HUD GNMA Requirements for bank accounts in excess of 250K

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ID Status Date Public/Private Industry AHACPA Contact
#7416 Closed public Multifamily Les Sparks
Customer Reply

HUD has a requirement for multi families that they need to deposit funds in excess of 250K in an institution with credit ratings acceptable by GNMA. Do you have any guidance/ links on this? Many banks aren’t rated by the major rating companies.

Thanks

9/92 4-16
4350.1 REV-1
CHG-9

4-22 Investment of Reserve for Replacements Funds. Consistent with program
* regulations and the Regulatory Agreement, the reserve for replacement
funds must be maintained by the mortgagee. Investment options should be
determined jointly by the mortgagor and mortgagee. The Regulatory
Agreement requires, “.. such fund, whether in the form of a cash
deposit, or invested in obligations of, or fully guaranteed by the
United States of America, shall at all times be under the control of the
mortgagee.”

A. This paragraph suspends this provision by authorizing the mortgagee
to invest funds in excess of $100,000 in U. S. government-backed
securities and to hold funds in excess of $100,000 in institutions
under the control of, and whose deposits are insured by, the
Federal Deposit Insurance Corporation, National Credit Union
Association, or other U.S. government insurance corporations under
the following conditions:

1. Mortgagees must determine that the institution has a rating
consistent at all times with current minimally acceptable
ratings as established and published by Government National
Mortgage Association (GNMA).

2. Mortgagees must monitor the institution’s ratings no less than
on a quarterly basis, and change institutions when necessary.
The mortgagee must document the ratings of the institutions
where the funds are deposited and maintain the documentation
in the administrative record for three years, including the
current year.

3. If the mortgagee does not perform the required quarterly
review of the institutions where there are deposits in excess
of $100,000 and does not maintain the funds in an institution
with a rating consistent with current minimally acceptable
ratings as established and published by GNMA, and the
institution fails, the mortgagee is held responsible for
replacing any lost funds. In addition, the mortgagee shall be
subject to sanctions. In the event the mortgagee fails to
replace the lost funds, HUD will seek all available remedies
to recover whatever funds are lost as a result of the failed
institution.

B. The above language is not deemed a modification of the Regulatory
Agreement. Therefore, HUD reserves the right to invoke this
Regulatory Agreement provision and make it operational in the
future through notice or handbook change, if it is determined that
such a policy is necessary or desirable.

Kathy Christensen

From Les Sparks:
Strange this is the second one of these this morning. The last one was actually sent to DEC because of the amount being over the limit.

Yes, HUD requires the owner to do something once they have more than the guarantee amount to determine the nature of the concentration risk the project has. Failure to do this review coupled with a loss of the funds would trigger a requirement that the owner repay the project for the amount lost. All because they did not perform the review. Of course, the funny thing about this whole concept is that banks are prohibited by law from disclosing their own internal ratings. We suggest a simple review from a site such as Bankrate.com should be sufficient for most cases. They key appears to be that once the project’s cash in any account exceeds $250,000, then a review should be performed and the results of that review be included in the notes to the financial statements.

From client:

Thanks so much for the response.
What is even stranger is that this compliance requirement (chapter 3 in HUD audit guide) seems to be focused on the replacement reserve account which is required to be by the HUD insured lender. I noticed you wrote it applies to all cash accounts. For the regular cash account I can understand this requirement, however do you think it applies to reviewing the rating on the HUD lender which is holding the replacement reserve account?

From Les:

Joseph, yes, this requirement applies to all cash account held by a project (operating, security deposits, R4R and residual receipts.

All of these cash accounts are required to be placed in guaranteed accounts. The review applies to any account that exceeds the Fed’s guarantee.

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