HUD Fails to Adequately Oversee FHA-Insured Loans Originated with Borrower-Financed Downpayment Assistance
On March 3, 2017, the Office of the Inspector General (OIG) for the U.S. Department of Housing and Urban Development (HUD) published an audit report of its findings regarding whether HUD had adequate controls in place to ensure that FHA-insured loans originated with borrower-financed downpayment assistance complied with HUD requirements. The audit report concluded that HUD failed to adequately ensure compliance with HUD requirements for more than $16.1 billion in FHA loans that may have been originated with such assistance, and that such failure put borrowers and the FHA Mortgage Insurance Fund at unnecessary risk.
Specifically, the audit report states that government entities, including state housing finance agencies, are a significant source of such downpayment assistance, and that lenders engaging in such programs must ensure that they are operating in compliance with HUD requirements. In this regard, the audit report found that the lenders audited in connection with the report failed to comply with HUD requirements by improperly requiring borrowers receiving downpayment assistance to obtain premium interest rates, resulting in the repayment of the assistance through higher mortgage payments and fees. In other words, this downpayment assistance essentially forced the borrower to finance his or her own downpayment, instead of receiving assistance in the form of a true gift. According to the audit report, this occurred, notwithstanding concerns raised by the OIG, due to HUD’s lack of proper oversight of these loans. Moreover, the audit report found that HUD’s requirements appeared to have enabled the growth of these downpayment assistance programs.
As a result of the audit report, the OIG recommended that HUD: (1) reconsider its position on questioned borrower-financed downpayment assistance programs; (2) develop and implement policies and procedures to review loans with downpayment assistance; (3) develop requirements for lenders to review downpayment assistance programs; (4) require lenders to obtain a borrower certification that details borrower participation; (5) ensure that lenders enter all downpayment assistance data into FHA Connection; and (6) implement data fields where lenders would be required to enter specific downpayment assistance information.
A copy of the audit report is available here: https://www.hudoig.gov/sites/default/files/documents/2017-LA-0003.pdf.
