HUD watchdog: oversight of temporary COVID-19 forbearances is lacking

An audit found that the temporary policy for endorsement of loans with COVID-19 forbearance activity featured loans that were not compliant with the policy itself

The watchdog for the U.S. Department of Housing and Urban Development (HUD) says an audit discovered that the temporary policy for endorsement of loans with COVID-19 forbearance activity had multiple compliance issues.

The Office of Inspector General for HUD said the department should improve two major areas –  ensuring lenders follow the outlined policy, and improving its records regarding indemnification agreements, according to a report released on Monday.

“We audited the [HUD] temporary policy for endorsement of loans with COVID-19 forbearance activity because an analysis of data in HUD’s systems showed that there may have been loans that did not comply with the policy’s requirements,” the HUD OIG said in its announcement of the report. “The policy was one aspect of HUD’s broader emergency response to COVID-19, which also included an eviction moratorium and loan forbearance for borrowers experiencing financial hardship.”

The audit set out to determine whether HUD’s temporary endorsement policy for COVID-19 forbearances was properly followed by lenders, whether or not HUD monitored and enforced indemnification agreements for loans that were subject to it, and HUD’s reasons for ending the policy during the pandemic, “and its plans to evaluate and use such policies in the future,” the OIG said.

The report said that HUD did not properly ensure compliance with the policy by lenders. It also found that the Department did not ensure that “indemnification agreement data and records related to the policy were complete and accurate,” which the OIG attributes to a lack of necessary updates for its oversight strategy to “specifically cover the policy and reconcile relevant data and records,” the OIG explained.

This led the Federal Housing Administration (FHA)’s insurance fund to be “exposed to greater risk from at least $83 million in loans for which lenders did not follow requirements,” the OIG said. HUD’s ability to monitor and enforce indemnification agreements “could be compromised” until it makes necessary corrections and updates its records, the findings read.

Limited use of the policy ultimately led to its discontinuation, but HUD did not put plans in place to evaluate a potential future need should another recognized disaster require it.

“As a result, HUD did not know whether using a similar policy during future disasters and emergencies or permanently could manage risk to the insurance fund while increasing lender participation,” the OIG said.

To address these identified issues, the OIG made six recommendations. The first is to require lenders to execute five-year indemnification agreements for loans found to be missing required agreements; the second is to “request and analyze data from lenders for loans at risk of noncompliance to identify loans that should have been subject to the policy,” OIG said.

Other recommendations include more adequate recording of indemnification agreements; better review processes regarding indemnification data on applicable loans; updating incorrect or incomplete indemnification agreements; and to provide more consideration on how such a policy could be used in the future.

In a comment response posted in the report, FHA Associate Deputy Assistant Secretary for the Office of Single-Family Housing Julie Shaffer said the audit is missing some key contextual information.

“While we acknowledge opportunities for improvement in the delivery of FHA programs, we believe the draft report does not fully capture the unprecedented nature and complexity of the circumstances that preceded this temporary COVID-19 policy,” Shaffer said.

She goes on to say that pending a review of the loan samples used to conduct the audit, review of the available data shows “consistency with FHA’s performance in facilitating successful outcomes for borrowers during the COVID-19 National Emergency while maintaining the historically strong capital position of the Mutual Mortgage Insurance Fund.”

Still, HUD agreed to propose a management decision in response to the report’s recommendations that will include action plans and target dates.

“We look forward to working with HUD during the audit resolution process,” the OIG said.

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