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The U.S. Department of Housing and Urban Development (HUD) – Office of Inspector General (OIG) reviewed 46 Federal Housing Administration (FHA) loans that Pierce Commercial Bank underwrote as an FHA direct endorsement lender. Pierce was a supervised FHA direct endorsement lender located in Tacoma, WA. This case was referred to us by OIG’s Office of Investigation. Our review objective was to determine whether Pierce underwrote 46 loans in accordance with FHA requirements. Pierce originated 1,912 FHA-insured loans between 2006 and 2009, primarily in Washington State, totaling more than $475.8 million. Of the 145 files obtained, we selected 46 loans with an original mortgage value of more than $11.9 million that included 44 finalized and an additional 2 in-process claims.

Pierce did not properly underwrite at least 25 of the 46 loans reviewed because its underwriters did not follow FHA’s requirements in HUD Handbook 4155.1, REV-5. For these 25 loans, the FHA insurance fund suffered an estimated net loss of more than $3.5 million after reducing the proceeds from property sales from actual claims paid of more than $6.7 million. Pierce was closed November 5, 2010, by the Washington Department of Financial Institutions. On August 5, 2011, the U.S. Attorney for the Western District of Washington indicted former Pierce Commercial Bank employees referred to in this report.

We recommend that HUD’s Departmental Enforcement Center initiate debarment action against the Pierce employees responsible for the material underwriting deficiencies cited in this report.