[Federal Register Volume 64, Number 85 (Tuesday, May 4, 1999)]
[Notices]
[Pages 23850-23852]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 99-11061]
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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.
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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.
[[Page 23851]]
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:
I. 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
[[Page 23852]]
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:
Equity skimming in multifamily insured projects;
Violent crime in public and assisted housing; and
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:
Distributions or withdrawal of cash;
Repayment of advances made to the project by the owner/
agent;
Lending funds to owners, partners, affiliates or the
management agent;
Payments of principal and/or interest on any secondary
financing unless approved by HUD;
Splitting of management fees with the project owner;
Using project funds to purchase equipment or services not
for use by the project;
Paying more for services and supplies than could be
procured on the open market;
Payment of construction or rehabilitation costs from
operations that should have been paid from mortgage proceeds;
Payments to consultants, attorneys, accountants for
partnership activities, which are not reasonable and necessary
operating expenses of the project; and
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. 99-11061 Filed 5-3-99; 8:45 am]
BILLING CODE 4210-01-P