RESULTS IN BRIEF
The Cal-Mortgage Loan Insurance Program (Cal-Mortgage) is administered by the Office of Statewide Health Planning and Development (OSHPD). It insures loans for health facility construction in California, including hospitals, primary care clinics, and elderly care facilities. Many of Cal-Mortgage's clients are high-risk borrowers that could not obtain loans without this insurance because their projects are deemed too risky. Accordingly, the likelihood of default for Cal-Mortgage clients is significantly higher than it is for clients of larger, private insurers. When its borrowers default and are unable to continue payment on their debt, Cal-Mortgage must pay off the insured debt. Although the very nature of dealing with high-risk borrowers increases the likelihood of defaults, Cal-Mortgage further increases its risk of client defaults with its ineffectual application process, vague guidelines, and incomplete and inconsistent monitoring.
Our audit revealed that Cal-Mortgage does not adequately screen applicants because it does not adhere to objective guidelines in its application process. It does not use all available information or standard procedures to assess its applicants' financial viability, nor has it established procedures for determining its maximum level of risk when insuring a client. Due to this inadequate process, Cal-Mortgage has insured a number of financially unstable applicants, some of which have defaulted on their loans.
Cal-Mortgage does not consistently require that borrowers submit information about their financial condition, and it does not consistently conduct timely or structured site visits with borrowers. As a result, Cal-Mortgage may have little notice of financial difficulties before a borrower defaults on its debt. Weaknesses in its monitoring include inconsistent methods to oversee borrowers, a lack of formal procedures for this oversight, and insufficient supervision by Cal-Mortgage management.
Moreover, it cannot effectively monitor the risk in the borrower portfolio because the portfolio database is unreliable, contains numerous errors, and is not properly maintained. Finally, because Cal-Mortgage does not have benchmarks or standard criteria for identifying problem borrowers that require executive management intervention, the director of the OSHPD, which oversees this insurance program, may not be fully aware of the risk present in Cal-Mortgage's portfolio.
To improve consistency and minimize the risk of financial loss to the State, Cal-Mortgage should develop a more rigorous process to determine the financial viability of applicants and should define a maximum level of risk that it will accept when insuring a borrower.
The Legislature should consider changing the law to require that Cal-Mortgage develop a maximum level of insurance risk acceptable for loan insurance approval. The new law should ensure that Cal-Mortgage sets the risk level to minimize the potential of loan defaults and the resulting default payments from the Health Facilities Construction Loan Insurance Fund, while still being able to accomplish its statutory mission.
To ensure that Cal-Mortgage adequately oversees its borrowers and is sufficiently warned of those experiencing financial difficulties, it should establish a standard monitoring system for tracking and analyzing borrowers' financial information.
To improve its management information for monitoring and oversight, Cal-Mortgage should periodically review the portfolio database for errors and develop procedures for maintaining and ensuring the integrity of the database.
To ensure that OSHPD management has the information necessary to assess the level of risk in the portfolio, Cal-Mortgage should develop benchmarks and standard criteria for calling an at-risk borrower's financial status to OSHPD's attention.
The Office of Statewide Health Planning and Development generally concurs with our findings and believes it has made considerable progress in implementing most of the recommendations. However, the OSHPD believes that the Cal-Mortgage program has had few defaults and that its historical record would seem to indicate effective management of the program.