The Title I property improvement program was established by the National Housing Act (12 U.S.C. 1703) to encourage lending institutions to finance property improvement projects that would preserve the nation’s existing housing stock. Under the program, FHA insures 90 percent of a lender’s claimable loss on an individual defaulted loan. The total amount of claims that can be paid to a lender is limited to 10 percent of the value of the total program loans held by each lender. Today, the value of Title I’s outstanding loans is relatively small compared with other FHA housing insurance programs. As of September 30, 1997, the value of loans outstanding on the property improvement program totaled about $4.4 billion on 364,423 loans. By contrast, the value of outstanding FHA single-family loans in its Mutual Mortgage Insurance Fund totaled about $360 billion. Similarly, Title I’s share of the owner-occupied, single-family remodeling market is small—estimated by the National Association of Home Builders to be about 1 percent in fiscal year 1997. Approximately 3,700 lenders are approved by FHA to make Title I loans. Lenders are responsible for managing many aspects of the program, including making and servicing loans, monitoring the contractors, and dealing with borrowers’ complaints. In conducting these activities, lenders are responsible for complying with FHA’s underwriting standards and regulations and ensuring that home improvement work is inspected and completed. FHA is responsible for approving lenders, monitoring their operations, and reviewing the claims submitted for defaulted loans. Title I program officials consider lenders to have sole responsibility for program operations and HUD’s role is primarily to oversee lenders and ensure that claims paid on defaulted loans are proper. Homeowners obtain property improvement loans by applying directly to Title I lenders or by having a Title I lender-approved dealer—that is a contractor—prepare a credit application or otherwise assist the homeowner in obtaining the loan from the lender. During fiscal years 1986 through 1996, about 520,000 direct and 383,000 dealer loans were made under the program. By statute, the maximum size of property improvement loans is $25,000 for single-family loans and the maximum loan term is about 20 years. Title I regulations require borrowers to have an income adequate to meet the periodic payments required by a property improvement loan. Most borrowers have low- to moderate incomes, little equity in their homes, and/or poor credit histories. HUD’s expenses under the Title I program, such as claim payments made by FHA on defaulted loans, are financed from three sources of revenue: (1) insurance charges to lenders of 0.5 percent of the original loan amount for each year the loan is outstanding, (2) funds recovered from borrowers who defaulted on loans, and (3) appropriations. In an August 1997 report on the Title I program, Price Waterhouse concluded that the program was underfunded during fiscal years 1990 through 1996. Price Waterhouse estimated that a net funding deficit of about $150 million occurred during the period, with a net funding deficit in 1996 of $11 million. Data from the Price Waterhouse report on estimated projected termination rates for program loans made in fiscal year 1996 can be used to calculate an estimated cumulative claim rate of about 10 percent over the life of Title I loans insured by FHA in that fiscal year. When FHA-approved Title I lenders make program loans, they collect information on borrowers, such as age, income, and gender; the property, such as its address; and loan terms, such as interest rate. While lenders are required to report much of this information to their respective regulatory agencies by the Home Mortgage Disclosure Act, HUD collects little of this information when Title I loans are made. Using information that it requires lenders to provide, HUD records the lender’s and borrower’s names, state and county, as well as the size, term, and purpose of the loan. Other information collected by HUD on other single-family loan insurance programs, such as the borrower’s address, Social Security number, income, and debt are not collected by HUD when Title I loans are made. HUD does collect all of the information available on borrowers, property, and loans when Title I loans default and lenders submit claims. Title I officials told us they collected little information when loans were made because they consider the program to be lender-operated. As a result, HUD cannot identify the characteristics of borrowers and neighborhoods served by the program, nor can it identify certain potential abuses of the program. For example, HUD does not collect borrowers’ Social Security numbers and property addresses when loans are made. Therefore, HUD would have difficulty determining if some borrowers are obtaining multiple Title I loans or if some borrowers are exceeding the maximum amount of Title I loans per property when loans are made. HUD regulations limit the total amount of indebtedness on Title I loans to $25,000 for each single-family property. In this regard, our examination of HUD’s Title I claims data found a number of instances in which the same Social Security number was used for multiple claims. As discussed previously, claims on about 10 percent of the program’s loans can be expected over the life of program loans. Our examination of 16,556 claims paid by HUD between January 1994 and August 1997 revealed 247 instances in which the same Social Security number appeared on multiple claims. These cases totaled about $5.2 million in paid claims. In several instances, claims were paid on as many as five loans having the same Social Security number during the 3-1/2-year period. Our Office of Special Investigations, together with HUD’s Office of the Inspector General, is inquiring further into the circumstances surrounding these loans. However, because these loans may have been for multiple properties, or multiple loans on the same property that totaled less than $25,000, they may not have violated program regulations. Allowing individual borrowers to accumulate large amounts of Title I HUD insured debt, however, exposes HUD to large losses in the case of financial stress on the part of such heavily indebted borrowers. In addition, while information available to HUD allows identification of potential abuses of the $25,000 indebtedness limit after loans have defaulted, control over the indebtedness limitation is not possible for 90 percent of the program’s loans made that do not default because borrowers’ Social Security numbers and property addresses are not collected when the loans are made. While HUD collects more extensive information on program loans when they default, we found problems with the accuracy of some of the information recorded in its claims database. Our random sample of 53 loans on which a claim had been denied and subsequently paid by HUD, found that 7 loans, or 13 percent, had been miscoded as dealer loans when they were direct loans, or direct loans when they were dealer loans. This is important because HUD recently cited high default rates on dealer loans, among other reasons, for proposing regulations to eliminate the dealer loan portion of the program. Considering the miscoding on identifying loans as dealer or direct, we question HUD’s ability to identify default experience by loan type. In addition, HUD’s information on claims denied and subsequently approved was problematic. Although HUD can deny claims for property improvement loans for a number of reasons, HUD did not have a system in place to provide information on why claims are denied or approved for payment following a denial. HUD could not provide us with information on how many claims it denied because of poor underwriting or other program abuses or which lenders had a higher-than-average number of claims denied for specific program violations. In addition, we were unable to determine from HUD’s data system why a denied claim was subsequently paid following an appeal by the lender or waiver by HUD. Such information is important in determining how well lenders are complying with program regulations, whether internal controls need to be strengthened, and which lenders should be targeted for review by HUD’s Office of Quality Assurance. We also found that files for claims that were initially denied by HUD and subsequently paid frequently did not contain the names of program officials who decided the denied claims should be paid and the reasons for their decisions. Of the 53 randomly selected loan claim files we examined, 50 contained no evidence of further review by a HUD official following the initial denial or provided any basis for eventually paying the claim. Unless information on who makes decisions to deny claims and the reasons for the denial and subsequent payments are documented, HUD has no basis for reviewing the reasonableness of those decisions. HUD recently made changes to its claims database system to identify the reasons claims are denied. Program officials agreed that such information is important in determining how well program regulations are being complied with and in targeting lenders for quality assurance reviews. Claims examiners are now required to identify their reasons for denial, including the section of the regulation that was violated. However, the change does not address the problem of missing documentation in the claims file explaining the reasons for paying claims that were previously denied. HUD’s monitoring reviews of Title I lenders to identify compliance problems have declined substantially in recent years. Between fiscal years 1995 and 1997, HUD performed 33 Title I on-site quality assurance reviews of lenders. Most of these reviews (26) were performed in fiscal year 1995. During fiscal years 1996 and 1997, HUD performed five and two on-site lender reviews, respectively. According to HUD officials, prior to fiscal year 1997, HUD had a staff of 23 individuals to monitor the 3,700 lenders approved by FHA to make Title I loans and about 8,000 other FHA approved lenders making loans on other FHA insurance programs. Because of this limited monitoring resource, HUD decided to focus its lender monitoring on major high volume FHA programs, according to these HUD officials.