Defaulted Title I Home Improvement Loans--Highly Vulnerable to Fraud, Waste, and Abuse

AFMD-82-14: Published: Dec 7, 1981. Publicly Released: Feb 1, 1982.

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GAO reviewed the Department of Housing and Urban Development's (HUD) loan servicing and accounting for defaulted title I Home Improvement Loan Program loans. Under the title I program, HUD guarantees loans made by private lenders for home improvement. Defaulted loans are acquired by HUD when borrowers fail to make their loan payments and lenders return the loans to HUD for payment of an insurance claim.

As a result of inadequate controls and outdated management practices, millions of dollars owed to the United States have been subject to waste, fraud, and abuse. Nationwide, thousands of borrowers have more than one home improvement loan in default. Since credit reports do not always show the previous loans, borrowers are often able to obtain multiple loans by simply not including information about other loans on their loan applications. Legislation has been introduced in Congress which, if enacted, would provide Federal agencies, including HUD, specific authorization to report defaulting borrowers to credit bureaus. The following wasteful management practices and accounting problems contribute to the high volume of uncollectible home improvement loans: (1) HUD loan servicing is not in compliance with Federal Claims Collection Standards; (2) millions of dollars are written off annually simply because no reasonable effort is made to locate defaulting borrowers; (3) liens are seldom obtained on assets owned by defaulting borrowers; (4) defaulting borrowers are charged a lower effective interest rate on their loans after default than they were charged when their loans were current; (5) the title I accounting system does not provide proper controls over such items as collections and inventory and does not properly account for interest income. Changes are needed to ensure aggressive loan servicing, remove rewards which encourage current borrowers to default, increase the use of legal remedies to obtain collections, and improve accounting methods.

Recommendations for Executive Action

  1. Status: Closed - Implemented

    Comments: FIA assignment will provide for verification.

    Recommendation: The Secretary of HUD should direct the Assistant Secretary for Housing and/or Administration to make full legal use of credit bureau reporting on loans in current inventory, should pending legislation be enacted.

    Agency Affected: Department of Housing and Urban Development

  2. Status: Closed - Implemented

    Comments: When we confirm what actions the agency has taken in response to this recommendation, we will provide updated information.

    Recommendation: The Secretary of HUD should direct the Assistant Secretary for Housing and/or Administration to direct home improvement lenders to report all title I loans and their status to credit bureaus and require lenders to obtain credit reports on loan applicants before making loans.

    Agency Affected: Department of Housing and Urban Development

  3. Status: Closed - Implemented

    Comments: When we confirm what actions the agency has taken in response to this recommendation, we will provide updated information.

    Recommendation: The Secretary of HUD should direct the Assistant Secretary for Housing and/or Administration to improve internal controls over receipts and accounting records by implementing controls already required in HUD procedures. Also, complete the current inventory reconciliation and thereafter reconcile periodically.

    Agency Affected: Department of Housing and Urban Development

  4. Status: Closed - Implemented

    Comments: FIA assignment will provide for verification.

    Recommendation: The Secretary of HUD should direct the Assistant Secretary for Housing to establish a system to control and track the expiration dates of liens obtained by lenders or the Department of Justice.

    Agency Affected: Department of Housing and Urban Development

  5. Status: Closed - Implemented

    Comments: To address the problems resulting in this recommendation, HUD reduced the ceiling on unsecured signature loans from $7,500 to $2,500. GAO feels that this action will reduce the volume of unsecured loans being returned to HUD in default.

    Recommendation: The Secretary of HUD should direct the Assistant Secretary for Housing to determine a claim amount, based on such factors as legal cost involved, over which lenders will be required to obtain judgments and/or place liens on improved property before HUD pays an insurance claim.

    Agency Affected: Department of Housing and Urban Development

  6. Status: Closed - Implemented

    Comments: FIA assignment will provide verification.

    Recommendation: The Secretary of HUD should direct the Assistant Secretary for Housing to require that, when financially feasible, defaulted loans be referred to the Department of Justice for collection action before the loans are written off as uncollectible.

    Agency Affected: Department of Housing and Urban Development

  7. Status: Closed - Implemented

    Comments: FIA assignment will provide verification.

    Recommendation: The Secretary of HUD should direct the Assistant Secretary for Housing to establish and enforce foreclosure policies on secured loans in accordance with the Federal Claims Collection Standards.

    Agency Affected: Department of Housing and Urban Development

  8. Status: Closed - Implemented

    Comments: FIA assignment will provide verification.

    Recommendation: The Secretary of HUD should direct the Assistant Secretary for Housing and/or Administration to initiate systematic servicing of defaulted home improvement loans immediately upon receiving insurance claims from the lenders.

    Agency Affected: Department of Housing and Urban Development

  9. Status: Closed - Implemented

    Comments: FIA assignment will provide verification.

    Recommendation: The Secretary of HUD should charge defaulting borrowers the maximum allowable interest rate and amend HUD regulations in order to apply payments received in accordance with the U.S. Rule.

    Agency Affected: Department of Housing and Urban Development

  10. Status: Closed - Implemented

    Comments: When we confirm what actions the agency has taken in response to this recommendation, we will provide updated information.

    Recommendation: The Secretary of HUD should direct the Assistant Secretary for Housing and/or Administration to ensure, before writing loans off as uncollectible, that locator services have been used to find defaulting borrowers.

    Agency Affected: Department of Housing and Urban Development

  11. Status: Closed - Implemented

    Comments: FIA assignment will provide verification.

    Recommendation: The Secretary of HUD should increase the accuracy of financial reporting by computing and reporting interest on defaulted home improvement loans under accrual accounting methods.

    Agency Affected: Department of Housing and Urban Development

 

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