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We audited Towne Mortgage Company, a Federal Housing Administration (FHA) nonsupervised lender, as part of the activities in our fiscal year 2018 annual audit plan.  We selected Towne Mortgage based on our analysis of risk factors for single-family servicing lenders in Region 5’s jurisdiction.[1]  Our audit objective was to determine whether Towne Mortgage properly implemented its Loss Mitigation program for FHA-insured loans in accordance with the U.S. Department of Housing and Urban Development’s (HUD) requirements.

Towne Mortgage generally implemented its Loss Mitigation program for FHA-insured loans in accordance with HUD’s requirements for the 18 loans reviewed.  However, it did not always accurately report borrowers’ delinquent or default status to HUD.  This condition occurred because Towne Mortgage lacked adequate procedures and controls regarding its default reporting for FHA-insured loans.  As a result, HUD did not have complete and accurate information to properly assess the performance of the FHA-insured loans and effectively monitor Towne Mortgage’s loss mitigation efforts.

We recommend that the Deputy Assistant Secretary for Single Family Housing require Towne Mortgage to (1) implement adequate procedures and controls to ensure that borrowers’ delinquent and default information is accurately reported in accordance with HUD’s requirements, (2) provide verification to HUD that it has taken the appropriate action to correct its delinquent or default status code reporting for the borrowers affected as a result of its system change, and (3) ensure that the staff responsible for making entries into its servicing system is properly trained and understands HUD’s reporting requirements.