oversight

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)

                                                                              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