On April 20^th HUD released the final rule covering changes designed to assist FHA in managing risk of the FHA loan portfolio.  The final rule has an effective date of May 20, 2010.  There have been many calls to FHA regarding the necessity of the 2009 audits for loan correspondents.  Today we have received two separate communications from HUD indicating that 2009 audits will not be required.  One of these sources was HUD OIG.  We anticipate a mass communication from HUD soon that will state the following:

"1)   To FHA-approved Loan Correspondents (with a FYE of December 2009) who have NOT completed the online certification and/or electronically submitted the annual renewal fee.   

Dear FHA-approved Loan Correspondent:

Effective immediately, if you have not received any notice (e.g., Notice of Violation, Notice of Administrative Action, etc.) from the Department's Mortgagee Review Board Secretary, and you wish to continue participating in FHA's programs, you must complete the online certification and electronically submit the annual renewal fee.  You are not required to submit the annual audited financial statement.  However, failure to complete the online certification and electronically submit the annual renewal fee within 90 days of your institution's fiscal year end may result in your institution being referred to the Mortgagee Review Board for administrative action, which may include termination.  

We hope you find this information helpful.  If you have additional questions, please contact the FHA Resource Center at 1-800-CALL-FHA (1-800-225-5342).  Persons with hearing or speech impairments may access this number via TDD/TTY by calling 1-877-TDD-2HUD (1-877-833-2483)."

At this stage, we believe it is safe to definitively say that 2009 audit submissions will not be required.

This final rule requires that within one year of May 20, 2010, "each approved lender or mortgagee that exceeds the size standard for its industry classification established by the Small Business Administration at 13 CFR 121.201 Sector 52 (Finance and Insurance), Subsector 522 (Credit Intermediation and Related Activities) shall have a net worth of not less than $1,000,000, of which no less than 20 percent must be liquid assets consisting of cash or its equivalent acceptable to the Secretary."

"Each approved lender or mortgagee that meets the size standard for its industry classification established by the Small Business Administration at 13 CFR 121.201 Sector 52 (Finance and Insurance), Subsector 522 (Credit Intermediation and Related Activities) shall 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 Secretary."

We have received numerous requests for the definition of a small business as defined by SBA in the above mentioned regulations.  SBA indicates that any mortgage broker with less than $7 million in annual receipts qualifies as a small business. Annual receipts is further defined by the SBA as follows:

"13 CFR § 121.104 How does SBA calculate annual receipts?

(a) Receipts means ''total income'' (or in the case of a sole proprietorship, ''gross income'') plus ''cost of goods sold'' as these terms are defined and reported on Internal Revenue Service (IRS) tax return forms (such as Form 1120 for corporations; Form 1120S and Schedule K for S corporations; Form 1120, Form 1065 or Form 1040 for LLCs; Form 1065 and Schedule K for partnerships; Form 1040, Schedule F for farms; Form 1040, Schedule C for other sole proprietorships). Receipts do not include net capital gains or losses; taxes collected for and remitted to a taxing authority if included in gross or total income, such as sales or other taxes collected from customers and excluding taxes levied on the concern or its employees; proceeds from transactions between a concern and its domestic or foreign affiliates; and amounts collected for another by a travel agent, real estate agent, advertising agent, conference management service provider, freight forwarder or customs broker. For size determination purposes, the only exclusions from receipts are those specifically provided for in this paragraph. All other items, such as subcontractor costs, reimbursements for purchases a contractor makes at a customer's request, and employee-based costs such as payroll taxes, may not be excluded from receipts"

Beginning May 20, 2013, ALL lenders, irrespective of size, shall have a minimum net worth of $1 million, plus 1% of total loan originations in excess of $25 million up to a maximum of $2.5 million.  The liquidity requirement will remain at 20% of required net worth. 

Multifamily lenders must meet the $1 million net worth requirement.  For lenders that  also engage in servicing of multifamily mortgages, an additional 1% of the total loans originated, purchased or serviced in excess of $25 million will be required.  If servicing is not performed, an additional net worth of .5% in excess of $25 million will be required.  The maximum net worth for both types of multifamily lenders remains at $25 million.  Liquidity is 20% of net worth.  If a lender originates both single family and multifamily mortgages, then the lender will be required to use the 1% of mortgage volume in excess of $25 million.

Many users have noticed an increase in the number of submissions immediately going to Review status.  This is surprising as the audit reports do not show any indication of items that would have triggered a review in the past.  In response to our inquiries, LASS sent us the following information.

"There have been new changes made to the review process, meaning there have been new guidelines added.  There is a push with the FHA to get a more accurate review process implemented, this means more submissions will be selected for review at random, this includes reviews that seemingly have no flags raised."

Accordingly, many more submissions are being reviewed.  LASS indicates that this process is random.  There does not appear to be any known flag that is causing the review status.  Many of the recently submitted reports go immediately to review. 

We remind supervised lenders and their auditors that 2010 will be the first year that these entities will be asked to submit their annual financial statements to LASS in accordance with the requirements of HUD Handbook 4060.1.  The audits performed will now have to audit work performed in accordance with Chapter 7 of the Consolidated Audit Guide for Audits of HUD Programs for Title II-approved lenders and Chapter 8 for Title I-approved lenders.  AHACPA believes that, in general, Chapter 7 will be the guidance for Title II-approved supervised lenders.