HUD Lacked Adequate Oversight of Agencies’ Compliance with Declaration of Trust Requirements

HUD’s Office of Inspector General (OIG) audited HUD’s oversight of public housing agencies’ declarations of trust. The audit was part of the activities in OIG’s fiscal year 2015 annual audit plan. The audit objective was to determine whether HUD had adequate oversight of public housing agencies’ compliance with its declaration of trust requirements.

The United States Housing Act of 1937, as amended, requires that public housing properties that receive funding under the act be operated as public housing for a set amount of time based on the type and use of assistance received. Public housing agencies that receive HUD assistance are required to maintain a declaration of trust against all property in each development or project that benefits from the assistance. A declaration of trust is a legal instrument that grants HUD an interest in public housing property. It also provides public notice that the property was developed, maintained, or operated with federal assistance and is, therefore, held in trust by the public housing agency for the benefit of HUD. The declaration of trust establishes that the property is to be operated as public housing in accordance with the terms and covenants of the consolidated annual contributions contract and restricts the public housing agency from transferring, conveying, assigning, leasing, mortgaging, pledging, or otherwise encumbering the property without the expressed permission of HUD. This instrument serves as a protection mechanism for HUD’s interests and investments in that it would allow HUD to invalidate the illegitimate conveyance or encumbrance of a property and grants HUD the interest necessary to seize and reassign a property in the event of a substantial default.

In August 2009, HUD issued Public and Indian Housing Notice 2009-28, which required all public housing agencies to be in full compliance with the declaration of trust requirements within 12 months of the beginning date of their next fiscal year. According to the notice, if HUD should determine that a public housing agency is not in compliance with its plan requirements and certifications, HUD may take whatever action it deems necessary and appropriate, including temporarily withholding cash payments pending correction of the deficiency, disallowing all or part of the cost of the activity or action not in compliance, wholly or partly suspending or terminating the current award for the public housing agency’s program, requiring that some or all of the grant amounts be remitted to HUD, conditioning a future grant and electing not to provide future grant funds to the public housing agency until appropriate actions are taken to ensure compliance, withholding further awards for the program, or taking other remedies that may be legally available.

What Auditors Found

OIG determined that HUD did not always ensure that public housing agencies maintained valid and sufficient declarations of trust for HUD-assisted sites. Specifically, of the 115 projects reviewed, two projects did not have declarations of trust and 20 projects had declarations of trust with deficiencies that impaired their validity. The deficiencies included declarations of trust that expired or will expire regardless of the period in which the project is required to be operated as public housing or the receipt of additional HUD funds; declarations of trust that were not in the form required by HUD; declarations of trust that did not contain legal descriptions; and a declaration of trust that was not signed or executed by the public housing agency.

Further, OIG was unable to determine whether the declarations of trust for 47 projects were sufficient. OIG simply could not make a determination for 40 projects; the public housing agencies did not provide support that the declarations of trust were filed in public records for five projects; and the public housing agencies did not provide complete declarations of trust for four projects.

Therefore, OIG concluded that HUD’s interests and investments were not always protected to prevent potential conveyances or encumbrances of public housing property without HUD approval. In addition, OIG estimated that HUD will provide more than $509 million in operating subsidies over the next year for projects in which its interests are not protected.

Auditor’s Recommendations

OIG recommended that HUD require the public housing agencies to record new declarations of trust for 22 projects to ensure that HUD’s interests are protected and support that 47 projects have sufficient declarations of trust that cover all HUD-assisted sites. OIG also recommended that HUD amend the declaration of trust form and implement adequate procedures and controls to ensure that public housing agencies maintain valid and sufficient declarations of trust that are recorded in public records to prevent HUD-assisted sites from being conveyed or encumbered.

• PHA’s Declaration of Trust: Audit Report Number 2016-CH-0001, February 2016