oversight

The Yorkville Cooperative, Fairfax, Virginia, Did Not Administer Its Section 221(d)(3) Property and Housing Assistance Contract According to Its Regulatory Agreement and HUD Requirements

Published by the Department of Housing and Urban Development, Office of Inspector General on 2009-11-25.

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

                                                               Issue Date
                                                                      November 25, 2009
                                                               Audit Report Number
                                                                     2010-PH-1003




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

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

SUBJECT:   The Yorkville Cooperative, Fairfax, Virginia, Did Not Administer Its Section
            221(d)(3) Property and Housing Assistance Contract According to Its
            Regulatory Agreement and HUD Requirements


                                 HIGHLIGHTS

 What We Audited and Why

           We audited the Yorkville Cooperative (Cooperative) based on a request from the
           U.S. Department of Housing and Urban Development’s (HUD) Richmond
           Multifamily Program Center and a citizen complaint. The objective of the audit
           was to determine whether the Cooperative administered its Section 221(d)(3)
           property and housing assistance contract according to its regulatory agreement
           and HUD requirements.


 What We Found


           The Cooperative did not administer its Section 221(d)(3) property and housing
           assistance contract in accordance with its regulatory agreement and HUD
           requirements. Specifically, it used operating funds to pay for ineligible expenses
           (legal fees and resident promotions) and made erroneous calculations and
           unsupported housing assistance payments on behalf of its board members. It also
           billed HUD for housing assistance payments it may not have been eligible to
           receive.

What We Recommend


           We recommend that the Director of the Richmond Multifamily Program Center
           require the Cooperative to reimburse its operating account from nonfederal funds
           $243,772 for ineligible expenses. Also, the Cooperative needs to develop and
           implement adequate procedures and controls to ensure that disbursements made
           from its operating account are for expenses that are reasonable, necessary, and in
           accordance with program requirements. We further recommend that the
           Cooperative reimburse HUD from nonfederal funds $14,313 for the overpayment
           of housing assistance payments and provide support or reimburse HUD $66,850
           from nonfederal funds for unsupported housing assistance payments. The
           Cooperative also needs to develop and implement procedures to ensure that
           housing assistance payments are correctly calculated and supported with the
           required documentation.

           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.

Auditee’s Response


           We discussed the findings with Cooperative officials during the audit. We
           provided a copy of the draft report to the Cooperative on October 22, 2009, for its
           comments and discussed the report with the officials at the exit conference on
           November 6, 2009. The Cooperative provided its written comments to our draft
           report on November 13, 2009. In its response, the Cooperative generally
           disagreed with the results.

           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 Objective                                                            4

Results of Audit
      Finding 1: The Cooperative Used Funds from Its Operating Account to Pay for   5
      Ineligible Expenses
      Finding 2: The Cooperative Did Not Adequately Administer Housing              8
      Assistance Payments in Accordance with HUD Requirements

Scope and Methodology                                                               12

Internal Controls                                                                   14

Appendixes
   A. Schedule of Questioned Costs and Funds to Be Put to Better Use                16
   B. Auditee Comments and OIG’s Evaluation                                         17




                                            3
                         BACKGROUND AND OBJECTIVE

The Yorkville Cooperative (Cooperative) was organized on July 15, 1977, for the purposes of
acquiring, rehabilitating, and operating as a cooperative housing project under Section 221(d)(3).
The affairs of the Cooperative are governed by a board of directors which consists of five
members. The Cooperative is located at 3146 Draper Drive, Fairfax, Virginia.

The U.S. Department of Housing and Urban Development (HUD) entered into a regulatory
agreement with the 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 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. Based on HUD’s Tenant Rental
Assistance Certification System assistance payment report, the Cooperative received $2.2 million
in calendar year 2008.

During our audit period, HUD authorized the Cooperative the following financial assistance for
the housing assistance payments:

                   Fiscal year              Authorized funds              Disbursed funds
                      2006                        $1,405,123                    $1,405,123
                      2007                        $2,427,715                    $2,427,715
                      2008                        $2,823,100                    $2,786,670
                      2009                        $2,956,624                      $854,372
                      2009                          $394,775                     $394,7751
                     Totals                      $10,007,337                   $7,868,6552

The objective of the audit was to determine whether the Cooperative administered its Section
221(d)(3) property and housing assistance contract according to its regulatory agreement and
HUD requirements.




1
  The Cooperative received $394,775 in additional supplemental funding due to the American Recovery and
Reinvestment Act of 2009.
2
  According to financial information obtained from the Richmond Multifamily Program Center, the Cooperative has
$2.1 million available to use for its program.


                                                       4
                                RESULTS OF AUDIT

Finding 1: The Cooperative Used Funds from Its Operating Account to
Pay for Ineligible Expenses

The Cooperative paid $225,640 in ineligible expenses to include legal fees associated with
refinancing its property, former management agent fees, and board of directors’ meeting
expenses. Additionally, it improperly used operating funds totaling $18,132 to pay for social
gatherings, promotions, a flat screen television and a video game console. This problem
occurred because the Cooperative disregarded HUD requirements. Also, it had not developed
and implemented adequate procedures and controls to ensure that disbursements made from its
operating account were for eligible expenses in accordance with program requirements. As a
result, $243,772 was unavailable to pay for the Cooperative’s necessary operating expenses and
repairs.



 The Cooperative Paid Expenses
 That Were Not Eligible


              The Cooperative paid $243,772 for expenses that were ineligible. Specifically, it
              paid $225,640 in legal fees and $18,132 for other expenses that were not operating
              expenses of the project. The table below shows the expenses that were ineligible.

                   Attorney legal fees                               $225,640
                   Social gatherings & promotions                     $15,632
                   Flat screen television and video game console       $2,500

              We reviewed legal fees, totaling $257,420, paid to the Cooperative’s attorney from
              January 2006 to December 2008. Of the $ 257,420 reviewed, the Cooperative
              improperly paid its attorney $225,640 from operating funds for services associated
              with the refinancing of the property, its former management agent, and the
              attorney’s attendance at recurring board of directors meetings. However, the
              services provided by the attorney were entity related and were not operating
              expenses of the project. When the Cooperative became aware that the legal
              expenses were not operating expenses, it reclassified the expenses as entity
              expenses. However, it continued to use operating funds to pay for these reclassified
              expenses. According to HUD Handbook 4370.2, the legal expense account should
              only be used for fees associated with rental collections. Additionally, appendix 3b
              of HUD Handbook 4381.5 states that the management agent will comply with HUD
              handbooks, notices, or other policy directives that relate to management of the
              project and ensure that all expenses of the project are reasonable and necessary. The
              legal fees paid were neither reasonable nor necessary operating expenses. Further,


                                                5
             the legal expenses paid were not for the operating costs of the project but were entity
             expenses. Thus, legal expenses paid, totaling $225,640, were ineligible.

             The Cooperative also used $18,132 in operating funds to pay for annual and
             monthly board meetings, food, social parties, a flat screen television, and a video
             game console. During the audit, we asked responsible officials to show us the flat
             screen television and the video game console, and neither item could be located.
             Paragraph 8(b) of the Cooperative’s regulatory agreement states that owners shall
             not without the prior approval of the HUD Secretary assign, transfer, dispose of,
             or encumber any personal property of the project, including rents, or pay out any
             funds except for reasonable operating expenses and necessary repairs. Thus, the
             disbursements paid were ineligible.


The Cooperative Disregarded
HUD Requirements


             The Cooperative disregarded HUD requirements. It believed that as a low-
             income project, it had no alternative but to use operating funds to pay for its legal
             expenses and to provide social activities for its members. As noted above,
             paragraph 8(b) of the regulatory agreement does not allow the use of operating
             funds to pay for social gatherings. HUD Handbook 4370.2 requires that the legal
             expense account only be used for fees associated with rental collections.
             There were no documents available indicating that HUD approved any budgets
             authorizing the use of operating funds to pay for annual and monthly board
             meetings, food, various parties, a flat screen television and legal fees not
             associated with rental collections.


Conclusion


             The Cooperative’s actions resulted in more than $243,000 being unavailable to
             pay for necessary operating expenses and repairs. The Cooperative needs to
             follow HUD requirements regarding the use of its operating accounts. It had not
             developed and implemented adequate procedures and controls to ensure that
             disbursements made from its operating account were for expenses that were
             reasonable, necessary, and in accordance with program requirements. Once the
             Cooperative develops and implements these controls, an estimated $81,257 will
             be used for eligible purposes annually.




                                                6
Recommendations



          We recommend that the Director of the Richmond Multifamily Program Center
          require the Cooperative to

          1A.     Reimburse its operating account from nonfederal funds $243,772 for
                  ineligible expenses.

          1B.     Develop and implement adequate procedures and controls to ensure that
                  disbursements made from its operating account are for expenses that are
                  reasonable, necessary, and in accordance with program requirements,
                  thereby ensuring that an estimated $81,257 will be used for eligible
                  purposes annually.




                                           7
Finding 2: The Cooperative Did Not Adequately Administer Housing
Assistance Payments in Accordance with HUD Requirements
The Cooperative did not always administer housing assistance payments in accordance with
HUD requirements. Specifically, it did not maintain adequate documentation to support $54,180
in housing assistance payments during periods it made rental concessions. It also overpaid
$14,313 and could not adequately support another $12,670 in housing assistance payments it
made for units occupied by members of its board of directors. These problems occurred because
the Cooperative disregarded HUD requirements and its management agent did not perform
adequate supervisory oversight of its former occupancy specialist. Overall, it was unable to
adequately support $66,850 in housing assistance payments, and it improperly overpaid $14,313
in housing assistance.



    The Cooperative Billed HUD
    $54,180 in Housing Assistance
    Payments Which It May Not
    Have Been Entitled to Receive


                    The Cooperative granted 112 rental concessions3 totaling $80,686 and in the same
                    month, billed HUD for housing assistance payments totaling $54,180 for the same
                    tenants, which is prohibited. We reviewed a schedule of rent concessions that the
                    Cooperative granted between March 2006 and December 2008. According to the
                    schedule reviewed, the rent concessions ranged from $64 to $9,877 and totaled
                    $80,686. We compared the names of the tenants that were granted rent
                    concessions to the Cooperative’s housing assistance register to determine whether
                    housing assistance payments were made for the same tenants. During the month
                    in which the rent concessions were made, the Cooperative billed HUD $54,180 in
                    housing assistance payments for the same tenants.

                    According to HUD Handbook 4350.3, REV-1, chapter 9, paragraph 12-5, if the
                    owner grants a rent concession, the owner cannot bill HUD for either the rental
                    assistance or the tenant’s portion of the rent for the month or months in which the
                    concession is given.

                    The Cooperative stated that the $80,686 was not rent concessions but was for
                    adjustments and write-offs for uncollectable rents. Without adequate
                    documentation to support that the amounts were adjustments and write-offs and
                    not rental concessions, the housing assistance payments billed to HUD are
                    classified as unsupported. Thus, the Cooperative needs to provide adequate
                    support for those adjustments.


3
    Rental concessions is a period in which a tenant receives free rent.


                                                             8
The Cooperative Incorrectly
Calculated Housing Assistance
Payments


            The Cooperative incorrectly calculated housing assistance payments, resulting in
            overpayments of $14,313 for the period 2005 through 2009 for units occupied by
            five members of its board of directors. To determine whether the Cooperative
            correctly calculated housing assistance payments, we reviewed 30 annual
            reexaminations for the five tenant files. The Cooperative incorrectly calculated
            housing assistance payments in all five files reviewed. The Cooperative did
            however properly determine eligibility for the members of its board of directors.

The Cooperative Lacked Proper
Documentation to Support
Housing Assistance Payments


            The Cooperative lacked proper documentation to support housing assistance
            payments totaling $12,670 made for units occupied by five members of the board
            of directors during the period 2005 through 2009. Our review of housing
            assistance, totaling $154,738, resulted in unsupported housing assistance
            payments totaling $12,670. Of the five board members’ tenant files reviewed,
            two files did not contain documentation to support items such as income, medical
            allowance, and full-time student status.

            Although the deficiencies noted above were in essence documentation issues, the
            lack of documentation was material and resulted in the Cooperative’s making
            unsupported housing assistance payments of $12,670.

The Cooperative Disregarded
HUD Requirements and Did
Not Perform Adequate
Supervisory Oversight of its
Former Occupancy Specialist


            The Cooperative disregarded HUD requirements regarding subsidy contract
            responsibilities. HUD Handbook 4350.3 and other HUD regulations required the
            Cooperative and its management agent to ensure that the computation of tenant
            rents, assistance payments, recertifications, and other subsidy contract
            responsibilities were performed in accordance with HUD requirements.

            Neither the Cooperative nor its management agent performed adequate
            supervisory oversight of its former occupancy specialist. The Cooperative’s lack
            of supervision of its former occupancy specialist contributed to the deficiencies


                                             9
             noted above. The former occupancy specialist was dismissed before we started
             this audit. None of the recertifications reviewed was signed or reviewed by the
             supervisor or its management agent. The management agent stated that although
             a review of the files was not performed by its office, the Cooperative’s staff
             conducted a full review of tenant files. However, as of the date of this report, the
             Cooperative had not provided evidence showing that a review had been
             performed.

Conclusion


             The Cooperative did not always maintain adequate support documentation for
             housing assistance payments made, incorrectly calculated housing assistance
             payments, and billed HUD for housing assistance payments it may not have been
             eligible to receive. As a result, it disbursed $66,850 without proper
             documentation and incorrectly calculated housing assistance payments, resulting
             in $14,313 in overpayments. The Cooperative needs to develop and implement
             procedures to ensure that housing assistance payments are correctly calculated
             and supported with the required documentation.

Recommendations


             We recommend that the Director of the Richmond Multifamily Program Center
             require the Cooperative to

             2A.    Provide documentation to support $54,180 it billed HUD during the period
                    it granted rental concessions or reimburse its program from nonfederal
                    funds.

             2B.    Discontinue the practice of billing HUD for housing assistance payments
                    in the same month in which rental concessions are granted.

             2C.    Correct the errors in the tenant files identified by the audit.

             2D.    Reimburse its program $14,313, from nonfederal funds for the
                    overpayment of housing assistance for units occupied by five members of
                    its board of directors.

             2E.    Provide documentation to support housing assistance payments totaling
                    $12,670 for units occupied by two members of its board of directors or
                    reimburse its program from nonfederal funds.

             2F.    Develop and implement procedures to ensure that housing assistance
                    payments are correctly calculated and supported with the required
                    documentation. The procedures, at a minimum, should include a


                                              10
statement from management certifying that the determined housing
assistance payment amounts have been reviewed by management and
prepared in accordance with HUD requirements.




                       11
                         SCOPE AND METHODOLOGY

To accomplish our objective, we reviewed

       The regulatory agreement between HUD and the Cooperative; HUD Handbooks 4350.3
       (Occupancy Requirements for Multifamily Programs), 4370.2, REV-1 (Financial
       Operations and Accounting Procedures for Insured Multifamily Projects), 4350.1
       (Multifamily Asset Management Project Servicing), and 4381.5 (Management Agent
       Handbook, appendix 3b: HUD-9839-B, Project Owner’s and Management Agent’s
       Certification for Multifamily Housing Projects for Identity-of-Interest or Independent
       Management Agents).

       The Cooperative’s accounting records, audited financial statements for 2007 and 2008,
       tenant files, computerized databases including housing assistance payment register and the
       general ledger, board meeting minutes from January 2006 to March 2009, organizational
       chart, and housing assistance contract.

       HUD’s monitoring reports for the Cooperative.

       Twenty eight invoices associated with legal fees from January 2006 to December 2008 and
       20 disbursements from the general ledger associated with social gatherings from January
       2006 to March 2009.

       Thirty annual reexaminations for five tenant files, totaling $154,738, made between 2005
       and 2009 to the five members of the Cooperative’s board of directors to determine
       eligibility and whether their housing assistance payments were accurately calculated.

       The schedule of 112 rental concessions granted during our audit period.

We also interviewed the Cooperative’s employees and HUD staff.

For the period of January 2006 through December 2008, the Cooperative paid ineligible
expenses totaling $243,772 related to legal fees and social gatherings and promotions. We
estimated that the Cooperative will put $81,257 ($243,772 divided by three years = $81,257)
to better use annually by developing and implementing adequate procedures and controls to
ensure that disbursements made from its operating account are for expenses that are reasonable,
necessary and in accordance with program requirements.

To achieve our audit objective, we relied in part on computer-processed data in the Cooperative’s
databases. Although we did not perform a detailed assessment of the reliability of the data, we did
perform a minimal level of testing and found the data to be adequate for our purposes.

We performed our on-site audit work from April through June 2009 at the Cooperative’s office
located at 3146 Draper Drive, Fairfax, Virginia. The audit covered the period January 2006
through March 2009 but was expanded when necessary to include other periods.


                                                 12
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
objective. We believe that the evidence obtained provides a reasonable basis for our findings
and conclusions based on our audit objective.




                                              13
                              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
              objective:

                      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 items are significant weaknesses:



                                               14
The Cooperative did not establish and implement adequate controls to ensure
that operating funds were only disbursed for reasonable and eligible
expenses.

The Cooperative did not establish and implement adequate controls to ensure
that housing assistance payments were accurate and properly supported.




                         15
                                   APPENDIXES

Appendix A

              SCHEDULE OF QUESTIONED COSTS
             AND FUNDS TO BE PUT TO BETTER USE

           Recommendation         Ineligible 1/    Unsupported   Funds to be put
                  number                                    2/   to better use 3/

                    1A             $243,772
                    1B                                               $81,257
                    2A                             $54,180
                    2D              $14,313
                    2E                             $12,670

                    Totals         $258,085        $66,850           $81,257


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.

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.

3/   Recommendations that funds be put to better use are estimates of amounts that could be
     used more efficiently if an Office of Inspector General recommendation is implemented.
     These amounts include reductions in outlays, deobigation of funds, withdrawal of
     interest, costs not incurred by implementing recommended improvements, avoidance of
     unnecessary expenditures noted in preaward reviews, and any other savings that are
     specifically identified. In this instance, if the Cooperative implements our
     recommendation, it will cease to incur program costs that are ineligible, unnecessary, or
     unreasonable. We only estimated the initial year of this benefit. Once the Cooperative
     successfully improves its controls, this will be a recurring benefit.




                                              16
Appendix B

        AUDITEE COMMENTS AND OIG’S EVALUATION


Ref to OIG Evaluation   Auditee Comments




Comment 1




                         17
Comment 1




Comment 2




Comment 3




            18
Comment 4




            19
Comment 5




Comment 6




            20
Comment 7



Comment 8



Comment 9




Comment 10




             21
22
                         OIG Evaluation of Auditee Comments

Comment 1   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 estimated replacement cost of the
            project. As with all program participants, the Cooperative must follow applicable
            criteria in HUD Handbooks 4370.2, 4381.5, and the regulatory agreement while
            serving low-income families and individuals.

Comment 2   The objective of this audit was to determine if the Cooperative was administering
            the program in accordance with its regulatory agreement and HUD criteria. The
            audit objective was not to evaluate whether the HUD criteria governing the
            Section 221 (d)(3) program was appropriate for nonprofit entities.

Comment 3   Although the Cooperative disagrees with HUD’s definition of a reasonable
            operating expense, the criteria of the program must be adhered to. HUD
            Handbook 4381.5 states that participants must comply with handbooks, notices or
            other policy directives that relate to the management of the project and ensure that
            all expenses of the project are reasonable and necessary. Audit results show that
            the Cooperative paid for expenses that were neither reasonable nor necessary
            operating expenses.

Comment 4   The Cooperative should comply with the guidance it received from HUD’s
            Richmond field office. According to HUD Handbook 4370.2, the legal expense
            account should only be used for fees associated with rental collections.
            Additionally, appendix 3b of HUD Handbook 4381.5 states that the management
            agent will comply with HUD handbooks, notices, or other policy directives that
            relate to management of the project and ensure that all expenses of the project are
            reasonable and necessary. The legal fees paid were neither reasonable nor
            necessary operating expenses.

Comment 5   The Cooperative used operating funds to pay for food, social parties, a flat screen
            television, and a video game console. These are not reasonable or necessary
            operating expenses. Further, the Cooperative could not locate the flat screen
            television or the video game console when we asked to see them.

Comment 6   The Cooperative has not provided adequate evidence to show that the amounts
            listed in its schedule of concessions report were in fact adjustments and not rent
            concessions.

Comment 7   The Cooperative’s statement that our office used incorrect income for two
            recertifications is not correct. To calculate income, we used the income
            information that was included in the tenant file. During the audit, we requested
            that the Cooperative provide documentation to nullify the exceptions found. The



                                             23
              Cooperative did not provide adequate documentation; thus the housing assistance
              payments were classified as unsupported.

Comment 8     Neither the Cooperative nor its management agent performed adequate
              supervisory oversight of its former occupancy specialist. Of the five tenant files
              reviewed, none of the recertifications were signed or reviewed by the supervisor
              or its management agent.

Comment 9     The Cooperative and its management agent failed to provide documentation
              showing when the review was performed, who performed the review, or the
              results of the review.

Comment 10 The audit identified internal control weaknesses with the Cooperative’s
           administration of its Section 221(d)(3) program that should be corrected.




                                               24