Update for FHA Supervised Mortgagee Lenders

9/29/2011

By Robert L. Hamby, CPA

As most financial institutions are already aware, in accordance with the HUD handbook, the FHA required the submission of audited financial statements for supervised mortgagees, as stated in the Mortgagee Letter 2009-31 dated September 18, 2009. This requirement created a lot of uncertainty for banks in determining whether they should continue their mortgage operations for FHA loans due to the increased cost of meeting the audit requirements. To make matters worse, the Department of Housing and Urban Development kept changing the audit requirements during 2011.

In January 2011 the Department of Housing and Urban Development issued Mortgagee Letter 2011-05 that revised the audit requirements for supervised lenders. Under the revised audit requirements, a supervised mortgagee in a parent-subsidiary structure was allowed to submit the consolidated audited financial statements of the parent company if the parent company executed a corporate guarantee agreement whereas the parent company guarantees the on-going net worth and liquidity compliance of the FHA approved subsidiary. The FHA approved lender was also required to submit their fourth quarter Call Report, a Compliance Report and Internal Control Report.

In order to meet the requirements of a Compliance and Internal Control Report, financial institutions need to engage a CPA firm to perform the procedures necessary to issue the two separate reports which are outlined in HUD Handbook. More specifically, Chapters 1, 2 and 7 of the HUD Handbook discuss the compliance requirements and gives examples of the reports to be issued.

In July 2011, HUD issued Mortgagee Letter 2011-25 that further revised the audit requirements for FHA Supervised Mortgagee Lenders. This letter allows financial institutions under the $500 million in total assets threshold for FDICIA financial statement audit requirements a reprieve for the HUD audit requirements until April 7, 2012 but still required submission of the fourth quarter call report and both the Compliance and Internal Control Reports.

Confused yet? As it stands right now, if you are an FHA Supervised Mortgagee Lender with total assets under $500 million, there is no financial statement audit requirement for 2011. You will be required to submit your fourth quarter call report and both the Compliance and Internal Control Reports as previously discussed. HUD has not given any guidance on what the requirements will be after the April 7, 2012, exemption rule runs out.

HUD initially required all of these reports to be submitted electronically through their LASS on-line system. Since the system, as of yet, has not been updated for the revised reporting requirements, financial institutions are allowed to submit paper copies to HUD.