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CHAPTER 7. FHA-APPROVED LENDERS AUDIT GUIDANCE
7-1 Program Objective. The U.S. Department of Housing and Urban Development
(HUD) insures loans and mortgages made by private and governmental, financial, and
mortgage lending institutions to finance the purchase, refinancing, or construction of
single-family homes and multifamily projects. HUD approves such institutions for
participation in the Federal Housing Administration (FHA) insurance programs for
Title I property improvement and manufactured housing loans and for Title II single-
family and multifamily mortgages. After initial approval, institutions are required to
recertify annually to maintain their FHA-approved status.
As defined in 24 CFR (Code of Federal Regulations) Part 202, a “lender” or “Title I
lender” is a financial institution that (a) holds a valid Title I contract of insurance and is
approved by the HUD Secretary or (b) is under suspension or held a Title I contract that
has been terminated but remains responsible for servicing or selling Title I loans that it
holds and is authorized to file insurance claims on such loans. A “mortgagee” or “Title
II mortgagee” is a mortgage lender that is approved to participate in the Title II
programs.
As it revises its various requirements, FHA is adopting a common industry practice of
using the terms “lender” and “borrower” for all of its programs and discontinue the use
of the terms “mortgagee” and “mortgagor.” Throughout this guide, we use the terms
“lender” and “borrower” to include “mortgagee” and “mortgagor,” respectively.
Auditors should be aware that existing guidance and Federal regulations may continue
to use both sets of terminology.
7-2 Lender Approval Types. HUD has four types of lenders that are approved for
participation (refer to 24 CFR 202.6 through 202.10).
A. Supervised Lenders. Supervised lenders are financial institutions that are
members of the Federal Reserve System (FRS) or institutions with accounts insured
by the Federal Deposit Insurance Corporation (FDIC), the Office of the Comptroller
of the Currency (OCC), or the National Credit Union Administration (NCUA).
Supervised lenders may originate, underwrite, purchase, hold, service, or sell FHA-
insured loans.
1. Small Supervised Lenders. Small supervised lenders are members of FRS or
regulated by FDIC, OCC, or NCUA, the consolidated assets of which do not
meet the threshold required by those agencies for submitting audited financial
statements (delineated at 12 CFR 363.1(a), 562.4(b)(2), and 715.4(c)).
2. Large Supervised Lenders. Large supervised lenders are those lenders that
are members of FRS or regulated by FDIC, OCC, or NCUA, the consolidated
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assets of which are equal to or greater than the prevailing threshold required by
those agencies for submitting audited financial statements (delineated at 12
CFR 363.1(a), 562.4(b)(2), and 715.4(c)).
B. Non-supervised Lenders. Non-supervised lenders are lending institutions that
have as their principal activity the lending or investing of funds in real estate
mortgages, consumer installment notes, or similar advances of credit or the
purchase of consumer installment contracts and are not approved as supervised, as
described in paragraph A above, or as government lenders, as described in
paragraph D below. A non-supervised lender may originate, purchase, hold,
service, or sell all types of FHA-insured loans, including multifamily loans.
C. Investing Lenders. Investing lenders may purchase, hold, or sell FHA-insured
loans but may not originate FHA-insured loans in their own name or submit
applications for the insurance of mortgages. An investing lender may not service
FHA-insured loans without prior approval of the HUD Secretary. Investing lenders
are generally required to provide only audited financial statements and a
computation of adjusted net worth. Those investing lenders that are authorized to
service FHA-insured mortgages are also required to submit a report on internal
controls and a report on compliance.
D. Governmental Lenders. Government lenders are Federal, State, or municipal
governmental agencies; a Federal Reserve bank, a Federal home loan bank, the
Federal Home Loan Mortgage Corporation (Freddie Mac), or the Federal National
Mortgage Association (Fannie Mae). A government lender may originate,
purchase, service, or sell FHA-insured loans, including multifamily loans. No
financial reporting is required.
Lenders with Title I authority are approved to process or service loans for property
improvements and the purchase of manufactured housing. Lenders with Title II
authority are approved to process or service loans for single-family homes and
multifamily projects. A lender may be approved for both Title I and Title II programs.
These institutions are approved on the basis of their financial capacity, experience,
facilities, and other criteria as specified in HUD Handbook 4060.1, Mortgagee
Approval Handbook, HUD Handbook 4700.2, Title I Lender Approval Handbook, and
subsequent mortgagee letters and Title I letters.
7-3 Audit and Reporting Requirements. The following chart is a summary of the
financial reporting requirements for supervised and non-supervised lenders. A more
detailed explanation of the financial reporting requirements is also provided below.
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Scenario
Level of
financial
statements
Audited
consolidating
schedules
Financial data
templates,
including net
worth schedule
Net worth
schedule
(audited)
Supervised lenders
Stand-alone bank
Bank
N/A
Bank
Bank
Bank ≥ 40% of
consolidated entity; no
guarantee by parent
Consolidated Not required Consolidated Bank
Bank <40% of
consolidated entity;
guarantee by parent
Consolidated Not required Consolidated Bank
Bank <40% of
consolidated entity; no
guarantee by parent
Consolidated Required Bank Bank
Multiple banks, each
<40% of consolidated
entity; no guarantee by
parent
Consolidated Required Each Bank Each Bank
Non-supervised lenders
Stand-alone lender
Lender
Lender
Lender
Lender
Lender in a parent/
subsidiary structure
Lender Required Lender Lender
Except for governmental
1
and small supervised lenders, all FHA-approved lenders are
required to have an annual audit in accordance with this guide regardless of the
number of loans originated or serviced. All required audits are to be submitted
within 90 days of the close of the lender’s fiscal year. Audits must be performed in
accordance with the most currently effective Government Accountability Office
generally accepted government auditing standards (GAGAS, also referred to as the
“Yellow Book”), auditing standards generally accepted in the United States of America
(GAAS) as issued by the American Institute of Certified Public Accountants (AICPA),
2
and this guide.
If the supervised or non-supervised lender is also a Government National Mortgage
Association (Ginnie Mae) approved issuer and wants to have the same audited financial
1
Governmental lenders follow the audit requirements of the Single Audit Act as set forth in 24 CFR 44.
2
The Public Company Accounting Oversight Board (PCAOB) has established professional standards that apply to
financial audits of publicly traded companies with a reporting obligation under the Securities Exchange Act of
1934. As noted in the “Yellow Book,” auditors may elect to use the PCAOB standards in conjunction with
GAGAS.
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statements satisfy both FHA and Ginnie Mae, the financials will also have to be
prepared in accordance with Ginnie Mae’s requirements (See chapter 6 of this guide).
Unqualified opinions in the audit report on the financial statements and compliance are
acceptable for recertification. If either opinion is qualified, HUD will determine, on a
case-by-case basis, whether a report with a qualification is acceptable for recertification
purposes. In addition to the detailed description of the reason for the qualification in
the audit report, an appropriate finding may need to be included by the auditor in the
schedule of findings and recommendations. When findings are reported, a corrective
action plan prepared by the lender must accompany the audit findings. For additional
information on the required audit reports and suggested wording, please refer to chapter
2 of this guide, which contains examples.
In some instances, a HUD-approved lender may enter into arrangements whereby the
responsibility for performing certain required procedures transfers to another HUD-
approved entity. A common example is when a lender originates a loan and later sells
the loan and the related servicing to another HUD-approved entity. In these situations,
the lender must comply with any required activities for the period during which it is
legally obligated to perform those services, and the independent auditor would report
on the lender’s compliance during that period. After the transfer of responsibility to
another party, the independent auditor for the entity acquiring those responsibilities
would report on that party’s compliance with HUD requirements.
A. General Audit Requirements. The audit reporting package must include:
1. Audit of the Financial Statements and Supplementary Information.
a. The basic financial statements prepared in accordance with generally
accepted accounting principles (GAAP) and the independent auditor’s report
thereon in accordance with GAAS and GAGAS.
b. The independent auditor’s report must cover the lender’s computation of its
adjusted net worth, the hardcopy of the electronic submission, and if
applicable, consolidating schedules. The auditor’s reporting on this
information should be done in accordance with GAAS relating to
“Supplementary Information in Relation to the Financial Statements as a
Whole.”
2. Internal Control Report.
The internal control reports, which do not include the expression of the
independent auditor’s opinion, must include
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a. An independent auditor’s report on internal control over financial reporting
based on an audit of financial statements. If the lender engages the auditor
to provide an opinion on internal control over financial reporting, as
required either by FDIC or under the standards of the Public Company
Accounting Oversight Board, such reporting may be submitted for this
requirement.
b. An independent auditor’s report on internal control over compliance with
HUD-assisted programs. This report may be combined with the
independent auditor’s report on internal control over financial reporting.
Alternatively, auditors may issue combined reports (1) on internal control over
financial reporting and compliance based on the audit of the financial
statements under GAGAS and (2) on compliance and internal control over
compliance with major HUD programs.
3. Compliance Report.
The compliance report relating to major HUD programs must include
a. A listing of compliance areas tested.
b. An independent auditor’s opinion on compliance with specific program
requirements that could have a direct and material effect on each major
HUD-assisted program.
3
4. Schedule of Findings and Questioned Costs. This is required for all material
instances of noncompliance, and significant deficiencies and material
weaknesses in internal control identified by the auditor (including those cases in
which corrective action was taken by the lender on the finding after the end of
the fiscal year). Refer to section 7-9 of this chapter for information on reporting
findings. A management letter reporting all immaterial instances of
noncompliance should accompany the compliance report.
5. Corrective Action Plan. This is prepared by the lender using the lender’s
letterhead, in which the lender describes the corrective action taken or planned
in response to the findings identified by the auditor. The plan should also
include comments on the corrective action taken on prior findings resulting
3
A major program is defined as an individual assistance program or a group of programs in a category of Federal
financial expenditures, which is equal to or exceeds the amount shown in the threshold table in chapter 1 of this
guide during the applicable year or a project that has an outstanding HUD-insured or HUD-guaranteed loan
balance, which is equal to or exceeds the amount shown in the table as of the reporting date.
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from relevant HUD, Office of Inspector General audits and HUD program
reviews.
B. Reporting Requirements for Lenders in Parent-Subsidiary Structures
1. Non-supervised Lenders. For non-supervised lenders, HUD will accept the
audits of the consolidated financial statements of the parent if they include
consolidating schedules that distinguish the balance sheets and operating
statements of each FHA-approved subsidiary and the computation of adjusted
net worth of each FHA-approved subsidiary. Such information must be
subjected to audit procedures in accordance with GAAS relating to
“Supplementary Information in Relation to the Financial Statements as a
Whole.”
2. Large Supervised Lenders. Supervised lenders in parent-subsidiary structures
(i.e., subsidiaries) are permitted to submit the audited consolidated financial
statements of a parent company, without audited or unaudited consolidating
schedules if one of the following conditions is met:
a. The FHA-approved subsidiary owns at least 40 percent of the assets on the
consolidated balance sheet or
b. The FHA-approved subsidiary provides FHA with an executed copy of a
corporate guaranty agreement between it and the parent company in which
the parent company guarantees the ongoing net worth and liquidity
compliance of the FHA-approved subsidiary. At the time of the revision of
this chapter, FHA was finalizing a standardized agreement (see attachment
E) and will require lenders to use this agreement or obtain prior approval to
use a different agreement.
A supervised FHA-approved lender electing to submit audited consolidated
financial statements pursuant to one of the above-mentioned conditions must
submit its fourth quarter call report as an attachment to its electronic
submission. Additionally, the reports on internal control and compliance at the
FHA-approved subsidiary’s level must be included as an attachment to the
FHA-approved lender’s electronic submission.
3. Investing Lender. Investing lenders in parent-subsidiary structures are
permitted to submit the audited consolidated financial status of the parent as
allowed in paragraphs B.1 and B.2 above.
Investing lenders are required to submit audited financial statements and an
audited computation of adjusted net worth. Investing lenders that have been
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approved to service FHA loans must also submit reports on internal control and
compliance.
C. Reporting Requirements for Small Supervised Lenders. Small supervised
lenders are not required to submit audited financial statements to FHA or an audited
computation of adjusted net worth. Such lenders must submit a copy of their
unaudited regulatory report (i.e., report of condition and income, also known as the
“call report” and submitted on the Federal Financial Institutions Examination
Council forms 031 and 041, or a consolidated or fourth quarter NCUA call report,
submitted on NCUA Form 5300 or 5310), signed by an officer, that aligns with
their fiscal yearend.
7-4 Electronic Submission of Audited Financial Statements and Compliance Data.
All FHA-approved lenders are required to electronically submit their financial and
compliance data to the Lender Approval and Recertification Division through FHA’s
electronic data system within 90 days of the close of the end of their fiscal year. The
submission must be based on the signed issued paper copy of the audit of the lender’s
financial statements, supplemental information, and the signed independent auditor’s
report containing the auditor’s opinion. A copy of the issued signed hardcopy of the
financial statements, supplemental information, and the signed independent auditor’s
report(s) must be submitted electronically.
Lenders that are approved by both FHA and Ginnie Mae must complete the electronic
submission of their financial and compliance data through FHA’s electronic system and
submit their audited financial statements to Ginnie Mae in accordance with the Ginnie
Mae Mortgage-Backed Securities Guide.
A. Auditor Involvement in the Electronic Submission Process. The responsibility
for the electronic submission of the lender’s financial and compliance data rests
with the lender; however, the auditor is required to perform a separate agreed-upon
procedures engagement to determine whether the financial data entered into HUD’s
electronic system by the lender are accurate and reconcile with the data on the
lender’s hardcopy audited financial statements that are contained in the issued
signed audit report. In general, the auditor must compare the electronic data
transmitted to HUD to the hardcopy of the basic financial statements, supplemental
information, footnotes, the signed independent auditor’s reports, the computation of
adjusted net worth, and financial data templates. This procedure should be
performed under the current AICPA Statements on Standards for Attestation
Engagements for Agreed Upon Procedures Engagements.
B. Extension Requests. A request for a 30-day extension must be submitted to HUD
management, through the electronic system, no earlier than 45 days before the
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electronic submission due date and no later than 15 days before the submission due
date.
C. Operating Loss Reporting. Approved lenders must submit either audited or
unaudited financial statements to HUD, within 30 days of the end of each fiscal
quarter in which the lender experiences an operating loss of 20 percent or greater of
its net worth and must continue to make submissions until the lender demonstrates
an operating profit for two consecutive quarters or until the next annual
recertification by FHA, whichever is the longer period (24 CFR 202.5(m)(1)). The
submission should be emailed to LEAPRecert@hud.gov.
7-5 Compliance Requirements and Suggested Audit Procedures Applicable to
Lenders with Both Title I and Title II Authorities.
A. Quality Control Plan.
1. Compliance Requirement. The adoption and implementation of a quality
control plan is a required element of a lender’s application for approval to
participate in FHA programs. FHA-approved lenders are required to
a. Originate and service HUD-insured mortgages in accordance with accepted
practices of prudent lending and comply with all relevant HUD rules and
regulations.
b. Maintain quality control plans consistent with the requirements of chapter 7
of HUD Handbook 4060.1 (Title II) or chapter 6 of HUD Handbook 4700.2
(Title I) as applicable.
c. If they use third-party originators (TPO), ensure that the direct endorsement
lender has a quality control plan that requires the review of loans that are
originated by the TPO.
d. Review all loans that are originated or underwritten by their company or
originated by a sponsored TPO that go into default within the first six
payments (referred to as early payment default).
e. Review a sampling of rejected applications (see suggested audit procedure
below in 7-5.D.2.d.).
f. Immediately report to HUD, via Neighborhood Watch, fraud or material
violations of FHA requirements that, based on the auditor’s judgment,
represent a significant risk to the FHA insurance fund (paragraph 7-3(J),
HUD Handbook 4060.1, REV-2).
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2. Implementation. FHA-approved lenders must implement a quality control
plan consistent with their needs and the above-referenced guidance to assist
corporate management in determining whether their personnel are following
HUD requirements and corporate policies and procedures. Lenders must ensure
the following:
a. Quality control reviews are performed on a regular and timely basis.
Depending on a lender’s production volume, origination reviews may be
performed weekly, monthly, or quarterly. The review of a specific
mortgage should be completed within 90 days of closing.
b. Reviews of different aspects of servicing will vary in frequency; however,
delinquent servicing and loss mitigation activities should be reviewed
monthly. Timing and frequency of quality control reviews is addressed in
the Origination and Servicing sections of HUD Handbook 4060.1.
c. The quality control function must be independent of the origination and
servicing functions.
The quality control procedures may be conducted by the entity itself internally,
by personnel not involved in any aspect of loan origination or servicing, or by
an external reviewer (see 24 CFR 202.5(h)).
3. Suggested Audit Procedures.
a. Obtain a copy of the lender’s quality control plan and compare it to the
general and specific requirements contained in chapter 7 of HUD Handbook
4060.1 or chapter 6 of HUD Handbook 4700.2 as applicable.
b. Determine whether the lender has a procedure in place to disseminate
quality control policies and procedures to all employees involved in loan
origination and servicing.
c. Determine whether the lender has guidelines to revise its procedures in a
timely manner to accurately reflect changes in HUD requirements, that
personnel are informed of the changes, and that employees are held
accountable for performance failures and errors.
d. Determine whether the lender has procedures for reviewing and monitoring
its sponsored third-party originators. At a minimum, these procedures must
include the requirements outlined in “Basic Requirements for Quality
Control of Single Family Production” in chapter 7 of HUD Handbook
4060.1 and Mortgagee Letter 2011-02.
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e. Determine whether the quality control plan requires that all mortgage
change records be reviewed for accuracy of sale, transfer of loans, and
terminations of insurance.
(1) For cases involving the transfer of legal rights to service FHA-insured
loans,
(a) The transferee is required to report the “change of legal rights to
service” to HUD.
(b) The transferor is required to verify that the “change of legal rights to
service” has been reported and that all of the details contained in the
report are accurate.
(2) For cases involving the holder’s sale of loans,
(a) The holder (seller) is required to report the “sale of loans” to HUD
within 15 calendar days, and
(b) The buyer is required to confirm that the “sale of loans” has been
reported and that all of the details contained in the report are
accurate.
f. Determine whether the lender has a procedure for expanding the scope of
quality control reviews as required by chapter 7, paragraph 7-3.F of HUD
Handbook 4060.1 when fraudulent activity or patterns of deficiencies are
identified.
g. Inquire into whether the lender relies on an internal or external quality
control review of its origination, underwriting, and servicing functions.
(1) If the lender relies on an internal review,
(a) Verify that the quality control system is separate and apart from the
loan processing and underwriting process and is carried out by
knowledgeable personnel not involved in loan processing and
underwriting.
i. Check the employee or contractor listing or organization chart
and loan production report provided by the lender to ensure that
the personnel are not involved in the day-to-day processes that
they are reviewing and
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ii. Interview the personnel identified as the quality control
reviewers. Inquire about their roles and responsibilities, how
loans are selected, what occurs during a review, steps taken when
fraud is suspected, to whom they report, how deficiencies are
resolved, and what they are to do when they note any other type
of irregularity during their quality control reviews of the loan
files.
(b) Determine whether the lender provided the staff access to current
guidelines relating to the operations it is responsible to review. It is
not necessary to maintain these guidelines in hardcopy format if they
are accessible in an electronic format.
(2) If the lender relies on an outside review firm,
(a) Determine whether the lender ensured that the outside firm met
HUD’s requirements (refer to HUD Handbook 4060.1, chapter 7, or
HUD Handbook 4700.2, chapter 6).
(b) Determine whether the agreement with the outside firm is in writing,
states the roles and responsibilities of each party, and is available for
review by HUD staff.
h. Determine whether the sample sizes of FHA loans to review used
throughout the year were determined in accordance with the criteria
specified in chapter 7 of HUD Handbook 4060.1. This includes a random
sample of insured loans being serviced by the lender or its agent.
i. Determine whether the lender is in compliance with the timeliness and
frequency requirements in section 7-6 of Handbook 4060.1.
j. Determine whether any branch offices received an onsite review as required
by chapter 7 of HUD Handbook 4060.1 or chapter 6 of HUD Handbook
4700.2.
k. Determine whether the quality control plan includes coverage for any
sponsored third-party originators and authorized agents of the lender.
l. Determine whether the sponsor’s quality control program provides for the
sponsor to review the loans originated and sold by each of its sponsored
TPOs. If it does,
(1) Determine whether the sponsor determined an appropriate percentage of
loans to be reviewed (refer to paragraph 7-6(C) of Handbook 4060.1).
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(2) Determine whether the sponsor retained the documents and
methodologies used in making that determination and the results of the
review.
(3) Review the documentation for compliance with HUD requirements and
determine whether the findings were reported and followed up in
accordance with the lender’s policies and procedures.
m. In addition to the loans selected by the lender for routine quality control
reviews, select a sample of early payment defaulted loans and determine
whether the lender performed a review of such loans within 45 days from
the end of the month in which the loan was reported as 60 days past due.
Determine whether the early payment default review report and follow-up,
including review findings and any actions taken along with procedural
information as specified in chapter 7 of HUD Handbook 4060.1, are
retained for a period of 2 years.
n. Review the supporting documentation of the most recent review to
determine whether all of the required general and specific elements included
in chapter 7 of HUD Handbook 4060.1 or chapter 6 of HUD Handbook
4700.2 were included in the quality control review. The quality control plan
must provide for the written reverification of the borrower’s employment,
deposits, gift letter, or other sources of funds.
o. Obtain a written copy of the latest quality control review report and
determine whether senior management officials also received a copy that
included any deficiencies identified during the review.
p. Determine whether management is monitoring its default and claims rate in
accordance with FHA’s Credit Watch Program. Copies of Neighborhood
Watch reports may be obtained to determine whether the client is using such
reports to meet the monitoring requirement.
q. Determine whether the lender notified the Office of Lender Activities and
Program Compliance of any violations, false statements, or program abuses
that were documented in the quality control review report within 60 days of
the initial discovery.
r. Determine whether senior management officials promptly initiated
corrective action for all deficiencies noted in the quality control review
report.
s. Determine whether the files evidenced the actions taken by senior
management to correct the deficiencies.
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t. Determine whether the files contain evidence that the appropriate employees
were notified of the deficiencies and provided instructions to correct the
deficiencies and prevent recurrence.
B. Sponsor Responsibility for Third-Party Originators.
1. Compliance Requirement. HUD does not monitor sponsored TPOs for the
purpose of the origination of loans submitted for FHA insurance. FHA-
approved lenders are responsible for performing quality control reviews of their
sponsored TPOs. Such reviews include but are not limited to performing a
review of loans originated and sold to the lender by each of its sponsored TPOs
(Mortgagee Letter 2011-02). The lender must determine the appropriate sample
amount of each sponsored TPO’s loans to review based on volume, past
experience, and other factors specified in chapter 7 of HUD Handbook 4060.1.
2. Suggested Audit Procedures.
a. Determine whether the sponsoring lender has issued an annual written
communication to each TPO under its sponsorship indicating its intent to
assume the responsibility of ensuring the TPO’s compliance.
b. Test the documentation supporting the reviews and the reports of the TPOs
and determine the accuracy and reliability of the reviews and reports.
C. Branch Office Operations.
1. Compliance Requirement. A lender may maintain one or more branch offices
for the origination of loans and submission of applications for mortgage
insurance. A lender may originate or service FHA-insured loans from branches
that meet FHA requirements (chapter 2 of HUD Handbook 4060.1 or HUD
Handbook 4700.2 and Mortgagee Letter 2011-34). Each branch office where a
lender’s FHA origination personnel are assigned must be registered with FHA,
and its facilities must meet State originating requirements. It must also meet
FHA’s staffing and manager requirements in chapter 2 of HUD Handbook
4060.1 or HUD Handbook 4700.2.
The direct lending branch office is a branch that will be used for the sole
purpose of direct lending. Its facilities must meet State originating
requirements. It must also meet FHA’s staffing and operating requirements in
HUD Handbook 4060.1.
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2. Suggested Audit Procedures.
a. Determine whether all branches that manage a lender’s FHA
origination personnel are registered with HUD by reviewing the
appropriate form or screen printout from FHA’s Lender Electronic
Assessment Portal (LEAP).
b. Through inquiry or physical observation, determine whether the branches
are true branches and are not subsidiaries, independent contractors, agents of
the lender, or separate entities. A lender with a separate tax identification
number is required to have approval in its own right. A branch must have at
least one employee including a branch manager. The branch manager may
manage more than one branch except in the case of a direct lending branch,
which must have its own manager. Branch office expenses must be paid by
the lender.
c. Review the lender’s payroll records for indications of any branch office
personnel, except the receptionist, who are not employed exclusively by the
lender at any given time. Inquire of personnel to determine whether branch
employees conduct only the business affairs of the lender during normal
business hours.
d. Determine whether the branch office facilities meet State mortgage lending
licensing requirements.
e. Review company records for evidence that:
(1) The present branch office managers are corporate officers or employees
authorized to bind the corporation in matters involving loan origination
and servicing and whether the branch office manager of each direct
lending branch office manages only that one branch.
(2) Branch compensation and contractual relationships comply with the
requirements set forth in chapter 2, paragraph 2-14 of HUD handbook
4060.1.
D. Loan Origination.
1. Compliance Requirement. HUD requires lenders to originate loans in
accordance with HUD requirements. They must obtain and verify information
with at least the same care that would be exercised in originating a loan in
which the mortgage would be entirely dependent on the property as security to
protect their investment.
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Information on the lender’s copy of form HUD-92900, “HUD/FHA Application
for Commitment for Insurance under the National Housing Act,” must be
supported by documents in the lender’s files (HUD Handbook 4155.1).
Lenders may not require, as a condition of providing an insured loan, the
principal amount of the loan to exceed a minimum amount established by the
lender (24 CFR 203.18d).
Regulations at 24 CFR 202.12 prohibit lenders from originating insured
mortgages if it is the customary practice of the lender to engage in “tiered
pricing” of its loans (for discount points, origination fee, and other such fees) of
more than 2 percent in an area (metropolitan statistical area or county in rural
areas). The regulation further requires HUD to ensure that any variations in
mortgage charge rates be based only on the actual variations in costs to the
lender to make the loan. The 2 percent limitation on variation in “mortgage
charge rates” must be applied to all Section 203 mortgages by loan type.
For Title I loans, HUD expects that the lender will exercise prudence and
diligence in determining whether the borrower is solvent and an acceptable
credit risk with a reasonable ability to make payments on the loan obligation.
All documentation supporting this determination of credit worthiness must be
retained in the loan file (24 CFR 201.22).
2. Suggested Audit Procedures.
a. Obtain an understanding of the lender’s procedures for processing loan
applications. Determine whether the lender’s procedures provide for the
applicant’s credit report, employment verification, and verification of
deposits to be sent directly to the lender and not passed through any
interested third party (e.g., real estate agent).
b. Obtain a sample of files for Title II loans originated during the audit period
to perform the following tests. These files should include loans originated
at the lender’s branch offices and by its sponsored TPOs as well as its
central office.
(1) Review loan file documentation for evidence that the loan applicant had
an opportunity for a face-to-face interview. If the loan applicant opted
not to have a face-to-face interview, determine whether the lender asked
sufficient questions to elicit a complete picture of the borrower’s
(i) financial situation, (ii) source of funds for the transaction, and
(iii) intended use of the property. Verification of all of this information,
as well as the identity of the loan applicant, must be documented in the
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loan file. In addition, determine whether a home equity conversion
mortgage (HECM) loan applicant completed the required counseling.
(2) Review all files in the sample to determine whether any forms have been
signed by the lender but not completed by the applicant.
(3) Determine whether all employment and income data are supported by a
verification of employment or other sources, especially for self-
employed applicants and applicants with nonemployment income.
Review loan file documentation for evidence that the lender reconciled
any conflicting information before submitting the application package to
the appropriate HUD Homeownership Center for endorsement or
insuring the loan under the lender insurance procedure.
(4) Determine whether the applicant’s cash assets, source of funds, and
liabilities are supported by documentation such as verifications of
deposit, gift letters, credit reports, etc.
c. Obtain a sample of files for Title 1 loans originated during the audit period
to be examined for the documentation required by the regulations. The
sample should include loans originated at the lender’s branch offices as well
as the home office.
(1) Determine whether the lender obtained a separate dated credit
application on the HUD-approved form from the borrower, any co-
maker, or cosigner and verified the validity of the borrower’s Social
Security number in accordance with Title I Letter TI-414.
(2) Determine whether all income and employment data are supported by
written verification or other documentation, especially for self-employed
applicants and those with nonemployment income.
(3) Determine whether the lender obtained a complete and current consumer
credit report on the borrower, any co-maker, or cosigner and checked on
any credit inquiries reported within the previous 90 days.
(4) Determine whether the lender obtained written verification of the
borrower’s payment status on any senior mortgages or deeds of trust on
the property to be improved.
(5) For each person on the credit application, determine whether the lender
checked HUD’s Credit Alert System to verify whether the borrower is in
default or a claim has been paid on behalf of the borrower on any
federally insured or guaranteed loan and whether the lender recorded the
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borrower’s “credit alert response code” on the application for each
person listed.
(6) When the principal balance of the loan exceeds $5,000 and the initial
payment exceeds 5 percent of the loan amount, determine whether the
lender obtained written verification of the source of these funds through
verifications of deposit, bank statements, gift letters, or other methods or
evidence.
(7) Review the loan file documentation for evidence that the lender
conducted a face-to-face or telephone interview with the borrower
before making a final determination of the borrower’s credit worthiness.
(8) For dealer loans with a credit application date of December 12, 2001, or
later, review the file documentation to determine whether a telephone
interview occurred before loan disbursement was made. Lenders are
required to conduct a telephone interview before disbursing the loan in
addition to the credit underwriting telephone interview.
d. Obtain a sample of files for rejected loans during the audit period and
perform the following review:
(1) Determine whether individual reviews were conducted for all sampled
rejected applications that were denied due to a statistical category or
score (e.g., credit score, debt-to-income ratio). Determine whether the
score accurately reflected the financial status (e.g., loan and rent
payments, current housing payments) of the applicant. A rejection
should not be influenced by statistical categories or geographic location.
(2) Determine whether the rejections were made based on established
criteria and the reasons for the rejections were provided to the applicant.
Determine whether procedures for accepting and processing the loans
were followed.
E. Loan Servicing.
1. Compliance Requirement. Lenders that service FHA-insured loans are
permitted to collect certain fees from the borrowers in accordance with HUD
rules (HUD Handbook 4330.1, chapter 4). Sponsored TPOs are not allowed to
service loans.
Lenders that service insured HECMs with adjustable rate mortgages are
responsible for adjusting those rates in accordance with the annual and lifetime
caps as established by HUD Handbook 4235.1.
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Loan servicing procedures are to be followed consistently and should not vary.
The lender must have an organized means of periodically identifying the
payment status of delinquent loans to enable personnel to initiate and follow up
on collection activities and must document its records to reflect its collection
activities regarding delinquent loans. The lender must accept partial payments
under an executed modification agreement or an acceptable repayment plan
(refer to 24 CFR 201.41 for details). A modification agreement may be used to
increase or reduce monthly payments but not to increase the term or the interest
rate to ensure that the delinquent or defaulted loan is brought current before or
by the end of the loan term. A modification agreement may also be used to
effect a reduction in the interest rate and monthly payment for current loans (24
CFR 203.500).
2. Suggested Audit Procedures.
a. Obtain an understanding of the lender’s procedures for servicing loans.
b. Select a sample of delinquent and defaulted loans, including loans in
foreclosure, for testing the lender’s loan servicing procedures.
c. Review the loan file documentation for evidence that the lender documents
its records to reflect its servicing on delinquent and defaulted mortgages.
(1) Determine whether the lender maintains individual servicing records
documenting collection (loan servicing) activities.
(2) Review the servicing records to determine whether they contain
information on collection contacts attempted and completed.
d. Review selected loan file documents for evidence that the lender
communicates with the borrower or makes a reasonable effort to do so to
determine the cause of default.
(1) Review the individual loan servicing records for recorded collection
contacts of more than one type (i.e., telephone, letter, face-to-face
interview, etc.) if one type of contact effort is unsuccessful.
(2) Review the individual loan servicing records for borrower explanations
of defaults and documented attempts by loan servicing personnel to
contact the borrowers.
(3) Based on the review of the individual loan servicing records, when the
cause of delinquency appears to be temporary (i.e., illness,
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unemployment), test whether the lender offers reasonable repayment
plans.
e. Review selected receipts for evidence that the lender accepts partial or late
payments offered by borrowers.
(1) Review the lender’s procedures for the handling of partial payments.
Obtain a representation letter from the lender concerning such
procedures.
(2) Review the servicing records for the recording of partial payments
accepted, held in a pending file, or rejected. (Note: The decision to
reject a late or partial payment must be a decision based on the
individual circumstances.)
(3) Review the payment records of selected borrowers to determine whether
(a) The amount of the late charge, if any, was computed correctly.
(b) The late charge was assessed after 15 days of delinquency or the 17
th
day of the month.
f. Determine whether the lender has implemented steps to comply with the
provisions of HUD’s loss mitigation program. Servicing lenders should use
the following six tools to mitigate losses to the insurance fund: special
forbearance, mortgage modification, partial claim, FHA home modification,
preforeclosure sale, and deed in lieu of foreclosure. HUD requires that all
loss mitigation tools be considered, and the servicing lender is required to
document its loss mitigation efforts. Review selected servicing and claim
files for evidence that such relief measures were considered (refer to
Mortgagee Letters 2000-05, 2002-17, 2003-19, 2008-23, and 2009-23).
g. Determine whether the lender sends notices to advise the borrower about
HUD’s foreclosure relief program once it has decided to foreclose. Review
the loan files selected for evidence that such letters were sent before the
initiation of foreclosure proceedings.
h. Compare charges assessed to borrowers for servicing activities to allowable
amounts (refer to 24 CFR 203.552, 24 CFR 203.25, and chapter 4 of HUD
Handbook 4330.1). For the loans selected:
(1) Review charges to borrowers for checks returned due to insufficient
funds.
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(2) Review charges to borrowers for attorney’s fees and determine whether
(a) The charges were for services performed by someone other than
salaried members of the lender’s staff and
(b) The charges were made only in those cases in which the lender
decided to foreclose and referred the loan to an attorney for initiation
of foreclosure proceedings.
i. Obtain an understanding of the lender’s procedures for paying insurance
premiums to HUD. Determine whether the lender follows one of the two
acceptable methods of making insurance premium payments (electronic
payment through pay.gov or bank check) and that its practices comply with
HUD regulations. Review a representative sample of insurance claims
submitted to HUD. Recalculate the net claim amount on the Single Family
Application for Insurance Benefits (form HUD-27011) and compare the
claim amount information to the accounting records. Test the amounts
included in the claim for preservation and protection expenses to determine
whether they are supported by documentation.
j. Select a sample of adjustable rate HECMs and determine whether the lender
is exceeding the limitations of the 2 percent annual and 5 percent lifetime
caps.
k. Select a sample of HECMs and determine whether the disbursements have
been made in accordance with the mortgage note.
F. Federal Financial and Activity Reports.
1. Compliance Requirement. Lenders participating in HUD-assisted Title I and
Title II programs are required to ensure that financial status, single-family
default monitoring, and reports required under the Home Mortgage Disclosure
Act (HMDA) contain reliable data and are presented in accordance with the
terms of applicable agreements between the entity and HUD. The individual
agreements, handbooks, and mortgagee letters contain the specific reporting
requirements that the lender is to follow. Refer to HMDA reporting
requirements at: http://www.ffiec.gov/hmda/guide.htm.
In addition to the specific reporting requirements referenced above, lenders
originating Title I loans are required to submit annual HMDA reports by March
1 of each year pursuant to Title I Letter TI-479. All lenders with Title I
authority are required to report any noncompliance by borrowers, contractors, or
other parties related to a Title I-insured loan pursuant to Title I Letter TI-447.
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2. Suggested Audit Procedures.
a. Obtain a list from management of the HUD programs participated in during
the reporting period, along with all related guidance and reference materials
addressing reporting requirements for each program listed.
b. Obtain an understanding of the lender’s procedures for preparing and
reviewing the required reports.
c. Select a sample of financial reports, other than those that are included in the
audited financial statements, and determine whether the reports selected are
prepared in accordance with HUD instructions.
d. Select a sample of activity reports and determine whether the reports
selected are prepared in accordance with HUD requirements and are filed in
a timely manner.
e. For the sample, trace significant data to supporting documentation; i.e.,
worksheets, ledgers, etc. Report all material differences between selected
reports and lender records.
f. Review adjustments made to the general ledger accounts having a material
effect on the HUD program activity and evaluate the propriety of those
adjustments.
G. Lender Annual Recertification, Adjusted Net Worth, Liquidity and Licensing.
To help strengthen FHA’s oversight of approved lenders and better manage
program risks, Section 203 of the Helping Families Save Their Homes Act of 2009
(Public Law 111-22) provides limitations on those eligible to participate in FHA
programs. This Act directs that lenders not be and not have any officer, partner,
director, principal, manager, supervisor, loan processor, loan underwriter, or loan
originator of the applicant lender who is currently (1) suspended; (2) debarred; (3)
under a limited denial of participation; (4) under indictment for or has been
convicted of an offense that reflects adversely upon the applicant’s integrity,
competence, or fitness to meet the responsibilities of an approved lender;
(5) subject to unresolved findings contained in HUD or other governmental audit,
investigation, or review; (6) engaged in business practices that do not conform to
generally accepted practices of prudent lenders or that demonstrate irresponsibility;
(7) convicted of or who has pled guilty to a felony related to participation in the real
estate or mortgage loan industry; or (8) in violation of any other requirement as
established by the HUD Secretary. The timeframes associated with criminal
activity and clarification of the term “unresolved findings” is further outlined in
Mortgagee Letter 2010-38.
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1. Compliance Requirements. All lenders must maintain both fidelity bond and
errors and omissions insurance of at least $300,000 each (24 CFR 7(b)(5)).
HUD does not require that it be the beneficiary of such coverage. A fidelity
bond that is generally acceptable to the secondary market agencies, such as
Ginnie Mae, Fannie Mae, or Freddie Mac, will meet FHA’s requirement. An
applicant must provide evidence of such coverage.
In compliance with Mortgagee Letter 2010-38, FHA-approved lenders must
complete the online annual certification (formerly known as the yearly
verification report) before electronically submitting the annual renewal fee and
audited financial statements. The annual recertification process must be
completed within 90 days of the lender’s fiscal year end. There are three steps
to FHA’s annual recertification process; namely, (1) the completion of the
online annual certification, (2) electronic payment of the annual renewal fee,
and (3) electronic submission of acceptable audited financial statements and
other required documents that have been received as acceptable by HUD. On
April 20, 2010, HUD made changes to the net worth requirements (24 CFR
202.5(n)). The following net worth requirements are effective May 20, 2010,
for all approved supervised and non-supervised lenders and all approved
investing lenders with FHA approval as of May 20, 2010.
• Existing non-small-business-approved lenders. An applicant for FHA-
approved lender that exceeds the size standards for its industry classification
as established by the Small Business Administration (SBA) at 13 CFR
121.201, section 52 (Finance and Insurance), subsector 522 (Credit
Intermediation and Related Activities), must have a net worth of not less
than $1 million, of which no less than 20 percent must be liquid assets
consisting of cash or its equivalent acceptable
4
to the HUD Secretary.
• Existing small-business-approved lenders. An approved lender that meets
the SBA size standards for its industry classification must have a net worth
of not less than $500,000, of which no less than 20 percent must be liquid
assets consisting of cash or its equivalent acceptable to the HUD Secretary.
The net worth requirements for small business lenders remain applicable as
long as the lender continues to meet the SBA size standard for small
business. If a small business lender no longer meets the SBA size standard
of a small business, as evidenced by the audited financial statements
4
Cash and cash equivalents constitute liquid assets. Cash includes cash on hand, checking accounts, savings
accounts, and certificates of deposit. Cash equivalents are readily marketable investments; e.g., securities readily
convertible into cash. To be considered a liquid asset, the cash or cash equivalent must not be restricted or
otherwise reserved for any purpose other than the payment of a current liability. FHA does not consider a line of
credit or loans or mortgages held for resale by the lender to be liquid assets.
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provided to HUD 90 days after the end of a fiscal year, the lender must meet
the net worth requirements for a non-small-business lender by the last day of
the fiscal year in which the audited financial statements were submitted.
In addition, the following net worth requirements are effective on May 20,
2013, for new applicants for FHA approval to participate in FHA single-family
and multifamily programs, for all approved supervised and non-supervised
lenders, and for all FHA-approved investing lenders:
• Single-family lenders. Irrespective of size, each applicant and each
approved lender, for participation solely under the FHA single-family
programs, shall have a net worth of not less than $1 million, plus an
additional net worth of 1 percent of the total volume in excess of $25
million of FHA single-family insured mortgages originated, underwritten,
purchased, or serviced during the prior fiscal year, up to a maximum
required net worth of $2.5 million. No less than 20 percent of the
applicant’s or approved lender’s required net worth must be liquid assets
consisting of cash or its equivalent acceptable to the HUD Secretary.
• Multifamily lenders. Irrespective of size, each applicant for approval and
each approved lender for participation solely under the FHA multifamily
programs must have a minimum net worth of not less than $1 million. For
those multifamily approved lenders that also engage in mortgage servicing,
an additional net worth of 1 percent of the total volume in excess of $25
million in FHA multifamily mortgages originated, purchased, or serviced
during the prior fiscal year, up to a maximum required net worth of $2.5
million, is required. For multifamily approved lenders that do not perform
mortgage servicing, an additional net worth of one half of 1 percent of the
total volume in excess of $25 million in FHA multifamily mortgages
originated during the prior fiscal year, up to a maximum required net worth
of $2.5 million, is required. No less than 20 percent of the applicant’s or
approved lender’s required net worth must be liquid assets consisting of
cash or its equivalent acceptable to the HUD Secretary.
An FHA computation of adjusted net worth is required for all lenders even if
there were no loans originated or serviced during the audit period. The required
amount, which must be maintained throughout the year, varies by program
participant type and approval date. When the lender is a parent or a subsidiary
of a parent, the adjusted net worth computation must focus on the assets and
equities of the individual FHA-approved entity.
Included in this chapter are examples of adjusted net worth computation
schedules, which are shown in attachments A and B.
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The following are unacceptable assets and are not to be used in the computation
of adjusted net worth:
a. Any asset or portion thereof pledged to secure obligations of another entity
or any person. Supervised institutions that provide financial services to
incorporated communities are sometimes required by State law to pledge
their assets for the benefit of the community or to the government regulator.
These pledged assets are acceptable for supervised institutions only.
b. An asset due from an officer or stockholder of the lender or from a related
entity, except for:
(1) A construction loan receivable, secured by a first mortgage, from a
related entity.
(2) A mortgage loan receivable established in the normal course of business
in an arm’s length transaction and secured by a first mortgage on the
related property.
(3) A receivable from a related party when the affected parties have
executed a cross-default agreement
5
or corporate guarantee agreement
6
with Ginnie Mae.
(4) A receivable from an officer or stockholders of a publicly traded
supervised institution that owns less than 5 percent of the shares
outstanding or issued.
c. An investment in a related entity in which any officer or stockholder of the
lender has a personal interest
7
unrelated to that person’s position as an
officer or stockholder of the lender.
d. Any intangible asset, including but not limited to goodwill, covenants not to
compete, franchise fees, organization costs, value placed on insurance
renewals, and value placed on property management contract renewals aside
from mortgage servicing rights referenced below.
5
A cross-default agreement is an agreement between related affiliated Ginnie Mae issuers, which provides for the
default of all affiliated issuers in the event of a default by any one of them.
6
A corporate guarantee agreement is an agreement in which the issuer’s parent guarantees the performance of the
issuer.
7
“Personal interest” as used here indicates a relationship between the lender and a person or entity in which that
specified person (e.g., spouse, parent, grandparent, child, brother, sister, aunt, uncle, or in-law) has a financial
interest in or is employed in a management position by the lender.
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e. The value of any servicing contract not determined in accordance with
Financial Accounting Standards Board Accounting Standards Codification
860-50 – Transfers and Servicing – Servicing Assets and Liabilities or
revisions thereto.
f. Any asset unrelated to the lending business and not readily marketable and
for which appraised values are highly subjective. Examples include but are
not limited to antiques, artwork, and gemstones.
g. That portion of any marketable security (listed or unlisted) in excess of the
lower of cost or market, except for shares of Fannie Mae stock required to
be held under a servicing agreement, which should be carried at cost,
including unrealized gains on “available for sale” securities.
h. Any amount in excess of the lower of cost or market value of mortgages in
foreclosure, construction loans, or property acquired through foreclosure.
i. Any asset, which is principally used
8
for the personal enjoyment or benefit
of an officer, director, or stockholder and not for normal business purposes.
This includes motor vehicles and personal residences.
j. “Other assets” unless the financial statements are accompanied by a
schedule covered by the audit opinion or a schedule prepared by the issuer
or lender and signed by an officer of the issuer or lender.
k. That portion of contributed property, not otherwise excluded, in excess of
the value as of the date of contribution, determined by an independent
appraisal. If property is contributed but the related mortgage or debt is not
also transferred to the company, the value of the contributed property should
be reduced by that obligation.
Beginning in 2011, mortgage lenders were required to file their annual licensing
requirements with the National Mortgage Licensing System (NMLS). The
lender must also file a quarterly call report on loan information that also
includes selected financial data. The detail required depends on the size of the
lender. The link to the NMLS website can be found below:
http://mortgage.nationwidelicensingsystem.org/Pages/default.aspx
8
“Principally used” means that any other use of the property must be solely incidental.
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2. Suggested Audit Procedures.
a. As of the financial statement date and additional representative points of
time during the audit period, test whether the lender meets the required
levels for adjusted net worth, liquidity, fidelity bond coverage, and errors
and omissions bond according to HUD Handbook 4060.1. If the lender does
not meet the requirement, report the deficiency in the report on compliance
and in a written audit finding. Determine whether there are internal control
deficiencies related to the noncompliance that should be reported in the
report on internal controls and in a written audit finding.
b. Ensure that the lender has filed the annual certification, paid the annual
renewal fee, and submitted audited financial statements for the prior year.
c. Determine the lender’s compliance in reporting any quarterly net operating
loss, calculated based on GAAP, in excess of 20 percent of net worth (refer
to HUD Handbook 4060.1).
d. Determine the lender’s compliance with the liquidity requirements as
outlined above (refer to HUD Handbook 4060.1).
e. Review the lender’s filings with NMLS to ensure that the required filings
were made. Review the yearend filing to ensure that the financial data filed
agree with the audited financial statement data.
7-6 Compliance Requirements and Suggested Audit Procedures Applicable to Lenders
with Title I Authority.
A. Loan Disbursement.
1. Compliance Requirement. The lender has certain responsibilities to be carried
out in connection with the disbursement of loan proceeds (24 CFR 201.26 and
201.40). These responsibilities vary widely, depending upon whether the loan is
a property improvement or manufactured home loan and whether the
disbursement is made directly to the borrower or to a dealer. The disbursement
of loan proceeds must be adequately documented in the lender’s file. When
dealer loans are involved, the lender must also maintain separate dealer files,
which reflect compliance with HUD’s requirements concerning the dealer’s
approval and supervision (24 CFR 201.27).
2. Suggested Audit Procedures.
a. Review the lender’s procedures for determining borrower eligibility and
evaluating whether the loan proceeds are being used for eligible purposes
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(24 CFR 201.20 or 201.21 as appropriate). Also, review the lender’s
procedures for documenting that the property improvements have been
completed or the manufactured home has been satisfactorily delivered and
installed (24 CFR 201.26(a) or (b) as appropriate).
b. Select a representative sample of property improvement loan files and
determine whether each file contains the following:
(1) The note, security instrument if any, credit application, completion
certificate, and notice of HUD’s role in the loan transaction required by
24 CFR 201.26(b)(7) for manufactured home loans and 24 CFR
201.26(a)(8) for property improvement loans.
(2) A contract or contract proposal between the borrower and a dealer or
contractor or a detailed written description of the work with a materials
list and estimated costs if the borrower is carrying out the work without
a dealer or contractor.
(3) Evidence of an onsite inspection to determine that the improvements
were completed if the loan is for $7,500 or more.
c. Select a representative sample of manufactured home loan files. Review the
files to determine whether each file contains the following documents:
(1) The note, security instrument, credit application, purchase contract,
manufacturer’s invoice, itemized statements of other costs, and fees or
charges.
(2) Evidence of the borrower’s initial payment, a placement certificate
signed by the borrower and dealer, and the notice of HUD’s role in the
loan transaction required by 24 CFR 201.26(b)(7).
d. For each file reviewed under A.2.c above, determine whether the lender has
documented a site-of-placement inspection within 60 days after
disbursement of the loan proceeds.
e. When the lender approves dealer loans, determine whether
(1) The lender supervised and monitored each dealer and visited the dealer
periodically.
(2) Each dealer’s approval is documented on a HUD-approved form, signed
and dated by both parties.
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(3) Each dealer’s file contained the dealer’s current financial statement,
including a determination that the dealer met the minimum adjusted net
worth requirements of 24 CFR 201.27(a)(1) and credit reports on the
dealership and its owners, principals, and officers.
(4) The file contained documentation of the lender’s experience with the
dealer’s Title I loans, including information on borrower defaults and
borrowers’ complaints and evidence of the resolution of those
complaints.
B. Eligible Fees and Charges.
1. Compliance Requirement. Title I Letters TI-440, dated May 2, 1996, and
TI-440-S, dated July 3, 1996, list all fees and charges allowed in the program.
2. Suggested Audit Procedures. Obtain the lender’s general ledger, cash journal,
canceled checks, and supporting invoices for at least 2 months of the audit
period and based on review of a representative sample, determine whether
a. The fees and charges were within the allowable amounts contained in Title I
Letters TI-440 and TI-440-S and report amounts paid in excess of the
allowable amounts.
b. Disbursements are supported by invoices and were for eligible amounts in
return for goods or services actually provided in connection with a Title I
loan. Review and report on any differences.
c. Referral fees are being paid. During the review of loan origination and loan
settlement documents, the auditor should be alert for any fees or other types
of payments that show evidence of being referral fees. If the auditor notes
any such referral fees, they must be reported as a finding.
d. Points and closing costs are accurate.
7-7 Compliance Requirements and Suggested Audit Procedures Applicable to Lenders
with Title II Authority.
A. Loan Settlement.
1. Compliance Requirement. The loan origination fee should normally
compensate the lender for the required loan settlement services. As a result of
regulatory changes to 24 CFR 203.27, FHA no longer limits the origination fee
to 1 percent of the mortgage amount for its standard mortgage insurance
programs. HUD has specified the types and amount of additional charges and
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fees that the lender may collect from the borrower. Additionally, the lender is
responsible for promptly submitting upfront mortgage insurance premiums to
HUD following loan settlement, disbursing the funds, and completing the
transaction in accordance with the closing documents without undue delay (24
CFR 203.284).
2. Suggested Audit Procedures.
a. Obtain an understanding of the lender’s procedures for settling and
completing loan transactions.
b. Select a representative sample of HUD loans for testing from those settled
during the audit period.
(1) Examine the signed settlement statement (form HUD-1). Prove the
mathematical accuracy of the HUD-1. Compare amounts listed on the
HUD-1 to other authentic loan documents, including the good faith
estimate.
(2) Review the fees and charges collected from the borrowers as shown on
loan settlement statements.
(a) Determine whether they are equal to the lender’s actual out-of-
pocket costs for the related service or the maximum charge allowed
by HUD, whichever is lower (refer to 24 CFR 203.24, 24 CFR
203.26, chapter 6 of HUD Handbook 4155.2, and chapter 4 of HUD
Handbook 4330.1).
(b) Determine whether all such fees were disclosed in the good faith
estimate.
(3) Review the points and closing costs to determine whether those costs
were the costs that the borrower agreed to.
(4) Review computations and supporting data for amounts collected to
establish escrow accounts for taxes and hazard insurance. Determine
whether the amounts charged are in accordance with the supporting data.
Report any differences.
(5) Review computations and supporting data for interest collected from the
borrower at loan closing. Reconcile and report on any differences.
(6) Compare the amount of the insured mortgage to the acquisition costs to
determine whether the borrower made the required minimum
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investment. The form HUD-92900 contains the acquisition cost of the
property. The HUD-1 contains the amount of the insured mortgage.
(7) Examine the canceled check or other supporting documentation for
evidence that the lender submitted the mortgage insurance premium to
HUD in accordance with HUD policy at the time of closing. Determine
whether payment reached HUD’s depository within 10 calendar days of
closing (Mortgagee Letter 2005-28, dated June 20, 2005).
(8) Compare the purchase contract and the HUD-1 for agreement as to sales
price, earnest money deposit, and any seller concessions.
B. Escrow Accounts.
1. Compliance Requirement. HUD requires that lenders establish escrow
accounts and borrowers make monthly payments thereto to ensure that funds
will be available to pay taxes and insurance premiums. Each month, the lender
must collect from the borrower an amount that the lender estimates will be
sufficient to enable it to accumulate funds to pay all escrow obligations before
delinquency; i.e., (a) mortgage insurance premiums; (b) taxes, special
assessments, and ground rents if any; (c) hazard insurance premiums if any; and
(d) flood insurance premiums when required. The lender should analyze the
escrow account at least annually to determine whether projected escrow
balances will be sufficient to fund escrow disbursements. Any projected escrow
shortage should be collected by either (a) lump sum payment or (b) allocating
the shortage over a 12-month period. The mortgage instrument provides the
authority for the lender to accumulate sufficient escrow funds with which to pay
the borrower’s tax and insurance bills 30 days before the bills become
delinquent (HUD Handbook 4330.1, chapter 2).
Lenders may not use borrower escrow funds for any purpose other than that for
which they were received, and lenders may not report escrows as their own
assets. If a lender reports its escrow funds on its balance sheet, such funds must
be fully offset by a corresponding liability and must be segregated on the
balance sheet.
2. Suggested Audit Procedures.
a. Obtain an understanding of the policies and procedures for reconciling
escrow accounts.
b. Determine whether escrows are reported on the balance sheet. If so,
determine whether the proper liability account is established and reported
and the accounts are segregated as required.
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c. Obtain trial balances of individual escrow accounts and reconcile or review
the reconciliation of the total with the lender’s control account and the
related bank account. Select a sample and test to determine whether the
lender used escrow funds to pay late charges, assumption fees, or any other
expense that are not allowable expenses as specified above.
d. For selected mortgages, obtain the most recent escrow analysis and note
whether it was prepared not more than 1 year previously and whether
monthly deposits appear adequate to provide for payments of taxes,
insurance, etc., by review of actual payments or other evidence of amounts
due (e.g., tax assessment notices or prospective rate adjustment notices from
insurance companies). Also, determine whether the most recent real estate
tax bills for each account were paid. If not paid within the discount period,
inquire as to reasons for the delay and test to determine whether the
borrower retained the benefit of the discount and any late charges assessed
were borne by the lender at its expense. Determine whether the borrower
was furnished a statement of interest paid during the preceding calendar
year within 60 days after the end of that calendar year.
e. On accounts selected for review, inspect supporting documents for escrow
disbursements such as receipts, invoices, tax bills, and canceled checks.
Determine whether the funds were used only for the intended purpose and
the proper amount was disbursed.
f. Determine whether escrow funds have been deposited into accounts fully
insured by FDIC or NCUA and whether the lender covered any overdrafts
on selected accounts by advancing its own funds to custodial accounts so
that FDIC or NCUA insurance protection was not impaired. HUD
regulations neither require nor forbid escrow accounts to bear interest.
However, in those cases in which accounts are interest bearing, determine
whether interest earned, net of any bank account fees, is passed on to the
borrower.
g. Determine whether the lender advises the borrower of the amount of any
surplus escrow funds in accordance with HUD requirements.
h. Review the policies and procedures that the lender has established to ensure
that bills payable from the escrow fund or the information needed to pay
such bills is obtained in advance of the due date.
i. For any bills paid late by the lender, determine whether any late charges or
penalties assessed are paid out of the lender’s funds and not the borrower’s
funds.
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j. Determine whether the lender requires the borrower to purchase hazard
insurance coverage from the lender or from a specific company.
k. Review selected loan payoffs for evidence that the lender returns to the
borrower the amounts held in escrow for taxes and hazard insurance within
30 days of receipt by the lender of payoff funds.
l. Determine whether the lender has notified HUD within 15 calendar days of
the sale or transfer of an FHA-insured loan to another FHA-approved
lender, pursuant to Mortgagee Letter 2011-33.
C. Kickbacks.
1. Compliance Requirement. HUD regulations and the Real Estate Settlement
Procedures Act prohibit lenders from paying any fee, kickback, compensation,
or thing of value, including a fee representing all or part of the lender’s
origination fee, to any person or entity other than for services actually
performed or to any person or entity for referral of the loan or as a finder’s fee
(HUD Handbook 4155.2, chapter 6).
2. Suggested Audit Procedures.
a. Obtain the general ledger; the cash journal; and a representative sample of
canceled checks, check vouchers, and supporting invoices for at least 2
months of the audit period and determine whether
(1) Disbursements are supported by an invoice and were not for an
unreasonable amount in return for goods or services actually performed.
Reconcile and report on any differences.
(2) Any funds were advanced to real estate agents, real estate brokers,
mortgage brokers, or packagers as an advance of anticipated
commissions on sales to be financed with an FHA-insured mortgage.
b. Determine whether any no-interest loans or loans at less than prevailing
rates were made to a real estate broker, real estate agent, mortgage broker,
packager, builder, or any other party from whom, based on available
evidence, the lender accepts proposals involving FHA-insured mortgages.
c. From a sample of payments, determine whether any payment was made for
a gratuity or for a gift valued above items that are customarily distributed in
the normal course of advertising or public relations or as a general
promotion device to any person or entity involved in FHA-insured mortgage
transactions of the lender.
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d. From a sample of payments, determine whether any fees or compensation
was paid that is prohibited by the Real Estate Settlement Procedures Act.
e. During the review of loan origination and loan settlement documents, the
auditor should be alert for any fees or other types of payments that may
represent kickbacks. If the auditor notes any kickbacks or indications of
kickbacks, these should be reported in an audit finding.
7-8 Multifamily Insured Loans Reporting Requirement - Loan Fees for Multifamily
Mortgages
A. Compliance Requirement. Lenders participating in FHA multifamily
programs are now required by Mortgagee Letter 2011-05 to report total loan
fees earned that exceed 5 percent of the insured loan amount on each FHA-
insured loan of more than $2 million endorsed during the lender’s fiscal year
period covered in its audited financial statements.
Loan fees include
1. Origination and placement fees as permitted by the Multifamily Accelerated
Processing Guide,
2. Plus trade profit, trade premium, or marketing gain earned on the sale of the
Ginnie Mae security at a value above par, even if the security sale is delayed
until after endorsement,
3. Minus loan fees applied by the lender to its legal expenses incurred in
connection with loan closing.
Loan fees should be reported on a separate schedule included as supplemental
information with the lender’s annual audited financial statements submitted to
HUD (see example format below). For each loan in which the lender earned
total loan fees of more than 5 percent, the schedule must list (1) the FHA loan
number, (2) the loan amount at initial or final endorsement, and (3) the amount
of total loan fees earned above 5 percent, both in dollar amount and as a
percentage of the FHA-insured loan amount.
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Schedule of loan fees for
multifamily lenders
FHA loan number
Dollar amount of
endorsed loan
Loan fees earned that exceed 5%
of insured loan amount
Percentage of
insured loan amount
Amount in dollars
Lenders are not required to separately report on total loan fees that do not exceed 5
percent.
If, on a single loan endorsement, the trade profit, trade premium, or marketing gain
earned on the sale of the Ginnie Mae security is received by the lender during a
fiscal year reporting period that is after the period in which the origination and
placement fees were received and if the total of the fees earned requires reporting
under Mortgagee Letter 2011-05, the lender must disclose the total loan fees it
earned that are above 5 percent of the loan amount on the schedule filed during the
next fiscal year.
Mortgagee Letter 2011-05 also states that that lenders’ annual audited financial
statements are not subject to Freedom of Information Act requests.
B. Suggested Audit Procedures.
1. Review insured loans of more than $2 million that closed during the reporting
period and determine whether the total loan fees earned exceeded 5 percent of
the loan amount.
2. Review the report and determine whether all of the fees earned that exceeded 5
percent of the loan amount were listed in the report.
3. Determine whether the report included all of the required information and
whether that information was accurate based on information in the loan file.
4. Determine whether (1) any trade profit, trade premium, or marketing gain fees
earned on the sale of the Ginnie Mae security were received by the lender
during a fiscal year reporting period that was after the period in which the
origination and placement fees were received, (2) the total of the fees earned
requires reporting under Mortgagee Letter 2011-05, and (3) the lender disclosed
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the total loan fees it earned that were above 5 percent on the schedule filed
during the next fiscal year.
7-9 Audit Finding Reporting.
All material instances of noncompliance with any HUD requirement or regulation,
significant deficiencies and material weaknesses in internal controls, instances of fraud
or illegal acts, or contract violations that were disclosed during the audit process must
be reported as findings in the audit report. All nonmaterial instances of noncompliance,
deficiencies in internal control, instances of fraud or illegal acts, or contract violations
relating to HUD programs disclosed during the audit process may be reported to
management in a separate communication outside of the audit report. Such reporting
must be in writing in a management letter or other type of written auditor
communication and must be mentioned in the independent auditor’s report, including
the date of the management letter or other written communication. The management
letter or other communication should accompany the electronic submission.
Noncompliance, deficiencies, or instances of violations, which were corrected during
the audit process or after the fiscal year under audit or disclosed as a part of the audit
process before the end of the fiscal year under audit and before the issuance of the audit
report, must be included in the report as resolved findings or in a management letter,
depending on their materiality, regardless of whether they were found to be material or
immaterial FHA compliance issues.
A. Content of Finding.
Findings are to be presented in accordance with the standards and requirements of
the Government Auditing Standards, “Yellow Book.” A finding should be
supported by sufficient, competent, and relevant evidence; be presented in a manner
to promote adequate understanding of the matters reported; and provide convincing
but fair presentations in proper perspective. Each finding is to be accompanied by a
corrective action plan prepared by the lender.
Please refer to chapter 2 for the information that is to be included in a finding.
B. Corrective Action in Process.
Many times when lenders are presented with draft findings, they will start to take
action to correct the deficient condition. When this action is underway and the
auditor has completed his or her fieldwork, the lender may include the action
completed and the action remaining to be taken in the lender’s comments and in the
corrective action plan. Regardless of whether the lender is in the process of
correcting the finding, the auditor is to include the finding in the report with all
required elements.
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C. Corrective Action Completed.
Many times when the lender is presented with draft findings, it will start to take
action and complete that action, correcting the deficient condition before the
completion of the fieldwork. When this action occurs, the finding is still to be
included in the audit report with all required elements. The action taken or
completed should be included in the lender’s comment section and should be
validated by the auditor. The recommendation section should follow the lender’s
comment section, and the auditor should indicate whether any of the information is
inconsistent with or in conflict with the report’s findings. In addition, the auditor
could include any additional recommendations he or she believes are necessary
based on the testing of that action.
7-10 Reference Material. The following is the reference material that was in effect at the
time this handbook chapter was issued. It is the auditors’ responsibility to use the
appropriate reference material that was in effect during the period covered by their
audit.
Throughout this chapter, except in this paragraph, reference is made to handbooks
using only the base handbook number without the revision number (i.e., REV-1, REV-
6, etc.). In this section only, we are citing the revision numbers that were current on the
date of publication since it was those documents we used in establishing the
requirements of this audit guide. Also, the auditor should ensure that the updated
references or the reference materials that were in effect during the period of the audit
are used for performing the audits. Auditors should make any needed modifications or
updates to the material used to perform their audits. If reference to the handbook is
needed in the audit report findings or in any other part of their audit report, auditors
should ensure that the entire updated reference (including the revision number) is used.
The information collection requirements contained in this handbook have been
approved by the Office of Management and Budget (OMB) under the Paperwork
Reduction Act of 1995 (44 U.S.C. (United States Code) 3501-3520) and assigned the
following OMB approval numbers: 2502-0328, 2502-0551, and 2502-0005.
Document
Title
24 CFR Part 5
General HUD Program Requirements: Waivers
24 CFR Part 201
Title I Property Improvement and Manufactured
Home Loans
24 CFR Part 202
Approval of Lending Institutions and Mortgagees
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Document
Title
Mortgagee letters
Various
Forms
Various
HUD Handbook 4060.1, REV-2
FHA Title II Mortgagee Approval Handbook
HUD Handbook 4145.1
Architectural Processing and Inspections for Home
Mortgage Insurance
HUD Handbook 4150.1, REV-1
Valuation Analysis for Home Mortgage Insurance
9
HUD Handbook 4150.2
Valuation Analysis for Single Family One-to-Four-
Unit Dwellings
HUD Handbook 4155.1
Mortgage Credit Analysis for Mortgage Insurance on
One-to-Four Family Properties
HUD Handbook 4155.2
Lender’s Guide to the Single Family Mortgage
Insurance Process
HUD Handbook 4235.1, REV-1
Home Equity Conversion Mortgages
HUD Handbook 4240.2, REV
The Graduated Payment Mortgage Program
HUD Handbook 4240.4, REV-2
203K Handbook Rehabilitation Home Mortgage
Insurance
HUD Handbook 4330.1, REV-5
Administration of Insured Home Mortgages
HUD Handbook 4330.4, REV-1
FHA Single Family Insurance Claims
HUD Handbook 4350.4
Insured Multifamily Mortgagee Servicing and Field
Office
HUD Handbook 4700.2
Title I Lender Approval Handbook
LEAP User Manual
LEAP User Manual
9
The 1999 transmittal pages for HUD Handbook 4150.2 specified that most of 4150.1 was being incorporated
into the new 4150.2 except for several chapters and paragraphs. The inclusion of 4150.1 in this listing of
applicable handbooks may give the mistaken impression that all of 4150.1 is applicable, when it is not.
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If the program participant does not have this reference material, it may be obtained by
accessing HUD’s Client Information and Policy System (HUDCLIPS) at
http://www.hud.gov/offices/adm/hudclips/index.cfm, or it may be ordered from HUD’s
Direct Distribution System by telephone at (800) 767-7468; in a letter addressed to
HUD, Customer Service Center, Room B-100, 451 Seventh St., SW, Washington, DC
20410; or by fax at (202) 708-2313.
7-11 Technical Assistance.
On behalf of the HUD Secretary, the Lender Approval and Recertification Division
determines the acceptability of all audited financial statements submitted by FHA-
approved lenders. Therefore, it is important that such submissions meet the
requirements delineated in this chapter and HUD Handbook 4060.1, REV-2. If a
program participant has questions related to HUD’s audited financial statements’
requirements, the participant may contact the helpline at 202-755-7400 or submit an
email to LEAPRecert@hud.gov.
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Attachment A
FHA Lenders with Title I Authority - Adjusted Net Worth Computation*
Stockholders; equity (net worth) $________ (a)
Per balance sheet
Less unacceptable assets $________ (b)
Adjusted net worth for HUD purposes $________ (c)
(c) = (a)-(b)
Less minimum net worth required $1,000,000 (d)
Adjusted net worth above/below minimum net worth required $________ (e)
(e) = (c)-(d)
*FHA loan activity is not required.
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Attachment B
FHA Lenders with Title II Authority - Adjusted Net Worth Computation*
Stockholders; equity (net worth) $________ (a)
Per balance sheet
Less unacceptable assets $________ (b)
Adjusted net worth for HUD purposes $________ (c)
(c) = (a)-(b)
Less minimum net worth required $1,000,000 (d)
Adjusted net worth above/(below) minimum net worth required $________ (e)
(e) = (c)-(d)
*Schedule is effective immediately. Lenders with Title II authority without any FHA loan activity may continue
to use this computation after May 20, 2013.
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Attachment C
Title II Single Family Program Lenders’ Adjusted Net Worth Computation
(Effective After May 20, 2013)
FHA servicing portfolio
*
at (end of fiscal year under audit) _________ (a)
*HUD-FHA-insured single-family mortgages only. Include HECMs at maximum claim amount.
FHA originations – FHA-insured Title II loan originations
during the fiscal year _________ (b)
FHA purchases – FHA-insured Title II third-party
originator purchases during the fiscal year _________ (c)
Total FHA loan activity [(d) = (a)+(b)+(c)] _________ (d)
FHA-insured Title II loan originations retained at
the fiscal yearend _________ (e)
FHA-insured Title II third-party originator purchases
retained at the end of fiscal year _________ (f)
Adjustments [(g) = (e)+(f)] _________ (g)
Total adjusted FHA loan activity [(h) = (d)-(g)] _________ (h)
Net worth required $1,000,000 (i)
If (h) ≤ $25 million, skip lines (j) and (k) and insert (i) on line (o).
Additional net worth required _________ (j)
If (h) > $25,000,000, then (j) = (h)-(25,000,000)*(1%).
Total net worth [(k)
**
= (i)+(j)] _________ (k)
If line (k) < $2,500,000, insert line (k) on line (o).
If line (k) > $2,500,000, insert $2,500,000 on line (o).
**
After May 20, 2013, the maximum net worth required will be $2.5 million.
Stockholders’ equity (net worth) per balance sheet _________ (l)
Less unacceptable assets _________ (m)
Adjusted net worth [(n) = (l)-(m)] _________ (n)
Minimum net worth required _________ (o)
Adjusted net worth above/(below) required minimum amount [(p) = (n) – (o)] _________ (p)
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Attachment D
Title II Multifamily Program Servicers - Adjusted Net Worth Computation
(Effective After May 20, 2013)
FHA servicing portfolio
*
at (end of fiscal year under audit) _________ (a)
*HUD-FHA-insured single-family mortgages only. Include HECMs at maximum claim amount.
FHA originations – FHA-insured Title II loan originations
during the fiscal year _________ (b)
FHA purchases – FHA-insured Title II third-party
originator purchases during the fiscal year _________ (c)
Total FHA loan activity [(d) = (a)+(b)+(c)] _________ (d)
FHA-insured Title II loan originations retained at
the fiscal yearend _________ (e)
FHA-insured Title II third-party originator purchases
retained at the end of fiscal year _________ (f)
Adjustments [(g) = (e)+(f)] _________ (g)
Total adjusted FHA loan activity [(h) = (d)-(g)] _________ (h)
Net worth required $1,000,000 (i)
If (h) ≤ $25 million, skip lines (j) and (k) and insert (i) on line (o).
Additional net worth required _________ (j)
If (h) > $25,000,000, then (j) = (h)-(25,000,000)*(0.5%).
Total net worth [(k)
**
= (i)+(j)] _________ (k)
If line (k) < $2,500,000, insert line (k) on line (o).
If line (k) > $2,500,000, insert $2,500,000 on line (o).
**
After May 20, 2013, the maximum net worth required will be $2.5 million.
Stockholders’ equity (net worth) per balance sheet _________ (l)
Less unacceptable assets _________ (m)
Adjusted net worth [(n) = (l)-(m)] _________ (n)
Minimum net worth required _________ (o)
Adjusted net worth above (below) required minimum amount [(p) = (n) – (o)] _________(p)
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Attachment E
ILLUSTRATIVE CORPORATE GUARANTY AGREEMENT
U.S. Department of Housing and Urban Development
Federal Housing Administration
Whereas, __________________________ (“Parent”) is the parent company of
_________________________ (the “Subsidiary”), an institution with FHA lender identification
number
_________________________ ; and
Whereas, the Subsidiary is currently a Lender in good standing and approved by the Federal Housing
Administration (“FHA”) to participate in FHA programs; and
Whereas, the Subsidiary accounts for less than forty percent (40%) of the Parent’s assets; and
Whereas, as a condition precedent to FHA allowing the Subsidiary to continue to participate in
FHA programs, FHA requires that the Parent promises the performance by it of actions necessary
for the Subsidiary to meet the obligations required to maintain approval for participation in FHA
programs (“Corporate Guaranty”);
Now, therefore, in consideration of FHA allowing the Subsidiary to continue to participate in FHA
programs, and for other good and valuable consideration, the receipt and sufficiency of which are
hereby acknowledged, the parent agrees as follows:
1. Guaranty. The Parent hereby irrevocably promises to FHA the prompt and unconditional
performance of any actions necessary for the Subsidiary to meet the obligations required to
maintain approval for participation in FHA programs (“Approval Obligations”) in accordance
with the requirements of 24 CFR Part 202 et seq. and the FHA Title II Mortgagee Approval
Handbook 4060.1, REV-2, as amended, modified, or supplemented from time to time (the
“Handbook”). The obligations of the Subsidiary include but are not limited to the obligation
of FHA-approved participants to meet ongoing net worth and liquidity requirements.
In the event that FHA determines that the Subsidiary has failed to meet or maintain Approval
Obligations, the Parent shall be liable for any sanctions, fees, debts, or damages so ordered by
FHA relating to such failure. Except to the extent that actions taken by FHA against the
Subsidiary cause the promises made by Parent with respect to the Subsidiary to be satisfied, in
the event FHA terminates the Subsidiary’s approval to participate in FHA programs, the
Parent hereby agrees to reimburse FHA for any and all actual and direct losses, damages, costs
and expenses (including, without limitation, reasonable attorney’s fees) resulting from the
nonperformance or nonfulfillment of the Subsidiary of FHA program requirements and all
legal and other expenses of or for the collection of payments due to the Subsidiary.
In the event that any payment to FHA in respect of the obligations promised by the Parent
pursuant to this Corporate Guaranty is rescinded or must otherwise be returned for any reason
whatsoever, the Parent shall remain liable with respect of such obligations as if such payment
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had not been made. During the term of this Corporate Guaranty, the Parent shall not be
discharged or released hereunder by reason of the discharge or release of the Subsidiary from
its obligations under the Handbook and related agreements for any reason, including surrender
by the Subsidiary of its FHA lender approval; a discharge in bankruptcy, receivership, or other
proceeding; a stay or other enforcement restriction; or any other reduction, modification,
impairment, or limitation of the liability of the Subsidiary. FHA shall not be obligated to file
any claim relating to the obligations promised by the Parent pursuant to this Corporate
Guaranty in the event that the Subsidiary becomes subject to a bankruptcy or reorganization or
similar proceeding, and the failure of FHA to so file shall not affect the Parent’s obligations
hereunder.
2. Make Well Agreement. If Subsidiary fails to meet ongoing net worth and liquidity
requirements set forth in the regulations at 24 CFR part 202 and the Handbook, the Parent
shall make or cause to be made cash payments to Subsidiary in such amount as is required to
meet such requirements. Parent shall make the cash payments required by this Section not
later than thirty (30) Business Days following the date on which Subsidiary’s net worth and
liquidity amounts fall below HUD’s minimum requirements.
3. Independent Obligation. The obligation of the Parent under this Corporate Guaranty shall be,
in each instance, absolute, irrevocable, and unconditional and independent of the obligations of
the Subsidiary. Parent may not assign its rights or delegate its obligations under this Corporate
Guaranty without FHA’s prior written consent. FHA may proceed directly against the Parent
to enforce its rights under this Corporate Guaranty without proceeding against or joining the
Subsidiary. The Parent hereby waives any rights it may have to compel FHA to proceed first
against the Subsidiary. Neither the exercise of any remedies against the Subsidiary nor the
sale, enforcement, or realization of any of the servicing rights shall (except to the extent that
such actions cause the obligations guaranteed by the Parent to be satisfied) in any way affect
the Parent’s obligations hereunder, even though any rights which the Parent may have against
such Subsidiary or others may be extinguished, diminished, or otherwise affected by such
action.
4. No Waiver; Cumulative Rights. FHA may grant any extension of time or indulgence to the
Subsidiary for the payment of any sums due or take any note or other obligation or any security
for the payment of any sum or sums due or to become due without notice to the Parent and
without thereby in any releasing or affecting the liability of the Parent under this Corporate
Guaranty. No failure on the part of FHA to exercise and no delay in exercising any right,
remedy, or power hereunder shall operate as a waiver thereof, nor shall any single or partial
exercise by FHA of any right, remedy, or power hereunder preclude any other or future
exercise of any right, remedy, or power. Each and every right, remedy, and power hereby
granted to FHA or allowed it by law or other agreement shall be cumulative and not exclusive
of any other and may be exercised by FHA at any time or from time to time.
5. Cost of Enforcement. The Parent agrees to indemnify FHA for all out-of-pocket third-party
costs and expenses, including but not limited to reasonable attorneys’ fees incurred or paid by
FHA in enforcing this Corporate Guaranty, whether or not litigation is commenced, if the
Parent defaults in any payment owing by it hereunder.
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6. Governing Law and Consent to Jurisdiction. This Corporate Guaranty shall be governed by
and construed in accordance with the Federal law of the United States of America. To the
extent that Federal law does not apply, the laws of the State of New York shall apply. The
Parent agrees that the United States of America District Court for the District of Columbia shall
have exclusive jurisdiction to hear and determine any claims or disputes pertaining directly or
indirectly to this Corporate Guaranty or to any matter arising here from or related hereto. The
Parent hereby expressly submits and consents in advance to such jurisdiction and venue in any
action or proceeding either commenced by FHA or brought against the Parent in such court.
7. No Oral Change. This Corporate Guaranty may not be changed or amended except by a
writing signed by the party against whom enforcement of such change or amendment is sought,
and no obligation of the Parent shall be released or waived except by a writing signed by FHA.
8. Parent’s Representations and Warranties. The Parent hereby represents and warrants to
FHA as follows:
a. The Parent is duly organized, validly existing, and in good standing under the laws of the
jurisdiction of its organization and has all requisite power and capacity to enter into this
Corporate Guaranty and to perform its obligations hereunder. The Parent’s execution and
delivery of this Corporate Guaranty and any related agreements or instruments and the
consummation of the transactions contemplated hereby has been duly authorized by all
requisite action, and no further action or approval is required in order to constitute this
Corporate Guaranty as a binding and enforceable obligation of the Parent;
b. The Parent’s execution and delivery of this Corporate Guaranty does not violate any
provision of law or regulation or any order or any court or other agency or instrumentality
or government (including but not limited to a supervisory agreement, memorandum of
understanding, cease and desist order, capital directive, supervisory directive, or consent
decree);
c. The execution, delivery, and performance of this Corporate Guaranty and any related
agreements or instruments by the Parent, its compliance with the terms hereof and thereof,
and consummation of the transactions contemplated hereby and thereby will not violate,
conflict with, result in any material breach of, constitute a material default under, be
prohibited by, or require any additional approval under its by-laws or any instrument or
agreement to which it is a party or by which it is bound;
d. All consents, licenses, clearances, authorizations and approvals of, and registrations and
declarations with any governmental authority or regulatory body necessary for the due
execution, delivery, and performance of this Corporate Guaranty have been obtained and
remain in full force and effect, and all conditions thereof have been duly complied with,
and no other action by and no notice to or filing with any governmental authority or
regulatory body is required in connection with the execution, delivery, or performance of
this Corporate Guaranty; and
e. This Corporate Guaranty constitutes a legal, valid, and binding obligation of the Parent
enforceable against the Parent in accordance with its terms, subject to bankruptcy,
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insolvency, reorganization, moratorium, and other laws of general applicability relating
to or affecting creditors’ rights and to general equity principles.
9. Termination. This Corporate Guaranty shall be terminated if and when the Subsidiary has
relinquished its FHA lender approval, has transferred its FHA mortgages to an approved FHA
lender with FHA’s consent, and has satisfied all outstanding obligations to FHA. This
Corporate Guaranty shall not terminate, and this section shall in no way limit FHA’s rights in
the event FHA is entitled to proceed against the Parent under Section 1 above.
10. Notices. All notices or demands on the Parent shall be deemed effective when received,
shall be in writing, and shall be delivered by hand or by registered mail or by facsimile
transmission promptly confirmed by registered mail, addressed to the Parent at:
Parent Address:
Parent Fax #:
or to such other address or fax number as the Parent shall have notified FHA in a written notice
delivered to FHA in accordance with the related Guaranty Agreements.
In witness whereof, the undersigned has caused this Corporate Guaranty to be executed by a duly
authorized officer and its corporate seal to be affixed and attested by its Secretary in accordance
with express authority of its Board of Directors.
Dated:
Attest: By:
(Secretary) (Authorized Officer)
(Seal)
