oversight

Review of Program Recipients' Complaints, State of Maine FIX ME Program, Maine State Housing Authority, Augusta, Maine

Published by the Department of Housing and Urban Development, Office of Inspector General on 2000-09-25.

Below is a raw (and likely hideous) rendition of the original report. (PDF)

Telephone: (617) 565-5259      http://www.hud.gov/oig/oigindex.htm             Fax: (617) 565-6878
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                                                  U.S. Department of Housing and Urban Development
                                                  New England Office of District Inspector General
                                                     for Audit, 1AGA
                                                  Thomas P. O’Neill ,Jr. Federal Building
                                                  Room 370
                                                  10 Causeway Street
                                                  Boston, Massachusetts 02222-1092




September 25, 2000                                Audit Memorandum
                                                  No: 00-BO-255-1803


MEMORANDUM FOR: James Barnes, Office of Community Planning and
                 Development, 1AD




FROM: Stephen D. King, Acting District Inspector General, Office of Audit, 1AGA


SUBJECT:        Review of Program Recipients’ Complaints
                State of Maine FIX ME Program
                Maine State Housing Authority
                Augusta, Maine

In response to several complaints received from program recipients (homeowners), we
performed a review of the Maine State Housing Authority’s (MSHA) FIX ME Program. Our
objective was to evaluate MSHA’s administration of the program.

The complainants alleged the following in regards to the FIX ME Program: shoddy workmanship,
violations of local codes, incomplete and illegal electrical work, coercion to pay contractors for
unsatisfactory work, and lack of adequate inspections. We determined that, although most of the
homeowners (1999 loan recipients) were satisfied with the program, there were still problems that
needed to be corrected. Our review identified deficiencies in the following areas: contractors did
not obtain the required local building permits and local building inspections, work write-ups/cost
estimates were not prepared by CAP agencies, one CAP agency did not properly document the
required inspections of repair work, and MSHA’s monitoring reviews of CAP agencies (which
administer the day to day operations of the program) were limited in scope and did not disclose
the type of problems identified by the complainants. In our opinion, the overall design and
structure of the FIX ME Program allowed these problems to occur because of a lack of adequate
controls. MSHA needs to improve and standardize their procedures, and establish clear lines of
accountability to prevent similar problems from recurring.
Your office issued a Monitoring Review report on the FIX ME Program in March 1999. This
report addressed the following deficiencies:

        •   Lack of sufficient oversight of CAP agencies by MSHA.
        •   Inadequate program complaint resolution procedures.
        •   Improper charging of management fees to homeowners.
        •   Use of HOME funds for ineligible activities (garage construction).
        •   Contractors not adhering to local building codes and obtaining permits.
        •   Lack of detailed work specifications, cost estimates, and cost reasonableness
            determinations for repair projects.

At the time of our review, all of the findings and recommendations remained outstanding except
for the 2 monetary findings which were recently resolved between your office and MSHA:

        Your office’s Monitoring Review determined that CAP agencies charged “management
        fees” to homeowners; up to 8% of the loan or $400, whichever was greater (Finding
        No.2 - Improper Charging of Management Fees). Your review initially concluded that
        these fees were improper charges to the homeowner, especially since, in your office’s
        opinion, the management services provided by the respective CAP agency were
        inadequate. Since January 1999, MSHA has agreed to no longer charge homeowners
        this management fee. On August 31, 2000, your office notified MSHA that it was not
        required to refund the management fees. Since there was no explicit prohibition against
        charging these fees, MSHA had acted in good faith in interpreting the applicable criteria.
        MSHA agreed to change its procedures and discontinue charging this fee to
        homeowners. This issue has been resolved.

        Your office’s Monitoring Review also noted that MSHA had authorized the construction
        of 37 new garages ($209,811), prior to October 1998 (Finding No.3 - Ineligible
        Projects/Garages). Your office’s report concluded that construction of new garages did
        not constitute reasonable housing improvements, and were not an appropriate use of
        Federal HOME Funds. MSHA discontinued construction of garages as of January 1,
        1999 after a meeting with HUD/CPD in October 1998. On July 24, 2000 MSHA
        notified HUD/CPD that they had reimbursed the Federal HOME Program $209,811 for
        work performed on newly constructed garages, thereby resolving this issue.

Within 60 days please give us, for each recommendation in this report, a status report on: (1) the
corrective action taken; (2) the proposed corrective action and the date to be completed; or (3)
why action is considered unnecessary. Also, please furnish us copies of any correspondence or
directives issued because of this review.

If you or your staff have any questions, please contact our office at (617) 565-5259.



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                                        Background

The State of Maine has designated the Maine State Housing Authority (MSHA, 353 Water St.,
Augusta, Maine) as its agency to administer the HOME Program. The FIX ME Program, part of
MSHA’s HOME program, represents a commitment to address a major state housing need,
repairing homes of low and very low-income homeowners. The need for such a program was
identified as a priority by the state’s consolidated housing plan. There were an estimated 85,000
homeowners in the state with incomes of half or less of the median income, including about
30,000 with annual incomes of $10,000 or less. The FIX ME Program is funded by both State
and Federal HOME funds.

MSHA has contracted with 11 Community Action Programs (CAP) agencies and one regional
non-profit organization to deliver the FIX ME Program to qualified applicants. These contracts
stipulate the responsibilities of the CAPs regarding the origination and selling of loans to MSHA.
A total of 3,843 homeowners have received $37.2 million from the inception of the FIX ME
Program in June of 1995 through December of 1999. Out of this total, 2,412 were Federal
HOME subsidized loans. Federal expenditures on these loans were $14.2 million of which $12.9
million represents the Federal subsidy used to reduce the interest rate on each loan, while the
other $1.3 million represents the administrative (project related ‘soft’) costs for the program.

Your office conducted a Monitoring Review of the FIX ME Program in October 1998, as a
result of several complaints by program recipients. The complaints were similar to those received
by HUD/OIG in October 1999. The Monitoring Report, issued in March 1999 by your office,
confirmed the existence of problems noted by the complainants, and concluded that “the State of
Maine was not fulfilling the Federal Statutory requirements of the HOME Program.”

The complainants became concerned that the findings in the Monitoring Report were not properly
addressed and corrected, and that MSHA had refused to acknowledge the existence of some of
the problems. Acting upon these concerns, the complainants contacted members of the Maine
State Legislature and the State of Maine Congressional delegation. The complainants also
requested that our Office initiate a review of the FIX ME Program.

The Business and Economic Development Committee of the Maine State Legislature conducted
an evaluation of MSHA’s FIX ME Program and issued their final report in April, 2000. This
evaluation considered the effectiveness, efficiency, and performance of MSHA in carrying out the
requirements of the FIX ME Program. Their report recommended that MSHA standardize
procedures and/or develop written policies for work plans, complaint process, binding arbitration
for unresolved complaints, and review procedures. These recommendations, if adopted by
MSHA, would address some of the deficiencies identified during our review. MSHA is required
to report the progress made in implementing these recommendations to the committee by
September 15, 2000.



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On March 16, 2000, MSHA placed a moratorium on the FIX ME Program. Maine Governor
Angus King appointed a new Director, Michael L. Finnegan, who commenced duties on April
27, 2000, and will be responsible for developing detailed procedures and plans for a new FIX
ME Program.

                               Scope and Methodology

The purpose of our review was to evaluate MSHA’s administration of the FIX ME Program in
response to the complaints received. To accomplish this objective, we reviewed: applicable
HUD regulations, MSHA’s brochures and procedural guides, monitoring reviews of CAP
agencies, MSHA complaint resolution process, results of MSHA’s FIX ME customer surveys,
and documentation regarding actions taken by MSHA in response to HUD’s monitoring report.
We interviewed FIX ME homeowners to determine whether they were generally satisfied with the
repair work and with the program. We also interviewed MSHA managers and staff who
administer the FIX ME Program to gain an understanding of the program structure and to identify
program procedures, policies, and internal controls.

We selected two CAP agencies, Kennebec Valley CAP (KVCAP) and Penquis CAP (PCAP)
to perform detailed reviews of the FIX ME Program. At the CAP agencies, we reviewed 20
complaints, identified as resolved by MSHA and the CAPs, to confirm the status of resolution
efforts. Our review also included an examination of 20 FIX ME loan files that were originated
after the HUD/CPD Monitoring Report of March 1999, and interviews with homeowners who
received these loans.

Our review was conducted from December 1999 through May 2000, and covered the
operations of MSHA’s FIX ME program from June, 1995 through December 31, 1999. We
expanded the scope of our review as necessary, and our effort was performed in accordance
with generally accepted government auditing standards.

                                     Review Results

MSHA took action on some of the issues disclosed in the HUD Monitoring Review, however,
the FIX ME Program has problems that MSHA still needs to correct through program revisions
and other administrative changes. Our review of loans initiated after the issuance of the CPD
Monitoring Report in March 1999, disclosed several problems in the administration of the
program.

FIX ME Program procedures did not always ensure that the contractor’s work was in
compliance with local building codes and requirements, upon completion of the repair work.
Although CAP agencies certify to MSHA that; “the (repair) work has been completed…in
compliance with…all applicable building codes and housing standards” for each project on
Monthly Completion Certifications, our review disclosed that required building permits had not

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been obtained in 3 of the 9 instances where they were required. At Penquis CAP (PCAP), we
reviewed ten home repair projects and determined that permits were required for three of them.
Of the three permits required, only two were obtained. At Kennebec Valley CAP (KVCAP),
we reviewed ten projects and found that of the six permits required, only four were obtained.
Program procedures used by the CAPs placed the responsibility for obtaining permits and local
building inspections (prior to the start of repair work) primarily with the homeowner, and then
with the contractor. The program did not require CAP agencies to take a proactive approach to
ensure that either the homeowner or the contractor obtained permits and inspections.

Neither PCAP nor KVCAP performed work write-ups or costs estimates for FIX ME repair
work, which would form the comparative basis for determining if the contractor’s bid is
reasonable. Instead, as provided for in the program procedures, they evaluated the contractor’s
bids by completing a “Cost Reasonableness Certification”, a one page form signed by the
homeowner and a CAP agency inspector acknowledging that bids received were reasonable as
to cost. These certifications did not identify the work specifications and detailed cost breakdown
for each repair project. To be allowable under Federal awards, OMB Circular No. A-87 (Cost
Principles for State, Local, and Indian Tribal Governments) requires “costs to be necessary and
reasonable for proper and efficient performance and administration of the Federal award.” A non
profit subrecipient (CAP Agency) must comply with the requirements of OMB Circular No. A-
122 “Cost Principles for Non-Profit Organizations,” which has the same general cost
requirements as A-87 {24 CFR 92.505}. In order to determine if the costs are reasonable
beforehand, the CAPs would have to prepare a cost estimate to establish a baseline for
comparing costs submitted with the contractor bids. In order to prepare a cost estimate, the
CAPs would have to define what work is to be done, i.e., prepare a work write-up.

MSHA (via the CAP agencies) has “empowered” the homeowner with the responsibility of work
write-ups/cost estimates. In correspondence to HUD on this issue in April 1999 MSHA stated:
“(the FIX ME) repair model, which allows homeowners to take the lead in determining the nature
and cost of the work on their homes is different from HUD’s standard model. MSHA’s
approach, a “public assistance” model, allows the homeowner to take the lead in defining the
rehabilitation work to be done and negotiating the price.” The FIX ME program was designed to
assist lower income homeowners who might not have qualified for more traditional bank loans.
These homeowners, in some cases, were unable to satisfactorily identify the rehabilitation work to
be done and estimate the total cost. As a result, the program was placing responsibilities upon
some homeowners who could not properly carry out their assigned responsibilities and
experienced serious problems in doing so.

At KVCAP, we noted that interim and final inspections were not adequately documented. Of ten
project files reviewed, there was no documentation to support interim or final inspections for any
of the projects. Although there were notations in the project files which indicated that KVCAP
technical personnel had visited the clients and reviewed the repair work, none of the interim or
final inspections were properly documented. (KVCAP had documented the initial inspections,

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and believed that this was sufficient for the entire inspection process). KVCAP officials agreed to
document the interim and final inspections in the future.

Our review identified other problems that related directly to the overall structure and operation of
the FIX ME program. In contracting with CAP agencies to carry out the day to day
administration of the program, MSHA delegated responsibilities for complaint resolution to each
CAP. In most cases, CAP agencies devised their own procedures for recording and resolving
complaints and other problems encountered by homeowners with repair work performed by
contractors. MSHA did not have an accurate estimate, at any one time, of the total number and
type of complaints recorded at the CAP agencies. Unless the complainant appealed directly to
MSHA, MSHA was unaware a complaint was even filed. Without the involvement of MSHA in
this resolution process, they could not ensure that complaints from homeowners were resolved on
a timely basis. MSHA monitoring reviews of CAP agencies did not fully explore this area.

We identified as many as 120 complaints or problems of FIX ME homeowners, which was
significantly higher in number than the 57 recorded at MSHA. (Subsequent to the HUD/CPD
Monitoring Review, both KVCAP and PCAP had surveyed their FIX ME clients and identified
problems with some completed projects. These problems were not considered as “complaints”,
and they were included in the total of 120 complaints/ problems we identified). These
complaints/problems were identified from MSHA, KVCAP, and PCAP records.

Another problem area noted was in the payment of contractors for work performed, and also the
determination of the type of repair work to be performed. The current structure of the program
permits the homeowner to have primary responsibility for dealing with the contractor and agreeing
on the type of repair work to be performed. CAP agencies review the estimates of work, but the
contract for the repair work is between the homeowner and the contractor. CAP agencies were
not parties to the repair contract. As a result, CAP agencies were unsure of what control and
authority they had to ensure the contractor would perform the work in a satisfactory manner. If a
homeowner had a problem with the contractor and/or the work that was performed, they were
initially responsible to contact the contractor and request the work be done right. This included
cases where the contractor stated that the repair was complete; if the homeowner was not
satisfied, they were to instruct the CAP agency not to process the final payment, and it was the
homeowner’s responsibility not to deliver the payment to the contractor. Our review determined
that, at least for some homeowners, they were unable to carry out their responsibilities in the
program, as noted in the following example:

        KVCAP Client, MSHA Loan # 16144 - Home repairs included kitchen cabinets, repair
        of roof leak, and installing insulation under mobile home. An inspection by KVCAP of the
        repair work concluded; “ Most of the things the client requested the contractor to do
        were not in the contractor’s estimate and the client requested them while the
        contractor was working on the home.” In a phone interview with HUD/OIG, the
        homeowner stated that the contractor had been paid even though the work performed
        was “not completely satisfactory.” When asked why the contractor was paid for
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        unsatisfactory work, the homeowner responded that the money used to pay the
        contractor was not “their money”, it was KVCAP’s money, and the homeowner could
        not object for work that KVCAP was paying for. In this case, the homeowner did not
        understand that the funds used for payment were indeed from the loan they had obtained,
        and it was the homeowner’s responsibility to identify unsatisfactory work prior to the
        contractor being paid.

In our opinion, more control and authority should be exercised by the CAP agencies and MSHA
in the operation of the program. MSHA needs to revise its monitoring and oversight procedures
for CAP agencies, and develop comprehensive procedures for recording and tracking all FIX
ME complaints. In addition, monitoring reviews of the CAP agencies should be more
comprehensive in scope and be more thorough in identifying program deficiencies. CAP agencies
need to have full authority and exercise a greater degree of control in managing such issues as
work write-ups, final inspections, and payments to the contractor.



Auditee Comments

MSHA agreed to revise the complaint process for FIX ME clients, and to ensure that all required
permits were obtained and inspections performed for all FIX ME loans. For prior FIX ME
projects already completed, MSHA agreed to coordinate its efforts with HUD in determining the
most appropriate way to assure that building permits have been obtained, inspections conducted,
and these actions sufficiently documented. MSHA also agreed to prepare work write-ups (work
specifications/cost estimates) to ensure cost reasonableness for FIX ME projects. MSHA
agreed to require the completion of three documented inspections for each project, and to retain
final payment to the contractor until completion of the final inspection and satisfactory completion
of the project. MSHA noted in their response that it is working closely with HUD/CPD on the
implementation of a new HOME program which will replace the FIX ME Program. This new
program, currently in draft form, will incorporate the requisite program revisions as noted in
MSHA’s response to our report.



OIG Evaluation of Auditee Comments

We believe the actions taken and planned by MSHA will strengthen controls over the FIX ME/
Home program and will correct the identified deficiencies. We recognize the efforts of MSHA in
addressing the conditions cited in the audit finding, and we have amended our recommendations
accordingly.



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Recommendations

We recommend that you:

1A. Resolve all outstanding findings included in the Monitoring Report of March 1999.

1B. Review and concur, as appropriate, with MSHA’s implementation of a new HOME
    program which should address the following program issues:

         •     Monitoring and oversight procedures for CAP agencies.

         •     Developing procedures to record and track all HOME program complaints.

         •     Obtaining copies of required building permits and records of local inspections
               before work is started.

         •     Identifying work specifications and cost estimates prior to solicitation of bids.

         •     Retaining a portion of the final payment to the contractor until completion of the
               final inspection.

         •     Thoroughly documenting the three required inspections of project repair work.

1C. Review and concur with MSHA’s plans to: determine which prior completed projects
    required local building permits and local inspections, ensure the permits are obtained and
    inspections completed, and document the actions in the FIX ME project files.




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                       Attachment A



Auditee Comments




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     Attachment A




10
     Attachment A




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                                                                             Attachment B


Distribution
Deputy Secretary, SD, Room 10100 (1)
Chief of Staff, S, Room 10000 (1)
Special Assistant to the Deputy Secretary for Project Management, SD, Room 10100 (1)
Acting Assistant Secretary for Administration, S, Room 10110 (1)
Assistant Secretary for Congressional and Intergovernmental Relations, J, Room 10120 (1)
Senior Advisor to the Secretary, Office of Public Affairs, S, Room 10132 (1)
Director of Scheduling and Advance, AL, Room 10158 (1)
Counselor to the Secretary, S, Room 10234 (1)
Deputy Chief of Staff, S, Room 10226 (1)
Deputy Chief of Staff for Operations, S, Room 10226 (1)
Deputy Chief of Staff for Policy, S, Room 10226 (1)
Deputy Chief of staff for Program, S, Room 10026 (1)
Deputy Assistant Secretary for Public Affairs, W, Room 10222 (1)
Special Assistant for Inter-Faith Community Outreach, S, Room 10222 (1)
Executive Officer for Administrative Operations and Management, S, Room 10220 (1)
Senior Advisor to the Secretary for Pine Ridge Project, W, Room 10216 (1)
General Counsel, C, Room 10214 (1)
Director, Office of Federal Housing Enterprise Oversight, O, 9th Floor Mailroom (1)
Assistant Secretary for Housing/Federal Housing Commissioner, H, Room 9100 (1)
Office of Policy Development and Research, R, Room 8100 (1)
Inspector General, G, Room 8256 (1)
Assistant Secretary for Community and Development, D, Room 7100 (1)
Government National Mortgage Association, T, Room 6100 (1)
Assistant Secretary for Fair Housing and Equal Opportunity, E, Room 5100 (1)
Chief Procurement Officer, N, Room 5184 (1)
Assistant Secretary for Public and Indian Housing, P, Room 4100 (1)
Chief Information Officer, Q, Room 3152 (1)
Director, Office of Departmental Operations and Coordination, I, Room 2124 (1)
Chief Financial Officer, F, Room 2202 (1)
Director, Enforcement Center, V, 200 Portals Building (1)
Director, Real Estate Assessment Center, X, 1280 Maryland Avenue, SW, Suite 800 (1)
Director, Office of Multifamily Assistance Restructuring, Y, 4000 Portals Building, (1)
Secretary’s Representative, 1AS (2)
Assistant Deputy Secretary for Field Policy and Management, SDF, Room 7108 (2)
Deputy Chief Financial Officer for Finance, EF, Room 2202 (1)
Director, Office of Budget, FO, Room 3270 (1)
Primary Field Audit Liaison Officer, 3AF1(2)
Headquarters Audit Liaison Officer, DOT, (2)
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Departmental Audit Liaison Officer, FM, Room 2206 (2)
Acquisitions Librarian, Library, AS, Room 8141 (1)
Assistant Inspector General for Audit, GA, Room 8286 (1)
Deputy Assistant Inspector General for Audit, GA, Room 8286 (1)
Assistant Inspector General for Investigation, GI, Room 8274 (1)
Appropriate Special Agent-In-Charge, 1AGI (1)
Director, Program Research and Planning Division, GAP, Room 8180 (1)
Director, Financial Audits Division, GAF, Room 8286 (1)
Director, Information Systems Audit Division, GAA, Room 8172 (1)
Counsel to the Inspector General, GC, Room 8260 (1)
Central Records, GF, Room 8256 (4)
Semi-Annual Report Coordinator, GF, Room 8254 (1)
Office of Inspector General Webmanager - Electronic Format (1)
Public Affairs Officer, G, Room 8256 (1)
Auditee (2)
Deputy Staff Director, Counsel, Subcommittee on Criminal Justice, Drug Policy & Human
Resources, B373 Rayburn House Office Building, Washington, DC 20515

The Honorable Fred Thompson, Chairman, Committee on Governmental Affairs, 340 Dirksen
Senate Office Building, United States Senate, Washington, DC 20510 (1)

The Honorable Joseph Lieberman, Ranking Member, Committee on Governmental Affairs, 706
Hart Senate Office Bldg., United States Senate, Washington,DC 20510 (1)

The Honorable Dan Burton, Chairman, Committee on Government Reform, 2185 Rayburn Bldg.,
House of Representatives, Washington, DC 20515 (1)

Henry A. Waxman, Ranking Member, Committee on Government Reform, 2204 Rayburn Bldg.,
House of Representatives, Washington, DC 20515 (1)

Ms. Cindy Fogleman, Subcommittee on Oversight and Investigations, Room 212, O’Neill House
Office Building, Washington, DC 20515 (1)

Olympia Snowe, U.S. Senator, 250 Russell Senate Office Building, Washington, DC 20510

Susan Collins, U.S. Senator, 172 Russell Senate Office Building, Washsington, DC 20510

Thomas Allen, U.S. Representative, 1717 Longworth House Office Building, Washington, DC
20515

John Baldacci, U.S. Representative, 1740 Longworth House Office Building, Washsington, DC
20515

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Director, Housing and Community Development Issue Area, United States General Accounting
Office, 441 G Street, NW, Room 2474, Washington, DC 20548 (Attention: Judy England-
Joseph) (1)

Steve Redburn, Chief, Housing Branch Office of Management & Budget, 725 17th Street, NW,
Room 9226, New England Executive Office Building, Washington, DC 20503 (1)

The Honorable Wayne Allard, Chairman, Subcommittee on Housing and Transportation, 513
Hart Senate Office Building, Washsington, DC 20510

Clinton C. Jones, III, Senior Majority Counsel, Committee on Banking and Financial Services,
B-303 Rayburn Building, U.S. House of Representatives, Washington, DC 20515




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