HUD I.G.: 'Flood Insurance for Federal Housing Administration Loan Originations'

WASHINGTON, Feb. 26 -- The Department of Housing and Urban Development Inspector General issued the following audit report (No. 2021-KC-0002) on Jan. 5, 2021, entitled "Flood Insurance for Federal Housing Administration Loan Originations":

Here are excerpts:

To: Joseph Gormley, Deputy Assistant Secretary for Single Family Housing, HU

From: Ronald J. Hosking, Regional Inspector General for Audit, 7AGA

Subject: FHA Insured $940 Million in Loans for Properties in Flood Zones Without the Required Flood Insurance

Attached is the U.S. Department of Housing and Urban Development (HUD), Office of Inspector General's (OIG) final results of our review of Federal Housing Administration (FHA)-insured loans to determine whether loans in special flood hazard areas met flood insurance requirements.

HUD Handbook 2000.06, REV-4, sets specific timeframes for management decisions on recommended corrective actions. For each recommendation without a management decision, please respond and provide status reports in accordance with the HUD Handbook. Please furnish us copies of any correspondence or directives issued because of the audit.

The Inspector General Act, Title 5 United States Code, appendix 8M, requires that OIG post its reports on the OIG website. Accordingly, this report will be posted at https://www.hudoig.gov.

If you have any questions or comments about this report, please do not hesitate to call me at 913-551-5870.

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Highlights

What We Audited and Why

We audited Federal Housing Administration (FHA)-insured loans originated in calendar year 2019. We compared location data from FHA-insured loans to National Flood Insurance Program (NFIP) data to identify a targeted universe of properties that we believed were at risk of not having the required flood insurance. We reviewed a statistical sample of these loans. We initiated this audit because a prior Office of Inspector General audit found that FHA did not always ensure that lenders complied with Federal requirements for properties located in special flood hazard areas (SFHA)./1

Increased access to data created an opportunity to perform a more comprehensive review of compliance with FHA's flood insurance requirement. Our audit objective was to determine whether FHA insured loans that were not eligible for insurance because they did not have the required flood insurance coverage.

What We Found

FHA insured at least 3,870 loans that closed in 2019, totaling $940 million, which were not eligible for insurance because they were made for properties in SFHA flood zones without the required NFIP coverage. We found loans that had private flood insurance instead of the required NFIP coverage, NFIP coverage that did not meet the minimum required amount, or no NFIP coverage at the time the loan was closed and endorsed.

What We Recommend

We recommend that FHA require lenders to provide evidence of sufficient flood insurance or execute indemnification agreements for the 43 loans in our statistical sample that did not have sufficient flood insurance at the time of our audit. We also recommend that FHA add to HUD databases the information necessary to ensure that the required flood insurance is in place at loan origination, including flood zone, flood insurance type, flood insurance amount, and site value of the property, and include system checks that prevent endorsement of loans without the required flood insurance.

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Table of Contents

Background and Objective ... 3

Results of Audit ... 5

* Finding: FHA Insured $940 Million in Loans for Properties in SFHA Flood Zones Without the Required Flood Insurance ... 5

Scope and Methodology ... 8

Internal Controls ... 10

Appendixes ... 11

A. Schedule of Funds To Be Put to Better Use ... 11

B. Auditee Comments ... 12

C. Criteria ... 13

D. Exception Summary ... 15

E. Sampling and Projections ... 17

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View full report at https://www.hudoig.gov/sites/default/files/2021-01/2021-KC-0002.pdf