Avoid HUD Scrutiny by Taking Residents' Rent Debt Collection Seriously
Some sites don’t pursue residents aggressively enough to collect back rent owed and excess assistance. They believe that because residents’ income levels are low and the amounts owed are small, it’s not worth the sites’ time or money to chase after these debts. So these sites may end up with large unpaid resident accounts receivable balances on their books.
But this hands-off approach can get you in trouble with HUD. Sites funded by one of HUD’s multifamily subsidy programs will receive notice of their Management and Occupancy Review (MOR) date. During management reviews, HUD staffers look at your rent collection policies and check your resident accounts receivable balances to make sure they’re not too high. If they find you’re not doing enough to collect on residents’ rent debts, you can lose points on your management review. And if your site does poorly on the management review, this can attract the attention of HUD auditors, who will pore over your site’s policies and accounts.
So it’s important to take action to collect these debts, if only to show HUD that you’re doing your best to keep your site in good financial condition. We’ll tell you how to show HUD you’re being aggressive in collecting residents’ rent debts.
Take Steps to Collect Back Rent and Excess Assistance
To avoid problems with HUD, make sure you take all necessary action to collect back rent and excess assistance from residents. Depending on the circumstances, you’ll need to take some or all of the following steps.
1. Offer repayment agreement for excess assistance. Whenever you discover that a resident is getting too much assistance and paying too little rent (for instance, due to an inaccurate certification), don’t just let the resident slide for the excess assistance. Enter into a repayment agreement with the resident that spells out the resident’s duty to repay the difference between the rent actually paid and the rent the resident should have paid. HUD requires you to sign a repayment agreement to give residents a chance to repay the overpaid assistance instead of getting evicted.
According to the Handbook, the resident and owner must both agree on the terms of the repayment agreement [HUD Handbook 4350.3, par. 8-23(A)(1)]. Additionally, the repayment agreement must:
- Include the total retroactive rent amount owed, the amount of lump sum paid at the time of execution of the agreement, if applicable, and the monthly payment amount.
- Reference the paragraphs in the lease whereby the resident is in noncompliance and may be subject to termination of her lease.
- Contain a clause whereby the terms of the agreement can be renegotiated if there is a decrease or increase in the family’s income of $200 or more per month.
- Include a statement that the monthly retroactive rent repayment amount is in addition to the family’s monthly rent payment and is payable to the owner.
- State that late and missed payments constitute default of the repayment agreement and may result in termination of assistance and/or tenancy.
- Be signed and dated by the resident and the owner [HUD Handbook 4350.3, par. 8-23(B)].
2. Follow HUD rules on terminating leases for nonpayment. If residents don’t comply with an agreement to repay excess assistance or don’t pay their share of the rent on time, follow HUD procedures for terminating leases for nonpayment of rent. Owners may terminate tenancy when a resident is in material noncompliance with the lease. This includes nonpayment of rent due under the lease. According to the Handbook, the owner must not terminate tenancy until any grace period permitted by state law has expired. If the resident pays all amounts due under the lease within the grace period, this is not material noncompliance, but rather a minor violation. However, repeated minor violations constitute cause for eviction [HUD Handbook 4350.3, par. 8-13(A)(5)].
HUD rules for terminating tenancy and providing notice can be found in paragraph 8-13(B) of HUD Handbook 4350.3. Generally, the notice must:
- Specify the date the lease will be terminated;
- Give enough detail about the reason for termination to allow the resident to prepare a defense. In a termination for nonpayment of rent, this means stating the date and dollar amount of each instance of nonpayment;
- Make it clear that you’ll bring an eviction action in court if the resident remains in the unit; and
- Inform the resident of her right to meet with you within 10 days to discuss the proposed termination of tenancy.
The Handbook notes that these procedures are the minimum standards required by HUD. Most state and/or local laws are more restrictive than HUD’s minimum requirements; therefore, an owner should be aware of state and local laws governing terminations.
3. Seek resident’s eviction for nonpayment of rent. After you’ve followed HUD rules on lease termination, have your attorney bring an eviction action for nonpayment using your state’s procedures. As part of your eviction case, ask the court to award you a money judgment for the back rent owed. This paves the way for getting money the resident owes you.
4. Enforce money judgment. If you have a court-ordered money judgment in hand against a resident, the resident is legally required to pay you the amount stated. But you should not do nothing if residents ignore these orders. Instead, use your state’s enforcement procedures to collect on the amounts of the judgments. In some states, this includes getting court orders:
- “Garnishing” residents’ wages—that is, having their employers pay you directly from their paychecks; and
- “Attaching” their assets—that is, collecting directly from residents’ bank accounts or other assets.
If a resident has moved out or abandoned the unit, leaving an outstanding past-due rent balance, or if you’ve successfully evicted a resident but the court didn’t order a money judgment, follow your state’s debt collection procedures to collect the amount due. In most cases, this includes enlisting the help of a collection agency to demand payment from the resident, reporting the debt to credit agencies, and filing a lawsuit to establish the amount owed and to get an enforceable judgment.