HUD OIG Issues Audit Reports on Loss Mitigation Options for FHA Loans

The HUD Office of Inspector General (OIG) issued two audit reports examining whether servicers of FHA loans provided proper loss mitigation assistance to homeowners after their COVID-19 forbearance ended.

The first audit report broadly examined loan servicers’ compliance with FHA requirements for providing loss mitigation assistance to borrowers exiting COVID-19 forbearance.  The OIG found, based on a statistical sample of FHA-insured loans totaling $41 billion in unpaid principal balance, that servicers did not provide proper loss mitigation to approximately two-thirds of delinquent borrowers after their COVID-19 forbearance ended.  The audit found that servicers: (i) failed to provide the borrowers with the loss mitigation option for which they were eligible, (ii) failed to properly calculate the borrowers’ loss mitigation options, and (iii) provided loss mitigation options that did not result in the borrowers’ loans becoming current.

The OIG made several recommendations to HUD in the first audit report, including, among other things, that HUD:

• engage with the mortgage servicers to determine reasons for noncompliance and develop mitigation plans;
• review the sampled loans for which borrowers did not receive appropriate loss mitigation options to ensure that the borrowers are remedied by their servicers;
• provide additional guidance and training to servicers to address common loss mitigation issues found during the audit; and
• design and implement a data-driven methodology to determine the appropriate mix of origination and servicing lender monitoring and desk reviews.

The second audit report examined a specific servicer’s compliance with the FHA requirements and found that the servicer did not provide proper loss mitigation assistance to 83% of borrowers.  The OIG found that the servicer (i) did not provide the loss mitigation option for which borrowers were eligible, (ii) incorrectly calculated loss mitigation options, (iii) did not reinstate arrearages, and (iv) declined loss mitigation in error.

The OIG report recommended that HUD require the servicer to take multiple remedial actions, including:

• updating and implementing controls to the servicer’s internal system;
• identifying loans with COVID-19 recovery partial claims that were affected by the improper application of partial claim funds;
• identifying FHA borrowers who received a non-HUD-approved loss mitigation option and ensuring that the borrowers receive an updated, approved loss mitigation option; and
• updating its servicing script to include information related to the Homeowner Assistance Fund (HAF) program, identifying borrowers who may benefit from HAF, and conducting outreach to these borrowers.