Lender Failure to Report Notice of Material Event

ID Status Date Public/Private Industry AHACPA Contact
#10996 Closed public FHA Lender _General Support
Customer Reply

A lender failed to report a quarterly net operating loss in excess of 20 percent of net worth (2nd quarter) as a Notice of Material Event.

Would this be considered a both material weakness and a material noncompliance finding within the audit report?

Les Sparks

Kevin, it is clearly a compliance issue.  In fact, this issue will raise a lot of question after the LEAP submission.  In the last 2-3 weeks, we have had 3 clients penalized by the mortgagee review board for this very issue.  The fines are typically around $10k initially.  This is considered really 3 separate issues by FHA.  The first, not reporting the loss to FHA as a notice of material event.  Second failure to file the notice of material event itself; and third, answering the LEAP recertification questions incorrectly (In particular, question 7)

 

AS to internal control, clearly compliance monitoring was not sufficient to stop the problem form happening.

 

Les Sparks

AHACPA

(801) 547-0809

 

From: AHACPA Support <[email protected]>
Sent: Sunday, March 17, 2019 6:05 PM
To: [email protected]
Subject: Lender Failure to Report Notice of Material Event

Customer Reply

Les

Thank you so much with your reply. The only other question I have is that if the year as a whole the loss also exceeds 20% of the of the adjusted net worth, can this be combined as one compliance issue (quarterly loss and annual loss exceeding 20% of adjusted net worth), or does this need to be reported as 2 separate compliance issues.

Thanks, Kevin

Les Sparks

Kevin, as far as I know a loss of more than 20% in a year is not a violation or an item to be reported on.  IT is only the 20% in a quarter.  Now, more importantly, did the client meet net worth throughout the year/  That is a bigger question.

 

Les Sparks

AHACPA

(801) 547-0809

 

From: AHACPA Support <[email protected]>
Sent: Tuesday, March 19, 2019 7:14 AM
To: [email protected]
Subject: Lender Failure to Report Notice of Material Event [Client Reply]

Customer Reply

Les

The client did meet the net worth requirement for each quarter of the year and there were no other findings that were noted.  Within the Report on Compliance for Each Major HUD Program, we were going to issue a Qualified Opinion. Do you believe this issue rises to that level, to Qualify the Opinion?

Kevin

Les Sparks

I am not sure that failure to report within 30 days is anything other than a finding – unless…

 

They did not file the notice of material even and also incorrectly answered the certification questions, particularly question 6.

 

Les Sparks

AHACPA

(801) 547-0809

 

From: AHACPA Support <[email protected]>
Sent: Wednesday, March 20, 2019 9:04 AM
To: [email protected]
Subject: Lender Failure to Report Notice of Material Event [Client Reply]

Les Sparks

Kevin, given the nature of HUD’s interest in this topic I can only say that it might be.  It is certainly noncompliance.  How big of an issue depends.  That depends may hinge on how much HUD is enforcing this dilemma.   Since the issue encompasses the quarters and the year in general, we continue to see a lot of lenders miss this requirement. 

 

If I was forced to give my opinion, it would be a finding.  Then, you must also ask about internal control.

 

Let me tell you why I think this is important.  If HUD discovers on their own the noncompliance (30-day notice not made) they will send the lender to the Mortgagee Review Board.  That will normally result in 3 findings:

  • The failure itself

  • Lying on the recertification requirements.

  • If the loss but them below net worth they penalize again.

 

Kinda hard to get past all of that.

 

 

Les Sparks

AHACPA

(801) 547-0809

 

From: AHACPA Support <[email protected]>
Sent: Sunday, March 17, 2019 6:05 PM
To: [email protected]
Subject: Lender Failure to Report Notice of Material Event

Customer Reply

Les

The entity has now filed a Notice of Material Event, on March 21, 2019 for the 2nd quarter loss in excess of 20% of net worth and the annual loss in excess of 20% of net worth.  Although these are late, they were filed prior to the annual recertification which will be completed this week.

Can they answer Question 7 yes now? If don’t answer Question 7 yes, can the annual recertification be submitted without this question being answered yes?

Kevin

Les Sparks

I think they can be combined.  However, I did misspeak.  Annual 20% losses also require a NOME. 

 

Les Sparks

AHACPA

(801) 547-0809

 

From: AHACPA Support <[email protected]>
Sent: Monday, March 25, 2019 12:18 PM
To: [email protected]
Subject: Lender Failure to Report Notice of Material Event [Client Reply]

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