Treasury Department Releases Section 1602 Audits
The Treasury Department’s Office of Inspector General (OIG) recently posted audits of the Section 1602 program for Rhode Island and Arkansas. The American Recovery and Reinvestment Act, a stimulus package signed into law by President Obama in February 2009 in response to the Great Recession, provided in Section 1602 grants to be awarded to states for low-income housing projects in lieu of low-income housing credit allocations. The purpose of Section 1602 was to fill the gap left by the reduced demand for low-income housing tax credits so that low-income housing projects could continue or start up in instances where developers could not obtain private investment. It was also intended to increase the availability of affordable housing.
Under the Recovery Act, state housing credit agencies were allowed to exchange a portion of their low-income housing credits for Section 1602 funds. The maximum funds available to a state could not exceed its “Low-income Housing Grant Election Amount” as determined under Section 1602. In turn, state housing credit agencies would disburse funds to eligible subawardees to help finance either the construction or the acquisition and rehabilitation of qualified low-income housing projects. Section 1602 also provided that subawarded projects be subject to the same eligibility and compliance requirements as the low-income housing credits found in Section 42 of the IRC.
The OIG found that Rhode Island Housing (RIH) generally complied with the Treasury’s 1602 program requirements. Specifically, RIH met the applicable requirements for receiving its $36,891,061 1602 program award as well as requirements for subawarding those funds to six eligible low-income housing projects. The OIG also found that RIH established a process for monitoring the long-term viability of 1602 program-funded projects and their compliance with program requirements.
With the audit of the Arkansas Development Finance Authority (ADFA), the OIG concluded that ADFA did not fully comply with the Treasury’s 1602 program requirements. Although ADFA substantially met the eligibility and compliance requirements set forth in both Section 42 of the Internal Revenue Code (IRC) and Section 1602 of the Recovery Act for receiving its $92,869,859 1602 program award, it did not meet all subaward requirements related to one low-income housing project. Specifically, ADFA did not meet all requirements in regard to one property that received a Section 1602 grant. ADFA didn’t complete the final financial feasibility underwriting for the project at the time it was placed in service. In addition, although ADFA established compliance monitoring oversight, it didn’t perform a timely on-site inspection for the site within the second full calendar-year after being placed in service.
For ADFA, the OIG recommended that the Treasury’s Fiscal Assistant Secretary ensure that ADFA completes the final financial feasibility underwriting for the project and perform timely future on-site inspections as required by the 1602 program requirements.