oversight

HUD Did Not Always Enforce the Requirements of the Regulatory Agreements and HUD Handbooks Pertaining to Owner Advances and Distributions

Published by the Department of Housing and Urban Development, Office of Inspector General on 2014-09-17.

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

                              Revision
OFFICE OF AUDIT
REGION 7
KANSAS CITY, KS




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

               Owner Advances and Distributions in
                 Multifamily Housing Programs




2014-KC-0003                                  SEPTEMBER 17, 2014
                                                                     Issue Date: September 17, 2014

                                                                     Audit Report Number: 2014-KC-0003




TO:            Nancie-Ann Bodell, Acting Director of Asset Management and Portfolio
               Oversight, Office of Multifamily Housing Programs, HT

               //signed//
FROM:          Ronald J. Hosking, Regional Inspector General for Audit, 7AGA

SUBJECT:       HUD Did Not Always Enforce the Requirements of the Regulatory Agreements
               and HUD Handbooks Pertaining to Owner Advances and Distributions


    Attached is the U.S. Department of Housing and Urban Development (HUD), Office of
Inspector General’s (OIG) final results of our review of owner distributions and advances in
multifamily housing programs.

    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
913-551-5870.




                                                Office of Audit Region 7
                                  400 State Avenue, Suite 501, Kansas City, KS 66101
                                      Phone (913) 551-5870, Fax (913) 551-5877
                           Visit the Office of Inspector General Website at www.hudoig.gov 
                                           September 17, 2014
                                           HUD Did Not Always Enforce the Requirements of the
                                           Regulatory Agreements and HUD Handbooks Pertaining
                                           to Owner Advances and Distributions



Highlights
Audit Report 2014-KC-0003


 What We Audited and Why                    What We Found

We selected the U.S. Department of         HUD did not always enforce the requirements of the
Housing and Urban Development              regulatory agreements and HUD handbooks pertaining
(HUD), Office of Multifamily Housing       to owner advances and distributions. Of the 54
Programs, for audit based on an internal   property owners reviewed, 10 had unauthorized
audit suggestion expressing concern        distributions or owner advances that were not required
that multifamily property owners took      to be repaid. This condition occurred because HUD
unauthorized distributions or owner        treated the repayment requirement as a book-keeping
advances with no consequence. Our          correction. Additionally, HUD lacked detailed
audit objective was to determine           procedures for implementing HUD Handbook 4370.1,
whether HUD enforced the                   chapter 2.
requirements of the regulatory
agreements and HUD handbooks that
pertain to owner advances and
distributions.

 What We Recommend

We recommend that the Acting Director
of the Office of Asset Management and
Portfolio Oversight provide guidance to
multifamily property owners on the
requirements of HUD Handbook
4370.1, chapter 2, and regulatory
agreements to ensure that distributions
are taken only from available surplus
cash. In addition, we recommend that
the Acting Director develop and
implement detailed operational
procedures to ensure the repayment of
unauthorized distributions and owner
advances and for the pursuit of civil
money penalties for owners with a
pattern of unauthorized distributions or
owner advances.



                                                  
                          TABLE OF CONTENTS

Background and Objective                                                      3

Results of Audit
      Finding: HUD Did Not Always Enforce the Requirements of the            4
               Regulatory Agreements and HUD Handbooks Pertaining to Owner
               Advances and Distributions

Scope and Methodology                                                        7

Internal Controls                                                            8

Appendixes
A.    Auditee Comments and OIG’s Evaluation                                   9
B.    Criteria                                                               12




                                          2
                      BACKGROUND AND OBJECTIVES

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 is the Office of Asset Management and Portfolio Oversight, which is
responsible for oversight of multifamily project assets after their development. This office is
also responsible for oversight of regulated property ownership and management, routine
mortgage servicing, default servicing, acquisition and disposition of loans and properties, and
management of properties of which the HUD Secretary is owner or “mortgagee in possession.”
It serves as the multifamily housing liaison with the Real Estate Assessment Center and the
Departmental Enforcement Center and oversees field office and lender servicing activities for
HUD-involved properties.

The Policy and Participation Standards Division, under the Office of Asset Management and
Portfolio Oversight, is responsible for the development of policy for asset management and
disposition through the drafting of regulations, handbooks, and notices to implement law and
program policy. The National Housing Act, as amended, and the program regulations are found
in 24 CFR (Code of Federal Regulations) Part 241. The National Housing Act authorized
Federal Housing Administration (FHA) insurance for mortgage loans to multifamily rental
housing and health care facilities. It insures lenders against loss on mortgage defaults and is
intended to keep the project competitive, extend its economic life, and finance the replacement of
obsolete equipment. The basic instructions are in HUD Handbook 4585.1 and are administered
by the Office of Multifamily Housing Development.

HUD Handbook 4370.1, chapter 2, sets forth the policy on owner distributions and advances. A
distribution is any withdrawal or taking of cash or any assets of the project other than for the
payment of reasonable expenses necessary for the operation and maintenance of the project.
Distributions paid in excess of surplus cash or in excess of the amount earned the previous fiscal
year plus any distributions unpaid from previous years must be refunded to the project.

The Departmental Enforcement Center establishes general policies, procedures, and guidelines to
be followed by its staff charged with enforcing statutory and regulatory requirements governing
multifamily properties while processing financial referrals. These policies and procedures cover
enforcement procedural requirements, such as issuing a notice of violation and the applicable
timeframes, and reference the various available sanctions, such as debarments and civil money
penalties, and their applicability. The Departmental Enforcement Center may pursue
foreclosure, civil money penalties, double damages, or various other remedies when program
violations have occurred. The Departmental Enforcement Center reviews compliance flags
pertaining to owner advances and unauthorized distributions that are greater than $10,000. If the
amount is less than $10,000, then the responsible HUD field office reviews the compliance flag.

Our audit objective was to determine whether HUD enforced the requirements of the regulatory
agreements and HUD handbooks that pertain to owner advances and distributions.


                                                3
                               RESULTS OF AUDIT


Finding 1: HUD Did Not Always Enforce the Requirements of the
Regulatory Agreements and HUD Handbooks Pertaining to Owner
Advances and Distributions
HUD did not always enforce the requirements of the regulatory agreements and HUD handbooks
pertaining to owner advances and distributions when it allowed 10 of the 54 property owners we
reviewed to take more than $1.2 million in unauthorized distributions without requiring the
owners to repay the money. This condition occurred because HUD treated the repayment
requirement as a book-keeping exercise. Additionally, HUD lacked detailed procedures for
implementing HUD Handbook 4310.1, chapter 2. As a result, the FHA insurance fund was put
at greater risk of paying a claim.


 HUD Did Not Always Enforce
 Regulatory Agreements and
 HUD Handbooks

              HUD did not always enforce the requirements of the property regulatory
              agreements and HUD Handbook 4310.1, chapter 2, when it allowed 10 of the 54
              property owners reviewed to take more than $1.2 million in unauthorized
              distributions without requiring the owners to repay the money. Of the 10 property
              owners who took an unauthorized distribution, 5 exceeded available surplus cash
              and took distributions totaling over $1 million, and 5 were in a negative-surplus-
              cash position and took distributions totaling $196,540. HUD did not pursue
              enforcement tools for any of the 10 property owners.

              The Departmental Enforcement Center required 1 of the 10 property owners to
              repay an unauthorized distribution in 2010 and warned the owner not to exceed
              available surplus cash in the future. However, the property owner’s $9,204
              unauthorized distribution in 2012 did not meet the Departmental Enforcement
              Center’s referral threshold of $10,000, and the responsible HUD field office did
              not require the owner to repay the $9,204 distribution. Furthermore, the
              responsible HUD field office did not seek enforcement actions against the
              property owner, which had established a pattern of taking unauthorized
              distributions.




                                               4
                                                
           Unauthorized distribution by property
           Property        Distribution      Distribution    Unauthorized
           identifier      exceeding         with prior      distribution
                           prior year        year negative following a
                           surplus cash      surplus cash    warning
           A                                 $4,950
           B               $3,162
           C               $26,477
           D               $10,561
           E                                 $9,204          $9,204**
           F                                 $14,000
           G                                 $148,386
           H               $422,496
           I                                 $20,000
           J               $631,754
           Total           $1,094,450        $196,540*       $9,204*
           *The $196,540 includes the $9,204
           **The Departmental Enforcement Center issued a warning letter after a 2010
           unauthorized distribution, but the HUD field office handled the 2012
           unauthorized distribution because it was below the Departmental Enforcement
           Center’s referral threshold of $10,000.

           HUD did not require the unauthorized distributions to be repaid for any of the 10
           properties with an unauthorized distribution compliance flag. HUD regulatory
           agreements state that owners may take a distribution only from available surplus
           cash. HUD Handbook 4370.1, chapter 2, part 25, states that surplus cash
           calculated at the end of one fiscal period is not available for distribution until the
           next fiscal period. HUD Handbook 4370.1, chapter 2, part 23, states that
           distributions made in excess of available surplus cash must be repaid to the
           property.

HUD Viewed the Requirement
as a Book-Keeping Exercise and
Lacked Detailed Procedures

           HUD viewed the requirement for the repayment of the unauthorized distributions
           as a book-keeping exercise. The 10 properties ended the fiscal period with
           surplus cash in each instance in which an unauthorized distribution was taken.
           HUD stated that since surplus cash existed after the distribution, repayment of the
           unauthorized distribution would serve only to increase the amount of surplus cash
           available, and, therefore, the property owners could rightfully take the distribution
           the next fiscal period. Thus, requiring repayment was a book-keeping exercise,
           and the distribution did not need to be returned. However, the regulatory
           agreement and HUD Handbook 4370.1, chapter 2, do not allow for advances of
           surplus cash.


                                              5
                                               
          Further, HUD did not have detailed procedures in place to implement the
          requirements of HUD Handbook 4370.1, chapter 2, which states that unauthorized
          distributions must be returned to the property.

          In addition, HUD Handbook 4370.1, chapter 2, part 24, states that owners who
          take a distribution when the project is in a negative-surplus-cash position are
          subject to civil or criminal penalties. The Departmental Enforcement Center
          warned the owners of property E in 2010 not to take unauthorized distributions
          and required the owner to return the 2010 unauthorized distribution. However,
          the responsible HUD field office did not have procedures to detail how to
          implement the enforcement actions set forth in the Handbook and pursue a civil
          money penalty against the owner of property E when it violated the regulatory
          agreement and took another unauthorized distribution in 2012.

FHA’s Insurance Fund Was Put
at Greater Risk

          As a result of the issues discussed above, the FHA insurance fund was put at a
          greater risk of paying a claim. This practice of allowing properties to take
          advances of surplus cash put the property at risk of potentially ending a fiscal
          period with negative surplus cash and eventually resulting in a default or claim.

Recommendations

          We recommend the Acting Director of the Office of Asset Management and
          Portfolio Oversight

          1A.     Provide guidance to multifamily property owners on the requirements of
                  HUD Handbook 4370.1, chapter 2, and regulatory agreements to ensure that
                  distributions are taken only from available surplus cash.

          1B.     Develop and implement detailed operational procedures to ensure the
                  repayment of unauthorized distributions and owner advances that are not
                  referred to the Departmental Enforcement Center under existing protocol,
                  including the pursuit of civil money penalties and other administrative
                  procedures for owners with a pattern of unauthorized distributions or
                  advances.




                                           6
                                             
                        SCOPE AND METHODOLOGY

Our review period generally covered financial statements from January 1, 2010, through
December 31, 2013. We conducted the audit from our office in Kansas City, KS, from February
through July 2014.

To accomplish our objective, we

      Interviewed HUD staff;
      Reviewed applicable Federal regulations, HUD handbooks, and regulatory agreements;
      Selected a statistical sample of FHA-insured multifamily properties that received an
       auditor or system-generated compliance flag for unauthorized distribution or owner
       advances and reviewed the property financial statements; and
      Reviewed HUD, Departmental Enforcement Center, and auditor comments to the
       financial statements to determine how the compliance flag was resolved.

We selected a statistical sample from a universe of 5,785 FHA-insured multifamily properties
that received a compliance flag between January 1, 2011, and December 31, 2013, for an
unauthorized distribution or owner advance. The compliance flags were generated during the
annual audit or when the Financial Assessment Subsystem (FASS) automatically generated a
system compliance flag. We drew the universe from multiple HUD systems, including (1) FASS
– Multifamily, (2) the Integrated Real Estate Management System (iREMS), (3) the Housing
Enterprise Real Estate Management System, and (4) the Online Property Integrated Information
Suite Data Mart.

From the 5,785 properties, we selected a statistical sample of 95 properties for our review;
however, we were able to reach a conclusion after reviewing 54 properties in the statistical
sample. Therefore, we did not review the remaining 41. We found issues with 10 of the 54
properties that we reviewed (see finding). The compliance flags for the other 44 properties were
either false positives or were properly resolved by the Departmental Enforcement Center or
HUD multifamily field office.

We accessed iREMS to obtain property financial statements and HUD comments for the year in
which the property received the compliance flag. During our review, we used iREMS to verify
the reliability of our computer-processed data. Although we did not perform a detailed
assessment of the reliability of the data, we determined that the computer-processed data were
sufficiently reliable to be used in meeting our objective because the data in the sampled items
were corroborated by documentary evidence available in iREMS.

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 objective.


                                                7
                                                 
                              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:

                     Controls over repayments of unauthorized distributions.

               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:

                     HUD lacked detailed operational procedures to implement the required
                      repayment of unauthorized distributions.




                                                 8
                                                   
                        APPENDIXES

Appendix A

        AUDITEE COMMENTS AND OIG’S EVALUATION


Ref to OIG Evaluation      Auditee Comments




Comment 1
Comment 2
Comment 3


Comment 4




                             9
                              
Comment 5




            10
              
                         OIG Evaluation of Auditee Comments

Comment 1   We changed all references to the Office of Asset Management to the Office of
            Asset Management and Portfolio Oversight.

Comment 2   We changed the column header to clarify that the unauthorized distribution was
            taken after a year in which the property had negative surplus cash.

Comment 3   We added a footnote to the table and detail in the related discussion to explain
            that the Departmental Enforcement Center required repayment of the first
            unauthorized distribution and issued a warning letter, but that the second
            unauthorized distribution was not referred to the Departmental Enforcement
            Center because the amount was less than $10,000, and the HUD field office did
            not require repayment of the second unauthorized distribution.

Comment 4   We discussed the requirement to refer distributions over $10,000 to the
            Department Enforcement Center in the background section on page 3 of the
            report.

Comment 5   We combined the recommendations into one to allow for your more targeted
            management plan, ensuring the Office of Asset Management and Portfolio
            Oversight implements procedures to ensure repayment of unauthorized
            distributions and owner advances and pursuit of civil money penalties in the
            future.




                                            11
                                              
Appendix B

                                        CRITERIA

HUD Handbook 4370.1, REV-2 – Reviewing Annual and Monthly Financial Reports,
Chapter 2

Exhibit 2-14, Part C3

       If distributions were paid in excess of surplus cash or in excess of the amount earned the
       previous fiscal year plus any distributions unpaid from previous years, the excess must be
       refunded to the project.

Section 2-25, Part A

       Owners who take distributions when the mortgage note is in default or when the project
       is in a non-surplus-cash position are subject to civil or criminal penalties.

HUD Regulatory Agreements

The requirement is generally found in Section 6 but can vary depending on the regulatory
agreement for each property.

6. Owners shall not without the prior written approval of the Secretary:

       (e) Make, or receive and retain, any distribution of assets or any income of any kind of
           the project except surplus cash and except on the following conditions:
               (1) All distributions shall be made only as of and after the end of a semiannual or
                   annual fiscal period, and only as permitted by the law of the applicable
                   jurisdiction.




                                                12