U.S. Department of Housing and Urban Development District Office of the Inspector General Office of Audit Richard B. Russell Federal Building 75 Spring Street, SW, Room 330 Atlanta, GA 30303-3388 (404) 331-3369 January 16, 2002 2002-AT-1806 MEMORANDUM FOR: Virginia Peck, Director, Community Planning and Development, Knoxville, TN, 4JD FROM: Nancy H. Cooper District Inspector General for Audit–Southeast/Caribbean, 4AGA SUBJECT: Citizen’s Complaint Chattanooga Neighborhood Enterprise, Inc. (CNE) Chattanooga, Tennessee In response to a citizen’s complaint, the Office of Inspector General (OIG) conducted an audit survey of CNE’s operations. Our review focused primarily on CNE’s HOME and Community Development Block Grant (CDBG) Programs. We also reviewed other activities as appropriate. Our objectives were to determine if the complainant’s allegations were valid and if additional audit work was warranted. BACKGROUND The complainant made numerous allegations regarding CNE and City officials. The primary allegation was that CNE and City of Chattanooga officials improperly forced homeowners, primarily elderly homeowners, to sell their properties to CNE or other entities. The allegations generally centered around CNE or persons affiliated with CNE or the City purchasing properties, rehabilitating them, and reselling them at much higher prices in an isolated area of North Chattanooga. The complainant also alleged that a partner of Tremont Street Properties, Inc., used his positions as a City housing board member and a CNE employee to harass a citizen into selling properties. Allegedly, the individual used his positions to direct City building inspectors to fine the owner for property code violations, which would require expensive property repairs. Further, it was alleged that a meeting took place with City officials and others at which the owner was pressured to sell the properties to Tremont. Exit CNE held partnership interests with several for-profit companies. The complainant believed there might be problems with the creation and operation of the companies. HUD provided CDBG and HOME funds to the City of Chattanooga, Tennessee, to administer various HUD approved programs. The City entered into an agreement with CNE whereby the City would provide grant funds to CNE to administer affordable housing programs. During our review period, the City provided the following funds to CNE: CDBG HOME TOTAL FY (million) (million) (million) 1999 $1.8 $1.5 $3.3 2000 1.8 1.3 3.1 2001 1.1 1.3 2.4 SCOPE AND METHODOLOGY We focused our review primarily on CNE’s CDBG and HOME Programs, but also reviewed other areas to address the allegations and other concerns. Allegations that were not relative to HUD programs or were insignificant, we did not review. To accomplish our objectives, we interviewed the complainant, CNE staff, City of Chattanooga, Tennessee staff, and others as necessary. We also reviewed documents obtained from the complainant, CNE, the City and others. We also: - Inspected a sample of properties to assess the quality of CNE’s rehabilitation work; - Interviewed the seller and reviewed documentation regarding the sale of properties to Tremont Street Properties, Inc.; - Reviewed loan origination for CNE’s homeownership rehabilitation loans; - Reviewed the corporate structure of CNE’s partnership interests to determine the risk, if any, to HUD; and, - Reviewed the purchase and subsequent sale of HUD foreclosed properties. Our survey generally covered the period July 1, 1998, through June 30, 2001. We extended the review to other periods when appropriate. We conducted our survey from June 28, 2001, through August 30, 2001. We conducted our review in accordance with generally accepted government auditing standards. SUMMARY We found that CNE generally administered its affordable housing programs in compliance with HUD requirements. However, during its fiscal year ended June 30, 2001, CNE inappropriately charged $15,900 of ineligible administrative expenses to the programs. As discussed in the Finding, this occurred because CNE did not have adequate written procedures for allocating 2 Exit program costs, and staff misunderstood management’s oral instructions. Also, CNE inadvertently submitted duplicate claims for reimbursement. We believe these were isolated instances and were not intentional program violations. However, because the funds were misspent, they were not available for the benefit of the intended recipients. The allegation that a partner of Tremont Street Properties, Inc., used his positions as a City housing board member and a CNE employee to direct inspectors to fine the owner for code violations was not valid. The seller stated that he was never fined for code violations. Our review of City records did not indicate inspectors harassed the owner. The seller did confirm that a meeting was held at which he felt pressured to sell the properties. However, the purchaser claimed the sale of the properties was not discussed at the meeting, and no notes were maintained from the meeting. Thus, we could not substantiate whether the allegation was valid. The Tremont partner was not a CNE employee at the time the properties were sold. Thus, he did not use his position as a CNE employee to force the sale. Since he was a City housing board member at the time, his involvement in the purchase of the properties was a conflict of interest. We found that although CNE could improve its rehabilitation work, it was acceptable. We also found no deficiencies with respect to either CNE’s loan origination activities or its purchase and subsequent sale of HUD foreclosed properties. We did not find any concerns with CNE’s partnership interests in the for-profit companies. Details of our finding and recommendations are in Appendix A. We recommended that you require the City of Chattanooga to ensure the $15,900 was repaid to the programs and that you require CNE to develop and implement detailed procedures to ensure only eligible expenses were charged to its programs. In response to our draft report, CNE agreed with the recommendations , repaid the $15,900, and revised its written policies and procedures. Based on this response, no further action is required of you or of CNE. We provided a copy of this memorandum to CNE and the City of Chattanooga. If you have any questions, please contact me at (404) 331-3369 or Gerald Kirkland, Assistant District Inspector General, at (865) 545-4368. Appendices: A – Finding and Recommendations B – CNE Comments C – HUD Comments D – Distribution 3 Exit Appendix A FINDING AND RECOMMENDATIONS Finding – CNE Charged $15,900 of Ineligible Expenses to Its Programs CNE charged $15,900 of ineligible expenses to its affordable housing programs. This occurred because CNE did not have adequate written procedures for allocating program costs and staff misunderstood management’s oral instructions. Also, CNE inadvertently submitted claims for costs that had previously been reimbursed by the City. As a result, the funds were not available for the benefit of the intended recipients. The City of Chattanooga executed agreements with CNE wherein the City provided CDBG and HOME funds to CNE for its affordable housing programs. The agreements required CNE to expend funds only for eligible direct and indirect expenses. We reviewed CNE’s Time and Mileage Reports for the fiscal year ended June 30, 2001, to determine their eligibility. We determined that CNE improperly charged $5,400 and $400 of administrative charges to the CDBG and HOME Programs, respectively. The costs were associated with other CNE activities; however, CNE inappropriately allocated them to the CDBG and HOME Programs. Thus, CNE violated its agreements with the City. We believe these were isolated instances that occurred because CNE did not have adequate written procedures for allocating costs, and accounting department staff misunderstood management’s oral instructions. CNE recognized the problem and prior to our completing fieldwork, began utilizing a computer software package for its time and mileage charges. CNE also began addressing weaknesses in its written procedures. We also found that in fiscal year 2001 CNE submitted claims and was reimbursed $10,100 for CDBG Program costs which the City had already reimbursed. We believe CNE inadvertently submitted the claims. Because the costs are immaterial compared to CNE’s total funding, we did not expand our review to other fiscal years. CNE Comments In its December 13, 2001, response to the draft report, CNE agreed with the finding and recommendations. CNE provided a copy of a $15,900 check payable to the City of Chattanooga showing repayment of the ineligible costs. CNE also provided evidence of revised procedures for employee time charges. Excerpts from CNE’s response are included as Appendix B. We did not include a copy of the revised procedures, however they are on file and available for review. HUD Comments In its November 13, 2001, response to the draft report, HUD generally agreed with the finding, suggesting minor changes to the finding and a revision to the draft recommendations. HUD’s response is included as Appendix C. 4 Exit OIG Response to Comments All necessary corrective actions have been taken to address our recommendations. Recommendations: We recommend you: 1A. Advise the City of Chattanooga of the finding, and require them to contact CNE for repayment of the $15,900 of ineligible expenses. (Action completed) 1B. Require CNE to develop improved written procedures to ensure only eligible expenses are charged to its programs and to ensure the expenses are properly allocated. (Action completed) 5 Exit Appendix B CNE COMMENTS 6 Exit Appendix C HUD COMMENTS 7 Exit 8 Exit Appendix D DISTRIBUTION Chattanooga Neighborhood Enterprise, Inc. Mayor, City of Chattanooga, Tennessee 37402 Secretary, S Deputy Secretary, SD (Room 10100) Chief of Staff, S (Room 10000) Assistant Secretary for Administration, S (Room 10110) Acting Assistant Secretary for Congressional and Intergovernmental Relations, J (Room 10120) Deputy Assistant Secretary, Office of Public Affairs, S, (Room 10132) Deputy Assistant Secretary for Administrative Services, Office of the Executive Secretariat, AX (Room 10139) Deputy Assistant Secretary for Intergovernmental Relations, Acting Deputy Chief of Staff, S (Room 10226) Deputy Chief of Staff for Policy, S (Room 10226) Deputy Chief of Staff for Programs, S (Room 10226) Special Counsel to the Secretary, S (Room 10234) Senior Advisor to the Secretary, S Special Assistant for Inter-Faith Community Outreach, S (Room 10222) Executive Officer for Administrative Operations and Management, S (Room 10220) General Counsel, C (Room 10214) Assistant Secretary for Housing/Federal Housing Commissioner, H (Room 9100) Assistant Secretary for Policy Development and Research, R (Room 8100) Assistant Secretary for Community Planning and Development, D (Room 7100) Assistant Deputy Secretary for Field Policy and Management, SDF (Room 7108) Office of Government National Mortgage Association, T (Room 6100) Assistant Secretary for Fair Housing and Equal Opportunity, E (Room 5100) Director, Office of Departmental Equal Employment Opportunity, U Chief Procurement Officer, N (Room 5184) Assistant Secretary for Public and Indian Housing, P (Room 4100) Director, Office of Departmental Operations and Coordination, I (Room 2124) Office of the Chief Financial Officer, F (Room 2202) Chief Information Officer, Q (Room 3152) Acting Director, HUD Enforcement Center, V, 1250 Maryland Avenue, SW, Suite 200 Acting Director, Real Estate Assessment Center, X, 1280 Maryland Avenue, SW, Suite 800 Director, Office of Multifamily Assistance Restructuring, Y, 1280 Maryland Avenue, SW, Suite 4000 Inspector General, G (Room 8256) 9 Exit Regional Director, 4AS Area Coordinator, Knoxville Area Office, 4JS Director, Office of Community Planning and Development, 4JD Audit Liaison Officer, 3AFI Audit Liaison Officer, Office of Public and Indian Housing, PF (Room P8202) Departmental Audit Liaison Officer, FM (Room 2206) Acquisitions Librarian, Library, AS (Room 8141) Counsel to the IG, GC (Room 8260) HUD OIG Webmanager-Electronic Format Via Notes Mail (Cliff Jones@hud.gov) Public Affairs Officer, G (Room 8256) Stanley Czerwinski, Associate Director, Resources, Community, and Economic Development Division, U.S. GAO, 441 G Street N.W., Room 2T23, Washington DC 20548 The Honorable Fred Thompson, Ranking Member, Committee on Governmental Affairs, United States Senate, Washington DC 20510-6250 The Honorable Joseph Lieberman, Chairman, Committee on Governmental Affairs, United States Senate, Washington DC 20510-6250 The Honorable Dan Burton, Chairman, Committee on Government Reform, United States House of Representatives, Washington DC 20515-6143 The Honorable Henry A. Waxman, Ranking Member, Committee on Government Reform, United States House of Representatives, Washington, DC 20515-4305 Ms. Cindy Fogleman, Subcommittee on Oversight and Investigations, Room 212, O'Neil House Office Building, Washington, DC 20515-6143 Steve Redburn, Chief, Housing Branch, Office of Management and Budget, 725 17th Street, NW, Room 9226, New Executive Office Bldg., Washington, DC 20503 Sharon Pinkerton, Deputy Staff Director, Counsel, Subcommittee on Criminal Justice, Drug Policy and Human Resources, B373 Rayburn House Office Bldg., Washington, DC 20515 Andy Cochran, House Committee on Financial Services, 2129 Rayburn House Office Bldg, Washington, DC 20515 10 Exit
Citizen's Complaint Chattanooga Neighborhood Enterprise, Inc. (CNE), Chattanooga, TN
Published by the Department of Housing and Urban Development, Office of Inspector General on 2002-01-16.
Below is a raw (and likely hideous) rendition of the original report. (PDF)