We audited NFM, Inc. (NFM), a nonsupervised lender approved to originate Federal Housing Administration (FHA) single-family mortgage loans. We selected NFM based on significant risk indicators, which included a high percentage of loans with front- and/or and back-end ratios in excess of U.S. Department of Housing and Urban Development (HUD) requirements and loans defaulting within six or fewer payments. Our objective was to determine whether NFM complied with HUD requirements in the origination and quality control review of FHA loans.
NFM generally complied with HUD requirements in the origination of FHA loans. We reviewed cash assets used to meet the minimum required investment, employment and income records, liabilities, and credit characteristics for a sample of six loans and found no significant discrepancies. However, we found that NFM did not implement certain aspects of its quality control plan in accordance with HUD requirements. It did not perform routine quality control reviews within the timeframe required by HUD. It also did not review all loans that defaulted within the first six payments in a reasonably timely manner. These conditions occurred because NFM did not emphasize HUD requirements and did not fully implement its quality control plan. Consequently, the effectiveness of the plan, which was designed to ensure accuracy, validity, and completeness in its loan underwriting process, was lessened.
We recommend that HUD’s Deputy Assistant Secretary for Single Family Housing direct NFM to fully implement its quality control functions as required and follow up in 9 months to ensure the lender’s compliance.