oversight

The City of Norfolk, Virginia, Did Not Ensure That Program Income Was Returned to Its HOME Program as Required

Published by the Department of Housing and Urban Development, Office of Inspector General on 2009-03-20.

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

                                                               Issue Date
                                                                     March 20, 2009
                                                               Audit Report Number
                                                                     2009-PH-1007




TO:        Ronnie Legette, Director, Office of Community Planning and Development,
            Richmond Field Office, 3FDM



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

SUBJECT:   The City of Norfolk, Virginia, Did Not Ensure That Program Income Was
            Returned to Its HOME Program as Required



                                  HIGHLIGHTS

 What We Audited and Why

           We audited the City of Norfolk’s (City) HOME Investment Partnerships (HOME)
           program based on a request from the Community Planning and Development
           Division in the U.S. Department of Housing and Urban Development’s (HUD)
           Richmond, Virginia, field office. Our audit objective was to determine whether
           the City properly administered its HOME program by following HUD
           requirements related to homebuyer assistance, modernization rehabilitation, and
           funds for community housing development organizations.

 What We Found


           The City generally followed HUD requirements related to homebuyer assistance,
           modernization rehabilitation, and funds for community housing development
           organizations. However, it did not properly monitor its subrecipient to ensure that
           about $288,700 in program income was returned to its HOME program as
           required. The City has since implemented adequate procedures for monitoring its
           subrecipients to ensure that this problem does not recur.

What We Recommend


           We recommend that the Director of the Richmond Office of Community Planning
           and Development require the City to recover $288,728 in program income that
           was not properly returned to its HOME program or repay the amount to its
           program from nonfederal funds.

Auditee’s Response


           We discussed the audit results with the City and HUD officials throughout the
           audit and at an exit conference on February 27, 2009. The City provided written
           comments to our draft report on March 6, 2009. The City agreed with our finding
           and recommendation. The complete text of the City’s response can be found in
           appendix B of this report.




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                           TABLE OF CONTENTS

Background and Objective                                                         4

Results of Audit
 Finding: The City Did Not Ensure That Program Income Was Returned to Its HOME   5
 Program as Required

Scope and Methodology                                                            8

Internal Controls                                                                9

Appendixes
   A. Schedule of Questioned Costs                                               11
   B. Auditee Comments                                                           12
   C. Calculation of Program Income Due to the City’s HOME Program               13




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                      BACKGROUND AND OBJECTIVE

The HOME Investment Partnerships Program (HOME) was created under Title II of the
Cranston-Gonzalez National Affordable Housing Act, as amended, and is regulated by 24 CFR
[Code of Federal Regulations] Part 92. HOME is the largest federal block grant to state and
local governments designed exclusively to create affordable housing for low-income households.
HOME funds are awarded annually as formula grants to participating jurisdictions. States are
automatically eligible for HOME funds and receive either their formula allocation or $3 million,
whichever is greater. Participating jurisdictions may choose among a broad range of eligible
activities, such as providing home purchase or rehabilitation financing assistance to eligible
homeowners and new homebuyers and building or rehabilitating housing for rent and ownership.
States may also use HOME funds for other reasonable and necessary expenses related to the
development of non-luxury housing, including site acquisition or improvement, demolition of
dilapidated housing to make way for HOME-assisted development, and payment of relocation
expenses.

As a participating jurisdiction, the City of Norfolk (City) administers its HOME program through
the Norfolk Redevelopment and Housing Authority (subrecipient). The City provided its
subrecipient more than $11.1 million over a five-year period to administer its HOME program.

                            Program year              Grant amount
                                2003                   $1,990,356
                                2004                   $2,423,543
                                2005                   $2,242,132
                                2006                   $2,226,825
                                2007                   $2,316,498
                                Total                 $11,199,354

The City uses its HOME funds on the following activities:

       Homebuyer assistance
       HOME program Equity Secure (modernization/rehabilitation)
       American Dream Downpayment Initiative funds
       Community housing development organization operating assistance

In addition, the City uses 10 percent of its HOME funds for its administrative expenses.

Our audit objective was to determine whether the City properly administered its HOME program
by following HUD requirements related to homebuyer assistance, modernization rehabilitation,
and funds for community housing development organizations.




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                               RESULTS OF AUDIT

Finding 1: The City Did Not Ensure That Program Income Was
Returned to Its HOME Program as Required
The City did not adequately monitor its subrecipient to ensure that program income was returned
to its HOME program as required. As a result about $288,700 in program income received from
homes or properties that were refinanced or resold before the end of the required affordability
periods was not available to provide other low-income families the opportunity to become
homeowners. The City has since implemented adequate procedures for monitoring its
subrecipients to ensure that this problem does not recur.



 Program Income from
 Properties Refinanced or Sold
 Was Not Returned to the
 HOME Program as Required


              Regulations identified in 24 CFR [Code of Federal Regulations] 92.254 require
              deed restrictions, land covenants, or other similar mechanisms to impose resale or
              recapture requirements and to ensure affordability periods related to HOME-
              assisted housing. Additionally, if a property is refinanced before the end of the
              affordability period, all or a portion of assistance must be returned to the
              participating jurisdiction, classified as program income. Affordability periods are
              identified as the minimum number of years, specified by HUD, that the home
              must be occupied by an income-eligible homeowner.

              The City’s subrecipient entered into an agreement with the Olde Huntersville
              Development Corporation (Olde Huntersville), a community housing
              development organization, to provide downpayment and closing cost assistance to
              qualified homebuyers. The agreement required Olde Huntersville to secure a
              deed of trust in the name of the subrecipient, as well as a promissory note payable
              to the subrecipient for each home purchase involving homebuyer assistance. The
              note payable would equal the greater of 25 percent of the sale price or the
              difference between the fair market value of the home and the amount affordable
              for the family, plus the closing cost and downpayment assistance.

              Olde Huntersville did not secure deeds of trust in the name of the subrecipient as
              required. Instead, it improperly secured deeds of trust in its own name and
              improperly kept program income from homes refinanced. We identified 37
              homebuyer assistance loans that the subrecipient discovered were inactive before
              the end of the affordability periods. Our review of files and foreclosure

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           information for the 37 homebuyers that received about $635,300 in downpayment
           assistance through Olde Huntersville from 1994 through 2001 showed that it
           improperly secured deeds of trust in its own name for all 37 loans. It also failed
           to remit to the subrecipient proceeds from 23 of the homes that were refinanced
           for equity or sold before the end of the required affordability periods. Of the 37
           cases reviewed, Olde Huntersville received note payoffs for 23 homes, and 14
           were foreclosed on. There were no proceeds available after the sale of the 14
           foreclosed homes to cover the amount owed to the HOME program for those
           loans that did not meet the affordability periods. However, we estimated that
           about $288,700 (see appendix C) should have been remitted to the subrecipient by
           Olde Huntersville for the 23 homes that were refinanced for equity or sold before
           the end of the required affordability periods. Olde Huntersville only received
           about $245,200 in proceeds for those homes because it underestimated the amount
           of the payoffs. Instead of remitting the proceeds it received to the subrecipient for
           return to the HOME program as required, it improperly retained the proceeds.

The City and Its Subrecipient
Did Not Perform Adequate
Monitoring


           The City did not perform adequate monitoring to ensure the return of proceeds or
           program income from home sales to its HOME program. As a result, Olde
           Huntersville improperly put deeds of trust in its own name and did not remit home
           sales proceeds to the subrecipient as required. The subrecipient was first alerted
           to the issue in July 2005, when homeowners called to request guidance after
           receiving letters informing them of refinancing restrictions. In one case, the
           subrecipient learned that the homeowner had refinanced and that the payoff was
           made to Olde Huntersville.

           Upon learning that Olde Huntersville did not remit program income as required,
           the subrecipient took action to limit its community housing development
           organizations’ involvement in the HOME program to prevent the situation from
           recurring. These organizations are currently limited to developing affordable
           housing for sale to low-income families approved by the subrecipient to receive
           downpayment assistance. The subrecipient accepts and approves all applications
           from prospective homeowners, verifies income eligibility, determines
           downpayment assistance based on income, provides financial seminars for
           homeowners, helps homeowners obtain preapproval from lenders, and obtains
           deeds of trust in its name. Olde Huntersville ceased to participate in the City’s
           HOME program in February 2002.

           The City’s annual action plan, incorporated into its most recent consolidated plan
           submitted to HUD, states that it has developed comprehensive guidelines for
           subrecipient monitoring using HUD monitoring forms as a guide. The City
           provided a copy of its monitoring template/checklist for its HOME program, as

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             well as its most recent monitoring report on the subrecipient. The City also
             recently included a provision in its agreement with its subrecipient requiring the
             subrecipient to perform monitoring of HOME program subrecipients and provide
             copies of its monitoring reports to the City within 30 days of its monitoring
             activities.

Conclusion


             The City failed to ensure that its HOME program was administered in accordance
             with applicable requirements because it did not adequately monitor its
             subrecipient. Also, its subrecipient did not monitor its community housing
             development organization to ensure its compliance with HOME program
             requirements. As a result, more than $288,700 in program income from
             properties that were refinanced or sold before the required affordability periods
             was not returned to the City’s HOME program and, therefore, not available to
             provide other low-income families the opportunity to become homeowners. The
             City and its subrecipient have taken the necessary steps to help prevent further
             instances of noncompliance; however, the City must recover the program income
             that was not properly returned to its HOME program or repay the amount to its
             program from nonfederal funds.

 Recommendation

             We recommend that the Director of the Richmond Office of Community Planning
             and Development

             1A.    Require the City to recover $288,728 in program income that was not
                    properly returned to its HOME program or repay the amount to its
                    program from nonfederal funds.




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                        SCOPE AND METHODOLOGY

We performed our audit at the City’s subrecipient’s offices from June to November 2008. The
subrecipient is located at 201 Granby Street, Norfolk, Virginia. Our audit covered the period
July 1, 2002, through June 30, 2008. However, we extended the period as necessary to achieve
our audit objective.

We relied on data from HUD’s Integrated Disbursement and Information System reports. We
traced the information found in the reports to actual file documents and found the data to be
sufficiently reliable to meet our audit objective.

To accomplish our objective, we reviewed

       Applicable laws, regulations, agreements between the City and its subrecipient,
       agreements between the subrecipient and its community housing development
       organizations, and HUD program requirements at 24 CFR Part 92.

       The subrecipient’s accounting records, audited financial statements for 2006 and 2007,
       policies and procedures, and organizational chart.

       HUD’s monitoring reports for the subrecipient.

       Homeowner files and foreclosure information for all loans (37) that the subrecipient
       discovered were inactive before the end of the affordability periods. The homeowners
       collectively received $635,322 in downpayment assistance loans from the City’s HOME
       program from 1994 to 2001.

       Files for 25 of 452 low-income families that received downpayment assistance loans to
       determine compliance with HUD guidelines.

       Files for 10 of 68 homeowners that received modernization/rehabilitation assistance to
       determine compliance with HUD guidelines.

       Funding for community housing development organizations to determine whether funds
       were spent in a timely manner and for eligible activities.

We also interviewed employees of the City and its subrecipient as well as HUD staff.

We conducted the audit in accordance with generally accepted government auditing standards.
Those standards require that we plan and perform the audit to obtain sufficient, appropriate
evidence to provide a reasonable basis for our finding and conclusion based on our audit
objective. We believe that the evidence obtained provides a reasonable basis for our finding and
conclusion based on our audit objective.



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                              INTERNAL CONTROLS

Internal control is an integral component of an organization’s management that provides
reasonable assurance that the following controls are achieved:

       Program operations,
       Relevance and reliability of information,
       Compliance with applicable laws and regulations, and
       Safeguarding of assets and resources.

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.

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

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

                      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.

 Significant Weaknesses


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


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Lack of monitoring on the part of the City and its subrecipient to ensure that
program income from homes refinanced or sold was returned to the
HOME program as required.




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                                   APPENDIXES

Appendix A

                SCHEDULE OF QUESTIONED COSTS

                           Recommendation            Ineligible 1/
                                  number
                                         1A            $288,728

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
     policies or regulations.




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Appendix B

             AUDITEE COMMENTS




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Appendix C

CALCULATION OF PROGRAM INCOME DUE TO THE CITY’S
                HOME PROGRAM

                                                              Years until
  Loan                          HOME loan        Date sold or    20th     Program income
 Number Settlement date           amount         refinanced* anniversary       due**
  1188    12/07/1999            $18,720.00        07/14/2004      16         $14,976.00
   995    12/15/1998            $14,986.93        10/12/2004      15         $11,240.20
   636    05/01/1998            $19,900.00        11/25/2003      15         $14,925.00
   225    05/25/1995            $16,660.00        12/31/2002      13         $10,829.00
   214    05/03/1994             $9,400.00        03/29/2002      13          $6,110.00
  1155    09/30/1999            $18,600.00        10/21/2002      17         $15,810.00
   215    03/29/1994            $16,700.00        04/21/2004      10          $8,350.00
1063/1064 04/28/1999            $14,683.87        08/13/2003      16         $11,747.10
  1228    01/03/2000            $15,090.70        09/05/2003      17         $12,827.10
  1340    05/26/2000            $14,180.88        07/09/2004      16         $11,344.70
   238    10/01/1996            $18,361.60        04/28/2004      13         $11,935.04
   241    10/31/1996            $22,118.26        06/14/2004      13         $14,376.87
   234    04/12/1996            $20,750.00        06/07/2005      11         $11,412.50
   220    12/16/1994            $19,676.93        06/30/2004      11         $10,822.31
   228    10/23/1995            $18,475.00        01/09/2004      12         $11,085.00
   501    05/23/1997            $27,750.00        04/19/2005      13         $18,037.50
   222    01/30/1995            $14,332.50        01/19/2005      11          $7,882.88
   254    06/06/1997            $25,111.22        11/08/2004      13         $16,322.29
   571    12/19/1997            $19,794.36        11/26/2003      15         $14,845.77
   230    02/16/1996            $14,500.00        11/18/2002      14         $10,150.00
   218    10/12/1994            $23,093.71        12/03/2002      12         $13,856.23
   239     8/20/1996            $22,372.94        02/23/2004      13         $14,542.41
  1581    04/19/2001            $17,000.00        01/23/2004      18         $15,300.00
  TOTAL                                                                     $288,727.89

* The schedule above does not include 14 loans which were foreclosed on because there were no
proceeds after the sale of those homes to cover the funds due for the loans that did not meet the
affordability period. The affordability period for each loan was 20 years and the loan amounts
provided were forgiven at a rate of five percent per year.

** The program income due was calculated by dividing the HOME loan amount by 20 years
(affordability period for each loan), and multiplying the result by the number of years remaining
from the date the loan was sold, refinanced, or closed to the twentieth anniversary.



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