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We completed a review of First Niagara Bank’s servicing of Federal Housing Administration (FHA)-insured mortgages and its implementation of the U.S. Department of Housing and Urban Development’s (HUD) Loss Mitigation program.  We selected First Niagara Bank based on an Office of Inspector General risk assessment of single-family lenders.  The objective of the audit was to determine whether First Niagara Bank properly serviced FHA-insured mortgages; specifically, whether it (1) properly implemented HUD’s Loss Mitigation program, (2) provided the proper reporting for the FHA-insured mortgages it serviced, and (3) established and implemented an effective quality control program.

There were 10 loans with a total of more than $1.65 million in unpaid principal balance, for which HUD needed to determine whether the servicing practices were adequate.  First Niagara Bank did not always properly implement applicable procedures and requirements in servicing FHA-insured mortgages.  Specifically, they did not (1) properly implement HUD’s Loss Mitigation program, (2) did not accurately report their servicing of FHA-insured mortgages, and (3) did not implement an effective quality control program.  The lack of adequate loss mitigation efforts could affect the borrower’s ability to retain home ownership and have a negative impact on the FHA insurance fund.  If HUD determines that First Niagara Bank did not take the appropriate actions, it could result in an unnecessary loss of home ownership and more than an $825,000 loss to the insurance fund. Furthermore, First Niagara Bank did not accurately report the servicing of their FHA-insured mortgages. 

We recommend that HUD instruct First Niagara Bank to provide support showing that the lender’s servicing practices for identified loans were acceptable for mortgages insured by HUD.  For any loan for which HUD determines that the servicing practices were inadequate, HUD should take the appropriate administrative actions, including indemnifying inadequately serviced loans.  We also recommend that HUD instruct First Niagara Bank to provide evidence that 80 loans were either paid in full or closed; and remove the loans from HUD’s FHA-insured portfolio.  As such, this will result in a $4,201,504 reduction in obligations to the mortgage insurance fund and reinstate the 15 loans totaling $951,723 that were incorrectly terminated from HUD’s FHA-insured portfolio.