oversight

The Commonwealth of Virginia, Richmond, Virginia, Did Not Ensure HOME Funds Were Disbursed and Used in Accordane with Federal Regulations

Published by the Department of Housing and Urban Development, Office of Inspector General on 2006-09-18.

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

                                                              Issue Date
                                                                           September 18, 2006
                                                              Audit Report Number
                                                                           2006-PH-1013




TO:        Ronnie Legette, Director, Office of Community Planning and Development,
             Richmond Field Office, 3FDM



FROM:



SUBJECT: The Commonwealth of Virginia, Richmond, Virginia, Did Not Ensure HOME
           Funds Were Disbursed and Used in Accordance with Federal Regulations


                                 HIGHLIGHTS

 What We Audited and Why

            We audited the Commonwealth of Virginia’s (Commonwealth) HOME
            Investment Partnerships program (HOME) as part of our fiscal year 2006 annual
            audit plan. Our audit objective was to determine whether the Commonwealth’s
            Department of Housing and Community Development was properly administering
            its HOME program.

 What We Found


            The Commonwealth did not ensure that HOME funds were disbursed and used in
            accordance with federal regulations. We reviewed project funds disbursed
            through the Commonwealth’s Affordable Housing and Preservation program,
            operating assistance grants awarded to community housing development
            organizations, and downpayment and closing cost assistance provided through the
            Commonwealth’s Single Family Regional Loan Fund. The Commonwealth did
           not always comply with federal regulations and/or its own requirements in its
           disbursements and administration of HOME funds for various purposes. These
           problems occurred because it did not develop and document critical risk
           assessments and implement an adequate monitoring program to ensure that it
           properly administered the HOME program. As a result, HOME funds totaling
           $183,706 were used for ineligible expenses or activities and $527,060 in expenses
           were unsupported. The Commonwealth also accumulated more than $3.2 million
           in administrative funds that should have been used to improve its administration
           of its HOME program and to fund additional eligible HOME projects. Doing so
           would have enabled the Commonwealth’s HOME program to better meet its main
           goal of providing affordable housing for low-income households.

What We Recommend


           We recommend that the director of the Richmond Office of Community Planning
           and Development require the Commonwealth to recover $183,706 it spent on
           ineligible expenses and provide support for $527,060 in expenses or repay the
           amount to the HOME program. In addition, the Commonwealth should use the
           accumulated $3.2 million in administrative funds to improve its monitoring
           program and recommit any excess funds to eligible HOME projects. Lastly, we
           recommend that the Commonwealth create and implement procedures to ensure
           that HOME funds are disbursed and used in compliance with applicable
           regulations.

           For each recommendation without a management decision, please respond and
           provide status reports in accordance with HUD Handbook 2000.06, REV-3.
           Please furnish us copies of any correspondence or directives issued because of the
           audit.

Auditee’s Response


           We discussed the report with the Commonwealth during the audit and at an exit
           conference on August 10, 2006. The Commonwealth provided written comments
           to our draft report on August 23, 2006. The Commonwealth generally concurred
           with our findings and stated that improvements would be implemented to address
           the management challenges noted in our report. The complete text of the
           Commonwealth’s response, along with our evaluation of that response, can be
           found in appendix B of this report.




                                            2
                           TABLE OF CONTENTS

Background and Objectives                                                      4

Results of Audit
      Finding 1: The Commonwealth Did Not Administer Affordable Housing and    5
      Preservation Funds in Compliance with Federal Regulations
      Finding 2: The Commonwealth Did Not Always Administer HOME Operating     12
      Assistance Grants in Compliance with Federal Regulations
      Finding 3: The Commonwealth Did Not Ensure That Downpayment Assistance   16
      Was Awarded in Compliance with Applicable Requirements

Scope and Methodology                                                          20

Internal Controls                                                              21

Appendixes
      A. Schedule of Questioned Costs and Funds to Be Put to Better Use        22
      B. Calculation of Interest to Be Repaid to HUD                           23
      C. Auditee Comments and OIG’s Evaluation                                 24




                                            3
                     BACKGROUND AND OBJECTIVES

The HOME Investment Partnerships program (HOME) was created under Title II of the Cranston-
Gonzalez National Affordable Housing Act, as amended, and is regulated by 24 CFR [Code of
Federal Regulations] Part 92. HOME is the largest federal block grant to state and local
governments designed exclusively to create affordable housing for low-income households.
HOME funds are awarded annually as formula grants to participating jurisdictions. States are
automatically eligible for HOME funds and receive either their formula allocation or $3 million,
whichever is greater. Participating jurisdictions may choose among a broad range of eligible
activities, such as providing home purchase or rehabilitation financing assistance to eligible
homeowners and new homebuyers and building or rehabilitating housing for rent or ownership.
States may also use HOME funds for other reasonable and necessary expenses related to the
development of nonluxury housing, including site acquisition or improvement, demolition of
dilapidated housing to make way for HOME-assisted development, and payment of relocation
expenses.

As a participating jurisdiction, the Commonwealth of Virginia (Commonwealth) administers its
HOME program through the Department of Housing and Community Development. The
Commonwealth received more than $63.2 million in HOME grants from the U. S. Department of
Housing and Urban Development (HUD) over a four-year period.

                            Grant year                  Grant amount
                              2002                       $13,489,000
                              2003                       $15,802,000
                              2004                       $17,603,748
                              2005                       $16,398,717
                              Total                      $63,293,465

The Commonwealth spends its HOME funds on the following major activities:

       •   Affordable Housing Preservation and Production program
       •   Indoor Plumbing Rehabilitation program
       •   Single Family Regional Loan Fund
       •   Community housing development organization operating assistance

In addition, 10 percent of HOME funds are authorized for the Commonwealth’s administrative
costs.

Our objective was to determine whether the Commonwealth properly administered its HOME
program.




                                                4
                                RESULTS OF AUDIT

Finding 1: The Commonwealth Did Not Administer Affordable
Housing and Preservation Funds in Compliance with Federal
Regulations
The Commonwealth did not administer HOME project funds awarded through its Affordable
Housing and Preservation program in compliance with federal regulations. It did not properly
secure project funds for recapture or ensure that project expenditures were eligible, supported,
and made within required timeframes. These problems occurred because the Commonwealth
did not develop and document critical risk assessments and implement an adequate monitoring
program to properly administer its HOME program. As a result, $25,006 in HOME funds were
used for ineligible expenses or activities, and $469,203 was unsupported. The Commonwealth
also accumulated more than $3.2 million in administrative funds that could have been used to
improve its administration of its HOME program and to fund additional eligible HOME projects.



 Disbursements of $319,203
 Were Not Properly Secured for
 Recapture



              The Commonwealth did not properly secure HOME program funds provided to
              Hope Community Builders (Hope), a community housing development
              organization. Hope constructed duplexes at Covenant Heights in Harrisonburg,
              Virginia, but improperly based the amount of the HOME investment subject to
              recapture for 17 homebuyers solely on the downpayment assistance provided to
              the homebuyers and failed to include $319,203 in other HOME assistance in the
              form of loans which the homebuyers were not required to pay back (forgiven
              loans/debt). Regulations at 24 CFR [Code of Federal Regulations]
              92.254(a)(5)(ii) require that HOME investment subject to recapture should be
              based on the entire amount of HOME assistance that enabled the homebuyer to
              buy the dwelling unit. This should include any HOME assistance that reduces the
              purchase price from fair market value to an affordable price. Based on this
              requirement, the Commonwealth should have included $319,203 in forgiven
              loans/debt it provided to homebuyers in addition to the downpayment assistance.
              The mortgage notes executed between Hope and the 17 homebuyers did not
              comply with federal regulations because the notes did not name the
              Commonwealth as a party to the transactions or address the recapture
              requirements pertaining to the $319,203 in additional HOME assistance. In many
              cases, the minimum period of affordability should have also increased for these
              homebuyers because of the additional HOME assistance. Since the



                                               5
             Commonwealth did not comply with the affordability and recapture provisions in
             the Code of Federal Regulations, $319,203 in HOME funds was not secured and
             is at risk if the homebuyers do not comply with affordability requirements.


 Disbursement of $150,000 Was
 Not Supported


             The Commonwealth could not substantiate that $150,000, which it disbursed to
             the Southampton County Assembly (Southampton), a community housing
             development organization, was used for eligible HOME activities. Regulations
             at 24 CFR [Code of Federal Regulations] 92.508(a) require participating
             jurisdictions to establish and maintain sufficient records documenting that
             program requirements were met. Section (a)(3)(ii) requires participating
             jurisdictions to maintain project records on the source and application of funds for
             each project, including supporting documentation.

             In March 2001, the Commonwealth contracted with Southampton to acquire land
             in Boykins, Virginia, and build five houses for low-income families for a total
             cost of $150,000. Although the Commonwealth quickly paid Southampton the
             entire $150,000, it did not perform monitoring to ensure that the funds were spent
             on eligible HOME costs. In 2005, the Commonwealth unsuccessfully attempted
             to contact Southampton to examine its records. Consequently, the
             Commonwealth continues to have no assurance that the $150,000 it disbursed to
             Southampton in 2001 was used for eligible HOME activities.


$430,000 Was Not Spent within
Required Timeframes


             In November 2002, the Commonwealth contracted with Community Housing
             Partners Corporation, a community housing development organization, to
             rehabilitate 72 units at Northway Apartments in Galax, Virginia, for a total of
             $430,000. The Commonwealth disbursed the entire amount to Virginia Housing
             and Development Authority (Virginia Housing), the fund administrator, in March
             2003. Virginia Housing did not disburse any of the HOME funds for the project
             until January 2004. The remaining funds were not completely disbursed until
             December 2005. Virginia Housing did not remit any interest to HUD for the
             extended period the HOME funds were held without being disbursed.
             Regulations at 24 CFR [Code of Federal Regulations] 92.502(c)(2) require that
             funds drawn from the United States Treasury account be expended on eligible
             costs within 15 days. Interest earned beyond 15 days of a disbursement must be
             returned to HUD. The Commonwealth violated these requirements when it did
             not ensure that HOME funds drawn were used on eligible costs within 15 days



                                              6
                  and that the interest earned beyond the 15-day period was returned to HUD. We
                  calculated the interest due HUD at $14,853 (see appendix B for calculation).

    $10,153 in HOME Funds Was
    Spent on an Ineligible Unit



                  The Commonwealth entered into a contract with Community Housing Partners
                  Corporation to rehabilitate 98 units at Meadowview Apartments in Pulaski,
                  Virginia, for a total of $995,000. The contract stated that the 98 units were to be
                  occupied by families at 50 percent of area median income. One family, who had
                  lived at Meadowview since 1990, had an income of more than $78,000, which
                  was well over the income limit of $36,350. The Commonwealth was not aware
                  of this because it did not perform monitoring to ensure that the income levels of
                  all tenants were within the allowable limit before disbursing the HOME funds.
                  HUD Office of Community Planning and Development Notice 98-2 states that if a
                  participating jurisdiction is developing an occupied project in which some of the
                  units are occupied by overincome tenants, it may not invest HOME funds in those
                  units. The Commonwealth violated this requirement because HOME funds were
                  spent on a unit occupied by a family with income in excess of the allowable limit.
                  Because the Commonwealth violated this requirement, approximately $10,153 1 in
                  HOME funds was expended on an ineligible unit.


    The Commonwealth Did Not
    Implement an Adequate
    Monitoring Program


                  The Commonwealth was not able to identify violations of HOME regulations
                  and/or its own procedures because it did not develop and document critical risk
                  assessments and implement an adequate monitoring program to ensure that it
                  properly administered its HOME program. Regulations at 24 CFR [Code of
                  Federal Regulations] 92.504(a) require a participating jurisdiction to manage the
                  day-to-day operations of its HOME program and ensure that HOME funds are
                  used in accordance with all program requirements and written agreements, taking
                  appropriate action when performance problems arise. It further states that the use
                  of subrecipients does not relieve the participating jurisdiction of this responsibility
                  and that the performance of each subrecipient must be reviewed at least annually.
                  In addition, regulations at 24 CFR [Code of Federal Regulations] 92.104 require
                  the Commonwealth to submit a consolidated plan, which must describe the
                  standards and procedures that the state will use to monitor activities carried out in
                  furtherance of the plan and will use to ensure long-term compliance with
                  requirements of the programs involved, including the comprehensive planning
1
    1/98 of $995,000


                                                    7
                   requirements 2 . In its fiscal year 2005 consolidated plan, the Commonwealth
                   stated that it has increased the use of risk assessments to identify program areas or
                   projects in which problems are most likely to occur. It further stated that if
                   necessary, available monitoring and compliance resources can be concentrated on
                   programs or projects that exhibit greater potential for falling out of compliance.

                   Contrary to its 2005 consolidated plan, the Commonwealth did not perform a risk
                   assessment to determine resources it needed to monitor its HOME program, and it
                   performed on-site monitoring reviews of only 3 of 26 community housing
                   development organizations (12 percent) in 2005. As a result, it did not identify
                   violations of HOME regulations and/or its own procedures. For example, the
                   Commonwealth failed to perform monitoring reviews of Southampton for more
                   than four years; consequently, it had no assurance that HOME funds disbursed to
                   the development organization were used for eligible HOME costs. In the case of
                   Meadowview Apartments by Community Housing Partners Corporation, the
                   Commonwealth did not perform monitoring to verify that all of the tenants’
                   income levels were within the allowable limit before committing HOME funds
                   for the project. As a result, HOME funds were expended on an ineligible unit.

    The Commonwealth
    Accumulated $3.2 Million in
    Administrative Funds


                   Our review of data in HUD’s Integrated Disbursement and Information System
                   indicated that the Commonwealth had $3.2 million in administrative funds
                   available to be disbursed as of May 18, 2006.

                    Fiscal year      Amount reserved       Total disbursed      Available to disburse
                       2004            $1,680,385             $51,724                $1,628,661
                       2005            $1,584.884                 $0                 $1,584,884
                                            Total                                    $3,213,545

                   As the table above shows, the Commonwealth has only disbursed $51,724 of the
                   cumulative $3.2 million reserved for fiscal years 2004 and 2005. As a result, there
                   are approximately two years worth of unspent administrative funds for the HOME
                   program. These administrative funds could be used to strengthen the
                   Commonwealth’s administrative procedures pertaining to its HOME program.
                   Part of the strengthening should involve investing time and funds (if needed) to
                   perform and document a comprehensive risk assessment to (1) identify and
                   prioritize HOME program subrecipients/areas requiring monitoring, as well as the
                   extent of monitoring needed; and (2) determine, hire, and maintain the appropriate
                   staffing levels needed to properly administer the HOME program. Any excess
                   funds could be used to fund other eligible HOME projects. Therefore, any funds
2
    24 CFR [Code of Federal Regulations] 91.330



                                                     8
            the Commonwealth does not use to strengthen its monitoring program should be
            reprogrammed for the use of HOME-eligible projects. This would help the
            Commonwealth ensure that the HOME program’s main goal of providing
            affordable housing for low-income households is accomplished more efficiently.

The Commonwealth Should
Evaluate Its Staffing Levels


            As discussed previously, the Commonwealth has only disbursed $51,724 of the
            cumulative $3.2 million in administrative funds reserved for fiscal years 2004 and
            2005. Based on the problems noted during our review and the significant amount
            of administrative funds available, it is evident that the Commonwealth needs to
            evaluate its staffing levels to ensure that they are adequate to monitor and
            administer its HOME program effectively.

            As of 2005, the Commonwealth was administering and monitoring HOME funds
            with approximately 26 community housing development organizations and 16
            Single Family Regional Loan Fund agencies. As previously discussed, the
            Commonwealth performed on-site monitoring reviews of only 3 of 26 community
            housing development organizations (12 percent) in 2005. Further, it did not
            perform any monitoring of its Single Family Regional Loan Fund agencies in
            2003 and 2004. For 2005, Commonwealth staff documented only one monitoring
            report and correspondence addressing four monitoring visits for which no reports
            were written. During this period, the Commonwealth had at least 16 active
            Single Family Regional Loan Fund agencies.

            During the period of our review, the following staff were responsible for the areas
            we reviewed: two program administrators, one housing finance manager, and one
            financial and program analyst. These staff members were responsible for
            performing a variety of functions, including but not limited to monitoring projects
            to ensure compliance, verifying project completion reports, reviewing and
            endorsing program guidelines, approving grant agreements and disbursement
            requests, and making recommendations for funding HOME activities.

            At the start of our audit, one program administrator position and the housing
            finance manager position were vacant. The program administrator position had
            been vacant since September 2005. In addition, the deputy director of housing
            resigned on March 30, 2006. The table below depicts turnover related to the
            critical housing finance manager position during our audit period.




                                             9
             Position filled or vacant                  Period
                       Filled                 October 2002 to August 2003
                      Vacant                September 2003 to January 2004
                       Filled               February 2004 to September 2005
                      Vacant                    October 2005 to Present

    Commonwealth staff acknowledged that they did not devote adequate time to on-site
    monitoring visits due to heavy workloads. Another consequence of the lack of adequate
    staff was that the Commonwealth was unable to close HOME program activities within
    120 days of the final draw as required by 24 CFR [Code of Federal Regulations]
    92.502(d)(1). The HUD Richmond Office of Community Planning and Development
    addressed this issue in its review of the Commonwealth’s performance during the 2003
    program year. As of April 30, 2006, the Commonwealth had 52 HOME activities
    totaling more than $1.35 million that were still open after 120 days of the final draw. The
    52 activities included 34 for which the final draws had occurred at the time of HUD’s
    review.

Recommendations



           We recommend that director of the Richmond Office of Community Planning and
           Development

           1A.     Require the Commonwealth to take action to secure $319,203 in HOME
                   funds provided to homebuyers at Covenant Heights and ensure that the
                   entire amount of the HOME assistance is secured for the minimum period
                   of affordability.

           1B.     Require the Commonwealth to provide documentation to substantiate the
                   eligibility of $150,000 provided to Southampton or repay the HOME
                   program from nonfederal funds.

           1C.     Require the Commonwealth to repay HUD $14,853 for interest earned on
                   the $430,000, which was drawn for Northway Apartments but not used
                   within 15 days.

           1D.     Require the Commonwealth to repay the HOME program $10,153 for the
                   unit at Meadowview Apartments occupied by a family with income in
                   excess of the allowable limit.

           1E.     Require the Commonwealth to at least annually, develop and document a
                   risk assessment to identify its universe of HOME program recipients and
                   available resources to adequately monitor the program.




                                            10
1F.   Require the Commonwealth to improve its monitoring procedures to
      include (at a minimum) determining whether recipients are following their
      contracts with the Commonwealth, performing on-site reviews of
      recipients at least annually, examining recipients’ records when
      performing its on-site reviews, and ensuring that HOME funds are
      expended on valid HOME program activities.

1G.   Require the Commonwealth to evaluate staffing levels and ensure that
      staffing is adequate to effectively monitor and administer the HOME
      program.

1H.   Require the Commonwealth to take action to ensure that HOME activities
      outstanding beyond 120 days of their final draws are closed and
      implement procedures to ensure that the requirement to close activities
      within 120 days of the final draw is met.

1I.   Require the Commonwealth to establish a procedure (on an annual basis)
      that will ensure future funds obligated by the Commonwealth for
      administrative funds are based on actual administrative costs. This
      procedure should ensure that any amount the Commonwealth determines
      is in excess of the actual expenditures is recommitted for use on eligible
      HOME projects.

1J.   Require the Commonwealth to recommit any portion of the $3,213,545
      not used by the Commonwealth to strengthen its monitoring program for
      use on eligible HOME projects.

1K.   Determine whether the procedures implemented by the Commonwealth
      are sufficient to adequately monitor its HOME program. If the
      Commonwealth fails to implement sufficient procedures, the director
      should seek appropriate administrative actions as described in 24 CFR
      [Code of Federal Regulations] Part 92.




                               11
Finding 2: The Commonwealth Did Not Always Administer HOME
Operating Assistance Grants in Compliance with Federal Regulations
The Commonwealth failed to administer operating assistance grants awarded to community
housing development organizations in compliance with federal regulations and its own operating
procedures. It did not always ensure that operating assistance funds were properly expended by
community housing development organizations. In addition, it disbursed operating assistance
funds without reviewing supporting documentation and improperly awarded funds for expenses
that should not have been paid with HOME funds. Further, it did not always reprogram HOME
operating assistance funds associated with expired contracts. These deficiencies occurred
because the Commonwealth did not properly develop risk assessments and implement a
monitoring plan to ensure that deviations from requirements would be detected. In addition, it
did not ensure that it employed sufficient staff to effectively administer its HOME program. As a
result, HOME funds were spent on ineligible expenses totaling $82,500 and unsupported
expenses of $9,357. In addition, $60,000 in available funds associated with expired contracts
could be put to better use if the Commonwealth reprograms the funds for other eligible HOME
activities.




 Operating Assistance Funds
 Were Improperly Expended


              The Commonwealth awarded operating assistance grants to Piedmont Housing
              Alliance (Piedmont) and Central Virginia Housing Coalition (Central Virginia)
              without executing written agreements requiring them to fund HOME-eligible
              projects within 24 months of receiving the operating assistance grants. The table
              below provides the details of the grants awarded.

                    Community housing               Date grant          Grant
                  development organization           effective         amount       Expended
                                                 Unknown –
                Piedmont Housing Alliance                             $ 40,000        $40,000
                                                 contract missing
                Piedmont Housing Alliance        May 21, 2004         $ 40,000        $17,500
                Central Virginia Housing
                                                 May 21, 2004         $ 50,000        $21,875
                Coalition
                               Totals                                 $130,000        $79,375

              Regulations at 24 CFR [Code of Federal Regulations] 92.300(e) require
              participating jurisdictions providing funds for community housing development
              organizations’ operating expenses to execute written agreements with the
              organizations requiring them to also fund HOME-eligible projects. The
              agreements must be executed within 24 months of the community housing


                                               12
           development organizations’ receipt of funds for operating expenses. The
           Commonwealth violated this requirement when it provided operating assistance
           grants without executing written agreements with the community housing
           development organizations requiring them to fund HOME-eligible projects within
           24 months of receiving the operating assistance funds. Further, the
           Commonwealth communicated to Piedmont that its initial proposed project did
           not meet minimum affordability requirements on May 5, 2003 but awarded it a
           second operating grant on May 21, 2004, for the same project. The $79,375 in
           operating assistance funds expended by Piedmont and Central Virginia is
           ineligible because the community housing development organizations did not also
           fund HOME-eligible projects within 24 months of receiving HOME funds for
           operating expenses.

The Commonwealth Disbursed
Funds for Unsupported and
Ineligible Costs


           The Commonwealth’s community housing development organization operating
           assistance guidelines require grantees to submit paid invoices with each
           programmatic and financial report to receive additional funding. Paid invoices
           are to be reimbursed at a rate of 75 percent, with the remaining portion
           representing a 25 percent cash match by the grantee. The quarterly reports
           submitted by community housing development organizations did not always
           include paid invoices supporting expenses incurred. In the case of Petersburg
           Urban Ministries (Petersburg), there was no support for $9,357 in HOME
           operating assistance funds expended. Additionally, the Commonwealth
           disbursed $3,125 to Petersburg that should have been paid from Petersburg’s own
           funds for it to meet its 25 percent match requirement.


The Commonwealth Needs to
Reprogram Funds Associated
with Expired Contracts

           The Commonwealth’s contracts with Piedmont, Central Virginia, and Petersburg
           have expired. The table below shows the amount of available funds associated
           with each of the expired contracts.

            Community housing development organization             Amount available
            Piedmont Housing Alliance                                 $22,500
            Central Virginia Housing Coalition                        $28,125
            Petersburg Urban Ministries                               $ 9,375
                                   Total                              $60,000




                                          13
           The available funds from the expired contracts represent funds that were not
           requested by the community housing development organizations. The associate
           director of the Division of Housing stated that the Commonwealth was instructed
           that closing an operating grant before closing out the related project development
           funds causes a double counting of the units in HUD’s Integrated Disbursement
           and Information System. This statement is not supported because section 5-1-3 in
           chapter 5 of the Integrated Disbursement and Information System Reference
           Manual includes instructions on how to deobligate funds. The $60,000 associated
           with the expired contracts should be reprogrammed for other eligible HOME
           activities.


The Commonwealth Did Not
Perform Adequate Monitoring
or Properly Evaluate Staffing


           The deficiencies associated with the operating assistance grant funds occurred
           because the Commonwealth did not perform a risk assessment or implement an
           adequate monitoring plan to ensure that deviations from requirements would be
           detected. For example, the Commonwealth performed on-site monitoring reviews
           of only 3 of 26 community housing development organizations (12 percent) in
           2005. Additionally, it did not perform monitoring of its Single Family Regional
           Loan Fund agencies in 2003 and 2004. For 2005, Commonwealth staff
           documented only one monitoring report and correspondence addressing four
           monitoring visits for which no reports were written. During this period, the
           Commonwealth had at least 16 active Single Family Regional Loan Fund
           agencies. In addition, it did not evaluate staffing to ensure that it had sufficient
           staff to effectively administer its HOME program.

           The Commonwealth should develop and document a comprehensive risk
           assessment to determine the resources it needs to implement an effective
           monitoring plan and hire and maintain the appropriate staffing levels needed to
           effectively administer its HOME program. This will help to ensure that the
           operating assistance grant funds are administered in accordance with applicable
           guidelines and regulations. Recommendations to address these issues were made
           in finding 1.

Recommendations



           We recommend that the director of the Richmond Office of Community Planning and
           Development require the Commonwealth to




                                            14
2A.   Repay the HOME program $79,375 for the operating assistance funds
      awarded to community housing development organizations that did not
      initiate development of eligible HOME projects.

2B.   Provide adequate documentation to support the $9,357 spent by Petersburg
      or repay the amount to the HOME program.

2C.   Recover the $3,125 overpayment of HOME funds from Petersburg.

2D.   Deobligate $60,000 in available funds associated with expired contracts
      and reprogram them for other eligible HOME activities, thereby putting
      the funds to better use.




                              15
Finding 3: The Commonwealth Did Not Ensure That Downpayment
Assistance Was Awarded in Compliance with Applicable Requirements
The Commonwealth failed to ensure that assistance for downpayment and closing costs provided
through its Single Family Regional Loan Fund was awarded in compliance with applicable
requirements. Our review disclosed deficiencies pertaining to 7 of 22 cases of assistance
provided for downpayment or closing costs. The Commonwealth did not always award
assistance for eligible properties or ensure that assistance awarded was supported or awarded in
compliance with the Commonwealth’s own procedures. These deficiencies occurred because the
Commonwealth did not develop risk assessments and implement a monitoring plan to ensure that
deviations from requirements would be detected. In addition, it did not employ sufficient staff to
effectively administer its HOME program. As a result, HOME funds were used for ineligible
assistance in the amount of $76,200 and unsupported assistance totaling $48,500. In addition,
$38,556 in funds awarded in excess of the Commonwealth’s set limits could have been used to
assist additional homebuyers if the Commonwealth had complied with its own procedures.



 Assistance Was Awarded for
 Ineligible Properties


               The Commonwealth awarded assistance for the purchase of homes with prices
               exceeding the single family mortgage limits under Section 203(b) of the National
               Housing Act. The properties’ settlement statements indicated the Commonwealth
               awarded $41,200 and $35,000, respectively, for two properties with prices of
               $206,000 and $197,000 in Charlottesville, Virginia. The mortgage limit for both
               homes was $194,116. No market analysis was performed to determine whether
               the prices of the homes were within 95 percent of the median price of single-
               family homes in the jurisdiction. Regulations at 24 CFR [Code of Federal
               Regulations] 92.254(a)(2)(iii) provide that participating jurisdictions may either
               use the single family mortgage limits under Section 203(b) of the National
               Housing Act or 95 percent of the median price of single-family homes in an area
               as the price limit when awarding HOME funds for downpayment assistance. The
               Commonwealth did not comply with this requirement. As a result, $76,200 was
               awarded for properties that were not eligible for HOME funds.


 Assistance Awarded Was Not
 Supported

               In 3 of the 18 cases associated with the Covenant Heights project discussed in
               finding 1, we could not verify the recipients’ family sizes to determine whether
               they met the applicable income requirements for assistance. The community
               housing development organization responsible for the project disposed of
               applications documenting information on family sizes, along with other important


                                               16
          details. As a result, we were unable to completely verify the family sizes
          indicated on homebuyer/homeowner rehabilitation completion reports for the
          three recipients. We were only able to verify the existence of one member in two
          of the cases and two members in the third case, based on the signatures shown on
          the settlement statements for the sale of the properties. Commonwealth staff
          stated they were not aware that applications needed to be maintained for a specific
          period. Regulations at 24 CFR [Code of Federal Regulations] 92.508(c) state that
          all records pertaining to each fiscal year of HOME funds must be retained for the
          most recent five-year period. Section 92.508(c)(2) further states that for
          homeownership housing projects, records may be retained for five years after the
          project completion date, except for documents imposing recapture/resale
          restrictions, which must be retained for five years after the affordability period
          terminates. The table below depicts the downpayment assistance awarded for the
          three cases.

                                   Total
                                  number        Number        Unable to     Downpayment
           Property address      in family      verified       verify         assistance
           196 Jericho Road          4             1             3             $16,000
           3195 Joppa Court          3             1             2             $16,500
           3211 Joppa Court          7             2             5             $16,000
            Total unsupported                                                  $48,500

          The $48,500 in downpayment assistance awarded is unsupported because the
          Commonwealth failed to comply with the Code of Federal Regulations’ record
          retention requirements.

The Commonwealth Did Not
Comply with Its Own
Procedures


          In another two cases, the Commonwealth paid assistance that exceeded the
          amount allowed under its own procedures as outlined in its Program Design
          Manual and consolidated plan. In one case, the recipient received assistance of
          $54,306, which represented 62 percent of the home’s land and construction costs.
          This assistance exceeded the maximum assistance of $20,000 allowed based on
          the Commonwealth’s established procedures. As a result, the recipient received
          excess assistance of $34,306. In the other case, the Commonwealth overpaid
          $4,250 by exceeding its maximum allowable assistance based on 10 percent of the
          home’s sales price plus $2,500 in closing costs. Regulations at 24 CFR [Code of
          Federal Regulations] 91.325(d)(3) require states to certify that they will evaluate
          projects in accordance with their adopted guidelines before committing HOME
          funds to the projects. In addition, part 92.201(b)(1) states that each participating
          jurisdiction is responsible for distributing HOME funds according to its



                                           17
           assessment of the geographical distribution of housing needs as identified in the
           state's approved consolidated plan. If the Commonwealth had complied with
           these requirements and followed its own guidelines, $38,556 in HOME funds
           could have been used to assist additional families and, thereby, put to better use.
           Additionally, complying with its own procedures will ensure that HOME funds
           are awarded to eligible recipients in a fair and consistent manner.


The Commonwealth Did Not
Perform Adequate Monitoring
or Properly Evaluate Staffing


           The deficiencies associated with the downpayment and closing cost assistance
           funds occurred because the Commonwealth did not implement an adequate or
           effective monitoring plan to ensure that deviations from requirements would be
           detected. For example, the Commonwealth did not perform monitoring of its
           Single Family Regional Loan Fund agencies in 2003 and 2004. For 2005,
           Commonwealth staff documented only one monitoring report and correspondence
           addressing four monitoring visits for which no reports were written. During this
           period, the Commonwealth had at least 16 active Single Family Regional Loan
           Fund agencies. In addition, it did not evaluate staffing to ensure that it was
           adequate to effectively administer its HOME program.

           The Commonwealth should develop and document a comprehensive risk
           assessment to determine the resources it needs to implement an effective
           monitoring plan and hire and maintain the appropriate staffing levels needed to
           effectively administer its HOME program as a whole. This will help to ensure
           that the Commonwealth awards HOME assistance funds for downpayment and
           closing costs in accordance with applicable requirements and guidelines.
           Detailed recommendations to address these issues are contained in finding 1.

Recommendations



           We recommend that the director of the Richmond Office of Community Planning and
           Development require the Commonwealth to

           3A.    Repay the HOME program $76,200 for assistance paid in cases in which
                  property prices exceeded the Section 203(b) mortgage limits.

           3B.    Obtain and provide supporting documents to show that three recipients of
                  $48,500 in downpayment assistance met the applicable income limits or
                  recover and credit the amount back to the HOME program.




                                            18
3C.   Take action to comply with its own procedures for awarding
      downpayment and closing cost assistance to ensure that HOME funds are
      awarded to eligible recipients in a fair and consistent manner.




                             19
                        SCOPE AND METHODOLOGY

To accomplish our audit objective, we

   •   Reviewed applicable federal regulations relating to the administration of the HOME
       program.

   •   Reviewed Commonwealth documents including the consolidated annual action plan,
       annual performance and evaluation report, monitoring reports relating to the
       administration of the HOME program, procurement procedures, fidelity bond coverage,
       organization charts, employee time sheets, indirect cost plan, human resource policies,
       and related correspondence.

   •   Obtained a list of subrecipients/community housing development organizations receiving
       HOME program funds from the Commonwealth for fiscal years 2002, 2003, 2004, and
       2005 and selected a nonstatistical sample of four projects, six Operating Assistance
       Grants,and 22 cases of downpayment and closing cost assistance to determine whether
       the HOME program requirements were met.

   •   Conducted interviews with officials and employees of HUD’s Community Planning and
       Development Division, the Commonwealth, and subrecipients/community housing
       development organizations of the HOME program.

   •   Reviewed HOME program contracts established between the Commonwealth and the
       selected community housing development organizations.

   •   Reviewed general ledgers, invoices, applications,tenant files, and settlement sheets and
       other legal documents to ensure that expended HOME funds were used for eligible
       HOME activities.

We performed the majority of our fieldwork between December 2005 and May 2006 at the
offices of the Commonwealth, located at 501 North Second Street, Richmond, Virginia. In
addition, we conducted fieldwork at the offices of Community Housing Partners Corporation, a
community housing development organization, located in Christiansburg, Virginia. We also
performed related fieldwork at Meadowview Apartments in Pulaski, Virginia, and Northway
Apartments in Galax, Virginia. In addition, we conducted fieldwork at Hope Community
Builders, another community housing development organization, located in Harrisonburg,
Virginia, and made related site visits to the Covenant Heights project located in Harrisonburg,
Virginia, and the Central Shenandoah Planning District Commission located in Staunton,
Virginia, to pick up documents. The audit generally covered the period July 1, 2002, through
September 30, 2005, but was expanded when necessary.

We performed our review in accordance with generally accepted government auditing standards.




                                               20
                             INTERNAL CONTROLS

Internal control is an integral component of an organization’s management that provides
reasonable assurance that the following objectives are being achieved:

   •   Effectiveness and efficiency of operations,
   •   Reliability of financial reporting, and
   •   Compliance with applicable laws and regulations.

Internal controls relate to management’s plans, methods, and procedures used to meet its
mission, goals, and objectives. Internal controls include the processes and procedures for
planning, organizing, directing, and controlling program operations. They include the systems
for measuring, reporting, and monitoring program performance.



 Relevant Internal Controls


              We determined the following internal control was relevant to our audit objectives:

              •   Monitoring of eligible HOME activities – Policies and procedures that
                  management has in place so that adequate reviews are performed to ensure
                  HOME grants are used for eligible activities.

              We assessed the relevant control identified above.

              A significant weakness exists if management controls do not provide reasonable
              assurance that the process for planning, organizing, directing, and controlling
              program operations will meet the organization’s objectives.


 Significant Weaknesses


              Based on our review, we believe the following items are significant weaknesses:

              •   Lack of management oversight or monitoring (relates to findings 1, 2 and 3).

              •   Lack of adequate reviews performed on sub-recipients and/or community
                  housing development organizations (relates to findings 1 and 2).




                                               21
                                    APPENDIXES

Appendix A

              SCHEDULE OF QUESTIONED COSTS
             AND FUNDS TO BE PUT TO BETTER USE

         Recommendation            Ineligible 1/    Unsupported      Funds to be put
                number                                       2/       to better use 3/
                       1A                            $319,203
                       1B                            $150,000
                       1C        $ 14,853
                       1D        $ 10,153
                        1J                                            $3,213,545
                       2A        $ 79,375
                       2B                            $ 9,357
                       2C        $ 3,125
                       2D                                             $    60,000
                       3A        $ 76,200
                       3B                            $ 48,500
                    Totals       $183,706            $527,060         $3,273,545


1/   Ineligible costs are costs charged to a HUD-financed or HUD-insured program or activity
     that the auditor believes are not allowable by law; contract; or federal, state, or local
     polices or regulations.

2/   Unsupported costs are those costs charged to a HUD-financed or HUD-insured program
     or activity when we cannot determine eligibility at the time of audit. Unsupported costs
     require a decision by HUD program officials. This decision, in addition to obtaining
     supporting documentation, might involve a legal interpretation or clarification of
     departmental policies and procedures.

3/   “Funds to be put to better use” are estimates of amounts that could be used more
     efficiently if an Office of Inspector General (OIG) recommendation is implemented. This
     includes reductions in outlays, deobligation of funds, withdrawal of interest subsidy costs
     not incurred by implementing recommended improvements, avoidance of unnecessary
     expenditures noted in pre-award reviews, and any other savings which are specifically
     identified. In these instances, if the Commonwealth implements our recommendations, it
     will use the $3.2 million in excess administrative funds to improve monitoring of the
     HOME program and recommit any unused portion for eligible HOME projects, and
     $60,000 in HOME funds will become available to support additional eligible HOME
     activities.


                                             22
  Appendix B

        CALCULATION OF INTEREST TO BE REPAID TO HUD

                                                                    Daily     Days
                                           Ending      Interest   interest   elapsed   Calculated Calculated
   Date1/       Balance2/   Disbursement   balance      rate3/     rate4/       5/     interest6/ balance7/
Mar. 30, 2003    $430,000                  $430,000    0.9876%    0.000027    290       $3,374      $433,374

Jan. 14, 2004    $433,374     $108,409     $324,965    1.3856%    0.000038    341       $4,207      $329,172

Dec. 20, 2004    $329,172     $100,000     $229,172    2.9790%    0.000082    296       $5,536      $234,708

Oct. 12, 2005    $234,708     $ 29,069     $205,639    3.9485%    0.000108     78       $1,736      $207,375

Dec. 29, 2005    $207,375     $192,522     $ 14,853                           Total     $14,853



  1/ The first date represents the date the entire $430,000 should have been expended. This date
  was 16 days after the Commonwealth disbursed the funds to the fund administrator for the
  Northway project. The last four dates represent the dates the funds were disbursed by the fund
  administrator.

  2/ The $430,000 is the total amount the Commonwealth disbursed for the project. The remaining
  balances were calculated by adding the calculated interest to the ending balance after each
  disbursement (see last column).

  3/ The interest rate is based on the 13-week Treasury bill rate in effect during the applicable
  period.

  4/ The daily interest rate was obtained by dividing the interest rate by 365.

  5/ The days elapsed represent the number of days that passed before each disbursement was
  made.

  6/ The calculated interest was obtained as follows: ending balance x interest rate/365 x days
  elapsed.

  7/ The calculated balance was obtained by adding the calculated interest to the ending balance.




                                                      23
Appendix C

        AUDITEE COMMENTS AND OIG’S EVALUATION


Ref to OIG Evaluation   Auditee Comments




                         24
Comment 1




Comment 2




Comment 3




            25
Comment 3




Comment 4




Comment 5




            26
Comment 5

Comment 6



Comment 7




Comment 8




Comment 9




            27
Comment 10




Comment 11




Comment 12




             28
                          OIG Evaluation of Auditee Comments


Comment 1    As described in the audit report, we believe the Commonwealth did not take steps
             needed to properly secure HOME program funds. However, we are pleased that
             the Commonwealth has agreed to take the necessary action to secure HOME
             program funds provided to Hope, and also to ensure that future agreements or
             notes comply with federal recapture requirements.

Comment 2    We are pleased that the Commonwealth has agreed that it could not substantiate
             that $150,000 which it disbursed to Southampton was used for eligible HOME
             activities and that it is now working to correct this problem.

Comment 3    We are encouraged that the Commonwealth has acknowledged this problem and
             is now determining an arrangement to address the $14,853 in interest due HUD.

Comment 4    We are encouraged that the Commonwealth is now reviewing the issue of HOME
             funds being used to rehabilitate a unit inhabited by a family with income in excess
             of the allowable limit. However, the Commonwealth can prevent this problem in
             the future by strengthening its monitoring program to ensure that the income
             levels of all tenants are within the allowable limit before disbursing the HOME
             funds.

Comment 5    The audit evidence showed that the Commonwealth awarded operating assistance
             grants to Piedmont and Central Virginia without executing written agreements
             requiring them to fund HOME-eligible projects within 24 months of receiving the
             operating assistance grants. We are encouraged that the Commonwealth agrees
             that the $21,875 expended by Central Virginia is ineligible because this
             community housing development organization did not fund HOME-eligible
             projects within 24 months of receiving HOME funds for operating expenses.
             However, the Commonwealth did not have documentation supporting its
             contention that the operating assistance grants awarded to Piedmont resulted in
             HOME-eligible units or projects. On the contrary, we were provided
             correspondence from the Commonwealth indicating the Piedmont project was not
             affordable, and thereby not eligible for HOME funds.

Comment 6 In the case of Petersburg, the audit evidence showed there was no support for
          $9,357 in HOME operating assistance funds expended. We are pleased however
          that that the Commonwealth is now taking steps to clarify its documentation and
          record keeping procedures.

Comment 7    The Commonwealth stated that a final disbursement has now been made to
             Petersburg, and that remaining funds associated with Piedmont and Central
             Virginia have now been reprogrammed. Once the Commonwealth provides




                                             29
              evidence showing that these funds have been expended or reprogrammed for
              eligible HOME activities, recommendation 2D can be closed.

Comment 8     The audit evidence showed the Commonwealth awarded assistance for the
              purchase of two homes with prices exceeding the single family mortgage limits
              under Section 203(b) of the National Housing Act. The Commonwealth was also
              unable to provide a market analysis showing that the sales prices for the homes
              was within 95 percent of the area median sales price for the region.

Comment 9     We are pleased that the Commonwealth plans to conduct an onsite visits to
              document the correct family size and to take action to ensure that all subrecipients
              and participants of the HOME downpayment assistance program comply with
              federal record retention requirements.

Comment 10 The Commonwealth stated that it allows subrecipient administrators in certain
           high-cost localities to provide assistance of up to 20 percent of home sale prices.
           The property in question was located in Southampton County. However, the
           Commonwealth did not list Southampton County as a high cost locality eligible
           for assistance of up to 20 percent in its consolidated plan or program design
           manual. In addition, the case in question did not have a settlement agreement
           showing that an eligible homeowner purchased the property.

Comment 11 The Commonwealth stated that we did not seek information or initiate any
           dialogue about its staffing plans or organizational structure during the audit. We
           disagree with this statement. We requested and documented information on the
           Commonwealth’s organizational structure and staffing levels in our audit
           workpapers. In addition, beginning in March 2006, we requested risk assessments
           from Commonwealth staff. We followed up on our request in April 2006. We
           were not provided any information on the Commonwealth’s extensive assessment
           of its entire Housing Division’s organization and structure. Instead, we were
           informed that risk assessments were not formally documented.

Comment 12 We are encouraged that the Commonwealth has implemented and plans to
           continue to implement improvements to help resolve the deficiencies noted in our
           report.




                                               30