Section 232 of the National Housing Act, as amended, authorizes FHA to insure mortgages made by private lenders to finance the construction or renovation of nursing homes, intermediate care facilities, board and care homes, and assisted living facilities. Congress established the Section 232 program in 1959 to provide mortgage insurance for the construction and rehabilitation of nursing homes. The Housing and Community Development Act of 1987 expanded the program to allow for the insuring of refinancing or purchase of FHA-insured facilities and, in 1994, HUD issued regulations implementing legislation to expand the program to allow for the insuring of assisted living facilities and the refinancing of loans for facilities not previously insured by FHA. Since 1960, FHA has insured 4,372 loans through the Section 232 program in all 50 states, the District of Columbia, the U.S. Virgin Islands, and Puerto Rico. As of the end of fiscal year 2005, there were 2,054 currently insured loans. FHA does not insure all residential care facilities, as there are approximately 16,500 nursing home facilities and over 36,000 assisted living facilities in operation. We did not identify any private mortgage insurance that is currently available for loans made to nursing homes or other similar facilities. According to HUD officials, in recent times, the Section 232 program exists, in part, to support the market for residential care facilities when the private market is reluctant to finance such projects due to market conditions. The loans are advantageous to borrowers because they are nonrecourse loans whereby the lender (in this case the lender and the insurer, FHA) has no claim against the borrower in the event of default and can only recover the property. The loans are also generally long term (in some cases up to 40 years) and, according to HUD and lender officials, offer an interest rate that is, in many cases, lower than what private lenders offer for non-FHA insured loans made to nursing homes and other similar facilities. Additionally, FHA insures 99 percent of the unpaid principal balance plus accrued interest. HUD administers the Section 232 program through its field offices, with HUD headquarters oversight. HUD’s field structure consists of 18 Hub offices and 33 program centers. Generally, each Hub office has a number of program centers that report to it. Program centers administer multifamily programs within the states in which they are located or portions thereof. Hub offices also administer multifamily programs, as well as augment the operations of and coordinate workload between their program centers. Under Medicaid, states set their own nursing home payment rates (reimbursement rates), and the federal government provides funds to match states’ share of spending as determined by a federal formula. Within broad federal guidelines, states have considerable flexibility to set reimbursement rates for nursing homes that participate in Medicaid but are required to ensure that payments are consistent with efficiency, economy, and quality of care. Under Medicare, skilled nursing facilities receive a federal per diem payment that reflects the resident’s care needs and is adjusted for geographic differences in costs. While the decentralization of the program allows field offices some flexibility in their specific practices, the results of our visits to five field offices revealed differences in the extent to which field office staff were aware of current program requirements. Further, while individual offices had developed useful practices for implementing the program’s loan underwriting and monitoring requirements, they lack a mechanism for systematically sharing practices with other offices. We also found that field office officials were concerned about adequate current or future levels of staff expertise—a critical factor in avoiding unwarranted risk in the Section 232 program, in that health care facility loans are generally more complicated and require specialized expertise compared with loans insured under HUD’s other multifamily programs. Lack of awareness of current requirements and insufficient staff expertise can contribute to insuring loans with increased risks. Both factors are related to recommendations made in the HUD Office of Inspector General’s 2002 report that HUD has not fully addressed (see app. III for further information on weaknesses identified by HUD’s Inspector General). FHA has numerous underwriting requirements for loans insured under the Section 232 program; for example, facilities must provide evidence of market need; a (real estate) appraisal; and be in compliance with limits on loan-to-value and debt service coverage ratios. FHA also requires a variety of reviews for monitoring Section 232 loans. (Loan underwriting and monitoring requirements, which can involve fairly complex reviews and analyses, are described in more detail in app. II.) According to HUD headquarters officials, the field offices that administer the Section 232 program are required to follow all program statutes and regulations, but the decentralization of the program allows field offices some flexibility in their specific practices. For example, individual field offices can designate how to staff the underwriting and monitoring of Section 232 loans, depending on such factors as loan volume relative to other multifamily programs, to fully utilize resources. HUD headquarters provides guidance on program policies and requirements; when necessary, reviews applications for certain types of loans, such as those submitted by nonprofit entities; and provides technical assistance or additional guidance and support if contacted by field offices. HUD headquarters staff also conduct Quality Management Reviews, which are management reviews of field offices administering HUD programs and services. For these reviews, evaluators visit offices and coordinate subsequent reports. The process also involves reporting the status of follow-up corrective actions. While not focused on the Section 232 program, this process helps to oversee the program by reviewing the management of the field offices that administer it. We found that the five field offices that we visited varied in their understanding and awareness of policies related to the Section 232 program. For example, staff in two field offices said that their standard regulatory agreement (that serves as the basic insurance contract and spells out the respective obligations of FHA, the lender, and the borrower) did not include language that would require operators of insured facilities to submit financial statements on new loans. According to officials at HUD headquarters, field offices should be using language requiring these financial statements. HUD and most lender officials we interviewed told us that operator financial statements provide information on the legal entity operating the facility in cases where the borrower and the operator of the residential care facility are different entities. These officials also stated that, in such situations, borrower financial statements may not disclose expenses, income, and other financial information, and may only show the transactions between the borrower and operator, thus making operator financial statements a necessity. Also, HUD’s Inspector General identified HUD’s lack of a requirement for operators to submit financial statements electronically to be part of an internal control weakness for the Section 232 program. Additionally, we found that the field offices that we visited were not always aware of specific notices that established new requirements or processes for the Section 232 program. For example: Four of the five field offices that we visited were not aware of a notice that disqualifies potential Section 232 borrowers if they have had a bankruptcy in their past. According to a HUD headquarters officials, this policy is intended to protect HUD from insuring a potentially risky loan based on a borrower’s financial history. Officials at four of the five field offices we visited did not know about required addendums to the regulatory agreement regarding state licensing requirements for nursing homes. HUD developed these addendums to place a lien on a property’s operational documents, such as a Certificate of Need and state licenses, to prevent operators from taking these documents with them upon termination of a property’s lease. Without these documents, a facility may not be able to operate and, consequently, the property’s value would be greatly diminished. According to HUD headquarters officials, HUD headquarters communicates changes in the Section 232 program’s policies and procedures to field offices in a variety of ways besides sending formal notices. For example, HUD headquarters also posts some notices on a “frequently-asked questions” section of a Web site available to field offices, lenders, attorneys, and others. HUD headquarters officials also conduct nationwide conference calls with the field offices in which various HUD multifamily programs, including the Section 232 program, are discussed. The conference calls are conducted separately for loan development staff and asset management staff that work, respectively, on the underwriting and monitoring of loans. HUD headquarters officials stated that these conference calls provide a forum to disseminate information to the field offices and for individual field offices to discuss any issues, questions, or concerns regarding any multifamily programs, including the Section 232 program. HUD headquarters officials stated that they plan to address the lack of awareness we observed by updating the “Multifamily Asset Management and Project Servicing Handbook” to clarify current policies and requirements for the Section 232 program. HUD is also planning to update the handbook to address the 2002 HUD Inspector General report that identified that HUD's current handbook was not specific to Section 232 nursing home operations. However, HUD officials told us the updates to the handbook would not be completed until the proposed revisions to the applicable regulatory agreements have been approved. The proposed revisions have been awaiting approval since August 2004, and it is not clear when the revised agreements will be approved. As discussed earlier, field offices have some flexibility in practices that they use in administering the Section 232 program. In our visits to five field offices, we found a variety of practices that could be useful in the underwriting and monitoring of Section 232 loans if shared with other field offices. However, currently, HUD does not have systematic means by which to share this information among field offices. Officials in two of the five field offices we visited identified specific practices they had developed to carry out loan underwriting requirements. For example: Asset management staff, whose focus is monitoring the performance of loans that are already insured, are asked to review a variety of documents submitted in the underwriting process, such as financial statements and information on the occupancy of the facility.