The U.S. Department of Housing and Urban Development (HUD), Office of Inspector General, audited National Bank of Kansas City (National Bank). Our audit objectives were to determine whether National Bank followed Federal Housing Administration (FHA) requirements for (1) borrower eligibility and creditworthiness and property eligibility when underwriting loans and (2) implementing a quality control program.

National Bank did not follow HUD's requirements regarding income, liability, and asset determination in 4 of the 16 defaulted loans reviewed. These loans had material underwriting deficiencies that affected the insurability of the loans. In addition, National Bank did not comply with HUD's quality control requirements. Specifically, its plan lacked elements required by HUD, and it did not ensure that its quality control reviews met HUD requirements.

We recommended that HUD require National Bank to indemnify to for two actively insured loans with unpaid principal balances totaling more than $385,600 and future losses on two loans with unpaid principal balances totaling more than $280,800. Also, we recommended that HUD verify that National Bank provides its underwriters with additional training on its new procedures and properly performs its quality control function.