oversight

HUD Did Not Enforce and Sufficiently Revise Its Underwriting Requirements for Multifamily Accelerated Processing Loans

Published by the Department of Housing and Urban Development, Office of Inspector General on 2016-05-20.

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

           HUD’s Office of Multifamily
           Production – Washington, DC
          Multifamily Accelerated Processing Program




Office of Audit, Region 4        Audit Report Number: 2016-AT-0001
Atlanta, GA                                            May 20, 2016
To:            Edward Golding, Principal Deputy Assistant Secretary for Housing, H
               Priya Jayachandran, Acting Deputy Assistant Secretary, Multifamily Housing
               Programs, HT

               //signed//
From:          Nikita N. Irons, Regional Inspector General for Audit, Atlanta Region, 4AGA
Subject:       HUD Did Not Enforce and Sufficiently Revise Its Underwriting Requirements for
               Multifamily Accelerated Processing Loans


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 Production’s
multifamily accelerated processing 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.
                       Audit Report Number: 2016-AT-0001
                       Date: May 20, 2016

                       HUD Did Not Enforce and Sufficiently Revise Its Underwriting
                       Requirements for Multifamily Accelerated Processing Loans




Highlights

What We Audited and Why
We audited the U.S. Department of Housing and Urban Development’s (HUD) multifamily
accelerated processing (MAP) program administered by its Office of Multifamily Production.
We initiated the audit under our annual audit plan. Our objectives were to determine whether (1)
HUD adequately reviewed and approved loans underwritten by MAP-approved lenders for
Federal Housing Administration (FHA) insurance and (2) the 2016 MAP Guide was adequately
revised to improve the review and approval process for MAP loans.

What We Found
HUD did not adequately review and approve nine 1 loans underwritten by MAP-approved lenders
for FHA insurance. Specifically, HUD did not require lenders to adequately address a number of
underwriting components. As a result, HUD inappropriately approved nine loans submitted by
six MAP lenders, which exposed the FHA insurance fund to unnecessary risk.
In addition, the 2016 MAP Guide was not sufficiently revised and could be further improved and
modified to correct inconsistencies with certain underwriting components and the overall review
and approval process. By missing these underwriting components, HUD may have missed the
opportunity to develop a stronger MAP Guide to reduce risk exposure.

What We Recommend
We recommend that the Principal Deputy Assistant Secretary for Housing require the Office of
Multifamily Housing Programs to revise its memorandum of understanding to ensure that loans
are reviewed for compliance with MAP underwriting requirements. In addition, we recommend
that the Acting Deputy Assistant Secretary for Multifamily Housing Programs require the Office
of Multifamily Production to (1) issue alternate guidance to update and clarify inconsistencies in
the 2016 MAP Guide and (2) formalize a training program to ensure that new staff members are
familiar with the Single Underwriter model.




1
 According to the Office of Multifamily Production, between 2002 and 2010, more than 8,600 loans were
underwritten and closed by MAP-approved lenders. We reviewed nine of the loans that had strong indicators of
problems and found underwriting deficiencies in all nine loans. See the Background and Objectives section of this
audit report for a listing of the nine loans.
Table of Contents
Background and Objectives ....................................................................................3

Results of Audit ........................................................................................................5
         Finding 1: HUD Did Not Adequately Review and Approve MAP Loans................... 5

         Finding 2: The 2016 MAP Guide Needed Further Improvement ............................. 16

Scope and Methodology .........................................................................................22

Internal Controls ....................................................................................................24

Appendix .................................................................................................................25
         A. Auditee Comments and OIG’s Evaluation ............................................................. 25




                                                             2
Background and Objectives
Since 1937, Federal Housing Administration (FHA) multifamily mortgage insurance has been a
major source of financing for affordable housing. FHA mortgage insurance protects lenders
against losses from defaults. HUD’s Office of Housing is responsible for establishing
requirements for the administration of HUD’s multifamily mortgage insurance program,
primarily through its Office of Multifamily Housing Programs (Multifamily). Within
Multifamily, the Office of Multifamily Production is responsible for originating FHA mortgage
insurance loans and implementing the multifamily accelerated processing (MAP) program. The
MAP program is designed to establish national standards under which approved lenders may
prepare, process, and submit loan applications for FHA multifamily mortgage insurance. In
accordance with MAP guidelines, the sponsor works with the MAP-approved lender, which
submits required exhibits for the preapplication stage. After HUD reviews the exhibits, it either
invites the lender to apply for a firm commitment for mortgage insurance or declines the
application. For acceptable exhibits, the lender submits the firm commitment application,
including a full underwriting package, to HUD to determine whether the loan is an acceptable
risk. Further, the MAP team leader must decide to approve, reject, or require modification of the
application based upon the recommendation of technical specialists.

Following the 2008 financial crisis, Multifamily experienced an unprecedented demand for
services. Between 2008 and 2013, Multifamily experienced an increase in originations from $3
billion nationally to almost $18 billion. The complexity of the work also increased. In response,
HUD initiated the Multifamily for Tomorrow transformation, consisting of four components: (1)
National Workload Sharing, 2 (2) the Single Underwriter Model in the Office of Multifamily
Production, 3 (3) the Account Executive Model in the Office of Asset Management, 4 and (4)
streamlining the organizational structure. 5

During the implementation of the transformation, HUD also began to revise its 2016 MAP
Guide. Before finalizing the MAP Guide in January 2016, HUD issued notices and
memorandums implementing some of the changes in the program. For example, the Single
Underwriter Model discussed above was introduced in a memorandum, dated January 30, 2015.
The MAP Guide was originally published in May 2000 and revised in March 2002 (2002 MAP
Guide) and November 2011 (2011 MAP Guide).




2
  Multifamily Production and Asset Management workload was electronically digitized and distributed evenly to
ensure consistency.
3
  This system segments applications by risk and complexity for assignment to the appropriate underwriter. An
underwriter will manage the end-to-end review of an application and draw in technical specialists as needed.
4
  In this system, account executives manage nontroubled assets; senior account executives manage complex and
troubled assets; and asset resolution specialists manage the most complex, risky, or troubled assets.
5
  Multifamily consolidated its 17 hubs into five new regions and established four new offices in headquarters.



                                                        3
 From June 21, 2004, to August 14, 2015, we issued eight external audit reports, which concluded
 that six MAP lenders did not underwrite and process nine loans in accordance with HUD’s
 requirements. These eight external reports identified more than $110 million in questioned costs
 and funds put to better use. The loans for each project listed in the table below were
 underwritten using the 2002 MAP Guide, published on March 15, 2002.

                                                                                                       Questioned
                           Project                                                  HUD                   cost -
Audit report                                            Lender
                            name                                                    office             funds put to
                                                                                                        better use
                    Hudson Valley and
2004-SE-1005                                    Continental Securities          Buffalo, NY            $13,268,851
                      Amber Courts
2007-FW-1011           Asbury Square              Capmark Finance              Ft. Worth, TX            5,934,112
                                                                              Oklahoma City,
2009-FW-1010           Cypress Ridge               Harry Mortgage                                       3,759,333
                                                                                   OK
                    Wingate Towers &
2011-PH-1009                                         Deutsche Bank             Baltimore, MD            29,774,713
                    Garden Apartments
                                                 Prudential Huntoon
2014-AT-1015         Preserve at Alafia            Paige & Assoc.             Jacksonville, FL          20,157,329
                                                    (Prudential)
2015-AT-1003          Amaranth at 544                  Prudential              Ft. Worth, TX            10,159,961
                                                Berkadia Commercial
2015-KC-1005               Temtor                                            Kansas City, MO
                                                     Mortgage                                           11,312,956
2015-AT-1007         Lafayette Towers                  Prudential                Detroit, MI            15,727,529
                                             Total                                                    $110,094,784

 As of September 2015, the program’s default percentage of unpaid principal balance 6 had
 decreased to 0.15 from a default rate of 1.65 percent in September 2010. Of the loans
 underwritten using the 2011 MAP Guide, no loans had gone into early claim. 7 HUD attributed
 the default rate reduction to market factors, improved underwriting, and an increase in loss
 mitigation strategies.

 Our objectives were to determine whether (1) HUD adequately reviewed and approved loans
 underwritten by MAP-approved lenders for FHA insurance and (2) the 2016 MAP Guide was
 adequately revised to improve the review and approval process for MAP loans.




 6
   The defaulted unpaid principal balance as of September 2015 was $109 million for 10 loans, while the active loans
 totaled 10,760. As of September 2010, the defaulted unpaid principal balance totaled $723 million for 87 loans
 when the active loans totaled 9,807.
 7
   HUD defines an early claim as a claim filed within 4 years of final endorsement.



                                                          4
Results of Audit

Finding 1: HUD Did Not Adequately Review and Approve MAP
Loans
HUD did not adequately review and approve nine loans underwritten by MAP-approved lenders.
Specifically, it did not require lenders to adequately address a number of key components in the
underwriting process before approving MAP loans. The loans contained multiple deficiencies,
which affected the insurability of the loans. HUD failed to enforce and comply with MAP
underwriting requirements. In addition, it did not maintain an adequate monitoring system of
approved loans for compliance with MAP requirements. As a result, HUD inappropriately
approved nine loans submitted by six MAP lenders, which exposed the FHA insurance fund to
unnecessary risk. The nine loans contained significant underwriting deficiencies as summarized
in table 1.

                                  Table 1: List of loan deficiencies
                                           Number of
              Deficiency                                                 Multifamily hub
                                           occurrences
Inadequate review of principals and                      Detroit, MI, Jacksonville, FL, Ft. Worth, TX,
contractors                                    7         Kansas City, MO, Oklahoma City, OK,
                                                         Baltimore, MD, and Buffalo, NY
Inadequate review of appraisal                           Detroit, MI, Jacksonville, FL, and Ft. Worth,
                                               3
                                                         TX
Inadequate review of project revenue                     Jacksonville, FL, Ft. Worth, TX, and Kansas
                                               3
                                                         City, MO
Inadequate review of market studies            2         Jacksonville, FL, and Ft. Worth, TX
Inadequate review of project financial                   Detroit, MI, and Ft. Worth, TX
                                               2
background
Failure to ensure that critical repairs                  Detroit, MI
                                               1
were completed before closing
Inadequate review of project repair cost                 Baltimore, MD
                                               1
and scope of work
Improper consideration of technical                      Ft. Worth, TX
                                               1
staff conclusions
Inadequate assessment of prepaid cost          1         Jacksonville, FL
Failure to follow MAP timelines for                      Ft. Worth, TX
                                               1
site inspections
Failure to enforce FHA guidelines for                    Buffalo, NY
                                               1
loan limits




                                                   5
We reviewed all eight external audit reports 8 issued between 2004 and 2015 that were conducted
to determine whether individual MAP-approved lenders underwrote and processed the loans on
nine 9 projects according to MAP requirements. We reviewed these audit reports to determine
whether HUD adequately reviewed and approved the loans submitted by the MAP-approved
lenders for FHA insurance.

Under HUD’s MAP program, approved lenders prepare, process, review, and submit loan
applications for multifamily mortgage insurance. Regarding HUD’s role, the 2002 MAP Guide,
paragraph 11.2.F, provides that each HUD technical specialist, by discipline, reviews the
respective lender’s reviewers’ reports, the underwriting summary, and certain key elements of
the application specified in the MAP Guide. The HUD technical specialist reviews the quality of
the lender’s review and the transaction itself. The HUD technical specialist does not reprocess
the case. However, if the technical specialist determines that certain underwriting conclusions
were not supportable and affect HUD’s risk, the specialist recommends the modification of the
firm commitment application, recommend that the lender modify the application, or recommend
a rejection. Whether the application is modified internally or by the lender may depend upon the
scale or severity of the issue, timing, etc. The team leader must decide to approve, reject, or
require modification of the application based upon the recommendation of the specialist.

Based on our review, for the following deficiencies, HUD should have determined that the
lenders’ underwriting conclusions were not supportable, which should have resulted in HUD’s
recommending (1) modification of the firm commitment application or (2) a rejection of the loan
application.

Inadequate Review of Principals and Contractors
HUD did not ensure that the lenders adequately assessed the eligibility and background of
principals and participants in seven of the projects. Table 2 describes the deficiencies noted
during our review.

                 Table 2: List of principals’ and contractors’ review deficiencies
    Project
                                                      Our determination
     name
     Alafia
         HUD did not (1) require the lender (Prudential) to mitigate the risk associated with
         the principal’s lack of experience in HUD programs, (2) assess the borrower’s
         financial capacity, and (3) question the lender’s allowing the broker to also act as a
         trustee for a $1 million loan to the borrower. 10
Amaranth HUD did not require the lender (Prudential) to provide documentation to adequately




8
  The reports reviewed are listed in the Background and Objectives section of this audit report.
9
  Seven of the eight audit reports included a review of one project’s underwriting in each report; however, one of the
eight audit reports included a review of the underwriting of two projects. See the Background and Objectives
section of this audit report for details.
10
   2002 MAP Guide, paragraphs 8.3.J, 8.3A.4, 8.4.A.1.2, 8.3.F, 8.16, and 3.2.K



                                                           6
 Project
                                                     Our determination
  name
              support the borrower’s financial capacity. Specifically, the borrower’s net worth
              calculation included $6.9 million in real property. However, HUD did not require
              the lender to provide support for the property. 11
    Temtor    HUD did not require the lender (Berkadia) to mitigate the risk associated with the
              principal’s lack of experience in HUD programs. 12
Lafayette     HUD did not require the lender (Prudential) to (1) adequately outline the borrower’s
              experience in HUD programs and (2) assess the eligibility of two principals not
              listed on the underwriter narrative but listed in the borrower’s support
              documentation. 13
 Wingate      HUD did not require the lender (Deutsche) to (1) perform a full credit investigation
              of the sponsor and the principals of the project and (2) obtain complete financial
              statements from the general contractor to accurately determine its working capital. 14
     Amber    HUD did not require the lender (Continental) to make a valid determination of the
              construction contractor’s capacity. Specifically, the contractor’s working capital
              inappropriately included significant loans due from officers and affiliates as current
              assets. However, HUD did not identify the issue and require the lender to
              recalculate the figure. 15
 Cypress      HUD did not require the lender (Harry) to (1) obtain complete financial statements
              from the general contractors to accurately determine its working capital and (2)
              affirm the general contractor’s construction capacity in terms of the type and size of
              previous projects. 16

The following is an example of HUD’s inadequate review of principals and contractors.

•     HUD did not require Prudential to adequately assess the background and eligibility of the
      borrower and its principals before approving them for the FHA mortgage for Lafayette.
      HUD did not assess the eligibility of two principals that were not listed in the underwriter
      narrative. The underwriter narrative listed one sole principal in the borrower’s mortgage
      development team. However, HUD’s files included the borrower’s limited liability
      corporation documentation, which revealed that the borrower had two additional principals.




11
    At the time of underwriting for Amaranth, the 2002 MAP Guide did not require support for real property. Instead,
it required only that the lender practice due diligence and prudent underwriting practices as defined in the MAP
Guide, paragraphs 11.1.C and 15.3.A.6. During HUD’s review of the mortgage credit, however, it considered
whether the lender carried out its due diligence. HUD has since identified this weakness, updated the criteria, and
developed requirements in paragraph 8.4.A.5 of the 2011 MAP Guide to require that the principals provide real
estate-owned and mortgage debt schedules to support asset values reported on their financial statements.
12
   2002 MAP Guide, paragraph 8.3. J
13
    See criteria cited in footnote 10.
14
    2002 MAP Guide, paragraphs 8.3.E.3, 8.3.H, 8.4.A.2, and 8.4.C.12.d
15
    2002 MAP Guide, paragraph 8.4.C.3
16
    2002 MAP Guide, paragraphs 8.4.C.12.d and 8.4.C.3



                                                         7
     HUD should have identified the additional principals. HUD’s failure to identify and require
     an assessment of the additional principals was significant because one of the principals had
     financial issues, including outstanding liens totaling $2.2 million filed by contractors, civil
     suits, mortgage defaults, and foreclosures. HUD’s failure to enforce its requirements resulted
     in the approval of a borrower that contributed to the project’s default.

Due to HUD’s failure to enforce its eligibility requirements for the project principals and
contractors, five lenders inappropriately approved multiple principals and contractors that may
not have had the capacity to complete and operate the projects.

Inadequate Review of Appraisals
HUD did not adequately review the appraisals for three of the projects. Many of the deficiencies
identified in the projects’ appraisals were recurring issues. Table 3 describes these deficiencies.

                            Table 3: List of appraisal review deficiencies
 Project
                                                   Our determination
  name
  Alafia  HUD (1) allowed the lender (Prudential) to use an inappropriate comparable, (2) did
          not require the lender to provide adequate support for adjustments, and (3) did not
          require the lender to identify the actual location of the vacant land site. 17
Amaranth HUD did not question the lender’s (Prudential) (1) inappropriate adjustments, (2)
          inclusion of inappropriate outliers, and (3) inclusion of a property with incomparable
          zoning. 18
Lafayette HUD (1) allowed the lender (Prudential) to use an inappropriate comparable, (2) did
          not question the lender’s failure to use the previous sale of the subject property as a
          comparable, (3) did not question the lender’s inappropriate comparable adjustments,
          (4) did not question the lender’s unreasonable project expense estimate, and (5) did
          not question the lender’s unsupported capitalization rates. 19

The following is an example of HUD’s inadequate review of appraisals.

•    HUD did not require that Prudential adequately support the value of the property for
     Lafayette. The lender overstated the property value by more than $11 million. The subject
     property previously sold for $16 million, and the appraiser valued the property at $28.6
     million less than 1 year later with only $1.4 million in repairs. Based on information also
     available at the time of the lender’s appraiser review, we recalculated the value to be $17.5
     million, more than $11 million less than Prudential’s appraised value. The improper $28.6
     million appraised value was used to support the $22.8 million mortgage amount. HUD
     should have identified and required the lender to address the (1) inappropriate comparable




17
   2002 MAP Guide, paragraphs 7.10.C.2 and 7.4.A.3
18
   2002 MAP Guide, paragraphs 7.10.C.2, 7.4.A.3, and 7.4.A.4
19
   2002 MAP Guide, paragraphs 7.11.C.2, 7.4.A.3, and 7.4.A.4



                                                       8
     sales, (2) inappropriate market data adjustments, (3) unreasonable operating expenses, and
     (4) unsupported capitalization rates. In addition, HUD should have rejected the application
     or required the lender to modify the loan application.

Due to HUD’s failure to enforce MAP appraisal and Uniform Standards of Professional
Appraisal Practice (USPAP) requirements, the lender’s appraisers overstated three projects’
combined land value by more than $15 million. 20

Inadequate Review of Project Revenue
HUD did not adequately assess project revenue for three of the subject projects. 21 Table 4
describes the deficiencies noted.

                         Table 4: List of project revenue review deficiencies
 Project
                                                     Our determination
  name
  Alafia HUD inappropriately approved the unsupported estimate of revenue 22 proposed by
         the lender (Prudential). The lender overstated the project revenue estimated for the
         project because it failed to use available up-to-date market data and relied on
         optimistic indicators, which was a violation of HUD requirements.
Amaranth HUD inappropriately approved the unsupported estimate of revenue 23 proposed by
         the lender (Prudential), although HUD was aware that the proposed rents might need
         to be lowered to be more competitive. The lender overstated the revenue that the
         project could achieve, which affected the project’s ability to meet its obligations.
 Temtor HUD inappropriately allowed the lender (Berkadia) to include (1) commercial rent 24
         in projected revenue without establishing the market rent and (2) uncertain tax
         increment financing in its projected income estimate.

Due to the lack of tax increment financing revenue guidance 25 (Temtor) and HUD’s failure to
enforce revenue requirements (Alafia and Amaranth), the lenders overstated the achievable
revenue, which in turn affected the project’s ability to meet its financial obligations.

Inadequate Review of Market Studies
HUD did not adequately review the market studies for the Alafia and Amaranth projects. 26
Specifically, HUD did not identify and require the lender to resolve the timeliness issues in the



20
   The lender’s appraisal overstated the land value by $4 million, $300,000, and $11 million for Alafia, Amaranth,
and Lafayette, respectively.
21
   2002 MAP Guide, paragraphs 7.6.A, 7.6.B, and 7.6.F
22
   2002 MAP Guide, paragraphs 7.6.A and 7.6.B
23
   2002 MAP Guide, paragraph 7.6.B
24
   2002 MAP Guide, paragraph 7.6.F
25
   The 2016 MAP Guide now includes language regarding how lenders should address tax increment financing
income.
26
   2002 MAP Guide, paragraphs 7.5.B and 7.5.E



                                                          9
Alafia market study. The Alafia market study included outdated statistics, such as
unemployment rates, census data, trend analysis for employment, and building permits, that were
dated from January 2000 to May 2007, about 15 months before the effective date of the July
2008 market study report.

In addition, HUD did not require the lender to adequately support the market need for Amaranth.
HUD should have required the lender to ensure that the market analysis included verifiable
information. HUD’s failure to enforce this requirement also affected the project’s feasibility.
The market study stated that Amaranth was superior to other properties in the market and, thus,
warranted higher rents. However, we reviewed the comparable property data and determined
that other properties offered the same or similar amenities and in some instances, were located in
superior areas.

Due to HUD’s failure to enforce its market study requirements, the lender underwrote the loans
with inadequate and untimely information for Amaranth and Alafia, respectively, which did not
conservatively present the market conditions affecting the projects’ feasibility.

Inadequate Review of Project Financial Background
HUD did not ensure that the financial history of Lafayette and Asbury was adequately reviewed.
Specifically,

•      Lafayette - HUD did not require Prudential to provide all of the required financial statements
       on the property for the previous 3 years. The MAP Guide required the borrowers to submit
       the last 3 fiscal years’ financial statements for projects, 27 but there may be conditions beyond
       the borrower’s control under which the financial information cannot be obtained. In those
       instances, the borrower must submit evidence, satisfactory to the lender, that the financial
       statements were not obtainable. The lender must submit to HUD (1) a written statement by
       the borrower explaining why the records were not obtainable and (2) a memorandum from
       the lender stating that it evaluated the statement and agreed that the information was
       unobtainable. However, HUD did not ensure that the lender provided such documentation.
       Specifically, HUD’s records included notes about the financial position of the project, which
       stated that the financial information provided in the application was limited and not thorough.
       Since HUD did not enforce this requirement, it was also unable to completely assess the
       property’s financial position. Due to HUD’s failure to enforce the requirements for financial
       background, the lenders did not obtain complete financial data needed to assess the project’s
       financial position to make sound economic decisions regarding mortgage approval for
       insurance.

•      Asbury - HUD did not question the negative working capital as an issue to be addressed by
       the lender. The lender attached the mortgage credit analysis worksheet for the owner of
       Asbury to the underwriting narrative submitted with the firm application. The mortgage




27
     2002 MAP Guide, paragraph 8.4.B.3



                                                     10
     credit analysis worksheet showed that the project had a $1.1 million negative working capital
     balance. In addition, HUD’s review did not identify that the aged accounts payable schedule
     had not been obtained and reviewed by the lender in accordance with MAP requirements. 28
     Due to HUD’s failure to enforce the requirements, it did not ensure that all of the financial
     information in the application was consistent and supported sound economic decisions
     regarding mortgage approval.

Failure To Ensure That Critical Repairs Were Completed Before Closing
HUD did not ensure that the critical repairs 29 at Lafayette were completed before the loan’s
closing. Lafayette’s project capital needs assessment showed that the project’s critical repairs
totaled more than $99,000. The assessment included repair items related to asbestos, electrical
hazards, and fire safety. The 2002 MAP Guide 30 required critical repairs to be completed before
closing due to safety and security hazards. However, 8 of the 10 repairs were not completed. In
addition, a HUD construction specialist explained that in some instances, the Detroit, MI,
Multifamily hub had a general practice of allowing critical repairs to be completed within 3 or 4
months after closing. Due to HUD’s failure to enforce the critical repair requirements, the lender
obtained loan approval for a project that had incomplete repairs, including health and safety
issues.

Inadequate Review of Project Repair Cost and Scope of Work
HUD did not adequately review the architectural and engineering cost report and the scope of
work for Wingate’s repairs. 31 The cost report noted that the conditions for firm commitment
included that asbestos would be removed as part of the proposed work but did not include an
amount. The cost report also included a cost comparison worksheet based on figures submitted
by the general contractor. However, the cost comparison worksheet did not mention asbestos
removal and did not provide a cost estimate for asbestos removal. The scope of work also did
not include all of the repairs needed to bring the property to a marketable condition. Further,
during construction, the general contractor filed a demand for arbitration for additional costs of
$680,000 for the removal of asbestos, which was not included in the original scope of work. Due
to HUD’s failure to enforce its substantial rehabilitation requirements, 32 the lender
underestimated the project’s construction costs.




28
   2002 MAP Guide, paragraphs 8.4.B.2.d.1 and 8.4.B.2.d.2
29
   Critical repairs are any individual or combination of repairs required to correct conditions that (1) endanger the
safety or well-being of residents, patients, visitors or passers-by; (2) endanger the physical security of the property;
(3) adversely affect project or unit(s) ingress or egress; and (4) prevent the project from reaching sustaining
occupancy.
30
   2002 MAP Guide, paragraphs 5.25.A and 5.25.B
31
   2002 MAP Guide, paragraph 6.6.B.1.b.1
32
   2002 MAP Guide, paragraph 6.6.B.1.b.1 required the lenders to provide cost estimation specific to substantial
rehabilitation including asbestos removal. In addition, the lender’s cost estimator is also required to prepare a
detailed cost estimate including quantities and unit costs for all items.



                                                            11
Improper Consideration of Technical Staff Conclusions
HUD’s management did not always fully consider pertinent information identified by its
technical staff. Specifically, the borrower for Amaranth should have provided a higher level of
funding for its initial operating reserves. The lender (Prudential) calculated an operating deficit
of $482,507; 33 however, the HUD technical specialist recommended a debt service of more than
$800,000. Although HUD’s program manager reviewed the technical specialist’s comments, the
specialist’s recommendations were disregarded, and the program manager allowed the borrower
to obtain a firm commitment without requiring a higher operating deficit. In addition, HUD
management did not fully consider the appraisal concerns identified by its technical staff. The
lender’s appraiser valued the land at more than $1.6 million, while HUD’s appraiser valued the
land at less than $1.3 million, a difference of more than $345,000. HUD’s program manager
reviewed the HUD appraiser’s analysis but did not mention the appraiser’s reduction in the
lender’s land valuation in the firm issuance request. Due to HUD’s improper consideration of its
technical staff’s input, the lender overstated the project’s land value and failed to require a higher
deficit reserve, which contributed to the project’s failure in meeting its debt service.

Inadequate Assessment of Project Prepaid Costs
HUD inappropriately allowed the lender to include prepaid costs 34 not related to the project for
the Alafia project. 35 The borrower intended to develop the property into a mixed-use
development, including commercial use, retail use, and apartments; however, only the costs
related to the apartments should have been included as eligible prepaid costs in accordance with
HUD’s requirements. The project’s inappropriate prepaid costs included commercial
development for a full service hotel, travel expenses for lodging and airfare to conventions,
meals, and security devices for the owners’ businesses not located at the subject site. HUD
should have questioned the ineligible costs before endorsing the mortgage. Due to HUD’s
failure to enforce its prepaid cost requirements, the lender included inappropriate expenses in the
mortgage amount.

Failure To Follow MAP Timelines for Site Inspections
HUD inappropriately approved the lender’s firm application for Asbury without requiring it to
participate in a thorough joint inspection with HUD and the lender’s architect. The followup
joint inspection was required to determine the type and the extent of the work that would make
the project viable. The property’s initial site inspection was completed by the lender more than 7
months before HUD issued the invitation letter indicating preapplication approval and more than
14 months before HUD received the firm application. As a result, the owner’s architectural
drawings and specifications did not address all of the property’s rehabilitation needs. In
accordance with the MAP Guide, 36 an additional site inspection was required to provide any



33
   A HUD Office of Inspector General (OIG) appraiser calculated the operating deficit at $958,636 for a difference
of $476,129.
34
   Prepaid costs are future expenses that have been paid in advance. The total prepaid costs were included in the
mortgage amount.
35
   National Housing Act (12 U.S.C. (United States Code) 17151(d)(4)) Section 221
36
   2002 MAP Guide, paragraph 5.14



                                                         12
necessary additional conditions for firm commitment. HUD should have noted that the
inspection was completed several months earlier and required an additional site inspection before
issuing the invitation for the firm commitment. If HUD had required the additional inspection, it
may have learned that both the contractor and the owner’s architect had informed the lender that
the scope of work did not include many of the vital repairs needed by the project. Due to HUD’s
failure to enforce the timelines requirements for site inspections, the lender’s scope of work did
not include repairs for 87 uninhabitable units, which contributed to a maximum occupancy rate
being significantly less than the proposed occupancy rate needed to pay expenses and debt
service.

Failure To Enforce FHA Guidelines for Loan Limits
HUD inappropriately allowed the lender to underwrite a loan with an amount exceeding FHA
financing limits. According to the MAP Guide, 37 secondary financing is limited to the difference
between the HUD-insured mortgage and the HUD fair market value of the property. However,
the Hudson purchase transaction included the financing instruments shown in table 5.

                                      Table 5: FHA limit calculation
                                   Financial instrument                                    Amount
             Secured Series “A” bond (secured by FHA mortgage)                             $18,900,00
             Unsecured Series “B” bond (unsecured secondary bonds)                          4,245,000
             Other – undetermined 38 (secondary note)                                         485,000
             Total                                                                        $23,630,000
             Fair market value                                                           (21,000,000)
             Amount over FHA limit                                                         $2,630,000

The Hudson transaction included financing totaling more than $23.6 million, and the HUD fair
market value of the property was $21 million. The finance transaction included $18.9 million in
Series A bonds secured by the FHA mortgage, more than $4.2 million in unsecured Series B
secondary bonds, and $485,000 for a subordinate secondary note. Due to HUD’s failure to
enforce FHA loan limit requirements, it allowed the lender to include inappropriate secondary
financing, which caused the loan to exceed financing limits by more than $2 million and thereby
exposed the FHA fund to additional unreasonable or unnecessary risk.

Lack of Adequate Monitoring System
The Office of Multifamily Housing Programs did not ensure that compliance reviews were
conducted for the MAP program. According to HUD’s Departmental Management Control
Program handbook, 39 management control is an ongoing process requiring managers to evaluate



37
   2002 MAP Guide, paragraph 8.10.B
38
   The bond documents for the $4.2 million amount referred to a subordinate secondary note totaling $485,000, but
the lender claimed that at least part of the amount was a part of the $4.2 million. However, the lender was unable to
provide documentation to support its position.
39
   HUD Handbook 1840.1, REV-3, Policy



                                                          13
their programs and establish appropriate controls to ensure that HUD programs and activities are
efficiently and effectively managed; protect against fraud, waste, and abuse; and follow
applicable laws and regulations. Further, it states that HUD will maximize its use of available
resources by incorporating risk management concepts and strategies in the conduct of all
programs and activities. In addition, 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.

On February 6, 2012, Multifamily 40 and HUD’s Office of Risk Management and Assessment
(ORMA) entered into a memorandum of understanding, which outlined that ORMA would
perform five post commitment loan reviews per month. The memorandum provided that the
loan reviews were intended to evaluate the quality of multifamily underwriting and ensure that
the underwriter complied with the MAP Guide. However, the loan reviews conducted by ORMA
did not include a compliance component and did not state whether HUD underwriters complied
with MAP requirements. Instead, the loan reviews focused only on identifying patterns, trends,
and potential areas of risk. In addition, ORMA had not conducted a loan review since October
2014, 41 and the number of active multifamily loans had increased by 384 since then. The
memorandum did not clearly define what was required in the compliance review component.
Specifically, it stated that ORMA would conduct compliance reviews but later stated that the
purpose of the reviews was not to question the actions and decisions of underwriters and loan
committees. A compliance review essentially is an assessment of whether an organization
follows certain requirements. Therefore, a compliance review should consider whether the
actions and decisions of an underwriter or loan committee followed MAP requirements.

An adequate and continuous monitoring system could have identified the types of deficiencies
discussed above. See table 1 for a summary of the underwriting deficiencies.

Conclusion
The Office of Multifamily Production did not require lenders to adequately address a number of
key components in the underwriting process, including but not limited to the eligibility of
principals and contractors, appraisals, project revenue, market studies, financial capacity, and the
completion of critical repairs before approving loans for insurance. This condition occurred
because HUD did not enforce and comply with MAP underwriting requirements applicable at the
time and maintain an adequate monitoring system for the MAP program. As a result, HUD
inappropriately approved nine loans submitted by six MAP lenders, which exposed the FHA
insurance fund to unnecessary risk.
Recommendations




40
   As stated in the Background and Objectives section of this report, the Office of Multifamily Production falls under
the Office of Multifamily Housing Programs.
41
   Based on the current Memorandum of Understanding, 5 loans would be reviewed per month by ORMA; therefore,
at least 80 loans were not reviewed at the time of our audit.



                                                          14
We recommend that the Principal Deputy Assistant Secretary for Housing to require the Office
of Multifamily Housing Programs to
1A.    Revise its memorandum of understanding with the Office of Risk Management and
       Assessment to ensure that loans approved by the Office of Multifamily Production are
       reviewed for compliance with MAP underwriting requirements.
1B.    Coordinate with the Office of Risk Management and Assessment to conduct compliance
       reviews of loans approved by the Office of Multifamily Production that have not been
       completed since October 2014.




                                              15
Finding 2: The 2016 MAP Guide Needed Further Improvement
The 2016 MAP Guide was not sufficiently revised and could be further improved and modified.
Based on the deficiencies cited in finding 1 of this report, we identified further improvements
that could be made to certain underwriting components of the 2016 MAP Guide. The
improvements would strengthen the MAP Guide and correct inconsistencies with the (1) onsite
physical inspections by appraisers, (2) justification of loan decisions, (3) valuation process, and
(4) Single Underwriter model. This condition occurred because HUD did not fully consider all
areas of improvement in risk prevention. By missing these underwriting components, HUD may
have missed the opportunity to develop stronger MAP Guide to reduce risk exposure.
The MAP Guide was originally published in May 2000 and revised in March 2002, November
2011, and January 2016. The 2011 MAP Guide included updates to requirements presented in
the 2002 MAP Guide, which strengthened controls in some areas. For example, the 2011 MAP
Guide included an update that may have prevented a deficiency identified in our review of
Amaranth’s 42 underwriting discussed in finding 1 of this report. Specifically, at the time of
underwriting for Amaranth, the 2002 MAP Guide required the lender to practice due diligence
and prudent underwriting practices. However, the 2011 MAP Guide was updated to include
details regarding asset values reported on financial statements. The 2011 MAP Guide required
the lenders to obtain principals’ real estate-owned and mortgage debt schedules to support asset
values reported on the financial statements.

During the implementation of the Multifamily for Tomorrow transformation, HUD further
revised the MAP Guide in 2016. The 2016 MAP Guide included numerous changes made to
clarify or correct items in the 2011 MAP Guide. The revisions included but were not limited to
(1) the incorporation of guidance issued in mortgagee letters, (2) tax credits, (3) substantial
rehabilitation, (4) workload distribution, (5) processing changes, and (6) commercial space. The
2016 MAP also included an update that may have prevented a deficiency identified in our review
of Temtor’s 43 underwriting discussed in finding 1 of this report. Specifically, the 2016 MAP
Guide included language regarding how lenders should address tax increment financing income.
At the time of underwriting for Temtor, the 2002 MAP Guide did not provide guidance for how
tax increment financing should be treated.

Underwriting Components Could Be Improved
HUD revised and published its 2016 MAP Guide during our audit. We reviewed the revised
2016 MAP Guide and determined that it could be further improved for certain underwriting
components. Our review the 2016 MAP Guide was limited to the underwriting components,
which were identified as deficiencies in Finding 1 of this report and the overall review and
approval process; therefore, we did not form an opinion on the adequacy of the MAP Guide in its
entirety.




42
     Audit report number 2015-AT-1003, issued on June 30, 2015.
43
     Audit report number 2015-KC-1005, issued on August 4, 2015.



                                                        16
HUD’s Departmental Management Control Program handbook 44 explains that HUD will
establish and maintain a cost-effective system of management controls to provide reasonable
assurance that programs and activities are effectively and efficiently managed and to protect
against fraud, waste, abuse, and mismanagement. Based on our review, the 2016 MAP Guide we
identified further improvements could be made to strengthen the MAP guide and correct
inconsistencies with (1) onsite physical inspections by appraisers, (2) justification of loan
decisions, (3) the valuation process, and (4) the Single Underwriter model.

Execution of Onsite Physical Inspections Could Be More Clear
The 2016 MAP Guide did not clearly show whether onsite physical inspections will be
conducted by HUD review appraisers. Paragraph 7.18.E of the Workload Sharing section of the
2016 MAP Guide stated that workload sharing arrangements may require the HUD review
appraiser to perform reviews without conducting a physical inspection. The assignment will
generally be completed with the appraiser making certain assumptions, such as that the condition
is consistent with photographs and other reports.

HUD’s senior management explained that USPAP allows for appraisal desk reviews without a
physical site inspection. However, the 2016 MAP Guide did not discuss conducting HUD
review appraiser desk reviews without a physical inspection. We acknowledge that USPAP
allows for appraisal reviews without physical site inspections. However, each valuation
appendix in the 2016 MAP Guide included a HUD review appraiser certification stating the
appraiser personally conducted a physical inspection of the subject property.

Justification of the Loan Decision Not Fully Documented
Paragraph 7.18.D of the Loan Committees section of the 2016 MAP Guide provided that HUD
review appraisers are expected to complete workload assignments to facilitate loan approval (or
rejection), including an executive summary and other material. The summary is intended to
allow management the ability to efficiently complete its reviews and conclusions. Management
has the right to disagree with conclusions made by HUD review appraisers or any other
technicians. Management should document in the file the reasons for any disagreement.

The requirement allows management to disagree with the conclusions developed by the technical
staff as long it documents the reasons for disagreement. However, implementing the
requirement as written creates a control weakness because it does not require management to
provide adequate documentation in addition to providing a reason to justify why it overruled the
conclusions and recommendations of all technical staff. Based on the deficiency cited in finding
1 of this report, during our review of the Amaranth’s underwriting, we found that the HUD
management did not fully consider conclusions formed by its technical staff.

Compliance with Appraisal Standards Could Be Clearer in Updated Valuation Process
Paragraph 7.1.D of the Valuation Analysis and Market Analyst section of the 2016 MAP Guide




44
     HUD Handbook 1840.1, REV-3, section 1-2



                                                17
 stated, “in all cases, a qualified HUD employee must review each appraisal for compliance with
 USPAP and HUD requirements.”

 This requirement could be clarified to prevent a potential control weakness. Based on the prior
 versions of the MAP Guide (2002 and 2011), we determined that HUD previously complied with
 appraisal standards in USPAP Standard Rule 3 by including an appendix, which had a
 certification executed by a USPAP-certified HUD appraiser. The 2016 MAP Guide includes
 appendixes with a similar certification statement, which requires the appraiser’s name and
 license number. However, the requirement conflicts with what is provided in the appendixes.
 Specifically the requirement in the body of the MAP Guide explains that a HUD employee must
 review the appraisal for USPAP compliance; however, the appendixes provide a certification for
 a USPAP-certified appraiser and not just any employee.

 Single Underwriter Model Not Clearly Outlined
 A comprehensive outline of how HUD plans to implement the Single Underwriter model is vital,
 considering the large loan amounts 45 associated with these transactions. According to the Deputy
 Director of the Office of Multifamily Production, the purpose of the Single Underwriter model is
 to allow for one underwriter to manage the end-to-end review of the application by drawing in
 technical experts, such as construction analysts and appraisers, as needed to (1) increase the
 efficiency of processing applications, (2) provide improved customer service, and (3) help better
 manage risk. However, the 2016 MAP Guide did not clearly outline the implementation of this
 new process. 46 Specifically, the 2016 MAP Guide did not clearly explain who would determine
 whether the use of a technical specialist would be required. For example, one section of the
 2016 MAP Guide 47 provides that the underwriter will make the decision, while another section
 explains that the production team will do so. 48 The 2016 MAP Guide also did not clearly explain
 how the determination of whether the use of a technical specialist would be required for a limited
 review or full review.
 HUD’s training material for the Single Underwriter model outlines the updated process in detail.
 Specifically, the training material explained the processing under the model as shown in table 6.

              Table 6: Detailed outline of the Single Underwriter model process
            Step
Step                   Responsible party                         Process
        description
 1     Perform intake Housing program - Receive application
                            assistant       - Route to next available underwriter analyst
                                            - Notify branch chiefs
                                            - Track workload by branch; create reports for



 45
    The MAP loan amounts insured from fiscal years 2010 through 2015 ranged from $287,000 to $190 million with
 an average of more than $10 million.
 46
    Before the Single Underwriter model, each part of the loan was always reviewed by a technical specialist.
 47
    Paragraph 4.4.A.1 of the HUD Processing section of the 2016 MAP Guide
 48
    Paragraph 4.4.A.4 of the HUD Processing section of the 2016 MAP Guide



                                                        18
             Step
Step                         Responsible party                                    Process
          description
                                                           division director
 2          Check                Underwriter           -   Check completeness of application, flag missing
         completeness              analyst                 components, and follow up as needed
 3      Assess risk via          Underwriter           -   Enter into Development Application Processing 49
        the New Early              analyst             -   Generate FHA number
           Warning                                     -   Conduct quantitative portion of NEWS 50 to
            System                                         provide insight into the level of risk and expertise
           (NEWS)                                          required to process application
                                                       -   Load materials onto regional SharePoint
                                                       -   Send results to branch chiefs
 4      Check capacity           Underwriter           -   Branch chiefs coordinate via email to validate
          within the             branch chiefs             complexity, determine capacity, and route to
           region                                          branch
                                                       -   One branch chief designates workload
                                                           distribution
                                                       -   Lead tracks capacity and works with national
                                                           workload sharing coordinator
 5         Assign              Underwriter &      -        Underwriter branch chief assigns underwriter
        underwriter &        technical specialist -        Technical specialist branch chief assigns
          technical             branch chiefs              technical specialist
          specialist                              -        Underwriter branch chief and technical specialist
                                                           branch chief inform staff of assignments
 6      Collaborate on        Underwriter and -            Collaborate on processing without supervisor
        processing of        technical specialist          involvement
         application                              -        Flag issues to respective branch chiefs as they
                                                           arise (for example, need for greater level of
                                                           expertise than expected) for resolution

 HUD’s senior management explained the intake and underwriting process consistently with what
 was provided in the training material. However, as stated above, the 2016 MAP Guide did not
 reflect what was explained by HUD officials and what is listed in the training material. In
 addition, the 2016 MAP Guide did not include the training material as an appendix. HUD’s
 senior management also explained that its written procedures are the MAP Guide. Furthermore,




 49
    The Development Application Processing system is used for analyzing, processing, and tracking applications
 for FHA mortgage insurance for loans to purchase, refinance, or build multifamily housing and health care facilities.
 50
    NEWS is a new system developed by Multifamily. HUD explained that NEWS will standardized the early
 warning system and introduce additional risk assessments, working across key underwriting dimensions (loan,
 borrower, market, etc.)




                                                           19
the training material is not a formal document, which will be signed and issued by HUD
officials.
Regarding training HUD staff on the Single Underwriter model, the Deputy Director of the
Office of Multifamily Production said that comprehensive training was being provided and
planned for current staff. However, the training needs of new staff had not been addressed.

Development of the Revised 2016 MAP Guide Could Have Been More Comprehensive
The 2016 MAP Guide could be further improved to strengthen underwriting components and
correct inconsistencies with the (1) onsite physical inspections by appraisers, (2) justification of
loan decisions, (3) valuation process, and (4) Single Underwriter model. This condition occurred
because the Office of Multifamily Production did not fully consider all areas of improvement in
risk prevention.

The Office of Multifamily Production explained that it would not be able to address the issues
identified in the report right away because the MAP Guide was published in January 2016.
Therefore, it would not be able to update the requirements until the next revision to MAP Guide,
which may not be until 2018 or 2019. However, the Office of Multifamily Production has the
authority to issue alternative formal clarification to address the weaknesses and inconsistencies
before that time.

Conclusion
We identified needed improvements and inconsistencies with certain underwriting components
and the overall review and approval process in the 2016 MAP Guide. Because HUD did not
fully consider all areas of improvement in risk prevention, it may have missed the opportunity to
develop a stronger MAP Guide to reduce risk exposure.

Recommendations
We recommend that the Acting Deputy Assistant Secretary for Multifamily Housing Programs
require the Office of Multifamily Production to
2A.    Update the valuation appendixes to reflect the requirements provided in paragraph 7.18.E
       of the 2016 MAP Guide. The updated requirements should be included in the MAP
       Guide when it is formally revised.
2B.    Update the requirements provided in paragraph 7.18.D of the MAP Guide by issuing
       alternate guidance to require management to provide adequate support documentation to
       justify loan approval in instances in which technical staff and underwriters recommend or
       conclude that a loan should not be approved. The updated requirements should be
       included in the MAP Guide when it is formally revised.
2C.    Update the requirements provided in paragraph 7.1.D of the 2016 MAP Guide by issuing
       alternate guidance to ensure USPAP compliance when the reviewer is not an appraiser.
       The updated requirements should be included in the MAP Guide when it is formally
       revised.




                                                 20
2D.   Update the requirements provided in paragraph 4.4.A of the 2016 MAP Guide by issuing
      alternate guidance, which clearly outlines who will determine whether a technical
      specialist will be used for each part of a loan under the Single Underwriter model and
      how that determination will be made. The updated requirements should be included in
      the MAP Guide when it is formally revised.
2E.   Formalize a detailed training program process to ensure that new employees hired after
      the multifamily transformation is complete are familiar with the Single Underwriter
      model.




                                              21
Scope and Methodology
We conducted the audit from September 2015 through March 2016 at HUD’s Office of
Multifamily Production headquarters in Washington, DC, HUD offices in Fort Worth, TX, and
Jacksonville, FL, and the Atlanta, GA, HUD Office of Inspector General (OIG) regional office.
The audit covered the period March 2002 through November 2011 and was adjusted as
necessary.

The review was conducted based on information contained in the lenders’ and HUD’s project
files 51 with no reliance on systems used and maintained by lenders and HUD. The records
obtained from the lenders and HUD, which we reviewed for audit evidence, were not computer
generated or based. Therefore, we did not conduct an assessment of data reliability.

To accomplish our objectives, we

     •   Reviewed organizational charts effective from 2002 to 2015;

     •   Reviewed applicable laws, regulations, and relevant HUD program requirements,
         including HUD’s MAP Guide revisions in 2002, 2011, and 2016;

     •   Reviewed policies and procedures that govern the MAP program related to the review
         and approval of loan applications for endorsement;

     •   Interviewed Office of Multifamily Production, Office of Risk Management and
         Assessment, HUD’s Lender Quality and Monitoring Division, and applicable field office
         staff to obtain an understanding of the controls significant to the audit objective;

     •   Interviewed Office of Multifamily Production and applicable field office staff to obtain
         background information on each project and determine the cause of the underwriting
         deficiencies;

     •   Reviewed lenders’ and HUD’s project files for the subject loans;

     •   Reviewed eight external HUD OIG audit reports for each of the subject loans;




51
  We obtained and reviewed each of the external audits, which included and discussed information contained in the
lender project files.




                                                        22
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.




                                                23
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:

•   Policies and procedures to ensure that the Office of Multifamily Production complied with
    laws and regulations for the review and approval of MAP loans.

•   Policies and procedures to ensure that the Office of Multifamily Production provided
    reasonable assurance that the MAP program was effectively and efficiently managed to
    ensure that the FHA fund was not exposed to unnecessary risk.

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 failed to comply with and enforce MAP requirements to adequately review and
    approve MAP loans (finding 1).




                                                  24
Appendix

Appendix A
             Auditee Comments and OIG’s Evaluation



Ref to OIG    Auditee Comments
Evaluation




Comment 1




                                 25
Ref to OIG   Auditee Comments
Evaluation




Comment 2




Comment 3




                                26
Ref to OIG   Auditee Comments
Evaluation




Comment 4




Comment 5




                           27
                               OIG Evaluation of Auditee Comments


Comment 1         HUD stated it will evaluate best practices and make continuous improvements to
                  address lessons learned from operational experience. HUD’s Departmental
                  Management Control Program handbook, 52 states management control is an
                  ongoing process requiring managers to evaluate their programs and establish
                  appropriate controls to ensure that HUD programs and activities are efficiently
                  and effectively managed; protect against fraud, waste, and abuse; and follow
                  applicable laws and regulations. Accordingly, we agree with the Office of
                  Multifamily Production’s proposed action that best practices should be evaluated
                  for continuous process improvements.
Comment 2         HUD agreed to revise its Memorandum of Understanding (MOU) with the Office
                  of Risk Management before September 30, 2016. We appreciate HUD’s
                  acknowledgement of the monitoring issue and its plan to take action to include a
                  compliance facet for its monitoring reviews.
Comment 3         HUD did not agree with recommendation 1B and stated that it would not conduct
                  the compliance reviews that were missed since October 2014. Instead, HUD
                  stated that it will conduct compliance reviews for firm commitments starting in
                  October 2016, which will coincide with the updated MOU. HUD also stated that
                  it will review any early defaults, which occur for loans originated in fiscal years
                  2015 and 2016. We acknowledge the updated MOU will include a compliance
                  function. However, as stated in finding 1, at least 80 loans were not reviewed
                  since October 2014 and if HUD does not complete the missed compliance
                  reviews, it will miss the opportunity to identify potential fraud, waste, and abuse
                  in these loans. Therefore, HUD should implement recommendation 1B.
Comment 4         HUD agreed to address the needed improvements and inconsistencies identified in
                  the 2016 MAP Guide by issuing administrative guidance in Fiscal Year 2017.
                  While administrative guidance will serve as interim clarification, the updated
                  requirements should be included in the MAP Guide when it is formally revised.
Comment 5         HUD agreed to develop a training program for new employees hired after the
                  transformation is complete. We appreciate HUD’s willingness to improve the
                  MAP program and to strengthen its controls over it by focusing on staff training.




52
     HUD Handbook 1840.1, REV-3, Policy



                                                    28