Council for Affordable and Rural Housing Panel Discussion:
RHS’s New Enforcement Tools
Remarks by:
John B. Meyers
Consultant
Louisville, KY
502.451.2727
A Road Trip With the IG — or,
Down Memory Lane
There are always at least two sides to every story. In this case, one
side is what the law says or means or how it is applied. The other side is
yours — what you did or are doing. Sometimes you were right, sometimes wrong
— but to the OIG it doesn’t make any difference what your side is because
the OIG is always right.
I’m going to cover the OIG response to the 1996 initial equity skimming
law, a brief overview of one OIG report which was referred for investigation,
and the Agency commitment to support the OIG in its major effort to ferret
out fraud, waste and abuse.
OIG Response to the Initial Equity Skimming Law
Someone once said that when all you have is a hammer, the whole world
looks like a nail. In August 1996, the first Equity Skimming Penalty was
enacted. It read:
Whoever, as an owner, agent, or manager, or who is otherwise in custody,
control, or possession of property that is security for a loan made or
insured under this section willfully uses, or authorizes the use, of any part
of the rents, assets, proceeds, income, or other funds derived from such
property, for any purpose other than to meet actual or necessary expenses of
the property, or for any other purpose not
authorized by this title or the regulations
adopted pursuant to this title, shall be fined not more than $250,000 or
imprisoned for not more than 5 years, or both.
What a hammer! OIG went to work and issued the March 1999 monumental Report
entitled “Rural Rental Housing Program: Uncovering Program Fraud and Threats
to Tenant Health and Safety.” Richard Price talked about this the other year.
One of the statements in the Report’s Executive Summary is that:
The Inspector General and the Undersecretary for Rural Development for Rural
Development undertook this Initiative to curb program abuse and provide a
road map for future efforts to ensure integrity in the RRH program.
Out of 32 high risk owners and management agents covered in the Report, 16
were referred for investigation, with 10 then being under investigation.
Brief overview of one OIG report on a borrower which resulted in a referral
for investigation — an example of the Road Map.
While we can’t go with the IG on an audit or evaluation, their Report can
be useful for showing their road trip — what they set out to do, what they
did, and what they found.
A little background is that I worked with an owner/manager to address a
number of issues raised by OIG during what we thought was an audit. OIG had
camped in his office for a few months and had long lists of expenses which
they questioned. OIG gave him the long lists which they identified by check
number — which is a good way to nail down an audit trail. I didn’t get a
copy of the Report until two years later. I’ll intertwine the Report with
what we did to address the issues raised by OIG.
As part of the effort to document fraud, the IG undertook and issued an
Evaluation Report on an identity of interest owner/manager dated December 1998. It stated:
Purpose. We evaluated the management operations of [name deleted], Inc. (the
“management company”), to determine if it had accurately reported expenses
related to the operation and maintenance of its XX Rural Rental Housing
(RRH) Program projects and had properly maintained the physical condition of
those projects. This evaluation was part of a nationwide review of RRH
owner/managers and management companies. The objective of the review was to
identify and refer for investigation those owner/managers and management
companies that had misused RRH funds.
In the words of the Evaluation Report:
Recent amendments to the Housing Act allow OIG and RHS to take aggressive
action to identify and refer for prosecution those who misuse project funds,
commonly known as “equity skimming,” while neglecting the physical condition
of projects.
Thus, OIG, RHS, and RD State offices have undertaken a nationwide joint
effort to identify and refer for prosecution those owner/managers and
management companies that have misused funds while neglecting the physical
condition of projects. The management companies included in this review were
selected based on size, physical condition, and the existence of an identity
of interest relationship between the owner and the management company.
In this case, RD had identified the owner as someone they thought (or knew)
was abusing the program. There was no love lost between the owner and the
Agency. In addition to the bad relationship, the Agency probably fingered the
owner because it believed that the management company had allowed the
physical condition of a number of projects to deteriorate.
The OIG Evaluation Report stated:
Our objectives were to determine if the management company had accurately
reported expenses related to the operation and maintenance of RRH projects
and properly maintained the physical condition of those projects.
Who can oppose this objective? It’s our tax money that can be abused in a 515
operation. We don’t support fraud, waste and abuse — there’s no
constituency for that. That would be like rooting for the bank robbers in
every robbery of a bank. We want and support a clean program.
So the report found:
Physical Condition of Projects Had Deteriorated. The management company had
allowed the 16 projects we visited to deteriorate. Five projects had serious
deterioration; one of the five and one other project had safety concerns.
These conditions needed immediate attention to ensure the safety of tenants
and to protect the Government’s security interest.
Aha! OIG and the Agency went out with a hammer and found a nail sticking up:
Some of the common types of deterioration we observed included:
1) Damaged screens and storm windows;
2) aluminum or vinyl siding that was dented, had holes, was missing, or was
moldy;
3) broken gutters and downspouts;
4) cracked stoops, sidewalks, driveways, and parking lots;
5) rusted stair railings and rotted stair landings; and
6) missing and broken shutters.
Another common problem was that the trim and siding of most buildings needed
paint or stain. In many instances, wood trim was severely worn, moldy, or
rotted.
Of course, there were some other, serious conditions as well, so the findings
were not totally off base. In terms of your operations, it is likely that you
have at least one project that has problems in the list.
The Report did state:
We noted the reserve account balances of the projects we visited were
generally very low and not sufficient for the repairs needed by many of the
projects.
And how did these conditions come about? According to the Report:
Management Company Charged Unallowable and Unsupported Costs to Projects.
The report listed a number of items, several of which are interesting.
First:
The management company also allocated a $1,050 software license fee to all XX
of its projects. The owner stated that since they used the software to
account for project costs, it should be an allowable project expense.
However, regulations issued by RD on purchases of computer software prohibit
charges for software purchased by a management company.
[note RD Administrative Notice
2842 (1930-C), dated August 2, 1993.]
Now, the way Reports are processed is that OIG sends a draft to the
Agency, generally the State Office, for comment. The Agency can offer
critical comments such as saying the OIG doesn’t understand something or
misinterprets an Instruction or AN. Or the Agency can sign off, saying, “It
looks good to me. We’ll do whatever you tell us to do.” In this case, the
Agency agreed with the conclusion that Mitch Copman’s Tenant Certification
program licensing fees are not allowable project costs, and the Agency
probably supplied the AN in support of their position.
Because we knew the fees were an
issue, the owner/manager and I had written that the August 1996 $50 check for a certain project for the expense
of the software license should not have been determined to be “unallowable.”
We pointed out that:
RD AN No. 3356 dated August 18, 1997 provides in Attachment D, last three
paragraphs beginning on the bottom of page 1:
. . . . (T)he guidance articulated in AN 2842 (1930-C) dated August 2, 1993,
still applies.
That AN stated:
. . . . MFH borrowers are encouraged to use automated system to manage MFH
projects and to prepare and process paperwork associated with project
management. Where economically feasible, computer applications can improve
management efficiency and reduce errors and omissions. . . .
. . . . The cost may be prorated over several projects owned by the same
borrower entity. . . . .
We explained in a letter to OIG that:
The software license is a cost of doing business to support the software
purchased. Not to maintain the software would make this orphan software with
the loss of the ability to prepare and process project paperwork. For
example, the Form 1944-8 Tenant Certification was Revised (and reissued) on
4-97 and 4-96, following revisions in 11-93 and previous dates. Without
updates to the software, the software would have become outdated and the
Tenant Certifications unacceptable to the Agency. Accordingly, we believe
this fee is allowable.
So there we were, with the Agency and OIG having selected one part of the
AN to hit on the owner, and we selected another part in defense of the
borrower. At the time we made the response, we had not seen the Evaluation
Report.
It should be of concern to all of us here that the Agency had not
contested the issue of the license fees and had not pointed out that they
were allowable project costs. All I can guess is that the Agency was so
convinced that the owner was ripping off the projects that they made it all
part of a package. The Agency might also have believed in OIG so strongly (or
been so relieved that they weren’t named) that they deferred to the better
judgment of the IG. Or, as I’ll go into shortly, they are on the side of the
OIG, having been enrolled in the fight against fraud, waste, and abuse.
Unsupported Costs
Second, the Evaluation Report dinged the guy on his identity of interest
maintenance company. The Report stated:
Unsupported Costs. The management company was unable to provide receipts and
invoices to support $11,589 in expenses charged to the four projects. Our
review disclosed payments for maintenance labor, supplies, and caretaker
travel that were not supported by invoices, employee time cards, or purchase
receipts. Supporting documentation is required to substantiate that work was
actually performed or that materials and supplies were actually purchased for
the project’s use. Further, RD regulations require borrowers to maintain
records in order to conduct their operations and make those records available
for review. We made repeated requests for supporting documentation; however,
the management company never provided evidence to substantiate the charges.
[note 6 RD Instruction 1930-C,
paragraph 1930.122, dated August 30, 1993.]
The OIG read the 1930-C Instructions and, even before the December 2000
legislation was passed, determined that there should be standards for record
keeping. They seized upon about the only handle they could find, which is
only an admonition to Agency staff, and not a hard requirement on borrowers:
Section 1930.122. Borrower accounting methods, management reporting and audits.
It is the objective of FmHA that borrowers will maintain accounts and records
necessary to conduct their operation successfully and from which they may
accurately report operational results to FmHA for review, and otherwise
comply with the terms of their loan agreements with the Agency. Borrower
accounts and records will be kept or made available in a location within
reasonable access for inspection, review, and copying by representatives of
FmHA or other agencies of the U.S. Department of Agriculture authorized by
the Department.
The issues on record keeping for the projects focused on documentation. The
responses to OIG ranged from locating the time sheets for each employee and
relating them to the work orders to identifying items used in maintenance on
specific dates.
For example, there was a questioned June 1997 project check, #2196, to
the Management Agent in the amount of $569.17; the check was reimbursement
from the project to the Agent. OIG disallowed the check as being unsupported.
We responded that:
Invoice #475 details the items being billed, with the charges for maintenance
for 13.5 hours being disallowed in the amount of $213.44.
Enclosed is a Time Sheet indicating a total of 13.5 hours maintenance on the
project by the Maintenance Staff on June 2, 3, 5, and the details of the work
performed.
The work directly benefited the project and is supported and allowable.
OIG had seen the records and made extensive copies. For whatever reason, they
hadn’t closed the connections between the time sheet, the invoice, and the
check. We, of course, believe the time sheets and invoice together supported
the check.
One of my observations on the Time Sheets I reviewed was that Maintenance
Staff are not good record keepers. They misdated some work order completion
notes, such as having done the work on June 4, and then showed their Time
Sheet as having been at the project on June 3rd rather than the 4th.
Perhaps in response to this particular case, the OIG drafted the new
provisions in the legislation for “Improper Documentation:”
(aa) DOUBLE DAMAGES FOR UNAUTHORIZED USE OF HOUSING PROJECTS ASSETS AND
INCOME —
(1) ACTION TO RECOVER ASSETS OR INCOME —
(B) IMPROPER DOCUMENTATION — For purposes of this subsection, a use of
assets or income in violation of the applicable loan, loan guarantee,
statute, or regulation shall include any use for which the documentation in
the books and accounts does not establish that the use was made for a
reasonable operating expense or necessary repair of the project or for which
the documentation has not been maintained in accordance with the requirements
of the Secretary and in reasonable condition for proper audit.
The only safe harbor is if the Agency defines what documentation is
acceptable and necessary, and what constitutes “reasonable condition for
proper audit,” whatever “reasonable condition” means. There is about a zero
likelihood that the Agency will touch this — they’ll do everything they can
to duck it. As Richard Price has put it in the past, this will criminalize
stupidity.
Where all this stands with my owner is, apparently, that the case was
referred to the U.S. Attorney for indictment. The Evaluation Report itself
stated:
As a result of the above conditions, we have referred these matters for
criminal investigation. Therefore, we are not recommending that any
administrative actions be taken or that any unsupported or unallowable
charges be collected from the management company at this time.
Agency Commitment to Support the OIG
In its monumental March 1999 Report entitled “Rural Rental Housing
Program: Uncovering Program Fraud and Threats to Tenant Health and Safety,”
the OIG outlined some of what it and the Agency were going to do about
combating all this waste, fraud and abuse:
RHS Plans to Make Prosecution More Likely
To promote a greater acceptance of these cases for criminal prosecution in
the future, RHS plans to incorporate stricter language into its regulations
that will prohibit common unallowable charges and practices, including the
unauthorized use of reserve funds, and clearer definition of unallowable
costs, such as those related to tax preparation fees. RHS will also require
owners and management agents to certify that management agreements are in
compliance with program regulations.
RHS further plans to provide extensive training on these revised regulations
and on the approvals of management agreements. The training effort will
include RHS National Office and State office staff, as well as owners, and
management agents.
OIG has not dropped the ball on fighting the waste, fraud and abuse —
that’s their livelihood. They don’t get paid to report only that all is
well. The Inspector General testified before the House Appropriations
Subcommittee on Agriculture, Rural Development, Food and Drug Administration,
and Related Agencies on February 17, 2000 about the Multifamily Housing
Enforcement Program:
OIG and RHS recently combined forces to develop a team approach for review of
borrowers and management agents at high risk of defrauding or abusing the
multifamily rural housing program. Our report, issued in March 1999,
described a high-risk profile which we used to identify over $4.2 million in
misused funds, as well as health and safety hazards posing an immediate
danger to the tenants.
Historically, OIG has responded vigorously when indications of fraud and
abuse are identified. However, as our resources are stretched, almost to the
breaking point, we are frequently unable to respond to requests for audit
assistance. As a result, some who abuse the RRH program can continue to do so
with impunity –???? at least until additional staffing and resources become
available.
We have worked closely with RHS to develop proposed legislation to improve
the integrity of the multifamily housing program. The draft bill would
authorize a broad range of criminal and civil authorities which could be
brought to bear against persons or entities who misuse RHS housing programs.
Specifically, the proposed legislation would:
(1) establish civil sanctions for equity skimming,
(2) establish civil monetary penalties for persons or entities who violate
agreements and contracts,
(3) authorize the Secretary to withhold the renewal or extension of loan or
assistance agreements and request judicial intervention to enforce compliance
with an administrative decision,
(4) provide sanctions for money laundering and provide civil fines for
obstruction of Federal audits, and,
(5) authorize the Secretary to impose civil penalties when project accounting
records are found to be in unsuitable condition for audit.
These provisions will strengthen our ability to audit and prosecute cases of
program fraud and abuse, significantly improve program controls, and
facilitate the effective administration of rural housing programs.
In March 2000, the USDA Undersecretary sent a letter on the “RHS
Multi-Family Housing Enforcement Program.” It said, in part:
As discussed with you during the recent Rural Development State Director
policy meeting, the Rural Housing Service (RHS) Multi-Family Housing (MFH)
programs are subject to vulnerabilities from program fraud and abuse. The
RHS/Office of Inspector General (OIG) Task Force that developed a team
approach to reviewing program participants was beneficial in using the best
of each Agency’s abilities to further the goal of detecting fraud and abuse.
We are building upon that success by improving cooperation and coordination
between agencies and departments involved in the detection and enforcement
process.
Additionally, we will provide for a standing team of staff members trained
and able to review complex problem or multi-state program(s) participants, or
to assist states that may lack the expertise in enforcement matters.
Our six point MFH Enforcement Program:
1. Coordinate more closely with the OIG Audit and Investigation.
2. Establish a team of National and Field Office RHS staff.
3. Establish a liaison with the Washington office of the Department of
Justice.
4. Develop coordination with HUD’s Office of Enforcement.
5. Pursue statutory changes.
6. Develop training for field staff.
Recent Accomplishments:
• In October of 1999, National Office MFH program and OIG Audit staff, along
with an Assistant United States Attorney (AUSA) experienced in working with
the Agency, made a presentation to a national gathering of Alternative Civil
Enforcement AUSAs. The presentation described the RHS MFH programs, the joint
RHS/OIG initiative, and a successful case study of the criminal and civil
prosecution of a RHS MFH borrower in Washington State. The purpose of the
presentation was to familiarize the AUSAs with the MFH program and to
encourage them to accept more cases for action when presented by OIG and RHS.
• National Office MFH program staff have met with representatives of HUD’s
Office of Enforcement to discuss mutual issues. In particular, the
possibility of joint action against a nation-wide management agent/borrower
operating in both RHS and HUD programs was discussed.
Next Steps:
• Establish the Field and National Office Review Teams to begin audit and
reviews of potential problem cases.
• Work with OGC to establish a system to develop quality criminal and civil
cases, working in conjunction with the Department of Justice.
• Continue coordination efforts with both HUD’s Office of Enforcement and
the Department of Justice.
We encourage you to provide the MFH program staff with those situations that
you believe warrant a more detailed review so that such cases may be
considered for review by the teams.
Let me assure you that referrals of perceived problems will not be considered
a negative, and in fact would reflect that you are taking proactive steps to
improve your MFH program performance.
As taxpayers and as participants in the 515 program, we have to support
this. And the Agency employees are supportive — I think they’re in a payback
mood, so this fits well.
OIG has fixed on this innovative team approach and is publicizing this
effort to the OIG community. In a magazine aimed at OIG types, Public Inquiry,
in the Special Edition Fall / Winter 2000, the OIG described its efforts:
The Rural Rental Housing Program is vulnerable to program fraud and abuse
because of the large cash flows involved. The USDA OIG has worked with the
Rural Housing Service to detect fraud and abuse and remove from participation
those who abuse the program, and has taken a team approach to identifying and
acting on the worst offenders. Additional efforts to improve the RRH Program
will result in better program regulations to develop a loan classification
system to identify and prioritize “at risk” properties as well as
identity-of-interest relationships.
And, on March 14, 2001, before the House Committee on Appropriations the
USDA Inspector General testified before the House Appropriations Subcommittee
on Agriculture, Rural Development, Food and Drug Administration, and Related
Agencies:
I am pleased to have this opportunity to visit with you today to discuss the
activities of the Office of Inspector General (OIG) and to provide you with
information on our audits and investigations of some of the major programs
and operations of the U.S. Department of Agriculture (USDA).
The Department’s Rural Housing Program is another effort which will continue
to need attention by the Department. The American Homeownership and Economic
Opportunity Act of 2000 was signed into law on December 27, 2000. It
strengthened the ability of Rural Development to seek prosecution of
individuals, both civilly and criminally, who abuse and defraud the
Multi-Family Housing Program. Many of the reforms enacted will directly
address the problems found in our nationwide initiative with the Rural
Housing Service that identified and documented significant abuse and fraud in
the Multi-Family Housing Program.
We are continuing substantial audit and investigative efforts in this area to
include cooperative efforts with DOJ to encourage acceptance of these cases
for prosecution. The passage of the new legislative authority significantly
increases the chances for successful prosecution.
We are proud of our record and accomplishments at OIG. We continually assess
where the risks for waste, fraud, and abuse are in the Department and direct
our limited resources to those we judge to be at the highest risk. The
question is, do we have sufficient resources to address all or even the
majority of those areas that are vulnerable and at risk? As I have indicated
today, the answer is clearly, no.
In the past five years, OIG got an Equity Skimming statute, geared up and
reported major fraud, waste and abuse in the March 1999 Report, with a large
number of referrals for investigation. The Report for one referral included
disputed expenses, and particularly expenses that the OIG thought were
unsupported. Following the Report, OIG and the Agency drafted the new
legislation which provides civil and criminal penalties for owning and
managing 515 projects. And the Agency agreed to work closely with OIG.
Will the OIG and the Agency use this new tool — this legislation? Kind
of a silly question. Of course they will. Keep in mind that they have a new
hammer, and all of the program looks like a nail. Once they got the initial
Equity Skimming statute, they took it for a major test drive, and reported
good results.
In the interim, you can at least seek to leave a trail of requesting rent
increases to cover the real needs (the short-term and long-term needs) of the
project. Let the Agency tell you that the rents would be too high to fund the
need for capital improvements as well as the maintenance in the current
operating expenses. Have your CPA review the audit trail generated by the
management of the projects and even the maintenance of the units. If you use
a third-party manager, there may even be the issue of record keeping and
documentation.
Additionally, while we wait for the 1930-C revision to come out in the
3560, keep in mind that the Agency told OIG in that March 1999 Report what
3560 will accomplish:
• Perform yearly physical inspections of all RRH apartment complexes.
• Develop and implement quality standards for RRH apartment complexes.
• Coordinate with State and local authorities concerning health and safety
hazards and seriously deferred maintenance.
• Require owners to certify, under penalties of law, to the accuracy of
financial data submitted to RHS.
• Focus independent audit requirements to emphasize high-risk areas.
• Revise regulatory citations to require the approval of identity-of-interest
companies by RHS.
• Develop regulatory citations prohibiting specific charges to RRH apartment
complexes.
Believe it or not, the Agency is working toward these as we speak through
their training, conversations and Administrative Notices.
Just a few weeks ago, on March 28, 2001, the Acting Deputy Under
Secretary for Natural Resources and Environment and Rural Development advised
the Inspector General that OIG:
. . . specifically cited RHS’s management challenge of fraud and abuse in its
rural rental housing program. RHS has taken many positive actions to
eliminate fraud and abuse in this program including requiring routine
physical inspection of each property to determine the extent of health and
safety, routine maintenance and fiscal problems. RHS has in place a loan
classification system to categorize borrowers according to the quality of
their performance. In addition, RHS can pursue successful prosecution of
program abusers through criminal and civil actions as a result of recently
enacted legislation. It is the opinion of RHS that oversight and management
of the rural rental housing program at the present time is sufficient to keep
fraud and abuse at a minimum, if not eliminate abuse entirely.
If RHS is thinking they can eliminate abuse, much less minimize it, then
it’ll be through nailing hides to the wall for all to see. Keep in mind, the
Agency and OIG have a neat new hammer, and all the borrowers look like nails
sticking up.
Just last month, in May 2001, the Agency discussed the Multi-Family
Housing Enforcement Team (which just begs for an acronym such as MHET
pronounced as MEAT) by stating:
The team’s mission is to ensure quality rental housing opportunities for
rural residents while protecting the government’s investments. This will be
done by assisting in investigations and providing technical assistance and
training to agency staff for timely resolution of complex MFH servicing
situations.
Team members assist with reviews of problem properties, coordinate
multi-state reviews of problem owners/agents, and recommend enforcement
actions.
The team’s first case was in September 2000. Two members, joined by an OIG
auditor, started a review of a problem borrower’s projects and operations.
The team currently consists of 8 members, enabling them to conduct more than
one review or training session at a time.
Summary
In summary, I can’t tell you what the Agency and OIG are going to do with
the new law against equity skimming, but they’re geared up to do something.
They will use problem projects (classified as D projects) as jumping off
points. It is up to you to do anything you can to resolve the problems. And
with OIG hungry to do its job, you as owners and managers are just fodder
for the machine.
Good luck.
Next: Remarks by Harry J. Kelly, Esq.