oversight

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)

                                                      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.




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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




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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




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                                                                                   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.




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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)




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               Appendix B

CNE COMMENTS




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               Appendix C

HUD COMMENTS




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                                                                                      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)




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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




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