We audited Neighborhood Loans, Inc., to evaluate its quality control (QC) program for originating and underwriting Single Family FHA-insured loans. Our audit covered the period October 2020 through September 2022.  We selected Neighborhood Loans for review based on its increasing loan volume and delinquency rate and because its rate of self-reporting loans to HUD when it identified fraud, material misrepresentations, and other material findings that it could not mitigate was below average for 5 of the last 6 years.

We found that Neighborhood Loans’ QC program for originating and underwriting FHA-insured loans was not sufficient.  Specifically, Neighborhood Loans (1) did not select the proper number of loans for review and maintain complete data to document its loan selection process; (2) did not complete all loan reviews in a timely manner; (3) did not always complete key review steps and sometimes missed material deficiencies; and (4) did not adequately assess, mitigate, and report loan review findings, which included self-reporting loans to HUD when required.  These issues occurred because Neighborhood Loans had insufficient controls over its QC program, was not always familiar with HUD requirements, and experienced staffing constraints.  As a result, HUD did not have assurance that Neighborhood Loans’ QC program fully achieved its intended purposes, which include, among other things, protecting the FHA insurance fund and lender from unacceptable risk, guarding against fraud, and ensuring timely and appropriate corrective action.

We recommend that HUD require Neighborhood Loans to (1) update its QC plan and related procedures to align with HUD requirements; (2) provide training to staff and management on HUD requirements for lender QC programs; (3) review the loans that it had not selected and take appropriate actions when applicable; (4) review its QC files for loans in which it may not have performed complete reverifications and reverify information where appropriate (5) evaluate its QC files for reviews in which it did not yet assess the risk of findings identified; and 6) evaluate its QC files for the loans in which it identified material findings to confirm whether it self-reported to HUD all findings of fraud or material misrepresentation, along with any other material findings that it did not acceptably mitigate.