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We audited St. Francis Hospital, Inc. because the U.S. Department of Housing and Urban Development (HUD), Office of Hospital Facilities, requested immediate assistance from HUD’s Office of Inspector General (OIG) to review suspected violations of the hospital’s regulatory agreement and rider (including covenants).  Our objective was to determine whether the hospital complied with the executed regulatory agreement and HUD requirements for its Section 242 program.  The review was also consistent with our mission to prevent and detect fraud in HUD programs under OIG’s strategic plan.

The hospital did not comply with the regulatory agreement and Federal regulations.  Specifically, it submitted inaccurate financial information, improperly disbursed mortgage proceeds, incurred an unauthorized liability, and subjected mortgage funds to bank sweeps.  This condition occurred because hospital management did not implement adequate controls and lacked internal controls and written policies and procedures to ensure that the HUD-insured mortgage was administered according to its executed regulatory agreement and HUD requirements for its Section 242 program.  Additionally, members of the hospital’s board of trustees, including its chairman, had potential conflicts of interest through employment with and serving on the board of the bank from which the hospital obtained a line of credit.  As a result, $21.4 million in proceeds from the HUD-insured mortgage and HUD’s collateralized properties were not disbursed properly and the multifamily insurance portfolio was subjected to increased risk.  Also, HUD depended on inaccurate financial information to approve the $29.8 million mortgage increase.

We recommend that HUD’s Office of Healthcare Programs require the hospital to (1) repay $21.4 million in improperly disbursed mortgage funds, (2) resolve the apparent conflicts of interest between its board of trustees members and the bank, and (3) improve its internal controls and implement policies and procedures to provide accurate and complete reporting of financial information to ensure compliance with Federal regulations and HUD requirements.  We also recommend that the Departmental Enforcement Center pursue administrative actions, as appropriate, against the responsible parties for the regulatory violations cited in this report.  Additionally, we recommend that HUD’s Office of General Counsel for Program Enforcement pursue civil remedies, if legally sufficient, against responsible parties.