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HUD OIG audited Universal American Mortgage, Co. LLC, located in Miami, FL, in accordance with our annual audit plan. Universal was selected for review because its default rate of 3.8 percent was higher than the Miami area default rate of 1.9 percent. Our objectives were to determine whether the lender followed U.S. Department of Housing and Urban Development (HUD) requirements when originating and underwriting loans and implementing its quality control program. In addition, we wanted to determine whether the loans reviewed contained improper restrictive covenants.

Universal did not follow HUD requirements when it originated and underwrote three of the six loans reviewed. Specifically, it used inaccurate and unsupported income, credit, and asset information to qualify borrowers for three Federal Housing Administration (FHA) loans. This condition occurred because the lender did not exercise due care when it underwrote the loans. As a result, Universal increased the risk to the FHA insurance fund by $442,703.

In addition, the lender did not fully comply with HUD requirements when implementing its quality control program. It did not (1) meet the requirements for credit reverification and (2) report a deficiency found in its quality control review. This condition occurred because Universal did not follow its controls to ensure compliance with HUD requirements. As a result, it increased the risk to the insurance fund because it did not have assurance regarding the accuracy, validity, and completeness of its loan origination and underwriting operations. We did not find any improper restrictive covenants placed on the properties reviewed.

We recommend that the Deputy Assistant Secretary for Single Family Housing require the lender to (1) indemnify HUD for the three ineligible FHA-insured loans with an estimated potential loss of $442,703, (2) reimburse the unallowable tax service fee charged to three borrowers, and (3) fully implement its quality control plan and follow up in 9 months to ensure that its quality control reviews are conducted in accordance with HUD regulations.