Department of Housing and Urban Development:

Loan Origination and Foreclosed Property Management Processes

AIMD-00-41R: Published: Nov 19, 1999. Publicly Released: Nov 19, 1999.

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Pursuant to a congressional request, GAO determined: (1) the extent to which the Department of Housing and Urban Development (HUD) had established adequate loan origination procedures and consistently applied them to determine whether loan applicants comply with the Direct Endorsement (DE) program's statutory, regulatory, and eligibility requirements and have any outstanding delinquent federal debt; and (2) whether HUD's Management and Marketing (M&M) contractors were adequately documenting the actions taken to preserve, protect, and maintain HUD's foreclosed properties.

GAO noted that: (1) HUD had established adequate policies and procedures for its DE lenders to follow when making loan eligibility determinations, including procedures to screen loan applicants for outstanding delinquent federal debt; (2) GAO found loan files prepared by the DE lenders to obtain HUD's insurance endorsement consistently contained all the documentation required by HUD to support their eligibility determinations; (3) DE lenders consistently used both the Credit Alert Interactive Voice Response System and private sector credit reports to determine if loan applicants had any outstanding delinquent federal debts; (4) for programs like HUD's Direct Endorsement program, where lenders initiate and approve transactions that are guaranteed by the federal government, effective oversight controls must be in place; (5) in fiscal years 1997 and 1998, auditors of HUD's consolidated financial statements identified and reported weaknesses in its lender oversight program and made recommendations to HUD to improve its lender oversight; (6) one cited weakness was HUD's failure to timely follow up on the results of its post-endorsement reviews that identified risky underwriting practices; (7) HUD officials stated that they have taken actions they believe will address the auditor's concerns; (8) in March 1999, HUD entered into M&M contracts with private sector firms to manage and market its inventory of foreclosed properties; (9) a key requirement of M&M contracts is that firms take appropriate actions to preserve, maintain, and protect HUD's properties until the properties are sold; (10) the contracts require M&M contractors to maintain individual property files that contain evidence of the preservation, maintenance, and protection of the properties; (11) the M&M property files examined lacked adequate documentary evidence that contractors were fulfilling their contractual obligation to HUD; (12) GAO found HUD's oversight process identified M&M contractor documentation issues in a timely manner; and (13) HUD has communicated these identified deficiencies to its M&M contractors, required some contractors to prepare written recovery plans specifying how identified problems will be addressed, and recently terminated its largest M&M contractor due in part to its failure to maintain adequate property files.

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