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We audited Eustis Mortgage Corporation, a Federal Housing Administration (FHA) direct endorsement lender located in New Orleans, LA. We selected Eustis Mortgage as a result of our regional risk analysis and the U.S. Department of Housing and Urban Development’s (HUD), Office of Inspector General’s (OIG) annual audit plan goal to review single-family programs and lenders. Our objective was to determine whether Eustis Mortgage (1) complied with HUD regulations, procedures, and instructions when originating and underwriting its FHA-insured single-family mortgages and (2) had implemented a quality control program that met HUD requirements.

Eustis Mortgage did not underwrite 4 of 18 defaulted FHA-insured loans in accordance with HUD requirements. These conditions occurred because Eustis Mortgage’s staff was not always aware of the applicable HUD underwriting requirements. As a result, these loans exposed HUD to unnecessary insurance risks totaling more than $270,000.

Further, Eustis Mortgage’s quality control program did not fully comply with HUD requirements. These conditions occurred because Eustis Mortgage did not (1) have adequate basic controls over its quality control program and (2) fully understand all of HUD’s requirements. As a result, it increased the risk to the FHA insurance fund because it could not always ensure compliance with FHA’s and its own origination requirements; guard against errors, omissions, and fraud; and ensure swift and appropriate corrective action.

We recommend that the Deputy Assistant Secretary for Single Family Housing require Eustis Mortgage to (1) indemnify four loans with unpaid principal balances of $490,274, thereby putting an estimated $279,456 to better use; (2) implement a quality control plan that complies with HUD requirements; and (3) provide training to its staff and contractors concerning HUD underwriting and quality control requirements.