I. INTRODUCTION
The “Helping Families Save Their Homes Act of 2009” brought about changes in auditing requirements for financial institutions that make FHA home loans. The HUD Mortgagee Letter 2009-31 dated September 19, 2009, which discusses the new law’s annual audited financial statement requirements may be reviewed by going to the HUD website at: www.hud.gov and searching for HUD Mortgagee Letter 2009-31.
Under this new law, if your bank originates FHA home loans, you will be required to submit an annual audited financial statement within 90 days of your fiscal year end, beginning with the year ending December 31, 2010, and in future years under both governmental audit standards and HUD requirements. HUD’s concern is adequacy of your capital. Thus, this audit will concentrate on valuation of your bank’s loans and investments. (NOTE: The annual audited financial statement requirement does not apply to FHA loan correspondents.)
Removal of the annual audited financial statement requirement for some institutions resulted from the issuance of a final rule by HUD providing for elimination of the FHA approval process for loan correspondents. Loan correspondents will no longer be approved participants in FHA programs. Loan correspondents, however, will continue to have the opportunity to participate in FHA programs as third-party originators (TPOs) through sponsorship by FHA-approved mortgagees, as is currently the case, or through application to be approved, as a FHA approved mortgagee. In eliminating FHA’s approval of loan correspondents, FHA-approved mortgagees assume full responsibilities to ensure that a sponsored loan correspondent/TPO adheres to FHA’s loan origination and processing requirements.
The effective date of the final rule was May 20, 2010. A loan correspondent (as that term was defined immediately before May 20, 2010) with FHA approval as of May 20, 2010, maintained its FHA approval through December 31, 2010.
For purposes of the final rule, a loan correspondent is an entity that performs any origination function except underwriting, cannot service or own FHA insured mortgage loans and is sponsored by one or more sponsors who underwrite the mortgages. Further requirements for loan correspondents are discussed at paragraph 2-28 of the HUD Handbook No. 4060.1 Rev 2, issued August 15, 2006. Those include:
Institutions that remain subject to the annual audited financial statement requirement may consider setting up a single member limited liability company (LLC) wholly owned by the bank to house their FHA home loans.
The general advantages of setting up such an LLC are (1) not requiring a separate LLC tax return since the single member LLC is a disregarded entity for income tax purposes; and (2) limiting the governmental audit scope to just the LLC assets and not the entire bank, thereby reducing the cost of the government audit.
While any bank interested in setting up a single member LLC for this purpose should consult their own legal counsel and CPA, the general steps required would include:
¨ Establishing the legal entity and related operating agreement
¨ Acquiring state licensing for the LLC
¨ Applying to FHA/HUD and paying required fees
¨ Meeting minimum net worth requirements for both the initial application and ongoing operations (generally $250,000)
¨ Meeting minimum liquid assets requirements (generally $100,000)
¨ Meeting ongoing operating requirements for staff, facility, etc.
Additional information regarding this issue can be found at HUD Handbook 4060.1 Chapter 2 and HUD Handbook 2000.4 Chapter 7.
II. FHA RESCINDS AUDIT REQUIREMENTS FOR BANKS UNDER $500 MILLION IN ASSETS
The Federal Housing Administration’s financial and compliance audit requirements for small supervised lenders with less than $500 million in assets are being rescinded. These changes do not impact the annual audit reporting requirements for any other lenders, including supervised lenders with more than $500 million in total assets. The revisions to the interim audit reporting requirement supersede the annual audit reporting requirements set forth in mortgagee letter 2011-25 for small supervised lenders.
For annual recertification, small supervised lenders must, within 90 days of their fiscal year end, submit a copy of their unaudited regulatory report that aligns with their fiscal year end (i.e., Report of Condition and Income, also known as the “Call Report”) on Federal Financial Institutions Examination Council Forms 031 and 041, with such report to be signed by a corporate officer.
In order to manage the risk to the FHA insurance fund, the Department of Housing and Urban Development (HUD) retains the right to request additional financial documentation, up to and including audited financial statements, if HUD determines that a small supervised lender or mortgagee poses a heightened risk to the FHA insurance fund.
HUD may determine that a small supervised lender or mortgagee poses a heightened risk to the FHA insurance fund based upon, but not limited to, one or more of the following factors: (1) failing to provide required financial submissions (unaudited financial regulatory report) within the required 90-day period following the lender’s or mortgagee’s fiscal year end; (2) maintaining insufficient adjusted net worth or unrestricted liquid assets as required by the regulation; (3) reporting opening cash and equity balances that do not agree with the prior year’s reported cash and equity balances; (4) experiencing an operating loss of 20 percent or greater of the lender’s or mortgagee’s net worth for the annual reporting period as governed by the regulation; (5) experiencing an increase in loan volume over the prior 12-month period, determined by the Secretary to be significant; (6) undertaking significant changes to business operations, such as a merger or acquisition; and (7) other factors that the Secretary considers appropriate in indicating a heightened risk to the FHA insurance fund.
Elimination of the requirement that audited financial statements be submitted as a condition for FHA lender approval or renewal for small supervised lenders with less than $500 million in assets was made permanent effective October 17, 2013. Until further guidance is issued, small supervised lenders will not be required to submit a report on internal controls as it relates to administering HUD-assisted programs or a report on compliance with specific requirements applicable to major and non-major HUD programs.
Small supervised lenders should not submit their annual recertification documentation through the Lender Approval and Assessment Subsystem. Instead, the information should be emailed to small.supervised.lenders@hud.gov.