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The Department of Housing and Urban Development issued a final rule that eliminates some reporting requirements for financial institutions that originate and/or service Federal Housing Administration insured loans, including small supervised lenders and mortgagees.

HUD Reduces Reporting Requirements for Less Risky Mortgage Lenders

  • 10/3/2013

HUD Reduces Reporting Requirements for Less Risky Mortgage Lenders

The Department of Housing and Urban Development (HUD) recently issued a final rule that eliminates some reporting requirements for financial institutions that originate and/or service Federal Housing Administration (FHA) insured loans. This rule is relevant to financial institutions that are deemed less risky.

The new rule, which takes effect on October 17, 2013, waives a previous requirement that qualifying financial institutions must submit audited financial statements and reports that show their internal controls and compliance processes related to FHA loans. HUD issued a proposed rule on April 18, 2013, that temporarily waived the reporting requirements until the final rule was officially adopted.

“Overall, this rule is a positive development in mortgage lending for small supervised lenders,” says David Heneke, a financial institutions manager with CliftonLarsonAllen. “It allows most small community financial institutions to continue to offer FHA-insured loan products without the audit costs.”

“Before HUD issued this rule, many small financial institutions decided to disband their FHA lending programs, because the revenue generated did not balance the added audit costs of products,” he adds. “This final rule allows community financial institutions to continue to offer a range of financial products to their customers, and provide mortgage financing to individuals who may not qualify for conventional mortgage loans.”

Effect on small supervised lenders and mortgagees

The rule impacts small supervised lenders and mortgagees, which are regulated by a governmental entity. They do not have to submit audited financial statements because they do not meet the minimum asset threshold set by their supervising federal banking agencies. The threshold is currently set at $500 million in consolidated assets.

Small supervised lenders mortgagees are only required to comply with the audit requirement if the Secretary of HUD determines that they pose a heightened risk to the FHA insurance fund. In this case, HUD can require it to submit additional information, including internal control and compliance reports.

HUD will consider various factors to determine if an institution is high risk, including:

  • Failing to provide required financial submissions within the required 90-day period following the lender’s or mortgagee’s fiscal year-end
  • Maintaining insufficient adjusted net worth or unrestricted liquid assets
  • Reporting opening cash and equity balances that do not agree with the prior year’s reported cash and equity balances
  • Experiencing an operating loss of 20 percent or greater of the lender’s or mortgagee’s net worth for the annual reporting period
  • Experiencing a significant increase in loan volume over the prior 12-month period, as defined by HUD
  • Undertaking significant changes to business operations, such as a merger or acquisition

If a small institution is not considered a high risk by HUD, it is now only required to submit unaudited financial regulatory reports that align with its fiscal year-end. The filing deadline will still be 90 days following its fiscal year-end.

Submitting reports

For institutions required to submit audited financial statements and reports on internal control and compliance, reports must be submitted electronically to HUD through the Lender Assessment Subsystem (LASS).

Small supervised lenders/mortgagees are not required to submit any reports through LASS, as the site has not been updated to process their submissions. HUD issued a statement that small supervised lenders should email their regulatory Call Reports in a PDF format to small.supervised.lenders@hud.gov.

How we can help

If you are a financial institution that decided to end your FHA lending program due to these audit requirements, your advisor can help you decide whether to restart your program. Depending on your business model, FHA lending may provide a profit opportunity for smaller financial institutions, since the audit burden no longer exists for institutions that are not considered high risk.


David Heneke, Manager, Financial Institutions
david.heneke@CLAconnect.com or 320-203-5621