oversight

HUD's Process for Tracking the American Dream Downpayment Initiative

Published by the Department of Housing and Urban Development, Office of Inspector General on 2008-03-26.

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

                                                                  Issue Date
                                                                       March 26, 2008
                                                                  Audit Report Number
                                                                       2008-PH-0001




TO:        Nelson R. Bregon, General Deputy Assistant Secretary for Community
            Planning and Development, D



FROM:      John P. Buck, Regional Inspector General for Audit, Philadelphia Regional
            Office, 3AGA

SUBJECT:   HUD’s Process for Tracking the American Dream Downpayment Initiative
            Had Weaknesses


                                   HIGHLIGHTS

 What We Audited and Why

           As part of the U.S. Department of Housing and Urban Development (HUD),
           Office of the Inspector General’s (OIG) strategic plan, we audited HUD’s
           American Dream Downpayment Initiative (Initiative). Our audit objective was to
           determine whether HUD had adequate controls to ensure that its grantees did not
           exceed allowable downpayment assistance limits and that funds were used as
           required.

 What We Found


           HUD had controls in place to ensure that grantees did not exceed allowable
           downpayment assistance limits and that funds were used as required, but the
           controls had weaknesses. Specifically, HUD relied heavily on its Integrated
           Disbursement and Information System, which did not have adequate capability to
           specifically track the Initiative’s activities. Further, regardless of the total amount
           of downpayment assistance provided to the homebuyers reported via the system,
           the accomplishment reports prepared by HUD and used to report the total amount
           of the Initiative’s funding disbursed always reflected the grantees’ budgeted
           funding limits. If grantees exceeded downpayment assistance limits, HUD
           charged the excessive amount to the participating jurisdiction’s HOME
           Investment Partnerships (HOME) Act formula allocation.

What We Recommend


           We recommend that HUD perform periodic analyses to ensure that information
           reflected on the Initiative’s accomplishment reports is accurate and coincides with
           the grantees’ HUD-approved consolidated plans. If any of the reported
           information is found to be inaccurate, HUD needs to correct the appropriate
           reports and monetary figures.

           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 provided the draft report to HUD on March 4, 2008. We discussed the report
           with HUD throughout the audit and at the exit conference on March 13, 2008.
           HUD provided written comments to our draft report on March 19, 2008. In its
           comments, HUD stated that it finds our recommendation acceptable.

           The complete text of HUD’s response, along with our evaluation of that response,
           can be found in appendix A of this report.




                                            2
                           TABLE OF CONTENTS

Background and Objectives                                                 4

Results of Audit
      Finding: HUD’s Process for Tracking the Initiative Had Weaknesses   5

Scope and Methodology                                                     9

Internal Controls                                                         10

Appendix
   A. Auditee Comments and OIG’s Evaluation                               12




                                           3
                      BACKGROUND AND OBJECTIVES


The American Dream Downpayment Initiative (Initiative) was signed into law by President Bush
on December 16, 2003, under the American Dream Downpayment Act (Act) (Public Law 108-
186). The Initiative was created to assist low-income, first-time homebuyers in purchasing
single-family homes by providing funds for downpayments, closing costs, and rehabilitation
carried out in conjunction with the assisted home purchase. The Initiative is administered as a
set-aside of the HOME Investment Partnerships Program (HOME), a formula grant program.
The Initiative provides funds to all 50 states and to local participating jurisdictions that have a
population of at least 150,000 or will receive an allocation of at least $50,000 under the
Initiative’s formula. Initiative funds have restrictions that do not apply to other HOME funds;
such as, they should only be used for downpayment, closing cost, and rehabilitation assistance to
low-income, first-time homebuyers purchasing homes priced within loan limits under the U.S.
Department of Housing and Urban Development’s (HUD) Section 203(b) single-family
mortgage insurance program. In contrast, other HOME funds may be used to purchase,
construct, or rehabilitate affordable housing for rent or ownership by low-income households or
provide downpayment or direct rental assistance to low-income households. Another key
distinction of the Initiative is that unlike other HOME funds used for homeownership assistance,
the amount of Initiative assistance per homebuyer is limited to $10,000 or 6 percent of the
purchase price, whichever is greater.

The Act authorized up to $200 million annually for fiscal years 2004 through 2007. As of
October 2007, $260 million had been appropriated, and $204 million had been expended for the
Initiative. Congress authorized an additional $10 million for fiscal year 2008 for the Initiative.
The Act also directed the U.S. Government Accountability Office (GAO) to perform a state-by-
state analysis of the impact of the grants.

The objective of our audit was to determine whether HUD had adequate controls to ensure that
downpayment assistance grantees did not exceed allowable downpayment assistance limits and
that funds were used as required.




                                                 4
                                    RESULTS OF AUDIT


Finding: HUD’s Process for Tracking the Initiative Had Weaknesses
HUD’s process for tracking the Initiative had weaknesses as follows:

      •   HUD’s Integrated Disbursement and Information System, used to track downpayment
          assistance, did not have the capability to separately track the Initiative’s activities; and

      •   HUD did not ensure that activities reported via the system were only those activities
          outlined in the participating jurisdiction’s HUD-approved consolidated plans.

GAO1 reported similar problems in June 2006, but HUD did not take adequate action to correct
them. HUD believed that its process for tracking the Initiative’s activities was the most cost-
effective way to track the Initiative and that redesigning the Integrated Disbursement and
Information System specifically for the Initiative would be too costly. However, our audit
showed that improved manual controls could be implemented to ensure that participating
jurisdictions use Initiative funds as required.



    HUD’s Integrated
    Disbursement and Information
    System Was Not Capable of
    Separately Tracking the
    Initiative’s Activities


                 HUD relied on information captured by its Integrated Disbursement and
                 Information System to track and report the Initiative’s activities. The system is a
                 nationwide database, which provides HUD with information regarding program
                 activities including funding data. HUD uses this information to report to
                 Congress and to monitor grantees. The system is also the drawdown and
                 reporting system for the four Office of Community Planning and Development
                 formula grant programs, which include Community Development Block Grants,
                 HOME, Emergency Shelter Grants, and Housing Opportunities for People with
                 AIDS.

                 The system allowed grantees to request their grant funding for the formula
                 allocations but did not have the capability to separately track the Initiative’s
                 activities. Thus, participating jurisdictions and HUD field offices did not have an
                 automated capability to track the Initiative as a separate program. Since HUD’s
                 information system was not capable of separately tracking the Initiative, HUD
1
    GAO-06-677, HUD Homeownership Programs.


                                                     5
            implemented workaround procedures to attempt to capture data on projects that
            met some of the basic criteria of the program, such as projects for downpayment
            assistance for first-time homebuyers. Under HUD’s procedures, however,
            Initiative and non-Initiative HOME funds were comingled and were not tracked
            separately. Further, regardless of the total amount of downpayment assistance
            provided to the homebuyers reported via the system, the accomplishment reports
            prepared by HUD and used to report the total amount of the Initiative’s funding
            disbursed always reflected the grantees’ budgeted funding limits even if grantees
            exceeded the Initiative’s downpayment assistance limits. If grantees exceeded the
            limits, HUD charged the excessive amount of the downpayment assistance to the
            participating jurisdiction’s remaining HOME formula allocation. The problem
            with HUD’s procedures is that the Act prohibits jurisdictions from exceeding
            $10,000 or 6 percent of the purchase price of a home, whichever is greater. HUD
            had no assurance that participating jurisdictions complied with these
            requirements.

HUD Prepared the Initiative’s
Accomplishment Reports
without Reviewing
Consolidated Plans

            According to 24 CFR [Code of Federal Regulations] 92.608, before receiving the
            Initiative’s formula allocation, a participating jurisdiction must address the use of
            the Initiative’s funds in its consolidated plan. The consolidated plan serves the
            following functions:

               •   Planning document for the jurisdiction, which builds on a participatory
                   process among citizens, organizations, businesses, and other stakeholders;
               •   Submission for federal funds under HUD’s formula grant programs for
                   jurisdictions;
               •   Strategy to be followed in carrying out HUD programs; and
               •   Management tool for assessing performance and tracking results.

            The consolidated plan also includes an action plan. The action plan must include
            the following:

               •   Description of planned use of the Initiative’s funds,
               •   Plan for targeted outreach to residents and tenants of public and
                   manufactured housing, and
               •   Description of actions taken to ensure suitability of families receiving the
                   Initiative’s assistance to undertake and maintain homeownership.

            HUD’s Office of Affordable Housing Programs was responsible for selecting
            which activities in the Integrated Disbursement and Information System qualified
            as Initiative activities, but it did not review or have knowledge of the activities


                                              6
                 addressed in the participating jurisdiction’s consolidated plan. The HUD field
                 offices reviewed and approved the participating jurisdiction’s consolidated plan.
                 Since HUD’s Office of Affordable Housing Programs did not review the
                 approved plans before selecting the Initiative activities in its system, there is no
                 assurance that activities selected by headquarters were activities associated with
                 the participating jurisdiction’s planned projects proposed in the approved
                 consolidated plans.

                 Although our audit did not attempt to fully quantify the extent of misreporting of
                 Initiative projects, GAO estimated during its review in 2005 that about 29 percent
                 of the projects it reviewed that were shown as Initiative projects were actually
                 non-Initiative projects.

    GAO Reported Data
    Limitations with the Initiative


                 According to the Cranston-Gonzalez National Affordability Housing Act, GAO
                 was directed to perform a state-by-state analysis of the impact of the Initiative’s
                 grants by June 2006. However, GAO found significant limitations with the
                 quality of the data provided via the Initiative and could not provide accurate
                 conclusions about the impact of the Initiative’s programs. Specifically, GAO
                 found that data HUD reported on the Initiative’s accomplishments included a mix
                 of the Initiative and non-Initiative HOME projects. Consequently, GAO reported
                 that the expenditures and accomplishments attributable to the Initiative might not
                 be known. GAO further concluded that HUD’s internal control for Initiative
                 reporting did not meet GAO’s standards because HUD could not be certain that
                 the Initiative’s expenditure and accomplishment data it reported were
                 representative of the Initiative’s projects.2 GAO’s standards call for controls that
                 would appropriately classify projects so that the collected information maintains
                 its relevance, value, and usefulness for controlling operations and making
                 decisions.

                 GAO recommended that HUD develop and implement controls to ensure that
                 expenditures and accomplishments attributed to the Initiative are accurate. HUD
                 did not implement the GAO recommendations because it believed that its process
                 for tracking the Initiative’s activities was the most cost-effective way to track the
                 Initiative and that redesigning the Integrated Disbursement and Information
                 System specifically for the Initiative would be too costly. As of February 2008,
                 HUD had awarded a contract and was in the process of performing a major
                 redesign of the Integrated Disbursement and Information System. In awarding the
                 contract, HUD decided that its redesign would not include implementing an
                 improved mechanism to separately track the Initiative.

2
 GAO issued these standards as required by 31 U.S.C. [United States Code] §3512 ©. Also see GAO Standards for
Internal Control in the Federal Government, GAO/AIMD-00-21.3.1 (Washington, DC: November 1999), and GAO
Internal Control Management and Evaluation Tool, GAO-01-1008G (Washington, DC: August 2001).


                                                      7
Conclusion


             Based on the data participating jurisdictions entered into the Integrated
             Disbursement and Information System, HUD prepared the Initiative’s
             accomplishment detail reports. However, before publishing the monthly report on
             its Web site, HUD performed analyses to determine whether grantees were within
             the budgeted funding allocations. Specifically, HUD reviewed the information
             jurisdictions entered into the system to determine the purchase price and the
             amount of downpayment assistance provided to the homebuyer. HUD then
             calculated the amount of the activity that it would attribute to the Initiative, and it
             charged the excessive amounts to the participating jurisdiction’s HOME program
             to ensure that HUD only applied $10,000 or 6 percent of the purchase price of a
             unit to the Initiative funding. For example, if a grantee reported a downpayment
             assistance activity of $20,000, HUD classified $10,000 to the Initiative’s
             budgeted amounts and the excessive amounts to the participating jurisdiction’s
             HOME program formula allocation. HUD ensured that the amounts charged did
             not exceed the grantees’ Initiative budget and that it did not report that established
             program limits had been exceeded.

             HUD had not taken action to adequately track the Initiative or to correct the issues
             identified by GAO. As of October 2007, $260 million had been appropriated, and
             $204 million had been expended for the Initiative. Congress authorized an
             additional $10 million for fiscal year 2008 for the Initiative. Although the
             funding levels have decreased in recent years for the Initiative, considerable funds
             remain to be expended. Improvements are needed to help ensure that
             participating jurisdictions use remaining Initiative funds as required. To this end,
             we recommend that HUD perform periodic analyses to ensure that information
             reflected on the Initiative’s accomplishment reports is accurate and coincides with
             grantees’ HUD-approved consolidated plans. If any of the reported information is
             found to be inaccurate, HUD needs to correct the appropriate reports and
             monetary figures.

Recommendations


             We recommend that the General Deputy Assistant Secretary for Community
             Planning and Development

             1A.    Direct responsible HUD staff to perform periodic analyses to ensure that
                    information reflected on the Initiative’s accomplishment reports is
                    accurate and coincides with the grantees’ HUD-approved consolidated
                    plans. If any of the reported information is found to be inaccurate, HUD
                    needs to correct the appropriate reports and monetary figures.




                                               8
                        SCOPE AND METHODOLOGY

To accomplish our objectives, we performed the following:

   •   Reviewed HUD’s processes and controls in effect to ensure that downpayment assistance
       grantees did not exceed allowable downpayment assistance.

   •   Contacted HUD OIG’s computer-assisted audit techniques specialist and obtained tables
       from HUD’s Integrated Disbursement and Information System.

   •   Reviewed and performed queries on the Integrated Disbursement and Information System
       tables using ACL software to determine whether grantees exceeded the allowable
       downpayment assistance.

   •   Reviewed applicable federal regulations and other applicable information concerning the
       Initiative found on the HUD Web site.

   •   Conducted interviews with Office of Community Planning and Development
       headquarters personnel and other government officials such as GAO personnel.

We performed our audit work between August and December 2007 at HUD headquarters located
in Washington, DC, and at the HUD field office located in Baltimore, Maryland. The audit
covered the period January 2004 through July 2007 but was expanded when necessary to include
other periods. To achieve our audit objective, we relied in part on computer-processed data in
HUD’s database. Although we did not perform a detailed assessment of the reliability of the
data, we did perform a minimal level of testing and found the data to be adequate for our
purposes.

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




                                              9
                             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 controls were relevant to our objective:

                  •   Program operations – Policies and procedures that management has
                      implemented to reasonably ensure that a program meets its objectives.

                  •   Validity and reliability of data – Policies and procedures that management
                      has implemented to reasonably ensure that valid and reliable data are
                      obtained, maintained, and fairly disclosed in reports.

                  •   Compliance with laws and regulations – Policies and procedures that
                      management has implemented to reasonably ensure that resource use is
                      consistent with laws and regulations.

                  •   Safeguarding resources – Policies and procedures that management has
                      implemented to reasonably ensure that resources are safeguarded against
                      waste, loss, and misuse.

              We assessed the relevant controls 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.




                                               10
Significant Weakness


           Based on our review, we believe the following item is a significant weakness:

               •   The process HUD used to track the Initiative was inadequate.




                                            11
                     APPENDIX

Appendix A

       AUDITEE COMMENTS AND OIG’s EVALUATION


                    Auditee Comments




Comment 1




                           12
                        OIG Evaluation of Auditee Comments


Comment 1   HUD did in fact have controls in place to ensure that grantees did not exceed
            allowable downpayment assistance limits and that funds were used as required,
            but the controls had weaknesses. Given these weaknesses, we are pleased that
            HUD has agreed to perform periodic analyses to ensure that information reflected
            on the Initiative’s accomplishment reports is accurate and coincides with the
            grantees’ HUD-approved consolidated plans.




                                           13