I am working with a client who owns 13 HUD insured entities and a number of other non-HUD real estate entities. All of the entities are for-profit. The client has individual bank accounts on each of the HUD’s and then also uses a centralized account which each property has a share of – this amount appears as cash on the individual entity and a corresponding share of the funds in the centralized account. I attended the AHACPA update last fall and noted in the manual that a management agent can use a centralized account with the following conditions:

1.) Managing agents must determine that the financial institution has a rating consistent at all times with current minimally acceptable ratings as established and published by Government National Mortgage Association (GNMA).
2.) The managing agent must monitor the institution’s ratings no less than on a quarterly basis, and change institutions when necessary. The managing agent must document the ratings of the institution where the funds are deposited and maintain the documentation in the administrative record for three years, including the current year.
3.) In the event that the managing agent fails to follow these procedures and the bank fails, the owner/managing agent will be expected to make up losses sustained by the various project accounts held by the failed bank.
4.) Deposits to and disbursements from the centralized account must clearly be traceable to each project. The actual cash position of each and every project in the centralized account must be easily identifiable at all times without exception.
5.) The managing agent must allow a project owner to require, at any time, that the particular owner’s funds be kept isolated and separate from the funds of other projects held by the agent; that is, at all times an owner is to have the prerogative of not participating in the centralized account arrangement or of withdrawing from such an arrangement.

If the client follows all of these except #2, in that they have not historically made and documented a review and consideration of the credit rating of the banking institution and maintained this information for the files, is it sufficient to verbally notify them of these requirements this year or is this something that would result in an official management letter comment or something requiring formal disclosure to HUD? Have you seen similar situations in practice or with other members?