Rural Housing Service: Progress on GAO Recommendations and Preliminary Observations on Loan Guarantee Risk Management
Released: 2015-05-19T00:00:00

Letter

Background

The federal government plays a major role in supporting housing. Federal housing assistance includes, but is not limited to, the following categories:

Homeownership programs, often called single-family housing programs, provide mortgage insurance, loan guarantees, and direct loans to support the purchase or refinance of a home, as well as grants or loans for home repairs or modifications.

Rental housing programs, often called multifamily programs, provide loans, interest rate subsidies, loan guarantees, tax incentives, or a combination of these to promote the development and rehabilitation of privately owned rental properties.

Rental assistance programs, which make rents affordable to eligible households by paying the difference between the unit’s rent and 30 percent of a household’s adjusted income. These programs include (1) tenant-based rental assistance that provides vouchers for eligible tenants to rent privately owned apartments or single-family homes and can be applied to different properties if tenants move, and (2) project-based rental assistance that is attached to specific properties and available to tenants only when they are living in units at these properties.

In the 1930s, when most rural residents worked on farms and rural areas generally were poorer than urban areas, Congress authorized separate housing assistance for rural areas and made USDA responsible for administering it. Specifically, in 1937 the Bankhead-Jones Farm Tenant Act authorized USDA to provide long-term, low-interest loans to farm tenants and sharecroppers so that they could purchase and repair farms, including homes on farms. The Housing Act of 1949 authorized new rural lending programs through USDA and made farm owners eligible for assistance for dwellings and other farm buildings. Amendments added in 1961 made nonfarm properties eligible for single-family loans and created the farm labor housing program. A 1962 amendment created the rural rental housing program.

The housing programs that RHS currently administers include, but are not limited to, the following:

The Section 502 Single Family Housing Guaranteed Loan Program (single-family guarantee program) provides guarantees on mortgage loans to households with low and moderate incomes in rural areas.

The Section 521 Rental Assistance Program (rental assistance program) provides rental subsidies to help very low- and low-income rural tenants afford decent rental housing. The properties in which the tenants live were created through other RHS programs that provide low-interest loans for the development of multifamily housing.

The Section 514 and 516 Farm Labor Housing Loan and Grant Program (farm labor housing program) provides direct loans and grants for the development of on-farm and off-farm housing for farmworker tenants. The farm labor housing program is the only RHS program that does not have to meet rural eligibility criteria—that is, it funds properties in both urban and rural areas.

Opportunities Exist to Increase Collaboration and Consider Consolidation of RHS and HUD Programs

Our prior work assessing fragmentation, overlap, and duplication in selected housing programs concluded that increased collaboration or even consolidation of certain housing programs (including RHS programs) could make the programs and program administration more effective.

In an August 2012 report, we found that overlap exists between selected single-family federal housing programs—particularly those of RHS and HUD—in the products offered and populations (income groups) and geographic areas they served. For instance,

RHS, HUD, and VA all guarantee single-family mortgage loans for homeowners.

According to fiscal year 2009 loan data, 74 percent of HUD borrowers fell into the low- to moderate- income category and therefore met the income eligibility requirement for the RHS single-family guarantee program in fiscal year 2009.

Also according to fiscal year 2009 data, HUD served a larger number of low- and moderate-income households in nonmetropolitan counties, including those parts of the county considered by USDA’s Economic Research Service to be rural or completely rural (see fig. 1).

HUD and VA single-family programs are not restricted geographically. In contrast, eligible areas for RHS programs are “rural,” as defined by statute. However, in our August 2012 report, we found that RHS can operate in virtually all areas of the United States, and 37 percent of the population as of 2011 was eligible for rural housing programs on the basis of geography alone. Over the years, we have found that the methods for identifying eligible areas results in similar areas being treated differently. For example, in our August 2012 report, we reiterated a finding from a 2004 report that the definition of rural used to determine eligibility for rural housing programs can lead to similar areas receiving different eligibility determinations. Our 2004 report recommended that Congress consider certain changes to the definition to better ensure that RHS made more consistent eligibility determinations for rural housing programs. We maintain that these changes would improve the consistency with which RHS determines eligibility for such programs. In addition, the changes would help target the programs to more rural areas—for instance, by eliminating “grandfathered” eligibility for places that had become part of metropolitan areas.

Agencies have started to work on better coordinating their single-family programs. In February 2011, the administration announced a task force to evaluate the potential for coordinating or consolidating homeownership loan programs at HUD, USDA, and VA. But, in our August 2012 report, we found that opportunities existed to increase collaboration among the agencies and potentially realize efficiencies. The single-family task force’s efforts as of 2012 had not yet incorporated key collaborative practices we identified in previous work. We concluded that practices, such as identifying goals and resources and defining strategies and outcomes, would be important as the task force moved forward. We recommended that HUD, USDA, and VA, and the Director of the Office of Management and Budget (OMB) take steps to establish a more rigorous approach to collaboration. For example, as a first step, agencies could define and articulate goals or common outcomes for their collaborative efforts. HUD, USDA, and VA generally agreed with the recommendation; however, HUD and OMB stated that actions should wait until after the housing markets stabilized. In 2014, representatives from HUD, USDA, VA, and other agencies addressed our recommendation by signing a Joint Federal Housing Agencies Working Group Organization Charter. The charter stated that the purpose of the working group included promoting coordination and consistency in federal housing programs. It also set membership rules, voting procedures, and meeting schedules.

Our August 2012 report also found overlapping purposes in selected RHS, HUD, and Treasury multifamily programs, but differing products, areas served, and delivery methods. For example, RHS, HUD, and Treasury provide financing for development and rehabilitation of multifamily housing for low- and moderate-income households, but RHS- financed properties were more concentrated in rural areas, while properties financed through HUD and Treasury programs were more concentrated in urban and suburban areas. But for rental assistance programs, while RHS had a much higher proportion of assisted units in small town rural zip codes and isolated rural zip codes (rural zip codes) than HUD had in those areas, HUD had a greater number of assisted units in rural zip codes than RHS. Specifically, as of 2012, HUD provided assistance to 235,828 units in rural zip codes and RHS to 176,957 (see fig.2).

We also found that agencies had been working to coordinate multifamily programs. More specifically, HUD, USDA, and Treasury had been working to consolidate and align requirements in rental housing programs through the Interagency Rental Policy Working Group established by the White House’s Domestic Policy Council in 2010. Although the working group’s efforts were consistent with many key collaborative practices, our August 2012 report found that the group had not taken full advantage of opportunities to reinforce agency accountability for collaborative efforts or expanded the scope of its evaluation to include proposals that would require statutory action. We recommended that the Rental Policy Working Group take steps to document collaborative efforts in strategic and annual plans to help reinforce agency accountability for these efforts. As of May 2015, this recommendation has not been implemented, and RHS indicated that it was seeking ways to formally document the results of interagency collaboration.

We also found that consolidation of similar RHS and HUD housing programs may offer an effective means for achieving long-term cost savings. We first suggested in 2000 that Congress consider requiring USDA and HUD to examine the benefits and costs of merging programs serving similar markets and providing similar products. In our August 2012 report, we found that in subsequent years, certain aspects of the RHS and HUD homeownership programs grew more alike (for example, as RHS shifted from single-family direct loans toward loan guarantees). However, we indicated that the current statutory framework imposed additional challenges on the agencies’ ability to consolidate similar programs. For example, HUD has noted that without legislative changes, any efforts to merge the programs likely would result in a more cumbersome delivery system. Thus, any evaluations of which programs, products, systems, and processes to retain, revise, consolidate, or eliminate would involve complex analyses, trade-offs, and difficult policy decisions. We concluded that the single-family task force offered opportunities for these agencies to identify potential areas for consolidation or greater coordination and which actions would require statutory change. We recommended that to build on efforts already under way to coordinate, consolidate, or improve housing programs, and help inform Congress’s decision-making process, HUD, Treasury, USDA, and VA should evaluate and report on the specific opportunities for consolidating similar housing programs, including those that would require statutory changes. HUD, USDA, and VA generally agreed with the recommendation. However, the recommendation has yet to be implemented.

Additional Actions Are Needed to Address GAO Recommendations on Improper Rental Assistance Payments and Oversight of Farm Labor Housing

In our prior work on RHS’s rental assistance and farm labor housing programs, we concluded that RHS could take additional steps to enhance program oversight and efficiency. Our May 2012 report on improper rental assistance payments made seven recommendations to RHS, three of which are implemented. In a March 2011 report on oversight of the farm labor housing program, we made seven recommendations to RHS, three of which are implemented. Further actions are needed to address the remaining recommendations. The following discussion addresses selected recommendations from these reports. (See app. I for a full list of the recommendations from these reports and their status.)

Improper Rental Assistance Payments

In our May 2012 report, we found that RHS had made annual estimates of improper payments in its rental assistance program and taken steps to reduce such payments. RHS generates these estimates as part of annual improper payment audits. From fiscal years 2007 through 2010, RHS reduced its reported error rate (total amount improperly paid divided by program outlays) from 3.95 percent (representing $35 million in errors) to 1.48 percent (representing $15 million in errors). RHS’s error rates reported in fiscal years 2013 and 2014 were 1.79 and 1.99 percent, respectively.

However, we also found that RHS’s reported error rates might understate the magnitude of the problem for several reasons, including the following:

RHS had not estimated improper payments due to unreported tenant income because it lacked the authority to match data on tenant income against federal wage and benefits databases.

RHS had not estimated improper payments made on the behalf of deceased tenants because it had not completed steps to gain access to the Social Security Administration’s (SSA) Death Master File, which could be used to match data to detect such payments.

In 2008, RHS began excluding improper payments of less than $100 from estimated error rates. However, RHS did not submit this change to OMB, which is responsible for approving agency methodologies for estimation.

Our May 2012 report also found that RHS had not fulfilled all OMB reporting requirements for improper payments. For example, USDA’s Performance and Accountability Reports (1) did not contain a description of steps the agency took to ensure managers were accountable for reducing and recovering improper payments; and (2) did not fully discuss whether the agency had the internal controls, human capital, information systems, and other infrastructure to reduce improper payments.

To address limitations in RHS’s detection and estimation of improper payments, in our May 2012 report we suggested that Congress consider amending the Social Security Act to grant RHS access to the National Directory of New Hires database (New Hires database) for purposes of verifying tenant incomes. Although USDA drafted legislation to obtain this access, and a bill was introduced in the 113th Congress (2013–2014) to provide access, these proposals were not enacted. We continue to believe that providing RHS with this access would strengthen the accuracy and integrity of RHS’s payment process.

In addition, we recommended that USDA do the following:

Draft proposed legislation to grant RHS access to SSA benefits data for income verification purposes. USDA has not yet drafted this legislation. USDA officials told us that they wanted to obtain access to the New Hires database before pursuing access to the SSA benefits data.

Complete steps to use SSA’s Death Master File to identify improper payments made on behalf of deceased tenants. RHS officials told us in March 2015 that they now conduct prepayment checks against the Death Master File to avoid making improper payments to deceased tenants and that they planned to use the file to help detect improper payments in future audits.

Submit RHS’s methodology for estimating improper payments, including the use of the $100 exclusion threshold, to OMB for review. As of March 2015, RHS officials said they had prepared a draft request to USDA’s Office of the Chief Financial Officer to request an OMB review of the methodology. However, RHS has yet to submit the methodology to OMB for review.

Our May 2012 report also made two recommendations to address shortcomings in RHS’s reporting on improper payments. First, we recommended that RHS complete steps to ensure agency manager accountability for reducing and recovering improper payments and include a discussion of these steps in USDA’s Performance and Accountability Reports. RHS addressed this recommendation in USDA’s fiscal year 2012 Annual Financial Report (AFR)—the report in which USDA now reports improper payment information. Second, we recommended that RHS discuss internal controls, human capital, information systems, and other infrastructure in USDA’s Performance and Accountability Reports. However, RHS has not included this discussion in the AFRs. In March 2015, RHS officials told us that the discussion was not applicable to the rental assistance program because the improper payments stem from the actions of private property managers (who request RHS rental subsidies on behalf of tenants), not from insufficient RHS resources for internal controls and infrastructure. We disagree that RHS internal controls and resources are not applicable to the rental assistance program because RHS has processes, people, and data that it uses to prevent and detect improper payments. We maintain that RHS should provide the required discussion in the AFR to better inform Congress and OMB of its capability to reduce improper payments.

Oversight of Farm Labor Housing Program

In a March 2011 report, we found that RHS could strengthen its management processes in several areas to more effectively implement and oversee the farm labor housing program. As the only federally assisted source of housing for farmworkers, the program plays an important role in constructing and rehabilitating housing. However, we concluded that a number of RHS management processes hindered the agency’s ability to provide farmworkers with access to decent and safe housing and ensure compliance with program requirements, as follows:

The enforcement mechanisms RHS used may not be effective in bringing borrowers—that is, the recipients of the program’s loans and grants—into compliance in a timely manner. Forms of borrower noncompliance varied in severity—from mortgage default or health and safety violations on a property to failure to submit annual budget documentation. We concluded that some RHS enforcement actions were too mild (servicing letters), and others too severe (acceleration of the loan payments) to have the intended effect of returning borrowers to compliance. We recommended that RHS implement enforcement actions that could be tailored to the severity of the borrower’s noncompliance. The agency agreed with this recommendation and published a proposed rule to establish civil money penalties as a “mid-level” enforcement mechanism. But according to USDA, a regulatory change is needed before Rural Development can use the services of USDA Administrative Law Judges to adjudicate civil money penalty cases.

Although RHS staff must ensure that borrowers (or their management agents) verify tenants’ income levels, the processes RHS used for verifying income were inconsistent among state offices that help implement the program. For example, some state offices used third- party income verification systems, such as a wage matching system, while other states did not have access to these verification tools. We recommended that USDA seek legislative authority to gain access to the New Hires database for data matching purposes and noted that we first recommended granting such access in 2004. USDA agreed with our 2011 recommendation and, as discussed previously, proposed legislation to obtain this access. Although the legislative proposals have not been enacted, we maintain that providing RHS access to the database would improve management of the program.

Although borrowers must verify the legal residency of tenants, we found inconsistencies in the methods RHS used to ensure borrower compliance. The Citizenship and Immigration Services division of the Department of Homeland Security operates the Systematic Alien Verification for Entitlements (SAVE) program, which provides an online service for verifying legal residency documentation. This service is available, upon request, to all federal, state, and local benefit-granting agencies. As part of supervisory reviews of borrowers, we found that staff from some RHS state offices used SAVE to check whether borrowers were verifying residency status, while staff from several other offices either did not or were unaware of the program. We recommended that to better ensure that requirements for tenant eligibility were met, RHS should require staff to use the SAVE program to verify tenants’ residency status during supervisory reviews. As of April 2015, RHS had not implemented this recommendation.

Preliminary Observations on Risk Management of RHS’s Single-Family Loan Guarantee Program

As requested by this Subcommittee, we are conducting ongoing work on RHS that focuses on RHS’s methods of estimating credit subsidy costs and risk-management practices for its single-family guarantee program. In relation to risk management, we have been examining the extent to which RHS’s practices are consistent with key federal requirements, including those in OMB Circular A-129 (Policies for Federal Credit Programs and Non-Tax Receivables) and federal internal control standards. Overall, our work as of May 2015 indicates that while aspects of RHS’s risk-management practices broadly align with selected federal requirements, other aspects are not fully consistent with requirements and leading practices. Our preliminary observations are summarized below.

RHS has policies, procedures, and practices for a number of risk- management functions addressed in OMB Circular A-129. Examples include the following:

RHS has procedures for determining borrower creditworthiness, including an automated underwriting system that helps lenders determine whether applicants qualify for an RHS-guaranteed mortgage. The procedures also require RHS field staff to perform several steps. For example, RHS field staff must review every loan application and associated loan documentation (such as the property appraisal) before the lender closes the loan. If the documentation is satisfactory, RHS issues a conditional commitment to guarantee the loan, which may require the lender to satisfy certain conditions before proceeding to loan closing. Once the lender closes the loan and submits the closing package to RHS, RHS field staff must conduct a final review to determine whether the lender met the conditions before issuing the loan guarantee.

RHS has policies and procedures for overseeing lenders that underwrite or service RHS-guaranteed mortgages. For example, lenders must meet eligibility standards prescribed in regulation and apply to RHS for approval. RHS procedures require RHS field and contractor staff to conduct periodic desk or on-site reviews of lenders and servicers, and RHS has developed risk-based criteria to guide the selection of lenders and servicers for review. RHS staff must prepare written reports on their findings, and the lenders and servicers must respond in writing to any report recommendations. RHS also has documented procedures for reviewing lender loss claims on guaranteed loans that have defaulted.

RHS has established a risk appetite—the amount and type of risk an organization is willing to accept in pursuit of its objectives—for the single-family guarantee program. According to RHS officials, the program’s risk appetite is expressed primarily through the goal of making each annual cohort of loan guarantees “subsidy-neutral,” while keeping guarantee fees at a level affordable to low- and moderate-income households. In the budgetary context, subsidy- neutral means that, initially, the present value of lifetime estimated cash inflows (for example, guarantee fees) equals the present value of lifetime estimated cash outflows (for example, loss claims).

Our ongoing work indicates that RHS also has been making a number of enhancements to its risk-management practices. Chief among these is the development of an econometric model intended to support analysis of RHS’s guaranteed portfolio and help estimate credit subsidy costs for the single-family guarantee program. According to RHS officials, the model will help the agency better estimate the effects of market and policy changes on portfolio performance and improve management of program risks. RHS expects that development of the model will be completed in December 2015. RHS also has proposed regulations that would strengthen its authority to require lenders to indemnify (compensate) RHS for loss claims on defaulted loans that were not properly underwritten. Current regulations authorize RHS to seek indemnification within 24 months of loan closing when RHS concludes that the lender did not comply with the agency’s underwriting standards. In March 2015, RHS issued a proposed rule that, among other things, would increase the indemnification period to 5 years. Additionally, Rural Development is exploring the appointment of a Chief Risk Officer, in response to a congressional report directive and consistent with OMB Circular A-129 requirements.

Based on our ongoing work, we have found elements of RHS’s risk management that are not fully consistent with federal requirements and leading practices, which may limit the effectiveness of RHS’s overall risk- management efforts. Examples include the following:

Limitations in performance benchmarks. While RHS uses a number of benchmarks to assess the performance of its guaranteed portfolio, two key benchmarks have limitations that diminish their usefulness. In particular, these benchmarks are not fully consistent with certain attributes of successful performance measures—such as objectivity and reliability—that we identified in prior work. According to RHS officials, since 2004, they have compared the overall delinquency and foreclosure rates for RHS’s portfolio with corresponding rates for FHA’s insured portfolio of 30-year fixed-rate mortgages. RHS has established performance goals stating that RHS should be within a specified range of FHA’s delinquency and foreclosure rates at the end of each fiscal year. Although RHS generally has met these goals, using FHA’s performance as a benchmark may not provide objective and reliable information for risk management. The weakness in the benchmark is two-fold. First, a simple comparison of two portfolios ignores potential differences in their composition—for example, in the age and geographic distribution of loans—that may influence loan performance and make comparisons of the portfolios invalid. Second, it implies that FHA has been effectively managing its risk. However, FHA has at times exhibited shortcomings in this area. For example, in a 2006 report, we found that FHA had not developed sufficient standards and controls to manage risks associated with the substantial proportion of FHA- insured loans with down-payment assistance.

Lack of formal procedures for a key committee. RHS does not have written procedures for a key part of its risk-management structure. Specifically, since 2009 RHS has had a Credit Policy Committee that, according to RHS officials, meets regularly to detect, discuss, and analyze credit quality issues and address them through policy changes. According to federal internal control standards, agencies should have effective control activities, including policies and procedures, to help mitigate risks and should document significant events. However, the Credit Policy Committee operates without policies and procedures describing its purpose, scope, membership, or decision-making process. RHS also has not defined the roles and responsibilities of committee members and does not prepare minutes of meeting discussions and results.

Key relationships not documented. RHS has not documented the relationships between the agency components that have risk- management functions and responsibilities. OMB Circular A-129 states that federal credit agencies should codify clearly defined lines of authority and communication. RHS’s risk-management structure is decentralized and complex. According to RHS officials, it involves staff in 47 state offices; the Centralized Servicing Center and National Financial and Accounting Operations Center in St. Louis, Missouri; and USDA headquarters. Although RHS has basic organizational charts for these components of the risk-management structure, it has not documented the lines of authority or communication among them.

As we complete our ongoing work, we will determine whether additional actions are needed by RHS to rectify these issues. We will consider making recommendations, as appropriate, in our final report.

In conclusion, our reviews of RHS housing assistance programs since 2011 have identified a number of areas in which RHS could strengthen its program oversight and enhance collaboration and consolidation efforts. RHS has made progress in implementing some of our recommendations, but additional actions are needed to address others. Additionally, our ongoing work has identified shortcomings in certain aspects of RHS’s risk management for the single-family guarantee program. To operate as efficiently and effectively as possible, it will be important for RHS to sustain the improvements it has made, implement outstanding audit recommendations, and address any future recommendations we may make in a timely manner.

Chairman Luetkemeyer, Ranking Member Cleaver, and Members of the Subcommittee, this concludes my prepared statement. I would be happy to respond to any questions that you may have at this time.

GAO Contact and Staff Acknowledgments

For further information about this testimony, please contact me at 202- 512-8678 or sciremj@gao.gov. Contact points for our Offices of Congressional Relations and Public Affairs may be found on the last page of this statement. Individuals making key contributions to this testimony include Steve Westley, Assistant Director; Melissa Kornblau, Analyst-in- Charge; Alexandra Martin-Arseneau; Andy Finkel; John McGrail; Marc Molino; Barbara Roesmann; and Julie Trinder-Clements.

Appendix I: Content and Status of Relevant GAO Recommendations

The following table summarizes the status of our prior recommendations to USDA from our August 2012, May 2012, and March 2011 reports that discuss RHS housing assistance programs. We classify each recommendation as either open (the agency has either not taken or completed steps to implement the recommendation) or implemented. The recommendations are listed by report.