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The U.S. Department of Housing and Urban Development, Office of Inspector General audited Nations Lending Corporation, a Federal Housing Administration (FHA)-approved nonsupervised direct endorsement lender approved to originate, underwrite, and submit mortgages for insurance under the U.S. Department of Housing and Urban Development’s (HUD) direct endorsement program. We selected Nations for audit based on our risk assessment of single-family lenders with home offices located in our region. The audit was part of the activities in our fiscal year 2012 annual audit plan. Our audit objective was to determine whether Nations complied with HUD’s regulations, procedures, and instructions in the underwriting of FHA-insured loans and quality control.

Nations generally complied with HUD’s requirements for underwriting FHA-insured loans. Specifically, it generally complied with HUD’s regulations, procedures, and instructions in the underwriting of 10 FHA-insured loans reviewed. Additionally, Nations’ written quality control plan was generally adequate, and its routine quality control reviews were completed in accordance with HUD’s requirements. However, its quality control reviews for early payment defaults were deficient. Specifically, Nations did not adequately document its quality control reviews for early payment defaulted loans or perform the reviews in a timely manner. Additionally, it did not maintain evidence of follow-up or corrective actions taken based on the review results. As a result, Nations could not ensure the accuracy, validity, and completeness of its loan underwriting activities. Further, it may not be able to identify potential deficiencies and make necessary corrections in a timely manner; thus, potentially increasing the risk to FHA’s Mutual Mortgage Insurance Fund.

We recommend that HUD’s Deputy Assistant Secretary for Single Family Housing require Nations to (1) implement an adequate quality control program that complies with HUD’s requirements for early payment defaults and (2) amend its quality control plan to include the requirements for timely reviews of early payment defaults.