U. S. Department of Housing SYSTEMIC IMPLICATIONS REPORT and Urban Development Office of Inspector General Office of Investigation one April 15, 2011 A. Description of Systemic Deficiency: During the course of interviewing borrowers in the Radius Capital Corporation case i( it was disclosed that Settlement Agents were using copies of the HUD-1 wherein the signatures of the borrower, seller, and settlement agent was on the 'third page? also called the HUD-1 Settlement Statement Addendum, Certification Addendum to HUD-1 Settlement Statement (versus the copy of the HUD-1 wherein the borrower, seller, and settlement agent sign the HUD-1 at the bottom of the second page) or the 3-page HUD-1, all of which state that the individual has reviewed the HUD-1 Settlement Statement and it is true to the best of their believe and knowledge. In one set of lender and title files (which was reviewed with the borrower), the files had several HUD-1's with various differing dollar amounts, however It appeared that the same signature page appeared on more than one HUD-1 or the HUD-1 had no signature page at all. In addition, there was an instance wherein the Settlement Agent "revised? the HUD-1 and the borrower was allegedly refunded money (which he claims he did not receive). The Settlement Agent took it upon herself to 'revlse' the HUD-1 the revised HUD-1 had the new lnfonnation, but included that borrower. sellers. and her (settlement agent's) signatures from the closing. which occurred a few days prior. In theory, with the signature page separate from the material dollar amounts of the HUD-1, anyone could attach the signature page to any HUD-1, whether the information on it Is accurate or not. 8, Suggestions to Correct Deficiency: it is recommended that require the each page of be signed or initialed by all parties involved in the transaction. This would include the buyer, seller and the closing agent I settlement agent. Techmquee: interview of borrowers and file analysis. Distribution: 1 Case File :2 MG [33 OMAP {74 Other? w: U. S. Department of Housing SYSTEMIC IMPLICATIONS REPORT and Urban Development Office of Inspector General Office of In vestigation DATE: 06/17/201 1 A. Description of Systemic Deficiency: While reviewing the attached Daily Situation Report concerning the Joplin, Missouri Tornado Disaster area, the following matter came to our attention. Page 4 under the Community Planning and Development header indicates that $78,000,000 of unobligated 2008 Disaster Funding is still available for the same area. This funding is not availbale to assist in the current disaster. There is also an apparent inability/unwillingness/no need to spend these funds. Considering the relatively small Size of this area, it seems improbable that there is any unidentified need or opportunity elegible for the expenditure of these funds. 8. Suggestions to Correct De?ciency: It seems unreasonable given the current budgetary situation, that funds with this type of designation can remain unobligated for an indefinite period of time. HUD should establish procedures that establish spending and recovery standards for prior year funding regardless of purpose. If $78 million are available in a mostly rural area like Joplin, Missouri, there is a very good likelihood that similarly large pools are available for recovery. HUD Should also implement an annual review practice that would identify and assess these situations to determine the appropriate course of action. C. Investigative Techniques: Distribution: 1 Case File [12 AlGl [13 OMAP [:14 Other:_ U. S. Department of Housing and Urban Development Office of Inspector General Office of Investigation SYSTEMIC IMPLICATIONS REPORT AGENT: (b) (7)(C) DISTRICT/OFFICE: Region 14 – (b) DATE: (7)(C) April 15, 2011 A. Description of Systemic Deficiency During the course of interviewing borrowers in the Radius Capital Corporation case (b) (7)(C) it was disclosed that Settlement Agents were using copies of the HUD-1 wherein the signatures of the borrower, seller, and settlement agent was on the “third page” also called the HUD-1 Settlement Statement Addendum, Certification Addendum to HUD-1 Settlement Statement (versus the copy of the HUD-1 wherein the borrower, seller, and settlement agent sign the HUD-1 at the bottom of the second page) or the 3-page HUD-1, all of which state that the individual has reviewed the HUD-1 Settlement Statement and it is true to the best of their believe and knowledge. In one set of lender and title files (which was reviewed with the borrower), the files had several HUD-1’s with various differing dollar amounts, however it appeared that the same signature page appeared on more than one HUD-1 or the HUD-1 had no signature page at all. In addition, there was an instance wherein the Settlement Agent “revised” the HUD-1 and the borrower was allegedly refunded money (which he claims he did not receive). The Settlement Agent took it upon herself to “revise” the HUD-1 – the revised HUD-1 had the new information, but included that borrower, sellers, and her (settlement agent’s) signatures from the closing, which occurred a few days prior. In theory, with the signature page separate from the material dollar amounts of the HUD-1, anyone could attach the signature page to any HUD-1, whether the information on it is accurate or not. B. Suggestions to Correct Deficiency It is recommended that HUD/FHA require the each page of HUD-1’s be signed or initialed by all parties involved in the transaction. This would include the buyer, seller and the closing agent / settlement agent. C. Investigative Techniques Interview of borrowers and file analysis. Distribution: 1 Case File 2 AIGI 3 OMAP 4 Other:__ __ U. s. Department of Housing SYSTEMIC IMPLICATIONS and Urban Development REPORT Of?ce of Inspector General Of?ce of Investigation DISTRICT DATE: November 27, 2012 Southeast A. Many local Public Housing Authorities (PHAs) require program applicants and continuing participants to provide tax returns as a means to verify material statements during the application and recerti?cation process. Tax returns are a good asset for PHAs to verify information. and should be encouraged, however over the last several years, numerous PHAs throughout Florida have reported signi?cant numbers of participants claiming earned income tax credits on their tax returns, but reporting not reporting income on their applications. When questioned regarding the discrepancy, the tenants report that they did not in fact receive income, and lied to the Internal Revenue Service (IRS) in order to obtain a higher income tax rentm. have utilized a variety of methods in response to these activities. including attempted program terminations for unreported income, repayment agreements based on the income reported to the IRS, or instructing the participant to submit a corrected tax return and provide a copy of the transcript to the PHA. It should be noted that de?'auding another Federal Agency is not grounds for termination of participation in HUD programs. B. 9.099038008meme This Systemic Implications Report provides two recommendations to improve or correct the de?ciency. The ?rst is for Public Indian Housing Division (HUD-PIH) to develop and issue guidelines or best practice recommendations for dealing with tax return discrepancies. This recommendation notice should be developed in consultation with HUD-GIG and the IRS. and can include guidance on how and when to submit investigative referrals to each agency. The second recommendation is a possible best practice to provide the PHAs with additional grounds to pursue administrative actions for tax return discrepancies. instructing PHAs to utilize questions or warnings during the application process regarding earned income tax credit. These will provide the PHA with material statements from which false information can be utilized as grounds to terminate program participation. c. Investigative Techniques: Income tax returns are an invaluable resource for to verify income and statements made by program applicants and participants and should be encouraged wherever possible. They are also very useful during program ?'aud investigations by HUD-GIG or other agencies. By implementing the above recommendations, the will be able to more accurately manage their programs, and HUD-OIG can establish guidelines by which potential frauds are referred for investigation. CI Case File [12 AIGI D3 OMAP D4 Other:_ U. S. Department of Housing SYSTEMIC IMPLICATIONS 30d Urban Development REPORT Office of Inspector General Office of Investigation AGENT: DATE: April 17, 2012 Midwest A. Description of Systemic De?ciency In the joint and FBI investigation: A Community Development investigation supported the allegations that former Community Development Department (CDC) Director, knowingly circumvented 24 CFR 85.36 bidding rules and regulations by awarding approximately $165,000 dollars of demolition contracts to speci?c owners of demolition companies. The investigation showed the contracts were awarded without a competitive bid process. Subsequent interviews and investigation revealed the CDC director knowingly awarded these contracts without providing the opportunity for other demolition contractors to bid. Although the Director of the CDC had been employed in the the United States Attorney?s Of?ce (USAO) ultimately declined crimipal qusecutlon (5)05) (5)05) (5)05) (5)05) (5)05) (5)05) (5)05) (5)05) (5)05) (5)05) -- 3 05) (5)05) (5)05) (5)05) (5)05) (5)05) (5)05) (5)05) (5)05) (5)05) (5)05) (5)05) (5)05) (5)05) (5)05) (5 - (D) (5)05) (5)05) (5)05) (5)05) (5)05) (5)05) (5)05) (5)05) (5)05) (5)05) (5)05) (5)05) (5)05) (5)05) (5 (U0) - NOTE: 24 CFR 85.36, a component of 24 CFR 570 requires acknowledgement of proper bidding procedures to be taken into account when distributing CDBG or HOME funds. Activities for these funds include demolition proiects, landscaping community grounds, etc. (5) 05) (5)05) (5)05) (5)05) (5)05) (5)05) (5)05) (5)05) (5)05) (5)05) (5)05) (5)05) (5)05) (5)05) (5)05) (5) 05) (5)05) (5)05) (5)05) (5)05) (5)05) (5)05) (5)05) (5) - B. Suggestions to Correct De?ciency Based upon this investigation, it is suggested that all Community Development Directors and other city personnel involved in the bid process be required to certify at time of hire and each year thereafter in the person?s employment that they have read and understand 24 CFR 570, with emphasis on CFR 24 CFR 85.36, and that these certi?cations be maintained at the local HUD of?ce or in the city employees personnel ?le or both. Funding may be withheld contingent upon the receipt of the annual certi?cations from the appropriate grant of?cials. Furthermore, in reviewing CPD grant agreements, the language of the contracts were vague and non-binding when describing what rules should be followed when bidding out jobs awarded with federal funds. Even though the grant agreements specify all agencies will follow 24 CFR 570 when distributing these funds, it is non?speci?c when talking about bid procedures. It is also suggested that a separate, decisive paragraph and signature line that outlines what bidding procedures be required for certain dollar thresholds. In short, there must be competition for a CDBG or HOME funded project. The steward of these funds (Community Development Director, Service Director, City Manager) must bid out these jobs properly, the way 24 CFR 85.36 was intended. Simply giving a contractor a contract, knowing proper bidding procedures were not followed (forgive an emergency job or lack of bids submitted after advertisement) should be outlined in the grant agreements as well as applicable civil, or criminal penalties that may arise should the stewards of these funds intentionally not follow these procedures. C. Investigative Techniques Distribution:1 El Case File AIGI l:l3 OMAP l: 4 Other:_ U. S. Department of Housing and Urban Development Office of Inspector General Office of Investigation SYSTEMIC IMPLICATIONS REPORT AGENT (b) (7)(C)(b) (7)(C) DISTRICT/OFFICE Region 4 (b) (7)(C)(b) (7)(C) DATE April 13, 2012 A. Description of Systemic Deficiency: The Department does not have a protocol in place with the Social Security Administration (hereinafter SSA) to verify the validity of Social Security numbers associated with borrowers of FHA loans and the veracity of information that is connected with these borrower’s numbers. The case below illustrates the need to have a Memorandum of Understanding between the United States Department of Housing and Urban Development and the Social Security Administration when it pertains to FHA mortgage loans. From sometime in 2006 through January 2010, (b) (7)(C) created and used false documents in order to obtain mortgage loans for individuals within the Northern District of Alabama. (b) (7)(C) admitted creating false disability award letters that purported to have been issued from the Social Security Administration. These letters would state that the loan applicant was either the direct beneficiary or the recipient beneficiary for a third party of disability benefits that were being paid by the SSA. These letters were used to support income statements made by the loan applicants for mortgage applications that were submitted to various financial institutions which included Direct Endorsement Lenders. That application was ultimately approved by lending officials with a variety of financial institutions. The document below is an actual document used in the scheme. The borrower obtained an FHA loan based on this fake Social Security letter that supported her monthly income on the 1003, which was also fraudulent. The letter advises the lender that this borrower was receiving $2,800 a month in disability from the Social Security Administration. The fact of the matter was this individual was not receiving any Social Security benefits and was unemployed. The property subsequently defaulted and the department had to pay Wells Fargo $93,532.00 U. S. Department of Housing SYSTEMIC 0233313333333; REPORT O?ice of investigation AGE DATE: June 11. 2012 A. Wotan.? constancy: . During the uity Conversion Mortgage (1 M) investigation was discovered that while the participants of a HECM program are required to receive counseling prior to being approved for participation. a Power of Attorney (POA) is not required to receive any program counseling. Additoinally. the FDA is granted the complete autonomy to act as a manager of the estate. however, the participant of the HECM program lborrower may be residing in the home. and does not exercise any financial control over the property. This systemic de?ciency allows for the to have the complete authority to change, receive, or request a line of credit advance, without the knowledge or consent of the participant. making HUD and the borrower vulnerable to fraud. 8. Wamnum Dona-my: It is recommended, in situations where a is acting on behalf of a HECM participant corresponding with the scrvicer, changing line of credit or payment amounts). the FDA should be required to attend program counseling and sign a certi?cation of their attendance. A further review of this process should be conducted by HUD program staff. C. haunts?: During the investigation the following files were reviewed and techniques were utilized: A review of the servicing tile showed that the POA does not sign any certifications or receive any counseling regarding the HEC program. An interview with the HUD National Servicing Center also disclosed that the POA is not required to sign any certi?cations or receive any type of counseling for the program participation. Distribution: Case File AIGI OMAP Other:__ U. S. Department of Housing and Urban Development Office of Inspector General Office of Investigation SYSTEMIC IMPLICATIONS REPORT AGENT:(b) (7)(C)(b) (7)(C)(b) (7)(C) DISTRICT/OFFICE: (b) (7)(C) - (b) (7)(C) DATE: April 16, 2012 HUD OIG, Midwest Region A. Description of Systemic Deficiency In a current HUD Office of Inspector General investigation, involving the HUD insured Home Equity Conversion Mortgage (HECM), “Section 255”; investigators were made aware of a process that as an office, we believe merits review and correcting by HUD single family officials. The systemic concern is the use of the “Power of Attorney,” who has the authority to act with complete autonomy, on behalf of the mortgagor/borrower. Specifically, the scenario is as follows: A HUD insured mortgage (FHA Case (b) (4)(b) (4) ), was originated and ultimately closed on January 7, 2009. On that date, an attorney-in-fact (person designated by the Power of Attorney) signed the closing package documents and was issued a check for $75,000. Subsequent withdrawals from this mortgage included an additional $275,000 between the aforementioned January date and December 2, 2009, which was the final draw. The mortgagor died 3 days later on December 5, 2009. What was most concerning to agents in this case and is the most telling in terms of a deficiency is the fact that the actual mortgagor was an elderly woman, who was in a nursing home at the time of the closing. Moreover, further investigation revealed that she had been admitted into the nursing home on November 28, 2006, which was almost 26 months before the actual closing. Finally, at no time since her admittance had she been released to her former residence, which was subject to the HECM. Paragraph 1.8 of the Home Equity Conversion Loan Agreement from this specific loan file stated: “Principal Residence” means the dwelling where the Borrower maintains his or her permanent place of abode, and typically spends the majority of the calendar year. A person may have one principal residence at any one time. The Property shall be considered to the be the Principal Residence of any Borrower who is temporarily or permanently in a health care institution as long as the Property is the Principal Residence of at least one other Borrower who is not in a health care institution. In this particular case, there was no co-borrower who occupied the HECM residence. In fact, the investigation revealed that on October 30, 2008, nursing home records document the mortgagor’s inability to recognize the names of family members in a picture. This was the same date that an ambulance took her to obtain an Illinois Identification card because without it, the mortgage would not have gone through. Further, the care facility’s records reflect that her only departure of the nursing home since admission, other than hospital visits, was this trip to the State of Illinois identification office. Yet, the attorney-in-fact (agent of Power of Attorney) was provided the opportunity to act on behalf of the borrower in virtually every step in the process. Moreover, in many cases, he was not even required to meet face-to-face. For instance, the HECM counseling in this mortgage was conducted between the counselor and the attorney-in-fact (Power of Attorney) telephonically. Secondly, the initial loan application was filled out by the attorney-in-fact and mailed to the loan officer. Finally, the closing was held at the residence of the attorney-in-fact (Power of Attorney), wherein, he signed every document that was made part of the settlement package. B. Suggestions to Correct Deficiency It is recommended that mortgagors meet in-person with the borrower when providing counseling, if they are both located in the same geographical area. If they are not, then it is recommended that the mortgagors meet in-person with the attorney-in-fact (Power of Attorney). In this particular instance, the Power of Attorney resided in the Chicago metropolitan area, within a reasonable driving distance of the mortgagor. Yet, the Power of Attorney was allowed to attend the counseling session telephonically and then sign on behalf of the borrower. Additionally, it is improper for a Power of Attorney to fill out a loan application, wherein he or she stands to gain from the mortgage draws, without being required to post a surety/fiduciary bond to ensure faithful performance of his or her duties. Lastly, it is recommended that the borrower be required to attend the closing for his or her own property, otherwise this opens the door to the potential for fraud. If at any point in the process described in Page 1 of this SIR, had there been a requirement for a face-toface meeting with the borrower, this mortgage would have been immediately terminated. As described earlier, the only departures for the borrower/mortgagor from her nursing facility were by ambulance. The property in question was vacant for over two years prior to the closing. If any of the recommended safeguards had been implemented, Paragraph 1.8 (above) would have immediately kicked in and HUD would have been less vulnerable to fraud. HECM mortgagors are particularly vulnerable to victimization due to their advanced age and mental capacity. It is prudent to provide additional protections for his vulnerable class, rather than allow the attorney-in-fact complete autonomy through the Power of Attorney. Stricter standards for Power of Attorney instruments must be implemented, while simultaneously requiring the applicant to have some interaction with the various HECM mortgagor professionals involved in the loan application process. C. Investigative Techniques Distribution: Case File AIGI OMAP Other:__ __ U. S. Department of Housing SYSTEMIC IMPLICATIONS and Urban Development Of?ce of Inspector General REPORT O?ice of In vestigation AGENT: 9AGI DATE: February 27, 2012 A. Description of Systemic De?ciency: Community and Planning Development (CPD) grants all have di??erent rules on how the grant monies can be spent. HUD currently requires that recipients and sub-recipients of CPD funds demonstrate that the ?rnds were spent on eligible activities according to the speci?c program. However, there appears to be no speci?c HUD requirement for recipients and sub-recipients of CPD grants (across the board) to maintain HUD funds separate from other private and public funds. When an entity co-mingles HUD funds with other public and private funds, it is dif?cult to account for and determine if HUD are being spent in accordance with HUD regulations through ?nancial record reviews. The following is an example of the problem encountered in a recent HUD OIG investigation (kept in basic format for explanation purposes): A non-pro?t HUD Community Development Block Grant (CDBG) sub-recipient receives $500,000 per year from a mixture of state funds, HUD ?mds, and private donations. The $500,000 is composed of $200,000 from the state, $100,000 from HUD CDBG funds, and $200,000 from private donations. The non-pro?t places the entire $500,000 in a single account. Over the course of a year the non-pro?t buys cases of wine, hosts parties at an exclusive dinner club, Sponsors golf outings for board members, etc. The non-pro?t also claims to have provided business technical assistance to multiple companies throughout the year (an authorized HUD expenditure). When questioned about the expenses, the non-pro?t claims that the unauthorized expenditures were funded with the non-HUD money. By co-mingling the funds, it provides recipients and sub-recipients a way to side step or conceal the speci?c ways they are spending public money. The non-pro?t can simply explain that one employee paid $100,000 per year works full time doing business technical assistance; they have then justi?ed the HUD funds expenditure for the year. In this example, if HUD teamed-up with state investigators/auditors and jointly conducted an investigation, they would likely determine that public money was used for unauthorized expenditures. Were state funds or HUD funds used for the unauthorized expenditures? There is no way of knowing because the funds are being managed through a co-mingled account. Public perception is another factor. If a concerned citizen or the media obtain the ?nancial records for the non-pro?t, they would see all the aforementioned unauthorized expenditures coming out of an account that contains state and federal money. B. Suuestions to Correct De?ciency: Require recipients and sub-recipients of all HUD CPD funds to maintain a separate bank account, or some other method of keeping a wall between the money, for each grant and not allow any other funds to be co-mingled in the account. This would signi?cantly increase the transparency and allow investigators, auditors, CPD staff, and the public to clearly see exactly how HUD funds are being spent. The aforementioned non-pro?t could have three (3) bank accounts, 1 private, 1 state, and 1 HUD. They could then easily demonstrate how HUD funds were spent versus state and private funds. Most recipients and sub-recipients receive reimbursement by HUD for expenditures based on authorized activities after they have already spent the money (HUD funds are not given in advance but instead given after the fact). The same separation should apply. Using the previous example, the non-pro?t (a sub-recipient) knows that the original recipient of HUD funds will be providing them $100,000 of their CDBG funds at the end of the year. The non-pro?t should semrate $100,000 at the beginning of the year and dedicate it to HUD expenditures based on the assumption that they will be reimbursed at the end of the year with HUD money. They could then draw- down on the $100,000 when needed for an authorized HUD expenditure. At the end of the year, the non-pro?t is reimbursed, and there is then no question as to how the money was spent. Any associated costs or extra burden on the recipients and sub-recipients with this proposed requirement would be minimal. This would improve the ef?ciency of HUD audits, investigations, and monitoring. 24 CFR Section 85.20 provides guidance on ?nancial management of grant fimds. The regulation speci?cally states that the ?mds must be accounted for and spent on authorized activities. Nowhere does the regulation require the separation of HUD ?mds from non-HUD funds. C. Investigative Techniques: Agents in Las Vegas, Phoenix, and Sacramento report similar issues on CPD investigations they have conducted. In these instances, the source and application method was attempted to distinguish HUD ?mds from other sources. In one case this technique was success?il and in others it was not. In order to conduct an in-depth ?nancial analysis, HUD OIG forensic auditors are typically needed which ties up resources that could be better utilized elsewhere. The case agents for the aforementioned cases are in concurrence that requiring separate accounts for HUD funds would increase transparency of the CPD program and make ?nancial accountability more easily obtainable. Distribution: 1 Case File E12 [13 OMAP [:14 Other:__ U. S. Department of Housing SYSTEMIC and Urban Development IMPLICATIONS REPORT Of?ce of Inspector General Of?ce of Investigation AGENT: DISTRIC - DATE: February 13, 2012 10AGI, HUD-OIG A. Description of Systemic De?ciency: In 2010 and 201 l, the Seattle HUD Of?ce of Inspector General (OIG), Of?ce of Investigation, was provided with a list of approximately 1,300 felony fugitives receiving public and section 8 housing assistance throughout Region 10. . (bl (7wcwbi (7W0 . (hi mm (7)03) (bl (7)7130? (7)05) . itb) M03) (7)03) wide range of felony crimes including rape murder, aggravated assault narcotics traf?cking, felony theft and fraud charges. A large number of the felony arrest warrants were for crimes perpetrated outside the jurisdiction of where the tenant was/is residing. Many of the fugitives had been/are living in HUD funded units for many years. Due to the sheer number of active felony warrants in Region 10?s geographical area. Special Agents spent a considerable amount of man hours attempting to confirm the tenants? true identities, active status of arrest warrants and verifying extradition orders of the fugitives back to the jurisdiction of the originating arrest warrants. Special Agents learned in the course of their investigations that because of the economic cutbacks many of the felony arrest warrants full extradition orders had been changed to limited or no extradition status. Though the felony warrants were/are still active the warrant issuing agencies do not have the funding to extradite the subjects return to the jurisdiction of the original offense. A?er confirming the active arrest warrants and matching them to HUD funded tenant programs and subsequently learning of the lack of an extradition order, the Special Agents contacted the various HUD funded Public Housing Authorities (PHA) and informed them of their tenant?s status as a wanted fugitive felon. Special Agents were informed that since the warrants were not extraditable the were choosing not to temtinate the subject from the HUD funded program. The informed the Special Agents that HUD had informed them that it was a discretion as to whether or not to terminate the fugitive felons from the HUD funded program. Special Agents researched information regarding the HUD supported PHA discretion policy and learned from the Code of Federal Regulations (CFR) the following pertaining to fugitive felons: OIGM 3000 Appendix 14g 24 CFR 5.859 Fugitive Felon or Parole Violator. The lease must provide that the PHA may terminate the tenancy during the term of the lease if a tenant is: (I) Fleeing to avoid prosecution, or custody or confinement after conviction, for a crime, or attempt to commit a crime, that is a felony under the laws of the place from which the individual ?ees, or that, in the case of the State of New Jersey, is a high misdemeanor; or (2) Violating a condition of probation or parole imposed under Federal or State law. Special Agents have learned from talking with the various that most have determined 24 CFR 5.859 to mean that the have discretion in terminating the tenancy of felony fugitives and probation and parole violators based on the term ?may? in the required lease documentation. Special Agents researched the United States Code calling for the elimination of housing with respect to fugitive felons and probation and parole Violators and learned the Personal Responsibility and Working Reconciliation Act (PRWORA) of 1996, which amended Title I of the US Housing Act of 1937 under Public Law 104-193-August 22, 1996, calls for the immediate termination of any fugitive felon and probation and parole violator. 110 STAT. 2348 Public Law 104?193-Aug. 22, 1996 See. 903. Elimination of housing assistance with respect to fugitive felons and probation and parole violators. Eligibility For Assistance-The United States Housing Act of 1937 (42 U.S.C. 1437 et seq.) is amended- 42 USC 143 provide that it shall be cause for immediate termination of the tenancy of a public housing tenant if such tenant- (A) is ?eeing to avoid prosecution, or custody or con?nement after conviction, under the laws of the place from which the individual ?ees, for a crime, or attempt to commit a crime which is a felony under the laws of the place from which the individual ?ees, or which, in the case of the State of New jersey, is a high misdemeanor under the laws of the State; or (2) is violating a condition of probation or parole imposed under Federal or State law. 42 USC 143 is ?eeing to avoid prosecution, or custody or con?nement after conviction, under the laws of the place from which the individual ?ees, for a crime, or attempt to commit a crime, which is a felony under the laws of the place from which the individual ?ees, or which, in the case of the State of New Jersey, is a high misdemeanor under the laws of such State; or (II) is violating the conditions of probation or parole imposed under Federal or State law. Special Agents have learned that the are following an interpretation of the CFR that indicates there is discretion in HUD policy as to whether or not to terminate fugitive felons and probation and parole violators While the USC under PRWORA mandates that fugitive felons and probation and parole violators be immediately terminated. B. Suggestions to Correct De?ciency: OIGM 3000 Appendix 14g 1. Inform the through a HUD issued directive that when they are informed of the status of a tenant who has an active felony warrant the PHA must take action by terminating the tenant under 42 USC 143 or or by issuing an order of compliance to the suspected fugitive tenant to personally resolve the issue with the warrant issuing agency within ten days or face termination for violation of a notice to comply. If the PHA refuses to take action and continues to allow the fugitive to reside in the HUD funded PHA program in violation of 42 USC 1437 HUD shall reduce the funding for the voucher or the PHA unit of the fugitive in order to comply with federal law mandating the elimination of housing fugitive felons and probation and parole violators. 2. Inform through a HUD memorandum that failure to take action regarding the termination of fugitive felons within ten days of the notification by either immediately terminating the fugitive?s tenancy or having the fugitive resolve their arrest warrant(s) within ten days after the PHA employee has been noti?ed, will result in HUD 01G forwardng a report to the local Prosecutor?s or District Attorney?s Of?ce within jurisdiction for charges of harboring a felony fugitive. C. Investigative Techniques: Distribution:1i: Case File D2 AIGI D3 OMAP D4 Other:_ OIGM 3000 Appendix 14g U. S. Department of Housing and Urban Development Office of Inspector General Office of Investigation SYSTEMIC IMPLICATIONS REPORT AGENT: (b) (7)(C) DISTRICT/OFFICE: DATE: 5/24/12 7AGI/ A. Description of Systemic Deficiency During the course of an investigation (b) (7)(C) on an Indian Housing Authority (IHA), (b) (7)(E) Subpoena was served requesting financial records. Agents offered to take the documents, photocopy them and return them, and the Executive Director and the IHA Attorney determined that they would photocopy the records and provide them. As a result, the IHA paid $10,000 to photocopy the records at Kinko’s and then charged additional expenses for renting a trailer and hotel and meal expenses for five employees to travel 1 ½ hours to provide (b) (7)(E)(b) (7)(E) . The IHA is funded through an Indian Housing Block Grant, which is administered through HUD’S Office of Native American Programs. This particular IHA has a requirement that ONAP reviews all expenditures prior to the funds being released. That office authorized the expenditure of funds to pay the expenses of the copies and travel associated with the Subpoena, even though the Indian Housing Authority has income from non-program sources that could have been utilized. The HUD OIG office became aware of the expenses in reviewing the Indian Housing Authority records. The United States Attorney’s Office pointed out that the payment for subpoena expenses rests with the Department of Justice. He further stated that in this case, the Department of Justice would not have paid for expenses related to the copying of the records due to the nature of the records. The Assistant United States Attorney on the case was concerned that the IHA had another federal agency approve the expenses when those expenses should not have been paid with federal funds. B. Suggestions to Correct Deficiency Coordinate with ONAP to determine how these types of expenses should be handled in the future. Also, coordinate with the Department of Justice to determine the best way to handle situations like this. Develop a policy on how compliance with a Federal Grand Jury (or OIG) subpoena can be made without utilizing the Indian Housing Block Grant Funds, which should include coordination between ONAP and the HUD OIG or other investigating agency to reduce the cost of the expenses. C. Investigative Techniques Reviewed records, conducted interviews, coordinated with U.S. Attorney’s Office who requested that OIG address the matter with HUD/ONAP. Distribution: 1 Case File 2 AIGI 3 OMAP 4 Other:__ __ U. S. Department of Housing SYSTEMIC IMPLICATIONS and Urban Development REPORT Of?ce of Inspector General Oi?ce of Investigation AGENT: Disrnicrio DATE: October 22, 2012 Region VI A. Description of Systemic De?ciency: HUD's stated purpose of the Single Family Property Disposition Program is to reduce the property inventory in a manner that expands homeownership opportunities and strengthens neighborhoods and communities. To meet that purpose, HUD designed its sales procedures to provide owner-occupants an opportunity to acquire HUD Real Estate Owned (REO) properties before investors. ln operating the disposition program, HUD noted instances of alleged abuse where investors posed as owner-occu pants when bidding on REO properties. To address concerns about these potential abuses, HUD issued Notice 2003-1, Owner-Occupant Purchaser Certifications, to require that owner-occupants certify on the ?l ndividual Owner-Occupant Certi?cation? addendum to the sales contract, form HUD-9548B, that they have not purchased a HUD-owned property within the past 24 months as an owner occupant and that their offer was submitted with the representation that they would occupy the property as their primary residence for at least 12 months. The certi?cation was required on both insured and uninsured sales. The notice further stated that the certi?cation must be signed by both the purchaser(s) and the broker and submitted with the sales contract along with any other required addenda. This notice was distributed to all Homeownership Center Directors, all REO Directors, all REO Branch Chiefs and all Management and Marketing Contractors. During the investigation of allegations that a real estate investor utilized straw buyers to falsely bid on and purchase 44 HUD REO properties as owner occupants, the OIG noted that the straw buyers did not personally sign the Owner-Occupant certi?cations because the broker either forged the buyers? signature or the buyers granted the broker authorization to sign on their behalf. Since the buyers did not sign the Owner-Occupant certi?cations, the OIG was unable to hold them accountable for their participation in the scheme. Normally in an FHA Loan funded transaction, the buyer/borrower not only signs the Owner-Occupant certification, but also certifies their intent to occupy the property on the Uniform Residential Loan Application (URLA) and the Deed of Trust, both of which contain occupancy language. Furthermore, the buyer/borrower in an FHA Loan funded transaction, signs the URLA and Deed of Trust in the presence of a Closing Agent and/or a Closing Attorney. in the aforementioned 44 HUD REO property transactions, the purchases were funded with cash or non-FHA Loans. In the cash or non-FHA Loan transactions, the requirements to certify occupancy at closing were non- existent. 8. Suggestions toComct De?ciency: The deficiency described above could be corrected by requiring owner occupant purchasers in cash or non-FHA Loan funded transactions to re-certify their intent to occupy the REC property at closing. This would serve as an additional deterrent to the Owner?Occupant Purchasers Certi?cation, and provide a potential witness to the fraud in the form of a closing agent and/or closing attorney if an investigation results in prosecution. Procedures for ensuring that the required documents, including the Owner-Occupant Purchaser Certification, form HUD-95480, are used by brokers to submit offers and are fonivarded to HUD by the Contractors are delineated in the HUD-Acquired Single Family Property Disposition Handbook, 4310.5. This same Handbook also regulates the procedures for what takes place at closings, Chapter 11, Sales Closings. Section Ill, paragraph 11-8, Procedures for Processing Sales Closings. states that closing agents act on behalf of HUD, and therefore a contractual/written agreement is required for all sales closings, except when conducted by quali?ed HUD staff. Such agreement must specify the closing agent?s duties and responsibilities in order to provide necessary protection to HUD. Paragraph 11-16. Closing Agent Responsibilities, subparagraph A, Completion of Documents by Closing Agent, provides speci?c instructions to the closing agent of what their responsibilities are at the closing, including what forms to sign and directions on how to have the forms executed. This section could be amended to include the requirement that all owner-occupant purchasers re-sign the Owner-Occupant Purchaser Certification, form HUD-95480, at closing in the presence of a closing agent and/or closing attorney. Amendment of the Closing Agent ReSponsibilities would also require a corresponding amendment to Closing Agent Services Contracts, so that the Closing Agents themselves would be contractually obligated to enforce the change. The intent to propose a change to HUD regulations and/or rccedures to address his nerceived de?cienc was discussed with Denve (ht) (7 aforementioned case, and was positively received. C. Investigative Techniques: This de?ciency was discovered during the comparison of HUD REO ?leslmaintained by the Homeownership Center to the closing files for each transaction. Investigators noted that although initial Owner-Occupant Purchaser Certi?cations were required during the bidding process, no such occupancy language was required at closing. This de?ciency only occurred on cash and nonwFHA loan funded transactions. Distribution: 1 l] Case File [12 AlGl D3 OMAP B4 U. S. Department of Housing SYSTEMIC IMPLICATIONS Urban Development REPORT Of?ce of Inspector General Of?ce of fnvestlga tfon DISTRICT DATE: A. The Section 8 program and its variants (Housing Choice Voucher. Project-based Section 8. etc) allow program participants to rent privately owned homes or apartments. The process of entering the Section 8 program includes making application; receiving a voucher; locating a suitable home or apartment: and entering into contacts and agreements between the owner of the property from whom the program participants seek to rent, the prospective tenants. and HUD The family signs a number of documents at the time it begins to rent a unit include a lease, which identi?es the individuals who may occupy the unit as their residence. and a three-part Housing Assistance Payments Contract (Form HUD-52641), also known as the HAP Contract. The HAP Contract is ten pages long and identi?es the persons who may reside in the unit, assigns responsibility for the payment of utility services. establishes the rent the owner will receive in combination of payments from the tenants and from HUD, de?nes a number of terms and outlines the several program miss and requirements. The HAP Contract also contains grounds for the termination of rental assistance to program participants and requires owners to certify to a number of elements. including that they are not a parent, child. grandparent, grandchild, sister or brother of any member of the family receiving assistance, nor does the family have an ownership interest in the unit being rented. Despite the contact, no clause' Is included that directly prohibits an owner from Inaportlon of the home being rented bythe programpartlc - ..- l. mu. :0 l- I I. (bl collected HAP payments on behalf of . icted at trial for failing to report her assets and househol - -- -- - - that included the HAP payments he received on aintained that no law speci?cally prohibited him from res . ng unsu-"his rental unit. a situation referred to as ?shared housing.? In response. representatives from the Housing Authority of Billings testi?ed that program rules concerning shared housing require landlords to clearly identify the areas of a unit for which the family receives assistance and prorates the family's rent based on the total square footage of the unit. ?Family" is de?ned as a single person or group of persons and includes household with or without children; elderly families; disabled family; displaced family; a remaining tenant of a tenant family that has left the unit; or a single person who is not elderly or displaced, or a person with disabilities, or the remaining member of a tenant family. See Housing Choice Voucher Program Guidebook (4350.3 REV-1), p. 5-2 is convicted of making false statements in connection with his list of the occupants of his rental unit on the HAP resided together. the Housing Authority of Billings developed a separate form on which landlords are required to acknowledge that they cannot live in the assisted unit. The form also includes several of the requirements contained in the HAP Contract but in a clearer manner. (See the attached exhibit.) More recently, an investigation involving a landlord that used a small portion of the un?nist basement of a unit for which he receives HAP on behalf of tenants residing on the main ?oor of the home was recen declined to be acceoted osecuiton In contrast to the eartier cases no shared . amounts. property. or mai boxes were identified that further linked the tenant with the landlord. A visit to the premises b( evealed that the landlord cooked meals on a hotplate in the basement and used only the bathroom of the subsidized unit. Despite having created the Owner's Certification form described above. the Housing Authori of Billin 5 did not retroactivel cuire landlords to s'-n it' as a result in the (5) B. Situations to Comet Melony: Establish regulations to require landlords to certify at the time of their tenants' lease-up or annually to statements concerning con?icts of interest and other program rules. c. investigative Distributionz1 Case File DZ AIGI D3 OMAP U4 Other:_ U. s. Department of Housing SYSTEMIC IMPLICATIONS and Urban Development REPORT Office of Inspector General Of?ce of Investigation AGENT: - oars: November 27, 2012 Southeast A. Many local Public Housing Authorities (PHAs) require program applicants and continuing participants to provide tax returns as a means to verify material statements during the application and recerti?cation process. Tax returns are a good asset for PHAs to verify information. and should be encouraged, however over the last several years, numerous PHAs throughout Florida have reported signi?cant numbers of participants claiming earned income tax credits on their tax returns, but reporting not reporting income on their applications. When questioned regarding the discrepancy, the tenants report that they did not in fact receive income, and lied to the Internal Revenue Service (IRS) in order to obtain a higher income tax retum. have utilized a variety of methods in response to these activities. including attempted program terminations for unreported income, repayment agreements based on the income reported to the IRS, or instructing the participant to submit a corrected tax return and provide a copy of the transcript to the PHA. It should be noted that de?'auding another Federal Agency is not grounds for termination of participation in HUD programs. B. ?90800:meme This Systemic Implications Report provides two recommendations to improve or correct the de?ciency. The ?rst is for Public Indian Housing Division (HUD-PIH) to develop and issue guidelines or best practice recommendations for dealing with tax return discrepancies. This recommendation notice should be developed in consultation with HUD-GIG and the IRS. and can include guidance on how and when to submit investigative referrals to each agency. The second recommendation is a possible best practice to provide the PHAs with additional grounds to pursue administrative actions for tax return discrepancies. Instructing PHAs to utilize questions or warnings during the application process regarding earned income tax credit. These will provide the PHA with material statements from which false information can be utilized as grounds to terminate program participation. c. Toetmlquos: Income tax returns are an invaluable resource for to verify income and statements made by program applicants and participants and should be encouraged wherever possible. They are also very useful during program ?'aud investigations by HUD-GIG or other agencies. By implementing the above recommendations, the will be able to more accurately manage their programs, and HUD-OIG can establish guidelines by which potential hands are referred for investigation. CI Case Flle [12 OMAP D4 Other:_ U. S. Department of Housing SYSTEMIC IMPLICATIONS 0:3? Urfblan Deglogment I ce 0 nape enera REPORT O?ice of Investigation AGENT: Special Investigations DIvtelon (GIO) DATE: January 17. 2013 A. Description of Systemic De?ciency: On November 3, Department of Housing an an Develo initiated by the United States I I (75(53'Xb) L) mwn/xwwu'nw "an (7)230!) on k. He?d) (mow) (MC) for Conspiracy to Commit Mail Fraud. HUD when, at the time (moan (mow) (7X9) ?g herein it was alleged been mvolved in a mortgage fraud scheme. (5) (5) Kb) peci?cally, the review found that the acks basic internal policies, management and oversight, to ensure a sound and effective personnel security program. The following systemic weaknesses were identi?ed as major barriers to a sound and effective personnel security program: 1. does not have written policies, procedures and/or regulations to direct personnel security specialists in the administration of the personnel security program. 2. does not have an e??ective case management system for the timely review and evaluation of the character, background, and history, of candidates for employment before they are selected and enter on duty with HUD. The lack of an effective system has resulted in inability to timely identify candidates for employment who have a criminal record, or a pending criminal charge, in order to properly evaluate a candidates suitability for employment before they enter on duty with HUD. 3. acks an effective case management system to ensure the timely review and adjudication of personnel security background investigations, and re- investigations. The lack of an effective system has resulted in inability to take timely and appropriate personnel action relative to employees who pose a personnel security risk based on suitability issues identi?ed and reported to HUD in background investigations, and re-investiga?ons. B. Suggestion to comet De?ciency: The following recommendations are made to address the major barriers identi?ed: 1. . uld immediately develop and implement personnel security program policies, procedures and regulations for the administration of personnel security program in accordance with Title 5, Code of Federal Regulations, part 731, and US. O?ce of Personnel Management, Federal Investigative Standards. 2. -ou1d immediately develop and implement an e?'ectivc and timely case management process for reviewing and evaluating the character, background, and history, of candidates for employment before they are selected and enter on duty with HUD in accordance with Title 5, Code of Federal Regulations, Part 731, and Of?ce of Personnel Management, Federal Investigative Standards requirements. 3. should immediately develop and implement an e??ective case management system to ensure the timely review and adjudication of personnel security background investigations, and re-investigations, in accordance with Title 5, Code of Federal Regulations, Part 731, and US Of?ce of Personnel Management, Federal Investigative Standards requirements. c. Investigative Techniques: si?nw by information and doc 1 Case File [:12 [13 on? [:14 Other:__ U. S. Department of Housing SYSTEMIC IMPLICATIONS 012d De?elogment I ce 0 nspe or enera REPORT Office of Investigation DISTRICT I OFFICE: DATE 2AGI June 26, 2013 A. Description of Systomlc De?ciency: A recent investigation into Single Family Origination (SFO) Fraud conducted by this of?ce has revealed a potential weakness in the underwriting of HA-insured loans under the Section 203 programs. A Cooperating Defendant (CD) revealed that he preferred to report self-employment for the straw buyers he utilized because ?ctitious Income Tax Returns can easily be ?led and then amended after the lender obtains an Income Tax Transcript. This allowed the CD to utilize straw buyers who otherwise would not have quali?ed for mortgages because they were unemployed, or their employment earnings were insuf?cient for mortgage quali?cation. FHA underwriting guidelines require that self-employed borrowers provide Income Tax Returns for the prior 2 years as one form of income veri?cation. The borrower is also required to sign an Internal Revenue Service (IRS) form 4506-T, Request for Tax Transcript. However, the Tax Transcripts are frequently not received by the lender until after the mortgage closing, and an IRS form 1040X can easily be ?led to change the reported income. In multiple instances, the CD prepared IRS forms 1040 for the prior year reporting that the straw buyers were self-employed and earned income of over $100,000 per year. The CD would ?le the returns with the IRS within one month of closing (in one instance the 1040 was ?led on the day of closing). The CD could ?le the return but not pay any tax to the IRS, leaving a report of income earned and an amount of tax owed. The CD would wait 2 to 3 months for the lender to obtain Income Tax Transcripts, and then the CD would ?le an amended Income Tax Return (1040X) for the straw buyer, reducing the amount of income from over $100,000 to less than $15,000. The amended ?ling also eliminated any tax owed to the IRS. This activity is known in the mortgage industry as ?gaming the tax transcript,? and was identi?ed as a signi?cant threat at the Mortgage Bankers Association National Fraud Issues Conference in 2012. Other instances have been identi?ed in HUD-OIG investi ations throu_ out the . ?n a scheme to ?'audulently obtain mortgage loans and automobile loans. One of the straw buyers, who earned only a few thousand dollars a year, quali?ed for an FHA-insured mortgage of over $300,000 based on false tax returns ?led with the IRS which reported that he earned over $101,000 per year. The income tax transcript revealed that the straw buyer?s tax returns for 2006 and 2007 were ?led with the IRS on November 25, 2008; and the mortgage application occurred in February 2009. The property has since gone into foreclosure and is awaiting claim to FHA. In 2010, an FHA mortgagor in Phoenix, Arizona norted that had acted as a straw buyer in the purchase of a property for an acquaintance. informed investigators that the individual behind the scheme kne $133333 was unemployed, but ?led income tax returns with the IRS reporting that 33118- $137,802 and $143,074 in the two prior years. The investigation revealed that the straw buyer?s tax returns were ?led with the IRS on June 1, 2009; and the mortgage application occurred in September 2009. In May 2010, a 1040X was ?led which corrected the straw buyer?s income to $1,814 for the year. The mortgage is currently in default. B. Suggestions to Comet De?ciency: FHA underwriting guidelines state that a borrower is not eligible for participation in the program if they have ?Delinquent Federal Debt.? Delinquent Federal Debt includes delinquent Federal taxes, but tax delinquency is generally restricted to a tax lien. FHA underwriting guidelines also state, ?Tax liens may remain unpaid, provided the lien holder subordinates the tax lien to the FHA mortgage.? A review should be conducted to determine if continued tax delinquency should be identi?ed as a credit risk and affect eligibility. The FHA should consider steps to tighten the underwriting of loans to self-employed borrowers. Additional steps may include requiring the lender to obtain Income Tax Return Transcripts and reconciliation of those transcripts with borrower-supplied information prior to the loan closing. Tax Return Transcripts clearly show the tax liability of a taxpayer as well as the outstanding balance of any taxes owed, and any unpaid tax balances should be adequately explained, justi?ed and documented. Additionally, the FHA should consider instituting a ?seasoning? period for tax returns supplied as support for a mortgage application. A seasoning period would provide greater opportunity for the review and/or enforcement of the returns (the added expense of tax payments may deter the fraudulent ?lings), as well as making it more dif?cult to quickly manipulate returns for mortgage quali?cation. The FHA should require that lenders not approve loans for self-employed borrowers until the underwriter receives a tax transcript. If the borrower has a tax delinquency or returns had been ?led shortly before the loan application, the borrower should be required to show support of payment to the IRS. Finally, the FHA should initiate Quality Assurance reviews of loans to self-employed borrowers, which represented approximately 5% of total endorsements in 2012. In the case referenced above, the CD was able to manipulate the most recent year?s tax ?lings for the straw buyers, but was unable and/or reluctant to manipulate prior year?s ?lings because the straw buyers had already ?led returns for those years. When the lender obtained the previous two years? Income Tax Transcripts, the most recent year matched the Uniform Residential Loan Application (URLA) and IRS form 1040 ?gures, but the prior year didn?t match. The discrepancies in the prior years were overlooked by the Direct Endorsement (DE) Underwriter(s) and the loans were subsequently insured by FHA. C. Investigative Techniques: The following investigative techniques may be used in the investigation and detection of SFO fraud: 1. Obtain Tax Return Transcripts from the lender for multiple years. Returns for the most recent year can be easily manipulated, but manipulating prior years? returns can be time consuming and costly (particularly if a return has already been ?led for that year). Reconcile the prior years with information provided on the URLA and IRS forms 1040 provided during the origination process. Discrepancies in employment income as well as the presence/absence of Schedules and SE should be noted and may indicate a fraudulent ?ling. Review corporate ?lings maintained by the Secretary of State/Commonwealth. Corporate ?lings are publicly available records and are available on the intemet in most states. Corporate ?lings generally include information such as company name, corporation type, business type, date of incorporation, company of?cers, and business location. Analyze the purported occupation and earnings of the self-employed borrower and compare with known information worrower?s previous occupational ?eld, prevailing wages in area). Review forms 1040 provided in the origination process and identify returns that appear to have been ?led late, or were ?led during the. mortgage application process. Distribution: 1 El Case File D2 AIGI D3 OMAP [:14 Other:_ U. S. Department of Housing SYSTEMIC IMPLICATIONS and Urban Development REPORT Of?ce of Inspector General Office of Investigation OFFICE: DATE Region 2 2AGI March 15, 2013 A. Description 0! Systemlc De?ciency: A recent investigation into Single Family Origination (SFO) Fraud conducted by this of?ce has revealed a potential weakness in the underwriting of FHA-inursed loans under the Section 203 programs. A Cooperating Defendant (CD) revealed that to report self-employment for the straw buyers Witilized because ?ctitious Income Tax Returns can easily be ?led and then amended after the lender obtains an Income Tax Transcript. This allowed the CD to utilize straw buyers who otherwise would not have quali?ed for mortgages because they were unemployed, or their employment earnings were insuf?cient for mortgage quali?cation. FHA underwriting guidelines require that self-employed borrowers provide Income Tax Returns for the prior 2 years as one form of income veri?cation. The borrower is also required to sign an Internal Revenue Service (IRS) form 4506-T, Request for Tax Transcript. However, the Tax Transcripts are frequently not received by the lender until after the mortgage closing, and an IRS form 1040X can easily be ?led to change the reported income. In multiple instances, the CD prepared IRS forms 1040 for the prior year reporting that the straw buyers were self-employed and earned income of over $100,000 per year. The CD would ?le the returns with the IRS within one month of closing (in one instance the 1040 was ?led on the day of closing). The CD could ?le the return but not pay any tax to the IRS, leaving a report of income earned and an amount of tax owed. The CD would wait 2 to 3 months for the lender to obtain Income Tax Transcripts, and then the CD would ?le an amended Income Tax Return (1040X) for the straw buyer, reducing the amount of income from over $100,000 to less than $15,000. The amended ?ling also eliminated any tax owed to the IRS. 3. Suggestions to Correct De?ciency: FHA underwriting guidelines state that a borrower is not eligible for participation in the program if they have ?Delinquent Federal Debt.? Delinquent Federal Debt includes delinquent Federal taxes, but tax delinquency is generally restricted to a tax lien. FHA underwriting guidelines also state, ?Tax liens may remain unpaid, provided the lien holder subordinates the tax lien to the FHA mortgage.? A review should be conducted to determine if continued tax delinquency should be identi?ed as a credit risk and affect eligibility. The FHA should consider steps to tighten the underwriting of loans to self-employed borrowers. Additional steps may include requiring the lender to obtain Income Tax Return Transcripts and reconciliation of those transcripts with borrower?supplied information prior to the loan closing. Tax Return Transcripts clearly show the tax liability of a taxpayer as well as the outstanding balance of any taxes owed, and any unpaid tax balances should be adequately explained, justi?ed and documented. Additionally, the FHA should consider instituting a ?seasoning? period for tax returns supplied as support for a mortgage application. A seasoning period would provide the IRS with a greater opportunity for review and/or enforcement of the returns, as well as making it more dif?cult to quickly manipulate returns for mortgage quali?cation. The FHA should require that lenders not approve loans for self?employed borrowers until the underwriter receives a tax transcript. If the borrower has a tax delinquency, the borrower should be required to show support of payment to the IRS. Finally, the FHA should initiate Quality Assurance reviews of loans to self employed borrowers. In the case referenced above, the CD was able to manipulate the most recent year?s tax ?lings for the straw buyers, but was unable and/or reluctant to manipulate prior year?s ?lings because the straw buyers had already ?led returns for those years. When the lender obtained the previous two years? Income Tax Transcripts, the most recent year matched the Uniform Residential Loan Application (URLA) and IRS form 1040 ?gures, but the prior year didn?t match. The discrepancies in the prior years were overlooked by the Direct Endorsement (DE) Underwriter(s) and the loans were subsequently insured by FHA. c. Investigative Techniques: The following investigative techniques may be used in the investigation and detection of SFO fraud: 1. Obtain Tax Return Transcripts from the lender for multiple years. Returns for the most recent year can be easily manipulated, but manipulating prior years? returns can be time consuming and costly (particularly if a return has already been ?led for that year). Reconcile the prior years with information provided on the URLA and IRS forms 1040 provided during the origination process. Discrepancies in employment income as well as the presence/absence of Schedules and SE should be noted and may indicate a fraudulent ?ling. 2. Review corporate ?lings maintained by the Secretary of State/Commonwealth. Corporate ?lings are publicly available records and are available on the intemet in most states. Corporate ?lings generally include information such as company name, corporation type, business type, date of incorporation, company of?cers, and business location. 3. Analyze the purported occupation and earnings of the self employed borrower and compare with known information (borrower?s previous occupational ?eld, prevailing wages in area). - 4. Review IRS forms 1040 provided in the origination process and identify returns that appear to have been ?led late, or were ?led during the mortgage application process. Distribution: 1 CI Case File D2 AIGI D3 OMAP D4 Other:_ U. S. Department of Housing SYSTEMIC IMPLICATIONS and Urban Develonment REPORT Of?ce of Inspector General O?ice of Investigation AGENT: - DATE: May 15, 2013 Region 7/8/10, A. mum of Systemic De?cleney: There is no process currently available for agents to pursue in streamlining or fast-tracking the suspension and debannent process of real estate professionals absent criminal charges. There are instances where real estate professionals have violated HUD program rules and/or violated state or federal law(s) and are willing to take responsibility for their actions. Yet, generally, the facts of the investigation or the loss amount(s) do not meet prosecutorial guidelines or are not appealing to the county, state or federal prosecutor?s office for criminal prosecution. Where the burden of proof is lesser than in criminal court it would be an effective investigative tool whereby agents could prepare a referral to the DEC for review and possible action. This is a viable alternative in lieu of just closing the investigation without action, where action may in fact be warranted. A possible corrective measure to address this issue would be to create an GIG-approved form whereby the subject of the investigation could voluntarily agree to a suspension as a means of investigative resolution. 010 could also consider using this same ?administrative process? for NH program participants and FHA borrowers involved in some sort of HUD program fraud. The 016 could actively pursue and address as appropriate remedies and deterrence through 0163 administrative authority to protect HUD programs. Putting a process in place like this would have a direct and substantial impact to HUD and governmental programs at large. These options would allow agents and management to effectively and efficiently ?correct deficiencies? as they are realized and allow the OIG to efficiently utilize its limited resources in support of other HUD objectives. a anmm The 016 OGC, DEC, HUD and DOJ should work together to develop an approved process whereby agents would have the reference material and forms to consider while working in the ?eld on cases in order to facilitate suspension and debannent actions against real estate professionals, and others who defraud HUD programs. c. Investigative Suggestion: Other: Distribution:1_31 [1 Case File [1232 AIG) OMAP [1334 Other:_ U. S. Department of Housing and Urban Development Office of Inspector General Office of Investigation SYSTEMIC IMPLICATIONS REPORT AGENT: (b) (7)(C) DISTRICT/OFFICE: Region 7/(b) DATE: (7)(C) 11/4/2013 A. Description of Systemic Deficiency During the course of an investigation of an Indian Tribal Housing Authority , it was discovered that the housing stock was in very poor condition, including boarded up units and non-existent units due to fires (photos available). The (b) (7)(C)(b) (7)(C) was not sure of the status of the units and had not reported to HUD staff that there were units that should be removed from the Formula Grant computation. After notification by the case agent, the HUD (b) (7)(C) spent a few days with the Indian Housing Authority to try and locate and identify the status of the units. (b) (7)(C) Subsequently, the (b) (7)(C)(b) (7)(C) identified units that should have been taken off line and notified the HUD staff about that. The HUD staff then did the calculations and went back for three years (as stated in the CFR) to recover the funds, a total of $70,000, even though some of the units had been out of service for more than three years. Per the HUD (b) (7)(C) the (b) (7)(C)(b) (7)(C) is responsible for inspecting the units. There is no requirement for ONAP properties to be inspected by the REAC staff like other HUD housing. B. Suggestions to Correct Deficiency In Public Housing Authorities and Project Based Section 8 properties, HUD requires a REAC inspection of the units on an annual basis. The scores from this inspection have a role in determining the future level of monitoring by HUD and can also provide for administrative sanctions. Since the REAC group is already in existence and functioning, they could do annual inspections of the units on the Indian Reservations to ensure that the residents have access to units that are decent, safe and sanitary and protect HUD’s investment in the housing stock. Also, this could assist the HUD Formula Grant staff to ensure that the number of units is accurately reported and Indian Housing Authorities are getting the funds needed to maintain the housing stock. Such an implementation could prevent the awarding of HUD funds for units that no longer existed or fail to meet housing quality standards. C. Investigative Techniques Interviews of (b) (7)(C)(b) reviewing records. Distribution: 1 Case File (7)(C)(b) (7)(C) 2 AIGI 3 OMAP , looking at housing stock, 4 Other:__ __ U. S. Department of Housing SYSTEMIC IMPLICATIONS and Urban Development REPORT Of?ce of Inspector General Of?ce of Investigation AGENT: DATE: November 5, 2013 A. Description of Systemic De?ciency )revealed that Ino ua s, 0 were preVIous convrc eo, sen enceo, ano ooearred, have been in business relationships as Section 8 landlords withw. These individuals have been debarred from HUD, which exc es em rom procurement and non-procurement as either a principal or participant with HUD. The investigations found that approximately 50 Section 8 tenants were housed by the Limited Liability Companies whose owner or management member(s) are currently debarred by HUD. Owners and active members of the who have been debarred from all HUD activity, simply did not have to disclose to the Housing Authorities that they, as an individual, had been debarred from HUD. No direct statements/certi?cations were discovered on Section 8 landlord paperwork in the Saint Louis City, Saint Louis County, or the Wichita, Kansas, Housing Authorities. Accordingly, no criminal or civil action could be pursued against landlords in violation of the aforementioned. 8. Suggestions to Correct Deficiency Require Public Housing Authorities to run landlords and any entity associated with those landlords through Excluded Parties List System (EPLS) upon initiation as a Section 8 landlord and on an annual basis upon tenant?s re-certi?cation. Require landlords to certify upon initiation of becoming a Section 8 landlord and annually upon tenant that they, or any entity associated with them: -Have never been terminated as a Section 8 landlord by any housing authority; and -Have not been placed on EPLS system. The landlord should certify under 18 USC 1001 (false statements) that he/she has been completely truthful in the certi?cation. C. Investigative Techniques After it was found that previously debarred individuals were operating and/or managing and continuing to obtain HAP payments, HUD-OIG personnel gathered all HAP contracts associated with the LLC's from the anororiate Housino Authorities. The su5oect HAP contracts were read and (MO 8 no anguage was con aIneo In a ec Ion 8 landlord management business Is suspended or debarred from HUD, that business shall not be initiated or be continued with the individual landlord or management business. HUD-OIG personnel also discovered through the System Award Management system (SAM’s) that though the individuals were directly debarred from all dealings with HUD, LLC’s and commercial companies that the subject was directly involved with as either as an agent, managing partner, or owner was not debarred per SAM’s. A verification through the Secretary of State business search and viewing the company’s website, also identified that the debarred subjects were directly associated with the LLC’s. During a Missouri NAHRO conference presentation by a HUD OIG agent, approximately 50 representatives from various housing authorities in Missouri were asked if their respective housing authorities ran their landlords through EPLS. Only two housing authorities actually ran their landlords through this system. Distribution: 1 Case File 2 AIGI 3 OMAP 4 Other:__ __ U. S. Department of Housing SYSTEMIC IMPLICATIONS and Urban Development REPORT Of?ce of Inspector General Of?ce of Investigation AGENT DATE: (WC) January 29. 2014 A. Description of Systemic De?ciency In July 2011. the US. Department of Housing and Urban Development (HUD) Of?ce of Inspector General (OIG) Of?ce of Audit (0A) issued Audit Report 2011-NY-1802: The City of Dunkirk. NY Used Community Development Block Grant Recovery Act Funding for an Ineligible Activity. The audit was initiated as a result of Congressional interest in conmlunities that used American Recovery and Reinvestment Act (ARRA) funds for ineligible projects. including water parks. Speci?cally. Hospitality LLC received $100.000 in ARRA fluids for a water park that was not completed. The Audit produced emails between HUD Conmnulity Plaiming and Development (CPD) program staff relative to the ARRA Grant awarded to the City of Dunkirk. Speci?cally. on September 21. 2010. thenm emailed requesting they go to Dunkirk and conduct an onsite visit of the wor pe ormed for the project. review all supporting documentation to support eligibility and docmnentation to support cost. and report the results of the visit to the director the next day. The next day (September 22. 2010). one of the C) that conducted the monitoring visit emailed the and reported the following: 0 A site visit was made to the hotel and the Manager was interviewed. Inspection revealed that work was being done only to the hotel?s guest rooms and common areas. and not in the pool area. The manager con?rmed that the hotel renovations are scheduled to be fully complete prior to the start of the proposed pool enhancements. As part of the who conducted the onsite visit were b) (7X0 were as 1 tiey too notes uring t1e onsite v151t. specr ca urulg or if the ?ndings were memorialized. did not ta notes an. 10 not memoria 1ze the ?sh. di sen an ema note a ove of the ?ndings. However. even i {71.1. . a er reviewmg tie emai gig: recollection of the events was nmte . A B. Suggestions to Correct Deficiency It is respectfully suggested that a process be created to require HUD employees take notes and more speci?cally memorialize site \isits and interviews. especially when done informally and without any preparation. It is possible that the information obtained would be useful for future program matters and/or OIG Audits/Investigations. The availability of notes and memos help to preserve the event and allow for the participating HUD employee to refresh his/her memory. especially when an individual?s recollection of an event fades with time. or if the HUD employee responsible for the visit/interview is no longer a HUD employee C. Investigative Techniques Distribution:1 Case File D2 AIGI D3 OMAP D4 Other:_ U. S. Department of Housing and Urban Development Office of Inspector General Office of Investigation SYSTEMIC IMPLICATIONS REPORT AGENT: (b) (7)(C)(b) (7)(C)(b) (7)(C)(b) (7)(C) DISTRICT/OFFICE: DATE: Northeast Region/(b) (7)(C) Office of Investigations July 2, 2014 (REV-1) A. Description of Systemic Deficiency This office initiated an investigation into bid rigging, theft of government funds, and bribery related to HUD CDBG rehabilitation funds awarded to the City of Bayonne. During the course of this investigation, HUD-OIG, Office of Investigation (HUD-OIG OI) found deficiencies in the Integrated Disbursement Information System (IDIS) Access request form and HUD’s Rules of Behavior form. IDIS is the draw down and reporting system for HUD’s grant programs. CPD staff and grantees who receive HUD CPD grants (CDBG, ESG, HOPWA, HOME) use IDIS to set up, fund, and request payments for CPD-eligible activities. Requests for and approvals of payments in IDIS must be completed by two separate individuals - a creator (requestor) and an approver (Attachment 1), who are designated by the grantee’s approving official. The requestor cannot act as an approver because to do so would exceed his/her HUD-granted authority. Taking into account the challenges encountered by smaller municipal grantees, it is possible for one individual to be designated as both a requestor and approver, but they cannot act in both roles for the same transaction. When a request for payment is approved, payment to the grantee is made in the form of an Automated Clearing House deposit from HUD’s Treasury account into the grantee’s bank account. After reviewing HUD IDIS access form 27055 (11/13), “IDIS OnLine Access Request” (Attachment 2), the Reporting Agent noticed the following: 1 – The form lists a warning that reads as follows: Warning: HUD will prosecute false claims and statements. Conviction may result in criminal and/or civil penalties (18 U.S.C 1001, 1010, 1012; 31 U.S.C. 3729, 3802) 2 – The form does not advise the user or require an affirmative statement or certification from the person being granted IDIS access that it is a violation of 18 USC 1030 (Fraud and Related Activity in Connection with Computers) to knowingly access a computer without authorization or to exceed his/her HUD authorized access. 3 – The form does not contain a certification that the user being granted access was advised of HUD’s Separation of Duties policy (Attachment 3), effective December 14, 2001, which reads that a separation of duties between the IDIS requestor and approver must exist. HUD Rules of Behavior Form 27065 (02/11) (Attachment 4) defines a user’s role when being granted access to HUD systems. This packet requires the user to sign and certify page 4 of the packet and return the certification to HUD. The certification page does not contain any warnings or certifications regarding the violation of 18 USC 1030. Consequently, it is possible for a grantee to allow a single person to use two different ID’s thereby giving one person the ability to both create and approve draw requests without an independent review. B. Suggestions to Correct Deficiency 1) We recommend HUD revise the IDIS access request form and the Rules of Behavior form to include a warning and certification by the person being granted access to IDIS. The warning should require the user to acknowledge that (1) he/she understands HUD’s policy requiring a separation of duties between the requestor and approver; (2) he/she is prohibited from misusing the IDIS, i.e., exceeding their authority; and (3) he/she understands the existence of and penalty for violating 18 USC 1030. The elements of 18 USC 1030(a)4, “Accessing to Defraud and Obtain Value” are: - Knowingly accessing a protected computer without or in excess of authorization; - With intent to defraud; - Access furthered the intended fraud; and - Obtained anything of value The penalty for violating this statute includes a fine and imprisonment of not more than ten years, or both. We acknowledge that the current IDIS software prevents the same ID number from becoming both the requestor and approver for the same transaction and CPD staff can restrict a user’s role. Both of these checks help HUD control IDIS use and access and should continue. While we acknowledge that our recommendation might not deter individuals with malicious intent from conspiring with each other to misuse IDIS IDs, the insertion of the recommended warning will assist prosecutors prove elements of intent in furtherance of a conspiracy when we learn of the intentional misuse of IDIS IDs. This recommendation should deter less sophisticated individuals from IDIS ID misconduct. We consulted with the Director, Of?ce of Community Planning and Development, Newark, New Jersey, who concrured with the recommendations made in this report. We consulted with the Regional Inspector General for Audit, Of?ce of Audit, New York, New York, who with the made in this report. C. Investigative Techniques Dining the aforementioned investigation, HUD OIG OI reviewed HUD records/C PD system procedures and conducted interviews of numerous witnesses and CPD staff. We learned that the easily circumvented the separation of duties requirement and thus, misappropriated DBG funds in exchange for bribes. the approver (with requested and approve on mu trple occasions, at least 424000 HUD CDBG fluids, 1n ortedly for eligible work, which was never erfonned. In exchange, received kickbacks from the who was paid the DBG funds. told the HUD-OIG OI that was not aware that it was a violation of HUD rules to use another employee?s ID to access IDIS. No matter how implausible this defense sounds, prosecutors are reticent to use the aforementioned statute when HUD does not warn, in any form, that this behavior is prohibited. HUD- OIG OI learned that it is n_ot uncommon for grantees to exceed their access authority by usin- another user 3 ID. Durin this investiatiorr, HUD- OIG OI also lea-med that Finally, HUD-OIG OI learned that another employee?s IDIS ID was frequently used by other grantee employees long after the person to whom the ID was issued had left the agency. Distribution:1 Case File AIGI E13 OMAP :14 Other:_ U. S. Department of Housing SYSTEMIC IMPLICATIONS and Urban Development REPORT Of?ce of Inspector General Office of Investigation AGENT: DATE: Regional Of?ce A. Description of Systemic De?ciency In the evaluation of a project, the Real Estate Assessment Center?s (REAC) inspection is the principal tool used by HUD to assess site conditions and protect residents living in HUD assisted or insured multi-family housing against poor living conditions. As long as a project obtains a score of 60 HUD's administrative proceduresexempt an owner from further scrutiny about property conditions. Unscrupulous owners strive to provide the minimum amount of maintenance to obtain this passing score. The Of?ce of Investigation (OI) has investigated multiple allegations of substandard Multi-Family Housing. These allegations related to both uninsured and insured properties. It has been determined that many Multi-Family Developments with delorable oh sical conditions are still able to achieve coassin . (5) (5)03) 0? 0? (5) 0? (5) The HUD program centers in Multifamily Housing are experiencing dif?culty with managing the insured and subsidized portfolio in cases where the ability to take strong stance on physical condition is easily challenged and/or set aside by current operating policy. When a project fails a REAC inspection, the HUD Program Center sends out a Notice of Default and/or Notice of Violation that gives the owner 3 days to cure an exigent, health and safety ?nding and 60 days to provide a certi?cation that all of the other physical de?ciencies identi?ed in the REAC inspection have been corrected. If the project fails to correct all de?ciencies and submit a certi?cation within the 60-day time frame, the owner is ?agged in the APPS system and administrative sanctions occur abatement, suspension or termination of the HAP Contract and/or civil monetary penalties). REAC will re-inspect the project to con?rm that the owner is in compliance. If the project fails a second inspection (up to one year later), sanctions will be enforced. In addition, the Program Center would categorize the project as being ?troubled? and additional scrutiny would occur MOR). While the Department can take action against an owner that has two failing scores, the attorneys for the owners may insist on a HUD auhorized third inspection as a delaying tactic while owners continue to collect huge rental subsidies. These stalling tactics can delay HUD from taking action for up to two years. Some project owners can, and do, easily skirt the intent of Uniform Physical Condition Standards assessment by managing to achieve the minimum acceptable score level (60) rather than aspiring to a higher score where there are only minor defects noted in any particular assessment. They refer to it as ?gaming the system,? and there is a cottage industry of 20 to 30 companies that have sprung up to help owners of HUD assisted housing attain the magic score of 60. B. Suggestions to Correct Deficiency The following are some suggestions to improve the REAC process: 1) Raise the minimum acceptable level of 60. 2) Change the patterns of inspections to focus on specific properties. 3) Target management reviews for properties with a history of marginal or static performance at or below 75. 4) Allow doubling or tripling of sample units where poor inspection scores occur at whatever cut off is selected. 5) Allow changes to frequency of inspections forhistorically poor performers. 6) Increase the number of Quality Assurance inspectors. 7) Decrease the amount of time that notice is given to a property owner of an impending REAC inspection. C. Investigative Techniques Distribution: 1 Case File 2 AIGI 3 OMAP 4 Other:__ __