The U.S. Department of Housing and Urban Development (HUD) may pursue fraud charges based on new findings by the agency's watchdog that Countrywide Bank FSB underwriters employed weak due diligence.
A recent audit report from HUD's Office of the Inspector General (OIG) found that seven of 14 randomly selected Countrywide loan files contained material underwriting deficiencies. The OIG audited Countrywide, a Bank of America unit, based on its default-to-claim rate of 6.75% for Federal Housing Administration loans in the Midwest region between 2008 and 2010.
According to the report, the underwriting deficiencies led to HUD paying out more than $1 million in claims and incurring actual losses of more than $720,000. The losses were tied to the sale of properties associated with the seven deficient loans.
‘For these seven loans, Countrywide did not properly verify, analyze or support borrowers' employment and income, source of funds to close, liabilities and credit information," the report says.
The report also finds that Countrywide did not comply with HUD's quality-control standards and that the company failed to review early-payment defaults in accordance with the agency's guidelines.
In the report's conclusion, regional HUD auditor Kelly Anderson recommends that HUD's general counsel for program enforcement pursue Countrywide and/or its principals for incorrectly certifying to the integrity of loan data or due diligence processes. The agency could pursue remedy under the Program Fraud Civil Remedies Act, the report notes.
Anderson also recommends that Bank of America reimburse HUD for the more than $720,000 in losses, reimburse HUD for $3,000 in borrower fees or prove that the fees were reasonable and customary, implement a quality-control plan that complies with HUD's rules, and perform a complete review of early-payment default loans.
In a formal response tacked on to the report, Bank of America Senior Vice President Linda Jacopetti called the Countrywide loan files "well documented’ and said the underwriting decisions were supported.
‘The OIG's suggestions that, based on its disagreement with underwriting determinations in a handful of cases reviewed long after the files were closed, Countrywide underwriters failed to exercise due diligence in underwriting the loans is inflammatory and gratuitous," Jacopetti wrote.