OFFICE OF AUDIT
REGION 5
CHICAGO, IL
Michigan State Housing Development Authority
Lansing, MI
Multifamily Project-Based Section 8 Program
2013-CH-1011 SEPTEMBER 30, 2013
Issue Date: September 30, 2013
Audit Report Number: 2013-CH-1011
TO: Barbara Chiapella, Director of Multifamily Housing Hub, 5FHMLA
//signed//
FROM: Kelly Anderson, Regional Inspector General for Audit, 5AGA
SUBJECT: The Michigan State Housing Development Authority, Lansing, MI, Did Not
Follow HUD’s Requirements Regarding the Administration of Its Program
Attached is the U.S. Department of Housing and Urban Development (HUD), Office of
Inspector General (OIG), final audit report of our audit of the Michigan State Housing
Development Authority’s multifamily project-based Section 8 program for new-regulation
projects.
HUD Handbook 2000.06, REV-4, sets specific timeframes for management decisions on
recommended corrective actions. For each recommendation without a management decision,
please respond and provide status reports in accordance with the HUD Handbook. Please furnish
us copies of any correspondence or directives issued because of the audit.
The Inspector General Act, Title 5 United States Code, section 8M, requires that OIG post its
publicly available reports on the OIG Web site. Accordingly, this report will be posted at
http://www.hudoig.gov.
If you have any questions or comments about this report, please do not hesitate to call me at
(312) 353-7832.
September 30, 2013
The Michigan State Housing Development Authority,
Lansing, MI, Did Not Follow HUD’s Requirements
Regarding the Administration of Its Program
Highlights
Audit Report 2013-CH-1011
What We Audited and Why What We Found
We audited the Michigan State Housing The Authority did not comply with HUD’s
Development Authority’s multifamily requirements regarding the administration of its
project-based Section 8 program for multifamily project-based Section 8 program for new-
new-regulation projects as part of the regulation projects. Specifically, it failed to use
activities in our fiscal year 2013 annual program residual receipts to reduce or offset housing
audit plan. We selected the Authority assistance payments for new-regulation projects. As a
based on a referral from U.S. result, nearly $31.6 million in unused or excess project
Department of Housing and Urban funds was not available for HUD to offset future
Development (HUD) management. Our subsidy expenditures.
objective was to determine whether the
Authority administered its program in The Authority did not remit unused or excess funds
accordance with HUD’s requirements. upon termination of the housing assistance payments
contracts for three new-regulation projects. As a
What We Recommend result, more than $1.2 million in unused or excess
project funds was not available for HUD to achieve
program savings.
We recommend that the Director of
HUD’s Detroit Office of Multifamily The Authority inappropriately disbursed replacement
Housing Programs require the Authority reserves for four projects. As a result, more than
to (1) ensure that program residual $290,000 was not available to benefit its multifamily
receipts of nearly $31.6 million are used projects. Further, its projects lost more than $175,000
instead of seeking unnecessary housing in interest income.
subsidies; (2) reimburse HUD and the
U.S. Treasury more than $1.2 million
for the projects with terminated
program contracts; (3) reimburse its
project’s escrow accounts more than
$465,000 for the inappropriate
disbursements of replacement reserves;
and (4) implement adequate controls to
address the findings cited in this audit
report.
TABLE OF CONTENTS
Background and Objective 3
Results of Audit
Finding 1: The Authority Did Not Use Residual Receipts To Reduce or Offset
Housing Assistance Payments 5
Finding 2: The Authority Did Not Remit Excess Project Funds to HUD 9
Finding 3: The Authority Inappropriately Disbursed Replacement
Reserves 12
Scope and Methodology 14
Internal Controls 17
Appendixes
A. Schedule of Questioned Costs and Funds To Be Put to Better Use 19
B. Auditee Comments and OIG’s Evaluation 20
C. Federal and the Authority’s Requirements 44
D. Program Residual Receipts Available for Reduction or
Offset of Housing Assistance Payments as of May 31, 2013 47
2
BACKGROUND AND OBJECTIVE
The Michigan State Housing Development Authority was established in 1966 under the laws of
the State of Michigan to provide decent, safe, and sanitary housing. The Authority is governed
by an eight-member board consisting of the State’s treasurer, the director of the State’s
Department of Human Services, and the director of the State’s Department of Transportation.
The board includes five other members appointed to 4-year terms by the State’s governor and
confirmed by the State senate. The board’s responsibilities include overseeing the administration
of the Authority and approving policies. The board appoints the Authority’s executive director.
The executive director is responsible for ensuring that policies are followed and providing
oversight of the Authority’s programs.
The Authority is the housing finance agency for the State of Michigan, acting as the contract
administrator for 541 properties. The Authority administered 402 contracts as performance-based
contract administrator and 139 contracts as traditional contract administrator. As the contract
administrator, the Authority acts under an annual contributions contract with the U.S. Department of
Housing and Urban Development (HUD) to administer Section 8 funding to assisted project owners
to ensure that Section 8 subsidies fund only necessary and reasonable project operating expenses
and otherwise comply with applicable program requirements.
Under its traditional contract administrator portfolio, the Authority administered contracts for 139
projects, of which 41 were subject to the multifamily project-based Section 8 program’s new
regulations, effective February 29, 1980. Under HUD’s Part 883 requirements, the Authority issued
mortgage loans for new construction multifamily projects, as a housing finance agency. Generally,
mortgages issued in the 1970s and 1980s carried a term of 30 years. As of May 31, 2013, of the 41
new-regulation contracts, 1 contract had been split into 2 new-regulation contracts, and 3 contracts
had been terminated. Therefore, 371 (41 – 1 – 3) contracts remained current as of May 31, 2013.
During the period January 1, 2010, through December 31, 2012, the Authority received more than
$106 million in housing assistance payments for the new-regulation projects2 in its housing finance
agency and traditional contract administrator portfolio.
The program’s new regulations, effective February 29, 1980, require that project funds be used
for the benefit of the project, to make mortgage payments, to pay operating expenses, to make
required deposits to the replacement reserve, and to provide limited distribution income to the
owner. As determined by the Authority, any remaining funds must be deposited with the
Authority, other lender, or other Authority-approved depository in an interest-bearing account.
This account is generally known as the residual receipt escrow. The Authority, however, refers
1
To avoid double counting, we removed the original contract from our count.
2
HUD identifies projects that entered into housing assistance payments contract, version 8-80 on or after February
29, 1980, as new-regulation projects. For new-regulation projects, HUD requires that excess project funds be used
to reduce or offset housing assistance payments. Projects that entered into housing assistance payments contract,
version 11-75, or were effective before February 29, 1980 are identified as old-regulation projects. HUD’s
requirement for the reduction or offsetting of housing assistance payments does not apply to old-regulation projects.
3
to it as operating reserve cash. In other words, program residual receipts are generated as a result
of projects having excess project funds under the program’s new regulations. Further, upon
termination of the program housing assistance payments contracts, excess project funds must be
remitted to HUD.
On August 3, 2012, HUD issued Housing Notice H-2012-14. The notice required that the
program residual receipts of new-regulation projects in excess of $250 per revenue-generating3
unit be applied monthly to reduce or offset housing assistance payments up to the full amount of
the monthly subsidy request, depending upon the amount of residual receipts available. The
notice applied to all multifamily project-based Section 8 projects subject to the program’s new
regulations, which included all of the 41 projects administered by the Authority under its housing
finance agency and traditional contract administrator portfolio.
Our objective was to determine whether the Authority administered its program for new-
regulation projects in accordance with HUD’s requirements. Specifically, we wanted to
determine whether the Authority (1) applied program residual receipts to reduce or offset
housing assistance payments for new-regulation projects, (2) remitted excess or unused project
funds to HUD upon termination of new-regulation contracts, and (3) appropriately maintained
escrows for new-regulation projects.
3
HUD’s clarifications of Housing Notice H-2012-14, dated October 2, 2012, clarified the number of units included
in the notice as revenue-generating units.
4
RESULTS OF AUDIT
Finding 1: The Authority Did Not Use Residual Receipts To Reduce or
Offset Housing Assistance Payments
The Authority did not use more than $31.1 million in residual receipts to reduce or offset
housing assistance for new-regulation projects. It also inappropriately disbursed residual receipts
totaling nearly $429,000 to six project owners. These weaknesses occurred because the
Authority failed to comply with HUD’s requirements due to its lack of understanding of Federal
requirements regarding its role in administering the program. As a result, nearly $31.6 million in
unused or excess project funds was not available for HUD to offset future subsidy payments.
Residual Receipts Were Not
Used To Reduce or Offset
Housing Assistance Payments
During the period November 2012 through May 2013, 17 of the 37 new-
regulation projects maintained an average balance of more than $31 million in
residual receipts. However, contrary to HUD’s requirements,4 the Authority
inappropriately received more than $4.6 million in housing assistance for the
projects instead of using the residual receipts that were available to reduce or
offset housing assistance payments (see appendix D).
Further, contrary to HUD’s requirements,5 the Authority inappropriately
disbursed $428,804 of residual receipts, in excess of the required retained balance
of $250 per revenue-generating unit, to six new-regulation projects instead of
reducing or offsetting housing assistance (see appendix D). Therefore, had the
Authority complied with HUD’s requirements, these residual receipts would not
have been available for disbursement.
The Authority Lacked an
Understanding of Federal
Requirements
The Authority did not apply residual receipts to reduce or offset housing
assistance payments for new-regulation projects because it lacked an
understanding of HUD’s requirements regarding its role as the program
4
Housing Notice H-2012-14, section V.C.
5
Housing Notice H-2012-14, sections V.C. and V.A.
5
administrator. According to the Authority, HUD’s requirements6 did not apply
because the Authority is a housing finance agency. Therefore, in accordance with
24 CFR (Code of Federal Regulations) 883.306(e), the Authority, not HUD,
determines whether surplus project funds (residual receipts) may be used to (1)
reduce or offset housing assistance payments or (2) for other project purposes.
On October 23, 2012, HUD issued a letter to the Authority regarding its notice.
The letter stated that the Authority’s interpretation that it had the ability to
determine whether funds should be offset lacked merit. Further, the letter stated
that while HUD’s requirements7 provided the Authority with some degree of
control over the residual receipts account by allowing it to (1) determine that
surplus project funds exist, (2) require that such excess funds be deposited in a
separate account, and (3) make withdrawals subject to the Authority’s approval,
both regulatory and contract provisions were clear that these funds must
ultimately be remitted to HUD. That is, the funds belong neither to the Authority
nor the project owner but, rather, to HUD. HUD acknowledged that neither the
regulatory provision nor the corresponding contract provision explicitly state that
the determination to use residual receipts to reduce housing assistance payments
rests with HUD, as opposed to the Authority.
However, any such determination is by nature a decision that is related to the
funding of the rental assistance payments that flow from HUD through the
contract to the Authority, as the contract administrator, and ultimately to the
owner. Therefore, HUD is entitled to determine that residual receipts must be
used to reduce or offset housing assistance payments.
In December 2012, the Authority completed a cash-flow analysis for 15 projects
with available residual receipts. According to its analysis, the residual receipts for
seven projects should have been used to reduce or offset housing assistance.
However, for the remaining nine8 projects, it projected a cash-flow shortage
generally due to an allowance for future owners’ limited distribution income.
According to HUD’s requirements,9 owner’s limited distribution is calculated
annually based on project operations after all project expenses and replacement
reserves have been paid. Therefore, the Authority could not retain current
residual receipts to provide future income to project owners.
As a result of our audit, in June 2013, the Authority revised its cash-flow analysis
and schedule of available residual receipts. However, in reviewing the
documentation, we determined that the Authority’s analysis still contained errors.
For example, the revised schedule projected a cash-flow shortage for four projects
6
Housing Notice H-2012-14, section V.C.
7
24 CFR 883.306(e) and section 2.6(c)(1) of the contract, form HUD-52645A (8-80)
8
One project is listed on the Authority’s analysis as having a cash flow shortage and as having funds available to
offset.
9
24 CFR (Code of Federal Regulations) 883.306(b)
6
due to accumulated unpaid owners’ income. However, based on our review, only
two of the four project owners did not receive income due to a shortage in the
projects’ cash flows. For the remaining two projects, although the projects had
surplus cash, the owners chose not to receive income. According to HUD’s
regulations,10 residual receipts may be used to pay unpaid owners’ income that
resulted from a cash-flow shortage. Therefore, the Authority could not use
residual receipts to provide for cumulative unpaid owners’ income for these three
projects.
In June 2013, although the Authority disagreed with HUD’s interpretation of the
notice, it began to reduce or offset housing assistance payments for 5 projects,
which it determined had surplus project funds. Further, the Authority requested to
use the residual receipts of two projects (contract numbers MI33H150039 and
MI28H150181) to pay refinancing costs and reestablish the escrow accounts.
However, in a letter, dated February 21, 2013, HUD denied the Authority’s
request to use project funds, including residual receipts, to refinance the
Authority-held mortgages because it was not an eligible use of the residual
receipts.
Conclusion
The Authority did not comply with HUD’s regulations for reducing or offsetting
housing assistance payments because it lacked an understanding of Federal
requirements regarding its role in administering the program. The Authority
entered into an annual contributions contract with HUD for all new-regulation
projects and agreed to all of the contract terms, including the requirement to
ensure that all of HUD’s requirements would be followed. Therefore, HUD’s
regulations11 requiring the reduction or offset of housing assistance payments
beginning in November 2012 would be applicable. Based on our review, as of
May 31, 2013, 15 of the 1712 new-regulation projects had program residual
receipts totaling more than $31.1 million available to reduce or offset housing
payments. As a result, unused or excess project funds were not available for
HUD to offset future subsidy payments.
Appendix D of this report details the program residual receipts available for
reduction or offset of housing assistance payments as of May 31, 2013, for the 15
new-regulation projects.
Recommendations
10
24 CFR 883.306(d)
11
Housing Notice H-2012-14
12
During our review, 17 projects had residual receipts balances available for offsetting. However, the Authority
released residual receipts for two projects (contract numbers MI28H150202 and MI28H150206); therefore, as of
May 31, 2013, only 15 projects had residual receipts available to reduce or offset housing assistance payments.
7
We recommend that the Director of HUD’s Detroit Office of Multifamily
Housing Programs require the Authority to
1A. Ensure that $31,148,477 in residual receipts for the 15 projects as of May
31, 2013, is used to reduce or offset housing assistance payments in
accordance with HUD’s requirements.
1B. Reimburse the appropriate escrow accounts from non-Federal funds
$428,804 in residual receipts, above the required retained balances,
disbursed to the six projects, or support that these funds were not required
to reduce or offset housing assistance payments.
1C. Implement adequate written policies, procedures, and controls to ensure
that residual receipts for new-regulation projects are treated in accordance
with HUD’s requirements. Such procedures and controls should include
but not be limited to (1) providing training to its staff and (2) periodically
monitoring the projects’ residual receipts accounts to ensure that
unnecessary housing assistance payments are not received.
We recommend that the Director of HUD’s Detroit Office of Multifamily
Housing Programs to
1D. Review the Authority’s methodology for determining surplus project
funds to ensure compliance with HUD’s requirements.
8
Finding 2: The Authority Did Not Remit Excess Project Funds to HUD
The Authority did not remit unused or excess project funds to HUD for three new-regulation
projects with terminated program contracts. This weakness occurred because the Authority (1)
lacked adequate procedures and controls and (2) its staff lacked a sufficient understanding of
HUD’s requirements. As a result, more than $1.2 million in unused or excess project funds was
not available to HUD to achieve program savings. In addition, the Authority’s failure to remit
unused or excess project funds caused the U.S. Treasury to lose nearly $13,000 in interest.
The Authority Did Not Remit
Excess Project Funds to HUD
According to HUD’s regulations,13 upon termination of the program contract, any
unused or excess project funds must be remitted to HUD. However, based on our
review of the three projects, the Authority did not ensure that unused or excess
funds totaling more than $1.2 million were remitted to HUD.
Project Funds Transferred to Preservation Fund
For contract number MI28H150160, the project had unused or excess project
funds totaling $114,164 when its program contract terminated on August 31,
2007. The Authority paid project expenses totaling $35,155, and the project
earned $4,313 in interest between September 2007 and July 2008, thus reducing
the amount of excess project funds to $83,322 ($114,164 – $35,155 + $4,313).
Instead of remitting the funds to HUD, the Authority inappropriately transferred
$77,830 to its preservation fund 14 and maintained $5,492 ($83,322 – $77,830) in
the project’s residual receipts account. According to a letter from HUD, dated
December 11, 2008, the Authority was required to remit all excess project funds
to HUD in accordance with its housing assistance payments contract. In
November 2010, in response to HUD’s request, the Authority remitted residual
receipts totaling $6,465 ($5,492 from residual receipts + $973 interest earned),
however, the Authority excluded $26 in interest earned during November 2010.
Therefore, as of August 31, 2013, the Authority had failed to remit the project
funds totaling $77,856 ($77,830 that was transferred to the preservation fund +
$26 that was transferred to the interest account).
Project Funds Maintained in Escrow
For terminated contract numbers MI33H150050 and MI28H150191, the
projects had unused or excess funds totaling $436,759 and $698,671,
13
24 CFR 883.306(e)
14
An internally created fund that is not associated with the program.
9
respectively. However, the Authority failed to remit the funds to HUD as
required. 15 For example, the project associated with contract number
MI28H150191 went into foreclosure in January 2012, and the Authority
terminated its program contract on December 31, 2012. However, the
Authority had failed to remit $698,671 ($604,949 in replacement reserves
+ $93,722 in unused or excess funds) in its escrow accounts as of May 31,
2013. According to the Authority, its loan agreement with the owner
allowed the replacement reserves to be applied to the defaulted mortgage.
However, HUD did not waive the requirement for the Authority to remit
unused or excess project funds.
The following table shows the contract numbers, contract termination dates, funds
remitted and not remitted to HUD for the three new-regulation projects with
terminated program contracts, and lost interest.
Funds Funds not Amount of
Contract Contract remitted remitted to interest
number termination date to HUD HUD16 lost17
MI28H150160 August 31, 2007 $6,465 $77,856 $7,774
MI33H150050 February 28, 2013 0 436,759 1,391
MI28H150191 December 31, 2012 0 698,671 3,665
Totals $6,465 $1,213,286 $12,830
The Authority Lacked
Adequate Procedures and
Controls
The Authority did not remit excess or unused project funds to HUD for
terminated program contracts because (1) it lacked adequate procedures and
controls and (2) its staff lacked a sufficient understanding of HUD’s requirements.
For instance, for contract number MI28H150160, the Authority believed that
since it had remitted the project’s residual receipts as of November 2010, the
funds that were previously transferred to the preservation fund were not required
to be remitted to HUD. Additionally the Authority’s loan agreements for new-
regulation projects allowed for the absorption of the replacement reserves upon
mortgage default. Therefore, the Authority believed that it did not have to remit
the funds to HUD for contract number MI28H150191.
Conclusion
15
24 CFR 883.306(e)
16
As of May 31, 2013
17
See scope and methodology
10
The Authority did not remit excess or unused project funds to HUD for
terminated program contracts because (1) it lacked adequate procedures and
controls and (2) its staff lacked a sufficient understanding of HUD’s requirements.
As a result, more than $1.2 million in unused or excess project funds was not
available to HUD to achieve program savings. In addition, the Authority’s failure
to remit unused or excess project funds caused the U.S. Treasury to lose nearly
$13,000 in interest as of May 31, 2013.
Recommendations
We recommend that the Director of HUD’s Detroit Office of Multifamily
Housing Programs require the Authority to
2A. Reimburse the U.S. Treasury $608,337 ($77,856+ 436,759 + $93,722) for
the three projects with terminated program contracts.
2B. Obtain approval from HUD to apply the project’s replacement reserves to
the defaulted mortgage for contract number MI28H150191 or reimburse
the U.S. Treasury $604,949.
2C. Reimburse the U.S. Treasury $12,830 from non-Federal funds for the lost
interest.
2D. Implement adequate procedures and controls, including but not limited to
providing training to staff, to ensure that unused or excess project funds
are remitted to HUD when the contracts for new-regulation projects
terminate.
2E. Ensure that loan agreements for new-regulation projects comply with
HUD’s regulations.
11
Finding 3: The Authority Inappropriately Disbursed Replacement
Reserves
The Authority inappropriately disbursed replacement reserves for project owners’ limited
distribution income after maturity of the Authority-held mortgages. This condition occurred
because the Authority lacked adequate procedures and controls to ensure that it complied with
HUD’s and its own requirements regarding the maintenance of project funds. As a result, HUD
lacked assurance that funds totaling more than $290,000 were available to benefit the projects,
and the projects lost more than $175,000 in interest.
The Authority Inappropriately
Disbursed Replacement Reserves
The Authority inappropriately disbursed $290,437 of replacement reserves18 for 4
of the 22 (18 percent) projects under program contracts as owners’ income or due
to changes in ownership. According to HUD’s and the Authority’s
requirements,19 replacement reserves must be maintained to fund extraordinary
maintenance and repair and replace capital items. Further, according to HUD’s
regulations,20 upon termination of the program contract, any excess project funds
must be remitted to HUD. We reviewed the Authority’s capital needs
assessments for the four projects and determined that the balance in each project’s
replacement reserve was not sufficient to meet the Authority’s requirements.
Therefore, the reserves should not have been disbursed to the projects’ owners.
The Authority’s noncompliance occurred because it lacked adequate procedures
and controls to ensure that it complied with HUD’s and its own requirements
regarding the maintenance of project funds. The table below identifies the
contract numbers, mortgage payoff dates, amount of replacement reserves
required by the Authority’s capital needs assessment, the balance in replacement
reserves that was inappropriately disbursed to owners, and lost interest.
18
Replacement reserves are required to be established by the program contract to defray the cost of the replacement of major
depreciable items.
19
24 CFR 880.602(a) and Authority's reserve for replacement policy revised April 2013.
20
24 CFR 883.306(e)
12
Replacement
Replacement reserves Amount of
Contract Mortgage payoff reserves inappropriately interest
number date required disbursed lost21
MI33H150072 June 19, 2003 $189,284 $154,589 $121,553
MI28H150209 November 30, 2006 494,318 89,427 30,747
MI33H150074 January 18, 2006 158,593 43,917 22,353
MI33H150080 April 1, 2006 177,569 2,504 781
Totals $1,019,764 $290,437 $175,434
Recommendations
We recommend that the Director of HUD’s Detroit Office of Multifamily
Housing Programs require the Authority to
3A. Reimburse $290,437 to the appropriate project escrows from non-Federal
funds for the inappropriate disbursement of replacement reserves.
3B. Reimburse appropriate escrow accounts $175,434 from non-Federal funds
for the lost interest cited in this finding.
3C. Implement adequate quality control procedures to ensure that escrow
accounts are maintained appropriately upon maturity of the Authority-held
mortgages for new-regulation projects.
We recommend that the Director of HUD’s Detroit Office of Multifamily
Housing Programs
3D. Review the Authority’s escrow maintenance to ensure that escrow funds
were not disbursed inappropriately for the remaining 6 (28 – 22) new-
regulation projects with matured Authority-held mortgages between
October 2002 and December 2012. If deficiencies are noted, HUD should
ensure that the Authority appropriately reimburses the deficient project
escrows from non-Federal funds.
21
See scope and methodology
13
SCOPE AND METHODOLOGY
We performed onsite audit work between November 2012 and June 2013 at the Authority’s
offices located at 735 East Michigan Avenue, Lansing, MI. The audit covered the period
January 1, 2010, through September 30, 2012, but was adjusted as determined necessary.
To accomplish our objective, we reviewed
Applicable laws; regulations; HUD’s program requirements at 24 CFR Parts 880
and 883; Housing Notice H-2012-14; HUD Handbook 4350.1, REV-1; HUD
Handbook 4370.2, REV-1; and legal opinions issued by HUD’s and the HUD Office
of Inspector General’s (OIG) Offices of General Counsel.
The Authority’s accounting records; annual audited financial statements for 2009,
2010, and 2011; computerized databases; policies and procedures; board meeting
minutes for January 2010 through September 2012; organizational chart; annual
audited financial statements for new-regulation projects; capital needs assessment
for new-regulation projects; and program assistance payments contracts and
annual contributions contracts for all new-regulation projects.
HUD’s files for the Authority, program assistance payments contracts, and annual
contributions contracts for all new-regulation projects.
We also interviewed the Authority’s employees, property managers, and HUD staff.
Our review was limited to the information such as activity statements provided by (1) the
Authority and (2) housing payments and project records maintained in the following HUD
systems:
Tenant Rental Assistance Certification,
Integrated Real Estate Management, and
Line of Credit Control System.
Finding 1
We reviewed the Authority’s vouchering and receipt of housing assistance payments for all 37
projects under a current new-regulation contract for the period November 2012 through May
2013.
We also reviewed the Authority’s treatment of program residual receipts for the period
November 2012 through May 2013 for all 37 projects under a current new-regulation contract.
14
The purpose of our review was to determine whether the Authority applied the program residual
receipts for all new-regulation projects in accordance with HUD’s requirements.22
Finding 2
We also reviewed all of the 41 new-regulation projects administered by the Authority and
determined that one project’s contract had been split into two new-regulation contracts and three
projects’ new-regulation contracts had been terminated as of May 31, 2013. We reviewed the
activity statements for all three projects to determine whether funds were appropriately remitted
to HUD upon the termination of the projects’ program contracts.
We reviewed the Authority’s management of escrow funds for the three projects with terminated
program contracts as of May 31, 2013.
We calculated interest using the U.S. Treasury’s 10 –year interest rate, compounded daily, from
the date the inappropriately maintained escrow funds should have been remitted to HUD through
May 31, 2013.
Finding 3
We also reviewed all of the 41 new-regulation projects administered by the Authority and
determined that one project’s contract had been split into two new-regulation contracts and three
projects’ new-regulation contracts had been terminated as of May 31, 2013. We determined that
37 (41 – 1 – 3) projects’ contracts were current as of May 31, 2013. Of the 37 projects having a
current contract, 28 project owners had paid off their initial Authority-held mortgage loan
between October 2002 and December 2012. We judgmentally selected 22 of the 28 (79 percent)
projects to review the Authority’s management of project escrow funds.
We calculated interest, using the rate (compounded daily) provided by the Authority, that each
individual project should have earned from the date of the inappropriate disbursement from
replacement reserves through May 31, 2013.
We relied in part on data maintained by the Authority in its systems. Although we did not
perform a detailed assessment of the reliability of the data, we performed a minimal level of
testing and found the data to be adequately reliable for our purposes. Specifically, we confirmed
that the monthly loan statements provided by the Authority matched the monthly loan statements
we independently obtained from three projects. In addition, we independently determined the
number of new-regulation projects administered by the Authority using HUD’s system and the
original housing assistance payments contracts. We provided our review results and supporting
schedules to the Director of HUD’s Detroit Office of Multifamily Housing Programs and the
Authority’s executive director during the audit.
22
Housing Notice H-2012-14, section V.C.
15
We conducted the audit in accordance with generally accepted government auditing standards.
Those standards require that we plan and perform the audit to obtain sufficient, appropriate
evidence to provide a reasonable basis for our findings and conclusions based on our audit
objective. We believe that the evidence obtained provides a reasonable basis for our findings
and conclusions based on our audit objective.
16
INTERNAL CONTROLS
Internal control is a process adopted by those charged with governance and management,
designed to provide reasonable assurance about the achievement of the organization’s mission,
goals, and objectives with regard to
Effectiveness and efficiency of operations,
Reliability of financial reporting, and
Compliance with applicable laws and regulations.
Internal controls comprise the plans, policies, methods, and procedures used to meet the
organization’s mission, goals, and objectives. Internal controls include the processes and
procedures for planning, organizing, directing, and controlling program operations as well as the
systems for measuring, reporting, and monitoring program performance.
Relevant Internal Controls
We determined that the following internal controls were relevant to our audit
objective:
Effectiveness and efficiency of operations – Policies and procedures that
management has implemented to reasonably ensure that a program meets
its objectives.
Reliability of financial reporting – 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 applicable laws and regulations – Policies and
procedures that management has implemented to reasonably ensure that
resource use is consistent with laws and regulations.
We assessed the relevant controls identified above.
A deficiency in internal control exists when the design or operation of a control does
not allow management or employees, in the normal course of performing their
assigned functions, the reasonable opportunity to prevent, detect, or correct (1)
impairments to effectiveness or efficiency of operations, (2) misstatements in
financial or performance information, or (3) violations of laws and regulations on a
timely basis.
17
Significant Deficiency
Based on our review, we believe that the following item is a significant deficiency:
The Authority lacked an understanding of Federal requirements and
sufficient quality control procedures to ensure compliance with HUD’s
requirements regarding the (1) use of program residual receipts, (2)
remittance of excess project funds to HUD, and (3) appropriate maintenance
of escrow funds (see findings 1, 2, and 3).
18
APPENDIXES
Appendix A
SCHEDULE OF QUESTIONED COSTS
AND FUNDS TO BE PUT TO BETTER USE
Recommendation Ineligible 1/ Unsupported 2/ Funds to be put
number to better use 3/
1A $31,148,477
1B $428,804
2A 608,337
2B $604,949
2C 12,830
3A 290,437
3B 175,434
Total $1,087,038 $1,033,753 $31,148,477
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 the 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.
3/ Recommendations that funds be put to better use are estimates of amounts that could be
used more efficiently if an OIG recommendation is implemented. These amounts include
reductions in outlays, deobligation of funds, withdrawal of interest, costs not incurred by
implementing recommended improvements, avoidance of unnecessary expenditures
noted in preaward reviews, and any other savings that are specifically identified. In this
instance, if the Authority implements our recommendations, excess project funds will be
used to reduce or offset Section 8 housing assistance payments.
19
Appendix B
AUDITEE COMMENTS AND OIG’S EVALUATION
Ref to OIG Evaluation Auditee Comments
20
Ref to OIG Evaluation Auditee Comments
Comment 1
21
Ref to OIG Evaluation Auditee Comments
Comment 2
Comment 3
Comment 4
22
Ref to OIG Evaluation Auditee Comments
Comment 4
Comment 4
Comment 5
Comment 6
23
Ref to OIG Evaluation Auditee Comments
Comment 6
Comment 7
Comments 2
and 4
24
Ref to OIG Evaluation Auditee Comments
Comment 8
Comment 8
Comment 9
Comments 9
and 10
25
Ref to OIG Evaluation Auditee Comments
Comment 11
Comment 12
Comments 1,
3, 4, and 6
Comment 13
26
Ref to OIG Evaluation Auditee Comments
Comments 1,
3, 4, and 6
Comment 14
Comment 15
Comment 16
27
Ref to OIG Evaluation Auditee Comments
Comment 16
Comment 17
Comment 18
Comment 19
28
Ref to OIG Evaluation Auditee Comments
Comment 20
Comment 21
29
Ref to OIG Evaluation Auditee Comments
Comment 21
Comment 17
Comment 22
Comment 23
30
Ref to OIG Evaluation Auditee Comments
Comment 22
Comments 22
and 24
Comment 25
31
Ref to OIG Evaluation Auditee Comments
Comment 26
32
Ref to OIG Evaluation Auditee Comments
Comment 26
Comment 26
33
Ref to OIG Evaluation Auditee Comments
Comment 25
Comment 27
Comment 28
Comments 6
and 15
34
Ref to OIG Evaluation Auditee Comments
Comment 6
and 15
Comment 29
35
OIG’s Evaluation of Auditee Comments
Comment 1 We acknowledge that HUD’s regulations at 24 CFR 883.306(e) effective
February 29, 1980, permits the housing finance agency to assume responsibility
for (1) project development, (2) supervision of the development, and (3) the
management and maintenance functions of owners subject to HUD periodic
review and monitoring by HUD. The Authority is entitled to a reasonable fee,
determined by HUD, for administering a contract. In regards to the use of surplus
funds, we also acknowledge that the regulation stated that if the Authority
determines at any time that surplus project funds are more than the amount
needed for project operations, reserve requirements, and permitted distributions,
the Authority may require the excess to be placed in a separate account to be used
to reduce housing assistance payments or for other project purposes.
However, upon termination of the contract, any excess project funds must be
remitted to HUD. The executed housing assistance payments contract further
expounds on this requirement stating that surplus project funds must be deposited
with the agency, mortgagee, or other agency approved depository in an interest
bearing account. Withdrawals from the account will be made only with the
approval of the Authority for project purposes, including the reduction of housing
assistance payments. Therefore, the agency does not have exclusive control of
surplus funds since HUD is limiting the use of the surplus funds to project related
purposes and stating that the funds ultimately belong to HUD.
Comment 2 As a result of our audit, the Authority conducted an analysis of its program
projects escrow accounts to determine whether surplus funds were available.
However as stated in finding 1 of this report, we determined that the Authority’s
analysis contained errors. In May 2013, the Authority began implementing the
offsets for the June 2013 housing assistance payments. However, the Authority
started offsetting housing assistance payments using its flawed analysis.
Comment 3 As stated in the report, the Authority lacked an understanding of HUD’s
requirements regarding its role in administering the program. The Authority
believed that the notice did not apply to it. However, the Notice specifically
stated that it applied to all projects that are subject to a new regulation project-
based Section 8 housing assistance payments contract, including 883 properties.
According to the Notice, the regulatory schemes codified in 24 CFR 880.104(a),
881.104(a), and 883.105(a) establishes the universe of projects to which the
applicable new regulation applies. The Notice did not exclude properties in
which State agencies were the contract administrators. Therefore, the Notice
applied to both HUD-insured and non-insured properties. Further, the Authority
entered into an annual contributions contract with HUD for all new-regulation
projects and agreed to all of the contract terms, including the requirement to
ensure that all of HUD’s requirements would be followed. Further, the Authority
entered into an annual contributions contract with HUD for all new-regulation
36
projects and agreed to all of the contract terms, including the requirement to
ensure that all of HUD’s requirements would be followed.
Comment 4 We acknowledge that according to 24 CFR 883, the Authority determines whether
a project has surplus project funds. However, the executed housing assistance
payments contract requires that surplus project funds be deposited with the
agency, mortgagee, or other agency approved depository in an interest bearing
account. Further, the Authority has not provided the audit guidelines it uses to
determine excess funds. As mentioned in comment 2, we determined that the
Authority’s analysis for determining surplus funds contained significant
deficiencies. In addition, according to the Notice, the regulatory schemes codified
in 24 CFR 880.104(a), 881.104(a), and 883.105(a) establishes the universe of
projects to which the applicable new regulation applies. The Notice did not
exclude properties in which State agencies were the contract
administrators. Therefore, the Notice applied to HUD-insured and non-insured
properties. Under part 883, the Authority is responsible for project development
and for supervision of the development, management and maintenance functions
of owners. However, the Authority’s actions are subject to audit and review by
HUD to assure compliance with Federal requirements and HUD’s objectives.
In a letter from the Authority to HUD dated January 29, 2010, the Authority
stated that funds remaining in the operating cash reserve constitute what are
commonly called residual receipts. In addition, the Authority was not
consistently following the policies as stated in its own comments. For instance,
the owners of Program project numbers MI28H150193, MI33H150063, and
MI28H150177, all received limited distribution payments before making deposits
to their operating cash reserve. Further, the Authority’s own regulatory
agreements for the Program projects state that residual receipts should include all
funds received by the mortgagor in connection with the operation of the project
after (1) the mortgage note is paid, (2) all amount required are deposited into the
replacement reserve, and (3) after all other project expenses have been paid. The
Authority’s definition of residual receipts in its regulatory agreements is
consistent with HUD’s definition of residual receipts.
Comment 5 HUD Handbook 4350.1, REV-1, chapter 1, section 1-3 states that in carrying out
its mission, HUD monitors and works with mortgagors, managing agents,
mortgagees, subsidy contract administrators, and other clients to ensure
compliance with the requirements of HUD's programs. Further, chapter 1
section1-4, of the handbook also states that the Office of Multifamily Housing
Management exercise responsibility toward the taxpayer as applicable by:
C. Maximizing collections of all funds due HUD,
D. Enforcing statutes and regulations, and
E. Allocating, administering, and monitoring subsidy-based programs in a cost-
effective manner.
37
The handbook further states that generally, all projects owned by non-profit
mortgagors and all Section 236 and 221(d)(3) projects owned by limited
distribution mortgagors as well as Section 8 new construction and substantial
rehabilitation projects subject to the 1979 - 80 revised Section 8 regulations are
required to establish a residual receipts account. The requirement for a residual
receipts account is established by a regulatory agreement or a project-based
subsidy contract such as Section 8 housing assistance payments.
Comment 6 The audit report included statements made by HUD, which show agreement with
our conclusions. However, these statements were not used to support the audit
report. Therefore, we relied on HUD’s regulations, Notices, Handbooks,
Guidebooks, and other criteria related to the program in addition to the legally
executed documents (between HUD and the Authority) to support our audit
report. HUD regulations at 24 CFR 883, states that upon termination of the
contracts, any excess project funds should be remitted to HUD. Therefore, the
regulation clearly implies that HUD has ownership of excess or surplus project
funds. The Notice states that the Department is setting forth the policy and
procedures for the Department’s use of new regulation residual receipts to offset
housing assistance payments for projects subject to a new regulation project-based
Section 8 program contract. The Notice applied to all projects that are subject to a
new regulation project-based Section 8 program contracts that are subject to 24
CFR 880.205, 881.205, or 883.306. It did not exclude 883 properties managed
for State agencies.
Instead, the Notice specifically stated that for projects subject to 24 CFR 883, in
effect as of February 29, 1980, the State agency, rather than HUD, is entitled to
make the determination that project funds are more than the amount needed and to
require that the excess be deposited into an interest-bearing account to be used for
project purposes, including the offset of housing assistance. Although the Notice
permits the State agency to make the determination, the requirement that excess
funds to be used to offset housing assistance is the purpose of the Notice. Further,
the Authority entered into an annual contributions contract with HUD for all new-
regulation projects and agreed to all of the contract terms, including the
requirement to ensure that all of HUD’s requirements would be followed.
HUD Handbook 4350.3 REV-1, chapter 1, section 4, states that subsidy contract
administration involves a broad range of responsibilities, including program
compliance functions to ensure that HUD-subsidized properties are serving
eligible families at the correct level of assistance, and asset management functions
to ensure the physical and financial health of HUD properties. HUD has primary
responsibility for contract administration but has assigned portions of these
responsibilities to other organizations that act as contract administrators for HUD.
These contract administrators are generally housing agencies, such as State
housing finance agencies or local housing authorities. Traditional contract
administrators have been used for over 20 years and have annual contributions
38
contracts with HUD. Under their contracts, traditional contract administrators are
responsible for asset management functions and housing assistance payments
contract compliance and monitoring functions. They are paid a fee by HUD for
their services. Further, HUD Handbook 4350.3 REV-1, chapter 25, section 1
states that generally, all projects owned by non-profit mortgagors and all Section
236 and 221(d)(3) projects owned by limited distribution mortgagors as well as
Section 8 New Construction or Substantial Rehabilitation projects subject to
the revised Section 8 regulations are required to establish a residual receipts
account. The requirement for a residual receipts account is established by a
regulatory agreement or a project-based subsidy contract such as Section 8
Housing Assistance Payments contract.
Comment 7 The letter from HUD dated March 27, 2013, references a meeting between HUD
and the Authority which occurred on January 20, 2013. The Authority presented
its cash flows analysis to HUD and requested that HUD allow its alternate method
of calculating residual receipts and not to hold the owners to the required retained
balance of $250 per unit. On February 21, 2013, HUD responded to the
Authority’s request stating that the Authority’s proposed alternative method did
not comply with the Notice and was therefore not approved. Further, the letter
gave the Authority until March 7, 2013, to respond to allow the reduction of
housing assistance payments to begin on April 1, 2013. The Authority failed to
meet the April 1, 2013, date, therefore HUD stated it would start sending out
recapture letters to owners for the May 2013 voucher submissions applicable to
the June 2013 subsidy payments. The Authority failed to comply with the Notice
until HUD sent out the recapture letters to the owners.
Comment 8 The Authority asserts that of the $31 million in surplus funds, more than $6.8
million is not available to offset housing assistance payments. As stated in
finding 1, the Authority requested to use more than $6.4 million of residual
receipts of two projects (contract numbers MI33H150039 and MI28H150181) to
pay refinancing costs and reestablish the escrow accounts. However, in a letter,
dated February 21, 2013, HUD denied the Authority’s request to use project
funds, including residual receipts, to refinance the Authority-held mortgages
because it was not an eligible use of the residual receipts. For the remaining more
than $350,000, the agency projected negative operations. However, as mentioned
in the audit report and comment 2, the agency’s projected analysis contained
significant errors. Therefore, the Authority should obtain HUD’s approval for its
revised analysis.
Comment 9 HUD’s memorandum, dated October 2, 2012, in response to question number 3
regarding the retained balance, states that if HUD has approved requests for the
use of residual receipts accounts before the Notice was issued, the approval
remains in place. Any requests made after the Notice must be denied. In
addition, in response to question number 7 regarding the use of residual receipts,
for a poorly scored Real Estate Assessment Center review, the owner must
39
receive written approval from the HUD field office before considering the use of
monies in the residual receipts account. Therefore, we have determined that HUD
approval would be needed for the disbursements of residual receipts that occurred
after the Notice.
Comment 10 HUD Handbook 4350.3 REV-1 CHG-3, chapter 1 section 5 states that Federal
statutory program eligibility requirements cannot be overruled by State or local
law. Further, the Authority did not provide documentation to support its
assertions that the disbursements for the four projects were permitted, approved
by HUD, or that the court order overruled the Federal statutory requirements.
Comment 11 The Authority did not provide documentation to support that the funds were
transferred from the replacement reserve account to the operating cash reserve
(residual receipts) account.
Comment 12 We amended the wording in our recommendation to request that repayment be
from non-Federal funds to the appropriate escrow account, not to HUD.
Comment 13 HUD’s memorandum, dated October 2, 2012, states that items that have accrued
must be paid from the retained balance. The Authority disbursed an accrued
limited distribution to contract number MI33H150193. The portion of the limited
distribution that exceeded contract number MI33H150193’s retained balance was
considered an inappropriate residual receipts disbursement.
Comment 14 In section 2.1 of the contract, the term obligation is not referring to rights of
parties. Instead, it is stating that neither HUD nor the housing finance agency
must assume any (monetary) obligations beyond that provided in the HUD
approved agreement and contract. Further the Authority’s master agreement
executed with HUD on September 30, 1980, section 0.4 states that the Authority
agrees to comply, and to require owners to comply with the U. S. Housing Act of
1937 and all applicable regulations and requirements.
Comment 15 The Inspector General Act of 1978, as amended, creates independent and
investigative units, called Offices of Inspector General. The mission of the OIG,
as spelled out in the Act, is to: (1) conduct and supervise independent and
objective audits and investigations relating to agency programs and operations (2)
promote economy, effectiveness, and efficiency with in the agency, (3) prevent
and detect fraud waste and abuse in agency programs, (4) review and make
recommendation regarding existing and proposed legislation and regulations
relating to agency programs and operations, and (5) to keep the agency and
Congress fully and currently informed of problems in the agency programs and
operations. As stated in the audit report, our objective was to determine whether
the Authority administered its program for new-regulation projects in accordance
with HUD’s requirements. Specifically, we wanted to determine whether the
Authority (1) applied program residual receipts to reduce or offset housing
40
assistance payments for new-regulation projects, (2) remitted excess or unused
project funds to HUD upon termination of new-regulation contracts, and (3)
appropriately maintained escrows for new-regulation projects.
In addition, 24 CFR 883.106 (c)(2) states that HUD will periodically monitor the
activities of housing finance agencies participating under this part only with
respect to Section 8 or other HUD programs. This monitoring is intended
primarily to ensure that certifications submitted and projects operated under this
part reflect appropriate compliance with Federal law and other requirements.
Comment 16 As mentioned in the audit report, the Authority did not provide adequate
documentation to support its determination of excess project funds. It also did not
provide documentation to support its assertions that limiting project funds to $250
per unit would be a detriment to its projects. Additionally, the projects’ excess
funds would be used to offset housing assistance over a period of time.
Therefore, the Authority’s assertions that the projects would be in default or have
their utilities shut off are unfound. Further, the recommendation in the report
does not state that funds should be reimbursed to HUD, but used to offset future
housing assistance. We contacted seven different HUD field offices and
determined that seven different state housing agencies were complying with the
Notice and using the $250-per unit as the retained balance in offsetting residual
receipts for new-regulation projects.
Comment 17 As recommended in the audit report, the Authority should work with HUD to
ensure the recommendations are addressed appropriately.
Comment 18 HUD’s regulations at 24 CFR 883.306(e) effective February 29, 1980, state that
upon termination of the contract, any excess project funds must be remitted to
HUD.
Comment 19 We agree with the Authority’s calculation of excess funds for the project number
MI28H150160. We have updated the report and recommendation to reflect the
corrected amount. However, the Authority did not provide a copy of the wire
transfer to the United States Treasury.
Comment 20 The Authority did not provide documentation to support its calculation of surplus
funds for the MI33H150050 project, nor did it provide a copy of the wire transfer
to the United States Treasury.
Comment 21 As stated in the audit report, according to the Authority, its loan agreement with
the owner allowed the replacement reserves to be applied to the defaulted
mortgage. However, HUD did not waive the requirement for the Authority to
remit unused or excess project funds. Further, the Authority’s attachments
contained a response from HUD stating that HUD required additional information
from the Authority.
41
Comment 22 HUD requires the excess project funds to be remitted on the contract termination
date, not the OIG. In a letter to the Authority dated May 25, 2010, HUD stated
that funds remaining in the operating reserve cash (residual receipts) account on
the contract termination date, excluding funds that HUD has determined are not
excess project funds, as can be clearly demonstrated as such by the Authority,
shall be remitted to HUD on the contract termination date. Further, HUD’s
regulations at 24 CFR 883.306(e) effective February 29, 1980, state that upon
termination of the Contract, any excess project funds must be remitted to HUD.
Comment 23 As recommended in this report, HUD will ensure that the Authority’s agreements
for new-regulation projects comply with HUD’s regulations.
Comment 24 For project number MI28H150160, the Authority failed to remit the excess
project funds after the contract termination for more than 2,192 days.
Comment 25 As stated in the audit report, the Authority inappropriately disbursed replacement
reserves. The replacement reserve is required to be established by the program
contract, to defray the cost of the replacement of major depreciable items. The
contract between the Authority and the owner requires the establishment of the
replacement reserve. Also, according to section 2.6(d)(1) of the Authority’s
contract with the owner, the owner is required to establish and maintain the
reserve account, at the direction of the Authority to aid in funding extraordinary
maintenance and repair and replacement of capital items. Section 2.6 (c) (1)
states that project funds must be used for the benefit of the project, to make
mortgage payments, make required deposits to the replacement reserve, and to
provide limited distributions to the owner. The contract does not state that funds
accumulated for the extraordinary maintenance and repair and replacement of
capital items can be used for paying owner income. Further, the section 2.6 (d)
(1) (ii) states that if the replacement reserve achieves a level sufficient to meet the
projected requirements, the rate of deposit to the reserve may be reduced with the
Authority’s approval.
Comment 26 The Authority did not provide documentation to support that all of the projects’
replacement reserves needs were addressed, that new replacement reserves were
established, or that the replacement reserves distributed to owners were excess
project funds.
Comment 27 HUD will determine whether the Authority’s updated procedures meet HUD’s
requirements.
Comment 28 We disagree with the Authority’s interpretation that HUD OIG was sent out to
audit as a response to the Authority’s correspondence with HUD expressing its
disagreement with the Notice. HUD and the Authority have been in constant
discussions regarding the ownership of program escrows from 2008 forward.
42
OIG was asked by HUD management to audit the Authority to ensure compliance
with the Notice.
Comment 29 We commend the Authority for its willingness to cooperate with HUD in the
administration of its programs.
43
Appendix C
FEDERAL AND THE AUTHORITY’S REQUIREMENTS
Finding 1
Section 8(z)(1)of the United States Housing Act of 1937, as amended, states that HUD’s
Secretary may reuse any budget authority, in whole or part, that is recaptured on account of
termination of a housing assistance payments contract.
HUD’s regulations at 24 CFR 880.601(e) state that project funds must be used for the benefit of
the project, to make required deposits to the replacement reserve, and to provide distributions to
the owner in accordance with HUD’s regulations. Any remaining project funds must be
deposited with the Authority, other lender, or other Authority-approved depository in an interest-
bearing account.
HUD’s regulations at 24 CFR 883.306(b) state that for the life of the contract, project funds may
be distributed only to profit-motivated owners at the end of each fiscal year of project operation
following the effective date of the contract and after all project expenses have been paid or funds
have been set aside for payment and all reserve requirements have been met.
HUD’s regulations at 24 CFR 883.306(d) state that any shortfall in return may be made up from
surplus project funds in future years.
HUD’s regulations at 24 CFR 883.306(e) state that if the Authority determines at any time that
surplus project funds are more than the amount needed for project operations, reserve
requirements, and permitted distributions, the Authority may require the excess to be placed in a
separate account to be used to reduce housing assistance payments or for other project purposes.
Part I, section 1.2, of the annual contributions contract for all new-regulation projects, form
HUD-52643B, version 8-80, states, “The Authority is authorized to (a) enter into an Agreement,
(b) enter into Contract, (c) make housing assistance payments on behalf of Families, and (d) take
other necessary actions, all in accordance with the forms, conditions, regulations, and
requirements prescribed or approved by HUD.”
Part II, paragraph 2.6(c)(1), of the new-regulation contract, version 8-80, states that to the extent
the Authority determines that project funds are more than needed for making mortgage
payments, paying operating expenses, making required deposits to the replacement reserve in
accordance with HUD’s regulations, and providing distributions to the owner as provided in
HUD’s regulations, the surplus project funds must be deposited with the Authority, lender, or
other Authority-approved depository in an interest-bearing account.
44
Housing Notice H-2012-14, section V.A., states that to the extent that Residual Receipts are
available at a new regulation project, Owners are allowed an initial reserve (“Retained Balance”)
in an amount equivalent to $250 per unit to use for project purposes. HUD will consider
approving requests for releases from the account in accordance with the outstanding procedures
found in HUD Handbook 4350.1, Multifamily Asset Management and Project Servicing, Chapter
25, “Residual Receipts,” paragraph 25-9.
Housing Notice H-2012-14, section V.C., states that residual receipts account balances in excess
of $250 per revenue-generating unit must be applied monthly to offset Section 8 housing
assistance payments up to the full amount of the monthly subsidy request, depending upon the
amount of residual receipts available for the offset.
HUD’s memorandum, dated October 2, 2012, in answer to question number 4 under the section,
Calculating the Balance of Residual Receipts Account, states that the $250 per unit of retained
balance applied to the number of units is the number of revenue-producing units in the project,
regardless of units under the Section 8 contract or the total number of units in the project.
Finding 2
HUD’s regulations at 24 CFR 883.306(e) state that upon termination of the housing assistance
payments contract, any excess project funds must be remitted to HUD.
Part II, section 2.6(c)(1), of the new-regulation contract, version 8-80, states that upon
termination of the housing assistance payments contract, any excess funds must be remitted to
HUD.
Finding 3
HUD’s regulations at 24 CFR 883.306(e) state that upon termination of the housing assistance
payments contract, any excess project funds must be remitted to HUD.
HUD’s regulations at 24 CFR 880.602(a) state that a replacement reserve must be established
and maintained in an interest-bearing account to aid in funding extraordinary maintenance and
repair and replacement of capital items.
Part II, section 2.6(c)(1), of the new-regulation contract, version 8-80, states that upon
termination of the housing assistance payments contract, any excess funds must be remitted to
HUD.
Part II, section 2.6(d)(1), of the new-regulation contract, version 8-80, states that the project
owner must establish and maintain, at the direction of the Authority, a replacement reserve in an
interest-bearing account to aid in funding extraordinary maintenance and repair and replacement
of capital items.
45
The Authority’s reserve for replacement policy, revised April 2013, states that the Authority’s
loan agreements between projects and the Authority require the establishment and maintenance
of the Authority’s held replacement reserve fund. The replacement reserve fund is primarily
designed to defray the cost of the replacement of major depreciable items provided for in the
original mortgage. Further, upon payment in full of the mortgage loan, the disbursement of
excess funds is governed by the legal documents and applicable law. The projects with
replacement reserve needs amounts must resolve the need amount before owner’s income can be
disbursed.
46
Appendix D
PROGRAM RESIDUAL RECEIPTS AVAILABLE FOR
REDUCTION OR OFFSET OF HOUSING ASSISTANCE
PAYMENTS AS OF MAY 31, 2013
Available Disbursements Unnecessary
Contract residual above retained subsidy
Number number receipts balance received
1 MI28H150189 $16,652,079 $0 $681,447
2 MI28H150183 5,853,755 318,063 766,024
3 MI28H150181 5,365,492 0 755,983
4 MI33H150039 1,213,614 0 758,347
5 MI28H150177 619,355 0 396,913
6 MI33H150065 457,294 0 257,116
7 MI28H150223 319,212 19,703 333,508
8 MI33H150056 281,046 0 239,243
9 MI28H150190 190,107 0 127,552
10 MI28H150204 88,093 65,510 211,993
11 MI33H150080 48,052 0 22,318
12 MI33H150079 39,782 0 26,624
13 MI33H150051 19,142 0 16,137
14 MI28H150080 1,325 2,623 4,308
15 MI33H150076 129 21,716 1,794
16 MI28H150193 0 1,189 0
17 MI28H150202 0 0 21,916
18 MI28H150206 0 0 8,936
Totals $31,148,477 $428,804 $4,630,159
47
The Michigan State Housing Development Authority, Lansing, MI, Did Not Follow HUD's Requirements Regarding the Administration of Its Program
Published by the Department of Housing and Urban Development, Office of Inspector General on 2013-09-30.
Below is a raw (and likely hideous) rendition of the original report. (PDF)