oversight

Servicing of Multifamily HUD-Held Mortgages

Published by the Department of Housing and Urban Development, Office of Inspector General on 2013-05-03.

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

OFFICE OF AUDIT
REGION 9
LOS ANGELES, CA




          U.S. Department of Housing and Urban
        Development, Office of Multifamily Housing
                Programs, Washington, DC

      Servicing of Multifamily HUD-Held Mortgages




2013-LA-0001                                  MAY 3, 2013
                                                        Issue Date: May 3, 2013

                                                        Audit Report Number: 2013-LA-0001




TO:            Mark B. Van Kirk
               Director, Office of Asset Management, HTG



FROM:          Tanya E. Schulze
               Regional Inspector General for Audit, Los Angeles Region, 9DGA


SUBJECT:       HUD Did Not Always Follow Monthly Accounting Report Requirements and Did
               Not Collect Net Cash for Multifamily Projects With HUD-Held Mortgages


    Attached is the U.S. Department of Housing and Urban Development (HUD), Office of
Inspector General’s (OIG) final results of our review of monthly accounting report and net cash
requirements of multifamily HUD-held mortgages.

    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 8L, 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
213-534-2471.
                                             May 3, 2013
                                             HUD Did Not Always Follow Monthly Accounting Report
                                             Requirements and Did Not Collect Net Cash for
                                             Multifamily Projects With HUD-Held Mortgages



Highlights
Audit Report 2013-LA-0001


 What We Audited and Why                      What We Found

We audited the U.S. Department of            HUD did not always obtain, document, and review
Housing and Urban Development’s              monthly accounting reports for projects with defaulted
(HUD) servicing of multifamily               Federal Housing Administration (FHA)-insured
projects with HUD-held mortgages             mortgages that were assigned to HUD and projects
because it was part of the Office of         with defaulted Section 202 direct loans made by HUD.
Inspector General’s (OIG) annual audit       This condition occurred because HUD prioritized other
plan. We reviewed 33 multifamily             asset management functions above the monitoring of
projects with HUD-held mortgages that        multifamily projects that were experiencing financial
totaled $307.9 million. Our objective        difficulties. For monthly accounting reports that were
was to determine whether HUD (1)             obtained, HUD staff lacked the knowledge and
obtained, documented, and reviewed the       expertise needed to adequately review the reports.
monthly accounting reports and (2)           Without proper monitoring of projects with defaulted
collected monthly net cash payments          mortgages, there is an increased risk of loss to the FHA
from multifamily projects that required      insurance fund on the universe of outstanding HUD-
these submissions.                           held mortgage balances where monthly accounting
                                             reports are required totaling more than $3.2 billion.
 What We Recommend
                                             HUD also did not ensure that projects remitted net cash
                                             after the mortgage default and after HUD accepted a
We recommend that the Director of the        full or partial assignment of the FHA-insured
Office of Asset Management (1) ensure        mortgage. This condition occurred because HUD staff
his office has controls in place to follow   was not aware of the net cash remittance requirements
the requirements regarding obtaining         or chose not to enforce them. For projects with partial
and documenting the receipt and review       payment of claims mortgage assignments, which
of monthly accounting reports, (2)           resulted in HUD-held second mortgages, the terms of
provide HUD asset management staff           the second deed of trust notes omitted the requirement
with training on the monthly accounting      to remit monthly net cash. As a result, HUD did not
report review process and analysis, (3)      collect net cash to reduce the borrower’s outstanding
ensure that projects remit monthly net       obligation, increasing the risk of loss to the FHA
cash, and (4) follow the handbook            insurance fund on the universe of outstanding HUD-
requirements regarding net cash              held mortgage balances where remittance of net cash is
remittance.                                  required totaling more than $3.1 billion.
                           TABLE OF CONTENTS

Background and Objective                                                      3

Results of Audit

      Finding 1:    HUD Did Not Always Obtain, Document, and Review Monthly
                    Accounting Reports                                        5

      Finding 2:    HUD Did Not Ensure That Net Cash Was Remitted             8

Scope and Methodology                                                         11

Internal Controls                                                             13

Appendixes
A.    Criteria                                                                15
B.    Schedule of Sampled Projects Reviewed                                   19




                                              2
                       BACKGROUND AND OBJECTIVE


                                                  Office of Multifamily
                                                   Housing Programs




                                                                                                        Housing
                                                                             Housing
   Deputy       Program             Multifamily                                                        Assistance      Affordable
                                                        Asset             Assistance and
  Assistant     Systems              Housing                                                            Contract        Housing
                                                     Management                Grant
  Secretary    Management          Development                                                       Administration   Preservation
                                                                          Administration
                                                                                                       Oversight




                      Policy and Participation        Field Asset          Business Relationships
                             Standards               Management            and Special Initiatives




The U.S. Department of Housing and Urban Development’s (HUD) Office of Multifamily
Housing Programs is responsible for the overall management, development, direction, and
administration of HUD’s multifamily housing programs. Within the Office of Multifamily
Housing Programs, the Office of Asset Management is responsible for oversight of multifamily
project assets after their development. The Office of Asset Management is responsible for
oversight of property ownership and management, routine mortgage servicing, default servicing,
acquisition and disposition of loans (mortgage notes) and properties, and management of
properties of which the HUD Secretary is owner or “mortgagee-in-possession.”

Under the Office of Asset Management, the Field Asset Management Division is responsible for
matters affecting the condition and management of the properties, dealing with property
ownership and sales issues, and processing requests for prepayment of Federal Housing
Administration (FHA)-insured, HUD-held mortgages, and Section 202 direct loans.

HUD-held mortgages are mortgages that were originated and insured under any multifamily
section of the National Housing Act or formerly coinsured loans endorsed for full insurance,
which had defaulted and been assigned to HUD. When an FHA-insured mortgage goes into
default, the lender sends a notice of default to notify HUD that the project owner has defaulted
on its mortgage payments and the project is experiencing financial difficulties. The lender may
then file an election to fully assign the mortgage or request extensions on an election to assign
while the project owner works through the partial payment of claims process. Upon assignment,
HUD becomes the lender for the mortgage for a full assignment. Or HUD may, with the
concurrence of the lender, make a partial payment of an insurance claim on a defaulted
mortgage. The lender would agree to accept partial payment in lieu of full assignment and recast
the remaining mortgage balance. In exchange, a HUD-held second mortgage would be created
and be equal to the amount of the partial payment.

Section 202 direct loans are also HUD-held mortgages. They are long-term, low-interest-rate
loans made by HUD to nonprofit borrower corporations formed to provide rental assistance for
elderly and handicapped persons. As such, these HUD loans do not have mortgage insurance,


                                                              3
and HUD serves as the lender. Since HUD is the lender, Section 202 direct loans do not go
through the assignment process upon default. The requirement to remit net cash is not applicable
for Section 202 projects with defaulted mortgages.

Our objective was to determine whether HUD obtained, documented, and reviewed monthly
accounting reports and collected monthly net cash payments for projects with mortgages that
required these submissions.




                                               4
                                     RESULTS OF AUDIT


Finding 1: HUD Did Not Always Obtain, Document, and Review
           Monthly Accounting Reports
HUD did not always obtain, document, and review the monthly accounting reports for projects
with assigned mortgages or defaulted Section 202 direct loans. This condition occurred because
HUD prioritized other asset management functions above the monitoring of these projects that
were experiencing financial difficulties. For monthly accounting reports that were obtained and
reviewed, HUD staff lacked the knowledge and expertise needed to adequately review the
reports and missed obvious errors and problems. Without adequate reviews of monthly
accounting reports, the financial health of the projects can deteriorate quickly and go undetected.
This weakness could lead to additional insurance claims and losses to the FHA insurance fund
for 9,305 HUD-held mortgages, which included 9,192 FHA-insured mortgages assigned to HUD
and 113 defaulted Section 202 direct loans, with outstanding mortgage balances totaling more
than $3.2 billion. 1


    HUD Did Not Always Obtain
    and Document the Receipt and
    Review of Monthly Accounting
    Reports

                 HUD is required to obtain, document, and review accounting reports upon a
                 notice of default. It did not always obtain and document the receipt and review of
                 monthly accounting reports. HUD handbook requirements state that project
                 owners are required to submit monthly accounting reports to HUD when a notice
                 of election to assign is received from the lender and continue to submit monthly
                 accounting reports to HUD after assignment until the project is no longer
                 experiencing financial difficulties (see appendix B). HUD also requires that
                 monthly accounting reports be submitted when financial difficulties are evident
                 and before any request for a partial payment of claim. For Section 202 projects,
                 monthly accounting reports are required upon default and until the project is no
                 longer experiencing financial difficulties. Of the 33 projects with HUD-held
                 mortgages reviewed with outstanding mortgage balances of more than $307.9
                 million, HUD did not obtain all required monthly accounting reports for 15
                 projects. For eight of the projects, HUD did not obtain any monthly accounting
                 reports (see appendix C).

                 HUD Handbook 4370.1, REV-2, chapter 3, requires establishment of a system for
                 monitoring the receipt and documenting the review of monthly accounting

1
 This amount represents the FHA-insured loans that were assigned to HUD and Section 202 direct loans that
defaulted. See the Scope and Methodology section.


                                                       5
           reports. HUD did not use the monthly accounting reports control log (form HUD-
           93483) or any tracking or record-keeping system to document the receipt of
           monthly accounting reports for 31 of 33 projects reviewed. For 19 of the projects,
           HUD did not use the monthly accounting summary worksheet (form HUD-93482)
           or any record-keeping and review system to document the review of the monthly
           accounting reports. The summary worksheet is a useful tool for analyzing activity
           trends in occupancy, collections, other income, operating disbursements, debt
           service, end-of-month status of accounts, tenant accounts receivable, security
           deposit deficiency, and reconciliation of annual reports.

           HUD project managers gave a variety of explanations for their failure to maintain
           the control logs. Some stated that they received monthly accounting reports
           electronically but did not document or track receipt of the reports. Others
           explained that tracking logs and reports were lost due to employees’ retirements
           or computer malfunctions or were missing because of field office policies of
           purging monthly accounting reports after the annual financial statements were
           received. Other project managers indicated that they documented the receipt,
           review, and approval of monthly accounting reports in the Integrated Real Estate
           Management System. However, they did not always consistently enter monthly
           accounting report information into the system. More than one project manager
           explained that they were overwhelmed with their workload and that they had
           other asset management priorities besides obtaining and documenting the receipt
           and review of the monthly accounting reports.

HUD Did Not Adequately
Review Monthly Accounting
Reports

           For the 27 projects for which monthly accounting reports were obtained, project
           managers did not review the reports adequately. They did not detect errors and
           discrepancies or reconcile information with previous monthly accounting reports.
           We noted the following issues:

              •   A beginning cash balance for the month that was different from the ending
                  cash balance on the previous month’s accounting report;

              •   Check registers with missing check numbers;

              •   Reports provided that were incomplete or did not include supporting
                  documentation such as check registers, accounts payable aging schedules,
                  and bank reconciliations;

              •   Supporting documentation, such as general ledgers, that could not be
                  easily reconciled to the standard HUD monthly accounting report forms
                  but no additional documentation or clarification was requested; and



                                           6
                   •   Questionable disbursements that were not followed up on, thereby
                       increasing the risk of unauthorized distributions of project funds.

Conclusion

             HUD did not follow requirements for obtaining, documenting, and reviewing
             monthly accounting reports because HUD project managers were overwhelmed
             by their workload and generally lacked sufficient knowledge and expertise to
             conduct a complete analysis of the monthly reports. As a result, HUD’s
             monitoring of these projects was insufficient, increasing the risk of loss to the
             FHA insurance fund. The adequate review of the monthly accounting reports
             would allow HUD to detect areas within project operations that could further
             damage the financial health of the projects and prevent additional claims to the
             FHA insurance fund on 9,305 HUD-held mortgages, which included 9,192 FHA-
             insured mortgages and 113 defaulted Section 202 direct loans, with outstanding
             mortgage balances totaling $3.2 billion.

Recommendations

             We recommend that the Director of the Office of Asset Management

             1A.       Ensures that HUD’s Office of Asset Management has controls in place to
                       follow requirements regarding obtaining and documenting the receipt and
                       review of the monthly accounting reports.

             1B.       Provides asset management staff with training on analyzing monthly
                       accounting reports and the monthly accounting report review process.




                                                7
Finding 2: HUD Did Not Ensure That Net Cash Was Remitted
HUD did not ensure that projects with defaulted FHA-insured mortgages remitted net cash
before and after it accepted assignment of the mortgage. This condition occurred because HUD
staff was not aware of the net cash requirements or did not require project owners to remit
monthly net cash. For projects reviewed with partial payment of claims mortgage assignments,
the terms of the second deed of trust notes omitted the requirement to remit monthly net cash.
As a result, HUD did not collect net cash to reduce the borrower’s outstanding obligation,
increasing the risk of loss to the FHA insurance fund for HUD-held mortgages with outstanding
mortgage balances totaling more than $3.1 billion. 2


    HUD Did Not Ensure That
    Projects Remitted Net Cash to
    the Lender Before Mortgage
    Assignment

                 When a project defaults on its FHA-insured mortgage, the project owner is
                 required to remit net cash to the lender while the mortgage is in default until
                 assignment of the mortgage. Net cash is the monthly ending cash balance after
                 project operating expenses are paid and it is applied to the FHA-insured
                 mortgage. For all 29 projects 3 reviewed, net cash was not remitted to the lender
                 upon mortgage default. When monthly net cash is not remitted after default,
                 additional interest accumulates, resulting in a larger mortgage balance and a larger
                 claim to the FHA insurance fund. In addition, while in default and net cash is not
                 remitted, there is an increased risk with project owners making unauthorized
                 distributions to recover their investments.

    HUD Did Not Ensure That
    Projects Remitted Net Cash to
    HUD After Mortgage
    Assignment

                 After full or partial mortgage assignment, HUD becomes the lender on the
                 original insured mortgage note (for full assignment) or on a second mortgage note
                 (for partial payment of claims). HUD, as the lender for all assigned mortgages,
                 has the responsibility to collect the debt. One of the field office’s direct
                 responsibilities for servicing HUD-held mortgages after full assignment or
                 assignment through the partial payment of claims process is to collect monthly net
                 cash from the project owner. Net cash is collected monthly to lower the
                 outstanding mortgage balance and decrease the potential loss to the FHA

2
  This amount represents the 9,192 FHA-insured mortgages that were assigned to HUD. See the Scope and
Methodology section.
3
  The four projects with Section 202 direct loans were not included because the assignment process does not apply to
direct loans from HUD.


                                                         8
             insurance fund. It also acts as a tool to help ensure that project owners do not
             make unauthorized distributions. Contrary to requirements, HUD did not collect
             net cash after mortgage assignment for all 29 projects with mortgage assignments
             in our sample.

             Of the 29 projects reviewed, 18 went through the partial payment of claims
             process that created a HUD-held second mortgage note. The handbook specifies
             that under the terms of the second mortgage note, the owner is required to pay a
             monthly service charge and submit all net cash to HUD. In all 18 instances, net
             cash was not remitted monthly to HUD. Contrary to the handbook requirements,
             the terms of the second mortgage notes did not require remittance of net cash
             monthly. Instead, the practice was to adhere to the terms of the second mortgage
             notes which required submission of a monthly service charge and remittance of
             restricted surplus cash at the end of each fiscal year.

HUD Was Not Aware of Net
Cash Remittance Requirements

             Discussions with HUD supervisors and project managers indicated that some
             were not aware of the monthly net cash remittance requirements, while others
             chose not to enforce them. When these requirements were brought to their
             attention, some project managers explained that such requirements, if
             implemented, would be unreasonable due to the lack of cash flow for the projects.
             One project manager explained that a project with a zero cash balance at the
             beginning of the month would not be able to operate business normally or pay its
             obligations in a timely manner. Some project managers stated that they were
             unaware of any projects that had submitted net cash payments.

             HUD Handbook 4350.1, REV-1, chapter 10, dated September 1992, and HUD
             Handbook 4350.1, REV-2, chapter 14, dated November 2010, both specify
             requirements for remittance of net cash and we generally disagreed with the
             project managers’ explanations regarding projects not remitting net cash. Since
             net cash is remaining cash after all reasonable and necessary operating expenses
             are paid, the project would not need additional cash. Project obligations, such as
             accounts payable, generally have a thirty-day grace period for payment.
             Therefore, monthly net cash payments should be made towards the mortgage to
             reduce the outstanding obligation, decrease the risk of unauthorized distributions,
             and decrease the potential claim to the FHA insurance fund.

Conclusion

             Although submission of net cash before and after mortgage assignment is required
             for projects with defaulted and assigned FHA-insured mortgages, we did not
             identify any instances in which net cash was remitted to HUD. This condition
             occurred because HUD did not ensure that handbook requirements were followed


                                              9
                regarding net cash and the HUD-held second mortgage note terms were not
                consistent with handbook requirements for partial payment of claim assignments.
                As a result, HUD did not collect net cash to reduce the borrower’s outstanding
                obligation, increasing the risk of loss to the FHA insurance fund for these
                mortgages with outstanding mortgage balances totaling more than $3.1 billion. 4

    Recommendations

                We recommend that the Director of the Office of Asset Management

                2A.      Require that asset management staff implement controls to ensure projects
                         with a notice of mortgage default remit all net cash monthly to the lender
                         before the mortgage assignment and to HUD after the assignment.

                2B.      Ensures that HUD Handbook 4350.1, REV-1, Chapter 10, HUD-Held
                         Servicing, September 1992, and HUD Handbook 4350.1, REV-2, Chapter
                         14, Partial Payment of Claims Loan Modifications, November 2010, are
                         followed.




4
 This amount represents the 9,192 FHA-insured mortgages that were assigned to HUD. See the Scope and
Methodology section.


                                                     10
                            SCOPE AND METHODOLOGY

Our audit period covered January 1, 2009, to June 30, 2012. We conducted our fieldwork at our
San Francisco, CA, field office between July 2012 and February 2013.

To accomplish our objective, we

    •   Reviewed applicable laws and regulations, policies and procedures, HUD handbooks,
        guidance, and internal controls relating to the servicing of multifamily projects with
        HUD-held mortgages.
    •   Obtained, reviewed, and analyzed HUD multifamily data on projects with insured
        mortgages that had defaulted on their mortgage payments.
    •   Interviewed HUD field office staff responsible for servicing multifamily projects with
        HUD-held mortgages.
    •   Obtained hardcopy and electronic project documentation from HUD multifamily hubs
        nationwide.

To determine whether multifamily properties with HUD-held mortgages were submitting
monthly accounting reports and remitting net cash as required, we selected 33 HUD-held
mortgages from a universe of 9,305 (9,192 previously FHA-insured mortgages 5 and 113
defaulted Section 202 mortgages 6). Of the 33 loans reviewed, 26 were reviewed during the
audit and 7 were reviewed during the survey. During the survey, we selected samples of projects
with HUD-held mortgages that were troubled or experiencing financial and management
difficulties. There was no threshold on the unpaid principal balance amounts.

The audit sample for the remaining 26 loans was selected based on the following factors:

    •   HUD-held mortgages in which the previously FHA-insured mortgage defaulted during
        our audit period or Section 202 loans that were in default as of June 1, 2012, and
    •   HUD-held mortgages with unpaid principal balances greater than $5 million.

The HUD-held mortgages were pulled from HUD’s Housing Enterprise Real Estate Management
System and Multifamily Delinquency and Default Reporting System. These systems were used
only in the sample selection process. We did not rely on information from these systems to
determine our audit results. Audit results were determined through examination of
documentation. We did not project our findings to the population using the sample.

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



5
  These 9,192 HUD-held mortgages that were previously FHA-insured had a total unpaid principal balance of more
than $3.1 billion.
6
  These 113 defaulted Section 202 mortgages had a total unpaid principal balance of more than $87.6 million.


                                                      11
objective. We believe that the evidence obtained provides a reasonable basis for our findings
and conclusions based on our audit objective.

We held an exit conference with the Office of Multifamily Housing Programs on April 2, 2013.
The Office of Multifamily Housing Programs agreed with our audit recommendations. It did not
wish to include a formal response in the audit report and will provide a detailed response with its
management decision following the issuance of the final audit report.




                                                12
                              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:

               •      Policies and procedures implemented to reasonably ensure that required
                      monthly accounting reports were received and adequately reviewed.
               •      Policies and procedures implemented to reasonably ensure that net cash was
                      collected from projects with mortgage defaults and projects with mortgages
                      assigned to HUD.

               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.

 Significant Deficiencies

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

               •      HUD did not always follow procedures to obtain and to document the
                      receipt and review of monthly accounting reports for projects with
                      defaulted and assigned mortgages (finding 1).



                                                 13
•   When monthly accounting reports were received, HUD did not ensure that
    they were adequately reviewed (finding 1).
•   HUD did not implement procedures for collecting net cash from projects
    with defaulted or assigned FHA-insured mortgages (finding 2).




                           14
                                    APPENDIXES

Appendix A

                                      CRITERIA

HUD Handbook 4350.1, REV-1, Chapter 10 - HUD-Held Servicing, Section 3 - Reinstating
Defaulted Mortgages, Paragraph 10-8 - Owner Responsibilities After Assignment, subparagraph
A: “The owner must pay all reasonable and necessary project operating expenses and each
month remit all remaining net cash to the lock box operated by the Multifamily Notes Branch
until a written reinstatement plan is executed.”

HUD Handbook 4350.1, REV-1, Chapter 10 - HUD-Held Servicing, Section 3 - Reinstating
Defaulted Mortgages, Paragraph 10-8 - Owner Responsibilities After Assignment, subparagraph
B: “The owner will submit monthly accounting reports…”

HUD Handbook 4350.1, REV-1, Chapter 10 - HUD-Held Servicing, Section 4 - General
Servicing Requirements, Paragraph 10-11 - Monthly Accounting Reports: “Upon receipt of a
notice of election to assign a mortgage, Monthly Accounting Reports, Forms HUD-93479,
93480, and 93481, including project net cash, must be submitted by the project owner.”

HUD Handbook 4350.1, REV-1, Chapter 10 - HUD-Held Servicing, Section 5 - Servicing Partial
Payment of Claims Mortgages, Paragraph 10-19 - General: “HUD may, with the concurrence of
the mortgagee, make a partial payment of an insurance claim on a defaulted mortgage covering
certain multifamily housing projects. The mortgagee would agree to accept partial payment in
lieu of full assignment and to recast the remaining mortgage balance. The mortgagor must give
HUD a second mortgage on the property for the amount of the partial payment.”

HUD Handbook 4350.1, REV-1, Chapter 10 - HUD-Held Servicing, Section 5 - Servicing Partial
Payment of Claims Mortgages, Paragraph 10-20 - Owner Requirements: “Under the terms of the
second mortgage, the owner is required to do the following:
       A. At a minimum, the owner is required to pay a service charge of .5 percent of the
          second mortgage per month. Each second mortgage document must be reviewed to
          determine the date the mortgagor must begin making debt service payments.
       B. The owner must submit all net cash derived from project operations. There will be no
          distributions to any type owner until the second mortgage is brought current.
       C. Submit Monthly Accounting Reports, Forms HUD 93479, 93480, and 93481 until
          debt payment service payments begin, or as determined by the Loan Management
          Branch Chief.”


HUD Handbook 4350.1, REV-1, Chapter 10 - HUD-Held Servicing, Section 7 - Default
Servicing of Section 202 Projects, Paragraph 10-29 - Defaults and Adverse Trends: “When there
is a default or adverse trend, the Loan Management/Asset Management staff should contact the


                                             15
Borrower to ascertain the cause and require the Borrower to begin submitting Monthly
Accounting Reports.”

HUD Handbook 4350.1, REV-1, Chapter 11 - Workouts for HUD-Held Projects, Paragraph 11-
12 - Preparing the Provisional Workout Arrangement, Subparagraph E(9) - Provisional Workout
Arrangement--Mandatory Terms: “All Workouts will require the owner to submit monthly
accounting reports to HUD for each month of the Workout term.”

HUD Handbook 4350.1, REV-2, Chapter 14 - Partial Payment of Claims Loan Modifications,
Section 1 - General Information, Paragraph 14-1 - Introduction: “The owner must provide
Monthly Accounting Reports to the Hub/Program Center, once the difficulties are evident and
prior to any request for a partial payment of claim (PPC).”

HUD Handbook 4350.1, REV-2, Chapter 14 - Partial Payment of Claims Loan Modifications,
Section 3 - Owner and Mortgagee Requirements, Paragraph 14-5E - Threshold Requirements for
a PPC or Mortgage Modifications: “The owner must have submitted and continued to submit all
net cash monthly to the mortgagee once the loan is in default.”

HUD Handbook 4350.1, REV-2, Chapter 14 - Partial Payment of Claims Loan Modifications,
Section 4 - Field and Headquarters Reviews, Paragraph 14-9 - PPC Processing Office Director’s
Decision and Headquarters Processing: “If the mortgagee and owner accept the PPC
proposal...the mortgagee should continue to collect all net cash but maintain these funds in a
suspense account.”

HUD Handbook 4370.1, REV-2, Chapter 3 - Monthly Accounting Reports, Section 1 -
Managing Monthly Accounting Review Process, Paragraph 3-1 - Introduction: “Monthly
statements are generally required whenever annual financial statement reviews, onsite reviews,
or other information indicates the project is experiencing financial or management difficulties or
the owner/agent is suspected of noncompliance.”

HUD Handbook 4370.1, REV-2, Chapter 3 - Monthly Accounting Reports, Section 1 -
Managing Monthly Accounting Review Process, Paragraph 3-2 - Monitor Receipt of Reports:
“The Branch Chief must establish a system for monitoring the receipt of the monthly accounting
reports. The Monthly Accounting Reports Control Log, Form HUD-93483 shown in Appendix
14, may be used for this purpose. The Branch Chief should review the system periodically to
ensure that required reports are being received on a current basis.”

HUD Handbook 4370.1, REV-2, Chapter 3 - Monthly Accounting Reports, Section 1 -
Managing Monthly Accounting Review Process, Paragraph 3-3 - Supervisory Review:
“Supervisory staff should periodically check to see that the Monthly Accounting Reports Control
Log is being maintained and that the staff is completing the reviews in a timely and quality
fashion. The receipt of monthly accounting reports should not be entered into the control log
unless the reports are fully completed. If incomplete forms are received, the owner/management
agent should be requested to send completed copies.”

HUD Handbook 4370.1, REV-2, Chapter 3 - Monthly Accounting Reports, Section 2 -
Analyzing Monthly Reports, Paragraph 3-4 - Introduction: “…the monthly review has three


                                                16
purposes: evaluate compliance, identify potential diversions, and assess project performance.
The review procedures require the Asset/Loan management staff to review individual
transactions and to analyze month-to-month trends in cash flow, occupancy, rent collections, and
liquidity.”

HUD Handbook 4370.1, REV-2, Chapter 3 - Monthly Accounting Reports, Section 2 -
Analyzing Monthly Reports, Paragraph 3-6 - Check for Completion:

       Upon receipt of the monthly reports, the Asset/Loan Management staff should check to
       see if:
               A. Each of the following schedules has been submitted:
                      1. Schedule A - HUD-93479, Monthly Report for Establishing, Net
                          Income
                      2. Schedule B - HUD-93480, Schedule of Disbursements
                      3. Schedule C - HUD-93481, Schedule of Accounts Payable
               B. All lines have been completed for each schedule. If a schedule is missing or is
                  incomplete, the Asset/Loan Management staff should immediately request any
                  missing or corrected schedules from the owner/management agent...

       If the reports are not easily understood, the project owner should be required to use the
       standard HUD forms; there is no obligation to accept alternate reporting systems.

HUD Handbook 4370.1, REV-2, Chapter 3 - Monthly Accounting Reports, Section 2 -
Analyzing Monthly Reports, Paragraph 3-8 - Monthly Accounting Summary Worksheet: “After
reviewing the monthly accounting reports for completeness and accuracy, the Asset/Loan
management staff should complete Form HUD-93482, Monthly Accounting Summary
Worksheet shown in Appendix 16. The worksheet summarizes key items from a series of
monthly accounting reports onto one page and enables the staff to determine trends as well as
conditions at a particular time.”

HUD Handbook 4370.1, REV-2, Chapter 3 - Monthly Accounting Reports, Section 2 -
Analyzing Monthly Reports, Paragraph 3-10 - Review HUD-93479, Monthly Report for
Establishing Net Income (Schedule A):

       Schedule A, Form HUD-93479 summarizes cash flows during the month and the
       project’s working capital position as of the end of the month… The following questions
       should be asked when reviewing Schedule A...
               C. Is the beginning cash balance (i.e., opening cash) the same amount as Line 4
                  (cash on hand in bank at end of month) on the previous month's report?
               G. Is the cash-on-hand (Line 4) a positive or negative figure?

HUD Handbook 4370.1, REV-2, Chapter 3 - Monthly Accounting Reports, Section 2 -
Analyzing Monthly Reports, Paragraph 3-11 - Review HUD-93480, Schedule of Disbursements
(Schedule B):




                                                17
       This schedule lists all disbursements from the project's operating account for the month
       covered by the report. Schedule B identifies:
          • the date the check was disbursed,
          • the check number,
          • the payee,
          • the specific purpose of the disbursement, and
          • the amount of the check.

       The following questions should be asked when reviewing Schedule B.
              A. Is the total disbursed the same amount as Line 3, on Schedule A?
              B. Are the checks listed consecutively? Any variation in the sequence of check
                 numbers may indicate two or more bank accounts, two or more checkbooks
                 for the same account, “kiting”, voided checks that have not been identified, or
                 commingling of funds with other projects.
              D. Is repayment of advances being made?
              E. Are distributions being made to the owner in accordance with the Regulatory
                 Agreement and any applicable modified agreements?

HUD Handbook 4370.1, REV-2, Chapter 3 - Monthly Accounting Reports, Section 2 -
Analyzing Monthly Reports, Paragraph 3-14 - Corrective or Follow-up Action: “If
noncompliance, questionable disbursements or performance problems are noted, the Asset
Management staff should follow-up to ensure that necessary classifications or corrective actions
have been taken.”




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    Appendix B

                  SCHEDULE OF SAMPLED PROJECTS REVIEWED


                                                                                  Did not         Monthly
                                                                 Summary         obtain all      Accounting
                                               Control log      worksheet        Monthly         Reports not   Monthly net
Sample                                         HUD-93483        HUD-93482       Accounting       adequately      cash not
item #       FHA #              Hub             not used         not used         Reports         reviewed       remitted
     1     11335334       Fort Worth                x                x              x7                               x
     2     11435503A      Fort Worth                x                                x7                              x
     3     11411246       Fort Worth                x                x               x7                              x
     4     06735368       Jacksonville              x                x               x                x              x
     5     12335361A      San Francisco             x                                x7                              x
     6     05335917       Greensboro                x                x               x                x              x
     7     04411151       Detroit                                                                     x              x
     8     12335423A      San Francisco             x                                 x               x              x
     9     11335188A      Fort Worth                x                                 x               x              x
    10     12335372A      San Francisco             x                                 x               x              x
    11     12135922A      San Francisco             x                x                x               x              x
    12     12535170A      San Francisco             x                x                x               x              x
    13     08532017A      Kansas City               x                                 x               x              x
    14     11435451       Fort Worth                x                x                x               x              x
    15     08111026       Atlanta                                                     x               x              x
    16     00035406       Baltimore                 x                x                x               x              x
    17     00045002       Baltimore                 x                x                                x              x
    18     06135658A      Atlanta                   x                                                 x              x
    19     06735378A      Jacksonville              x                                                 x              x
    20     08135264A      Atlanta                   x                x                x7                             x
    21     09235606A      Minneapolis               x                                 x               x              x
    22     04435569A      Detroit                   x                x                x               x              x
    23     06735382A      Jacksonville              x                x                                x              x
    24     06735359A      Jacksonville              x                                                 x              x
    25     06735360A      Jacksonville              x                                                 x              x
    26     02432002A      Boston                    x                x                                x              x
    27     06135542A      Atlanta                   x                                                 x              x
    28     09235634       Minneapolis               x                x                                x              x
    29     012EH629       New York                  x                x                x7                       Sec. 202 - n/a
    30     012EH024       New York                  x                x                x7                       Sec. 202 - n/a
    31     12911051       Los Angeles               x                x                x               x              x

    7
        HUD did not obtain any of the required monthly accounting reports for these eight projects.


                                                               19
                                                                            Monthly
                                                  Summary     Monthly      Accounting
                                   Control log   worksheet   Accounting    Reports not   Monthly net
Sample                             HUD-93483     HUD-93482   Reports not   adequately      cash not
 item # FHA #      Hub              not used      not used    obtained      reviewed       remitted
     32 122EH501   Los Angeles          x             x          x7                      Sec. 202 - n/a
     33 121EH061   San Francisco        x             x           x             x        Sec. 202 - n/a
 Total                                 31            19          23            25              29




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