HUD's watchdog takes issue with its retired COVID-19 policy

Department of Housing and Urban Development
Washington, DC - July 26, 2021: Exterior of the Department of Housing and Urban Development building located in downtown Washington, DC

The Department of Housing and Urban Development's temporary policy for endorsing loans with COVID-19 forbearance was "unclear" and exposed the Federal Housing Administration's insurance fund to risk, an audit by a government watchdog found.

Per a report published by HUD's Office of Inspector General, at least $83 million worth of loans were insured by the FHA, a part of HUD, without lenders following the necessary protocols.

The policy, put in place June 15, 2020, gave lenders the ability to insure loans that went delinquent due to COVID-19, thereby continuing the flow of capital in the system. The policy has since been retired by the department, but HUD's watchdog claims that there are lessons to be learned and potential issues from the policy still looming.

The HUD OIG's audit, which covered the time period spanning June 15, 2020 through Oct. 5, 2020, found that lenders did not always execute partial indemnification agreements when required, nor did they use accurate status codes when submitting loans for endorsement. 

Additionally, some of the loans submitted for endorsement under the policy were not always eligible. Nor did HUD ensure that said data and records were complete and accurate, which could compromise the monitoring of these indemnification agreements in the future.

HUD did not immediately respond to a request for comment.

Out of 170 loans reviewed by the OIG, 28 had "compliance issues that increased the risk to [FHA's] insurance fund, including loans that were submitted for endorsement without the required partial indemnification agreement or were otherwise ineligible for insurance."

Deficiencies went undetected because of unclear guidance and because the department did not update its normal oversight strategy to specifically cover the policy and reconcile relevant data and records, the report said.

Though the policy was underused, with fewer than 3% of FHA-approved lenders requesting the endorsement of delinquent loans, the inspector suggested that the department should evaluate the policy to find out why so little lenders opted in and whether using a similar policy during future disasters could manage risk to the insurance fund while increasing lender participation.  

Another report by a Congressional watchdog pointed to outstanding technology-related issues at the department.

The Government Accountability Office flagged HUD's management of its IT infrastructure and cybersecurity protocols as needing attention. Recommendations regarding both topics are iterations from previous reports that have not been fully implemented by the department.

In its report published in mid-May, GAO notes "shortcomings" in HUD's IT management capabilities and limitations in the systems supporting the department's mission.

The Congressional watchdog points to suggestions it made a decade ago when it urged the department to develop a process to help the agency identify IT governance actions and projects that achieve cost savings and efficiencies.

At the time, GAO called on HUD to organize this process in such a way that the selection decision would be made by senior management and governance boards and the decision would be supported by  "analysis, consider predefined quantitative measures, and are consistently documented." The agency did just that and in November 2022 the department reported to GAO that its governance boards had begun considering whether IT investments were designed to deliver operational value to programs or the agency as a whole. 

But as of January 2023, the department had "not yet begun tracking expected or actual cost savings or efficiencies for individual investments or from its IT governance processes," according to the report. The watchdog urged HUD to fully implement this recommendation, which would improve HUD's ability to monitor the outcomes of its IT governance activities. 

Another suggestion made by the government agency is for HUD to address cybersecurity challenges by incorporating privacy into an organization-wide risk-management strategy that includes a determination of risk tolerance. Doing so would give HUD greater assurance that can manage privacy risks within acceptable thresholds, GAO's report said. 

Criticisms around how HUD manages its IT systems by the watchdog go back at least 25 years, with a report from 1999 from GAO noting that HUD should "implement defined processes for managing information technology investments and for estimating costs."

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