FEDERAL LEGISLATION
DFWAMB advocates that FHA replace the annual audit for mortgage broker participation in the FHA program with the surety bond payable to FHA. Nearly every state has implemented bonding rather than an audit for licensing. They have found bonding to be the preferred method of protecting citizens and the lending industry.
ISSUES/BACKGROUND
The FHA loan program is of vital importance to mortgage brokers. According to Wholesale Access, brokers originated 38.6 percent of all FHA loans for a total of $110 billion in 2003.
The bonding requirement should increase the amount of competition for originating FHA loans.
Most small businesses find the cost to produce audited financial statements to be a significant burden. The cost of hiring an accountant who meets government auditing standards and the man hours needed to compile and report the needed data is simply impractical for a small business. As a result, many mortgage brokers decide not to originate FHA loans. By asking these businesses to purchase bonding, HUD will increase competition for FHA loans since bonds are generally cheaper than audited financials while still providing relief to injured customers.
Government auditing standards are designed for large business enterprises. A large portion of these standards simply cannot be effectively applied to very small businesses such as brokers.
HUD has never proven, nor even offered evidence, that audited financials and net worth requirements have any relationship to loan performance and loan origination quality.
HUD's net worth requirement is of little value for indemnification because a company in trouble can easily dissipate its net worth. Because the net worth for brokers (Correspondents) usually needs to be in cash, it tends to destabilize a small business by robbing it of needed operating funds.
the bonding requirement achieves the goal of requiring audited financial statements because it ensures that customers have relief from dishonest originators.
STATUS/OUTLOOK
DFWAMB is working with HUD and the Surety Bond Association to craft surety bond guidelines acceptable to the FHA program that would substitute a surety bond for the annual audit provision.
|
|
