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We audited SWBC Mortgage Corporation, a Federal Housing Administration (FHA) direct endorsement lender in San Antonio, TX. We selected the lender for audit because as of September 30, 2011, it had 25 seriously delinquent loans. Our objective was to determine whether the lender originated single-family home loans in accordance with U. S. Department of Housing and Urban Development (HUD) and FHA requirements for loans with amortization dates between October 1, 2009, and September 30, 2011.

The lender did not follow HUD-FHA underwriting requirements for 1 and had minor deficiencies in 3 of 10 loans reviewed. These deficiencies occurred because the lender’s internal controls needed improvement. As a result, the lender originated one ineligible loan totaling $176,739 that resulted in an increased risk of loss of at least $115,654 to FHA’s Mutual Mortgage Insurance Fund. Additionally, while the minor deficiencies did not affect loan approval, the lender placed itself at risk of originating additional ineligible loans.

We recommend that the Deputy Assistant Secretary for Single Family Housing require the lender to indemnify HUD for the ineligible FHA loan with an estimated potential loss of more than $115,000 and implement policies and procedures to strengthen its internal controls.