oversight

HUD's Regulatory Agreement with the Yorkville Cooperative Does Not Protect HUD's Interest

Published by the Department of Housing and Urban Development, Office of Inspector General on 2010-01-12.

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

                                                      U.S. Department of Housing and Urban Development
                                                                         Wanamaker Building, Suite 1005
                                                                                   100 Penn Square East
                                                                            Philadelphia, PA 19107-3380

                                                                      Regional Inspector General for Audit




                                                                                MEMORANDUM NO:
                                                                                2010-PH-0801

January 12, 2010

MEMORANDUM FOR:                 Charlie Famuliner, Director, Multifamily Program Center,
                                 Richmond Field Office, 3FHML

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

SUBJECT:                        HUD’s Regulatory Agreement with the Yorkville Cooperative
                                 Does Not Protect HUD’s Interest


                                          INTRODUCTION

We performed this review at your request due to concerns regarding the appropriateness of the
U.S. Department of Housing and Urban Development’s (HUD) current regulatory agreement
with the Yorkville Cooperative (Cooperative). Our objective was to determine if HUD entered
into the appropriate regulatory agreement with the Cooperative for its Section 221(d)(3)
program.

For each recommendation without a management decision, please respond and provide status
reports in accordance with HUD Handbook 2000.06, REV-3. Please furnish us copies of any
correspondence or directives issued because of the audit.

                                 METHODOLOGY AND SCOPE

The scope of our review was limited strictly to addressing concerns regarding the
appropriateness of HUD’s current regulatory agreement with the Cooperative. To accomplish
this objective, we

           Reviewed HUD Handbooks 4350.1, 4370.2, REV-1 and other HUD policies and
           procedures governing HUD’s 221(d)(3) properties.

           Reviewed HUD’s 1979 regulatory agreement with the Cooperative.

           Interviewed Cooperative officials and officials from HUD’s Richmond, VA,
           Multifamily field office.


      Visit the Office of Inspector General’ s World Wide Web site at http://www.hud.gov/offices/oig/
           Reviewed the Cooperative’s 2007 and 2008 audited financial statements.

            Reviewed the Cooperative’s independent public accountant’s workpapers used to
           prepare the 2007 and 2008 audited financial statements.

           Reviewed audit workpapers supporting our recently issued external audit report on
           the Yorkville Cooperative (Audit Report Number 2010-PH-1003).

We performed our review from September 2009 through December 2009 at HUD’s Richmond,
VA, Multifamily field office located at 600 East Broad Street, Richmond, VA, and at the
Cooperative’s office located at 3146 Draper Drive, Fairfax, VA. The audit generally covered the
period January 2006 through March 2009, but was expanded when necessary to include other
periods.

Our objective was to determine if HUD entered into the appropriate regulatory agreement with
the Cooperative for its Section 221(d)(3) program.

                                         BACKGROUND

The U.S. Department of Housing and Urban Development (HUD) entered into a regulatory
agreement with the Yorkville Cooperative (Cooperative) in 1979 for HUD’s Section 221(d)(3)
insured multifamily program. The Section 221(d)(3) program insures mortgage loans to
facilitate the new construction or substantial rehabilitation of multifamily rental or cooperative
housing for moderate-income families, the elderly, and the handicapped. Section 221(d)(3)
mortgages are for nonprofit sponsors or cooperatives up to 100 percent of the HUD/Federal
Housing Administration (FHA) estimated replacement cost of the project.

The regulatory agreement also provided the Cooperative the use of housing assistance payments
contracts for its units. The Cooperative executed a Section 8 contract with HUD for 237 units.
Currently, 229 units are occupied, and eight are vacant. During our audit period, HUD
authorized the Cooperative the following financial assistance for its program:

                       Fiscal year Authorized funds Disbursed funds
                          2006         $1,405,123      $1,405,123
                          2007         $2,427,715      $2,427,715
                          2008         $2,823,100      $2,786,679
                          2009         $2,956,624        $854,372
                          2009           $394,775        $394,775
                       Totals        $10,007,337       $7,868,664

Our objective was to determine if the HUD entered into the appropriate Regulatory Agreement
with the Cooperative for its Section 221(d)(3) program.




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                                   RESULTS OF REVIEW

Current Regulatory Agreement Is Not Appropriate

HUD and the Cooperative did not enter into an appropriate regulatory agreement for participants
of the Section 221(d)(3) program. The regulatory agreement executed in 1979 was intended for
entities participating in the Multifamily Insurance program but it did not include specific
regulatory requirements needed for entities participating in the program as cooperatives. The
agreement failed to include necessary requirements pertaining to the general operating reserve
account.

When the Cooperative signed its regulatory agreement in 1979, HUD’s Washington, DC, field
office was responsible for administering FHA multifamily functions and servicing loans for
entities located in Fairfax, VA. In January 1997, oversight of the Cooperative’s participation in
the 221(d)(3) program transferred to the Richmond, VA, Multifamily Program Center. Due to
the transfer in HUD oversight and the length of time that transpired since the regulatory
agreement was signed, HUD officials could not explain why an incorrect regulatory agreement
was executed.

The Cooperative Established a General Operating Reserve Account

According to HUD Handbook 4350.1 REV-1, chapter 26, cooperatives insured under the Section
213 or 221(d)(3) programs are required to establish and maintain a general operating reserve
fund. The purpose of the reserve is to provide the cooperative with a measure of financial
stability. The fund may be used to finance the sale of memberships, to meet deficiencies arising
from time to time as a result of delinquent payment by individual cooperators and other
contingencies and to provide funds for repurchase of membership of withdrawing members. The
reserve is to be maintained in a special account which can be in the form of a cash deposit or
investment. Once the reserve equals 25 percent of annual carrying charges, funding of the
reserve can be discontinued.

Although the Cooperative’s regulatory agreement with HUD did not include a section pertaining
to the establishment of a general operating reserve account, the Cooperative did in fact establish
an account. The Cooperative funded the general operating reserve based on the terms and
conditions outlined in HUD Handbook 4350.1, REV-1. The general operating reserve has a
current balance of $989,521. The current balance is greater than the required 25 percent of the
annual carrying charges. The Cooperative ceased funding of the account in August 1999. The
general operating reserve is currently escrowed with the U.S. Bank and the Fairfax County
Redevelopment and Housing Authority is the trustee.

HUD Lacks Oversight of the General Operating Reserve Account

Without a regulatory agreement containing a section governing the reserve account, HUD lacks
the ability to provide adequate oversight and control over the funds in the account. According to
HUD Handbook 4370.2, HUD should exercise project control through the provisions of a
regulatory agreement. The regulatory agreement sets forth specific requirements on the


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establishment and maintenance of various funds, defines the requirements for tenant application
and eligibility, and establishes the requirements of the project management and administration.
Owners shall refer to the regulatory agreement and to other control documents for specific
provisions, requirements, and restrictions applicable to the specific project.

The Cooperative’s Current Regulatory Agreement Should Be Amended

The Cooperative’s reserve account currently has a balance of $989,521. Our recent external
audit at the Cooperative identified significant internal control weaknesses and questioned costs.
HUD currently has no oversight over how the Cooperative will use the funds in the reserve
account. During our recent external audit at the Cooperative, HUD’s legal counsel advised that a
rider may be attached to the regulatory agreement to include requirements for the reserve
account. Therefore, it is imperative for HUD to enter into an amended regulatory agreement with
the Cooperative to ensure it has adequate control and oversight over these funds.

                                   RECOMMENDATION

We recommend that the Director of HUD’s Multifamily Program Center, Richmond field office

1A.    Enter into an amended regulatory agreement with the Cooperative. The regulatory
       agreement should include a rider pertaining to the general operating reserve. This will
       ensure that the $989,521 in reserve funds will only be used for eligible expenses.

                                  AUDITEE’S RESPONSE

We provided our discussion draft audit memorandum to the Director of HUD’s Multifamily
Program Center, Richmond field office, on January 4, 2010. We held an exit conference on
January 6, 2010. The Director concurred with our recommendation and provided written
comments to our discussion draft audit memorandum on January 8, 2010. The complete text of
HUD’s response can be found in appendix B of this memorandum.


For each recommendation without a management decision, please respond and provide status
reports in accordance with HUD Handbook 2000.06, REV-3. Please furnish us copies of any
correspondence or directives issued because of the review.




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Appendix A

                 FUNDS TO BE PUT TO BETTER USE


                           Recommendation       Funds to be put
                               number           to better use 1/
                                   1A             $989,521



1/   Recommendations that funds be put to better use are estimates of amounts that could be
     used more efficiently if an Office of Inspector General (OIG) recommendation is
     implemented. These amounts include reductions in outlays, deobligation of funds,
     withdrawal of interest subsidy costs not incurred by implementing recommended
     improvements, avoidance of unnecessary expenditures noted in preaward reviews, and
     any other savings that are specifically identified. The Cooperative’s reserve account
     currently has a balance of $989,521. By amending its regulatory agreement with the
     Cooperative HUD can ensure that these funds are used for purposes intended.




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Appendix B

             AUDITEE COMMENTS




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