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The Federal Housing Administration should be stricter in policing lenders who fail to submit annual recertification documents required to be an FHA-approved lender, according to a new inspector general report.

Tight credit in the U.S. financial market has sharply boosted the number of lenders in the FHA program, which helps low- and moderate-income families buy homes by insuring the lender against default. To continue in the program, lenders must submit a yearly verification report within 30 days after their fiscal year ends and an annual audited financial statement within 90 days.

But an inspector general found that in 2009, the FHA took a leisurely seven months to send violation notices to some lenders that missed the deadline and during that time the lenders wrote more than 7,000 FHA-insured loans worth almost $1.4 billion. “The noncompliant lenders had higher default and claim rates than the national average,” the watchdog said. “If the division had issued the notices of violation in a timely manner, the noncompliant lenders would have been sanctioned sooner, limiting the exposure of the FHA fund to loans from these risky lenders.”

The FHA said it disagreed with the inspector general’s recommendations and that it preferred to first issue a notice of deficiency giving a late filer an extra 30 days grace period. However, the inspector general said the FHA gave lenders three reminders prior to recertification deadlines, and those who ignored the reminders “are already demonstrating an unwillingness” to comply with FHA regulations.

In April, the Center for Public Integrity reported how the FHA has struggled to stop lenders from slipping risky loans under the agency’s protective umbrella, in part by barring lenders if too many of their borrowers default.

Quick fact: In 2009, a total of 12,232 FHA lenders originated 2 million loans valued at more than $376 billion. That was up from 2006 when 8,401 lenders participated in the FHA program, according to the inspector general’s report.

Other new reports released by the Government Accountability Office (GAO) and departmental and agency Office of Inspectors General (OIG):

  • Pentagon should detail size, severity of aircraft shortfalls as it rolls out costly Joint Strike Fighter (GAO)
  • Forest Service fails to document workers on the job in stimulus-funded project (OIG)
  • Homeland Security has yet to finalize rule using biometrics to monitor departure of certain foreign visitors (GAO)
  • IRS could do more to encourage tax preparers to reduce the $345 billion gap between federal taxes owed and paid (OIG)

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