oversight

Eastwood Terrace Apartments, Nacogdoches, TX, Multifamily Section 8, Subsidized Questionable Tenants, Overhoused Tenants and Uninspected Units

Published by the Department of Housing and Urban Development, Office of Inspector General on 2018-08-02.

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

          Eastwood Terrace Apartments,
               Nacogdoches, TX
  Multifamily Section 8 Project-Based Rental Assistance




Office of Audit, Region 6     Audit Report Number: 2018-FW-1005
Fort Worth, TX                                     August 2, 2018
To:            Mary Walsh, Southwest Region Director, Multifamily Housing, 6AHMLA

               //signed//
From:          Kilah S. White, Regional Inspector General for Audit, 6AGA
Subject:       Eastwood Terrace Apartments, Nacogdoches, TX, Multifamily Section 8,
               Subsidized Questionable Tenants, Overhoused 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 Eastwood Terrace Apartments in
Nacogdoches, 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-1005
                    Date: August 2, 2018

                    Eastwood Terrace Apartments, Nacogdoches, TX, Multifamily Section 8,
                    Subsidized Questionable Tenants, Overhoused Tenants and Uninspected
                    Units


Highlights

What We Audited and Why
We audited the Eastwood Terrace Apartments multifamily Section 8 Project-Based Rental
Assistance (PBRA) program. We selected Eastwood Terrace in accordance with the Office of
Inspector General’s (OIG) goal to review HUD’s multifamily housing programs. Our objective
was to determine whether the owner administered its Section 8 PBRA program in accordance
with U.S. Department of Housing and Urban Development (HUD) regulations and guidance;
specifically, whether the owner ensured that tenants were eligible for the program and that
housing assistance subsidies were correct.

What We Found
The owner did not administer its Section 8 PBRA program in accordance with HUD regulations
and guidance. It did not ensure that tenants were eligible for the program and that housing
assistance subsidies were correct. Specifically, the owner (1) billed HUD for at least 81 tenants
without the required documentation for recertifications and did not ensure that it could support
the eligibility of its tenants, as certified on its reimbursement requests to HUD, (2) housed
tenants in units larger than their family size should have allowed, and (3) failed to ensure that
required annual inspections were conducted. These conditions occurred because the owner
failed to implement appropriate controls and lacked proper oversight of its staff, which allowed
onsite managers to mismanage its program and admit tenants with questionable qualifications
into uninspected units. As a result, HUD paid the owner more than $1.8 million for unsupported
tenants and units that it could not assure HUD were decent, safe, or sanitary.

What We Recommend
We recommend that the Southwest Region Director of Multifamily Housing require the
Eastwood Terrace owner to (1) support or repay HUD more than $1.8 million for tenants whose
eligibility the owner could not support, (2) properly house tenants in the correct unit size, (3)
perform annual inspections as required, and (4) ensure that its recently implemented quality
control program is working as designed and in accordance with HUD requirements.
Table of Contents
Background and Objective......................................................................................3

Results of Audit ........................................................................................................5
         Finding: Eastwood Terrace Apartments Subsidized Questionable Tenants,
         Overhoused Tenants and Uninspected Units ................................................................. 5

Scope and Methodology .........................................................................................13

Internal Controls ....................................................................................................15

Appendixes ..............................................................................................................16
         A. Schedule of Questioned Costs .................................................................................. 16

         B. Auditee Comments and OIG’s Evaluation ............................................................. 17

         C. Unsupported Tenant File Results ............................................................................ 24

         D. Unsupported Tenant Subsidy Payments and Repayments to HUD ..................... 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.
Eastwood Terrace Apartments is a 192-unit complex at 2817 E J Campbell Blvd. in
Nacogdoches, TX. It is a combination of two formerly separate apartment complexes (Eastwood
Terrace and Oakhill Plaza). The property is not insured by the Federal Housing Administration,
but it is 100 percent HUD subsidized. The owner of the property is Eastwood Terrace and
Oakhill Plaza, LLC, a Texas limited liability company, 1 and its management agent is Arnold
Grounds. 2 Eastwood Terrace received approximately $5.1 million in multifamily project-based
Section 8 subsidies between June 2014 and September 2017.
HUD subsidized rents for the 192 units through a yearly housing assistance payments contract
with the owner. 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.
Southwest Housing Compliance Corporation (SHCC) was HUD’s performance-based contract
administrator for Eastwood Terrace’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.
SHCC performed an onsite management and occupancy review at Eastwood Terrace on February
15 and 16, 2017, and issued a report, dated March 17, 2017, assigning Eastwood Terrace an
unsatisfactory score. As a result, the management agent performed a 100 percent file review for
the period January 2014 through March 2017 and completed mass inspections of all 192 units.
Eastwood Terrace provided SHCC required corrective action responses and supporting
documentation to address the findings and observations in the review. On April 2, 2018, SHCC
closed the 2017 review summary report.



1
    Eastwood Terrace and Oakhill Plaza, LLC, is owned 100 percent by ZG Investment Properties, Ltd.
2
    Arnold Grounds Apartment Management and Affordable Housing Specialist became Eastwood Terrace’s
    management agent effective January 2018. J. Allen Management was Eastwood Terrace's management agent
    from May 2014 through August 2015. The owner served as the management agent from September 2015
    through December 2017.



                                                     3
The owner hired Arnold Grounds, effective January 2018, as its management agent to oversee
day-to-day operations at Eastwood Terrace. Previously, the owner was the management agent
and relied on onsite managers to oversee the day-to-day operations at Eastwood Terrace.
Our objective was to determine whether the owner administered Eastwood Terrace’s Section 8
PBRA program in accordance with HUD regulations and guidance; specifically, whether the
owner ensured that tenants were eligible for the program and that housing assistance subsidies
were correct. This is the third audit in a series 3 of Office of Inspector General (OIG) Region 6
reviews of multifamily Section 8 PBRA programs.




3
    We also conducted the following audits: (1) 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, and (2) Villa Main Apartments, Port Arthur, TX, Subsidized Nonexistent
    Tenants, Unsupported Tenants, and Uninspected Units, audit report 2018-FW-1002, issued January 31, 2018.




                                                        4
Results of Audit

Finding: Eastwood Terrace Apartments Subsidized Questionable
Tenants, Overhoused Tenants and Uninspected Units
Eastwood Terrace’s owner did not administer its Section 8 PBRA program in accordance with
HUD regulations and guidance. It did not ensure that tenants were eligible for the program and
that housing assistance subsidies were correct. Specifically, the owner (1) billed HUD for at
least 81 tenants without the required documentation for recertifications and did not ensure that it
could support the eligibility of its tenants, as certified on its reimbursement requests to HUD, (2)
housed tenants in units larger than their family size should have allowed, and (3) failed to ensure
that required annual inspections were conducted. These conditions occurred because the owner
failed to implement appropriate controls and lacked proper oversight of its staff, which allowed
onsite staff to mismanage its program and admit tenants with questionable qualifications into
uninspected units. As a result, HUD paid the owner more than $1.8 million for unsupported
tenants and units that it could not assure HUD were decent, safe, or sanitary.


The Owner Billed HUD for Questionable Tenants
The owner billed HUD for at least 81 tenants whose eligibility it could not support as shown in
Table 1. The owner could not locate four tenant files, which left it unable to support that the
subsidies HUD paid benefited eligible tenant families. A review of the remaining 77 tenant files
showed that all of the files contained deficiencies. The files (1) showed that Eastwood Terrace
overhoused tenants; (2) lacked annual certification documents; (3) lacked Enterprise Income
Verification (EIV) reports, 4 third-party income verifications, or both; (4) included unsigned
forms HUD-50059, which are used to submit eligibility information to HUD for housing
assistance payments; and (5) had income discrepancies, as shown in Appendix C. The resulting
unsupported payments for these deficiencies totaled more than $1.9 million. 5

Table 1: Subsidies paid for 81 questionable tenants and uninspected units
                                    Unsupported       Reimbursed to HUD
              Issue              subsidy payments        via repayment                              Total
                                  (see appendix D)        agreements
  Lack of documentation for 81
                                     $1,906,228              $40,884                             $1,865,344
 tenants and uninspected units
 Totals                              $1,906,228              $40,884                             $1,865,344


4
    The EIV 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.
5
    Eastwood Terrace reimbursed HUD $40,884 during our fieldwork for deficiencies it identified for nine tenant
    files in our sample. It also reimbursed HUD $6,879 for two tenant files before our fieldwork started.



                                                        5
Missing Tenant Files
The owner could not locate 4 of the 81 files requested. Therefore, only 77 of the files were
available for review. The owner repaid HUD $15,675 6 for the subsidies it received for the four
missing files. The amounts related to these missing tenant files were not included in our
recommendation in appendix A to support or reimburse HUD for identified deficiencies.

Overhoused Tenants
Of the 77 tenant files reviewed, 35 families (45 percent) were living in units larger than their
household size should have allowed. In seeking the most efficient use of housing assistance,
HUD requires owners of all federally subsidized properties to assign a family to a unit of
appropriate size, taking into consideration all persons residing in the household. 7 In one
instance, a three-member household moved into a three-bedroom unit in February 2015. At the
family’s 2016 annual recertification, there were only two members left in the household;
however, Eastwood Terrace allowed them to remain in the three-bedroom unit. At the 2017
annual recertification, Eastwood Terrace moved the two-member family into a four-bedroom
unit, when they should have been in a two-bedroom unit according to HUD requirements and its
own policy. This error resulted in Eastwood Terrace receiving a contract rent of $1,085 8 per
month instead of $744. Although Eastwood Terrace completed a 100 percent file review, it did
not identify this error.

Missing Documents and Signatures
All 77 of the available files were missing one or more significant documents or required
certifications, including annual certifications, income documents, and unsigned or questionable
documents.
Annual certifications. Of the 77 available files, 21 (27 percent) were missing evidence of annual
certifications. HUD requires providers to certify tenant eligibility at least yearly. 9 Without a
certification, there was no evidence that the provider considered possible changes in the tenant’s
income and family composition.
Income documents. All 77 available files were missing EIV reports, third-party income
verifications, or both. HUD mandated the use of the EIV system 10 for (1) verification of
employment and income of tenants, (2) reducing administrative and subsidy errors, and
(3) required third-party verification of income. Even when the staff had EIV reports, the
records showed that they disregarded the information or did not follow up on inconsistent
information.



6
     This amount was included in the Eastwood Terrace reimbursements via repayment agreements.
7
     HUD Handbook 4350.3, chapter 3
8
     The $1,085 monthly contract rent for the four-bedroom unit included a HUD subsidy of $950 and $135 for the
     tenant’s portion of the rent.
9
     HUD Handbook 4350.3, chapter 7
10
     24 CFR 5.233



                                                         6
Unsigned and questionable documents. Of the 77 available files, 43 (56 percent) were missing
tenant or owner signatures or both on forms HUD-50059 and HUD-50059-A as required by
HUD Handbook 4530.3, REV-1, chapter 7. Many of the forms had inconsistent tenant
signatures, which indicated that someone other than the tenants (such as former Eastwood
Terrace staff) may have signed the documents. In at least eight instances, tenant signatures 11 on
documents such as Social Security cards, Texas driver’s licenses and identification cards, and
other HUD forms did not appear to match the multiple signatures on the tenant eligibility
certifications. 12 Without relevant information and tenant signatures on required forms, the owner
could not assure HUD that eligible tenants occupied the subsidized units.
Income Discrepancies
Of the 77 available files, 58 (74 percent) contained income discrepancies because they
did not include all income required to be reported. Annually, HUD required the owner to
calculate each tenant’s rent subsidy and the tenant’s share of the rent based on the
tenant’s income. 13 However, the forms HUD-50059 in the files did not include all
required income sources. Specifically, they did not include employment income shown
on EIV reports in the tenant files. Instead, the forms showed either $0 income or much
lower income from nonwage sources, such as child support and gifts. Further, other
household members failed to report income. For example, three adult members of a
household all signed statements certifying that they had $0 income. However, EIV
reports showed that at least one family member had employment income. There was no
evidence in the file that Eastwood Terrace addressed the discrepancy. Further, as shown
in Table 2, many of the annual recertifications included multiple forms HUD-50059 for
the same year with inconsistent income information and missing signatures.




11
     Although we have evidence to support our conclusion, for privacy reasons, we did not include examples of the
     inconsistent signatures in this report.
12
     Forms HUD-50059 and 50059A
13
     See footnote 10.



                                                          7
Table 2: Multiple forms HUD-50059 annual recertifications for the same year
              Number of annual recertifications
                                                                                   Deficiencies
Sample         2017        2016         2015        2014
    2                         2                                Incomes differed and signature missing on some forms
    3                         3                                Incomes differed and signature missing on some forms
    4            2            3                       2        Incomes differed and signature missing on some forms
    5            2            2           2           2                          Incomes differed
    6            2                                                               Incomes differed
    8            2            2                       2        Incomes differed and signature missing on some forms
   11                         2           3                    Incomes differed and signature missing on some forms
   12            2            2           2                                      Incomes differed
   16                         3                                Incomes differed and signature missing on some forms
   17                         2           2                    Incomes differed and signature missing on some forms
   20                                     2           2        Incomes differed and signature missing on some forms
   21            3            4                                Incomes differed and signature missing on some forms
   25            2            2           2                    Incomes differed and signature missing on some forms
   26            2            2                                Incomes differed and signature missing on some forms
   29            2            3           2                                      Incomes differed
   30                         2                                             Signature missing on form
   35                         2           2                    Incomes differed and signature missing on some forms
   41                         2                                Incomes differed and signature missing on some forms
   47            2            2                                Incomes differed and signature missing on some forms
   48            2            2                                Incomes differed and signature missing on some forms
   50            2            2                                Incomes differed and signature missing on some forms


  The Owner Billed HUD for Uninspected Units
  Of the 77 files reviewed, 75 14 (97 percent) had missing inspection reports, or the inspection
  reports were not completed for the entire review period. HUD required the owner to complete
  annual inspections to ensure that the units for which it provided subsidies were decent, safe,
  sanitary, and occupied or available for occupancy. 15 After the file reviews were completed, the
  owner provided auditors with additional annual inspections from its 2017 100 percent
  inspections and a spreadsheet that summarized inspections conducted by the former management
  agent. 16 We were able to accept only the 2017 inspections, which were largely duplicates of
  reviewed inspections already in the files, 17 and applied them if they were within a reasonable

  14
       If the file did not contain an inspection report for each year of the audit period (2014 through 2017), we counted
       the file as a missing inspection report error. See appendix C.
  15
       24 CFR 5.705 and form HUD-52670 part V – owner's certification
  16
       The former management agent was J. Allen Management.
  17
       Many of the 2017 inspection reports in the files were either illegible, incomplete, or both.



                                                              8
timeframe of the recertification date. Although the owner explained that he believed the
inspection information provided in the spreadsheets was from 2015 and 2016 inspections, it was
not sufficient to support the housing assistance payment subsidies or to assure HUD and
taxpayers that the units were decent, safe, or sanitary. The spreadsheets did not include required
information, such as when the inspections were conducted and by whom, and required
signatures. In addition, the spreadsheet creation dates were from 2018, indicating that the
spreadsheets were not completed contemporaneously.
The Owner Lacked Oversight and Did Not Have Controls to Detect or Prevent Deficiencies
The owner did not have appropriate oversight or controls to detect or prevent deficiencies in the
tenant files. In addition, it did not verify the information that the onsite managers provided when
it certified the accuracy of its monthly requests to HUD for subsidy payments. Instead, the
owner (1) hired the prior owner’s employees; (2) relied on the onsite staff, which engaged in
questionable practices and mismanaged its program; and (3) allowed questionable mass
document processing. The owner blamed former employees for subsidy issues and other
inconsistencies. However, the owner was ultimately responsible for submissions to HUD for
unsupported housing payments.

The Owner Hired the Prior Owner’s Employees
Despite being aware of the property’s troubled history, after acquiring Eastwood Terrace in
2014, the owner hired the same onsite property employees who had worked for the prior owner.
The owner believed that if he maintained the previous owner’s experienced employees, it would
maintain continuity between owner changes.

The Owner Relied on Staff, Which Had Questionable Practices and Mismanaged Its Program
For day-to-day operations, the owner relied on its former onsite staff, which engaged in
questionable practices and mismanaged its program. The files reviewed contained multiple
issues, which the onsite staff should not have allowed. These issues included overhoused
tenants, income discrepancies, missing required documents, and a lack of required inspections
and signatures. In some instances, it appeared that the onsite staff had conflicts of interest or
actively engaged in questionable behavior. For example, a former employee, who regularly
certified applications, forms HUD-50059, and other required documents maintained in the tenant
files, was also a HUD-subsidized tenant at Eastwood Terrace for part of the time when she was
an employee. In at least one instance, the former employee certified that she was a gift donor for
a different tenant. The former employee also signed a document containing a tenant’s signature.
During the 100 percent file review, the tenant verified with Eastwood Terrace that the signature
on the document represented as hers was not her signature. Further, the tenant verified that
although she completed an application in 2016, she did not move into Eastwood Terrace, which
could be an indication of a ghost tenant. 18 The onsite staff processed a form HUD-50059 for this
tenant and collected $5,062 in related subsidies on behalf of the owner. Upon discovering the
issue, the owner reimbursed HUD for the overpayment. When potential conflicts of interest and
questionable practices existed, Eastwood Terrace was at risk for fraudulent activity.

18
     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.



                                                           9
In addition, paperwork was often misfiled, 19 and onsite staff was inconsistent in how it recorded
tenant names, which led to confusion. Tenant files contained a mixture of documents with
variations on names, which made it difficult to determine which documents applied to the correct
tenant file or whether individuals with different names were the same tenant. In one case, onsite
staff processed documents for a tenant using different names. In reviewing payment history data,
it appeared that Eastwood Terrace received subsidies for multiple tenants for the same unit. The
only way to identify the potential duplicate issue was through cumbersome individual file
reviews, paying close attention to the possibility of unrelated name errors. A typical owner
would not have the resources to regularly engage in that level of review. These examples show
the importance of providing proper oversight of staff and implementing effective controls to
prevent and detect questionable practices.
The Owner Allowed Mass Document Processing
Onsite staff processed and approved mass tenant actions on the same date, which did not appear
feasible. For example, onsite staff processed 19 move-ins on October 30, 2015; 15 20 move-ins
on June 30, 2016; and 12 move-outs on June 23, 2016. Moving this many tenants in or out of
units on the same day, when the process was time consuming and required detailed information
collection procedures, appeared questionable. We reviewed 9 21 of the 15 move-ins processed on
June 30, 2016, and found inconsistencies and errors. In one case, records in the file showed that
a tenant moved in on June 30, 2016, when the tenant did not apply for admission to the program
until March 30, 2017.
The Owner Blamed Former Employees for Issues
The owner acknowledged that there were subsidy issues in 2015 and that he saw “things that
were not right,” which led to the management and occupancy review. The owner stated that the
low score Eastwood Terrace received was a result, in part, of suspected instances of employee
dishonesty and collusion related to tenant eligibility, including underhousing 22 and overhousing.
He also said he met with the contract administrator, who pointed out signatures in files that were
not correct. The owner said he believed that the employees took advantage of him. However, on
the requests for subsidy payment, the owner certified that each tenant’s eligibility and assistance
payment was computed in accordance with HUD regulations and the facts and data submitted
were true and correct; the required inspections had been completed; and the units for which
assistance was billed were decent, safe, and sanitary. The certifications were incorrect, and the
owner received unsupported payments totaling more than $1.8 million.

The Owner Had Made Improvements
In response to administrative and physical condition issues identified by HUD and its project-
based contract administrator, the owner took steps to improve its program operations by hiring a
new management agent and implementing changes to its oversight procedures. The owner
admitted that being the owner of a HUD-subsidized multifamily property and being the property


19
     The misfiled documents often belonged to other tenants.
20
     Four of these files were missing.
21
     These 9 files were included in our review of 77 sample files. See Scope and Methodology section.
22
     In our review of 77 tenant files, we did not identify any instances of underhousing.



                                                          10
manager was new to him. Therefore, the owner said he decided to find a team of consultants to
assist him and hired an audit team to address the deep-rooted problems. As Eastwood Terrace
conducted its 100 percent file review, the owner repaid HUD for errors that it identified.
The Owner Entered Into Repayment Agreements
The owner entered into three repayment agreements to reimburse HUD for tenant files it could
not support. The owner received a reduced monthly housing assistance payment subsidy to
satisfy the repayment agreements. As of June 2018, the owner had repaid HUD the amounts in
two of the three repayment agreements as shown in Table 3. We deducted the amounts the
owner repaid to HUD for each of our 81 sample files totaling $40,884. We did not deduct any
amounts for the third repayment agreement because payments had not been made by the end of
our fieldwork.
Table 3: Owner repayment agreements
 Repayment Agreement setup        Voucher reimbursement                            Repayment
  number           month                  month                                 agreement amount   Paid
      1         August 2017     August 2017 – January 2018                           $56,750       Yes
      2         October 2017     February 2018 – June 2018                            41,747       Yes
      3          March 2018     July 2018 – December 2018                            182,919        No
 Total repayment agreement amount                                                    281,416

Conclusion
The owner violated its housing assistance payments contract with HUD for its Section 8 PBRA
program by submitting incorrect certifications to bill HUD for questionable tenants and by
charging HUD for units that it failed to ensure were decent, safe, and sanitary. This condition
occurred because the owner relied on its onsite managers, who mismanaged the program.
Further, the owner and former management agent lacked oversight of their staff and failed to
implement appropriate controls to ensure that they could support the eligibility of their tenants
and that more than $1.9 million in HUD housing assistance payments was accurate, as certified
on their reimbursement requests. In understanding the issues it faced, the owner undertook steps
to manage its program in a more efficient and effective manner. It hired a new management
agent, conducted a 100 percent file review and mass inspections, and entered into repayment
agreements with HUD for tenant files it could not support. 23 However, the owner collected
housing assistance payments of more than $1.8 million, which it could not support.

Recommendations
We recommend that the Southwest Region Director of Multifamily Housing require the
Eastwood Terrace Apartments owner to
          1A.      Support that the subsidies for 77 tenants and units with income discrepancies,
                   missing EIV reports, missing income verifications, missing annual certifications
                   and missing signatures are supported and accurate or repay HUD $1,865,344 for
                   those subsidies. Repayment must be from non-project funds.



23
     Of its repayments through June 2018, $40,884 related to 9 of 81 tenant files in our sample.



                                                           11
1B.   Ensure tenants are housed in the correct unit size.
1C.   Ensure annual inspections are performed in a timely manner and in accordance
      with HUD requirements.
1D.   Ensure that its new property management agent is providing oversight to its onsite
      staff and that its recently implemented quality control program is working as
      designed and in accordance with HUD requirements.
1E.   Maintain tenant files in a manner that ensures they contain the correct records and
      all required documentation.




                                        12
Scope and Methodology
We performed our fieldwork at Eastwood Terrace’s office located in Nacogdoches, TX, and the
OIG Office of Audit in Houston, TX, from November 2017 through June 2018. Our audit period
was June 2014 through September 2017.
To accomplish our objective, we
     •    Reviewed relevant HUD regulations and requirements.
     •    Reviewed Eastwood Terrace’s policies and procedures.
     •    Reviewed the contract administrator’s management and occupancy review period for
          Eastwood Terrace, dated March 17, 2017.
     •    Reviewed Eastwood Terrace’s latest Real Estate Assessment Center inspection report.
     •    Reviewed Tenant Rental Assistance Certification System move-in and move-out reports
          and unit payment history reports.
     •    Reviewed the project’s audited financial statements.
     •    Interviewed employees at Eastwood Terrace.
     •    Interviewed the owner, project-based contract administrator and management agent staff.
     •    Corresponded with HUD staff.

     •    Removed HUD reimbursed amounts for unsupported tenant files from repayment
          agreements.
Of the 401 subsidized tenants during our review period receiving more than $5.1 million in
housing assistance payments, we selected a nonstatistical sample of 15 tenants totaling $482,375
in housing assistance payments during the survey phase for tenants who (1) had housing
assistance payment amounts of more than $10,000, (2) received payments under more than one
name (duplicates), 24 (3) and had low income. Based on the results, we expanded our review in
the audit phase to include an additional 66 tenants 25 for the audit phase totaling more than $1.4
million in housing assistance payments. We selected tenants who had (1) housing assistance
payment amounts of more than $10,000 and (2) income of $5,000 or less. For these 81 (15 + 66)
tenants totaling more than $1.9 million in housing assistance payments, we reviewed their files to
determine whether documentation supported the tenant’s eligibility for subsidized housing.



24
     We could not precisely identify the number of duplicate tenants because there were several tenants with multiple
     variations of their names and some with different names for the same tenant in the unit payment history data,
     which we used to identify our universe and select our sample.
25
     Four of the files were missing. Records showed these four tenants moved into Eastwood Terrace on June 30,
     2016.



                                                           13
To achieve our audit objective, we relied on computer-processed data regarding the unit payment
history for each tenant. We assessed the reliability of the computer-processed data and
determined that the data were generally reliable. The test results refer only to the tenants tested
and cannot be projected to the population of 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. We believe that the evidence obtained provides a reasonable basis for our findings
and conclusions based on our audit objective.




                                                 14
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 Eastwood Terrace’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 Eastwood Terrace’s owner implemented to provide adequate
    oversight of former onsite managers at Eastwood Terrace.
•   Policies and procedures that Eastwood Terrace’s owner implemented to ensure that its
    monthly HUD billings were accurate.
•   Policies and procedures that Eastwood Terrace’s owner implemented to ensure that its units
    were decent, safe, and sanitary.
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 in place 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
    accurate (finding).



                                                  15
Appendixes

Appendix A


                             Schedule of Questioned Costs
                           Recommendation
                                             Unsupported 1/
                               number
                                   1A              $1,865,344

                                 Totals             1,865,344



1/   Unsupported costs are those costs charged to a HUD-financed or HUD-insured program
     or activity when we cannot determine eligibility at the time of the audit. Unsupported
     costs require a decision by HUD program officials. This decision, in addition to
     obtaining supporting documentation, might involve a legal interpretation or clarification
     of departmental policies and procedures.




                                              16
Appendix B
             Auditee Comments and OIG’s Evaluation



Ref to OIG
Evaluation    Auditee Comments




                               17
Ref to OIG
Evaluation   Auditee Comments




Comment 1




Comment 2




                                18
Ref to OIG
Evaluation   Auditee Comments




Comment 3




Comment 4




Comment 2




                                19
Ref to OIG
Evaluation   Auditee Comments




Comment 5




Comment 6




Comment 7




                                20
Ref to OIG
Evaluation   Auditee Comments




                                21
                         OIG Evaluation of Auditee Comments


Comment 1   The owner explained that its most recent management occupancy review (MOR)
            required a 100 percent file review and 100 percent unit inspections. The owner
            stated that its file review overlapped OIG’s audit and the OIG results were based
            on information collected before the owner completed its review. The owner
            provided details on its required file reviews and unit inspections, who conducted
            them, and when they were conducted.
            We agree that the owner undertook the required 100 percent file reviews and unit
            inspections because it received an unsatisfactory score in its MOR, as discussed in
            the background and objective section of the report. We revised a portion of the
            finding for clarification. The OIG report was based on information the owner
            provided throughout the audit process, including review of information collected
            after the owner's 100 percent file audit. The owner will need to work with HUD
            to resolve the finding and recommendations during the audit resolution process.
Comment 2   The owner asserted that it had already taken steps for HUD to be paid for a
            considerable amount of the acknowledged unsupported subsidy and that its
            voucher adjustments were not reflected in the OIG report. It also stated that
            repayment agreements were reflected, but not credited in the report. The owner
            believes that the questioned costs will be significantly reduced when it resolves
            the issue with HUD.
            We maintain our position as described in the finding. We considered voucher
            adjustments that were included in the contract administrator’s unit payment
            history reports. Further, we reported $281,416 in repayment agreements that the
            owner entered into with HUD and credited repayment agreement amounts in
            Appendix D of the report in determining unsupported questioned costs of $1.8
            million for the audit period. The owner will need to work with HUD to resolve
            the finding and recommendations during the audit resolution process. Additional
            repayments after the audit period should be discussed with HUD at that time.
Comment 3   The owner asserted that although the draft report stated that OIG performed
            fieldwork from December 2017 through June 2018, information collected by the
            OIG ceased in late January 2018.
            We revised the report to reflect the entrance conference date as the fieldwork start
            date. However, we maintain that fieldwork, which included work at both the
            Eastwood Terrace and OIG offices, was conducted through June 2018. Our audit
            work did not cease in January 2018. For example, the owner provided a USB
            drive with additional file documents in April 2018 that we evaluated before
            drafting the report.




                                              22
Comment 4   The owner asserted that OIG’s report did not include how the owner became
            aware of employee misconduct and fraudulent actions during the MOR, and how
            it responded by notifying OIG and pledging cooperation and assistance.
            The report appropriately reflects the owner’s corrective actions and
            responsiveness related to its MOR. We maintain our position as stated in the
            finding.
Comment 5   The owner believes the OIG misinterpreted and misapplied HUD program
            requirements and guidance.
            We maintain our position as described in the finding. The owner will need to
            work with HUD to resolve the finding and recommendations during the audit
            resolution process.
Comment 6   The owner provided a summary of the history and management of the property to
            clarify information and statements in the OIG’s finding and conclusion.
            The background and objective section of the report described Eastwood Terrace's
            history and management structure. We did not revise the report.
Comment 7   The owner outlined its efforts to improve the property’s physical condition,
            management, and oversight procedures, which it said were not detailed in the
            report.
            OIG recognized that the owner had made improvements in the finding section of
            the report. The owner will need to work with HUD during the audit resolution
            process to ensure the improvements meet program requirements.




                                             23
       Appendix C
                                    Unsupported Tenant File Results

                                  Missing     Missing        Missing                        Missing       Missing
         Over-       Income                                                   Missing      inspection   signatures
Tenant                             EIV        income          annual
         housed   discrepancies                                             tenant files     reports     on 50059
                                  reports   verification   certifications
   1                   X            X                                                          X
   2       X           X            X                                                          X
   3                                X                            X                             X
   4       X                        X                                                          X
   5                   X            X                                                          X
   6                                X                            X                             X
   7                                X            X                                             X
   8       X           X            X            X                                             X            X
   9       X           X            X            X                                             X            X
  10                   X            X            X               X                             X
  11                   X            X            X                                             X            X
  12       X                        X            X                                             X            X
  13       X                        X            X               X                             X            X
  14       X           X            X                                                          X
  15                                X            X                                             X            X
  16       X                        X                                                          X            X
  17                   X            X                                                          X            X
  18       X                        X            X                                             X            X
  19                   X            X                                                          X            X
  20                   X            X            X               X                             X            X
  21       X           X            X                                                          X            X
  22       X                        X                                                          X
  23       X           X            X            X                                             X
  24       X           X            X            X                                             X            X
  25                   X            X                                                          X            X
  26                                X            X                                             X            X
  27                                X            X                                             X            X
  28                   X            X            X                                             X
  29                   X            X            X                                             X
  30                   X            X            X                                             X




                                                      24
                                  Missing     Missing         Missing        Missing    Missing       Missing
         Over-       Income
Tenant                             EIV        income           annual        tenant    inspection   signatures
         housed   discrepancies
                                  reports   verification    certifications    files      reports     on 50059
  31       X           X            X            X                X                        X            X
  32                   X            X            X                                         X
  33                   X            X            X                                         X            X
  34       X           X            X            X                                         X            X
  35       X           X            X            X                                         X            X
  36       X           X            X            X                                         X            X
  37                                X            X                                         X
  38                                X            X                X                        X
  39       X           X            X            X                                         X            X
  40       X           X            X            X                X                        X            X
  41                   X            X            X                                         X
  42       X           X            X            X                                         X            X
  43                   X            X            X                                         X            X
  44                   X            X            X                                         X
  45                   X            X            X                X                        X            X
  46                   X            X                             X                        X            X
  47                   X            X            X                                         X            X
  48       X           X            X            X                                         X            X
  49                   X            X            X                                         X            X
  50       X           X            X            X                                         X            X
  51       X           X            X            X                                         X            X
  52                                X
  53                   X            X            X                                         X
  54                                                                           X
  55                   X            X                             X                        X
  56                                                                           X
  57                   X            X                             X                        X
  58                   X            X            X                                         X
  59       X           X            X            X                X                        X            X
  60       X           X            X            X                X                        X
  61                                                                           X
  62                   X            X            X
  63                   X            X                             X                        X
  64                                                                           X



                                                       25
                                  Missing     Missing         Missing        Missing
         Over-       Income                                                             Missing       Missing
Tenant                             EIV        income           annual        tenant
         housed   discrepancies                                                        inspection   signatures
                                  reports   verification    certifications    files
                                                                                         reports     on 50059
  65       X           X            X            X                                          X           X
  66       X                        X                             X                         X           X
  67       X           X            X            X                                          X           X
  68                   X            X            X                X                         X
  69                   X                         X                                          X
  70                   X                         X                X                         X           X
  71                   X                         X                                          X           X
  72                   X            X                             X                         X
  73       X           X            X           X                                           X           X
  74       X           X            X           X                                           X
  75       X           X                        X                                           X
  76       X           X            X           X                                           X           X
  77       X                                    X                 X                         X           X
  78                                X           X                                           X
  79       X           X            X           X                                           X           X
  80       X           X            X           X                 X                         X           X
  81                                X           X                                           X
Totals     35          58           72          57               21            4           75          43




                                                       26
Appendix D
            Unsupported Tenant Subsidy Payments and Repayments to HUD


                                       Housing assistance
                  Unsupported                                 Remaining unsupported
                                     payments reimbursed to
     Sample     housing assistance                              housing assistance
                                       HUD via repayment
                    payments                                        payments
                                          agreements
        1                  $22,310                                          $22,310
        2                   33,833                                           33,833
        3                   36,484                                           36,484
        4                   27,748                                           27,748
        5                   24,871                                           24,871
        6                   39,903                                           39,903
        7                   23,086                                           23,086
        8                   27,440                                           27,440
        9                   17,560                                           17,560
       10                   24,991                                           24,991
       11                   23,386                                           23,386
       12                   22,512                                           22,512
       13                   35,197                                           35,197
       14                   34,314                                           34,314
       15                   25,511                                           25,511
       16                   37,860                                           37,860
       17                   22,824                                           22,824
       18                   16,091                                           16,091
       19                   22,664                                           22,664
       20                   27,707                                           27,707
       21                   21,650                                           21,650
       22                   33,105                                           33,105
       23                   24,349                                           24,349
       24                   22,321                                           22,321
       25                   33,719                                           33,719
       26                   29,626                                           29,626
       27                   34,605                                           34,605
       28                   24,084                                           24,084
       29                   36,234                                           36,234
       30                   14,997                                           14,997
       31                   11,649                                           11,649
       32                   26,171                                           26,171
       33                    9,003                                            9,003


                                           27
                                                 Housing assistance
                        Unsupported                                            Remaining unsupported
                                               payments reimbursed to
           Sample     Housing assistance                                         housing assistance
                                                 HUD via repayment
                         payments                                                    payments
                                                    agreements
              34                    35,497                                                         35,497
              35                    19,642                                                         19,642
              36                    18,707                                                         18,707
              37                    36,433                                                         36,433
              38                    24,463                                                         24,463
              39                    36,448                                                         36,448
              40                    30,270                                                         30,270
              41                    14,476                                                         14,476
              42                    34,732                                                         34,732
              43                    21,700                                                         21,700
              44                    16,117                                                         16,117
              45                    12,856                                                         12,856
              46                    17,056                        $12,730                           4,326
              47                    18,222                          4,692                          13,530
              48                    31,998                                                         31,998
              49                    34,632                                                         34,632
              50                    27,270                                                         27,270
              51                    21,833                                                         21,833
              52                    14,205                                                         14,205
              53                    16,981                                                         16,981
              54                     5,269                          5,269                               -
              55                     9,480                          1,427                           8,053
              56                         -                          1,817 26                            -
              57                     4,185                                                          4,185
              58                    10,740                                                         10,740
              59                     2,766                                                          2,766
              60                     9,608                          6,552                           3,056
              61                     3,183                          3,183                               -
              62                     9,572                                                          9,572
              63                     4,010                          1,527                           2,483
              64                     5,406                          5,406                               -
              65                     8,291                                                          8,291




26
     Eastwood Terrace reimbursed HUD for this sample item before we began our fieldwork. We did not question
     any costs for this sample item; thus, we did not include this amount in the housing assistance payment
     reimbursement total.



                                                        28
                                             Housing assistance
                        Unsupported                                   Remaining unsupported
                                           payments reimbursed to
             Sample   Housing assistance                                housing assistance
                                             HUD via repayment
                         payments                                           payments
                                                agreements
               66                      -                   5,062 27                        -
               67                 42,522                                             42,522
               68                 41,365                                              41,365
               69                 39,949                                              39,949
               70                 37,552                                              37,552
               71                 39,181                                              39,181
               72                 38,560                                              38,560
               73                 38,232                                              38,232
               74                 37,618                                              37,618
               75                 36,994                                              36,994
               76                 36,994                                              36,994
               77                 20,568                                              20,568
               78                 22,120                                              22,120
               70                 28,888                                              28,888
               80                 11,492                        98                    11,394
               81                 10,340                                              10,340
             Totals            1,906,228                    40,884                 1,865,344




27
     Ibid.



                                                  29