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The U.S. Department of Housing and Urban Development (HUD), Office of Inspector General, audited James B. Nutter & Company, a Federal Housing Administration (FHA) lender located in Kansas City, MO.  We selected James B. Nutter based on data analysis showing that the servicer might be completing foreclosures faster than the industry standard, which would suggest that it might not be fully using HUD’s loss mitigation tools.  Our audit objective was to determine whether James B. Nutter complied with HUD’s Loss Mitigation program requirements.               

James B. Nutter did not always comply with HUD’s Loss Mitigation program requirements.  Specifically, it did not always (1) properly evaluate loans for loss mitigation, (2) properly determine the borrower’s ability to support the mortgage payment, (3) calculate the borrower’s cash reserve contributions for loans approved for standard preforeclosure sale, and (4) start foreclosure in accordance with HUD requirements.  We found significant deficiencies in 11 of 25 (44 percent) FHA loan files reviewed.  These deficiencies occurred because James B. Nutter’s loss mitigation policy (1) did not implement all of HUD’s requirements and (2) lacked detailed operating procedures that included steps for implementation, such as detailed checklists.  As a result, HUD incurred losses of $287,922, and the FHA Mutual Mortgage Insurance Fund faced an increased risk of $289,960.

We recommend that HUD’s Deputy Assistant Secretary for Single Family Housing require James B. Nutter to (1) reimburse HUD $287,922 for the loss incurred on five loans that did not receive active and proper loss mitigation or were improperly denied loss mitigation; (2) indemnify HUD for six loans that were not properly evaluated for loss mitigation, with a potential loss of $289,960; (3) update its policies and procedures for loss mitigation to include requirements found in HUD’s mortgagee letters; (4) update its procedures to implement checklists to ensure that it considers all loss mitigation options before starting foreclosure and follows all HUD requirements for those options; and (5) provide training to loss mitigation staff on the new policies and procedures.  We also recommend that HUD’s Deputy Assistant Secretary for Single Family Housing determine the loss for four FHA loans that went to claim after our review and seek reimbursement for the loss from J.B. Nutter.