Last week, HUD issued Housing Notice 2015-02.  The topic of the Notice is the “Required Actions for Multifamily Housing Projects Receiving Failing Scores from HUD’s Real Estate Assessment Center (REAC).”

The Notice revises the required steps HUD must take in cases when a project receives a score of 59 or below on a REAC inspection. It also supplements Notice 2011-24.  Previous to the 2011 Notice HUD placed a noncompliance flag in APPs when the project received a score of 59 or less. These changes are in response to Section 230 of the Consolidated Appropriations Act, 2014.  Section 230 directs HUD to take certain procedural steps when certain multifamily housing projects score 59 or less on the REAC physical inspection. Most of the law codifies the procedures that Housing and the Departmental Enforcement Center (DEC) already follow.

Under the revised guidelines, the following are triggers for HUD action:

• Project receives a score of 30 or less;
• Project receives a score of between 31 and 59 and the owners fails to certify timely in writing that all deficiencies were corrected (within 30 days);
• Project receives a score between 31 and 59 and receives consecutive scores of less than 60

Failure to meet these guidelines will result in a noncompliance flag in APPs.  The rules apply to all insured and noninsured projects with project-based assistance under Section 8 or a “contract for similar project-based assistance.”  There is no mention of applicability to projects with only a HUD-insured mortgage.

What this means to You:

HUD has issued no specific guidance in the HUD Audit Guide related to these recent changes. Chapter 3 of the Guide mentions physical inspections twice. Once in Item F – Distributions and Item M – Management functions. Neither of the procedures mentions a specific inspection score. All that is required is to determine that owners have complied with or responded to all outstanding notices from HUD regarding maintenance of the project.

However, auditors are required to list any such findings as a result of the inspection under item #3 in the Schedule of Prior Audit Findings. In our opinion, if the required corrections have not been completed by the date required under the Notice, then the auditor would have to consider whether to generate a finding to be included in the Schedule of Findings and Questioned Costs.