After targeting two branch offices of Prospect Mortgage for an audit, the HUD Office of Inspector General is urging the Federal Housing Administration to conduct full underwriting reviews to protect the agency from paying potential claims on 166 delinquent FHA-insured loans.
But the Sherman Oaks, Calif.-based lender contends many of the OIG's findings are not violations of FHA requirements, saying the auditors' recommendations are "unwarranted."
Prospect Mortgage has 238 branch offices. OIG auditors targeted a Florida branch with a 21.5% default rate and North Carolina branch with delinquencies of 11.7%.
The auditors reviewed 33 loans and cited 25 for underwriting deficiencies that expose FHA to actual or potential losses of $2.2 million. The OIG is recommending that Prospect Mortgage pay $550,257 for actual or estimated losses on the sale of eight properties. It also wants Prospect to indemnify FHA for potential losses on 17 loans that are three months to 22 months delinquent.
Due to "improper" quality controls at the two branch offices, the OIG said, FHA faces possible losses on another 166 loans that are in default. The auditors recommend that FHA review these loans as they go to claim over the next five years. If the loans don't meet FHA requirements, Prospect should indemnify FHA from losses, the OIG says.
Prospect Mortgage originated nearly 24,800 FHA-insured loans over the past two years and has a 1.5% serious delinquency (90-days or more past due) and claims rate, which is below the average rate for all FHA lenders.
In a comment letter, Prospect Mortgage raised objections to the sample of loans the OIG auditors selected to review. The FHA-approved lender noted that 24 of the loans were manually underwritten and 18 loans were made to African-American borrowers.
"There are broader fair lending implications to the methodology employed to select loans for review by the OIG and to the loans which the OIG indicates that Prospect should not have originated that cannot be ignored," the company says in its comment letter.
