HUD Explains What Happens When a Site Gets a Failing REAC Score
Nearly 4 million American families live in rental housing that is owned, insured, or subsidized by HUD. To ensure that these families have housing that’s decent, safe, sanitary, and in good repair, HUD’s Real Estate Assessment Center (REAC) conducts approximately 20,000 physical inspections on sites each year.
REAC inspections are scored on a scale of 1 to 100. The most recent REAC score determines when the next inspection will occur. If you get a score from 90 to 100, inspections will occur every three years. Between 80 and 89, inspections will occur every two years. And for a score of 79 or below, inspections will occur every year.
A passing score for a REAC Physical Inspection is 60 or above. All inspections with a score of 59 and below are subject to referral to HUD’s Department of Enforcement Center (DEC). What to expect after receiving a failing score is the subject of recently issued HUD Notice 2015-02. The notice explains the steps required of HUD by Section 230 of the Consolidated Appropriations Act of 2014 and Section 226 of HUD’s Fiscal Year 2015 Appropriations Act.
Section 230 applies to insured and noninsured sites with project-based assistance under Section 8 of the United States Housing Act of 1937 or a “contract for similar project-based assistance.” HUD considers “similar project-based assistance” to include contracts for all multifamily sites that use the manual voucher submission and review process to submit assistance vouchers to HUD’s Tenant Rental Assistance Certification System (TRACS). In addition to sites with project-based Section 8 assistance, Section 230 and the notice apply to sites that are subject to one of the following rental assistance contracts:
- Rent Supplement Contract
- RAP Contract
- Section 202 Project Rental Assistance Contract
- Section 811 Project Rental Assistance Contract
- Section 202/162 Project Assistance Contract
- Section 811 Project Rental Assistance
- Senior Preservation Rental Assistance Contract
Section 230(a) states that it does not apply to units assisted under the Section 8 Project-Based Voucher Program or to public housing units assisted under Section 9 of the U.S. Housing Act.
Score Triggers for HUD Action
Section 230(a) requires HUD to take specific actions upon the following triggers:
- When a site “receives a REAC score of 30 or less”;
- When a site “receives a REAC score between 31 and 59” and the owner “fails to certify in writing that all deficiencies have been corrected”; or
- When a site “receives a REAC score between 31 and 59” and “receives consecutive scores of less than 60 on REAC inspections.”
HUD defines the date the site “receives a REAC score” in each of these instances to mean the date on which HUD releases the REAC inspection report. The release date is the date the inspection is reviewed for accuracy and completeness of data and released to the owner, HUD staff, and HUD’s database. This release date is also noted on the email message that HUD sends to the owner electronically.
With respect to the third bullet, the notice states that HUD will consider any inspection report that was released on or after the date of the law’s enactment (Jan. 17, 2014) to be the first inspection in any series of inspections that will constitute “consecutive” scores.
HUD Action Steps
Section 230(b) sets out the following steps that HUD must take if one of the triggers for action is met:
Provide initial notice to owner. The statute requires the Secretary to notify the owner and provide an opportunity for response within 30 days. Currently, REAC provides the owner with a letter that accompanies the inspection report notifying the owner of the results of the inspection. This REAC letter fulfills the initial owner notification requirement in Section 230(b)(1). The letter provides the owner with an opportunity to respond to the inspection report by requesting a technical review within 30 days of the release date or a “data-base adjustment” within 45 days of the release date. If the owner doesn’t submit an appeal or if the final score, after the appeal process, remains 59 or below, then HUD will proceed to the next step.
Develop a CDE plan within 60 days of the release date. Section 230(b)(1) further states: “If the violations remain, the Secretary shall develop a Compliance, Disposition and Enforcement (CDE) Plan within 60 days, with a specified timetable for correcting all deficiencies.” This language requires slight changes to current practices. HUD interprets this language to mean that if the owner’s appeal to REAC for a technical review or data-base adjustment did not result in a final score above 59, then the violations remain.
HUD interprets Section 230(b) to require HUD to develop a CDE Plan within 60 days from the inspection release date. However, in cases where an owner has sought a technical review or data-base adjustment, HUD will start the 60-day clock upon REAC’s release of the post-appeal score, assuming the score is 59 or below and “violations remain.” In cases where the owner did not submit an appeal, the 60-day clock will start from the date the inspection was originally released.
Provide “Notice of the CDE Plan.” Section 230(b)(1) further requires HUD to “provide notice of the Plan to the owner, tenants, the local government, any mortgagees, and any contract administrator.” This statutory language adds an additional requirement to HUD’s current practices.
When HUD issues a Notice of Violation of Regulatory Agreement and/or Notice of Default (NOVs/NODs) concerning poor physical condition of the project, HUD will insert the heading, “Compliance, Disposition and Enforcement Plan” in the space immediately preceding the NOVs/NODs’ instructions to the owner to:
- Conduct a survey of 100 percent of the site, identifying all physical deficiencies;
- Correct the physical deficiencies identified at the site from the survey, including, but not limited to, those deficiencies identified in the REAC inspection;
- Execute a certification that the site is in compliance with HUD’s physical condition standards of 24 CFR § 5.703 and state and local codes;
- Submit the completed survey and certification form to the HUD Account Executive in 60 days of receipt of HUD’s notice; and
- Provide tenants with a “Notice of Compliance, Disposition and Enforcement Plan” for the site and provide HUD with a certification of compliance with this directive.
A separate form can be used to accomplish the last bullet. It’s provided as an attachment to Notice H 2015-02. HUD is not requiring the owners to give tenants a copy of NOVs/NODs containing the CDE Plan.
The preparer of the NOV/NOD containing the CDE Plan will instruct the owner to deliver the “Notice of a Compliance, Disposition and Enforcement Plan” to each tenant and provide HUD with a certification that such delivery has been completed. In addition, the notice preparer will send a copy of attachment to the appropriate unit of local government, any lenders (if known to HUD), and any contract administrator for the project. The notice preparer must document the “Comment” section of the “Physical Inspection Detail” screen in the Integrated Real Estate Management System (iREMs) to annotate the issuance of these notices to the additional parties.
Schedule REAC re-inspection. Multifamily Account Executives and DEC Analysts will continue to process requests for re-inspection according to Notice H-2011-24. Notice H-2011-24 states that if the owner of a site with a score of 31 to 59 responds to an NOV/NOD by providing HUD with a copy of the 100 percent survey of the project and the Project Owner’s Certification that the project is in compliance with HUD’s physical condition standards and state and local codes, then a re-inspection is scheduled one year from the date of the last inspection. If the owner fails to respond to the NOV/NOD, then HUD strives to conduct a re-inspection as soon after the 60-day cure period mentioned in the NOV/NOD expires as possible.
Sites that receive a score of 30 or below on a physical inspection will also be scheduled for a re-inspection as soon as possible after the cure period mentioned in the NOV/NOD expires regardless of whether they submit the Owner’s Certification and the 100 percent survey. In cases where the deficiencies noted on the last REAC inspection report and the owner’s 100 percent survey cannot be completed in 60-days, the NOV/NOD (CDE Plan) now instructs the owner to submit a repair plan with the 100 percent survey and to request an extension of time to complete the repairs. This repair plan must provide the cost and source of funds that will be used to make the repairs. If the repair plan is approved it will serve as an amendment to the CDE Plan. If the repair plan isn’t approved a re-inspection will be scheduled as soon as possible after the 60-day cure period expires.
If the results of a re-inspection show that the site continues to be in poor physical condition (as reflected by a score of 59 or less), then HUD will take the next appropriate steps to enforce compliance. Such actions include considering imposition of civil money penalties, abatement of the Section 8 or other rental assistance subsidy, in whole or in part, and possible assignment of an FHA loan and/or foreclosure.