How HOTMA May Affect Your State Agency’s Verification Standards
As a LIHTC site owner or manager, it’s important to be aware of Housing Opportunity Through Modernization Act (HOTMA) provisions since the legislation deals with reforms to the Section 8 Housing Choice Voucher program. And although the HOTMA legislative text or HUD regulations concerning HOTMA don’t mention LIHTC, the rules still affect LIHTC properties.
Low-income housing tax credit law requires site owners to use HUD’s Section 8 rules regarding income calculations. According to Treasury Regulations §1.42-5(b)(1)(vii), “Tenant income is calculated in a manner consistent with the determination of annual income under Section 8 of the U.S. Housing Act of 1937.”
The “determination of annual income” language requires you to consider what type of income and assets to include or exclude, and covers how to calculate or annualize certain types of income. But it doesn’t necessarily cover how to verify income. Also, IRS Treasury Regulations 1.42-5 provides a list of acceptable verifications that are legally applicable to the LIHTC program. These include “a copy of the tenant's federal income tax return, Forms W-2, or verifications of income from third parties such as employers or state agencies paying unemployment compensation.” This list is broad and allows for much variation among state allocating agencies.
In other words, although LIHTC and HUD’s Section 8 program use the same rules for what income and assets are included in tenant income, how you must verify income and assets may differ between the two programs depending on the compliance rules your state LIHTC allocating agency sets.
Under HOTMA, there’s now a specific hierarchy for verification for HUD programs. It simplifies the standards for income verification and sets different levels of acceptability of verification sources. For example, it places a higher value on tenant-provided documentation than before. While state allocating agencies have their own rules, HOTMA provides an opportunity for them to examine their verification rules and decide whether to update their own verification standards.
An understanding of HUD’s verification hierarchy may help you if your state housing agency decides to borrow or adopt some HOTMA verification principles. We’ll go over HOTMA’s verification hierarchy and discuss how these changes make it simpler to verify income and assets for HUD program tenants.
HOTMA Verification Hierarchy
HUD programs have relied on Appendix 3 of HUD Handbook 4350.3, Acceptable Forms of Verification, to verify tenant information during the certification process. Many housing agencies adopted parts or all of Appendix 3 in coming up with their own verification standards for LIHTC sites. Now with HOTMA, HUD is implementing a new order of preference for verifications. There are six different levels that describe verification documentation, from most acceptable (Level 6) to least acceptable (Level 1).
Level 6: Upfront Income Verification using EIV. This is income verification using HUD’s Enterprise Income Verification (EIV) system. This represents the highest level of acceptable documentation. HUD program owners must pull the EIV Income Report for each family at every annual reexamination and may use it as the sole verification of Social Security income. However, the EIV system is unavailable to LIHTC sites.
Level 5: Upfront Income Verification using non-EIV system. This level represents the highest level of acceptable verification that an LIHTC owner could achieve. This level uses non-EIV systems to verify income and employment. For example, an owner could subscribe or pay for reports to services such as “The Work Number” or other web-based software. These services maintain a database that organizations can use to verify employment and income information. The databases collect payroll information with employers including small, medium, and Fortune 500 companies contributing payroll records.
Level 4: Tenant-Provided Verification. This level of verification requires an original or authentic document generated by a third-party source dated within 120 days of the date received by the HUD program owner. For fixed-income sources, a statement dated within the appropriate benefit year is acceptable documentation. Such documentation may be in the possession of the tenant or applicant and is commonly referred to as tenant-provided documents.
Examples of acceptable tenant-provided documentation generated by a third-party source include but aren’t limited to the following: pay stubs, payroll summary report, employer notice/letter of hire/termination, SSA benefit verification letter, bank statements, child support payment stubs, welfare benefit letters and/or printouts, and unemployment monetary benefit notices.
HUD program owners are required to obtain a minimum of two current and consecutive pay stubs for determining projected annual income from wages when they rely on pay stubs for Level 4 documentation. They were previously required to collect the most recent four to six weeks of pay stubs to verify employment income. For new income sources or when two pay stubs aren’t available, HUD says that owners should determine income based on the information from a traditional written, third-party verification form or the best available information.
Income tax returns with corresponding official tax forms and schedules attached and including third-party receipt of transmission for income tax return filed are an acceptable form of written, third-party verification. And when verification of assets is required, HUD program owners are required to obtain a minimum of one statement that reflects the current balance of banking/financial accounts. Owners were previously required to average the balance of six checking account statements to determine the cash value of a checking account.
Level 3: Written, Third-Party Verification Form. This level is used if Level 5 or Level 4 verification is not available or is rejected by the owner and when the applicant or tenant is unable to provide acceptable documentation. This type of verification is a form developed by the HUD program owner and used uniformly for all families when needed to collect information from a third-party source. The form is completed by the third party, and owners send the form directly to the third-party source by mail, fax, or email. A HUD program owner may skip this level of verification before attempting Level 2, which means they will have completed only Level 3 or Level 2 verification before moving to Self-Certification.
Level 2: Oral Third-Party Verification. HUD considers this level a medium order of acceptability. This level requires an independent verification of information by contacting the individual income/expense sources via telephone or in-person visit. HUD program staff must document in the tenant file the date and time of the telephone call or visit to the third party and the name of the person contacted and their telephone number, along with the confirmed information. This verification method is commonly used when the independent source doesn’t respond to a faxed, mailed, or emailed request for information in a reasonable time frame (10 business days). A HUD program owner may skip this level of verification if they attempted Level 3, which means they will have completed only Level 3 or Level 2 verification before moving to Self-Certification.
Level 1: Self-Certification. With this level, the tenant submits a signed statement of reported income and/or expenses to the owner. This verification method is used as a last resort when the owner hasn’t been successful in obtaining information through all other required verification techniques. HUD doesn’t require that a self-certification be notarized; however, HUD recommends including language on any self-certification to ensure the certifier understands the consequences of knowingly providing false information.