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The U.S. Department of Housing and Urban Development's Office of Inspector General (OIG) reviewed 15 Federal Housing Administration (FHA) loans that D & R Mortgage Corporation (D & R) underwrote as an FHA direct endorsement lender. Our review objective was to determine whether D & R underwrote the 15 loans in accordance with FHA requirements. This review is part of Operation Watchdog, an OIG 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. D & R did not properly underwrite 9 of the 15 loans reviewed because its underwriters did not follow FHA’s requirements. As a result, FHA’s insurance fund suffered actual losses of more than $936,000 on the 9 loans. D & R’s direct endorsement underwriters incorrectly certified that due diligence was used in underwriting the nine loans.

We recommend that HUD’s Associate General Counsel for Program Enforcement determine legal sufficiency and if legally sufficient, pursue remedies under the Program Civil Remedies Act against D & R and/or its principals for incorrectly certifying to the integrity of the data or that due diligence was exercised during the underwriting of 9 loans that resulted in losses to HUD totaling $936,572, which could result in affirmative civil enforcement action of approximately $1,940,644. We also recommend that HUD’s Deputy Assistant Secretary for Single Family take appropriate administrative action against D & R and/or its principals for the material underwriting deficiencies cited in this report once the affirmative civil enforcement action cited in recommendation 1A is completed.