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We conducted a review of Federal Housing Administration (FHA) loans underwritten by Sterling National Mortgage Company, Inc. (Sterling), an FHA direct endorsement lender. The review was conducted as part of the Office of Inspector General’s (OIG) Operation Watchdog initiative to review the underwriting of 15 direct endorsement lenders at the suggestion of the FHA Commissioner. The Commissioner expressed concern regarding the increasing claim rates against the FHA insurance fund for failed loans. The objective of the review was to determine whether Sterling underwrote 20 loans in accordance with U.S. Department of Housing and Urban Development (HUD)/FHA requirements. Sterling officials did not underwrite 6 of the 20 loans reviewed in accordance with HUD/FHA regulations. As a result, the FHA insurance fund suffered actual losses of more than $429,703 on five loans and faces a potential loss of $79,120 on one loan for total losses of more than $508,823.

We recommend that HUD’s Associate General Counsel for Program Enforcement determine legal sufficiency and if legally sufficient, pursue remedies under the Program Fraud Civil Remedies Act and/or civil money penalties against Sterling and/or its principals for incorrectly certifying to the integrity of the data or that due diligence was exercised during the underwriting of six loans that resulted in actual losses of $429,703 on five properties and a potential loss of $79,120 on one property for a total loss of $508,823. We also recommend that HUD’s Deputy Assistant Secretary for Single Family take appropriate administrative action against Sterling and/or its principals for the material underwriting deficiencies cited in this report once the affirmative civil enforcement action is completed.