[Federal Register Volume 78, Number 180 (Tuesday, September 17, 2013)]
[Rules and Regulations]
[Pages 57058-57061]
From the Federal Register Online via the Government Printing Office [www.gpo.gov]
[FR Doc No: 2013-22583]


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DEPARTMENT OF HOUSING AND URBAN DEVELOPMENT

24 CFR Parts 5 and 202

[Docket No. FR-5536-F-02]
RIN 2502-AJ00


Federal Housing Administration (FHA) Approval of Lending 
Institutions and Mortgagees: Streamlined Reporting Requirements for 
Small Supervised Lenders and Mortgagees

AGENCY: Office of the Assistant Secretary for Housing--Federal Housing 
Commissioner, HUD.

ACTION: Final rule.

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SUMMARY: This rule streamlines the FHA financial statement reporting 
requirements for lenders and mortgagees who are supervised by federal 
banking agencies and whose consolidated assets do not meet the 
thresholds set by their supervising federal banking agencies for 
submission of audited financial statements (currently set at $500 
million in consolidated assets). HUD's regulations currently require 
all supervised lenders and mortgagees to submit annual audited 
financial statements as a condition of FHA lender approval and 
recertification. Through this rule, in lieu of the annual audited 
financial statements, small supervised lenders and mortgagees would be 
required to submit their unaudited financial regulatory reports that 
align with their fiscal year ends and are required to be submitted to 
their supervising federal banking agencies. Small supervised lenders 
and mortgagees would only be required to submit audited financial 
statements if HUD determines that the supervised lenders or mortgagees 
pose heightened risk to the FHA insurance fund.
    This rule does not impact FHA's annual audited financial statements 
submission requirement for nonsupervised and large supervised lenders 
and mortgagees. The rule also does not impact those supervised lenders 
and mortgagees with consolidated assets in an amount that requires that 
lenders or mortgagees submit audited financial statements to their 
respective supervising federal banking agencies. Additionally, this 
final rule, consistent with the proposed rule, makes three technical 
changes to current regulations regarding reporting requirements for 
FHA-approved supervised lenders and mortgagees.

DATES: Effective Date: October 17, 2013.

FOR FURTHER INFORMATION CONTACT: Richard Toma, Deputy Director, Office 
of Lender Activities and Program Compliance, Office of Housing, 
Department of Housing and Urban Development, 490 L'Enfant Plaza East 
SW., Room P3214, Washington, DC 20024-8000; telephone number 202-708-
1515 (this is not a toll-free number). Persons with hearing or speech 
impairments may access this number through TTY by calling the toll-free 
Federal Relay Service at 800-877-8339.

SUPPLEMENTARY INFORMATION:

I. Background

    On April 18, 2013 (78 FR 23178), HUD published for public comment a 
proposed rule that would streamline reporting requirements and relieve 
burden on small supervised lenders and mortgagees.\1\ HUD's 
regulations, at 24 CFR 202.5(g), require that all lenders and 
mortgagees provide annual audited financial statements within 90 days 
of their fiscal year ends. Small supervised lenders and mortgagees, 
however, are not required by their supervising federal banking agencies 
to submit audited financial statements, but are permitted to submit 
unaudited financial regulatory reports. These unaudited financial 
regulatory reports currently include a consolidated or fourth quarter 
Report of Condition and Income (Federal Financial Institutions 
Examination Council forms 031 and 041, also known as the ``Call 
Report''), a consolidated or fourth quarter Thrift Financial Report, 
and a consolidated or fourth quarter NCUA Call Report (NCUA Form 5300 
or 5310). The HUD requirement is therefore inconsistent with that of 
the federal banking agencies, and has the potential to impose a 
potentially financially prohibitive requirement on small supervised 
lenders and mortgagees who wish to participate in FHA programs. While 
HUD takes its counterparty risk management responsibilities seriously, 
HUD also seeks to balance its management of risk with the execution of 
its mission.
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    \1\ The term ``small supervised lenders and mortgagees'' refers 
to those lenders and mortgagees supervised by the Board of Governors 
of the Federal Reserve System; the Federal Deposit Insurance 
Corporation (FDIC); and the National Credit Union Administration 
(NCUA) (collectively, the ``federal banking agencies'') whose 
consolidated assets do not meet the thresholds set by their 
supervising federal banking agencies for submission of audited 
financial statements (currently set at $500 million in consolidated 
assets).
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    Upon reconsideration, HUD has determined that the financial 
regulatory reports required by the federal banking agencies contain 
sufficient information for HUD to ensure that small supervised lenders 
and mortgagees are suitably capitalized to meet potential needs 
associated with their participation in

[[Page 57059]]

FHA lending programs. Accordingly, HUD issued the April 18, 2013, 
proposed rule to bring its reporting requirements for small supervised 
lenders mortgagees into alignment with that of the federal banking 
agencies. In addition to the streamlined reporting requirements, HUD 
proposed to make three conforming amendments to current regulations, 
which are also made final by this rule. Interested readers should refer 
to the preamble of the April 18, 2013, proposed rule for additional 
information on the proposed regulatory change.

II. This Final Rule

    This final rule follows publication of the April 18, 2013, proposed 
rule and takes into consideration the public comments received on the 
proposed rule. The public comment period on the proposed rule closed on 
June 17, 2013. HUD received 6 public comments. Commenters included a 
savings bank, banker and home builder associations, and credit unions. 
All public comments supported the proposed rule. Section III of this 
preamble discusses the comments received on the proposed rule. HUD has 
decided to adopt the proposed rule as final with no substantive 
changes. HUD, however, has taken the opportunity afforded by this final 
rule to reorganize Sec.  202.5(g), for clarity purposes only.

A. Streamlined Reporting Requirements for Small Supervised Lenders and 
Mortgagees

    This final rule amends Sec.  202.5(g) and adds a new (c) to Sec.  
202.6, Supervised Lenders and Mortgagees, that exempts small supervised 
lenders and mortgagees from submitting a copy of an audited financial 
statement. Small supervised lenders and mortgagees are instead 
required, within 90 days of their fiscal year end, to furnish to HUD 
the unaudited financial regulatory report that aligns with the small 
supervised lender's or mortgagee's fiscal year end and that the small 
supervised lender or mortgagee is required to submit to their 
respective federal banking agency. In order to manage the risk to the 
FHA insurance fund, HUD retains the right to request additional 
financial documentation, up to and including audited financial 
statements, if HUD determines that a small supervised lender or 
mortgagee poses a heightened risk to the FHA insurance fund.
    HUD may determine that a small supervised lender or mortgagee poses 
a heightened risk to the FHA insurance fund based upon, but not limited 
to, one or more of the following factors: (1) Failing to provide 
required financial submissions under Sec.  202.6(c)(2) within the 
required 90-day period following the lender's or mortgagee's fiscal 
year end; (2) maintaining insufficient adjusted net worth or 
unrestricted liquid assets as required by Sec.  202.5(n); (3) reporting 
opening cash and equity balances that do not agree with the prior 
year's reported cash and equity balances; (4) experiencing an operating 
loss of 20 percent or greater of the lender's or mortgagee's net worth 
for the annual reporting period as governed by Sec.  202.5(m)(1); (5) 
experiencing an increase in loan volume over the prior 12-month period, 
determined by the Secretary to be significant; (6) undertaking 
significant changes to business operations, such as a merger or 
acquisition; and (7) other factors that the Secretary considers 
appropriate in indicating a heightened risk to the FHA insurance fund.

B. Technical Amendments

    As noted earlier in this preamble, the April 18, 2013, proposed 
rule contained three conforming amendments to current regulations 
regarding reporting requirements for FHA-approved supervised lenders 
and mortgagees. These nonsubstantive amendments, which are adopted 
without change by this final rule, will codify existing requirements 
and correct a regulatory citation. The amendments are as follows:
    1. Audited financial statement for large supervised lenders and 
mortgagees. This rule adds subparagraph (b)(4) to Sec.  202.6 to 
clarify that annual audited financial statements required to be 
submitted by supervised lenders and mortgagees are to be submitted in 
accordance with the same requirements as those applicable to 
nonsupervised institutions under Sec.  202.7(b)(4). Additionally, as 
referenced above, it exempts small supervised lenders and mortgagees 
from the requirement to submit audited financial statements.
    2. Technical correction to uniform financial reporting standards. 
This rule makes a conforming amendments to Sec.  5.801(a)(5) by 
removing loan correspondents and adding supervised lenders and 
mortgagees. Section 5.801 requires conformance with the uniform 
financial reporting requirements if HUD requires the submission of 
financial information.
    3. Technical correction to Sec.  202.3(b). This rule replaces an 
incorrect citation in Sec.  202.3(b) by removing the reference to Sec.  
202.5(n)(2) and inserting the correct citation to Sec.  202.5(m).

III. Discussion of Public Comments

    The following section presents a summary of the public comments in 
response to the April 18, 2013, proposed rule, and HUD's response.
    All commenters supported HUD's proposed rule permitting small 
supervised lenders and mortgagees to submit their financial regulatory 
reports required by their respective federal banking agencies in place 
of annual audited financial statements. Commenters also supported HUD's 
decision to retain the right to require audited financial statements 
when they determine, based on the proposed list of relevant factors, 
that an entity poses a heightened risk to the FHA insurance fund. A 
number of commenters emphasized the important role of community banks 
in the communities they serve that may not have access to larger 
lenders and mortgagees. In addition, the commenters noted that 
community bank residential mortgage lending activities have posed very 
little risk to the insurance fund, but requiring community banks to 
finance annual audited financial statements may result in community 
banks no longer offering homebuyers FHA loans.
    One commenter requested that in addition to no longer requiring the 
submission of annual audited financial statements for small supervised 
lenders and mortgagees, HUD no longer require costly internal control 
and compliance audit requirement imposed on small supervised lenders 
and mortgagees.
    In response to the comment, HUD clarifies that small supervised 
lenders and mortgagees, as a result of this rule, are no longer 
required to submit internal control and compliance reports. Internal 
control and compliance reports are a part of the annual audit report. 
Therefore, exempting small supervised lenders and mortgagees from 
submitting annual financial audits required by Sec.  202.5(g) and Sec.  
202.6(b)(4) means they are also not subject to the internal control and 
compliance report requirement. If, however, the Secretary determines 
that a small supervised lender or mortgagee poses a heightened risk to 
the FHA insurance fund under Sec.  202.6(c)(3), the Secretary can 
require the submission of additional information, including internal 
control and compliance reports.

IV. Findings and Certifications

Public Reporting Burden

    The information collection requirements contained in this rule have 
been approved by the Office of Management and Budget (OMB) under the 
Paperwork Reduction Act of 1995

[[Page 57060]]

(44 U.S.C. 3501-3520) and assigned OMB control number 2506-0085. In 
accordance with the Paperwork Reduction Act, an agency may not conduct 
or sponsor, and a person is not required to respond to, a collection of 
information, unless the collection displays a currently valid OMB 
control number.

Regulatory Flexibility Act

    The Regulatory Flexibility Act (RFA) (5 U.S.C. 601 et seq.), 
generally requires an agency to conduct a regulatory flexibility 
analysis of any rule subject to notice and comment rulemaking 
requirements unless the agency certifies that the rule will not have a 
significant economic impact on a substantial number of small entities. 
This rule would not have a significant economic impact on a substantial 
number of small entities because the rule is specifically intended to 
ease the regulatory burden on small entities. The current regulations 
require full independent audited financial statements, over and above 
what is required by federal banking agencies in their oversight of 
these small supervised lenders and mortgagees. This rule would bring 
HUD's reporting practices in line with that of the federal banking 
agencies and reduce the cost of participating in FHA programs by 
releasing small supervised lenders and mortgagees from the requirement 
to submit annual audited financial statements. Instead, the rule would 
require the submission of the unaudited financial regulatory report 
already required by the small supervised lender's or mortgagee's 
supervising federal banking agency. Therefore, the undersigned 
certifies that this rule will not have a significant impact on a 
substantial number of small entities.

Executive Order 13132, Federalism

    Executive Order 13132 (entitled ``Federalism'') prohibits an agency 
from publishing any rule that has federalism implications if the rule 
either (1) imposes substantial direct compliance costs on state and 
local governments and is not required by statute, or (2) preempts state 
law, unless the agency meets the consultation and funding requirements 
of section 6 of the Executive Order. This rule would not have 
federalism implications and would not impose substantial direct 
compliance costs on state and local governments or preempt state law 
within the meaning of the Executive Order.

Environmental Impact

    This rule does not direct, provide for assistance or loan and 
mortgage insurance for, or otherwise govern or regulate real property 
acquisition, disposition, leasing, rehabilitation, alteration, 
demolition, or new construction. Nor does it establish, revise, or 
provide for standards for construction or construction materials, 
manufactured housing, or occupancy. This rule is limited to the 
procedures governing the submission of financial reports by small 
supervised lenders and mortgagees applying to participate, or 
recertifying for participation, in FHA's single-family programs. 
Accordingly, under 24 CFR 50.19(c)(1), this rule is categorically 
excluded from environmental review under the National Environmental 
Policy Act of 1969 (42 U.S.C. 4321).

Unfunded Mandates Reform Act

    Title II of the Unfunded Mandates Reform Act of 1995 (2 U.S.C. 
1531-1538) (UMRA) establishes requirements for federal agencies to 
assess the effects of their regulatory actions on state, local, and 
tribal governments, and on the private sector. This rule would not 
impose any federal mandates on any state, local, or tribal governments, 
or on the private sector, within the meaning of the UMRA.

Catalogue of Federal Domestic Assistance

    The Catalogue of Federal Domestic Assistance Number for the 
principal FHA single-family mortgage insurance program is 14.117.

List of Subjects

24 CFR Part 5

    Administrative practice and procedure, Aged, Claims, Crime, 
Government contracts, Grant programs--housing and community 
development, Individuals with disabilities, Intergovernmental 
relations, Loan programs--housing and community development, Low and 
moderate income housing, Mortgage insurance, Penalties, Pets, Public 
housing, Rent subsidies, Reporting and recordkeeping requirements, 
Social security, Unemployment compensation, Wages.

24 CFR Part 202

    Administrative practice and procedure, Home improvement, 
Manufactured homes, Mortgage insurance, Reporting and recordkeeping 
requirements.

    Accordingly, for the reasons stated in the preamble, HUD amends 24 
CFR parts 5 and 202 to read as follows:

PART 5--GENERAL HUD PROGRAM REQUIREMENTS; WAIVERS

0
1. The authority citation for part 5 continues to read as follows:

    Authority: 42 USC 3535, 1437a, 1437c, 1437d, 1437f, 1437n, 
3535(d), Sec. 327, Pub. L. 109-115, 119 Stat. 2936, and Sec. 607, 
Pub. L. 109-162, 119 Stat. 3051.


0
2. Revise Sec.  5.801 paragraph (a)(5) to read as follows:


Sec.  5.801  Uniform financial reporting standards.

    (a) * * *
    (5) HUD-approved Title I and Title II supervised and nonsupervised 
lenders and mortgagees.
* * * * *

PART 202--APPROVAL OF LENDING INSTITUTIONS AND MORTGAGEES

0
3. The authority citation for part 202 continues to read as follows:

    Authority: 12 U.S.C. 1703, 1709 and 1715b; 42 U.S.C. 3535(d).


Sec.  202.3  [Amended]

0
4. In Sec.  202.3 paragraph (b), remove the citation ``Sec.  
202.5(n)(2)'' and add in its place ``Sec.  202.5(m)''.

0
5. Revise Sec.  202.5 paragraph (g) to read as follows:


Sec.  202.5  General approval standards.

* * * * *
    (g) Financial statements. The lender or mortgagee shall:
    (1) Furnish to the Secretary a copy of its audited financial 
statements within 90 days of its fiscal year end, except as provided in 
Sec.  202.6(c);
    (2) Furnish such other information as the Secretary may request; 
and
    (3) Submit to an examination of that portion of its records that 
relates to its Title I and/or Title II program activities.
* * * * *

0
6. In Sec.  202.6, add new paragraphs (b)(4) and (c) to read as 
follows:


Sec.  202.6  Supervised lenders and mortgagees.

* * * * *
    (b) * * *
    (4) Audit report. Except as provided in paragraph (c) of this 
section, a lender or mortgagee must:
    (i) Comply with the financial reporting requirements in 24 CFR part 
5, subpart H. Audit reports shall be based on audits performed by a 
certified public accountant, or by an independent public accountant 
licensed by a

[[Page 57061]]

regulatory authority of a State or other political subdivision of the 
United States on or before December 31, 1970, and shall include:
    (A) Financial statements in a form acceptable to the Secretary, 
including a balance sheet and a statement of operations and retained 
earnings, a statement of cash flows, an analysis of the lender's or 
mortgagee's net worth adjusted to reflect only assets acceptable to the 
Secretary, and an analysis of escrow funds; and
    (B) Such other financial information as the Secretary may require 
to determine the accuracy and validity of the audit report.
    (ii) Submit a report on compliance tests prescribed by the 
Secretary.
    (c) Financial statement requirements for small supervised lenders 
and mortgagees.
    (1) Definitions. For the purposes of this section, the following 
definitions apply:
    (i) Federal banking agency means the Board of Governors of the 
Federal Reserve System; the Federal Deposit Insurance Corporation; and 
the National Credit Union Administration; or any successor agency 
thereof.
    (ii) Small supervised lender or mortgagee means a supervised lender 
or mortgagee possessing consolidated assets below the threshold for 
required audited financial reporting as established by the federal 
banking agency that is responsible for the oversight of that supervised 
lender or mortgagee.
    (2) Financial statement requirements. Small supervised lenders and 
mortgagees shall not be subject to the requirement to submit a copy of 
an audited financial statement under Sec.  202.5(g) and the audit 
report requirements under paragraph (b)(4) of this section. Small 
supervised lenders and mortgagees are required, within 90 days of their 
fiscal year end, to furnish to the Secretary the unaudited financial 
regulatory report--a consolidated or fourth quarter Report of Condition 
and Income (Federal Financial Institutions Examination Council forms 
031 and 041, also known as the ``Call Report''), a consolidated or 
fourth quarter Thrift Financial Report, or a consolidated or fourth 
quarter NCUA Call Report (NCUA Form 5300 or 5310), or such other 
financial regulatory report as may be required--that aligns with the 
small supervised lender's or mortgagee's fiscal year end and that the 
small supervised lender or mortgagee is required to submit to their 
respective federal banking agency.
    (3) Requirement for audited financial statement and other 
information based on determination of heightened risk to the FHA 
insurance fund. If the Secretary determines that a small supervised 
lender or mortgagee poses a heightened risk to the FHA insurance fund, 
the lender or mortgagee must provide, upon request, additional 
financial documentation, up to and including an audited financial 
statement, and other information as the Secretary determines necessary. 
The Secretary may determine that a small supervised lender or mortgagee 
poses a heightened risk to the FHA insurance fund based upon, but not 
limited to, one or more of the following factors:
    (i) Failing to provide required financial submissions under Sec.  
202.6(c)(2) within the required 90-day period following the lender's or 
mortgagee's fiscal year end;
    (ii) Maintaining insufficient adjusted net worth or unrestricted 
liquid assets as required by Sec.  202.5(n);
    (iii) Reporting opening cash and equity balances that do not agree 
with the prior year's reported cash and equity balances;
    (iv) Experiencing an operating loss of 20 percent or greater of the 
lender's or mortgagee's net worth for the annual reporting period as 
governed by Sec.  202.5(m)(1);
    (v) Experiencing an increase in loan volume over the prior 12-month 
period, determined by the Secretary to be significant;
    (vi) Undertaking significant changes to business operations, such 
as a merger or acquisition; and
    (vii) Other factors that the Secretary considers appropriate in 
indicating a heightened risk to the FHA insurance fund.

    Dated: September 9, 2013.
Carol J. Galante,
Assistant Secretary for Housing--Federal Housing Commissioner.
[FR Doc. 2013-22583 Filed 9-16-13; 8:45 am]
BILLING CODE 4210-67-P