The Department of Housing and Urban Development is trying to reduce loan fraud in its FHA program by promising lighter penalties to lenders who police themselves and report problems voluntarily.

The agency relies on 50 employees to root out loan fraud. Last year, it levied $700,000 in civil penalties.

But in an era of government downsizing, it wants to try another tack as well.

"It's become increasingly clear to me that the best way to monitor is to engage in full partnership with those who are being monitored," said Nicolas P. Retsinas, assistant secretary for housing and Federal Housing Commissioner.

In announcing the plan, Mr. Retsinas described it is an enhancement and "not a substitution for the monitoring that we do and will continue to do."

Lenders who agree to monitor themselves would have to establish systems to prevent fraud and train their underwriters to spot it.

A blueprint for agreements between individual lenders and HUD was signed Friday by the agency and the Mortgage Bankers Association, whose members make most FHA loans. Mr. Retsinas said he hoped to announce individual deals at the group's meeting this month in San Francisco.

Typically, fraudulent loans involve false information on borrower income, the source of the down payment, or the value of the property. Also, some FHA loans are made to straw borrowers, HUD officials said.

Fraud sometimes results from negligence, as when commission-driven loan officers omit face-to-face interviews with borrowers and rely on wholesale brokers to compile the loan file, officials said. Or rogue employees can set out to deliberately insure bad loans.

Though many lenders report signs of fraud even without the promise of lighter penalties, others sit tight, hoping the government won't find out, said Bill Heyman, director of HUD's office of lender activities and program compliance.

Most fraud is uncovered by the FHA's 43 field representatives, who audit lenders that have high initial losses and foreclosures. Far from cutting back, this portion of the FHA has been beefed up recently, according to a HUD official.

Mr. Retsinas said FHA data did not yet show that it was receiving a greater flow of risky loans. Some lenders, including Countrywide Home Loans Inc., say they now routinely steer weak- credit, low-income borrowers to FHA loans instead of sending them to Fannie Mae or Freddie Mac.

But Mr. Retsinas said his agency was aware of the dangers of "adverse selection" and hoped to avoid it by influencing the development of automated underwriting technology.

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