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We audited Peoples Home Equity, Inc.(Peoples), a Federal Housing Administration (FHA) approved nonsupervised direct endorsement lender located in Brentwood, TN.  We selected Peoples based on its high default rates.  The audit was part of our annual audit plan to review single family programs and lenders.  Our audit objectives were to determine whether Peoples complied with HUD requirements when it originated and underwrote FHA loans, and implemented its quality control program. 

Peoples did not always originate and underwrite FHA insured loans in accordance with HUD requirements.  Specifically, 10 of 20 loans reviewed contained underwriting deficiencies.  This occurred because Peoples’ underwriters lacked knowledge, skills, and understanding of how to properly underwrite loans.  As a result, Peoples exposed HUD to unnecessary insurance risk of more than $521,000 for six loans and caused HUD to pay more than $971,000 in claims for four loans.

Further, Peoples did not follow HUD’s requirements when implementing its quality control program.  Peoples’ quality control reviews were not conducted in compliance with requirements and the quality control plan did not have the required provisions.  This occurred because Peoples did not ensure that its quality control contractor followed HUD’s requirements.  Because of Peoples’ noncompliance with HUD’s requirements and lack of due diligence, Peoples placed the FHA insurance fund at risk.  As a result, the effectiveness of Peoples’ quality control program to guard against errors, omissions, and fraud and to protect HUD from unacceptable risk was diminished.

We recommend that HUD require Peoples to (1) idemnify six loans with unpaid balances of $965,262, thereby putting an estimated $521,242 to better use; (2) reimburse HUD for four claims totaling $971,959; (3) continue training staff; (4) enforce written controls; and  (5) implement and enforce a quality control plan.