Herman Ransom, Director, Office of Multifamily Housing - Hud-Oig

INTERNAL CONTROLSInternal control is a process adopted by those charged with governance and management,designed to provide reasonable assurance about the achievement of the organization’s mission,goals, and objectives with regard to• Effectiveness and efficiency of operations,• Reliability of financial reporting, and• Compliance with applicable laws and regulations.Internal controls comprise the plans, policies, methods, and procedures used to meet theorganization’s mission, goals, and objectives. Internal controls include the processes andprocedures for planning, organizing, directing, and controlling program operations as well as thesystems for measuring, reporting, and monitoring program performance.Relevant Internal ControlsSignificant DeficiencyWe determined that the following internal controls were relevant to our auditobjectives:• Policies and procedures intended to ensure that FHA insured loans are properlyoriginated, underwritten, and closed.• Safeguarding FHA insured mortgages from high-risk exposure.• Policies and procedures intended to ensure that the quality control program is aneffective tool in reducing underwriting errors and noncompliance.We assessed the relevant controls identified above.A deficiency in internal controls exists when the design or operation of a controldoes not allow management or employees, in the normal course of performing theirassigned functions, the reasonable opportunity to prevent, detect, or correct (1)impairments to effectiveness or efficiency of operations, (2) misstatements infinancial or performance information, or (3) violations of laws and regulations on atimely basis.Based on our review, we believe that the following item is a significant deficiency:• PrimeLending did not have effective controls in place to ensure that itsunderwriters complied with HUD loan origination and underwritingrequirements (finding).12