State of New York Office of the State Comptroller Division of Management Audit

State of New York Office of the State Comptroller Division of Management Audit DIVISION OF HOUSING AND COMMUNITY RENEWAL PROCESSING OF RENT OVERCHARGE COMPLAINTS IN NEW YORK CITY REPORT 95-S-120 H. Carl McCall Comptroller

State of New York Office of the State Comptroller Division of Management Audit Report 95-S-120 Mr. Joseph Lynch Acting Commissioner Division of Housing and Community Renewal Hampton Plaza 38-40 State Street Albany, NY 12207 Dear Mr. Lynch: The following is our audit report on the Division of Housing and Community Renewal s processing of rent overcharge complaints in New York City. This audit was performed pursuant to the State Comptroller s authority as set forth in Section 1, Article V of the State Constitution and Section 8, Article 2 of the State Finance Law. Major contributors to this report are listed in Appendix A. February 21, 1997 In an effort to reduce the costs of printing, if you wish your name to be deleted from our mailing list or if your address has changed, contact Raymond W. Cecot at (518) 474-3271 or at the Office of the State Comptroller, Alfred E. Smith State Office Building, 13th Floor, Albany, NY 12236.

Executive Summary Division Of Housing And Community Renewal Processing Of Rent Overcharge Complaints In New York City Scope of Audit About 1 million housing units in New York City are subject to rent stabilization regulations, which are administered by the Division of Housing and Community Renewal (DHCR). In administering the regulations, DHCR must respond to formal complaints from landlords and tenants. For example, a tenant may claim a rent is excessive; if DHCR agrees with such a complaint, it orders the landlord to refund the excess amount to the tenant and may also order the landlord to pay the tenant a penalty. In our prior audit report 87-S-30, we identified a large backlog of unresolved rent overcharge complaints at DHCR. As of December 31, 1995, DHCR had a backlog of about 30,000 unresolved rent overcharge complaints from tenants. Our audit addressed the following questions about DHCR s practices for processing complaints about excessive rents from tenants in New York City for the period April 1, 1992 through March 31, 1996:! Has DHCR taken appropriate action to reduce the backlog of complaints?! Has DHCR developed adequate plans and procedures for processing incoming complaints in a fair and timely manner? Audit Observations and Conclusions When tenants file complaints with DHCR, they should be able to expect that their complaints will be resolved in a timely manner. We found that DHCR officials have taken steps to try to reduce the backlog of complaints and begin processing incoming complaints in a timely manner. However, the backlog is still very large and complaints still take years to resolve. During this time, tenants often move and cannot be located. As a result, they often do not learn of the results of their overcharge complaint. Between March 31, 1993 and December 31, 1995, the number of unresolved complaints from New York City tenants about excessive rents decreased by less than 1 percent from 30,558 to 30,374. We therefore conclude that DHCR has not made adequate progress in reducing the backlog of complaints. We examined a sample of complaints and found that it took an average of 52 months for DHCR to determine whether the rent was excessive. If the decision was appealed (about 1 in 11 such decisions are appealed), it took an average of 57 additional months for DHCR to rule on the appeal. We determined that 9 percent of the unresolved complaints are between 7 and 12 years old, and if complaints continue to be filed and closed at the current rate,

the backlog of complaints will not be eliminated for another 10 years. (see pp. 3-5) As a result of the delays in processing complaints about excessive rents, the tenants who are overcharged must wait years before their excessive rents are reduced and the excess payments refunded. Many such tenants never receive their refunds, because by the time the complaint is resolved, the tenant has moved and cannot be located. In about one-third of the complaints that were resolved during the 13 months ended November 30, 1995, the rent was judged to be excessive and the tenants were awarded refunds and penalties totaling $14.1 million. On the basis of this sample, we estimate that the backlog of unresolved complaints could represent as much as $69 million in rent refunds and penalties for tenants. (see p. 6) DHCR officials have taken several actions, including implementing a number of pilot projects, in an effort to reduce the backlog of complaints and begin processing incoming complaints in a timely manner. For example, if a complaint has yet to be assigned for action, DHCR has begun to contact the tenant to ensure that the tenant can be located and is still interested in pursuing the complaint. DHCR has also developed a detailed tracking system for the activities related to complaint resolution and has taken steps to reduce delays in collecting relevant documentation from tenants filing complaints and the landlords named in the complaints. (see pp. 6-8) This report recommends additional actions that can be taken by DHCR to reduce delays in complaint processing. For example, DHCR should evaluate the effectiveness of its pilot projects to determine which new procedures should be fully implemented. DHCR should also establish performance standards for complaint processing activities and monitor the activities against these standards. DHCR should also establish a target date for eliminating the backlog. Comments of DHCR Officials DHCR officials are pleased with the recognition given in the report to the actions they have taken to improve the complaint processing system and cite other improvements they have made since the completion of the audit. They note that many of the report s recommendations are useful and that actions have been taken to implement them. DHCR officials report that new rent overcharge complaints are now resolved at the rent administration level in about six months, as compared to the 52-month interval cited for the audit period. They further report that the overcharge caseload has been reduced from 30,374 as of December 31, 1995, to 20,064 as of November 4, 1996. DHCR officials question our estimate of the value of pending case awards; however, they do not offer their own estimate.

Contents Introduction Processing Overcharge Complaints Rent Overcharge Account Appendix A Appendix B Background... 1 Audit Scope, Objectives and Methodology... 1 Response of DHCR Officials to Audit... 2 Timeliness of Processing... 3 Effects of the Processing Delays... 6 Efforts to Improve the Process... 6... 11 Major Contributors to This Report Comments of DHCR Officials

Introduction Background A sizable amount of the rental housing in New York City is under some type of price control, commonly referred to as rent control or rent stabilization (rent control relates to housing units built before 1947, while rent stabilization generally relates to housing units built between 1947 and 1973). There are nearly 1 million rent stabilized and 100,000 rent controlled housing units in New York City. There are also about 65,000 rent stabilized apartments in other counties. Most of the housing units subject to rent stabilization are apartments in buildings of six or more units. The New York State Omnibus Housing Act of 1983 mandated the consolidation of all rent regulations under the control of the Division of Housing and Community Renewal (DHCR). Effective April 1984, DHCR's Office of Rent Administration (ORA) assumed the responsibility for administering rent regulations covering rent controlled and rent stabilized apartments in New York State. Rent control and rent stabilization regulations are designed to provide owners with an adequate return on their investments and tenants with protection from burdensome rent increases in a market with a persistent shortage of decent, affordable rental housing. As the sole administrator of the State's rent regulation laws, ORA is responsible for administering the rent control and rent stabilization system to protect the rights of tenants and landlords. During the year ended March 31, 1996, ORA was appropriated about $25 million. ORA operates four bureaus to handle tenant and landlord complaints. Our audit focused on the operations of the Rent Overcharge Bureau, which handles complaints about rents from New York City tenants living in rent stabilized apartments. Our prior audit report (87-S-30) identified a large backlog of complaints at ORA. As of December 31, 1995, the Rent Overcharge Bureau had a backlog of about 30,000 unresolved complaints from tenants. Audit Scope, Objectives and Methodology We audited the Rent Overcharge Bureau's complaint processing practices for the period April 1, 1992 through March 31, 1996. The primary objectives of our audit were to evaluate the adequacy of the Bureau s plans and procedures for addressing the backlog of outstanding complaints from tenants and for implementing a process to resolve complaints in a fair and timely manner. To accomplish these objectives, we reviewed applicable laws, policies and procedures. We also interviewed ORA and other DHCR personnel, and reviewed relevant ORA data and records. We conducted our audit in accordance with generally accepted government auditing standards. Such standards require that we plan and perform our audit to adequately assess those operations of ORA which are included within the audit scope. Further, these standards require that we understand ORA's internal control structures and its compliance with those laws, rules and regulations that are relevant to those operations which are included in our

audit scope. An audit includes examining, on a test basis, evidence supporting transactions recorded in the accounting and operating records and applying such other auditing procedures as we consider necessary in the circumstances. An audit also includes assessing the estimates, judgements, and decisions made by management. We believe our audit provides a reasonable basis for our findings, conclusions and recommendations. We use a risk-based approach when selecting activities to be audited. This approach focuses our audit efforts on those operations that have been identified through a preliminary survey as having the greatest probability for needing improvement. Consequently, by design, finite audit resources are used to identify where and how improvements can be made. Thus, little audit effort is devoted to reviewing operations that may be relatively efficient or effective. As a result, our audit reports are prepared on an "exception basis." This report, therefore, highlights those areas needing improvement and does not address activities that may be functioning properly. Response of DHCR Officials to Audit A draft of this report was provided to DHCR officials for their review and comment. Their comments have been considered in preparing this report and are included as Appendix B. Within 90 days after final release of this report, as required by Section 170 of the Executive Law, the Commissioner of the Division of Housing and Community Renewal shall report to the Governor, the State Comptroller, and the leaders of the Legislature and fiscal committees, advising what steps were taken to implement the recommendations contained herein, and where recommendations were not implemented, the reasons therefor. 2

Processing Overcharge Complaints There are many factors included in the calculation of the maximum rent allowable for each rent stabilized apartment. For example, there are annual increases established by the New York City Rent Guidelines Board. Rents can also be increased (1) if the landlord increases services, substantially rehabilitates an apartment or makes a major capital improvement; (2) in cases of landlord hardship; (3) to cover high labor costs in maintaining the building; and (4) due to increases in fuel costs. In addition, if the landlord fails to correct housing violations or does not adequately provide essential services, such as heat, painting or repairs, ORA can reduce rents and levy civil penalties against the landlord. When a tenant files a complaint with the Rent Overcharge Bureau, the complaint is assigned to one of nearly 60 Bureau examiners, and the examiner evaluates the merits of the complaint. During this process, the examiner usually contacts both the tenant and the landlord, and obtains documentation from both parties in support of their respective positions. (If the tenant cannot be located, the complaint cannot be resolved and the case is closed without resolution.) After reviewing the relevant documentation, the examiner decides whether to adjust the tenant s rent. The examiner s decision can be appealed by either the tenant or the landlord. Such appeals are evaluated by ORA reviewers. When tenants file complaints with the Rent Overcharge Bureau, they should be able to expect that their complaints will be resolved in a timely manner. We found that it takes an inordinate amount of time to process most rent overcharge complaints. Consequently, a large backlog of open cases exists. We found that complaints are not resolved for an average of more than four years and can remain unresolved for as long as nine years. By then, quite often the tenant has moved and cannot be located to receive repayment of any overcharge. ORA officials have initiated several actions in an effort to improve complaint processing, and we have identified additional improvements that can be made. DHCR officials responded to our draft report that new cases now go directly to processing and the number of open cases has been greatly reduced. Timeliness of Processing In October 1986, the time of our prior audit, ORA maintained no official records of the number of outstanding unresolved complaints from tenants and landlords. At that time, we estimated that the outstanding caseload totaled about 46,000 complaints. Since then, ORA has automated its complaint records, and as of December 31, 1995, the records indicated that more than 68,000 complaints were outstanding. While the number of outstanding 3

complaints has increased greatly since 1986, it has declined by about 11 percent since 1993 when there were almost 77,000 outstanding complaints. However, as shown by the following graph, the number of outstanding complaints in the Rent Overcharge Bureau declined by less than 1 percent (from 30,558 to 30,374) between April 1, 1993 and January 1, 1996. Trend in Overcharge Complaints versus All Other Complaints 46,171 43,331 All Other Complaints 40,670 38,049 30,558 33,056 33,162 30,374 Rent Overcharge Complaints 4/1/93 4/1/94 4/1/95 1/1/96 To determine how long it takes for the Rent Overcharge Bureau to process a complaint, we reviewed Bureau records relating to the 4,304 complaints that were closed out by the Bureau during the six months ended September 30, 1995. As shown in the following time line, we found that it took an average of 34 months for these cases to be assigned to an examiner and another 18 months for the cases to be examined and closed, for a total of 52 months. 4

Timeline of Average Overcharge Case Processing Filing of initial complaint by tenant to assignment of complaint to a rent examiner - 34 months Fact finding on the complaint to closing of case by rent examiner - 18 months Filing of appeal to assignment of case for review - 55 months Review of appeal to decision- 2 months 0 10 20 30 40 50 60 70 80 90 100 110 MONTHS We also examined the length of the appeal process (about 1 in 11 cases result in an appeal). During the six months ended September 30, 1995, 444 appeals were closed on Rent Overcharge Bureau cases. We determined that it took about 4.5 years for these appeals to be assigned to an ORA reviewer and another two months for the cases to be closed. In about 10 percent of these cases, the original decision was reversed. The total average processing time for an original complaint and appeal was about nine years. We also determined the age of the unresolved complaints. As of October 31, 1995, there were 31,923 open cases (including appeals) in the Rent Overcharge Bureau, of which 16,371 (51 percent) were more than three years old and 2,883 cases (9 percent) were between 7 and 12 years old. During the 1995 calendar year, there were 7,010 new overcharge complaints, while 10,109 complaints were closed. If complaints continue to be filed and closed at the same rate, the backlog of overcharge complaints will not be eliminated for another 10 years. DHCR officials report that new rent overcharge complaints are now resolved at the rent administration level in about six months, as compared to the 52- month interval cited for the audit period. They further report that the overcharge caseload has been reduced from 30,374 as of December 31, 1995, to 20,064 as of November 4, 1996. 5

Effects of the Processing Delays The Rent Overcharge Bureau s complaint resolution process is dysfunctional and in need of reform. Because of the time it takes to resolve a complaint, ORA's administration of rent complaints is ineffective and it will continue to be so until the complaint backlog is reduced and eliminated. The inability to resolve cases timely works to the detriment of tenants and landlords. Because of the delay in complaint resolution, tenants who are overcharged have to wait years for the repayment of these overcharges and a reduction in their monthly rent. Moreover, tenants often are not located because they have moved and thus are unlikely to receive their refunds. For example, about 44 percent of the cases that were closed during the last quarter of the 1995 calendar year were closed without resolution, primarily because the tenant moved and could not be located. We note that in 35 percent (2,201 out of 6,230) of the complaints that were resolved during the 13 months ended November 30, 1995, the examiner decided that the rent was excessive. The overcharges totaled $7 million, and examiners added penalties of $7.1 million. If these 13 months were representative, and we found no reason to believe they were not, the 30,374 unresolved complaints as of December 31, 1995, could eventually result in awards to tenants totaling as much as $69 million. However, unless the timeliness of the complaint resolution process is significantly improved, much of this amount may never be collected by the tenants. (DHCR officials maintain that older cases which our estimate includes, have significantly larger awards due to their long pendency periods. They also point out that processing times are becoming much shorter, the caseload is getting smaller, and changes in the law regarding amnesty affect overcharges. For these reasons DHCR officials question our estimate of the value of pending case awards. However, they do not offer their own estimate.) Landlords are also affected by delays in complaint processing, as they must retain records for long periods of time to ensure that their rights are protected. Moreover, if a rent is found to be excessive, the amount of the refund and penalty owed by the landlord is increased by processing delays. Although the calculation of the refund can go back only four years, it can take another four or more years to process the complaint and the landlord could then owe up to eight or more years worth of rent overcharges. Efforts to Improve the Process ORA officials have taken several actions in an effort to reduce the backlog of overcharge complaints and process incoming complaints in a timely manner. For example, in a pilot project ORA initiated the use of "wake-up" notices. Wake-up notices are correspondence sent to complainants before their cases are assigned to examiners asking if they are still interested in pursuing their complaint. If ORA is unable to locate a complainant, the case is closed. Since November 1995, about 100 wake-up notices have been sent out each week. As a result, the number of closed complaint cases increased 58 percent 6

from an average of 768 per month for the period from January through October 1995 to 1,216 per month for November and December 1995. We note that of the 2,106 complaints (excluding appeals) that were closed during November and December 1995, more than half of the complaints (1,094) were closed without resolution because the tenants could not be located. ORA officials believe their finite resources are better utilized processing cases in which the tenant can be contacted and indicates a continued interest in the outcome of the complaint. We support this approach as an interim measure until the backlog is resolved, since it allows ORA to dedicate its limited resources to cases in which overcharges can be collected by the tenants. We believe, however, that the cases should be suspended, rather than closed, and reopened if the complainant recontacts ORA. (DHCR officials indicated they will reopen and adjudicate such cases.) We found that ORA examiners generally did not make one comprehensive request to the tenants and landlords for all documentation necessary to process the complaints. Rather, the examiners routinely made several requests for additional information, which increased processing time. In early 1996, ORA introduced a new overcharge complaint form in which more information and documentation is requested up-front. We are in agreement with this concept; however, we believe complainants would be better served if the request for information was even more comprehensive and if the new form included a conspicuously placed warning that the processing of the complaint could be suspended if the complainant fails to advise ORA of a change of address. (DHCR officials agreed to work with their public information staff to ensure tenants are receiving this important message.) ORA officials are also considering the establishment of a Mediation Unit to promptly resolve complaints in which a tenant claims that the landlord failed to provide a lease or a lease renewal. Such an approach has been successfully used by one of the other ORA bureaus. During 1995, ORA officials also provided additional staff training to help reduce the backlog and developed a detailed tracking system for case activities. Moreover, in addition to the use of wake-up notices, ORA officials also initiated two other pilot projects: the pre-screening of cases for proper documentation and the expediting of cases that had been vigorously pursed by tenants. We found, however, that ORA has not evaluated the results of these pilot projects. Without such an evaluation, ORA has no basis for determining which pilot projects are successful and should be formally implemented. Similarly, ORA generally relies on supervisory review of staff activities and supervisory review of activity reports to monitor and assess staff performance. While this can be an effective management control process, the process would 7

be more effective if it were combined with objective performance data and comparison with specific goals. Although ORA records performance measurement statistics, such as the number of cases closed by each rent examiner, there are no formal performance measurement standards. For example, according to ORA records, the number of overcharge cases closed each week by rent examiners during the eight weeks ended December 2, 1995 ranged from a low of 1.1 to a high of 4.3 and averaged about 3.0. However, this information is not compared to specific goals or standards so that the performance of the examiners can be evaluated. Although ORA officials are aware of and monitor the low producers, the process would be more effective if performance data was compared with specific goals as part of an overall performance measurement system. We also note that in February 1996, DHCR issued the first phase of the agency s Strategic Plan. The reduction of the complaint backlog is addressed within the Plan as one of DHCR s priorities to improve the efficiency and effectiveness of DHCR operations. However, as of July 1996, the Strategic Plan had yet to describe specific strategies and activities for improving complaint processing and reducing the backlog, and had yet to establish a target date for eliminating the backlog. DHCR officials told us that the second phase of the Strategic Plan will be more specific regarding what actions will be taken. They also indicated that they have already introduced several initiatives to help reduce the backlog. We further note that ORA s procedures manual regarding overcharge complaint processing has not been updated since 1988, and there are no documented procedures for the processing of appeals. As a result, examiners and appeal reviewers cannot rely on manuals for guidance in processing complaints. DHCR officials responded that with the possibility of amendments to the Rent Stabilization Law, it would be an inefficient use of staff resources to update the manual at this time. They stated they will continue to update the existing procedures manual using bulletins, policy statements and opinion letters. 8

Recommendations 1. Develop and implement specific Strategic Plan strategies and activities to eliminate the rent complaint backlog as quickly as possible and to keep the processing of the complaints current thereafter. Consider:! utilizing the wake-up notices on a continuing basis until the backlog is resolved,! making a comprehensive request for complete rent history documentation from the landlord and tenant when a complaint is first filed, and! updating the procedures manual for overcharge complaint processing and establishing written procedures for the processing of appeals. 2. Develop a system to measure ORA performance which includes measurable goals and objectives and the use of performance indicators. 3. If a complainant cannot be located, the case should be suspended and then reopened if the complainant recontacts ORA. 4. Include in the Overcharge Complaint Form the need for tenants to notify DHCR of any change of their address while the complaint is being processed. 5. Measure the results of pilot projects and evaluate whether they should be fully implemented on an ongoing basis. 9

10

Rent Overcharge Account When ORA determines that a tenant has been overcharged, the methods available to collect the overcharge depend upon whether the tenant is still in the apartment or has moved to another location. If the tenant lives in the apartment, ORA will order an immediate reduction in the tenant s rent to allow the tenant to collect the overcharge. Tenants that no longer reside in the apartment are provided with an order that allows them to collect the rent overcharge in the same manner any other debt would be collected. Due to the lengthy processing time that ORA has experienced in the last several years, many tenants no longer reside in the apartment when the case is decided. If ORA does not have a current address, it does not attempt to locate the tenant. Consequently, many tenants are not aware that they have won their overcharge complaint and landlords are not required to pay the overcharge award. (DHCR officials responded that they do attempt to reach all parties to a case by tracking and using addresses, even when they change. They added that corrected rents determined by an overcharge order are recorded into the data base.) In 1993, ORA issued Policy Statement 93-4 to establish a fund called the Rent Overcharge Account to hold rent overcharges for individuals that won cases, but could not be located. In this system, landlords would not be allowed to keep the overcharge award simply because the tenant could not be located. From December 1993 through November 1995, the Rent Overcharge Bureau issued overcharge orders totaling $7.9 million to more than 1,300 tenants who could not be located. However, ORA was unsuccessful in implementing the Rent Overcharge Account and, as of October 1995, less than $50,000 of the $7.9 million in awards were deposited into the escrow account by landlords. In December 1995, ORA issued Policy Statement 95-1 rescinding Policy Statement 93-4. ORA discontinued the Rent Overcharge Account stating that the amount of staff time dedicated was unwarranted by the amount of funds claimed by tenants. While they did not present any formal legal opinion on this matter, DHCR officials added that Policy Statement 93-4 was without basis in law. They concluded that the escrow account had not been beneficial to the tenants. Although the Rent Overcharge Account was discontinued as a method to assist tenants in recovering their overcharge awards, we believe that ORA should attempt to locate the tenants that have received overcharge awards so that they may take action to recover the overcharged amounts. As shown by the aforementioned figure of $7.9 million in overcharge awards issued from December 1993 through November 1995, a substantial amount is owed to tenants by landlords and ORA should make an effort to ensure that overcharged tenants are notified of their awards. In addition, after three years 11

have elapsed, DHCR should turn any unclaimed funds in the account over to the State Comptroller s Bureau of Unclaimed Funds. Since the oldest funds in escrow are from October 1993, funds are considered unclaimed starting in October 1996. ORA has not established any procedures to forward these funds accordingly. (DHCR officials agree that funds unclaimed are to be forwarded to the Comptroller s Office.) Recommendations 6. Attempt to locate missing tenants who are due rent overcharge awards, and document such attempts in the case files. 7. Establish a procedure to forward to the State Comptroller s Office any Rent Overcharge Account funds that are unclaimed after three years. 12

Major Contributors to This Report Jerry Barber Frank Houston Kevin McClune Steve Sossei Tom Trypuc Harry Maher Keith Murphy Bebe Belkin Leota Bernard Appendix A

Appendix B

2B-2

B-3

4B-4

* Note * State Comptroller s Note Recommendation 6 in the draft report was revised in the final report. B-5