The clash between the Department of Housing and Urban Development and its inspector general over down payment assistance programs run by state or local housing finance agencies continues to heat up.

In an audit released by HUD's Office of Inspector General, the watchdog said that Fremont, Calif.-based loanDepot is charging higher interest rates on Federal Housing Administration-insured loans. The premium pricing is used to cover some of the costs of down payment assistance provided by the Golden State Finance Authority, according to the report which is dated Sept. 30.

"The funds derived from a premium priced mortgage may never be used to pay any portion of the borrower's down payment," wrote Tanya Schulze, an auditor for the HUD IG based in Los Angeles.

The IG's finding directly contradicts an Aug. 11 memorandum issued by HUD General Counsel Helen Kanovsky, which said the department had changed its auditing standards in 2013 and no longer places restrictions on how a governmental entity may fund downpayment assistance programs. The memo was issued after a similar issue was found in a HUD IG audit of Tucson-based NOVA Financial & Investment Corp.

"The use of funds derived from the sale of mortgages with higher than market interest rates does not constitute premium pricing as defined by FHA, nor does it violate any other requirement placed on DPA provided by governmental entities," Kanovsky wrote in the Aug. 11 memo.

LoanDepot argued in its response to the audit that the IG is not adhering to the latest HUD general counsel's interpretation. "OIG disagrees with loanDepot's assertion that the audit report relies on an incorrect definition of premium," wrote Schulze.

The inspector general's office said it's had numerous discussions with HUD program officials about premium pricing and the audit process. "Up to this point, OIG has not been provided compelling evidence to change the substance of the audit report," it wrote.

There is a dispute resolution process when the inspector general and HUD officials are at loggerheads, according to mortgage consultant Brian Chappelle.

Hopefully, the issuance of this second audit will spur a senior official at HUD to follow the general counsel's legal opinion and state definitively "that state and local down payment assistance programs as outlined in these cases meet FHA requirements," Chappelle said in a note to clients.

A lot is at stake for these lenders. The inspector general wants loanDepot to indemnify FHA for possible losses on 62 agency-insured loans if they go into default and NOVA is on a similar hook for losses on 709 loans.

"This dispute between HUD and the Inspector General epitomizes what lenders are dealing with when enforcement agencies feel free to disregard legal interpretations by program officials," Chappelle said in an interview. "No wonder lenders are reconsidering their participation in the FHA program."

A HUD spokesman did not return calls seeking comment.

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