Within the myriad of rules and regulations FHA lenders must follow is notifying the FHA of a change to the information provided at approval, or a change that affects the lender’s FHA-approval status. One way they can do this is with a Notice of Material Event, which is submitted via LEAP. In our 30 years of serving Independent Mortgage Bankers, we have noticed time and time again that our clients were not aware of this requirement and more times than not, are beyond the 30-business-day mark since the triggering event. Not only has this caused them much aggravation, but also monetary fines and penalties assessed by the mortgagee review board.
Some of the most common triggering events that are often overlooked are as follows:
- Liquid Asset Deficiency
- Net Worth Deficiency
- Operating Losses of 20% or greater of net worth within a quarter
- Change in Fidelity Bond Coverage and or Errors and Omissions Insurance
Liquid Asset Deficiency and Net Worth Deficiency
If at any time a Mortgagee’s adjusted net worth or liquidity falls below the required minimum, the Mortgagee must submit a NME (Notice of Material Event) to FHA within 30 business days of the deficiency as well as Corrective action plan that outlines the steps taken to mitigate the deficiency and includes the relevant information and efforts made to correct the deficiency.
Operating Losses of 20% or greater of net worth within a quarter
If any quarterly loss within the fiscal reporting year exceeds 20% or greater of the Company’s net worth FHA must be notified of the event within 30 business days of the end of the quarter through LEAP. The Company will then be required to submit quarterly unaudited financial statements to FHA until the lender shows an operating profit for two consecutive quarters or submits financial reports as part of the Lender’s annual recertification, whichever is the longer period.
Change in Fidelity Bond Coverage and/or Errors and Omissions Insurance
A Lender must submit a Notice of Material Event to FHA of any significant change or changes to its fidelity bond coverage and or change in its errors and omissions insurance. Should the Lender lose its Fidelity Bond Coverage or Errors and Omissions Insurance it is required to obtain a new policy within 30 days
It’s imperative that FHA Lenders are aware of these deficiencies and understand the importance of being proactive and properly notifying FHA. In our experience, lenders only become aware of these issues when their annual certified audit is concluded. Unfortunately, by that time, it is beyond 30 business days and they are subjected to penalties assessed by the mortgagee review board.
One way lenders can mitigate this risk is by adjusting for occurrences quarterly rather than wait for the end of the fiscal year. We often see a neglect in adjusting IRLCs and MSRs, as well as depreciation, quarterly. However, making these valuation adjustments and recording depreciation every quarter will, in most cases, assuage the operating losses of 20% or greater of net worth within a quarter deficiency. By doing this, lenders will be less likely to experience the unintended consequences of their unknown neglect.
For any further questions or concerns please contact Santo Chiarelli, Partner at ACS, LLP.
About the Author
As an Accounting and Auditing Partner at ACS, Santo is responsible for ACS’s Mortgage Banking Service division and has been for the past 30 years. Before ACS, he began his professional career as an audit member of the NYC CPA firms Yohalem, Gillman & Company LLP (now part of Anchin Block & Anchin) and Berenson, Berenson, Adler LLP (now part of CohnReznick). In addition to his professional work experience, he also served as an adjunct accounting professor at Wagner College in New York and at Fairleigh Dickinson Graduate School in New Jersey.