Established by the National Housing Act, FHA administers several programs that support multifamily housing for low- and moderate-income families by insuring loans made by private lenders. Specifically, these programs insure mortgage loans for the construction, purchase, substantial rehabilitation, and refinancing of multifamily apartments and health care facilities. FHA insures most of its mortgages for multifamily housing under its General Insurance Fund and Special Risk Insurance Fund. To cover lenders’ losses, FHA collects insurance premiums that borrowers pay to the lenders and deposits the premiums into the funds. In addition, because the funds were not designed to be self sustaining, Congress provides budget authority as part of FHA’s budget each fiscal year to cover anticipated costs—known as “credit subsidy costs”—for some of the multifamily insurance programs. In fiscal year 2001, Congress provided $101 million in credit subsidy budget authority to FHA. When a default occurs on an insured loan, the lender may elect to assign the mortgage to HUD—effectively making the Department the new lender for the mortgage—and file an insurance claim with HUD for the unpaid principal balance of the loan. As a result, the lender is protected from financial losses stemming from a borrower’s default. FHA’s multifamily insurance programs also benefit borrowers by providing favorable financing terms. For example, under one of the programs, nonprofit borrowers can finance up to 100 percent of a project’s replacement costs, and for-profit borrowers can finance up to 90 percent of these costs. As of September 30, 2001, FHA had about 15,000 multifamily mortgages in its insured portfolio, with a total unpaid principal balance of approximately $55 billion. To obtain an FHA-insured loan, a prospective borrower must use a lender approved by HUD’s Lender Approval and Recertification Division, and the HUD-approved lender, in turn, must submit a mortgage insurance application to HUD. HUD’s multifamily housing field offices—comprising 18 “hubs” and their associated 33 program centers—are responsible for processing the applications and approving or rejecting them. Historically, these responsibilities included the bulk of the loan underwriting duties, such as preparation of the property appraisal, mortgage credit analysis, and other loan exhibits. Because this process was often slow and inefficient, in 1994 HUD developed an expedited approach for processing loan insurance applications—known as “fast-track”—that delegated certain underwriting functions to the lenders. About 30 of HUD’s field offices eventually adopted fast-track processing, but, according to HUD, variations existed among the offices regarding the extent of the functions delegated to the lenders and the thoroughness of the offices’ review of loan documents. In order to standardize the responsibilities of both lenders and the field offices, in May 2000, HUD implemented the Multifamily Accelerated Processing (MAP) program for several of its insurance programs, including the most widely used programs. HUD’s objective for the MAP program was to provide a consistent, reliable, and expedited process that would enable FHA to insure more loans while limiting risk to the FHA insurance funds. To accomplish this objective, HUD, among other things, developed a new guidebook for lenders and HUD staff and established set time frames for the mortgage insurance application and review process. In addition, although HUD delegated significant underwriting responsibilities to the lenders, it continued to retain the final underwriting decision authority. Under MAP, a lender’s insurance application goes through a two-stage review process. The first stage, called “pre-application,” focuses on the overall eligibility and feasibility of the property to be insured (for example, whether a sufficient market exists for the property). If an application passes this stage, HUD invites the lender to submit a complete set of underwriting exhibits as part of the second stage, known as “firm commitment.” If the application passes this stage and the borrower agrees to accept the conditions of the FHA mortgage insurance agreement, the loan becomes FHA-insured. Although only about 30 percent of all multifamily loans insured by FHA in fiscal year 2001 were insured through the MAP program, HUD expects that in subsequent years the large majority of its insured multifamily loans will be MAP loans. During fiscal year 2001, HUD insured 212 loans under the MAP program, with a total value of about $1.5 billion. As shown in figure 1, this total was about equally divided between new construction and substantial rehabilitation loans and refinancing and acquisition loans. To mitigate the financial risks of the MAP program, HUD established controls and procedures covering the (1) approval of MAP lenders, (2) review and monitoring of lenders’ underwriting of loans, and (3) sanctioning of poorly performing lenders. Specifically: HUD requires HUD-approved lenders wanting to participate in the MAP program to apply to the Lender Qualifications and Monitoring Division within HUD’s Office of Multifamily Housing. The division is responsible for reviewing documentation submitted by the lender and deciding whether or not the lender meets the MAP program’s qualification standards. In addition, for every mortgage insurance application submitted by a MAP lender, the cognizant HUD multifamily field office is required to review the qualifications of the lender’s staff involved in making the loan. As of March 2002, HUD had approved about 100 lenders to participate in the MAP program. HUD’s multifamily field offices are responsible for conducting and documenting reviews of MAP mortgage insurance applications and associated loan exhibits (for example, appraisal, market study) to ensure lenders’ compliance with HUD’s underwriting requirements. At both stages of the application process, a team of technical specialists, known as a MAP team, with expertise in the areas of architecture, property appraisal, mortgage credit, and building costs reviews the application and its associated underwriting exhibits. The MAP team may require the lender to correct underwriting deficiencies uncovered by the reviews. After each stage of review, the team’s supervisor, called the MAP team leader, is required to provide a recommendation to the field office director on whether to accept or reject the application. On the basis of the team leader’s recommendation, the field office director decides whether or not to insure the loan. The field offices are to complete each stage of their reviews within 45 to 60 days, depending on the type of loan. To further monitor MAP lenders’ underwriting of loans and to oversee the work of the field offices, teams of field staff assigned to HUD’s Lender Qualifications and Monitoring Division are to conduct comprehensive reviews of samples of loans already approved for mortgage insurance. These reviews focus on the same four technical areas that the field offices analyze in reviewing an insurance application. After completing a review, the teams are to document their findings and recommendations in written reports, which are to be reviewed and approved by the division’s director. Upon approval, the reports are issued to the cognizant lender and multifamily field office. If HUD determines that a lender is not complying with program requirements, HUD’s Office of Multifamily Housing may take enforcement actions against the lender. Specifically, Multifamily Housing has the authority to suspend or terminate a lender’s participation in the MAP program. HUD’s guidance requires an FHA-approved lender wishing to participate in MAP to submit documentation demonstrating, among other things, that it is financially sound, has a satisfactory lending record, and has qualified underwriters. Our review of HUD’s approval files for 20 MAP lenders found that HUD followed its procedures in determining that these lenders met the requirements for financial soundness and satisfactory lending. However, we also found that HUD sometimes lacked a sufficient basis for determining whether the lenders’ underwriters met MAP qualification requirements. Furthermore, in approving MAP lenders, HUD did not ensure that the lenders had quality control plans in accordance with HUD’s regulations. According to HUD’s guidance, a lender must, among other things, be financially sound and have a satisfactory lending record to qualify for the MAP program. As evidence of its financial soundness, a prospective MAP lender must provide HUD with a recent audited financial statement showing a net worth in excess of $250,000. As evidence of a satisfactory lending record, a lender must submit information on the FHA-insured and conventional multifamily housing loans it made during the previous 5 years. For the lender’s FHA-insured loans, the submission must include a list of the loans that were assigned to HUD for insurance benefits and a narrative explanation of why the assignments occurred. HUD uses this information to (1) determine whether the lender has a recent history of assignments that can be attributed to poor lending practices and (2) ask cognizant multifamily field offices about their experience with the lender. To determine whether approved MAP lenders met HUD’s requirements, we examined HUD’s approval files for the 20 lenders that made the 35 new construction and substantial rehabilitation loans we reviewed during our visits to eight of HUD’s multifamily field offices. We found that all 20 lenders provided the required documentation and that the documentation adequately supported HUD’s conclusion that the lenders met the criteria for financial soundness and satisfactory lending records. Specifically, we found that 19 of the 20 lenders we reviewed submitted the required audited financial statements and that the statements showed the lenders met the net worth requirement. In accordance with HUD’s guidance, the remaining lender was exempted from the requirement because its accounts were insured by the Federal Deposit Insurance Corporation.With respect to lending performance, we used a HUD database containing assignment information to confirm that all 20 lenders submitted complete lists of their assigned loans. The lenders either had no loans assigned to HUD or had few assignments relative to their total number of FHA-insured loans—an indicator of sound lending practices, according to HUD.