Rural Rental Housing:

Excessive Profits and Program Abuses in Multifamily Housing

T-RCED-92-63: Published: May 13, 1992. Publicly Released: May 13, 1992.

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GAO discussed the Farmers Home Administration's (FmHA) Rural Rental Housing Program, focusing on whether: (1) developers are receiving more federal financial assistance than needed to encourage construction of multifamily housing projects; and (2) fraud and abuse exists within FmHA multifamily housing programs. GAO noted that: (1) developers receive more federal financial assistance than needed to encourage the construction of multifamily housing projects primarily because developers are able to combine FmHA assistance with the Low-Income Housing Tax Credit; (2) three FmHA multifamily housing program project developers received excessive profits, representing 780 to 970 percent of their initial cash investments to build the projects; (3) an ongoing Department of Agriculture (USDA) investigation shows that the FmHA multifamily housing program is high-risk and subject to fraud and abuse; (4) fraudulent and abusive activities include overstating construction costs, overcharging for project management and maintenance fees, diverting construction materials, and improper use of project funds; (5) within the last 5 years USDA has conducted 45 criminal investigations of alleged fraud in the program, resulting in 35 indictments and 26 convictions; and (6) fraudulent and abusive activities exist primarily because of insufficient internal controls.

Matter for Congressional Consideration

  1. Status: Closed - Implemented

    Comments: The down payment required was raised from 3 percent to 5 percent.

    Matter: Congress should take the necessary steps to eliminate the excess profit opportunities now available to developers under the FmHA section 515 multifamily housing program. Some alternatives for doing this would be to: (1) eliminate the maximum downpayment requirement on section 515 multifamily housing loans so that developers have more equity in the project; (2) restrict FmHA section 515 projects from receiving tax credits; or (3) institute some combination of both. Since the tax credit is set to expire in June 1992, Congress may wish to consider this matter in its deliberations on renewing tax credits.

 

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