Abuse of the Technical Rejection Process in HUD-202 and HUD-811 Applications
An Application for a HUD-202 (housing for elderly) or HUD-811 (housing for disabled) facility may receive what is known as a "technical rejection." We have published this web page to explain the technical rejection process and warn Applicants of its abuse. While Applicants must always face the possibility of loss in fair competition with other Applicants, in such a loss the Applicant will at least learn how the Application rated compared to others and where the weak points of the Application lie. With a technical rejection, the Application is not even scored. Instead of a lesson that has become so expensive that few non-profits can afford it, the $5,000 to $15,000 out-of-pocket expenses now required just to file an Application becomes a total loss. Where the landowner might be persuaded to wait a year and allow a second chance on a strong Application that just barely lost, a technical rejection is generally taken as a zero and nearly always kills the plan and the hope of salvaging any of the expenditures for a second chance. Below we explain how the process works and cite some past and present examples from our own experience of how this process is abused. We include an example from 2006 which is so incredible that we currently advise non-profits not to deal with the Nashville HUD. To do so they must be fully prepared to lose their considerable investment at the whim of that office. Please note that our personal experience is limited to just a few HUD offices and we have not recently been aware of abuses in those other offices. We would like to hear from others who believe they have had similar experiences so that we may better understand how localized or general this problem currently is.
The Technical Rejection Process
What it is intended to do and how it actually functions in practice.
HUD-202 and HUD-811 Applications go through a preliminary technical review process before they are evaluated and scored. As a result of this preliminary review the Application may receive a "technical rejection," in which case the Application is never evaluated and never gets to compete with other Applications. The regulations in 24 CFR lay down some of the responsibilities and overall objectives of HUD in this Application review, but the more precise nature of the technical review is always defined in the Federal Register as part of the HUD-202 and HUD-811 Applications, now part of the SuperNOFA. It has always been the case that an Application would receive a technical rejection if it was missing parts that were clearly defined in the Federal Register as required. Such missing parts are called non-curable deficiencies. The necessity for doing this is quite clear and the rules are well-defined.
In addition to this, however, there also have been several points of judgment involved that are much less well-defined. The primary areas have been demand or economic viability, environmental impact and environmental hazards, and legal issues concerning the control and ownership of the land. This part of the review process has changed considerably over recent years. Some years ago, the local HUD offices had the primary responsibility of determining the suitability of the Application in these areas. Applications had to deal with these areas, of course, but only at whatever level seemed adequate to the situation. Technical rejections were quite common, and as we describe below, the technical rejection process was abused. However, the cost of filing an Application was much less than it is now so that the impact of the abuse was less catastrophic. In the interim the Government has realized that HUD does not have qualified personnel to make most of these judgements properly and the Application requirements accordingly have grown in scope, imposing a considerable financial burden on the Applicant, but also removing the requirement that HUD make judgements which are beyond the expertise of its personnel. Accordingly, this should reduce technical rejection abuse.
The Appeal
There is an Appeal process that applies to the technical rejection and which probably was at least partially intended to prevent or reduce abuse. However, the current form of the Appeal process seems specifically designed to promote abuse. First, the so-called Appeal is reviewed by exactly the same person who issued the technical rejection in the first place - the ultimate in conflict of interest. Second, there is no requirement that criteria for technical rejection be applied even-handedly even within the same HUD office and often they are not. Third, a HUD official or office suffers no consequences for turning down what is later found to be a valid Appeal. Fourth, the timing requirements for HUD issuing the technical rejection and responding to an Appeal are such that it can be made impossible to evaluate the Application in the unlikely event that the Appeal is won. The timing also makes it impossible to effectively take the matter to your Congressman or to a higher level within HUD - at this point there is nothing HUD can reasonably do to reinstate the Application even if they acted immediately.
It is plain to see that this system can be easily be abused for unethical, unscrupulous or nefarious reasons. However, the fact that because there are no consequences to the HUD office or official makes it likely that the reason for abuse may be much more trivial than that - a minor show of power or authority, a minor lack of courage to do what is right, or simply that it is the path of least resistance.
Some History and Examples
In these examples we will not name the communities involved. There is no point in singling them out - the same could involve any community. The examples are quite real and at one point or another we have we have communicated with HUD on all of them, including all supporting details.
At one time the HUD-202 and even the HUD-811 descriptions in the Federal Register also included a process for issuing a technical rejection on the basis of demand for the project (normally covered in Exhibit 4a). We do housing demand analyses professionally and among other things we are certified to do demand analysis for Rural Development. We have done demand analyses for over 50 proposed facilities and there has never been a case where we had found there was sufficient demand and which did not rent up properly when built. If the demand for a proposed area is weak we tell the client and either seek another location or we do not continue the Application - it would be unethical for us to do otherwise. However, we found that no matter how careful, thorough, detailed, competent, and professional a submitted demand analysis was, it could be rejected at the whim of a single person at HUD. Appealing such rejections was very rarely successful. The most blatant example in our own experience was one in which we applied for a rural 202 facility in county A. It was and still is HUD practice to evaluate demand according to county. We received a technical rejection based on lack of demand, complete with a HUD calculation which the rejection letter claimed showed there was insufficient demand for a facility in county A. As usual our Appeal was completely ignored. When awards were made later that year we found that another Applicant had an award for a facility the same size as in our Application - and it was in county A, the same county which in our technical rejection letter HUD had claimed had no demand and for which our Appeal had been summarily rejected. HUD was caught red-handed on that one, but of course it was well after the fact, with no benefit to us and with no consequences to anyone at HUD.
How did this happen? We learned that at that time, in practice the actual demand "analysis" consisted of a HUD official contacting a person involved in subsidized housing in target county. If that person said the proposed facility would adversely affect public housing in that county, his unsupported word would be sufficient to kill the Application. The HUD "calculation" as given in our letter was only made if some person in local subsidized housing said there was a problem. Now, the Applicant who won that year already had some subsidized housing in County A and was thus the recipient of the HUD calls checking demand. When HUD called about our Application, it seems the housing market was terrible - no demand or waiting lists at all. When HUD called about their own Application all these problems had magically cleared up. The supposedly definitive calculation was done for our Application, but not for the other Applicant for the same county.
It has always amazed us that unsupported statements from a person with such an obvious conflict of interest would be considered. The fact that they were not only considered but allowed to be the single controlling factor is, we think, inexcusable. In point of fact it appears that the local HUD offices were uncomfortable enough about this practice that the real reason was rarely cited in a technical rejection letter. For rural Applications it was nearly always the same HUD "demand calculation" that when applied to almost any rural county would show "insufficient demand." In several other cases when we had gotten a technical rejection we showed that if the same calculation HUD applied to our Application had been applied to the winning Application the winner would have turned out with even less "demand" than our Application and should thus have also been given a technical rejection. So, obviously the calculation was only applied when it had been decided by other means that the Application was to be rejected.
Often where we had been given a technical rejection on the basis of demand we have been able to pinpoint a conflict of interest source for the rejection. In some cases there has been no such obvious reason. In the case of one 811 project we received a technical rejection for lack of demand since there was no waiting list. There were no facilities at all available in the area for which we were applying, so of course there was no waiting list as such, but we had presented letters from State officials who would be referring clients to the facility that they would be able to more than fill the facility from people on their lists. Our Appeal to the Nashville HUD office fully detailed this absurdity but the Appeal was denied.
We complained about this practice loudly and frequently, using the above examples and a few more with complete details, but largely to no avail. Finally, the situation had gotten so bad that several years ago when we taught a consultant training class sponsored by the Nashville HUD office we recommended that non-profits not apply for HUD-811 or HUD-202 facilities because the so-called technical rejection due to lack of demand was completely unpredictable and the rapidly increasing cost of filing an Application had reached the point where the risk was too great for most non-profits to handle. We gave some detailed descriptions and at that time we singled out the Nashville HUD Office under Ed Phillips as being particularly bad in abusing the technical rejection process, as for instance the 811 case cited above. It chanced that a HUD official higher up the chain of command than Ed Phillips had attended that class and was very interested in what we had to say. We have no way of knowing if we had any direct influence in the matter, but not very long afterward there was a considerable revision of the demand section of the Federal Register for HUD-202 or HUD-811 Applications and any mention of technical rejection on the basis of demand was very pointedly left out. In addition to this, the situation at the Nashville HUD Office improved markedly for several years, until that HUD higher-up retired - we wonder about that coincidence.
Are We on a List?
As you read this page at some point you will begin to wonder if perhaps it is a matter that we are on someone's "list." We do not believe we have been singled out in any of this. What you read here is as likely to happen to any Applicant. Our best evidence that we have not been singled out for negative treatment is that we are routinely called upon by local HUD offices to take over and straighten out Applications by others that have been awarded but afterward encounter trouble. This has happened with the Nashville HUD even after the incident described in the above paragraph.
The Latest from Nashville - The Unbelievable Example
This year (2006) the technical rejection problem has returned to the Nashville HUD and appears to be worse than ever. As we indicated above, in our reading of the current Federal Register covering HUD-202 and HUD-811 Applications there are instructions to be used for evaluating the demand portions of proposals, but nowhere is there any mention of technical rejection of a proposal without evaluation, on the basis of lack of demand. It appears to us that you have to go back to the generalities of 24 CFR, ignore the changes in the actual Applications, and extrapolate considerably to say otherwise. In fact, the technical review process now provides little basis for technical rejection of the proposal other than for missing documents, or in some cases missing signatures; that is, for the standard, stated non-curable deficiencies.
In the technical rejection letter we received on an Application this summer, Ed Phillips and the Nashville HUD appear to have recognized this. What we received was a Swiss army knife of "technical rejections," none of which has any basis in fact and none of which appear to have any basis in the regulations in the Federal Register. Apparently the idea was that surely at least one of them would be able to slip by no matter what we did. Our first reaction was to give it up as a lost cause, but on reflection we did file an Appeal. The Federal Register states, "The local HUD office will make a determination on any Appeals before making its selection recommendations." That is, the local HUD office under the leadership of Mr. Phillips is completely responsible for the final disposition of technical rejections issued by the same person - the same old conflict of interest situation. However, this gave Mr. Phillips the clear opportunity to correct what had been done if he wished to. In our Appeal we outlined the situation so that there could be no question that Mr. Phillips was aware of what he was approving. In effect it gave him the opportunity to completely to sign off and confirm his full responsibility for and full knowledge of what he was doing so that we could feel completely justified in publishing the page you are reading..
The four points upon which the technical rejection was based:
1). The proposal was rejected on the basis of lack of demand. We believe there is no longer a basis in the Federal Register for technical rejection on lack of demand; that it has become an evaluation item where lack of demand causes loss of evaluation points. But even ignoring this, our proposal was for a 202. The one existing Rural Development facility for elderly and disabled was full with a waiting list. There also were elderly in the general public housing, which had a waiting list that included an elderly Applicant. All told there were 20 on the waiting lists representing a very long wait time in the rural community. Our proposal was for a 13 unit facility so that the existing waiting list was 150% of our facility. Calling this situation a lack of demand requires complete rejection of the basic facts. In addition to this our own professional analysis of demand was very positive and was fully detailed and supported with data in the proposal. It seems clear that once again the HUD "evaluation" of demand was decided by some means other than actual demand.
2). The land is owned by the City and the City has a concrete pad adjacent to the lot where above ground fuel tanks are stored. These tanks could have been a problem, so when we had our Phase I done, we requested that the environmentalist proceed directly to a Phase II examination, which was done and submitted as part of the proposal. The environmentalist took samples and tested them. In the executive summary of the combined Phase I/Phase II the conclusion is that "contamination was detected but at concentrations below the State of Tennessee's current most stringent cleanup levels." If there were contamination his testing would have detected it. As a result no special remediation is called for. In any event the City planned to move the tanks and do any necessary cleanup when the facility was built. This was all done as spelled out in the Federal Register HUD-202 Application requirements. The environmental firm is not only technically qualified to make the determinations required in Phase I/II, they are responsible for the correctness of those studies. That is, they are in a liability position. If what they report should later prove to be incorrect they are responsible for any required remediation.
HUD inspected the site and smelled fuel in the vicinity of the tanks. On the basis of smelling gasoline they issued a technical rejection of the site as unsuitable. Of course the explicit inclusion of the formal - and expensive - Phase I/II environmental study in the Federal Register Application requirements is intended to prevent this amateur second-guessing by unqualified HUD personnel. This potential problem had already been recognized and completely solved in full accord with HUD requirements. Rejecting the Phase I/II findings on the basis of an amateur sniff test is clearly in violation of both the letter and the intent of the Federal Register Application.
3. We were issued a technical rejection on the basis that a 2" gas line running at the edge of the property was too close to the proposed structure. This "technical rejection" results from a utility letter from the gas company where in the electronic copy the required setback from the line can be read as 150 feet instead of the 15 feet actually intended. But suppose that HUD insisted on this obviously erroneous reading of the document (other structures in the area are clearly closer than the fictitious 150 feet). The salient point here is that the utility letter from the gas company on which this questionable number occurs is not part of the proposal as required by the Federal Register. The Nashville HUD office requests that these letters be included along with the formal proposal, which we did. Since these letters are not part of the formal proposal they could hardly be grounds for any sort of rejection even if they were completely missing. If HUD had genuinely believed their erroneous reading of the document and really were concerned they could have treated the situation similar to a curable deficiency and sent a letter asking for clarification. Indeed, we included a clarification document with our Appeal, which was ignored. In any event, there is absolutely no basis for treating this as a non-curable deficiency since it is not even a deficiency in the formal HUD-202 Application.
4. The technical rejection letter noted that in the Phase I report the environmentalist did not examine the Sanborn Fire Insurance Maps because none were available for the area. Thus, the rejection letter stated, we have not provided proof that our project can get fire insurance and that it is therefore the basis for technical rejection. This would be humorous if it was not so serious. The Sanborn Fire Insurance Maps are historical documents. Their usage in the Phase I report has nothing whatever to do with fire insurance. They happen to be some of the most detailed maps showing the location and nature of buildings over a long span of years. Their use in Phase I is to help determine what sort of building might have stood on the land under review 50 or 75 years ago, perhaps resulting in environmental hazards. They are an historical resource, not a present-day tool for dealing with fire insurance. Sanborn Maps were unavailable for our land probably because the maps generally covered more urban areas. There is no requirement in the Federal Register HUD-202 Application to show proof of insurability.
Our Appeal was rejected, of course. In his response to our Appeal, Mr. Phillips confirmed his approval and full responsibility for three of the four above technical rejections, including items 2 and 3 which clearly appear to run afoul of HUD regulations. His only change of mind regarded HUD's major gaffe concerning the Sanborn Maps and fire insurability.
We leave the above for you to interpret as you see fit. It appears to us to have been an obvious fishing expedition. We find it difficult to even imagine a scenario in which such an odd series of unjustified "technical rejections" could be leveled at what was a strong Application without there being some underlying but unmentioned cause. As the Nashville HUD expects no consequences for doing this, however, the cause really could be quite trivial.
We leave you with this warning. Although we have not yet been able to determine whether spurious technical rejections - particularly the Sanborn Map rejection - were applied uniformly to other Nashville Applicants in this round, we do not believe that we have been singled out for this treatment. Your Application to the Nashville HUD office has every chance of getting the same sort of groundless technical rejection. Be sure you can afford this absolute gamble before you apply.
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