Treasury’s HHF Blight Elimination Program Lacks Important Federal Protections Against Fraud , Waste, and Abuse
Since 2010, the Troubled Asset Relief Program’s (“TARP”) Housing Finance Agency Innovation Fund for the Hardest Hit Housing Markets (“Hardest Hit Fund” or “HHF”) has provided funds through housing finance agencies in 18 states and the District of Columbia (“HFAs” or the “state HFAs”) to homeowners in states hit hardest by the housing bubble. The Hardest Hit Fund has largely been a program to provide Federal funds to unemployed and underemployed homeowners to help pay their mortgage.
Starting in mid-2013, Treasury began allowing seven state HFAs to use existing HHF dollars to demolish vacant and abandoned homes to help neighboring homeowners under a new Blight Elimination Program. At that time, the Department of Housing and Urban Development’s (“HUD”) Neighborhood Stabilization Program (“NSP”) provided $300 million for blight elimination.
Treasury’s Blight Elimination Program allocates nearly $622 million among seven state agencies, who work with local partners to use contractors and subcontractors to perform the demolition and other work. These local partners pay the contractors or subcontractors and seek reimbursement from the housing agencies for the work performed. The Office of the Special Inspector General for the Troubled Asset Relief Program performed a review of risks that could impact the effectiveness of this program. This work led to a December 14, 2015 SIGTARP Alert Letter to Treasury Secretary Lew advising him that in Evansville, Indiana, this program was being abused to demolish lived-in (rather than abandoned) homes, resulting in people having to leave their homes, so that a car dealership could be relocated.
What SIGTARP Found
SIGTARP found that Treasury’s HHF Blight Elimination Program is significantly vulnerable to the substantial risks of unfair competitive practices and overcharging than HUD’s program. These risks could lead to fraud, waste, and abuse.
While two Federal programs fund similar activities and entail similar risks, only HUD’s program has Federal requirements to protect the Government against substantial risks inherent in contracting for demolition work—Treasury’s Hardest Hit Fund does not. As a result, substantial risks under HHF blight elimination continue unchecked for a program that, at nearly $622 million, is double the size of HUD’s program.
SIGTARP found that Treasury’s blight elimination program is vulnerable to the risk of unfair competitive practices such as bid rigging, contract steering, and other closed-door contracting processes. SIGTARP found that when Treasury repurposed the Hardest Hit Fund to include blight elimination, it failed to create Federal requirements for full and open competition (and other competition requirements). HUD has a requirement for full and open competition and six pages of other competition requirements in its blight elimination program.
SIGTARP found that Treasury does not require full and open competition for blight elimination contracts. The nearly 280 local partners that award the work include nearly 100 that are individuals, 8 are for-profit companies, 105 non-profit entities, and 33 land banks. These demolition contracts are not subject to any Federal requirement for competitive solicitation or competitive awarding of federal funds, putting the program at significant risk of unfair competitive practices.
Federal requirements for competition are critically important to keep programs fair, drive down costs, motivate better contractor performance, and help curb fraud, waste, abuse, favoritism, undue influence, contract steering, bid rigging, and other closed-door contract processes. The sole other Federal blight elimination program through HUD has these Federal competition requirements, while preserving flexibility for states.
SIGTARP found that without Federal requirements, most state agencies in HHF do not have their own competition requirements. Only HHF South Carolina has a requirement for full and open competition, which is just 6 percent of the program. State and city competition rules that Treasury relies on exclusively may not even apply because 87 percent of the partners are not municipalities or public agencies. Even when applicable, local rules may be inconsistent.
SIGTARP also found that Treasury’s blight elimination program is vulnerable to the risk of overcharging and fraud because, unlike HUD, Treasury has no requirement that Federal funds will only cover blight elimination costs that are necessary and reasonable. Instead, Treasury set a worst-case scenario maximum allowable cost of $25,000 or $35,000 per property depending on the state. Treasury has no way of knowing whether the demolition and other costs submitted for Hardest Hit Fund dollars are necessary and reasonable, and is at a significant disadvantage in identifying waste, fraud and abuse.
Treasury’s Blight Elimination Program leaves decisions about what costs are necessary and reasonable, and about whether and in what form to have competition in the solicitation and award of contracts, to the recipients of Federal funds. HUD does not place such trust or hope in recipients to protect the Federal government.
The requirements of a grant program (at HUD) should be the bare minimum for a TARP program. HHF does not have to be a grant for Treasury to protect it. That would be form over substance. Federal grant funds are not the only Federal funds that should be protected. It is a long-standing practice for the Federal Government to establish requirements to protect Federal programs when it provides substantial funding. The other large TARP housing program HAMP has a comprehensive set of Treasury requirements to protect the program and the Government.
Treasury should take action now by creating Federal requirements similar to those HUD imposes in its blight elimination program to require full and open competition and limit costs to only those that are necessary and reasonable. Treasury recently expanded this program allocating more than $100 million. There are hundreds of millions of dollars ($458 million) left to be spent in this program, and three out of seven states have not reported any demolitions.
There is no harm in Treasury creating Federal requirements for full and open competition, and other competition requirements, similar to those HUD imposes. HUD allows for the same locally-tailored solutions and flexibility that Treasury seeks. The Hardest Hit Fund should be inflexible to fraud, waste, and abuse.
Full report below…
Treasury’s HHF Blight Elimination Program Lacks Important Federal Protections Against Fraud, Waste, and Abuse