U. S. Department of Housing and Urban Development

Washington, D.C. 20410-8000

# January 9, 2002

OFFICE OF THE ASSISTANT SECRETARY

FOR HOUSING-FEDERAL HOUSING COMMISSIONER

> **MORTGAGEE LETTER** **2002-01**

TO: ALL APPROVED MORTGAGEES

ALL APPROVED NONPROFIT AGENCIES

SUBJECT: Nonprofit Participation in Single Family FHA Activities -

> New Requirements and Restrictions

This Mortgagee Letter clarifies the requirements that new nonprofit
applicants must meet to participate in FHA\'s Single Family activities,
including purchasing discounted HUD Homes, serving as mortgagors, and
offering secondary financing assistance. Nonprofits that are seeking FHA
approval, and FHA-approved nonprofits currently listed on the nonprofit
roster seeking re-approval at the expiration of their current
certification, must meet the requirements of this Mortgagee Letter and
Mortgagee Letter 00-08. Mortgagees must assure that nonprofit mortgage
loan applicants meet the eligibility criteria and comply with the
required disclosures. The changes described in this Mortgagee Letter and
attachments are effective 30 days from the date of this letter.

NEW POLICY DIRECTIVES: RESPONSIBILITIES OF THE MORTGAGEE AND THE
NONPROFIT AGENCIES

Currently, mortgagees may not approve an application for FHA mortgage
insurance from a nonprofit agency without verifying its approval status,
applicable geographical restrictions, and specific restrictions on
property inventories. This Mortgagee Letter supplements and clarifies
FHA\'s current requirements for nonprofit participation in FHA programs
and review requirements for mortgagees, as stated below.

**General Clarification**

Because this Mortgagee Letter is intended to clarify a number of
application requirements for nonprofits interested in participating in
FHA\'s programs, an updated application checklist is attached
(Attachment 1). This new application guide supercedes the checklist
provided to nonprofits in Mortgagee Letter 00-08. In addition, the
Affordable Housing Program Format (Attachment 2) has been revised
slightly, to clarify FHA\'s requirements. This new version also
supercedes the version attached to Mortgagee Letter 00-08.

**Conflict of Interest Issues**

The Department has a responsibility to ensure that no conflict of
interest exists between nonprofit agencies, their boards of directors,
their principal staff or any other entities that may participate in
operating their affordable housing programs. Therefore, FHA will require
that members of the board of directors (Chief Executive Officer,
President, Vice President, Secretary, and Treasurer - excluding
non-voting members) and salaried or voluntary principal staff (Executive
Director/President or Vice President, Project/Program Director, or
similar position) provide their social security numbers (SSN) to FHA.
FHA will keep the SSNs confidential. The SSNs will be used only to
assure the Department that no conflict of interest relationship exists
and the board and staff have no outstanding unpaid government loans,
sanctions, foreclosures, inappropriate transfers of real property,
business relationships, etc.

It is a conflict of interest for a nonprofit to employ staff who also
work for and receive financial benefits from a for-profit entity that is
providing the nonprofit with services related to the nonprofit\'s
affordable housing plan. Board members must serve on a voluntary basis,
and may not be paid nor receive any compensation for any services they
provide in the implementation of the nonprofit\'s affordable housing
program. FHA will collect information on the job responsibilities of all
Board members to ensure that their occupational activities and
obligations do not conflict with the work of the nonprofit. HUD strictly
prohibits the sale or lease of properties with FHA financing and/or
discounted HUD Homes to any of the nonprofit\'s officers, directors,
elected or appointed officials, employees, or business associates,
either during their tenure or for one year thereafter, or to any
individual who is related by blood, marriage, or law to any of the
above.

**Ineligible Participants**

To be approved and to maintain approval, neither the nonprofit, nor any
officer, partner, director, principal or employee shall:

-   Be suspended, debarred, or otherwise restricted under the
    Department\'s regulations in 24 or 25 CFR, or similar procedures of
    any other Federal agency.

-   Be indicted for, or convicted of, an offense which reflects upon the
    responsibility, integrity, or ability of the nonprofit to
    participate in FHA activities.

-   Be subject to unresolved findings as a result of HUD or other
    government audits or investigations.

-   Be engaged in activities that do not conform to generally accepted
    practices of prudent nonprofits or that demonstrate
    irresponsibility.

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These requirements are applicable at the time that the nonprofit applies
for approval and at all times while it is an approved nonprofit.

**Consultant Services**

Nonprofit agencies must have the administrative capacity to develop and
carry out their FHA approved homeownership plans in a timely and
successful manner. Nonprofits that obtain consultant services to help
implement their homeownership programs are not relieved from this
requirement. The nonprofit\'s operations must be independent of the
influence, control, or direction of the consultant or any other outside
party, particularly those seeking to derive profit or gain from a
proposed project (such as, but not limited to, landowners, real estate
brokers, bankers, contractors, builders, or consultants). Therefore, to
assure that the consultant services are provided on an \'arms length\'
basis, the nonprofit must disclose any written and/or side agreements
with parties that may derive financial gain through the homeownership
program. Disclosure should identify the name of the business entity, and
the individuals from the company who will be working with the nonprofit,
the terms of the relationship and how the party will be compensated.
Failure to adequately disclose may result in a conflict-of-interest
determination.

In addition, consultant services - administrative, management,
financial, or otherwise - provided under an independent contractor
relationship (as opposed to employer-employee relationship) shall not
constitute more than half of the nonprofit\'s activities. This
measurement will be calculated by evaluating: the ratio of nonprofit
staff to contracted or consultant staff; the ratio of hours devoted to
the implementation of the Affordable Housing Plan by nonprofit staff
versus contracted or consultant staff; and the funds devoted to paying
nonprofit staff compared to those paying contracted or consultant staff.
In other words, the nonprofit must have the in-house resources and
capacity to run its own programs, and contract for services on a
temporary and supplementary basis.

**Financial Capacity**

Nonprofit agencies must have the financial capacity to operate their
homeownership programs. Nonprofits will be required, if applicable, to
submit the following with their application or recertification package
so that FHA may assess each organization\'s financial stability in terms
of cash balances, assets and liabilities, annual expenses, and cash flow
from operations:

-   Consistent with the requirements of the Single Audit Act Amendments
    of 1996 (31 U.S.C. §§7501-07), nonprofit applicants that expended
    **\$300,000 or more** in Federal awards in the most recent fiscal
    year are required to submit for such fiscal year a financial audit
    by the applicant\'s Independent Public Accountant certifying that
    the applicant maintains internal controls over Federal awards;
    complies with

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applicable laws, regulations, and contract or grant provisions; and
prepares appropriate financial statements. \'Federal awards\' include
discounts associated with the purchase of HUD Homes and FHA-insured
financing, as defined in OMB Circular A-133, \"Audits of States, Local
Governments, and Nonprofit Organizations,\" with which the audit must be
in conformance. Additionally, applicants are required to submit their
most recent quarterly financial statement along with certification from
a CPA or other financial professional attesting that this information
accurately represents the financial condition of the nonprofit agency.

-   Applicants that expended **less than \$300,000** in Federal awards
    in the most recent fiscal year must submit a complete, un-audited
    year-end financial statement for such fiscal year, prepared in
    accordance with generally accepted accounting principles and
    reporting practices and must include an auditor\'s review report, a
    treasurer\'s report and any supplemental schedules. Additionally,
    applicants are required to submit their most recent quarterly
    statement, along with certification from a CPA or other financial
    professional attesting that this information accurately represents
    the financial condition of the nonprofit agency.

Based on an analysis of submissions, FHA may limit the number of
properties a nonprofit may purchase at a discount and/or purchase with
FHA-insured financing.

**Nonprofit Status**

Eligible nonprofits must have [two years]{.underline} 501(c)(3) IRS
tax-exempt status. Nonprofits must submit to FHA their IRS letter of
determination to prove their 501(c)(3) tax-exempt status. In addition,
nonprofits must certify compliance with IRS regulations that require
nonprofits to notify the IRS of any substantial and material changes in
the nonprofit\'s character, purpose, or methods of operation \[IRS Reg.
1.501(a)-1(a)(2)601.201(h)(3)(ii)\]. Finally, nonprofits may not assume
the name and employer identification number (EIN) of another dormant or
defunct nonprofit.

**Clarification of Experience Criteria**

> Nonprofit agencies must meet strict housing development experience

requirements. The nonprofit must have a minimum [of two consecutive
years]{.underline}, within the last five years, of housing development
experience. Housing development experience is defined as acquisition,
rehabilitation, and sale to low-to-moderate income persons. Hiring of
experienced personnel does not relieve the nonprofit of the experience
requirement. Organizations that do not meet this experience requirement
may be able to obtain limited approval if they have at least one

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year of housing development experience and one year of other related
housing provider experience. To be considered, the organization\'s
\"other related housing experience\" must demonstrate that the
organization has the financial and administrative capacity to purchase,
rehabilitate and resell homes to low to moderate-income families.

**Adequate Facilities**

To ensure that all approved nonprofits have adequate space for employees
and records, FHA will now require the submission of photographs and
floor plans for the agency\'s facilities. This new requirement is
identical to the requirement for lenders seeking FHA approval.

Additionally, nonprofits must have office(s) located within a 200 mile
radius of the geographical areas in which they plan to do business, as
identified in the nonprofit\'s Affordable Housing Plan. For each office,
nonprofits are required to have adequate office space, equipment and
clerical assistance, so that employees may perform their duties in a
responsible manner. This includes, but is not limited to, a desk,
telephone, and photocopying equipment. A nonprofit\'s main office must
be its designated facility to which the Department directs all
communications about the management affairs of the nonprofit, and from
which the public obtains information on the activities of the nonprofit.

The nonprofit\'s facilities must be located in a space that is separate
and apart from any other entity. A nonprofit may share general
reception-type entrances or lobbies with another business entity or
nonprofit. However, the facilities must be clearly defined to the
public, so that visitors will know, at all times, exactly with which
entity they are doing business. This includes a sign and other common
means of identification used by nonprofits and business entities.

**Evidence of Performance**

Nonprofits applying to continue participating as Mortgagors must submit
to HUD information on the performance of all of their FHA-insured loans,
as described in Attachment 1, #15. HUD will examine property purchase
prices and dates, resale prices and dates, default rates, and evidence
of rehabilitation completion (in the case of 203(k) loans) to assess the
nonprofit\'s capabilities and compliance with FHA requirements.

**Quality Control Plan**

As a condition of approval to participate in FHA activities, nonprofits
must submit a written Quality Control Plan that explains the
organization\'s internal and external audit and monitoring procedures.
The Quality Control Plan must include

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periodic reports that identify for senior management areas of
deficiency, including fraud or violations of FHA regulations and its own
policies and procedures, errors and omissions, and unacceptable patterns
or trends. The Quality Control Plan must describe in detail the
nonprofit\'s review procedures and outline the corrective actions to be
initiated immediately when discrepancies are found.

**Reporting Requirements**

With the issuance of this Mortgagee Letter, nonprofits will be required
to include in their annual reports information on *all* REO properties
purchased at a discount - 10% or higher. These reports are due each
February to the Homeownership Center Director and provide information
about the nonprofit\'s program accomplishments over the past calendar
year (See Mortgagee Letter 00-08, Attachment 3). Previously, only
nonprofits that purchased REO properties at a 30% discount were required
to submit this annual report. Properties purchased under an Asset
Control Area (ACA) agreement must be included in the report, but listed
separately from other purchases.

In addition, nonprofits must submit a list of all business partners
participating in the rehabilitation and resale of the property. The list
should include the name of the company, the name of the principals, the
name and title of all staff with whom the nonprofit is working, a
description of the services provided by the company, and an account of
the costs and fees associated with those services. This information must
be reported for all real estate agents, lenders, and contractors
involved in the rehabilitation and sale of REO property.

**Record-Keeping Requirements**

In order to accommodate on-site reviews, the non-profit agency should
maintain records in a specific format. Attachment 4 lists the required
items to be included in each property file. Files should be maintained
individually for each property purchased, sold, or leased. In addition
to the individual property files, other documents should be maintained
for review and are listed in Attachment 4. Accounting records should be
maintained in a property specific format so that cost calculations can
be made for all expenses related to each specific property. Files should
be maintained for a minimum of three years after the property is sold by
the nonprofit.

**Mortgagee Responsibilities**

As established in Mortgagee Letter 00-08, mortgagees may not process any
loan application on behalf of a nonprofit agency without an approval
letter, dated within the past two years, verifying that the nonprofit is
a participating agency and identifying any conditions or limitations
placed on the nonprofit\'s activities. In addition, the mortgagee

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is responsible for assessing the financial and management capacity of
the nonprofit to carry out its affordable housing program. The Credit
Evaluation responsibilities of the mortgagee are detailed in Mortgagee
Letter 00-08, Attachment 6. HUD will also use a Financial Capacity
Worksheet (Attachment 3) to evaluate the nonprofit\'s financial capacity
when certifying nonprofits for participation in FHA programs. This
worksheet may also be used by the mortgagee\'s underwriters to assist in
assessing the nonprofit\'s financial condition.

**Information Collection Requirements**

The information collection requirements referred to in this Mortgagee
Letter have been approved by the Office of Management and Budget (OMB)
under the Paperwork Reduction Act of 1995 (44 U.S.C. Chapter 35). The
OMB number issued for this requirement is OMB 2502-0540.

Questions regarding this Mortgagee Letter should be directed to the FHA
Homeownership Centers in Atlanta (1-888-696-4687), Denver
(1-800-543-9378), Philadelphia (1-800-440-8647) and Santa Ana
(1-888-827-5605).

Sincerely,

##  John C. Weicher

> Assistant Secretary for Housing-

Federal Housing Commissioner

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