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CHAPTER 1. GENERAL AUDIT GUIDANCE

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Purpose. This guide is to assist independent auditors (IAs) in performing programspecific audits of participants in selected Department of Housing and Urban Development (HUD) Housing and Ginnie Mae programs. These audits must be performed in accordance with the standards for financial audits of the U.S. General Accounting Office's (GAO) Government Auditing Standards, issued by the Comptroller General of the United States. The objectives of a HUD program-specific audit are to assist the program managers in HUD in determining whether the auditee has: (a) provided financial data and reports that can be relied upon; (b) internal control in place to provide reasonable assurance that it is managing HUD programs in compliance with applicable laws and regulations; and (c) complied with the terms and conditions of Federal awards and guarantees, and thus expended Federal funds properly and with supporting documentation. This guide is effective for audits of fiscal years ending March 31, 2002 and thereafter. HUD program audit reports are a primary tool used by program managers to meet their stewardship responsibilities in overseeing these HUD programs and assuring the integrity of the funds. Program managers must act upon the areas of noncompliance and internal control weaknesses noted in these reports. To be of value, these reports must contain adequate information to give reported matters perspective and to allow the managers to take necessary corrective action. Use of this guide is mandatory for audits by IAs of all for profit HUD program participants. Audits of non-profit participants are to be conducted in accordance with OME Circular A-133 and related guidance. This guide is divided into chapters. The first chapter discusses purpose, background, audit planning and other considerations and establishes certain requirements for the performance of the audit. The second chapter contains the reporting requirements. The remaining chapters of the guide contain a compliance supplement for a particular HUD program (Chapter 3 has been reserved for future use). Each audit

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should be conducted in accordance with requirements of Chapters 1 and 2 and the applicable compliance supplement included in Chapters 4 through 8 of this guide. Chapter 4 of this guide is reproduced in its entirety in the Real Estate Assessment Center's (REAC) Summary of Financial Reporting and Audit Guidance for Multifamily Program Participants and Independent Auditors. This summary is available on HUD's website at http://www.hud.gov/reac/products/prodmf.html. Auditors should refer to that document for a detailed discussion on HUD's electronic submission reporting requirements for multifamily program participants (refer to 24 CFR Par 5, Subpart H). This guide is not intended to be a complete manual of procedures, nor is it intended to supplant the auditor's judgment of audit work required. Suggested audit procedures contained herein may not cover all circumstances or conditions encountered in a particular audit. The auditor should use professional judgment to tailor the procedures so that the audit objectives may be achieved. However, all applicable compliance requirements in this guide must be addressed by the auditor. If the auditor desires technical assistance pertaining to HUD programs, their regulations or operations, the auditor should contact the particular HUD Headquarters or Field program office listed in the applicable chapter. A list of local and state offices is available on the Internet at http://www.hud.gov. 1-2 Auditor Qualifications. An auditor must meet the auditor qualifications of Government Auditing Standards, including the qualifications relating to independence and continuing professional education. Additionally, the audit organization is to meet the quality control standards of Government Auditing Standards. While the Government Auditing Standards urge audit organizations to make their ext6rnal quality control review reports available to appropriate oversight bodies, it is not necessary to submit the report to either the HUD Field office or the HUD/OIG unless requested to do so. The standards on auditor qualifications in the Government Auditing Standards require that accountants and accounting firms comply with the applicable provisions of the public

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accountancy laws and rules of the jurisdictions in which they are licensed and where the audit is being conducted. If the auditee is located in a State outside the home State of the auditor, and the auditor performs substantial fieldwork in the auditee's State, the auditor should document his/her compliance with public accountancy laws of that State regarding licensing, in the audit working papers. This guide does not impose additional licensing requirements beyond those established by the individual state board of accountancies (some states allow temporary practice without a license). Refer to HUD Handbooks 4370.2 and 4470.1 regarding additional requirements placed on the IA's relationship with the mortgagor and/or general contractor. 1-3 Audit Scope and Approach. The audit should be sufficiently comprehensive in scope to permit an expression of an opinion on the financial statements and supplemental data of the HUD-assisted activity. The opinion should state whether the basic financial statements present fairly, in all material respects, the financial position of the auditee as of the date of the financial statements and the results of its operations and its cash flows for the period then ended in conformity with accounting principles generally accepted in the United States of America. In addition, the opinion should state that the supplemental data has been subjected to the audit procedures applied in the audit of the basic financial statements and whether it is fairly stated in all material respects in relation to the financial statements taken as a whole. The Government Auditing Standards require the IA to consider the auditee's internal control as part of planning and performing the audit and report on internal control. The auditor should report on internal control in accordance with Chapter 2 of the guide. Also, the IA is required to test and report on the auditee's compliance with applicable HUD laws and regulations regardless of the amount of Federal financial assistance. The auditor's report on compliance should include an opinion on the auditee's compliance with specific requirements

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applicable to each of its major programs. Reporting requirements are discussed further in Chapter 2. 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. In addition, a Government National Mortgage Association (Ginnie Mae) Issuer with a remaining principal balance exceeding $300,000 as of the reporting date is considered a ma3or program. For Projects/Lenders/Issuers with HUD-assisted activity of $300,000 or less for the period under audit (a non-major program), the auditor must also test and report on the entity's compliance with specific requirements. The auditor's report on compliance is described in Chapter 2. Government Auditing Standards require the reporting of all material instances of noncompliance and quantification in terms of dollar value, if appropriate. 1-4 Matters Requiring Immediate Attention. The auditor should specifically assess the risk of material misstatement of the financial statements due to fraud and should consider that assessment in designing the audit procedures to be performed. In making this assessment, the auditor should consider fraud risk factors contained in AICPA SAS No. 82, Consideration of Fraud in a Financial Statement Audit. Normally, an audit in accordance with generally accepted auditing standards does not include audit procedures specifically designed to detect illegal acts. However, procedures applied for the purpose of forming an opinion on the -financial statements may bring possible illegal acts to the auditor's attention. If the auditor becomes aware of illegal acts or fraud that have occurred or are likely to have occurred, the auditor should promptly prepare a separate written report and include all questioned costs. The auditor should submit this report to the HUD District Inspector General for Audit

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(DIGA), as the designated oversight official. A current list of DIGAs is available on the Internet at http://www.hud.gov/oig/oigindex.html and in the Appendix. 1-5 Planning the Audit. A letter of engagement between the auditee and the IA shall be prepared. The letter should state that the audit is to be performed in accordance with generally accepted auditing standards, the Government Auditing Standards, and this audit guide. It should specify that the scope of the audit and the contents of the financial report meet the requirements of this audit guide. it should also specify that the auditor is required to provide the Secretary of Housing and Urban Development, the HUD Inspector General and the GAO or their representatives access to working papers or other documents to review the audit. Access to working papers by HUD and GAO representatives includes making necessary photocopies. Generally, the auditor should use professional judgment to determine the extent of testing necessary to support his/her opinion on the auditee's financial statements and to report on the auditee's compliance with applicable laws and regulations. Each of the applicable compliance requirements contained in this guide must be tested regardless of the amount of Federal financial assistance. Where the auditor decides not to perform detailed testing of a particular compliance requirement, the reasons therefore must be appropriately explained and documented in the working papers. All material instances of noncompliance identified by the auditor must be reported as a finding, even in those cases where corrective action was taken by the auditee after the audit period. For guidance, consult the particular program chapter. The schedule of findings and questioned costs (Chapter 2, Example F) must include the following information for each finding, where applicable, as required by the Government Auditing Standards: (a) the number of items and dollar value of the population; (b) the number of items and the dollar value of the selected sample; and (c) the number of items and the dollar value of the instances of noncompliance. The auditor is required to obtain written representation from management that includes matters concerning compliance

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with program laws and regulations that have a material effect on the financial statements and each HUD-assisted program. The auditor shall retain working papers and reports for a minimum of three years from the date of the audit report, unless the auditor is notified in writing by a HUD office or the GAO to extend the retention period. When auditors are aware that HUD or the auditee is contesting an audit finding, the auditor shall contact the parties contesting the audit finding for guidance prior to destruction of the working papers and report. 1-6 Consideration of Internal Control Compliance. Overall guidance for the consideration of internal control, testing and reporting requirements for Federal financial assistance programs is provided in the Government Auditing Standards. The Government Auditing Standards require that a sufficient understanding of internal control be obtained to plan the audit and to determine the nature, timing, and extent of tests to be performed. In fulfilling the audit requirement relating to an understanding of internal control and assessing the level of control risk, the auditor should follow, at a minimum, the guidance contained in AICPA SAS No. 55, Consideration of the Internal Control in a Financial Statement Audit and SAS No. 78, Consideration of Internal Control in a Financial Statement Audit: An Amendment to SAS No. 55. In addition, when auditing HUD programs, the auditor should perform tests of controls to evaluate the effectiveness of the design and operation of internal control in preventing or detecting material noncompliance with the requirements of the HUD-assisted programs. The auditor should perform these procedures regardless of whether the auditor assesses the internal control risk below the maximum. The steps performed and conclusions reached should be clearly evidenced in the auditor's working papers. The working papers should clearly demonstrate the auditor's understanding and assessment of control risk related to internal control established for HUD-assisted activities. Tests may be omitted only in areas when internal control is likely to be ineffective in preventing or detecting noncompliance, in which case a reportable condition or material weakness should be reported.

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As part of this evaluation of completed audits. Americans with Disabilities Act.04 REV-2 CHG-1 1-7 Quality Control Review for Audit Reports. The corrective action plan is considered a necessary part of the Project/Lender/Issuer's audit requirement. Additional guidance concerning the corrective action plan is contained in Chapter 2 of this guide. the auditee must comment on the status of corrective action taken on prior findings. Consolidated Civil Rights Monitoring Requirements for Section 8. The Fair Housing Act prohibits discrimination based on race. and 24 CFR Part 100. 24 CFR Part 1 (Title VI of the Civil Rights Act. 1-8 Corrective Action Plan.1. In addition. religion. the supporting audit working papers shall be made available upon request by the OIG or the REAC. To facilitate these requests. firm address. the following references should be used: HUD Handbook 8004. color. familial status or disability in all aspects of the 1-9 1-7 12/01 . The HUD Office of Inspector General (OIG) and the REAC have implemented procedures for evaluating audits performed by nonFederal auditors. the auditee is required to submit a corrective action plan with the auditor's report on HUDassisted programs. and telephone number of the audit partner on the engagement and the IA's Federal employer ID number. To assist the Department in resolving instances of noncompliance and material weaknesses in internal control identified by the auditor. Fair Housing and Non-Discrimination. Whenever an evaluation of an audit report or working papers discloses inadequacies. When performing compliance work in the fair housing and non-discrimination area. The Fair Housing Act (applicable to all housing in the nation). In the corrective action plan.2000. the transmittal letter should include the name. national origin. the auditee must describe the corrective action taken or planned in response to findings identified by the auditor. the IA may be asked to take corrective action. it will consider filing complaints with the cognizant State Board of Accountancy and initiating action to debar the practitioner from further participation in Federal programs. and others) and Part 8 (Section 504 of the Rehabilitation Act)(both of which are applicable to all HUD-assisted housing). If HUD determines that the audit report and working papers are substandard or contain major inadequacies. sex.

2000. such as number and ages of children). The prohibitions extend to actions. 12/01 1-8 .04 REV-2 CHG-1 of the sale or rental of a dwelling (familial status refers to family composition. which have disparate impact because of any of the prohibited bases.

It is expected that the specific compliance requirements identified in this guide will cover those laws and regulations that. the compliance reports (in Section C below) and illustrated in this guide are the only reports necessary for reporting on the auditee's compliance with laws and regulations. The audit report should be issued to the auditee's governing body and/or top official. The report cover should clearly indicate the HUD-assisted activities and period(s) that were audited.2000.04 REV-2 CHG-1 CHAPTER 2. the auditor should also issue the compliance report in accordance with Government Auditing Standards. The auditor's report on the basic financial statements together with the auditor's report on accompanying supplemental information required by HUD. could have a direct and material effect on the financial statements. In addition. The following reports are required to be submitted by the auditee: A. In such cases. if not complied with. and a report on internal control. It must identify any reportable conditions and material weaknesses noted (Example B). considered laws and regulations in addition to those noted in this guide. as part of the audit of the financial statements. there are additional reports required to be issued in an audit conducted in accordance with this audit guide. However. C. The auditor's combined report on internal control as it relates to both financial reporting and administering the HUD-assisted programs. as appropriate. A report on compliance with applicable laws and regulations that may have a direct and material effect on each HUD-assisted program including: B. REPORTING REQUIREMENTS AND SAMPLE REPORTS 2-1 Government Auditing Standards require that the auditor issue the following reports based on the audit of the financial statements: a report on the financial statements. if the IA. for which noncompliance could have a direct and material effect on the financial statements. 2-1 12/01 . stating whether that supplemental information is fairly stated in all material respects in relation to the basic -financial statements taken as a whole (Example A). a report on compliance with applicable laws and regulations.

the IA should report on fair housing and nondiscrimination. the number of items and dollar value of the population. In addition. Where the HUD-assisted activity is nonmajor. the auditee should determine if significant findings from previous HUD required annual audits. Nonmaterial instances of noncompliance should be communicated to the auditee in accordance with the Government Auditing Standards. In the auditee's comments on audit resolution matters. 12/01 2-2 . the auditor's report on specific requirements applicable to fair housing should be separate (Example E) from the auditor's opinion on compliance with specific requirements applicable to major programs. i. The auditor is required to follow up on prior audit findings. The findings should include an identification of all material questioned costs. when the auditor concludes that the comments materially misrepresent the status of any prior audit finding(s). The report on compliance should also identify and include all material instances of noncompliance. as a result of noncompliance.2000. and report. perform procedures to assess the reasonableness of the comments on audit resolution matters relating to HUD programs prepared by the auditee. HUD management reviews. D.e. fair housing reporting should be included in the auditor's report on non-major HUD-assisted programs.inspections have been corrected and disclose those which remain uncorrected at the time of the review (Example G). as a current-year audit finding. or REAC physical . and the number of items and the dollar value of the instances of noncompliance (Example F). HUD-OIG audits. Where the HUD-assisted activity is major.04 REV-2 CHG-1 -- an opinion on compliance with specific requirements applicable to major HUD-assisted programs (Example C) a report on compliance with specific requirements applicable to non-major HUD-assisted programs (Example D) -- When performing tests of compliance requirements contained in Chapter 4. the findings should contain adequate information necessary to facilitate the audit resolution process. the number of items and the dollar value of the selected sample.

B. auditors should exercise professional judgment in tailoring their reports to the circumstances of individual audits. Report on Internal Control. 2-3 12/01 . F. Opinion on Compliance with Specific Requirements Applicable to Major HUD Programs. including all questioned costs found as a result of these acts that the auditors become aware of. F. These reports are not meant to be all-inclusive. wherein the auditee officials describe the corrective action taken or planned in response to the findings identified by the auditor. on internal control. on compliance with specific requirements and the auditee's corrective action plan that may be issued in an audit in accordance with this guide. This report should be sent to the cognizant District Inspector General for Audit (see Appendix for list of District Inspectors General for Audit). E. C. Report on Compliance with Specific Requirements Applicable to Non-major HUD Program Transactions. The following are illustrations of reports on financial statements. The plan should also include comments on the corrective action taken on prior findings resulting from IA or relevant HUD-OIG audits and HUD program reviews (Example H). D. Any report from the auditors on illegal acts or fraud that have occurred or are likely to have occurred. 2-2 Auditor's Reports. A corrective action plan developed by the auditee.2000. should be covered in a separate written report in accordance with the provisions of the Government Auditing Standards. Report on Audited Financial Statements and Supplemental Information.04 REV-2 CHG-1 E. Illegal acts are to be reported on without regard to whether the condition giving rise to the questioned costs has been corrected or whether the auditee does or does not agree with the finding and questioned costs. Examples: A. Report on Compliance with Specific Requirements Applicable to Fair Housing and Non-Discrimination. Schedule of Findings and Questioned Costs.

04 REV-2 CHG-1 G. 12/01 2-4 .2000. Auditee's Comments on Audit Resolution Matters Relating to HUD Programs. Corrective Action Plan (An Auditee Responsibility). H.

20XX. as well as evaluating the overall financial statement presentation. contracts. the financial statements referred to above present fairly. We conducted our audit in accordance with auditing standards generally accepted in the United States of America and the standards applicable to financial audits contained in Government Auditing Standards. In our opinion. the financial position of [the Entity] as of December 31. Our responsibility is to express an opinion on these financial statements based on our audit.: We have audited the accompanying balance sheet of [the Entity] as of December 31. and grants. capital and cash flows for the year then ended. An audit also includes assessing the accounting principles used and significant estimates made by management. 2-5 12/01 .2000. In accordance with Government Auditing Standards.S. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. U. evidence supporting the amounts and disclosures in the financial statements. and the results of its operations and its cash flows for the year then ended in conformity with accounting principles generally accepted in the United States of America. on a test basis. regulations. We believe that our audit provides a reasonable basis for our opinion. and the related statements of income. An audit includes examining. changes in partners. in all material respects. issued by the Comptroller General of the United States. we have also issued our report(s) dated [date of report] on our consideration of [the Entity's] internal control and on our tests of its compliance with certain provisions of laws.04 REV-2 CHG-1 EXAMPLE A REPORT ON AUDITED FINANCIAL STATEMENTS AND SUPPLEMENTAL INFORMATION Independent Auditor’s Report To the Partners [the Entity] Anytown.A. Those reports are an integral part of the audit performed in accordance with Government Auditing Standards and should be read in conjunction with this report in considering the results of our audit. These financial statements are the responsibility of the [the Entity's] management. 20XX.

CPA and Company Certified Public Accountants Anytown.S. is fairly stated.A. in relation to the financial statements taken as a whole. U.04 REV-2 CHG-1 The accompanying supplemental information (shown on pages XX-XX) is presented for the purposes of additional analysis and is not a required part of the basic financial statements of [the Entity]. [Date] 12/01 2-6 .2000. in our opinion. in all material respects. Such information has been subjected to the auditing procedures applied in the audit of the basic financial statements and.

issued by the U. We conducted our audits in accordance with auditing standards generally accepted in the United States of America and the standards applicable to financial audits contained in Government Auditing Standards. We noted certain matters involving internal control and its operation that we consider to be reportable conditions.: We have audited the financial statements of [the Entity] as of and for the year ended December 31.S. in our judgment. The management of [the Entity] is responsible for establishing and maintaining effective internal control. we considered [the Entity's] internal control over financial reporting and its internal control over compliance with requirements that would have a direct and material effect on a HUD-assisted program in order to determine our auditing procedures for the purpose of expressing our opinions on the financial statements and on compliance and not to provide assurance on the internal control over financial reporting and the internal control over compliance. noncompliance with which would be material to a HUDassisted program. Reportable conditions involve matters coming to our attention relating to significant deficiencies in the design or operation of internal control that. U. Office of the Inspector General. 20XX. In planning and performing our audit of the financial statements.04 REV-2 CHG-1 EXAMPLE B INDEPENDENT AUDITOR'S REPORT ON INTERNAL CONTROL (COMBINED REPORT APPLICABLE TO INTERNAL CONTROL OVER FINANCIAL REPORTING BASED ON AN AUDIT OF FINANCIAL STATEMENTS AND INTERNAL CONTROL OVER COMPLIANCE FOR HUD-ASSISTED PROGRAMS--REPORTABLE CONDITIONS WERE NOTED--NO MATERIAL WEAKNESSES) To the Partners [the Entity] Anytown. Those standards and the Guide require that we plan and perform the audits to obtain reasonable assurance about whether the financial statements are free of material misstatement and about whether [the Entity] complied with laws and regulations. We have also audited (the Entity's] compliance with requirements applicable to HUD-assisted programs and have issued our reports thereon dated [Date]. issued by the Comptroller General of the United States and the Consolidated Audit Guide for Audits of HUD Programs (the "Guide"). summarize. process. could adversely affect [the Entity's] ability to record.2000.S. and have issued our report thereon dated [Date]. and report 2-7 12/01 . Department of Housing and Urban Development.A.

[Date] 12/01 2-8 . CPA and Company Certified Public Accountants Anytown. Our consideration of internal control would not necessarily disclose all matters in internal control that might be reportable conditions and.04 REV-2 CHG-1 financial data consistent with the assertions of management in the financial statements or its ability to administer HUD-assisted programs in accordance with applicable laws and regulations.A. would not necessarily disclose all reportable conditions that are also considered to be material weaknesses as defined above. accordingly. This report is intended solely for the information and of the audit committee.S. and the Department of Housing and Urban Development and is not intended to be and should not be used by anyone other than these specified parties. [Include paragraphs to describe the reportable conditions noted. we believe none of the reportable conditions described above is a material weakness. However.] A material weakness is a condition in which the design or operation of one or more of the internal control components does not reduce to a relatively low level the risk that misstatements that would be material in relation to the financial statements being audited or that noncompliance with applicable requirements of laws and regulations that would be material in relation to a HUD-assisted program may occur and not be detected within a timely period by employees in the normal course of performing their assigned functions.2000. management. U.

[the Entity] complied. issued by the Comptroller General of the United States. in all material respects. This report is intended solely for the information of the audit committee.2000. for the year ended December 31. with the requirements referred to above that are applicable to each of its major HUD-assisted programs for the year ended December 31.S. Office of the Inspector General.S. the standards applicable to financial audits contained in Government Auditing Standards.A. on a test basis. U. evidence about [the Entity's] compliance with those requirements and performing such other procedures as we considered necessary in the circumstances. and the Consolidated Audit Guide for Audits of HUD Programs (the "Guide") issued by the U. An audit includes examining. Department of Housing and Urban Development. In our opinion. management. 20XX. Compliance with those requirements is the responsibility of (the Entity's] management. Those standards and the Guide require that we plan and perform the audit to obtain reasonable assurance about whether noncompliance with the requirements referred to above that could have a direct and material effect on a major HUD-assisted program occurred. CPA and Company Certified Public Accountants 2-9 12/01 .: We have audited the compliance of [the Entity] with the specific program requirements governing [list those requirements tested] that are applicable to each of its major HUD-assisted programs. Our responsibility is to express an opinion on [the Entity's] compliance based on our audit. 20XX. Our audit does not provide a legal determination of [the Entity's] compliance with those requirements. We conducted our audit of compliance in accordance with auditing standards generally accepted in the United States of America. and the Department of Housing and Urban Development and is not intended to be and should not be used by anyone other than these specified parties. We believe that our audit provides a reasonable basis for our opinion.04 REV-2 CHG-1 EXAMPLE C INDEPENDENT AUDITOR'S REPORT ON COMPLIANCE WITH SPECIFIC REQUIREMENTS APPLICABLE TO MAJOR HUD PROGRAMS To the Partners [the Entity] Anytown.

04 REV-2 CHG-1 Anytown. U.2000.S.A. [Date] 12/01 2-10 .

U. we performed auditing procedures to test compliance with the requirements governing [list those requirements tested] that are applicable to those transactions. and have issued our report thereon dated [Date of report]. The results of our tests disclosed no instances of noncompliance that are required to be reported herein under the Guide. Accordingly.S.S. management. we do not express such an opinion. Office of the Inspector General. the objective of which is the expression of an opinion on [the Entity's] compliance with these requirements. and the Department of Housing and Urban Development and is not intended to be and should not be used by anyone other than these specified parties. This report is intended solely for the information of the audit committee. In connection with that audit and with our consideration of [the Entity's] internal control used to administer HUD programs. U.A. we selected certain transactions applicable to certain non-major HUD-assisted programs for the year ended December 31.04 REV-2 CHG-1 EXAMPLE D INDEPENDENT AUDITOR’S REPORT ON COMPLIANCE WITH SPECIFIC REQUIREMENTS APPLICABLE TO NON-MAJOR HUD PROGRAM TRANSACTIONS To the Partners [the Entity] Anytown. [Date] 2-11 12/01 . 20XX. 20XX. Department of Housing and Urban Development. Our procedures were substantially less in scope than an audit.A. As required by the Guide.2000.S.: We have audited the financial statements of [the Entity] as of and for the year ended December 31. as required by the Consolidated Audit Guide for Audits of HUD Programs (the "Guide”) issued by the U. CPA and Company Certified Public Accountants Anytown.

20XX. Our procedures were substantially less in scope than an audit.A.S. office of the Inspector General. [Date] 12/01 2-12 . USA We have applied procedures to test [the Entity's] compliance with Fair Housing and NonDiscrimination requirements applicable to its HUD-assisted programs. Our procedures were limited to the applicable compliance requirement described in the Consolidated Audit Guide for Audits of HUD Programs issued by the U.S.04 REV-2 CHG-1 EXAMPLE E INDEPENDENT AUDITOR'S REPORT ON COMPLIANCE WITH SPECIFIC REQUIREMENTS APPLICABLE TO FAIR HOUSING AND NON-DISCRIMINATION To the Partners [the Entity] Anytown. management. and the Department of Housing and Urban Development and is not intended to be and should not be used by anyone other than these specified parties.2000. for the year ended December 31. we do not express such an opinion. CPA and Company Certified Public Accountants Anytown. This report is intended solely for the information and use of the audit committee. Accordingly. U. The results of our tests disclosed no instances of noncompliance that are required to be reported herein under the Guide. the objective of which would be the expression of an opinion on (the Entity's] compliance with the Fair Housing and Non-Discrimination requirements. Department of Housing and Urban Development.

e. If corrective action is not necessary. Recommendation . -- -- -- -- The auditor should attempt to identify the condition. a statement by the auditor 2-13 12/01 . Effect .g.2000. where applicable: (a) the size and corresponding dollar value of the population. These findings-may also serve as a basis for HUD to conduct additional work.04 REV-2 CHG-1 EXAMPLE F SCHEDULE OF FINDINGS AND QUESTIONED COSTS (Should be Attached to Auditor's Report on Compliance) When the auditor identifies a finding. As part of this report.why the condition exists..g. and (c) the size and dollar value of the instances of noncompliance. a control procedure not followed or one which is inadequate. Cause . In addition. normally addresses the cause e.g. this should be monetized in all possible instances and described as thoroughly as possible. a prudent management practice. the auditee was unaware of the regulation or internal control was not a high priority of the auditee. the specific regulation.what happened as a result of the condition. as part of the finding.what the auditee should do to correct the condition. or an internal control procedure. criteria. this schedule must include the following information for each finding. the auditee is responsible for developing a separate corrective action plan (see Example H) based on the auditor's findings and recommendations and including the plan when submitting the auditor's report. The Government Auditing Standards state that well-developed findings generally consist of the following attributes: -Statement of condition . the auditor is required to include the auditee's summary comments on the findings and recommendations in the report.g. effect.the nature of the deficiencies.what the auditee should be doing. develop procedures to implement regulation or follow established procedures. the auditor is required to make a recommendation for corrective action to the auditee. e. a regulation not being followed. (b) the size and dollar value of the sample tested. Criteria . In addition. e. and cause to provide sufficient information to HUD officials to permit timely and proper corrective action.

04 REV-2 CHG-1 describing the reason it is not should accompany the audit report. 12/01 2-14 .2000.

The amount of the rent supplements received for these tenants for the prior audit period was $15. The auditor may rely on management's representation as to the completeness of reports submitted during the audit period. The auditor does not have to independently confirm the completeness of audit and other reports received by management. number and title: Finding No. Status - Finding No. The owner has not obtained the required documentation from third-party sources nor has the owner reimbursed the appropriate programs.2000. 2-15 12/01 .350. program review reports and state agency reports. 2 - Status - * -* -- This includes all prior audits.04 REV-2 CHG-1 EXAMPLE G AUDITEE'S COMMENTS ON AUDIT RESOLUTION MATTERS RELATING TO HUD PROGRAMS The Owner has not taken corrective action on findings from prior audit report. 1 The required documentation with regard to eligibility was not obtained for tenants receiving rent supplements.

specific information should be provided by the auditee to support its position. Officials responsible for completing the proposed actions should also be identified. documentation should be submitted for any actions the auditee considers completed. 12/01 2-16 .Internal Control Review A. B. C. Appropriate documentation should be submitted for actions taken. Comments on Findings and Recommendations The auditee should provide a statement of concurrence or nonconcurrence with the findings and recommendations. If the auditee believes a corrective action is not required. an appendix may be attached to the submission. An update should be included on dates for completion of major tasks and responsible officials for any actions not completed. if the auditee does not agree with a finding. If the information is voluminous. The auditee should provide a report on the status of corrective actions taken on prior findings that remain open. Status of Corrective Actions on Prior Findings The auditee must comment on all prior findings whether or not corrective action has been completed. For planned actions. Actions Taken or Planned The auditee should detail actions taken or planned to correct deficiencies identified in the report. a statement describing the reasons should be included. In addition. auditees should provide projected dates for completion of major tasks.2000.04 REV-2 CHG-1 EXAMPLE H CORRECTIVE ACTION PLAN Name and Number of Project ________________________________________________ Auditor/Audit Firm ________________________________________________________ Audit Period ______________________________________________________________ The following is a recommended format to be followed by auditees for submitting a corrective action plan: Section I .

B.2000. Status of Corrective Actions on Prior Findings (See Section I.) C. C. above. A.) B. Comments on Findings and Recommendations (See Section I.Compliance Review A.04 REV-2 CHG-1 Section II .) 2-17 12/01 . Actions Taken or Planned (See Section I.

4-2 Reporting Requirements. role is to conduct and report the results of their audit in accordance with generally accepted auditing standards (GAAS) and generally accepted government auditing standards (GAGAS). Separately. These statements must also be certified to by the CEO of the management agent. The auditors. This report should cover the following items: 4-1 12/01 . practitioners with non-profit clients who participate in FHA/HUD programs covered by the Single Audit Act should conduct financial audits in accordance with OMB Circular A-133 and the associated compliance supplement. The report should include the following basic financial statements plus supplemental data prepared in accordance with REAC instructions. The report shall include the Employer Identification Number assigned by the IRS. where applicable. when owned by a corporation. Example A) on the ownership entity's basic financial statements. When circumstances prohibit the ideal number of partners. In that regard. This number must be entered below the partner or corporate signatures. or officers' certifying signatures. It should be certified by two general partners.2000. the Independent Auditor shall: A. In addition to the basic financial statements of the housing project.04 REV-2 CHG-1 CHAPTER 4. 4-1 HUD Multifamily Housing Programs Background. when the project is owned by an individual. Issue an Independent Auditors' Report (refer to Chapter 2. It is the owner's responsibility to file an accurate electronic submission with HUD's Real Estate Assessment Center. The Regulatory Agreement incident to the insured mortgage requires the annual submission of audited financial statements prepared in accordance with the requirements of the Secretary. the auditor is required to submit a report on the consideration of internal controls and a report on compliance with specific requirements as well as supplemental data reports. when the project is owned by a partnership or by two officers. These statements must be certified to be accurate by the mortgagor. within 90 days after the end of the fiscal year. This chapter contains HUD's requirements for conducting annual financial audits of entities participating in profit motivated and limited distribution multifamily housing programs. explanatory information should be provided with the audit report.

Example A) on the supplemental information. This report may be added to the auditors. C. Compliance Requirement. Volume 1. if a Limited Liability Company owns the property. Identify all required financial reports by inquiry of the owner/manager. Obtain an understanding of the auditee's procedures for preparing and reviewing the financial reports. Projects participating in HUD-assisted activities are required to ensure that financial status reports contain reliable financial data and are presented in accordance with the terms of applicable agreements between the entity and HUD.04 REV-2 CHG-1 o o o o o Balance Sheet Statement of Income Statement of Changes in Partner's Capital 1/ Statement of Cash Flows Footnotes to the basic financial statements. B. 12/01 4-2 . _______________________________ 1/ Or similarly titled report based on the type of participating ownership entity. Auditing Standards. report on the basic financial statements or may appear separately in the auditor-submitted document 2/. including descriptions of accounting policies. For example. 2/ Refer to AICPA Professional Standards. AU §551. 4-3 Compliance Requirements and Audit Areas A. Issue the additional reports described in Chapter 2. b. 2.06 e.S. U. Issue an Independent Auditors’ Report (refer to Chapter 2.2000. The individual agreements contain the specific reporting requirements that the entity is to follow. Suggested Procedures a. a Statement of Changes in Members' Equity should be opined upon. Federal Financial Reports 1.

including determining that applicants are processed and selected in appropriate order. if applicable to the project.2000. If the owner is under a repayment plan for delinquent excess income. b. i. Report any delinquent unremitted excess income of the project as of the end of the period under audit as a finding. obtain a sample of the Monthly Reports of Excess Income for the period under audit and test the accuracy. approving and rejecting applications. ledgers. other than those which are included in the audited financial statements. Management and owners are prohibited from discriminatory practices in accepting applications. d.e. renting units and designating units or sections of a project for renting to prohibited bases of the "Fair Housing Act" and according to the Regulatory Agreement. Fair Housing and Non-Discrimination 1. Determine if the owner has approval to retain excess income. Reconcile any differences. Obtain a copy of the owner's approved Affirmative Fair Housing Marketing Plan. and providing reasonable 2. 4-3 12/01 . B. For the sample. Select a sample of financial reports. etc. For a Section 236 Interest Reduction Payment Subsidy project.04 REV-2 CHG-1 c. determine compliance with the plan. Suggested Audit Procedures a. trace significant data to supporting documentation. worksheets. e. f. Report all material differences between financial reports and project records. Inquire of the owner/manager as to policies and procedures relating to: marketing of the units. processing. Review significant adjustments made to the general ledger accounts affecting HUD-assisted activity and evaluate for propriety. Compliance Requirement. and determine that the reports selected are prepared in accordance with HUD instructions.

Confirm the outstanding loan balance and annual escrow account activity with the loan servicer as of the client's fiscal year end. d. and associated loan amortization schedule to determine the terms and conditions of those agreements. Verify that the monthly mortgage and escrow payments were made. or tenants evicted and legal invoices for any evidence of litigation or potential litigation related to discriminatory rental practices. c. C. d. slogan or statement is displayed in marketing materials. including documented reasons for valid rejections.2000.04 REV-2 CHG-1 accommodation to applicants and tenants with disabilities in accordance with the requirements of applicable federal civil rights laws. Read the mortgage note. Determine that the HUD-approved Equal Housing Opportunity logo. Obtain an understanding of the owner's procedures for assuring prompt payment of the mortgage Obtain or prepare a schedule of-. The schedule should include the amount. e. Test whether procedures were placed in operation as established by management through inquiry and examination of documentary evidence. by escrow item. Owners shall promptly make all payments due under the note and mortgage (Regulatory Agreement).the client's mortgage and escrow payments and withdrawals for the reporting period. b. Review a sample of correspondence files for applications rejected. Mortgage Status 1. mortgage (or deed of trust). 12/01 4-4 . Determine if payment on the notes are current at the 2. c. Suggested Audit Procedures a. Compliance Requirement. and date each item was paid or disbursed.

4-5 12/01 . Compliance Requirement. Owners of profit motivated and limited distribution properties shall establish a reserve for replacement account and make deposits in accordance with HUD requirements. d. Replacement Reserve 1.) e. verify the reserve for replacement account activity for the reporting period for compliance with the client's Regulatory Agreement. forbearance agreement.HUD Regulatory Agreement) Suggested Audit Procedures a. c. (Source . b. Obtain an understanding of the project owner's procedures. (Note: the auditor should use alternative procedures to satisfy this requirement if the auditor considers the confirmation process unreliable or impractical. Determine that the reserve fund has been established in a federally insured depository approved by the mortgagee.04 REV-2 CHG-1 reporting entity's fiscal year end. interest was retained in the account and test whether the conditions were met for the funds not federally insured for the period. Disbursements from such fund may be made only after receiving written consent from HUD. Using the schedule prepared for the mortgage status compliance requirement.) test whether the owner is complying with the terms and conditions.2000. use agreement. Verify that deposits were made into the replacement reserve. workout agreement. etc. (mortgage modification agreement. 2. D. If the project is operating under an agreement. including the Regulatory Agreement (and any amendments or other written agreements with HUD) for establishment and maintenance of the fund and for making approved disbursements from the reserve fund.

monthly (or annual) mortgage statements) and the schedule prepared above. Determine that the prior year's amount required to be deposited to the residual receipts fund was calculated correctly and deposited within 60 days of the close of the fiscal year. Compliance Requirement. Owners of limited distribution properties shall establish a residual receipts account and make deposits into the account in accordance with HUD requirements.HUD Regulatory Agreement). Disbursements from such fund may be made only after receiving written consent from HUD (source .) f. verify the residual receipts account activity for the reporting period for compliance with the client’s Regulatory Agreement. Using the schedule prepared for the mortgage status compliance requirement. b. Normally. (Note: the auditor should use alternative procedures to satisfy this requirement if the auditor considers the confirmation process unreliable or impractical. E. Trace to the client's general ledger. Suggested Audit Procedures a. Residual Receipts 1. Read the client's Regulatory Agreement (and any amendments) to determine the client's requirements for making deposits into the residual receipts fund. 2. program participants are required to deposit "surplus cash" into the account within 60 days after the end of each fiscal year.04 REV-2 CHG-1 e. Trace disbursements from the reserve for replacement to the associated HUD approval form and canceled invoices.2000. Confirm the account balance and annual reserve for replacement account activity with the loan servicer as of the client's fiscal year end. c. 12/01 4-6 . Determine if sampled disbursements were authorized by HUD and used for the purpose authorized by HUD.

Compliance Requirement. Test whether established procedures for deposit of cash receipts into a federally insured bank are being followed through inquiry and examination of documentary evidence. (Note: the auditor should use alternative procedures to satisfy this requirement if the auditor considers the confirmation process unreliable or impractical. or receive and retain any distribution of assets or any income of any kind of the project except surplus cash. 4-7 12/01 . Surplus cash distributions can only be made as of and after the end of a semiannual or annual fiscal period. Verify that deposits were made into the residual receipts account. The allowable distribution for limited distribution owners is further restricted to a percentage of the owner's initial equity investment as described in the Regulatory Agreement or subsequent HUD approved agreements. Surplus cash distribution cannot be made when the owner is in default under any of the terms of the Regulatory Agreement or under the note or mortgage. e.04 REV-2 CHG-1 d. Confirm the account balance and annual residual receipts account activity with the loan servicer as of the client's fiscal year end. Trace to the client's general ledger. Distributions to Owners 1. F. g.2000. Trace disbursements from the residual receipts account to the associated HUD approval form and canceled invoices. Owners of profit motivated and limited distribution properties are not allowed to make. Suggested Audit Procedures 2. monthly (or annual) mortgage statements) and the schedule prepared above. Determine if disbursements were authorized by HUD and used for the purpose intended. f.

d. total tenant payment. G. If applicable. 12/01 4-8 . Read the minutes of Partner meetings held during the reporting period for evidence of any discussions about distributions. determining initial eligibility. Scan cash disbursements for evidence of payments made to the project owners. and reexamination of eligibility with the provisions in HUD Handbook 4350. and rectifying improper or inaccurate tenant information. Suggested Audit Procedures a. 2. annual recertification of tenant eligibility. determine that surplus cash computations were prepared in accordance with HUD criteria. and Recertification 1.04 REV-2 CHG-1 a. Inquire of management about the payment of distributions during the reporting period. b. They are also responsible for determining initial tenant eligibility. f.2000. e. correctly calculating the tenant's contribution toward rent and utilities and correctly calculating any subsidy.3. Trace payments and determine if they are allowable under the terms of the Regulatory Agreement. Conduct follow-up or corroboration of management's responses as considered necessary. Owners who participate in HUD's rent subsidy programs are responsible for accepting applications. Inquire of management about the existence of any notices of default under any of the terms of the Regulatory Agreement and read any notices. c. Tenant Application. Read the client's Regulatory Agreement (and any amendments or associated documents) to determine the client's requirements for receiving distributions. Compare the client's procedures for accepting applications. Eligibility. Compliance Requirement.

Compare the amount claimed per the HAP billing f.2000. determine that the owner followed the guidance in HUD Handbook 4350. d. income and allowances for adjusted income Lease/Lease addenda in the form as required by HUD Certification and recertification forms (Form HUD-50059) Move-In and Move-Out inspections Computation of tenant's contribution toward rent and utilities and the subsidized portion of the tenant's monthly rent c. disability status. signed by the applicant. waiting list preferences. Test Section 8 rents to ensure that those rents do not exceed the fair market rents. and family composition.3 pertaining to overpayment of a subsidy and follow-up to suspected fraud. (3) (4) (5) (6) e. Review a sample of tenant files for evidence of whether the owner noted any improper or inaccurate information while determining tenant eligibility or during tenant recertification.04 REV-2 CHG-1 b. Review a sample of tenant files to determine that applications are complete. Review a sample of tenant files to determine that the tenant file contains the following documents as follows: (1) (2) Application Required verifications of social security numbers. If so. that the tenant payment was calculated correctly and that the family income was reexamined on an annual basis. Include in the sample some of the oldest and some of the most recently admitted tenants. 4-9 12/01 . that tenants met the eligibility requirements pertaining to their subsidized unit for annual income.

and if findings were identified. Management Functions 1.2000. Inquire of management about any fees charged to the project for property management services. Where an agent has multiple projects. Also inquire about whether there has been a change in the project's property management agent. H. d. whether corrective action was taken (HUD Form 9834 Part A. Test workorders and complaints for timely followup and adherence to management's procedures. b.4). The owner is responsible for performing management functions or contracting with a management agent to provide project management. Compliance Requirement. including the accuracy of the total number of units on the bill. the coverage must be at least equal to two months of the highest potential collections. Inquire whether management has conducted routine unit and general property inspections. e. 2.04 REV-2 CHG-1 to the supporting documentation in the tenant files. All principals of the management entity and all persons who participate directly or indirectly in the management and maintenance of the project and its assets. Verify the mathematical accuracy of the billing. g. accounts and records must be covered. The owner or the owner's agent must be approved by HUD to manage a project and must certify that they will adhere to HUD's project management regulations. 12/01 4-10 . Suggested Audit Procedures a. Determine that the owner's designated management agent has obtained a fidelity bond in an amount at least equal to two months potential collections. c. Test management's procedures for ensuring that units meet applicable housing quality standards.

Read a copy of the owner's latest HUD approved management certification (form HUD-9839a. Determine there is comprehensive general liability coverage on industry standard form. Unauthorized Change of Ownership/Acquisition of Liabilities 4-11 12/01 .. Determine if the management fees charged exceeds the HUD approved amount. Trace the amounts on the schedule to the client's general ledger.04 REV-2 CHG-1 Conduct follow-up or corroboration of management's responses as considered necessary. f. etc. i. Test a sample of payments. h. I. m. including those made to identity of interest relationship for services. in an amount required by the project's mortgage and HUD is named as an additional payee in the event of loss. j. supplies.2000. Compare the schedule created above to form HUD-9839. or c. Review the maintenance contracts and vendor invoices for identity of interest relationships with the owner/agent and agent/service contractor. Obtain from client or prepare a schedule analyzing the fees charged to the project for management services. as appropriate). to determine that the amounts do not exceed the amounts ordinarily paid for such services and supplies. b. k. g. l. Review the management certification to determine if the owner has disclosed the existence of an identity of interest (item 12). Determine if HUD has approved the current management agent. Review the Management Entity Profile for disclosure of identity of interest companies.

J.HUD Regulatory Agreement). Compliance Requirements. Inquire of management about the existence of any agreements to sell or encumber any of the mortgaged property and read any agreements. Review confirmations to determine if a change of ownership has occurred. motivated and limited distribution properties shall not. b. Inquire of management about the existence of any 2. or encumbrance of any of the mortgaged property. Suggested Audit Procedures a. dispose of. Read the minutes of Partner meetings held during the reporting period for evidence of any unauthorized conveyance. without the prior written consent of HUD. Suggested Audit Procedures a. Unauthorized Loans of Project Funds 1. Review the results of the audit procedures applied to specific accounts or other general procedures to identify the existence of any unauthorized conveyance. 12/01 4-12 . without the prior written consent of HUD.2000. 2. c. Confirm all material debt agreements listed on the client's balance sheet. convey. except for reasonable operating expenses and necessary repairs (Source HUD Regulatory Agreement. transfer. including rents. or permit the conveyance. transfer of encumbrance of such property (Source . or pay out any funds except from surplus cash. or encumber any of the mortgaged property. transfer. or encumber any personal property of the project. transfer.04 REV-2 CHG-1 1. Owners of profit. d. or if any of the mortgaged property was encumbered without HUD approval. Compliance Requirements. assign. or encumbrance of any of the mortgaged property. transfer. Owners of profit motivated and limited distribution properties shall not.

Read the minutes of Partner meetings held during the reporting period. assign. Highlight discussions of any unauthorized agreements to assign. without the prior written consent of HUD. 2. Unauthorized Transfer of Beneficial Interest 1. Inquire of management about the existence of any agreements to convey. or encumber any of the personal property of the project. or transfer any beneficial interest in any trust holding title to the property. K. Compliance Requirements. b. Read the minutes of Partner meetings held during the reporting period for evidence of discussions of any unauthorized conveyance. transfer. or transfer any beneficial interest. c. dispose of. or transfer of any beneficial interest of any of the owners. 4-13 12/01 . assign. dispose of. assignment.04 REV-2 CHG-1 agreements to assign. or any right to manage or receive the rents and profits from the mortgaged property (Source . including rents and read any agreements. assignment or transfer of any beneficial interest of any of the owners. Owners of profit motivated and limited distribution properties shall not. transfer.2000. Review the results of the audit procedures applied to specific accounts or other general procedures to identify the existence of any unauthorized transactions. c.HUD Regulatory Agreement). or encumber any of the personal property of the project. _______________________ 3/ Beneficial interest is generally the right to profits from an estate or property. or the interest of any general partner in a partnership owning the property. convey. Suggested Audit Procedures a. b. without owning the estate or property. 3/ Review the results of the audit procedures applied to specific accounts or other general procedures to identify the existence of any unauthorized conveyance.

2. 2. For the sample. covering the period under audit. b. M. Compliance Requirements.HUD Regulatory Agreement and 24 CFR Part 5. Excess Income 1. If the owner has received a letter from HUD permitting or denying the retention of Excess Income. 12/01 4-14 . obtain and read a copy of that correspondence from the property's management. Compliance Requirements. Owners of profit motivated and limited distribution properties are required to submit electronically to HUD audited financial information in accordance with GAAP and HUD requirements (Source . Owners of limited distribution properties with mortgages insured under Section 236 of the National Housing Act must obtain prior authorization from HUD before retaining Excess Income and use Excess Income only for HUD authorized purposes. determine if the client retained Excess Income or remitted the amount collected to HUD in accordance with HUD instructions.04 REV-2 CHG-1 L. Inquire of management about the existence of a letter of permission or denial from HUD with respect to Excess Income. Identify any material misstatements or omission from the data electronically submitted to HUD's REAC. Electronic Submission Verification 1. c. Monthly Report of Excess Income filed by the client. Determine if the reports selected were prepared in accordance with HUD instructions.2000. Select a sample of the HUD forms HUD-93104. Subpart H) Suggested Audit Procedures Compare the client's FASS submission from the last reporting period to the Annual Financial Report prepared for the same period. Trace amounts retained back to the client's supporting records. Suggested Audit Procedures a.

determine if: o o HUD approved if the amount retained The amount retained was used for authorized purposes as enumerated in Housing Notices 4-15 12/01 . If Excess Income was retained by the client.04 REV-2 CHG-1 d.2000.

if an identity of interest exists between a subcontractor. materials supplier. If an identity of interest exists between the mortgagor and the contractor. the project is ordinarily HUD's only source for loss recovery in the event of a foreclosure. Additional support for any cost items questioned by HUD is expected within 15 days of the request. The cost certification is the basis for HUD's determination of the maximum insurable mortgage which is necessary before the project may proceed to final endorsement. thereby reducing investor risk and encouraging the availability of a money supply for the housing market. A reasonable time is set for submission of the cost certification which must be in the Field Office 30 days before final endorsement/closing. Through the insured multifamily project loan program. The HUD Field Office Manager has the option to set an earlier date to halt the unnecessary accumulation of certain costs. HUD expects completed certifications.2 Title Cost Certification Guide for Mortgagors and Contractors of HUD-Insured Multifamily Projects 8/97 5-2 . Similarly. INSURED DEVELOPMENT COST CERTIFICATION AUDIT GUIDANCE 5-1 Program Objectives. 5-1 2000. If not available from the owner.04 REV-2 HUD Handbook No. fully documented and in the prescribed format to be submitted by the mortgagor. a critical factor to multifamily projects. then a cost certification must be submitted. Extended delays in the cost certification process which postpone final endorsement can cause substantial harm to the project's viability and eventual success. For the insured loan program. HUD insures mortgage repayments. 5-3 Reference Material. or an equipment lessor. safe.2000. 4470.04 REV-2 CHAPTER 5. Multifamily insured loans are an integral part of HUD's housing program which has the objectives of providing decent. Program Procedures. affordable and sanitary housing for low and moderate-income families. Therefore. Effective dates for the determination of actual costs are usually the date of the final project inspection report showing final completion and the mortgagor's cost certification cut-off date. it is essential that collateral value is commensurate with the insurance risk. they may be obtained from the local HUD Field Office. or if a cost plus type construction contract was used. the contractor is also required to submit a cost certification. The IA should obtain and become familiar with the following HUD Handbooks.

the consideration of the mortgagor's internal control structure and the mortgagor's compliance with specific requirements. and with the Cost Certification Guide for Mortgagor and Contractors of HUD-Insured Multifamily Projects--HUD Handbook 4470. An illustrative report on cost .27.1 REV-1 5-4 Reporting Requirements.4571.5 4470. HUD Handbook 4470. Mortgagors and contractors are required to determine costs in accordance with HUD Handbook 4470.2 contains the requirement for who among the mortgagor. The Form HUD-92330 should be supported by the information contained in the required financial statements. 885. The Certificate of Actual Cost.1 REV-2 Mortgage Credit Analysis For Project Mortgage Insurance (Section 207) Cost Estimation For Project Mortgage Insurance 4450.825 require mortgagors/borrowers to submit Certificates of Actual Cost before final endorsement of the insured loans or disbursement of loan proceeds or capital advances for the project.425 and 885. and suppliers must provide cost certifications and guidance on eligible costs. auditor's reports and required financial statements should be submitted to the applicable HUD Field Office. Form HUD-92330 is submitted upon completion of the physical improvements to the satisfaction of HUD and before endorsement. The IA is also required to report on the accompanying balance sheet and operating statement. rebates. subcontractors.Final Closing 4571. or officers. The certificate shall show the actual cost to the mortgagor after deduction of any kickbacks. 24 CFR 207. The Mortgagor's Certificate of Actual Cost (Form HUD-92330) in a form prescribed by HUD shall be submitted after the cost Certification cut-off date. stockholders.04 REV-2 Each Form HUD-92330 and Form HUD-92330-A must be accompanied by the auditor's report on the certification of actual cost. Mortgage Credit Analysis for Project Mortgage Insurance. trade discounts or other similar payments to the mortgagor. general contractor.2 .1 REV-2 Section 202 Direct Loan Program for Housing for the Elderly and/or Handicapped Supportive Housing for Elderly Conditional Commitment .1 REV-2. 5-2 8/97 2000. or partners. necessary financial statements which must accompany the Certificate of Actual Cost. and details concerning the Form HUD-92330 (mortgagor) and Form HUD-92330-A (contractor). The period covered by the operating statement is from the beginning of marketing and rent-up activities to the cut-off date.

e. B. Select a sample of financial reports. nor is this Certificate subject to an audit in accordance with the Government Auditing Standards. For the sample. Review significant adjustments made to the general ledger accounts affecting HUD-assisted activity and evaluate for propriety. d. No other financial statements or reports are necessary. etc.certification is provided in the final section of this Chapter. 1. Compliance Requirement. 5-5 Compliance Requirements and Audit Area A. For cost certifications due from contractors (HUD-92330-A). ledgers. worksheets. Obtain an understanding of the auditee's procedures for preparing and reviewing the financial reports. 5-3 2000. The individual agreements contain the specific reporting requirements that the entity is to follow. Federal Financial Reports . b. the auditor need only submit the Contractor's Certificate of Actual Cost and his/her report thereon. other than those which are included in the audited financial statements. Compliance Requirement. Identify all required financial reports by inquiry of the owner/manager. trace significant data to supporting documentation. 8/97 2. Report all material differences between financial reports and project records. Projects participating in HUD-assisted activities are required to ensure that financial status reports contain reliable financial data and are presented in accordance with the terms of applicable agreements between the entity and HUD. Mortgagors and contractors involved in projects that are to receive HUD-insured loans have agreed to maintain adequate records for the purpose of determining the .04 REV-2 c. e. Suggested Audit Procedures a. Accounting System . and determine that the reports selected are prepared in accordance with HUD instructions. 1. i.

Suggested Audit Procedures a. C.2 . HUD notifies the mortgagor/borrower. This date may.eligible costs associated with the projects (HUD Handbook 4470. taxes. any date in between. be the same date as the final completion date. Report all material differences between the amounts reported on the Form HUD-92330 and the supporting documents. Review Form HUD-92330 for completeness and support by the accounting records. This date becomes the basis for establishing the cut-off date for insured projects.. direct loan projects and capital 8/97 . at the earliest. and mortgage insurance premium. 2. or which are escrowed with the mortgagee are eligible for inclusion on the mortgagor's or contractor's Certificates of Actual Cost. c. accounting system for identifying actual costs associated with a given project. the mortgagor determines the cost cut-off date for the actual cost of interest. only the costs which have been or will be paid in cash within 45 days after the date of final endorsement or 5-4 2000. ledgers. Trace significant data from Form HUD-92330 to supporting documentation. Test the system to determine that it identifies the costs to be reported on the Form HUD-92330 on an individual project basis. ie. For projects with insured mortgages. b. be a date 60 days after the final completion date or at the mortgagor's option. showing substantial completion. the general contractor and the mortgagee of the date of completion in writing. etc. Chapter 3). Cut-Off Timing and Eligibility of Costs 1. This form must be properly endorsed by the Field Chief Architect. As a general rule.The date chosen as the cut-off date and the date to which the operating statement and balance sheet are computed must be the same. Compliance Requirement. worksheets. The final completion date is the date on which the HUD representative signs the final HUD Representative's Trip Report.04 REV-2 closing. Form HUD-5379. and at the latest. Obtain an understanding of the mortgagor's and contractors.

.1 REV-2 and 4470. taxes and mortgage and property insurance premiums. contain information on allowable costs to be reported on Form HUD-92330 and the ways in which costs are to be adjusted for items considered to be a recovery of costs. 4470. Where an identity of interest exists the contractor must also submit a Certificate of Actual Cost or the party involved in the identity of interest is required to submit additional documentation as required by 4470. Suggested Audit Procedures a. Chapter 1). Chapter 2. or a materials supplier. Eligible costs are those costs of the project construction and certain fees actually paid in cash or such costs that will be paid in cash within 45 days of final endorsement. Review the trip report Form HUD-5379 or similar notification to determine the final completion date. Based on the completion date. Chapter 3.2. describe several situations which constitute an identity of interest involving a mortgagor.2. 4450. Review these cost/charges to determine that none were incurred after the cut-off date. 5-5 2000.2 Chapter 3. 8/97 b. the mortgagor/borrower determines the project's cut-off date for time sensitive expenses.04 REV-2 such as interest. Identity of Interest 1.2.1 REV and 4470. a contractor. c. HUD Handbooks 4430. a subcontractor. Review mortgagor and project records such as contracts and vendor invoices to determine if 2. 2. Suggested Audit Procedures a.1 REV-1.advance projects (HUD Handbook 4470. D. Compliance Requirement. Review the other amounts claimed on Form HUD-92330 to determine that the claims represent those expenses paid in cash or expected to be paid in cash within 45 days after final closing. The contractor is also required to submit a Certificate of Actual Cost if a cost plus construction contract was used. HUD Handbooks 4470.1 REV-2. All amounts claimed should be net of any adjustments or recoveries of costs.

5-6 2000. the Certificate of Actual Cost and the Project's financial statements have been prepared on the basis of accounting and reporting practices prescribed by the Department of Housing and Urban Development (HUD). xxx-xxxxx. Our responsibility is to express an opinion on these financial statements based on our audit.2 have been met. pertaining to the development of the Sample Company.04 REV-2 5-6 Illustrative Report Report of Independent Certified Public Accountants To the Partners Sample Company We have audited the Mortgagor's Certificate of Actual Costs (Form HUD-92330). 1995 (date of commencement of marketing and rent-up activities. liabilities and project equity. evidence supporting the amounts and disclosures in the financial statements. Furthermore. the accompanying financial statements represent the financial statements of the project. 1997 and the results of project operations for the period from August 28. Where an identity of interest exists. from mortgagors to contractors. b. As described in Note 1. through April 30. 1997. 1997. An audit includes examining. An audit also includes assessing the accounting principles used and significant estimates made by management. as well as evaluating the overall financial statement presentation. These prescribed practices are a comprehensive basis of accounting other than generally accepted accounting principles. etc.) through April 30. on a test basis. suppliers and equipment lessors. This report is intended solely for filing with HUD and is not intended for any other purpose. determine that the additional reporting requirements of HUD Handbook 4470. Project No. We conducted our audit in accordance with generally accepted auditing standards and Government Auditing Standards. 5-7 8/97 8/97 . Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. These financial statements are the responsibility of the Partnership's Management. the statement of assets. as of April 30. We believe that our audit provides a reasonable basis for our opinion.an identity of interest exists between any of the parties involved in the project.

2000. on the Mortgagee's Certificate.04 REV-2 2 In our opinion. rebates or trade discounts. the assets. as of April 30. The statement does not include depreciation and amortization expenses and certain other expenses which are not incidental to the rental b. 1997. or amounts approved by HUD. c.) through April 30. For this project.04 REV-2 SAMPLE COMPANY PROJECT NO. etc. and the results of project operations for the period from August 28. 1995 (date of commencement of marketing and rent-up activities. Financing charges are limited to the lesser of amounts actually paid. 1995. In accordance with Government Auditing Standards we have also issued a report dated [date of report] on our consideration of [the Entity's] internal controls and a report dated [date of report] on its compliance with laws and regulations. through April 30. present fairly the actual costs of the Sample Company. These standards differ in some respects from generally accepted accounting principles. on the basis of accounting described in Note 1. Certified Public Accountant [date of audit] 8/97 5-8 2000.S. the financing charges are the amounts actually paid. Department of Housing and Urban Development (HUD) in the Audit Guide for Auditing Development Costs of HUD-Insured Multifamily Projects. liabilities and project equity. . 1997. the Mortgagor's Certificate of Actual Cost and the financial statements referred to above. Costs are to be exclusive of kickbacks. The statement of rental operations reflects the rental activity and operating expenses of the Project from August 28. XXX-XXXXX NOTES TO FINANCIAL STATEMENTS 1 --Summary of Significant Accounting Policies Basis of Presentation The financial statements have been prepared in conformity with the accounting and reporting standards prescribed by the U. and the financial statements reflect the following additional HUD accounting and reporting principles: a. 1997.

and the income from the Project. 5-9 2000.operation of the Project. The Partnership will operate under the provisions of Section 221(d)(4) of the National Housing Act. Furthermore. Partnership (non-project) obligations are classified as project equity. The responsibility for management of the affairs of the Partnership. d. and the costs incurred to develop the Project. Compensation for such services is as determined in the management agreement between the partners. a 203-unit project located in [location of Project]. for the purpose of developing and operating the Sample Company. Project equity represents the difference between the funds received by the Project from Sample Company.04 REV-2 SAMPLE COMPANY PROJECT NO. Project equity is not intended to reflect the equity of the Partnership and the financial statements are not intended to represent those of the Partnership. 8/97 5-10 . XXX-XXXXX NOTES TO FINANCIAL STATEMENTS 1 --Summary of Significant Accounting Policies 8/97 Organization Sample Company is a limited partnership organized under the laws of the State of [State of Project]. with mortgage insurance provided by the Federal Housing Administration (FHA) of the Department of Housing and Urban Development. Accordingly. and the ongoing management of the Sample Company is vested with the general partners.

issuing the securities backed by a pool of mortgages. The issuer is responsible for and fully liable for the satisfactory performance of any work performed by a subcontract servicer.2000. Program Procedures. a custodian of mortgage documents. Through its well known mortgage-backed securities (MBS) and multiclass programs. It does this by facilitating secondary market activities for packaged residential mortgages. Ginnie Mae's mission is to support expanded. also known as Ginnie Mae. servicing the mortgages in the pool. Once approved by Ginnie Mae.. For each pool or loan package of mortgages and accompanying issue of securities. Ginnie Mae creates a vehicle for channeling funds from the securities markets into the mortgage market and helps to increase the supply of credit available for housing. affordable housing in America by providing an efficient government-guaranteed secondary market vehicle linking the global capital markets with the federal housing market. there can be only one issuer. (d) withdraw mortgage documents from the document custodian. arranging for the marketing of the securities. and approved by Ginnie Mae. by another servicer (referred to as a subcontract servicer). GINNIE MAE ISSUERS OF MORTGAGE-BACKED SECURITIES AUDIT GUIDANCE 6-1 Program Objective. While the issuer is responsible for servicing the pool or loan package of mortgages. the issuer of the mortgage-backed securities is responsible for acquiring eligible mortgages.04 REV-2 The issuer may not delegate or transfer to others its obligations to: (a) make monthly payments to investors. the securities issuer. is a wholly-owned Government corporation. All activities of any subcontract servicer must be covered by a contractual agreement between the issuer and the subcontract servicer. 6-1 8/97 6-2 2000. The Government National Mortgage Association. administering the securities outstanding and making the full and timely payment of all amounts due to the investors. and (e) . The issuer is responsible for using its own resources to cover shortfalls in amounts due to investors that result from mortgage delinquencies or foreclosures. The parties involved in the MBS program are Ginnie Mae. a mortgage servicer (often the issuer) and perhaps a transfer agent. the servicing may be carried out on behalf of the issuer. the securities dealer.04 REV-2 CHAPTER 6. creating a pool of mortgages to be held by a custodian. (c) make the payment of the guarantee fee to Ginnie Mae. the investor. (b) submit required monthly reports to Ginnie Mae. which must also be a Ginnie Mae-approved issuer. Created by Congress in 1968.

Ginnie Mae program regulations are contained in 24 CFR Part 300 through 395.maintain the Register of Certificate Holders (HUD Handbooks 5500. HUD Handbooks for Ginnie Mae are as follows: HUD Handbook No. are required to submit the following financial statements.gov. including those Ginnie Mae-approved issuers who are inactive. 6 Title Government National Mortgage Association Mortgage-Backed Securities Guide for the Ginnie Mae I Program Government National Mortgage Association Mortgage-Backed Securities Guide for the Ginnie Mae II Program 5500.2). 6-3 Reference Material. 6-4 Reporting Requirements. notes to the financial statements. statement of operations. Information on the most recent issuances of the guides may be obtained from Ginnie Mae at (202) 401-8794.2 The issuer should have a copy of the appropriate guide(s). Section 6-4 Chapter 6. Current guides are also available on the Internet at www. Section 6-5 Chapter 1.ginniemae. Section 1-9 Audited Financial Statements. cash flow statement. Section 2-1 8/97 6-2 2000.4 REV-1 Chapter 2. Section 2-1 Compliance with Specific Requirements Chapter 2.1 and 5500. 5500. Section 6-5 Chapter 6. Rev. Ginnie Mae issuers of MBS. Chapter 6. Section 2-1 Chapter 2.1 . reports and supplemental information on an annual basis: Type of Report Financial Statements and opinion Internal Controls Reference in IG 2000.04 REV-2 Supplemental Information: Issuer's Adjusted Net Worth Parent's Adjusted Net Worth (if appropriate) Insurance Requirement Corrective Action Plan (if appropriate) A. and . Issuers are required to submit audited annual financial statements which include a balance sheet.

Ginnie Mae will accept alternative financial statements (i. However. For an issuer whose equity is less than 40 percent of the equity of its parent..e. and a report on compliance with specific requirements. In addition to the financial statements. Ginnie Mae will accept consolidated financial statements of the issuer's parent provided the conditions in item (1) above are met and the issuer's parent enters into a Corporate Guarantee Agreement (Agreement) with Ginnie Mae to guarantee the performance of the 8/97 2.supplemental schedules as stipulated in Chapter 2 of this guide. The consolidating schedules must be subjected to the auditing procedures applied to the consolidated statement of the parent. A sample report on consideration of internal controls and report of compliance with specific requirements are included in Chapter 2. all issuers must submit a report on internal controls. 6-3 2000. Note that the adjusted net worth computation for the issuer's parent is only required when the issuer's parent presents a consolidated financial statement along with consolidating schedules that reflect the financial condition of the issuer and the issuer makes up less than 40 percent of the parent's equity. B. which distinguish the balance sheet and operating statement of the Ginnie Mae issuer are included with the parent's audit. .04 REV-2 Ginnie Mae requires submission of audited financial statements exclusively of the issuer. The financial documents are to be submitted to Ginnie Mae's Review Agent using the Transmittal/Checklist presented in Attachment F. The required format for presenting the analysis of the issuer's insurance is presented in Attachment D. Other Reports . not exclusively of the issuer) if certain conditions are met as stated below: 1. Ginnie Mae will accept consolidated financial statements of the issuer's parent provided: the consolidating schedules. The computation of the issuer's and issuer's parent adjusted net worth is designed to eliminate those assets -considered unacceptable by Ginnie Mae. The computation of the issuer's and issuer's parent adjusted net worth and computation of issuer's insurance requirements are to be reported on supplemental schedules to the basis financial statements. The required format for presenting this analysis is provided in Attachment B for the issuer and Attachment C for the issuer's parent. For issuers that make up 40 percent or more of the equity of its parent.

adjusted net worth calculation. the issuer must submit its unaudited regulatory report (Call report. all other required reports (internal controls. the issuer is required to submit with its parent's consolidated audited financial statements. an adjusted net worth calculation on the parent. A sample auditor's report on the consolidating balance sheet and operating statement is included as Attachment E to this Chapter. is required to be at least 110 percent (120 percent for issuers approved to issue manufactured housing or multifamily pools) of the required net worth of the Issuer. In addition to the audited financial statement of the issuer's parent. The parent's net worth. Two copies of the audited financial statements and auditor's reports should be . as long as the issuer makes up 90 percent or more of the parent's equity and there is no more than one bank holding company covered in the audit. The parent's audited financial statement and adjusted net worth calculations must be audited by the parent's auditor in accordance with this Audit Guide. Furthermore. compliance with specific requirements. Ginnie Mae will accept audited financial statements on the issuer's parent. 8/97 6-4 2000. after adjustments for unacceptable assets. For issuers that are federally or state-regulated institutions. 3. C. Submission of Reports.issuer. OTS Report or 10K).04 REV-2 The required format for presenting the "Presentation of Adjusted Net Worth Calculation for Issuer's Parent" is provided in Attachment C of this Chapter. and office of Thrift Supervision. Office of the Comptroller of the Currency. Although Ginnie Mae may accept alternative audited financial statements. The parent must also demonstrate in its adjusted net worth calculation that it meets the above 110 percent (120 percent for issuer approved to issue manufactured housing or multifamily pools) requirement. insurance requirement) must be prepared by the IA exclusively for the issuer. The parent must meet the terms and conditions of the Agreement for the issuer to remain in good standing with Ginnie Mae. such as those under the supervision of Federal Deposit Insurance Corporation.

The single auditor approach also may solve practical problems associated with travel when the issuer. The individual agreements contain the specific reporting requirements that the entity is to follow. independent of whether the issuer had securities or commitment authority outstanding. Suggested Audit Procedures 8/97 2. Arrangements then may be reached as to the most effective approach to conducting the review of custodial documents. Federal Financial Reports. the custodian will arrange with an IA to review documents relating to each of the respective issuer's pools. thus reducing the cost of compliance while assuring necessary audit coverage.1 and/or 5500. .2.submitted by the issuer.04 REV-2 pools. The single auditor approach or the review of custodial documents by the issuer's IA are both acceptable methods in completing the Custodial Review section of the audit guide. the issuer. To determine if the single auditor approach is practical in a given situation. 1. Single Auditor Approach In many instances it may be to the advantage of the custodian. Separate reports then will be prepared by the IA for each issuer's pools. Issuers participating in HUD-assisted activities are required to ensure that financial status reports contain reliable financial data and are presented in accordance with the terms of applicable agreements between the entity and HUD. or both to engage an IA to conduct a review of the mortgage documents held by a particular custodian for several issuers rather than to have each issuer require that a different IA review that part of the custodial documents pertaining to each issuer's 6-5 2000. D. Reports must be submitted within 90 days of the end of the issuer's fiscal year to Ginnie Mae's Review Agent. 6-5 Compliance Requirements and Suggested Audit Procedures A. Under the single auditor approach. the IA and issuer should contact the custodians holding the issuer's pool loan documents to determine the extent of the custodian's activities with other issuers. The Review Agent's address may be obtained from the address list "Addresses" found in HUD Handbooks 5500. custodian. Compliance Requirement. and IAs are not located near each other.

To be approved and maintain eligibility to issue Ginnie Mae-guaranteed mortgage backed securities and act as administrator of such securities. worksheets. ethics. b. d. B. a loss of either approval may cause the issuer to become ineligible to issue and service Ginnie Mae mortgage-backed securities. an applicant must meet and maintain the following requirements: a.04 REV-2 financial statements. Select a sample of financial reports. e. ledgers. Have as a principal element of its business operation the origination or servicing of mortgage loans. For the sample.a.e. c. and determine that the reports selected are prepared in accordance with HUD instructions. Report all material differences between financial reports and issuer records. i. Review significant adjustments made to the general ledger accounts affecting HUD-assisted activity and evaluate for propriety. . Eligibility to Issue Mortgage-Backed Securities 1. management b. Obtain an understanding of the auditee's procedures for preparing and reviewing the financial reports. Conduct its business operations in accordance with accepted sound mortgage lending and servicing practices. trace significant data to supporting documentation. 8/97 d. Be an FHA-approved mortgagee in good standing. and have the experience. A State or local government instrumentality that is an FHA-approved mortgagee is eligible. For issuers approved by Fannie Mae or Freddie Mac. Identify all required financial reports by inquiry of the issuer. Mortgagees approved by FHA only as loan correspondents are not eligible to be Ginnie Mae issuers. other than those which are included in the audited 6-6 2000. Compliance Requirement. and standards. etc. c.

1962. 8/97 f. issued November 20. the officer in charge of day-to-day operations must be a fulltime employee solely of the issuer firm. and the issuer's offices must be self-contained and separate from those of any other entity. religion. national origin. each with sufficient experience in the origination and/or servicing of mortgages of the type to be pooled to assure an ability to manage the pool on a long-term basis. Equal Employment Opportunity. Except in instances where the issuer can demonstrate that an alternative arrangement constitutes a sound business practice. Have and maintain fidelity bond coverage and a mortgage servicing errors and omissions policy based on the issuer's total servicing portfolio in accordance with HUD Handbooks 5500.capability. Maintain policies that prohibit any discrimination of a borrower based on race. familial status or disability. issued on September 24. Maintain a net worth based on an audited financial statement prepared in accordance with generally accepted accounting principles in assets acceptable to Ginnie Mae. which names Ginnie Mae as loss payee. 2. Moreover. 1965. Title VII of the Civil Rights Act of 1968.04 REV-2 three full-time officers and one additional employee. g. as amended. as outlined in Section G. this section incorporates by reference section 202 of Executive Order 11246. The issuer shall comply with any applicable rules. and with applicable rules and regulations of the Federal Housing Administration.2. Equal Opportunity in Housing. of this Chapter. Executive Order 11063. sex. age. regulations. Chapter 3. and orders of general applicability issued under Title VI of the Civil Rights Act of 1964. color. The issuer is required to comply with the implementing rules and regulations of the Department of Labor (41 CFR Part 60-1) and the Department of Housing and Urban Development (24 CFR Part 130). Chapter 2 and 5500. the issuer must have at least 6-7 2000.1 . e. and access to adequate facilities necessary to assure Ginnie Mae of its ability to issue and service mortgage-backed securities. as amended. .

plus 0. plus 0. although not rated. c. Also verify that the fidelity bond and errors and omissions policies are written by an insurance carrier which has a Best's rating of B+ or better. Determine that the issuer meets requirements covered in Section 6-5.125 percent of the amount of . with testing of the adequacy of insurance at least on a quarterly basis. Also inquire that the required levels of insurance were maintained throughout the year. An issuer's minimum insurance coverage must comply with the following. For issuers with a total mortgage servicing portfolio of more than $100 million and up to $500 million: $300. and 5500. Chapter 3 and Section 1-10 of this guide.000. and is specifically licensed or authorized by law to transact business with the state or territory where the name insured has its corporate headquarters. Chapter 2.2. Verify that Ginnie Mae is named as the loss payee. Test whether the issuer has and follows an established policy which prohibits discrimination in housing and lending as provided by HUD Handbooks 5500. Chapter 3.1.04 REV-2 2.000. (2) 2000. 6-9 8/97 b.2.000. Lloyd's of London.04 REV-2 (3) For issuers with a total mortgage servicing portfolio of more than $500 million and up to $1 billion: $900. based on the issuer's total servicing portfolio irrespective of ownership: (1) For issuers with a total mortgage servicing portfolio of $100 million or less: $300. Recompute the issuer's required fidelity bond and mortgage servicing errors and omissions coverage policy at the end of the fiscal year in accordance with Handbooks 5500. Suggested Audit Procedures a.15 percent of the amount of total servicing in excess of $100 million. above. is an acceptable insurer.1.8/97 6-8 2000. 5500. Chapters 2 and 6. paragraph B.

then the servicing of each issuer must be added to calculate the combined total servicing portfolio.000.525. All affiliated Ginnie Mae issuers should be identified in the auditor's verification of insurance. An issuer .2 of this Chapter. It is the issuer's responsibility to arrange for such an institution to hold the documents. C.04 REV-2 must be evidenced by the execution of a "Master Custodial Agreement" with the custodian certifying on the reverse side of the Schedule of Pooled Mortgages that it has examined and has in its possession the required documents. plus 0. The maximum fidelity bond coverage is not limited.000. Compliance Requirements. (4) For issuers with a total mortgage servicing portfolio of more than $1 billion: $1. Documents relating to the pooled mortgages are required to be held on Ginnie Mae's behalf for the life of the pool by a custodial institution. subsidiary.1 percent of total servicing in excess of $1 billion. e. d. The maximum mortgage servicing errors and omission insurance coverage requirement is $20.000. The custodial relationship 6-10 8/97 2000. or related party) of any other Ginnie Mae issuer(s). The amount of this combined servicing portfolio should be used to determine the minimum required insurance coverage. Review of Custodial Documents 1.total servicing in excess of $500 million. Determine whether the issuer is an affiliate (parent. paragraph G. Compare the issuer's adjusted net worth (net worth reported in the audited financial statements as adjusted for any Ginnie Mae unacceptable assets) to the minimum required net worth as discussed in Section 6-5. If an affiliates) is covered by the same insurance policy. The required format for presenting the "Presentation of Insurance Requirement" is provided in Attachment D of this Chapter. A custodial institution is permitted to function as custodian to more than one issuer.

1. Suggested Audit Procedures a. and not in receivership. Appendix 53). If the issuer's securities outstanding is less than $25 million and there has been no increase in the number of pools held by the document custodian within the last fiscal year.may use more than one custodian. (1) Is a federally regulated financial institution in good standing with its primary regulator. paragraph C.2.2. hereinafter referred to as Document Custodial Manual (HUD Handbook 5500. 8/97 (3) . below. Pools issued on or after February 1. liquidation or any other management 6-11 2000. If more than one custodian is used. Appendix 77 and HUD Handbook 5500.04 REV-2 oversight by its primary regulator. (2) Maintains a secure. Utilizes knowledgeable employees in its custodial function to handle mortgage documents and perform custodial functions. The Auditor must follow the procedures in Section 6-5. The review of the document custodian must be performed at the document custodian facility. Ginnie Mae will permit an off-site review of the document custodian. A custodial institution must meet the eligibility requirements as specified in Chapter 3 of the Ginnie Mae Guide. 1979 must have a single custodian. Determine if the issuer uses more than one custodial institution. 1 and 1/2 hours fire resistant storage facility with adequate access controls. Standards for Documents Custodians. at least one custodial institution must be reviewed each year and all custodial institutions must be reviewed within a three year cycle. All document custodians must have an on-site review every three years. Determine that the custodial institution meets the following eligibility requirements. 2. unless Ginnie Mae has given written permission for more than one custodian. unless operating under an approved management plan. conservatorship.

Maintains the minimum insurance requirements of its primary regulator and maintains coverage to indemnify against losses involving Ginnie Mae pools and loan documents custody. any blanket legal opinions. in addition to the Document Custodian Manual. Maintains updated written procedures within its operation.(8) above.04 REV-2 (5) (6) (7) (8) 8/97 (9) If custody is by an affiliate. Such fiduciary powers must include ordinary trust services such as personal trust services. copy of the . the custodial institutions must either meet all the requirements in paragraph C.a.2. custodian services and/or investment advisory services offered to the public and not be limited to maintaining custody of valuable documents for Ginnie Mae issuers. It must also have obtained prior approval to exercise fiduciary powers from its primary regulator. Satisfies eligibility requirements and other requirements as directed by Ginnie Mae. 6-12 2000. Self custodial issuers must maintain a separate trust department which is physically separate from the servicing area and operations. the custodian must provide evidence that there is a vertical independence between the issuer and the custodial/warehouse institution. guardianship. The trust service function must be subject to periodic review or inspections by its primary regulator. or if the custodial documents are not held in the trust department. b.(4) Maintains for review annual financial statements audited by an independent auditor for itself or its parent. personal representative services (executor). Verify that the custodial institution maintains or performs the following inventory accounting requirements: (1) Maintains an Issuer Master File which contains the Issuer Custodial Register.

and any other applicable issuer level documents. original blanket interim assignments) (a copy of which is included in each individual loan file to which the blanket interim assignment applies). 6-13 2000. 8/97 (3) (5) . Maintains a Nonliquidation Release Inventory/File of all forms HUD 11708 submitted on or after July 1. and the document release date. original pool level waiver letters from Ginnie Mae.issuer's corporate resolution for a name change. form HUD 11711A (Release of Security Interest) if applicable. which will include at a minimum a reconciliation of the pool numbers on the issuer custodial register to a current issuer provided listing of pools. copies of opinion(s) from qualified outside legal counsel (originals maintained in the issuer master file). If an inventory is maintained it must contain the pool number. 1992 on the basis of the nonliquidation reason code. FHA/VA/Rural Housing Service of the Department of Agriculture (RHS) case number or loan number. Maintains a Pool Master File for each pool in custody which contains a copy of the Master Custodial Agreement. the actual and/or due dates for final certification and recertification. form HUD 11711B (Certification and Agreement). and all forms HUD 11708 (Request for Release of Documents) for liquidated release codes. copies of the forms HUD 11708 must be kept in chronological order by document release date. and the pool numbers on the issuer custodial register agree to the pool master files in custody. and a count of the total number of pools in custody. (2) Maintains an Issuer Custodial Register which includes a list of pools currently in custody (must provide pool identification numbers).04 REV-2 (4) Has performed an Annual Physical Inventory of all pools held for the issuer. Schedule of Pooled Mortgages. If a file is maintained.

or Other than the unrecorded assignment to Ginnie Mae. If more than one custodial institution is used." and/or (2) An executed original form HUD 11711B (Certification) signed by an officer of the issuer covering the mortgages that are being reviewed and that were closed after March 31. stating that: (a) Release(s) of security interest (form HUD 11711A) delivered by the issuer to the custodian comprises) all evidence of any security agreements affecting any and all mortgages in this pool. the custodian is required to notify the issuer of the overdue documents every 90 days. obtain a list of the pools. If the issuer uses only one custodial institution. it will be necessary for the issuer to identify which pools are at which custodial institution in order to select a sample of pooled mortgages for that institution. 1979. For pools selected determine if the pools include: (1) An original form HUD 11711A (Release of Security Interest) executed by any and all secured institutions) relating to any or all mortgages included in the mortgage pool that are being reviewed and that were closed after March 31. Select a representative sample of Ginnie Mae pools for review.04 REV-2 "The lending or other financing institution named herein agrees to relinquish any and all right. The notification must be in writing and documented in the inventory or file. there are and will be no other security 8/97 (b) . c. The form should state: 6-14 2000. 1979. title or interest it may have in mortgages to be placed in this Ginnie Mae mortgage-backed securities pool no later than the date and time of delivery (release) of the securities by Ginnie Mae and/or its agent.If any documents have been released for more than 180 days.

Note: If there has been a transfer of issuer responsibility and the pool was issued more than three years ago. The purpose of the Schedule of Pooled Mortgages is _________________________________ 1 For programs other than the Single Family Mortgage-Backed Securities Program. review the custodial files for the following documents and compare the information shown on these documents to the information on the Schedule of Pooled Mortgages. For sampled mortgages. 1996. The blanket assignments 8/97 (2) . (1) The original note or other evidence of indebtedness endorsed in blank and without recourse. prior to January 1. e.2. d. Obtain a copy of the original Schedule of Pooled Mortgages (form HUD 11706) 1 from the document custodian for each of the pools selected. 6-15 2000. the forms HUD 11711A and/or 11711B are not required to be in the custodial file. The assignments to Ginnie Mae can be in blanket form. was: Project loans: form HUD 11721. An assignment to Ginnie Mae of the mortgage or other security instrument in recordable form but not recorded. select a sample of pooled mortgages from the Schedule of Pooled Mortgages.04 REV-2 to provide a means of identifying and controlling mortgages placed in the pool which secure the obligations issued. Reconcile and report on any differences.1 and Paragraph 7-5 and Appendix 53 of Ginnie Mae Handbook 5500. Procedures for the custodian document review are contained in Paragraph 8-4 and Appendix 77 of Ginnie Mae Handbook 5500.agreements affecting any mortgages in this pool. Accordingly. the form number. Manufactured home loans: form HUD 11725.

be either recorded or certified by the issuer to have been transmitted for recordation. Copies of the 8/97 (2) . Report any missing documentation as a finding. 1979. if required by state law to assure validity. Original recorded mortgages (or other security instruments) signed by the mortgagor securing repayment of the indebtedness. (1) Original evidence of insurance or guaranty signed by FHA. there will not be evidence of guaranty. Within 12 months of issuance of the securities the following documents must be in the custodial file.04 REV-2 that the document files contain the following documents. These interim assignments must be either originals or certified copies of the originals and. VA or RHS. If evidence of insurance or guaranty is not on file. Determine that within 12 months of the issuance of the securities. if state law requires recordation in order to make the assignment valid against all lien holders from the originating mortgagee to any intervening interest holder and from such holder to any further holders of mortgage ownership. transfer of issuer and/or custodial responsibility 6-16 2000. If the pool was issued after March 31. Loans that cannot be insured or guaranteed must be withdrawn from the pool but only after obtaining Ginnie Mae's approval. f. An assignment to the issuer must immediately precede the unrecorded assignment to Ginnie Mae. (NOTE: Compare the mortgagor's name as it appears on the Schedule of Pooled Mortgages with that which appears on the recorded mortgage to assure identity). and if the mortgage was originated by a mortgagee other than the issuer. determine from the issuer why the required documents are missing. If the loan is a VA vendee loan or contract. there also must be a recorded assignment.must apply to mortgages in the same pool and same recording jurisdiction.

Within 12 months of a transfer of issuer responsibility the following documents must be in the custodial file and the custodian is required to have completed recertification of the appropriate pools: (6) An updated endorsement on the promissory notes. (5) Verify that the custodian has completed the final certification on the back of the Schedule of Pooled Mortgages. A recorded assignment of the mortgage to the issuer. Report any pool(s) for which the final certification or recertification is past due . These are not required if the mortgage is retained by the original lender. and All documents required in paragraphs C. Copies of mortgagee title insurance policies are acceptable.04 REV-2 the document recording information.e above must be in the custodial file.d and C. VA or RHS (not required in cases involving conveyance of HUD Secretary-owned property.2.recorded mortgage are acceptable if the copies clearly show the document recording information.d and C.2. The custodian is required to have completed recertification of the appropriate pools within 12 months.2. A complete chain of original recorded interim assignments. Copies of the recorded interim assignments are acceptable if the copies clearly show 6-17 2000.e above are in the custodial files. 8/97 (4) (7) (8) Within 12 months of a transfer of custodial responsibility all documents required in C. (3) Evidence that a mortgagee title insurance policy has been obtained or other evidence of the title's acceptability to FHA. if an exception has been authorized by Ginnie Mae. or VA vendee loans or contracts).2.

A written certification from the document custodian that it . (1) Confirm that the document custodian meets all the eligibility requirements as stated in Section 6-5. g. Mortgagor. above. 8/97 6-18 2000. Any items not reconciled should be reported as a finding. Missing documents for mortgages which are still current by the issuer's records could be an indication that the issuer has received mortgage pay-offs and not passed through payments to securities holders . i. Determine that documents and/or loan files released from custodial files are evidenced by a Request for Release of Documents (form HUD 11708).04 REV-2 (2) h. paragraph C.for documents and/or files removed from the custodian's care.1.2. This listing should be reviewed with the custodian and errors corrected by the custodian. The custodian should note this removal on its inventory control record (The Schedule of Pooled Mortgages). and the defect. Select paid-in-full and/or foreclosed mortgages listed on form HUD 11708 on a test basis.a. Any discrepancies should be noted on an exceptions listing noting the Pool Number. In lieu of an on site audit of the document custodian. Prepare a list of missing documents and/or loan files not supported by a form HUD 11708. provided the conditions set forth in section C. Verify that these mortgage documents are no longer with the custodian. and reported as a finding. For the sampled mortgages: (1) Ascertain whether the custodian is in possession of a form HUD 11708. the following procedures are acceptable.and has not been completed. This listing should be reviewed with the custodian and subsequently with the issuer. The custodian should furnish this listing to the appropriate issuers and the IA should subsequently review with the issuer the reasons for any missing or deficient documents. above have been met.

Contractual requirements with respect to pool administration . Administration of the pool of mortgages and of payments to securities holders is the responsibility of the issuer. Verify that all pools are properly certified and report any pool past due for certification in accordance with Section 6-5. ISSUER'S ADMINISTRATION OF POOLED MORTGAGES 1. Compliance Requirement. the custodian must certify that the loans on the trial balance agree to the loans in custody.b. Servicing of pooled mortgages must be carried out in accordance with generally accepted practices in the mortgage lending industry. (ii) maintains a Pool Master File for each pool in custody for the issuer.meets all eligibility requirements is acceptable.04 REV-2 pools held for the issuer. above. (3) Select a representative sample of Ginnie Mae pools for review and request verification from the document custodian of the following: (a) Using the issuer's trial balance. 8/97 (b) D.2.2.f. (iv) maintains a Non-Liquidation Release Inventory/File of all forms HUD 11708 submitted on or after July 1. A certification from the document custodian that it (I) maintains the Issuer Master File for the issuer. paragraph C. (iii) has performed and provided the date of the Annual Physical Inventory for all 6-19 2000. paragraph C. Item (v) above should be reviewed with the issuer and any items not reconciled should be reported as a finding. above. and (v) obtains from the document custodian a copy or list of any documents that have been released for more than 180 days and have not been returned to the document custodian. (2) Confirm that the document custodian maintains or performs the required inventory accounting required in Section 65. 1992 on the basis of the nonliquidation reason code.

Special attention should be given to issuers with a concentration of VA loans in declining market areas. deposits. the VA will determine the cost effectiveness of bidding at the foreclosure sale.04 REV-2 from a pool. In the VA program. Suggested Audit Procedures a. disbursement. If a . reduce a loan balance or remove funds from a pool custodial account unless in compliance with the Ginnie Mae Guide and authorized by Ginnie Mae. These shortfalls have been particularly large in the VA program. Test the custodial account titles for compliance with requirements established by Ginnie Mae Letter Agreements. manufactured housing loans and Department of Veterans Affairs (VA) guaranteed loans. The servicing system must be capable of producing at any time for any mortgage. Test whether the issuer meets Ginnie Mae's requirement for separate custodial bank accounts for principal and interest collections (non-interest bearing) and tax and insurance escrow funds (option of interest bearing) applicable to pooled mortgages with the principal and interest accounts held in institutions meeting Ginnie Mae's rating requirements (All Participants Release.are contained in the guaranty agreement executed by the issuer and Ginnie Mae for each pool. Consequently. or adjustment and indicating the latest outstanding balances of principal. Forms HUD-11709 and 11720. For each of these loan types. VA will not bid if its losses will exceed the guarantee amount. the issuer may not be fully reimbursed through the claims process. In no instance may the issuer or subservicer remove a loan 8/97 6-20 2000. and for each monthly due date. Any shortfall in collections must be paid to the securities holder out of the issuer's own funds. the amount of each collection. should a foreclosure take place. July 10. advance. this no-bid. 1990). 2. should a default occur. will be costly to the issuer as it must pay off the security holder for the outstanding mortgage balance. The issuer may incur losses for pooled loans that are not fully insured such as coinsured multifamily loans. advance and unapplied payments. an accounting which identifies the Ginnie Mae pool number for each listed mortgage.

assignments. f. d. Test whether disbursements from principal and interest custodial bank accounts are authorized pursuant to the Guaranty Agreement. Test whether the issuer is making payments of interest.04 REV-2 b. Test whether the issuer is disbursing payments to Ginnie Mae I securities holders on a date that can be expected to result in receipt of the funds by the securities holders by the 15th of the month. principal. and unscheduled principal to securities holders by the 15th of the month. e. g. Compare mortgages listed in the issuer's Liquidation Schedule (Form HUD-11710E) to those identified on Form HUD-11708 held by the custodian as having been withdrawn from the pool to ensure proper pass-through of proceeds to securities holders. (NOTE: These accounts may contain funds for more than one pool provided that the issuer maintains separate accounting records for each pool). prepayments in full. 6-21 2000. and foreclosures are passed through to the securities holders in the regular monthly payment following the month of receipt. Review a representative sample of payments to securities holders to determine that such payments were made to those shown in the securities holders register for the pools being tested. assure that it is used only for payments to Ginnie Mae securities holders.principal and interest disbursement clearing account is used. Test whether partial prepayments. 8/97 c. Test that all such recoveries are recorded on Mortgage-Backed Securities report controls and the pool collateral is removed from the custodian's possession and the transaction is supported by documentation. Review monthly collections of mortgage principal and interest and collections of claims on defaulted and liquidated mortgages to ascertain that funds have been deposited in the proper custodial accounts on a daily basis. .

within the timeframes identified in Handbooks Ginnie Mae 5500.2 using the issuer's own funds and only after receiving Ginnie Mae approval. test whether these pools have received new final certifications (recertification) within the j. Obtain an understanding of the issuer's controls to project the need for and availability of funds. issuer. These controls should allow the issuer to make required advances to securities holders. k. Test that the issuer has a system to follow up on and obtain the required documents to enable the custodian to make its final certification in a timely manner. covering documents listed on the reverse side of the Schedule of Pooled Mortgages. (Issuers are required to "buy out" uninsured or otherwise defective loans from the pools in accordance with instruction in the Handbooks Ginnie Mae 5500.04 REV-2 (NOTE: Limited exceptions to this requirement are included in the Ginnie Mae Handbooks. and Department of Veterans Affairs guaranteed loans.1 and 5500.02 of the Guaranty Agreement. particularly for internal reserve pools. Test whether the issuer incurred losses for pooled loans not fully insured such as coinsured multifamily loans.2.1 and 5500. or if the issuer has transferred pools from one document custodian to another. (2) Cover principal amounts not recovered in claim settlements or which are due in connection with defective loans. Test whether the issuer is using its own resources to: (1) Make advances to the pool accounts to cover shortfalls in collections from mortgagors. 6-22 2000. manufactured housing loans.) 8/97 i. Ginnie Mae must receive the final certification. If the issuer has acquired pools from another. . Determine that the issuer has disclosed a contingent liability in the financial statements.h.) Special attention should be given to the issuer's calculation and use of excess funds. as required under Section 4.

timeframes outlined in the Ginnie Mae Handbooks. n. Undelivered payments should not be used as excess funds or used by the issuer to fund pool shortfalls. Form HUD-11710D and Form 11710E Issuers reporting: All Ginnie Mae issuers of record Frequency of reporting: Monthly Deadline for submission: loth day of following month Trial Loan Balance Information Issuers reporting: All Ginnie Mae issuers of record 6-24 2000. 6-23 2000. Test whether the issuer is servicing delinquent mortgages and managing foreclosures and assignments in accordance with the applicable requirements of the VA. 8/97 . change of mortgage servicer or transfer of issuer responsibility was accomplished after written approval from Ginnie Mae. RHS and the Ginnie Mae Guide. Test whether the issuer established a complete securities holders register in accordance with Ginnie Mae instructions and updated the register prior to paying holders each month. The register should include a record of all certificate transfers for the life of the pool. Compliance Requirement. Ginnie Mae issuers of MBS are required to submit the following reports periodically throughout the year: a. o. 8/97 m. change of document custodian.04 REV-2 b. E. Test whether undelivered payments are deposited into the principal and interest custodial account and that checks which remain outstanding in excess of 6 months of the payment date are stopped and the funds are returned to the P&I custodial account. Form HUD-11710A. FHA. Review of Monthly Accounting Reports and Quarterly Submissions 1.04 REV-2 l. Test whether any transfer of the P&I or T&I custodial accounts.

6-25 2000. Loan level detail must be reported by all issuers every 3 months.1. along with supporting documents. Instructions for the preparation and submission of the forms or magnetic tape are found in Appendices 11 through 14 of Handbook 5500.1.Frequency of reporting: Quarterly Deadline for submission: 45 days of end of calendar quarter c. 1990). Reports must be provided to Ginnie Mae on a pre-formatted disk. as explained in the chapters and appendices for the other programs. Issuers with more than 100 pools (including Ginnie Mae I pools and Ginnie Mae II pools and loan packages) are required to report in electronic form using the procedures and format specified in Handbook 5500. Issuers that are not federally regulated must report their financial condition quarterly to Ginnie Mae. The reports. Form HUD-11710E (Liquidation Schedule) and Form HUD-11710D (Issuer's Monthly Summary Report). must be sent to Ginnie Mae with sufficient lead time and via a method that ensures delivery no later than the tenth calendar day of each month. The loan level data should report trial balance information for all non-liquidated loans as of the cut-off date for the quarter (All Participants Release. Form HUD-11750 Issuers reporting: Mortgage bankers not federally regulated Frequency of reporting: Quarterly Deadline for submission: 60 days after end of calendar quarters and 90 days after end of calendar year Issuers must report to Ginnie Mae monthly on each pool. Mortgage Bankers Quarterly Financial Reporting. e. Additional or alternative reports are required in connection with pools other than those for single family level payment loans. 8/97 d. Issuers must report to Ginnie Mae quarterly on all of the loans in their portfolio. Such reports must be provided on Form HUD-11710A (Issuer's Monthly Accounting Report).04 REV-2 f. Chapter 11. . September 24. HUD-11750.

in accordance with Ginnie Mae MBS requirements. Test whether entries are made in accordance with instructions in the Ginnie Mae Handbooks. Also. Compare the amount of checks sent to securities holders for the month to the amount reported to Ginnie Mae. Statement of Income and Additional Information.) reported to Ginnie Mae. e.P. agree to the issuer's records. as follows: (1) Pool Principal Balance (Section 1. test that the unpaid loan balances passed through to securities holders and reported in the Liquidation Schedule. Form HUD-11710A) b. March 5. Federally regulated financial institutions (banks. Compare the custodial account balances reported on Forms HUD-11710A and HUD-11710D to the actual balances (after reconciliation) of the disbursement clearing and custodial bank accounts as shown by the bank statements. 2. Obtain an understanding of the issuer's procedures for collecting and entering all data relating to mortgage collections and securities payments on Form HUD-11710A.which includes a Statement of Condition.B. Compare the securities balance reported on the Form HUD-11710A to the Remaining Pool Balance (R. Line D. Select a sample of Form HUD-11710A's and trace delinquency information to the issuer's internal mortgage servicing delinquency reports. Suggested Audit Procedures a. 1990). f. c. 8/97 . 6-26 2000.04 REV-2 g. reconcile the total unpaid principal balance of the pooled mortgages to the unpaid principal balance of the securities. d. On pools selected for review. Test whether a Liquidation Schedule (Form HUD-11710E) is submitted to Ginnie Mae for each loan removed from the pool. savings and loans and credit unions) are not required to submit this report (All Participants Release. or its agent.

of Form HUD-11710A to fully correct for any difference.00 for each loan in the pool up to a maximum of $50. This test verifies the accuracy of the P&I balance reported in Section 5. Other) (equals) Security Principal Balance (Section 3. Line D) (3) (4) (5) (6) (7) Differences may arise in the reconciliation between the pooled loan balance and the outstanding securities balance due to additional principal payments or rounding. Line F) (minus) Delinquent Principal (Section 1. Any greater difference must be funded to the pool in the current report. For pools selected for review.04 REV-2 dollar amount expected in the P&I account for any particular pool as of a given cut-off date. test the expected Principal and Interest (P&I) Custodial Account balances at cut-off. Such differences should not exceed $1.(2) (plus) Prepaid Principal (Section 1. Form HUD-11710E) (minus) CD Pools Only: Additional Principal Adjustment or FIC change for Graduated Payment Mortgage Pools (Section 2. Reconcile and report on any difference. Block D. At least once a year. The test assumes that all collections are paid out by the pass through of funds to securities holders or taken as issuer servicing fees.00 per pool. Block B2 of the Form HUD-11710A report. The test formula will only yield accurate results when the mortgage and securities balances reconcile in Step 7 above. 8/97 . adjustments to the securities holders payments must be made in Section 2. h. Block D. This test (outlined below) identifies a minimum 6-27 2000. Block C) (plus) CD Pools Only: Last Liquidation Principal Installment (Principal portion of last installment reported on Liquidation Schedule. Line G) (minus) Concurrent Date (CD) Pools Only: Scheduled Principal (Section 1-A.

The test formula is different between Internal Reserve (IR) and Concurrent Date (CD) pools. (IR and CD) minus delinquent P&I. Servicing fees collected on prepaid interest are already included in item (2) above. this entry will be zero (Section 1. Interest). If the issuer withdraws it servicing fee prior to the cutoff. if taken after the cut-off date. (CD only) plus additional principal adjustment. so this amount is not a shortage in the account. Item F. (2) (3) (4) (5) 8/97 (7) (8) . funds not yet collected but which have already been distributed to holders through calculation of scheduled payment (Section 1. Pool Interest). Item G. (IR and CD) plus prepaid P&I. Total). 6-28 2000. funds which have been collected but are not required to be distributed to holders at the next payment date (Section 1. Servicing fees are not distributed to holders.04 REV-2 (6) (IR and CD) plus delinquent servicing fee as calculated based on total delinquent interest (Section 1. These are funds collected but not due holders until the 15th of the following month (Section 1. (CD only) plus additional principal payments. Item G. the issuer-funded adjustment which has been deposited to the custodial account but is not distributed until the following month (Section 1. Line B-2). Item H). Item G). (IR and CD) minus prepaid servicing fee. to be distributed on the 15th of the following month. which include: (1) (IR only) plus payment to securities holders. (IR and CD) plus servicing fee. Interest). but in either case indicates the amount of P&I funds which should be held in the account at the cut-off date. Section 2. Total). as calculated based on prepaid interest amounts (Section 1. (Form HUD-11710A. Item F. Line C.

For all issuers that are not federally regulated financial institutions. (10) (CD only) plus fixed installment on liquidations. 8/97 k. j. This "extra" month payment. Compliance Requirement.04 REV-2 day of each month. Obtain an understanding of the issuer's procedures and test whether the issuer meets the delivery requirement by the tenth calendar 6-29 2000. There also are recordkeeping and reporting requirements. Differences should be reconciled and exceptions reported. These procedures must . F. is included in the scheduled P&I amount.(9) (CD only) plus liquidation principal. i. This calculated expected P&I balance should agree with the reported P&I balance (Form HUD-11710A. Securities Marketing and Trading Practices 1. funds collected but not due to be distributed until the following month (Section 1. 2). because it is necessary to amortize a liquidating loan through one payment beyond the month during which pay-off or foreclosure funds are received on CD pools. Test that loan level information is being reported quarterly to Ginnie Mae. as calculated on the interest portion of the last payment installment (based on last interest installment on the Form HUD-11710E). and @ minimum forward delivery contract requirements relating to so-called mark to market deposit requirements. Section 5. (11) (CD only) minus servicing fee from liquidations. Ginnie Mae has established securities marketing and trading requirements which are intended to assure that issuers carry out their securities marketing and trading activities in a manner consistent with prudent business practices and their own and others financial capacity. test that quarterly financial information is being submitted on the HUD-11750. (b) prudent business practice rules. Similarly. normally not due until the following month. Item C). There are three components to these requirements: (a) a suitability rule. B. a formatted disk.

Name of the firm and individual with whom d. optional or mandatory delivery. and investors to complete a transaction and to determine the business reputation of the dealers. Test whether the issuer is following established procedures to determine the financial capacity of dealers. "Price" of the securities. Obtain an understanding of the written procedures established by the issuer to determine the financial integrity of dealers. (4) (5) (6) (7) (8) . The applicable requirements are found in HUD Handbook 5500. repurchase or other credit arrangement. sale. Type of securities. 8/97 6-30 2000. or investors to complete transactions. Dollar amount of securities. including an explanation of standards for. Obtain an understanding of the procedures established by the issuer to maintain a record of all commitments entered into to deliver or acquire securities. brokers. brokers. 2. Test whether the issuer's records of such commitments include the following: (1) (2) (3) Date of the transaction (trade date).be implemented by all approved issuers. brokers.04 REV-2 b. Nature of the transaction: purchase. and investors.1. Obtain copies of the resolution executed by the issuer's Board of Directors designating key persons responsible for overall supervision of issuer activities relating to the marketing and trading of securities. brokers. and investors. Suggested Audit Procedures a. Settlement date. and steps taken in determining the financial capacity of dealers. whether or not securities and/or commitments are outstanding. Interest rate on the securities. c. e.

or other credit transactions. It also should include any positions involving repurchase. 6-31 8/97 (2) 2000. (9) Current market price (value) of the contract.) test whether the issuer's records include the following: (1) A copy of the delayed delivery contract required by the Ginnie Mae Handbook. g.the transaction was executed. Prove the mathematical accuracy of the net position. Determine the potential impact on an issuer's net worth of any identified forward or future commitment contract entered into by the issuer to purchase or sell securities. less commitments the issuer has available for disposing of loans and securities. or will be. if there are material potential effects on the issuer's net worth. The statement should identify amounts of loans and securities closed and held for sale. Review the issuer's statement showing the computation of the issuer's "net position" and compare information to the issuer's accounting records. deposited. deposited. For "regulated transactions" (see Note 1 at step h.04 REV-2 (3) Records of mark to including: market deposits by issuer type of collateral market computations. a copy of the letter of credit. amounts of and by contra-party. NOTE 1: "Regulated transaction" means the purchase or sale of securities by an issuer pursuant to a delay delivery contract except that the term does not include: (1) A sale of securities where: (1) the issuer holds a valid. value. . outstanding commitment to guaranty mortgage-backed h. reverse-repurchase. (4) If the collateral used is a letter of credit. plus those expected to be acquired. f. determine whether they are disclosed in the appropriate footnotes to the financial statements. The name of the financial institution with which collateral is.

(3) A sale or purchase of securities pursuant to a contract which does not obligate the issuer to actually sell/purchase securities.securities (which is not applied in connection with another transaction) issued by Ginnie Mae in an amount at least equal to the face amount of the securities sold. . An issuer's adjusted net worth will be calculated by subtracting the total amount of unacceptable assets from the net worth as stated on the IA audited balance sheet. A "Presentation of Adjusted Net Worth Calculation" is required for all issuers. Adjusted Net Worth 1. A purchase (or sale) of mortgage participation certificates directly from (or to) the Federal Home Loan Mortgage Corporation. Computation. Do not aggregate the unacceptable assets into one line titled "Unacceptable Assets. a put or call transaction in which the issuer has the option to perform. Unacceptable assets are defined in Attachment A to this Chapter and should be itemized by asset classification." If evidence exists indicating the existence of related party receivables which have not been deducted by the IA. Ginnie Mae will deduct the amount from the issuer's adjusted net worth. that is. (4) G. The required format for the "Presentation of Adjusted Net Worth Calculation" is provided on Attachment B of this Chapter. even if there were no securities or commitments outstanding at fiscal year end. and (2) the settlement date under the contract is no later than the last day of the calendar month in which the 150th day after the contract's trade date falls.04 REV-2 (2) A sale of securities guaranteed by Ginnie Mae and based on construction loans (construction loan securities) or project loans (project loan securities). Excess/(deficit) net worth is computed as the difference between adjusted net worth and required net worth. 8/97 6-32 2000.

2 percent of any additional securities.04 REV-2 in disallowance of questionable assets and result in suspension or in termination of issuer status. for additional information could result 6-33 2000. _______________________ 2 Pools that have been logged and are in the review process and the commitment line balance has been reduced.Failure of the issuer to respond timely and satisfactorily to requests made by Ginnie Mae.000 base net worth plus 0. growing equity or adjustable rate mortgages. For issuers approved to securitize mortgage-backed securities pools backed by multifamily construction or permanent loans. commitment authority.000 base net worth plus one percent of the amount of securities outstanding in excess of $5 million. For issuers approved to securitize mortgage-backed securities pools backed by manufactured home loans.000 base net worth plus 0.2 percent of any additional securities.04 REV-2 . 8/97 b. the adjusted net worth computation must focus exclusively on the assets and liabilities of the Ginnie Mae issuer. Required Net Worth will be calculated as of the end of the issuer's fiscal year as follows: a. but less than $20 million. the net worth is: $500. total pools funded and dollar amount of unexpended construction loan draws 3 in excess of $35 million. the net worth is: $500. the net worth is: $250. 2. commitment authority and total pools funded 2 in excess of $20 million. 8/97 6-34 2000. 3/ The net amount between Construction Loan commitment authority reserved and total Construction Loan draws made. Where the Ginnie Mae issuer is a subsidiary. Required Net Worth. For issuers approved to securitize mortgage-backed securities pools backed by single family level payment. graduated payment. or its agent. commitment authority and total pools funded in excess of $35 million. plus 0. c.2 percent of any additional securities.

6-35 8/97 2000. An investment in a related entity in which any officer or stockholder of the mortgagees has a personal interest 6/ unrelated to that person's position as an officer or stockholder of the mortgagee.000 minimum depending upon an issuer's pool type eligibility. except for: o A construction loan receivable. A mortgage loan receivable established in the normal course of business in an arm's length transaction and secured by a first mortgage on the related property.d. The base net worth requirement may float downward subject to a $250. 2002 which will reflect the change in price level during 1996 through 2000. The Ginnie Mae President shall have discretion to waive or lessen any increase or decrease given by the indexing formula. Future adjustments will follow in this manner. o o 3. An asset due from an officer or stockholder of the mortgagee or from a related entity. from a related entity. 2. The adjusted base net worth will be rounded to the nearest thousand.04 REV-2 ATTACHMENT A UNACCEPTABLE ASSETS FOR COMPUTATION OF ADJUSTED NET WORTH 1. secured by a first mortgage. These pledged assets are acceptable for supervised institutions only. The base net worth requirement for all issuer types will be indexed to inflation and adjusted every five years with a one year advance notice to issuers. . Any asset or portion thereof pledged to secure obligations of another entity or any person. Supervised institutions that provide financial services to incorporated communities are sometimes required by State law to pledge their assets for the benefit of the community. The reference period from which inflation will be calculated is December 1995. A receivable from a related party where the affected parties have executed a cross-default agreement 4/ or corporate guarantee agreement 5/ with Ginnie Mae. The first adjustment of the base net worth requirement will be on January 1.000 or $500. The change in price index will be measured by the Consumer Price Index (CPI).

Any asset which is principally used 7/ for the personal enjoyment or benefit of an officer. 6/ "Personal interest" as used here indicated a relationship between the mortgagee and a person or entity in which that specified person (e. affiliate. uncle. 7. This includes automobiles and personal residences. but are not limited to. Any asset not readily marketable and for which appraised values are very subjective. sister.04 REV-2 4. or property acquired through foreclosure. and value placed on property management contract renewals. subsidiary. value placed on insurance renewals.g. 10. Any amount in excess of the lower of cost or market value of mortgages in foreclosure. That portion of an investment in a joint venture. Accounting for Transfers and Servicing of Financial Assets and Extinguishments of Liabilities or subsequent revisions thereto. "Other Assets" unless the financial statements are accompanied by a schedule prepared by the independent 5. 11. 6. or stockholder and not for normal business purposes. organization costs. as adjusted. or in-law) has a financial interest in or is employed in a management position by the mortgagee. 125. and gemstones. which is greater than equity. The value of any servicing contract not determined in accordance with SFAS No. child. such as goodwill. parent.________________________________ 4/ A cross default agreement is an agreement between related affiliated Ginnie Mae issuers which provides for the default of all affiliated issuers in the event of a default by any one of them. grandparent. art work. "Equity as adjusted" means the book value on the books of the related entity reduced by the amount of unacceptable assets carried by the related entity. brother. and/or other related entity. construction loans. which should be carried at cost. 5/ A corporate guarantee agreement is an agreement where the issuer's parent guarantees the performance of the issuer. Examples include. aunt. covenants not to compete. Any intangible asset. Accounting for Certain Mortgage Banking Activities and SFAS No. . 8. antiques. That portion of any marketable security (listed or unlisted) in excess of the lower of cost or market. director. franchise fees. 8/97 6-36 2000. 9. 65. except for shares of Fannie Mae stock required to be held under a servicing agreement. spouse.

$ 2. $ Total Unacceptable Assets Adjusted Net Worth B. That portion of contributed property. 8/97 $ ________ 1/ $ ________ $ ________ $ ________ $ ________ $ ________ $ ________ $ _______2/ Excess (Deficit) Net Worth (Adjusted Net Worth . Adjusted Net Worth Calculation: Stockholders Equity per Statement of Financial Condition at end of reporting period Less: Itemized Unacceptable Assets 1. in excess of the value as of the date of contribution determined by an independent appraisal. $ 3.auditor or a schedule prepared by the issuer/mortgagee and signed by an officer of the issuer/mortgagee.04 REV-2 ATTACHMENT B REQUIRED FORMAT FOR PRESENTATION OF ADJUSTED NET WORTH CALCULATION FOR ISSUER A. 6-37 2000. Required Net Worth Calculation: Unpaid Principal Balance of Securities Outstanding (Note: Number of Pools _____) Plus: Outstanding Balance of Commitments Authority Issued and Requested Total Outstanding Portfolio and Authority Required Net Worth C. 8/97 6-38 2000.Required Net Worth) ______________________________________ .04 REV-2 12. not otherwise excluded. ______________________________ 7/ "Principally used" means that any other use of the property must be solely incidental.

2/ In the event adjusted net worth does not meet the Ginnie Mae requirement. $ 3.04 REV-2 ATTACHMENT D REQUIRED FORMAT FOR PRESENTATION OF INSURANCE REQUIREMENT A. Adjusted Net Worth Calculation Stockholders Equity per Statement of Financial Condition at end of reporting period Less: Itemized Unacceptable Assets 1.04 REV-2 ATTACHMENT C REQUIRED FORMAT FOR PRESENTATION OF ADJUSTED NET WORTH CALCULATION FOR ISSUER'S PARENT A. the IA may include any comments from representatives of the issuer of corrective measures contemplated. 6-40 2000. $ Total Unacceptable Assets Adjusted Net Worth B. Comparison of Net Worth Calculations Issuer's Required Net Worth (taken from Issuer's Adjusted Net Worth Calculation) (Multiply issuer's required net worth by 110% for issuers with single family status only. otherwise multiply by 120%) Parent's Required Net Worth C. 6-39 2000. 1/ Excess/(Deficit): Unacceptable assets are defined in Attachment A.1/ Unacceptable assets are defined in Attachment A. Identification of Affiliated 1/ Ginnie Mae Issuers: $ ________ $ ________ 8/97 $ ________ 1/ $ ________ $ ________ $ ________ 8/97 Affiliated Ginnie Mae Issuers: (Issuer Name and Ginnie Mae Issuer Identification . $ 2.

Excess (Deficit) Insurance Coverage: Fidelity Bond Coverage Required Mortgage Servicing Errors and Omissions Coverage 6-41 2000. directly or indirectly through one or more intermediaries.04 REV-2 E. Ginnie Mae Loss Payable Endorsement Fidelity Bond Coverage Mortgage Servicing Errors and Omissions Coverage $ 1/ $ Yes/No $ ________ $ $ $ $ $ ________ ________ ________ ________ ________ $ ________ $ ________ $ ________ $ $ ________ 8/97 Yes/No Definition of an Affiliate: An affiliate is a party that. Required Insurance Calculation Servicing Portfolio: Ginnie Mae Fannie Mae Freddie Mac Conventional (Other) Total Servicing Portfolio Required Fidelity Bond Coverage Required Mortgage Servicing Errors and Omissions Coverage C. or is under common control with an issuer. Verification of Insurance Coverage: Fidelity Bond Coverage at End of Reporting Period Mortgage Servicing Errors and Omissions Coverage at End of Reporting Period ________ D. controls. is controlled by.04 REV-2 ATTACHMENT E REPORT OF INDEPENDENT AUDITORS ON CONSOLIDATING BALANCE SHEET AND STATEMENT OF INCOME . 8/97 6-42 2000.Number) Affiliated Issuers on Same Insurance Policies: (Issuer Name and Ginnie Mae Issuer Identification Number) B.

Our audit was conducted for the purpose of forming an opinion on the consolidated financial statements taken as a whole. is fairly stated in all material respects in relation to the consolidated financial statements taken as a whole. 2. respectively. this report is a matter of public record and its distribution is not limited.D. 5. If you have any questions regarding the items being sent. 4. you may contact Mr. ________________________________ of the organization or me at telephone number ____________________________. No. The following consolidating balance sheet and statement of income on pages "XX" and "XX".Board of Directors ABC Financial Corporation We have audited. Complete Items 1 through 7 1. 1992 included on page "XX" of [identify report]. Issuer Name:___________________________________________ Issuer Address:________________________________________ Issuer's Tax Identification No. 7. in our opinion. in accordance with generally accepted auditing standards and Government Auditing Standards. However. management. the consolidated financial statements of ABC Financial Corporation and subsidiaries as of December 31. are presented for purposes of additional analysis and are not a required part of the consolidated financial statements of ABC Financial Corporation and subsidiaries. and the Government National Mortgage Association (Ginnie Mae). Such information has been subjected to the auditing procedures applied in our audit of the consolidated financial statements and. 3./Ms. This report is intended for the information of the audit committee. 6. Our facsimile number is ______________________________. [Firm Signature] [Date] 6-43 8/97 ATTACHMENT F REQUIRED TRANSMITTAL/CHECKLIST FOR ANNUAL SUBMISSION OF FINANCIAL DOCUMENTS Address to: Ginnie Mae's Review Agent To whom it may concern: The following information is being sent to maintain eligibility in the Mortgage-Backed Securities Program.______________________________________ IA's Tax Identification No.________________________ Ginnie Mae I. 1991 and have issued our unqualified opinion thereon dated January 24.____________________________________ FHA Mortgagee No.____________________________ IA's Contact Person____________________________________ .

___IA's Report on Internal Controls 4. (if appropriate) 8. ___Annual Audited Financial Statement for period ended __/__/__ 2. address and Ginnie Mae Issuer Number (if applicable) of all affiliates. ___IA's Presentation of Adjusted Net Worth for Parent. ___Corrective Action Plan (if appropriate) 9. ___IA's Presentation of Adjusted Net Worth for Issuer 7. ___IA's Report on Compliance with specific Requirements 5. ___Schedule of "Other Assets" 10. ___Name. ___IA's Report on Consolidating Balance Sheet and Statement of Income (if appropriate) 3. An "affiliate" is defined for these purposes as an organization that is related to the issuer through some type of control or ownership (as defined by GAAP).and Telephone Number:________________________________ Place a Checkmark by Item(s) Submitted 1. ___IA's Presentation of Insurance Requirement 6. Use additional page if necessary: _______________________________________________________________________________ _______________________________________________________________________________ __________________________________________________________ Signature:_______________________________________Date:________________________ Type of Print Signature Name:_________________________________________________ Title:________________________________________________________________________ 8/97 6-44 .

Mortgagee Approval and Recertification.1 . loan correspondents.04 REV-2 Mortgagees Letters Various HUD Handbook 4000. and investing mortgagees which have authority to originate. sell. the applicant. HUD insures mortgages made by private lending institutions to finance the purchase of single family and multifamily homes.04 REV-2 CHAPTER 7. HUD-APPROVED TITLE II NONSUPERVISED MORTGAGEES AND LOAN CORRESPONDENTS AUDIT GUIDANCE 7-1 Program Objective. HUD approves the mortgagees for participation in the mortgage insurance programs for single family and multifamily homes as evidenced by the mortgagee's receipt of the yearly verification report in the last month of its fiscal year. HUD approves lending institutions which belong to the Federal Reserve System or with Federal Deposit Insurance Corporation or National Credit Union Administration insurance on their accounts.2 Mortgagee's Handbook-Application REV-1 Through Insurance (Single Family) . and other criteria as specified in HUD Handbook 4060. or service HUD-insured mortgages depending on the type of institution. if approved. purchase. Reference Material Document 24 CFR Part 202 Title Regulations Relating to the Office of Assistant Secretary for Housing-Federal Housing Commissioner. HUD also approves other financial institutions designated as nonsupervised mortgagees. whether supervised or nonsupervised. These types of institutions are designated by HUD as supervised mortgagees. All mortgagees and loan correspondents.1. After a review of the application and clearance through certain Headquarters systems. must apply for initial or branch approval to participate in the HUD/FHA mortgage insurance programs through the Lender Approval and Recertification Division at HUD Headquarters. These institutions are approved on the basis of their financial capacity. following the directions in HUD Handbook 4060. facilities.2000. will be assigned a unique HUD/FHA identification number and notified that it may now originate FHA insured mortgages. Program Procedures . Department of Housing and Urban Development 7-1 8/97 7-2 7-3 2000. experience.

even in those cases where corrective action was taken by the auditee after the end of the fiscal year.4 7-4 Reporting Requirements.4 Single Family Direct Endorsement Program HUD Handbook 4060. although the audit is performed under Government Auditing Standards. A Title II.1 HUD Handbook 4205.4 HUD Handbook 4350.2 Mortgagee's Guide-Home Mortgage Insurance Fiscal Instructions Mortgage Credit Analysis for Mortgage Insurance on One-to-Four Family Properties Single Family Coinsurance Program Administration of Insured Home Mortgages FHA Single Family Insurance Claims Multifamily Mortgagees HUD Handbook 4155. other than nonsupervised loan correspondents.04 REV-2 For nonsupervised mortgagees. testing of compliance with internal controls and the presentation of the results of those tests may be included in the auditors' 8/97 . The scope of the auditors.1 HUD Handbook 4330.1 HUD Handbook 4330. The audit shall be performed under Government Auditing Standards and shall include the auditor's report on the basic financial statements and a computation of the mortgagee's Adjusted Net Worth. For nonsupervised loan correspondents. 7-2 2000. the office of Housing has changed the compliance and auditing requirements. All instances of noncompliance identified by the auditor must be reported as findings. These reports are required for every Title II nonsupervised mortgagee or loan correspondent regardless of the number of loans originated or serviced during the fiscal year.HUD Handbook 4000. A suggested format for the computation of Adjusted Net Worth and the list of unacceptable assets are shown in paragraph 7-6 of this chapter. the audit report shall also cover internal controls.3 Field Office Guide for Mortgagee Monitoring HUD Handbook 4110. nonsupervised mortgagee or loan correspondent is required by 24 CFR Part 202 annually to submit an audit report to the Commissioner within 90 days of the close of its fiscal year. compliance with specific requirements that have a direct and material effect on HUD-assisted mortgages.1 Mortgagee Approval and Recertification HUD Handbook 4060. including: an opinion on compliance with specific requirements applicable to major HUD-assisted programs (or a report on compliance with specific requirements applicable to nonmajor HUD-assisted program transactions).

Department of HUD Lender Approval and Recertification Division Suite 3214 490 L'Enfant Plaza East Washington.S. Lenders/mortgagees that are approved under both Title I and Title II and also are Ginnie Mae issuers must submit one set of audited financial statements to Ginnie Mae and another. SW Washington.04 REV-2 All servicing/origination income must be accounted for in compliance with FASB Statement No. Where the mortgagee/loan correspondent is a subsidiary and information on its assets. one copy of the report should be sent by the auditee to: Mailing address: U. Department of HUD Lender Approval and Recertification Division Room B-133 3214 Plaza 451 Seventh St. Accounting for Transfers and Servicing of Financial Assets and Extinguishments of Liabilities. which distinguish the balance sheet and operating statement of the mortgagee/loan correspondent subject to the HUD audit requirement. DC 20024 When a Title II mortgagee is also a Ginnie Mae issuer. 125. DC 20410-8888 Delivery: U. the audited financial statements are now sent only to Ginnie Mae for review (See Chapter 6). liabilities and results of operation are included in the consolidated financial statements of its parent entity. or subsequent amendments. audited by the IA. to the Office of Lender Activities and Program Compliance. A sample auditor's report on the consolidating balance sheet and operating statement is included as Attachment 8/97 . for Title I. The consolidating schedules must be subjected to the auditing procedures applied to the consolidated statement of the parent and the auditor's opinion must cover the financial statement accounts of the subsidiary. Except for Ginnie Mae issuers. The audit is not subject to the requirements or procedures of paragraph 7-5 except where mandated by Government Auditing Standards. 7-3 2000.report on the basic financial statements.S. HUD will accept the audited consolidated financial statements of the parent. if it includes consolidating schedules.

Quality Control Plan 1. 2. If the mortgagee relies on the external b. and servicing functions. to assist corporate management in determining whether HUD requirements and the mortgagee's policies and procedures are being followed by its personnel.04 REV-2 auditor or other qualified organization. c.5(h)). The monthly quality control procedures may be conducted by the entity itself internally or an external review. Inquire whether the mortgagee relies on an internal or external quality control review of its origination.1 REV-2.(24 CFR Subsection 202. 7-5 Compliance Requirements and Audit Areas A. Each approved mortgagee must develop and implement a quality control plan consistent with its needs. Chapter 9 or the latest HUD guidance for loan origination and servicing. .A to this Chapter. Each HUD-approved mortgagee is required to establish and maintain a written quality control plan in accordance with HUD Handbook 4060. Suggested Audit Procedures a. Determine whether the mortgagee has a procedure in place which assures that all employees involved in loan origination and servicing understand the mortgagee's quality control policies and procedures. Compliance Requirement HUD-approved mortgagees are required to originate and service HUD-insured mortgages in accordance with accepted practices of prudent lending institutions and comply with all relevant Departmental rules and regulations.1. Obtain a copy of the mortgagee's quality control plan and compare it to the general and specific requirements contained in Handbook 4060. which may be performed by the independent 8/97 7-4 2000. underwriting. and the above referenced guidance.

04 REV-2 the mortgagor's employment. Obtain a written copy of the latest quality control report and determine that senior management officials also received a copy which included any deficiencies identified during the review. Determine that any branch offices received an on-site review as required by HUD Handbook 4060. Chapter 9 were included in the quality control review. false statements or program abuses in the report. Determine that senior management 8/97 e. The Quality Control Plan must provide for the written reverification of 7-5 2000. If the mortgagee relies on an internal review. the IA should report this as part of the additional information required under Chapter 2 of this guide. It should also include a random sample of insured loans being serviced by the mortgagee or its agent. .review process and the IA's engagement includes the performance of the quality control review. deposits.1 . d. gift letter or other sources of funds.1 and that the plan includes coverage for any loan correspondents and authorized agents of the mortgagee.1 REV-2. determine that it was performed by knowledgeable personnel with no direct responsibilities in the areas they reviewed. Review the supporting documentation of the most recent quality control review to determine that it included a review of a representative sample in accordance with guidance in HUD Handbook 4060. f. Determine that the mortgagee also notified the Office of Lender Activities and Program Compliance of any violations. g. Review the supporting documentation to determine that the required general and specific elements included in Handbook 4060.

a mortgagee may register a branch office that does not meet the requirements of a traditional branch office (non-traditional branch office). c.04 REV-2 separate tax ID number is required to have approval as a mortgagee in its own right. A loan correspondent is also permitted to establish branch offices in accordance with 24 CFR Subsection 202. that serves only that branch. The mortgagee may determine the location and type of its branch office facilities. in an office in which no business except that of the mortgagee is conducted. Determine that all branches are registered with HUD by review of the appropriate form or screen printout. B. agent of the auditee or separate entity. A mortgagee may maintain one or more branch offices for the submission of applications for mortgage insurance. 8/97 2000. independent contractor. A traditional branch office is a separately located unit of the mortgagee. The branch office should have its own telephone and maintain its own accounting records.1 Chapter 5). Review auditee payroll records for indications of any branch office personnel. Each branch office must be registered by HUD. determine that the branch is a true branch and is not a subsidiary. Through inquiry and/or physical observation. b. A branch must have at least one employee.5(k) (HUD Handbook 4060. A mortgagee with a 7-6 2. except the receptionist that are not employed exclusively for the . including a branch manager. Suggested Audit Procedures a. Compliance Requirement. Branch Office Operations 1.officials promptly initiated corrective action for all deficiencies noted. In addition. It may be located in the mortgagee's home office. The non-traditional branch office facility may be located in either commercial or non-commercial space. net branch.

as a condition of providing an insured loan. Information on the auditee's copy of Form HUD-92900.2 REV-1). They must obtain and verify information with at least the same care that would be exercised in originating a loan in which the mortgage would be entirely dependent on the property as security to protect its investment. in rural areas).auditee at any given time.04 REV-2 Mortgagees may not require. 7-7 8/97 2000. Determine that the branch office is located in space which is separated by a partition from any other entity and is clearly identified to the public and that the branch office's operating costs are paid by the approved mortgagee or loan correspondent. HUD/FHA Application for Commitment for Insurance Under the National Housing Act must be supported by documents in the auditee files (HUD Handbook 4000. origination fee and other such fees) of more than two percent in an area (metropolitan statistical area or county. The regulation . d. 24 CFR 202. Review company records for evidence that the present branch office manager is a corporate officer or an employee authorized to bind the corporation in matters involving loan origination and servicing and manages only one branch. that the principal amount of the loan exceed a minimum amount established by the mortgagee (24 CFR 203. HUD requires the originators of insured mortgages to develop such loans in accordance with HUD requirements.12 prohibits lenders from originating insured mortgages if it is the customary lending practice of the lender to engage in "tiered pricing" of its loans (for discount points.18d). e. Compliance Requirement. Inquire of personnel to determine that branch employees conduct only the business affairs of that entity during normal business hours. C. Loan Origination 1.

further requires HUD to ensure that any variations in mortgage charge rates be based only on the actual variations in costs to the lender to make the loan. the IA may rely on the testing of loan files performed by the independent third party. c. which follow. retested some of the same files chosen for testing. A face-to-face interview is required only when the applicant puts down less than ten percent and does not have homeownership counseling. employment verification. This should include loans originated at the auditee's branch offices and by their loan correspondents as well as the central office.04 REV-2 loan application was reviewed with the loan applicant. Suggested Audit Procedures a. Determine that the auditee's procedures provide that applicant's credit report. Review all files in the sample for any forms that have been signed by the mortgagee but not completed by the applicant. 8/97 . The two percent limitation on variation in "mortgage charge rates" shall be applied to all Section 203 mortgages by loan type. Obtain a sample of files for loans originated during the audit period to test areas c-f. provided the IA has reviewed the independent reviewer's procedures. Review loan file documentation for evidence that a face-to-face interview with the loan applicant was conducted by a company employee and that the completed 7-8 2000. d. and the independent written reports indicate no significant discrepancies were identified. 2. and verification of deposits are sent directly to the auditee and do not pass through any third party. Where an auditee uses an independent third party to perform quality control over loan origination. b. Obtain an understanding of the auditee's procedures for processing loan applications.

Ensure that the score accurately reflected the financial status (e.04 REV-2 h. Ensure that all procedures for accepting and processing the loan were followed. especially for self-employed applicants and applicants with non-employment income. Test that the applicant's cash assets. Obtain a sample of files for rejected loans during the audit period. 7-9 8/97 f. current housing payments) of the applicant.g. etc.. g. Review loan file documentation for evidence that the mortgagee reconciled any conflicting information prior to submitting the application package to the HUD Field Office for endorsement. Determine that all employment and income data is supported by a verification of employment or other sources. Test whether loan correspondents are selling mortgages to other than their sponsors without prior HUD approval. credit score. A rejection should not be influenced by statistical categories or geographic location. Review for the following: (1) Determine that an individual review was provided for all applications denied due to a statistical category or score (e. review selected loan documentation for indications of underwriting by the loan . gift letters.e.g. Determine that the rejection was made based on established criteria and the reason for the rejection was provided to the applicant. loan and rent payments. and credit reports. and liabilities are supported by documentation such as verifications of deposits. In connection with the Direct Endorsement Program. to determine that the loan correspondent does not underwrite loans. debt/income ratio). source of funds. (2) 2000.

2 REV-1. without undue delay (HUD Handbook 4000. Report any differences as findings. d. Compare the fees and charges to the guidelines contained in HUD Handbook 4000.27). b. The mortgagee's responsibilities prior to and following loan settlement are minimal.04 REV-2 that the origination fee did not exceed one percent of the loan amount. Loan Settlement 1. the mortgagee is responsible for promptly submitting up-front mortgage insurance premiums to HUD following loan settlement and disbursing the funds and completing the transaction in accordance with the closing documents. HUD has specified the types and amount of additional charges and fees which the mortgagee may collect from the borrower. Review the fees and charges collected from the mortgagors as shown on loan settlement statements to determine that they are equal to the mortgagee's actual out-of-pocket costs for the related service or the maximum charge allowed by HUD.4 REV-1. Prove the mathematical accuracy of the Form. Determine 7-10 2000. The loan origination fee should normally compensate the mortgagee for the required services. i. Examine the signed settlement statement (Form HUD-1).correspondent. Compare amounts listed in the Form to other authentic loan documents. Select a representative sample of loans for testing from those settled during the audit period. whichever is lower. D. Compliance Requirement.2 REV-1. Additionally. c. However. and Chapter 7. 8/97 . Determine whether the differences may be due to discriminatory 2. Chapter 2. Ensure points and closing costs are accurate. 24 CFR 203. Suggested Audit Procedures a. Review the agreements between the auditee and its staff appraisers and test for compliance with Handbook 4000.

1 . Examine the canceled check or other supporting documentation for evidence that the mortgage insurance premium is submitted to HUD. 7-11 8/9 2000. Test that payment reached HUD's depository within 15 days of closing. Reconcile and report on any differences. Review computations and supporting data for amounts collected to establish escrow accounts for taxes and hazard insurance. The Form HUD-92900 contains the acquisition cost of the property. The HUD-1 contains the amount of the insured mortgage. in accordance with HUD policy at the time of closing. Loan servicing procedures are to be followed consistently and should not vary based on any . Compare the amount of the insured mortgage to the acquisition cost to determine that the mortgagor made the minimum investment. Loan Servicing 1.1. e. by the mortgagee. f. h.practices. Reconcile and report on any differences.04 REV-2 Mortgagees which service insured Home Equity Conversion Mortgages (HECM). Compare the purchase contract and the HUD-1 for agreement as to sales price. Chapter 4). Mortgagees and loan correspondents which service HUD/FHA insured loans are permitted to collect certain fees from the borrowers in accordance with HUD regulations (HUD Handbook 4330. Compliance Requirement. Review computations and supporting data for interest collected from the mortgagor at loan closing. g. i. earnest money and any seller concessions. with adjustable rate mortgages are responsible for adjusting those rates in accordance with the annual and lifetime caps as established by Handbook 4235. E.

Review selected loan file documents for evidence that the auditee communicates with the mortgagor or makes a reasonable effort to do so in order to determine the cause of default. (3) Based on the review of the individual loan servicing records. (2) (3) c. etc. face-to-face interview. (1) Obtain an understanding of the auditee's servicing procedures. Suggested Audit Procedures a.of the prohibited bases. when the cause of (2) 8/97 . 2. Review the individual loan servicing records for mortgagor explanations of defaults and documented attempts by loan 7-12 2000. b. Review the loan file documentation for evidence that the auditee documents its records to reflect its servicing on delinquent and defaulted mortgages. Review the servicing records for recorded collection contacts attempted and completed.. letter. (1) Review the individual loan servicing records for recorded collection contacts of more than one type (i.e.) if one type of contact effort is unsuccessful. Select a sample of delinquent and defaulted loans including loans in foreclosure for testing the mortgagee's loan servicing procedures. telephone. Ascertain whether the auditee maintains individual servicing records documenting collection (loan servicing) activities.04 REV-2 servicing personnel to contact the mortgagors.

held in a pending file.delinquency appears to be temporary (i. unemployment) test whether the auditee offers reasonable repayment plans. (1) Review the servicing records for the recording of partial payments accepted. Review selected claims files for evidence that such relief measures were considered (refer to Mortgagee Letters 96-11 . if any. workout agreements.. d. acceptance of partial payments and deeds in lieu of foreclosure. Obtain a representation letter from the auditee concerning such procedures e.04 REV-2 f. Review selected receipts for evidence that the auditee accepts partial or late mortgage payments offered by mortgagors as provided for in HUD Handbook 4330. illness. (Note: The decision to reject a late or partial payment must be a decision based on the individual circumstances. 96-32 and 96-61 ). (2) (b) (3) Review the auditee's procedures for the handling of partial payments. The late charge was assessed after 15 days of delinquency.) Review the payment records of selected mortgagors to ascertain whether: (a) The amount of the late charge. Inquire whether the auditee sends notices to advise the mortgagor about . or the 17th day of the month. 96-25. or rejected.e. Such steps would include informal forbearance. 7-13 8/97 2000. was computed correctly.1. Inquire whether the auditee has implemented steps to comply with the provisions of HUD's Loss Mitigation procedures.

g. Test the amounts included in the claim for preservation and protection expenses to determine that they are supported by documentation. (2) (b) h.HUD's foreclosure relief program once it has decided to foreclose.04 REV-2 i. Compare charges assessed to borrowers for servicing activities to allowable amounts. 7-14 2000. Obtain an understanding of the auditee's procedures for paying mortgage insurance premiums to HUD. Review a representative sample of insurance claims submitted to HUD following mortgage defaults. 8/97 j. Review charges to the mortgagor for attorney's fees and test whether: (a) The charges were for services performed by someone other than salaried members of the auditee's staff. Recalculate the net claim amount on the Single Family Application for Insurance Benefits (Form HUD-27011) and compare the claim amount information to the accounting records. For the loans selected: (1) Review charges to mortgagors for checks returned due to insufficient funds. Review the loan files selected for evidence that such letters were sent prior to the initiation of foreclosure proceedings. The charges were made only in those cases where the auditee made a decision to foreclose and referred the loan to an attorney for initiation of foreclosure proceedings. Determine that the auditee follows one of the two acceptable methods of making mortgage insurance premium payments (electronic payment or bank check) and that its practices comply with HUD regulations. Select a sample of adjustable rate HECMs and test that the limitations of the 2% .

1. F. Suggested Audit Procedures a. if any. to insure that funds will be available to pay taxes and insurance premiums. b. Escrow Accounts 1.04 REV-2 charges. k. Chapter 2). special assessments. and (d) flood insurance premiums where required. if any. Test whether the auditee did not use escrow funds for late 7-15 8/97 2.e. HUD requires that mortgagees establish escrow accounts and that mortgagors make monthly payments thereto. 2000. assumption fees or any purpose other than specified above.annual and 5% lifetime caps are not being exceeded by the mortgagee. The mortgage instrument provides the authority for the mortgagee to accumulate sufficient escrow funds with which to pay the mortgagor's tax and insurance bills thirty days prior to the time the bills become delinquent (HUD Handbook 4330. . at least annually. Obtain trial balances of individual escrow accounts and reconcile or review the reconciliation of the total with the auditee's control account and the related bank account. to determine if projected escrow balances will be sufficient to fund escrow disbursements. Any projected escrow shortage should be collected by either (a) lump sum payment or (b) allocating the shortage over a 12-month period. i. (a) mortgage insurance premiums. The mortgagee should analyze the escrow account. Select a sample of HECMs and determine that the disbursements have been made in accordance with the mortgage note. and ground rents. (b) taxes.. Compliance Requirement. Each month the mortgagee must collect from the mortgagor an amount which the mortgagee estimates will be sufficient to enable it to accumulate funds so as to pay all escrow obligations prior to delinquency. (c) hazard insurance premiums. Obtain an understanding of the policies and procedures for reconciling custodial trust accounts.

etc. by review of actual payments or other evidence of amounts due (e.04 REV-2 d. obtain the most recent escrow analysis. Test whether escrow funds are deposited in accounts fully insured by the Federal Deposit Insurance Corporation (FDIC). and canceled checks. test whether interest earned. However. or National Credit Union Administration (NCUA) and whether the auditee covered any overdrafts on selected accounts by advancing its own funds to custodial accounts so that FDIC or NCUA insurance protection was not impaired. Review the policies and procedures that the auditee has established to ensure that bills payable from the escrow fund 7-16 2000. tax bills. For selected mortgages. HUD regulations neither require or forbid that escrow accounts bear interest. less expenses.c. Test whether the auditee advises the mortgagor of the amount of any surplus escrow funds in accordance with HUD requirements. Also. inspect supporting documents for escrow disbursements such as receipted invoices. Test whether the mortgagor was furnished a statement of interest paid during the preceding year within 60 days after the end of the calendar year. 8/97 . g. in those cases where accounts are interest bearing. test whether the most recent real estate tax bills for each account were paid. If not paid within the discount period. On accounts selected for review.g. e. inquire as to reasons for the delay and test whether the mortgagor retained the benefit of the discount. and any late charges assessed were borne by the auditee at its expense.. note whether it was prepared not more than one year ago.. tax assessment notice or prospective rate adjustment notices from insurance companies). and whether monthly deposits appear adequate to provide for payments of taxes. insurance. is passed on to the mortgagor. f.

HUD executes a contract with the mortgagee for each mortgage.04 REV-2 Due Under Sections 235(b). however. In addition. Under Section 235. the mortgagor must meet other continuing eligibility criteria. h. determine that any late charges/penalties assessed are paid out of the auditee's funds and not the mortgagor's funds. Review the mathematical accuracy of Form HUD-93102. Suggested Audit Procedures a. G.1 REV-3. Chapter 10). Select a representative sample of mortgagors receiving Section 235 Assistance Payments from the records of the mortgagee. 235(j). Review selected loan payoffs for evidence that the auditee returns to the mortgagor the amounts held in escrow for taxes and hazard insurance within 30 days of receipt by the mortgagee of payoff funds. j. Mortgagee's Certification and Application for Assistance of Interest Reduction Payments. Section 235 Assistance Payments 1. 2000. Once a mortgage is insured. or . many of the initial eligibility criteria cease their applicability. Monthly Summary of Assistance Payments 7-17 8/97 2. and Form HUD-300. Compliance Requirement. HUD sends assistance payments to the mortgagee on behalf of the mortgagor as long as the mortgagor is eligible for the payments. Inquire whether the auditee requires the mortgagor to purchase hazard insurance coverage from the auditee or from a specific company. i. This practice may fall within the purview of the Sherman Anti-Trust Act. family composition. occupancy and employment at least annually and as otherwise required by HUD (HUD Handbook 4330. the mortgagee must secure recertifications of income.or the information needed to pay such bills is obtained in advance of the due date. For any bills paid late by the auditee. b.

Test the mathematical accuracy of assistance payments computed by the mortgagee and trace to the Form HUD-300 or computer printout. ascertain whether the auditee acted to suspend the assistance payments contract. or equivalent computer printout. General Accounting Operations Division Office of Finance and Accounting .235(i) or of Interest Reduction Payments Due Under Section 236. Report on any discrepancies. compare the number of Section 235 loans shown on the billing to the Treasury to the records of the mortgagee's servicing portfolio. DC 20410-4500 d. Copies of the paid HUD-93102s can be obtained from: Director. Ascertain that the recertification was completed in a timely manner by the mortgagor i. Tests should include both Formula I and Formula II computations and factors used in computations. c. 7-18 (2) (3) 8/97 . Determine that the formula providing the greater/lesser amount of assistance was used.e. no sooner than 60 days before and no later than 30 days after the mortgage anniversary date.HUD 451 Seventh Street.. Select a sample of individual loan files and: (1) Examine documentary evidence that the mortgagee obtained and verified information concerning mortgagor income. Report on any discrepancies. Room 3222 Washington. SW. Compare a sample of HUD-93102s to copies paid by the U.S. family composition and occupancy of the property. Also. Treasury to determine that the dollar amounts are identical. If the recertification was not completed timely.

Mortgagees participating in HUD-assisted activities are required to ensure that financial status. Handbooks and Mortgagee Letter contain the specific reporting requirements that the mortgagee is to follow (Handbooks 4330. other than those which are included in the audited financial statements. Identify all HUD-required financial and activity reports by inquiry of the mortgagee. and reports required under the Home Mortgage Disclosure Act contain reliable data and are presented in accordance with the terms of applicable agreements between the entity and HUD. For the samples. 7-19 8/97 b. Compliance Requirement. 2000. Chapter 7 and 4155. e. ledgers. The individual agreements.1 REV-4. Mortgagee Letter 95-3 ). Report all material differences between selected reports and mortgagee records.1 REV-3. etc.04 REV-2 . H. Select a sample of financial reports. d. c. Chapter 3.2000. Single Family Default Monitoring.e. trace significant data to supporting documentation. i. Select a sample of activity reports and determine that the reports selected are prepared in accordance with HUD requirements.04 REV-2 (4) Review the mortgagee's records of loans subject to recapture of assistance paid on behalf of mortgagors for documentation of the cumulative assistance paid so that it can be recaptured (Mortgagee Letter 81-38). and determine that the reports selected are prepared in accordance with HUD instructions. Federal Financial and Activity Reports 1 . Suggested Audit Procedures a. 2. worksheets. Obtain an understanding of the auditee's procedures for preparing and reviewing the required reports.

up to maximum of $250. $250.000 plus 1% of mortgage 8/97 Direct Endorsement . 2. A nonsupervised mortgagee or loan correspondent shall have and maintain a net worth.04 REV-2 Entity Type Loan Correspondent Amount $50. Compliance Requirement. Compliance Requirement. Review significant adjustments made to the general ledger accounts affecting HUD-assisted activity and evaluate for propriety.000. HUD regulations prohibit mortgagees from paying any fee. Suggested Audit Procedures a. c. If the auditor notes any kickbacks or indications of it. the auditor should be alert for any fees or other types of payments which may represent kickbacks. J. Reconcile and report on any differences. as follows: 7-20 2000. these should be reported as a finding. including a fee representing all or part of the lender's origination fee to any person or entity other than for services actually performed or to any person or entity for referral of the loan or as a finder's fee (24 CFR 202.5(l).f. Mortgagee Approval Requirements 1. I. canceled checks and supporting invoices for at least two months of the audit period. Kickbacks 1. cash journal. Obtain the general ledger. in assets acceptable to the Secretary.000 plus $25. Test whether disbursements are supported by an invoice and were not for a unreasonable amount in return for goods or services actually performed. During the review of loan origination and loan settlement documents.000 per branch. b. compensation or thing of value. kickback.

per Handbook 4060.1 REV-1. The required amount. varies by program participant type and approval date per the guidance in Section J. shall maintain both fidelity bond and errors and omissions insurance of at least $300.04 REV-2 8/97 B. 2.04 REV-2 correspondent is a subsidiary. fidelity bond coverage and errors and omissions bond. but not loan correspondents.000 (24 CFR 202.Nonsupervised Mortgagees volume in excess of $25 million. Where the mortgagee/loan 7-21 2000. Supervised institutions that provide financial . at least 20 percent of the adjusted net worth must be in liquid assets (cash. the adjusted net worth computation must focus on the assets and liabilities of the individual (non-consolidated) entity with the HUD audit requirement. Mortgagee Approval Requirements. up to maximum net worth of $1 million. 8/97 7-22 2000. Suggested Audit Procedure Test whether the nonsupervised mortgagee or loan correspondent meets the required levels for adjusted net worth. REQUIREMENT. An FHA computation of Adjusted Net Worth is required for all nonsupervised mortgagees and loan correspondents even if there were no loans originated or serviced during the audit period. Multifamily only Nonsupervised Mortgagees $250.000 each.7(b)(2) and 202. (24 CFR 7(b)(5)). cash equivalents or marketable securities) up to a maximum of $100.8(b)(4)). liquid assets. UNACCEPTABLE ASSETS FOR COMPUTATION OF ADJUSTED NET WORTH 1. All mortgagees.000 For nonsupervised mortgagees and loan correspondents approved by HUD for program participation. 7-6 ADJUSTED NET WORTH A. Any asset or portion thereof pledged to secure obligations of another entity or any person. which must be maintained throughout the year.

grandparent. child. subsidiary. uncle. A receivable from a related party where the affected parties have executed a cross-default agreement 1/ or corporate guarantee agreement 2/ with Ginnie Mae.g. such as goodwill. or in-law) has a financial interest in or is employed in a management position by the mortgagee. Any intangible asset. "Equity as adjusted" means the book value on the books of the related entity reduced by the amount of unacceptable assets carried by the related entity. which is greater than equity. aunt. 2. 2/ A corporate guarantee agreement is an agreement where the issuer's parent guarantees the performance of the issuer. parent. An investment in a related entity in which any officer or stockholder of the mortgagees has a personal interest3/ unrelated to that person's position as an officer or stockholder of the mortgagee. o o 3. spouse. A mortgage loan receivable established in the normal course of business in an arm's length transaction and secured by a first mortgage on the related property. brother. franchise fees. sister. as adjusted.04 REV-2 4. secured by a first mortgage. An asset due from an officer or stockholder of the mortgagee or from a related entity. That portion of an investment in a joint venture. 8/97 5. except for: o A construction loan receivable. ________________________________ 1/ A cross default agreement is an agreement between related affiliated Ginnie Mae issuers which provides for the default of all affiliated issuers in the event of a default by any one of them. 7-23 2000. and/or other related entity. affiliate. These pledged assets are acceptable for supervised institutions only. 3/ "Personal interest" as used here indicated a relationship between the mortgagee and a person or entity in which that specified person (e. .services to incorporated communities are sometimes required by State law to pledge their assets for the benefit of the community. from a related entity. covenants not to compete.

Accounting for Transfers and Servicing of Financial Assets and Extinguishments of Liabilities or subsequent revisions thereto. Any amount in excess of the lower of cost or market value of mortgages in foreclosure. construction loans. That portion of any marketable security (listed or unlisted) in excess of the lower of cost or market. Any asset not readily marketable and for which appraised values are very subjective. 10. That portion of contributed property.and SFAS 125. and gemstones. antiques. "Other Assets" unless the financial statements are accompanied by a schedule prepared by the independent auditor or schedule prepared by the 7. 7-25 2000. but are not limited to. 12. Examples include. value placed on insurance renewals. 11. 8. which should be carried at cost. in excess of the value as of the date of contribution determined by an independent appraisal. Any asset which is principally used 4/ for the personal enjoyment or benefit of an officer. The value of any servicing contract not determined in accordance with SFAS No.04 REV-2 8/97 . _______________________________ 4/ "Principally used" means that any other use of the property must be solely incidental. 8/97 7-24 2000. art work.organization costs. 9. or property acquired through foreclosure. director or stockholder and not for normal business purposes. 65. This includes automobiles and personal residences.04 REV-2 issuer/mortgagee and signed by an officer of the issuer/mortgagee. 6. not otherwise excluded. and value placed on property management contract renewals. Accounting for Certain Mortgage Banking Activities . except for shares of Fannie Mae stock required to be held under a servicing agreement.

and HUD. is fairly stated in all material respects in relation to the consolidated financial statements taken as a whole." respectively. are presented for purposes of additional analysis and are not a required part of the consolidated financial statements of ABC Financial Corporation and subsidiaries.000 $ ________ $ $ $ . in our opinion.ATTACHMENT A REPORT OF INDEPENDENT AUDITORS ON CONSOLIDATING BALANCE SHEET AND STATEMENT OF INCOME Board of Directors ABC Financial Corporation We have audited. (Firm Signature] [Date] 8/97 7-26 2000. the consolidated financial statements of ABC Financial Corporation and subsidiaries as of December 31. 1992 included on page "XX" [identify report]. this report is a matter of public record and its distribution is not limited. in accordance with generally accepted auditing standards and Government Auditing Standards. Our audit was conducted for the purpose of forming an opinion on the consolidated financial statements taken as a whole. Such information has been subjected to the auditing procedures applied in our audit of the consolidated financial statements and. This report is intended for the information of the audit committee. The following consolidating balance sheet and statement of income on pages "XX" and "XX. However. 1991 and have issued our unqualified opinion thereon dated January 24. management.04 REV-2 Attachment B COMPUTATION OF ADJUSTED NET WORTH FOR APPROVAL OF NONSUPERVISED MORTGAGEES OTHER THAN LOAN CORRESPONDENTS Minimum Net Worth Required Stockholders Equity (Net Worth) per Balance Sheet Less Unacceptable Assets Adjusted Net Worth for HUD Requirement Purposes Adjusted Net Worth ABOVE Amount Required Adjusted Net Worth BELOW Amount Required $ ________ $ 250.

000 25. 4.000 or Line 3) $ ________ Owners' Equity (Net Worth) per Balance Sheet Less Unacceptable Assets Adjusted Net Worth for HUD Requirement Purposes Adjusted Net Worth ABOVE Amount Required Adjusted Net Worth BELOW Amount Required 8/97 7-28 $ ________ $ $ ______ $ ______ 2000. Home Office Add: Branch Office $ x Number of Branch Offices Subtotal Total $ 50.7-27 2000. $ ________ .000 $ ______ $ ______ $ 3. Net Worth Required (lesser of $250. Add: Originated* during fiscal year Purchased* from Loan Correspondent during fiscal year Subtotal Less: Amounts included in Line 2: Servicing retained $ $ ________ $ ________ $ ________ 3.04 REV-2 8/97 Attachment C COMPUTATION OF ADJUSTED NET WORTH FOR APPROVAL AND RECERTIFICATION OF NONSUPERVISED LOAN CORRESPONDENTS 1.04 REV-2 Attachment D COMPUTATION OF ADJUSTED NET WORTH FOR RECERTIFICATION OF NONSUPERVISED MORTGAGEES OTHER THAN LOAN CORRESPONDENTS 1. 2. Servicing Portfolio* at: ________ ________ (end of fiscal year under audit) 2.

Total 1% of Line 4 Minimum Net Worth required (Greater of $250. 7-29 2000.678 $ 250.000 or Line 5) Net Worth Required (Lesser of $1.321 $ 291. $ Stockholders Equity (Net Worth) per Balance Sheet Less Unacceptable Assets Adjusted Net Worth Adjusted Net Worth ABOVE Amount Required Adjusted Net Worth BELOW Amount Required $ ________ $ ________ $ $ ________ $ ________ * HUD/FHA insured single family mortgages only. Include Home Equity Conversion Mortgages (HECMS) at maximum claim amount. 6.357 $ 41.000 or Line 6) $ ________ $ ________ $ $ ________ $ ________ 7.Loan Correspondent purchases retained Subtotal 4. 5.04 REV-2 Attachment E E X A M P L E COMPUTATION OF ADJUSTED NET WORTH FOR APPROVAL OF NONSUPERVISED MORTGAGEES OTHER THAN LOAN CORRESPONDENTS Minimum Net Worth Required Stockholders Equity (Net Worth) per Balance Sheet Less Unacceptable Assets Adjusted Net Worth for HUD Requirement Purposes Adjusted Net Worth ABOVE Amount Required Adjusted Net Worth BELOW Amount Required $ $ 345.000 8/97 54.357 $ ________ .000.

Servicing Portfolio* at: 6/30/97 ________ (end of fiscal year under audit) Add: Originated* during fiscal year Purchased* from Loan Correspondent during fiscal year Subtotal $ 87.04 REV-2 $ 5.000 Owners' Equity (Net Worth) per Balance Sheet Less Unacceptable Assets $ Adjusted Net Worth for HUD Requirement Purposes Adjusted Net Worth ABOVE Amount Required Adjusted Net Worth BELOW Amount Required 7-31 2000.000 3.000 9 $ 225.000 $ 46.8/97 7-30 2000. Home Office Add: Branch Office $ 25. 250.420 $ $ 50.000 x Number of Branch Offices Subtotal Total Net Worth Required (lesser of $250. $ 23.000 $ 70.678 $ 255.900.654.000 or Line 3) $ 321.420 $ ________ 8/97 Attachment G E X A M P L E COMPUTATION OF ADJUSTED NET WORTH FOR RECERTIFICATION OF NONSUPERVISED MORTGAGEES OTHER THAN LOAN CORRESPONDENTS 1.321 2.000 $ 275. 4.098 45. 2.000 .04 REV-2 Attachment F E X A M P L E COMPUTATION OF ADJUSTED NET WORTH FOR APPROVAL AND RECERTIFICATION OF NONSUPERVISED LOAN CORRESPONDENTS 1.500.400.

Less: Amounts included in Line 2: Servicing retained Loan Correspondent purchases retained Subtotal Total 1% of Line 4 Minimum Net Worth required $ 13.054.000.000 $ 38.678 $ 3.111.111 $ 2.321 $ 1.789 Stockholders Equity (Net Worth) per Balance Sheet Less Unacceptable Assets Adjusted Net Worth Adjusted Net Worth ABOVE Amount $ 345.543 4. 5. Include Home Equity Conversion Mortgages (HECMS) at maximum claim amount.000.000 or Line 5) 7. (Greater of $250.000. 8/97 7-32 $ [Search] [Prev List] [Doc List] [Next List] [First Doc] [Prev Doc] [Curr Doc] [Next Doc] [Last Doc] [Top] [Help] .111 Required Adjusted Net Worth BELOW Amount __________ Required * HUD/FHA insured single family mortgages only. Net Worth Required $ 1.000 $ 25.000.200.200.000.543 $ 1.3.000 $120.111. 6.000 or Line 6) $ 3.000 (Lesser of $1.456.

2 CHAPTER 8. Investing lenders are financial institutions approved by HUD to purchase. and other criteria as specified in HUD regulations at 24 CFR [Code of Federal Regulations] Part 202 and HUD Handbook 4700.2.2000. if approved. hold. Department of Housing and Urban Development (HUD) insures private lending institutions against losses sustained as a result of borrower defaults on Title I property improvement and manufactured home loans. The U. D. following the directions in HUD *Handbook 4700. B. All mortgagees and loan correspondents. experience. An investing lender may not originate Title I loans in its own name.” After a review of the application and clearance through certain HUD Headquarters systems. Nonsupervised lenders are financial institutions. facilities. A loan correspondent may be either supervised or nonsupervised. HUD approves four categories of private lending institutions for participation in the Title I program: A. the applicant. HUD-APPROVED TITLE I NONSUPERVISED LENDERS AND LOAN CORRESPONDENTS AUDIT GUIDANCE 8-1 Program Objective. C. Supervised lenders are financial institutions that are members of the Federal Reserve System or the accounts of which are insured by the Federal Deposit Insurance Corporation or the National Credit Union Administration.”) 8-2 Program Procedures. and it may not service such loans except with the prior approval of HUD. must apply for initial or branch approval to participate in the HUD/Federal Housing Administration (FHA) mortgage insurance programs through the Lender Approval and Recertification Division at HUD Headquarters. (NOTE: Except in paragraph 8-5 D of this chapter. the principal activities of which are the lending or investment of funds in loans or mortgages and which are neither supervised lenders nor governmental institutions.S. Lending institutions are approved for participation in the Title I program on the basis of their financial capacity.* 8-1 9/2006 . will be assigned a unique HUD/FHA identification number and notified that it may now originate FHA-insured mortgages. use of the term “lender” also includes the term “loan correspondent. and sell Title I loans that have been originated by other lenders. “Title I Lender Approval Handbook.2. Loan correspondents are financial institutions approved by HUD for the purpose of originating Title I direct loans for sale or transfer to a sponsoring Title I lender.04 REV-2 CHG. whether supervised or nonsupervised.

It is the auditor’s responsibility to use the appropriate reference material that was in effect during the period covered by the audit.2 8-3 Reference Material. is used.04 REV-2 CHG. and 2502-0005. the auditor should ensure that the updated reference is used for performing the audit. 2502-0328.cgi or may be ordered from HUD’s Direct Distribution System by telephone at (800) 767-7468. and 202 Title Regulations Relating to Title I Property Improvement and Manufactured Home Loans Title I Property Improvement and Manufactured Home Loan Regulations Title I Lender Approval Handbook HUD Handbook 1060. including the revision number.2000.C. 451 Seventh Street. 201. the auditor should ensure that the entire updated reference.) This will enable periodic updates to paragraph 8-3 rather than revising the references in the entire handbook/chapter. REV-6. it may be obtained by accessing HUD’s Client Information and Policy System (HUDCLIPS) at the following Web site: http://www. in a letter addressed to HUD.2 REV-6 HUD Handbook 4700..hudclips. Washington. etc. The information collection requirements contained in this handbook have been approved by the Office of Management and Budget (OMB) under the Paper Reduction Act of 1995 (44 U. SW. *The following is the reference material that was in effect at the time this handbook chapter was issued. or by fax at (202) 708-2313. Document 24 CFR Parts 5. REV-1. Also.e. reference is made to handbooks using the base handbook number without the revision number (i. DC 20410.* 8-2 9/2006 .org/cgi/index. Room B-100. Throughout this chapter. 2502-0551. 3501-3520) and assigned the following OMB approval numbers.2 REV-1 Title I letters Various If the program participant does not have this reference material. If reference to the handbook is needed in the audit report. Customer Service Center.S.

8-3 9/2006 . Electronic Submission of Audited Financial and Compliance Data.801. even in those cases in which corrective action was taken by the auditee after the end of the fiscal year. a computation of the lender’s adjusted net worth. Audit Requirements. A suggested format for the computation of the adjusted net worth and the list of unacceptable assets are shown in paragraph 8-6 of this chapter. Every nonsupervised Title I lender or loan correspondent is required to have an annual audit and to submit it to HUD within 90 days of the close of its fiscal year. and 202. The audit shall be performed in accordance with “generally accepted government auditing standards” (“GAGAS” also referred to as the “Yellow Book”) and shall include the auditor’s report on the basic financial statements. In accordance with GAGAS. A. “Reporting on Information Accompanying the Basic Financial Statements in Auditor Submitted Documents. including an opinion on compliance with specific requirements applicable to major HUD-assisted programs. 3 and a hard copy of the completed Lender Assessment Subsystem (LASS) Financial Data Templates (FDT).” These reports are required for every Title I lender regardless of the number of loans originated or serviced during the fiscal year. Every nonsupervised Title I lender is required by 24 CFR 5. These reports are required for every Title I lender.2 8-4 *Audit and Reporting Requirements.8 to electronically submit its financial and compliance data to the Office of Lender Approval and Recertification Division through LASS within 90 days of the close of* 3 Adjusted net worth must reflect only those assets acceptable to the Secretary.2000.7. regardless of the number of loans originated or serviced. the audit report is to include reports on internal control structure and compliance with specific requirements that have a direct and material effect on HUD-insured loans made by nonsupervised Title I lenders and loan correspondents. The auditor’s report must include an opinion on the lender’s adjusted net worth and on the fair presentation of the hard copy of the LASS FDT in relation to the audited basic financial statements in accordance with Statement on Auditing Standards (SAS) 29. 202. regardless of the number of loans originated or serviced during the fiscal year B. or a report on compliance with specific requirements applicable to nonmajor HUD-assisted program transactions. All instances of noncompliance with any HUD requirements identified by the auditor (including adjusted net worth or liquidity deficiencies) must be reported as findings in the report on compliance. Refer to paragraph 8-7 for information on reporting findings in the audit report.04 REV-2 CHG.

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*its fiscal year, regardless of the number of loans originated or serviced. This electronic submission must be completed based on the paper copy of the audit of the lender’s financial statements. Lenders/mortgagees that are approved under both Title I and Ginnie Mae must complete an electronic submission of their financial and compliance data through LASS. Also, these lenders/mortgagees must submit a paper copy of their audited financial statements to Ginnie Mae. Ginnie Mae issuers must send the paper copy of the audit report to Ginnie Mae Special Project Group 1915 B Chain Bridge Road, PMB 701 McLean, VA 22102-4401 When the mortgagee/loan correspondent is a subsidiary of a parent company and the information on its assets, liabilities, and results of operation are included in the consolidated financial statements of the parent entity, HUD will accept the LASS electronic submission based on the audited consolidated financial statements of the parent if it includes consolidating schedules, audited by the independent auditor, which distinguish the balance sheet, operating statement, and computation of adjusted net worth of the mortgagee/loan correspondent subject to the HUD audit requirement. The consolidating schedules must be subjected to the auditing procedures applied to the consolidated statement of the parent, and the auditor’s opinion must cover the financial statement accounts of the subsidiary. C. Auditor Involvement in the Electronic Submission Process. Regulations in 24 CFR 5.801, 202.7, and 202.8 established the requirement for Title I and Title II nonsupervised mortgagees, nonsupervised lenders, and loan correspondents to submit annual financial information based on audited financial statements electronically to HUD. To facilitate this online data collection, HUD developed LASS. LASS collects the following information: 1. FDT – Collection of financial data via a financial data template from the balance sheet, operations and equity statement, cash flow statement, net worth statement, and liquidity statement. 2. Data Collection Form (DCF) – Collection of certain basic information regarding the lender’s recertification submission, such as fiscal year-end data, audit period covered, lender and auditor information, and the type and details of the audit opinions and findings. Also, the signed audit opinion report, internal control report, and compliance reports must be attached as portable document format, pdf, .gif, or .jpeg files.* 8-4 9/2006

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3. *Notes and Finding – Collection of the lender’s footnotes accompanying the financial statements and if applicable the schedule of findings and questioned costs and lender’s corrective action plan. These documents must be attached in a .pdf, .gif, or .jpeg file format. The responsibility for the electronic submission of the lender’s financial and compliance data through LASS rests with the lender. To ensure the accuracy and completeness of the data within LASS, auditors are required to perform a separate “agreed-upon procedures” engagement. In general, the auditor must compare the electronic data in LASS to the hard copy of the basic financial statements, audit reports, and FDT. This procedure should be performed under the Statement of Standards for Attestation Engagements (SSAE) No. 10, “Agreed-Upon Procedures Engagements,” of the American Institute of Certified Public Accountants (AICPA). Although the procedure is simple, it is over and above the issuance of the SAS 29 reporting discussed earlier, and it will require some additional time. Consequently, the audit engagement letter should be expanded to include this separate attestation engagement, which may involve additional costs. To perform these procedures, auditors must register with HUD’s Secure Connection system for a user ID and password, as well as obtain a unique independent public account (IPA) identifier (UII). For further information about obtaining a user ID, passwords, and UII, refer to the LASS User Manual at the LASS Web site: http://www.hud.gov/offices/hsg/sfh/lass/prodlass.cfm As stated above, the auditors will compare the “submitted” information within all LASS templates (FDT, DCF, notes and findings) and all attachments (footnotes, findings, corrective action plans, and signed copy of the audit reports) with the hard copy information prepared by the lender and reported by the auditor. If the information agrees “exactly,” the auditor will complete the attestation report on the “LASS Auditor Reporting” screen by clicking on the “Agrees” option button. This will return the data to the lender for final submission to HUD for its review and evaluation. The lender can only submit final data that “agrees” with hard copy documents. The secure features of LASS will not permit the lender or HUD to alter data after the auditor’s reporting process. The term “exactly” refers to substantive matters and does not include nonsubstantive typographical, spelling, font, and formatting difference or differences in amounts that are clearly inconsequential (e.g., rounding differences). By clicking the “Agrees” option button, the auditor will be attesting to the statements listed in the second paragraph of the independent auditor’s report. These exhibits address situations in which (a) a lender has a stand-alone audit performed of its financial statements, and (b) a lender is a subsidiary of a parent or is a parent and a stand-alone audit of the lender’s financial statements has not been performed. It* 8-5 9/2006

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*should be noted that the “agreed-upon procedures” attestation report could be submitted by the auditor who audited the financial statement or by another independent auditor who did not perform the financial statement audit. When the “Agrees” option buttons in the independent accountant’s report are checked and the report is ready for submission, a hard copy of the report should be printed for the auditor’s records. After submission, the system will not permit this report to be printed. If the information does not agree exactly, the auditor will complete the attestations report on the “LASS Auditor Reporting” screen by clicking on the “Does Not Agree” option button. This will return the data to the lender and allow the lender to correct the data. Once the lender resubmits the corrected data, the auditor must repeat the above process. While the LASS report screens identify those elements that do not agree, most auditors will find it beneficial to discuss any areas of disagreement with the lender and come to a resolution before the lender’s submission of the financial and compliance data to HUD. If the user experiences technical problems using the LASS system, the LASS technical assistance center should be contacted at (202) 755-7400, extension 163, or by e-mail at lass@hud.gov.*

8-5

Compliance Requirements and Suggested Audit Procedures. A. Branch Office Operations. 1. Compliance Requirement. A lender may maintain one or more branch offices for the origination of Title I loans. Each branch office that is originating Title I loans must be approved by HUD following submission of the form for branch office notification. A loan correspondent is also permitted to establish branch offices in accordance with 24 CFR Part 202 and HUD Handbook 4700.2. 2. Suggested Audit Procedures. a. Determine whether HUD accepted the branch office as evidenced by a copy of Form HUD-92001-B, Branch Office Notification. b. Test whether the branch is a true branch and is not a subsidiary, an agent of the lender, or a separate entity and that it has at least one employee, including a branch manager, that serves only that branch. The branch office must have its own telephone and maintain its own accounting records. 8-6 9/2006

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c. Review lender payroll records to determine that all branch office personnel, except the receptionist, are employed exclusively for one HUD-approved lender at any given time and conduct only the business affairs of that entity during normal business hours. d. Determine whether the branch office (1) is located in a space which is separated by a partition from any other entity, (2) is clearly identified to the public, and (3) had its operating costs paid by the approved lender. e. Determine whether the present branch office manager is a corporate officer or an employee authorized to bind the corporation in matters involving loan origination and servicing. B. Loan Origination. 1. Compliance Requirement. HUD expects that the lender will exercise prudence and diligence in determining whether the borrower is solvent and an acceptable credit risk with a reasonable ability to make payments on the loan obligation. All documentation supporting this determination of credit worthiness shall be retained in the loan file (24 CFR 201.22). 2. Suggested Audit Procedure. a. Compare the lender’s procedures for processing Title I loan applications and making a decision on the borrower’s credit worthiness with the requirements in 24 CFR 201.22. b. Obtain a sample of files for loans originated during the audit period to be examined for the documentation required by the regulations. The sample should include loans originated at the lender’s branch offices as well as the home office. (1) Determine whether the lender obtained a separate dated credit application on the HUD-approved form from the borrower, any comaker, and/or cosigner and verified the validity of the borrower’s Social Security number in accordance with Title I Letter TI-414. (2) Determine whether all income and employment data are supported by written verification or other documentation, especially for selfemployed applicants and those with nonemployment income. 8-7 9/2006

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(3) Determine whether the lender obtained a complete and current consumer credit report on the borrower, any comaker, and/or cosigner and checked on any credit inquiries reported within the previous 90 days. (4) Determine whether the lender obtained written verification of the borrower’s payment status on any senior mortgages or deeds of trust on the property to be improved. (5) For each person on the credit application, determine whether the lender checked HUD’s Credit Alert System to verify whether the borrower is in default or a claim has been paid on behalf of the borrower on any federally insured or guaranteed loan and whether the lender recorded the borrower’s “credit alert response code” on the application for each person listed. (6) When the principal balance of the loan exceeds $5,000 and the initial payment exceeds 5 percent of the loan amount, determine whether the lender obtained written verification of the source of these funds through verifications of deposit, bank statements, gift letters, or other methods/evidence. (7) Review the loan file documentation for evidence that the lender conducted a face-to-face or telephone interview with the borrower before making a final determination on the borrower’s credit worthiness. (8) *For dealer loans with a credit application date of December 12, 2001, or later, lenders are required to conduct a telephone interview before disbursing the loan, which is in addition to the credit underwriting telephone interview. Review the file documentation to determine whether the telephone interview before loan disbursement was made.* c. Obtain a sample of files for rejected loans during the audit period and perform the following review: (1) Determine whether an individual review was provided for all rejected applications that were denied due to a statistical category or score (e.g., credit score, debt/income ratio). Determine whether the score accurately reflected the financial status (e.g., loan and rent payments, current housing payments) of the applicant. A rejection should not be influenced by statistical categories or geographic location. 8-8 9/2006

2000.04 REV-2 CHG- 2

(2) Determine whether the rejection was made based on established criteria and the reason for the rejection was provided to the applicant. Determine whether procedures for accepting and processing the loan were followed. C. Loan Disbursement. 1. Compliance Requirement. The lender has certain responsibilities to be carried out in connection with the disbursement of loan proceeds (24 CFR 201.26 and 201.40). These responsibilities vary widely, depending upon whether the loan is a property improvement or manufactured home loan and whether the disbursement is made directly to the borrower or to a dealer. The disbursement of loan proceeds must be adequately documented in the lender’s file. When dealer loans are involved, the lender must also maintain separate dealer files, which reflect compliance with HUD’s requirements concerning the dealer’s approval and supervision (24 CFR 201.27). 2. Suggested Audit Procedures. a. Review the lender’s procedures for determining borrower eligibility and evaluating whether the loan proceeds are being used for eligible purposes (24 CFR 201.20 or 201.21 as appropriate). Also, review the lender’s procedures for documenting that the property improvements have been completed or the manufactured home has been satisfactorily delivered and installed (24 CFR 201.26(a) or (b) as appropriate). b. Select a representative sample of property improvement loan files and determine whether each file contains the following: (1) *The note, security instrument, if any, credit application, completion certificate, and notice of HUD’s role in the loan transaction required by 24 CFR 201.26(b)(7) for manufactured home loans and 24 CFR 201.26(a)(8) for property improvement loans.* (2) A contract or contract proposal between the borrower and a dealer/contractor or a detailed written description of the work with *a materials list and estimated costs if the borrower is carrying out the work without a dealer/contractor.* (3) Evidence of an on-site inspection to determine that the improvements were completed if the loan is for $7,500 or more. 8-9 9/2006

The lender shall remain responsible to the Secretary for proper collection efforts. and fees or charges. purchase contract. credit application. security instrument. 1. (2) Evidence of the borrower’s initial payment. Loan Servicing. (3) Each dealer’s file contained the dealer’s current financial statement.10 9/2006 .2. including a determination that the dealer met the minimum adjusted net worth requirements of 24 CFR 201. principals. including information on borrower defaults and borrowers’ complaints and evidence of the resolution of those complaints. determine whether (1) The lender supervised and monitored each dealer and visited the dealer periodically. and the notice of HUD’s role in the loan transaction required by 24 CFR 201.2 c. (4) The file contained documentation of the lender’s experience with the dealer’s Title I loans. itemized statements of other costs.26(b)(7). Select a representative sample of manufactured home loan files.c above. For each file reviewed under C. The lender shall service loans in accordance with accepted practices of prudent lending institutions. (3) Copies of all other documents relating to the loan transaction. (2) Each dealer’s approval is documented on a HUD-approved form. When the lender approves dealer loans. manufacturer’s invoice. d.2000. It shall have adequate facilities for contacting the borrower in the event of default and shall otherwise exercise diligence in collecting the amount due. Review the files to determine whether each file contains the following documents: (1) The note.04 REV-2 CHG. e. D. and officers. signed and dated by both parties. a placement certificate signed by the borrower and dealer. Compliance Requirement. determine whether the lender has documented a site-of-placement inspection within 60 days after disbursement of the loan proceeds.27(a)(1) and credit reports on the dealership and its owners. even though 8 .

.18.* 8 . (4) The lender communicated with the borrower or made a reasonable effort to do so to determine the cause of default and seek its cure before accelerating the maturity of the loan.e. A modification agreement may also be used to effect a reduction in the interest rate and in the monthly payment for current loans.41 for more details). 2. letter.11 9/2006 . etc.) when one type of contact effort was unsuccessful. The lender shall accept partial payments under an executed modification agreement or an acceptable repayment plan (refer to 24 CFR 201. The lender shall have an organized means of periodically identifying the payment status of delinquent loans to enable personnel to initiate and follow up on collection activities and shall document its records to reflect its collection activities on delinquent loans. (3) The servicing records contained information on collection contacts attempted and completed. 24 CFR 201. b.2000. face-to-face interview.2 actual loan servicing and collection may be performed by an agent of the lender. A modification agreement may be used to increase or reduce monthly payments but not to increase the term or the interest rate to assure that the delinquent or defaulted loan is brought current before or by the end of the loan term. telephone. (2) The lender maintained individual servicing records documenting collection (loan servicing) activities. (5) The lender offers special relief measures such as modification agreements or informal repayment plans when such measures are appropriate and the selected loan files evidence that such relief measures were considered.04 REV-2 CHG. a. The auditor is to select a sample of delinquent and defaulted loans and determine whether (1) The lender documented its records to reflect its servicing on delinquent and defaulted loans. Review the individual loan servicing records to determine whether more than one type of contact was made (i. Suggested Audit Procedures. *The auditor is to obtain an understanding of the lender’s servicing procedures.

Review and report on any differences. Determine whether any differences may be due to discriminatory practices and report any problems noted.12 9/2006 . *Obtain the lender’s general ledger.04 REV-2 CHG. c. dated May 2.* E. and supporting invoices for at least two months of the audit period and determine whether a. Referral fees are being paid. Federal Financial Reports. the auditor should be alert for any fees or other types of payments. canceled checks. d. Points and closing costs are accurate. 1. 2. b. Compliance Requirement. determine whether the lender follows an acceptable method of making annual payments and that its practices comply with HUD regulations. c. On the sample selected. 1. The fees and charges were within the allowable amounts contained in Title I Letter TI-440 and report amounts paid in excess of the allowable amounts. which may represent referral fees. lists all fees and charges allowed in the program. cash journal. If the auditor notes any such referral fees. Title I Letter TI-440. they must be reported as a finding. Suggested Audit Procedures.2 (6) *The notice of default and acceleration used by the lender is in compliance with the regulations (24 CFR 201. Lenders participating in HUD-assisted activities are required to submit various reports in accordance with the terms of 8 .* F. Disbursements are supported by invoices and were not for unreasonable amounts in return for goods or services actually performed in connection with a Title I loan.2000. The auditor is to obtain an understanding of the lender’s procedures for paying loan insurance premiums to HUD.50(b)) and Title I Letter TI-408. During the review of loan origination and loan settlement documents (paragraphs 8-5B and C). Eligible Fees and Charges. Compliance Requirement. 1996.

etc. G.000 for uses in originating or purchasing Title I loans. A nonsupervised lender shall have and maintain an adjusted net worth of not less then $250. It shall also have a reliable warehouse line of credit or other funding program acceptable to the Secretary of not less than $500. For the sample. b.* 2.2 applicable agreements between the entity and HUD. d. A loan correspondent shall have and maintain an adjusted net worth of not less than *$63. and determine whether the reports selected are prepared in accordance with HUD instructions. Financial Approval Requirements.000 for each branch office authorized by the Secretary. Compliance Requirements. 1. Obtain an understanding of the auditee’s procedures for preparing and reviewing the financial reports. or other parties related to a Title I-insured loan pursuant to Title I Letter TI-447. Suggested Audit Procedures.000. Review significant adjustments made to the general ledger accounts affecting HUD-assisted activity and evaluate the propriety of those adjustments.e. a. up to a maximum requirement of $250. e. Identify all HUD-required activity reports by inquiry of the lender.04 REV-2 CHG.13 9/2006 .000 in assets acceptable to the Secretary. c. Select a sample of financial reports.000* in assets acceptable to the Secretary. *Originating Lenders: Submission of annual Home Mortgage Disclosure Act reports by March 1 of each year pursuant to Title I Letter TI-479. trace significant data to supporting documentation. i. other than those which are included in the audited financial statements. ledgers. plus an additional $25. contractors. The following specific reports are required: a. All Lenders: Reporting of any noncompliance by borrowers. b. worksheets.2000. Report all material differences between financial reports and lender records. 8 ..

2 or the latest HUD guidance. Each HUD-approved lender is required to establish and maintain a written quality control plan in accordance with HUD Handbook 4700. b. Test whether the nonsupervised lender or loan correspondent maintained the required levels for adjusted net worth. Suggested Audit Procedures. Suggested Audit Procedures. 1.2. 8 . Each approved lender must develop and implement a quality control plan.2000. b.2 2. determine that it was performed by knowledgeable personnel with no direct responsibilities in the areas they reviewed. The monthly quality control procedures may be conducted by the entity itself internally or by an external review. c.14 9/2006 .5(h)). to assist corporate management in determining whether HUD requirements and the lender’s policies and procedures are being followed by its personnel. H. Determine whether the lender has a procedure in place. consistent with its needs and the above referenced guidance. a. which may be performed by the independent auditor or other qualified organization (24 CFR 202. underwriting. Inquire whether the lender relies on an internal or external quality control review of its origination. which ensures that all employees involved in loan origination and servicing understand the lender’s quality control policies and procedures. Obtain a copy of the lender’s quality control plan and compare it to the general and specific requirements contained in Handbook 4700. If the lender relies on the external review process and the independent auditor’s engagement includes the performance of the quality control review. The following suggested audit procedures are to be followed whether the quality control review was performed by the entity or by an external source. Compliance Requirement. the independent auditor should report this as part of the additional information required under chapter 2 of this guide. Test whether the nonsupervised lender maintained the required level for its warehouse line of credit. a. If the lender relies on an internal review. and servicing functions.04 REV-2 CHG. 2. HUD-approved lenders are required to originate and service HUD-insured mortgages in accordance with accepted practices of prudent lending institutions and comply with all relevant departmental rules and regulations. Quality Control Plan.

04 REV-2 CHG. Determine that any branch offices received an on-site review at least once during the year and that the plan includes coverage for any loan correspondents and authorized agents of the lender. Review the supporting documentation to determine that the required general and specific elements included in Handbook 4700. e. Determine that the lender also notified the Quality Assurance Division of any violations. or program abuses in the report. A. Review the supporting documentation of the most recent quality control review to determine that it included a review of a representative sample of at least 10 percent of the number of insured mortgages originated or a statistically derived sample. Audit Requirement. deposits. Determine whether the files evidence that the employees were notified of the deficiencies and provided instructions to correct the deficiencies and prevent a recurrence. *Determine whether the files evidenced the actions taken by senior management to correct all deficiencies noted and that the corrective action was promptly initiated. paragraph 85 G.2 d. f. g. h. It should also include a random sample of insured loans being serviced by the mortgagee or its agent. If an entity is both a Title I and Title II lender. even if there were no loans originated during the period.2000. * 8-6 Adjusted Net Worth. Financial Approval Requirements.15 9/2006 .2 were included in the quality control review. When the lender is a 8 . *An FHA computation of adjusted net worth is required for all nonsupervised Title I lenders and loan correspondents. The required amount that must be maintained throughout the year varies by program participant type and approval data according to the guidance in this chapter. the adjusted net worth under Title II is the only statement necessary. gift letter. which included any deficiencies identified during the review. Computation. B. Obtain a written copy of the latest quality control report and determine that senior management officials also received a copy. or other sources of funds. The quality control plan must provide for the written reverification of the lender’s employment. false statements.

These pledge assets are acceptable for supervised institutions only. except for* 8 . Unacceptable Assets for Computation of Adjusted Net Worth.300.* ***************************************************** XYZ Lender Corporation Computation of Adjusted Net Worth to Determine Compliance with HUD Net Worth Requirements March 31. XXXX Stockholders equity (net worth) per balance sheet Less unacceptable assets: construction loans to related company – not secured by first mortgage Other – goodwill Adjusted net worth for HUD requirement purposes 1 $17. must be submitted as part of the corrective action plan. an explanation of the steps taken to correct the adjusted net worth deficiency. An asset due from an officer or stockholder of the mortgagee or from a related entity.2 parent or a subsidiary to a parent.000 1 $ 5. along with any relevant documentation. Any asset or portion thereof pledged to secure obligations of another entity or any person.500. 2.000.16 9/2006 . 1.000 $12. the adjusted net worth computation must focus on the * *assets and liabilities of the individual (nonconsolidated) entity with the HUD audit requirement. ***************************************************** C.2000.200.000 300.04 REV-2 CHG.000 $12.000 In the event adjusted net worth does not meet or exceed the minimum HUD requirement. *The following are unacceptable assets and are not to be used in the computation of adjusted net worth. Supervised institutions that provide financial services to incorporated communities are sometimes required by State law to pledge their assets for the benefit of the community.

*A construction loan receivable. secured by a first mortgage.* 2 Cross-default agreement is an agreement between related affiliated Ginnie Mae issuers which provides for the default of all affiliated issuers in the event of a default by any one of them. The value of any servicing contract not determined in accordance with Statement of Financial Accounting Standards (SFAS) No. subsidiary. A receivable from a related party when the affected parties have executed a cross-default agreement2 or corporate guarantee agreement 3 with Ginnie Mae. or revisions thereto. grandparent. franchise fees. Any intangible asset. 4. Accounting for Transfers and Servicing of Financial Assets and Extinguishments of Liabilities. 6. covenants not to compete. child. A corporate guarantee agreement is an agreement in which the issuer’s parent guarantees the performance of the issuer. 4 8 . An investment in a related entity in which any officer or stockholder of the mortgagee has a personal interest 4 unrelated to that person’s position as an officer or stockholder of the mortgagee. 5. parent. and/or other related entity. b. value placed on insurance renewals.g.17 9/2006 . 7. 65. Any asset not readily marketable and for which appraised values are subjective. and value placed on property management contract renewals. artwork. That portion of an investment in a joint venture. and gemstones. and SFAS 125. from a related entity. 3 “Personal interest” as used here indicates a relationship between the mortgagee and a person or entity in which that specified person (e. c. organization costs. aunt. 3. brother. or in-law) has a financial interest in or is employed in a management position by the mortgagee. Examples include but are not limited to antiques. spouse.2000. A mortgage loan receivable established in the normal course of business in an arm’s length transaction and secured by a first mortgage on the related property. sister. “Equity as adjusted” means the book value on the books of the related entity reduced by the amount of unacceptable assets carried by the related entity. Accounting for Certain Mortgage Banking Activities.04 REV-2 CHG. uncle. such as goodwill. affiliate..2 a. which is greater than equity as adjusted.

11. “Other assets” unless the financial statements are accompanied by a schedule prepared by the independent auditor or schedule prepared by the issuer/mortgagee and signed by an officer of the issuer/mortgagee. after the fiscal year under audit. 10. instances of fraud or illegal acts. and relevant 5 “Principally used” means that any other use of the property must be solely incidental. and/or prior to the issuance of the audit report.” A finding should be supported by sufficient. competent. Such reporting must be in writing in a Management Letter or other type of written auditor communication and must be mentioned in the Independent Auditor’s Report including the date of the Management Letter or other written communication. which is principally used 5 for the personal enjoyment or benefit of an officer. Findings are to be presented in accordance with the standards and requirements of the “Yellow Book. Any amount in excess of the lower of cost or market value of mortgages in foreclosure. except for shares of Fannie Mae stock required to be held under a servicing agreement. *That portion of any marketable security (listed or unlisted) in excess of the lower of cost or market value. regulation. 12. instances or violations that were corrected during the audit process. Any asset. including adjusted net worth and/or liquidity deficiencies. All material instances of noncompliance with any HUD requirement. 9. or contract violations disclosed during the audit process may be reported separately to management.2 8. That portion of contributed property. which should be carried at cost.04 REV-2 CHG. Non compliances. or property acquired through foreclosure. Content of Finding. 8 . deficiencies in internal control. must be included in the report as resolved findings or in a management letter depending on their materiality. All nonmaterial instances of noncompliance. or if they were disclosed as a part of the audit process before the end of the fiscal year under audit. instances of fraud or illegal acts. not otherwise excluded. in excess of the value as of the date of contribution determined by an independent appraisal. director. deficiencies.18 9/2006 . or stockholder and not for normal business purposes. deficiencies in internal control. A. or contract violations that were disclosed during the audit process must be reported as findings in the audit report. This includes automobiles and personal residences. construction loans. 8-7 Audit Finding Reporting.2000.

and the auditor should state whether he/she tested the action or not. the auditee can include the action completed and the action remaining to be taken in the auditee’s comments and in the corrective action plan. Regardless of whether the auditee is in the process of correcting the finding. In addition. and acts on audit reports conducted using this chapter. questions on audits performed using this chapter should be referred to that office’s help desk at (202) 755-7400. For this reason. It is important that the report meet its requirements and expectations. the finding is still to be included in the audit report with all required elements. The recommendation section should follow the auditee’s comment section. they will start to take action to correct the deficient condition. they will start to take action and complete that action. *Corrective Action in Process. or by sending an e-mail to lass@hud. The Office of Lender Approval and Recertification Division receives. prior to the completion of the fieldwork. correcting the deficient condition. Corrective Action Completed. and provide convincing but fair presentations in proper perspective.* 8 .19 9/2006 . the auditor could include any additional recommendations he/she believes necessary based on the testing of that action. The action taken/completed should be included in the auditee’s comment section and should be validated by the auditor. reviews. extension 163.* B. When this action is underway and the auditor has completed his/her fieldwork.2 evidence.04 REV-2 CHG. the auditor is to include the finding in the report with all required elements. 8-8 Technical Assistance Needed. Many times when auditees are presented with draft findings. Many times when auditees are presented with draft findings. be presented in a manner to promote adequate understanding of the matters reported.gov. C. Please refer to chapter 2 for the information that is to be included in a finding.2000. When this occurs.

GINNIE MAE ISSUERS OF MORTGAGED-BACXED SECURITIES AUDIT GUIDANCE HUD-APPROVED TITLE II NONSUPERVISED MORTGAGEES AND LOAN CORRESPONDENTS AUDIT GUIDANCE HUD-APPROVED TITLE I NONSUPERVISED LENDERS AND LOAN CORRESPONDENTS AUDIT GUIDANCE Page 1-1 2-1 3-1 4-1 5-1 6-1 7. 2. 7-1 8. 4. GENERAL AUDIT GUIDANCE REPORTING REQUIREMENTS AND SAMPLE REPORTS [RESERVED] HUD MULTIFAMILY HOUSING PROGRAMS INSURED DEVELOPMENT COST CERTIFICATION AUDIT GUIDANCE .04 REV-2 CHG-1 Paragraph Table of Contents 1. 6.2000. 3. 8-1 i 12/01 . 5.

Department of Housing and Urban Development Office of the Inspector General SPECIAL ATTENTION OF: Title I Mortgagees.04. REV-2.04.04.).e.. they will be consolidated into a revised Audit Guide and issued as Handbook No. Significant Changes: a. and Loan Correspondents TRANSMITTAL Handbook No: 2000. 2006 1. REV-2. Throughout this chapter. chapter 8. This handbook chapter is a change to Handbook IG 2000. and clarify existing information/guidance. dated August 1997. etc. CHG-2 Chapter Number: 8 Issued: September 1. CHG-2. REV-1. Chapter 8. REV-3. 1 September 2006 . A change was necessary to reflect changes in reporting. Lenders. Summary: The Office of the Inspector General is in the process of updating the handbook and will release each chapter as it is completed. Consolidated Audit Guide for Audits of HUD Programs.S. reference is made to handbooks. 2. REV-2. 2000. REV-6. and 8-4C. add suggested audit steps. Electronic Submission of Audited Financial Statements. d. HUD . Reference Material. 3. When all of the individual chapters of the Audit Guide are revised. contains the current reference documents at the time this Audit Guide chapter was issued and information on how to obtain the reference materials.Approved Title I Nonsupervised Lenders and Loan Correspondents Audit Guidance. A section was added on reporting audit findings that are corrected or are being corrected before the completion of the audit (paragraph 8-7). Electronic reporting requirements are added to this chapter in paragraphs 84B. Auditor Involvement in the Electronic Submission Process. This transmits Handbook 2000. c. b. Paragraph 8-3. using the base handbook number without the revision number (i. This will enable periodic updates to paragraph 8-3 rather than to the entire handbook/chapter. This chapter serves as a reference for auditors who perform audits of approved Title I nonsupervised lenders and loan correspondents.U.04. Included is a listing of unacceptable assets that are not to be used in the computation of adjusted net worth (paragraph 8-6C).

and it is not be used to report findings that were resolved before the audit report was issued. The requirements in this chapter shall apply to audits of profit-motivated sponsors/entities with fiscal years ending on or after December 31. f. dated September 2006 5.e. Effective Date: This chapter is effective and can be used upon issuance. 2006. Chapter 2 requirements include that the existence of a management letter or other type of auditor communication must be mentioned in the independent auditor’s report. Filing Instructions: The issuance of this chapter cancels chapter 8. Donohue Inspector General. Auditors will be able to convey nonmaterial instances of noncompliance to management via management letter or other type of auditor communication as long as the requirements of chapter 2. paragraph F. Kenneth M. 4. Remove Chapter 8. are followed. the date of issuance is to be included. Paragraph 8-8 was added to provide a contact point for questions that may arise during the course of the audit. it must be provided to HUD with the audit report package. G 2 September 2006 . dated August 1997. dated August 1997 Insert Chapter 8.

R-7.04 REV-2 U. R-2. R-7-1.Handbook 2000. W-2. W-1. R-8 . R-6-2. R-1. R-3. R-7-2.S. R-6-1. R-6. Department of Housing and Urban Development Office of Inspector General Independent Auditors August 1997 Consolidated Audit Guide for Audits of HUD Programs GA: Distribution: W-3-1. W-3. R-3-1. W-4.

Department of Housing and Urban Development Office of Inspector General SPECIAL ATTENTION OF: Title II and I Mortgagees. Audits of States. 1997 1. 1997 and thereafter. Consolidated Audit Guide for Audits of HUD Programs. Lenders. Government Auditing Standards (1994 2. Loan Correspondents. 1993. Title I and Title II. Summary. d. This Transmits Handbook 2000. c.04 REV-1 dated July 15. Updates net worth information for Ginnie Mae. An update was necessary to reflect changes in program regulations. e.S. Owners. Management Agents TRANSMITTAL Handbook No: 2000. 3. This handbook is an update of Handbook IG 2000. Updates unacceptable assets for computation of adjusted net worth for Ginnie Mae.04 REV-2 Issued: August 25.U. Ginnie Mae Issuers. Incorporates Revision) . Local Governments and non-Profit Organizations . Incorporates the revised OMB Circular A-133. . HUD Handbooks and .04 REV-2. b. Loan Management Branch Chiefs. This Government Auditing Standards (1994 Revision) Handbook serves as a reference to independent auditors of selected Housing and Ginnie Mae programs. It is effective for audits of fiscal years ending September 30. Incorporates Mortgagee Letter 96-12. Significant Changes a.

. . . . . . . . . . . . . .2000. . . 3. . . . . . . . 2. . . SECTION 236 SUBSIDIZED PROJECTS.04 REV-2 Paragraph Table of Contents 1. . HUD-HELD MORTGAGES. . . . . . . . . . . . . . . . . GINNIE MAE ISSUERS OF MORTGAGED-BACKED SECURITIES AUDIT GUIDANCE. . . . . . . . . . . REPORTING REQUIREMENTS AND SAMPLE REPORTS . . Page 1-1 2-1 3-1 4-1 5-1 6-1 7-1 8-1 5. HUD-APPROVED TITLE I NONSUPERVISED LENDERS AND LOAN CORRESPONDENTS AUDIT GUIDANCE. . . . SECTION 232 NURSING HOMES AND SIMILAR FACILITIES AND SECTION 242 HOSPITALS AUDIT GUIDANCE AND SAMPLE FINANCIAL STATEMENTS. SECTION 8 AUDIT GUIDANCE. 8. . 8/97 i . HUD-APPROVED TITLE II NONSUPERVISED MORTGAGEES AND LOAN CORRESPONDENTS AUDIT GUIDANCE. . . GENERAL AUDIT GUIDANCE. . . INSURED AND COINSURED MULTIFAMILY PROJECTS. . . . . . . . . . . . 7. . . . . 6. . . . . . . . . . . . . . . . . . . . . 4. . . . . . . INSURED DEVELOPMENT COST CERTIFICATION AUDIT GUIDANCE. . . . . . . . .

2000. Form HUD-92410 Computation of Surplus Cash. 2. Distributions and Residual Receipts. Form HUD-93486 Note: These forms may be reproduced as necessary. Statement of Profit and Loss. 8/97 ii .04 REV-2 Forms Required by this Handbook 1.

Use of this guide is mandatory for audits by IAs of all for profit participants in the HUD programs identified in paragraph 1-4. 881. 885. 884. General Accounting Office's (GAO) Government Auditing Standards . 236. It is anticipated that nonprofit institutions which own individual properties receiving HUD 1 assistance under specified housing programs will be required to complete project-specific audits because each project is deemed to be a separate entity. 889. (b) internal controls in place to provide reasonable assurance that it is managing HUD programs in compliance with applicable laws and regulations. and thus expended Federal funds properly and with supporting documentation. these reports must contain adequate information to give reported matters perspective and to allow the managers to take necessary corrective action.2000. 232.S. effective June 30. 1-1 GENERAL AUDIT GUIDANCE Purpose . 221. The objectives of a HUD program-specific audit are to assist the program managers in HUD in determining whether the auditee has: (a) provided financial data and reports that can be relied upon. and © complied with the terms and conditions of Federal awards and guarantees. 242. 1997. issued by the Comptroller General of the United States. HUD program audit reports are a primary tool used by program managers to meet their stewardship responsibilities in overseeing these HUD programs and assuring the integrity of the funds. These audits must be performed in accordance with the standards for financial audits of the U. 880.04 REV-2 CHAPTER 1. Those audits are HUD programs whose regulations are set forth in 24 CFR parts 207. 213. 1997 and thereafter. HUD is developing regulations to implement OMB Circular A-133. To be of value. 277. and 890 1 8/97 1-1 . 1994 Revision. 886. 883. This guide is effective for audits of fiscal years ending September 30. This guide is to assist independent auditors (IAs) in performing program-specific audits of participants in selected Department of Housing and Urban Development (HUD) Housing and Ginnie Mae programs. As of the issuance of this audit guide. The areas of noncompliance and internal control weaknesses noted in these reports must be acted upon by program managers.

Additionally. audit planning and other considerations and establishes certain requirements for the performance of the audit. If the auditor desires technical assistance pertaining to HUD programs. This guide is not intended to be a complete manual of procedures. 1-2 Auditor Qualifications . While the Government Auditing Standards urge audit organizations to make their external quality control review reports available to appropriate oversight bodies. the auditor should contact the particular HUD Headquarters or Field program office listed in the applicable chapter. An auditor must meet the auditor qualifications of Government Auditing Standards. The auditor should use professional judgement to tailor the procedures so that the audit objectives may be achieved. nor is it intended to supplant the auditor's judgement of audit work required.gov. all applicable compliance requirements in this guide must be addressed by the auditor. This guide is divided into chapters.2000. If the auditee is located in a State outside the home State 8/97 1-2 . A list of local and state offices is available on the Internet at www. their regulations or operations.04 REV-2 to be conducted in accordance with OMB Circular A-133 and related guidance. Suggested audit procedures contained herein may not cover all circumstances or conditions encountered in a particular audit. The standards on auditor qualifications in the Government Auditing Standards require that accountants and accounting firms comply with the applicable provisions of the public accountancy laws and rules of the jurisdictions in which they are licensed and where the audit is being conducted. The first chapter discusses purpose. it is not necessary to submit the report to either the HUD Field Office or the HUD/OIG unless requested to do so. The remaining chapters of the guide each contain a compliance supplement for a particular HUD program. including the qualifications relating to independence and continuing professional education.hud. Each audit should be conducted in accordance with requirements of Chapters 1 and 2 and the applicable compliance supplement included in Chapters 3 through 8 of this guide. However. the audit organization is to meet the quality control standards of Government Auditing Standards. background. The second chapter contains the reporting requirements.

IA's performing audits of mortgagors having HUD-insured or Secretary held multifamily mortgages must have no business relationship with the auditee except for the performance of the audit. in all material respects. Chapter 11. according to HUD Handbook 4470. the financial position of the auditee as of the date of the financial statements and the results of its operations and its cash flows for the period then ended in conformity with generally accepted accounting principles.04 REV-2 of the auditor. 8/97 1-3 . in the audit working papers. IAs performing cost certification audits of mortgagors or general contractors must have no business or financial relationship with the mortgagor or general contractor except for the performance of the audit. an individual who acts as the mortgagor's "fee accountant" (i. accounting systems work. Accordingly.. The audit should be sufficiently comprehensive in scope to permit an expression of an opinion on the financial statements and supplemental data of the HUD-assisted activity.2000. The Government Auditing Standards require the IA to consider the auditee's internal controls as part of planning and performing the audit and report on internal controls.e. 1-3 Audit Scope and Approach . The opinion should state whether the basic financial statements present fairly.2 REV-1. According to HUD Handbook 4370. Chapter 3. the auditor should document his/her compliance with public accountancy laws of that State regarding licensing. The auditor should report on internal controls in accordance with Chapter 2 of the guide. This guide does not impose additional licensing requirements beyond those established by the individual state board of accountancies (some states allow temporary practice without a license). the opinion should state that the supplemental data has been subjected to the audit procedures applied in the audit of the basic financial statements and whether it is fairly stated in all material respects in relation to the financial statements taken as a whole. an individual who performs manual or automated bookkeeping services and/or maintains the official accounting records) is prohibited by HUD policy from performing the audit of that mortgagor. and tax preparation.1 REV-2. In addition. Also. and the auditor performs substantial fieldwork in the auditee's State. for these audits.

In addition. Major program means an individual assistance program or a group of programs in a category of Federal financial assistance which exceeds $300.706 Due Date Within 60 days after the end of the fiscal year 8/97 1-4 . For Projects/Lenders/Issuers with HUD-assisted activity of $300.000 during the applicable year.000 or less for the period under audit (a non-major program). Reporting requirements are discussed further in Chapter 2. one program requires the reporting of all instances of noncompliance (see paragraph 1-6). if applicable. a Government National Mortgage Association (Ginnie Mae) Issuer with a remaining principal balance exceeding $300. Authority for audits covered by this audit guide and their respective due dates are as follows: Auditees Multifamily Housing Mortgagors with Insured.2000. A mortgagee or loan correspondent which originates and/or services an aggregate of FHA-insured loans exceeding $300. Instances of noncompliance should be assigned a monetary value. as a result of noncompliance. The auditor's report on compliance is described in Chapter 2. the auditor must also test and report on the entity's compliance with specific requirements. In addition. The auditor's report on compliance should include an opinion on the auditee's compliance with specific requirements applicable to each of its major programs.04 REV-2 Also. the IA is required to test and report on the auditee's compliance with applicable HUD laws and regulations regardless of the amount of Federal financial assistance.000 during the period under audit is considered a major program. Coinsured or Section 236 Subsidized Loans Audit Authorization Regulatory Agreement 24 CFR Part 251. A project which has an outstanding HUD-insured or guaranteed loan balance exceeding $300.000 as of the reporting date is considered a major program.000 as of the reporting date shall be considered a major program. Government Auditing Standards require the reporting of all material instances of noncompliance and an identification of total amounts questioned for each program. 1-4 Audit Authorization .

82.6 GNMA Handbook 5500.2000. Consideration of Fraud in a Financial Statement Audit.15 24 CFR Part 203.5 24 CFR Part 202.5 24 CFR Part 202.601 24 CFR Part 881. 8/97 1-5 .2 1-5 Matters Requiring Immediate Action .14 24 CFR Part 202.601 24 CFR Part 202.1 REV 6 GNMA Handbook 5500. In making this assessment.04 REV-2 Auditees Insured Development Cost Certificate Audit Authorization 24 CFR Part 207. The auditor should specifically assess the risk of material misstatement of the financial statements due to fraud and should consider that assessment in designing the audit procedures to be performed.27 Due Date Prior to final endorsement Within 60 days after the end of the fiscal year Within 90 days after the end of the fiscal year Within 90 days after the end of the fiscal year Within 90 days after the end of the fiscal year Within 90 days after the end of the fiscal year Section 8 Assistance Payments: New Construction Substantial Rehabilitation Title II Nonsupervised Mortgagees Loan Correspondents Coinsuring Mortgagees Title I Nonsupervised Lenders Title I Loan Correspondents Ginnie Mae 24 CFR Part 880. the auditor should consider fraud risk factors contained in AICPA SAS No.

2000. the Government Auditing Standards. 1-6 Planning the Audit .html and in the Appendix. an audit in accordance with generally accepted auditing standards does not include audit procedures specifically designed to detect illegal acts. If the auditor becomes aware of illegal acts or fraud that have occurred or are likely to have occurred. the reasons therefore must be appropriately explained and documented in the working papers.5.04 REV-2 Normally. as the designated oversight official. The auditor should submit this report in accordance with the requirements of the Government Auditing Standards (Sections 5. However. Generally. It should also specify that the auditor is required to provide the Secretary of Housing and Urban Development. even in those cases where corrective action was taken by the auditee after the 8/97 1-6 . procedures applied for the purpose of forming an opinion on the financial statements may bring possible illegal acts to the auditor's attention.hud. A current list of DIGAs is available on the Internet at www.18 . All material instances of noncompliance identified by the auditor must be reported as a finding. The letter should state that the audit is to be performed in accordance with generally accepted auditing standards. It should specify that the scope of the audit and the contents of the financial report meet the requirements of this audit guide. Access to working papers by HUD and GAO representatives includes making necessary photocopies. the auditor should use professional judgement to determine the extent of testing necessary to support his/her opinion on the auditee's financial statements and to report on the auditee's compliance with applicable laws and regulations. A letter of engagement between the auditee and the IA shall be prepared. Each of the applicable compliance requirements contained in this guide must be tested regardless of the amount of Federal financial assistance. the HUD Inspector General and the GAO or their representatives access to working papers or other documents to review the audit. and this audit guide.gov/oig/oigindex.20) to the HUD District Inspector General for Audit (DIGA). the auditor should promptly prepare a separate written report and include all questioned costs. Where the auditor decides not to perform detailed testing of a particular compliance requirement.

The auditor is required to obtain written representation from management that includes matters concerning compliance with program laws and regulations that have a material effect on the financial statements and each HUD-assisted program. The Government Auditing Standards require that a sufficient understanding of internal controls be obtained to plan the audit and to determine the nature. and extent of tests to be performed. Consideration of Internal Control in a Financial Statement Audit: An Amendment to SAS No. 55. 1-7 . at a minimum.04 REV-2 audit period. consult the particular program chapter. The auditor shall retain working papers and reports for a minimum of three years from the date of the audit report. Overall Consideration of Internal Controls and Compliance guidance for the consideration of internal controls. unless the auditor is notified in writing by a HUD office or the GAO to extend the retention period. 78. where applicable.2000. In addition. In addition. In fulfilling the audit requirement relating to an understanding of internal controls and assessing the level of control risk. When auditors are aware that HUD or the auditee is contesting an audit finding. one program (see Chapter 7) requires the auditor to report all instances of noncompliance as findings regardless of materiality. timing. testing and reporting requirements for Federal financial assistance programs is provided in the Government Auditing Standards. and (c) the number of items and the dollar value of the instances of noncompliance. as required by the Government Auditing Standards : (a) the number of items and dollar value of the population. the auditor should follow. when auditing HUD programs. the auditor shall contact the parties contesting the audit finding for guidance prior to destruction of the working papers and report. The schedule of findings and questioned costs (Chapter 2. the auditor should perform tests of controls to evaluate the effectiveness of the design and operation of internal controls in preventing or detecting material 8/97 1-7 . the guidance contained in AICPA SAS No. Consideration of the Internal Control Structure in a Financial Statement Audit and SAS No. For guidance. 55. Example F) must include the following information for each finding. (b) the number of items and the dollar value of the selected sample.

Tests may be omitted only in areas when internal controls are likely to be ineffective in preventing or detecting noncompliance. The steps performed and conclusions reached should be clearly evidenced in the auditor's working papers. the IA may be asked to take corrective action. and telephone number of the audit partner on the engagement and the IA's Federal employer ID number. 1-8 . In addition.2000. The HUD Office of Quality Control Review for Audit Reports Inspector General (OIG) has implemented procedures for evaluating audits performed by non-Federal auditors. 1-9 Corrective Action Plan . the auditee must describe the corrective action taken or planned in response to findings identified by the auditor. in which case a reportable condition or material weakness should be reported. the auditee is required to submit a corrective action plan with the auditor's report on HUD-assisted programs. The working papers should clearly demonstrate the auditor's understanding and assessment of control risk related to internal controls established for HUD-assisted activities. To facilitate these requests. If the OIG determines that the audit report and working papers are substandard or contain major inadequacies. which should be on the auditee's letterhead. The submission of the corrective action plan is considered a necessary part of the Project/Lender/Issuer's audit requirement and should be submitted to HUD together with the 8/97 1-8 . as directed by Chapter 2 of this guide. the supporting audit working papers shall be made available upon request by the OIG. the auditee must comment on the status of corrective action taken on prior findings. it will consider filing complaints with the cognizant State Board of Accountancy and initiating action to debar the practitioner from further participation in Federal programs. the transmittal letter should include the name. firm address. As part of this evaluation of completed audits. In the corrective action plan.04 REV-2 noncompliance with the requirements of the HUD-assisted programs. Whenever an evaluation of an audit report or working papers discloses inadequacies. To assist the Department in resolving instances of noncompliance and material weaknesses in internal controls identified by the auditor. The auditor should perform these procedures regardless of whether the auditor assesses the internal control risk below the maximum.

and 24 CFR Part 100. familial status or disability in all aspects of the sale or rental of a dwelling (familial status refers to family composition. 1-10 Fair Housing and Non-Discrimination . color. The Fair Housing Act prohibits discrimination based on race.1. and others) and Part 8 (Section 504 of the Rehabilitation Act)(both of which are applicable to all HUD-assisted housing). sex. national origin.04 REV-2 auditor's reports and audited financial statements. 8/97 1-9 . Additional guidance concerning the corrective action plan is contained in Chapter 2 of this guide. Consolidated Civil Rights Monitoring Requirements for Section 8 . The prohibitions extend to actions which have disparate impact because of any of the prohibited bases. There should be as many copies of the corrective action plan as there are copies of the audit report. The Fair Housing Act (applicable to all housing in the nation). religion. Americans with Disabilities Act .2000. the following references should be used: HUD Handbook 8004. such as number and ages of children). HUD-required audit reports submitted without a corrective action plan will be considered incomplete and returned to the auditee for completion. 24 CFR Part 1 ( Title VI of the Civil Rights Act. When performing compliance work in the fair housing and non-discrimination area.

It is expected that the specific compliance requirements identified in this guide will cover those laws and regulations that. The auditee should transmit copies of the audit report and its corrective action plan to the applicable HUD office according to the particular program requirements. and a report on internal controls. However. as part of the audit of the financial statements. could have a direct and material effect on the financial statements.04 REV-2 CHAPTER 2. a report on compliance with applicable laws and regulations.2000. according to the particular HUD program requirements. as appropriate. if the IA. The auditor's report on the financial statements and any required supplementary schedules. The following reports are required to be submitted by the auditee: A. 2-1 REPORTING REQUIREMENTS AND SAMPLE REPORTS Government Auditing Standards require that the auditor issue the following reports based on the audit of the financial statements: a report on the financial statements. for which noncompliance could have a direct and material effect on the financial statements. 8/97 2-1 . the compliance reports (in Section C below) and illustrated in this guide are the only reports necessary for reporting on the auditee's compliance with laws and regulations. considered laws and regulations in addition to those noted in this guide. The report cover should clearly indicate the HUD-assisted activities and period(s) which were audited. if not complied with. together with the auditor's report on the supplementary schedules stating whether that supplementary information is fairly stated in all material respects in relation to the basic financial statements taken as a whole (Example A). there are additional reports required to be issued in an audit conducted in accordance with this audit guide. The audit report should be issued to the auditee's governing body and/or top official. In such cases. the auditor should also issue the compliance report in accordance with Government Auditing Standards. In addition.

-- When performing tests of compliance requirements contained in Chapter 3 or 4. fair housing reporting should be included in the auditor's report on nonmajor HUD-assisted programs. the auditor's report on specific requirements applicable to fair housing should be separate (Example E) from the auditor's opinion on compliance with specific requirements applicable to major programs. The auditor's combined report on internal controls as they relate to both financial reporting and administering the HUD-assisted programs. It must identify any reportable conditions and material weaknesses noted (Example B). The report on compliance should also identify and include all material instances of noncompliance. A report on compliance with applicable laws and regulations that may have a direct and material effect on each HUD-assisted program including: -an opinion on compliance with specific requirements applicable to major HUD-assisted programs (Example C) a report on compliance with specific requirements applicable to nonmajor HUD-assisted programs (Example D) C. Nonmaterial instances of noncompliance should be communicated to the auditee in accordance with the Government Auditing Standards. as a result of noncompliance. and number and corresponding dollar amount of the instances of noncompliance (Example F).2000. the findings should contain adequate information necessary to facilitate the audit resolution process. size of the universe and corresponding dollar amount. In addition.e. Where the HUD-assisted activity is nonmajor. Where the HUD-assisted activity is major. regardless of materiality. The findings should include an identification of all material questioned costs. for audits of applicable non-supervised mortgagees and loan correspondents. 8/97 2-2 . size and dollar amount of the sample. the IA should report on Fair Housing and Non-Discrimination.04 REV-2 B. (i. Note that the Office of Lender Activities requires the reporting of all instances of noncompliance.

This report should be sent to the cognizant District Inspector General for Audit (see Appendix for list of District Inspectors General for Audit). office address and telephone number of the audit partner on the engagement. auditors should exercise 8/97 2-3 . the auditor should determine if significant findings from previous HUD required annual audits. F. E. In the auditor's comments on audit resolution matters. all required elements must be submitted simultaneously to the Department. The IA's Federal employer ID number. on internal controls. wherein the auditee officials describe the corrective action taken or planned in response to the findings identified by the auditor.2000. In addition. Illegal acts are to be reported on without regard to whether the condition giving rise to the questioned costs has been corrected or whether the auditee does or does not agree with the finding and questioned costs. or HUD management reviews have been corrected and disclose those which remain uncorrected at the time of the review (Example G). HUD-OIG audits. Any report from the auditors on illegal acts or fraud that have occurred or are likely to have occurred. The name. the following information is to be included by the auditor with the audit report in an accompanying transmittal letter: A. These reports are not meant to be all-inclusive. 2-2 The auditor may issue the required reports (Examples A through G) separately or simultaneously to the auditee. A corrective action plan developed by the auditee. The following are illustrations of auditors' reports on financial statements. should be covered in a separate written report in accordance with the provisions of the Government Auditing Standards. The plan should also include comments on the corrective action taken on prior findings resulting from IA or relevant HUD-OIG audits and HUD program reviews (Example H). B. 2-3 Auditor's Reports .04 REV-2 D. however. on compliance with specific requirements and the auditee's corrective action plan that may be issued in an audit in accordance with this guide. including all questioned costs found as a result of these acts that the auditors become aware of.

H. Auditor's Comments on Audit Resolution Matters Relating to HUD Programs. Compliance Auditing Considerations in Audits of Governmental Entities and Recipients of Governmental Financial Assistance .04 REV-2 professional judgement in tailoring their reports to the circumstances of individual audits. G. 58. Guidance on modifications to the report on internal controls and on compliance is included in AICPA SAS No.2000. B. 74. Report on Compliance with Specific Requirements Applicable to Nonmajor HUD Program Transactions. Examples : A. F. E. 60. Reports on Audited Financial Statements . Report on Compliance with Specific Requirements Applicable to Fair Housing and Non-Discrimination. 8/97 2-4 . Communication of Internal Control Structure Related Matters Noted in an Audit and AICPA SAS No. Corrective Action Plan (An Auditee Responsibility). C. Opinion on Compliance with Specific Requirements Applicable to Major HUD Programs. respectively. Report on Audited Financial Statements and Supplemental Information. Guidance on modifications to reports on financial statements is included in AICPA SAS No. D. Report on Internal Controls. Schedule of Findings and Questioned Costs.

on a test basis. The supporting information included in the report (shown on pages XX to XY) are presented for the purposes of additional analysis and are not a required part of the basic financial statements of [the Entity]. as well as evaluating the overall financial statement presentation. 199X. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. Our responsibility is to express an opinion on these financial statements based on our audit. and cash flows (and changes in partners' equity)(and analysis of net worth) for the year then ended. in 8/97 2-5 .: We have audited the accompanying balance sheet of [the Entity] as of June 30. U. Such information has been subjected to the auditing procedures applied in the audit of the basic financial statements and.04 REV-2 EXAMPLE A REPORT ON AUDITED FINANCIAL STATEMENTS AND SUPPLEMENTAL INFORMATION Independent Auditor's Report To the Partners ABC Entity Anytown. and the related statements of income. the financial statements referred to above present fairly. in all material respects. Our audit was conducted for the purpose of forming an opinion on the basic financial statements taken as a whole. 199X. the financial position of [the Entity] as of June 30. evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management.2000. and the results of its operations and its cash flows and its (analysis of net worth/changes in partners' equity) for the year then ended in conformity with generally accepted accounting principles. An audit includes examining.S. We believe that our audit provides a reasonable basis for our opinion. In our opinion.A. These financial statements are the responsibility of [the Entity's] management. issued by the Comptroller General of the United States. We conducted our audit in accordance with generally accepted auditing standards and Government Auditing Standards .

In accordance with Government Auditing Standards . U. [Date] 8/97 2-6 . is fairly stated in all material respects in relation to the financial statements taken as a whole.S.2000. we have also issued a report dated [date of report] on our consideration of [the Entity's] internal controls and a report(s) dated [date of report(s)] on its compliance with laws and regulations.04 REV-2 our opinion. CPA and Company Certified Public Accountants Anytown.A.

We conducted our audits in accordance with generally accepted auditing standards and Government Auditing Standards . noncompliance with which would be material to a HUD-assisted program.: We have audited the financial statements of [the Entity] as of and for the year ended June 30.04 REV-2 EXAMPLE B INDEPENDENT AUDITOR'S REPORT ON INTERNAL CONTROLS (COMBINED REPORT APPLICABLE TO THE FINANCIAL STATEMENTS AND HUD-ASSISTED PROGRAMS--REPORTABLE CONDITIONS WERE NOTED--NO MATERIAL WEAKNESSES) To the Partners ABC Partnership Anytown. and we assessed control risk in order to determine our auditing procedures for the purpose of expressing our opinions on the financial statements of [the Entity] and on its compliance with specific requirements applicable to its (major) HUD-assisted programs and to report on internal controls in accordance with the provisions of the Guide and not to provide any assurance on internal controls.2000. The management of the [the Entity] is responsible for establishing and maintaining internal controls. and have issued our report thereon dated [date of report]. Those standards and the Guide require that we plan and perform the audits to obtain reasonable assurance about whether the financial statements are free of material misstatement and about whether [the Entity] complied with laws and regulations. issued by the Comptroller General of the United States and the Consolidated Audit Guide for Audits of HUD Programs (the "Guide"). 199X. We have also audited [the Entity's] compliance with requirements applicable to HUD-assisted programs and have issued our reports thereon dated [date of report]. we obtained an understanding of the design of relevant internal controls and determined whether they had been placed in operation.A. U.S. issued by the U. In planning and performing our audits. In fulfilling this responsibility. Office of the Inspector General. estimates and judgments by management are required to assess the expected benefits and related costs of 8/97 2-7 .S. Department of Housing and Urban Development.

as required by the Guide. Also.2000. We performed tests of controls. Accordingly. assurance that assets are safeguarded against loss from unauthorized use or disposition and that transactions are executed in accordance with management's authorization and recorded properly to permit the preparation of financial statements in accordance with generally accepted accounting principles and that HUD-assisted programs are managed in compliance with applicable laws and regulations.] A material weakness is a reportable condition in which the design or operation of one or more of the internal control components does not reduce to a relatively low level the risk that errors or irregularities in amounts that would be material in relation to the financial statements being audited or that noncompliance with laws and regulations that would be material to a HUD-assisted program may occur and not be detected within a timely period by 8/97 2-8 . and report financial data consistent with management's assertions in the financial statements or to administer HUD-assisted programs in accordance with applicable laws and regulations. Because of inherent limitations in any internal controls. errors. we do not express such an opinion. Our procedures were less in scope than would be necessary to render an opinion on internal control policy and procedures. [Include paragraphs to describe the reportable conditions noted. Reportable conditions involve matters coming to our attention relating to significant deficiencies in the design or operation of internal controls that. to evaluate the effectiveness of the design and operation of internal controls that we considered relevant to preventing or detecting material noncompliance with specific requirements applicable to [the Entity's] HUD-assisted programs. We noted certain matters involving internal controls and their operation that we consider to be reportable conditions under standards established by the American Institute of Certified Public Accountants. projection of any evaluation to future periods is subject to the risk that procedures may become inadequate because of changes in conditions or that the effectiveness of the design and operation of policies and procedures may deteriorate. irregularities or instances of noncompliance may nevertheless occur and not be detected. The objectives of internal controls are to provide management with reasonable. in our judgment. could adversely affect the organization's ability to record.04 REV-2 internal controls. summarize. but not absolute. process.

However. [Firm Signature] [Date] 8/97 2-9 . [We also noted other matters involving internal controls and their operations that we have reported to the management of [the Entity] in a separate communication dated September 8.04 REV-2 employees in the normal course of performing their assigned functions. would not necessarily disclose all reportable conditions that are also considered to be material weaknesses as defined above.2000. and the Department of Housing and Urban Development. this report is a matter of public record and its distribution is not limited. However. accordingly. Our consideration of internal controls would not necessarily disclose all matters in internal controls that might be reportable conditions and. we believe none of the reportable conditions described above is a material weakness. management. 199X] This report is intended for the information of the audit committee.

199X. The management of [the Entity] is responsible for compliance with those requirements. evidence about [the Entity's] compliance with those requirements. with the requirements described above that are applicable to each of its major HUD-assisted programs for the year ended June 30. In addition. 199X. 199X and have issued our report thereon dated [date of report]. We conducted our audit of compliance in accordance with generally accepted auditing standards. and the Department of Housing and Urban Development. However.S. issued by the Comptroller General of the United States. In our opinion. U. This report is intended for the information of the audit committee. Government Auditing Standards. We believe that our audit provides a reasonable basis for our opinion. for the year ended June 30. this report is a matter of public record and its distribution is not limited.04 REV-2 EXAMPLE C INDEPENDENT AUDITOR'S REPORT ON COMPLIANCE WITH SPECIFIC REQUIREMENTS APPLICABLE TO MAJOR HUD PROGRAMS To the Partners ABC Partnership Anytown. Office of Inspector General. in all material respects. Our responsibility is to express an opinion on compliance with those requirements based on our audit. we have audited [the Entity's] compliance with the specific program requirements governing [list those requirements tested] that are applicable to each of its major HUD-assisted programs.: We have audited the financial statements of [the Entity] as of and for the year ended June 30. [the Entity] complied.A. Department of Housing and Urban Development. and the Consolidated Audit Guide for Audits of HUD Programs (the "Guide") issued by the U. [Signature] [Date] 8/97 2-10 . management. Those standards and the Guide require that we plan and perform the audit to obtain reasonable assurance about whether material noncompliance with the requirements referred to above occurred. An audit includes examining.2000.S. on a test basis.

and the Department of Housing and Urban Development. Department of Housing and Urban Development. 199X. the objective of which is the expression of an opinion on [the Entity's] compliance with these requirements.: We have audited the financial statements of [the Entity] as of and for the year ended June 30. and have issued our report thereon dated August 14. 199X. we do not express such an opinion. As required by the Guide. we performed auditing procedures to test compliance with the requirements governing [list those requirements tested] that are applicable to those transactions. this report is a matter of public record and its distribution is not limited. Accordingly. as required by the Consolidated Audit Guide for Audits of HUD Programs (the "Guide") issued by the U. we selected certain transactions applicable to certain nonmajor HUD-assisted programs for the year ended June 30. U.04 REV-2 EXAMPLE D INDEPENDENT AUDITOR'S REPORT ON COMPLIANCE WITH SPECIFIC REQUIREMENTS APPLICABLE TO NONMAJOR HUD PROGRAM TRANSACTIONS To the Partners ABC Partnership Anytown. In connection with our audit of the 199X financial statements of [the Entity] and with our consideration of [the Entity's] internal controls used to administer HUD programs.S. The results of our tests disclosed no instances of noncompliance that are required to be reported herein under the Guide. This report is intended for the information of the audit committee. 199X. [Signature] [Date] 8/97 2-11 . However.S. Our procedures were substantially less in scope than an audit.2000.A. management.

for the year ended June 30. [Signature] [Date] 8/97 2-12 . Our procedures were substantially less in scope than an audit. Accordingly. and have issued our report thereon dated August 14. 199X.S.2000. We have applied procedures to test [the Entity's] compliance with Fair Housing and Non-Discrimination requirements applicable to its HUD-assisted programs. The results of our tests disclosed no instances of noncompliance that are required to be reported herein under the Guide. management and the Department of Housing and Urban Development. this report is a matter of public record and its distribution is not limited. the objective of which would be the expression of an opinion on [the Entity's] compliance with the Fair Housing and Non-Discrimination requirements. However.04 REV-2 EXAMPLE E INDEPENDENT AUDITOR'S REPORT ON COMPLIANCE WITH SPECIFIC REQUIREMENTS APPLICABLE TO FAIR HOUSING AND NON-DISCRIMINATION To the Partners ABC Partnership Anytown. USA We have audited the financial statements of [the Entity] as of and for the year ended June 30. Our procedures were limited to the applicable compliance requirement described in the Consolidated Audit Guide for Audits of HUD Programs issued by the U. 199X. we do not express such an opinion. Department of Housing and Urban Development. Office of Inspector General. This report is intended for the information of the audit committee. 199X.

the specific regulation.g. (b) the size and dollar value of the sample tested. this should be monetized in all possible instances and described as thoroughly as possible.what the auditee should be doing. a regulation not being followed. -- -- -- -- The auditor should attempt to identify the condition. These findings may also serve as a basis for HUD to conduct additional work. a control procedure not followed or one which is inadequate. the auditee was unaware of the regulation or internal control was not a high priority of the auditee. As part of this report. normally addresses the cause e. Criteria . e. and cause to provide sufficient information to HUD officials to permit timely and proper corrective action. e. this schedule must include the following information for each finding.what the auditee should do to correct the condition. Cause . and (c) the size and dollar value of the instances of noncompliance. develop procedures to implement regulation or follow established procedures.what happened as a result of the condition. the auditor is required to make a recommendation for corrective action to the auditee.the nature of the deficiencies.g.04 REV-2 EXAMPLE F SCHEDULE OF FINDINGS AND QUESTIONED COSTS (Should be Attached to Auditor's Report on Compliance) When the auditor identifies a finding..g. criteria. Recommendation . as part of the finding.g. a prudent management practice.why the condition exists. In addition. the auditee is responsible for developing a separate corrective action plan (see 8/97 2-13 . where applicable: (a) the size and corresponding dollar value of the population. e. In addition. or an internal control procedure.2000. Effect . the auditor is required to include the auditee's summary comments on the findings and recommendations in the report. effect. The Government Auditing Standards state that well-developed findings generally consist of the following attributes: -Statement of condition .

If corrective action is not necessary.04 REV-2 Example H) based on the auditor's findings and recommendations and including the plan when submitting the auditor's report. 8/97 2-14 .2000. a statement by the auditor describing the reason it is not should accompany the audit report.

program review reports and state agency reports.350. - Finding No. Status - The Project has not obtained the required documentation from third-party sources nor has the Project reimbursed the appropriate programs. 1 The required documentation with regard to eligibility was not obtained for tenants receiving rent supplements. The amount of the rent supplements received for these tenants for the prior audit period was $15.04 REV-2 EXAMPLE G AUDITOR'S COMMENTS ON AUDIT RESOLUTION MATTERS RELATING TO THE HUD PROGRAMS * The Project has not taken corrective action on findings from prior audit report.2000. * number and title: Finding No. The auditor does not have to independently confirm the completeness of audit and other reports received by the auditee. The auditor may rely on management's representation as to the completeness of reports submitted during the audit period. * 8/97 2-15 . 2 Status - * --- This includes all prior audits.

Status of Corrective Actions on Prior Findings The auditee must comment on all prior findings whether or not corrective action has been completed.2000.Internal Controls Review A. Appropriate documentation should be submitted for actions taken. an appendix may be attached to the submission. If the auditee does not agree with a finding. Officials responsible for completing the proposed actions should also be identified. Actions Taken or Planned The auditee should detail actions taken or planned to correct deficiencies identified in the report. Comments on Findings and Recommendations The auditee should provide a statement of concurrence or nonconcurrence with the findings and recommendations. documentation should be submitted for any actions the auditee considers completed. a statement describing the reasons should be included. In addition. B. If the auditee believes a corrective action is not required.04 REV-2 EXAMPLE H CORRECTIVE ACTION PLAN Name and Number of Project __________________________ Auditor/Audit Firm __________________________________ Audit Period ________________________________________ The following is a recommended format to be followed by auditees for submitting a corrective action plan: Section I . specific information should be provided by the auditee to support its position. If the information is voluminous. The auditee should provide a report on the status of corrective actions taken on prior findings that remain open. For planned actions. C. An update should be included on dates for completion of major tasks and responsible officials for any actions not completed. auditees should provide projected dates for completion of major tasks. 8/97 2-16 .

) C. Status of Corrective Actions on Prior Findings (See Section I.Compliance Review A. above.) 8/97 2-17 . C.04 REV-2 Section II . A. Comments on Findings and Recommendations (See Section I.2000. Actions Taken or Planned (See Section I.) B. B.

2 Rev-1 8/97 2-18 .04 REV-2 Financial Statements and Supplemental Information Required for: Type of Statement Insured & Ginnie Certificate Title II Title I MultiMae of Actual Mortgagees Lenders family Issuers Cost _________________________________________________________________________________________________ Section 8 Balance Sheet X X X X X X Statement of Operations and Retained Earnings or Statement of Profit and Loss X HUD 92410 X X X X Statement of Change in Partner's Equity 1 X FASB 95 Cash Flow X X X X X Notes to F/S 2 X X X X X X Supplemental Data X Statement of Receipts and Disbursements X Issuers Adjusted Net Worth X X X Parent's Adjusted Net Worth (if appropriate) X Certificate of Actual Cost X Insurance Requirement X The Statement of Receipts and Disbursements may be omitted if the Statement of Cash Flows is prepared using the Direct Method 2 1 See HUD Handbook 4370.2000.

who typically pay a portion of their housing costs.3 Form HUD-9834 3-4 Reporting Requirements . affordable. both require project owners to submit 8/97 3-1 . Program Procedures . This assistance is provided to owners from HUD. maintaining a replacement reserve. The remaining portion of the rent for the unit is paid to the owner by HUD in the form of a housing assistance payment. The owner is responsible for affirmative fair housing marketing and nondiscriminatory rental activities. and sanitary rental housing through use of a system of housing assistance payments. management and maintenance functions. and determining the family's contribution toward rent.04 REV-2 CHAPTER 3. The Contract sets forth the rights and duties of the owner and the contract administrator with respect to the housing and the housing assistance payments.Substantial Rehabilitation. as defined by 24 CFR parts 812 and 813. submission of accurate requests for Housing Assistance Payments. 4350. Reference Material HUD Handbook No. selection/reexamination of tenants with HUD approval. safe. submission of relevant and reliable financial and operating statements. 3-1 SECTION 8 AUDIT GUIDANCE Program Objectives . HUD enters into the Housing Assistance Payment Contract with an owner.2000. The objective of the Section 8 program is to provide lower-income families with decent. drug free.2 Title Section 8 Additional Assistance Program for Projects with HUD-Insured or HUD-Held Mortgages Occupancy Requirements of Subsidized Multifamily Housing Programs Instructions for Completing Management Reviews of Multifamily Projects 3-2 3-3 4350. 24 CFR Part 880 Section 8 . and Part 881 Section 8 . The owner may contract with another entity for marketing and management and maintenance.New Construction. The owners rent housing to eligible low-income families.

Compliance Requirement .2000. in a form required by HUD. The Plan is designed to promote equal housing choice for all prospective tenants regardless of race.04 REV-2 audited financial statements to the contract administrator within 60 days after the end of the project fiscal year. age. familial status or disability. Projects with Section 8 units under contract are required to have an Affirmative Fair Housing Marketing Plan (Plan) covering those units. sex. In addition to the basic financial statements. 3-5 Compliance Requirements and Audit Areas A. Suggested Audit Procedures a. Chapter 1 and 2 and 24 CFR 200 Subparts I and M). 2. Management and owners are also prohibited from discriminatory practices in accepting applications. Obtain a copy of the owner's approved Affirmative Fair Housing Marketing Plan. The audit report can include other financial statements and supplemental information as to project operations. b. the auditor is required to submit a report on the consideration of the internal control structure and a report on compliance with specific requirements. The financial statements to be audited for this program are the basic financial statements of the project. religion.3. The audit must be performed by an independent auditor. Inquire of the owner/manager as to policies and procedures relating to: marketing of the units. Management and owners must comply with the requirements of their HUD-approved Plan. Audit reports and corrective action plans should be submitted to the appropriate HUD Field Office. Fair Housing and Non-Discrimination 1. color. renting units and designating units or sections of a project for renting to prohibited bases of the "Fair Housing Act. financial conditions and occupancy as HUD may require for contract administration and project monitoring." (Handbook 4350. The Plan outlines the marketing strategies the owner must use to attract persons least likely to apply because of such factors as racial and ethic composition of the neighborhood in which the project is located. 8/97 3-2 . national origin.

or tenants evicted and legal invoices for any evidence of litigation or potential litigation related to discriminatory rental practices.1 REV-1 for additional requirements and exceptions). including documented reasons for valid rejections. will be deposited in the replacement reserve annually. B. approving and rejecting applications. The owner is responsible for all management functions relating to repair.04 REV-2 processing. Partially-assisted projects are exempt from the requirement for periodic deposits to a reserve account. and replacement of capital items. Management. Compliance Requirement . maintenance. Maintenance. For Section 8. and Replacement Reserve 1. c. slogan or statement is displayed in marketing materials.2000. 8/97 3-3 . An amount. including determining that applicants are processed and selected in appropriate order. e. A replacement reserve must be established and generally maintained in an interest-bearing account to aid in funding extraordinary maintenance and repair and replacement of capital items (see Handbook 4350. d. Determine that the HUD-approved Equal Housing Opportunity logo. and providing reasonable accommodation to applicants and tenants with disabilities in accordance with the requirements of applicable federal civil rights laws. Review a sample of correspondence files for applications rejected.602 and 880. a partially assisted project is defined as a project for non-elderly families which includes more than 50 units of which 20 percent or fewer are assisted (24 CFR 880. Test whether management's procedures were placed in operation as established by management through inquiry and examination of documentary evidence. as required by HUD. All earnings including interest on the reserve must be added to the reserve.401). The reserve must be built up to and maintained at a level determined by HUD to be sufficient to meet projected requirements.

whether corrective action was taken. Compliance Requirement . Federal Financial Reports 1. The individual agreements contain the specific reporting requirements that the entity is to follow.2000. Determine that the replacement reserve is used only to fund extraordinary repair and maintenance items or the replacement of capital items and the uses have been approved by HUD. b. Suggested Audit Procedures a. Inquire whether owner/management has conducted routine unit and general property inspections. d. Select a sample of financial reports other than those which are included in the audited financial statements. C. 2. and determine that the reports selected are prepared in accordance with HUD instructions. c.04 REV-2 2. Suggested Audit Procedures a. b. Projects participating in HUD-assisted activities are required to ensure that financial status reports contain reliable financial data and are presented in accordance with the terms of applicable agreements between the entity and HUD. Obtain an understanding of the auditee's procedures for preparing and reviewing the financial reports. and if findings were identified. 8/97 3-4 . Test management's procedures for ensuring that subsidized units meet applicable housing quality standards. c. Identify all required financial reports by inquiry of the owner/manager. Determine that the replacement reserve has been established in an interest-bearing account and has received monthly deposits at the HUD-approved amount.

Review significant adjustments made to the general ledger accounts affecting HUD-assisted activity and evaluate for propriety. determining initial eligibility. D. c. Review a sample of tenant files to determine that applications are complete. the owner is responsible for accepting applications. Review a sample of tenant files to determine if the owner noted any improper or inaccurate information while determining tenant eligibility or during tenant recertification. determine that the owner followed the guidance 2. and rectifying improper or inaccurate tenant information in accordance with the guidelines provided in HUD Handbook 4350. determining initial tenant eligibility. Compliance Requirement . If so. trace significant data to supporting documentation. Include in the sample some of the oldest and some of the most recently admitted tenants. total tenant payment. Suggested Audit Procedures a.3.3 and the applicable Housing Assistance Payments Contract. Where tenants or projects are subsidized. and Reexamination of Tenants 1. For the sample. signed by the applicant.04 REV-2 d. Eligibility. and reexamination of eligibility with provisions in HUD Handbook 4350. etc. that the tenant payment was calculated correctly and that the family income was reexamined on an annual basis. b.e. i. Compare the owner's procedures for accepting applications. ledgers. 8/97 3-5 .2000. worksheets. Application. e. that tenants met the eligibility requirements pertaining to their subsidized unit for annual income and family composition. Report all material differences between financial reports and project records. correctly calculating the tenant's contribution toward rent and utilities and correctly calculating any subsidy. completing annual recertification of tenant eligibility.

disability status. Compliance Requirement . d.3 pertaining to overpayment of a subsidy and followed-up on suspected fraud. Compare the amount claimed per the HAP billing to the supporting documentation in the tenant files. Test Section 8 rents to ensure that those rents do not exceed the fair market rents.2000. Verify the mathematical accuracy of the billing. whichever is greater.04 REV-2 in HUD Handbook 4350. The security deposit may be adjusted if the tenant transfers to another unit in the project. interest-bearing account in a federally insured depository. g. The owner is permitted to collect a security deposit from each family equal to one month's initial total tenant payment or $50. waiting list preferences and allowances for adjusted income Lease/Lease addenda in the form as required by HUD Certification and recertification forms (Form HUD-50059) Move-In and Move-Out inspections (3) (4) (5) e. The balance of this account must at all times be equal to the total 8/97 3-6 . then the owner must place the security deposits in a segregated. Review a sample of tenant files to determine that the tenant file contains the following documents: (1) (2) Application Required verifications of social security numbers. If the project is bound by the Section 8 New Construction and Substantial Rehabilitation regulations published in 1979 and 1980. Security Deposits 1. including the accuracy on the total number of units on the bill. E. f.

Owners subject to the revised Section 8 regulations must consider interest income in calculating the amount of refund due a tenant and must comply with any applicable state and local laws concerning interest payments on security deposits. d. plus any accrued interest.608 and HUD Handbook 4350. c.3. Chapter 4). e.3.2000.04 REV-2 amount collected from the families then in occupancy. Determine that the full amount of the security deposit account balance is insured by a Federal depository. 8/97 3-7 . Test whether the account balance at year end was equal to the total amount collected from the tenants in occupancy. Suggested Audit Procedures a. Test whether refunds or an itemized list of claims when no refund is due is provided to families within 30 days after the family has moved out or a shorter time if required by State or local law. depositing and refunding the families security deposit with the provisions in Handbook 4350. The owner must follow applicable local refund procedures for the security deposit or provide a list of claims against the security deposit to the family within 30 days of move-out (24 CFR 888. Chapter 4. plus any accrued interest. 2. b. Determine that a segregated interest-bearing account has been established in a federally insured depository institution for depositing security deposits if required by State or local law or Housing Assistance Payments Contracts and determine that the account balance is supported by the owner's records. Compare the owner's procedures for collecting.

such as limits on rental amounts. or preservation of a broad cross section of rental or cooperative housing. The objectives of the mortgage insurance programs for multifamily housing are to assist in the construction. or corporation. the mortgage or loan agreement. rehabilitation.2000. These Interest Reduction Payments are shown as separate revenue on the books and records of these projects and on their annual financial statements. the mortgagor agrees to various controls and regulations of certain aspects of the project's operation. The Department insures mortgages made by private lending institutions to help finance construction. Many mortgagors contract with professional management firms (referred to as "management agents") to operate the projects. These requirements are contained in a Regulatory Agreement. a building loan agreement. Program Procedures . For insured and coinsured loans. or refinancing of multifamily (five or more units) rental or cooperative housing. eligibility of tenants. Mortgage loans insured by HUD under the Section 236 program include a provision for HUD to make Interest Reduction Payments to the mortgagee on behalf of the mortgagor. purchase. a partnership. SECTION 232 NURSING HOMES AND SIMILAR FACILITIES AND SECTION 242 HOSPITALS AUDIT GUIDANCE AND SAMPLE FINANCIAL STATEMENTS 4-1 Program Objectives . trust. Agreements with management agents must conform to the pertinent requirements of the Regulatory Agreement. etc. HUD statutes and regulations contain definitions and additional information on this program. fiscal management.04 REV-2 CHAPTER 4. either nonprofit or profit motivated. For its part. HUD-HELD MORTGAGES. and made a part of. INSURED AND COINSURED MULTIFAMILY PROJECTS. SECTION 236 SUBSIDIZED PROJECTS. an individual. Section 236 projects must submit Form HUD-93104 to HUD on a monthly basis along with any "Excess Income" generated by the project as required by the Regulatory Agreement. rehabilitation. the mortgagor may be a public entity. 4-2 8/97 4-1 . or a corporate charter which are incorporated in. rates of return.

within 60 days after the end of the fiscal year.2000. 4350.1 4370.2 4561. The Regulatory Agreement incident to the insured mortgage requires the annual submission of audited financial statements prepared in accordance with the requirements of the Secretary.1 REV-1 4350.5 REV-2 4470.2 8025.2 4566.3 4360. Servicing. and Disposition Requirements for Projects with Section 223(f) Coinsured Loans Implementing Affirmative Fair Housing Marketing Requirements Instructions for Completing Management Reviews of Multifamily Projects 4381.1 REV-2 4355.1 Form HUD-9834 4-4 Reporting Requirements . the auditor is required 8/97 4-2 .2 REV-1 Title Multifamily Asset Management and Project Servicing Occupancy Requirements of Subsidized Multifamily Housing Programs HUD-Held Project Servicing Handbook Reviewing Annual and Monthly Financial Reports Flexible Subsidy Handbook Financial Operations and Accounting Procedures for Insured Multifamily Projects The Management Agent Handbook Cost Certification Guide for Mortgagors and Contractors of HUD-Insured Multifamily Projects Management. In addition to the basic financial statements of the housing project.04 REV-2 4-3 Reference Material HUD Handbook No. Servicing.1 4370. and Disposition Requirements for Projects with Section 221(d) Coinsured Loans Management.

explanatory information should be provided with the audit report. The report should include the following basic financial statements plus the following supplemental data prepared in accordance with generally accepted accounting principles (per Handbook 4370. 4. Statement of Changes in Partners' Equity. Basic Financial Statements 1.2000. Notes to Financial Statements.04 REV-2 to submit a report on the consideration of internal controls and a report on compliance with specific requirements as well as the supplemental data reports in the list which follows. Supplemental Data (See HUD Handbook 4370. Chapter 3) 1. Statement of Profit and Loss (HUD-92410. These statements must be certified to be accurate by the mortgagor. if applicable). Statement of Cash Flows. when the project is owned by an individual. when the project is owned by a partnership or by two officers. 3. with separate Schedule for Subaccounts. The Statement of Profit and Loss (HUD-92410) and the Computation of Surplus Cash. B. A. This number must be entered below the partner or corporate signatures. Chapter 3) and be submitted to the appropriate HUD Field Office. These statements must also be certified to by the CEO of the management agent. 8/97 4-3 . When circumstances prohibit the ideal number of partners' or officers' certifying signatures. It should be certified by two general partners.2 REV-2. Distributions and Residual Receipts (HUD-93486) should be submitted on the preprinted forms provided in this Chapter. Balance Sheet. 6.2 REV-1. Delinquent tenant accounts receivable. 5. Statement of Retained Earnings or Undivided Profits. where applicable. 2. Accounts and notes receivable (other than from regular tenants). 2. when owned by a corporation. The report shall include the Employer Identification Number assigned by the IRS.

Mortgagor escrow deposits. subsidy payments. Comments on statement of position (balance sheet) items. founders fees. Accrued taxes payable. Reserve funds. 14. etc. 10. Change in fixed asset accounts. 9. 6. Tenant deposits. Donations. 12. 4-5 Compliance Requirements and Audit Areas A. 17. for non-profit elderly housing only. Federal Financial Reports . Illustrative reports are included at the end of this Chapter. Listing of identity of interest companies and activity. Residual receipts.initial submission. 15. 7. Projects participating in HUD-assisted activities are required to ensure that financial status reports contain reliable financial data and are presented in accordance with the terms of applicable agreements between the entity and HUD.04 REV-2 3. 8/97 4-4 . Compliance Requirement . Unauthorized distribution of project revenue. 8. 13. Distributions to owners or stockholders. Stock activity reports . Accounts payable. Notes payable (other than mortgage). 16. 11. Compensation of partners or officers. The individual agreements contain the specific reporting requirements that the entity is to follow. 4. 5. 1.2000.

04 REV-2 For example. B. e. Additionally. are required to submit a monthly report of excess income (Form HUD 93104) by the 10th of the month following the month covered by the report. d. c. obtain a sample of the Monthly Reports of Excess Income for the period under audit and test the accuracy. Fair Housing and Non-Discrimination 1. Obtain an understanding of the auditee's procedures for preparing and reviewing the financial reports. Management and owners of all insured projects are prohibited from discriminatory practices in accepting applications. Report all material differences between financial reports and project records. other than those which are included in the audited financial statements. Compliance Requirement . Review significant adjustments made to the general ledger accounts affecting HUD-assisted activity and evaluate for propriety. and determine that the reports selected are prepared in accordance with HUD instructions. ledgers. b. Reconcile any differences. Report any delinquent unremitted excess income of the project as of the end of the period under audit as a finding. For a Section 236 Interest Subsidy project. each project insured since 8/97 4-5 . etc. Section 236 projects. f. per the Regulatory Agreement. Suggested Audit Procedures a. trace significant data to supporting documentation.2000. 2. Identify all required financial reports by inquiry of the owner/manager. For the sample. worksheets. Select a sample of financial reports.e. which receive an Interest Reduction Payment. i. renting units and designating units or sections of a project for renting to prohibited bases of the "Fair Housing Act" and according to the Regulatory Agreement.

The Plan is designed to promote equal housing choice for a prospective tenants regardless of race. or tenants evicted and legal invoices for any evidence of litigation or potential litigation related to discriminatory rental practices. Obtain a copy of the owner's approved Affirmative Fair Housing Marketing Plan. b. processing.3 Chapter 2). national origin. and providing reasonable accommodation to applicants and tenants with disabilities in accordance with the requirements of applicable federal civil rights laws. Review a sample of correspondence files for applications rejected. familial status or disability. 8/97 4-6 . age. (24 CFR 200 Subparts I and M and Handbook 4350. The Plan outlines the marketing strategies the owner must use to attract persons least likely to apply because of such factors as racial and ethnic composition of the neighborhood in which the project is located. d. approving and rejecting applications. 2. if applicable to the project. color. Suggested Audit Procedures a. religion. Management and owners must comply with the requirements of their HUD-approved Plan. Test whether procedures were placed in operation as established by management through inquiry and examination of documentary evidence.2000. e. Inquire of the owner/manager as to policies and procedures relating to: marketing of the units. c. Determine that the HUD-approved Equal Housing Opportunity logo. sex. including documented reasons for valid rejections. slogan or statement is displayed in marketing materials.04 REV-2 1972 is required to have an Affirmative Fair Housing Marketing Plan (Plan) covering the project.

An amount as required by HUD will be deposited monthly in the reserve fund. The entire balance of the replacement reserve need not be federally insured throughout the period under audit (Handbook 4350. c. Obtain an understanding of the project owner's procedures for establishment and maintenance of the fund and for making approved disbursements from the reserve fund.04 REV-2 C.2 REV-1. (A mortgage servicer may pool replacement reserves of various projects together. Chapter 2). Test whether mortgage payments are made in accordance with terms of the mortgage. Mortgage Status 1. Obtain an understanding of the owner's procedures for assuring prompt payment of the mortgage. If the project is operating under a mortgage modification agreement. Suggested Audit Procedures a. The mortgagor may not have control of a separate account or have funds commingled with the separate account. D.2000. 8/97 4-7 .1 Rev-1.) Suggested Audit Procedures a. 2. b. Compliance Requirement . Compliance Requirements . test whether the owner is complying with the terms and conditions. workout agreement or a forbearance agreement. Owners shall promptly make all payments due under the note and mortgage (Regulatory Agreement). Owners shall establish or maintain a reserve fund under the control of the mortgagee in a separate account in a federally insured depository with the mortgagee or in a federally insured depository designated by the mortgagee. Chapter 4). All disbursements from the fund must be approved by HUD (Regulatory Agreement and Handbook 4370. 2. Replacement Reserve 1.

For limited dividend projects. owners shall establish and maintain a residual receipts fund by depositing the residual receipts from the project with the mortgagee within the HUD-required number of days after the end of the period. E. Test whether disbursements. Chapter 2 and 4566. Test whether disbursements from the reserve fund were approved by HUD and were made for the HUD-approved purpose. The amount the owner is permitted to collect as a security deposit is 8/97 4-8 . Section 11-7). "Surplus cash" and "distributions" and amounts required to be deposited into the residual receipts fund are defined in the Regulatory Agreement.2 REV-1. Determine that the prior year's amount required to be deposited to the residual receipts fund was calculated correctly and deposited within 60 days of the close of the fiscal year. All disbursements of residual receipts must be approved by HUD (HUD Handbooks 4370. Test whether periodic deposits in amounts as required by HUD.04 REV-2 b. Security Deposits 1. Compliance Requirement . c. if any.2000. There shall be one security deposit account per property. Residual receipts is usually any cash remaining at the end of a semiannual or annual fiscal period after deducting from surplus cash the amount of all distributions of the project.1. b. have been made to the fund. 2. from the residual receipts account were approved by HUD. Determine that the reserve fund has been established in a federally insured depository approved by the mortgagee and test whether the conditions were met for the funds not federally insured for the period (Ginnie Mae Handbook 5500. F. Suggested Audit Procedures a. Residual Receipts 1. Compliance Requirement .2. Chapter 3).

2000. Chapter 4 and 4370.04 REV-2 dependent on the type of subsidy program in effect at the project. Test that refunds or an itemized list of claims when no refund is due is provided to tenants within 30 days after move-out or shorter if required by State or local law. Suggested Audit Procedures a.3.1 REV-2. Determine that the account is fully insured. The owner must keep amounts collected as security deposits in a separate federally insured account apart from other project funds. Determine that a segregated federally insured account has been established for depositing security deposits and that the account balance is supported by the owner's records. In cases where the funds in the project's security deposit account exceed the amount insured by Federal government deposit insurance. the project may open another bank account for the excess amounts (HUD Handbooks 4370. Chapter 2). c. 4350. The balance in the account must at all times be at least equal to all outstanding obligations under the account for security deposits. Determine whether at the end of the reporting period the amount on deposit is at least equal to the outstanding obligations under the security deposit account. depositing. 8/97 4-9 . Chapter 3. test whether the disposition of interest earned conforms to State or local laws and HUD regulations. Chapter 2. The entire balance of the security deposit account must be federally insured throughout the period under audit.3. 2.2 REV-1. Chapter 4 4566. and 4370. and refunding security deposits with the provisions in HUD Handbook 4350. If the account is interest bearing. Chapter 2.2. Owners must comply with applicable State and local laws regarding investment of security deposits and distribution of any interest earned thereon. d. Compare the owner's procedures for collecting. Test whether security deposits are collected at the time of the initial lease and agree with the amount required in the lease agreement.2 REV-1. b.

Distributions may be made only if owners have been in compliance with all provisions of the Regulatory Agreement. H. Suggested Audit Procedures a. Chapter 2 and 4566. unless those salaries or fees have been approved by HUD as essential to the operation of the project. CHG-1. The entire balance of cash receipts account need not be federally insured (HUD Handbook 4370. Test whether withdrawals were for allowable project expenses or distributions of surplus cash.2. Compliance Requirements . 2. Chapter 2. c.04 REV-2 G. Such funds shall be withdrawn only in accordance with the provisions for project expenses or for distributions of surplus cash (HUD Handbooks 4370. including that the project is in good repair and condition. b. Compliance Requirement .2 REV-1. for example. Other allowable conditions for distributions of project assets are 8/97 4-10 . Compare the owner's procedures for depositing all cash receipts from the project with the requirements of Handbook 4370. Cash Receipts and Disbursements 1. supervisory fees paid to general partners and any salaries or other fees paid to the sponsor or owners. The term distribution includes. Distributions to Owners 1. Chapter 3). All cash receipts must be deposited into an institution whose deposits are federally insured (not limited to banks). A distribution is any withdrawal or taking of cash or any assets of the project other than for the payment of reasonable expenses necessary to the operation and maintenance of the project.2 REV-1. Chapter 2.2 REV-1. CHG-1. Test whether established procedures for deposit of cash receipts into a federally insured bank are being followed through inquiry and examination of documentary evidence.2000. and must be identifiable to each project at all times.

and reexamination of eligibility with the provisions in HUD Handbook 4350. and rectifying improper or inaccurate tenant information in accordance with the guidelines provided in HUD Handbook 4350. determining initial eligibility. Additionally.3.2 and the Regulatory Agreement. Determine that any distribution is properly reflected in the project financial statements.3 and the applicable Regulatory Agreement.e. Tenant Application.2000. 2. 4370. Eligibility. annual recertification of tenant eligibility. 8/97 4-11 . I.. Determine that for any distributions made. and Recertification 1. owners may have waived their rights to accrue or pay distributions in return for subsidies or mortgage relief. Report any unallowable distribution of project assets as a finding. Review any distribution of assets to project owners to determine if it is permitted under ownership terms including any subsidy or mortgage relief contracts. there was compliance with all outstanding notices of requirements for proper maintenance of the project). 2. the owners were in compliance with all applicable provisions of the Regulatory Agreement relating to distributions to owners including the requirement for the project to be in good repair and condition (i. Where tenants or projects are subsidized. Compliance Requirement . the owner is responsible for accepting applications. Distributions to limited dividend and profit-motivated owners are permissible. correctly calculating the tenant's contribution toward rent and utilities and correctly calculating any subsidy.2 REV-1.04 REV-2 described in the Regulatory Agreement. Suggested Audit Procedures a. determining initial tenant eligibility. total tenant payment. 4566. Compare the owner's procedures for accepting applications. Suggested Audit Procedure . if the distributions adhere to guidelines contained in HUD Handbooks 4370.1 REV-2.

signed by the applicant. that tenants met the eligibility requirements pertaining to their subsidized unit for annual income.2 REV-1 and 4566. (3) (4) (5) J. that the tenant payment was calculated correctly and that the family income was reexamined on an annual basis.04 REV-2 b. waiting list preferences and allowances for adjusted income Lease/Lease addenda in the form as required by HUD Certification and recertification forms (Form HUD-50059) Move-In and Move-Out inspections c.2 and the Regulatory Agreement. Under HUD Handbooks 4370. such as obtaining fidelity bonds. determine that the owner followed the guidance in HUD Handbook 4350. Review a sample of tenant files to determine that applications are complete. Include in the sample some of the oldest and some of the most recently admitted tenants. Review a sample of tenant files to determine that the tenant file contains the following documents as follows: (1) (2) Application Required verifications of social security numbers. Review a sample of tenant files for evidence of whether the owner noted any improper or inaccurate information while determining tenant eligibility or during tenant recertification. the owner is responsible for performing or providing for certain management functions. Compliance Requirements . disability status. If so.2000. Management Functions 1. d.3 pertaining to overpayment of a subsidy and follow-up to suspected fraud. maintaining accounting records in accordance with HUD guidance and performing 8/97 4-12 . and family composition.

3. d. Suggested Audit Procedures a. and 4 of HUD Handbook 4370. 8/97 4-13 .2 and the Regulatory Agreement. All principals of the management entity and all persons who participate directly or indirectly in the management and maintenance of the project and its assets.2 REV-1 or Chapter 3 of Handbook 4566..2000.04 REV-2 maintenance and management activities for the project. c. including those made to identity of interest relationship for services. to determine that the amounts do not exceed the amounts ordinarily b. g. and if findings were identified. Review the financial operations and accounting procedures of the project to determine that they are in accordance with the significant requirements of Chapters 2. Review the maintenance contracts and vendor invoices for identity of interest relationships with the owner/agent and agent/service contractor. accounts and records must be covered. Inquire whether management has conducted routine unit and general property inspections. Determine that the management certificate has been approved by HUD. 2. whether corrective action was taken (HUD Form 9834 Part A. Where an agent has multiple projects. Test a sample of payments. f. Compare management's inspection guidelines to Form HUD-9834. e. changes to project ownership and property without prior written HUD approval are prohibited. Determine that the owner's designated management agent has obtained a fidelity bond in an amount at least equal to two months potential collections. etc. In addition. the coverage must be at least equal to two months of the highest potential collections. supplies.4). if required.

Review project records to determine if there have been any changes to project ownership. If there have been any changes in project ownership or in beneficial interest in the project. approved by HUD. or pay out of any funds except for operating expenses and necessary repairs to project structures. 8/97 4-14 . h. Report all changes in project ownership or beneficial interest.2000.. determine that HUD approval has been obtained if required.04 REV-2 paid for such services. etc. in the geographic area. supplies. encumbrances or liens of personal property of the project including rents.

04 REV-2 Illustrative Reports (Sample) ABC Partnership 075 44001 BALANCE SHEET AS OF Assets CURRENT ASSETS 1110 1120 1130 1140 Less 1150 1151 Less 1160 1170 1190 1210 1230 1240 1250 1270 1290 Petty Cash Cash in Bank Tenant Accounts Receivable Accounts Receivable .FUNDED 1191 1192 Tenant Security Deposits (Contra) Other Deposits (Contra) Total Deposits Held in Trust $ $ $ RESTRICTED DEPOSITS AND FUNDED RESERVES 1310 1320 1340 Mortgagee Escrow Deposits (Schedule) Reserve for Replacements Residual Receipts Reserve Total Deposits $ $ $ $ 8/97 4-15 . Officers 4230 Reserve for Doubtful Notes Receivable Net Collectible Receivables Accrued Receivables Investments (Short-Term) Miscellaneous Current Assets Fuel Inventory Supplies Inventory Property Insurance Mortgage Insurance Taxes Miscellaneous Total Current Assets $ $ $ $ $ $ $ $ $ $ $ $ $ $ $ $ $ $ $ $ DEPOSITS HELD IN TRUST .Stockholders.Other 4220 Reserve for Collection Losses Net Accounts Receivable Notes Receivable .Other Notes Receivable .2000.

04 REV-2 (Sample) ABC Partnership 075 44001 BALANCE SHEET AS OF Assets (Continued) FIXED ASSETS 1410 1420 1430 1440 1450 1460 Land Buildings Building Equipment-Fixed Building Equipment-Portable Furniture Furnishings Total Fixed Assets Less Accumulated Depreciation (Sub-total) (Scheduled) $ $ $ $ $ $ $ $ $ $ $ OTHER ASSETS Total Assets 8/97 4-16 .2000.

HUD Accrued Wages Payable Accrued Interest Payable Accrued Taxes Notes Payable (Short-Term) Miscellaneous Current Liabilities Mortgage Payable .04 REV-2 (Sample) ABC Partnership 075 44001 BALANCE SHEET Liabilities CURRENT LIABILITIES 2110 2115 2120 2130 2150 2160 2190 2320 2210 2220 2230 Accounts Payable Accounts Payable .2000.Current Portion Rent Deferred Credits Interest Deferred Liabilities Payable to Other Projects Total Current Liabilities $ $ $ $ $ $ $ $ $ $ $ $ DEPOSIT LIABILITIES 2191 2192 Tenant Security Deposits (Contra) Other Deposits (Contra) Total Deposit Liabilities $ $ $ LONG-TERM LIABILITIES 2310 2320 Notes Payable Mortgage Payable Less: Current Portion Total Long-Term Liabilities $ $ $ $ $ $ OTHER LIABILITIES (Schedule) Total Liabilities Partners' Equity 3130 Partners' Equity $ $ Total Liabilities and Partners' Equity See notes to financial statements 8/97 4-17 .

Do not send this form to the above address. including the time for reviewing instructions. including suggestions for reducing this burden. 2502-0052 (Exp.Statement of Profit and Loss U. unless it displays a currently valid OMB control number. Washington. Department of Housing and Urban Development Office of Housing Federal Housing Commissioner OMB Approval No. This agency may not collect this information.C. gathering and maintaining the data needed. and you are not required to complete this form. and completing and reviewing the collection of information.S. Department of Housing and Urban Development. 9/30/98) Public reporting burden for this collection of information is estimated to average 1 hour per response. 20410-3600. Page 1 of 2 5120 5121 5130 5140 5170 5180 5190 5220 5230 5240 5270 5290 $ $ $ $ $ $ $ $ ( ( ( ( ( ) ) ) ) ) ( $ ) 5300 5410 5430 5440 5490 5910 5920 5930 5940 5990 $ $ $ $ $ $ $ $ $ $ $ $ $ 6210 6250 6310 6311 6312 6320 6330 6331 6340 6350 6351 6360 6370 6390 6420 6450 6451 6452 6453 $ $ $ $ $ $ $ $ $ $ $ $ $ $ $ $ $ $ $ $ $ form HUD-92410 (7/91) ref Handbook 4370.50 and over. searching existing data sources. D. Amount* Project Name: Apartments or Member Carrying Charges (Coops) Tenant Assistance Payments Rental Income 5100 Furniture and Equipment Stores and Commercial Garage and Parking Spaces Flexible Subsidy Income Miscellaneous (specify) Total Rent Revenue Potential at 100% Occupancy Apartments Furniture and Equipment Vacancies 5200 Stores and Commercial Garage and Parking Spaces Miscellaneous (specify) Total Vacancies Net Rental Revenue Rent Revenue Less Vacancies Elderly and Congregate Services Income—5300 Total Service Income (Schedule Attached) Interest Income—Project Operations Financial Revenue 5400 Income from Investments—Residual Receiptsd Income from Investments—Reserve for Replacement Income from Investments—Miscellaneous Total Financial Revenue Laundry and Vending NSF and Late Charges Other Revenue 5900 Damages and Cleaning Fees Forfeited Tenant Security Deposits Other Revenue (specify) Total Other Revenue Total Revenue Advertising Other Administrative Expense Office Salaries Office Supplies Office or Model Apartment Rent Administrative Management Manager or Superintendent Salaries Expenses 6200/6300 Manager or Superintendent Rent Free Unit Legal Expenses (Project) Auditing Expenses (Project) Bookkeeping Fees/Accounting Services Telephone and Answering Service Bad Debts Miscellaneous Administrative Expenses (specify) Total Administrative Expenses Fuel Oil/Coal Utilities Expense 6400 Electricity (Light and Misc. to the Reports Management Officer. No. For Month/Period Beginning: Part I Project Number: Ending: Description of Account Acct. Send comments regarding this burden estimate or any other aspect of this collection of information. Office of Information Technology.S. Paperwork Reduction Project (2502-0052). Power) Water Gas Sewer Total Utilities Expense * All amounts must be rounded to the nearest dollar.2 . $. U.

3.C. $ $ $ $ form HUD-92410 (7/91) ref Handbook 4370. 3729. 5990. (18 U. * All amounts must be rounded to the nearest dollar. 1010. Total principal payments required under the mortgage. 3802) Miscellaneous or other Income and Expense Sub-account Groups. even if payments under a Workout Agreement are less or more than those required under the mortgage. attach a separate schedule describing or explaining the miscellaneous income or expense. 1001.C.S. Replacement Reserve deposits required by the Regulatory Agreement or Amendments thereto. Conviction may result in criminal and/or civil penalties. 6390. 2. even if payments may be temporarily suspended or waived.S. 5290. If miscellaneous or other income and/or expense sub-accounts (5190. Part II 1.Janitor and Cleaning Payroll Janitor and Cleaning Supplies Janitor and Cleaning Contract Exterminating Payroll/Contract Exterminating Supplies Garbage and Trash Removal Security Payroll/Contract Grounds Payroll Grounds Supplies Operating and Grounds Contract Maintenance Repairs Payroll Expenses 6500 Repairs Material Repairs Contract Elevator Maintenance/Contract Heating/Cooling Repairs and Maintenance Swimming Pool Maintenance/Contract Snow Removal Decorating Payroll/Contract Decorating Supplies Other Miscellaneous Operating and Maintenance Expenses Total Operating and Maintenance Expenses Real Estate Taxes Payroll Taxes (FICA) Miscellaneous Taxes. 6729. Licenses and Permits Taxes and Insurance 6700 Property and Liability Insurance (Hazard) Fidelity Bond Insurance Workmen's Compensation Health Insurance and Other Employee Benefits Other Insurance (specify) Total Taxes and Insurance Interest on Bonds Payable Interest on Mortgage Payable Financial Expenses 6800 Interest on Notes Payable (Long-Term) Interest on Notes Payable (Short-Term) Mortgage Insurance Premium/Service Charge Miscellaneous Financial Expenses Total Financial Expenses Elderly & Congregate Service Expenses 6900 Total Service Expenses—Schedule Attached Total Cost of Operations Before Depreciation Profit (Loss) Before Depreciation Depreciation (Total)—6600 (specify) Operating Profit or (Loss) Officer Salaries Corporate or Mortgagor Entity Expenses 7100 Legal Expenses (Entity) Taxes (Federal-State-Entity) Other Expenses (Entity) Total Corporate Expenses 6510 6515 6517 6519 6520 6525 6530 6535 6536 6537 6540 6541 6542 6545 6546 6547 6548 6560 6561 6570 6590 6710 6711 6719 6720 6721 6722 6723 6729 6810 6820 6830 6840 6850 6890 6900 $ $ $ $ $ $ $ $ $ $ $ $ $ $ $ $ $ $ $ $ $ $ $ $ $ $ $ $ $ $ $ $ $ $ $ $ $ $ $ $ $ 6600 7110 7120 7130-32 7190 $ $ $ $ $ $ $ Net Profit or (Loss) $ Warning: HUD will prosecute false claims and statements. Project Improvement Reserve Releases under the Flexible Subsidy Program that are included as expense items on this Profit and Loss Statement.50 and over. and 7190) exceed the Account Groupings by 10% or more.2 Page 2 of 2 . 6890. 6590. Replacement or Painting Reserve releases which ar eincluded as expense items on this Profit and Loss statement 4. $. 1012. 5490. 31 U.

2000.04 REV-2 (Sample) STATEMENT OF CHANGES IN PARTNERS' EQUITY ABC Partnership 075 44001 For Year Ended Beginning of Year Add: Net Income Contributions Other Deduct: Distributions End of Year See notes to the financial statements $ $ $ $ $ $ 19 $ 8/97 4-20 .

xxx) (xx.xxx) (x.xxx) (x. XXX-XXXXX STATEMENT OF CASH FLOWS Years Ended December 31.xxx) (xx.xxx x.xxx) (x.xxx) (x.xxx x.xxx) (xx.xxx) (xx.xxx) (xxx) (xxx.xxx (xx.xxx) (xx.xxx) (x.xxx $xxx.xxx) (x.xxx) (x.xxx) xx.xxx (xx.xxx xxx.xxx) (xx.04 REV-2 SAMPLE COMPANY HUD PROJECT NO.xxx) (xx.xxx) (x.2000.xxx) (x.xxx Administrative Management fees Utilities Salaries and wages Operating and maintenance Real estate taxes and escrow deposits Property insurance Miscellaneous taxes and insurance Tenant security and other deposits Interest on mortgage Net cash provided by (used in) operating activities Cash flows from investing activities: Deposits into reserve for replacement Net deposits to residual receipts reserve Net cash used in investing activities Cash flows from financing activities: Mortgage principal payments Net cash used in financing activities Net increase (decrease) in cash and cash equivalents (Continued) (xx.xxx) xx.xxx) (x.xxx) 8/97 4-21 .xxx) (xx.xxx) (xx.xxx) (xxx) (xxx.xxx) (xx.xxx x.xxx) (xxx. 1996 and 1995 1996 Cash flows from operating activities: Rental receipts Interest receipts Other receipts 1995 $xxx.xxx x.xxx) (xxx.xxx) (xxx) (xx.xxx) (xx) (x.xxx) (x.xxx xxx.

xxx) xx.xxx (xxx) xx.xxx (x.xxx xxx (x.xxx) $(xx.xxx) x.xxx x.xxx) xx.xxx) xx.xxx (xxx) x.xxx xx (x. XXX-XXXXX STATEMENT OF CASH FLOWS (Continued) Years Ended December 31.xxx) xxx xxx xxx $ (x.2000.04 REV-2 SAMPLE COMPANY HUD PROJECT NO.xxx) See the notes to the financial statements 8/97 4-22 .xxx $(xx.xxx x. 1996 and 1995 1996 1995 Cash and cash equivalents: Beginning of period End of period Cash flows from operating activities: Net loss Adjustments to reconcile net loss to net cash provided by (used in) operating activities: Depreciation Decrease (increase) in prepaid insurance Decrease in prepaid mortgage payments Decrease (increase) in cash restricted for tenant security deposits Decrease (increase) in accounts receivable .xxx) x.xxx $(xx.other Decrease (increase) in tax and insurance escrow Increase in accounts payable Decrease in accrued liabilities Increase in excess rent due to HUD Increase (decrease) in tenants security deposits Increase in deferred revenue Net cash provided by (used in) operating activities $ xx.xxx) (xx.xxx x.xxx $ xx.xxx $ (xxx) $ x.xxx (x.

a project with a FY ending December 31.04 REV-2 (sample) ABC Partnership 075 44001 SUPPORTING DATA REQUIRED BY HUD Accounts and notes receivable (other than from regular tenants) Name of Borrower Original Date Terms Original Amount $ $ Total Delinquent tenant accounts receivable : Number of Tenants Delinquent Delinquent Delinquent Delinquent Totals Mortgage escrow deposits : Estimated amount required as of (audit date) for future payment of: City. should have at least 9/12 of the total tax and insurance to be paid accumulated as of December 31. which makes annual tax and insurance payments on April 1. Any deficiency should be deducted from surplus cash computation. State and County taxes Property insurance Mortgage insurance Total Total confirmed by mortgagee 1/ : Balance Due $ $ $ Amount Past Due $ $ $ $ $ 30 days 31-60 days 61-90 days over 90 days $ $ $ $ Amount on deposit in excess (deficient) of estimated requirements 2/ 1/ For instance. 2/ 8/97 4-23 .2000.

(date).) Reserve for replacements : In accordance with the provisions of the Regulatory Agreement.2000.04 REV-2 (sample) ABC Partnership 075 44001 SUPPORTING DATA REQUIRED BY HUD (Continued) Tenant security deposits : Tenant security deposits are held in a separate bank account in the name of the project. (date) Monthly deposits ($ Withdrawals: Balance. (NOTE: HUD requires that tenant security deposits be held in a separate bank account in the name of the project. restricted cash is held by (name of depository) to be used for replacement of property with the approval of HUD as follows: Balance. confirmed by mortgagee Accounts payable (other than trade creditors) Payable within 30 days Payable within 31-60 days Payable in more than 60 days Balance Detail of payables due in more than 60 days Creditor Purpose Date Incurred Terms : Amount Due $ : $ $ $ $ $ x 12) $ Original Amount $ Balance $ 8/97 4-24 .

Other (describe) (a) Total Cash (Add Lines 1. Cash (Accounts 1110. Surplus Cash Limited Dividend Projects 2a. 1120. Distribution Accrued and Unpaid as of the End of the Prior Fiscal Period 2c. Tenant security deposits liability (Account 2191) 13. Deposit Due Residual Receipts (Must be deposited with Mortgagee within 60 days after Fiscal Period ends) Prepared By Loan Technician Date Loan Servicer $ $ $ $ $ $ $ $ $ $ $ $ $ $ $ $ $ $ $ $ $ $ $ Reviewed By Date Page 1 of 2 form HUD-93486 (12-80) . Deficient Tax Insurance or MIP Escrow Deposits 10. Distributions and Residual Receipts Project Name U. Accounts payable (due within 30 days) 8. Annual Distribution Earned During Fiscal Period Covered by the Statement 2b. Accrued expenses (not escrowed) 11. 1192) 2.S. Amount Available for Distribution During Next Fiscal Period 5.Computation of Surplus Cash. Amount to be Carried on Balance Sheet as Distribution Earned but Unpaid (Line 2a plus 2b minus 2c) 4. Delinquent deposits to reserve for replacements 7. 2. Other (Describe) (b) Less Total Current Obligations (Add Lines 4 through 13) (c) Surplus Cash (Deficiency) (Line (a) minus Line (b)) Part B – Compute Distributions to Owners and Required Deposit to Residual Receipts 1. Accrued mortgage interest payable 5. and 3) Current Obligations 4. Tenant subsidy vouchers due for period covered by financial statement 3. Delinquent mortgage principal payments 6. Distributions Paid During Fiscal Period Covered by Statement 3. Loans and notes payable (due within 30 days) 9. 1191. Department of Housing and Urban Development Office of Housing Federal Housing Commissioner Fiscal Period Ended: Project Number _____/_____/_____ Part A – Compute Surplus Cash Cash 1. Prepaid Rents (Account 2210) 12.

This should be the difference between the unpaid balance shown on the amortization schedule and the amount shown in Account 2320 as of the Balance Sheet date. If the amount on Line 13(c) of Part A was zero or negative. enter the amount on Line 1. 2b. interest for the month of December is payable January 1. Note: If distribution is paid for a semi-annual period. On other limited-dividend projects. Line 2c. but • Which have not yet been released by the mortgagee and deposited in the project account. Distributions and Residual Receipts Part A Line 1. delinquent replacement reserve deposits are included in Line 6. enter the amount on Line 1. Include any excess income payments on Section 236 projects which should have been sent to HUD and were not as of the end of the fiscal year. Distributions are defined in paragraph 2-10 of Handbook 4370. Line 9. Line 5. divide annual distribution by 2. Include amounts receivable on tenant subsidy vouchers only if the amounts were earned during the period covered by the financial statement. Include any delinquent deposits to the reserve for replacement account (Account 1320). enter that amount here. Line 3. For limited-dividend projects. Enter zero if mortgagor agreed to waive distributions that have accrued prior to period covered by the statement. and • Approved by HUD prior to the end of the fiscal year.Instructions for Preparation of Form HUD-93486. Remember interest is paid in arrears. Maximum Insurable Mortgage. Notice of Mortgage Payment Due. The owner equity figure is determined at the time of cost certification and should not be confused with the Owner's Equity Account reported annually on the project Balance Sheet. On limited dividend projects. include the interest payment due the first of the next month (Account 2130). Keep in mind that rent supplement and RAP vouchers are submitted on the 20th of the month they are earned while Section 8 vouchers are submitted on the 20th of the month before they are earned. include delinquent interest payments shown on the Form HUD-92426. Include any deficiency reported in the mortgage escrow deposits schedule of the Supplemental Data to the financial statement.1 Rev-1. enter the amounts shown on previous year's balance sheet or Line 3 of last year's computation of surplus cash. use the HUD-92771 for the month following the last month covered by financial statements. For profit-motivated projects. For non-profit projects. For limited-dividend projects. Part B Line 1. Line 4. use the Form HUD-92426 for the month following the last month covered by the financial statement. The annual distribution permitted is computed by multiplying the distribution rate cited in the regulatory agreement by the difference between the HUDapproved mortgage amount (Line 10) and the replacement cost (Line 6) of Form HUD-2580. For projects current under the mortgage. Line 2b. For HUDheld projects. Enter Line 2(a) plus Line 2(b) less Line 2(c). but • For which reimbursement has not been received from the mortgagee. enter Line 1 less Line 4. 2c and 3 use only on limited dividend projects. Exclude accounts payable related to replacement reserve draws which were: • Approved by HUD prior to the end of the fiscal year. Enter zero if mortgagor agreed not to accrue distributions for the fiscal period covered by the financial statement. enter zero. enter lesser of Line 1 or Line 3. Do not include escrow deposits or HUD required reserves.) Line 2a. Line 4. Line 5. Line 3. For non-profit projects enter zero. Line 6. Computation of Surplus Cash. Line 7. Do not include funds in Project Improvement Accounts required on Flexible Subsidy or other projects. enter zero. If the amount on Line 13(c) of Part A was positive. Enter amount shown as distributions paid in the Statement of Changes in Owner's Equity or the Statement of Receipts and Disbursements. include delinquent interest shown on the Form HUD92771. Do not include Section 8 vouchers submitted for the first month of the next fiscal year. For profitmotivated projects. Page 2 of 2 form HUD-93486 (12-80) . Line 2. Be sure to include any lump-sum deposits required by special workout agreements or subsidy contracts. excess income is calculated monthly on Form HUD-93104. Notice of Default. Include amounts related to replacement reserve draws for items which have: • Been paid from project funds. For projects in default under the mortgage. Include principal delinquent under the mortgage. (For lines 2a. the annual distribution earned is calculated by multiplying the distribution rate cited in the regulatory agreement by the initial owner's equity account. Note that replacement reserve deposits are not included.

a statement to that effect will meet the requirement for this schedule.04 REV-2 (sample) ABC Partnership 075 44001 SUPPORTING DATA REQUIRED BY HUD Accrued taxes (Account 2150) Description of tax Basis For Accrual : Period Covered Date Due Amount Accrued $ (Continued) Total (should agree with AC 2150) Compensation of partners $ Name of Recipient Official Title Time Amount of Expenses Devoted to Interest Compenand Business Owned sation Allowance (Note: If compensation was not paid to partners.) 8/97 4-27 .2000.

8/97
(sample) ABC Partnership 075 44001 SUPPORTING DATA REQUIRED BY HUD (Continued) Assets Balance (Date) $ $ $ $ $ $ $ Additions Deductions (Date) (Date) Provisions Balance Balance Current Deductions Accumulated Depreciation Balance (Date) $ $ Net Book Value (Date) $ $ $ $ $ $ $ $ $

2000.04 REV-2

Changes in Fixed Assets

Year Ended (Date)

Land

4-28

Land Improvements

Buildings

Building Equipment

Fixed

Building Equipment

Portable

Maintenance Equipment

Furniture

Other

Totals

2000.04 REV-2

(sample) STATEMENT OF RECEIPTS AND DISBURSEMENTS Project No. Project Name For Year Ending SOURCE OF FUNDS Operations: Revenues Rental income $ Other income (Detail) $ $ Expenses Administrative expenses (Exclude Officer Salaries) Management fees Operating expenses Payrolls Maintenance expenses Rental expenses Taxes - Real Estate Taxes - Other Insurance Interest on building loan $ Mortgage Insurance Premium $ Cash provided by operations before amortization Amortization of Mortgage $ Cash provided by operations after debt service Other: $ Tenant security deposits $ Ownership advances $ APPLICATION OF FUNDS Reserve for replacements - funded Tenant security deposits - funded Increase in taxes and insurance escrow Increase in mortgage insurance escrow Officer Salaries Disbursements not shown above (Detail) INCREASE IN CASH UNRESTRICTED CASH AT BEGINNING OF YEAR UNRESTRICTED CASH AT END OF YEAR

$ $ $ $

8/97 4-29

2000.04 REV-2

LISTING OF IDENTITY OF INTEREST COMPANIES & ACTIVITIES DOING BUSINESS WITH OWNER/AGENT FYE 9/30/XX

Company Name Ed's Electric Mike's Painters Pat's Plants Woody's Workers

Type of Service Heavy Up Service Decorating Landscaping Kitchen Repairs

Amount Received $1000. $500. $200. $300.

Note to IAs: This listing is required by Handbook 4370.2 REV-1, Chapter 3 on Supporting Data for the Mortgagor's financial statements. It should include a listing of Identity of Interest companies doing business with the mortgagor or agent, along with a breakdown of services and amounts received. It is required if the payments for services performed for the project totalled $1000 in the aggregate during the operating period. See Handbook 4370.2 REV-1 for a specific definition of what relationships constitute an Identity of Interest between owners, officers, directors, project staff members and lender/vendors

8/97 4-30

2000.04 REV-2

(sample) ABC Partnership 075 44001 Certificate of Partners We hereby certify that we have examined the accompanying financial statements and supplemental data of ABC Partnership and, to the best of our knowledge and belief, the same is complete and accurate.

General Partners (Name) (Name)

(Date) (Date)

Partnership Employer Identification Number

8/97 4-31

2000.04 REV-2

(sample) ABC Partnership 075 44001 Management Agent's Certification We hereby certify that we have examined the accompanying financial statements and supplemental data of ABC Partnership and, to the best of our knowledge and belief, the same is complete and accurate.

(Name) (Firm Name)

(Date)

8/97 4-32

2000.04 REV-2

CHAPTER 5. 5-1

INSURED DEVELOPMENT COST CERTIFICATION AUDIT GUIDANCE

Program Objectives . Multifamily insured loans are an integral part of HUD's housing program which has the objectives of providing decent, safe, affordable and sanitary housing for low and moderate-income families. Through the insured multifamily project loan program, HUD insures mortgage repayments, thereby reducing investor risk and encouraging the availability of a money supply for the housing market. For the insured loan program, the project is ordinarily HUD's only source for loss recovery in the event of a foreclosure. Therefore, it is essential that collateral value is commensurate with the insurance risk. Program Procedures . The cost certification is the basis for HUD's determination of the maximum insurable mortgage which is necessary before the project may proceed to final endorsement, a critical factor to multifamily projects. Effective dates for the determination of actual costs are usually the date of the final project inspection report showing final completion and the mortgagor's cost certification cut-off date. The HUD Field Office Manager has the option to set an earlier date to halt the unnecessary accumulation of certain costs. A reasonable time is set for submission of the cost certification which must be in the Field Office 30 days before final endorsement/closing. HUD expects completed certifications, fully documented and in the prescribed format to be submitted by the mortgagor. If an identity of interest exists between the mortgagor and the contractor, or if a cost plus type construction contract was used, the contractor is also required to submit a cost certification. Similarly, if an identity of interest exists between a subcontractor, materials supplier, or an equipment lessor, then a cost certification must be submitted. Additional support for any cost items questioned by HUD is expected within 15 days of the request. Extended delays in the cost certification process which postpone final endorsement can cause substantial harm to the project's viability and eventual success.

5-2

5-3

Reference Material . The IA should obtain and become familiar with the following HUD Handbooks. If not available

8/97 5-1

rebates. Mortgagors and contractors are required to determine costs in accordance with HUD Handbook 4470.2. necessary financial statements which must accompany the Certificate of Actual Cost.2 Title Cost Certification Guide for Mortgagors and Contractors of HUD-Insured Multifamily Projects Section 202 Direct Loan Program for Housing for the Elderly and/or Handicapped Supportive Housing for Elderly Conditional Commitment . 885. subcontractors. 24 CFR 207.27.425 and 885. stockholders. 4470.1 REV-1 5-4 Reporting Requirements . The Mortgagor's Certificate of Actual Cost (Form HUD-92330) in a form prescribed by HUD shall be submitted after the cost certification cut-off date. and with the Cost Certification Guide for Mortgagor and Contractors of HUD-Insured Multifamily Projects--HUD Handbook 4470. HUD Handbook No. they may be obtained from the local HUD Field Office. and details concerning the 8/97 5-2 .825 require mortgagors/ borrowers to submit Certificates of Actual Cost before final endorsement of the insured loans or disbursement of loan proceeds or capital advances for the project. The certificate shall show the actual cost to the mortgagor after deduction of any kickbacks.2000. trade discounts or other similar payments to the mortgagor.04 REV-2 from the owner.1 REV-2 4450. HUD Handbook 4470.1 REV-2. Mortgage Credit Analysis for Project Mortgage Insurance. general contractor. Form HUD-92330 is submitted upon completion of the physical improvements to the satisfaction of HUD and before endorsement. or officers.2 contains the requirement for who among the mortgagor.5 4470. and suppliers must provide cost certifications and guidance on eligible costs.1 REV-2 4571. or partners.Final Closing Mortgage Credit Analysis For Project Mortgage Insurance (Section 207) Cost Estimation For Project Mortgage Insurance 4571.

The IA is also required to report on the accompanying balance sheet and operating statement. The individual agreements contain the specific reporting requirements that the entity is to follow. Projects participating in HUD-assisted activities are required to ensure that financial status reports contain reliable financial data and are presented in accordance with the terms of applicable agreements between the entity and HUD. 8/97 5-3 . The period covered by the operating statement is from the beginning of marketing and rent-up activities to the cut-off date. No other financial statements or reports are necessary. the consideration of the mortgagor's internal control structure and the mortgagor's compliance with specific requirements. Suggested Audit Procedures a. 5-5 Compliance Requirements and Audit Area A. Each Form HUD-92330 and Form HUD-92330-A must be accompanied by the auditor's report on the certification of actual cost. Compliance Requirement . nor is this Certificate subject to an audit in accordance with the Government Auditing Standards. 2.04 REV-2 Form HUD-92330 (mortgagor) and Form HUD-92330-A (contractor). b. The Certificate of Actual Cost. The Form HUD-92330 should be supported by the information contained in the required financial statements. Federal Financial Reports . Identify all required financial reports by inquiry of the owner/manager.2000. auditor's reports and required financial statements should be submitted to the applicable HUD Field Office. the auditor need only submit the Contractor's Certificate of Actual Cost and his/her report thereon. For cost certifications due from contractors (HUD-92330-A). Obtain an understanding of the auditee's procedures for preparing and reviewing the financial reports. An illustrative report on cost certification is provided in the final section of this Chapter. 1.

2000.04 REV-2 c. Chapter 3).e. Report all material differences between the amounts reported on the Form HUD-92330 and the supporting documents. Review significant adjustments made to the general ledger accounts affecting HUD-assisted activity and evaluate for propriety. accounting system for identifying actual costs associated with a given project. Test the system to determine that it identifies the costs to be reported on the Form HUD-92330 on an individual project basis. i. Accounting System . Mortgagors and contractors involved in projects that are to receive HUD-insured loans have agreed to maintain adequate records for the purpose of determining the eligible costs associated with the projects (HUD Handbook 4470. other than those which are included in the audited financial statements. d. Obtain an understanding of the mortgagor's and contractor's. worksheets. ledgers. Report all material differences between financial reports and project records. B. ie. 1. Cut-Off Timing and Eligibility of Costs 1. only the costs which have been or will be paid in cash within 8/97 5-4 . 2. Trace significant data from Form HUD-92330 to supporting documentation. For the sample. Suggested Audit Procedures a.2. c. trace significant data to supporting documentation. Select a sample of financial reports. worksheets. e. Compliance Requirement . b. C. Review Form HUD-92330 for completeness and support by the accounting records. As a general rule. and determine that the reports selected are prepared in accordance with HUD instructions. ledgers. Compliance Requirement . etc. etc.

2000. Form HUD-5379. The date chosen as the cut-off date and the date to which the operating statement and balance sheet are computed must be the same. 2. This date may. HUD notifies the mortgagor/borrower. or which are escrowed with the mortgagee are eligible for inclusion on the mortgagor's or contractor's Certificates of Actual Cost. This form must be properly endorsed by the Field Chief Architect. direct loan projects and capital advance projects (HUD Handbook 4470. any date in between.1 REV-2. and at the latest.2. The final completion date is the date on which the HUD representative signs the final HUD Representative's Trip Report. HUD Handbooks 4470. 8/97 5-5 . Eligible costs are those costs of the project construction and certain fees actually paid in cash or such costs that will be paid in cash within 45 days of final endorsement. the general contractor and the mortgagee of the date of completion in writing.2. contain information on allowable costs to be reported on Form HUD-92330 and the ways in which costs are to be adjusted for items considered to be a recovery of costs. This date becomes the basis for establishing the cut-off date for insured projects. Based on the completion date. 4450.1 REV and 4470. taxes. be a date 60 days after the final completion date or at the mortgagor's option. Review the trip report Form HUD-5379 or similar notification to determine the final completion date. Chapter 2. at the earliest. the mortgagor/borrower determines the project's b. be the same date as the final completion date. showing substantial completion. Suggested Audit Procedures a. For projects with insured mortgages.04 REV-2 45 days after the date of final endorsement or closing. and mortgage insurance premium. Chapter 1). the mortgagor determines the cost cut-off date for the actual cost of interest.

Review these cost/charges to determine that none were incurred after the cut-off date. Where an identity of interest exists the contractor must also submit a Certificate of Actual Cost or the party involved in the identity of interest is required to submit additional documentation as required by 4470.2000. a contractor.2. suppliers and equipment lessors. Where an identity of interest exists. Chapter 3. D. 4470. c. determine that the additional reporting requirements of HUD Handbook 4470. Compliance Requirement .1 REV-2 and 4470. 2. b. or a materials supplier. taxes and mortgage and property insurance premiums. Suggested Audit Procedures a. Identity of Interest 1. 8/97 5-6 .1 REV-1. HUD Handbooks 4430. describe several situations which constitute an identity of interest involving a mortgagor. Review the other amounts claimed on Form HUD-92330 to determine that the claims represent those expenses paid in cash or expected to be paid in cash within 45 days after final closing.04 REV-2 cut-off date for time sensitive expenses.2 Chapter 3. The contractor is also required to submit a Certificate of Actual Cost if a cost plus construction contract was used.2 have been met. from mortgagors to contractors. such as interest. All amounts claimed should be net of any adjustments or recoveries of costs. Review mortgagor and project records such as contracts and vendor invoices to determine if an identity of interest exists between any of the parties involved in the project. a subcontractor.

on a test basis. We believe that our audit provides a reasonable basis for our opinion. pertaining to the development of the Sample Company. An audit also includes assessing the accounting principles used and significant estimates made by management. etc. Project No.) through April 30. An audit includes examining. liabilities and project equity. 1997. as of April 30. These financial statements are the responsibility of the Partnership's Management. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. the accompanying financial statements represent the financial statements of the project. 8/97 5-7 . Our responsibility is to express an opinion on these financial statements based on our audit. as well as evaluating the overall financial statement presentation. We conducted our audit in accordance with generally accepted auditing standards and Government Auditing Standards. As described in Note 1. 1997. 1997 and the results of project operations for the period from August 28.04 REV-2 5-6 Illustrative Report Report of Independent Certified Public Accountants To the Partners Sample Company We have audited the Mortgagor's Certificate of Actual Costs (Form HUD-92330). evidence supporting the amounts and disclosures in the financial statements. xxx-xxxxx. 1995 (date of commencement of marketing and rent-up activities. This report is intended solely for filing with HUD and is not intended for any other purpose.2000. through April 30. These prescribed practices are a comprehensive basis of accounting other than generally accepted accounting principles. the Certificate of Actual Cost and the Project's financial statements have been prepared on the basis of accounting and reporting practices prescribed by the Department of Housing and Urban Development (HUD). Furthermore. the statement of assets.

and the results of project operations for the period from August 28. the assets. 1997.04 REV-2 2 In our opinion.2000. Certified Public Accountant [date of audit] 8/97 5-8 . we have also issued a report dated [date of report] on our consideration of [the Entity's] internal controls and a report dated [date of report] on its compliance with laws and regulations. 1997. on the basis of accounting described in Note 1.) through April 30. In accordance with Government Auditing Standards . the Mortgagor's Certificate of Actual Cost and the financial statements referred to above. 1997. etc. present fairly the actual costs of the Sample Company. liabilities and project equity. 1995 (date of commencement of marketing and rent-up activities. as of April 30. through April 30.

The statement does not include depreciation and amortization expenses and certain other expenses which are not incidental to the rental operation of the Project. Costs are to be exclusive of kickbacks. Project equity represents the difference between the funds received by the Project from Sample Company. or amounts approved by HUD. b.S. Department of Housing and Urban Development (HUD) in the Audit Guide for Auditing Development Costs of HUD-Insured Multifamily Projects. 1995. Project equity is not intended to reflect the equity of the Partnership and the financial statements are not intended to represent those of the Partnership. For this project. The statement of rental operations reflects the rental activity and operating expenses of the Project from August 28. c.04 REV-2 SAMPLE COMPANY PROJECT NO. Partnership (non-project) obligations are classified as project equity. and the costs incurred to develop the Project. Furthermore. rebates or trade discounts. and the income from the Project. d. These standards differ in some respects from generally accepted accounting principles. Financing charges are limited to the lesser of amounts actually paid. and the financial statements reflect the following additional HUD accounting and reporting principles: a. the financing charges are the amounts actually paid. 8/97 5-9 .2000. Accordingly. XXX-XXXXX NOTES TO FINANCIAL STATEMENTS 1 --.Summary of Significant Accounting Policies Basis of Presentation The financial statements have been prepared in conformity with the accounting and reporting standards prescribed by the U. on the Mortgagee's Certificate.

XXX-XXXXX NOTES TO FINANCIAL STATEMENTS 1 --. The Partnership will operate under the provisions of Section 221(d)(4) of the National Housing Act. Compensation for such services is as determined in the management agreement between the partners. with mortgage insurance provided by the Federal Housing Administration (FHA) of the Department of Housing and Urban Development.Summary of Significant Accounting Policies Organization Sample Company is a limited partnership organized under the laws of the State of [State of Project]. a 203-unit project located in [location of Project]. for the purpose of developing and operating the Sample Company. The responsibility for management of the affairs of the Partnership.2000. 8/97 5-10 .04 REV-2 SAMPLE COMPANY PROJECT NO. and the ongoing management of the Sample Company is vested with the general partners.

04 REV-2 CHAPTER 6. which must also be a Ginnie Mae-approved issuer. is a wholly-owned Government corporation. Ginnie Mae creates a vehicle for channeling funds from the securities markets into the mortgage market and helps to increase the supply of credit available for housing. Ginnie Mae's mission is to support expanded. by another servicer (referred to as a subcontract servicer). For each pool or loan package of mortgages and accompanying issue of securities. also known as Ginnie Mae. a custodian of mortgage documents. While the issuer is responsible for servicing the pool or loan package of mortgages. creating a pool of mortgages to be held by a custodian. affordable housing in America by providing an efficient government-guaranteed secondary market vehicle linking the global capital markets with the federal housing market. The Government National Mortgage Association. the investor. The issuer is responsible for using its own resources to cover shortfalls in amounts due to investors that result from mortgage delinquencies or foreclosures. the securities issuer. a mortgage servicer (often the issuer) and perhaps a transfer agent. the servicing may be carried out on behalf of the issuer. arranging for the marketing of the securities.2000. the securities dealer. The issuer is responsible for and fully liable for the satisfactory performance of any work performed by a subcontract servicer. Created by Congress in 1968. It does this by facilitating secondary market activities for packaged residential mortgages. administering the securities outstanding and making the full and timely payment of all amounts due to the investors. the issuer of the mortgage-backed securities is responsible for acquiring eligible mortgages. issuing the securities backed by a pool of mortgages. servicing the mortgages in the pool. there can be only one issuer. Program Procedures . Through its well known mortgage-backed securities (MBS) and multiclass programs. All activities of any subcontract servicer must be covered by a contractual 6-2 8/97 6-1 . Once approved by Ginnie Mae. The parties involved in the MBS program are Ginnie Mae. GINNIE MAE ISSUERS OF MORTGAGE-BACKED SECURITIES AUDIT GUIDANCE 6-1 Program Objective .

Current guides are also available on the Internet at www. and (e) maintain the Register of Certificate Holders (HUD Handbooks 5500.gov. (b) submit required monthly reports to Ginnie Mae. Ginnie Mae issuers of MBS.2 The issuer should have a copy of the appropriate guide(s). Ginnie Mae program regulations are contained in 24 CFR Part 300 through 395. 5500. are required to submit the following financial statements. 6-4 Reporting Requirements . (d) withdraw mortgage documents from the document custodian.2). Rev. and approved by Ginnie Mae. Information on the most recent issuances of the guides may be obtained from Ginnie Mae at (202) 401-8794. Section 2-1 Chapter 2.1. reports and supplemental information on an annual basis: Type of Report Financial Statements and Opinion Internal Controls Compliance with Specific Requirements Reference in IG 2000. © make the payment of the guarantee fee to Ginnie Mae. The issuer may not delegate or transfer to others its obligations to: (a) make monthly payments to investors.04 REV-2 agreement between the issuer and the subcontract servicer. Section 2-1 8/97 6-2 . Section 2-1 Chapter 2. HUD Handbooks for Ginnie Mae are as follows: HUD Handbook No.1 and 5500.2000. including those Ginnie Mae-approved issuers who are inactive.ginniemae. 6 Title Government National Mortgage Association Mortgage-Backed Securities Guide for the Ginnie Mae I Program Government National Mortgage Association mortgage-Backed Securities Guide for the Ginnie Mae II Program 5500.4 REV-1 Chapter 2. 6-3 Reference Material .

Section 6-4 Chapter 6. statement of operations. cash flow statement. 8/97 6-3 . In addition to the financial statements. and a report on compliance with specific requirements. Other Reports . The computation of the issuer's and issuer's parent adjusted net worth is designed to eliminate those assets considered unacceptable by Ginnie Mae. notes to the financial statements. The computation of the issuer's and issuer's parent adjusted net worth and computation of issuer's insurance requirements are to be reported on supplemental schedules to the basis financial statements.2000. The financial documents are to be submitted to Ginnie Mae's Review Agent using the Transmittal/Checklist presented in Attachment F. Section 6-5 Chapter 1. Issuers are required to submit audited annual financial statements which include a balance sheet. all issuers must submit a report on internal controls. Chapter 6. The required format for presenting the B. Section 6-5 Chapter 6. and supplemental schedules as stipulated in Chapter 2 of this guide. Section 1-9 Audited Financial Statements . Note that the adjusted net worth computation for the issuer's parent is only required when the issuer's parent presents a consolidated financial statement along with consolidating schedules that reflect the financial condition of the issuer and the issuer makes up less than 40 percent of the parent's equity. The required format for presenting this analysis is provided in Attachment B for the issuer and Attachment C for the issuer's parent. A sample report on consideration of internal controls and report of compliance with specific requirements are included in Chapter 2.04 REV-2 Supplemental Information: Issuer's Adjusted Net Worth Parent's Adjusted Net Worth (if appropriate) Insurance Requirement Corrective Action Plan (if appropriate) A.

For issuers that make up 40 percent or more of the equity of its parent.e. For an issuer whose equity is less than 40 percent of the equity of its parent. Furthermore. is required to be at least 110 percent (120 percent for issuers approved to issue manufactured housing or multifamily pools) of the required net worth of the Issuer. 8/97 6-4 .2000. Ginnie Mae will accept consolidated financial statements of the issuer's parent provided the conditions in item (1) above are met and the issuer's parent enters into a Corporate Guarantee Agreement (Agreement) with Ginnie Mae to guarantee the performance of the issuer. The consolidating schedules must be subjected to the auditing procedures applied to the consolidated statement of the parent. not exclusively of the issuer) if certain conditions are met as stated below: 1. Ginnie Mae requires submission of audited financial statements exclusively of the issuer. The parent must also demonstrate in its adjusted net worth calculation that it meets the above 110 percent (120 percent for issuer approved to issue manufactured housing or multifamily pools) requirement. Ginnie Mae will accept consolidated financial statements of the issuer's parent provided: the consolidating schedules. which distinguish the balance sheet and operating statement of the Ginnie Mae issuer are included with the parent's audit. after adjustments for unacceptable assets. The parent's net worth. The parent's audited financial statement and adjusted net worth calculations must be audited by the parent's auditor in accordance with this Audit Guide. 2. The parent must meet the terms and conditions of the Agreement for the issuer to remain in good standing with Ginnie Mae.. the issuer is required to submit with its parent's consolidated audited financial statements.04 REV-2 analysis of the issuer's insurance is presented in Attachment D. However. an adjusted net worth calculation on the parent. Ginnie Mae will accept alternative financial statements (i.

insurance requirement) must be prepared by the IA exclusively for the issuer. Two copies of the audited financial statements and auditor's reports should be submitted by the issuer. Ginnie Mae will accept audited financial statements on the issuer's parent. independent of whether the issuer had securities or commitment authority outstanding. OTS Report or 10K). as long as the issuer makes up 90 percent or more of the parent's equity and there is no more than one bank holding company covered in the audit. Reports must be submitted within 90 days of the end of the issuer's fiscal year to Ginnie Mae's Review Agent. 3.04 REV-2 The required format for presenting the "Presentation of Adjusted Net Worth Calculation for Issuer's Parent" is provided in Attachment C of this Chapter.2000. such as those under the supervision of Federal Deposit Insurance Corporation. Single Auditor Approach In many instances it may be to the advantage of the custodian. In addition to the audited financial statement of the issuer's parent. the issuer must submit its unaudited regulatory report (Call report. or both to engage an IA to conduct a review of the mortgage documents held by a particular custodian for several issuers rather than to have each issuer require that a different IA review that D. and Office of Thrift Supervision. 8/97 6-5 . A sample auditor's report on the consolidating balance sheet and operating statement is included as Attachment E to this Chapter. Office of the Comptroller of the Currency. the issuer.1 and/or 5500. all other required reports (internal controls. The Review Agent's address may be obtained from the address list "Addresses" found in HUD Handbooks 5500. Submission of Reports . adjusted net worth calculation. Although Ginnie Mae may accept alternative audited financial statements. For issuers that are federally or state-regulated institutions. C.2. compliance with specific requirements.

1. Select a sample of financial reports. Separate reports then will be prepared by the IA for each issuer's pools. The single auditor approach or the review of custodial documents by the issuer's IA are both acceptable methods in completing the Custodial Review section of the audit guide. Under the single auditor approach.2000. Issuers participating in HUD-assisted activities are required to ensure that financial status reports contain reliable financial data and are presented in accordance with the terms of applicable agreements between the entity and HUD.04 REV-2 part of the custodial documents pertaining to each issuer's pools. 8/97 6-6 . other than those which are included in the audited 2. The individual agreements contain the specific reporting requirements that the entity is to follow. thus reducing the cost of compliance while assuring necessary audit coverage. the IA and issuer should contact the custodian(s) holding the issuer's pool loan documents to determine the extent of the custodian's activities with other issuers. To determine if the single auditor approach is practical in a given situation. Arrangements then may be reached as to the most effective approach to conducting the review of custodial documents. and IAs are not located near each other. b. Obtain an understanding of the auditee's procedures for preparing and reviewing the financial reports. Compliance Requirement . Suggested Audit Procedures a. Identify all required financial reports by inquiry of the issuer. The single auditor approach also may solve practical problems associated with travel when the issuer. the custodian will arrange with an IA to review documents relating to each of the respective issuer's pools. custodian. c. Federal Financial Reports . 6-5 Compliance Requirements and Suggested Audit Procedures A.

and access to adequate facilities necessary to assure Ginnie Mae of its ability to issue and service mortgage-backed securities. trace significant data to supporting documentation.e. ledgers. A State or local government instrumentality that is an FHA-approved mortgagee is eligible. To be approved and maintain eligibility to issue Ginnie Mae-guaranteed mortgage backed securities and act as administrator of such securities. Compliance Requirement .2000. Eligibility to Issue Mortgage-Backed Securities 1. B. a loss of either approval may cause the issuer to become ineligible to issue and service Ginnie Mae mortgage-backed securities. and standards. c. 8/97 6-7 . Report all material differences between financial reports and issuer records. and determine that the reports selected are prepared in accordance with HUD instructions. Be an FHA-approved mortgagee in good standing. the issuer must have at least b. etc. and have the experience. ethics. an applicant must meet and maintain the following requirements: a. For the sample. i. Mortgagees approved by FHA only as loan correspondents are not eligible to be Ginnie Mae issuers. worksheets. e.04 REV-2 financial statements. management capability. Review significant adjustments made to the general ledger accounts affecting HUD-assisted activity and evaluate for propriety. d. Except in instances where the issuer can demonstrate that an alternative arrangement constitutes a sound business practice. Conduct its business operations in accordance with accepted sound mortgage lending and servicing practices. Have as a principal element of its business operation the origination or servicing of mortgage loans. For issuers approved by Fannie Mae or Freddie Mac. d.

and orders of general applicability issued under Title VI of the Civil Rights Act of 1964. Maintain policies that prohibit any discrimination of a borrower based on race. as amended. color. and the issuer's offices must be self-contained and separate from those of any other entity. and with applicable rules and regulations of the Federal Housing Administration. familial status or disability. which names Ginnie Mae as loss payee. Equal Opportunity in Housing. issued on September 24. Equal Employment Opportunity. national origin.2. this section incorporates by reference section 202 of Executive Order 11246. Have and maintain fidelity bond coverage and a mortgage servicing errors and omissions policy based on the issuer's total servicing portfolio in accordance with HUD Handbooks 5500.2000. The issuer shall comply with any applicable rules.1. issued November 20. e. 2. religion. each with sufficient experience in the origination and/or servicing of mortgages of the type to be pooled to assure an ability to manage the pool on a long-term basis. 1965. f.04 REV-2 three full-time officers and one additional employee. sex. Title VII of the Civil Rights Act of 1968. regulations. Chapter 2 and 5500. age. g. Executive Order 11063. of this Chapter. 8/97 6-8 . Chapter 3. as amended. the officer in charge of day-to-day operations must be a fulltime employee solely of the issuer firm. as outlined in Section G. Moreover. The issuer is required to comply with the implementing rules and regulations of the Department of Labor (41 CFR Part 60-1) and the Department of Housing and Urban Development (24 CFR Part 130). 1962. Maintain a net worth based on an audited financial statement prepared in accordance with generally accepted accounting principles in assets acceptable to Ginnie Mae.

b.1. Verify that Ginnie Mae is named as the loss payee. For issuers with a total mortgage servicing portfolio of more than $100 million and up to $500 million: $300.04 REV-2 2. Chapters 2 and 6. Test whether the issuer has and follows an established policy which prohibits discrimination in housing and lending as provided by HUD Handbooks 5500. and is specifically licensed or authorized by law to transact business with the state or territory where the name insured has its corporate headquarters. Chapter 3 and Section 1-10 of this guide.2.2000. above. with testing of the adequacy of insurance at least on a quarterly basis. Lloyd's of London.2. 5500. An issuer's minimum insurance coverage must comply with the following. and 5500. c. is an acceptable insurer. plus 0. although not rated. Also inquire that the required levels of insurance were maintained throughout the year. paragraph B.000. Also verify that the fidelity bond and errors and omissions policies are written by an insurance carrier which has a Best's rating of B+ or better. based on the issuer's total servicing portfolio irrespective of ownership: (1) For issuers with a total mortgage servicing portfolio of $100 million or less: $300. Determine that the issuer meets requirements covered in Section 6-5.15 percent of the amount of total servicing in excess of $100 million.1. Suggested Audit Procedures a. Chapter 2.000. Chapter 3. Recompute the issuer's required fidelity bond and mortgage servicing errors and omissions coverage policy at the end of the fiscal year in accordance with Handbooks 5500. (2) 8/97 6-9 .

Documents relating to the pooled mortgages are required to be held on Ginnie Mae's behalf for the life of the pool by a custodial institution. subsidiary. or related party) of any other Ginnie Mae issuer(s). (4) The maximum mortgage servicing errors and omission insurance coverage requirement is $20. paragraph G. then the servicing of each issuer must be added to calculate the combined total servicing portfolio. Determine whether the issuer is an affiliate (parent. The required format for presenting the "Presentation of Insurance Requirement" is provided in Attachment D of this Chapter. For issuers with a total mortgage servicing portfolio of more than $1 billion: $1. plus 0. d. The amount of this combined servicing portfolio should be used to determine the minimum required insurance coverage. Compare the issuer's adjusted net worth (net worth reported in the audited financial statements as adjusted for any Ginnie Mae unacceptable assets) to the minimum required net worth as discussed in Section 6-5. All affiliated Ginnie Mae issuers should be identified in the auditor's verification of insurance.525.04 REV-2 (3) For issuers with a total mortgage servicing portfolio of more than $500 million and up to $1 billion: $900. plus 0.000.000.000. The maximum fidelity bond coverage is not limited. e. It is the issuer's responsibility to arrange for such an institution to hold the 8/97 6-10 .2 of this Chapter. Review of Custodial Documents 1.000. C.2000. If an affiliate(s) is covered by the same insurance policy.1 percent of total servicing in excess of $1 billion.125 percent of the amount of total servicing in excess of $500 million. Compliance Requirements .

If the issuer's securities outstanding is less than $25 million and there has been no increase in the number of pools held by the document custodian within the last fiscal year. The review of the document custodian must be performed at the document custodian facility. at least one custodial institution must be reviewed each year and all custodial institutions must be reviewed within a three year cycle. Determine if the issuer uses more than one custodial institution. unless Ginnie Mae has given written permission for more than one custodian. A custodial institution is permitted to function as custodian to more than one issuer. A custodial institution must meet the eligibility requirements as specified in Chapter 3 of the Ginnie Mae Guide. Appendix 53). liquidation or any other 8/97 6-11 . 1979 must have a single custodian. 2. hereinafter referred to as Document Custodial Manual (HUD Handbook 5500.2000. An issuer may use more than one custodian.04 REV-2 documents. Suggested Audit Procedures a. Appendix 77 and HUD Handbook 5500.2. Determine that the custodial institution meets the following eligibility requirements. paragraph C. Standards for Documents Custodians. below. Ginnie Mae will permit an off-site review of the document custodian. The Auditor must follow the procedures in Section 6-5. All document custodians must have an on-site review every three years.1. Pools issued on or after February 1. (1) Is a federally regulated financial institution in good standing with its primary regulator. The custodial relationship must be evidenced by the execution of a "Master Custodial Agreement" with the custodian certifying on the reverse side of the Schedule of Pooled Mortgages that it has examined and has in its possession the required documents.2. and not in receivership. If more than one custodian is used. conservatorship.

custodian services and/or investment advisory services offered to the public and not be limited to maintaining custody of valuable documents for Ginnie Mae issuers. personal representative services (executor). Utilizes knowledgeable employees in its custodial function to handle mortgage documents and perform custodial functions. Maintains updated written procedures within its operation. The trust service function must be subject to periodic review or inspections by its primary regulator. (2) Maintains a secure.04 REV-2 management oversight by its primary regulator. Maintains the minimum insurance requirements of its primary regulator and maintains coverage to indemnify against losses involving Ginnie Mae pools and loan documents custody. (3) (4) (5) (6) (7) (8) 8/97 6-12 . unless operating under an approved management plan. Maintains for review annual financial statements audited by an independent auditor for itself or its parent. Satisfies eligibility requirements and other requirements as directed by Ginnie Mae. Self custodial issuers must maintain a separate trust department which is physically separate from the servicing area and operations. It must also have obtained prior approval to exercise fiduciary powers from its primary regulator. in addition to the Document Custodian Manual.2000. 1 and 1/2 hours fire resistant storage facility with adequate access controls. Such fiduciary powers must include ordinary trust services such as personal trust services. guardianship.

the custodian must provide evidence that there is a vertical independence between the issuer and the custodial/warehouse institution. original pool level waiver letters from Ginnie Mae. and any other applicable issuer level documents.a. b.04 REV-2 (9) If custody is by an affiliate. and all forms HUD 11708 (Request for Release of Documents) for liquidated release codes. (2) (3) 8/97 6-13 . any blanket legal opinions. form HUD 11711A (Release of Security Interest) if applicable. Verify that the custodial institution maintains or performs the following inventory accounting requirements: (1) Maintains an Issuer Master File which contains the Issuer Custodial Register. form HUD 11711B (Certification and Agreement). copies of opinion(s) from qualified outside legal counsel (originals maintained in the issuer master file).(8) above.2. the custodial institutions must either meet all the requirements in paragraph C. original blanket interim assignment(s) (a copy of which is included in each individual loan file to which the blanket interim assignment applies). Schedule of Pooled Mortgages. or if the custodial documents are not held in the trust department. the actual and/or due dates for final certification and recertification. and a count of the total number of pools in custody. Maintains an Issuer Custodial Register which includes a list of pools currently in custody (must provide pool identification numbers). Maintains a Pool Master File for each pool in custody which contains a copy of the Master Custodial Agreement. copy of the issuer's corporate resolution for a name change.2000.

1992 on the basis of the nonliquidation reason code. Select a representative sample of Ginnie Mae pools for review. which will include at a minimum a reconciliation of the pool numbers on the issuer custodial register to a current issuer provided listing of pools. If a file is maintained. copies of the forms HUD 11708 must be kept in chronological order by document release date.04 REV-2 (4) Has performed an Annual Physical Inventory of all pools held for the issuer. obtain a list of the pools. If more than one custodial institution is used. The form should state: 8/97 6-14 . and the document release date. If an inventory is maintained it must contain the pool number. (5) c.2000. FHA/VA/Rural Housing Service of the Department of Agriculture (RHS) case number or loan number. the custodian is required to notify the issuer of the overdue documents every 90 days. and the pool numbers on the issuer custodial register agree to the pool master files in custody. For pools selected determine if the pools include: (1) An original form HUD 11711A (Release of Security Interest) executed by any and all secured institution(s) relating to any or all mortgages included in the mortgage pool that are being reviewed and that were closed after March 31. Maintains a Nonliquidation Release Inventory/File of all forms HUD 11708 submitted on or after July 1. If any documents have been released for more than 180 days. If the issuer uses only one custodial institution. 1979. it will be necessary for the issuer to identify which pools are at which custodial institution in order to select a sample of pooled mortgages for that institution. The notification must be in writing and documented in the inventory or file.

1 8/97 6-15 . d. Manufactured home loans: form HUD 11725. the forms HUD 11711A and/or 11711B are not required to be in the custodial file. or Other than the unrecorded assignment to Ginnie Mae." and/or (2) An executed original form HUD 11711B (Certification) signed by an officer of the issuer covering the mortgages that are being reviewed and that were closed after March 31. 1979. there are and will be no other security agreements affecting any mortgages in this pool. Obtain a copy of the original Schedule of Pooled Mortgages (form HUD 11706) 1 from the document custodian for each of the pools selected. stating that: (a) Release(s) of security interest (form HUD 11711A) delivered by the issuer to the custodian comprise(s) all evidence of any security agreements affecting any and all mortgages in this pool. was: Project loans: form HUD 11721. Note: If there has been a transfer of issuer responsibility and the pool was issued more than three years ago. prior to January 1. title or interest it may have in mortgages to be placed in this Ginnie Mae mortgage-backed securities pool no later than the date and time of delivery (release) of the securities by Ginnie Mae and/or its agent.2000. the form number. 1996. The purpose of the Schedule of Pooled Mortgages is (b) For programs other than the Single Family Mortgage-Backed Securities Program.04 REV-2 "The lending or other financing institution named herein agrees to relinquish any and all right.

review the custodial files for the following documents and compare the information shown on these documents to the information on the Schedule of Pooled Mortgages. select a sample of pooled mortgages from the Schedule of Pooled Mortgages. (2) f.04 REV-2 to provide a means of identifying and controlling mortgages placed in the pool which secure the obligations issued. An assignment to Ginnie Mae of the mortgage or other security instrument in recordable form but not recorded. transfer of issuer and/or 8/97 6-16 . and if the mortgage was originated by a mortgagee other than the issuer. there also must be a recorded assignment. An assignment to the issuer must immediately precede the unrecorded assignment to Ginnie Mae. These interim assignments must be either originals or certified copies of the originals and. e. Accordingly. Reconcile and report on any differences. The blanket assignments must apply to mortgages in the same pool and same recording jurisdiction.1 and Paragraph 7-5 and Appendix 53 of Ginnie Mae Handbook 5500. The assignments to Ginnie Mae can be in blanket form. If the pool was issued after March 31.2000. if required by state law to assure validity.2. For sampled mortgages. (1) The original note or other evidence of indebtedness endorsed in blank and without recourse. be either recorded or certified by the issuer to have been transmitted for recordation. Determine that within 12 months of the issuance of the securities. if state law requires recordation in order to make the assignment valid against all lien holders from the originating mortgagee to any intervening interest holder and from such holder to any further holders of mortgage ownership. Procedures for the custodian document review are contained in Paragraph 8-4 and Appendix 77 of Ginnie Mae Handbook 5500. 1979.

if an exception has been authorized by Ginnie Mae. Copies of the recorded interim assignments are acceptable if the (2) (3) (4) 8/97 6-17 . Loans that cannot be insured or guaranteed must be withdrawn from the pool but only after obtaining Ginnie Mae's approval. If evidence of insurance or guaranty is not on file.04 REV-2 custodial responsibility that the document files contain the following documents. These are not required if the mortgage is retained by the original lender. Copies of the recorded mortgage are acceptable if the copies clearly show the document recording information. determine from the issuer why the required documents are missing. Copies of mortgagee title insurance policies are acceptable. (1) Original evidence of insurance or guaranty signed by FHA. VA or RHS (not required in cases involving conveyance of HUD Secretary-owned property. VA or RHS. If the loan is a VA vendee loan or contract.2000. A complete chain of original recorded interim assignments. Original recorded mortgages (or other security instruments) signed by the mortgagor securing repayment of the indebtedness. (NOTE: Compare the mortgagor's name as it appears on the Schedule of Pooled Mortgages with that which appears on the recorded mortgage to assure identity). Within 12 months of issuance of the securities the following documents must be in the custodial file. Evidence that a mortgagee title insurance policy has been obtained or other evidence of the title's acceptability to FHA. there will not be evidence of guaranty. or VA vendee loans or contracts). Report any missing documentation as a finding.

Within 12 months of a transfer of custodial responsibility all documents required in C. This listing should be reviewed with the custodian and subsequently with (2) 8/97 6-18 . Report any pool(s) for which the final certification or recertification is past due and has not been completed. A recorded assignment of the mortgage to the issuer. (5) Verify that the custodian has completed the final certification on the back of the Schedule of Pooled Mortgages.2. and All documents required in paragraphs C. Determine that documents and/or loan files released from custodial files are evidenced by a Request for Release of Documents (form HUD 11708).2.e above are in the custodial files.2. Prepare a list of missing documents and/or loan files not supported by a form HUD 11708.2000. g. Within 12 months of a transfer of issuer responsibility the following documents must be in the custodial file and the custodian is required to have completed recertification of the appropriate pools: (6) (7) (8) An updated endorsement on the promissory notes. For the sampled mortgages: (1) Ascertain whether the custodian is in possession of a form HUD 11708 for documents and/or files removed from the custodian's care.d and C.d and C.e above must be in the custodial file. The custodian is required to have completed recertification of the appropriate pools within 12 months.2.04 REV-2 copies clearly show the document recording information.

(iii) has performed and provided the date of the Annual Physical Inventory for all (2) 8/97 6-19 . provided the conditions set forth in section C.2. above. Verify that these mortgage documents are no longer with the custodian. Any discrepancies should be noted on an exceptions listing noting the Pool Number.b.2000. h. A certification from the document custodian that it (I) maintains the Issuer Master File for the issuer. The custodian should note this removal on its inventory control record (The Schedule of Pooled Mortgages). In lieu of an on site audit of the document custodian.04 REV-2 the issuer. paragraph C.a. I. (1) Confirm that the document custodian meets all the eligibility requirements as stated in Section 6-5. (ii) maintains a Pool Master File for each pool in custody for the issuer. and reported as a finding.2. and the defect. above. The custodian should furnish this listing to the appropriate issuers and the IA should subsequently review with the issuer the reasons for any missing or deficient documents. This listing should be reviewed with the custodian and errors corrected by the custodian. paragraph C. Mortgagor. above have been met. A written certification from the document custodian that it meets all eligibility requirements is acceptable. Select paid-in-full and/or foreclosed mortgages listed on form HUD 11708 on a test basis. Confirm that the document custodian maintains or performs the required inventory accounting required in Section 65. Any items not reconciled should be reported as a finding. Missing documents for mortgages which are still current by the issuer's records could be an indication that the issuer has received mortgage pay-offs and not passed through payments to securities holders .1. the following procedures are acceptable.

1992 on the basis of the nonliquidation reason code. In no instance may the issuer or subservicer remove a loan 8/97 6-20 . (b) Verify that all pools are properly certified and report any pool past due for certification in accordance with Section 6-5. and (v) obtains from the document custodian a copy or list of any documents that have been released for more than 180 days and have not been returned to the document custodian. deposits.2000. The servicing system must be capable of producing at any time for any mortgage. Servicing of pooled mortgages must be carried out in accordance with generally accepted practices in the mortgage lending industry. (3) Select a representative sample of Ginnie Mae pools for review and request verification from the document custodian of the following: (a) Using the issuer's trial balance. Compliance Requirement . an accounting which identifies the Ginnie Mae pool number for each listed mortgage.04 REV-2 pools held for the issuer. Contractual requirements with respect to pool administration are contained in the guaranty agreement executed by the issuer and Ginnie Mae for each pool. ISSUER'S ADMINISTRATION OF POOLED MORTGAGES 1. the amount of each collection.f. above. the custodian must certify that the loans on the trial balance agree to the loans in custody. D. and for each monthly due date. or adjustment and indicating the latest outstanding balances of principal. advance and unapplied payments. Item (v) above should be reviewed with the issuer and any items not reconciled should be reported as a finding.2. paragraph C. (iv) maintains a Non-Liquidation Release Inventory/File of all forms HUD 11708 submitted on or after July 1. Administration of the pool of mortgages and of payments to securities holders is the responsibility of the issuer. advance. disbursement.

should a foreclosure take place. the VA will determine the cost effectiveness of bidding at the foreclosure sale. 8/97 6-21 . Forms HUD-11709 and 11720. should a default occur. Consequently. the issuer may not be fully reimbursed through the claims process. In the VA program. this 'no-bid' will be costly to the issuer as it must pay off the security holder for the outstanding mortgage balance. July 10. 2. Special attention should be given to issuers with a concentration of VA loans in declining market areas. The issuer may incur losses for pooled loans that are not fully insured such as coinsured multifamily loans. These shortfalls have been particularly large in the VA program. For each of these loan types. VA will not bid if its losses will exceed the guarantee amount.04 REV-2 from a pool. Test the custodial account titles for compliance with requirements established by Ginnie Mae Letter Agreements. Any shortfall in collections must be paid to the securities holder out of the issuer's own funds. If a principal and interest disbursement clearing account is used. Test whether the issuer meets Ginnie Mae's requirement for separate custodial bank accounts for principal and interest collections (non-interest bearing) and tax and insurance escrow funds (option of interest bearing) applicable to pooled mortgages with the principal and interest accounts held in institutions meeting Ginnie Mae's rating requirements (All Participants Release. 1990). reduce a loan balance or remove funds from a pool custodial account unless in compliance with the Ginnie Mae Guide and authorized by Ginnie Mae. manufactured housing loans and Department of Veterans Affairs (VA) guaranteed loans. (NOTE: These accounts may contain funds for more than one pool provided that the issuer maintains separate accounting records for each pool). Suggested Audit Procedures a. assure that it is used only for payments to Ginnie Mae securities holders.2000.

Test whether the issuer is disbursing payments to Ginnie Mae I securities holders on a date that can be expected to result in receipt of the funds by the securities holders by the 15th of the month. g. prepayments in full. Compare mortgages listed in the issuer's Liquidation Schedule (Form HUD-11710E) to those identified on Form HUD-11708 held by the custodian as having been withdrawn from the pool to ensure proper pass-through of proceeds to securities holders.2000. d. Review monthly collections of mortgage principal and interest and collections of claims on defaulted and liquidated mortgages to ascertain that funds have been deposited in the proper custodial accounts on a daily basis. e. assignments. c. Test whether the issuer is using its own resources to: (1) Make advances to the pool accounts to cover shortfalls in collections from mortgagors. and unscheduled principal to securities holders by the 15th of the month.04 REV-2 b. Review a representative sample of payments to securities holders to determine that such payments were made to those shown in the securities holders register for the pools being tested. Test whether partial prepayments. Test whether disbursements from principal and interest custodial bank accounts are authorized pursuant to the Guaranty Agreement. principal. h. and foreclosures are passed through to the securities holders in the regular monthly payment following the month of receipt. Test that all such recoveries are recorded on Mortgage-Backed Securities report controls and the pool collateral is removed from the custodian's possession and the transaction is supported by documentation. f. Test whether the issuer is making payments of interest. 8/97 6-22 .

1 and 5500.04 REV-2 (NOTE: Limited exceptions to this requirement are included in the Ginnie Mae Handbooks. as required under Section 4. or if the issuer has transferred pools from one document custodian to another.) I. Determine that the issuer has disclosed a contingent liability in the financial statements. (Issuers are required to "buy out" uninsured or otherwise defective loans from the pools in accordance with instruction in the Handbooks Ginnie Mae 5500.1 and 5500. manufactured housing loans. j. Ginnie Mae must receive the final certification.2 using the issuer's own funds and only after receiving Ginnie Mae approval. particularly for internal reserve pools. 8/97 6-23 . Test that the issuer has a system to follow up on and obtain the required documents to enable the custodian to make its final certification in a timely manner. These controls should allow the issuer to make required advances to securities holders. and Department of Veterans Affairs guaranteed loans.) Special attention should be given to the issuer's calculation and use of excess funds. (2) Cover principal amounts not recovered in claim settlements or which are due in connection with defective loans. Obtain an understanding of the issuer's controls to project the need for and availability of funds. within the timeframes identified in Handbooks Ginnie Mae 5500. If the issuer has acquired pools from another issuer. Test whether the issuer incurred losses for pooled loans not fully insured such as coinsured multifamily loans.2.2000. test whether these pools have received new final certifications (recertification) within the timeframes outlined in the Ginnie Mae Handbooks.02 of the Guaranty Agreement. covering documents listed on the reverse side of the Schedule of Pooled Mortgages. k.

Test whether any transfer of the P&I or T&I custodial accounts.2000. o. RHS and the Ginnie Mae Guide. FHA. Review of Monthly Accounting Reports and Quarterly Submissions 1. Form HUD-11710A. m.04 REV-2 l. Test whether the issuer established a complete securities holders register in accordance with Ginnie Mae instructions and updated the register prior to paying holders each month. Ginnie Mae issuers of MBS are required to submit the following reports periodically throughout the year: a. The register should include a record of all certificate transfers for the life of the pool. change of document custodian. Test whether the issuer is servicing delinquent mortgages and managing foreclosures and assignments in accordance with the applicable requirements of the VA. change of mortgage servicer or transfer of issuer responsibility was accomplished after written approval from Ginnie Mae. Form HUD-11710D and Form HUD11710E Issuers reporting: All Ginnie Mae issuers of record Frequency of reporting: Monthly Deadline for submission: 10th day of following month Trial Loan Balance Information Issuers reporting: All Ginnie Mae issuers of record b. 8/97 6-24 . Test whether undelivered payments are deposited into the principal and interest custodial account and that checks which remain outstanding in excess of 6 months of the payment date are stopped and the funds are returned to the P&I custodial account. Compliance Requirement . n. E. Undelivered payments should not be used as excess funds or used by the issuer to fund pool shortfalls.

Issuers with more than 100 pools (including Ginnie Mae I pools and Ginnie Mae II pools and loan packages) are required to report in electronic form using the procedures and format specified in Handbook 5500. d. Issuers must report to Ginnie Mae quarterly on all of the loans in their portfolio.2000. Such reports must be provided on Form HUD-11710A (Issuer's Monthly Accounting Report). as explained in the chapters and appendices for the other programs.04 REV-2 Frequency of reporting: Quarterly Deadline for submission: 45 days of end of calendar quarter c. Instructions for the preparation and submission of the forms or magnetic tape are found in Appendices 11 through 14 of Handbook 5500. The loan level data should report trial balance information for all non-liquidated loans as of the cut-off date for the quarter (All Participants Release. 8/97 6-25 .1. The reports. Additional or alternative reports are required in connection with pools other than those for single family level payment loans. Mortgage Bankers Quarterly Financial Reporting. September 24. Form HUD-11710E (Liquidation Schedule) and Form HUD-11710D (Issuer's Monthly Summary Report). e. must be sent to Ginnie Mae with sufficient lead time and via a method that ensures delivery no later than the tenth calendar day of each month.1. Form HUD-11750 Issuers reporting: Mortgage bankers not federally regulated Frequency of reporting: Quarterly Deadline for submission: 60 days after end of calendar quarters and 90 days after end of calendar year Issuers must report to Ginnie Mae monthly on each pool. Chapter 11. 1990). Loan level detail must be reported by all issuers every 3 months. along with supporting documents.

or its agent. c.B. Suggested Audit Procedures a. Also. HUD-11750. b. Obtain an understanding of the issuer's procedures for collecting and entering all data relating to mortgage collections and securities payments on Form HUD-11710A. Select a sample of Form HUD-11710A's and trace delinquency information to the issuer's internal mortgage servicing delinquency reports. Compare the securities balance reported on the Form HUD-11710A to the Remaining Pool Balance (R. d. Reports must be provided to Ginnie Mae on a pre-formatted disk. savings and loans and credit unions) are not required to submit this report (All Participants Release. e. Compare the custodial account balances reported on Forms HUD-11710A and 11710D to the actual balances (after reconciliation) of the disbursement clearing and custodial bank accounts as shown by the bank statements. Statement of Income and Additional Information.2000.P. 1990). Compare the amount of checks sent to securities holders for the month to the amount reported to Ginnie Mae. which includes a Statement of Condition. 2. test that the unpaid loan balances passed through to securities holders and reported in the Liquidation Schedule. f.) reported to Ginnie Mae. Test whether a Liquidation Schedule (Form HUD-11710E) is submitted to Ginnie Mae for each loan removed from the pool.04 REV-2 f. Test whether entries are made in accordance with instructions in the Ginnie Mae Handbooks. agree to the issuer's records. Issuers that are not federally regulated must report their financial condition quarterly to Ginnie Mae. March 5. 8/97 6-26 . Federally regulated financial institutions (banks. in accordance with Ginnie Mae MBS requirements.

Form HUD-11710A) (plus) Prepaid Principal (Section 1.04 REV-2 g.00 per pool. Block D. Line G) (minus) Concurrent Date (CD) Pools Only: Scheduled Principal (Section 1-A. Block D. Line D. Line F) (minus) Delinquent Principal (Section 1. adjustments to the securities holders payments must be made in Section 2.00 for each loan in the pool up to a maximum of $50. Such differences should not exceed $1. At least once a year. Form HUD-11710E) (minus) CD Pools Only: Additional Principal Adjustment or FIC change for Graduated Payment Mortgage Pools (Section 2. Other) (equals) Security Principal Balance (Section 3. h. Block C) (plus) CD Pools Only: Last Liquidation Principal Installment (Principal portion of last installment reported on Liquidation Schedule. of Form HUD-11710A to fully correct for any difference. For pools selected for review. Reconcile and report on any difference.2000. Line D) (6) (7) Differences may arise in the reconciliation between the pooled loan balance and the outstanding securities balance due to additional principal payments or rounding. On pools selected for review. as follows: (1) (2) (3) (4) (5) Pool Principal Balance (Section 1. This test (outlined below) 8/97 6-27 . Any greater difference must be funded to the pool in the current report. reconcile the total unpaid principal balance of the pooled mortgages to the unpaid principal balance of the securities. test the expected Principal and Interest (P&I) Custodial Account balances at cut-off.

which include: (1) (IR only) plus payment to securities holders. (IR and CD) minus delinquent P&I. this entry will be zero (Section 1.2000. Total). Item F. The test formula will only yield accurate results when the mortgage and securities balances reconcile in Step 7 above. as calculated based on prepaid interest amounts (Section 1. If the issuer withdraws it servicing fee prior to the cutoff. Item G). Total). (2) (3) (4) (5) 8/97 6-28 . (IR and CD) plus prepaid P&I. Servicing fees collected on prepaid interest are already included in item (2) above. The test assumes that all collections are paid out by the pass through of funds to securities holders or taken as issuer servicing fees. if taken after the cut-off date. Item G.04 REV-2 identifies a minimum dollar amount expected in the P&I account for any particular pool as of a given cut-off date. This test verifies the accuracy of the P&I balance reported in Section 5. Block B2 of the Form HUD-11710A report. (IR and CD) plus servicing fee. funds which have been collected but are not required to be distributed to holders at the next payment date (Section 1. Section 2. Item F. Interest). The test formula is different between Internal Reserve (IR) and Concurrent Date (CD) pools. funds not yet collected but which have already been distributed to holders through calculation of scheduled payment (Section 1. (IR and CD) minus prepaid servicing fee. but in either case indicates the amount of P&I funds which should be held in the account at the cut-off date. (Form HUD-11710A. Item H). to be distributed on the 15th of the following month.

Pool Interest). This "extra" month payment. Differences should be reconciled and exceptions reported. Servicing fees are not distributed to holders. (11) (CD only) minus servicing fee from liquidations. Obtain an understanding of the issuer's procedures and test whether the issuer meets the 8/97 6-29 . B. Item C). I. Item G. Line C. funds collected but not due to be distributed until the following month (Section 1. These are funds collected but not due holders until the 15th of the following month (Section 1. so this amount is not a shortage in the account. This calculated expected P&I balance should agree with the reported P&I balance (Form HUD-11710A. is included in the scheduled P&I amount.2000. as calculated on the interest portion of the last payment installment (based on last interest installment on the Form HUD-11710E). the issuer-funded adjustment which has been deposited to the custodial account but is not distributed until the following month (Section 1. Interest).04 REV-2 (6) (IR and CD) plus delinquent servicing fee as calculated based on total delinquent interest (Section 1. Line B-2). (CD only) plus additional principal adjustment. (7) (8) (9) (10) (CD only) plus fixed installment on liquidations. (CD only) plus additional principal payments. because it is necessary to amortize a liquidating loan through one payment beyond the month during which pay-off or foreclosure funds are received on CD pools. (CD only) plus liquidation principal. normally not due until the following month. Section 5. 2). Similarly.

There also are recordkeeping and reporting requirements. brokers. brokers. b. j. and investors. k. These procedures must be implemented by all approved issuers. and steps taken in determining the financial capacity of dealers. including an explanation of standards for. 8/97 6-30 . (b) prudent business practice rules. whether or not securities and/or commitments are outstanding. For all issuers that are not federally regulated financial institutions.1. The applicable requirements are found in HUD Handbook 5500. F.2000. Test that loan level information is being reported quarterly to Ginnie Mae. Test whether the issuer is following established procedures to determine the financial capacity of dealers.04 REV-2 delivery requirement by the tenth calendar day of each month. Securities Marketing and Trading Practices 1. and © minimum forward delivery contract requirements relating to so-called mark to market deposit requirements. a formatted disk. Compliance Requirement . There are three components to these requirements: (a) a suitability rule. Obtain an understanding of the written procedures established by the issuer to determine the financial integrity of dealers. Ginnie Mae has established securities marketing and trading requirements which are intended to assure that issuers carry out their securities marketing and trading activities in a manner consistent with prudent business practices and their own and others financial capacity. test that quarterly financial information is being submitted on the HUD-11750. and investors. Suggested Audit Procedures a. 2. brokers. and investors to complete a transaction and to determine the business reputation of the dealers. or investors to complete transactions. brokers.

8/97 6-31 . The name of the financial institution with which collateral is. Settlement date.04 REV-2 c. e. For "regulated transactions" (see Note 1 at step h. Nature of the transaction: purchase. deposited. Interest rate on the securities. or will be. optional or mandatory delivery. Dollar amount of securities. sale. Current market price (value) of the contract. Type of securities. Obtain copies of the resolution executed by the issuer's Board of Directors designating key persons responsible for overall supervision of issuer activities relating to the marketing and trading of securities. (4) (5) (6) (7) (8) (9) f. repurchase or other credit arrangement. d. Test whether the issuer's records of such commitments include the following: (1) (2) (3) Date of the transaction (trade date).2000. Name of the firm and individual with whom the transaction was executed. "Price" of the securities. Obtain an understanding of the procedures established by the issuer to maintain a record of all commitments entered into to deliver or acquire securities.) test whether the issuer's records include the following: (1) (2) A copy of the delayed delivery contract required by the Ginnie Mae Handbook.

A sale of securities where: (1) the issuer holds a valid. Prove the mathematical accuracy of the net position. and (2) the settlement date under the contract is no later than the last day of the calendar month in which the 150th day after the contract's trade date falls. determine whether they are disclosed in the appropriate footnotes to the financial statements. Determine the potential impact on an issuer's net worth of any identified forward or future commitment contract entered into by the issuer to purchase or sell securities. reverse-repurchase. outstanding commitment to guaranty mortgage-backed securities (which is not applied in connection with another transaction) issued by Ginnie Mae in an amount at least equal to the face amount of the securities sold. plus those expected to be acquired. It also should include any positions involving repurchase. if there are material potential effects on the issuer's net worth. If the collateral used is a letter of credit.04 REV-2 (3) Records of mark to including: market deposits by issuer type of collateral market computations. (4) g. deposited. value. 8/97 6-32 . amounts of and by contra-party. NOTE 1: purchase pursuant that the (1) "Regulated transaction" means the or sale of securities by an issuer to a delay delivery contract except term does not include: h. less commitments the issuer has available for disposing of loans and securities.2000. The statement should identify amounts of loans and securities closed and held for sale. a copy of the letter of credit. or other credit transactions. Review the issuer's statement showing the computation of the issuer's "net position" and compare information to the issuer's accounting records.

A sale or purchase of securities pursuant to a contract which does not obligate the issuer to actually sell/purchase securities. Failure of the issuer to respond timely and satisfactorily to requests made by Ginnie Mae. (3) (4) G. Excess/(deficit) net worth is computed as the difference between adjusted net worth and required net worth. Ginnie Mae will deduct the amount from the issuer's adjusted net worth.2000. that is. Adjusted Net Worth 1. or its agent. A purchase (or sale) of mortgage participation certificates directly from (or to) the Federal Home Loan Mortgage Corporation. Unacceptable assets are defined in Attachment A to this Chapter and should be itemized by asset classification." If evidence exists indicating the existence of related party receivables which have not been deducted by the IA. A "Presentation of Adjusted Net Worth Calculation" is required for all issuers. An issuer's adjusted net worth will be calculated by subtracting the total amount of unacceptable assets from the net worth as stated on the IA audited balance sheet. a put or call transaction in which the issuer has the option to perform. for additional information could result 8/97 6-33 . even if there were no securities or commitments outstanding at fiscal year end. The required format for the "Presentation of Adjusted Net Worth Calculation" is provided on Attachment B of this Chapter. Computation .04 REV-2 (2) A sale of securities guaranteed by Ginnie Mae and based on construction loans (construction loan securities) or project loans (project loan securities). Do not aggregate the unacceptable assets into one line titled "Unacceptable Assets.

the adjusted net worth computation must focus exclusively on the assets and liabilities of the Ginnie Mae issuer. plus 0. c. Where the Ginnie Mae issuer is a subsidiary. For issuers approved to securitize mortgagebacked securities pools backed by single family level payment.000 base net worth plus 0. the net worth is: $500.2000. graduated payment. Required Net Worth will be calculated as of the end of the issuer's fiscal year as follows: a.000 base net worth plus one percent of the amount of securities outstanding in excess of $5 million. 2 commitment authority and total pools funded in excess of $20 million. 3 2 8/97 6-34 . Required Net Worth .2 percent of any additional securities. commitment authority and total pools funded in excess of $35 million. Pools that have been logged and are in the review process and the commitment line balance has been reduced. For issuers approved to securitize mortgagebacked securities pools backed by multifamily construction or permanent loans.2 percent of any additional securities. b. the net worth is: $500. but less than $20 million. For issuers approved to securitize mortgagebacked securities pools backed by manufactured home loans.000 base net worth plus 0. 2. total pools funded and dollar amount of unexpended construction loan draws 3 in excess of $35 million. The net amount between Construction Loan commitment authority reserved and total Construction Loan draws made. growing equity or adjustable rate mortgages.2 percent of any additional securities. the net worth is: $250.04 REV-2 in disallowance of questionable assets and result in suspension or in termination of issuer status. commitment authority.

2000.04 REV-2

d.

The base net worth requirement for all issuer types will be indexed to inflation and adjusted every five years with a one year advance notice to issuers. The change in price index will be measured by the Consumer Price Index (CPI). The base net worth requirement may float downward subject to a $250,000 or $500,000 minimum depending upon an issuer's pool type eligibility. The adjusted base net worth will be rounded to the nearest thousand. The reference period from which inflation will be calculated is December 1995. The first adjustment of the base net worth requirement will be on January 1, 2002 which will reflect the change in price level during 1996 through 2000. Future adjustments will follow in this manner. The Ginnie Mae President shall have discretion to waive or lessen any increase or decrease given by the indexing formula.

8/97 6-35

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ATTACHMENT A UNACCEPTABLE ASSETS FOR COMPUTATION OF ADJUSTED NET WORTH 1. Any asset or portion thereof pledged to secure obligations of another entity or any person. Supervised institutions that provide financial services to incorporated communities are sometimes required by State law to pledge their assets for the benefit of the community. These pledged assets are acceptable for supervised institutions only. An asset due from an officer or stockholder of the mortgagee or from a related entity, except for: o A construction loan receivable, secured by a first mortgage, from a related entity. o A mortgage loan receivable established in the normal course of business in an arm's length transaction and secured by a first mortgage on the related property. o A receivable from a related party where the affected 4 parties have executed a cross-default agreement or 5 corporate guarantee agreement with Ginnie Mae. 3. An investment in a related entity in which any officer or stockholder of the mortgagees has a personal interest 6 unrelated to that person's position as an officer or stockholder of the mortgagee.

2.

A cross default agreement is an agreement between related affiliated Ginnie Mae issuers which provides for the default of all affiliated issuers in the event of a default by any one of them. A corporate guarantee agreement is an agreement where the issuer's parent guarantees the performance of the issuer. "Personal interest" as used here indicated a relationship between the mortgagee and a person or entity in which that specified person (e.g. spouse, parent, grandparent, child, brother, sister, aunt, uncle, or in-law) has a financial interest in or is employed in a management position by the mortgagee.
6 5

4

8/97 6-36

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4.

That portion of an investment in a joint venture, subsidiary, affiliate, and/or other related entity, which is greater than equity, as adjusted. "Equity as adjusted" means the book value on the books of the related entity reduced by the amount of unacceptable assets carried by the related entity. Any intangible asset, such as goodwill, covenants not to compete, franchise fees, organization costs, value placed on insurance renewals, and value placed on property management contract renewals. The value of any servicing contract not determined in accordance with SFAS No. 65, Accounting for Certain Mortgage Banking Activities and SFAS No. 125, Accounting for Transfers and Servicing of Financial Assets and Extinguishments of Liabilities , or subsequent revisions thereto. Any asset not readily marketable and for which appraised values are very subjective. Examples include, but are not limited to, antiques, art work, and gemstones. That portion of any marketable security (listed or unlisted) in excess of the lower of cost or market, except for shares of Fannie Mae stock required to be held under a servicing agreement, which should be carried at cost. Any amount in excess of the lower of cost or market value of mortgages in foreclosure, construction loans, or property acquired through foreclosure.

5.

6.

7.

8.

9.

10. Any asset which is principally used 7 for the personal enjoyment or benefit of an officer, director, or stockholder and not for normal business purposes. This includes automobiles and personal residences. 11. "Other Assets" unless the financial statements are accompanied by a schedule prepared by the independent auditor or a schedule prepared by the issuer/mortgagee and signed by an officer of the issuer/mortgagee.

"Principally used" means that any other use of the property must be solely incidental.

7

8/97 6-37

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12. That portion of contributed property, not otherwise excluded, in excess of the value as of the date of contribution determined by an independent appraisal.

8/97 6-38

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ATTACHMENT B REQUIRED FORMAT FOR PRESENTATION OF ADJUSTED NET WORTH CALCULATION FOR ISSUER A. Adjusted Net Worth Calculation :

Stockholders Equity per Statement of Financial Condition at end of reporting period

$

Less: Itemized Unacceptable Assets 1/ 1. $ ________ 2. $ ________ 3. $ ________ Total Unacceptable Assets $ Adjusted Net Worth B. Required Net Worth Calculation Unpaid Principal Balance of Securities Outstanding (Note: Number of Pools Plus: Outstanding Balance of Commitments Authority Issued and Requested Total Outstanding Portfolio and Authority Required Net Worth C. Excess (Deficit) Net Worth (Adjusted Net Worth - Required Net Worth) : $

)

$

$ $ $ $
2/

1/

Unacceptable assets are defined in Attachment A. In the event adjusted net worth does not meet the Ginnie Mae requirement, the IA may include any comments from representatives of the issuer of corrective measures contemplated.

2/

8/97 6-39

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ATTACHMENT C REQUIRED FORMAT FOR PRESENTATION OF ADJUSTED NET WORTH CALCULATION FOR ISSUER'S PARENT A. Adjusted Net Worth Calculation :

Stockholders Equity per Statement of Financial Condition at end of reporting period

$

Less: Itemized Unacceptable Assets 1/ 1. $ ________ 2. $ ________ 3. $ ________ Total Unacceptable Assets $ Adjusted Net Worth B. Comparison of Net Worth Calculations Issuer's Required Net Worth (taken from Issuer's Adjusted Net Worth Calculation) (Multiply issuer's required net worth by 110% for issuers with single family status only, otherwise multiply by 120%) Parent's Required Net Worth C. Excess/(Deficit) : $ $ : $

$

1/

Unacceptable assets are defined in Attachment A.

8/97 6-40

Required Insurance Calculation Servicing Portfolio: Ginnie Mae Fannie Mae Freddie Mac Conventional (Other) Total Servicing Portfolio Required Fidelity Bond Coverage Required Mortgage Servicing Errors and Omissions Coverage C.2000. Identification of Affiliated 1/ Ginnie Mae Issuers : Affiliated Ginnie Mae Issuers: (Issuer Name and Ginnie Mae Issuer Identification Number) Affiliated Issuers on Same Insurance Policies: (Issuer Name and Ginnie Mae Issuer Identification Number) B. Verification of Insurance Coverage Fidelity Bond Coverage at End of Reporting Period Mortgage Servicing Errors and Omissions Coverage at End of Reporting Period D.04 REV-2 ATTACHMENT D REQUIRED FORMAT FOR PRESENTATION OF INSURANCE REQUIREMENT A. Excess (Deficit) Insurance Coverage Fidelity Bond Coverage Required Mortgage Servicing Errors and Omissions Coverage : $ $ : $ $ : $ $ $ $ $ $ $ 8/97 6-41 .

directly or indirectly through one or more intermediaries.2000.04 REV-2 E. 8/97 6-42 . is controlled by. Ginnie Mae Loss Payable Endorsement Fidelity Bond Coverage Mortgage Servicing Errors and Omissions Coverage : $ $ Yes/No Yes/No 1/ Definition of an Affiliate : An affiliate is a party that. controls. or is under common control with an issuer.

is fairly stated in all material respects in relation to the consolidated financial statements taken as a whole. and the Government National Mortgage Association (Ginnie Mae). This report is intended for the information of the audit committee. Such information has been subjected to the auditing procedures applied in our audit of the consolidated financial statements and. [Firm Signature] [Date] 8/97 6-43 . management. the consolidated financial statements of ABC Financial Corporation and subsidiaries as of December 31.2000. in our opinion. However. 1992 included on page "XX" of [identify report]. 1991 and have issued our unqualified opinion thereon dated January 24. The following consolidating balance sheet and statement of income on pages "XX" and "XX. are presented for purposes of additional analysis and are not a required part of the consolidated financial statements of ABC Financial Corporation and subsidiaries. Our audit was conducted for the purpose of forming an opinion on the consolidated financial statements taken as a whole. this report is a matter of public record and its distribution is not limited.04 REV-2 ATTACHMENT E REPORT OF INDEPENDENT AUDITORS ON CONSOLIDATING BALANCE SHEET AND STATEMENT OF INCOME Board of Directors ABC Financial Corporation We have audited. in accordance with generally accepted auditing standards and Government Auditing Standards." respectively.

7. Complete Items 1 through 7 1. (if appropriate) 8.___________________________ IA's Contact Person___________________________________ and Telephone Number:________________________________ Place a Checkmark by Item(s) Submitted 1.D._____________________ FHA Mortgagee No. you may contact Mr.___IA's Report on Consolidating Balance Sheet and Statement of Income (if appropriate) 3.___Name.___IA's Presentation of Adjusted Net Worth for Issuer 7.___IA's Report on Compliance with specific Requirements 5. 6. Use additional page if necessary: ____________________________________________________________ ____________________________________________________________ ____________________________________________________________ Signature:___________________________________Date:_______________ Type of Print Signature Name:____________________________________ Title:___________________________________________________________ 8/97 6-44 . 5. An "affiliate" is defined for these purposes as an organization that is related to the issuer through some type of control or ownership (as defined by GAAP). address and Ginnie Mae Issuer Number (if applicable) of all affiliates. Issuer Name:________________________________________________ Issuer Address:_____________________________________________ Issuer's Tax Identification No._______________________ IA's Tax Identification No. Our facsimile number is ___________________________________.___IA's Presentation of Adjusted Net Worth for Parent.___IA's Presentation of Insurance Requirement 6.___Annual Audited Financial Statement for period ended __/__/__ 2.___Corrective Action Plan (if appropriate) 9./Ms. If you have any questions regarding the items being sent. 2._____________________________ Ginnie Mae I. No. ____________________________ of the organization or me at telephone number _____________________________.___IA's Report on Internal Controls 4. 3.___Schedule of "Other Assets" 10.ATTACHMENT F REQUIRED TRANSMITTAL/CHECKLIST FOR ANNUAL SUBMISSION OF FINANCIAL DOCUMENTS Address to: Ginnie Mae's Review Agent To whom it may concern: The following information is being sent to maintain eligibility in the Mortgage-Backed Securities Program. 4.

Program Procedures . if approved. loan correspondents. These institutions are approved on the basis of their financial capacity. and investing mortgagees which have authority to originate. Department of Housing and Urban Development 7-2 7-3 8/97 7-1 . Mortgagee Approval and Recertification . will be assigned a unique HUD/FHA identification number and notified that it may now originate FHA insured mortgages. HUD approves lending institutions which belong to the Federal Reserve System or with Federal Deposit Insurance Corporation or National Credit Union Administration insurance on their accounts. and other criteria as specified in HUD Handbook 4060. HUD approves the mortgagees for participation in the mortgage insurance programs for single family and multifamily homes as evidenced by the mortgagee's receipt of the yearly verification report in the last month of its fiscal year. or service HUD-insured mortgages depending on the type of institution. HUD-APPROVED TITLE II NONSUPERVISED MORTGAGEES AND LOAN CORRESPONDENTS AUDIT GUIDANCE 7-1 Program Objective . sell. After a review of the application and clearance through certain Headquarters systems. HUD also approves other financial institutions designated as nonsupervised mortgagees. facilities. must apply for initial or branch approval to participate in the HUD/FHA mortgage insurance programs through the Lender Approval and Recertification Division at HUD Headquarters. Reference Material Document 24 CFR Part 202 Title Regulations Relating to the Office of Assistant Secretary for Housing-Federal Housing Commissioner. whether supervised or nonsupervised. All mortgagees and loan correspondents. experience. HUD insures mortgages made by private lending institutions to finance the purchase of single family and multifamily homes.04 REV-2 CHAPTER 7.2000.1. These types of institutions are designated by HUD as supervised mortgagees. the applicant.1. following the directions in HUD Handbook 4060. purchase.

1 HUD Handbook 4330. nonsupervised mortgagee or loan correspondent is required by 24 CFR Part 202 annually to submit an audit report to the Commissioner within 90 days of the close of its fiscal year.4 HUD Handbook 4060. even in those cases where corrective action was taken by the auditee after the end of the fiscal year.2 HUD Handbook 4155.2 REV-1 HUD Handbook 4000.1 HUD Handbook 4060.3 HUD Handbook 4110. A suggested format for the computation of Adjusted Net Worth and the list of unacceptable assets are shown in paragraph 7-6 of this chapter.04 REV-2 Mortgagees Letters HUD Handbook 4000. 8/97 7-2 . All instances of noncompliance identified by the auditor must be reported as findings.2000. A Title II. The audit and shall be performed under Government Auditing Standards shall include the auditor's report on the basic financial statements and a computation of the mortgagee's Adjusted Net Worth.1 HUD Handbook 4330.4 7-4 Reporting Requirements .4 HUD Handbook 4350. These reports are required for every Title II nonsupervised mortgagee or loan correspondent regardless of the number of loans originated or serviced during the fiscal year.1 Various Mortgagee's Handbook-Application Through Insurance (Single Family) Single Family Direct Endorsement Program Mortgagee Approval and Recertification Field Office Guide for Mortgagee Monitoring Mortgagee's Guide-Home Mortgage Insurance Fiscal Instructions Mortgage Credit Analysis for Mortgage Insurance on One-to-Four Family Properties Single Family Coinsurance Program Administration of Insured Home Mortgages FHA Single Family Insurance Claims Multifamily Mortgagees HUD Handbook 4205.

S. The scope of the auditors' testing of compliance with internal controls and the presentation of the results of those tests may be included in the auditors' report on the basic financial statements. Except for Ginnie Mae issuers. although the audit is performed under Government Auditing Standards . Department of HUD Lender Approval and Recertification Division Room B-133 3214 Plaza 451 Seventh St. the Office of Housing has changed the compliance and auditing requirements. other than nonsupervised loan correspondents. the audited financial statements are now sent only to Ginnie Mae for review (See Chapter 6).04 REV-2 For nonsupervised mortgagees.2000. the audit report shall also cover internal controls. Department of HUD Lender Approval and Recertification Division Suite 3214 490 L'Enfant Plaza East Washington. SW Washington. DC 20024 When a Title II mortgagee is also a Ginnie Mae issuer. for Title I. compliance with specific requirements that have a direct and material effect on HUD-assisted mortgages. 8/97 7-3 . including: an opinion on compliance with specific requirements applicable to major HUD-assisted programs (or a report on compliance with specific requirements applicable to nonmajor HUD-assisted program transactions). DC 20410-8888 Delivery: U.S. Lenders/mortgagees that are approved under both Title I and Title II and also are Ginnie Mae issuers must submit one set of audited financial statements to Ginnie Mae and another. For nonsupervised loan correspondents. one copy of the report should be sent by the auditee to: Mailing address: U. to the Office of Lender Activities and Program Compliance. The audit is not subject to the requirements or procedures of paragraph 7-5 except where mandated by Government Auditing Standards .

to assist corporate management in determining whether HUD requirements and the mortgagee's policies and procedures are being followed by its personnel. The consolidating schedules must be subjected to the auditing procedures applied to the consolidated statement of the parent and the auditor's opinion must cover the financial statement accounts of the subsidiary. which may 8/97 7-4 . which distinguish the balance sheet and operating statement of the mortgagee/loan correspondent subject to the HUD audit requirement. audited by the IA. Compliance Requirement HUD-approved mortgagees are required to originate and service HUD-insured mortgages in accordance with accepted practices of prudent lending institutions and comply with all relevant Departmental rules and regulations.1 REV-2. or subsequent amendments. liabilities and results of operation are included in the consolidated financial statements of its parent entity. The monthly quality control procedures may be conducted by the entity itself internally or an external review. Quality Control Plan 1. if it includes consolidating schedules. 7-5 Compliance Requirements and Audit Areas A. Each approved mortgagee must develop and implement a quality control plan consistent with its needs.04 REV-2 All servicing/origination income must be accounted for in compliance with FASB Statement No. Where the mortgagee/loan correspondent is a subsidiary and information on its assets. HUD will accept the audited consolidated financial statements of the parent. 125. Chapter 9 or the latest HUD guidance for loan origination and servicing. and the above referenced guidance.2000. A sample auditor's report on the consolidating balance sheet and operating statement is included as Attachment A to this Chapter. Each HUD-approved mortgagee is required to establish and maintain a written quality control plan in accordance with HUD Handbook 4060. Accounting for Transfers and Servicing of Financial Assets and Extinguishments of Liabilities .

Review the supporting documentation to determine that the required general and specific elements included in Handbook 4060.04 REV-2 be performed by the independent auditor or other qualified organization.1 REV-2. 8/97 7-5 . determine that it was performed by knowledgeable personnel with no direct responsibilities in the areas they reviewed.2000. Chapter 9 were included in the quality control review.1. Review the supporting documentation of the most recent quality control review to determine that it included a review of a representative sample in accordance with guidance in HUD Handbook 4060. It should also include a random sample of insured loans being serviced by the mortgagee or its agent. Inquire whether the mortgagee relies on an internal or external quality control review of its origination. and servicing functions. Obtain a copy of the mortgagee's quality control plan and compare it to the general and specific requirements contained in Handbook 4060. Determine whether the mortgagee has a procedure in place which assures that all employees involved in loan origination and servicing understand the mortgagee's quality control policies and procedures.(24 CFR Subsection 202. the IA should report this as part of the additional information required under Chapter 2 of this guide. c. Suggested Audit Procedures a. Determine that any branch offices received an on-site review as required by HUD Handbook 4060. d.1 and that the plan includes coverage for any loan correspondents and authorized agents of the mortgagee. If the mortgagee relies on the external review process and the IA's engagement includes the performance of the quality control review. The Quality Control Plan must provide for the written reverification of the mortgagor's b. underwriting.5(h)). e. 2.1. If the mortgagee relies on an internal review.

gift letter or other sources of funds. 8/97 7-6 . independent contractor.5(k) (HUD Handbook 4060. Obtain a written copy of the latest quality control report and determine that senior management officials also received a copy which included any deficiencies identified during the review. The mortgagee may determine the location and type of its branch office facilities. Through inquiry and/or physical observation. in an office in which no business except that of the mortgagee is conducted. B. Compliance Requirement . a mortgagee may register a branch office that does not meet the requirements of a traditional branch office (non-traditional branch office). It may be located in the mortgagee's home office. Determine that all branches are registered with HUD by review of the appropriate form or screen printout. net branch. g. A mortgagee may maintain one or more branch offices for the submission of applications for mortgage insurance.04 REV-2 employment. A loan correspondent is also permitted to establish branch offices in accordance with 24 CFR Subsection 202. Determine that the mortgagee also notified the Office of Lender Activities and Program Compliance of any violations. b. A traditional branch office is a separately located unit of the mortgagee.1 Chapter 5). The non-traditional branch office facility may be located in either commercial or non-commercial space. false statements or program abuses in the report. Suggested Audit Procedures a. deposits.2000. agent of the auditee or separate 2. determine that the branch is a true branch and is not a subsidiary. Determine that senior management officials promptly initiated corrective action for all deficiencies noted. Each branch office must be registered by HUD. Branch Office Operations 1. f. In addition.

HUD requires the originators of insured mortgages to develop such loans in accordance with HUD requirements. Inquire of personnel to determine that branch employees conduct only the business affairs of that entity during normal business hours.04 REV-2 entity. Loan Origination 1. C. The branch office should have its own telephone and maintain its own accounting records. Compliance Requirement . including a branch manager. Determine that the branch office is located in space which is separated by a partition from any other entity and is clearly identified to the public and that the branch office's operating costs are paid by the approved mortgagee or loan correspondent. HUD/FHA Application for Commitment for Insurance Under the National Housing Act must be supported by documents in the auditee files (HUD Handbook 4000. except the receptionist that are not employed exclusively for the auditee at any given time.2000. Review company records for evidence that the present branch office manager is a corporate officer or an employee authorized to bind the corporation in matters involving loan origination and servicing and manages only one branch.2 REV-1). Review auditee payroll records for indications of any branch office personnel. 8/97 7-7 . that serves only that branch. c. They must obtain and verify information with at least the same care that would be exercised in originating a loan in which the mortgage would be entirely dependent on the property as security to protect its investment. e. d. A branch must have at least one employee. A mortgagee with a separate tax ID number is required to have approval as a mortgagee in its own right. Information on the auditee's copy of Form HUD-92900.

18d). and the independent written reports indicate no significant discrepancies were identified. provided the IA has reviewed the independent reviewer's procedures. The two percent limitation on variation in "mortgage charge rates" shall be applied to all Section 203 mortgages by loan type. Obtain a sample of files for loans originated during the audit period to test areas c-f. employment verification.2000. and verification of deposits are sent directly to the auditee and do not pass through any third party. as a condition of providing an insured loan. that the principal amount of the loan exceed a minimum amount established by the mortgagee (24 CFR 203.04 REV-2 Mortgagees may not require. This should include loans originated at the auditee's branch offices and by their loan correspondents as well as the central office.12 prohibits lenders from originating insured mortgages if it is the customary lending practice of the lender to engage in "tiered pricing" of its loans (for discount points. origination fee and other such fees) of more than two percent in an area (metropolitan statistical area or county. 8/97 7-8 . the IA may rely on the testing of loan files performed by the independent third party. 2. c. Where an auditee uses an independent third party to perform quality control over loan origination. in rural areas). Obtain an understanding of the auditee's procedures for processing loan applications. which follow. 24 CFR 202. Review loan file documentation for evidence that a face-to-face interview with the loan applicant was conducted by a company employee and that the b. retested some of the same files chosen for testing. Suggested Audit Procedures a. Determine that the auditee's procedures provide that applicant's credit report. The regulation further requires HUD to ensure that any variations in mortgage charge rates be based only on the actual variations in costs to the lender to make the loan.

and liabilities are supported by documentation such as verifications of deposits. e. current housing payments) of the applicant. and credit reports. loan and rent payments.g. Determine that all employment and income data is supported by a verification of employment or other sources. debt/income ratio). credit score. source of funds. Ensure that the score accurately reflected the financial status (e. f.. Review for the following: (1) Determine that an individual review was provided for all applications denied due to a statistical category or score (e. g. Ensure that all procedures for accepting and processing the loan were followed. Test that the applicant's cash assets.g. A face-to-face interview is required only when the applicant puts down less than ten percent and does not have homeownership counseling. Review loan file documentation for evidence that the mortgagee reconciled any conflicting information prior to submitting the application package to the HUD Field Office for endorsement. especially for self-employed applicants and applicants with non-employment income. (2) 8/97 7-9 . Obtain a sample of files for rejected loans during the audit period. Determine that the rejection was made based on established criteria and the reason for the rejection was provided to the applicant. gift letters. Review all files in the sample for any forms that have been signed by the mortgagee but not completed by the applicant.04 REV-2 completed loan application was reviewed with the loan applicant.2000. etc. d. A rejection should not be influenced by statistical categories or geographic location.

2000.04 REV-2

h.

Test whether loan correspondents are selling mortgages to other than their sponsors without prior HUD approval. In connection with the Direct Endorsement Program, to determine that the loan correspondent does not underwrite loans, review selected loan documentation for indications of underwriting by the loan correspondent. Review the agreements between the auditee and its staff appraisers and test for compliance with Handbook 4000.4 REV-1, Chapter 2.

i.

D.

Loan Settlement 1. Compliance Requirement . The mortgagee's responsibilities prior to and following loan settlement are minimal. The loan origination fee should normally compensate the mortgagee for the required services. However, HUD has specified the types and amount of additional charges and fees which the mortgagee may collect from the borrower. Additionally, the mortgagee is responsible for promptly submitting up-front mortgage insurance premiums to HUD following loan settlement and disbursing the funds and completing the transaction in accordance with the closing documents, without undue delay (HUD Handbook 4000.2 REV-1, and Chapter 7, 24 CFR 203.27). Suggested Audit Procedures a. Select a representative sample of loans for testing from those settled during the audit period. Examine the signed settlement statement (Form HUD-1). Prove the mathematical accuracy of the Form. Compare amounts listed in the Form to other authentic loan documents. Review the fees and charges collected from the mortgagors as shown on loan settlement statements to determine that they are equal to the mortgagee's actual out-of-pocket costs for the related service or the maximum charge allowed by HUD, whichever is lower. Determine

2.

b.

c.

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that the origination fee did not exceed one percent of the loan amount. Compare the fees and charges to the guidelines contained in HUD Handbook 4000.2 REV-1. Report any differences as findings. d. Ensure points and closing costs are accurate. Determine whether the differences may be due to discriminatory practices. Review computations and supporting data for amounts collected to establish escrow accounts for taxes and hazard insurance. Reconcile and report on any differences. Review computations and supporting data for interest collected from the mortgagor at loan closing. Reconcile and report on any differences. The Form HUD-92900 contains the acquisition cost of the property. The HUD-1 contains the amount of the insured mortgage. Compare the amount of the insured mortgage to the acquisition cost to determine that the mortgagor made the minimum investment. Examine the canceled check or other supporting documentation for evidence that the mortgage insurance premium is submitted to HUD, in accordance with HUD policy at the time of closing, by the mortgagee. Test that payment reached HUD's depository within 15 days of closing. Compare the purchase contract and the HUD-1 for agreement as to sales price, earnest money and any seller concessions.

e.

f.

g.

h.

i.

E.

Loan Servicing 1. Compliance Requirement . Mortgagees and loan correspondents which service HUD/FHA insured loans are permitted to collect certain fees from the borrowers in accordance with HUD regulations (HUD Handbook 4330.1, Chapter 4).

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Mortgagees which service insured Home Equity Conversion Mortgages (HECM), with adjustable rate mortgages are responsible for adjusting those rates in accordance with the annual and lifetime caps as established by Handbook 4235.1. Loan servicing procedures are to be followed consistently and should not vary based on any of the prohibited bases. 2. Suggested Audit Procedures a. Select a sample of delinquent and defaulted loans including loans in foreclosure for testing the mortgagee's loan servicing procedures. Review the loan file documentation for evidence that the auditee documents its records to reflect its servicing on delinquent and defaulted mortgages. (1) (2) Obtain an understanding of the auditee's servicing procedures. Ascertain whether the auditee maintains individual servicing records documenting collection (loan servicing) activities. Review the servicing records for recorded collection contacts attempted and completed.

b.

(3)

c.

Review selected loan file documents for evidence that the auditee communicates with the mortgagor or makes a reasonable effort to do so in order to determine the cause of default. (1) Review the individual loan servicing records for recorded collection contacts of more than one type (i.e., telephone, letter, face-to-face interview, etc.) if one type of contact effort is unsuccessful. Review the individual loan servicing records for mortgagor explanations of defaults and documented attempts by loan

(2)

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servicing personnel to contact the mortgagors. (3) Based on the review of the individual loan servicing records, when the cause of delinquency appears to be temporary (i.e., illness, unemployment) test whether the auditee offers reasonable repayment plans.

d.

Review selected receipts for evidence that the auditee accepts partial or late mortgage payments offered by mortgagors as provided for in HUD Handbook 4330.1. (1) Review the servicing records for the recording of partial payments accepted, held in a pending file, or rejected. (Note: The decision to reject a late or partial payment must be a decision based on the individual circumstances.) Review the payment records of selected mortgagors to ascertain whether: (a) (b) The amount of the late charge, if any, was computed correctly. The late charge was assessed after 15 days of delinquency, or the 17th day of the month.

(2)

(3)

Review the auditee's procedures for the handling of partial payments. Obtain a representation letter from the auditee concerning such procedures.

e.

Inquire whether the auditee has implemented steps to comply with the provisions of HUD's Loss Mitigation procedures. Such steps would include informal forbearance, workout agreements, acceptance of partial payments and deeds in lieu of foreclosure. Review selected claims files for evidence that such relief measures were considered (refer to Mortgagee Letters 96-11, 96-25, 96-32 and 96-61).

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f.

Inquire whether the auditee sends notices to advise the mortgagor about HUD's foreclosure relief program once it has decided to foreclose. Review the loan files selected for evidence that such letters were sent prior to the initiation of foreclosure proceedings. Compare charges assessed to borrowers for servicing activities to allowable amounts. the loans selected: (1) (2) For

g.

Review charges to mortgagors for checks returned due to insufficient funds. Review charges to the mortgagor for attorney's fees and test whether: (a) The charges were for services performed by someone other than salaried members of the auditee's staff. The charges were made only in those cases where the auditee made a decision to foreclose and referred the loan to an attorney for initiation of foreclosure proceedings.

(b)

h.

Obtain an understanding of the auditee's procedures for paying mortgage insurance premiums to HUD. Determine that the auditee follows one of the two acceptable methods of making mortgage insurance premium payments (electronic payment or bank check) and that its practices comply with HUD regulations. Review a representative sample of insurance claims submitted to HUD following mortgage defaults. Recalculate the net claim amount on the Single Family Application for Insurance Benefits (Form HUD-27011) and compare the claim amount information to the accounting records. Test the amounts included in the claim for preservation and protection expenses to determine that they are supported by documentation.

i.

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j.

Select a sample of adjustable rate HECMs and test that the limitations of the 2% annual and 5% lifetime caps are not being exceeded by the mortgagee. Select a sample of HECMs and determine that the disbursements have been made in accordance with the mortgage note.

k.

F.

Escrow Accounts 1. Compliance Requirement . HUD requires that mortgagees establish escrow accounts and that mortgagors make monthly payments thereto, to insure that funds will be available to pay taxes and insurance premiums. Each month the mortgagee must collect from the mortgagor an amount which the mortgagee estimates will be sufficient to enable it to accumulate funds so as to pay all escrow obligations prior to delinquency, i.e., (a) mortgage insurance premiums, (b) taxes, special assessments, and ground rents, if any, (c) hazard insurance premiums, if any, and (d) flood insurance premiums where required. The mortgagee should analyze the escrow account, at least annually, to determine if projected escrow balances will be sufficient to fund escrow disbursements. Any projected escrow shortage should be collected by either (a) lump sum payment or (b) allocating the shortage over a 12-month period. The mortgage instrument provides the authority for the mortgagee to accumulate sufficient escrow funds with which to pay the mortgagor's tax and insurance bills thirty days prior to the time the bills become delinquent (HUD Handbook 4330.1, Chapter 2). Suggested Audit Procedures a. Obtain an understanding of the policies and procedures for reconciling custodial trust accounts. Obtain trial balances of individual escrow accounts and reconcile or review the reconciliation of the total with the auditee's control account and the related bank account. Test whether the auditee did not use escrow

2.

b.

8/97 7-15

f. and any late charges assessed were borne by the auditee at its expense. 8/97 7-16 . by review of actual payments or other evidence of amounts due (e. in those cases where accounts are interest bearing. Test whether the auditee advises the mortgagor of the amount of any surplus escrow funds in accordance with HUD requirements. Test whether escrow funds are deposited in accounts fully insured by the Federal Deposit Insurance Corporation (FDIC). note whether it was prepared not more than one year ago. is passed on to the mortgagor. However. etc. insurance. If not paid within the discount period. Review the policies and procedures that the auditee has established to ensure that bills d. HUD regulations neither require or forbid that escrow accounts bear interest. c. inquire as to reasons for the delay and test whether the mortgagor retained the benefit of the discount.04 REV-2 funds for late charges. Also. inspect supporting documents for escrow disbursements such as receipted invoices. Test whether the mortgagor was furnished a statement of interest paid during the preceding year within 60 days after the end of the calendar year. and canceled checks.. On accounts selected for review. e. and whether monthly deposits appear adequate to provide for payments of taxes. less expenses. For selected mortgages. test whether the most recent real estate tax bills for each account were paid.. assumption fees or any purpose other than specified above. or National Credit Union Administration (NCUA) and whether the auditee covered any overdrafts on selected accounts by advancing its own funds to custodial accounts so that FDIC or NCUA insurance protection was not impaired. obtain the most recent escrow analysis.2000. tax assessment notice or prospective rate adjustment notices from insurance companies). g.g. tax bills. test whether interest earned.

Review selected loan payoffs for evidence that the auditee returns to the mortgagor the amounts held in escrow for taxes and hazard insurance within 30 days of receipt by the mortgagee of payoff funds. Review the mathematical accuracy of Form HUD-93102. occupancy and employment at least annually and as otherwise required by HUD (HUD Handbook 4330. family composition. This practice may fall within the purview of the Sherman Anti-Trust Act. HUD executes a contract with the mortgagee for each mortgage. HUD sends assistance payments to the mortgagee on behalf of the mortgagor as long as the mortgagor is eligible for the payments. Section 235 Assistance Payments 1. the mortgagee must secure recertifications of income. Chapter 10). 8/97 7-17 . determine that any late charges/penalties assessed are paid out of the auditee's funds and not the mortgagor's funds. Mortgagee's Certification and Application for Assistance of Interest Reduction Payments. G. however. Select a representative sample of mortgagors receiving Section 235 Assistance Payments from the records of the mortgagee. In addition. Under Section 235. j. b. i.1 REV-3. Compliance Requirement .04 REV-2 payable from the escrow fund or the information needed to pay such bills is obtained in advance of the due date. Inquire whether the auditee requires the mortgagor to purchase hazard insurance coverage from the auditee or from a specific company. Monthly Summary of 2. For any bills paid late by the auditee. the mortgagor must meet other continuing eligibility criteria. h.2000. many of the initial eligibility criteria cease their applicability. Once a mortgage is insured. and Form HUD-300. Suggested Audit Procedures a.

c. 235(j). compare the number of Section 235 loans shown on the billing to the Treasury to the records of the mortgagee's servicing portfolio.e. Ascertain that the recertification was completed in a timely manner by the mortgagor i. Select a sample of individual loan files and: (1) Examine documentary evidence that the mortgagee obtained and verified information concerning mortgagor income. DC 20410-4500 d.S. If the recertification was not completed timely. Copies of the paid HUD-93102s can be obtained from: Director.. Room 3222 Washington. or equivalent computer printout. General Accounting Operations Division Office of Finance and Accounting . family composition and occupancy of the property. Report on any discrepancies.04 REV-2 Assistance Payments Due Under Sections 235(b). Report on any discrepancies. (2) (3) 8/97 7-18 . Compare a sample of HUD-93102s to copies paid by the U. or 235(i) or of Interest Reduction Payments Due Under Section 236. no sooner than 60 days before and no later than 30 days after the mortgage anniversary date. Treasury to determine that the dollar amounts are identical. Tests should include both Formula I and Formula II computations and factors used in computations. Determine that the formula providing the greater/lesser amount of assistance was used. ascertain whether the auditee acted to suspend the assistance payments contract.2000.HUD 451 Seventh Street. Also. SW. Test the mathematical accuracy of assistance payments computed by the mortgagee and trace to the Form HUD-300 or computer printout.

c. 8/97 7-19 . etc. For the samples.04 REV-2 (4) Review the mortgagee's records of loans subject to recapture of assistance paid on behalf of mortgagors for documentation of the cumulative assistance paid so that it can be recaptured (Mortgagee Letter 81-38). ledgers. Chapter 7 and 4155. e. d. worksheets. Federal Financial and Activity Reports 1.1 REV-3. Handbooks and Mortgagee Letter contain the specific reporting requirements that the mortgagee is to follow (Handbooks 4330. Suggested Audit Procedures a. trace significant data to supporting documentation. Compliance Requirement . Select a sample of financial reports. other than those which are included in the audited financial statements. Mortgagee Letter 95-3). Identify all HUD-required financial and activity reports by inquiry of the mortgagee. 2. . Report all material differences between selected reports and mortgagee records. Chapter 3. and reports required under the Home Mortgage Disclosure Act contain reliable data and are presented in accordance with the terms of applicable agreements between the entity and HUD. b. The individual agreements.2000. H. Select a sample of activity reports and determine that the reports selected are prepared in accordance with HUD requirements. i. and determine that the reports selected are prepared in accordance with HUD instructions. Mortgagees participating in HUD-assisted activities are required to ensure that financial status.e. Single Family Default Monitoring.1 REV-4. Obtain an understanding of the auditee's procedures for preparing and reviewing the required reports.

compensation or thing of value. Compliance Requirement . Compliance Requirement . Review significant adjustments made to the general ledger accounts affecting HUD-assisted activity and evaluate for propriety. in assets acceptable to the Secretary. b.2000. Obtain the general ledger. J. If the auditor notes any kickbacks or indications of it. HUD regulations prohibit mortgagees from paying any fee. as follows: 8/97 7-20 . I. A nonsupervised mortgagee or loan correspondent shall have and maintain a net worth. Mortgagee Approval Requirements 1.04 REV-2 f. including a fee representing all or part of the lender's origination fee to any person or entity other than for services actually performed or to any person or entity for referral of the loan or as a finder's fee (24 CFR 202. canceled checks and supporting invoices for at least two months of the audit period. Suggested Audit Procedures a. Test whether disbursements are supported by an invoice and were not for a unreasonable amount in return for goods or services actually performed. cash journal. 2. During the review of loan origination and loan settlement documents. these should be reported as a finding. Kickbacks 1. the auditor should be alert for any fees or other types of payments which may represent kickbacks. Reconcile and report on any differences.5(l). kickback. c.

All mortgagees.000 Direct Endorsement Nonsupervised Mortgagees Multifamily only Nonsupervised Mortgagees For nonsupervised mortgagees and loan correspondents approved by HUD for program participation. REQUIREMENT . $250.04 REV-2 Entity Type Loan Correspondent Amount $50.000 (24 CFR 202. per Handbook 4060. The required amount. shall maintain both fidelity bond and errors and omissions insurance of at least $300.8(b)(4)).000 per branch. 2. at least 20 percent of the adjusted net worth must be in liquid assets (cash.1 REV-1. Mortgagee Approval Requirements. up to maximum net worth of $1 million $250. fidelity bond coverage and errors and omissions bond.2000. An FHA computation of Adjusted Net Worth is required for all nonsupervised mortgagees and loan correspondents even if there were no loans originated or serviced during the audit period. varies by program participant type and approval date per the guidance in Section J. cash equivalents or marketable securities) up to a maximum of $100.000 plus $25. 7-6 ADJUSTED NET WORTH A.000 plus 1% of mortgage volume in excess of $25 million. Suggested Audit Procedure Test whether the nonsupervised mortgagee or loan correspondent meets the required levels for adjusted net worth. (24 CFR 7(b)(5)). but not loan correspondents.000.000 each. Where the mortgagee/loan correspondent 8/97 7-21 . up to maximum of $250.7(b)(2) and 202. which must be maintained throughout the year. liquid assets.

04 REV-2 is a subsidiary. 8/97 7-22 .2000. the adjusted net worth computation must focus on the assets and liabilities of the individual (non-consolidated) entity with the HUD audit requirement.

2. Supervised institutions that provide financial services to incorporated communities are sometimes required by State law to pledge their assets for the benefit of the community. 3 2 1 8/97 7-23 . A corporate guarantee agreement is an agreement where the issuer's parent guarantees the performance of the issuer. spouse.04 REV-2 B. uncle.2000. from a related entity. secured by a first mortgage. An investment in a related entity in which any officer or stockholder of the mortgagees has a personal interest 3 unrelated to that person's position as an officer or stockholder of the mortgagee. A mortgage loan receivable established in the normal course of business in an arm's length transaction and secured by a first mortgage on the related property. grandparent. child.g. aunt. parent. Any asset or portion thereof pledged to secure obligations of another entity or any person. except for: o o A construction loan receivable. A receivable from a related party where the affected parties have executed a cross-default agreement 1 or corporate guarantee agreement 2 with Ginnie Mae. or in-law) has a financial interest in or is employed in a management position by the mortgagee. A cross default agreement is an agreement between related affiliated Ginnie Mae issuers which provides for the default of all affiliated issuers in the event of a default by any one of them. "Personal interest" as used here indicated a relationship between the mortgagee and a person or entity in which that specified person (e. brother. An asset due from an officer or stockholder of the mortgagee or from a related entity. o 3. These pledged assets are acceptable for supervised institutions only. UNACCEPTABLE ASSETS FOR COMPUTATION OF ADJUSTED NET WORTH 1. sister.

franchise fees. value placed on insurance renewals. 9. Accounting for Certain Mortgage Banking Activities and SFAS 125. subsidiary. Accounting for Transfers and Servicing of Financial Assets and Extinguishments of Liabilities . "Equity as adjusted" means the book value on the books of the related entity reduced by the amount of unacceptable assets carried by the related entity. but are not limited to. director or stockholder and not for normal business purposes. such as goodwill. 7. Any intangible asset. except for shares of Fannie Mae stock required to be held under a servicing agreement.2000. 11. 4 8/97 7-24 . and/or other related entity. affiliate. 6. 5. and value placed on property management contract renewals. 8. which is greater than equity. That portion of an investment in a joint venture. organization costs. 10. construction loans. Any asset not readily marketable and for which appraised values are very subjective. and gemstones. Any amount in excess of the lower of cost or market value of mortgages in foreclosure. covenants not to compete. Any asset which is principally used 4 for the personal enjoyment or benefit of an officer. art work. antiques. 65. That portion of any marketable security (listed or unlisted) in excess of the lower of cost or market. Examples include. or subsequent revisions thereto. The value of any servicing contract not determined in accordance with SFAS No.04 REV-2 4. which should be carried at cost. as adjusted. This includes automobiles and personal residences. "Other Assets" unless the financial statements are accompanied by a schedule prepared by the independent auditor or schedule prepared by the "Principally used" means that any other use of the property must be solely incidental. or property acquired through foreclosure.

12. in excess of the value as of the date of contribution determined by an independent appraisal.2000. That portion of contributed property. 8/97 7-25 .04 REV-2 issuer/mortgagee and signed by an officer of the issuer/mortgagee. not otherwise excluded.

is fairly stated in all material respects in relation to the consolidated financial statements taken as a whole. However. Our audit was conducted for the purpose of forming an opinion on the consolidated financial statements taken as a whole." respectively. [Firm Signature] [Date] 8/97 7-26 .04 REV-2 ATTACHMENT A REPORT OF INDEPENDENT AUDITORS ON CONSOLIDATING BALANCE SHEET AND STATEMENT OF INCOME Board of Directors ABC Financial Corporation We have audited. this report is a matter of public record and its distribution is not limited. Such information has been subjected to the auditing procedures applied in our audit of the consolidated financial statements and. 1991 and have issued our unqualified opinion thereon dated January 24. and HUD. in our opinion. the consolidated financial statements of ABC Financial Corporation and subsidiaries as of December 31.2000. 1992 included on page "XX" [identify report]. management. This report is intended for the information of the audit committee. are presented for purposes of additional analysis and are not a required part of the consolidated financial statements of ABC Financial Corporation and subsidiaries. The following consolidating balance sheet and statement of income on pages "XX" and "XX. in accordance with generally accepted auditing standards and Government Auditing Standards.

2000.04 REV-2 Attachment B COMPUTATION OF ADJUSTED NET WORTH FOR APPROVAL OF NONSUPERVISED MORTGAGEES OTHER THAN LOAN CORRESPONDENTS Minimum Net Worth Required Stockholders Equity (Net Worth) per Balance Sheet Less Unacceptable Assets Adjusted Net Worth for HUD Requirement Purposes Adjusted Net Worth ABOVE Amount Required Adjusted Net Worth BELOW Amount Required $ $ $ 250.000 $ $ $ 8/97 7-27 .

04 REV-2 Attachment C COMPUTATION OF ADJUSTED NET WORTH FOR APPROVAL AND RECERTIFICATION OF NONSUPERVISED LOAN CORRESPONDENTS 1. Home Office Add: Branch Office × Number of Branch Offices Subtotal Total Net Worth Required (lesser of $250. Owners' Equity (Net Worth) per Balance Sheet Less Unacceptable Assets Adjusted Net Worth for HUD Requirement Purposes Adjusted Net Worth ABOVE Amount Required Adjusted Net Worth BELOW Amount Required $ $ $ 8/97 7-28 .000 or Line 3) $ $ $ 25. 4.000 $ $ $ 3. 2.000 $50.2000.

Include Home Equity Conversion Mortgages (HECMs) at maximum claim amount.000. 8/97 7-29 . 2. 6. $ $ $ $ $ $ $ 4. 5. 7. Stockholders Equity (Net Worth) per Balance Sheet Less Unacceptable Assets Adjusted Net Worth Adjusted Net Worth ABOVE Amount Required Adjusted Net Worth BELOW Amount Required $ $ $ $ $ * HUD/FHA insured single family mortgages only. Servicing Portfolio* at: (end of fiscal year under audit) Add: Originated* during fiscal year Purchased* from Loan Correspondent during fiscal year Subtotal Less: Amounts included in Line 2: Servicing retained Loan Correspondent purchases retained Subtotal Total 1% of Line 4 Minimum Net Worth required (Greater of $250.04 REV-2 Attachment D COMPUTATION OF ADJUSTED NET WORTH FOR RECERTIFICATION OF NONSUPERVISED MORTGAGEES OTHER THAN LOAN CORRESPONDENTS 1.000 or Line 6) $ $ $ $ 3.2000.000 or Line 5) Net Worth Required (Lesser of $1.

2000.357 8/97 7-30 .357 41.04 REV-2 Attachment E E X A M P L E COMPUTATION OF ADJUSTED NET WORTH FOR APPROVAL OF NONSUPERVISED MORTGAGEES OTHER THAN LOAN CORRESPONDENTS Minimum Net Worth Required Stockholders Equity (Net Worth) per Balance Sheet Less Unacceptable Assets Adjusted Net Worth for HUD Requirement Purposes Adjusted Net Worth ABOVE Amount Required Adjusted Net Worth BELOW Amount Required $ $ 345.000 $ $ $ 291.321 $250.678 54.

Owners' Equity (Net Worth) per Balance Sheet Less Unacceptable Assets Adjusted Net Worth for HUD Requirement Purposes Adjusted Net Worth ABOVE Amount Required Adjusted Net Worth BELOW Amount Required $ $ $ 255.098 45.420 5.000 275.2000.678 $ 25. 4.000 9 $50.000 or Line 3) $ $ 321.420 8/97 7-31 . Home Office Add: Branch Office × Number of Branch Offices Subtotal Total Net Worth Required (lesser of $250. 2.000 250.000 3.04 REV-2 Attachment F E X A M P L E COMPUTATION OF ADJUSTED NET WORTH FOR APPROVAL AND RECERTIFICATION OF NONSUPERVISED LOAN CORRESPONDENTS 1.000 $ $ $ 225.

5.2000.321 2. Servicing Portfolio* at: 6/30/97 (end of fiscal year under audit) Add: Originated* during fiscal year Purchased* from Loan Correspondent during fiscal year Subtotal Less: Amounts included in Line 2: Servicing retained Loan Correspondent purchases retained Subtotal Total 1% of Line 4 Minimum Net Worth required (Greater of $250.000 $ 1.543 $ 1. 8/97 7-32 .200. 7.543 4.321 $ 1.111.500. 6. Stockholders Equity (Net Worth) per Balance Sheet Less Unacceptable Assets Adjusted Net Worth Adjusted Net Worth ABOVE Amount Required $ 3.000 $ 25.054.200.000 $ 70.000.000 or Line 5) Net Worth Required (Lesser of $1.000 $ 120.000.111. 3.789 $ 345. Include Home Equity Conversion Mortgages (HECMs) at maximum claim amount.678 $ 3.000.000 $ 87.900. $ 13.456.000.000 or Line 6) $ 23.000.111 Adjusted Net Worth BELOW Amount $ Required * HUD/FHA insured single family mortgages only.654.000 $ 46.04 REV-2 Attachment G E X A M P L E COMPUTATION OF ADJUSTED NET WORTH FOR RECERTIFICATION OF NONSUPERVISED MORTGAGEES OTHER THAN LOAN CORRESPONDENTS 1.111 $ 2.000 $ 38.400.

facilities. and sell Title I loans that have been originated by another lender. of this chapter. Loan correspondents. which are financial institutions approved by HUD to purchase. hold. C.2. which are financial institutions approved by HUD for the purpose of originating Title I direct loans for sale or transfer to a sponsoring Title I lender. B. A loan correspondent may be either supervised or nonsupervised. Investing lenders. An investing lender may not originate Title I loans in its own name. following the 8/97 8-1 . whether supervised or nonsupervised. HUD insures private lending institutions against losses sustained as a result of borrower defaults on Title I property improvement and manufactured home loans. must apply for initial or branch approval to participate in the HUD/FHA mortgage insurance programs through the Lender Approval and Recertification Division at HUD Headquarters. D. and it may not service such loans except with the prior approval of HUD.2000. which are financial institutions that are members of the Federal Reserve System or whose accounts are insured by the Federal Deposit Insurance Corporation or the National Credit Union Administration. which are financial institutions whose principal activity is the lending or investment of funds in loans or mortgages. (NOTE: Except in paragraph 8-5. HUD-APPROVED TITLE I NONSUPERVISED LENDERS AND LOAN CORRESPONDENTS AUDIT GUIDANCE 8-1 Program Objective . Lending institutions are approved for participation in the Title I program on the basis of their financial capacity.") 8-2 Program Procedures . use of the term "lender" also incudes the term "loan correspondent. Supervised lenders. All mortgagees and loan correspondents.04 REV-2 CHAPTER 8. and other criteria as specified in HUD regulations at 24 CFR Part 202 and HUD Handbook 4700. experience. HUD approves four categories of private lending institutions for participation in the Title I program: A. and which are neither supervised lenders nor governmental institutions.D. Nonsupervised lenders.

24 CFR 201 and 202 Various Title I Letters If the program participant does not have this reference material. 8-4 Reporting Requirements .2000. Mortgagee Approval and Recertification .2 Regulations Relating to Title I Property Improvement and Manufactured Home Loans Title I Lender Approval Handbook Title I Property Improvement and Manufactured Home Loan Regulations. DC area). Every nonsupervised Title I lender or loan correspondent is required annually to submit one copy of the audit report to the Secretary within 90 days of the close of its fiscal year by 24 CFR Part 202.gov) or may be ordered from HUD On Demand on the Internet web site. The auditor's report on compliance and report on the internal control structure are required for every Title I lender or loan 8/97 8-2 . an analysis of the lender's net worth is required. After a review of the application and clearance through certain Headquarters systems. will be assigned a unique HUD/FHA identification number and notified that it may now originate FHA insured mortgages. the applicant. or a report on compliance with specific requirements applicable to nonmajor HUD-assisted program transactions. A suggested format for the analysis of net worth and a list of unacceptable assets are shown in paragraph 8-6 of this chapter.hud. This net worth must be adjusted to reflect only those assets acceptable to the Secretary.2 HUD Handbook 1060.1.04 REV-2 directions in HUD Handbook 4060. 8-3 Reference Material 24 CFR Parts 201 and 202 HUD Handbook 4700. including an opinion on compliance with specific requirements applicable to major HUD-assisted programs. if approved. In addition to the report on the basic financial statements. the audit report should include reports on internal control structure and compliance with specific requirements that have a direct and material effect on HUD-insured loans made by nonsupervised Title I lenders and loan correspondents. it may be obtained from HUD's Internet site (http://www. or by fax at 202-708-7468. In addition. at 1-800-767-7468 (202-708-3151 in the Washington.

SW Washington. Branch Office Operations 1. DC 20024-2118 A Title I lender who is also a Title II mortgagee may submit one set of audited financial statements for review. Each branch office that is originating Title I loans must be approved by HUD following submission of the form for Branch Office Notification.S. Material instances of noncompliance identified by the auditor must be reported as a finding. Suggested Audit Procedures a. even in those cases where corrective action was taken by the auditee after the audit period.2. Branch Office Notification. Department of HUD Lender Approval and Recertification Division Suite 3214 490 L'Enfant Plaza East Washington. The report should be sent to: Mailing address: U. DC 20410-8888 Delivery: U. Reports for Title I lenders who are also a Ginnie Mae issuers must be sent to both Ginnie Mae and the address above. 8/97 8-3 . Department of HUD Lender Approval and Recertification Division Room B-133 3214 Plaza 451 Seventh Street. as long as they are clearly identified for both programs.S. 8-5 Compliance Requirements and Suggested Audit Procedures A. regardless of the number of loans originated during the audit period.04 REV-2 correspondent. Compliance Requirement .2000. 2. A loan correspondent is also permitted to establish branch offices in accordance with 24 CFR Part 202 and HUD Handbook 4700. A lender may maintain one or more branch offices for the origination of Title I loans. Determine that HUD accepted the branch office as evidenced by a copy of Form HUD-92001LB.

Compare the lender's procedures for processing Title I loan applications and making a decision on the borrower's creditworthiness with the requirements in 24 CFR 201. c. Obtain a sample of files for loans originated during the audit period. including a branch manager. Suggested Audit Procedure a. The branch office should have its own telephone and maintain its own accounting records. and that it has at least one employee. with a reasonable ability to make payments on the loan obligation. d. e. are employed exclusively for one HUD-approved lender at any given time and conduct only the business affairs of that entity during normal business hours. HUD expects that the lender will exercise prudence and diligence in determining whether the borrower is solvent and an acceptable credit risk.22). Compliance Requirement . The sample should include loans originated at the 2. B. All documentation supporting this determination of creditworthiness shall be retained in the loan file (24 CFR 201. Test whether the branch is a true branch and is not a subsidiary. b. to be examined for the documentation required by the regulations. an agent of the lender or a separate entity. 8/97 8-4 .22. Loan Origination 1.2000. Determine that the present branch office manager is a corporate officer or an employee authorized to bind the corporation in matters involving loan origination and servicing. and that the branch office's operating costs are paid by the approved lender. Review lender payroll records to determine that all branch office personnel.04 REV-2 b. that serves only that branch. except the receptionist. Determine that the branch office is located in space which is separated by a partition from any other entity and is clearly identified to the public.

g. Determine that the lender checks HUD's Credit Alert System to verify whether the borrower is in default or a claim has been paid on any Federally insured or guaranteed loan. and records the Credit Alert Response Code for each person on the credit application. h.2000. and checks on any credit inquiries reported within the previous 90 days. e. especially for self-employed applicants and those with non-employment income. bank statements. c. and verifies the validity of the borrower's Social Security Number in accordance with Title I Letter TI-414.000 and the initial payment exceeds five percent of the loan amount. 8/97 8-5 . When the principal balance of the loan exceeds $5. f. Review the loan file documentation for evidence that the lender conducted a face-to-face or telephone interview with the borrower before making a final determination on the borrower's creditworthiness. Determine that all income and employment data is supported by written verification or other documentation.04 REV-2 lender's branch offices as well as the home office. determine that the lender obtains written verification of the source of these funds through verifications of deposit. Determine that the lender obtains written verification of the borrower's payment status on any senior mortgages or deeds of trust on the property to be improved. i. gift letters or other evidence. d. Determine that the lender obtains a separate dated credit application on a HUD-approved form from the borrower and any co-maker or co-signer. Determine that the lender obtains a complete and current consumer credit report on the borrower and any co-maker or co-signer.

Also review the lender's procedures for documenting that the property 2. debt/income ratio). Loan Disbursement 1.04 REV-2 j. Review for the following: (1) Determine that an individual review was provided for all applications denied due to a statistical category or score (e. (2) C. credit score. Review the lender's procedures for determining borrower eligibility and evaluating whether the loan proceeds are being used for eligible purposes (24 CFR 201. When dealer loans are involved. the lender must also maintain separate dealer files which reflect compliance with HUD's requirements concerning dealer approval and supervision (24 CFR 201. depending upon whether the loan is a property improvement or manufactured home loan. loan and rent payments.2000. Ensure that the score accurately reflected the financial status (e. The disbursement of loan proceeds must be adequately documented in the lender's file.27). Suggested Audit Procedures a.20 or 201.26 and 201. Determine that the rejection was made based on established criteria and the reason for the rejection was provided to the applicant. and whether the disbursement is made directly to the borrower or to a dealer. These responsibilities vary widely.g.21 as appropriate). current housing payments) of the applicant. Compliance Requirement . The lender has certain responsibilities to be carried out in connection with the disbursement of loan proceeds (24 CFR 201. Ensure that all procedures for accepting and processing the loan were followed. 8/97 8-6 .40). A rejection should not be influenced by statistical categories or geographic location. Obtain a sample of files for rejected loans during the audit period.g.

determine that the lender supervises and monitors each dealer and visits the dealer periodically. and the notice of HUD's role in the loan transaction required by 24 CFR 201. evidence of the borrower's initial payment. A contract or contract proposal between the borrower and a dealer/contractor. Review the files to determine that each file contains the following documents: note. a placement certificate signed by the borrower and dealer.2000. (2) (3) c. determine if the lender has documented a site-of-placement inspection within 60 days after disbursement of the loan proceeds.04 REV-2 improvements have been completed or the manufactured home has been satisfactorily delivered and installed (24 CFR 201. Where the lender approves dealer loans. credit application. Evidence of an on-site inspection to determine that the improvements were completed. Select a representative sample of manufactured home loan files. b.26(a) or (b) as appropriate).500 or more. itemized statements of other costs. For each file reviewed. fees or charges. . or a detailed written description of the work with a materials list and estimated costs if the borrower is carrying out the work without a dealer/contractor.26(a)(6). security instrument. the notice of HUD's role in the loan transaction required by 24 CFR 201. Select a representative sample of property improvement loan files and determine whether each file contains the following: (1) The note.26(b)(7). credit application. and copies of all other documents relating to the loan transaction. if the loan is for $7. purchase contract. Determine that each dealer's approval is documented on a HUD-approved form 8/97 8-7 d. security instrument (if the loan amount exceeds $7.500). completion certificate. manufacturer's invoice.

b. 1. 2. 8/97 8-8 . and shall otherwise exercise diligence in collecting the amount due. even though actual loan servicing and collection may be performed by an agent of the lender. including information on borrower defaults and borrower complaints and their resolution.27(a)(1). including a determination that the dealer meets the minimum net worth requirements of 24 CFR 201. Modification agreements and repayment plans are permitted on defaulted loans (24 CFR 201. The lender shall have an organized means of identifying. The lender shall remain responsible to the Secretary for proper collection efforts. and shall document its records to reflect its collection activities on delinquent loans. Suggested Audit Procedures a. Determine that each file contains the dealer's current financial statement. and credit reports on the dealership and its owners.41). principals and officers.2000. the payment status of delinquent loans to enable collection personnel to initiate and follow-up on collection activities. on a periodic basis. Test whether the lender documents its records to reflect its servicing on delinquent and defaulted loans. Loan Servicing . It shall have adequate facilities for contacting the borrower in the event of default. D.04 REV-2 signed and dated by both parties. Compliance Requirement . Select a sample of delinquent and defaulted loans. The file should also contain documentation of the lender's experience with the dealer's Title I loans. Loan servicing procedures are to be followed consistently and should not vary based on any of the prohibited bases. The lender shall service loans in accordance with accepted practices of prudent lending institutions.

50(b)) and Title I Letter TI-408. Review the selected loan files to ascertain whether such relief measures were considered. Test whether the notice of default and acceleration used by the lender is in compliance with the regulations (24 CFR 201.e. letter. 8/97 8-9 . Test whether the lender offers special relief measures such as modification agreements or informal repayment plans where such measures are appropriate. Review the servicing records for recorded collection contacts attempted and completed. Test that the lender maintains individual servicing records documenting collection (loan servicing) activities. etc. telephone. Eligible Fees and Charges . d. dated May 2. Test whether the lender communicates with the borrower or makes a reasonable effort to do so in order to determine the cause of default to seek its cure and prior to accelerating the maturity of the loan. Review the individual loan servicing records for recorded contacts of more than one type (i.2000. e. Determine that the lender follows the acceptable methods of making annual payments and that its practices comply with HUD regulations. Obtain an understanding of the lender's procedures for paying loan insurance premiums to HUD. Compliance Requirement.04 REV-2 (1) (2) Obtain an understanding of the lender's servicing procedures. (3) c. 1996 lists all fees and charges allowed in the program. E. 1. Title I Letter TI-440.) if one type of contact effort is unsuccessful. face-to-face interview. f..

c.2000. Obtain the lender's general ledger. it should be reported as a finding. cash journal. F. If the auditor notes any such referral fees. Suggested Audit Procedures a. Test disbursements to determine that they are supported by invoices and were not for unreasonable amounts in return for goods or services actually performed in connection with a Title I loan. Identify all required financial reports by inquiry of the lender. Compliance Requirement . other than those which are included in the audited financial statements. Select a sample of financial reports. 1. During the review of loan origination and loan settlement documents. b.04 REV-2 2. Determine whether the differences may be due to discriminatory practices. Obtain an understanding of the auditee's procedures for preparing and reviewing the financial reports. the auditor should be alert for any fees or other types of payments which may represent referral fees. canceled checks and supporting invoices for at least two months of the audit period. Ensure points and closing costs are accurate. 2. Suggested Audit Procedures a. Federal Financial Reports . c. b. Lenders participating in HUD-assisted activities are required to ensure that financial status reports contain reliable financial data and are presented in accordance with the terms of applicable agreements between the entity and HUD. The individual agreements contain the specific reporting requirements that the entity is to follow. Review and report on any differences. 8/97 8-10 . and determine that the reports selected are prepared in accordance with HUD instructions.

trace significant data to supporting documentation. G. Suggested Audit Procedures a. up to a maximum requirement of $250. Review significant adjustments made to the general ledger accounts affecting HUD-assisted activity and evaluate for propriety. Test whether the nonsupervised lender or loan correspondent maintained the required levels for adjusted net worth.000.000 for each branch office authorized by the Secretary.000 in assets acceptable to the Secretary.000 in assets acceptable to the Secretary. of not less then $250. Financial Approval Requirements 1. H. worksheets.e. Compliance Requirement HUD-approved lenders are required to originate and service HUD-insured mortgages in accordance with accepted practices of prudent lending institutions and comply with all relevant Departmental rules and regulations. Each approved lender must 8/97 8-11 . plus an additional $25. A nonsupervised lender shall have and maintain a net worth.000 for use in originating or purchasing Title I loans. etc. Report all material differences between financial reports and lender records. ledgers. Test whether the nonsupervised lender maintained the required level for its warehouse line of credit. It shall also have a reliable warehouse line of credit or other funding program acceptable to the Secretary of not less than $500. e. Compliance Requirements .04 REV-2 d. 2. A loan correspondent shall have and maintain a net worth of not less the $50.2000. Quality Control Plan 1.2 or the latest HUD guidance. b. Each HUD-approved lender is required to establish and maintain a written quality control plan in accordance with HUD Handbook 4700. For the sample. i.

Inquire whether the lender relies on an internal or external quality control review of its origination. and servicing functions. (24 CFR 202. If the lender relies on the external review process and the IA's engagement includes the performance of the quality control review. determine that it was performed by knowledgeable personnel with no direct responsibilities in the areas they reviewed. Suggested Audit Procedures a. It should also include a random sample of insured loans being serviced by the mortgagee or its agent.2. 2.5(h)).2000. The monthly quality control procedures may be conducted by the entity itself internally or an external review. If the lender relies on an internal review. underwriting. Obtain a copy of the lender's quality control plan and compare it to the general and specific requirements contained in Handbook 4700. d. which may be performed by the independent auditor or other qualified organization. Review the supporting documentation of the most recent quality control review to determine that it included a review of a representative sample of at least ten percent of the number of insured mortgages originated or a statistically derived sample. 8/97 8-12 . c. and the above referenced guidance. the IA should report this as part of the additional information required under Chapter 2 of this guide. to assist corporate management in determining whether HUD requirements and the lender's policies and procedures are being followed by its personnel. Determine whether the lender has a procedure in place which assures that all employees involved in loan origination and servicing understand the lender's quality control policies and procedures.04 REV-2 develop and implement a quality control plan consistent with its needs. Determine that any branch offices received an on-site review at least once during the year and that the plan includes coverage for b.

2 were included in the quality control review. If an entity is both Title II and Title I. Obtain a written copy of the latest quality control report and determine that senior management officials also received a copy which included any deficiencies identified during the review. the adjusted net worth for the Title II is the only statement necessary. f. even if there were no loans originated during the period. gift letter or other sources of funds. varies by program participant type and approval data per the guidance in paragraph 8-5 G.04 REV-2 any loan correspondents and authorized agents of the lender.2000. deposits. g. Determine that senior management officials promptly initiated corrective action for all deficiencies noted. Determine that the lender also notified the Quality Assurance Division of any violations. e. 8/97 8-13 . Requirement . The required amount which must be maintained throughout the year. false statements or program abuses in the report. 8-6 ADJUSTED NET WORTH A. Review the supporting documentation to determine that the required general and specific elements included in Handbook 4700. The Quality Control Plan must provide for the written reverification of the lender's employment. An FHA computation of Adjusted Net Worth is required for all nonsupervised Title I lenders and loan correspondents. Financial Approval Requirements.

8/97 8-14 .Goodwill Adjusted net worth for HUD requirement purposes 1 $17.000 $12.000 $12.2000. COMPUTATION XYZ LENDER CORPORATION COMPUTATION OF ADJUSTED NET WORTH To Determine Compliance with HUD Net Worth Requirements March 31. Section 7-6(C).000.not secured by first mortgage Other .000 300. UNACCEPTABLE ASSETS FOR COMPUTATION OF ADJUSTED NET WORTH Refer to Chapter 7.200.000 1/ / In the event adjusted net worth does not meet or exceed the minimum HUD requirement. along with any relevant documentation.04 REV-2 B.300. an explanation of the steps taken to correct the adjusted net worth deficiency.000 $ 5. 199X Stockholders equity (net worth) per Balance Sheet Less Unacceptable Assets: Construction loans to related company . must be submitted as part of the corrective action plan. C.500.

RI. MS. FL. NJ Mid-Atlantic District Inspector General for Audit Department of HUD The Wannamaker Building Philadelphia.2000. MA. PA. MD. VA. KY. GA 30303-3388 Telephone number: (404)331-3369 FAX number: (404)730-2382 AL.04 REV-2 Appendix HUD District Inspectors General for Audit New England District Inspector General for Audit Department of Housing and Urban Development Thomas P. NC. SC. MA 02222-1092 Telephone number: (617)565-5259 FAX number: (617)565-6878 CT. PA 19107-3390 Telephone number: (215)656-3401 FAX number: (215)656-3409 DE. Room 370 Boston. NY 10278-0068 Telephone number: (212)264-4174 FAX number: (212)264-1400 NY. Room 700 Atlanta. Federal Building 10 Causeway Street. DC. TN 8/97 1 . Russell Federal Building 75 Spring Street. VT New York/New Jersey District Inspector General for Audit Department of HUD 26 Federal Plaza New York. GA. Jr. WV Southeast/Caribbean District Inspector General for Audit Department of HUD Richard B. O'Neill. SW. NH. ME.

CO 80202-2349 Telephone number: (303)672-5452 FAX number: (303)672-5006 CO. NE Rocky Mountains District Inspector General for Audit Department of HUD First Interstate Tower Denver. 5th floor Kansas City. KS 66101-2406 Telephone number: (913)551-5870 FAX number: (913)551-5877 IA. MI. Box 2905 Fort Worth.O. SD.04 REV-2 Midwest District Inspector General for Audit Department of HUD 77 West Jackson Boulevard . ND. IN. WI Southwest District Inspector General for Audit Department of HUD 1600 Throckmorton P. LA. UT. MN. MO.26th Floor Chicago. MT. TX Great Plains District Inspector General for Audit Department of HUD Gateway Tower II. NM. KS. OH. TX 76113-2905 Telephone number: (817)885-5551 FAX number: (817)885-2725 AR.2000. WY 8/97 2 . OK. IL 60604-3507 Telephone number: (312)353-7832 FAX number: (312)353-8866 IL.

OR 8/97 3 . ID.04 REV-2 Pacific/Hawaii District Inspector General for Audit Department of HUD 450 Golden Gate Avenue. WA 98104-1000 Telephone number: (206)220-5360 FAX number: (206)220-5162 AK. CA 94102-3448 Telephone number: (415)436-8101 FAX number: (415)436-8107 AZ.2000. WA. HI. NV Northwest/Alaska District Inspector General for Audit Department of HUD 909 First Avenue Seattle. Room 8-5139 San Francisco. CA.