COMPLIANCE FINDING DOCUMENTATION



9000.85 HUD Compliance Audit Program – Escrow Accounts (Title II Lender)Client:Closing Date:Current Version: 11/2010 View Document SignoffsTitleNameDatePrepared by 1Prepared by 2Prepared by 3Reviewed by 1Reviewed by 2Reviewed by 3Reviewed by 4Preparer Comments: Note:The engagement team should use the FI HUD attribute sampling guidance to determine the appropriate sample size for each attribute being tested. For example, if the attribute being tested relates to loan pay-offs then the engagement team should use a report that generates the number of loans related to that attribute as the population for sample selections. This form is also required to be signed-off by the manager and in-charge. Overall ObjectiveThe objective of this audit program is to document the auditor's tests of compliance related to HUD requirements to establish escrow accounts that mortgagors make monthly payments to ensure that funds will be available to pay taxes and insurance premiums. GuidanceEach month the mortgagee must collect from the mortgagor an amount which the mortgagee estimates will be sufficient to enable it to accumulate funds to pay all escrow obligations before delinquency i.e., (a) mortgage insurance premiums; (b) taxes, special assessments, and ground rents, if any; (c) hazard insurance premiums, if any; and (d) flood insurance premiums where required. The mortgagee should analyze the escrow account, at least annually, to determine whether projected escrow balances will be sufficient to fund escrow disbursements. Any projected escrow shortage should be collected by either (a) lump sum payment or (b) allocating the shortage over a 12-month period. The mortgage instrument provides the authority for the mortgagee to accumulate sufficient escrow funds with which to pay the mortgagor’s tax and insurance bills 30 days before the time the bills become delinquent (HUD Handbook 4330.1, chapter 2). Mortgagees may not use mortgagor escrow funds for any purpose other than for which they were received and the mortgagee cannot report escrows as its own assets. If escrow funds are reported on the balance sheet, they must be fully offset by a corresponding liability and must be segregated on the balance sheet. The audit program should be modified to address the audit requirements identified in the guidance referenced above for every applicable requirement identified. 1Identify the person primarily responsible for completion of this section:StepNo.SUGGESTED AUDIT PROCEDURESDATEW/PREFREMARKS1.Verify there are no changes to the auditee’s policies and procedures for reconciling custodial trust accounts from the understanding obtained during the risk assessment process.2.Determine whether escrows are reported on the balance sheet. If so, verify that the proper liability account is established and reported, and the accounts are segregated as required.3.Obtain trial balances of individual escrow accounts and reconcile or review the reconciliation of the total with the auditee’s control account and the related bank account. Inquire as to whether the auditee did not use escrow funds for late charges, assumption fees, or any purpose other than specified above.4.For a selected sample of mortgages, obtain the most recent escrow analysis and note whether it was prepared not more than one year ago, and whether monthly deposits appear adequate to provide for payments for taxes, insurance, etc., by review of actual payments or other evidence of amounts due (e.g., tax assessment notices or prospective rate adjustment notices from insurance companies). Also, test whether that most recent real estate tax bills for each account were paid. If not paid within the discount period, inquire as to reasons for the delay and test whether the mortgagor retained the benefit of the discount and any late charges assessed were borne by the auditee at its expense. Test whether the mortgagor was furnished a statement of interest paid during the preceding year within 60 days after the end of the calendar year.5.For the sample accounts selected above, inspect supporting documents for escrow disbursements such as receipts, invoices, tax bills, and canceled checks. Determine that the funds were only used for the intended purpose and the proper amount was disbursed.6.Inquire whether escrow funds are deposited into accounts that are fully insured by the FDIC or NCUA. For the sample accounts selected above, test whether escrow funds are deposited into such accounts and whether the auditee covered any overdrafts on selected accounts by advancing its own funds to custodial accounts so that FDIC or NCUA insurance protection was not impaired. HUD regulations neither require nor forbid that escrow accounts bear interest. However, in those cases in which accounts are interest bearing, test whether interest earned, less expense, is passed on to the mortgagor.7.Review the auditee’s policies and procedures related to notification of surplus escrow funds to the mortgagor. Obtain supporting documents or communication from the auditee and review for evidence regarding whether they advised the mortgagor of the amount of any surplus escrow funds in accordance with HUD requirements.8.Review the policies and procedures that the auditee has established to ensure that bills payable from the escrow fund or the information needed to pay such bills is obtained in advance of the due date.9.Inquire of the auditee if any bills were paid late. For any bills paid late, determine whether any late charges/penalties assessed are paid out of the auditee’s funds and not the mortgagor’s funds.10.Inquire whether the auditee requires the mortgagor to purchase hazard insurance coverage from the auditee or from a specific company. If the mortgagor purchases the insurance from the auditee, obtain a sample of mortgages and test the propriety (mathematical accuracy, reasonableness, etc.) of the insurance charge to the mortgagor.11.Obtain a listing of FHA loans that were paid off during the reporting period and test the listing for completeness. Select a sample of at least 2 loan payoffs for review for evidence that the auditee returns to the mortgagor the amounts held in escrow for taxes and hazard insurance within 30 days of receipt by the mortgagee of payoff funds.Conclusion:The objective set forth at the beginning of this audit program section has been achieved and all "findings" identified have been evaluated for appropriate reporting in accordance with the HUD Handbook 4060.1 and Handbook 2000.04, Consolidated Audit Guide for Audits of HUD Programs.Yes _____ No _____ Signature __________________________________________________________Explanation of "No" conclusion____________________1The principle compliance requirements related to HUD-assisted programs are provided in the HUD Handbook 4060.1 and Handbook 2000.04, Consolidated Audit Guide for Audits of HUD Programs. When there have been changes to the compliance requirements and the changes are not yet reflected in the guidance referred to above, the auditor should determine the current compliance requirements and modify the audit procedures accordingly. ................
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