The U.S. Department of Housing and Urban Development (HUD) plays a crucial role in expanding access to affordable housing. By providing federal support and insurance for home loans, HUD helps lower the risk that lenders face when borrowers default on their mortgages.
Banks that get involved with HUD lending can access a broader market by offering loans that might be too risky without HUD’s backing. However, participating in these programs requires careful adherence to HUD’s complex regulations and standards and often comes with additional cost. Here’s what banks need to know and do if they decide to get involved with HUD lending.
Step One: Understand HUD Programs and Become an Approved Lender
The first step for any bank considering HUD lending is to understand the various programs offered. The most well-known is the Federal Housing Administration (FHA), which insures mortgages with low down payments and less stringent credit requirements than conventional loans. Other programs include the Section 184 Indian Home Loan Guarantee Program, Multifamily Housing Loan Programs, Section 108 Loan Guarantee Program, and Public Housing and Section 8 Project-Based Programs.
Each program has its own rules and eligibility requirements, which are detailed in HUD handbooks and mortgagee letters. Banks need to familiarize themselves with these details to ensure they offer these loans correctly and comply with all necessary guidelines.
Banks must obtain HUD approval before participating in HUD lending. This involves an application process that includes demonstrating:
- A solid financial position
- Sound operational practices
- A commitment to fair lending
Once approved, banks must strictly adhere to HUD’s lending guidelines to maintain their status.
Step Two: Implement Strong Internal Controls
Participating in HUD programs requires banks to implement robust internal controls. These controls are critical to managing risk and ensuring compliance with HUD’s regulatory requirements. This includes establishing procedures for loan origination, underwriting, servicing, and claims processing. Banks must also ensure that they have adequate staff training on HUD processes and compliance.
Step Three: Conduct Regular Audits and Quality Control
Regular audits are a cornerstone of HUD’s compliance monitoring. These audits ensure that loans are originated and serviced according to HUD’s regulations, and that the bank’s internal controls are effective in preventing errors and fraud. Quality control reviews, specifically, must be unbiased and thorough, checking both high-risk areas and random samples to ensure comprehensive compliance.
Banks involved in HUD lending programs are generally required to have annual audits conducted by independent auditors (24 CFR Part 5, Subpart H; and 24 CFR Part 202.5(g) and related mortgagee letters).
HUD requires an audit that consists of two components:
- A financial statement audit and
- A compliance audit of the entity’s major HUD programs.
The audit must be performed by a Certified Public Accountant (CPA) and in accordance with Generally Accepted Auditing Standards (GAAS), Generally Accepted Government Auditing Standards (GAGAS), and Uniform Guidance. For banks that have never undergone a financial statement audit, this is often a significant additional cost.
These audits examine the following:
- Financial Statements
- Internal Controls
- Compliance with HUD Program Regulations
- Regulatory Reporting
- Electronic Data Security
- Quality Control Reviews
- Training and Staff Competency
Other Items to Consider:
Ensuring Compliance with Fair Lending Laws
Compliance with fair lending laws is critically important in all banking activities, but it is especially scrutinized in HUD lending due to the programs’ objectives of expanding access to housing. Banks must rigorously ensure that they do not discriminate against borrowers on the basis of race, color, national origin, religion, sex, familial status, or disability.
Preparing for HUD Review
HUD periodically reviews its lenders to ensure compliance and assess performance. Banks should be prepared for these reviews by maintaining clear, organized records of all their HUD lending activities. Regular internal reviews and audits can help ensure that banks are always ready for a HUD review.
Conclusion
Getting involved with HUD lending can help banks reach more customers and support community development. However, the benefits come with increased responsibilities and cost. By understanding and preparing for these responsibilities, banks can successfully navigate HUD lending and become key players in promoting accessible and affordable housing.
For help understanding and navigating the complexities of HUD lending, or to ensure your bank is compliant and well-prepared for HUD reviews, connect with our team of experts. We offer comprehensive support – from initial application to ongoing compliance and audit readiness.
