FHFA Office of Inspector General Condemns Industry Quality Control

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The Enterprises’ pre-foreclosure property inspection processes need improvement to ensure that their programs’ objectives are achieved in the most effective manner. While the Enterprises paid in excess of $91.2 million for pre-foreclosure property inspections during 2011 and 2012, there is limited assurance that either Enterprise had effective controls in place to ensure the quality of inspections conducted or that inspectors submitted reports consistent with the existing requirements. Specifically, OIG found that:

 Property inspection reports contain inaccurate information which conflicts with corresponding photographs;

 Property inspection reports include missing, manipulated, and blurry photographs;

 Property inspectors conduct inspections outside of gated communities instead of waiting to obtain access to restricted properties;

 Servicers neither consistently conduct oversight procedures to evaluate vendors’ property inspection performance, nor validate inspection reports to ensure the information is accurate, complete, and consistent;

 Property inspection reports do not include the names or signatures of those who conducted the inspections; and

 Servicers inconsistently adopted requirements for inspectors to complete and pass criminal background checks.

The Enterprises do not have quality controls in place to obtain reasonable assurance that pre-foreclosure property inspection information is accurate, consistent, and complete. OIG identified several examples demonstrating that servicers do not maintain consistent oversight over their vendors. The lack of quality controls diminishes the inspection report’s integrity and casts doubt on whether these inspections are working and necessary. Further, the minimum attention to and oversight of pre-foreclosure property inspections poses a control weakness that vendors may be able to exploit with manipulated or fraudulent inspection reports.

Recently, both Enterprises revised their servicing policies and removed previous limits placed on claims reimbursed to servicers for property inspections. By removing these limits, the Enterprises may experience a significant increase in their property inspection expense. As a result, they may also face greater risk from reimbursing servicers for inadequate inspection reports.

 

OIG recommends that FHFA direct the Enterprises to:

(1) Jointly assess the effectiveness of their pre-foreclosure property inspection processes. OIG identified several specific areas to review as part of the assessment, including: (a) identifying pre-foreclosure property inspection risk and objectives; (b) identifying cost effective control alternatives for achieving the objective(s); and (c) recommending inspection standards and quality controls with regard to the content and frequency of inspections. 

Based on this assessment, FHFA should direct the Enterprises to: 

(2) Establish uniform pre-foreclosure inspection quality standards and quality control processes for inspectors. 

 Download the full report here

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