oversight

Congressional Inquiry, Neighborhood Housing Services, Inc., Tulsa, Oklahoma

Published by the Department of Housing and Urban Development, Office of Inspector General on 2001-04-06.

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

                                                       U.S. Department of Housing and Urban Development
                                                       Southwest District Office of Inspector General
                                                       819 Taylor Street, Suite 13A09
                                                       Fritz G. Lanham Federal Building
                                                       Fort Worth, Texas 76102
                                                       (817)978-9309 FAX (817)978-9316
                                                       http://www.hud.gov/oig/oigindex.html



April 6, 2001                                           2001-FW-1804

MEMORANDUM FOR:                 David Long
                                Director
                                Community Planning and Development Division, 6ID

                        /signed/
FROM:                   D. Michael Beard
                        District Inspector General for Audit, 6AGA

SUBJECT:                Congressional Inquiry
                        Neighborhood Housing Services, Inc.
                        Tulsa, Oklahoma


At the request of Congressman Steve Largent, we looked into allegations that Neighborhood Housing
Services, Inc. (NHS) made against the City of Tulsa. NHS, through its attorney, alleged:

    1. The City owes it over $400,000 for expense reimbursements for carrying out the City’s CDBG
       and HOME Programs and although NHS is fully entitled to these payments, the City will not
       pay NHS. The City requires additional documentation to pay NHS but will not specify what
       additional documentation is needed.
    2. The City unfairly requires NHS to remit program income collected by NHS before it can pay
       anymore program expenses.
    3. The City discriminated against NHS by withholding payments and requiring more
       documentation than required of other subrecipients. This situation is an orchestrated attempt to
       drive NHS out of business.
    4. It is not acceptable to cancel the CDBG and HOME contracts for failure to reimburse program
       income funds when other nonprofit agencies are not also being required to make the same
       reimbursements to their program income accounts.

In completing our review, we talked to representatives of NHS, City officials, and HUD’s Community
Planning and Development staff in Oklahoma City, Oklahoma. We reviewed materials such as
correspondence and payment requests provided by NHS, the City, and HUD. Our review covered the
1997, 1998, 1999, and 2000 program years.

If you have any questions, please call Jerry R. Thompson, Assistant District Inspector General for
Audit, on (817) 978-9309.
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                                             SUMMARY

We could not validate the allegations against the City. NHS submitted reimbursement requests to the
City but they lacked sufficient documentation to support full payment of each request. The City
requested additional documentation, but NHS did not provide it. The City asked NHS to remit
program income collected in accordance with the terms of the contract. Although NHS agreed it had
collected program income and owed it to the City, NHS chose not to remit the funds to the City. We
found no evidence to indicate the City discriminated against NHS by requiring more documentation than
required of other subrecipients or to indicate an orchestrated attempt to run NHS out of business. In
addition, we concluded the termination clause in the contract permits the City to terminate the contract
when the City determines sufficient cause exists, such as not remitting program income in a timely
manner.

                                          BACKGROUND

NHS is a state chartered, private, nonprofit corporation. The Neighborhood Reinvestment Corporation
created NHS to provide loans to homeowners in selected, older, established neighborhoods. Congress
established the Neighborhood Reinvestment Corporation in 1978 to promote reinvestment in older
neighborhoods by local financial institutions in cooperation with the community, residents, and local
governments. NHS makes loans to homeowners within the Tulsa city limits to rehabilitate and preserve
their neighborhoods and their homes. NHS secures loans with first, second, or third mortgages on the
properties. In 1994, the City of Tulsa designated NHS as a Community Housing Development
Organization. It is located at 502 S. Main Street, Suite 304, Tulsa, Oklahoma.

During the period reviewed, NHS had two HOME contracts, one for 1996 funds executed
February 12, 1998, and one for 1997 funds executed March 4, 1999. In addition, NHS had one
CDBG contract with the City for the 24th program year dated November 23, 1998. The HOME
contracts were for NHS to provide downpayment/closing assistance and lease/purchase assistance for
eligible properties. Each HOME contract requires NHS to act as a developer to purchase a maximum
of five houses, and if required, rehabilitate homes selling in the range of mid $30,000 to low $40,000.
The HOME contracts required NHS to arrange affordable financing with local lenders and resell the
homes purchased to qualified buyers. The CDBG contract was to provide housing rehabilitation loans
for approximately ten low- to moderate-income households. Under the contracts, the City would
reimburse NHS for administrative expenses based on a percentage of program costs. The contracts
required NHS to remit all program income to the City on a monthly basis. The City would use program
income to fund future NHS program activities.

Under the 1996 HOME contract, the City awarded NHS $232,525 to finance homebuyer program
costs and a maximum of $30,780 for administrative expenses. For the 1997 HOME contract, the City
awarded $178,533 for homebuyer program costs and $30,067 for administrative expenses. The City
awarded NHS $246,779 in CDBG funds including a maximum of 15 percent for administrative
expenses. The City paid the maximum administrative costs for the 1996 HOME contract. The 1996
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HOME contract and the CDBG contract expired on September 30, 1999. The 1997 HOME contract
was for the period October 1, 1998, through September 30, 2000. The City terminated this contract
on February 11, 2000, because NHS failed to remit program income and provide required information.

                                        RESULTS OF REVIEW

Allegation 1: The City owes NHS over $400,000 for expense reimbursements for carrying out the
City’s CDBG and HOME Programs and although NHS is fully entitled to these payments, the City will
not pay NHS. The City requires additional documentation to pay NHS but will not specify what
additional documentation is needed.

Results: The allegation is not valid.

Based on our review of $349,643 in unpaid requisitions provided by NHS and the City, NHS
submitted $155,745 in requisitions for HOME Program costs, $56,733 in HOME Program
administrative costs, $83,983 in CDBG Program costs, and $53,182 in CDBG administrative costs.
The requisitions for program costs were not sufficiently documented for the City to pay the requests.
The contracts between the City and NHS limit the amount of administrative cost under each contract to
$30,780 for the 1996 HOME contract, $30,067 for the 1997 HOME contract, and $32,189 for the
CDBG contract. These amounts are generally consistent with HUD limitations on administrative costs
for HOME and CDBG Programs. Based on the City’s records, it has already paid the $30,780 in
administrative costs for the 1996 contract.

On August 13, 1999, NHS submitted a voucher for payment of expenses at the Northgate Housing
Development Project. On August 24, the City returned it and asked for sufficient backup
documentation so that the City could process the claim. On October 20 1999, NHS again requested
reimbursement for rehabilitation costs on the project. On November 19, 1999, the City responded and
said that the majority of charges against the six properties in the development were not documented
and, based on an inspection of the six properties, listed serious deficiencies in the condition of each
property. In addition, the request was for final payment when work was still uncompleted. NHS
responded that it was a request for final payment and that work was still ongoing. Further, NHS said
that it believed that the HOME contract was an “Advance Basis contract, and therefore projects did not
have to be completed before submitted request for ‘advance’ funds.” NHS was aware that the City
funded projects on a reimbursement basis since March 1999.

Our review of the request for payment of $130,345 in rehabilitation costs on the Northgate Housing
Development showed that NHS did not fully document the costs claimed. NHS submitted invoices
from its contractor for work performed at six houses. The invoices did not always show the work done
on each house. For example, the description of the work was not specific and was very general, such
as, “remodel and repair work,” “miscellaneous equipment and material purchases,” and “subcontractor
invoice payment request, partial invoice.” In addition, instead of preparing an invoice listing the work
done at each site and the related costs, the contractor submitted an invoice with the total costs and
allocated the costs among the six properties equally. In our opinion, such descriptions do not
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adequately detail actual work done at each property. This method of allocating costs does not capture
the actual costs associated with rehabilitating each property. HUD and the City accumulate actual costs
by property.

The other HOME reimbursement request for $25,400 was also unsupported. The City raised some
issues about the request. NHS did not address the City’s concerns in its response.

NHS had another outstanding reimbursement request for $83,983 under the CDBG contract. After
reviewing the reimbursement request, the City identified specific records needed to complete processing
the request. In a November 19, 1999 letter, the City asked for a copy of the contract between one
homeowner and the rehabilitation contractor. The City also asked specific questions about the work
done by the contractor, the costs claimed, and copies of the owners release or final inspection signed by
the owner and contractor. In reply, NHS said the rehabilitation work was not complete. They
promised to provide the requested documentation when the contractors completed their work. NHS
did not say anything about providing a copy of the requested contract.

Outstanding administrative expense requests for the HOME and CDBG Programs total $109,915.
NHS is entitled to only $62,256 because this is the maximum administrative expense allowed under
both contracts. The City has not paid those requests because NHS has not submitted program income
as required and has refused to adequately document the program cost reimbursement requests. City
officials do not want to spend anymore money on NHS until it provides a full accounting of the costs
incurred for program operations as well as the program income due the City.

The City notified NHS about the documentation needed to verify program costs on November 16,
1998. The City sent NHS copies of the appropriate Office of Management and Budget Circulars
governing grant costs. The contract specified that NHS must comply with the requirements in those
circulars. Specifically, the City provided copies of:

OMB A-87, Principles and Standards for Determining Allowable Costs.
OMB A-110, Bonding and Insurance, Program Income, Cash Deposits, and Record Keeping.
OMB A-122, Cost Principles for Nonprofit Organizations.
OMB-133, Audit Requirements.

By letter dated April 8, 1999, the City sent NHS instructions on preparing reimbursement requests.
The letter said, in response to a NHS letter:

    “requirements have changed since the beginning of this program and in the past we’ve [the City]
    accepted requests without backup documentation. This is true, however mistakes in estimates,
    return of overages, and audit requirements have caused changes. …my concerns are to assist
    Neighborhood Housing Services in completing HOME and CDBG housing activities as quickly and
    as efficiently as possible. …please understand that each HOME request submitted must provide
    proof of cost. [The City] is required to verify monies going out to projects are real costs and in
    order to do that, real documentation must be provided.”
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We believe the City showed it was willing to resolve the situation and pay NHS what it owes.
However, NHS did not cooperate.

By letter dated April 20, 2000, the City proposed that NHS make specifically requested records
available at one of its attorneys’ office or another mutually acceptable site. The City also requested
access to eight specifically identified houses so that it could inspect them. The City agreed to provide a
photocopier so that it could make copies of the records. The City asked that the NHS Executive
Director not attend to avoid the possibility of a confrontation between representatives of NHS and the
City. In reply, NHS said that the Executive Director must attend. By letter dated May 2, 2000, the
City agreed.

In a letter dated May 10, 2000, NHS said it would make the records available May 11 at 1:00 pm.
NHS said the City must complete its review by 5:00 pm on May 12. The NHS required the City to
complete its inspection of the houses by Monday morning, May 15. NHS also specified that the City
pay all pending reimbursement requests by May 15 at 5:00 pm. In a letter dated May 11, NHS denied
the City access to the records because an individual delivering the photocopier purportedly said that a
new agency replacing NHS would be given the copies of the records. By contract, the City has access
to NHS’s HOME Program records. Denying the City access was a violation of the contract.

Allegation 2: The City unfairly requires NHS to remit program income collected by NHS before it
can pay anymore program expenses.

Results: The allegation is not valid.

The HOME and the CDBG contracts specifically require NHS to remit program income to the City.
The HOME contracts require NHS to remit all program income collected during the previous month to
the City by the 5th workday of each month. The CDBG contract requires NHS to remit all program
income received during each month to be remitted to the City by the 15th workday of the following
month. As indicated above, the primary reason the City has not paid NHS the amounts requested is
that the requests are not sufficiently documented to identify the work completed on the properties.

NHS admitted it owes program income to the City. On November 2, 1999, NHS indicated in a letter
to the City it owed the City approximately $146,800 but said it was unable to repay the entire amount
immediately because it would put a severe strain on its mission and charter. The letter requested the
City to permit NHS to pay the debt on or before December 10, 1999. Then, in its letter of December
9, 1999, NHS told the City it owed about $106,000 in program income and would remit this on or
before January 16, 2000. However, it did not remit the funds. The City also requested documentation
to establish the accuracy of the amount of program income, but NHS did not provide this either.

Allegation 3: The City discriminated against NHS by withholding payments and requiring more
documentation than required of other subrecipients. This situation is an orchestrated attempt to drive
NHS out of business.
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Results: We could not validate the allegation.

We could not find any evidence of discrimination or an orchestrated attempt to drive NHS out of
business. The City of Tulsa appeared to apply the same documentation requirements to all
subrecipients. The City’s documentation requirements conform to federal government requirements in
requiring adequate documentation for payments and income.

Our review of payment requests submitted by another subrecipient showed that its requests were
adequately documented. In support of its reimbursement request, the subrecipient provided copies of
the purchase settlement statement, a copy of the deed, the contract with the rehabilitation contractor, a
detailed list of work to be performed, rehabilitation expenses listed by individual property, inspection
reports on the property, and notarized requests from the contractor for payment of services rendered.
We also examined a subrecipient remittance of program income. It was made within a month of the sale
of the property. The level of documentation required equaled that required of NHS. The City withheld
payments because NHS would not provide required documentation supporting its reimbursement
requests. Withholding payments in this case is not discrimination. The City is accountable to HUD for
the use of federal funds and must assure that they are used appropriately.

NHS filed a discrimination complaint with HUD’s Office of Fair Housing and Equal Opportunity. That
Office is investigating the complaint.

Allegation 4. It is not acceptable to cancel the CDBG and HOME contracts for failure to reimburse
program income funds when other nonprofit agencies are not also being required to make the same
reimbursements to their program income accounts.

Results: The allegation is not valid.

The City of Tulsa terminated the 1997 HOME contract on February 11, 2000. The 1996 HOME and
CDBG contracts expired on September 30, 1999. The City terminated the contract because NHS
failed to comply with the terms and conditions of the contract. Specifically, NHS did not provide
information and payments required by the contract. The City was justified in terminating the HOME
contract. Further, other subrecipients are required to remit program income on a monthly basis.

While the City terminated the contract on February 11, 2000, it reminded NHS as early as June 30,
1999, and again on October 14, 1999, that termination of the contract was possible if NHS did not
comply with its terms. In that letter, the City officially notified NHS that it was in noncompliance with its
contract. The City added that noncompliance could result in contract termination. Further, the City
asked NHS to remit all program income generated and appropriate documentation supporting sales or
rentals of HOME assisted properties. As indicated above, NHS admitted it owed the City program
income but did not remit it.
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The City terminated the contract as provided for in the contract. The contract states, “If, through any
cause, Contractor or City shall fail to fulfill in a timely and proper manner their obligations under this
contract, or if Contractor or City shall violate any of the covenants, agreements, or stipulations of this
contact, City or Contractor shall thereupon have the right to terminate this contract by giving written
notice of such termination and specifying the effective date thereof, at least five days before the effective
date of such termination. In such event, all finished or unfinished documents, data, studies, surveys,
drawings, maps, models, photographs and reports prepared by Contractor under this contract shall
become property of City. Contractor shall be entitled to receive just and equitable compensation for
any work satisfactorily completed hereunder.” The contract provides that the contractor shall remit to
the City’s Finance Department by the 5th working day after the end of each month, a check equal to the
amount of program income received by Contractor during the previous month.

According to City records, NHS remitted HOME program income in December 1997, May 1998, and
July 1999. NHS remitted no other HOME program income during the period October 1997 through
June 2000. Except for the month of April 2000, the other subrecipient remitted program income each
month during the same period. NHS remitted $18,578 in HOME program income while the other
subrecipient remitted almost $4.6 million during the same period.
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DISTRIBUTION

Secretary's Representative, 6AS
Comptroller, 6AF
Director, Accounting, 6AAF
Director, Office of CPD, 6AD
Deputy Secretary, SD (Room 10100)
Chief of Staff, S (Room 10000)
Office of General Counsel, C (Room 10214)
Assistant Secretary for Housing/FHA, H (Room 9100)
Assistant Secretary for CPD, D (Room 7100)
Assistant Secretary for Public & Indian Housing, P (Room 4100)
Office of Policy Development and Research (Room 8100)
Assistant Secretary for FHEO, E (Room 5100)
A/S for Congressional and Intergovernmental Relations, J (Room 10120)
Assistant Secretary for Administration, A (Room 10110)
Assistant Secretary for Public Affairs, W (Room 10222)
FTW ALO, AF (2)
CPD ALO, DOT (Room 7220) (2)
Dept. ALO, FM (Room 2206) (2)
Acquisitions Librarian, Library, AS (Room 8141)
Director, Hsg. & Comm. Devel. Issues, US GAO, 441 G St. NW, Room 2474
      Washington, DC 20548 Attn: Stan Czerwinski
Henry A. Waxman, Ranking Member, Committee on Govt Reform,
      House of Rep., Washington, D.C. 20515
The Honorable Fred Thompson, Chairman, Committee on Govt Affairs,
      U.S. Senate, Washington, D.C. 20510
The Honorable Joseph Lieberman, Ranking Member, Committee on Govt Affairs,
      U.S. Senate, Washington, D.C. 20510
Cindy Fogleman, Subcomm. on Gen. Oversight & Invest., Room 212,
      O'Neill House Ofc. Bldg., Washington, D.C. 20515
The Honorable Dan Burton, Chairman, Committee on Govt Reform,
      House of Representatives, Washington, D.C. 20515
Deputy Staff Director, Counsel, Subcommittee on Criminal Justice, Drug Policy & Human
      Resources, B373 Rayburn House Ofc. Bldg., Washington, D.C. 20515
Steve Redburn, Chief, Housing Branch, Office of Management and Budget
      725 17th Street, NW, Room 9226, New Exec. Ofc. Bldg., Washington, D.C. 20503
Inspector General, G
City of Tulsa
Neighborhood Housing Services, Inc.