The U.S. Department of Housing and Urban Development (HUD), Office of Inspector General (OIG) reported that nearly $2 billion of Federal Housing Administration (FHA)-insured loans from 2016 were not eligible for insurance because they were made to borrowers with delinquent federal debt or who were subject to federal administrative offset for delinquent child support.
The OIG found that lenders used faulty sources of information to check databases before making the loans.
“This condition occurred because the sources used by lenders to identify ineligible borrowers lacked sufficient current information and FHA did not adequately guide lenders on reviewing child support,” the report stated. “As a result, the FHA insurance fund faced a higher risk of loss, and the government in general did not realize the benefits of the Debt Collection Improvement Act.”
OIG found that an estimated 9,507 loans worth $1.9 billion were not eligible for insurance. OIG cited the lack of use of the Do Not Pay portal for the problems.
“Our testing verified that the Do Not Pay databases reported delinquent federal debtors and debtors subject to federal offset for delinquent child support not identified using current underwriting methods,” the report stated.
Instead, auditors found that lenders used other methods which did not meet the standards of the Do Not Pay databases, including HUD’s Credit Alert Interactive Voice Response System (CAIVRS) system.
“HUD’s CAIVRS was not an adequate source of information on delinquent federal debt,” the report stated. “HUD developed CAIVRS to identify individuals who were in default or had claims paid on direct or guaranteed federal loans or who were delinquent on other debts owed to federal agencies. FHA required lenders to check each borrower in CAIVRS during the underwriting process. CAIVRS provided the lenders a passing result for our sample items and failed to reveal the existence of the federal debt.
“Some of the passing results can be attributed to a lapse in data-sharing agreements with the U.S. Department of Justice and the Small Business Administration. The Do Not Pay databases used for our testing included information on the delinquent federal debt that was missing from CAIVRS.”
Another source of verification was a credit report, which OIG auditors also found was an inadequate source of information.
“FHA required lenders to verify the validity and delinquency status of any delinquent Federal debts reflected in credit reports. However, for our sample, the delinquent debts owed to the Small Business Administration and U.S. Department of Justice did not appear on the associated credit reports,” the report stated. “The delinquent student loans did not always appear on the credit reports, and those that appeared did not specify whether they were federal or private student loans. While credit reports sometimes listed child support debts, the existence of a federal offset was not included on credit reports.
“All of this information was included in the Do Not Pay databases for the loans tested; however, FHA did not yet have access to the system. FHA’s handbook did not incorporate the federal regulation related to delinquent child support. The FHA Single Family Housing Policy Handbook instructed underwriters to treat child support as a recurring liability and include the monthly obligation in the borrower’s liabilities and debt. However, it did not include instructions to determine whether the child support was delinquent and subject to federal offset.”
As a result, auditors found, FHA increase liability because of the risky loans insured.
“FHA faced a higher risk due to an increased likelihood of default on the ineligible loans. The loans to borrowers in the Do Not Pay database had 2- and 3-month delinquency rates, twice as high as those of the general population. Failing to exclude these ineligible borrowers resulted in increased risk to the FHA fund,” the report stated.
OIG recommended, among other things, that FHA find a way for lenders to use the Do Not Pay portal.
“We recommend that FHA put $1.9 billion to better use by developing a method for using the Do Not Pay portal to identify delinquent child support and delinquent federal debt to prevent future FHA loans to ineligible borrowers,” OIG said in a release accompanying the report. “We also recommend that FHA revise the single-family handbook to comply with the regulation that prevents loans to borrowers with delinquent child support subject to federal offset and schedule the timely renewal of data-sharing agreements to prevent data loss in CAIVRS or discontinue use of CAIVRS if the information duplicates the information available in the Do Not Pay portal.”