oversight

Management Agents and/or Owner of Ivan Woods Senior Apartments in Lansing, Michigan, Improperly Used Project Funds

Published by the Department of Housing and Urban Development, Office of Inspector General on 2005-08-05.

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

           AUDIT REPORT




       IVAN WOODS SENIOR APARTMENTS
        MULTIFAMILY EQUITY SKIMMING

            LANSING, MICHIGAN

                 2005-CH-1013

               AUGUST 5, 2005




            OFFICE OF AUDIT, REGION V
                CHICAGO, ILLINOIS



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                                                               Issue Date
                                                                       August 5, 2005
                                                               Audit Report Number
                                                                        2005-CH-1013




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 Ivan Woods Senior Apartments in Lansing,
           Michigan, Improperly Used Project Funds

                                  HIGHLIGHTS

 What We Audited and Why


            We reviewed the books and records of Ivan Woods Senior Apartments (project), a
            90-unit multifamily housing project in Lansing, 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 Ivan Woods Limited
            Dividend Housing Association Limited Partnership (Partnership), the project’s
            owner, inappropriately used $9,928 in project funds from June 2002 through April
            2005 when the project was in a non-surplus cash position. Further, Maplegrove
            charged the project an additional $262 in excessive management fees that were
            not paid as of April 30, 2005. Maplegrove and/or the Partnership also lacked
            documentation to support that an additional $3,089 in project funds were properly


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           used. We provided Maplegrove, Keystone, and/or the Partnership schedules of
           the inappropriate disbursements and/or unsupported payments.

What We Recommend


           We recommend that HUD’s director of Detroit Multifamily Housing Hub ensure
           that the Partnership, 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 the 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 the Partnership,
           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 the Partnership, 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 the Partnership’s agent,
           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 the Partnership’s agent, Maplegrove’s managing member, and
           Keystone’s president to provide comments on our discussion draft audit report by
           July 15, 2005. Maplegrove’s managing member and Keystone’s president
           provided written comments dated July 14, 2005, and July 1, 2005, respectively.
           The Partnership’s agent did not provide any written comments as of July 28,
           2005. Maplegrove’s managing member and Keystone’s president generally
           agreed with our finding. However, Keystone’s president disagreed that expenses
           related to the Partnership’s low-income housing tax credits were inappropriate.
           Further, Maplegrove’s managing member and Keystone’s president 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 Inappropriately Used or Lacked   5
               Supporting Documentation for the Use of More Than $13,000 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

Ivan Woods Senior Apartments (project) is a 90-unit multifamily housing project in Lansing,
Michigan. The project is insured under section 223(f) of the National Housing Act, and its
regulatory agreement was executed on June 12, 2002. The project’s owner is Ivan Woods
Limited Dividend Housing Association Limited Partnership (Partnership). 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.

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 Inappropriately Used or
Lacked Supporting Documentation for the Use of More Than $13,000 in
                         Project Funds
Maplegrove, Keystone, and/or the Partnership improperly used $9,928 of project funds from
June 2002 through April 2005 when the project was in a non-surplus-cash position. The
inappropriate disbursements included $2,279 in excessive management fees, $5,700 for expenses
related to the Partnership’s low-income housing tax credits, and $1,949 for late fees/finance
charges. Further, Maplegrove charged the project an additional $262 in excessive management
fees that were not paid as of April 30, 2005. Maplegrove and/or the Partnership also lacked
documentation to support that an additional $3,089 in project funds were properly used. The
problems occurred because the Partnership, 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.


 The partnership paid
 management agents $2,279 in
 excessive management fees


               The Partnerhip paid Maplegrove and Keystone excess management fees of $2,279
               from June 2002 through April 2005 when the project was in a non-surplus-cash
               position.

               The Partnerhip paid Maplegrove management fees totaling $26,965 from June
               2002 through September 2003. However, Maplegrove only earned $25,389
               during this period. The following schedule summarizes the payments to
               Maplegrove.

                                            Management fees       Over(under)
                                 Year       Paid    Earned         payment
                                  2002      $16,779  $13,170             $3,609
                                  2003       10,186    12,219           (2,033)
                                 Totals     $26,965  $25,389             $1,576

               The underpayment of $2,033 during 2003 occurred because Maplegrove reduced
               its management fees for February and March 2003 by $3,218 to offset excessive
               management fees paid during 2002 and 2003.

               Maplegrove also charged the project $5,193 in management fees for August,
               October, and November 2003. Maplegrove only earned $4,921 of the fees. The



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           Partnership has not paid Maplegrove for these fees. However, the $262 in excess
           fees are carried on the project’s books as an accounts payable to Maplegrove.
           The accounts payable to Maplegrove as of April 30, 2005, was $52,477.

           The overpayments during 2002 occurred because Maplegrove included 1 percent
           of total monthly income for consulting fees along with 4 percent of total monthly
           income for management fees. Beginning April 2003, the Partnership paid
           Maplegrove a flat monthly rate of $1,731. Maplegrove’s accounts payable clerk
           said she followed the instructions provided by Maplegrove’s former chief
           accountant to pay the flat monthly fee.

           The Partnership paid Keystone management fees totaling $31,977 from December
           2003 through April 2005. However, Keystone only earned $31,274 during this
           period. The following schedule summarizes the payments to Keystone.

                                            Management fees      Over
                                 Year       Paid    Earned      payment
                                  2003       $1,941    $1,900        $41
                                  2004       22,163    21,667        496
                                  2005        7,873     7,707        166
                                 Totals     $31,977  $31,274        $703

           The overpayments occurred because Keystone determined its management fee
           based on 4 percent of the project’s total monthly income. Keystone’s vice
           president said Keystone followed its management agreement with the Partnership.
           She did not know Keystone included income HUD does not consider residential
           income. Keystone repaid the $703 in excessive management fees on July 1, 2005,
           by depositing $703 into the project’s operating account.

Management agents
inappropriately used more than
$7,500 in project funds

           Maplegrove and Keystone inappropriately disbursed $7,649 in project funds
           for expenses related to the Partnerhip’s low-income housing tax credits and late
           fees/finance charges. Maplegrove’s disbursements of $5,664 of the $7,649
           occurred from July 2002 through November 2003. Keystone disbursed the
           remaining $1,985 from December 2003 through June 2004. The low-income
           housing tax credits and late fees/finance charges were not reasonable and
           necessary expenses of the project. The following table identifies the inappropriate
           disbursements.

                 Inappropriate          Maplegrove            Keystone
                 disbursements       2002       2003      2003        2004      Totals
                Tax credits           $3,000     $1,350                $1,350    $5,700
                Fees/charges             531        783     $179          456     1,949
                Totals                $3,531     $2,133     $179       $1,806    $7,649



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            The disbursements for the Partnership’s low-income housing tax credits included
            annual compliance monitoring fees to the Michigan State Housing Development
            Authority and tenant compliance fees to a certified public accounting firm. The
            late fees/finance charges were for utilities, pest control, glass repair, heating and
            cooling, specialty retail stores, and advertising.

            Maplegrove’s accounts payable clerk said she did not know the expenses related
            to the Partnerhip’s low-income housing tax credits and 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 expenses related to project
            owners’ low-income housing tax credits and late fees/finance charges were not
            eligible project expenses. Keystone repaid the $635 in late fees/finance charges
            on July 1, 2005, by depositing $635 into the project’s operating account.

Maplegrove and/or owner
lacked documentation for the
use of more than $3,000 in
project funds


            Maplegrove and/or the Partnerhip also lacked documentation to support that an
            additional $3,089 in project funds was properly used. The unsupported
            disbursements included $1,062 and $2,027 to Maplegrove in 2002 and 2003,
            respectively. Maplegrove’s director of accounting could not explain why
            Maplegrove lacked supporting documentation for the unsupported payments.

The Partnership has fewer
project funds to make vendor
and reserve payments


            The Partnership 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 $38,897
            from the project’s reserve fund for replacement account to pay for vendor
            payments. 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 as of May 25, 2005, was
            $94,702, $294,939 below HUD’s minimum requirement of $389,641 for the
            project.




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Recommendations


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

          1A. Reduce the project’s accounts payable to Maplegrove by $1838 ($262 for
              the excessive management fees charged but not paid and $1,576 for the
              excessive management fees paid).

          1B. Transfer $1,338 ($703 for excessive management fees paid to Keystone and
              $635 for late fees/finance charges) from the project’s operating account to its
              reserve for replacement and/or reimburse HUD’s Federal Housing
              Administration 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 $7,014 ($5,700 for the Partnership’s
              low-income housing tax credits and $1,314 for late fees/finance charges) for
              the inappropriate expenses.

          1D. Provide documentation to support the $3,089 in unsupported payments or
              reimburse the project's reserve for replacement 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. Pursues double damages remedies if the Partnership and/or Keystone do not
              reduce the project’s accounts payable to Maplegrove and/or the Partnership,
              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 the Partnership, 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;
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

   •   The Partnership’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,
   •   The Partnership’s audited financial statements for the years ending December 31, 2002,
       and 2003,
   •   The Partnership’s management agreements with Maplegrove and Keystone, and
   •   The State of Michigan’s Department of Labor and Economic Growth concerning
       ownership information for 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 207; 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
                      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 management 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:

               •   The Partnership, 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                        $1,838
                           1B                         1,338
                           1C                         7,014
                           1D                                         $3,089
                          Totals                    $10,190           $3,089


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




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Ref to OIG Evaluation   Auditee Comments




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Ref to OIG Evaluation   Auditee Comments




Comment 1




Comment 2




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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 3
Comment 5

Comment 4
Comment 5
Comment 7




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Ref to OIG Evaluation   Auditee Comments




Comment 4
Comment 5
Comment 7

Comment 6
Comment 7




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Ref to OIG Evaluation   Auditee Comments




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. In
            addition, disbursements from the reserve fund for replacement require HUD
            approval; therefore, HUD can ensure that the use of the funds is for eligible
            project expenses.

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, Keystone, and/or the Partnership lacked documentation to support
            that project funds were properly used by $29,826. 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 the Partnership, Maplegrove, and/or Keystone provide
            documentation to support the $3,089 in unsupported payments or reimburse the
            project's reserve for replacement and/or the Federal Housing Administration
            insurance fund the applicable portion.

Comment 3   We adjusted our report by adding Keystone repaid the $703 in excessive
            management fees on July 1, 2005, by depositing $703 in the project’s operating
            account.

Comment 4   We adjusted our report by adding Keystone repaid the $635 in late fees/finance
            charges on July 1, 2005, by depositing $635 in the project’s operating account.

Comment 5   We added a recommendation for the Partnership, Maplegrove, and/or Keystone to
            transfer $1,338 ($703 for excessive management fees paid to Keystone and $635
            for late fees/finance charges) from the project’s operating account to its reserve for
            replacement and/or reimburse HUD’s Federal Housing Administration for the
            inappropriate expenses cited in this report that Keystone repaid to the project’s
            operating account.

Comment 6   We adjusted our report by reducing the amount of project funds Maplegrove,
            Keystone, and/or the Partnership improperly used by $2,415. We also deleted the
            disbursements for the Partnership’s low-income housing tax credits that included
            salary expenses for Keystone’s tax credit specialist.

Comment 7   We adjusted our report to recommend the Partnership, Maplegrove, and/or
            Keystone reimburse the project's reserve for replacement and/or HUD’s Federal
            Housing Administration insurance fund $7,014 ($5,700 for the Partnership’s low-
            income housing tax credits and $1,314 for late fees/finance charges) for the
            inappropriate expenses.




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Appendix C

                          FEDERAL REQUIREMENTS


The Partnership’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.

The Partnership and Maplegrove certified in their project owner’s/management agent’s
certification, dated November 16, 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
percent of residential and commercial income collected. The Partnership 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 all expenses of the project
are reasonable and necessary.

The Partnership and Keystone certified in their project owner’s/management agent’s
certification, dated December 24, 2003, 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
percent of residential income collected. The Partnership 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 all expenses of the project are reasonable and
necessary.

HUD Handbook 4370.2, REV-1, CHG-1, page 2-6, requires that all disbursements must 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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