oversight

HUD Evaluated and Selected Applications for the Recovery Act's Neighborhood Stabilization Program 2 in Accordance With Applicable Requirements

Published by the Department of Housing and Urban Development, Office of Inspector General on 2010-06-25.

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

                                                                Issue Date
                                                                             June 25, 2010
                                                                Audit Report Number
                                                                         2010-AT-0001




TO:          Yolanda Chavez, Deputy Assistant Secretary for Grant Programs, DG

             //signed//
FROM:        James D. McKay, Regional Inspector General for Audit, Atlanta Region, 4AGA

SUBJECT: HUD Evaluated and Selected Applications for the Recovery Act’s Neighborhood
          Stabilization Program 2 in Accordance With Applicable Requirements



                                     HIGHLIGHTS

 What We Audited and Why

We evaluated the U.S. Department of Housing and Urban Development’s (HUD) award process
for the Neighborhood Stabilization Program 2 (NSP2). Funding for NSP2 was provided through
the American Recovery and Reinvestment Act of 2009 (Recovery Act). Under the Recovery
Act, inspectors general are expected to be proactive and focus on prevention, thus we included a
review of the NSP2 evaluation and selection process in our 2010 audit plan.

Our primary objective was to determine whether HUD’s methodology and controls for the
evaluation and selection of applications for the $1.93 billion in NSP2 funds were in accordance
with applicable requirements. We added a second objective to determine whether HUD included
special conditions in the grant agreements of high-risk grantees.
What We Found


            HUD followed the applicable requirements during the evaluation and selection
            process and included special conditions in the grant agreements as required.


What We Recommend


             There are no recommendations made in this report since no reportable
             deficiencies were identified.

Auditee’s Response

            We provided the draft report to the Deputy Assistant Secretary for Grant
            Programs on May 24, 2010, and discussed the report with the Director of the
            Office of Block Grant Assistance at an exit conference on June 8, 2010. The
            Director stated that HUD agreed with the report and would not be providing
            written comments.




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                            TABLE OF CONTENTS

Background and Objectives                                                      4

Results of Audit
       HUD Evaluated and Selected Applications in Accordance With Applicable   5
       Requirements

Scope and Methodology                                                          9

Internal Controls                                                              10

Follow-up on Prior Audits                                                      11




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                     BACKGROUND AND OBJECTIVES

The Recovery and Reinvestment Act of 2009 (Recovery Act) provided $1.93 billion for a second
Neighborhood Stabilization Program (NSP). NSP2 was to provide assistance for the
redevelopment of abandoned and foreclosed-upon homes and residential properties so that such
properties could be returned to productive use or made available for redevelopment purposes.
Unlike the first NSP, which was formula based and provided only to State and local
governments, Neighborhood Stabilization Program 2 (NSP2) funding was competition based and
also available to nonprofit organizations. Applicants were required to apply by July 17, 2009,
meet minimum threshold requirements for eligibility, and respond to six rating factors in the
notice of funding availability (notice). The maximum number of points achievable was 150, and
applicants had to score at least 115 to be considered for funding. The U.S. Department of
Housing and Urban Development (HUD) considered NSP2 to be a component of the Community
Development Block Grant program, and basic requirements of that program apply to NSP2.

Our primary objective was to determine whether HUD’s methodology and controls for the
evaluation and selection of applications for the $1.93 billion in NSP2 funds were in accordance
with applicable requirements. We added a second objective to determine whether HUD included
special conditions in the grant agreements of high-risk grantees.




                                               4
                                     RESULTS OF AUDIT


HUD Evaluated and Selected Applications in Accordance With
Applicable Requirements
HUD’s methodology and controls for evaluating and selecting the applications were in
accordance with requirements in the notice. HUD received 482 applications from governmental
and nonprofit entities for the NSP2 funds, with 469 making the July 17, 2009, deadline. HUD
followed the required procedures for evaluating the 469 applications against threshold
requirements, such as program eligibility, and then rated the 404 applications that passed
threshold requirements against the six rating factors in the notice. At each step, HUD applied
quality control procedures to ensure that its decisions were correct and supportable. HUD then
ranked the 404 applications according to their scores and properly selected 56 for funding. Since
other Office of the Inspector General (OIG) work1 found that HUD failed to include special
conditions in the grant agreements for high-risk recipients of the earlier formula-based NSP
funds, we expanded our work to review the grant agreements for the 56 selected grantees and
found that HUD included special conditions as required by the regulations.


    HUD Evaluated and Selected
    Applications in Accordance
    With the Notice


                    Threshold Evaluation:
                    HUD evaluated the 469 applications making the July 17, 2009, deadline against
                    the threshold requirements stated in the notice. At this phase, the applications
                    needed to meet basic requirements such as program eligibility, requesting a
                    minimum of $5 million, and submitting certifications. Several two-person teams
                    reviewed the applications for the threshold requirements, and then a single four-
                    person team performed a quality control review to verify that decisions to reject
                    or accept applications were correct and supportable. As provided for in the
                    notice, the quality control team contacted applicants with correctible technical
                    deficiencies and allowed them 5 calendar days to correct a deficiency.
                    Applications of applicants that did not respond were rejected. After evaluating
                    for the threshold requirements, HUD rejected 67 applications.

                    We tested 34 of the 67 rejected applications to determine whether HUD properly
                    evaluated them for the threshold requirements. We reviewed the threshold forms
                    and the applications and found the same deficiencies that HUD noted for 33 of the
                    34 applications. The one application that was not correctly rejected was later
                    identified by HUD during its final quality control review. HUD corrected the

1
    See Follow-up on Prior Audits.
                                                     5
error for this application plus another that was also incorrectly rejected and
scored both applications according to the six rating factors.

Rating Factors Evaluation:
HUD properly evaluated and scored the 404 applications meeting threshold
requirements against the six rating factors in the notice. First, each application
was independently evaluated and scored by two persons. Then a panel comprised
of these two persons plus two senior staff persons reviewed the two scoring forms
as a group and completed a panel form with a consensus score. HUD performed a
final quality control review of all applications to ensure that scores were
supportable and to correct any discrepancies.

We tested 58 of the scored applications to determine whether HUD properly
evaluated and scored them against the six rating factors. We reviewed the scoring
and panel forms and found that information was generally verified, the scoring
was consistent with guidance in the notice, partial and subjective scoring was
supported, and the applications went through a final quality control review. As a
result of this final quality control review, HUD found and corrected scoring
mistakes on 8 of the 58 applications tested.

Selection:
HUD selected the applications for funding in accordance with the notice
requirements. The notice required HUD to select applications based on the
ranked order but allowed HUD to fund less than the full amount requested in an
application to ensure a fair distribution of funds and to enable achievement of the
purposes of NSP2. HUD staff ranked the 404 applications and recommended that
the 36 with the highest scores be awarded the NSP2 funds. However, according
to staff, the HUD Secretary wanted to fund additional applications. To fund
additional applications with the available funds, staff applied a mathematical
formula that redistributed funding and increased the number of funded
applications to 56.

We tested HUD’s methodology for selecting the 56 applications and awarding the
funds. The application selection was carried out in accordance with the final
rating and ranking. No application was skipped over to fund a lower rated
application. At no time did HUD deviate from the ranking and rating system, and
all applications were kept in the same order at all times. We also reviewed
HUD’s methodology for funding the applications. HUD consistently applied the
mathematical formula to all fundable applications.




                                  6
HUD Included Special
Conditions for High-Risk
Grantees

            HUD included special conditions in the grant agreements for high-risk NSP2
            grantees as required by the regulations. HUD included specific provisions in
            three grant agreements. Two were to ensure compliance with the 2010
            Consolidated Appropriations Act concerning the Association of Community
            Organizations for Reform Now, and the other was to resolve a grantee’s poor past
            performance.

            We questioned whether HUD should have also included special conditions for
            grantees with outstanding OIG audit recommendations. HUD staff stated that
            special conditions for other high-risk applicants were incorporated through the
            competitive process. That process included requiring applicants to identify their
            experience, plans, approach, procedures, and controls in their applications so that
            HUD could review and evaluate them. Staff stated that this was the same
            corrective or remedial information that HUD required (24 CFR (Code of Federal
            Regulations) 570.910) in management plans for grantees with performance
            deficiencies.

            We evaluated the applicable applications and related documents to determine
            whether special conditions were addressed and incorporated as the staff claimed.
            The grant agreements considered the application to be a part of the grant
            agreement.

            We then reviewed applications for the nine applicants with open
            recommendations from previous OIG audits of Community Development Block
            Grants activities. We evaluated the management plans and applicable consortium
            agreements within the applications, plus other related documentation, to
            determine whether the procedures could prevent a recurrence of the problems
            identified in the audits.

            Application rating factors 2 and 3 from the notice required the management plan
            to include budgets and schedules as well as monitoring and audit plans and
            responsibilities. If the application was for a consortium, it included an agreement
            specifying member responsibilities such as compliance monitoring. One
            applicant had a 100-plus-page monitoring plan to follow. Another applicant with
            20 open audit recommendations had a later OIG audit that found that the applicant
            had the capacity to properly administer NSP funds. For all nine applicants, the
            procedures appeared adequate to prevent a recurrence of the deficiencies.
            Therefore, we agreed that HUD included special conditions for the high-risk
            applicants through the incorporation of the applications in the grant agreements.



                                             7
Conclusion


             HUD properly evaluated and selected the applications for the NSP2 funding. It
             followed the requirements and procedures in the notice and employed quality
             control procedures to help ensure that its decisions were correct and supportable.
             In addition, it properly included special conditions in grant agreements for high-
             risk grantees.


Recommendations



             Our audit did not identify any reportable deficiencies, and, therefore, there are no
             recommendations.




                                                8
                         SCOPE AND METHODOLOGY

To accomplish our objectives, we reviewed

             The notice and related HUD documents;
             24 CFR 85.12 (special conditions for governmental units), 24 CFR 84.14 (special
             conditions for nonprofits), and 24 CFR 570.910 (corrective and remedial actions for
             Community Development Block Grants);
             The reliability of the three electronic forms (threshold, scoring, and panel) designed
             by HUD to document the application evaluation process;
             Applications and corresponding threshold, scoring, and panel forms;
             Grant agreements; and
             Applicable HUD OIG audit reports.
We also interviewed HUD’s Community Development Block Grant staff.

We performed two attribute samples designed to test whether or not HUD correctly evaluated the
applications. We statistically selected a sample from the 67 applications that HUD identified as
failing the threshold requirements and a second sample from 403 applications that HUD
evaluated against the six rating factors. HUD increased the number of applications evaluated
against the six rating factors to 404 after we selected the sample. Both samples were based on a
confidence level of 90 percent, a precision level of 10 percent, and an assumed error rate of 50
percent. We identified a statistical sample of 34 applications for the threshold testing and 58
applications for the six factors. Results of the sample testing showed that HUD correctly
evaluated the applications. We used statistical sampling because each sampling unit was
selected without preconceptions from the audit populations, thereby allowing these results to be
projected to the populations.

We performed our onsite audit work from November 2009 through April 2010 at HUD’s Office
of Block Grant Assistance, 451 Seventh Street, SW, Washington, DC.

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 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.




                                                9
                              INTERNAL CONTROLS

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

                      Controls over compliance with laws and regulations
                      Controls over reliability of data

              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 did not find any significant weaknesses.




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                       FOLLOW-UP ON PRIOR AUDITS


 The Office of Block Grant Assistance
 Lacked Adequate Controls Over the
 Inclusion of Special Conditions in
 Neighborhood Stabilization Program Grant
 Agreements, 2010-CH-0001, dated March
 29, 2010



HUD OIG audited HUD’s Office of Block Grant Assistance’s (Office) controls over special
conditions in NSP grant agreements under Title III of the Housing and Economic Recovery Act
of 2008 (Act) as amended. The audit was part of the activities in our fiscal year 2010 annual
audit plan. Our objective was to determine whether HUD’s Office ensured that HUD’s Office of
Community Planning and Development field offices (field offices) were consistent in their
consideration and inclusion of special conditions in NSP grant agreements with high-risk
grantees.

HUD’s field offices used different procedures for including special conditions in NSP grant
agreements under the Act. Also, HUD did not ensure that the field offices were consistent in
their consideration and inclusion of special conditions in NSP grant agreements with high-risk
grantees.

We recommended that HUD’s Deputy Assistant Secretary for Grant Programs require the Office
to determine whether NSP grantees under the Act were high risk by considering grantees’ past
performance or other serious actions in their HOME Investment Partnerships (HOME),
Emergency Shelter Grant, and/or Supportive Housing programs. If the NSP grantees were high
risk, they should be required to develop and implement management plans for their programs
that would include but not be limited to describing how unresolved HOME, Emergency Shelter
Grant, and/or Supportive Housing program performance issues were resolved or were being
resolved and explain whether the issues would impact the administration of their NSP. At the
time of this report, the recommendation remained open.




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