8 Ideas to Improve the Compliance Industry

Written by Erik Whitton, Spectrum Enterprises, Director of Private Monitoring

Every day managers struggle with the process of leasing units and making sure the paperwork is in compliance. They are often under tremendous pressure from owners to fill empty units on a tight deadline and have to do so without sufficient staffing, training, or experience. Similarly, compliance auditors that work for state agencies, consulting firms, investors, or in corporate compliance roles are tasked with reviewing files for compliance. Often these include large portfolios of properties that may be spread across multiple states and managed by different companies. What we all feel squeezed from is a lot of inconsistency in how different rules are applied or interpreted, along with many gray areas that leave people up to their own devices on deciding how to approach them. Finally, we have members of the general public trying to find safe affordable housing who may be denied an affordable unit by a cautious manager not wanting to make a mistake; or whose applications may be in limbo for long periods of time while the leasing team tries to get answers from their corporate compliance department, state agency, or consultant.

With these challenges in mind, here is my list of ideas that could make life better for us all.

1. An update to the HUD handbook and IRS 8823 Audit Guide to discuss investments in greater detail. There is far too much confusion on this topic. I feel like I am asked on a daily basis how to count accounts such as IRA’s where a retired individual is taking out periodic payments but may also cash in the account if they choose. Some states feel the account counts as income but not an asset while others feel it counts as both income and a separate asset on the tenant income certification form. Other investments such as annuities, 401k, and brokerage accounts have the same confusion. The confusion stems from the fact that a) the HUD handbook has changed the way these are treated over the last several updates to the handbook, and b) the current version of the handbook does not address all potential scenarios a manager might encounter. If the powers that be at HUD and the IRS could give this topic the attention it deserves everyone would benefit. Not only site managers, consultants, asset managers with multi state portfolios and state agency staff but also the actual tenants themselves (most often senior citizens). With clear direction from HUD and the IRS that certain investments don’t need to be double counted senior citizens would not lose the benefit of affordable housing. We see files too often where we are put in the uncomfortable position of denying housing to seniors living on fixed income or who may no longer be able to afford or maintain their current home because as a consultant we have to encourage our clients a conservative approach in estimating a household’s income. Trust me, no one here likes to deny an affordable unit to a senior citizen.

2.An update to the HUD handbook and IRS 8823 Audit Guide to discuss Year To Date (YTD) pay. If you were to search Section 42 of the internal revenue code, the IRS 8823 Audit Guide, and the HUD Handbook for the phrase “YTD” or “Year to Date” you would not find a single mention of this. Instead, you will find the definition of income echoed as all amounts “anticipated to be received.” Year to date income demonstrates how much a person has earned to date. It does not project forward. So where did this come from and why are so many people being turned away affordable units not based on their anticipated income but instead on their year to date pay? Why are so many owners being cited out of compliance due to YTD issues in tenant files? What is the correct way to do the math after verifying someone’s YTD pay? To begin with, the issue of YTD pay emerged when the National Council of State Housing Agencies (NCSHA) put out their Best Compliance Practices forms about 10 years ago. The set of forms included a tenant income certification form, under $5000 asset certification, certification of zero income, student verification, and employment verification. On the employment verification a line was included asking for the amount of YTD pay along with a ‘through’ date. It took a few years for the industry to react to this as the forms were implemented across the nation. And react they did.

Math was never a strong subject for me but I understand there to be some elemental flaws to the way I see YTD pay treated by managers and compliance officers. For instance, the employment verification form does not include a begin date for the ytd pay amount leaving us to assume January 1. This makes sense on some levels (what else would one assume?) but anytime that individual’s first pay period did not actually begin on January 1 you are going to wind up with an unsound result (mathematically speaking).

I understand that testing YTD pay for consistency with the verified amount of projected income falls under the due diligence expectation in this program. What I don’t understand is how many files I have seen marked as over income based on very minimal differences between YTD and projected pay that could be the result of undependable math.

Some managers count the number of weeks when doing YTD math. When doing so some round up while others round down and some even include partial weeks in their calculation (which does not make sense at all given the fact that payroll is not updated with each shift a person works but rather each pay check they are given). Some managers count the number of days in their YTD math. Some people use the pay check date while other use pay period end date. The point is, there’s too many variables. If HUD and the IRS could take a clear stance on this and update their guides we would all benefit. Again, no one would benefit so much as the applicants who are being denied affordable units when their YTD income tests slightly higher than the income limit.

I had a candid conversation with an IRS employee who was shocked to learn that so many applicants are denied housing or owners are cited out of compliance based on YTD pay where the file includes a fully completed 3rd party verification. While she could see a case made for a YTD rejection where a manager was forced to use pay stubs she felt strongly that YTD pay should not even be examined if a fully completed 3rd party verification is in the file documenting all anticipated income. I applaud this reaction but I would love to see our handbooks and manuals re-written to state this position so clearly. Along the same lines, I also applaud a state agency such as Tennessee who simply removed the YTD question for their forms and told managers not to bother testing YTD pay.

Three final thoughts on this topic:

  1. Update your EV form to ask the begin date, pay frequency, and how many pay periods are reflected in the amount.
  2. Use a website such as http://www.timeanddate.com/ which has a date to date calculator which will give you the number of weeks between 2 dates. Doing so will at least assure that all employees of a given company are consistent in their approach. I’ve seen every worksheet and approach people have taken to calculate YTD pay and I feel this is by far the best.
  3. Use the Spectrum Year To Date Clarification form to help document a file where the YTD test does not match the verified projected income.

3. An update to the HUD handbook and IRS 8823 Audit Guide to discuss factoring income from pay stubs or The Work Number. Companies are increasingly reluctant to complete employment verification forms to verify earned income for affordable housing applicants. As a result we are seeing more and more tenant files where the manager is forced to document income using pay stubs submitted by the applicant or a print out from The Work Number. These are listed as acceptable means of verifying income however there is no guidance on how to compute income. I see files where managers average the number of hours worked from these documents; or where they average the last 3, 6, 8, 10, or 12 gross pay amounts. Many managers will additionally test income using the YTD information supplied. Finally, where the Work Number provides the total earnings from the prior calendar year (assuming the individual had the job throughout the entire year) that must also be considered.

We are currently seeing far too much inconsistency in this area. With some guidance from officials at HUD and the IRS managers can be provided with a clear directive on how to factor income when forced to rely on pay stubs or The Work Number. At Spectrum we require at minimum 6 recent and consecutive pay stubs. We reject a file that does not meet this minimum standard. Our procedure is to test YTD and compare it to an average of the gross pay amounts. The higher outcome is used. If a job is verified using the Work Number we do a YTD test and compare this to an average of the last 6 gross pay amounts and then compare both results with the total income earned in the prior year (if the individual held the job for the entire year). Again, the highest result is used.

When averaging pay what do you do if 5 of the 6 pay amounts are fairly similar but one pay amount is significantly higher or lower? By including this in an income average computation are you really arriving at a result that reflects a true average? Some people feel you must exclude the highest and lowest pay amounts to arrive at a truer average. I don’t disagree.

4.Modify the form used to self certify Assets Under $5,000. By and large the NCSHA Best Practices forms mentioned earlier have been a tremendous success in bringing consistency to our industry. Anyone who oversees compliance in multi state portfolios can appreciate this effort. However, the Under $5000 Asset Certification form is poorly designed which results in our office frequently pointing out to the site that the form is incomplete or inaccurate. Anyone who reviews tenant files will agree with this. Tenants are not able to understand the directions on the form by certifying, for instance, whether any assets have been disposed of for less than fair market value in the past 2 years. Another common finding is that tenants do not state the total amount of income generated by their assets on the bottom of the form. Finally, many forms do not list the cash value of each asset, the applicable interest rate; and the corresponding annual income generated.

5. Update Tenant Income Certification forms to show the placed in service date. The process of figuring out what income limits apply to your building used to be among the more straightforward aspects that managers did not need to worry about. One would simply find the new income limits announced by HUD and institute them within 45 days. In 2009 with the HERA law a once simple concept has now become incredibly complicated. In Portland, ME for example you can be a manager of 3 tax credit buildings on the same block. Depending on the date each building placed in service you could have a different set of income limits for each as follows:

Placed In Service Date Maximum Income Limits
On or before 12/31/2008 FY2011 HERA Special
1/1/2009 to 5/13/2010 FY2010
5/14/2010 to 5/31/2011 FY2010
After 5/31/2011 FY2011

In order to facilitate compliance audits by state agency staff or investors it would be extremely helpful to list the placed in service date on each TIC form so an auditor immediately knows which income limits apply. Speaking from firsthand experience as a consultant, we see a lot of files submitted to our office for review but we often cannot get started with our review without the critical piece of information (knowing the placed in service date). Sometimes when we give a call to the site staff to ask what the placed in service date is we are met with an uncomfortable silence. Site staff may have never before heard the term ‘placed in service.’

6.On the topic of income limits, what sense does it make to even publish “2011” income limits on May 31 (where sites are not required to implement these amounts until mid-July)? Why confuse managers by forcing them to use 2010 income limits for over 6 months in 2011? I would nominate a system where HUD announces income limits on November 16 of each year allowing sites to use January 1 as the date to implement the new amounts. I can’t see a reason not to do this. If it takes HUD until late May to get the new amounts compiled they should just wait until late November to publish them and make them effective on January 1 (not to mention all of the corrections that have been made by HUD following the May 31, 2011 initial announcement.

7.An update to the NCSHA best practices for compliance. As stated earlier, it has been over 10 years since they last revisited this topic (with great success at the time). I give that organization a lot of credit for establishing a common framework to bring all of the state housing agencies to some semblance of consistency. The effects of that undertaking have helped to shape the compliance industry in a very promising way. However, a lot has changed in the past 10 years and we are in dire need for an update to this. At the time they were developing this they involved many state agency staff and compliance consultants into the conversation of shaping the best practices. It would be tremendous to bring people together again for the common much needed goal of streamlining compliance across the nation.

8. Affordable housing is competing with unrestricted market housing in too many markets. This puts affordable developments in serious risk as they cannot offer a truly reduced rent; they cannot accept student households; their residents must recertify their income each year; residents must open their homes to inspections; and any incoming tenant must undergo an invasive process to examine and verify their income and assets. In a market such as New York City households are willing to accept this as they do face the prospect of paying a truly reduced amount of rent each month. However, we see far too many areas where that simply is not the case. How can an affordable development fill their building and keep it full year after year if a development next door charges the same rent without any of these strings attached? Of all the ideas presented here I believe this to be the toughest nut to crack as the factors which created this seem beyond our grasp. One thing that demands scrutiny is the market studies which conclude that a particular area can benefit by adding a tax credit development with neighboring market developments without the benefit of a competitive rent.

You might read all of this and wonder whether any of these changes can really be made. I, too share these doubts. However I was involved in a situation a few years ago that opened my eyes to how simple it really can be to effect a meaningful change. We were working with a site in the midwest that had a household consisting of a single mother and her young children. A few years after move in they came up for recertification and her children had reached the age where they were all full time students. The mother was too. The father of the children (living separately) claimed them on his tax returns which meant (under the existing rules) that the household was no longer student eligible to live in a tax credit unit. The owner of the property realized he had a great tenant who paid rent on time, was working hard to improve her life by attending school while raising her children, and he did not want to lose them. The owner involved the state agency who in turn involved a senator. From this single household a new exception was made to allow the household to be student qualified even with the absent parent to claiming the children. I’m sure it was an involved process but in the end, it worked to the benefit of the entire industry.

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