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 25 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 26 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. 27 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. 28 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. 29
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)