oversight

The City of Rochester, New York's Management Controls Over the Asset Control Area Program Needs Improvement To Comply With All Requirements

Published by the Department of Housing and Urban Development, Office of Inspector General on 2009-02-12.

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

                                                                 Issue Date
                                                                 February 12, 2009
                                                                 Audit Report Number
                                                                 2009-NY-1007




TO:        Brian D. Montgomery, Assistant Secretary for Housing-Federal Housing
                                   Commissioner, H



FROM:      Edgar Moore, Regional Inspector General for Audit, 2AGA



SUBJECT: The City of Rochester, New York’s Management Controls Over the Asset
         Control Area Program Needs Improvement To Comply With All Requirements

                                   HIGHLIGHTS

 What We Audited and Why

            We audited the City of Rochester’s (City) asset control area (ACA) program as
            part of a nationwide audit of the U.S. Department of Housing and Urban
            Development’s (HUD) monitoring of ACA participants. We selected the City
            because of the level of activity the participant had in HUD’s ACA program. The
            objective of the audit was to determine whether the City administered its ACA
            program in compliance with program requirements to increase homeownership
            for low and moderate income borrowers and contribute to the revitalization of
            blighted communities.

 What We Found
            The City’s ACA program generally met the program objectives for increasing
            homeownership for low and moderate income borrowers and contributed to the
            revitalization of blighted communities, but was not always administered in
            compliance with program requirements. Specifically, the City did not (1) obtain
            HUD approval before allowing a nonprofit organization, which lacked the
            administrative capacity, to participate in its ACA program; (2) administer its ACA
            program in a cost-effective manner, as excess development costs were incurred and
           properties were not resold within the timeframe imposed by HUD; (3) sell an ACA
           property within the price limit imposed by HUD; (4) obtain HUD’s approval for
           conflict-of-interest issues; and (5) accurately calculate or report to HUD net
           development costs for each ACA property. Consequently, there was no assurance
           that the City’s ACA program, which received an average annual discount of more
           than $1.6 million on ACA properties, was always administered in an effective and
           efficient manner.

What We Recommend
           We recommend that the Assistant Secretary for Housing-Federal Housing
           Commissioner instruct the City to (1) develop procedures to ensure that any
           nonprofit hired to administer or participate in the ACA program is approved by
           HUD in accordance with ACA policies, (2) ensure that ACA properties purchased
           from HUD are resold within the timeframe imposed by HUD to avoid
           accumulating holding costs that increase the resale prices of the properties, (3)
           buy down the mortgage for the ACA property that was resold to the eligible
           purchaser for $4,700 more than the limit imposed by HUD, (4) cease participation
           with individuals or entities that have conflict-of-interest relationships with those
           who administer the ACA program unless HUD approval can be obtained, (5)
           develop procedures to ensure that net development costs for each ACA property
           are accurately calculated and reported to HUD, and (6) establish and implement
           internal control procedures to monitor the compliance of its ACA program
           participants with program requirements. In addition, the Assistant Secretary for
           Housing-Federal Housing Commissioner should review the noncompliance issues
           identified in the report and make a decision on whether to impose sanctions in
           accordance with section 8 of the ACA standard operating procedures.

Auditee’s Response
           We discussed the results of our review with the auditee during the audit and at an
           exit conference held on December 30, 2008. Auditee officials provided their
           written comments on December 29, 2008, in which they strongly disagreed with
           the finding. The complete text of the auditee’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 City of Rochester, New York’s Management Controls Over the   6
                 Asset Control Area Program Needs Improvement To Comply With
                 All Requirements.




Scope and Methodology                                                             12

Internal Controls                                                                 13

Appendixes

   A. Schedule of Questioned Costs and Funds to Be Put to Better Use              15

   B. Auditee Comments and OIG’s Evaluation                                       16
   C. Criteria                                                                    28




                                             3
                     BACKGROUND AND OBJECTIVES

The City of Rochester (City) maintains its city hall at 30 Church Street, Rochester, New York.
The City is administered by a mayor and a nine-member city council. The current mayor is Mr.
Robert Duffy. On December 28, 2005, the City renewed its asset control area (ACA) agreement
with the U.S. Department of Housing and Urban Development (HUD) for two years.

Section 204 of the National Housing Act (12 U.S.C. (United States Code) 1710) directs HUD to
promote the revitalization of neighborhoods through the creation of ACAs in HUD-approved
communities. HUD sells HUD-owned properties to authorized entities (local partners) located
within the ACA at a discounted price. In turn, the local partners must ensure that the properties
are rehabilitated and sold to eligible homebuyers.

The ACA agreement provided that the City would convey the properties to the Rochester
Housing Development Fund Corporation (Corporation) and the Corporation would be bound
with the respect to the properties as if it were the purchaser from HUD. The ACA agreement
was executed by the Assistant Secretary for Housing, the City’s mayor, and the president of the
Corporation.

HUD sells properties to the City at a discount from the “as is” fair market value. The City then
resells the properties to the Corporation. The Corporation is a nonprofit organization that was
established to purchase vacant single-family homes for renovation and resale to first time low
and moderate income families. It is located at 183 East Main Street, Suite 900, Rochester, New
York, and shares office space with the Greater Rochester Housing Partnership (Partnership).

The Corporation’s application to participate in HUD single-family programs was rejected by the
Philadelphia Homeownership Center, Program Support Division, in 2004. The reasons for the
rejection included the Corporation’s lack of administrative capacity to manage the ACA
program, allowing a member of the Corporation’s board of commissioners to receive
compensation through the Partnership that administers the City’s ACA program, and sharing
office space with the Partnership.

The Partnership was hired to administer the City’s single-family programs including the ACA
program. However, the Partnership has not sought or obtained approval to participate in HUD’s
single-family programs. The City has paid the Partnership $186,000 from Community
Development Block Grant (CDBG) funds annually to administer the ACA program. HOME
Investment Partnerships Program (HOME) and state grants were also used to pay various
community housing development organizations and developers a total of $681,839 during 2006
and 2007 to monitor the rehabilitation of 155 ACA properties.

As of November 2008, HUD officials had not formally issued the ACA draft regulations.
Therefore, in conducting the audit, we followed the ACA polices and guidance in the standard
operating procedures, the ACA agreement, and instructions for potential ACA participants, as
well as Mortgagee Letter 2002-01 and 24 CFR (Code of Federal Regulations) 84.4 and 42.
Appendix C contains excerpts of these ACA policies.


                                                4
The City has purchased 311 ACA properties from HUD since January 2004. During fiscal years
2006 and 2007, the City bought 70 and 62 ACA properties at discounts of more than $1.7 and
$1.5 million, respectively.

The objective of the audit was to determine whether the City’s ACA program was administered
in compliance with program requirements of increasing homeownership for low and moderate
income borrowers and contributing to the revitalization of blighted communities.




                                             5
                                 RESULTS OF AUDIT

Finding 1: The City of Rochester, New York’s Management Controls
           Over the Asset Control Area Program Needs Improvement
           To Comply With All Requirements

The City’s ACA program met the program objectives for increasing homeownership for low and
moderate income borrowers and contributed to the revitalization of blighted communities, but was
not always administered in compliance with program requirements. Specifically, the City did not
(1) obtain HUD approval before allowing a nonprofit organization, which lacked the administrative
capacity, to participate in its ACA program; (2) administer its ACA program in a cost-effective
manner, as excess development costs were incurred and properties were not resold within the
timeframe imposed by HUD; (3) sell an ACA property within the price limit imposed by HUD; (4)
obtain HUD’s approval for conflict-of-interest issues; and (5) accurately calculate or report to HUD
net development costs for each ACA property. Consequently, there is no assurance that the City’s
ACA program, which received an average annual discount of more than $1.6 million on ACA
properties, was always administered in an effective and efficient manner.


 The City Did Not Obtain
 HUD’s Approval for a
 Nonprofit Organization to
 Participate in Its ACA Program


               The City did not obtain HUD’s approval before allowing the Corporation, a
               nonprofit organization, to participate in its ACA program. The City purchases
               ACA properties from HUD and then resells the properties to the Corporation,
               which is legally responsible for accomplishing the ACA program objectives by
               repairing and reselling the properties to eligible purchasers. According to the
               ACA’s standard operating procedures, section 4.5, an ACA participant may carry
               out its obligations through various departments and through arrangements with
               other approved participating entities that have been determined as eligible to
               participate in the ACA program. A participating entity must be a HUD-approved
               nonprofit organization. However the Corporation’s application to participate in
               HUD’s single-family program, which includes the ACA program, was rejected by
               HUD for several reasons, such as (1) a member of the Corporation’s board of
               commissioners was an employee of the Partnership, a nonprofit organization that
               administered the ACA program, (2) the Corporation did not have sufficient staff
               to administer the ACA program, and (3) the Corporation was not located in a
               space that was separate and apart from any other entity as it was located in the
               same space as the Partnership.




                                                 6
          Moreover, according to an internal HUD memorandum, dated August 12, 2005,
          HUD rejected the Corporation’s application to become a HUD-approved
          nonprofit organization because it considered the Corporation to be a liability shell
          constructed to insulate the parent organization from any liability in the event of a
          serious financial problem. Therefore, reselling the ACA properties to the
          Corporation, which did not have staff to administer the ACA program, increased
          the risk that the program would not effectively achieve its objectives.

          HUD officials from the Philadelphia Homeownership Center stated that although
          they did not provide the City with written approval to allow the Corporation to
          participate in the ACA program, they considered that approval was granted
          because the Corporation was mentioned in the City’s ACA agreement approved
          by HUD headquarters officials. Nevertheless, the Corporation was not included
          in the HUD list of approved agencies authorized to participate in the single-family
          program.

          Despite HUD’s non-approval and contrary to regulations, during the years 2006
          and 2007, the City bought 132 ACA properties from HUD at a $3.2 million
          discount and resold these properties to the unapproved nonprofit organization (the
          Corporation). Accordingly, the City received an average annual discount of more
          than $1.6 million from the ACA properties’ appraised value during these two
          years.

The ACA Program Was Not
Administered in a Cost-
Effective Manner

          The ACA program was not administered in a cost-effective or efficient manner
          because the Corporation did not have the administrative capacity to do so. As a
          result, the City annually used $186,000 in CDBG funds to pay another nonprofit,
          the Partnership, for administering the program. The Corporation also used
          HOME and state grants to pay various community housing development
          organizations and developers a total of $681,839 during 2006 and 2007 to monitor
          the rehabilitation of 155 ACA properties, thereby inefficiently increasing the
          development costs for these properties.

          In addition, the City did not comply with the resale timeframes imposed by HUD
          for the ACA properties. During 2006 and 2007, the City resold 179 ACA
          properties to eligible homebuyers. Only 57 and 84 percent of 179 ACA properties
          were resold within 12 and 18 months, respectively. According to the ACA
          agreement, section 5.5, Resale Deadline, (1) 75 percent of the acquired properties
          must be resold within 12 months after the transfer effective date, and 100 percent
          of the properties must be resold within 18 months after the transfer effective date.
          The delay in quickly reselling the ACA properties increased the properties’
          holding costs (interest expense, property taxes, maintenance costs, etc.) that could
          have impacted the affordability of ACA properties for low to moderate income

                                            7
          buyers (due to increased sales prices) and/or could have resulted in the need for
          additional grants from the CDBG or HOME programs to reduce the properties’
          resale prices to more affordable amounts.

          We reviewed the financial records related to 21 ACA properties and determined
          that these properties had an “as is” appraised value of $802,000 and were sold by
          HUD with a $546,496 discount to the City for a total of $255,504. Under the
          ACA program, HUD offers discount prices for properties with the intent of
          contributing to the cost of rehabilitating and selling properties to homeowners at
          reduced prices. However, in this case, the City resold the properties to the
          Corporation, which did not have the capacity to properly administer the program.
          Consequently, as mentioned above, development costs increased because the
          Corporation had to hire a developer to monitor the rehabilitation for each property
          at a cost of more than $4,000 per property. Further, because the properties were
          not resold in a timely manner, unnecessary holding costs for property taxes,
          interest, security, and maintenance were also incurred. As a result, the
          development costs for these 21 properties amounted to more than $1.9 million.
          Although the appraised value for the rehabilitated properties was nearly $1.35
          million, the properties were later resold for approximately $1.31 million. Thus,
          the difference between the total development costs and the resale proceeds for the
          properties, which amounted to $613,720, had to be absorbed by grants from HUD
          and state programs (this amount included $375,436 in community housing
          development organization/HOME program funds and loss reserves of the
          nonprofit corporation), which was not the intent of the program. Consequently, if
          the Corporation had the capacity to administer and monitor these properties itself,
          federal and state grants might not have been needed to inefficiently pay
          significant portions of the development costs incurred; thus, more federal and
          state grants would have been available for other eligible families.


One ACA Property Was Resold
for $4,700 More Than the
Maximum Allowable Price

          One ACA property was resold for $58,700, although the appraised value at the
          time of resale was $54,000. According to the ACA agreement, section 5.3, Resale
          Price and Conditions, the purchaser shall not sell the acquired property for a
          resale price of more than the lesser of (1) fair market value of the property at the
          time of the resale or (2) 115 percent of the eligible expenses. As a result, the
          eligible buyer overpaid $4,700 for the property, and although not material, this
          excess could potentially increase the risk of default on the mortgage.




                                           8
HUD’s Approval to Resolve
Conflicts of Interest Was Not
Obtained

            The City did not obtain HUD’s approval before it allowed a vice president of a
            financial institution and the president of the Partnership to become commissioners
            of the nonprofit entity (the Corporation) that was legally responsible for
            accomplishing the ACA program objectives. In this instance, the financial
            institution obtained a fee from all banks that provided loans used for repair costs
            related to the ACA properties, and the Partnership received a fee from the City for
            administering the ACA program for the Corporation. Accordingly, due to the
            business relationships of the commissioners, it could appear that the financing of
            the program was conducted in a manner that benefited the financial institution by
            maximizing its fees, and it could also raise questions about the reasonableness of
            the fees paid to the Partnership to administer the program. The ACA agreement
            provided that the purchaser (the City) and its agents, board of directors, principal
            staff, and contractors were to avoid any and all conflicts of interest and self-
            dealings. However, as a result of not eliminating these conflict-of-interest
            matters, there was a potential that public and other interested parties might not
            believe that the program was administered in an efficient and independent
            manner.

Net Development Costs Were
Not Accurately Calculated or
Reported

            Based on review of a status report of ACA properties and interviews with
            Partnership staff, we learned that the Partnership’s procedures for calculating net
            development costs did not include removing grants or other sources of funding
            used to subsidize this cost. As such, the Partnership did not properly calculate or
            report to HUD the net development costs for the 132 ACA properties purchased
            from HUD during the audit period. The net development costs for each ACA
            property are used in the process of determining the maximum resale price for each
            ACA property. 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 funds).

            For instance, total development costs related to an ACA property located at 420
            Sawyer Street in Rochester were $86,951. Based on reports submitted to HUD by
            the Partnership, the ACA property net development costs were $81,951.
            Although the Partnership reduced the total development costs by $5,000, which
            represents the ineligible developer fees, the development costs were not reduced
            by the grants of $28,151 from federal and state sources used to subsidize the ACA
            property. Accordingly, based on the ACA agreement, net development costs for

                                             9
             this ACA property should have been reported as $53,800 to reflect the reduction
             of the total grants received from different sources including federal and state
             sources. As a result of reporting inaccurate information to HUD related to the net
             development costs for ACA properties, HUD was not able to conduct effective
             monitoring of the ACA participant’s compliance with the program requirements
             and determine whether the properties were sold for the lesser of the fair market
             value or 115 percent of the eligible development cost.

Conclusion

             The City’s ACA program was not always administered in compliance with program
             requirements. Specifically, ACA properties were resold by the City to a non-HUD-
             approved nonprofit organization that did not have staff to administer the ACA
             program. Also, the City did not administer the ACA program in the most effective
             manner as excess development costs were incurred and properties were not resold
             within the timeframe imposed by HUD, an ACA property was resold for $4,700
             more than the limit imposed by HUD, HUD’s approval was not obtained for
             conflict-of-interest issues, and net development costs for each ACA property were
             not accurately calculated or reported to HUD. This condition was caused by the
             City’s lack of procedures to ensure that operations were conducted in accordance
             with program requirements. Consequently, there was no assurance that the City’s
             ACA program, which received an average annual discount of more than $1.6 million
             on ACA properties purchased from HUD, was always administered in an effective
             and efficient manner.

Recommendations

             We recommend that the Assistant Secretary for Housing Federal- Housing
             Commissioner instruct the City to

             1A. Develop procedures to ensure that nonprofits hired to participate or
                 administer the ACA program are approved by HUD in accordance with
                 ACA policies and standard operating procedures.

             1B. Ensure that ACA properties purchased from HUD are resold within the
                 timeframe imposed by HUD to avoid accumulating holding costs that
                 increase the resale prices of the properties, thereby impacting the
                 affordability of the properties for low to moderate income buyers, and/or
                 may require the use of other funds or grants such as HOME grants.

             1C. Buy down the mortgage for the ACA property that was resold to the eligible
                 purchaser for $4,700 more than the limit imposed by HUD.

             1D. Cease participation with individuals or entities that have conflicts of interest
                 with the administrators of the ACA program, unless HUD’s approval can be
                 obtained.

                                              10
1E. Develop procedures to ensure that net development costs for each ACA
    property are accurately calculated and reported to HUD; procedures should
    ensure that ineligible expenses such as developer fees or grants received
    from different sources should be shown but not included in the computation.

1F. Establish and implement internal control procedures to monitor the
    compliance of its ACA program participants with program requirements.

In addition, the Assistant Secretary for Housing-Federal Housing Commissioner
should

1G. Review the noncompliance issues identified in the report and make a
    decision on whether to impose sanctions in accordance with section 8 of the
    ACA standard operating procedures to ensure the integrity of the ACA
    program and enforce compliance

1H. Review and determine the eligibility of the $186,000 paid to the non-HUD-
    approved organization (the Partnership) to administer the program. If any
    amounts are determined not to be eligible, they should be repaid.




                               11
                        SCOPE AND METHODOLOGY

Our audit was conducted at the Corporation, located at 183 East Main Street, Suite 900,
Rochester, New York. To accomplish our objectives, we performed the following:

           Obtained an understanding of the City’s ACA program through a review of City
           policies and agreements related to the program.

           Analyzed information obtained from public records using data retrieval tools such as
           LexisNexis.

           Reviewed prior audits, reviews, and reports on the City’s ACA program conducted by
           the Office of Inspector General (OIG), HUD, and independent public accountants.

           Analyzed information and reports submitted to HUD by the City and the Corporation.

           Conducted interviews with staff from HUD, the City, and the Corporation.

           Perfomed analytical procedures and selected items for testing based on evaluation of
           risks, including the relationship between appraised value and resale price, amount of
           holding costs per property, and questions about a specific category of cost. We
           selected the following samples:
           -Selected a nonstatistical sample of disbursements for expenses related to the ACA
            program and reviewed the supporting documents such as the check register,
            cancelled checks, and invoices.
           -Reviewed 21 ACA property files as well as associated homebuyer files.
           -Reviewed 73 ACA property appraisal reports.
           -Inspected 13 ACA properties.

We conducted our fieldwork from March through May 2008. The audit covered the period
January 1, 2006, through December 31, 2007. However, the period was extended as necessary to
achieve our objectives

We performed our audit in accordance with generally accepted government auditing standards.
Those standards require that we plan and perform the audit to obtain sufficient, 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 achieved:

       Effectiveness and efficiency of operations,
       Reliability of financial reporting,
       Compliance with applicable laws and regulations, and
       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. They include the processes and procedures for planning,
organizing, directing, and controlling program operations as well as the systems for measuring,
reporting, and monitoring program performance.



 Relevant Internal Controls
              We determined that the following internal controls were relevant to our audit
              objectives:

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

                      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.

                      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.

              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 that the following items are significant weaknesses:

                    The City’s controls were not always adequate to ensure that program
                    objectives were achieved. The City resold an ACA property for more than
                    the limit imposed by HUD, and ACA properties were not resold within the
                    timeframes imposed by HUD (see finding).

                    The City’s controls were not always adequate to ensure the reliability and
                    validity of reports submitted to HUD. Reports submitted to HUD by the
                    City did not include accurate information related to the net development
                    costs for each ACA property (see finding).

                    The City’s controls did not always ensure compliance with the ACA
                    agreement and program requirements. The City allowed a nonprofit
                    organization (the Corporation), which did not have the administrative
                    capacity, to administer the ACA program without obtaining HUD’s
                    approval. Also, the City did not obtain HUD’s approval regarding conflict-
                    of-interest issues.




                                             14
                                          APPENDIXES

Appendix A

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

     Recommendation
            number             Ineligible 1/     Unsupported 2/

                  1C                 $4,700
                  1H                                     $186,000



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 the 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.




                                                    15
Appendix B

        AUDITEE COMMENTS AND OIG’S EVALUATION


Ref to OIG Evaluation   Auditee Comments




Comment 1




                         16
Ref to OIG Evaluation   Auditee Comments




Comment 2




Comment 3




                         17
Ref to OIG Evaluation   Auditee Comments




Comment 4




                         18
Ref to OIG Evaluation   Auditee Comments




Comment 5




                         19
Ref to OIG Evaluation   Auditee Comments




Comment 6




                         20
Ref to OIG Evaluation   Auditee Comments




Comment 7




Comment 8




                         21
Ref to OIG Evaluation   Auditee Comments




Comment 9




Comment 10




Comment 11




Comment 12




                         22
Ref to OIG Evaluation   Auditee Comments




Comment 13


Comment 12




                         23
                           OIG Evaluation of Auditee Comments

Comment 1     We have revised the report by changing the finding title and reflecting that the
              City and the Corporation met the general program objective in acquiring,
              rehabilitating and reselling ACA properties. However, we determined that the
              Rochester ACA program was not always administered in compliance with HUD
              requirements. For instance, the City did not 1) obtain HUD's approval before
              allowing a nonprofit organization that lacked administrative capacity, to
              participate in its ACA program; 2) sell ACA properties within the timeframe
              imposed by HUD; 3) sell an ACA property within the price limit imposed by
              HUD; 4) obtain HUD's approval for conflict of interest issues; and 5) accurately
              calculate or report net development costs for each ACA property to HUD.

Comment 2     It is true that the Corporation signed the City’s ACA agreement as an ACA
              participating entity along with a HUD official. However, according to Mortgagee
              letter 2002-01 and the ACA Standard Operating Procedures, an ACA
              participating entity must be a HUD approved nonprofit entity. In addition, a
              nonprofit organization must have the administrative capacity to develop and carry
              out their FHA approved homeownership plans in a timely and successful manner
              to participate in FHA's Single Family activities, including purchasing discounted
              HUD homes. Consequently, although a HUD official signed the ACA
              agreements, this does not over ride the fact that the Corporation should not have
              been allowed to participate in the ACA program, since it was not considered an
              approved entity for participating in HUD’s Single Family Programs. As such, the
              Corporation should now seek approval from HUD to participate in its Single
              Family Programs to ensure compliance with program regulations.

Comment 3     The City’s ACA program could have been administered more efficiently and
              effectively. According to the ACA's Standard Operating Procedures, entitled
              Administrative Capacity-an applicant (ACA participant) should apprise HUD of
              its capacity to administer the ACA program and must demonstrate its ability to
              carry out a proposed business plan in a reasonable time frame and in a successful
              manner. The Corporation did not have administrative capacity to administer the
              ACA program, therefore other entities had to be hired and additional costs were
              incurred. Thus, the fees paid to the non-profit agencies were added to the costs of
              each ACA property, and home buyers had to pay the additional costs when they
              purchased the ACA properties. Furthermore, since the sales proceeds were not
              adequate to pay for the costs of administration, acquisition, rehabilitation and
              marketing, additional funds from state and federal programs had to be provided to
              cover the shortfall. As a result, these additional funds were not available to
              address other community needs, which was not the intent of the ACA program.

Comment 4 The auditee acknowledged that the sale deadlines were not met. According to the
          ACA agreement the City of Rochester was required to resell seventy five percent
          and hundred percent of the ACA properties within 12 and 18 months respectively
          of each property's transfer effective date. As a result of the noncompliance with
          the resale timeframe imposed by HUD, additional holding costs were incurred for


                                              24
              some ACA properties. Contrary to City official’s comments, the additional
              holding costs are not offset by properties that were sold within the program time
              limits. Marketability of properties can be impacted by the property’s features or
              external factors, such as economic conditions, however, the 12 and 18 month time
              limit imposed by HUD is a reasonable amount of time to complete the
              rehabilitation and marketing of the properties. Thus, City officials need to
              develop procedures to ensure that the ACA properties are sold within time frames
              imposed by HUD, or seek approval to extend the timeframes due to market
              conditions.

Comment 5     We agree that the Rochester ACA met its general program objective in acquiring,
              rehabilitating and reselling ACA properties and that the ACA home buyers we
              reviewed, were qualified to receive HOME and CDBG grants. The costs incurred
              for program administration and monitoring included $186,000 paid annually to
              the Partnership and an average of $4,000 paid to developers for each property.
              For the two program years in our sample the administrative and monitoring costs
              were approximately $992,000 or on average $6,400 per property. However, these
              costs may have been lower if all the administration and monitoring would have
              been conducted by one qualified organization, thereby eliminating some expenses
              paid for developers’ profits. Furthermore, hiring different organizations to
              administer the City’s ACA program along with the noncompliance with HUD
              resale deadlines resulted in the use of HOME and CDGB funds to pay these costs
              and reduced the City's HOME and CDBG funds available for other community
              needs.

Comment 6 According to the ACA agreement, section 5.3 entitled Resale Price and
          Conditions, the Fair Market Value of the property at the time of resale shall be
          determined by the appraisal obtained by the resale buyer's lender, or if there is no
          resale buyer's lender, by the FHA Roster appraiser hired by the purchaser. The
          purchaser, at its own expense, may order a second independent appraisal and the
          lesser of the two appraisals shall be the Fair Market Value of the property at the
          time of resale. Therefore, the correct fair market value of the above ACA property
          was supposed to be $54,000 and the correct resale price of the property was
          supposed to be $54,000 because the fair market value of the property was less
          than the net development cost. Accordingly, as stated in the finding the property
          was sold for more than the maximum allowable price; thus, the City should pay
          down the mortgage by $4,700.

Comment 7 We contacted the president of the Partnership subsequent to the exit conference
          and she informed us that she had stopped being a member of the board of
          directors of the Corporation prior to the start of our audit, but she was not able to
          provide the exact date. We also received correspondence from another Partnership
          employee that indicated that the president of the Partnership was on the board of
          directors for the Corporation. As such, documentation explaining the composition
          of the Corporation’s Board of Directors should be provided to HUD as part of the
          audit resolution process. Furthermore, the City is still required to obtain HUD's
          approval regarding the vice president of the financial institution being on the
          board of the Corporation. According to 24 CFR parts 84.42 & 84.4, HUD may

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              apply less restrictive requirements when awarding small awards and when
              approved by OMB, except for those requirements, which are statutory.
              Exceptions on a case-by-case basis may also be made by HUD.

Comment 8 We agree that not documenting all the expenses would present an inaccurate and
          misleading picture of the total development costs for each property. However,
          the ACA agreement- (Exhibit 8) states that any development costs that are paid
          from local, state, or federal grant funds ( including, but not limited to, HOME or
          CDGB funds) are ineligible expenses. Therefore, net development costs/total
          eligible expenses calculated and reported to HUD, should not include costs paid
          from local, state or federal funds. Total costs can be reported to HUD, but
          ineligible cost or other funding sources (grants, etc.) should be shown as being
          deducted from the total to arrive at net development costs. This will aide HUD in
          determining whether the properties were sold within the program limits of the
          lesser of fair market value or 115 percent of eligible/net development costs.

Comment 9 According to the ACA Instructions for Potential ACA Participants, prior to
          beginning negotiations for asset control area (ACA) contracts, the potential ACA
          participant must submit an application, known as the “ACA Business Plan”, to the
          appropriate Homeownership Center (HOC). A potential ACA participant may
          apply as a “Preferred Purchaser” or a “Non-preferred Purchaser”. The term
          “Preferred Purchaser” refers to Units of Local Government (ULG) or Nonprofit
          Organizations created pursuant to Section 501(c) of the Internal Revenue Code of
          1986. The term “Non-preferred Purchaser” refers to organizations that are not
          Units of Local Government, or Nonprofit Organizations created pursuant to
          Section 501(c) of the Internal Revenue Code of 1986 (e.g. For-profit
          Organizations). An ACA participant is a local government agency or nonprofit
          organizations, which has obtained prior HUD approval to participate in HUD’s
          single family program. The ACA participant may carry out its obligations through
          arrangement with other approved participating entities. The participating entities
          must be a HUD approved nonprofit organizations. Thus, the participating entity
          is an ACA partner that has been approved by HUD to purchase ACA properties at
          discount prices. However, nonpreferred entities are not eligible to purchase ACA
          properties at discount prices. In this case the Corporation did not have prior
          approval from HUD to qualify as being eligible to participate in HUD’s single
          family programs, and therefore was not eligible to participate in the ACA
          program.

Comment 10 City officials’ comments are not responsive to the finding; however, until HUD
           decides to change the time limits for selling the properties the City needs to
           develop procedures to ensure that properties are sold within the HUD established
           time frames to minimize holding costs and improve the affordability of the
           houses. As mentioned in our response to comment 4, the City can also formally
           request a waiver from HUD to extend the time period to sale the properties due to
           market conditions.

Comment 11 As mentioned in our response to Comment 6 the correct fair market value of the
           above ACA property was supposed to be $54,000, therefore, the correct resale

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             price of the property was supposed to be $54,000 because the fair market value of
             the property was less than 115 percent of eligible expenses. As such the City
             should buy down the mortgage by $4,700 for the excessive price paid by the
             purchaser.

Comment 12 The auditee’s comments are responsive to the recommendation.

Comment 13 The auditee’s comments are responsive to the recommendation; however, the
           standard operating procedures and the ACA agreement already provide the
           method for reporting net development costs.




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Appendix C
                                           CRITERIA
ACA Agreement between HUD and the City

    Section 2.3, Conflict of Interest, Prohibited Transfers, Nondiscrimination, A. Purchasers and
     their agents, board of directors, principal staff and contractors shall avoid any and all conflicts
     of interest and self-dealing.

    Section 5.3, Resale Price and Conditions, A. Purchaser shall not sell an acquired property for a
     resale price of more than the lesser of 1) fair market value of the property at the time of resale,
     or 2) 115 percent of the eligible expenses as defined in Exhibit 8, attached to the ACA
     agreement.

    Exhibit 8, Eligible Expenses, section 5. Costs not listed above are ineligible and cannot be
     included in the Net Development Costs calculation. Ineligible costs include, but are not
     limited to:
          b. Housing developer fees and/or real estate consultant fees.
          c. Sales bonuses and sales incentives for selling or listing real estate brokers/agents.
          h. Any development costs that are paid from local, state, or Federal grant funds
            (including, but not limited to, HOME or CDBG funds).

    Section 5.4, Resale Deadline. For each closing between Seller and Purchaser, Purchaser must
     1) convey by deed or lease to eligible buyers, officers, or teachers; or, 2) pursuant to section
     4.1B, reuse for community purposes, 75 percent (rounded down to the nearest whole number)
     of the properties acquired from seller at that closing within twelve months after the Transfer
     Effective Date, and 100 percent of the properties within eighteen months after the Transfer
     Effective Date.

Asset Control Area Standard Operating Procedures

     The ACA agreement, 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), which have been determined as eligible to participate in the ACA program
     pursuant to HUD’s published guidelines. A participating agreement, specifically governed by
     the ACA agreement, must spell out a PE’s rights and obligations as well as the duties HUD
     requires of its ACA program participants. Participating entities (PEs) must be HUD-approved
     nonprofit organization.

Instruction for Potential ACA Participants

    Section B9; identify participating entities that will administer a portion of the ACA program.

    It is a conflict of interest for a nonprofit to employ staff who also work for and receive financial
    benefits from a for-profit entity that is providing the nonprofit with services related to the
    nonprofit’s affordable housing plan.

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 Section G. The participant entity must describe its administrative capacity to develop and carry
  out its part in a reasonable and a successful manner.

 Section L. Nonprofits are required to have adequate office space, equipment and clerical
  assistance in each office, for employees to perform their duties in a responsible manner.

Mortgagee Letter 2002-01

This letter clarifies the requirements that new nonprofit applicants must meet to participate in
FHA’s [Federal Housing Administration] Single Family activities, including purchasing
discounted HUD homes.

Conflict of interest issues. The department has a responsibility to ensure that no conflict of
interest exists between nonprofit agencies, their board of directors, their principal staff or any
other entities that may participate in operating their affordable housing programs.

Nonprofit agencies must have the administrative capacity to develop and carry out their FHA
approved homeownership plans in a timely and successful manner.

The nonprofit’s facilities must be located in a space that is separate and apart from any other
entity.

24 CFR 84.42, Code of Conduct

The recipient shall maintain written standards of conduct governing the performance of its
employees engaged in the award and administration of contracts. No employee, officer or agent
shall participate in the selection, award, or administration of a contract supported by Federal
funds if real or apparent conflict of interest would be involved. Such a conflict would arise when
the employee, officer or agent, any member of his or her immediate family, his or her partner, or
an organization which employs or is about to employ any of the parties indicated herein, has a
financial or other interest in the firm selected for an award.

24 CFR 84.4, Deviation

The office of Management and Budget (OMB) may grant exception for classes of grants or
recipients subject to the requirements of this rule when exceptions are not prohibited by statute.
However, in the interest of maximum uniformity, exceptions for the requirements of this rule
shall be permitted only in unusual circumstances. HUD may apply more restrictive requirements
to a class of recipients when approved by OMB. HUD may apply less restrictive requirements
when awarding small awards and when approved by OMB, except for those requirements which
are statutory. Exceptions on a case-by-case basis may also be made by HUD.




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