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 each year to a lender is limited to 10 percent of the value of the total program loans held by each lender. In fiscal year 1997, FHA paid about $112 million on 8,179 Title I property improvement claims. Since the inception of the program in 1934, FHA has provided credit protection for Title I loans for over 35 million households to finance a variety of alterations and repairs. These property improvements are intended to improve or protect the basic livability or utility of a home, including structural additions and alterations; siding; roofing; insulation; and plumbing, heating, and cooling systems. Although property improvement loans made under Title I can be obtained for other types of structures, most loans are for improvements to single-family homes. Today, the value of the outstanding loans in the Title I program is relatively small compared with FHA’s other 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 home loans in its Mutual Mortgage Insurance Fund totaled about $360 billion. Similarly, Title I’s share of the remodeling market for owner-occupied, single-family homes is small—estimated at about 1 percent by the National Association of Home Builders and estimated by HUD at about 3.1 to 3.6 percent of the total financed home improvement work. Approximately 3,700 lenders are approved by FHA to make Title I loans. Lenders are responsible for managing many aspects of the program, including establishing interest rates and loan terms, 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 for 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. The Title I program’s officials consider lenders to have the sole responsibility for the program’s operations and HUD’s role to be primarily overseeing lenders and ensuring that the claims paid on defaulted loans are proper. A homeowner obtains a property improvement loan by applying directly to a Title I lender 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. For a direct loan, the proceeds are disbursed to the homeowner when the Title I loan is approved. However, the proceeds from a loan obtained through the assistance of a dealer are disbursed by the lender to the dealer when the home improvement work is completed. During fiscal years 1986 through 1996, about 520,000 direct and 383,000 dealer loans were made under the program. In calendar year 1997, about 60 percent of the loans (49,872) were made directly to borrowers, while 40 percent (33,360) were made through dealers. By statute, the maximum amount of property improvement loans is $25,000 on a single-family home, and the maximum loan term is about 20 years. Loans in excess of $7,500 must be secured by a recorded lien on the property being improved. Title I regulations require borrowers to have enough income to meet the periodic payments required by a property improvement loan. HUD’s guidelines generally require that borrowers’ total fixed expenses not exceed 45 percent of the their effective gross income. However, this expense-to-income ratio can be exceeded if a lender determines and documents compensating factors concerning a borrower’s credit worthiness that would support approval of the loan. Most Title I borrowers have low to moderate incomes, little equity in their homes, and/or poor credit histories. According to data collected by Price Waterhouse in an August 1997 study of the Title I program, most Title I borrowers nationally in 1995 had incomes that were at or near median area incomes. The exception was borrowers in California, where about 70 percent of the borrowers had incomes that were 115 percent above the area median income. Nationwide, the average size of a loan was $12,163 as of September 1997. HUD’s expenses under the Title I program, such as the 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 the August 1997 report, 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 the program’s loans made in fiscal year 1996 can be used to calculate an estimated cumulative claim rate of about 10 percent over the life of the Title I loans insured by FHA in that fiscal year. Since the inception of the Title I program, about 27 percent of borrowers who have defaulted on their loans did so within 12 months of the loans’ origination, while 58 percent defaulted within 24 months. The number of consumer inquiries and complaints made nationally about home improvement contractors is significant. According to data compiled by the Washington, D.C., Metropolitan Area Better Business Bureau, in 1997 about 241,000 inquiries were made nationally about home improvement contractors, making it the second most often asked about industry. In addition, the Bureau received 6,829 consumer complaints nationwide about home remodeling contractors and another 4,452 about roofers in 1997, making those occupations fifth and eleventh in terms of the number of complaints. In the last year, borrowers’ allegations about shoddy and incomplete work by Title I dealers and possible fraud in the program have been the subject of media reports. In response to the media reports of abuses and excessive claims with the dealer-initiated loans, HUD proposed on July 3, 1997, to take steps that would eliminate this portion of the program. A decision on dealer loans had not been made as of June 25, 1998. However, in commenting on a draft of this report, HUD stated that it has sought public comment, through the rulemaking process, on whether and under what circumstances the dealer component of the program should be retained. In addition, in October 1997, HUD’s Office of the Inspector General (OIG) reported on the results of its survey of the Title I property improvement program. The OIG’s report concluded that the dealer portion of the program traditionally experienced higher claim rates and greater program abuse than the direct loan portion of the program. HUD is not collecting the information needed to manage the Title I program. Specifically, we found that HUD (1) collects little information when loans are made on the borrowers, properties, and loan terms; (2) does not always have accurate data on the types of loans for which claims are submitted; and (3) does not maintain information on why it denies loan claims or why it subsequently approves some of them for payment. As a result, HUD cannot identify the characteristics of the borrowers and neighborhoods served by the program, nor can it accurately identify certain abuses of the program or default experience by loan types. Also, HUD has no basis for reviewing the reasonableness of decisions made to deny and subsequently approve claims. When FHA-approved Title I lenders make program loans, they collect information on the borrowers, such as age, income, and sex; the property, such as its address; and the loan terms, such as the interest rate. While lenders are required to report much of this information to their respective regulatory agencies—such as the Federal Reserve System, the Office of the Comptroller of the Currency, and the National Credit Union Administration—under the Home Mortgage Disclosure Act, HUD collects little of this information when Title I loans are made. Instead, using information that it requires lenders to provide, HUD records only the lender’s and borrower’s names, the state and county, as well as the amount, term, and purpose of the loan. Because it does not collect more detailed information, HUD cannot identify the characteristics of the borrowers and the neighborhoods served by the program, nor can it identify certain potential abuses of the program. Additional information that HUD collects on other single-family home loan insurance programs, such as the borrowers’ addresses, Social Security numbers, income, and debt, is 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 collect little information when loans were made because they consider the program to be lender-operated. In an August 1997 report on the Title I program, Price Waterhouse commented on the lack of data collected by HUD on this program and indicated that the cost of obtaining information would be marginal. Because HUD does not collect borrowers’ Social Security numbers and property addresses when loans are made, it would have difficulty determining whether some borrowers are obtaining multiple Title I loans. It would also have difficulty determining whether some borrowers are exceeding the maximum amount of Title I loans per property at the time new loans are made.