Procedural Changes to HUD REAC Failed Inspections Signed into Law

As a result of President Trump signing a new HUD appropriations bill in early May, the rules that govern what happens when a site fails its REAC inspection have changed. The appropriations bill included Section 223, which details changes to the required provisions for properties that score 59 or lower on an inspection. The changes underscore the growing scrutiny on physical inspection compliance at HUD assets.

The most notable changes are that enforcement actions begin after the first failed REAC, not the second consecutive inspection, and that the options for enforcement action have expanded from four options to nine. The highlights of the new law are:

• On REAC scores 59 or less, the HUD office must notify the owner/agent within 15 days that they are in default of their regulatory agreement for their failure to maintain the property in a decent, safe, and sanitary condition. Previously, this was 30 days; and
• When notifying the owner of the default of the regulatory agreement, the HUD office is required to provide a time frame for the owner to conduct a 100 percent survey inspection and repair any and all issues. This is typically a 60-day period, but now that section has been replaced with “a specific timetable,” which leaves open the possibility of both shorter and greater periods to correct issues.

Previous rules and regulations set out four options for enforcement on failed REAC inspections; this has now been expanded and clarified. The expanded options are:

A.              Require immediate replacement of the management agent;

B.              Impose civil money penalty;

C.              Abatement of the Section 8 contract;

D.             Transfer of the project to a new owner;

E.              Transfer of the Section 8 contract to another project;

F.              Pursue exclusionary sanctions, including suspension and debarments from federal programs;

G.             Seek judicial appointment of a receiver of the property who would manage the property and cure all noncompliance;

H.             Work with the owner, lender, or other party to stabilize the property through a work-out plan to correct noncompliance;

I.               Take any other action that is deemed necessary or appropriate.

Additional language in the new law requires the HUD Secretary to report quarterly to Congress on the status of all properties with failing scores and on what steps have been taken, and presumably, if the overall number of troubled properties has increased or decreased since the previous reporting period.