Congress Strikes Again. A Game Changer!

Online, October 19, 2010 (Newswire.com) - When Congress enacted the "Helping Families Save Their Homes Act of 2009" (Public Law 111-22) and it was signed into law by President Obama on May 20, 2009, the government dramatically changed the audit requirements for all banks participating in the FHA lending program. As a result, the FHA program administrators, which are supervised by HUD, determined that they would add significant regulations and oversight. Consequently, this created overlapping regulation and reporting requirements. Prior to passage, banks got a pass on the onerous regulations established for mortgage companies, because they were already subject to significant oversight by their respective federal regulatory authority. With enactment, the rules didn't just change; HUD changed the entire sport for banks wanting to participate as an approved FHA lender. Now, FHA lenders are required to have separate and distinctly different audits. This affects banks' ability to generate these loans and the related fees associated with these products.
Brent Currey, CPA, an audit manager at Frazer Frost, LLP, added, "The new application process, compliance reporting, and equity requirements established by HUD for FHA lenders seems to indicate that the HUD would prefer community banks not be able to offer these products."

What is a Supervised Mortgagee?
Supervised Mortgagee is a designation limited to financial institutions that are members of the Federal Reserve System, and financial institutions whose accounts are insured by the Federal Deposit Insurance Corporation (FDIC), or the National Credit Union Administration (NCUA). Examples of supervised mortgagees are banks, savings associations, and credit unions. As a supervised mortgagee, these entities may originate, underwrite, purchase, hold, service, and sell FHA insured mortgages and submit applications for mortgage insurance. In order to engage in these activities, the entity must apply to HUD for initial membership and submit a renewal request each year.

What was the renewal process for institutions before January 1, 2010?
Supervised Mortgagees engaging in FHA loan activities on or before January 1, 2010 were not required to have an annual audit. Institutions classified as supervised mortgagee's completed only a renewal form annually. Supervised mortgagees may have already been required to have an annual audit (institutions with more than $500 million in assets) and submit to their regulatory agency within 120 days of fiscal year end; however, this was not required for HUD (FHA) purposes. In addition, institutions between $500 million and $1 billion were required to file a management report entitled, "Report of Internal Controls Over Financial Reporting", but were not required to file independent auditor attestations in association with this report.

What are NEW audit requirements for institutions on or after January 1, 2010?
The new requirements indicate that supervised mortgagees must now have an annual audit and submit it to HUD within 90 days of the close of its fiscal year. This audit shall be performed in accordance with "Generally Accepted Government Auditing Standards" and shall include the independent auditor's report on the financial statements, a computation of the lenders adjusted net worth, and a hard copy of the completed Lender Assessment Subsystem (LASS) Financial Data Templates (FDT). The auditor's report must include an opinion on the lenders adjusted net worth and on the fair presentation of the hard copy of the LASS FDT in relation to the audited financial statements. Additionally, the auditor must submit an additional attestation report over "Internal Controls over Financial Reporting and Internal Control over Compliance for HUD-Assisted Programs", and a report on "Compliance with Specific Requirements Applicable to Major HUD Programs". Essentially now, all financial institutions which participate in HUD programs will be required to have attestation engagements performed relating to internal controls over financial reporting similar to what banks with assets > $1 billion are required to submit today.

What audit procedures must be performed?
The independent auditor must perform the normal audit procedures as required under the standard "Generally Accepted Auditing Standards" in addition with those procedures which are outlined in the HUD Audit Handbook "Handbook 2000.04, Chapter 7" which are needed to comply with "Generally Accepted Governmental Auditing Standards". Based on discussions with HUD, the identified handbooks in Mortgagee letter 2009-31 (HUD Handbook's 4060.1, and HUD Handbook 2000.04 available at www.HUD.gov) have not yet been updated, but supervised mortgagees will now be required to comply with external audit compliance testing to continue to offer FHA products.

Founded in 1918, Frazer Frost, LLP now ranks as one of the top accounting firms in the U.S. with offices in Los Angeles and Visalia, CA, Little Rock and Fayetteville, AR and Raleigh, NC. The firm has specialty practices in Food and Agriculture, Asian Services and SEC, Real Estate and Construction, Manufacturing, Business Valuation and Litigation Support, and Employee Benefit Plans. Additionally, the firm provides assurance services, tax and international tax services, information technology services, including SAS 70, cost segregation services, small business services, and health care and medical practice services. Frazer Frost is an independent firm associated with Moore Stephens North America, Inc. and Moore Stephens International Limited. For more information, go to: www.frazerfrost.com.

For more information, please contact:
Brent Currey, Audit Manager, Frazer Frost, LLP, [email protected], (501) 944-9941

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