The Department of Housing and Urban Development (HUD) let nearly $2 billion in federally insured loans go to nearly 10,000 borrowers who were barred from such funds, a government watchdog reported Monday.
The loans were distributed in 2016 to 9,507 borrowers who were either delinquent on federal debt or hadn’t paid their child support, according to HUD’s inspector general (IG). The IG reviewed 60 of the nearly 14,000 loans Federal Housing Administration (FHA) closed in 2016 and found more than three-quarters were given to barred borrowers.
“FHA faced a higher risk due to an increased likelihood of default on the ineligible loans,” the report said. The borrowers had a delinquency rate “twice as high as those of the general population.” (RELATED: At Least A Quarter Of Every Tax Dollar For HUD Grants May Be Wasted)
The agency’s guidance prohibits lenders from giving out FHA-insured loans to borrowers with delinquent federal debt, according to the IG report.
The sources lenders used “to identify ineligible borrowers lacked sufficient current information, and FHA did not adequately guide lenders on reviewing child support,” the report said.
HUD requires lenders to check borrowers against an agency database of federal debtors, but the IG found it “was not an adequate source of information on delinquent federal debt,” the report continued.
Meanwhile, the Department of Treasury houses a “Do Not Pay Business Center” used to identify potentially ineligible borrowers, which other agencies can use at no cost. The IG used the center to identify the delinquent borrowers in its report.
“The Do Not Pay databases used for our testing included information on the delinquent federal debt that was missing from” HUD’s database, the report said.
HUD also required lenders to check borrowers’ credit reports.
“Credit reports also were not an adequate source of information on federal debt and delinquent child support,” the report continued.
Debts owed to the Small Business Administration and to the Department of Justice didn’t appear in credit reports, and student loans were only sometimes included, the IG found. The reports did not indicate whether the student loans listed were private or public.
“All of this information was included in the Do Not Pay databases for the loans tested,” the report said.
The IG recommended FHA include the Do Not Pay database during the underwriting process.