Dusty Cuttriss

Supervised mortgagees are 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 National Credit Union Administration (NCUA). Examples include banks, savings associations and credit unions. In addition to the change in requirements, a final rule entitled Federal Housing Administration: Continuation of FHA Reform; Strengthening Risk Management Through Responsible FHA-Approved Lenders also was signed April 20, 2010, and became effective May 20, 2010. Both the letter and final rule will significantly affect supervised mortgagees’ ability to retain their approval status to originate, service or retain FHA-insured loans.

Supervised mortgagees with fiscal years ending on or after January 1, 2010, must submit audited financial statements with their 2011 renewal and must also submit annual audited financial statements to HUD within 90 days of their fiscal year-end. This is a shorter time frame than required by the bank and credit union regulatory agencies, which typically require audited financial statements to be submitted within 120 days of fiscal year-end.

Annual audited financial statements now are required for all supervised mortgagees, including some institutions that otherwise are not required to have an audit. Audited financial statements must be submitted in accordance with HUD Handbook 4060.1 REV-2 and prepared in accordance with the HUD Inspector General’s most recent Handbook 2000.4, Consolidated Audit Guide for Audits of HUD Programs. The financial statements are required to be submitted electronically through FHA’s Lender Assessment Subsystem (LASS), a web-based portal that allows lenders to upload their audited financial statements for FHA review. LASS templates require the financial statements of the approved supervised mortgagee and not the consolidated entity. However, HUD will accept the audit of the parent company’s consolidated financial statements if it includes consolidating schedules, audited by the auditor, that distinguish the balance sheet, operating statement and computation of adjusted net worth of the mortgagee subject to the HUD audit requirement.

The audit also is required to be performed in accordance with Generally Accepted Government Auditing Standards (GAGAS, also referred to as “Yellow Book”). In addition to the auditor’s report on the basic financial statements, the audit also must include an auditor’s computation of the mortgagee’s adjusted net worth, a report on compliance with specific requirements applicable to major HUD-assisted programs, a report on compliance and other matters based on an audit of the financial statements performed in accordance with Government Auditing Standards (GAS) and a report on internal control over financial reporting based on an audit of the financial statements performed in accordance with GAS and internal control over compliance with requirements applicable to HUD-assisted programs.

Supervised mortgagees also will be required to maintain liquid assets (as defined by HUD Handbook 4060.1, chapter 2, paragraphs 2-6 B and C) equal to 20 percent of their adjusted net worth. Supervised mortgagees must submit audited or unaudited financial statements within 30 days of the end of each fiscal quarter in which they experience an operating loss of 20 percent of their net worth, or until they demonstrate an operating profit for two consecutive quarters, or until the next recertification, whichever is longer.

While not likely to impact most financial institutions, the final rule on supervised mortgagees is increasing the net-worth requirements for FHA-approved supervised mortgagees from $250,000 to $2.5 million over three years. In addition, they must maintain sufficient fidelity bond coverage and also are required to promptly notify the HUD secretary in the event of termination of supervision by their supervising agency.

If you are a supervised mortgagee, the new requirements may have a significant impact on the ongoing monitoring, reporting and audit requirements of your institution. The following HUD links offer related guidance.

Mortgagee Letter 2009-31

HUD Handbook 4060.1 REV-2

Chapter 7 – HUD Consolidated Audit Guide

For more information on this issue or related matters, please consult your BKD advisor.