oversight

Management Agents and/or Owner of Savannah Trace Apartments in Kalamazoo, Michigan, Improperly Used Project Funds

Published by the Department of Housing and Urban Development, Office of Inspector General on 2005-08-04.

Below is a raw (and likely hideous) rendition of the original report. (PDF)

           AUDIT REPORT




       SAVANNAH TRACE APARTMENTS
       MULTIFAMILY EQUITY SKIMMING

          KALAMAZOO, MICHIGAN

                2005-CH-1012

              AUGUST 4, 2005




           OFFICE OF AUDIT, REGION V
               CHICAGO, ILLINOIS



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                                                               Issue Date
                                                                       August 4, 2005
                                                               Audit Report Number
                                                                        2005-CH-1012




TO:        Barbara Chiapella, Director of Detroit Multifamily Housing Hub, 5FHMLA
           Margarita Maisonet, Director of Departmental Enforcement Center, CV


FROM:      Heath Wolfe, Regional Inspector General for Audit, 5AGA

SUBJECT: Management Agents and/or Owner of Savannah Trace Apartments in Kalamazoo,
           Michigan, Improperly Used Project Funds

                                  HIGHLIGHTS

 What We Audited and Why


            We reviewed the books and records of Savannah Trace Apartments (project), an
            80-unit multifamily housing project in Kalamazoo, Michigan. We initiated the
            review based on a request from the Detroit Field Office of Multifamily Housing
            Hub for the U.S. Department of Housing and Urban Development (HUD). The
            review was also part of our efforts to combat multifamily equity skimming on
            HUD’s Federal Housing Administration insurance fund. Our objective was to
            determine whether the owner/management agents used project funds in
            compliance with the regulatory agreement and HUD’s requirements.

 What We Found

            Maplegrove Property Management, LLC (Maplegrove), the project’s former
            identity of interest management agent; Keystone Property Management, Inc.
            (Keystone), the project’s current management agent; and/or Richland Housing
            Partners, LLC (Richland), the project’s owner, inappropriately used $5,576 in
            project funds from January 2002 through April 2005 when the project was in a
            non-surplus-cash position and/or had defaulted on its HUD-insured mortgage.
            The inappropriate disbursements included $3,156 in excessive management fees,
            $1,488 for late fees/finance charges, $776 for lawn service, and $156 in office
            supplies/equipment. Further, Maplegrove charged the project an additional

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           $2,044 in excessive management fees that were not paid as of April 30, 2005.
           Maplegrove and/or Richland also lacked documentation to support that an
           additional $1,045 in project funds were properly used. We provided Maplegrove,
           Keystone, and/or Richland schedules of the inappropriate disbursements and
           unsupported payments.

What We Recommend


           We recommend that HUD’s director of Detroit Multifamily Housing Hub ensure
           that Richland, Keystone, and/or Maplegrove (1) reimburse the project’s reserve
           for replacement account and/or HUD’s Federal Housing Administration insurance
           fund for the inappropriate expenses, (2) provide documentation to support the
           unsupported payments or reimburse the appropriate amount to the project’s
           reserve account and/or HUD’s Federal Housing Administration insurance fund
           that cannot be adequately supported, and (3) implement procedures and controls.
           We also recommend that HUD’s director, in conjunction with HUD’s Office of
           Inspector General, pursue double damages remedies if Richland, Maplegrove,
           and/or Keystone do not make the reimbursement.

           We also recommend that HUD’s director of Departmental Enforcement Center
           impose civil money penalties against Richland, Maplegrove, Keystone, and/or their
           principals/officers for the inappropriate use of project funds.

           For each recommendation without a management decision, please respond and
           provide status reports in accordance with HUD Handbook 2000.06, REV-3.
           Please furnish us copies of any correspondence or directives issued because of the
           audit.

Auditee’s Response


           We provided our discussion draft audit report to Richland’s managing member,
           Maplegrove’s managing member, Keystone’s president, and HUD’s staff during
           the review. We held an exit conference on July 11, 2005.

           We asked Richland’s managing member, Maplegrove’s managing member, and
           Keystone’s president to provide comments on our discussion draft audit report by
           July 15, 2005. Richland’s managing member, Maplegrove’s managing member,
           and Keystone’s president (representatives) provided written comments dated July
           14, 2005, July 14, 2005, and July 1, 2005, respectively. The representatives
           generally agreed with our finding. However, the representatives did not agree
           with our recommendations regarding the pursuit of double damages remedies and
           the imposition of civil money penalties. The complete text of the written
           responses, along with our evaluation of those responses, can be found in appendix
           B of this report.


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                                   TABLE OF CONTENTS


Background and Objectives                                                            4

Results of Audit

      Finding: Management Agents and/or Owner Improperly Used or Lacked              5
               Supporting Documentation for the Use of More Than $6,500 in Project
               Funds

Scope and Methodology                                                                9

Internal Controls                                                                    10

Appendixes
   A. Schedule of Questioned Costs                                                   12
   B. Auditee Comments and OIG’s Evaluation                                          13
   C. Federal Requirements                                                           22




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                      BACKGROUND AND OBJECTIVE

Savannah Trace Apartments (project) is an 80-unit multifamily housing project in Kalamazoo,
Michigan. The project is insured under section 221(d)(4) of the National Housing Act, and its
regulatory agreement was executed on January 20, 1999. The project’s owner is Richland
Housing Partners, LLC (Richland). Maplegrove Property Management (Maplegrove) is the
project’s former identity of interest management agent. Keystone Property Management
(Keystone) is the project’s current management agent. The project was in default on its Federal
Housing Administration-insured mortgage from November 2003 through February 2005.

We initiated the review based on a request from the Detroit Field Office of Multifamily Housing
Hub for the U.S. Department of Housing and Urban Development (HUD). The review was also
part of our efforts to combat multifamily equity skimming on HUD’s Federal Housing
Administration insurance fund.

Our objective was to determine whether the owner/management agents used project funds in
compliance with the regulatory agreement and HUD’s requirements.




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                                RESULTS OF AUDIT

Finding: Management Agents and/or Owner Improperly Used or
 Lacked Supporting Documentation for the Use of More Than $6,500 in
                         Project Funds
Maplegrove, Keystone, and/or Richland inappropriately used $5,576 of project funds from
January 2002 through April 2005 when the project was in a non-surplus-cash position and/or had
defaulted on its HUD-insured mortgage. The inappropriate disbursements included $3,156 in
excessive management fees, $1,488 for late fees/finance charges, $776 for lawn service, and
$156 in office supplies/equipment. Further, Maplegrove charged the project an additional
$2,044 in excessive management fees that were not paid as of April 30, 2005. Maplegrove
and/or Richland also lacked documentation to support that an additional $1,045 in project funds
were properly used. The problems occurred because Richland, Maplegrove, and Keystone
lacked effective procedures and controls over the use of project funds. As a result, fewer funds
were available for debt service, and project funds were not used efficiently and effectively.


 Owner paid management
 agents $3,156 in excessive
 management fees


              Richland paid Maplegrove and Keystone excess management fees of $3,156 from
              January 2002 through April 2005 when the project was in a non-surplus-cash
              position and/or in default of its HUD-insured mortgage.

              Richland paid Maplegrove management fees totaling $34,289 from January 2002
              through July 2003. However, Maplegrove only earned $33,154 during this
              period. The following schedule summarizes the payments to Maplegrove.

                                           Management fees     Over(under)
                                Year       Paid   Earned        payment
                                 2002     $18,753  $19,862           $(1,109)
                                 2003      15,536   13,292             2,244
                                Totals    $34,289  $33,154           $1,135

              The underpayment of $1,109 during 2002 occurred because Maplegrove reduced
              its management fees for March 2002 by $2,589 to offset part of the excessive
              management fees paid during 2001 and 2002.

              Maplegrove also charged the project $27,483 in management fees for 11 months,
              September 2002 through January 2003 and August 2003 through January 2004.
              Maplegrove only earned $25,439 of the fees. Richland has not paid Maplegrove


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            for these fees. However, the $2,044 in excess fees is carried on the project’s
            books as an accounts payable to Maplegrove. The accounts payable to
            Maplegrove as of April 30, 2005, was $79,914.

            The overpayments occurred because Richland paid Maplegrove a flat monthly
            rate of $2,589 per month rather than 4.032 percent of the project’s residential
            income collected as required by the management agent’s certification, dated
            March 5, 2001. Maplegrove’s accounts payable clerk said she followed the
            instructions provided by Maplegrove’s former chief accountant to pay the flat
            monthly fee.

            Richland paid Keystone management fees totaling $30,068 from February 2004
            through April 2005. However, Keystone only earned $28,047 during this period.
            The following schedule summarizes the payments to Keystone.

                                            Management fees        Over
                                 Year       Paid    Earned        payment
                                  2004      $21,853  $20,355        $1,498
                                  2005        8,215     7,692          523
                                 Totals     $30,068  $28,047        $2,021

            The overpayments occurred because Keystone determined its management fee
            based on 4.382 percent of the project’s total monthly income. Keystone’s vice
            president said Keystone followed its management agreement with Richland. She
            did not know Keystone included income HUD does not consider residential
            income. Keystone repaid the $2,021 in excessive management fees on June 30,
            2005, by depositing $2,021 in the project’s operating account.

Management agents
inappropriately used $2,420 of
project funds

            Maplegrove and Keystone inappropriately disbursed $2,420 in project funds for
            late fees/finance charges, lawn service, and office supplies/equipment.
            Maplegrove’s disbursements of $1,568 of the $2,420 occurred from March 2003
            through November 2003. Keystone disbursed the remaining $852 from February
            2004 through December 2004. The late fees/finance charges were for
            maintenance supplies and services, pest control, lawn service, advertising,
            specialty retail stores, utilities, resident screening, computer software, and a late
            mortgage payment. The late fees/finance charges, lawn service, and office
            supplies/equipment were not reasonable and necessary expenses of the project.
            The following table identifies the inappropriate disbursements.




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                             Inappropriate        Maplegrove    Keystone
                             disbursements          2003         2004       Totals
                      Fees/charges                       $636       $852     $1,488
                      Lawn service                        776                   776
                      Office supplies/equipment           156                   156
                                 Totals                $1,568       $852     $2,420

            Maplegrove’s accounts payable clerk said she did not know late fees/finance
            charges were not eligible project expenses. She said she has not received training
            or been provided HUD handbooks regarding eligible project expenses.
            Keystone’s regional property manager said she was not aware that late
            fees/finance charges were not eligible project expenses. Keystone repaid the $852
            in late fees/finance charges on June 30, 2005, by depositing $852 in the project’s
            operating account.

Maplegrove and/or owner
lacked documentation for the
use of $1,045 in project funds

            Maplegrove and/or Richland also lacked documentation to support that an
            additional $1,045 in project funds were properly used. The unsupported
            disbursements included $982 for utilities, $48 to Maplegrove, and $15 of office
            supplies/equipment in 2003. Maplegrove’s director of accounting could not
            explain why Maplegrove lacked supporting documentation for the unsupported
            payments.

Richland has fewer project
funds to make vendor and
reserve payments


            Richland has fewer project funds to make vendor and reserve fund for
            replacement payments due to the inappropriate disbursements. HUD’s staff for
            the Detroit Field Office of Multifamily Housing Hub were not aware of the
            inappropriate and unsupported payments. HUD approved the use of $41,629
            from the project’s reserve fund for replacement account to pay for vendor
            payments. In addition, HUD approved the suspension of the project’s reserve
            payments from July through December 2004 and from February through July
            2005. HUD’s director of asset management for the Detroit Field Office of
            Multifamily Housing Hub said HUD would not have approved the use of the
            project’s reserve if it had known about the inappropriate and unsupported
            disbursements. As a result, the project’s reserve account as of May 25, 2005, was
            $37,265, $182,465 below HUD’s minimum requirement of $219,721 for the
            project.




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Recommendations

          We recommend that HUD’s director of Multifamily Housing Hub, Detroit Field
          Office, ensure that Richland, Maplegrove, and/or Keystone

          1A. Reduce the project’s accounts payable to Maplegrove by $3,156 ($2,044 for
              the excessive management fees charged but not paid and $1,135 for the
              excessive management fees paid).

          1B. Transfer $2,873 ($2,021 for excessive management fees paid to Keystone
              and $852 for late fees/finance charges) from the project’s operating account
              to its reserve for replacement and/or reimburse HUD’s Federal Housing
              Administration insurance fund for the inappropriate expenses cited in this
              report that Keystone repaid to the project’s operating account.

          1C. Reimburse the project’s reserve for replacement and/or HUD's Federal
              Housing Administration insurance fund $1,568 for the late fees/finance
              charges, lawn service, and office supplies/equipment Maplegrove
              inappropriately disbursed from project funds.

          1D. Provide documentation to support the $1,045 in unsupported payments or
              reimburse the project’s reserve for replacement account and/or the Federal
              Housing Administration insurance fund for the applicable portion.

          1E. Implement procedures and controls to ensure project funds are used
              according to the regulatory agreement, the project owner’s/management
              agent’s certifications, and HUD’s handbooks.

          We also recommend that HUD’s director of Multifamily Housing Hub, Detroit
          Field Office, in conjunction with HUD’s Office of Inspector General (OIG),

          1F. Pursue double damages remedies if Richland and/or Keystone do not reduce
              the project’s accounts payable to Maplegrove and/or Richland, Maplegrove,
              and/or Keystone do not reimburse the project’s reserve for replacement
              and/or the Federal Housing Administration insurance fund for the
              inappropriate expenses.

          We also recommend that HUD’s director of Departmental Enforcement Center

          1G. Impose civil money penalties against Richland, Maplegrove, and/or
              Keystone for the payment of inappropriate expenses that violated the
              project’s regulatory agreement.




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                         SCOPE AND METHODOLOGY

We performed the review at HUD’s Detroit and Grand Rapids Field Offices, Maplegrove’s and
Keystone’s offices, and the project from February through April 2005. To accomplish our
objective, we interviewed HUD’s staff; employees from the project, Maplegrove, and Keystone;
Richland’s managing member; and Maplegrove’s managing member.

To determine whether the owner/management agent used project funds in compliance with the
regulatory agreement and HUD’s requirements, we reviewed

   •   Richland’s regulatory agreement with HUD;
   •   HUD’s files and correspondence related to the project;
   •   HUD’s Real Estate Management System and Financial Assessment Subsystem information
       related to the project;
   •   The project’s financial records;
   •   Richland’s audited financial statements for the years ending December 31, 2000, 2001,
       2002, and 2003;
   •   Richland’s management agreements with Maplegrove and Keystone; and
   •   The State of Michigan’s Department of Labor and Economic Growth concerning
       ownership information for Richland, Maplegrove, and Keystone.

We also reviewed Title 12, United States Code, sections 1715 and 1735; Title 31, United States
Code, section 3801; 24 CFR [Code of Federal Regulations], parts 24 and 221; and HUD
Handbooks 2000.06, REV-3; 4350.1, REV-1; 4370.2, REV-1; and 4381.5, REV-2.

The review covered the period January 1, 2003, to December 31, 2004. This period was adjusted
as necessary. We performed our review in accordance with generally accepted government
auditing standards.




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                              INTERNAL CONTROLS

Internal control is an integral component of an organization’s management that provides
reasonable assurance that the following objectives are being achieved:

   •   Effectiveness and efficiency of operations,
   •   Reliability of financial reporting,
   •   Compliance with applicable laws and regulations, and
   •   Safeguarding resources.

Internal controls relate to management’s plans, methods, and procedures used to meet its
mission, goals, and objectives. Internal controls include the processes and procedures for
planning, organizing, directing, and controlling program operations. They include the systems
for measuring, reporting, and monitoring program performance.



 Relevant Internal Controls


              We determined the following internal controls were relevant to our audit objectives:

              •       Program operations - Policies and procedures that management has
                      implemented to reasonably ensure that a program meets its objectives.

              •       Validity and reliability of data - Policies and procedures that management
                      has implemented to reasonably ensure that valid and reliable data are
                      obtained, maintained, and fairly disclosed in reports.

              •       Compliance with laws and regulations - Policies and procedures that
                      management has implemented to reasonably ensure that resource use is
                      consistent with laws and regulations.

              •       Safeguarding resources - Policies and procedures that management has
                      implemented to reasonably ensure that resources are safeguarded against
                      waste, loss, and misuse.

              We assessed the relevant controls identified above.

              A significant weakness exists if internal controls do not provide reasonable
              assurance that the process for planning, organizing, directing, and controlling
              program operations will meet the organization’s objectives.




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Significant Weaknesses


           Based on our review, we believe the following items are significant weaknesses:

               •   Richland, Maplegrove, and Keystone lacked effective procedures and
                   controls over the use of project funds (see finding).




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                                  Appendixes
Appendix A

                  SCHEDULE OF QUESTIONED COSTS

                     Recommendation
                                            Ineligible 1/    Unsupported 2/
                         number
                           1A                       $3,179
                           1B                        2,873
                           1C                        1,568
                           1D                                         $1,045
                          Totals                    $7,620            $1,045


1/     Ineligible costs are costs charged to a HUD-financed or HUD-insured program or activity
       that the auditor believes are not allowable by law; contract; or federal, state, or local
       policies or regulations.

2/     Unsupported costs are those costs charged to a HUD-financed or HUD-insured program
       or activity when we cannot determine eligibility at the time of audit. Unsupported costs
       require a decision by HUD program officials. This decision, in addition to obtaining
       supporting documentation, might involve a legal interpretation or clarification of
       departmental policies and procedures.




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Appendix B

          AUDITEE COMMENTS AND OIG’S EVALUATION


Ref to OIG Evaluation     Auditee Comments




Comment 1




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Ref to OIG Evaluation   Auditee Comments




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Ref to OIG Evaluation   Auditee Comments




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Ref to OIG Evaluation   Auditee Comments




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Ref to OIG Evaluation   Auditee Comments




Comment 1




Comment 2
Comment 3




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Ref to OIG Evaluation   Auditee Comments




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Ref to OIG Evaluation   Auditee Comments




Comment 4
Comment 6




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Ref to OIG Evaluation   Auditee Comments




Comment 5
Comment 6
Comment 7




Comment 2




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                         OIG Evaluation of Auditee Comments

Comment 1   Reimbursement to the project’s reserve fund for replacement will return funds
            used from the reserve fund for replacement to pay for vendor payments.

Comment 2   We adjusted our report by removing Keystone lacked supporting documentation
            to support project funds were properly used. We also reduced the amount
            Maplegrove and/or the Partnership lacked documentation to support that project
            funds were properly used by $38,420. We also removed that Keystone’s regional
            property manager could not explain why Keystone lacked supporting
            documentation for the unsupported payments. We adjusted our report to
            recommend Richland, Maplegrove, and/or Keystone provide documentation to
            support the $1,045 in unsupported payments or reimburse the project’s reserve for
            replacement account and/or the Federal Housing Administration insurance fund
            for the applicable portion.

Comment 3   The supporting documentation Maplegrove provided contained $932 in
            inappropriate disbursements. The inappropriate disbursements were for lawn
            service and office supplies/equipment. We adjusted our report by increasing the
            amount Maplegrove and Keystone inappropriately disbursed in project funds to
            $2,420 including lawn service and office supplies/equipment in the list of
            inappropriate disbursements. We also increased the amount of Maplegrove’s
            inappropriate disbursements to $1,568.

Comment 4   We adjusted our report by adding Keystone repaid the $2,021 in excessive
            management fees on June 30, 2005, by depositing $2,021 in the project’s
            operating account.

Comment 5   We adjusted our report by adding Keystone repaid the $852 in late fees/finance
            charges on July 1, 2005, by depositing $852 in the project’s operating account.

Comment 6   We added a recommendation for Richland, Maplegrove, and/or Keystone to
            transfer $2,873 ($2,021 for excessive management fees paid to Keystone and $852
            for late fees/finance charges) from the project’s operating account to its reserve for
            replacement and/or reimburse HUD’s Federal Housing Administration insurance
            fund for the inappropriate expenses cited in this report that Keystone repaid to the
            project’s operating account.

Comment 7   We adjusted our report to recommend Richland, Maplegrove, and/or Keystone
            reimburse the project's reserve for replacement and/or HUD’s Federal Housing
            Administration insurance fund $1,568 for the late fees/finance charges, lawn
            service, and office supplies/equipment Maplegrove inappropriately disbursed
            from project funds.




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Appendix C

                           FEDERAL REQUIREMENTS


Richland’s regulatory agreement, paragraph 6, mandates that the owner may not, without prior
written approval of the secretary of HUD, assign, transfer, dispose of, or encumber any personal
property of the project, including rents, or pay out any funds except for surplus cash, except for
reasonable operating expenses and necessary repairs, and make or receive and retain any
distribution of assets or any income of any kind of the project except surplus.

Paragraph 9(d) of the regulatory agreement states the books and accounts of the operations of the
mortgaged property and of the project shall be kept in accordance with the requirements of the
secretary. Paragraph 13(g) of the regulatory agreement defines a distribution as any withdrawal
or taking of cash or any assets of the project, excluding payment for reasonable expenses
incident to the operation and maintenance of the project.

Richland and Maplegrove certified in their project owner’s/management agent’s certification,
dated March 5, 2001, that they have executed or will execute, within 30 days after receiving
approval(s), a management agreement for the project. The management agreement provides or
will provide that the management agent will manage the project for 4.032 percent of residential
income collected. Richland and Maplegrove agreed to comply with the project’s regulatory
agreement; HUD handbooks, notices, or other policy directives relating to the management of
the project; and HUD requirements regarding payment and reasonableness of management fees.
Maplegrove agreed to assure that all expenses of the project are reasonable and necessary.

Richland and Keystone certified in their project owner’s/management agent’s certification, dated
January 28, 2004, that they have executed or will execute, within 30 days after receiving
approval(s), a management agreement for the project. The management agreement provides or
will provide that the management agent will manage the project for 4.382 percent of residential
income collected. Richland and Keystone agreed to comply with the project’s regulatory
agreement; HUD handbooks, notices, or other policy directives relating to the management of
the project; and HUD requirements regarding payment and reasonableness of management fees.
Keystone agreed to assure that all expenses of the project are reasonable and necessary.

HUD Handbook 4370.2, REV-1, CHG-1, page 2-6, requires that all disbursements be supported
by approved invoices/bills or other supporting documentation. Page 2-6 also requires that all
disbursements be used to make mortgage payments and required deposits, and pay reasonable
expenses necessary for the operations and maintenance of the project and pay distributions of
surplus cash.

HUD Handbook 4381.5, REV-2, paragraph 1.6(a), states the property owners are ultimately
responsible for a project’s compliance with HUD’s regulations and requirements. HUD expects
owners to oversee the performance of their management agents and take steps to correct
deficiencies that occur.




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Title 12, United States Code, section 1715z-4a, “Double Damages Remedy for Unauthorized
Use of Multifamily Housing Project Assets and Income,” allows the attorney general to recover
double the value of any project assets or income that were used in violation of the regulatory
agreement or any applicable regulation, plus all costs relating to the action, including but not
limited to reasonable attorney and auditing fees.

Title 12, United States Code, section 1735f-15, “Civil Money Penalties Against Multifamily
Mortgagors,” allows the secretary of housing and urban development to impose a civil money
penalty of up to $25,000 per violation against a mortgagor with five or more living units and a
HUD-insured mortgage. A penalty may be imposed for any knowing and material violation of
the regulatory agreement by the mortgagor, such as paying out any funds for expenses that were
not reasonable and necessary project operating expenses or for making distributions to owners
while a project is in a non-surplus-cash position.




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