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We audited loanDepot based on a referral from the U.S. Department of Housing and Urban Development’s (HUD) Quality Assurance Division detailing a separate lender that originated Federal Housing Administration (FHA)-insured loans containing ineligible downpayment assistance gifts.  We selected loanDepot due to its high volume of loans with downpayment assistance funds.  Our objective was to determine whether loanDepot originated FHA loans containing downpayment assistance gift funds and secondary financing in accordance with HUD FHA requirements.

loanDepot’s FHA-insured loans with downpayment assistance gift funds and secondary financing did not always comply with HUD requirements, putting the FHA insurance fund at unnecessary risk, including potential losses of $4.7 million for 53 loans with ineligible assistance and $29.9 million for a projected 339 loans that likely contained ineligible assistance.  Looking forward 1 year, this is equivalent to at least $25.4 million in potential losses for loans that could contain ineligible assistance and have a higher risk of loss in the first year.  Also, loanDepot inappropriately charged borrowers $25,700 in fees that were not customary or reasonable and $46,510 in discount fees that did not represent the purpose of the fee.  The ineligible loans put borrowers at a disadvantage due to higher monthly mortgage payments imposed on them resulting from a premium interest rate.

We recommend that HUD determine legal sufficiency to pursue civil and administrative remedies against loanDepot for incorrectly certifying that mortgages were eligible for FHA mortgage insurance.  We also recommend that HUD require loanDepot to (1) stop originating FHA loans with the ineligible assistance; (2) indemnify HUD for the 53 loans with ineligible assistance; (3) indemnify HUD for loans that likely contain ineligible assistance; (4) reimburse borrowers for $25,700 in fees that were not customary or reasonable and $ 46,510 in discount fees that did not represent the purpose of the fee; (5) reduce the interest rate for borrowers who received ineligible assistance; (6) reimburse borrowers for overpaid interest as a result of the premium interest rate; and (7) update all internal control checklists to include specific HUD requirements on gifts, secondary financing, premium rates, and allowable fees.