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. 2 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 3 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. 4 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 5 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 6 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. 7 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. 8 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: 9 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. 10 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. 11 Appendix B AUDITEE COMMENTS 12 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. 13
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)