The risk of fraud is high in the nation’s largest housing program, report finds

A federal audit of the nation’s largest housing program found that states in about half the cases examined did not follow a requirement meant to ensure funding to create low-income housing was not misused.

Under the regulations, state housing agencies are supposed to require developers who receive federal Housing Trust Fund dollars to provide an independent audit that shows funds were used properly, according to a Government Accountability Office report released last week. But the audits were not done in 29 of the 70 projects scrutinized by the government watchdog agency between 2016 and 2022. 

While the report did not say whether investigators found that any of the money was misspent, officials at the U.S. Department of Housing and Urban Development, which oversees the program’s requirements, said the independent audits are “key to mitigating fraud risks” and that the finding “was very concerning and required attention.”

Of the 12 state agencies examined by the GAO, nine had at least one project where it either did not require developers building or rehabilitating low-income housing to conduct the so-called cost certification requirement or did not receive one. The report didn’t name those state agencies, but GAO investigators examined projects in Arizona, California, Georgia, Maine, Massachusetts, Minnesota, Mississippi, New York, North Dakota, Tennessee, Utah and Washington. Together, the states received about 42% of 2021 Housing Trust Fund dollars.

Washington State’s Commerce Department does follow a 2019 law passed by the state’s legislature to require the audits, a spokesperson for the agency said in an email. Spokespeople for the other state agencies mentioned in the GAO report declined comment or did not respond to inquiries.

The report was conducted at the request of Republicans on the House Financial Services Committee in 2021. At the time, Rep. Patrick McHenry, a North Carolina Republican, asked the GAO, among other things, to examine, “what oversight mechanisms are in place in the states to prevent waste, fraud and abuse” and whether those mechanisms are effective.

The GAO concluded that fraud in the program could occur in a number of ways.

Developers and contractors, for instance, could collude and "submit fraudulent bills to obtain excess funds.” Contractors could pay workers less than they are required to under the program and keep the “surplus” amount. And landlords could charge higher rents than they are legally allowed to.

But the fact that independent audits weren’t conducted at all in many of these projects is part of a bigger weakness in HUD’s ability to prevent fraud. The department’s oversight, the report found, is already limited because it relies “on weak control mechanisms.”

For example, HUD monitors whether states are using the funds properly through information they enter into a database called the Integrated Disbursement and Information System. But without the independent audits, the states cannot verify that the information they're receiving from developers and entering into the system is accurate. 

Making matters worse, the report said, is that state housing agencies may be “confused or unaware” that they’re supposed to require that the projects be audited.

HUD sends guidances to states about how the program’s regulations should be interpreted. "But none of the notices discussed the cost certification requirement,” the report said. 

Investigations further discovered that the federal agency’s Office of Community Planning and Development did a three-part training on the program in 2022, “but the video presentations, slides and transcripts did not include information about the requirement.”

The federal agency declined comment, but according to the report, it added details about the audit requirement to the FAQ section of its website when it was told about the GAO’s findings. And the department said that field offices will underscore the requirement when they begin conducting “in depth” monitoring of states’ “compliance with statutory, regulatory and grant requirements” next year. 

The GAO called these “positive steps,” but cautioned that not all state housing agencies will be monitored by field offices every year. “As a result, some inaccuracies could go undetected for long periods,” the report said.

In addition to the potential for fraud, the absence of independent audits also means it is hard to know for certain that the low-income housing is being built on time. Under the program’s requirements, states have to let HUD know within 120 days of using all of the federal funding for a project that it was actually completed.

However, HUD hasn’t been checking to see if states are doing that. And when the GAO examined the projects in the 12 states, it found 14 that were not marked completed within the 120 days. For one project, it had been four years since the state had used all the federal money for it. 

Again, the report concluded that state housing agencies might be confused or unaware of the requirement. For instance, some states told the GAO that they were waiting for leasing to begin and that was why the project had not been marked completed. But the requirement only mandates that the construction has to be finished. 

“Since HUD is not reviewing project completion times, it is not aware” that states were not meeting the requirement or misunderstood it, the report said.

The GAO report recommended that HUD provide more training to states on the requirements of the program. That “could help ensure that grantees understand the significance of the cost certification requirement and are interpreting and applying it correctly,” the report said. “Without effective communication of the requirement, HUD lacks reasonable assurance that funds are being used only for actual project costs, and opportunities for mismanagement and fraudulent activity may increase.”