Beginning in 2010, the HUD FHA Reform Act increased compliance and reporting requirements for supervised institutions.
These new requirements are intended to more effectively manage risks associated with lenders and mortgagees, including those supervised by the primary bank regulatory agencies. Additional requirements in Title 24, Part 202.6 were added as a part of the Reform Act and include:
Notification – Lenders must promptly notify the HUD Secretary in the event of termination of supervision by supervising agency.
Fidelity bond – A Title II mortgagee shall have fidelity bond coverage and errors and omissions insurance acceptable to the Secretary and in an amount required by the Secretary.
Operating losses – There are additional requirements for supervised mortgagees reporting operating losses of 20% or more of their net worth.
Net worth – Net worth requirements for supervised mortgagees are being increased from the current requirement of $250,000 as follows:
Effective May 20, 2011, each mortgagee with FHA approval as of May 20, 2010 that exceeds the size standards for a small business (as defined by the Small Business Administration at 13 CFR 121.201) must have a net worth of at least $1 million, calculated in accordance with HUD guidelines, with no less than 20% being liquid assets. Those not exceeding the size standards for a small business, as defined, must have a net worth of $0.5 million, with no less than 20% being liquid assets.
Effective May 20, 2013, all applicants for approval and all FHA approved lenders and mortgagees must have a minimum net worth of no less than $1 million, plus an additional net worth of one percent of the total volume in excess of $25 million of FHA single family insured mortgages originated, underwritten, purchased, or serviced during the fiscal year up to a maximum required net worth of $2.5 million, with no less than 20% being liquid assets.
As a supplemental schedule to the audited financial statements, each supervised mortgagee is required to include a ‘Computation of Adjusted Net Worth’.
Baker Tilly insights
These increased compliance and reporting requirements, along with continuing collateral valuation and mortgagor qualification challenges, have significantly changed the landscape of mortgage lending. Both the time necessary to complete the mortgage process from application to closing and the associated costs have increased measurably. Although details are unclear, government involvement in the mortgage industry will remain at historically high levels for the foreseeable future. Mortgage lenders and servicers should make extra efforts to fully understand the changing environment and maintain disciplined processes designed to maximize the level of compliance and efficiency.
