RHS now facilitates homeownership, develops rental housing, and  promotes community development through loan and grant programs in  rural communities. 3). Changing Some Eligibility Requirements Could Better Delineate Boundaries for Urban-Rural Areas and Address Inconsistent Treatment of Similar Communities

Changes to the way eligibility is defined might allow RHS to better  designate “rural” areas and treat communities with similar characteristics  more consistently. RHS has a policy stating that a  serious lack of mortgage credit at rates and terms comparable with those  offered by the agency exists in all rural areas. Additionally, RHS lacked sufficient  internal control to adequately monitor the disbursement of rental  assistance funds. Specifically, in estimating needs for its rental assistance  contracts, RHS used higher inflation factors than recommended, did not  apply the inflation rates correctly to each year of the contract, and based  estimates of future spending on recent high usage rather than average  rates. For example, using  these two methods, RHS overestimated its 2003 budget needs by $51  million or 6.5 percent. Internal Control Issues Contribute to Errors in Loan and Grants Databases

Today we are releasing a report addressed to the RHS Administrator on  internal control issues in the Information Resource Management (IRM)  databases. In reviewing 29,000 records for five states we found incorrect, incomplete,  and inconsistent entries. Until RHS  can demonstrate that its edit functions or other data entry design features  can ensure the accuracy and completeness of the data in the IRM  databases, second-party review would be necessary. Conclusions

RHS has made progress in improving program management over the past  few years. For example, while determining what areas are eligible for rural housing  programs will always require an element of judgment, several changes to  the current eligibility requirements could help RHS make more consistent  eligibility determinations. RHS has recently moved on  a number of fronts to correct the many rental assistance program  shortcomings identified in our reports. Matters for Congressional Consideration

To improve eligibility determinations in rural housing programs, we  suggested that Congress may wish to consider eliminating the MSA  criterion, recommending that RHS use density measures as a basis for its  eligibility decisions, phasing out the practice of “grandfathering”  communities, and eliminating the “lack of credit” requirement. To ensure that rental assistance funds are effectively distributed to  properties that have tenants with the greatest need, we recommended that  the Secretary of Agriculture require program officials to establish  centralized guidance on transferring unused rental assistance, improve  sampling methods to ensure a sufficient number of tenant households are  selected for supervisory reviews, and improve tenant verification of  information, including more effective use of alternate methods of income  verification.
Why GAO Did This Study

The rural America of 2005 is far different from the rural America of the 1930s, when the federal government first began to provide housing assistance to rural residents. Advances in transportation, computer technology, and telecommunications, along with the spread of suburbia, have linked many rural areas to urban areas. These changes, along with new fiscal and budget realities, raise questions about how Rural Housing Service (RHS) programs could most effectively and efficiently serve rural America.

What GAO Found

This testimony is based on a report on how RHS determines which areas are eligible for rural housing programs, three reports on RHS's rental assistance budgeting and distribution processes, and a report we are releasing today on internal control issues with RHS's loans and grants databases. GAO found that while RHS has significantly improved the housing stock in rural America and has made progress in addressing problems, several issues prevent the agency from making the best use of resources. Specifically: (1) Statutory requirements for program eligibility, including those related to metropolitan statistical areas (MSA), "grandfathering" communities, and demonstrating a "serious lack of mortgage credit," are of marginal utility. For example, using density measures rather than MSAs might allow RHS to better differentiate urban and rural areas, and phasing out the "grandfathering" of communities could better ensure that RHS makes more consistent eligibility determinations; (2) RHS has consistently overestimated its rental assistance budget needs by using higher inflation rates than recommended by the Office of Management and Budget and incorrectly applying those rates. Also RHS lacked sufficient internal controls to adequately monitor the use of rental assistance funds, particularly for fund transfers and income verifications. RHS has been taking actions that should correct many of the rental assistance shortcomings GAO identified; and (3) GAO found incorrect, incomplete, and inconsistent entries in RHS's loans and grants databases. Until RHS can demonstrate that its system edit functions or other design features can ensure the accuracy of data in its databases, second-party review is necessary to meet internal control standards.