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Mortgage Counseling Services, Inc., College Park, Georgia, Did Not Follow HUD Requirements in Originating and Closing Loans and Implementing Its Quality Control Program

HUD OIG performed an audit of Mortgage Counseling Services, Inc., a Federal Housing Administration approved non-supervised lender. The review was performed based on the lender’s high default rates. The purpose of the audit was to determine whether the lender followed the U.S. Department of Housing and Urban Development’s (HUD) requirements for (1) borrower eligibility and creditworthiness and property eligibility when underwriting loans and (2) implementing a quality control program. Based on information received during the audit, we expanded our audit objectives to include reviewing the closing process to determine whether Mortgage Counseling Services complied with HUD requirements when closing loans.

Mortgage Counseling Services did not follow HUD requirements when underwriting 8 of 16 FHA loans. HUD insured the eight loans that unnecessarily placed the FHA insurance fund at risk for more than $433,000. Mortgage Counseling Services did not conduct its quality control reviews in a timely manner. In addition, the lender did not report a significant quality control violation to HUD. As a result, Mortgage Counseling Services did not ensure the accuracy, validity, and completeness of its loan originations. Also, Mortgage Counseling Services did not fully comply with HUD requirements in closing two loans. Specifically, the lender misrepresented a HUD-1 settlement statement to HUD. Finally, the lender collected an uncustomary and unreasonable appraisal fee after the loan closed. As a result, HUD could not be assured that loans were properly closed, and the noncompliance could result in an increased risk to the FHA insurance fund.

OIG recommended that the Deputy Assistant Secretary for Single Family Housing require Mortgage Counseling Services to indemnify HUD for the potential loss on the eight loans with material deficiencies, reimburse HUD for overinsuring one loan, and ensure that Mortgage Counseling Services conducts quality control reviews in a timely manner as required by HUD regulations. OIG also recommend that the Deputy Assistant Secretary for Family Housing take appropriate action against Mortgage Counseling Services for its noncompliance in closing two loans.