CHAPTER 7. PROGRAM MONITORING

7-1 INTRODUCTION.

Program monitoring will be performed at three levels - local

HUD State and Area Offices, Designated Offices and

Headquarters. HUD will conduct compliance monitoring in

accordance with the HFA\'s own or approved procedures for

origination, underwriting, processing, servicing, management

and disposition procedures as well as compliance with HUD

regulations and guidelines.

Monitoring will be performed on a remote and on-site basis

primarily consisting of post-endorsement compliance reviews.

Periodic on-site monitoring to determine overall compliance

with program requirements will be performed primarily by

Designated Offices. Local HUD Office and/or Headquarters

personnel may participate in these reviews.

Headquarters\' primary responsibility will be overall program

evaluation and the review of documentation pertaining to

continued compliance of the HFA with program eligibility

requirements, including monitoring of the dedicated account,

where applicable, and other financial requirements.

7-2 ORIENTATION MEETING. Within 30 days after Headquarters

approves an HFA\'s application to participate in the risk

sharing programs, the Designated Office should schedule and

conduct an orientation meeting with the HFA.

A. The meeting should be scheduled at the Designated

Office. It should be conducted to elicit two-way

exchanges between HFA and HUD officials as to the

expectations of the HFA and the Department under the

pilot program. It should review program requirements,

responsibilities of the HFA, local HUD Office,

Designated Office and Headquarters, and how and for

what purpose monitoring activities will be conducted.

This meeting should also be an opportunity for the HFA

to describe its processing, underwriting and servicing

procedures to familiarize the Designated Office with

the basis for future monitoring.

B. It should be attended by principal HFA staff and HUD

staff responsible for remote and on-site monitoring.

Both development and asset management disciplines

should be represented.

7-3 HFA SUBMISSIONS AND INFORMATION.

A. PROJECT INFORMATION - THROUGH FINAL ENDORSEMENT.

Remote monitoring will be based on documentation

contained in project closing dockets, including

underwriting and other project information entered by

the HFA onto the information diskette submitted with

the docket at initial and final endorsement (or

construction start for new construction and substantial

rehabilitation projects without insured advances). The

type of information to be submitted by the HFA on the

diskette is listed in Appendix 11. HUD will provide

HFAs with the actual format and instructions for

reporting by diskette.

B. PROJECT INFORMATION - AFTER FINAL ENDORSEMENT. Project

management and servicing data must be submitted by the

HFA according to the requirements of paragraph 7-6C.

C. HFA INFORMATION. HFAs must submit annual audited

financial statements to HUD Headquarters (Office of

Insured Multifamily Housing Development) and the

Designated Office. In addition, the HFA must submit to

Headquarters:

1\. The semi-annual report on its portfolio insured

under Section 542(c) required by 24 CFR Section

266.115(d)(2). This report must include the

original mortgage amount and outstanding principal

balance for all projects underwritten, the status

of all projects (current, in default, workout,

foreclosure, etc.) and, if applicable, the date(s)

bankruptcy was filed and the date(s) the HFA

requested dismissal;

2\. An annual certification that there has been no

basic change in organization, business activities,

financial status or other information submitted

with its application for approval (or if changes,

the nature of those changes) and that the HFA

complied with all eligibility requirements during

the past year;

3\. Any change(s) to its standards and procedures,

loan terms and conditions before implementation of

such change(s), providing copies of any such

change within 5 business days after it has been

approved by the HFA. For Level II HFAs,

Headquarters must review proposed changes and

provide its written approval to the HFA before the

HFA can implement the change(s).

4\. Other information necessary to ensure compliance

with program requirements and performance of the

HFA in meeting program objectives.

7-4 INCREASES IN UNITS.

A. AFTER ISSUANCE OF FIRM APPROVAL LETTER. Upon

submission of the closing docket, an HFA may require

additional units. When the data diskette is loaded

into the Risk-Sharing data system and the number of

units is different from the Firm Approval Letter, an

exception report will be generated. The local HUD

Office should immediately adjust or correct the units

reserved for the project. Unless the additional

required units exceed the HFA\'s set-aside, no further

action relative to the number of units on the part of

the local HUD Office is needed. However, if there is

an increase in the mortgage amount, additional credit

subsidy must be allocated to the projects in accordance

with outstanding instructions.

B. REQUEST FOR ADDITIONAL ALLOCATION/SET-ASIDE. Increases

in the allocation or set-aside may be required as a

result of a closing docket submission that includes

additional units over and above the Firm Approval

Letter amount or that results from a direct request

from the HFA to increase its allocation or set-aside.

1\. The local HUD Office may increase the allocation

in any amount up to the amount in the set-aside at

any time after notifying the Designated Office

that maintains the set-aside.

2\. Requests for additional units in an amount that

exceeds the number of units in the approved set-

aside must be made in writing by the HFA to the

Designated Office which will, in turn, request

units from Headquarters. All determinations by

Headquarters to increase or decrease an HFA set-

aside will be made with written notification from

the Designated Office via an Addendum to the Risk-

Sharing Agreement.

C. ADDENDUM TO RSA. Any changes in the allocation or set-

aside must be immediately reflected in the data system

and incorporated by addendum into the Risk-Sharing

Agreement by the Designated Office. Such addendum will

serve as notification to the HFA that their request has

been approved.

7-5 LOCAL HUD OFFICE RESPONSIBILITIES

Local HUD Offices will make certain determinations

before final endorsement of the mortgage instrument.

All other HFA monitoring will be done by the Designated

Office. Local Office monitoring responsibilities

relative to review of insured advances and cost

certification are covered in paragraph 6-2D. The

Environmental Officer in the Local HUD Office is

responsible for any in-depth monitoring required of

Responsible Entities performing environmental reviews

of projects subject to HFA Risk- Sharing as well as

other HUD programs (see paragraph 7-6.B.3.).

7-6 DESIGNATED OFFICE RESPONSIBILITIES

A. PIPELINE REVIEWS. The Designated Office is

responsible for monitoring each HFA\'s progress

toward closing on projects for which a Firm

Approval Letter has been issued as well as

progress on using unit set-asides.

1\. Upon notification by Headquarters, Designated

Offices will survey the HFAs to determine the

number of projects in their current pipeline and

estimated date for submission for HUD-retained

review determinations and endorsement. The survey

must also include an estimate of the number of

units and mortgage amount. This survey will

assist Headquarters in reallocating units as

described in paragraph 2-4I.

2\. Headquarters will notify the Local HUD Offices and

the Designated Offices of any changes to set-

asides under this paragraph and will enter any

such changes into the data system. This system

will keep track of unit allocations as projects

are approved.

B. MONITORING OF RESPONSIBLE ENTITIES ASSUMING HUD

ENVIRONMENTAL RESPONSIBILITIES. Monitoring and

training of Responsible Entities (RE) performing

environmental reviews on Risk-Sharing projects shall be

conducted in accordance with 24 CFR 58.77(d).

1\. HUD shall review HFAs\' project records for

compliance with any special environmental

conditions of the Responsible Entity\'s (RE)

environmental review.

2\. HUD shall also review project files and conduct

limited monitoring of the RE\'s environmental

review for compliance with Part 58, including

review of the environmental review record and

Request for Release of Funds and Certification

form HUD-7015.15.

a\. Chapter 9 of Handbook 6509.2 REV-4, Community

Planning and Development Monitoring Handbook,

contains checklists and guidance which may be

used in performing the limited environmental

review.

b\. The HUD Environmental Officer is available to

provide technical advice, training and

monitoring support.

c\. Copies of all checklists and information

obtained from the environmental review shall

be provided to the HUD Environmental Officer.

3\. In addition, at least once every three years,

HUD\'s Environmental Officer intends to conduct in-

depth monitoring of REs to evaluate compliance

with Part 58 under all HUD programs subject to

assumption authority. Housing staff should notify

the HUD Environmental Officer and request an in-

depth monitoring of the procedures used and the

environmental review methods applied whenever:

a\. The RE or the HFA has a known history of

repeated deficiencies and inadequate

compliance with 24 CFR 58;

b\. The RE or the HFA is faced with such problems

as environmental litigation, adverse findings

from a prior monitoring visit, complaints or

local controversy regarding a project, or

criticism from other Federal or State

agencies; or

c\. Objections to the release of funds have been

received.

C. REMOTE MONITORING. Monitoring will be performed by

Designated Offices primarily on a post-endorsement

basis. Patterns detected by the Designated Office that

must be avoided or corrected by the HFA in future

processing must be brought to the attention of the HFA

in writing. Failure to make modifications or agree to

take corrective actions, or to accomplish such

modifications or corrective actions, within a time

period specified by the Designated Office, may be basis

for sanctions against the HFA.

1\. Sources. Remote monitoring by the Designated

Office will consist of reviewing: a) project

underwriting information files provided by the HFA

by diskette with the closing docket (as input into

the data system by the Local HUD Office); b)

project management and servicing information

submitted to the Designated Office after the

project reaches the management stage; and c) other

information contained in the closing docket

relative to compliance with underwriting standards

and procedures, including the Request for Release

of Funds and Certification documenting compliance

with environmental obligations in accordance with

Part 58.

2\. Number of Projects/Files to be Reviewed. Not all

projects/files need be reviewed for each HFA.

However, a random sample of sufficient projects/

files must be reviewed for each HFA to determine

whether there is a pattern of deviations or

noncompliance. In no event, however, should less

than 20-25 percent of the projects/files of an HFA

be reviewed; more files should be reviewed if

practices or patterns inconsistent with program

requirements are detected.

3\. Contents of Reviews:

a\. Project Data Files - Development. The

Designated Office will review the project

data submitted by the HFA (as input into the

data system by the Local HUD Office) to

determine whether the HFA\'s underwriting

assumptions and conclusions, based on the

HFA\'s procedures incorporated by reference

into the Risk- Sharing Agreement, are

reasonable. This review will include loan-

to-value ratios, debt service coverage

ratios, financing costs and similar data

elements.

b\. Risk Share. The Designated Office will also

determine whether the HFA processed in accord

with its own procedures or, for projects

processed under Level II, the procedures

approved by HUD, and whether the risk- share

apportionment is consistent with Level I or

Level II requirements.

c\. Management, Servicing and Disposition. The

Designated Office is responsible for

monitoring all management, servicing and

disposition activities of the HFA to

ascertain that the HFA complies with its

procedures and requirements, or for projects

processed under Level II, the procedures and

requirements approved by HUD.

\(1\) The HFA must submit copies of all

physical inspection reports and, for

projects not in safe and sanitary

condition, summaries of actions

required, with target dates, to resolve

issues.

\(2\) The HFA must also analyze project annual

audited financial statements and provide

HUD with summaries of any unresolved

findings resulting from such audits

including a summary of corrective

actions planned, with target dates.

d\. Personnel. The HFA will advise the

Designated Office of any changes in its

principal personnel (i.e., chief underwriter

and chief of loan management, servicing and

disposition) and of the names (with specimen

signatures) of individuals authorized to

commit the HFA under Section 542(c). These

names must be incorporated by addendum to the

Risk-Sharing Agreement, a copy of which must

be sent to the HFA, local HUD Office and

Headquarters.

D. ON-SITE MONITORING. To meet the statutory reporting

requirements of Congress for the pilot program, the

Designated Office will also schedule periodic (but not

less than annually) and as-needed on-site reviews. The

basis for these reviews will be the trends determined

through remote monitoring and elements that do not lend

themselves to remote reviews. If the performance of

the HFA has been less than satisfactory or marginally

satisfactory, the Designated Office may determine if

more frequent reviews are warranted. Representatives

of the local HUD Office and Headquarters may

participate in the on-site review.

On-site monitoring will involve but not be limited to:

1\. Development Staff Responsibilities. The review of

HFA activities from origination through closing

are subject to monitoring, including but not

limited to:

a\. review of how the HFA complies with its own,

or HUD-approved, procedures for project

underwriting, and that only procedures

incorporated by reference into the Risk-

Sharing Agreement are actually used by the

HFA;

b\. review of the adequacy of the HFA\'s market

determinations including its finding of no

adverse impact on existing or proposed

Federally insured or assisted projects in the

area;

c\. review of the HFA\'s project records for

compliance with any special environmental

conditions of the Responsible Entity\'s (RE)

environmental review. HUD staff shall also

conduct limited monitoring of the RE\'s

environmental review for compliance with Part

58, including review of the environmental

review record and Request for Release of

Funds and Certification form HUD-7015.15.

Refer to CPD Handbook 6509.2 REV-4 (Community

Planning and Development Monitoring Handbook)

for checklists and guidance in performing the

limited environmental review. Copies of all

checklists and information obtained from the

environmental review shall be provided to the

HUD Environmental Officer.

d\. construction administration procedures,

including inspections (including compliance

with lead-based paint requirements), labor

standards and prevailing wage compliance,

assurance of completion requirements and

latent defect escrows;

e\. insurance of advances and cost certification

procedures to determine whether advances were

consistent with construction progress,

whether the loan remained in balance by

comparing actual disbursements against a

project completion schedule, and whether

disbursements were supported by bills and/or

receipts;

f\. the HFA\'s procedures and implementation of

the quality control plan submitted with its

application for participation in the 542(c)

program (and/or any amendments), and for

monitoring the performance of any outside

contractors;

g\. verification that appraisals are performed by

Certified General Appraisers, licensed in the

State in which the property is located, and

that all appraisal functions are completed in

accord with the Uniform Standards of

Professional Appraisal Practice; and

h\. verification that loan origination records

are properly maintained and that loan

processing decisions are made by personnel

identified in the Risk-Sharing Agreement.

2\. Asset Management Staff Responsibilities. The HFA

shall be responsible for, among other things,

monitoring and determining the compliance of the

project owner to assure that the project is

maintained in a safe, sanitary, and financially

stable condition. The Designated Office will

monitor the performance of the HFA to determine

its compliance with applicable HUD regulations,

the provisions of the Risk-Sharing Agreement

between HUD and the HFA, and other guidelines

issued by HUD. The Designated Office should

determine, among other things, that the HFA is:

a\. Complying with its own procedures for project

management, loan servicing and property

disposition (including foreclosure and

acquisition of defaulted properties), and

that only procedures incorporated by

reference into the Risk-Sharing Agreement are

actually used by the HFA;

b\. Complying with applicable regulations and

guidelines, the Risk Sharing Agreement,

subsidy contracts and other legal agreements

between HUD and the HFA.

c\. Monitoring the performance of the owner and

management agent.

d\. Enforcing the provisions of the Regulatory

Agreement which is executed between the

mortgagor and the HFA including the

affordability requirements of the program and

affirmative fair housing marketing and other

equal opportunity requirements;

e\. Performing the required annual physical

inspections.

f\. Performing the required review of the

projects\' annual audited financial statement.

g\. Providing HUD with an annual audited

financial statement of the HFA in accordance

with the requirements of 24 CFR 44, Non-

Federal Government Audit Requirements.

h\. Retaining mortgage loan origination

documents, and loan servicing documents,

mortgage default and claim records in

compliance with instructions in this

Handbook.

The Designated Office should review the HFA\'s policies,

procedures, and organizational structure to determine

if the appropriate mechanisms are in place to provide

adequate management oversight of the project owner and

management agent. The Designated Office must determine

the adequacy of the HFA\'s response in resolving

corrective actions noted on physical inspection reports

and/or reviews of annual audited financial statements.

7-7 HEADQUARTERS RESPONSIBILITIES

A. REMOTE MONITORING. Headquarters, Office of Insured

Multifamily Housing Development, will remotely monitor

continued eligibility of the HFA for participation in

the program. Staff may also participate with

Designated Office personnel in on-site monitoring

reviews.

B. ITEMS TO BE MONITORED. Items subject to remote review

by Headquarters include:

1\. HFA\'s annual audited financial statement;

2\. maintenance of \"top-tier\" and \"A\" ratings, as

appropriate;

3\. establishment and/or maintenance of dedicated

accounts (where required pursuant to paragraph 2-

2B) in a financial institution acceptable to HUD;

4\. updates from Moody\'s and Standard and Poor\'s as to

pending and actual significant financial or

portfolio problems;

5\. compliance with the HFA\'s investment policies and

overall business and financial practices;

6\. annual certification that there was no basic

change in organization, business activities,

financial status or other information submitted

with its application for approval (or if changes,

the nature of those changes) and that the HFA

complied with all eligibility requirements during

the past year;

7\. the HFA semi-annual report on its portfolio

insured under Section 542(c) including the

original mortgage amount and outstanding principal

balance for all projects underwritten, the status

of all projects (current, in default, workout,

foreclosure, etc.) and, if applicable, the date(s)

bankruptcy was filed and the date(s) the HFA

requested dismissal.

8\. default ratio consistent with the default ratio

for the HFA\'s entire multifamily portfolio and the

default ratio for Section 542(c) program overall;

9\. proper billings for proper remittance and

collection of MIP; and

10\. claims process, including issuance of debentures

by the HFA.

C. PROCESSING PROCEDURES. The HFA must notify

Headquarters before implementing any change to its

standards and procedures, loan terms and conditions and

provide Headquarters with copies of any such change

within 5 days after it has been approved by the HFA.

Headquarters will review changes proposed by the HFAs

proposing to approve Level II loans and provide its

written approval to the HFA before the HFA can

implement the change. All changes must be incorporated

by reference in an addendum to the Risk-Sharing

Agreement. Copies of the addendum must be sent to the

HFA, local HUD Office and Designated Office.

D. COORDINATION WITH DESIGNATED OFFICES AND LOCAL HUD

OFFICES. Headquarters will communicate on a continuing

basis with Designated Offices and local HUD Offices

regarding results of monitoring reviews. This will

provide feedback concerning common deficiencies or

problems that will result in appropriate changes to

program policies and procedures.

7-8 NOTIFICATION OF DEVIATIONS AND NONCOMPLIANCE.

Deviations and noncompliance with program requirements will

be communicated to the HFA in writing. The Office issuing

the letter must thoroughly document all deviations and

noncompliances and retain the documentation in its files.

Copies of all such communications must be forwarded to

Headquarters. The HFA must respond to the notification

within the time frame specified in the letter, but no later

than 30 days after the date of the letter, as to how it has

or proposes to resolve the issue.

If, through limited monitoring of environmental activities

or by other means, Housing Staff becomes aware of any

environmental deficiencies, the HUD Environmental Officer

should be notified immediately and appropriate action taken.

The Housing Development Director in consultation with the

Environmental Officer may schedule in-depth environmental

monitoring, require attendance by RE staff at HUD-sponsored

or approved training, or suspend or terminate the RE\'s

assumption of the environmental review responsibility.

7-9 SANCTIONS

The Department may impose sanctions for noncompliance with

program requirements. The actions for which sanctions may

be imposed are identified in Section 266.120 of the

regulations. The types of sanctions are identified in

Section 266.125. The Office imposing the sanction must

thoroughly document the basis for the sanction and maintain

the documentation in its files. The HFA has a right to an

informal hearing on any sanction imposed.

A. DESIGNATED OFFICE

1\. Notification Letter. Sanction may be imposed by

the Director of Multifamily Housing (or Director

of Housing in Offices with this position) or

his/her designee. The letter imposing the

sanction should be sent by registered mail, return

receipt requested.

2\. Informal Hearing. The HFA may request an informal

hearing within 10 working days of the date it

receives the letter imposing the sanction, and the

informal hearing must be conducted within 10

working days of the Office\'s receipt of the HFA\'s

request for an informal hearing.

3\. Conduct of Hearing. The Director of Multifamily

of the Designated Office (or Director of Housing

in Offices with this position) or his/her designee

will serve as the hearing officer. The hearing

will be recorded and a transcript of the recording

will be made available to the HFA at the HFA\'s

request and expense.

4\. Opinion. The hearing officer will render his/her

opinion within 10 working days of the informal

hearing. The decision of the hearing officer

constitutes final HUD action.

B. HEADQUARTERS. Sanctions imposed by Headquarters will

be handled through the Mortgagee Review Board (MRB) and

its procedures.

C. COORDINATION AND NOTIFICATION.

1\. The Designated Office must inform the local HUD

Office(s) in its jurisdiction and Headquarters,

respectively, and Headquarters must inform the

Designated Office and the local HUD Office(s)

respectively, of any pending or imposed sanction

action and provide those Offices with a copy of

the sanction letter.

2\. Headquarters will be responsible for coordinating

actions taken by the MRB, whether or not MRB

actions resulted from sanctions imposed under the

542(c) program.