www.hudclips.org U. S. Department of Housing and Urban Development Washington, D.C. 20410-8000 January 25, 1995 OFFICE OF THE ASSISTANT SECRETARY FOR HOUSING-FEDERAL HOUSING COMMISSIONER MORTGAGEE LETTER 95-6 TO:ALL APPROVED MORTGAGEES SUBJECT: Annual Lender Recertification Requirements The purpose of this Mortgagee Letter is to clarify various issues concerning the annual recertification process. Additionally, it provides instructions to nonsupervised mortgagees on completion of their adjusted net worth computation. 1.Documentation Required for Annual Recertification Nonsupervised and loan correspondent type mortgagees are required to submit an audited financial statement to HUD, on an annual basis, within 90 days of the end of the lender's fiscal year as a part of the annual recertification process. (Supervised loan correspondent mortgages are not required to submit the audited financial statement.) The audit report must be prepared in accordance with the provisions of the Consolidated Audit Guide for Audits of HUD Programs, HUD Handbook 2000.04 REV-1. Mortgagees are reminded all information must be submitted within 90 days of the end of your fiscal year. Extensions beyond 90 days will be granted only in cases of catastrophic events such as the Los Angeles earthquake or the recent flooding in Texas. Failure to submit all required documentation during the annual recertification process may result in action by the Mortgagee Review Board to withdraw the mortgagee's HUD/FHA approval. These reports often fail to include the following information: a.Report on Internal Control (Audit Guide p. 2-8); b.Report on Compliance (Audit Guide p. 2-12 or 2-14). c.A statement indicating that the audit was conducted in accordance with Government Auditing Standards. d.Computation of Adjusted Net Worth. 2.Effective Date of New Adjusted Net Worth Requirement, Reminder The net worth requirements announced in Mortgagee Letter 93-2 go into effect for all supervised, nonsupervised and loan correspondent mortgages on January 9, 1995 regardless of date of original approval. As of that date all supervised and nonsupervised mortgages must have a net worth of at least $250,000 plus an amount based on volume of FHA business as discussed below. Loan correspondents must maintain a net worth of at least $50,000. Paragraph 2-4 and Appendix 9 of Handbook 4060.1 REV-1 and Attachment 1 of this letter provide more detail about the required amount of net worth. A Mortgagee is required by Paragraph 2-21 of Handbook 4000.1 REV-1 to notify the Department whenever it experiences an operating loss of 20 percent or more of its net worth. You must also notify the Department within 30 days if your net worth falls below the required amount. If you have already acted and corrected the deficit, then no notification is necessary. If you are unable to correct the deficit immediately, then the notification must contain a proposal for correcting the deficit as soon as possible, or a request to withdraw your approval voluntarily. If the proposed schedule is not acceptable, we will notify you and recommend you request a voluntary withdrawal. If you fail to make such a request, we will act to withdraw your approval under the provisions of 24 CFR Part 25. 3.Adjusted Net Worth Computation for Nonsupervised Mortgagees, effective January 9, 1995. As of January 9, 1995, the Adjusted Net Worth calculation must take into account the amount of FHA business conducted by the approved entity. Please refer to 24 CFR Section 202.12(n)(1) and HUD Handbook 4000.1 REV-1 paragraph 2-4 and Appendix 9. All nonsupervised mortgagees who have a fiscal year end of January 1995 or later, MUST have their independent auditor complete the Adjusted Net Worth calculation noted in Attachment 1 to this letter. Nonsupervised loan correspondent type mortgagees are not required to calculate net worth on the basis of the amount of FHA business conducted. We have attached a separate form (Attachment 2) loan correspondents may wish to use when preparing their adjusted net worth. This form is similar to the one in Paragraph 7-6 of HUD Handbook 2000.04 REV-1. Please remember that a nonsupervised mortgage whose parent is a supervised institution, is not considered to be supervised under HUD's regulations. 4.Clarifications to HUD Handbook 2000.04 REV-1 a. Paragraph 7-5C.2.f. states that the independent auditor must review loan documentation for evidence of follow-up by the lender through the date of settlement to ensure that the loan applicant's funds were not withdrawn prior to loan settlement. The HUD/FHA program office does not maintain such a requirement for approved mortgagees. Therefore, independent auditors do not need to comply with this specific requirement. b. Paragraph 7-5C.2.h. states that the independent auditor must ascertain that no more than one-third of a staff appraiser's salary is attributable to bonuses. This policy on appraiser compensation is not a requirement by the HUD/FHA program office, but is meant to be a guideline only. Any auditor who finds the lender has not complied with this guideline, need not report this to HUD as a finding. Questions regarding this Mortgagee Letter should be referred to the Lender Approval and Recertification Division at (202) 708-3976. Sincerely, Nicolas P. Retsinas Assistant Secretary for Housing- Federal Housing Commissioner Attachments Attachment 1 PLEASE REFERENCE APPENDIX 9 OF HUD HANDBOOK 4060.1 REV-1 FOR ADDITIONAL SAMPLE CALCULATIONS OF ADJUSTED NET WORTH. 1. Servicing Portfolio FYE $________ 2. Add: Origination $_______ Purchased from Loan Corresp. $_______ Sub-Total $_______ $________ 3 Less: Servicing Retained $_______ Loan Corresp. Purchase Retained $_______ Sub-Total $_______ $________ 4. TOTAL $________ 5. Net Worth Required $________ Stockholders Equity (Net Worth) per Balance Sheet $_______ Less Unacceptable Assets $_______ (Reference HUD Handbook 2000.04 para. 7-6C.) Adjusts Net Worth for HUD Requirement Purposes $_______ Adjusted Net Worth ABOVE Amount Required $_______ Adjusted Net Worth BELOW Amount Required $_______ Attachment 2 Computation of Adjusted Net Worth for Loan Correspondents (Nonsupervised) Stockholders equity (net worth) per Balance Sheet $________ Less Unacceptable Assets: (Refer to HUD Handbook 2000.04 paragraph 7-6C.) $_________ Adjusted Net Worth for HUD requirement purposes $_________