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4 Reasons an FHA Lender may have to file a Notice of Material Event

Within the myriad of rules and regulations FHA lenders must follow is notifying the FHA of a change to the information provided at approval, or a change that affects the lender’s FHA-approval status. One way they can do this is with a Notice of Material Event, which is submitted via LEAP. In our 30 years of serving Independent Mortgage Bankers, we have noticed time and time again that our clients were not aware of this requirement and more times than not, are beyond the 30-business-day mark since the triggering event. Not only has this caused them much aggravation, but also monetary fines and penalties assessed by the mortgagee review board.

 

Some of the most common triggering events that are often overlooked are as follows:

 

 

  1. Liquid Asset Deficiency
  2. Net Worth Deficiency
  3. Operating Losses of 20% or greater of net worth within a quarter
  4. Change in Fidelity Bond Coverage and or Errors and Omissions Insurance

 

Liquid Asset Deficiency and Net Worth Deficiency

 

If at any time a Mortgagee’s adjusted net worth or liquidity falls below the required minimum, the Mortgagee must submit a NME (Notice of Material Event) to FHA within 30 business days of the deficiency as well as Corrective action plan that outlines the steps taken to mitigate the deficiency and includes the relevant information and efforts made to correct the deficiency.

 

Operating Losses of 20% or greater of net worth within a quarter

 

If any quarterly loss within the fiscal reporting year exceeds 20% or greater of the Company’s net worth FHA must be notified of the event within 30 business days of the end of the quarter through LEAP. The Company will then be required to submit quarterly unaudited financial statements to FHA until the lender shows an operating profit for two consecutive quarters or submits financial reports as part of the Lender’s annual recertification, whichever is the longer period.

 

Change in Fidelity Bond Coverage and/or Errors and Omissions Insurance

 

A Lender must submit a Notice of Material Event to FHA of any significant change or changes to its fidelity bond coverage and or change in its errors and omissions insurance. Should the Lender lose its Fidelity Bond Coverage or Errors and Omissions Insurance it is required to obtain a new policy within 30 days

 

It’s imperative that FHA Lenders are aware of these deficiencies and understand the importance of being proactive and properly notifying FHA. In our experience, lenders only become aware of these issues when their annual certified audit is concluded. Unfortunately, by that time, it is beyond 30 business days and they are subjected to penalties assessed by the mortgagee review board.

 

One way lenders can mitigate this risk is by adjusting for occurrences quarterly rather than wait for the end of the fiscal year. We often see a neglect in adjusting IRLCs and MSRs, as well as depreciation, quarterly. However, making these valuation adjustments and recording depreciation every quarter will, in most cases, assuage the operating losses of 20% or greater of net worth within a quarter deficiency. By doing this, lenders will be less likely to experience the unintended consequences of their unknown neglect.

 

For any further questions or concerns please contact Santo Chiarelli, Partner at ACS, LLP.

 

 

About the Author


Santo Chiarelli

 

 

As an Accounting and Auditing Partner at ACS, Santo is responsible for ACS’s Mortgage Banking Service division and has been for the past 30 years. Before ACS, he began his professional career as an audit member of the NYC CPA firms Yohalem, Gillman & Company LLP (now part of Anchin Block & Anchin) and Berenson, Berenson, Adler LLP (now part of CohnReznick). In addition to his professional work experience, he also served as an adjunct accounting professor at Wagner College in New York and at Fairleigh Dickinson Graduate School in New Jersey.

 

 

The accounting department at FBC Mortgage, LLC (“FBC”) was trying to keep up with the rest of the company's growth, however they had outgrown the legacy system that was implemented in 2011. Dissatisfaction came to a head when a system upgrade ended up shutting their department down for days. Even after the system was fixed, the department was still having more issues than before. 

Dyron Watford, CFO at FBC, began searching for a solution that would expand on the loan level capabilities of their old tool, while providing some much-needed reliability to the department and a frustrated team. Knowing the cost to customize a generic accounting system was too high, he came to the conclusion that Loan Vision was the solution to many of their problems and began to prepare for its implementation. However, with an understaffed department and a go-live set for the beginning of the year, the accounting team at FBC still had an uphill battle. Luckily our implementation process, which has been honed over 150 different mortgage banks, is not only clear and concise, but also a key driver in the success of our customers on the system. Dyron and his team got first-hand experience with this, facing adversity that was out of their control, but still able to make their go-live a reality. Since starting on the Loan Vision system, the accounting team at FBC is operating more efficiently than they have in years, with Dyron stating, “We’re twenty times the size we were the last time we operated this smoothly.”

How is this possible? Firstly, they aren’t spending hours manipulating their LOS data to get the information they need due to Loan Vision’s import automation bringing that data in overnight. It allows them to get in to work, start the day, and know the information they need is available to them. This automation also eliminates a number of errors, giving them the freedom to move forward. “We typically have 95-97% of our imports going in correctly the first time without us having to look at it. It’s been a huge time saver for the group,” said Dyron. “When we come in, we’re able to put yesterday to rest and concentrate on how we can benefit the company for the rest of the day.”

Secondly, Loan Vision reports on real-time data, so there’s never any guess work. They are able to supply accurate, analytical reports that their executives can use to make the hard-hitting decisions. “Our executives always want to know where we are at this very minute and with Loan Vision, we’re able to make that happen,” expressed Dyron. “In today’s market especially, analyzing data at a speed where you can make an appropriate decision is a must. I have the confidence in this system that when I provide that data, it’s real-time and it’s correct.”

While Dyron and his team are in a much better spot, they are still excited about what more they can do on the system and what advancements Loan Vision will bring in the future. “It took us years to master our old accounting system. A little over a year after implementation, I realize we really have just scratched the surface with Loan Vision,” Dyron admitted. “Not only do we continue to learn more about the solution’s capabilities, the team at Loan Vision is constantly improving, adding new tools that further smooth out our processes. It really makes a difference, systematically, for teams and for companies our size.”

To learn more about FBC Mortgage’s successes with Loan Vision, check out the case study here. 

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