Supervised Mortgagees Must Prepare for HUD’s New Audit Requirements

Financial institutions that are supervised mortgagees face additional audit requirements due to a policy change by HUD. The changes are effective for fiscal years ending on or after January 1, 2010.

HUD issued Mortgage Letter 2009-31 on September 18, 2009, explaining the FHA program change. All supervised mortgagees (including qualifying banks, savings associations, and credit unions) must submit annual audited (conducted in accordance with GAGAS) financial statements to HUD within 90 days of their fiscal year-end. Included therewith is a requirement for a new compliance audit. Previously, these rules only applied to non-supervised mortgagees, such as a separate mortgage company.

“Many financial institutions will have audits between now and next March, and if they are participating in the FHA program, they’ll need to comply,” says Rich Gabrielson, financial institutions principal with LarsonAllen.

Additionally, if your organization is considering converting to or from a supervised mortgagee role, your audit may be affected.

“Lack of communication between the mortgage department and the CFO, and even upwards to the audit committee, could be cause for trouble come audit time,” Gabrielson warns. “It’s plausible that a financial institution may decide to convert to a supervised mortgagee without planning for the additional audit requirements. They may see it as an operational change without realizing the impact of it.”

New audit requirements
The letter states that audited financial statements must be submitted in accordance with HUD Handbook 4060.1 REV-2, and prepared in accordance with HUD Inspector General’s most recent Handbook 2004.04, Consolidated Audit Guide for Audits of HUD Programs (audit guide). Although HUD has not formally amended the guide to refer to supervised mortgagees, marketplace consensus is to follow chapter 7, along with chapters 1 and 2.

Under the HUD audit guide, auditors are required to issue the following:

• A report on the financial statements along with the accompanying supplemental information required by HUD
• A combined report on internal controls regarding financial reporting and compliance for HUD-assisted programs
• A report on compliance with applicable laws and regulations that may have a direct and material effect on each HUD-assisted program, which includes an opinion on compliance

Chapter 2 provides illustrations of these reports and describes additional documents that may be required in the audit.

Electronic submission
Financial statements and other financial and compliance data must be submitted for FHA review electronically through the LASS. This responsibility rests with supervised mortgagees.

Loan correspondent approval expiring
Organizations serving the role of loan correspondents can only originate loans that are underwritten by a sponsoring direct endorsement mortgagee; they can’t underwrite, own, or service FHA insured loans. Pursuant to HUD Mortgagee Letter 2010-20, issued June 11, 2010, loan correspondents approved and in good standing will be permitted to retain their approval through December 31, 2010.

“After that date, the FHA classification of loan correspondent is going away,” Gabrielson says. “If you’re going to continue FHA lending, you’ll either do so as a supervised mortgagee or by establishing a sponsorship relationship with an FHA-approved mortgagee.”

Verify your FHA lender approval status
If you need to check to see what type of FHA lender approval you have, go to HUD’s Neighborhood Watch website. Under the “Details” tab, you can obtain information such as a lender’s FHA ID number, address, and DBA names registered with FHA, as well as its approval status, approved lending area, and registered branches. You can search for a lender by name or ID number.

Next steps
Those financial institutions currently approved as a supervised mortgagee, or those planning to convert to a supervised mortgagee due to the expiration of loan correspondent status, should weigh the extra costs of compliance with the benefits and revenue being realized through the supervised mortgagee status. If the benefits and extra revenue are not enough, consider termination of your supervised mortgagee status and instead establish a sponsored relationship with an FHA-approved mortgagee.

If you desire to make a change, coordinate with your auditor to ensure you engage them for the proper audit work.

Rich Gabrielson, Financial Institutions Principal
rgabrielson@larsonallen.com or 507-434-7003

View our financial institutions principals.