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.
Recommendations
Housing
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Status2025-NY-1004-001-AOpenClosed
Update its QC plan and related processes and procedures to align with requirements for loan selection, including documenting how loan selections were determined.
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Status2025-NY-1004-001-BOpenClosed
Update its QC plan and related processes and procedures to align with requirements for (1) loan file reviews, including requirements to reverify borrower information, obtain appraisal field reviews, and complete reviews in a timely manner; (2) assessment of findings; (3) reporting findings internally and documenting response to findings; (4) mitigation of findings; and (5) reporting findings to HUD when required.
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Status2025-NY-1004-001-COpenClosed
Provide annual training to its staff and management on HUD requirements for lender QC programs and provide proof of training to HUD.
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Status2025-NY-1004-001-DOpenClosed
Review the 101 EPD loans not previously selected for review and submit the results to HUD, including any findings of fraud, material misrepresentations, or other material findings that it is unable to mitigate. If required, Neighborhood Loans should execute indemnification agreements or reimburse claims paid to help protect the FHA insurance fund from unacceptable risk.
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Status2025-NY-1004-001-EOpenClosed
Review its QC files for up to the 432 loans with post-closing reviews in which it may not have performed complete reverifications of borrower information and reverify information where appropriate. Neighborhood Loans should then evaluate the risk of any new findings identified, and if required, it should execute indemnification agreements or reimburse claims paid to help protect the FHA insurance fund from unacceptable risk.
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Status2025-NY-1004-001-FOpenClosed
Evaluate its QC files for the 59 loans with EPD reviews in which it did not assess the risk of findings identified to confirm whether it self-reported to HUD all findings of fraud or material misrepresentation, along with any other material findings that its records did not show had been acceptably mitigated. If required, Neighborhood Loans should execute indemnification agreements or reimburse claims paid to help protect the FHA insurance fund from unacceptable risk.
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Status2025-NY-1004-001-GOpenClosed
Evaluate its QC files for the 96 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 its records did not show have been acceptably mitigated. If required, Neighborhood Loans should execute indemnification agreements or reimburse claims paid to help protect the FHA insurance fund from unacceptable risk.
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Status2025-NY-1004-001-HOpenClosed$339,186.00Funds Put to Better Use
Recommendations that funds be put to better use estimate funds that could be used more efficiently. For example, recommendations that funds be put to better use could result in reductions in spending, deobligation of funds, or avoidance of unnecessary spending.
Provide indemnification agreements or documentation to support the one loan in which it missed material deficiencies and the three loans in which it identified material misrepresentations or other material findings that it did not acceptably mitigate or self-report to HUD. Implementation of this recommendation will protect the FHA insurance fund from an estimated loss of $339,186.