CHAPTER 4

ANNUAL RENEWAL OF FHA APPROVAL

4-1 Requirement for Annual Renewal. A mortgagee must renew its

approval each year. In addition to continuing to meet all the
requirements it

met for initial approval, it must also execute the Title II Yearly
Verification

Report. A mortgagee, except a governmental entity, must pay an annual

recertification fee. A non-supervised mortgagee or non-supervised loan

correspondent must submit an acceptable audited financial statements and

supplementary reports.

4-2 Yearly Verification Report. Annually, each mortgagee must

complete and return to the Department a Title II Yearly Verification
Report

(V-Form) which can be downloaded from their Institution Profile page in

the Lender Approval part of the FHA Connection. See instructions at:

https://entp.hud.gov/pdf/mp_lndapp.pdf. The report must be completed by

the mortgagee, signed by a senior officer (vice president or above) and

returned to FHA within 30 days after the close of the mortgagees fiscal

year. A copy should be given to a non-supervised mortgagees auditor for

review and as proof of FHA approval.

A. Update By Mortgagee. The mortgagee must make the necessary

changes to its institution profile in the FHA Connection to ensure the

V-Form information is correct before downloading, signing and submitting

the form.

B. Branch Office Information. The report displays the total number of

registered branch offices of the mortgagee. If the number is incorrect
or,

within the past year, branches have moved, changed or added a dba or

changed managers, the mortgagee should record the corrections through
the

Lender Approval functions on FHA Connection before downloading,

signing and submitting the form.

4-3 Annual Renewal Fees. All mortgagees except governmental

institutions must pay an annual renewal fee within 30 days after the
close of

the mortgagees fiscal year.

A. Amount. A mortgagee must remit a \$500 annual renewal fee for its

approved main office and \$200 for any registered branch office that was

registered at least six months prior to the end of the mortgagees fiscal
year.

No renewal fee is due for branches registered in the last six months of
a

mortgagees fiscal year. In addition, no fee is required for a
non-registered

office or any office that the mortgagee deletes through the Lender
Approval

functions on FHA Connection before they pay their renewal fee.

B. Payment. This payment must be made by accessing pay.gov via the

FHA Connection by using the Pay Now button that has been added to the

Institution Profile page of each mortgagee. Delete any branches that are
not

being renewed before clicking on the Pay Now button, in order to be

charged the correct amount. See instructions at:

https://entp.hud.gov/pdf/mp_lndapp.pdf.

4-4 LASS Submission of Annual Audited Financial Statements. Within

90 days after the close of its fiscal year, non-supervised mortgagees
and

non-supervised loan correspondents must submit their audited financial
and

compliance data electronically through LASS. The LASS homepage at

http://www.hud.gov/offices/hsg/sfh/lass/prodlass.cfm contains links on

how to register to use LASS, FAQs, latest updates and additional links
to

many items including the LASS User Manual. LASS consists of: (1)

specifically designed financial data templates (FDT) which collects

financial data; (2) a data collection form (DCF) which will collect

information about the mortgagee and the auditor reporting on the
financial

statements, internal controls, compliance data, and the attachment of
the

mortgagees signed audit reports, including the compliance and internal

control reports to their financial statements and (3) a Note and Finding

template which allows for the attachment of the mortgagees audited

footnotes, auditors finding, and mortgagees corrective action plans.

The hard copy basic financial statements and auditor reports must be
issued

prior to the mortgagee initiating their electronic submission of their

financial and compliance data and are the basis for the mortgagees

electronic submission. The basic financial statements must be prepared
and

audited in accordance with HUD IG most recent Handbook 2000.04,

Consolidated Audit Guide for Audits of HUD Programs; and GAOs most

recent Government Auditing Standards (the Yellow Book). The audit must

be done by a Certified Public Accountant (or a Public Accountant
licensed

on or before Dec. 31, 1970) qualified to perform the audit and licensed
to

practice in the State in which the mortgagee has its home office, and
who

has not been suspended, debarred, or otherwise excluded from performing

audits of mortgagees. When requested by the Department, a mortgagee

must submit any other materials that may be needed to make a

determination regarding continuation of approval.

If the auditor becomes aware of illegal acts or fraud that have occurred
or

are likely to have occurred, the auditor must report instances of fraud
and

illegal acts. The auditor must report directly to the HUD District
Inspector

General for Audit. For details, see Chapter 1 of the most recent version
of

HUD IG Handbook 2000.04, Consolidated Audit Guide for Audits of HUD

Programs. The Office of the Inspector will notify the appropriate
offices

within the Department, including the Office of Lender Activities and

Program Compliance.

A. Required Reports by Type of Mortgagee For LASS Submission.

1\. Non-supervised Mortgagee. A non-supervised mortgagee, unless

exempt per paragraph 4-4(B)(5), must maintain the following documents to

support their electronic submission:

a\. Audited financial statements

\* Balance sheet;

\* Income statement;

\* Cash flow statement;

\* Statement of Equity; and

\* Footnotes.

b\. Computation of adjusted net worth including a Statement of

Auditing Standards (SAS) 29 opinion. The SAS 29 opinion can be issued

in a separate report or included within the Independent Auditors Report
on

the Financial Statements.

c\. Independent Auditors Report on the Financial Statements.

d\. Independent Auditors Report on Internal Control.

e\. Independent Auditors Report on Compliance with Specific

Requirements Applicable to Major/Non-Major HUD Programs. Major

program mortgagees are subject to an audit of their compliance with HUD

major programs. Non-major program mortgagees are subject to a review of

their compliance with HUD non-major programs. Major program means an

individual assistance program or a group of programs in a category of

Federal financial assistance, which exceeds \$300,000 during the
applicable

year. A project, which has an outstanding HUD-insured or guaranteed loan

balance exceeding \$300,000 as of the reporting date, shall be
considered a

major program. A mortgagee or loan correspondent, which originates

and/or services an aggregate of FHA-insured loans exceeding \$300,000

during the period under audit, is considered a major program.

f\. Schedule of Audit Finding. When reporting deficiencies in internal

control or instances noncompliance the auditor should generate a
schedule

of finding. The auditor should place their findings in proper
perspective by

providing a description of the work performed that resulted in the
finding.

To the extent possible the auditor should develop the elements of
criteria,

condition, cause, effect, and recommendations to assist management in

understanding the need for taking corrective action.

g\. Corrective Action Plan. If the auditor has noted any findings then

the mortgagee must submit a corrective action plan, which addresses each

finding.

2\. Non-supervised Loan Correspondent. A non-supervised loan

correspondent, unless exempt per paragraph 4-4(B)(5), must maintain the

following documents to support their electronic submission:

a\. Audited financial statements.

\* Balance sheet;

\* Income statement;

\* Cash flow statement;

\* Statement of Equity; and

\* Footnotes.

b\. Computation of adjusted net worth including a Statement of

Auditing Standards (SAS) 29 opinion. The SAS 29 opinion can be issued

in a separate report or included within the Independent Auditors Report
on

the Financial Statements.

c\. Independent Auditors Report on the Financial Statements.

d\. Independent Auditors Report on Internal Control.

e\. Independent Auditors Report on Compliance with Specific

Requirements Applicable to Major/Non-major HUD Programs. Major

program mortgagees are subject to an audit of their compliance with HUD

major programs. Non-major program mortgagees are subject to a review of

their compliance with HUD non-major programs. Major program means an

individual assistance program or a group of programs in a category of

Federal financial assistance, which exceeds \$300,000 during the
applicable

year. A project, which has an outstanding HUD-insured or guaranteed loan

balance exceeding \$300,000 as of the reporting date, shall be
considered a

major program. A mortgagee or loan correspondent, which originates

and/or services an aggregate of FHA-insured loans exceeding \$300,000

during the period under audit, is considered a major program.

For Title II loan correspondents, the requirement for the auditor to
review

and report on the mortgagees compliance has been modified under the

condition that the Sponsor agrees to assume the responsibility of
assuring

compliance for each loan correspondent under their sponsorship. In those

instances where the Sponsor agrees to assume the responsibility of
assuring

compliance of loan correspondents under their sponsorship the Sponsor

must communicate annually in writing to the individual loan

correspondents their intent to assume responsibility for their
compliance.

The Sponsor must indicate the areas of compliance that they will be

assuming. The Sponsor must issue annually a written report summarizing

the results of their compliance testing. In addition, the Sponsor must

accumulate and retain the supporting information that served as the
basis

for the written annual compliance report issued to the loan
correspondent.

Nevertheless, in accordance with Government Auditing Standards (the

Yellow Book) it is incumbent upon the auditor to test and report on
those

areas of compliance not assumed by the Sponsor. In addition, the auditor

must determine where applicable that the Sponsors are testing and
reporting

the results of their compliance reviews. Accordingly, when meeting the

requirements of Government Auditing Standards, the auditor should issue
a

Report on Compliance and on Internal Control Over Financial Reporting

Based on an Audit of Financial Statements Performed in Accordance with

GOVERNMENT AUDITING STANDARDS. The report may vary

depending on whether there are reportable instances of noncompliance or

material weaknesses. However, if the non-supervised loan correspondent
is

also approved under the Title I program, then separate reports on
internal

control and compliance will have to be issued for that program.

f\. Schedule of Audit Finding. When reporting deficiencies in internal

control or instances noncompliance the auditor should generate a
schedule

of finding. The auditor should place their findings in proper
perspective by

providing a description of the work performed that resulted in the
finding.

To the extent possible the auditor should develop the elements of
criteria,

condition, cause, effect, and recommendations to assist management in

understanding the need for taking corrective action.

g\. Corrective Action Plan. If the auditor has noted any findings then

the mortgagee must submit a corrective action plan, which addresses each

finding.

B. Types of Mortgagee for Which LASS Submission are Not Required.

1\. Supervised Mortgagee.

2\. Supervised Loan Correspondent.

3\. Investing Mortgagee.

4\. Governmental Institution.

5\. Newly Approved Mortgagee. If the mortgagees initial approval date

is less than six months prior to the end of its fiscal year and the
audited

financial statements submitted for approval are for the period ended not

more than six months prior to the end of its fiscal year, then the
mortgagee

is not required to submit new audited financial statements for

recertification, nor is an annual recertification fee due. However, the

audited financial statements submitted with its next renewal must cover
the

period from the date of its initial audited financial statements to the
end of

its fiscal year. The period covered by the renewal audit cannot exceed
18

months.

C. Extensions. Extensions are granted only in cases of catastrophic

events beyond the control of lender or auditor. Extension requests must
be

submitted through LASS. The request must be received no earlier than 45

days prior to the submission due date and no later than 15 days prior to
the

submission due date.

4-5 LASS Review Procedures. Each annual LASS submission by a

non-supervised mortgagee or non-supervised loan correspondent is

reviewed to determine compliance with the Departments net worth,

liquidity, audit reporting and other financial requirements for
continued

approval. The review consists of, but is not limited to, the following

procedures.

A. Auditors Report. HUD reviews the information provided in the

LASS submission to verify:

1\. The audit was done by a qualified auditor, the audit firm contact is

identified, and contact information and identifying information on the
audit

firm is provided.

2\. The attestation was done by a qualified auditor, the attester is

identified, and contact information and identifying information on the
audit

firm is provided.

3\. The period covered by the financial statements corresponds to the

date recorded in FHA records as stated in the mortgagee history profile

screen.

4\. The audit was done in accordance with:

\* Generally Accepted Auditing Standards (GAAS);

\* Generally Accepted Government Auditing Standards (GAGAS) as

contained in the most recent General Accountability Office (GAO) Audit

Guide \-- Government Auditing Standards (commonly known as the Yellow

Book); and

\* The most recent version of HUD IG Handbook 2000.04

Consolidated Audit Guide for Audits of HUD Programs

5\. The financial statements comply with Generally Accepted

Accounting Principles (GAAP).

6\. The auditors opinion on the financial statements, including all

notes. In addition, the auditor must express a SAS 29 opinion on the

mortgagees computation of its adjusted net worth.

B. Annual Submission. HUD reviews the mortgagees LASS

submission for completeness and consistency and to verify that it
includes:

1\. Audited Financial Statements.

\* Balance Sheet. All accounts are properly classified and reported
within

the FDT. All unacceptable assets must be clearly identifiable. Escrows

must be excluded from assets of the mortgagee;

\* Income Statement. Revenues from mortgage and non-mortgage related

activities must be clearly identifiable and properly classified;

\* Statement of Equity;

\* Statement of Cash Flows;

\* Notes to the financial statements. Footnotes must be attached and
must

comply with GAAP;

\* Computation of Adjusted Net Worth for FHA Requirements. Mortgagee

has maintained their Net Worth required for their program type; and

\* Liquidity. Mortgagee has maintained their required Liquidity for
their

program type.

2\. Independent Auditors Report on Internal Control. Through review

of the LASS submission, HUD verifies that the audit contains the
required

and properly prepared report on internal control structure.

3\. Independent Auditors Report on Compliance with Specific

Requirements Applicable to Major/Non-major HUD Programs. Through

review of the LASS submission, HUD verifies that the audit contains

required and properly prepared compliance report: the CPAs Report on the

Internal Control Structure and Report on Compliance with Specific

Requirements Applicable to Major HUD Programs (if aggregate balances

originated or serviced were \$300,000 or more) or Report on Compliance

with Specific Requirements Applicable to Non-major HUD Program

Transactions. HUD checks that the reports are in accordance with:

\* HUD IG most recent Handbook 2000.04, Consolidated Audit Guide for

Audits of HUD Programs;

\* GAOs most recent Government Auditing Standards (the Yellow Book),

and

\* Statement of Auditing Standards (SAS) Number 74, Compliance

Auditing Considerations in Audits of Governmental Entities and
Recipients

of Governmental Financial Assistance, Feb. 1995.

If a loan correspondent submits the alternative Report on Compliance and

on Internal Control Over Financial Reporting Based on an Audit of

Financial Statements Performed in Accordance with Government Auditing

Standards, the report must adhere to Government Auditing Standards

reporting requirements.

4\. Audit Findings & Corrective Action Plans. HUD verifies that there

is an acceptable audit finding and corrective action plan for every

reportable condition and/or material weakness and material noncompliance

indicator.

5\. Adjusted Net Worth. HUD reviews the mortgagees financial

statements and notes to the LASS submission to determine if there are

unacceptable assets. Unacceptable assets are listed in chapter 7 of the
most

recent version of HUD IG Handbook 2000.04, Consolidated Audit Guide

for Audits of HUD Programs. Unacceptable assets must be deducted from

owners equity as shown in the Balance Sheet. The computation must be

shown in the Computation of Adjusted Net Worth.

a\. Correction of Deficiency Before Audit Report is Issued. If the

mortgagees adjusted net worth falls below FHA requirements, HUD

reviews the notes to the financial statements to determine if there has
been

a subsequent event that brings the mortgagees net worth to FHA

requirements.

b\. Correction of Deficiency After Audit Report is Issued. When the

mortgagee has corrected a deficiency in its Adjusted Net Worth after the

date of the auditors report, then the mortgagee must submit
documentation

to support that sufficient amount of capital has been contributed to the

company to correct the deficiency. This documentation must include the

audit finding, written by the financial statement auditor, on the lack
of

compliance with the net worth requirement and the corrective action
plan,

written by the mortgagee, detailing how the deficiency was corrected and

how the compliance will be monitored. The mortgagees corrective action

plan must describe the form of the capital contribution, the exact date
of the

contribution, and the amount or value of the contribution. Also, the
auditor

must provide a signed statement that they verified the subsequent
capital

contribution to the mortgagees books and records.

c\. Failure to Meet Net Worth Requirement. Analysis of the LASS

submission and notes that reveals that the mortgagees adjusted net worth

does not meet FHA requirements is grounds for administrative action by

HUDs Mortgagee Review Board.

d\. Failure to Maintain Required Net Worth. If the review of a LASS

submission discloses that the mortgagee does not consistently maintain
the

required net worth throughout the year, the Department may request that
the

mortgagee submit interim audited or compiled financial statements and

consider further actions. The failure to consistently maintain the
required

net worth is grounds for an administrative action by the Mortgagee
Review

Board.

6\. Liquid Assets. HUD reviews the Balance Sheet, Statement of Cash

Flows, and notes to the mortgagees LASS submission to verify that the

mortgagee has, and has consistently maintained, adequate liquid assets.

a\. Correction of Deficiency Before Audit Report is Issued. If the

mortgagees total liquid assets fall below FHA requirements, HUD reviews

the notes to the financial statements to determine if there has been a

subsequent event that brings the mortgagees liquid assets to FHA

requirements.

b\. Correction of Deficiency After Audit Report is Issued. When the

mortgagee has corrected a deficiency in its liquid assets after the date
of the

auditors report, then the mortgagee must submit documentation to support

that sufficient amount of cash and/or acceptable cash equivalents has
been

infused into the company to correct the deficiency. This documentation

must include the audit finding, written by the financial statement
auditor,

on the lack of compliance with the requirement and the corrective action

plan, written by the mortgagee, detailing how the deficiency was
corrected

and how the compliance will be monitored. Also, the auditor must provide

a signed statement that they verified the subsequent liquid asset
infusion to

the mortgagees books and records. Depending on the situation, HUD may

require a higher level of assurance or additional documentation.

c\. Failure to Meet Liquid Assets Requirement. Analysis of the LASS

submission and notes that reveals that the mortgagees total liquid
assets do

not meet FHA requirements is grounds for administrative action by the

Mortgagee Review Board.

d\. Failure to Maintain Required Liquid Assets. If HUDs review of

LASS submission discloses that the mortgagee does not consistently

maintain the required liquid assets throughout the year, the Department
may

request that the mortgagee submit interim audited or compiled financial

statements and consider further actions. The failure to consistently

maintain the minimum liquid assets is grounds for an administrative
action

by the Mortgagee Review Board.

7\. Revenues. The principal source of revenues of a non-supervised

mortgagee or non-supervised loan correspondent must be from its mortgage

lending operations, property improvement or manufactured home lending

activities. The mortgagee may include in its revenues activity from
loans

secured by real property or unsecured Title I insured loans.

8\. Indications of Noncompliance. HUD reviews the financial

statement submission, including the notes to the financial statements
and

the other documentation, for any indication of fraud, illegality, or
practices

not in compliance with FHA requirements. The review also provides a

means to determine whether the mortgagee meets the FHA principal

activity requirement.

If violations of FHA requirements, fraud, or illegality are identified,
the

mortgagee is referred to the Quality Assurance Division, the Office of

Inspector General, and/or the Mortgagee Review Board for further action

or, where appropriate, a letter is sent to the mortgagee requesting an

explanation.

9\. Reports on Compliance and Internal Control. Where the auditor has

reported noncompliance or material weaknesses in the compliance report
or

internal control report, the mortgagees management must provide a

Corrective Action Plan, which details the actions to be taken to correct
the

noncompliance or weaknesses. Depending on the nature of the findings,

the mortgagee may be referred to the Quality Assurance Division, the

Office of Inspector General, or the Mortgagee Review Board for further

appropriate action.

4-6 Acceptance of LASS Submission. After HUD has reviewed all the

information contained in the LASS submission and has determined it is

acceptable, the mortgagee is recertified from a financial standpoint.

Mortgagees can check the status of their LASS submission within the

LASS system, which will show its status as Audit Accepted.

4-7 Deficient LASS Submission. In some instances, FHA will

determine the submission is deficient. When this occurs, the mortgagee

must adhere to the review comments attached to the submission and follow

the instructions in the LASS user manual on how to cure a deficient

submission. Failure to submit an acceptable cure within the prescribed

timelines outlined in the LASS user manual may result in the loss of a

mortgagees FHA approval.

4-8 Rejected LASS Submission. In some instances HUD will reject a

submission. A rejected submission allows the mortgagee to modify the

submission to correct a deficiency that in HUDs opinion may have been

attributed to an oversight by the mortgagee and the auditor. Once the

submission has been changed the mortgagee must transmit the submission

to the auditor for review. If the auditor agrees with the content of the

template then they will transmit the submission back to the mortgagee
for

submission to HUD. If the auditor disagrees with the content of the

template then they indicate their disagreement and the submission is

returned to the mortgagee for modification. The process continues until
the

auditor has deemed the submission acceptable. The mortgagee transmits

the revised submission to HUD through the LASS system. Failure to

submit an acceptable submission within the prescribed timelines outlined
in

the LASS user manual may result in the loss of a mortgagees FHA

approval.

4-9 Termination of FHA Mortgagee Approval.

A. Notice of Violation. If a mortgagee, when required, fails to pay its

annual renewal fee, return its annual verification report, or in the
case of

non-supervised mortgagees and non-supervised loan correspondents,

submit an acceptable LASS submission, the Mortgagee Review Board may

send the mortgagee a Notice of Violation that gives the mortgagee 30
days

from receipt of the notice to comply.

B. Notice of Withdrawal û Termination of Approval. If the mortgagee

fails to comply with the Notice of Violation, the Mortgagee Review Board

may send the mortgagee a Notice of Withdrawal terminating its approval

upon receipt of the notice.

C. Appeal of Notice of Withdrawal. All mortgagees have a 30-day

period to appeal their termination and request reinstatement.

1\. Annual Fee. Reinstatement requests due to nonpayment of

the annual fee must be sent directly to the Lender Approval and

Recertification Division. The terminated mortgagee will be sent a

Settlement Agreement, which must be executed and returned with payment

of the required annual fee and a \$1,000 reinstatement fee. Once the

settlement agreement and required monies are received and reviewed, the

mortgagee will be reinstated.

2\. LASS Submission of Audited Financial Statements. Reinstatement

requests due to either an unacceptable or no LASS submission must be

made through the LASS system. The terminated mortgage must submit an

audit submission that meets all of our reporting and threshold
requirements.

In addition, where applicable the mortgagee must submit a corrective
action

plan that adequately resolves all reported internal control weaknesses
and

noncompliance. Once the submission has been accepted the mortgagee

must execute a Settlement Agreement online in LASS and then submit a

\$1,000 reinstatement fee directly to the Lender Approval and

Recertification Division. Once the reinstatement fee is received the

mortgagee will be reinstated and then must complete the LASS submission

of their annual audit.

If the termination was based on both nonpayment of the annual fee and no

acceptable LASS submission, two settlement agreements will be required,

but only one reinstatement fee must be paid.

Terminated mortgagees who dont appeal or seek reinstatement within the

30 day period may not reapply for FHA approval until 12 months after the

effective date of their termination.

4-10 Requests for Information. Under the Departments regulations at 24

CFR 202.5(g), mortgagees must provide, upon request, not only a copy of

their latest financial statements, but any additional information that
the

Department requests to be submitted to an examination of that portion of

the mortgagees records that relates to its FHA insured mortgage
activities.