Issue Date
September 1, 2009
Audit Report Number
2009-NY-0002
TO: Phillip A. Murray, Deputy Assistant Secretary for Single Family Housing, HU
FROM: Edgar Moore, Regional Inspector General for Audit, New York/New Jersey, 2AGA
SUBJECT: HUD’s Administration of the Asset Control Area Program Needs Improvement.
HIGHLIGHTS
What We Audited and Why
We conducted an audit of the U.S Department of Housing and Urban
Development (HUD)’s Asset Control Area (ACA) program as a follow-up to a
previous OIG audit of this program1, and as a part of the Office of Inspector
General’s (OIG) strategic plan goals to improve HUD’s fiscal accountability. The
objective of the audit was to determine whether HUD administered the ACA
program in compliance with ACA program requirements and federal regulations.
What We Found
Generally HUD’s Asset Control Area (ACA) program has increased
homeownership for low and moderate income borrowers and contributed to the
revitalization of blighted communities; however, HUD’s administration of the
ACA program was not always in compliance with ACA program requirements
and federal regulations, thus it needs improvement. Specifically, 1) final ACA
regulations need to be issued, 2) existing ACA program requirements need to be
1
National Audit, Asset Control Area Program, Single Family Housing, Report No. 2002-NY-0001, issued February
25, 2002.
adequately enforced, and 3) HUD’s monitoring needs to improve to ensure
compliance with ACA program requirements and federal regulations. As a result,
final regulations are not issued to ensure compliance, nonqualified entities were
allowed to administer and/or participate in the program, required public records
searches were not supported or conducted, properties outside of asset control
areas were included in the program, properties were not sold within HUD
timeframes and dollar limits, potential conflicts of interest were not identified and
resolved, and net development costs were incorrectly calculated. We attribute this
to HUD’s lack of guidance by not issuing final ACA program regulations and its
inadequate monitoring to detect and report issues of noncompliance.
What We Recommend
We recommend that the Deputy Assistant Secretary for Single Family Housing
instruct the Single Family Asset Management Office to develop and implement
controls to ensure that the final Asset Control Area regulations are issued
within a timely manner, provide additional training and technical assistance to ACA
program participants and staff to ensure that they are aware of future issued ACA
regulations, ensure that existing and future ACA requirements are adequately
enforced, and enhance controls to ensure that HUD monitoring is effective in
improving ACA participants’ compliance with program requirements.
Auditee’s Response
We provided HUD officials the draft report on June 26, 2009. We discussed the
results of our audit with officials from HUD’s Office of Single Family Asset
Management during the audit and at an exit conference held on July 1, 2009.
HUD officials generally disagreed with the draft audit report. Based on the oral
comments provided by HUD officials during the exit conference, the draft audit
report was revised where warranted and resubmitted to HUD officials on July 16,
2009. HUD officials were given until July 28, 2009, to provide written
comments, but were unable to provide written comments by that date.
2
TABLE OF CONTENTS
Background and Objectives 4
Results of Audit
Finding: HUD’s Administration of the Asset Control Area Program Needs 5
Improvement.
Scope and Methodology 11
Internal Controls 13
3
BACKGROUND AND OBJECTIVES
Section 204 of the National Housing Act, 12 U.S.C (United States Code) 1710 directed HUD to
promote the revitalization of neighborhoods through the creation of Asset Control Areas (ACAs)
in HUD approved communities. The legislation directed the Secretary to issue ACA program
regulations prior to the expiration of a two year period beginning on October 21, 1998. However,
Section 1303 of Public Law 107-206 dated August 2, 2002 extended the deadline for issuing the
Asset Control Area (ACA) program regulations to September 15, 2002.
The Secretary has the authority to designate as revitalization areas those locations that meet one
of the following requirements: very low income area; high concentration of default or foreclosed
assets; or has a low home ownership rate. The purpose of the ACA program is to promote the
revitalization of designated communities, through expanding homeownership opportunities at
designated revitalization areas. HUD sells single-family homes at a discount to units of local
government and approved nonprofit organizations (preferred purchasers). Discount sales are not
offered to for-profit organizations (purchasers). The discounted single family homes have to be
1) designed as a dwelling for occupancy by one to four families; 2) located in a revitalization
area; 3) previously subject to mortgage insurance; and 4) owned by the Secretary pursuant to the
payment of insurance benefits. The purchasers perform rehabilitation work on the homes and
resell them to eligible buyers for no greater than the lesser of the ACA properties’ fair market
value or 115 percent of the net development costs. An eligible buyer has to reside in the home
for three years unless the home buyer is an officer, teacher or emergency medical technician.
With the exception of teachers, police officers and emergency medical technicians, the eligible
home buyer’s household income has to be equal or be lesser than 115 percent of the median
income for the area.
As of January 17, 2008, HUD sold a total of 1,633 properties to 13 ACA participants (local
governments or non-profit organizations). A total of 1,325 properties were sold to home buyers.
As of January 17, 2008, there were a total of 15 ACA participants of which eight had expired
ACA agreements and will not be renewed.
A review of corrective action2 taken on recommendations in the nationwide audit report3 on
HUD’s ACA program, recommended that HUD should reevaluate and adjust the final action
target date for implementing the ACA program regulations, and that appropriate training should
be provided to HUD employees and program participants during fiscal year 2004; however,
although training was provided and proposed ACA program regulations were published on
December 22, 2008, final ACA program regulations have not been issued yet.
Our audit objective was to determine whether HUD administered the ACA program in
compliance with ACA program requirements and federal regulations.
2
Corrective Action Verification, Asset Control Area Program, Report number 2003-NY-0801, Dated September
30, 2003.
3
National Audit, Asset Control Area Program, Single Family Housing, Report No. 2002-NY-0001, issued February
25, 2002.
4
RESULTS OF AUDIT
Finding: HUD’s Administration of the Asset Control Area Program
Needs Improvement.
Generally HUD’s Asset Control Area (ACA) program has increased homeownership for low and
moderate income borrowers and contributed to the revitalization of blighted communities;
however, HUD’s administration of the ACA program was not always in compliance with ACA
requirements and federal regulations, thus it needs improvement. Specifically, 1) final ACA
regulations need to be issued, 2) existing ACA program requirements need to be adequately
enforced, and 3) HUD’s monitoring needs to improve to ensure compliance with ACA program
requirements and federal regulations. As a result, final regulations are not issued to ensure
compliance, nonqualified entities were allowed to administer and/or participate in the program,
required public records searches were not supported or conducted, properties outside of asset
control areas were included in the program, properties were not sold within HUD timeframes and
dollar limits, potential conflicts of interest were not identified and resolved, and net development
costs were incorrectly calculated. We attribute this to HUD’s lack of guidance by not issuing
final ACA program regulations and its inadequate monitoring to detect and report on issues
identified.
ACA Regulations Have Not
Been Issued.
Final regulations for the Asset Control Area (ACA) program have not been issued.
According to United States Codes (U.S.C) Section 1710 (h) the secretary was
required to issue regulations to implement the program. Such regulations were
supposed to have taken effect not later than the expiration of a two-year period
beginning on October 21, 1998. However, the deadline for issuing the regulations
was extended to September 15, 2002 and previous OIG reports4 have recommended
that regulations be developed and issued; yet, ACA regulations still have not been
issued. Accordingly, due to the delay in issuing ACA regulations, there is no
assurance that program participants are administering the ACA program
consistently. It appears that ACA regulations have not been issued because it was
not a priority, as such; we attribute this to HUD not establishing or implementing
procedures to ensure that the regulations would be issued to meet the established
deadlines. HUD’s senior officials in the Office of Single Family Asset Management,
responsible for overseeing the ACA program, stated that the proposed ACA program
regulations were published on December 22, 2008 and the final ACA program
regulations are scheduled to be issued within the next fiscal year. They state that
4
National Audit, Asset Control Area Program, Single Family Housing, Report No. 2002-NY-0001, issued February
25, 2002 and a Memorandum for Corrective Action Verification Report No: 2003-NY-0801, Dated September 30,
2003.
5
because a key position within the Headquarters Office of Single Family Asset
Management was vacant, publishing of these regulations is taking an extended time,
along with the need to obtain general public comments, complete legal reviews of
proposed regulations and obtain concurrences from many officials; nevertheless the
regulations are still not issued.
Existing ACA Program
Requirements Were not
Adequately Enforced
Based on audits of four entities (Rochester, New York; Camden, New Jersey;
Reading , Pennsylvania; and Dallas, Texas) participating in HUD’s ACA
program, we concluded that existing ACA program requirements have not been
adequately enforced. Specifically, nonqualified entities were allowed to
administer the program, required public record searches were not supported or
performed, properties outside of designated asset control areas were transferred to
a participating entity’s jurisdiction, and properties were not sold within HUD’s
established timeframes. The details are described below:
A. Nonqualified entities were administering ACA programs for three of the four
audited ACA programs. Two nonprofit entities were allowed to participate or
administer the ACA programs for Rochester, New York and Reading,
Pennsylvania without having approval to participate in HUD’s single family
programs. Also, a for-profit organization was allowed to administer the
Camden, New Jersey’s ACA program. According to the Standard Operating
Procedures (SOP), Section (4.5) an ACA program participant may carry out its
obligations through its various departments and through arrangements with other
approved participating entities (PEs) pursuant to HUD’s published guidelines.
The participating entities must be a HUD approved nonprofit organizations.
However, since the Headquarters Office of Single Family Asset Management
staff did not designate these three entities as approved participating entities, they
were not qualified to participate in the ACA program. Headquarters officials
stated that ACA agreements signed by the housing commissioner are
enforceable legal contracts and are deemed to be waivers for ACA program
requirements included in the SOP. However, although the housing
commissioner’s signing an ACA agreement creates a legally enforceable
agreement and effectively waives compliance with some program requirements,
this does not ensure that the entities have adequate financial and administrative
capacity to effectively and efficiently administer the program. Nevertheless,
headquarters officials have stated that upon future renewal of any ACA
agreement, staff will ensure that all participating entities are HUD approved
nonprofit entities before they are allowed to participate in the ACA program.
B. The Philadelphia Homeownership Center staff could not provide documents
to support that required public record searches were conducted for three of the
four audited ACA participating entities (Rochester, New York; Camden, New
6
Jersey; and Reading, Pennsylvania), their board members, staff and associated
entities. For the fourth ACA participant (Dallas, Texas), the Denver
Homeownership Center’s staff provided documents to support that the public
records searches were conducted. However, the Denver Homeownership
Center staff did not provide documentation for their conclusions regarding a
possible conflict of interest involving a principal staff of the fourth ACA
participant. According to the Standard Operating Procedures (SOP), Section
(2.3.3) the ACA Program Support Division in each homeownership center
was required to conduct public record searches of the ACA participants’ board
members, principal staff, and business partners to determine potential
conflicts of interest and ineligible participants affiliated with the ACA
program participants. However, documentation was not provided by
homeownership center staff to support that these public record searchers had
been conducted by the ACA Program Support Division; as a result, there is no
assurance that all potential conflicts of interest are being identified and
resolved.
C. Two properties located outside of the Dallas, Texas asset control area were
transferred to the ACA participant in Dallas, Texas. To determine whether
properties sold to ACA participants were located in approved ACA areas, we
tested a non-statistical sample of 156 properties sold to the four ACA
participants in our sample. According to SOP, section (4.4) the ACA
agreement will outline the geographic areas to be covered by the program
participant during the term of the agreement. Nevertheless, although the ACA
agreement specified the program jurisdiction, HUD transferred two properties
located outside of the designated asset control area to the ACA participant in
Dallas, Texas, thereby circumventing the general requirements.
D. Several prior external annual audits and HUD reviews, as well as our audits of
the four ACA participants revealed that the four participants were not able to sell
ACA properties within timeframe imposed by HUD. An average of over 22
percent of the ACA properties had not been sold after 18 months from the date
of acquisition. According to the ACA agreement, ACA participants were
required to resell 75 and 100 percent of its ACA properties to eligible home
buyers within 12 and 18 months respectively after they were acquired from
HUD. However, HUD officials neither sought corrective actions from ACA
participants nor imposed sanctions on these ACA participants for not complying
with the timeframes established by HUD. Office of Single Family Asset
Management official stated that ACA participants were not able to sell the ACA
properties within the established timeframe due to economic and other regional
factors, which impacted the real estate markets; however, no action was taken to
adjust the timeframes to market conditions.
7
HUD’s Monitoring Was Not
Adequate.
Audits of the four ACA participants and reviews of HUD monitoring reports for the
four audited ACA participants revealed that Homeownership Center (HOC) staff’s
monitoring of ACA participants needs to be improved to ensure ACA participant’s
compliance with the ACA program requirements. Although officials indicate that
monitoring was conducted, we found that
1. Conflicts of interest existed in the Rochester, New York’s ACA program
operations. The conflict was caused by allowing two board members of the
participating entity that administered the Rochester’s ACA program, to work for
two different entities that provided the Rochester ACA program with
administrative and financial services. In this instance, the participating entity
received a fee from the City for administering the ACA program, and the
financial institution obtained a fee from all banks that provided loans used for
repair costs related to the ACA properties. Accordingly, due to the business
relationships of the board members, it could raise questions about the
reasonableness of the fees paid to the participating entity to administer the
program, and it could appear that the financing of the program was conducted in
a manner that benefited the financial institution by maximizing its fees.
Although HUD conducted an annual monitoring review of the City of
Rochester's ACA program, HUD's annual reviews did not report any conflict of
interest issues The ACA agreement provided that the purchaser (Rochester) and
its agents, board of directors, principal staff, and contractors were to avoid any
and all conflicts of interest and self-dealing. However, by not identifying and
eliminating these conflict of interest matters, there is the potential that the public
and other interested parties might not believe that the program is being
administered in an efficient and independent manner;
2. The ACA participants in Dallas, Texas; Rochester, New York; and Camden,
New Jersey included either ineligible or unsupported costs in determining
some ACA properties’ net development costs. The net development costs for
each ACA property are used in the process of determining the maximum
resale price for each ACA property. Net development costs for 16 out of 24
tested ACA properties associated with the three ACA participants were found
to include unsupported or ineligible costs. According to the ACA agreement,
ineligible costs that cannot be a part of the net development costs or eligible
expenses include housing developer fees, sales bonuses, resale incentives, and
any development costs that are paid from local, state, or federal grant funds
(including but not limited to HOME or CDBG funds5). However, other than
for Camden, New Jersey, HUD's monitoring reviews of the ACA participant
5
The Home Investment Partnership Program (HOME) and Community Development Block Grant (CDBG) Program
are HUD’s Community Planning and Development programs in which resources are provided to address a range of
community development needs such as housing rehabilitation and down-payment assistance, etc.
8
in Dallas, Texas and Rochester, New York did not identify inadequacies or
that ineligible costs were included in determining the ACA properties' net
development costs. Accordingly, by not identifying these inaccuracies HUD’s
monitoring was not always effective in ensuring ACA participants compliance
with the program requirements.
3. Two of the four audited ACA participants (Rochester, New York and
Camden, New Jersey) sold ACA properties for more than the maximum limit
imposed by HUD. The noncompliance cases resulted from either including
ineligible costs in the calculation of net development costs or selling ACA
properties at fair market value that exceeded 115 percent of the ACA
properties’ net development costs. Verification of 48 ACA property files to
determine whether ACA properties were sold to eligible home buyers for the
lesser of fair market value or 115 percent of net development costs revealed
that five of the 48 ACA properties were sold for more than the lesser of fair
market value or 115 percent of net development costs. HUD's monitoring
reviews of the ACA participant in Rochester, New York did not determine or
report that an ACA property had been sold for more than the limit imposed by
HUD. According to the ACA agreement between HUD and the three ACA
participants, ACA participants were required to sell ACA properties for no
more than the lesser of 115 percent of the net development costs or fair market
value of the ACA properties.
According to the SOP, section (2.2) Housing Program Officers (HPOs) will provide
ongoing monitoring and evaluation of ACA program participants and coordinate
ACA program activities among HOC participants and Headquarters staff as needed
to ensure that quality controls for the ACA program are in effect. HPOs’ duties
include 1) providing continual guidance, training, and assistance to ACA program
applicants and participants; 2) addressing a participant’s specific compliance issues
and providing notification of such issues to HOC directors and other appropriate
HUD staff of instances of nonperformance and/or noncompliance; 3) providing
written and oral notification to the ACA program participant of noted instances of
noncompliance and corrective/remedial actions needed; and 4) making a
recommendation of an applicant’s approval/disapproval for the ACA program and
preparing the HOC’s written justification to support such recommendation.
However, based on the deficiencies noted above HUD’s monitoring was not always
adequate or efficient enough to ensure ACA participants’ compliance with the ACA
program requirements and federal regulations. Headquarters Housing officials
disagreed and stated that the monitoring performed including contracted out
monitoring procedures were adequate and that our review had not determined
material instances of non-compliance, However, although the Asset Control Area
program monitoring is generally being conducted, there is room for improvement
and the issuance of final regulations and more consistent and uniform monitoring
will improve compliance with program requirements and increase the effectiveness
and efficiency of the program.
9
Conclusion
Generally HUD’s Asset Control Area (ACA) program has increased
homeownership for low and moderate income borrowers and contributed to the
revitalization of blighted communities; however, since HUD’s administration of
the ACA program did not adequately follow ACA requirements, it needs
improvement. Specifically, ACA final regulations have not been issued, program
requirements were not always adequately enforced, and HUD’s monitoring was
not adequate to ensure compliance with program requirements. As a result, final
regulations are not issued to ensure compliance, nonqualified entities were
allowed to administer the program, required public records searches were not
supported or conducted, properties outside of asset control areas were included in
the program, properties were not sold within HUD timeframes and dollar limits,
potential conflicts of interest were not identified and resolved, and development
costs were incorrectly calculated. We attribute this to HUD’s lack of guidance by
not issuing final ACA program regulations and its inadequate monitoring to detect
and report issues of noncompliance. Accordingly, HUD needs to develop and
implement controls to ensure that the final Asset Control Area regulations are
immediately issued, provide additional training and technical assistance so that
ACA program participants and staff are aware of the future issued ACA
regulations, ensure that existing and future ACA requirements are adequately
enforced, and that HUD monitoring is always effective in improving ACA
participants’ compliance with program requirements.
Recommendation
We recommend that the Deputy Assistant Secretary for Single Family Housing
instruct the Office of Single Family Asset Management to:
1A. Develop and implement controls to ensure that the final Asset Control Area
regulations are issued in a timely manner.
1B. Develop and implement controls to provide additional training and technical
assistance to ensure that ACA program participants and staff are aware of the
future ACA regulations when issued.
1C. Develop and implement controls to ensure that existing and future ACA
requirements are always adequately enforced.
1D. Enhance procedures to ensure that HUD’s monitoring is always effectively
performed to ensure ACA participants’ compliance with program
requirements.
10
SCOPE AND METHODOLOGY
We conducted audits of the ACA participants in Rochester, New York; Dallas, Texas; Reading,
Pennsylvania; and Camden, New Jersey.
Our audit was conducted in Newark, New Jersey; Rochester, New York; Dallas, Texas; Reading,
Pennsylvania; Camden, New Jersey; and Washington, D.C., from March 2008 through April
2009. The audit period was calendar years 2006 and 2007. To achieve the audit objectives we:
Obtained and reviewed relevant laws, draft regulations, HUD standard operating
procedures, ACA program agreements, audit reports, and HUD monitoring review
reports.
Analyzed information and reports submitted to HUD by the four ACA participants.
Conducted interviews with HUD staff from the Denver and Philadelphia Homeownership
Centers; Headquarters Single Family Asset Management staff; and officials from the four
ACA participants.
Traced payments for costs associated with the ACA properties to source documents such
as cancelled checks and vendors’ invoices.
Selected non-statistical samples at each audited participating entity to examine appraisal
reports, review property files, verify property locations, and conduct inspections of select
properties. The sizes of the sample universes varied because of timing differences as to
when properties were acquired and finally sold, and to address different objectives;
therefore the results of these samples cannot be projected. The samples were as follows:
o From a universe of 409 ACA properties associated with Rochester, NY (179); Dallas,
TX (140); Camden, NJ (31); and Reading, PA (59), we selected and reviewed a
sample of 140 ACA property appraisal reports (73, 14, 4, and 49 respectively) to
determine the value of the properties and whether their resale price was within
required limits.
o From the same universe of 409 properties, we selected and reviewed a sample of 48
ACA property files (21 from Rochester; 14 from Dallas; 4 from Camden; and 9 from
Reading) to ensure that the files documented compliance with program regulations.
o From a universe of 331 ACA properties that had been sold to the three participating
entities, Rochester, NY (132); Dallas, TX (140); and Reading, PA (59), we selected a
sample of 156 ACA properties (132; 14; and 10 respectively) to determine whether
they were located within HUD’s approved ACA areas.
o From a universe of 382 ACA properties associated with Rochester, NY (132); Dallas,
TX (140); Camden, NJ (51); and Reading, PA (59), we selected and inspected a
11
sample of 38 ACA properties (13; 10; 5; and 10 respectively), to verify that the
properties were repaired in compliance with ACA program requirements.
Utilized data retrieval tools such as LexisNexis to perform public records searches to
identify any potential conflicts of interest.
We conducted the audit in accordance with generally accepted government auditing standards.
Those standards require that we plan and perform the audit to obtain sufficient and appropriate
evidence to provide a reasonable basis for our findings and conclusions based on our audit
objectives. We believe that the evidence obtained provides a reasonable basis for our findings
and conclusions based on our audit objectives
12
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.
Safeguarding of assets and segregation of duties.
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 audit objectives:
Program operations – Policies and procedures that management implemented
to reasonably ensure that its program met its objectives.
Validity and reliability of data – Policies and procedures that management
implemented to reasonably ensure that valid and reliable data were obtained,
maintained and fairly disclosed in reports.
Compliance with laws and regulations - Policies and procedures that
management implemented to reasonably ensure that its resource use was
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.
13
Significant Weaknesses
Based on our review we believe the following items were significant weaknesses:
HUD did not have adequate controls over compliance with laws and
regulations because final ACA program regulations have not been issued and
existing ACA program requirements and other federal regulations were not
adequately enforced.
HUD did not have adequate controls over the ACA program operations as
HUD’s monitoring of the ACA program needs improvement to detect all
ACA participants’ noncompliance with the ACA program requirements and
federal regulations.
14
HUD's Administration of the Asset Control Area Program Needs Improvement
Published by the Department of Housing and Urban Development, Office of Inspector General on 2009-09-01.
Below is a raw (and likely hideous) rendition of the original report. (PDF)