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We audited loanDepot, LLC, 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.  The focus on loans with Golden State Finance Authority (Golden State) gifts was a result of a separate audit (2015-LA-1009) on loanDepot’s use of downpayment assistance.  Our objective was to determine whether loanDepot originated FHA loans containing Golden State downpayment assistance grants in accordance with HUD FHA requirements.

loanDepot’s FHA-insured loans with Golden State downpayment assistance gifts did not always comply with HUD requirements, putting the FHA insurance fund at unnecessary risk, including potential losses of $5.5 million for 62 loans with ineligible gifts and $16.1 million for 178 loans that likely contained ineligible gifts.  Looking forward 1 year, this is equivalent to at least $16 million in potential losses for loans that would contain ineligible gifts and have a higher risk of loss in the first year.  Also, loanDepot inappropriately charged borrowers $13,726 in fees that were not customary or reasonable.  This condition occurred because loanDepot relied on Golden State, accepted the Platinum Downpayment Assistance Program structure, and did not conduct its own due diligence with regard to premium pricing, gifts, and fees.  The ineligible loans put borrowers at a disadvantage due to higher monthly mortgage payments, including the burden of funding the downpayment assistance program through premium interest rates.

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 gifts; (2) indemnify HUD for the 62 loans with ineligible gifts; (3) indemnify HUD for loans that likely contain ineligible gifts from the remaining 233 loans; (4) reimburse borrowers for $13,726 in fees that were not customary or reasonable; (5) reduce the interest rate for borrowers who received ineligible gifts; (6) reimburse borrowers for overpaid interest as a result of the premium interest rate; and (7) update all internal controls to include specific HUD requirements on gifts, premium rates, and allowable fees.