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We completed a corrective action verification (CAV) of recommendations 1A and 1C from prior OIG audit report 2015-LA-0001 (issued April 20, 2015).  The CAV was initiated based on preliminary analysis, which identified potential ineligible partial claims.  The prior audit determined that the Federal Housing Administration’s (FHA) claim payment system failed to identify two types of ineligible partial claims.  As part of its response to the audit report, HUD’s Office of Finance and Budget agreed to implement new system controls to prevent the problems from recurring.  The CAV objectives were to determine (1) whether HUD implemented adequate corrective actions in response to recommendations 1A and 1C of audit report 2015-LA-0001 and (2) the number and amount of previously unidentified FHA loan modification claims or partial claims that were ineligible due to a prior loss mitigation claim for the same loan within 24 months or a duplicate claim.

HUD implemented the agreed-upon corrective actions in response to the prior OIG audit recommendation 1A, yet further action is needed to improve Claims Subsystem controls and to address ineligible claims that were already paid.  HUD’s revised controls did not work in limited circumstances, and as a result, HUD paid 12 unsupported claims for amounts totaling $199,724, which appeared to have been ineligible based on a reported prior claim within 24 months.  Additionally, after the prior OIG audit testing period ended and before HUD implemented the related corrective action, lenders submitted 810 unsupported claims for amounts totaling $4.9 million, which appeared to have been ineligible due to a second reported claim within 24 months.  For recommendation 1C, HUD did not implement adequate corrective actions to detect and prevent payment of duplicate claims.  HUD attempted to implement enhanced Claims Subsystem controls to prevent duplicate payments in response to audit recommendation 1C but later reversed the changes because the new controls did not function as intended and blocked claim payments unnecessarily.  Ultimately, HUD did not implement a permanent corrective action to address the recommendation, and as a result, it paid 28 unsupported claims for amounts totaling $333,178 that were potentially ineligible duplicates based on matching partial claim note amounts.

Based on the cited deficiencies, we will reopen recommendation 1C from OIG audit 2015-LA-0001 until corrective action is fully developed and implemented.  In addition, we recommend that the Deputy Assistant Secretary for Finance and Budget (1) provide support of eligibility or require lender repayment of $5,115,079 for the 822 identified claims with a reported partial claim or loan modification within the prior 24 months, (2) further revise and implement Single Family Insurance System – Claims Subsystem controls to address deficiencies that allowed payment for a limited number of claims that were ineligible due to prior loan modification or FHA-HAMP option within 24 months, (3) provide support of eligibility or require repayment of $333,178 for the 28 identified potential duplicate claims with reported matching partial claim note amounts and take appropriate action as necessary to ensure that related partial claim note amounts are correctly reflected within HUD’s Single Family Mortgage Asset Recovery Technology system for loan-servicing purposes.