We audited the U.S Department of Housing and Urban Development (HUD) National Servicing Center’s (NSC) tracking and collection of FHA partial claims.  We initiated the audit to assess HUD’s implementation of the corrective actions from HUD OIG audit report 2016-KC-0001, HUD Did Not Collect an Estimated 1,361 Partial Claims Upon Termination of Their Related Federal Housing Administration (FHA)-Insured Mortgages; however, we determined based on a referral from HUD OIG’s Financial Audits Division that there was an issue with the collection of partial claims, and the corrective actions from the prior audit did not fix the condition.  Our objective was to determine whether the NSC serviced all due and payable partial claims in accordance with HUD rules, regulations, policies, and procedures.

We found HUD’s NSC did not service all due and payable partial claims in accordance with HUD rules, regulations, policies, and procedures.  Specifically, we identified that 74 of 81 statistically sampled FHA loan files involved servicing or collection discrepancies including missing loan documents, demand letters not being sent, and untimely delivery and upload of loan documents.  These conditions occurred because of an increased volume of partial claims and inadequate oversight of the Loan Servicing Contractor (LSC), including a lack of well-defined partial claims tracking and collection performance requirements in the LSC contract.  Further, the NSC relied on manual processes to handle the execution, servicing, and termination of partial claims.  As a result, there is an increased risk that FHA will not collect the debts, ultimately impacting the FHA insurance fund.