[Management Issues Related to the Collection of Delinquent
Loans and Property Taxes by the Department of Hawaiian
Home Lands]
[From the U.S. Government Printing Office, www.gpo.gov]

Report No. 01-I-211

Title: Management Issues Related to the Collection of Delinquent
       Loans and Property Taxes by the Department of Hawaiian
       Home Lands

 
  Date: February 20, 2001

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  N-IN-OSS-005-99(A)-M
  
  February 20, 2001
  
  ADVISORY LETTER
  
  Raymond C. Soon, Chairman
  Hawaiian Homes Commission
  P.O. Box 1879
  Honolulu, Hawaii 96805
  
  Subject:  Management Issues Related to the Collection of Delinquent Loans and Property
  Taxes by the Department of Hawaiian Home Lands (No. 01-I-211)
  
  Dear Chairman Soon:
  
  During our followup audit (Report No. 00-I-500, issued in June 2000) on the status of
  recommendations contained in our March 1992 audit report on the Hawaiian Homes
  Commission, we identified opportunities for management to improve controls related to the
  collection of delinquent loans and property taxes.  These issues are discussed in the
  paragraphs that follow.
  
  DELINQUENT LOANS
  
  Although the Administrative Rules of the Department of Hawaiian Home Lands (DHHL)
  contained general provisions regarding actions to be taken on delinquent loans, such actions
  were usually not taken because DHHL did not have detailed operating procedures to guide
  its employees and/or have sufficient staff assigned to collection efforts.  This contributed,
  as of June 30, 1999, to 609 DHHL loans with outstanding balances totaling $22.1 million
  that were delinquent an average of 26 months.  In addition, DHHL was at risk of losing loan
  advances totaling $1.4 million that were paid to lenders on behalf of delinquent borrowers. 
  Also, we noted that DHHL may have lost $9,134 because of overpayments made on behalf
  of lessees.
  
  Section 214(b)(4) of the Hawaiian Homes Commission Act states that DHHL "may permit
  and approve loans made to lessees by government agencies or private lending institutions,
  where the department assures the payment of such loans; provided that upon receipt of notice
  of default in the payment of such assured loans, the department may, upon failure of the
  lessee to cure the default within sixty days, cancel the lease and pay the outstanding balance
  in full."  Section 214(b)(5) of the Act states that DHHL "may secure, pledge, or otherwise
  guarantee the repayment of moneys borrowed by the department from government agencies
  or private lending institutions and pay the interim interest or advances required for loans." 
  In addition, Title 10, Chapter 3, Section 47(i), of DHHL's Administrative Rules states,
  "Whenever a borrower is delinquent with loan repayments, the department may demand that
  the borrower assign wages in part or all moneys due or to become due to such borrower by
  reason of any agreement or contract to which the borrower is a party, to the department to
  assure repayment of the loan."  Further, Section 47(j) of the Administrative Rules states,
  "Whenever a borrower is more than one hundred twenty days delinquent on loan repayments,
  the department may start garnishment proceedings in accordance with the applicable statute,
  or start cancellation proceedings as authorized under the act."
  
  Direct Loans
  
  As of June 30, 1999, DHHL had 1,546 outstanding direct loans totaling $50.1 million, of
  which 609 loans (39 percent) were delinquent for more than 60 days, as shown in Table 1. 
  The average length of delinquency for these 609 loans was about 26 months.
  
     Table 1.  Summary of Loans Delinquent More Than 60 Days
  
  
                            Number of
                         Delinquent Loans
                            Number of
                          Days Past Due
                           Total Amount
                            Delinquent  
  
  
                                 59
                           Over 60 days
                          $2,205,545
                              
                              
                                 33
                           Over 90 days
                            1,199,377
                              
                              
                               517
                          Over 120 days
                             18,730,795
  
  
                               609
  
                           $22,135,717
  
  
  We judgmentally selected for review 31 delinquent direct loans totaling $1.9 million and
  found that none of the contracts for the loans in the sample included provisions for
  garnishment of wages.  For example:
  
  - In January 1996, DHHL learned that a lessee had died in December 1995.  At the time of
  her death, the lessee had an outstanding direct loan totaling about $36,498, of which $2,541
  had been delinquent for 8 months.  In March 1996, DHHL contacted the lessee's designated
  successor to notify her that successorship documents were being prepared for her review and
  approval and to request that she submit a copy of the lessee's death certificate.  The
  Commission approved the designation of successorship in April 1996.  In December 1996
  (12 months after the lessee's death), DHHL notified the successor of the loan delinquency
  (now totaling $6,326) by a letter that also stated that the delinquency "is in direct violation
  of the terms agreed upon in your loan contract" and that "failure to make your monthly
  payments . . . is a violation of the Rules and Regulations of the Department and the
  conditions of your lease." Further, the letter asked the successor to "please call [a mortgage
  specialist] of the Loan Services Branch . . . within (10) working days from the date of this
  letter to discuss your account and if needed, schedule a conference. Failure to resolve your
  delinquency will result in a Contested Case hearing to determine why your lease should not
  be cancelled."  In January 1997 (shortly after the delinquency notice was sent), the successor
  paid $460 on the loan.  DHHL subsequently issued three more notices to the successor, in
  July 1997, November 1997, and June 1998, concerning the loan delinquency.  However,
  DHHL had not taken any action to garnish the successor's wages, and as of June 30, 1999,
  the loan was  45 months delinquent in the amount of $15,330.
  
  DHHL's Mortgage Loan Specialists told us that sometimes they did not have the time to
  follow up on delinquent loans because they were also responsible for processing loan
  applications.  The Administrator of the Homestead Services Division stated that the goal of
  DHHL was not to put the lessees out of their homes and that he instructed his staff to work
  very closely with the lessees to pay their delinquent loans.  He further said, however, that
  because of a staff shortage in his division, the collection of delinquent loans had been
  adversely affected.
  
  We also found that DHHL may have lost $9,134 because of overpayments involving two
  loans as follows:
  
  - In February 1993, DHHL entered into an agreement with a lessee to guarantee a Small
  Business Administration (SBA) loan granted to the lessee.  The case file disclosed that in
  June 1993, SBA was notified that DHHL would guarantee the maximum amount of $58,700. 
  However, when the lessee defaulted on the loan, DHHL paid SBA $64,052, which, according
  to a DHHL accountant, included accrued interest. In our opinion, the $64,052 payment by 
  DHHL represented an overpayment to SBA of $5,352 ($64,052 minus $58,700).
  
  - In another instance, although a lease was canceled in November 1997, DHHL did not have
  the home appraised until February 1999.  The lessee accepted the appraisal in August 1999,
  at which time DHHL paid the lessee $6,890 (the appraised value of $60,500 minus the
  outstanding balance of a direct loan and property taxes totaling $53,610 as of
  November 1997).  The lessee continued to live in the home at no cost until October 1999. 
  In our opinion, the lessee should have been paid only $3,108 ($60,500 minus the outstanding
  balance of a direct loan and property taxes totaling $57,392 as of February 1999, when the
  appraisal was completed).  DHHL's Fiscal Management Officer stated that DHHL had
  subsequently established procedures to be used when the sale of a home occurs.  However,
  those procedures would not have addressed the circumstances of this case.
  
  Loan Guarantees
  
  As of June 30, 1999, DHHL had made loan advances of approximately $1.5 million for 115
  Hawaiian Home Land lessees who were delinquent on their loan guarantees and had
  routinely made loan advances on delinquent loan guarantees without requiring that lessees
  enter into repayment agreements with DHHL.  For example, DHHL did  not bill a lessee for
  an SBA loan guarantee totaling $52,822, including accrued interest, that had been in default
  for a period of 22 months.  The case file disclosed that DHHL paid off the SBA loan in
  August 1997 without requiring the lessee to enter into an installment payment plan to repay
  DHHL.  We found that in at least five other instances, DHHL had fully paid off defaulted
  SBA loan guarantees totaling $133,618 without requiring the lessees to enter into repayment
  agreements.
  
  The Fiscal Management Officer stated that his staff had been instructed by the Homestead
  Services Division not to send out billing statements to the lessees but that he did not know
  why no action had been taken by the Division.  He also stated that the Division was aware
  that lessees were not being billed for defaulted loan guarantees because his staff prepared
  monthly reports to the Division regarding the status of the defaulted loans.  The accountant
  responsible for preparing the billing statements told us that he had been instructed by the
  Division not to mail out billing statements to the lessees because the terms of the loans had
  not been determined by the Division.  The accountant told us, however, that he believed the
  delinquent lessees should have been billed and suggested that the lack of billings may have
  been an oversight on the part of the Division because of other responsibilities.  When we
  inquired of the Division's Administrator why bills had not been sent, he stated that he was
  not aware of the reasons and would need to review the case files to determine the reasons for
  the bills not being sent.
  
  We suggest that DHHL develop and implement specific procedures to institute garnishment
  of wages and repayment agreements to liquidate delinquent debts, as provided in DHHL
  regulations.
  
  DELINQUENT REAL PROPERTY TAXES
  
  DHHL needs to develop procedures to monitor the status of property tax payments by lessees
  and to recover from lessees tax payments made by DHHL on their behalf.  As of
  May 25, 1999, the Commission, although not legally liable for payment of real property
  taxes, had made a commitment to pay about $1 million for delinquent real property taxes
  owed by lessees.
  
  Section 208(7) of the Hawaiian Homes Commission Act states, "The lessee shall pay all
  taxes assessed upon the tract [of land] and improvements thereon.  The department may pay
  such taxes and have a lien therefor as provided by section 216 of this Act."  In addition,
  Section 210 states:
  
  Whenever the department has reason to believe that any condition enumerated in section 208
  . . . has been violated, the department shall give due notice and afford opportunity for a
  hearing to the lessee . . . If upon such hearing the department finds that the lessee has
  violated any conditions . . . the department may declare the lessee's interest in the tract to be
  forfeited and the lease in respect thereto canceled.
  
  On May 25, 1999, the Commission authorized DHHL to (1) make, from the Hawaiian
  Homes General Loan Fund, advance payment of delinquent real property taxes of $1,039,290
  owed by Hawaiian homestead lessees to the County of Hawaii as of November 30, 1994 and
  to the City and County of Honolulu as of March 31, 1999 and (2) pursue repayment of the
  amounts advanced on behalf of  the lessees in accordance with the procedures described in
  the "Delinquent Real Property Tax Action Plan."  The Executive Assistant to the
  Commission's Chairman stated that DHHL had developed a plan to notify the lessees of
  delinquent real property taxes and that, according to the plan, the lessees had 30 days to
  resolve the delinquency by paying the amount in full or by contacting DHHL to work out a
  repayment plan.  Lessees who arranged for repayment within the 30-day period would be
  assessed a 6 percent interest rate.
  
  The Chairman's Executive Assistant also stated that DHHL would make advance payment
  on all outstanding property tax accounts after the 30-day period and that once the advance
  was made, those lessees who had not arranged for repayment would be notified that an
  advance was made on their behalf and be charged at a 10 percent interest rate.  The
  Commission's Chairman stated that DHHL agreed to pay delinquent property taxes of more
  than $500 and that the counties had been informed by DHHL that the advance payment was
  a "one time deal."  The Chairman added that although DHHL had no legal responsibility to
  pay for property taxes, DHHL agreed to pay the delinquent property taxes to stay on "good
  terms" with the local governments.  He also stated that under the conditions of the leases, the
  lessees were responsible for paying property taxes and that DHHL did not have procedures
  to determine whether lessees paid the taxes.  In October 1999, DHHL paid delinquent real
  property taxes of $512,904 for 228 Hawaiian Home Land lessees and had agreed to pay an
  additional estimated $408,539 for another 196 lessees.
  
  We suggest that DHHL develop and implement procedures to monitor the payment of real
  property taxes by Hawaiian Home Land lessees and take prompt action to ensure that lessees
  either pay the taxes or make arrangements with DHHL to repay advance payments made on
  their behalf.
  
  Since this letter does not contain any recommendations, a response is not requested.  
  
  This advisory letter will be listed in our semiannual report to the Congress, as required by
  Section 5(a) of the Inspector General Act (5 U.S.C. app. 3)
  
  Sincerely,
  
  
  
  Arnold E. van Beverhoudt, Jr.
  Audit Manager for Insular Areas