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HUD REAC Failed Inspection Changes

There have been changes that deal with the laws that govern what happens when a property fails its REAC Inspection, added to a recent appropriations bill. This appropriations bill included Section 223 that details changes to the required provisions for properties that score 59 or lower on an Inspection. The most notable changes are that enforcement actions begin after the first failed REAC, not the second consecutive inspection, as was previously stated, and that the options for enforcement action have expanded from four options to nine.

The highlights of the new law are:

REAC scores 59 or less

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.

Notification to Owner After Failed Score

In the notification to the owner, the HUD office is required to provide a time span for the owner to conduct a 100% survey inspection. After the survey, the owner/agent must repair all of any and all issues. HUD offices typically provide a 60 day period, but now that section has been replaced with “a specific timetable”. This leaves open the possibility of both shorter and greater periods to correct issues.

Revised Failed InspectionEnforcement Options

Previous rules and regulations set out four options for enforcement on failed REAC Inspections, this has now been expanded and clarified. The reasons are (in slightly paraphrased language) listed below, the * at the end, indicates a change:

(A) Require immediate replacement of the management agent
(B) Impose Civil Money Penalty (A punitive fine imposed by a civil court on an entity that has profited from illegal or unethical activity.)
(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 non-compliance
(H) Work with the owner, lender, or other parties to stabilize the property through a [work-out plan to correct non-compliance] *
(I) Take any other action that is deemed necessary or appropriate*

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

These changes further emphasize the growing scrutiny of physical inspection compliance on HUD assets. With the expanded protocol under REAC’s Industry Standard rules, new rules of behavior for REAC Inspectors, and improved oversight on Quality Assurance on REAC Inspectors, the landscape for REAC Inspections has changed dramatically.

We would like to thank our friends at Nixon Peabody for bringing these changes to our attention.

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