FHA Approved Supervised Mortgagees Must Now Submit Annual Audited Financial Statements and Reports on Compliance under the New HUD Requirements
By: Rebecca O’Malley, CPA
The Helping Families Save Their Homes Act of 2009 has resulted in several changes announced by the U.S. Department of Housing and Urban Development’s (HUD) Federal Housing Administration (FHA). HUD insures FHA mortgages made by private financial institutions, to finance multi-family and single-family homes. HUD is responsible for approving the mortgagees for participation in the program, through annual required submission of certain prescribed information.
As a part of the FHA Reform Act Final Rule 5356-F-02 (Reform Act), published in the Code of Federal Register (CFR) on April 20, 2010, which became effective May 20, 2010, significant changes were made that impact supervised mortgagees. The designation of supervised mortgagee is limited to financial institutions that are members of the Federal Reserve System, and financial institutions whose accounts are insured by the Federal Deposit Insurance Corporation (FDIC) or the National Credit Union Administration (NCUA).
Each FHA approved mortgagee must renew its approval annually. Prior to the new regulations, supervised mortgagees were required to submit an annual verification report and pay an annual renewal fee. Effective for fiscal years ending on or after January 1, 2010, all supervised mortgagees must submit with their 2011 renewal, annual audited financial statements prepared in accordance with HUD Handbook 4060.1 REV-2, and audited in accordance with the Inspector General’s most recent handbook (Handbook 2000.04). These financial statements must be submitted to HUD within 90 days of the fiscal year end.
In addition to the requirement to submit annual audited financial statements to HUD, the Reform Act requires the independent auditor to test and report on the supervised mortgagee’s internal controls over financial reporting and internal controls over compliance for HUD-assisted programs. The independent auditor is also required to perform a compliance audit over applicable laws and regulations that may have a direct and material effect on each HUD-assisted program. These audits must be performed in accordance with generally accepted auditing standards (GAAS) and the standards for financial audits of the U.S. Government Accountability Office’s Government Auditing Standards (GAGAS).
Upon the completion of the financial statement audit and compliance procedures described above, the independent audit firm is required by HUD and GAGAS to issue the following reports:
- Report on the financial statements, with the independent auditor’s report on accompanying supplemental information required by HUD;
- Combined report on internal control over financial reporting and internal control over compliance for HUD-assisted programs;
- Report on compliance with applicable laws and regulations having a direct and material effect on the HUD-assisted program, including an opinion on compliance; and
- Schedule of findings and questioned costs, including all control weaknesses and compliance findings.
The financial statements and supplementary reports are required to be filed electronically through the FHA’s Lender Assessment Sub System (LASS) within 90 days of the fiscal year end, for FHA review. The supervised mortgagee is responsible for the filing, and the auditors are required to perform an agreed-upon procedures engagement, which is separate from the audit. The auditor is required to attest to the accuracy and completeness of the data in the electronic filing, and agree back to the audited financial statements and reports on compliance and internal control.
There have been some questions in the industry about which HUD compliance requirements and which HUD auditing guidance is applicable, due to the fact that the HUD handbooks have not yet been updated to reflect the changed requirements. Upon discussions directly with HUD, and through a publication by the AICPA on October 18, 2010, it has been determined that until HUD issues clarifying guidance or updates the HUD Audit Guide to address the new requirements for supervised mortgagees, audits are to be performed in accordance with the HUD Handbook 2000.04, Chapter 7: “HUD-Approved Title II Nonsupervised Mortgagees and Loan Correspondents Audit Guidance”.
Supervised mortgagees should be following the compliance requirements in HUD Handbook 4060.1 REV 2 and also the compliance and approval requirements as documented in the Electronic Code of Federal Register, Title 24: Housing and Urban Development, Part 202. Specific requirements for supervised mortgagees are explained in Title 24, Part 202.5, the General Approval Standards.
Certain additional requirements, as set forth in Title 24, Part 202.6 have been added as a part of the Reform Act, and include:
Notification – Lender must promptly notify the Secretary in the event of termination of supervision by supervising agency;
Fidelity Bond – A Title II mortgagee shall have fidelity bond coverage and errors and omissions insurance acceptable to the Secretary and in an amount required by the Secretary;
Operating losses – There are additional requirements for supervised mortgagees reporting operating losses of 20% or more of their net worth; and
Net Worth – Net worth requirements for supervised mortgagees are being increased from the current requirement of $250,000 as follows:
- Effective May 20, 2011, each mortgagee with FHA approval as of May 20, 2010 that exceeds the size standards for a small business, as defined by the Small Business Administration at 13 CFR 121.201, must have a net worth of at least $1 million, calculated in accordance with the HUD guidelines, with no less than 20% being liquid assets. Those not exceeding the size standards for a small business, as defined, must have a net worth of $0.5 million, with no less than 20% being liquid assets.
- Effective May 20, 2013, all applicants for approval, and all FHA approved lenders and mortgagees must have a minimum net worth of no less than $1 million, plus an additional net worth of one percent of the total volume in excess of $25 million of FHA single family insured mortgages originated, underwritten, purchased or serviced during the fiscal year, up to a maximum required net worth of $2.5 million, with no less than 20% being liquid assets.
- As a supplemental schedule to the audited financial statements, each supervised mortgagee is required to include a ‘Computation of Adjusted Net Worth’.
As has seemed to be the norm throughout 2010, the regulatory environment for financial institutions has again seen some significant changes as a result of the current economic turmoil and the political actions taken. As you can see, the HUD FHA Reform Act has increased the compliance and reporting requirements for supervised institutions in order to increase supervision and in an effort to effectively manage risks associated with lenders and mortgagees.
The new requirements may have a significant impact on the loan origination, servicing, monitoring, reporting and audit requirements of your Institution. To discuss the impact on your Institution and for questions on the implementation of the requirements of the Reform Act and other regulations relating to HUD
FHA compliance and reporting, contact your CPA. You may also contact Dan St.Clair, Audit Principal at email@example.com or David Phelps, Business Advisory Services Shareholder at firstname.lastname@example.org.
Relevant material needed by mortgagees is available through HUDs lender website at http://www.hud.gov/groups/lenders.cfm.