oversight

Villa Main Apartments, Port Arthur, TX, Subsidized Nonexistent Tenants, Unsupported Tenants, and Uninspected Units

Published by the Department of Housing and Urban Development, Office of Inspector General on 2018-01-31.

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

                  Villa Main Apartments,
                      Port Arthur, TX
  Multifamily Section 8 Project-Based Rental Assistance




Office of Audit, Region 6     Audit Report Number: 2018-FW-1002
Fort Worth, TX                                   January 31, 2018
To:            Mary Walsh, Southwest Region Director, Multifamily Housing, 6AHMLA
               Craig Clemmensen, Director, Departmental Enforcement Center, CACB

               //signed//
From:          Kilah S. White, Regional Inspector General for Audit, 6AGA
Subject:       Villa Main Apartments, Port Arthur, TX, Subsidized Nonexistent Tenants,
               Unsupported Tenants, and Uninspected Units




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 Villa Main Apartments in Port Arthur, TX.
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 website. 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
817-978-9309.
                    Audit Report Number: 2018-FW-1002
                    Date: January 31, 2018

                    Villa Main Apartments, Port Arthur, TX, Subsidized Nonexistent Tenants,
                    Unsupported Tenants, and Uninspected Units



Highlights

What We Audited and Why
We audited the multifamily Section 8 project-based rental assistance (PBRA) program at the
Villa Main Apartments. We selected Villa Main in accordance with the Office of Inspector
General’s (OIG) goal to review the U.S. Department of Housing and Urban Development’s
(HUD) multifamily housing programs and because the OIG Office of Investigation conducted an
investigation and suggested that the complex might not have had appropriate controls to ensure
tenant eligibility. Our objective was to determine whether the owner administered its Section 8
PBRA program in accordance with HUD regulations and guidance. Specifically, we wanted to
determine whether tenants were eligible for the program, housing assistance subsidies were
accurate, and units received required inspections.

What We Found
The owner did not administer its Section 8 PBRA program at Villa Main in accordance with
HUD regulations and guidance. It assisted at least 82 tenants who were either ineligible for
assistance because they did not exist or the tenant eligibility and the unit physical condition
standards could not be supported. These conditions occurred because the owner and former
management agent lacked oversight of their staff. They also failed to establish effective control
systems, which allowed their onsite employees to commit fraud. The employees falsified tenant
eligibility, did not properly verify tenant income, and did not inspect the units as required by
HUD. As a result, HUD paid the owner $534,741 in subsidies for ineligible “ghost” tenants and
incurred more than $1 million in subsidies for which the owner could not support the tenants’
subsidy amounts or that the subsidized units were in decent, safe, and sanitary condition.

What We Recommend
We recommend that the Southwest Region Director of Multifamily Housing require the Villa
Main owner to (1) repay HUD $534,741 for housing subsidies received for ineligible nonexistent
“ghost” tenants and (2) support or repay HUD more than $1 million for tenants whose eligibility
the owner could not support. In addition, HUD should require its contract administrator to
ensure that the Villa Main owner’s recently implemented quality control program is working as
designed and in accordance with HUD requirements. We also recommend that the Departmental
Enforcement Center take appropriate administrative actions against the appropriate owner(s).
Table of Contents
Background and Objective......................................................................................3

Results of Audit ........................................................................................................5
         Finding: HUD Paid Subsidies to Villa Main Apartments for Nonexistent Tenants,
         Unsupported Tenants, and Uninspected Units............................................................... 5

Scope and Methodology .........................................................................................11

Internal Controls ....................................................................................................13

Appendixes ..............................................................................................................14
         A. Schedule of Questioned Costs .................................................................................. 14
         B. Auditee Comments and OIG’s Evaluation ............................................................. 15
         C. Ineligible Subsidy Payments for Nonexistent “Ghost” Tenants ........................... 25
         D. Unsupported Tenant Subsidy Payments ................................................................. 27




                                                             2
Background and Objective
The Section 8 project-based rental assistance (PBRA) program was authorized by Congress in
1974 to provide rental subsidies for eligible tenant families residing in specific multifamily rental
properties. Under the program, the U.S. Department of Housing and Urban Development (HUD)
enters into long-term housing assistance payments contracts with project owners to provide
housing units to eligible tenants. HUD also contracts with project-based contract administrators
to monitor and enforce owner compliance with the terms of the contracts and HUD regulations
and requirements.
Villa Main Apartments is a 140-unit complex at 901 Main Avenue in Port Arthur, TX. HUD
subsidized rents for 81 units through a yearly housing assistance payments contract with the
owner, Villa Main Housing Associates, Ltd, a Texas Limited Partnership. 1 The contract
summarized the terms and conditions for subsidy payments. Based on the tenant’s income, the
owner determined how much rent each tenant was responsible for and submitted monthly claims
to HUD for the difference between the tenant’s portion of the rent and the total approved rent for
an adequate housing unit. Between January 2012 and May 2017, HUD paid the owner more than
$2.2 million in tenant subsidies.
Southwest Housing Compliance Corporation was HUD’s performance-based contract
administrator for Villa Main’s Section 8 PBRA program. Due to national litigation between
HUD and other parties, HUD amended its contracts with administrators throughout the country
to delete certain monitoring tasks, effective October 1, 2011. HUD reinstated the monitoring
tasks in May 2016. However, the administrator had not performed onsite monitoring reviews of
Villa Main as of the end of our review period.
The owner hired management agents to oversee day-to-day operations at Villa Main. Three
management agents managed the project between January 2012 and May 2017. From December
2011 to May 2016, RealTex Housing Management, LLC was the management agent. UAH
Property Management LP managed the project from June to August 2016. Alpha-Barnes Real
Estate Services, LLC began managing the project in September 2016. The fraud detailed in this
report occurred during the time RealTex Housing Management, LLC was the management agent.
The Office of Inspector General’s (OIG) Office of Investigation (OI) conducted an investigation
at a different apartment complex 2 and subpoenaed bank records. During its investigation, OI


1
    The partnership includes Villa Main Housing Associates GP LLC, the general partner, and PNC Multifamily
    Capital Institutional Fund XXXIV Limited Partnership (the investment limited partner), Columbia Housing SLP
    Corporation (the special limited partner), and Madhouse Development Services, Inc. (the class B limited
    partner).
2
    We also conducted the following audit: The Beverly Place Apartments, Groves, TX, Subsidized Nonexistent
    Tenants, Unqualified Tenants, and Tenants With Questionable Qualifications, audit report 2017-FW-1009,
    issued June 29, 2017.




                                                       3
discovered fraud by onsite staff at Villa Main, including identity theft and manipulated tenant
income documents. Villa Main’s former manager and assistant manager pleaded guilty to
conspiracy and theft of public money and received prison sentences. This report does not
include findings for issues addressed through the investigative process.
Our objective was to determine whether the owner administered Villa Main’s Section 8 PBRA
program in accordance with HUD regulations and guidance. Specifically, we wanted to
determine whether tenants were eligible for the program, housing assistance subsidies were
accurate, and units received required inspections.




                                                 4
Results of Audit

Finding: HUD Paid Subsidies to Villa Main Apartments for
Nonexistent Tenants, Unsupported Tenants, and Uninspected Units
Villa Main’s owner did not administer its Section 8 PBRA program in accordance with HUD
regulations and guidance. Specifically, the owner billed HUD for at least 39 tenants who did not
exist and 43 tenants with falsified income or lacking the required documentation for
recertifications. Further, the owner failed to ensure that required annual inspections were
conducted. These conditions occurred because the owner and the former management agent
lacked oversight of their staff, which allowed onsite managers to defraud HUD and Villa Main
tenants. In addition, the owner failed to implement appropriate controls to ensure that its tenants
were eligible, housing assistance payments were accurate, and its units were inspected, as
certified on its reimbursement requests to HUD. As a result, HUD paid the owner $534,741 in
subsidies for nonexistent “ghost” tenants 3 or vacant units and more than $1 million for
unsupported tenants and units that it could not assure HUD were decent, safe, or sanitary. See
the table below.

Subsidies paid for 82 ineligible and unsupported tenants
                                        Ineligible       Unsupported
               Issue               subsidy payments subsidy payments                                   Total
                                    (see appendix C)   (see appendix D)
 At least 39 nonexistent
                                        $534,741                                                     $534,741
 “ghost” tenants
 Falsified income and lack of
                                                          $1,095,364                                 1,095,364
 documentation for 43 tenants
 Totals                                   534,741           1,095,364                                1,630,105

HUD Paid the Owner for Nonexistent “Ghost” Tenants
Villa Main improperly submitted housing assistance vouchers for units with tenants who had
moved out of their subsidized units or for vacant units. HUD required Villa Main to bill HUD
only for occupied units. 4 A comparison of utility records 5 to rent rolls and housing assistance
payments showed that 39 tenants did not live in Villa Main units at the time HUD paid their




3
    Nonexistent “ghost” tenants refers to subsidized units, which Section 8 PBRA tenants did not occupy but the
    owner billed HUD for those tenants on its certified reimbursement requests, resulting in ineligible monthly
    housing subsidies from HUD.
4
    Housing assistance payments renewal contract, section 4.d.2
5
    Utility records showed that the utilities were either in the complex’s name (vacant) or in the name of another
    person not on record as living in the unit. The tenant occupying the unit was responsible for utility payments.



                                                           5
housing subsidies. Further, interviews 6 with former Section 8 tenants, former onsite managers,
employers, reported income contributors, and non-Section 8 tenants confirmed that the onsite
staff set up nonexistent “ghost” tenants by filing subsidy information for tenants who had moved
out of units and renting those units to non-Section 8 tenants to collect rent for themselves. This
scheme allowed the former onsite managers to collect and keep rent from the non-Section 8
tenants, while the owner received housing subsidies from HUD for nonexistent “ghost” tenants.
Through their fraudulent actions, former onsite
managers used tenant personal identification
information to maximize HUD assistance,
                                                    Former onsite managers defrauded
while creating their own personal enrichment        HUD and Villa Main tenants.
opportunities and harming low-income
tenants. In one instance, utility records
showed that a Section 8 tenant’s service for unit 150 was disconnected in November 2011. We
interviewed the tenant’s former employer, who said the tenant worked there from August 2009
through August 2011, then moved to California. The former employer also stated that the
signatures on 2012 and 2013 verification of employment forms were not her signature. Income
information within the tenant’s file showed that she lived and worked in California in 2013. In
addition, the tenant file contained no evidence that the owner conducted the required tenant
recertifications in 2014 or 2015.
After the Section 8 tenant moved out of unit 150 in 2011, Villa Main continued to use her
personal identification information to collect HUD housing subsidies for that unit through April
2016. A different tenant confirmed that she lived in unit 150 and paid full rent by cash or money
orders. However, the tenant file showed that this tenant lived in unit 108 and not unit 150 as
stated by the tenant. Our review of utility records confirmed that utilities for unit 150 were in
this tenant’s name from December 2011 through April 2016. In this case, the onsite managers
used the tenant’s personal identification information to collect the HUD subsidy for unit 108,
while the tenant paid full rent for unit 150, which HUD also subsidized the entire time the tenant
lived there. The tenant said she did not know she had applied for Section 8 and that she currently
owned a house and business 7 and knew she did not qualify for the program. Further, the tenant
confirmed that signatures on 2014 and 2015 tenant recertifications for unit 108 were not her
signature.
In addition to the previously described fraudulent activities, the former onsite managers
minimized tenant income, which maximized HUD assistance, including utility allowance
reimbursement checks, which resulted in HUD’s paying the owner more than it should have in
subsidies for ineligible units and inflated utility allowances. The former onsite managers also
required other non-Section 8 tenants to pay cash or money orders for rent on subsidized units,
which the managers deposited into personal bank accounts instead of the project account as
required. After OI started its investigation, the onsite manager changed the tenant status to
“moved out” for nonexistent “ghost” tenants and asked the non-Section 8 tenants who still lived

6
    In addition to our interviews, we reviewed OI interviews with former onsite managers and non-Section 8 PBRA
    tenants.
7
    Auditors interviewed this former tenant at her business.



                                                        6
at Villa Main to apply for the program if they were qualified. These fraudulent activities resulted
in ineligible housing assistance payments for 39 nonexistent “ghost” tenants totaling $534,741.
HUD Paid the Owner for Unsupported Tenants
The owner billed HUD for at least 43 tenants whose eligibility it could not support. A review of
34 tenant files showed that all of the files contained deficiencies. The files (1) contained
falsified income verification documents; (2) had income discrepancies; (3) lacked Enterprise
Income Verification (EIV) system reports, 8 third-party income verification, or both; (4) included
blank and unsigned forms HUD-50059, which are used to submit eligibility information to HUD
through its Tenant Rental Assistance Certification System (TRACS) for subsequent housing
assistance payments; and (5) had missing or incomplete inspection reports. In addition, the
owner could not locate nine tenant files, which left it unable to support that the subsidies HUD
paid benefited eligible tenant families. The resulting unsupported payments for these
deficiencies totaled more than $1 million.
Falsified Income
Two tenants confirmed with auditors that their income was falsified. In one instance, a Section 8
tenant stated that she informed the former onsite manager that she had two jobs but the manager
responded, “I did not hear that.” The tenant said she paid $300 per month in rent. However,
forms HUD-50059 in the tenant’s file showed that the tenant’s rent ranged from $0 to $68 per
month from March 2012 through February 2016. Further, the tenant said that the onsite manager
asked her to sign certifications sporadically, backdate them, or sign the certifications without
dating them. Falsifying income allowed this tenant to receive more housing assistance than she
was entitled to, while the former onsite manager could keep the difference between the amount
the tenant paid and the total tenant payment. The new management agent completed adequate
recertifications for this tenant in October 2016 and March 2017, which provided the correct
income and tenant payment amounts. Although we did not interview all tenants, our review of
the 34 tenant files suggested that the example described above was not an isolated incident.
Income Discrepancies
Of the 34 reviewed files, 8 contained income discrepancies. Income on the forms HUD-50059
did not include income from other household members, or the tenant files contained EIV reports
showing that tenants had employment income; however, the forms HUD-50059 submitted to
HUD showed much lower income from nonwage sources, such as child support or gifts, which
were also questionable.
Lack of EIV Reports, Third-Party Income Verification, or Both
All 34 reviewed files had missing EIV reports, third-party income verification, or both.
HUD mandated the use of the EIV system for verification of employment and income of
tenants and for reducing administrative and subsidy errors and required third-party
verification of the income. Even when the staff had EIV reports, the records showed that


8
    The Enterprise Income Verification system is a web-based computer system containing employment and income
    information on individuals participating in HUD’s rental assistance programs. Regulations at 24 CFR (Code of
    Federal Regulations) 5.233 and HUD Handbook 4350.3, REV-1, require its use as a third-party verification
    source.



                                                        7
they disregarded the information. In some instances, former staff ignored the information
for unlawful purposes.

Lack of Tenant Signatures on Forms HUD-50059 and HUD-50059-A
All 34 files were missing tenant signatures on forms HUD-50059 and HUD-50059-A as required
by HUD. 9 Many of the forms were also missing. Without relevant information and tenant
signatures on required forms, the owner could not assure HUD that eligible tenants occupied the
subsidized units.
HUD Paid the Owner for Uninspected Units
All 34 reviewed files had missing inspection reports, or the inspection reports were not
completed. However, the owner billed HUD and received payment for these uninspected
units. HUD required the owner to complete annual inspections to ensure that the units for
which assistance was billed were decent, safe, sanitary, and occupied or available for
occupancy. 10

The Owner Lacked Oversight and Did Not Have Controls To Detect or Prevent the Fraud
and Deficiencies
The owner did not have appropriate oversight or controls to detect the onsite managers’ fraud or
prevent the managers from committing fraud against HUD and the tenants. The managers
routinely used the same amounts and sources of income each year in tenant eligibility
submissions to HUD. The owner did not verify the information that the onsite managers
provided when it certified the accuracy of its monthly requests to HUD for subsidy payments.

For example, for five consecutive years (2012 through 2016), Villa Main reported that one tenant
had no employment income and the same gift income of $1,920 annually. However, EIV reports
in the tenant’s file showed that he had employment income during this time, including an annual
salary of more than $55,000 during 2013 and 2014 (see figure 1), which significantly exceeded
the eligibility limit of $20,150 for his family size. In this instance, one of the prosecuted former
onsite managers generated the EIV report but failed to adjust the subsidy payment to the accurate
amount in Villa Main’s certification for payment to HUD. Had the onsite manager reported the
income, the owner would not have received housing subsidies for this tenant.




9
     HUD Handbook 4530.3, REV-1, chapter 7
10
     24 CFR 5.705



                                                 8
       Figure 1: Excerpt from EIV report in the tenant file showing more than
       $55,000 in income Villa Main failed to report to HUD




On the requests for subsidy payment, the owner certified that (1) each tenant’s eligibility and
assistance payment was computed in accordance with HUD regulations, administrative
procedures, and the contract; (2) all of the facts and data on which the requests for payment were
based were true and correct; (3) the required inspections had been completed; and (4) the units
for which assistance was billed were decent, safe, and sanitary. The certifications were incorrect,
and the owner received ineligible and unsupported payments totaling more than $1.6 million.

Evidence of noncompliance with HUD requirements in the tenant files, such as those identified
in this report, was obvious. The owner or the management agent could have detected the
deficiencies had it monitored the program and reviewed the files. HUD’s project-based contract
administrator’s onsite management and occupancy review in May 2011 found deficiencies
similar to those in this report, such as (1) the management agent did not use the existing tenant
search for applicants’ household members during the screening process; (2) several files
contained no evidence that management attempted to acquire third-party verification of income
before accepting the tenant self-certification of third-party income form; and (3) the management
agent had not investigated income discrepancies. There was no evidence that the owner took
actions to address the issues brought to its attention by the project-based contract administrator
until after the OI investigation had begun.




                                                 9
Improvements
Since the current management agent took over in September 2016, the owner and current
management agent had taken a more proactive approach and implemented changes to their
oversight procedures. These procedures included (1) performing monthly monitoring of
compliance with the required earned income verification report and (2) changing procedures for
disbursement of reimbursable utility allowance checks. We tested these procedures and found
that the new procedures appeared to be adequate. However, the current management agent had
not completed a physical inspection of the units as required.
Conclusion
The owner violated its housing assistance payments contract with HUD for its Section 8 PBRA
program by billing HUD for vacant units and nonexistent “ghost” tenants; submitting erroneous
certifications to bill HUD for unqualified and questionable tenants; and charging HUD for units
that it failed to ensure were decent, safe, and sanitary. This condition occurred because the
owner placed unwarranted trust in its onsite managers, which harmed its Section 8 PBRA
program. Further, the owner and former management agent lacked oversight of their staff and
failed to implement appropriate controls to ensure that tenants were eligible and HUD housing
assistance payments were accurate, as certified on its reimbursement requests. As a result, the
owner collected housing assistance payments of more than $1.6 million to which it was not
entitled.
Recommendations
We recommend that the Southwest Region Director of Multifamily Housing require Villa Main
Apartments owner to
       1A.    Repay HUD $534,741 for 39 subsidized units with ineligible “ghost” tenants.
       1B.    Provide support that the subsidized 43 units without annual physical inspections,
              without required EIV reports, or with missing files were eligible or repay HUD
              $1,095,364 for those subsidies.
       1C.    Implement appropriate controls to ensure tenants are eligible, housing assistance
              subsidies are accurate, and that units are inspected as required.
We further recommend that the Southwest Region Director of Multifamily Housing
       1D.    Verify that the owner is providing oversight to its onsite staff and its recently
              implemented quality control program is working as designed and in accordance
              with HUD requirements.
       1E.    Ensure that the project-based contract administrator’s review process includes
              steps to obtain reasonable assurance that tenants being reported as subsidized at
              Villa Main qualify for the program and live in the subsidized units.
We also recommend that the Director of the HUD Departmental Enforcement Center

       1F.    Consider whether administrative action against the appropriate owner(s) is
              warranted.


                                                10
Scope and Methodology
We performed our fieldwork at Villa Main’s office located in Port Arthur, TX, and the OIG
Offices of Audit in Houston, TX and Fort Worth, TX, from July through November 2017. Our
audit period was January 2012 through May 2017.
To accomplish our objective, we
     •   Reviewed relevant HUD regulations and requirements.
     •   Reviewed the management agents’ policies and procedures.
     •   Reviewed the contract administrator’s management and occupancy review period for
         Villa Main, dated June 17, 2011.
     •   Reviewed Villa Main’s latest Real Estate Assessment Center inspection report.
     •   Reviewed utility records subpoenaed by the Offices of Investigation and Audit.
     •   Reviewed and analyzed the monthly housing assistance payment requests for the audit
         period.
     •   Reviewed TRACS move-in move-out reports, TRACS assistance payment reports, unit
         payment history reports, and Lexis Nexis reports.
     •   Reviewed the project’s audited financial statements, general ledgers, check registers, and
         rent rolls.
     •   Interviewed tenants or employers or their reported income contributors when we could
         locate them.
     •   Interviewed HUD and management agent staff.

     •   Removed utility allowance amounts and proportional judgment amounts that were
         included in the OI plea agreement with the former onsite managers or referred to HUD’s
         Departmental Enforcement Center when calculating the ineligible amounts.
Of the 138 11 subsidized tenants during our review period, we selected a sample of 14 files for
tenants who (1) had high housing assistance payment amounts, (2) moved out in 2016, (3) had
problem indicators, and (4) were not tenants included in OI’s investigation. For the survey phase
of our audit, we reviewed the files to determine whether documentation supported the tenant’s
eligibility for subsidized housing. We also attempted to contact 14 tenants, employers, or
reported donor income contributors to verify information in the files. The test results refer only
to the tenants tested and cannot be projected to the population of tenants. Based on the results of
this review, we expanded our review in the audit phase to include an additional 68 tenants, who


11
     The number of assisted tenants (138) exceeded the number of assisted units (81) due to tenant move-ins and
     move-outs during the audit period.



                                                         11
had housing assistance payments of more than $10,000 during the review period. 12 For these 82
tenants (14 + 68), we compared information in the utility records to TRACS reports, including
rent rolls, move-in move-out reports, payment histories, and stolen check lists obtained from OI.
We also reviewed interview records from OI for 14 other tenants. We determined that 39 of the
tenants were clearly nonexistent “ghost” tenants.
We conducted the audit in accordance with generally accepted government auditing standards.
Those standards require that we plan and perform the audit to obtain sufficient, appropriate
evidence to provide a reasonable basis for our findings and conclusions based on our audit
objective(s). We believe that the evidence obtained provides a reasonable basis for our findings
and conclusions based on our audit objective.




12
     Of 138 tenants, 82 had housing assistance payment amounts of more than $10,000 with total payments of
     $2,087,911 out of $2,248,430 (93 percent of the total payments during the audit period).



                                                        12
Internal Controls
Internal control is a process adopted by those charged with governance and management,
designed to provide reasonable assurance about the achievement of the organization’s mission,
goals, and objectives with regard to

•   effectiveness and efficiency of operations,
•   reliability of financial reporting, and
•   compliance with applicable laws and regulations.
Internal controls comprise the plans, policies, methods, and procedures used to meet the
organization’s mission, goals, and objectives. Internal controls include the processes and
procedures for planning, organizing, directing, and controlling program operations as well as the
systems for measuring, reporting, and monitoring program performance.

Relevant Internal Controls
We determined that the following internal controls were relevant to our audit objective:

•   Policies and procedures that Villa Main’s owner implemented to ensure that its Section 8
    PBRA program was administered in accordance with HUD’s rules and regulations.
•   Policies and procedures that Villa Main’s owner implemented to provide adequate oversight
    of former onsite managers at Villa Main.
•   Policies and procedures that Villa Main’s owner implemented to ensure that its monthly
    HUD billings were accurate and included only occupied units.
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:

•   The owner and former management agent lacked oversight and did not have sufficient
    controls to ensure that they implemented the Section 8 PBRA program in accordance with
    HUD’s rules and regulations, including that their monthly billings to HUD were for eligible
    tenants and for adequately supported subsidies (finding).




                                                  13
Appendixes

Appendix A


                          Schedule of Questioned Costs
                  Recommendation
                                   Ineligible 1/ Unsupported 2/
                      number
                          1A             $534,741
                          1B                              $1,095,364

                        Totals            534,741          1,095,364



1/   Ineligible costs are costs charged to a HUD-financed or HUD-insured program or activity
     that the auditor believes are not allowable by law; contract; or Federal, State, or local
     policies or regulations.
2/   Unsupported costs are those costs charged to a HUD-financed or HUD-insured program
     or activity when we cannot determine eligibility at the time of the audit. Unsupported
     costs require a decision by HUD program officials. This decision, in addition to
     obtaining supporting documentation, might involve a legal interpretation or clarification
     of departmental policies and procedures.




                                              14
Appendix B
             Auditee Comments and OIG’s Evaluation



Ref to OIG
Evaluation    Auditee Comments




                               15
Ref to OIG
Evaluation   Auditee Comments




Comment 1




Comment 2




                            16
Ref to OIG
Evaluation   Auditee Comments




Comment 2




Comment 3




                                17
Ref to OIG
Evaluation   Auditee Comments




Comment 4




                                18
Ref to OIG   Auditee Comments
Evaluation




Comment 5




Comment 3




                                19
Ref to OIG   Auditee Comments
Evaluation




Comment 3




Comment 6




Comment 7




                                20
Ref to OIG
Evaluation   Auditee Comments




Comment 3




Comment 8




Comment 9




                            21
                         OIG Evaluation of Auditee Comments


Comment 1   Individual names redacted for public release of this audit report.
Comment 2   The owner’s representative (owner) explained Villa Main Apartments’
            management structure and that the Port Arthur Housing Authority was not a part
            of the ownership, but motivated by its mission, the Authority was very much
            interested in Villa Main’s success.
            We revised the report to reflect RealTex Housing Management, LLC as its former
            management agent. We also acknowledge the Authority’s interest in Villa Main’s
            success.
Comment 3   The owner asserted that it exercised reasonable measures to oversee Villa Main
            and that the audit report did not sufficiently recognize its compliance with
            industry norms in managing and operating affordable housing communities. The
            owner also commented that the audit report did not appropriately recognize that
            the owner was also a victim and not complicit in the fraud by its staff. The owner
            did not dispute the facts contained in the report, and acknowledged that the former
            management agent failed to supervise its personnel and failed to establish internal
            control systems. The owner also accepted its ultimate duty to operate the property
            in compliance with applicable laws and regulations. The owner stated that the
            property manager’s fraud should not be imputed to the owner and requested that
            related references to the owner be removed from the audit report.
            Our audit objective was to determine whether the owner administered its Section
            8 PBRA program in accordance with HUD regulations and guidance. As such,
            we reported our audit results based on HUD regulations and guidance, not based
            on industry norms. The audit report explains that former onsite managers
            defrauded HUD and Villa Main tenants. However, as its authorized agent, the
            former management agent certified compliance with HUD requirements and
            collected subsides on behalf of the owner. Therefore, it was the owner’s
            responsibility to ensure that its monthly billings and signed certifications to HUD
            were correct. As stated in the report, the evidence of noncompliance with HUD
            requirements in the tenant files, such as those identified in this report, was
            obvious. Further, there was no evidence that the owner exerted any oversight of
            the entities it hired. We acknowledge that entities that the owner hired did not
            detect the illegal activities by onsite staff. However, that does not alleviate the
            owner’s responsibility. The best protection against fraud is employing strong
            internal controls that are continually reviewed and updated, which the owner
            failed to do. We maintain our position as described in the finding and did not
            make any changes.
Comment 4   The owner stated that its ignorance of failures was reasonable given the
            sophisticated scheme applied by the fraudsters and requested report revisions to
            reflect the owner’s reliance on the property manager’s actions.


                                              22
            As stated in the report, the evidence of noncompliance with HUD requirements,
            some of which resulted from the fraudulent actions of former staff, was repetitive
            and obvious. Each of the 82 files reviewed had deficiencies (see Appendix D),
            most of which could have been identified with proper oversight. We maintain our
            position as described in the finding and did not make any changes.
Comment 5   The owner stated that it located five of the missing tenant files from the prior
            property manager and would deliver them to HUD OIG. It would also continue to
            investigate the missing tenant files and deliver those when located.
            The owner should submit its supporting documentation to HUD and work with
            HUD during the audit resolution process to satisfy the recommendations.
Comment 6   The owner asserted that it was not made aware of continued non-compliance
            following the May 2011 MOR and based on the absence of continued requests
            from the PBCA there was no indication suggesting the issues remained
            unresolved.
            As explained in the audit report, due to a national litigation between HUD and
            other parties, HUD amended its contracts with project-based contract
            administrators throughout the country to delete certain monitoring tasks
            (including MORs), effective October 1, 2011. HUD reinstated the monitoring
            tasks in May 2016. However, before the amendment went into effect, the
            administrator made the owner aware of deficiencies in its PBRA program. As
            reported, there was no evidence that the owner took action to address the issues
            brought to its attention by the administrator until after the OI investigation had
            begun. We maintain our position as described in the finding and did not make
            any changes.
Comment 7   The owner stated that there was no reason to not trust the management agent as a
            fully-capable property manager. It also requested that a sentence be struck in its
            entirety.
            The owner’s trust in onsite management staff allowed them to certify to HUD on
            behalf of the owner that it met requirements that it could not support. As the
            report showed, evidence of noncompliance with HUD requirements was obvious,
            not isolated events, and easily detected through routine file reviews. Relying on
            hired entities does not absolve the owner of its responsibility. We maintain our
            position as described in the finding and did not make any changes.
Comment 8   The owner did not agree with the audit recommendation for it to repay
            approximately $1.6 million and suggested that we recommend that HUD and the
            owner seek remedies from the at fault parties.
            As detailed in the background section of the audit report, Villa Main’s former
            manager and assistant manager pleaded guilty to conspiracy and theft of public
            money and received prison sentences. However, the owner is responsible for



                                              23
            repayments to HUD for ineligible housing assistance payments that it received.
            In Appendix C, we removed amounts included in prosecutions from subsidy
            payments for ineligible nonexistent “ghost” tenants. We continue to recommend
            that the owner repay HUD for subsidized units with ineligible “ghost” tenants,
            and provide support that the subsidized units without annual physical inspections,
            without required EIV reports, or with missing files were eligible or repay HUD
            for those subsidies.
Comment 9   The owner commented on the “Improvements” section of the report.
            We commend Villa Main’s efforts to improve its Section 8 project-based rental
            assistance program.




                                             24
Appendix C
                   Ineligible Subsidy Payments for Nonexistent “Ghost” Tenants


                                                                                 Ineligible
                               Move-in        Last utility      Move-out
                 Tenant                                                            HUD
                                date          service date       date
                                                                                 subsidy 13
                     1          8/24/2011         5/9/2012       7/31/2016           $27,825
                     2         11/10/2011       10/31/2012        6/6/2016             22,625
                     3          12/3/2009        4/29/2010       9/21/2016             30,885
                     4           5/1/2009       11/10/2010        4/6/2016             28,171
                     5          4/29/2008         3/3/2010       5/25/2016             29,051
                     6          7/31/2009       11/11/2011       4/26/2016             26,500
                     7          2/25/2011         3/5/2012       1/31/2016             25,418
                     8          12/3/2010       No records       11/3/2016             26,068
                     9          12/3/2010        9/26/2011       9/20/2016             24,883
                    10          7/15/2011        8/22/2011       6/30/2016             23,565
                    11          7/15/2011         2/4/2013       6/30/2016             18,142
                    12          4/27/2005        12/6/2013       5/17/2016             16,159
                    13          6/29/2011        2/20/2013       5/31/2016             17,062
                    14          5/28/2008        6/26/2014       4/30/2016             10,286
                    15          7/20/2012       11/26/2014       3/31/2016             11,197
                    16           3/1/2010         3/1/2012       2/29/2016             13,016
                    17         12/30/2008         8/2/2011        4/6/2016             27,921
                    18          8/24/2011        9/28/2011       7/30/2016             24,206
                    19          2/10/2009        12/2/2013       9/21/2016             19,421
                    20           8/1/2012        9/13/2012        4/8/2016             23,423
                    21           7/1/2010       12/12/2013       5/17/2016             15,000
                    22          11/2/2009        12/3/2014       5/26/2015              1,363
                    23          1/26/2009        9/26/2011       3/30/2016             16,102
                    24          9/23/2009        5/25/2011       5/25/2016             19,138
                    25          7/31/2009        2/28/2014       5/25/2016             16,013
                    26          11/1/2012        6/11/2015       9/16/2016              9,458
                    27          4/24/2012         3/7/2014       5/24/2016             15,203
                    28          2/21/2006        6/16/2011       4/30/2016             26,409
                    29          8/20/2009       11/25/2013       7/31/2016             14,993




13
     This amount does not include utility reimbursement amounts for which former onsite managers were prosecuted.



                                                         25
               Ineligible Subsidy Payments for Nonexistent “Ghost” Tenants


                                      Last utility   Move-out    Ineligible HUD
             Tenant    Move-in date
                                      service date    date          subsidy 14

                  30      6/29/2005    No records    5/31/2016           29,001
                  31       5/1/2009      6/2/2010    8/31/2016           29,930
                  32      8/17/2012     9/13/2012    5/25/2016           24,419
                  33      2/13/2009    11/12/2012    9/20/2016           23,323
                  34      7/13/2004     1/25/2016    5/25/2016            3,406
                  35      8/12/2011     7/30/2012    4/13/2016           24,041
                  36      9/15/1999     6/26/2014    8/31/2016           12,125
                  37      12/6/2007      3/4/2014     3/9/2016           13,512
                  38       3/4/2008     8/14/2014    2/29/2016            8,359
                  39      11/5/2012     10/6/2015    2/19/2016            1,863
             Total                                                      749,482
             Less proportional judgment amounts                        (214,741)
             Total ineligible amounts                                   534,741




14
     Ibid.



                                               26
      Appendix D
                                      Unsupported Tenant Subsidy Payments


                                                                                  Missing                        Unsupported
              Falsified       Income          Missing          Missing                              Missing
  Tenant                                                                           annual                          housing
               income      discrepancies    EIV reports     documentation*                        tenant files
                                                                                certifications                    subsidies
     1                                            X                 X                                                $36,080
     2            X              X                X                 X                                                 32,984
     3                           X                X                 X                 X                               24,859
     4            X              X                X                 X                 X                               28,739
     5                                            X                 X                 X                               25,331
     6                                                                                                 X              30,292
     7                                            X                 X                 X                               37,001
     8                           X                X                 X                 X                               18,964
     9                                            X                 X                                                 38,618
    10                                            X                 X                 X                               38,269
    11                                            X                 X                                                 28,647
    12                                                                                                 X              36,086
    13                           X                X                 X                                                 35,773
    14                           X                X                 X                 X                               35,773
    15                                                                                                 X              35,510
    16                           X                X                 X                                                 31,125
    17                                            X                 X                 X                               30,418
    18                                            X                 X                                                 29,972
    19                                                                                                 X              29,328
    20                                                                                                 X              28,901
    21                                            X                 X                 X                               28,514
    22                                            X                 X                 X                               27,141
    23                                                                                                 X              26,089
    24                                            X                 X                 X                               25,633
    25                                            X                 X                 X                               25,549
    26                                            X                 X                 X                               25,004
    27                                            X                 X                 X                               23,963
    28                                            X                 X                 X                               22,812
    29                           X                X                 X                 X                               21,559
    30                                            X                 X                                                 20,827


*Missing income verifications, missing inspection reports, and missing signatures on forms HUD-50059




                                                              27
                                      Unsupported Tenant Subsidy Payments


                                                                                 Missing                        Unsupported
              Falsified       Income          Missing          Missing                             Missing
  Tenant                                                                          annual                          housing
               income      discrepancies    EIV reports     documentation*                       tenant files
                                                                               certifications                    subsidies

    31                                            X                X                                                  20,564
    32                                            X                X                  X                               19,482
    33                                            X                X                  X                               19,446
    34                                            X                X                  X                               19,428
    35                                            X                X                  X                               19,038
    36                                                                                                 X              18,852
    37                                            X                X                  X                               18,234
    38                                            X                X                                                  17,394
    39                                                                                                 X              16,865
    40                                            X                X                  X                               16,451
    41                                                             X                                                   8,954
    42                                            X                X                  X                               10,827
    43                                                                                                 X              10,068
 Totals           2              8               33                34                23                9           1,095,364


*Missing income verifications, missing inspection reports, and missing signatures on forms HUD-50059




                                                              28