oversight

Violations Increased the Cost of Housing's Administration of Its Bond Refund Program

Published by the Department of Housing and Urban Development, Office of Inspector General on 2014-03-14.

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

OFFICE OF AUDIT
REGION 4
ATLANTA, GA




           U.S. Department of Housing and Urban
                       Development

                  Multifamily Bond Refunding
                        Washington, DC




2014-AT-0001                                   MARCH 14, 2014
                                                        Issue Date: March 14, 2014

                                                        Audit Report Number: 2014-AT-0001




TO:            Benjamin Metcalf, Deputy Assistant Secretary, Multifamily Housing, HT
               Mark VanKirk, Director, Office of Asset Management, HTG



FROM:          Nikita N. Irons, Regional Inspector General for Audit, Atlanta Region, 4AGA

SUBJECT:       Violations Increased the Cost of Housing’s Administration of Its Bond Refund
               Program


    Attached is the U.S. Department of Housing and Urban Development (HUD), Office of
Inspector General’s (OIG) final results of our review of the Office of Multifamily Housing
Programs’ implementation and management of its McKinney Act bond refund program.

    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
404-331-3369.
                                         March 14, 2014

                                         Violations Increased the Cost of Housing’s
                                         Administration of Its Bond Refund Program




Highlights
Audit Report 2014-AT-0001


 What We Audited and Why                        What We Found

We audited certain portions of the U.S.        There were violations relative to HUD’s
Department of Housing and Urban                calculation of rents using automatic annual
Development’s (HUD) multifamily housing        adjustment factors for bond-refunded projects
programs as part of our fiscal year 2013       and justification and support for writeoffs of
annual audit plan, based on an auditability    receivables due to HUD from bond refunds.
study that we conducted, which identified      Specifically, HUD paid more than $2.6 million
potentially significant risk factors in its    in excessive Section 8 rents due to a pattern of
McKinney Act bond refund program. The          violations, which would indicate the existence
objectives of the audit were to determine      of excess rents beyond the projects reviewed
whether HUD properly enforced                  during the audit and similar to violations
requirements that regulated the application    reported in past reviews (see Background and
of automatic adjustment factors to Section 8   Objectives section). More than $2.7 million in
rents for projects that had bond refund        questionable writeoffs of receivables due to
savings to prevent excessive rents and         HUD for bond refund savings were also
whether adjustments to receivables due to      identified. The amount included more than $2.6
HUD from bond refunds were properly            million, which HUD wrote off without proper
supported.                                     justification, and more than $139,000 for which
                                               HUD could not locate or provide proper
                                               documentation to show whether the writeoff
 What We Recommend
                                               was justified and supported. We also identified
                                               the release of more than $143,300 in trust fund
We recommend that the Deputy Assistant         balances to entities outside HUD without proper
Secretary for Multifamily Housing develop      support. These conditions occurred primarily
and implement procedures for (1)               because the Office of Housing had not
monitoring the calculation of annual rent      developed and implemented adequate
increases for Section 8 projects and the       monitoring of the bond refund program to
remittance of trust fund balances; and (2)     ensure compliance with requirements.
ensuring requests made by Housing for
adjustments to bond receivables are in
accordance with requirements. In addition,
we recommend that the Deputy Assistant
Secretary initiate actions needed to ensure
the enforcement of program requirements
and the proper resolution of more than $2.7
million in questioned costs.
                            TABLE OF CONTENTS

Background and Objectives                                                     3

Results of Audit
      Finding: Violations Increased the Cost of Housing’s Administration of   5
               Its Bond Refund Program

Scope and Methodology                                                         14

Internal Controls                                                             16

Appendixes
A.    Schedule of Questioned Costs and Funds To Be Put to Better Use          18
B.    Auditee Comments and OIG’s Evaluation                                   19
C.    Schedule of Projects With Excessive Section 8 Rents                     25
D.    Schedule of Questionable Writeoffs of HUD Receivables                   26




                                             2
                           BACKGROUND AND OBJECTIVES

The U.S. Department of Housing and Urban Development’s (HUD) Office of Multifamily
Housing Programs (Housing) was responsible for implementing and monitoring HUD’s
multifamily bond refund program. Under the Stewart B. McKinney Homeless Assistance Act
and 1992 amendments to Section 1012 of the Act, 50 percent of bond refund savings are due to
HUD for financing adjustment factor 1 (FAF) projects and non-FAF projects that entered into a
housing assistance payments contract from 1979 to 1984. Also, 24 CFR (Code of Federal
Regulations) 811.110(d)(1) provides that HUD approval of a Section 8 refunding proposal
requires evaluation by HUD’s Office of Multifamily Housing Programs. Since 1989, Housing
has been refunding the existing bonds for projects with new construction or substantial
rehabilitation subject to the McKinney Act. When McKinney Act bond refunds occur for FAF
projects, HUD and the bond issuer 2 enter into a refunding agreement. The trustee 3 splits any
bond savings resulting from lower interest rates equally between the bond issuer and HUD. The
issuer’s portion of the savings must be used to provide affordable housing for households with
very low incomes, and the trustee sends HUD its portion of the savings, a process known as a
trustee sweep. HUD then sends the savings to the U.S. Treasury. The savings amounts are
typically paid in installments until the project’s housing assistance payments contract expires or
the bonds are paid in full.

The HUD Office of Inspector General (OIG) and the U.S. Government Accountability Office
(GAO) issued previous audits, which showed that annual adjustment factor 4 rents for Section 8
bond-refunded projects were excessive or were not always calculated in accordance with
requirements. In 1992, HUD OIG issued an audit report, 5 which initially determined that HUD
was paying excessive rents for Section 8 bond-refunded projects. To fix the problem, OIG
recommended that HUD require the backing out of refund savings before applying the
adjustment factor to calculate the new rent amounts. HUD initially disagreed with the
recommendation and maintained that it did not have the authority to limit Section 8 rent
increases. HUD requested a legal opinion from the Office of General Counsel with respect to the
legality of adopting the OIG recommendations. In May 1993, the Office of General Counsel
informed HUD that it had the authority to implement requirements recommended by OIG. 6
However, after obtaining this legal opinion, HUD did not act in a timely manner to establish and
implement the OIG-recommended requirements. As a result, in January 1997, OIG reopened the
recommendations. In August 1997, HUD issued Housing Notice 97-49, which, as recommended


1
   FAF was a special financing factor offered by HUD to Section 8 project owners to offset the effects of prevailing
high interest rates in or around the early1980s.
2
  A bond issuer is the State or local government entity that issues bonds to finance multifamily projects and uses the
proceeds of those bonds to make loans to borrowers.
3
  The trustee is the entity with legal responsibility under the trust indenture for disposition of the proceeds of a bond
issuance and servicing of the debt represented by the obligations.
4
  Annual adjustment factor is a type of rent adjustment factor determined and published by HUD for use by project
owners to calculate increases to Section 8 contract rents for assisted mortgaged properties.
5
  93-HQ-119-0004, issued October 1992
6
  GCH-0070, issued May 4, 1993


                                                            3
by OIG, required contract administrators to back out sweep savings before applying the annual
adjustment factor.

In 1999, GAO audited HUD’s bond refund program and determined, despite the prior OIG
findings and issuance of the related Notice 97-49, that HUD still allowed excessive Section 8
rents 7. The excessive rents resulted from failures by HUD to enforce the calculation
requirements that were established by Notice 97-49 in response to the OIG audit, coupled with
HUD’s allowing the Notice to expire within 1 year of issuance. GAO also determined that the
expired Notice 97-49 was flawed because it did not adequately explain the methodology for
implementing the rent calculation procedure for backing out the sweep savings amounts or
contain an example of the calculation. The GAO report was issued on July 30, 1999, but it took
HUD until December 2003, or more than 4 years, to issue Housing Notice 03-28 to address the
GAO concerns. HUD allowed Notices 97-49 and 03-28 to expire in 2007, but the requirements
they contained are still enforceable.

By the time of our audit, most of the original FAF Section 8 contracts had been renewed under
Section 524 of the Multifamily Assisted Housing Reform and Affordability Act of 1997, and
operating cost adjustment factors 8 were used to adjust Section 8 rents, replacing the annual
adjustments factors. The excessive rents calculated using the annual adjustment factors caused
subsequent excessive rents based on operating cost adjustment factors.

The objectives of the audit were to determine whether HUD properly enforced requirements that
regulated the application of automatic adjustment factors to Section 8 rents for projects that had
bond refunds to prevent excessive rents and whether adjustments to the bond receivables were
properly supported.




7
 GAO/RCED-99-217, issued July 1999
8
 Operating cost adjustment factors were a type of rent adjustment factors determined and published by HUD for use
by project owners to calculate increases to Section 8 contract rents for assisted mortgaged properties.


                                                       4
                                          RESULTS OF AUDIT


Finding: Violations Increased the Cost of Housing’s Administration of
Its Bond Refund Program
We identified violations concerning the incorrect calculation of rents by HUD’s contract
administrators’ using automatic annual adjustment factors, and inadequate HUD justifications
and support for writeoffs of receivables due to HUD from bond refunds. These conditions
occurred primarily because Housing had not developed and implemented adequate monitoring of
the bond refund program’s rent calculation and writeoff processes or enforced related
requirements. As a result, HUD paid more than $2.6 million in unnecessary Section 8 subsidy
payments due to excessive rent calculations and had more than $2.7 million in questionable
writeoffs of receivables due to HUD for bond refund savings. The writeoffs included more than
$2.6 million, which was not justified, and more than $139,000 for which HUD could not locate
or provide support needed to determine whether the writeoffs were justified and supported. We
also identified the release of more than $143,300 in trust fund balances for FAF 424 to entities
outside HUD without proper support. The violations concerning excessive rents were similar to
violations identified in past audits by the OIG and GAO.


    Requirements for Calculating
    FAF Section 8 Rent Increases
    Not Enforced


                 We identified more than $2.6 million in excessive Section 8 rents (appendix C) due
                 to HUD’s failure to enforce requirements that its contract administrators were to
                 follow when calculating automatic annual adjustment factor increases for bond-
                 refunded projects that involved sweep payments to HUD. The excessive rents
                 represented the difference between the rents that the contract administrators
                 calculated and the rents that should have been used had they followed requirements.
                 HUD Housing Notices 97-49 and 03-28 9 require contract administrators to back out
                 sweep savings amounts before applying the annual adjustment factors to calculate
                 the rent increases. We selected three contract administrators from a total of 343
                 contract administrators with bond-refunded projects for the period January 1, 2004,
                 to July 31, 2013. None of the three contract administrators reviewed followed the
                 required calculation method to back out the sweep payments before calculating the
                 rent increases. The excessive rents related to 14 of the 15 projects reviewed. One
                 project did not have rent increases for the review period.


9
  Both notices had expired, but the requirements are enforceable because they were based on regulatory and statutory
requirements that are still applicable.




                                                               5
                                                              Excess housing
                                                            assistance payments
                                                 Project        due to excess     Projects with   Funds to be put
                    Contract administrator        count        Section 8 rents     violations      to better use
                Connecticut Housing Finance         5            $1,241,861             5            $107,330
                Authority
                New Jersey Housing                 4            $ 858,949              4            $154,451
                Mortgage Finance Agency
                Massachusetts Housing              6            $ 565,844              5            $ 17,858
                Finance Agency
                Total                              15           $2,666,654             14           $279,639

               The excessive rents caused a corresponding excess in subsidy payments to project
               owners, which was an unnecessary expense to HUD. These amounts could not be
               recovered because the contract administrators that made the incorrect calculations
               worked for and represented HUD. This condition was significant, considering that
               OIG, GAO, and HUD’s Office of General Counsel had addressed the rent
               calculation issues as early as 1992, but Housing consistently failed to adequately
               enforce the requirements (see Background and Objectives section). We estimate
               that more than $279,000 in annual funds could be put to better use if the rents for
               the 14 projects are adjusted to the level reflected by our calculations.

               In addition to the sampled projects, representatives for two of the contract
               administrators (Connecticut and Massachusetts) told us that they did not deduct
               sweep savings when they calculated annual adjustment factor increases for any of
               the other 42 bond-refund projects for which they were responsible. This total
               included 10 additional projects for Connecticut and 32 for Massachusetts.
               Massachusetts 10 was cited in the 1999 GAO audit for not backing out sweep
               savings before calculating annual Section 8 rent increases. The representatives for
               Connecticut and New Jersey contract administrators and officials at the Newark,
               NJ, field office told us that they were not familiar with the rent calculation
               requirements for backing out the sweep payments.

               If the lack of monitoring persists nationwide, the excessive rents may also apply to
               the more than 1,000 similar FAF projects nationwide that were not reviewed. We
               recognize that most Section 8 bond-refunded projects have completed or nearly
               completed their sweep payments to HUD. More than 77,000 units, with Section 8
               contracts will expire between 2014 and 2033 if not renewed.




10
  We included Massachusetts in our sample to determine whether HUD took action to ensure that it corrected the
violation cited in the GAO report and found that it had not.


                                                        6
                                               National universe – Section 8 McKinney Act projects
          Section 8 contract expiration year   Number of projects             Number of units

          2014-15 (within 2 years)                              164                          13,358
          2016-20                                               100                           6,251
          2021-25                                               396                          28,972
          2026-30                                               147                          12,516
          2031-33                                               280                          19,207
          Subtotal                                            1,087                          80,304
          Less: projects reviewed                              (15)                         (2,555)
          Total                                               1,072                          77,749



Unjustified or Unsupported
Negative Adjustments to HUD’s
Bond Receivables


         Housing did not follow or document that it properly followed HUD’s debt
         collection requirements before writing off more than $2.6 million in receivables due
         to HUD for savings derived from bond refunds. We selected and examined 12
         negative adjustments or writeoffs to the bond receivables, which totaled more than
         $9.9 million (appendix D), from a total of 63 negative adjustments or writeoffs,
         which totaled more than $ 21.6 million, during the period October 1, 2005, through
         January 1, 2013. We identified violations associated with three adjustments totaling
         more than $2.7 million, or 27.8 percent of the amount reviewed. HUD Handbook
         4350.1, REV-1, Multifamily Asset Management and Project Servicing Handbook,
         section 1-4 (Responsibility of Housing), requires that the Office of Multifamily
         Housing Management exercise responsibility toward taxpayers as applicable to its
         respective programs by maximizing collections of all funds due to HUD and
         enforcing statutes and regulations. Specifically, the more than $2.7 million
         included more than

         •      $2.6 million for FAF 210 which was prematurely written off as not
                economically collectable without evidence of proper analysis for a project
                that had the indicated financial capacity to make some if not all of the
                delinquent sweep payments. Section 4.03 of the trust indenture required the
                project to make missed sweep payments when funds became available. In
                addition, HUD’s Debt Collection Handbook 1900.25, REV-3, section 3-12,
                provides that when a claim is terminated, the unpaid balance may be written
                off from HUD’s accounting records.
                In this case, the files showed a number of financial and physical condition
                indicators that the project should have been able to pay all or at least a
                portion of the $2.6 million in the delinquent sweep payments that Housing
                wrote off. For instance, the writeoff was for the period 2003 to 2008, during
                which the project had annual net income (ranging from $172,662 to
                $458,143) and surplus cash (ranging from $47,850 to $93,836) and made

                                               7
                       distributions to the owner (ranging from $47,850 to $70,843 for 5 of the 6
                       years). The files also showed that in August 2007, the project had a Real
                       Estate Assessment Center inspection score of 82b, 11 coupled with no exigent
                       and fire safety deficiencies other than for smoke detectors.

                       The file showed that one reason HUD approved the refund was to enable the
                       project to make delinquent sweep payments. However, within 6 months of
                       the approval, Housing requested the writeoff with inadequate evidence to
                       support that determination and no explanation that reconciled the writeoff
                       request with the refunding approval, which was designed in part to restore
                       the project’s ability to make the past-due payments. HUD’s Debt Collection
                       Handbook 1900.25, REV-3, section 3-12 provides that a writeoff does not
                       mean that the debtor is resolved of his or her obligation to pay and HUD may
                       resume collection of the claim if its collectability can be reestablished within
                       the statute of limitations for debt collection requirements. In addition, the
                       files contained no evidence that the project owner asked Housing to request a
                       writeoff of its sweep payments.

                       The property owner also displayed a pattern of attempts to avoid making
                       sweep payments even after the 2008 re-refunding and writeoff. For instance,
                       the file contained copies of 2009 and 2010 emails from the owner to HUD in
                       which the owner asserted that the project was to make savings payments to
                       the U.S. Treasury only if projections in the sweep schedule held true. At the
                       time, however, a HUD official noted that the project was not affected by the
                       stressed economy and had a 3-month waiting list. Therefore, HUD did not
                       write off the amounts.

               •       $139,000 for two writeoffs for FAFs 393 and 184, which were not properly
                       supported. We examined the files provided by Housing for the writeoffs,
                       which did not contain evidence that the writeoffs were justified and
                       supported.
               We attribute the above violations to Housing’s lack of monitoring. As of
               September 30, 2013, HUD still had more than $17.1 million in outstanding bond
               receivables, which were subject to writeoffs or adjustments. The receivable balance
               was large enough to warrant continued oversight to ensure that any further writeoffs
               were justified and supported.




11
  Scores can range from 0 to 100, and a passing score is 60 or above. The lowercase letter “b” is given if there are
one or more non-life-threatening health and safety deficiencies, but no exigent or fire safety health and safety
deficiencies were observed other than for smoke detectors.


                                                          8
Improper Release of Balance in
Bond Trust Account


          HUD’s Newark field office allowed Church Street Corporation and the Borough of
          Keansburg Housing Authority to keep more than $143,300 in trust fund balances
          for FAF 424 without supporting that conditions imposed by HUD headquarters for
          them to do so were met. Specifically, section 4.16 of the Corporation’s trust
          indenture provides that upon final payment of the principal or the redemption price
          of and interest on the bonds and other fees, charges, and expenses, all amounts
          remaining in all funds and accounts should be paid to HUD. However, HUD
          headquarters issued a revised bond redemption proposal memorandum allowing the
          Corporaton to keep the balances in its trust accounts if

          •     It used the remaining savings in accordance with the quality requirements of
                the McKinney Act.

          •     It provided the annual certifications report and an independent audit
                validation report required by Section 9 of its refunding agreement.

          •     HUD’s Newark program center provided documentation showing that it
                entered into a memorandum of understanding with the Authority that
                required the Authority to commit any funds received from the bond
                redemption to affordable housing activities in the Borough of Keansburg.
          However, in May 2009, HUD’s Newark field office released HUD’s right to collect
          the more than $143,300 in trust balances without adequate support that HUD
          headquarters conditions had been met. Specifically, the Newark field office signed
          a document, which released HUD, the Corporation, and the Authority from any
          future claim arising against each other in connection with the transaction. The
          release may now prevent HUD from making a claim for the funds if the conditions
          that allowed the Corporation and the Authority to keep the funds were not met. The
          funds consisted of the following amounts:

                                                       Transfer to   Transfer to
                                                           the           the
           Trust account                               Corporation   Authority       Total
           Bond reserve fund                            $ 1,581       $ 1,581      $ 3,162
           Tax and utility reserve fund                 $45,106      $45,106       $ 90,212
           FAF escrow account                           $26,837           $0       $ 26,837
           Tax utility and general insurance escrow
           and replacement escrow                       $ 2,569       $ 2,569      $    5,138
           Rental escrow account and operating
           escrow account                               $18,020           $0       $ 18,020
                                               Total    $94,113      $49,256       $143,369


                                               9
          HUD headquarters Housing officials told us they were aware of this condition,
          which occurred because the Newark field office closed the transaction without
          implementing and documenting completion of the conditions that headquarters
          imposed on the transaction.

Inadequate Monitoring of
Certain Components of the
Bond Refund Program

          Housing did not have adequate monitoring in place over its bond refund program.
          HUD had not developed and implemented comprehensive and adequate risk-based
          monitoring procedures and controls to ensure that contract administrators accurately
          calculated rents for bond-refunded projects that involved sweep savings payments
          due to HUD and that requests to write off sweep payments due to HUD were
          properly assessed, supported, and approved before submitting them to the claims
          collection officer. HUD Handbook 1840.1, Departmental Management Control
          Program, paragraph 1-3(D)(4), provides that the Assistant Secretary for Housing is
          responsible for implementing management control requirements for Housing.
          Office of Management and Budget Circular A-123, section IV, requires managers to
          continuously monitor and assess the effectiveness of management controls for their
          programs.

          The inadequate monitoring deprived Housing of information that should have
          resulted in its detection and timely correction of what turned into a pattern of
          violations by contract administrators in the calculation of excessive rent increases
          for bond-refunded projects and lack of justification and support for the writeoff of
          millions in sweep savings payments due to HUD. Our assessment of HUD’s
          monitoring revealed the following conditions:

          •    Section 8 rent increases - HUD’s monitoring of its contract administrators
               did not consider whether they backed out trustee sweep payments before using
               annual adjustment factors to calculate new Section 8 rents for projects that
               involved sweep savings payments due to HUD from bond refunds. Housing’s
               monitoring review checklist for contract administrators included a section that
               addressed processing rent adjustments, but it did not specifically address
               backing out trustee sweep payments. When questioned about this, a HUD
               official explained that it was not a part of the contract administrators’
               responsibilities. However, Housing Notices 97-49 and 03-28 held contract
               administrators responsible for making the rent calculations.

               The inadequate monitoring resulted in missed opportunities by HUD to
               identify and to correct violations of its rent calculation requirements, which
               resulted in excessive Section 8 rents, causing millions in excessive subsidy
               payments by HUD to project owners. This condition was significant
               considering that a 1992 OIG audit initially identified problems with the


                                             10
              calculations and the matter was reiterated in a 1999 GAO audit (see
              Background and Objectives section). Despite these audits, we identified rent
              calculation problems throughout the 2004 to 2013 period covered by the audit.
              Housing had not developed or provided us with documentation to support that
              it had developed and implemented effective procedures to monitor and
              enforce the rent calculation requirements for bond-refunded projects. HUD’s
              ability to retroactively recover the excessive subsidies is questionable because
              it should have been aware of the problem and did little to stop the violations
              and the excessive calculations were made by contract administrators that
              worked for and represented HUD.

         •    Negative adjustments (some were writeoffs) to HUD receivables for bond
              savings - Housing could not demonstrate adequate monitoring and procedures
              to ensure the reasonableness, justification, support, and proper approvals of
              requests made by Housing officials to the departmental claims officers to
              write off or reduce receivable accounts for sweep savings payments due to
              HUD. The controls and oversight were needed and may have reduced or
              prevented instances of the type detected, of which adjustments or writeoffs
              totaling more than $2.7 million were not justified and were inadequately
              supported.

         •    Bond trust account balances remitted to HUD - Housing did not monitor
              bond trustees to determine whether they properly remitted to HUD all debt
              service reserve balances that remained after the bonds were paid in full. A
              HUD official stated that Housing did not monitor this area because it relied on
              trustees to make the required payments based on the terms stated in trust
              indentures for the respective projects. We visited four issuers and reviewed
              their records after bond payoff. In each case, the debt service reserve funds
              were disbursed appropriately.
              However, we identified one instance in which a HUD field office did not
              document compliance with conditions set by HUD headquarters on the release
              of funds which were otherwise payable to HUD. As a result, the HUD field
              office allowed the issuer and another entity to keep more than $143,300 in
              bond trust account balances (not the debt service reserves) without support
              that they met the conditions set by Headquarters to allow the payments.


Conclusion

         Housing needs to develop and implement controls and procedures, including
         monitoring, to ensure compliance with program requirements for calculating annual
         Section 8 rent increases for bond-refunded projects and for the writeoff of
         receivables due to HUD from these types of projects. We identified violations of
         the rent calculation requirements, which resulted in more than $2.6 million in
         excessive rent and related HUD subsidies. The violations for the small sample,

                                           11
        coupled with the historical nature of the violation (see the Background and
        Objectives section), indicate similar violations of the calculation requirements
        involving potentially millions in additional excess rents and subsidy payments from
        an undetermined portion of the more than 1,000 projects (consisting of more than
        77,000 units) not reviewed. The audit also revealed more than $2.7 million in
        writeoffs to HUD’s bond receivables that were either not justified or not properly
        supported. As of September 30, 2013, HUD had more than $17.1 million in
        outstanding bond receivables. This balance was large enough to warrant continued
        oversight of writeoffs. In addition, we identified more than $143,300 in bond funds
        that were due to HUD, which a field office improperly released to other parties
        without ensuring that conditions set by HUD headquarters were met to allow it to
        relinquish HUD’s rights to the funds. We attribute these violations to a lack of
        proper management oversight by Housing of the bond refund program and a failure
        by Housing, field offices, and contract administrators to follow requirements.

Recommendations

        We recommend that the Deputy Assistant Secretary for Multifamily

        1A. Develop and implement controls and procedures to monitor the application of
            required rent adjustments to Section 8 FAF projects which should include
            adding a section to Housing’s monitoring review checklist to address the
            backing out of trustee sweep payments.

        1B. Require contract administrators that did not apply the back-out requirements
            to recalculate all FAF projects with Section 8 rent increases that occurred
            from January 2004 to the present and adjust current and future rents to the
            amounts supported by the calculations. We estimate annual savings of
            $279,639 through the implementation of this recommendation for the projects
            reviewed.

        1C. Renew Housing Notices 97-49 and 3-28 and include appropriate example
            calculations to guide contract administrators and HUD staff on how to
            calculate annual adjustment factor rents for bond-refunded projects and for
            use in enforcing the requirements.

        1D. Develop and implement controls to ensure requests made by Housing for
            adjustments to bond receivables are properly assessed and supported in
            accordance with provisions in Housing Notice 3-28.

        1E. Reassess the $2,621,624 unjustified writeoff for FAF 210 and reinstate and
            pursue collection of all or any portion of the amount determined to have been
            written off without proper justification.




                                          12
1F. Reassess the $72,969 unsupported writeoff for FAF 393 and reinstate and
    pursue collection of all or any portion of the amount determined to have been
    written off without proper justification.

1G. Reassess the $67,000 unsupported writeoff for FAF 184 and reinstate and
    pursue collection of all or any portion of the amount determined to have been
    written off without proper justification.

1H. Develop and implement controls and procedures to monitor the remitting of
    trust fund balances to ensure that funds due to HUD upon prepayments or
    normal payoff of bonds are not released to other parties unless conditions
    established by headquarters are met and documented.




                                 13
                         SCOPE AND METHODOLOGY

We performed the audit from April to December 2013 at HUD headquarters in Washington, DC,
and OIG offices in Atlanta, GA, and Jacksonville, FL. The audit generally covered the period
January 1, 2004, through July 31, 2013. We adjusted the period when necessary.

To accomplish our objectives, we

   •   Researched HUD handbooks, Housing notices, the McKinney Act, and other
       requirements that govern the bond refund program.

   •   Assessed the results of a 1992 HUD OIG audit and a 1999 GAO audit of the bond refund
       program for issues that were relevant to our audit objectives and to determine whether
       HUD had taken timely and adequate action to address the concerns raised by those audits.

   •   Selected bond-refunded projects for review to determine whether they complied with
       HUD’s Section 8 rent calculation requirements. The sample included three contract
       administrators with 15 of the largest projects with large bond receivable balances due to
       HUD from a universe of 343 contract administrators and 754 projects, which included all
       FAF bond-refunded projects with a bond savings receivable balance due to HUD as of
       fiscal year 2004. We assessed calculations for the period January 1, 2004, through July
       31, 2013.

   •   Selected 12 of the largest negative adjustments to HUD’s bond receivables, which totaled
       more than $9.9 million, from a universe of 63 adjustments totaling more than $21.6
       million to determine whether the adjustments were properly supported. The sample
       included adjustments that were made for the period October 1, 2005, through January 1,
       2013.

   •   Selected debt service reserves for review to determine whether the funds remaining after
       bond payoff went to HUD as required. The sample included seven of the largest projects
       with large bond receivable balances due to HUD from a universe of 167 projects, which
       included projects that had been paid off or had their Section 8 contracts expire between
       October 1, 2009, and May 31, 2013.

We identified excessive rents of $279,639 shown as funds to be put to better use. This is the
difference between the excessive rents charged ($27,296,520) and the rents that should have
been charged ($27,002,905) if the rents had been calculated correctly, less $13,976 for vacancies.
Thus, the funds to be put to better use calculation was $27,296,520-$27,002,905-
$13,976=$279,639. We calculated vacancies based on the projects 3 year average vacancy rates.

We did not review and assess general and application controls for computer-processed data that
HUD entered into its information system. We conducted other tests and
procedures to ensure the integrity of computer-processed data that were relevant to our


                                               14
objectives. The tests included reviewing Housing’s files to determine which projects were bond
refunded projects with sweep savings due to HUD and the justification for writeoffs of
receivables due to HUD. The testing of data revealed that the reliability of the data was adequate
for our purposes.

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(s). We believe that the evidence obtained provides a reasonable basis for our findings
and conclusions based on our audit objectives.




                                               15
                              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
             objectives:

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

             •   Compliance with laws and regulations - Policies and procedures that
                 management has implemented to provide reasonable assurance that program
                 implementation is in accordance with laws, regulations, and provisions of
                 contracts or grant agreements.

             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 Deficiency

             Based on our review, we believe that the following item is a significant deficiency:

             •   Housing did not have adequate controls in place to ensure (1) accurate annual
                 automatic adjustment factor rents for Section 8 projects that involve sweep
                                                 16
payments to HUD and (2) proper justification and support for writeoffs of
sweep payments due to HUD.




                             17
                                    APPENDIXES

Appendix A

              SCHEDULE OF QUESTIONED COSTS
             AND FUNDS TO BE PUT TO BETTER USE

       Recommendation                             Unreasonable or     Funds to be put to
                       Unsupported 1/
                number                            unnecessary 2/        better use 3/
            1B.                                                          $279,639
            1E.                                     $2,621,624
            1F.           $72,969
            1G.           $67,000

1/   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.

2/   Unreasonable or unnecessary costs are those costs not generally recognized as ordinary,
     prudent, relevant, or necessary within established practices. Unreasonable costs exceed
     the costs that would be incurred by a prudent person in conducting a competitive
     business.

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, the $279,639 represents the Section 8 subsidy that would not be paid out over
     the next year if HUD increases its controls and ensures the proper rents are approved on
     projects with bond savings. Once HUD improves its controls these savings will
     recur. Our estimate only includes the initial year of this benefit.




                                             18
Appendix B

        AUDITEE COMMENTS AND OIG’S EVALUATION


Ref to OIG Evaluation   Auditee Comments




Comment 1




Comment 2




                         19
Comment 3




Comment 4




Comment 5




            20
Comment 6


Comment 7




Comment 8




Comment 9




            21
22
                         OIG Evaluation of Auditee Comments

Comment 1   HUD noted that the original objective in the survey was different from the final
            objective during the audit. We emailed HUD officials on July 3, 2013, shortly
            after the audit phase began to inform them of the areas we planned to focus on
            during the audit. While we acknowledge that the survey and audit objectives are
            different, it’s not unusual for objectives to change between the survey and audit
            phase. The survey typically identifies specific areas that need review and we
            refine the original broad objectives to address those areas accordingly during the
            audit.

Comment 2   HUD compared the amount of the violations identified during the audit to the
            amount of trustee sweeps sent to the Treasury over the entire course of the
            program which is exceptionally larger than our audit period universe. We revised
            the report title and finding caption to “Violations Increased the Cost of Housing’s
            Administration of Its Bond Refund Program”.

Comment 3   HUD indicated that the Audubon Pointe project (FAF 210) was fully vetted by the
            Little Rock Multifamily Director prior to the writeoff. However, our own review
            of the project’s Real Estate Assessment Inspection scores showed that the project
            was in good physical condition and the project’s financial statements showed that
            for the period 2003 through 2008 included in the writeoff, the project had annual
            net income (ranging from $172,662 to $458,143), surplus cash (ranging from
            $47,850 to $93,836) and made distributions to the owner (ranging from $47,850
            to $70,843 for 5 of the 6 years). These conditions collectively indicate that the
            project should have been able to pay all or at least a portion of the $2.6 million in
            the delinquent sweep payments that Housing wrote off. Section 4.03 of the trust
            indenture required the project to make missed sweep payments when funds
            became available.

Comment 4   HUD stated that it is unclear whether recommendation 1B is enforceable. To
            clarify, we are not asking that HUD collect past rents in this recommendation but
            rather to require contract administrators to recalculate the rents since 2004 and
            adjust current and future rents accordingly. The recalculation of rents is needed
            due to the cumulative nature of Section 8 rents for bond refunded projects in
            which past rent levels affect current and future rent levels. In other words, past
            overstated rents may result in overstated current and future rents. Additionally,
            the rent recalculations are necessary to comply with Housing Notices 97-49 and
            3-28 which OGC determined was enforceable.

Comment 5   HUD commented that recommendation 1C is asking for adjustments to Contract
            Administrator requirements and the renewal of Housing Notices that are still
            enforceable. While we recognize that the Notices are still enforceable, we believe
            the renewal is warranted in part to notify Contract Administrators that the Section
            8 rent calculation requirements for bond refunded projects are still in effect. The
            addition of a detailed example to the renewal of the Notices would also clarify the

                                             23
            requirements so that Contract Administrators can calculate Section 8 rents
            correctly. Adding an example to the notices does not change the responsibilities
            of the Contract Administrators under their contracts.

Comment 6   HUD noted that the monitoring included in recommendation 1D should be
            performed by the Office of the Chief Financial Officer and HUD asked for
            clarification on the recommendation. We revised the recommendation to
            “Develop and implement controls to ensure that requests made by Housing for
            writeoffs are properly assessed and supported in accordance with provisions in
            Housing Notice 3-28.” This Notice provides last resort exceptions such as
            mortgage default or property condemnation that would justify the termination of
            savings due to HUD from bond refunds.

Comment 7   HUD commented that they did not think the writeoffs related to recommendations
            1E, 1F, and 1G are enforceable or advisable. We disagree because the writeoffs
            did not have adequate support that they were justified. HUD Debt Collection
            Handbook 1900.25, REV-3, section 3-12, provides that a writeoff does not mean
            that the debtor is resolved of the claim if its collectability can be reestablished
            within the statute of limitations for debt collection requirements. Furthermore,
            HUD Handbook 4350.1, REV-1, Multifamily Asset Management and Project
            Servicing Handbook, section 1-4, requires that the Office of Multifamily Housing
            Management exercise responsibility toward taxpayers as applicable to its
            respective programs by maximizing collections of all funds due to HUD and
            enforcing statutes and regulations. A reassessment by HUD is warranted because
            more than $2.7 million in bond receivable writeoffs may be reinstated if
            collectability can be reestablished.

Comment 8   HUD stated that the final installment for FAF 184 occurred on February 1, 2003,
            and pursuit of the writeoff 11 years after the fact is not in HUD’s best interest.
            We disagree because our recommendation is not based on the date the final
            installment was made but rather the date the writeoff of the bond receivable
            occurred, which was December 2009 for FAF 184.

Comment 9   HUD commented that another HUD-OIG Audit report (2007-KC-0003-001-A)
            addressed the subject discussed in recommendation 1H and that a final rule should
            be ready for clearance this spring. As a result, HUD asked that we eliminate or
            defer the recommendation pending the implementation of the proposed rule. We
            are willing to defer the recommendation until the final rule is issued and at that
            time we will revisit the recommendation in light of the final rule to assess whether
            further action is needed.




                                             24
Appendix C

  SCHEDULE OF PROJECTS WITH EXCESSIVE SECTION 8
                     RENTS



  Project name by HUD office and contract administrator     FAF        Excess housing assistance
                                                           number       payments due to excess
                                                                            Section 8 rents

                                      HUD office: Hartford
                  Contract administrator: Connecticut Housing Finance Authority
  Augustana Homes of Bridgeport                           329A              $ 433,160
  Hamilton Park                                           329D                  162,488
  Huntington Towers Apartments                            329E                  228,202
  Meridian Towers Apartments                              329F                  205,951
  Naubuc Green Apartments                                 329G                212,060
                                               Subtotal                    $1,241,861

                                         HUD office: Newark
                 Contract administrator: New Jersey Housing Mortgage Finance Agency
  Essex Phoenix Mills                                       155A              $ 28,327
  Grove Street - Bailey-Holt Towers                         155D                473,238
  New Community Manor                                       155B                208,993
  Oakwood Plaza                                             155C               148,391
                                                  Subtotal                   $ 858,949


                                       HUD office: Boston
                  Contract administrator: Massachusetts Housing Finance Agency

  Kenmore Abbey                                           284K              $ 369,587
  Wilbraham Commons                                       284AE               103,888
  Gardener Terrace                                        284H                 39,236
  Solemar II                                              284AB                37,488
  Chelsea Village                                         284C                 15,645
  Joseph’s House                                          236J                    n/a
  Subtotal                                                                  $ 565,844
                          Total                                             $2,666,654




                                               25
Appendix D

   SCHEDULE OF QUESTIONABLE WRITEOFFS OF HUD
                  RECEIVABLES

                 FAF                         Not justified and     Not properly
                number           Amount         supported           supported            Notes
                  210        $ 2,621,624          $ 2,621,624                              a
                  393        $     72,969                             $   72,969          b
                  184        $     67,000                             $   67,000          b
                 Total       $ 2,761,593          $ 2,621,624         $   139,969

    Notes

    a. The writeoff, which occurred in February 2008, totaled more than $4.2 million, of
       which $2.6 million was not supported and justified. Specifically,

            •   The project’s audited financial statements for 2003 through 2008 showed that
                the project generated income totaling at least $172,662 and surplus cash of at
                least $47,850 for each year in that period. Further, the project made
                distributions to the ownership partners that ranged from $47,850 to $70,843
                during 5 of the 6 years.

                                                                                Owner
                         Year        Net income        Surplus cash          distributions
                         2003         $172,662           $70,843                $60,444
                         2004         $385,085           $70,843                $70,843
                         2005         $441,991           $70,844                    $0
                         2006         $400,632           $47,850                $70,843
                         2007         $458,143           $70,843                $47,850
                         2008         $250,847           $93,836                $70,843

            •   The trustee records showed that the project made its debt service payments
                during the period 2003 to 2007, although the corresponding sweep payments
                were written off. Additionally, information in the financial statements
                conflicted with the project owner’s contention in 2007 that operating expenses
                continued to increase each year. Operating expenses declined from 2006 to
                2008.

            •   HUD approved refunding of the Series 1991 bonds on August 1, 2007, to
                allow for rehabilitation and to restore the payment of trustee sweep housing
                assistance payment savings and partially cure a substantial delinquency in

                                             26
    collections of the delinquent amount. At that time, the only delinquent sweep
    payments were the ones that HUD asked to write off in its January 30, 2008,
    memorandum to the departmental claims officer. The files contained no
    evidence that HUD performed and documented an objective assessment of the
    project’s financial condition before it made the writeoff request. HUD made
    the request within 6 months after approving the refunding, which was
    intended in part to restore the project’s ability to pay the delinquent sweep
    payments.

•   HUD staff indicated that another reason for the writeoff was so that the bond
    savings could go back into the project to fund extensive repairs and
    replacements that project reserves could not totally finance. HUD Housing
    Notice 3-28, paragraph A(1)(a), provides that in cases of imminent mortgage
    default or physical deterioration threatening the health and safety of residents,
    cancelation of remaining sweep payments may be considered as a last resort
    and that HUD’s evaluation would take into account Real Estate Assessment
    Center and Financial Assessment Subsystem scores. The Real Estate
    Inspection Center inspection results indicated that neither of these conditions
    was present.

    In support of the needed repairs, the files contained a copy of the owner’s
    2007 budget proposal for more than $1.5 million, which consisted of more
    than $1.1 million for repairs, $75,000 for working capital, and $406,000 to be
    deposited into the reserve for replacement fund. However, the project was not
    in danger of imminent mortgage default, and most of the repairs were not
    associated with physical deterioration that threatened the health and safety of
    residents. For instance, HUD’s August 2007 Real Estate Assessment Center
    physical inspection report gave the project a physical inspection score of 82b.
    The report cited one or more non-life-threatening health and safety
    deficiencies and no exigent and fire safety deficiencies other than for smoke
    detectors. Therefore, the listed repairs were not a supported basis for
    cancelation of remaining sweep payments based on HUD’s last resort
    provision cited in Notice 03-28.

•   The writeoff was excessive even if the above repairs had met the last resort
    criteria, which they did not, and if they had been paid by the project, which
    they were not. Specifically, the rehabilitation proposal would have been
    sufficient only to provide possible support for writing off $1.1 million of the
    $2.6 million writeoff with a balance of $1.5 million, which still would be
    unjustified. However, the trust indenture showed that the project received
    more than $1.1 million from the 2008 bond re-refund to pay project costs
    including construction, reconstruction, equipment, and installation. This
    condition further supports our determination that HUD’s decision to write off
    the $ 2.6 million in delinquent sweep payments was not justified or supported.




                                 27
b. The files maintained by Housing did not contain appropriate documentation needed to
   show that the writeoff was justified and supported.




                                      28