six States:  Illinois, Indiana, Michigan, Minnesota, Ohio, and Wisconsin.