Mortgage and loan insurance programs: Multifamily mortgage insurance programs; fraud and abuse; OIG Program Fraud Alert,
[Federal Register: May 4, 1999 (Volume 64, Number 85)]
[Notices]
[Page 23850-23852]
From the Federal Register Online via GPO Access [wais.access.gpo.gov]
[DOCID:fr04my99-81]
DEPARTMENT OF HOUSING AND URBAN DEVELOPMENT
[Docket No. FR-4417-N-01]
Publication of OIG Program Fraud Alert: Fraud and Abuse in Multifamily Mortgage Insurance Programs
AGENCY: Office of Inspector General (OIG), HUD.
ACTION: Notice.
SUMMARY: This notice sets forth an OIG Program Fraud Alert concerning fraud and abuse practices involving the misuse of funds intended to support the operation of multifamily rental housing projects with HUD insured mortgages.
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Program Fraud Alerts address national trends in housing fraud. This notice specifically identifies and highlights violations of applicable statutes and HUD requirements involving the misuse or diversion of project assets or income by project owners or management agents, referred to throughout this notice as ``equity skimming.''
FOR FURTHER INFORMATION CONTACT: David J. Derecola, OIG/Office of Audit, Department of Housing and Urban Development, 451 Seventh Street, SW, Washington, DC 20410, telephone number 202-708-3444, ext. 124. Hearing- or speech-impaired individuals may access this number via TTY by calling the Federal Information Relay Service at 1-800-877-8399.
SUPPLEMENTARY INFORMATION:
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Background
The Office of Inspector General (OIG) issues Program Fraud Alerts based on information it obtains concerning particular fraudulent and abusive practices in HUD programs. Program Fraud Alerts provide the OIG with a means of notifying the public that we have become aware of certain abusive practices which we are pursuing criminally, civilly, or administratively, as appropriate. Program Fraud Alerts also serve as an effective tool to encourage compliance by program participants and provide them an opportunity to examine their own practices.
This is our first Program Fraud Alert to be published in the Federal Register. We intend to publish future Program Fraud Alerts in this same manner as a regular part of our dissemination of such information.
With regard to HUD's multifamily housing mortgage insurance programs, this Program Fraud Alert discusses: (1) The nature of HUD's multifamily mortgage insurance programs; (2) the vulnerabilities of multifamily projects to equity skimming; and (3) the use of OIG's anti- fraud initiative--Operation Safe Home--to combat equity skimming.
Program Fraud Alert: Equity Skimming in HUD Multifamily Housing Mortgage Insurance Programs
The OIG was established at the Department of Housing and Urban Development by Congress to identify and eliminate fraud, abuse, and waste in the Department's programs and to promote efficiency and economy in departmental operations. The OIG carries out this mission through independent and objective audits and investigations. To reduce fraud and abuse in HUD's housing programs, the OIG actively pursues the investigation of fraudulent schemes that illegally seek to obtain money or other benefits from these programs. A common practice for illegally taking money from projects is equity skimming. Equity skimming is costly both to the residents of rental housing projects and the taxpayers who subsidize the projects through HUD programs.
Multifamily Housing Mortgage Insurance Programs
The National Housing Act, as amended, authorizes HUD to provide insurance to private lenders who make financing available to owners of multifamily housing projects. In return, the owner agrees to operate the projects in a manner that provides affordable and well maintained housing for tenants and protects the financial interests of the Federal government. As a condition of providing insurance, owners must sign a Regulatory Agreement with HUD. Provisions in the Regulatory Agreement specify that expenditures must be reasonable and necessary to the project and further limit the circumstances and manner in which the owner may take cash or other assets out of the project.
HUD has about $45 billion of insurance in force on mortgage loans for about 15,000 multifamily rental properties. About 75 percent of the FHA-insured projects also receive some form of direct rental subsidy on behalf of tenants from HUD.
What Is Equity Skimming In HUD Multifamily Housing Programs?
Equity skimming is the willful misuse of any part of the rents, assets, proceeds, income or other funds derived from the project covered by the mortgage. The use of project assets or income for other than reasonable operating expenses and necessary repairs, or for the payment of unauthorized distributions to the owner, constitutes a violation of the Regulatory Agreement between the owner and HUD.
The misuse or diversion of project assets and income by owners of insured multifamily projects plays a significant part in the realization of losses to the FHA insurance funds. Further, equity skimming deprives projects of needed funds for repairs and maintenance. This in turn contributes to the financial and physical deterioration of projects and the resultant substandard living conditions for the families who depend upon the Federal government to provide housing. The communities where these projects are located also suffer because they become the breeding ground for crime, violence, and drugs.
What Are the Penalties for Misusing Project Funds?
The use of project funds in violation of the Regulatory Agreement is actionable civilly under the Double Damages Statute, 12 U.S.C. 1715z-4a. The Double Damages Statute permits the government to recover double the value of any assets or income of a project that the court determines to have been used in violation of a Regulatory Agreement, regulation or other form of regulatory control that has been imposed by the Secretary of HUD. The use of assets or income in violation of the regulatory agreement includes any use for which the documentation in the books and accounts does not establish that the use was made for reasonable operating expenses or necessary repair of the project. In addition, the government can recover any and all costs relating to its lawsuit for such damages, including reasonable attorney and auditing fees. The Double Damages Statute considers the use of project assets or income without adequate documentation as a prima facie case that the assets or income were used in violation of the Regulatory Agreement. Consequently, the Double Damages Statute can be used to recover costs that are not adequately documented by the owner. HUD does not have to prove criminal intent. Action can be taken against any person violating the statute which owns a project, as identified in the Regulatory Agreement, including but not limited to any stockholder holding 25 percent or more interest of a corporation that owns the project; any beneficial owner under any business or trust; any officer, director, or partner of an entity owning the project; and any heir, assignee, successor in interest, or agent of any owner.
The misuse of project funds can also be prosecuted as a criminal matter under 12 U.S.C. 1715z-19. Under the criminal statute, equity skimming is defined as willfully using or authorizing ``the use of any part of the rents, assets, proceeds, income or other funds derived from the property for any purpose other than to meet actual or necessary expense * * * in a period during which the mortgage note is in default or the project is in a nonsurplus cash position, as defined by the regulatory agreement, * * *'' Violation of this provision is a felony and can be punished by up to five years imprisonment and fines up to $500,000.
HUD's Anti-Crime Initiative
On February 4, 1994, Vice President Gore, former HUD Secretary Cisneros, Attorney General Reno, former Treasury
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Secretary Bentsen, and former National Drug Control Policy Director Brown announced ``OPERATION SAFE HOME'' in a joint press conference at the White House. Three major types of crime affecting HUD programs were targeted by Operation Safe Home:
‹bullet› Equity skimming in multifamily insured projects;
‹bullet› Violent crime in public and assisted housing; and
‹bullet› Fraud in the administration of public housing.
Implemented at HUD by the OIG, Operation Safe Home brings the coordinated resources and expertise of federal, State, and local law enforcement agencies to bear on crime in public and assisted housing. Operation Safe Home represents the OIG's commitment to focus resources on combating areas of high vulnerability and to hold such focus until the vulnerabilities are reduced to an acceptable level--the primary mission of HUD's OIG.
As part of Operation Safe Home, OIG has initiated an aggressive proactive effort to pursue civil litigation and criminal prosecution against owners of multifamily housing projects who misuse project operating funds--the equity skimming effort. A primary objective of the equity skimming effort is to create an enforcement program that provides an effective deterrent and recovery mechanism for the misuse of income and assets at projects having HUD insured mortgages.
OIG identifies and pursues, with the assistance of the U.S. Attorneys and HUD officials, the recovery of funds diverted from projects. Assistant U.S. Attorneys throughout the nation have played a significant role in the success realized by Operation Safe Home in cracking down on equity skimming in HUD's housing programs. Funds recovered in this manner can be directed at improving living conditions for the tenants and minimizing financial losses to HUD.
What Are the More Common Types of Equity Skimming?
If the project is in a non-surplus cash position or is in default, the following actions would most likely constitute equity skimming:
‹bullet› Distributions or withdrawal of cash;
‹bullet› Repayment of advances made to the project by the owner/ agent;
‹bullet› Lending funds to owners, partners, affiliates or the management agent;
‹bullet› Payments of principal and/or interest on any secondary financing unless approved by HUD;
‹bullet› Splitting of management fees with the project owner;
‹bullet› Using project funds to purchase equipment or services not for use by the project;
‹bullet› Paying more for services and supplies than could be procured on the open market;
‹bullet› Payment of construction or rehabilitation costs from operations that should have been paid from mortgage proceeds;
‹bullet› Payments to consultants, attorneys, accountants for partnership activities, which are not reasonable and necessary operating expenses of the project; and
‹bullet› Payments on personal or other business loans.
Project owners and management agents need to be aware of these common ineligible expenditures or misuses of funds, and need to avoid using project funds in these ways. Owners must remember that a project with a HUD insured mortgage is not like other rental properties they may own. Owners agree to certain restrictions regarding the use of project income and assets before becoming involved with HUD insured mortgages. Given the strong civil and criminal penalties which can be imposed for such violations, it is in the best interest of all project owners and agents to ensure adherence to the terms of their Regulatory Agreements.
What To Do if You Suspect Fraud Involving HUD's Multifamily Housing Programs?
If you have information about the misuse of project funds as described above, contact any of the district offices of the Office of Inspector General in HUD listed below, or call the OIG Hotline toll free at 1-800-347-3735 or any local HUD program office.
Office of Inspector General District Offices
New England (CT, MA, ME, NH, RI, VT), District Inspector General for Audit, (617) 565-5259, Special Agent in Charge, (617) 565-5293, Thomas P. O'Neill, Jr., Federal Bldg., 10 Causeway Street, Boston, MA 02222-1092 New York/New Jersey (NJ, NY), District Inspector General for Audit, (212) 264-8000, Special Agent in Charge, (212) 264-8062, 26 Federal Plaza, Suite 3430, New York, NY 10278-0068 Mid Atlantic (DE, MD, PA, VA, WV), District Inspector General for Audit, (215) 656-3401, Special Agent in Charge, (215) 656-3410, The Wanamaker Bldg., 100 Penn Square East, Philadelphia, PA 19107-3390 Southeast/Caribbean AL, FL, GA, KY, MS, NC, PR, SC, TN), District Inspector General for Audit, (404) 331-3369, Special Agent in Charge, (404) 331-5159, Richard B. Russell Federal Bldg., 75 Spring Street, S.W., Atlanta, GA 30303-3388 Midwest (IL, IN, MI, MN, OH, WI), District Inspector General for Audit, (312) 353-7832, Special Agent in Charge, (312) 353-4196, Ralph H. Metcalf Federal Bldg., 77 West Jackson Blvd., Chicago, IL 60604-3507 Southwest (AR, LA, NM, OK, TX), District Inspector General for Audit, (817) 978-9309, Special Agent in Charge, (817) 978-9310, P.O. Box 2905, 1600 Trockmorton, Fort Worth, TX 76113-2905 Great Plains (IA, KS, MO, NE), District Inspector General for Audit, (913) 551-5871, Special Agent in Charge, (913) 551-5866, Gateway Tower II, 5th Floor, 400 State Avenue, Kansas City, KS 66101-2406 Rocky Mountains (CO, MT, ND, SD, UT, WY), District Inspector General for Audit, (303) 672-5452, Special Agent in Charge, (303) 672-5449, First Interstate Tower North, 633 Seventeenth Street, Denver, CO 08202-3607 Pacific/Hawaii (AZ, CA, HI, NV), District Inspector General for Audit, (415) 436-8101, Special Agent in Charge, (415) 436-8108, 450 Golden Gate Avenue, P. O. Box 36003, San Francisco, CA 94102-3348 Northwest/Alaska (AK, ID, OR, WA), District Inspector General for Audit, (206) 220-5360, Special Agent in Charge, (206) 220-5380, Seattle Federal Office Bldg., 909 1st Avenue, Suite 200, Seattle, WA 98101-1000 Capital Office (DC), District Inspector General for Audit, (202) 708-2650, Special Agent in Charge, (202) 708-0387, 451 7th Street, S.W., Room 8256, Washington, DC 20410-4500
Dated: March 29, 1999. Susan Gaffney, Inspector General.
[FR Doc. 99-11061Filed5-3-99; 8:45 am]
BILLING CODE 4210-01-P
