Risk Based Enforcement Could Improve Program Effectiveness Report Number: 2014-OE-0002 February 12, 2016 Washington, DC MEMORANDUM TO: Nani A. Coloretti, Deputy Secretary, SD Helen Kanovsky General Counsel, C FROM: Kathryn Saylor, Assistant Inspector General for Evaluation, GAH SUBJECT: Effectiveness of the Departmental Enforcement Center (2014-OE-0002) Attached is the report on our evaluation of the Departmental Enforcement Center’s effectiveness. We contracted with Zelos, LLC to assist with this project. Zelos performed preliminary research and fieldwork on the project. The contract required that Zelos perform its work in accordance with the Council of Inspectors General on Integrity and Efficiency’s Quality Standards for Inspection and Evaluation, January 2012. Zelos identified several areas in which HUD could improve enforcement effectiveness. 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 as a result of our evaluation. 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, please contact me at (202) 809-3093 or Nikki Tinsley at (443) 822-8285. Effectiveness of the Departmental Enforcement Center (2014-OE-0002) February 12, 2016 At A Glance Why We Did the Evaluation Effective monitoring and enforcement can keep properties safe and well managed for the millions who rely on HUD to help provide their housing. This evaluation responds to congressional interest in departmental enforcement practices. What We Found Strengths: The Departmental Enforcement Center (DEC), working with the Office of Multifamily Housing Programs (Multifamily) and the Real Estate Assessment Center (REAC), improved housing physical conditions, making them safer for occupants, and improved the financial management of troubled multifamily properties. Although some other program offices had taken steps toward risk-based enforcement, they had not taken full advantage of the benefits demonstrated when programs allow DEC to assess compliance and enforce program requirements. DEC proved that it can remedy poor performance and noncompliance when programs are willing to participate in enforcing program requirements. Weaknesses: When it was created, DEC had independent enforcement authority, but it lost that authority when it moved from the Deputy Secretary’s office to the Office of General Counsel (OGC). DEC lost control of funding and staffing levels and contended with inadequate information technology systems and support. Further, managers’ reluctance to enforce program requirements limited DEC’s effectiveness in most programs. Although program offices were asking for more DEC financial analyses, they did not consistently use enforcement actions to remedy noncompliances. Turnover, retirements, and hiring limitations could leave DEC without enough skilled staff to support future workloads needed to service additional HUD programs. Opportunity: Historically, program managers have not wanted to use enforcement actions. That reluctance increases the risk that program funds will not provide maximum benefits to recipients and allows serious noncompliances to go unchecked. Risk-based monitoring and enforcement offers the opportunity to provide quality, affordable rental housing, improve the quality of life, and build strong, resilient communities. What We Recommend 1. HUD should implement the risk-based enforcement approach used by Multifamily in other programs. 2. Leadership should provide DEC with the authority, independence, and resources to address HUD-wide enforcement risks. 3. Program managers should work with DEC to identify flags or triggers for referrals of physical or financial shortcomings by participants and implement protocols for referrals to DEC. HUD agreed with findings 1 and 3 but disagreed with finding 2, which describes challenges hindering DEC’s effectiveness. HUD agreed, at least in part, with the report recommendations and described actions planned to address them. Table of Contents/Abbreviations Background and Objectives ...................................................................................................... 4 Background ......................................................................................................................... 4 Objectives ............................................................................................................................ 4 Finding 1: Enforcement Improved Multifamily Housing ............................................ 6 Enforcement Improved Physical Conditions ........................................................ 6 DEC Improved Financial Management and Reporting ..................................... 8 Enforcement Center’s Success Factors Identified .............................................. 9 HUD’s Response to Draft Report and OIG’s Evaluation ................................ 10 Finding 2: Challenges Hindered DEC’s Effectiveness ................................................ 11 Reduced Authority and Independence Limited DEC’s Enforcement ...... 11 Voluntary Enforcement Meant Little Enforcement ........................................ 12 Limited Staff Could Impact Expanding Enforcement Beyond Multifamily ............................................................................................................................................... 14 DEC Had Limited Access and Control Over Legal Support .......................... 15 DEC Reported Inadequate IT Support .................................................................. 16 Multifamily Reorganization Could Impact DEC’s Workload ....................... 16 HUD’s Response to Draft Report and OIG’s Evaluation ................................ 16 Finding 3: HUD Has Opportunity to Establish ERM ................................................... 18 OMB Encourages ERM ................................................................................................. 18 DEC Was Working With PIH ..................................................................................... 18 DEC Was Working With CPD .................................................................................... 19 2 Conclusion ........................................................................................................................ 19 HUD’s Response to Draft Report and OIG’s Evaluation ................................ 19 Recommendations ..................................................................................................................... 20 HUD’s Response to Draft Recommendations and OIG’s Evaluation ........ 21 Scope and Methodology .......................................................................................................... 22 Appendixes ................................................................................................................................... 23 Appendix A Multifamily Property Enforcement Activities ........................ 23 Appendix B Multifamily Enforcement Model .................................................. 24 Appendix C Full Departmental Response to the Draft Report ................. 25 Abbreviations CPD Office of Community Planning and Development DEC Departmental Enforcement Center ERM enterprise risk management FY fiscal year GAO U.S. Government Accountability Office HUD U.S. Department of Housing and Urban Development iREMS integrated Real Estate Management System IT information technology MOU memorandum of understanding Multifamily Office of Multifamily Housing Programs OGC Office of General Counsel OIG Office of Inspector General PIH Office of Public and Indian Housing PHA public housing agency REAC Real Estate Assessment Center 3 Background and Objectives Background The U.S. Department of Housing and Urban Development (HUD) provides affordable housing to approximately 4.5 million low-income families through multifamily and public and Indian housing programs, its largest housing assistance programs. When we include rental assistance to tenants, HUD spends approximately $37 billion annually on these programs. The Office of Multifamily Housing Programs (Multifamily) insures mortgages for projects and oversees the financial and HUD 2020 Management Reform Plan physical condition of those projects. To ensure that HUD Reform 3—Create an Enforcement achieves its mission “to create strong, sustainable, inclusive Authority With One Objective: To Restore the Public Trust. communities and quality affordable homes for all,” HUD The greatest breach of the public trust at must manage the risks associated with providing funds to its HUD is the waste, fraud, and abuse in HUD’s program participants. Enforcement is an effective risk existing portfolio of millions of housing units. management tool. HUD established the Departmental Enforcement Center (DEC) in 1997 as part of the HUD 2020 reform initiative to combine several different enforcement structures into a single enforcement center. At that time, HUD also established the Real Estate Assessment Center (REAC) to address inconsistencies in physical inspections and standards and evaluate financial reporting across all HUD programs. REAC’s responsibilities include obtaining physical, financial, and management scores for Multifamily and the Office of Public and Indian Housing (PIH), as well as being the central repository for financial statements and physical inspection reports. From 1997 to 2000, both programs reported to HUD’s Deputy Secretary, an indication of their importance to HUD 2020’s success. HUD 2020 focused enforcement on two activities: (1) addressing the backlog of more than 5,000 multifamily properties that HUD identified as being in poor physical condition or having financial management problems and (2) taking action against PIH public housing agencies (PHA) that received a failing score on their annual physical inspections. In 2001, DEC moved from the Office of Deputy Secretary to the Office of General Counsel (OGC), and REAC moved to PIH. DEC’s mission is to restore the public trust by protecting residents, improving the quality of housing, and eliminating fraud, waste, and abuse. DEC’s primary goal is to bring owners into full compliance so that there is no compromise in the quality of America’s housing. Objectives The evaluation assessed DEC’s effectiveness. Specifically, our objectives were to 4 Connect improvements in the physical and financial condition of multifamily properties to DEC’s enforcement efforts. Identify the enforcement practices that led to multifamily program improvements and consider the potential for applying the practices to improve other HUD programs. Identify opportunities to improve DEC’s effectiveness, and Determine whether DEC’s organizational placement and staffing levels impacted its effectiveness. Congressional staff, concerned about how enforcement funding was used, requested that the Office of Inspector General (OIG) evaluate enforcement effectiveness. Specifically, it wanted to know whether DEC’s move to OGC and reductions in DEC staff affected enforcement effectiveness. 5 Finding 1: Enforcement Improved Multifamily Housing DEC, Multifamily, and REAC together created an enforcement process that strengthened property condition and management across all multifamily properties, not just the poorly performing ones. Since 1999, multifamily properties have shown sustained improvement in physical condition and financial management. A risk-based, collaborative enforcement approach, including the following actions, contributed to program success: Multifamily worked with property owners to ensure safe, decent, and affordable housing as well as sound financial management of the properties. REAC inspected and scored properties using uniform physical condition standards. On a scale of 0 to100, a property with a score below 60 failed. REAC also tracked financial statement submissions and reviewed financial statements for indications of financial noncompliance problems. REAC “flagged” failing inspection scores, late financial filings, and other financial conditions that signaled operational problems and financial risk for Multifamily or DEC action. DEC escalated enforcement actions, ranging from issuing violation notices to suspensions, debarments, or both of individual owners or management agents. Both physical and financial conditions improved as a result of the risk-based approach. Enforcement Improved Physical Conditions In response to enforcement efforts starting in 2000, Multifamily’s property physical inspection scores improved dramatically in the first few years and had steadily reduced unacceptable physical inspection scores to an acceptable level in fiscal year (FY) 2014. DEC and REAC staff did not have data for the early years of their existence but estimated that around half of the approximately 29,000 multifamily properties were in physical or financial trouble. Initially REAC automatically referred properties that failed an inspection with a score below 60 to DEC for analysis and corrective action. In 2004, Multifamily changed the referral criteria, referring only properties scoring 30 or below to DEC. Multifamily believed it could address properties in the 31 to 59 range as the number of troubled properties decreased. Officials from Multifamily, DEC, and REAC believed that a coordinated response led to improvements. They attributed improvements to three factors described at the end of this section. The improvements were widespread across the multifamily portfolio and beneficial to the lower scoring properties. We verified improvements in three respects: Frequency of the improvements: On reinspection, properties that had scored 30 or below increased their scores 91percent of the time; only 9 percent decreased or remained the same. 6 Amount of increases in reinspection scores: Properties that failed with a score of 30 or below increased their scores on the next inspection by an average of 150 percent. DEC had the greatest impact on the properties that scored the lowest. Impact on failing properties: Physical inspection scores rose in every scoring increment from 0 to79. The lower the initial inspection scores, the greater the increase in the follow-on inspection (exhibit 1). Exhibits 1 and 2 demonstrate physical condition improvements. In the exhibit 1 analysis, we measured improvement by the change from one inspection to the next for all properties with multiple inspections from 2001 to 2014 Exhibit 1: Physical condition improvements Average change in later inspection score as a function of initial score 2001 to 2014 Source: Richard Schehl, mathematical statistician, REAC Physical Assessment Sub-System Division, August 7, 2014. Data analysis was performed by Turner Bond, statistician, OIG Integrated Data Analytics Division. The improvement in physical property conditions for all scoring categories below 80 indicated that enforcement activities influenced property owners in making needed changes to identified property conditions not meeting standards. In the exhibit 2 analysis, we compared a 3-year span (2001-2003) to a 4-year span (2010 -2014). We used a 3-year span because REAC inspected physical conditions for properties scoring between 80 and 90 every 2-3 years and inspected properties scoring below 80 every year. Selecting the earliest inspection for each property during the 3-year span and the latest during the 4-year span provides a snapshot of inspection scores for the entire portfolio. These results would have been even more impressive if data had been available from 1999 and 2000, when an estimated 5,000 properties were considered to be failing. 7 Exhibit 2: Multifamily portfolio physical condition improvements Comparison of an early period (2001-2003) to a recent period (2010-2014) Scoring Major scoring category Inspection Inspections in scoring range Result range schedule (number and percentage) FY 2001- FY 2010- 2003 2014 0-30 Failing – automatic referral from REAC Every year 137 77 (0.28%) Reduction in (0.51%) failing properties 31-59 Failing – Multifamily intervenes or Every year 1,793 (6.68%) 1,112 Reduction in refers to DEC (4.02%) failing properties (Before 2004, REAC referred these properties to DEC as “elective referrals.”) 60-79 Passing – Multifamily monitors Every year 6,482 4,486 Many high- improvements (24.14%) (16.21%) performing properties moved to the next higher category 80-100 Passing – highest scoring range Every 2-3 18,435 21,998 Increase in years (68.6%) (79.49%) highest performing properties Total properties in each sample period (unduplicated) 26,850 27,674. DEC Improved Financial Management and Reporting In 1998, HUD reported to the U. S. Government Accountability Office (GAO) that there were approximately 5,400 “troubled multifamily properties.” For our analysis, neither DEC nor REAC could provide complete data from its early years to establish a reliable baseline on financial reporting compliance. However, senior officials from Multifamily stated that before 1998, fewer than half of multifamily property owners provided financial reports in a timely manner and serious financial problems were widespread. The collaboration among Multifamily, REAC, and DEC has resulted in great improvements in financial management and financial reporting. Referrals to DEC decreased for both financial 8 management problems and failure to submit timely financial reports in response to DEC enforcement (exhibit 3). Exhibit 3: Reduction in referrals due to improved owner compliance (Note: From 2010 to 2014, changes in the referral criteria impacted an undetermined proportion of the decreases.) Enforcement Center’s Success Factors Identified Program managers attributed improvements in the physical condition and financial management of the multifamily portfolio and compliance with financial reporting requirements to the following factors: DEC, Multifamily, and REAC signed memorandums of understanding (MOUs)1 that included responsibilities and procedures for oversight, monitoring, and enforcement functions. Risk-based assessment protocols linked oversight and enforcement to physical and financial conditions. DEC, Multifamily, and REAC periodically evaluated and improved the procedures, responding to stakeholders’ concerns, and monitored trends in the multifamily portfolio. Staff received training. Leadership had authority to assign staff and balance workloads. Outreach, education, and collaboration helped owners and the industry understand standards and requirements. 1 DEC’s authority to enforce program requirements was established in MOUs with most housing programs in 1998; several of the MOUs have been updated since then. 9 Outreach convinced the industry and owners that DEC was there to help them and that they would be treated fairly and professionally. DEC and Multifamily used a range of escalating enforcement actions to address noncompliance and substandard performance. They developed protocols and authorities to escalate enforcement as an incentive to change behavior and improve results. DEC implemented a process to remove significantly noncompliant owners through limited denial of participation, suspension, and debarment. Appendix A includes the sequential activities Multifamily, REAC, and DEC performed to improve multifamily properties’ physical and financial conditions. Appendix B shows the model we developed that captures the multifamily enforcement approach. HUD’s Response to Draft Report and OIG’s Evaluation OGC agreed that DEC, working with other HUD components, had improved multifamily physical and financial conditions. OGC commented on the success of the enforcement program in addressing Program Civil Remedies Act cases by working with OIG and the U.S. Department of Justice to achieve significant settlements. OIG’s Evaluation. OIG agrees that OGC has been successful in addressing referrals from OIG. Finding 2 includes a chart showing a substantial number of suspension and debarment referrals from OIG. DEC is limited in its ability to initiate compliance reviews in programs other than multifamily housing, and program offices make few referrals. If DEC had authority to initiate reviews in other programs, HUD could expect increases in program compliance as well as increases in suspension and debarment referrals. 10 Finding 2: Challenges Hindered DEC’s Effectiveness DEC did not have the authority to monitor failing participants or require enforcement in any program offices except Multifamily. Program oversight and enforcement functions were stovepiped in HUD program offices. Significantly, in those instances in which field offices requested that DEC monitor, DEC did not have authority to report the need for corrective actions to anyone but high-level officials in the program office. Except for Multifamily, program offices retained full control of enforcement referrals and decisions, thereby reducing DEC’s enforcement role to enforcement by request, and DEC became a service organization. One REAC official believed DEC would be more effective if it reported to the Chief Operating Officer. When program offices chose to disregard DEC’s recommended enforcement actions, DEC could not appeal these decisions. Reduced Authority and Independence Limited DEC’s Enforcement DEC was limited in what it could review and what enforcement actions it could take because of HUD’s stovepiped approach to oversight and enforcement. In the 2002 HUD 2020 hearings, GAO testified that moving DEC and REAC out of the Deputy Secretary’s office was a matter to be watched. GAO’s position was that the organizational placement did not matter so long as results were not affected. Since DEC’s realignment with OGC, its effectiveness had been limited primarily to accomplishments in Multifamily. DEC lacked the authority to address significant failings in other HUD programs independently. In response to an earlier OIG audit (2004) regarding DEC’s authority, OGC opined that DEC’s mission had changed and that DEC was never intended to provide all departmental enforcement activities. OGC stated that DEC’s work had evolved over the years to meet the HUD Secretary’s priorities and the President’s Management Agenda. OGC issued a revised mission statement in 2004 for the Deputy Secretary to approve. The mission statement clarified that DEC’s authority was restricted to what was defined in the current MOUs. MOUs prevented DEC from enforcing program requirements without program office approval. DEC was not able to appeal to the Deputy Secretary in cases in which disagreements persisted with program officials. The Office of Community Planning and Development’s (CPD) MOU was the most explicit, compared with MOUs with other program offices. It stated: “ ... CPD will retain final authority to exercise-or not exercise-any remedy or enforcement action, including those that may be proposed by the DEC. The DEC will not comment or distribute any information relating to a CPD request for assistance or a referral to a third party unless authorized to do so by CPD.” 11 Program leaders in CPD acknowledged that they needed to do more monitoring but said they lacked the staff, systems, and skills to effectively implement more analysis and monitoring. PIH also expressed the need to conduct more risk-based monitoring. However, programs other than those of Multifamily have no automatic referral mechanisms so referrals are based on DEC establishing small pilot programs or seeking referrals based on working relationships with field staff. Voluntary Enforcement Meant Little Enforcement The Federal Register description of DEC, written by the HUD 2020 reformers, stated the following about the DEC initiative: “HUD’s workforce has not been given a clear mission, but rather schizophrenic mandates: On the one hand, to provide assistance to communities and help them meet their needs; while on the other, to police the actions of those same communities... -The Department's [HUD] culture lacks the work ethic and ability to make stewardship of public funds a priority”… “In the past, employees were too often charged to do both [provide assistance and enforce program requirements] at the same time. After the scandals in the 1980s, all emphasis was on monitoring and enforcing regulations. At other times, the emphasis was to help the grantee do whatever it wanted. Too often, employees were asked to be facilitators as well as monitors. These charges were inconsistent and often contradictory.” DEC staff told us that when DEC was under the Deputy Secretary, there were no contradictory roles to balance. Being under OGC, it was felt that OGC saw program offices as its clients and deferred to its judgment on use of enforcement. While there were instances in which programs implemented some “risk management” initiatives, HUD had not implemented a HUD-wide approach to addressing noncompliance risks. This lack of risk management limited requests for DEC services. Exhibit 4 shows the relative gap between Multifamily requests for enforcement services and requests from other program offices, while also considering the number of program participants. Exhibit 4: Program office referrals to DEC Approximate Number of referrals Program participants number FY 2010 FY 2011 FY2012 FY2013 FY 2014 Multifamily properties 29,000 3,795 3,942 3,865 3,411 2,731 Public housing agencies 2,600 0 22 42 9 9 Federal Indian tribes 800 0 0 4 0 0 CDBG grantees 1,200 1 2 4 2 2 FHA lenders 4,800 0 0 0 0 0 (Note: Most referrals requests from PIH and CPD were for limited financial analysis and not referrals for enforcement.) 12 Program field offices that requested DEC services did so largely because of personal relationships and trust between DEC and some field office managers. A DEC field director said that there continued to be resistance to letting DEC into program business. DEC managers and program officials reported that program offices did not use DEC services because program staff members lacked trust in DEC, as it was “tantamount to calling in the lawyers” and they did not know what DEC could do to help them improve program performance. PIH officials told us they had not used a consistent, risk-based approach to enforcement for a number of reasons: a desire to maintain regional discretion to enforce housing regulations, the inadequacy of the type and strength of existing agreements between HUD and PHAs, and political considerations. PIH believed that because its clients are quasi-governmental offices with limited funding, enforcement actions might not be as productive with a PHA as with multifamily properties. Further, PIH thought there was not much interest at HUD in pursuing financial sanctions against PHAs. Even when DEC built trust with program offices, program managers often would not relinquish oversight control to DEC. None of the program offices, except Multifamily, made data-driven, automatic referrals to DEC. PIH had done extensive work to develop a risk-based approach to monitoring and had implemented some pilot programs with DEC, but there were no automatic referrals. DEC’s role had been primarily helping with financial analysis, but few enforcement actions had resulted. The approach PIH was taking was to provide technical support and give PHAs time to correct problems. However, there did not appear to be much effort to use sanctions even in unmanageable cases. Some DEC field directors reported that cases they sent to headquarters CPD and PIH with recommendations to address noncompliance were not acted upon by headquarters program officials. The Inspector General received several reports from regional staff members, who had requested DEC reviews, but after DEC’s analysis and recommendation, the escalation was stopped by headquarters program offices. Suspension and debarment are among the final enforcement actions when HUD identifies a serious breach by an individual or group of individuals. Serious property-level failures can lead to default on a mortgage or foreclosure on a property. However, other than OIG, few program offices referred cases to DEC for suspension and debarment actions as shown in exhibits 5 and 6. 13 Exhibit 5: Referrals to DEC for suspension of participants during 2014 2014 suspensions Referral source Single Outside HUD Program OGC Family* PIH CPD agencies DEC OIG Total Single family 0 0 N/A N/A 18 9 145 172 Multifamily 0 0 N/A N/A N/A 6 15 21 Public housing 1 N/A 2 N/A N/A 2 61 66 Community planning and development 0 N/A N/A 1 N/A 0 26 27 Fair housing 2 N/A N/A N/A N/A 0 0 2 Totals 3 0 2 1 18 17 247 288 * Refers to the Office of Single Family Housing Exhibit 6: Referrals to DEC for debarment of participants during 2014 2014 debarments Referral source Single Outside HUD Program OGC Family PIH CPD agencies DEC OIG Total Single family 2 24 N/A N/A 0 1 89 116 Multifamily 0 N/A N/A N/A 3 0 13 16 Public housing 0 N/A 1 N/A N/A 8 46 55 Community planning and development 0 N/A N/A 0 N/A 0 15 15 Fair housing 0 N/A N/A N/A 0 0 0 0 Totals 2 24 1 0 3 9 163 202 N/A means that the referral source office would not be responsible for making referrals on that program area. According to DEC managers, program officials said that managing documentation for a suspension or debarment case was too burdensome and in some cases, the legal review and concurrence process was excessively slow, although it varied by region. Some field directors said that they gave up on the enforcement action because of legal delays. Headquarters attorneys were unaware of delays at the field office level. An OGC attorney said that too much enforcement would cause participants to leave the programs. Limited Staff Could Impact Expanding Enforcement Beyond Multifamily HUD 2020 envisioned that DEC would become HUD’s principal enforcement center. With the DEC move to OGC from the Deputy Secretary’s office in October 2001, DEC lost direct control over administrative and legal staffing that had previously directly supported DEC operations. DEC also lost direct control over its information technology (IT) budget. In past years, DEC leaders conducted outreach efforts to programs and regional offices to expand enforcement. They provided enforcement-related training, conducted special reviews, and developed new agreements to encourage program referrals. In response, programs requested assistance in 14 conducting financial analyses. However, limits on DEC resources resulted in lost opportunities to improve program effectiveness and strengthen conditions that discouraged waste, fraud, and abuse. Since the move to OGC, DEC staff levels had decreased from 218 in 2004 to 99 in 2014. DEC satellite office directors said they were typically unable to replace departing staff members with similarly skilled employees and they anticipated additional staffing challenges due to upcoming retirements and attrition. DEC had been able to cope because Multifamily referrals had decreased due to DEC’s enforcement success in improving housing and its ability to shift workload among its field offices. However, the projected demand for DEC services is expected to increase due to an ongoing reorganization and reduction in Multifamily offices and anticipated increases in requests for financial analysis by PIH and CPD. DEC had been unable to extend comprehensive enforcement activities to all program offices, which had reduced its effectiveness. PIH officials told us that they started a 2014 PIH-DEC pilot program, which included 44 high-risk PHAs, and would like to extend the pilot to 500 medium- and high-risk PHAs. CPD requested that DEC provide financial expertise over the last few years but had not used DEC enough to enforce CPD requirements. Both PIH and CPD stated that they would like to develop a more robust, systematic approach to risk assessment as discussed in finding 3. DEC leaders stated that they would need additional staff to perform financial analysis and enforcement if they were to expand current efforts with PIH and CPD. DEC Had Limited Access and Control Over Legal Support When DEC was established, it operated as an independent program, which had dedicated legal support within its staff, and it was able to establish priorities to manage enforcement issues as they arose. When DEC was realigned with OGC, 23 attorneys were transferred to OGC headquarters positions, and 18 were transferred to OGC regional and field offices. One OGC division supported DEC headquarters, while another OGC division, or program field office, supported DEC satellite offices. The priorities for the attorneys were dependent on OGC headquarters or field office decisions. Program officials told us that one reason they did not leverage DEC for enforcement assistance was that programs experienced lengthy delays due to DEC’s limited legal support. Conflicting objectives between DEC and programs caused delays or inaction when officials did not agree on when or whether to pursue potential cases. A 2010 OIG audit report on suspensions and debarments2 stated that processing delays placed “HUD and other Federal agencies at risk of awarding contracts, grants, and other subsidies to unethical, dishonest, and irresponsible parties.” DEC and program leaders told us that delays in the legal decision-making processes had, at times, resulted in the best enforcement options no longer being available. Senior program officials told us that enforcement delays meant that some cases could not be pursued because the 2 HUD’s Departmental Enforcement Center’s Compliance Division, Evaluation of Suspension and Debarment Referrals, Report Number IED-11-001R, November 4, 2010 15 party suspected of fraud or mismanagement was no longer “presently responsible” for funds (a HUD policy criterion for legal action). DEC Reported Inadequate IT Support DEC managers said OGC did not provide adequate IT funding. DEC used a SharePoint site to track its cases as a temporary solution until the Multifamily Real Estate Management Tracking System is completed. However, SharePoint was not designed for large-scale data management and analysis, and many problems resulted, including DEC had limited IT support available to keep the system operational and experienced system outages that impeded its work. The multifamily system could not export data to SharePoint for data analysis. DEC staff had to analyze individual case files to identify issues and develop enforcement approaches. Information was more transaction based, which limited DEC’s capacity to identify trends and what factors were related to each other. The multifamily system stored data in text fields so data summaries had to be obtained manually. Multifamily Reorganization Could Impact DEC’s Workload By 2016, Multifamily plans to realign its headquarters and field office structure, reducing office locations from 54 to 17 and redefining jobs and roles to distribute workloads, including enforcement, more evenly across the organization. The Multifamily transformation plan included reassignment, relocation, or retirement of an undetermined number of employees, all while it experienced increased work volume and complexity. Both Multifamily and DEC managers expressed concerns about the availability of skilled staff to perform program work, especially financial analysis. Managers anticipated that the shortage of skilled staff would place additional demands on DEC to provide financial analysis expertise to support multifamily program oversight. HUD’s Response to Draft Report and OIG’s Evaluation OGC disagreed with OIG’s conclusions on DEC weaknesses, saying DEC was established primarily to address multifamily cases. OCG pointed out that DEC works with other offices by performing limited “snapshot” reviews. OGC agreed that the MOUs between DEC and program offices are overly restrictive but said the MOUs are not required for aggressive enforcement action because OGC can take action or refer disagreements to the Deputy Secretary. With regard to independence and DEC’s location limiting its ability to enforce, OGC disagreed, saying DEC’s location within OGC is not limiting, enforcement in HUD is discretionary, and OGC can take enforcement action when necessary. With regard to staffing, OGC disagreed, saying DEC was not impacted because OGC had achieved efficiencies by consolidating functions, reductions were consistent with reductions throughout HUD, and DEC referrals had dropped by 50 percent. OGC believes DEC has 16 sufficient staffing to continue to work as a troubleshooter by performing snapshot reviews. OGC agreed that legal support should be timely but disagreed that legal support provided to DEC was insufficient or untimely. OGC was not aware of the situation when it took 12-18 months to take an enforcement action. With regard to IT support, OGC said the report was inaccurate. DEC uses both the integrated Real Estate Management System (iREMS) and SharePoint to track workload and said that DEC is working toward having one data entry system. OGC agreed that the current assignment process is limited and both iREMS and SharePoint lack the capacity to meet DEC’s data analytics needs. OGC provided information on planned capabilities of a new HUD Enforcement Management System, the first release of which was planned for mid-October 2015. OIG’s Evaluation. Contrary to OGC’s assertion, HUD 2020 did envision a DEC enforcement presence beyond Multifamily. The HUD management reform plan stated, “It is expected that, in the future the Enforcement Center will take on expanded responsibility for much of the other enforcement activity now carried out by offices elsewhere in HUD.” DEC snapshot reviews are limited in scope to mainly financial analysis. DEC lacks authority to address the issues uncovered during these reviews. OIG believes DEC could increase its effectiveness with broader enforcement authority and independence, which would allow it to take enforcement action when necessary to bring about program compliance. While enforcement may be discretionary, HUD should hold recipients of HUD funds accountable to comply with program requirements. DEC enforcement efforts outside of Multifamily should not be limited to snapshot financial reviews performed at the request of program offices. The HUD management reform plan stated that program offices had a conflicting role in getting funds to and spent by participants versus holding them accountable. OGC may have a similar conflict as it protects its program clients should DEC recommend enforcement against its program participants. When performing our evaluation of DEC staffing and IT and legal support, we relied on information gathered during discussions with DEC, Multifamily, REAC, and program office staff. We attempted to learn more about the situation causing the 12-18 month delay, but the PIH official we talked with could not provide additional information so we removed the example from the report. We revised the report to acknowledge the weakness in iREMS. While the new enforcement management system may resolve some problems, officials told us it will not provide the data analytics they need to identify and address program compliance problems. 17 Finding 3: HUD Has Opportunity to Establish ERM OMB Encourages ERM OMB plans to issue an updated Circular A-1231 to encourage departments and agencies to implement enterprise risk management (ERM) in support of mission accomplishment. ERM is a holistic approach to risk management, which HUD has not formally addressed. As discussed in finding 2, program managers were not consistent in enforcing program requirements, and HUD had not developed consistent risk assessment and enforcement across program lines. This inconsistency meant that some program participants violated program rules, which resulted in lower housing quality or provided incorrect benefits to program participants at the expense of taxpayers. ERM would improve controls over critical risks, support allocation of resources, and reduce financial management problems and failures. Together those benefits would lead to increased program participants benefits. The enforcement approach used to improve multifamily properties integrates components of ERM concepts and principles. HUD 2020 created a single HUD-wide enforcement authority because programs did not enforce program requirements. Congressional hearings in 1998 and 2002 focused on weaknesses in HUD management and housing program oversight, and GAO placed HUD on its high risk list. GAO and HUD OIG have often reported on inadequate oversight of HUD programs. While improvements in the multifamily housing portfolio could be linked to risk-based enforcement, other HUD programs limited DEC’s ability to enforce program requirements. As a result, those programs continued to support troubled properties, leaving participants in substandard housing or providing funding to grantees that mismanaged HUD funds. Because enforcement was not consistently implemented among all HUD programs, a multifamily owner was more likely to be disciplined for failing to correct property issues than participants in other HUD programs. HUD had not implemented the enterprise-wide approach to enforcement envisioned in HUD 2020. While program offices understood and, at times, implemented risk-based concepts in their oversight, they had not ceded control of enforcement decisions. Enforcement continued to be controlled within program offices. DEC Was Working With PIH DEC was in the early stages of working with PIH to institute a risk-based approach to PHA oversight. Program staff described a positive partnership between PIH and DEC over the past 3 years. DEC provided assistance in two areas. First, it provided technical assistance by training PHA boards of commissioners. Second, it began a pilot program with PIH and performed financial analyses on 44 troubled PHAs. If this pilot proved successful, PIH wanted DEC to perform financial analyses on more than 500 high- and moderate-risk PHAs. PIH had worked closely with REAC to develop a National Risk Assessment Tool to evaluate risks to PHAs. A 18 PIH risk officer said that the Office of Field Operations had been more “regional” in the past but had been trying for about 18 months to do risk assessment that was uniform and nationwide. This undertaking was being performed concurrently with the PIH effort and was an attempt to predict which PHAs might be in trouble before they are classified as troubled. The risk officer noted that DEC had not had a lot of involvement but that it needed to be involved and conduct enforcement activities in a risk management framework HUD-wide. DEC Was Working With CPD CPD seldom requested enforcement assistance because it was hesitant to call in an “outsider” (DEC) to do its job. A CPD program official said that CPD had recently revised the MOU with DEC to obtain technical assistance on the HOME Investment Partnerships Program. HOME funds housing and rental assistance for low income families. CPD revised the MOU to revitalize an enforcement role for DEC and clarify the working relationship for the field offices. As noted in finding 2, the current CPD MOU was explicit in limiting DEC’s assistance. CPD requested that DEC perform financial analyses of a few HOME grants. Conclusion HUD had not realized the consolidated enforcement authority envisioned in HUD 2020. With its move to OGC, DEC lost its independence; intended HUD-wide enforcement authority; and control over resources, staff levels, legal support, and technology. Still, DEC, working with Multifamily and REAC, implemented a risk-based approach to enforcement that improved both the physical and financial condition of multifamily properties. Other program offices continued to manage programs but failed to fully enforce program requirements. HUD could take a large step toward improving program results by embracing ERM and taking a HUD-wide approach to enforcement. HUD’s Response to Draft Report and OIG’s Evaluation OGC agreed that more can be done to incorporate enforcement into the agency’s ERM process and said DEC is working with the Chief Financial Officer to incorporate its activities into the process. OGC said DEC meets all three of the Green Book categories of fraud control activities, operating within the spectrums of response and detection and assisting program staff to implement change with the prevention spectrum. OIG Evaluation. OIG believes it is appropriate for DEC to work with the Chief Financial Officer to incorporate its activities into the agency’s ERM process. With regard to the Green Book comment, OIG assumes OGC is referring to a draft OMB Circular A-123 that soon will be issued and incorporate the GAO Framework for Managing Fraud Risks in Federal Programs. HUD and the Office of the Chief Financial Officer have not issued guidance on creating and managing risk and fraud profiles. Further, limits on DEC’s enforcement authority, along with staffing and resource limitations, prevent DEC from providing a comprehensive, consistent agency-wide assessment of risks and enforcement envisioned by ERM. 19 Recommendations Deputy Secretary—To strengthen HUD-wide enforcement that supports HUD’s broader risk management efforts, we recommend that the Deputy Secretary 1. Implement an enterprise-wide approach to enforcement using risk management concepts similar to those shown in the multifamily enforcement model. 2. Strengthen DEC’s authority to enforce program requirements. Program offices should be directed to incorporate risk management procedures, to include risk-based, data-driven referrals to DEC, and implement a process that allows DEC to recommend enforcement actions independently. The Deputy Secretary or designee should be the final arbiter when disagreements arise. 3. Provide DEC with the authority and resources necessary to implement a HUD-wide enforcement program. 4. Direct program offices and REAC to collaborate with DEC to research the types of data that would provide clear indications of financial and physical performance failures appropriate for use in data-driven referrals to DEC from each program office. General Counsel—To address operational challenges that impede DEC’s capacity to support HUD programs, we recommend that the General Council 5. Provide resources and support to DEC to strengthen enforcement across HUD programs. 6. Develop a strategy for addressing additional enforcement workload. Deputy Assistant Secretary for Multifamily Housing—We recommend that the Deputy Assistant Secretary 7. Evaluate the impact of Multifamily’s reorganization on enforcement, including (1) monitoring the impact of changes to the risk assessment process, (2) making changes to MOUs, (3) documenting procedural changes and how those changes affect DEC and REAC collaboration, (4) improving data tracking and data sharing with DEC and REAC on improvement and enforcement actions taken and associated results, and (5) ensuring that Multifamily has the capacity to maintain the improvements it has achieved in recent years. 20 Principal Deputy Assistant Secretary for Public and Indian Housing—To support potential expanded data gathering for program offices, we recommend that the Principal Deputy Assistant Secretary 8. Direct REAC to work with DEC and program offices to identify and develop strategies for collecting data needed to support its National Risk Assessment Tool and ERM to include major program participant risks. HUD’s Response to Draft Recommendations and OIG’s Evaluation In general, OGC responded that it disagrees that DEC could be more effective if it had more authority and independence. OGC contends that DEC is effective in taking enforcement actions, does not believe DEC’s current placement restricts its ability to take enforcement actions, and disagrees that DEC needs additional resources or support. OGC stated that the Deputy Secretary directed the General Counsel to review the MOUs between DEC and program offices to strengthen them or find alternative methods for DEC to receive assignments and that DEC is participating in a task force led by the Chief Financial Officer to strengthen the agency’s risk management system. OGC agreed to research ways to develop data-driven indicators for making referrals to DEC and to evaluate the impact of Multifamily’s transformation in its relationship with DEC. OIG met with the General Counsel on December 9, 2015, to discuss the findings, recommendations, and the OGC response. At that meeting, OIG explained it used the term “enforcement” in the report in a broader context than OGC had interpreted it. OIG referred to enforcement as an escalating range of activities, including risk identification, monitoring, analysis, and working with participants to modify behaviors and bring them into compliance. OGC thought OIG referred to enforcement as suspending or debarring a program participant, the final step in the escalating enforcement process. At the conclusion of the meeting, in general, OGC agreed with the recommendations to the extent that the recommendations of the two task force reviews find that they are able to implement them within existing authorities. 21 Scope and Methodology Our evaluation focused on the multifamily housing program and DEC’s risk management and enforcement activities. To a limited degree, we also reviewed DEC’s working relationship with PIH. We interviewed headquarters staff from DEC, Multifamily, REAC, OGC, PIH, OIG (the Offices of Audit and Investigation), and CPD as well as field staff in Multifamily and DEC. We analyzed data from REAC’s Physical Assessment Sub-System and Financial Assessment Sub-System, the Enforcement Center Program Compliance Integration System, and Multifamily’s iREMS. We reviewed prior audit and evaluation reports as well as other relevant draft and published documents. Our study was limited in content and scope by the information the programs could provide. DEC, REAC, and Multifamily could not provide all requested data due to system limitations (either the data were not collected, older data were considered to not be comparable to more current data, or the data could not be easily extracted). We reviewed data from FY 2000 through October 2014. We analyzed data and completed charting and statistical calculations. When necessary, we discussed inconsistent data with program staff. We did not subject data to independent verification and validation. We conducted fieldwork from July 3 to November 14, 2014. We generally performed work in accordance with the Council of Inspectors General on Integrity and Efficiency’s Quality Standards for Inspection and Evaluation, January 2012. 22 Appendixes Appendix A Multifamily Property Enforcement Activities Component REAC and Multifamily DEC activities 1. Assess for problems REAC inspects properties and refers failing and risks properties to DEC or Multifamily. 2. Select and implement Multifamily or DEC selects responses DEC analyst remedies (improve and and remedies based on the nature and enforce) severity of the violation or condition. Reviews and updates HUD file. Confirms property owner awareness of violation. Identifies mitigating circumstances. Determines whether there were inspection violations and status of correction. Attempts to obtain a corrective action plan with owner. 3. Monitor progress Multifamily or REAC determines DEC analyst monitors compliance. compliance and improvement and closes the case or refers to DEC for enforcement. 4. Escalate enforcement Multifamily or DEC escalates enforcement. If owner fails or refuses to make repairs, remedies as required DEC analyst prepares civil penalty documents for supervisory review and legal filing. If owner fails to pay penalty and remedy noncompliance, Regional attorney requests that U.S. Department of Justice file with court to enforce judgment. If owner still refuses, DEC takes additional enforcement action, which may include a) Abating the Section 8 subsidy; b) Suspension, debarment, or both of the principals; c) Declaring a technical default on the mortgage; or d) Foreclosing on the project. 5. Evaluate and improve Multifamily, REAC, or DEC evaluates and processes adjusts measures, triggers, and processes. 23 Appendix B Multifamily Enforcement Model 24 Appendix C Full Departmental Response to the Draft Report 25 26 27 28 29 30 31 32 33 34 35 Report number: 2014-OE-0002 36
Risk Based Enforcement Could Improve Program Effectiveness
Published by the Department of Housing and Urban Development, Office of Inspector General on 2016-02-12.
Below is a raw (and likely hideous) rendition of the original report. (PDF)