oversight

The Jefferson Parish Housing Authority Marrero, LA, Violated Federal Regulations

Published by the Department of Housing and Urban Development, Office of Inspector General on 2010-10-29.

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

                                                                 Issue Date
                                                                     October 29, 2010
                                                                 
                                                                 Audit Report Number
                                                                      2011-AO-1002




TO:        Scott G. Davis, Director, Disaster Recovery and Special Issues Division, DGBD



FROM:      Nikita N. Irons, Regional Inspector General for Audit, Gulf Coast Region,
             11AGA


SUBJECT: The State of Louisiana, Baton Rouge, LA, Did Not Always Ensure That
           Disbursements Under Its First Time Homebuyer Program Complied With
           Federal Regulations and Program Requirements


                                   HIGHLIGHTS

 What We Audited and Why

            We audited the U.S. Department of Housing and Urban Development (HUD)
            Community Development Block Grant (CDBG) Supplemental Disaster Recovery
            program funds, administered by the State of Louisiana, Office of Community
            Development (State). Specifically, we wanted to determine whether the State
            ensured that disbursements made under its First Time Homebuyer Program
            (Program) complied with Federal regulations and the cooperative endeavor
            agreement (agreement) with its subrecipient, the Finance Authority of New
            Orleans (Finance Authority). The audit was initiated as part of the Office of
            Inspector General’s (OIG) strategic plan to review activities related to Gulf Coast
            hurricane disaster relief efforts.

 What We Found

            The State did not always ensure that disbursements made under its Program
            complied with Federal regulations and the agreement. Specifically,
           disbursements to Program participants were not always eligible and supported.
           This deficiency occurred because the State did not ensure that (1) the Finance
           Authority implemented Program policies and procedures before making
           disbursements under the Program, (2) Program policies and procedures
           adequately addressed the Program requirements, and (3) the Finance Authority
           followed the Program policies and procedures once they were implemented. As a
           result, the State disbursed $268,415 for ineligible Program costs and was unable
           to support more than $1.2 million in Program costs.

           In addition, the State disbursed funds to the Finance Authority on a fee per loan
           basis, which was unallowable. This deficiency occurred because the State did not
           ensure that a budget amendment complied with Federal regulations or the
           agreement. The State also did not ensure that the findings in its monitoring
           reviews were resolved before continuing disbursements to the Finance Authority.
           As a result, it disbursed more than $1.3 million for unallowable costs and did not
           have assurance that costs were reasonable or necessary. Furthermore, the State
           did not have reasonable assurance that the Finance Authority used every
           opportunity to (1) maximize the disaster funds and (2) increase the number of
           individual families that were served by the Program.

What We Recommend

           We recommend that HUD’s Disaster Recovery and Special Issues Division
           require the State to (1) repay its Program the $268,415 in ineligible costs and (2)
           support or repay its Program more than $1.2 million in unsupported costs. In
           addition, the State must support or repay its Program more than $1.3 million
           disbursed to the Finance Authority on a fee per loan basis and cease payment of the
           fee per loan to the Finance Authority.

           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 provided a draft report to the State on September 30, 2010. We held an exit
           conference with the State on October 7, 2010. We asked the State to provide
           written comments to the draft report by October 15, 2010, and it provided written
           comments on that day. The State generally agreed with our 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: Disbursements to Participants Were Not Always Eligible and   6
      Supported

      Finding 2: The State Paid More Than $1 Million in Unallowable Costs     11
Scope and Methodology                                                         15

Internal Controls                                                             16

Appendixes
   A. Schedule of Questioned Costs                                            18
   B. Auditee Comments and OIG’s Evaluation                                   19
   C. Results of OIG Sampled Files Reviewed                                   23




                                            3
                                BACKGROUND AND OBJECTIVE

Between December 2005 and December 2007, Congress approved a total of $19.7 billion in
supplemental Community Development Block Grant (CDBG) disaster recovery assistance funds
for Gulf Coast hurricane relief. Of that amount, the U.S. Department of Housing and Urban
Development (HUD) awarded $13.4 billion to the State of Louisiana (State) for its recovery
efforts. The Louisiana Recovery Authority, in conjunction with the State, developed action plans
outlining the programs and methods used to administer the $13.4 billion in supplemental CDBG
funds. In Louisiana, the State is HUD’s principal grantee and the entity primarily responsible for
the $13.4 billion in allocated disaster funds. Therefore, the State is responsible for administering
and monitoring the CDBG disaster-related programs generated from the HUD allocations. The
State uses the supplemental CDBG funds to fill the gaps in funding in the areas of housing,
infrastructure, and economic development.

Of the $13.4 billion in CDBG funds allocated to Louisiana, the State budgeted $40 million for
the First Time Homebuyer Program (Program) under its housing programs category. As allowed
by HUD, the State executed a subrecipient agreement with the Finance Authority of New
Orleans (Finance Authority) to administer $27.8 million of the $40 million for Orleans Parish.
The agreement was effective March 1, 2008.

The Program’s purpose is to promote home ownership by allowing low- and moderate-income
households to purchase one- and two-family properties that are “ready to occupy,” as well as
unrepaired one- and two-family properties for which the purchaser would carry the home
through the repair process. Participating properties must either be (1) those properties that
received severe or major damage through the storms of 2005 or (2) properties located in locally
designated redevelopment zones.1

To be considered eligible for the Program, applicants must be first-time home buyers with annual
household incomes at or below 120 percent of the area median income who are acquiring a
principal residence. The Program offers two types of assistance. The first is a forgivable soft-
second home mortgage loan through participating lenders, not to exceed $65,000, to cover the
affordability gap between (1) the maximum first mortgage financing for which the home buyer
qualifies and (2) the purchase price of the home. Under the second type of assistance, the
Program offers closing cost assistance, not to exceed $10,000, to cover closing costs related to
the mortgage loan and required prepaid items, such as insurance, interest, and taxes. All
participants do not qualify to receive closing cost assistance.

As of March 2010, the State had expended more than $23.9 million of the $27.8 million
administered by the Finance Authority, for assistance to Program participants and Program
administrative costs2.


1
 The properties could either be formerly rental or ownership properties.
2
 The State disbursed $23,924,748 for the Program administered by the Finance Authority. Of that amount, $22,577,877 was for assistance to
Program participants and $1,346,871 was for Program administrative costs.



                                                                     4
Our overall objective was to determine whether the State ensured that disbursements made under
its Program complied with Federal regulations and the agreement with the Finance Authority.
Specifically, we wanted to determine whether (1) disbursements to Program participants were
eligible and supported and (2) the State disbursed funds to the Finance Authority in accordance
with Federal regulations and the agreement for the Program.




                                               5
                                                  RESULTS OF AUDIT

Finding 1: Disbursements to Participants Were Not Always
           Eligible and Supported
Disbursements to Program participants were not always eligible and supported as required by
Federal regulations, the agreement, and Program policies. This deficiency occurred because the
State did not ensure that the Finance Authority (1) implemented policies and procedures before
making disbursements under the Program, (2) developed Program policies which adequately
addressed Program requirements as outlined in its action plan and agreement, and (3) followed
the Program policies and procedures once they were implemented. As a result, the State
disbursed $268,415 for ineligible Program costs and was unable to support more than $1.2
million in Program costs.


More than $1.4 Million Paid
for Ineligible and/or
Unsupported Program Costs

                        According to the agreement, the State required the Finance Authority to follow the
                        Program policies and procedures and Federal regulations including, 24 CFR (Code
                        of Federal Regulations) 84.21 through 28, 24 CFR 85.21, and Office of Management
                        and Budget (OMB) Circular A-87. Those regulations required the Finance
                        Authority to follow the required accounting principles and procedures, use adequate
                        controls, and maintain adequate source documentation for all costs incurred.
                        However, a review of disbursements, totaling $2,302,609, to 363 Program
                        participants determined that 25 (69 percent) participants received disbursements
                        which included costs that were ineligible and/or unsupported (see appendix C).

                        Costs in disbursements were ineligible because participants’ income exceeded the
                        HUD income limit 4 or the closing cost grant award was incorrectly calculated,
                        resulting in an overpayment. According to the Program requirements, closing cost
                        grant assistance was provided based upon the participant’s need and if other
                        Program requirements were met. Regarding the closing cost grant, the State
                        required the Finance Authority to consider the participant’s reserves, including cash
                        in the bank or liquid assets, to determine need and in its calculation of the grant
                        assistance. To determine need, the Finance Authority determined a maximum
                        amount of reserves allowed by using the following formula:

                                        (housing payment x 3) + $3,000 = maximum reserves allowed



3
    Two Program participants did not receive a grant award for closing costs.
4
    This occurred in three instances. Participants’ household income could not exceed 120 percent of the area median income.

                                                                         6
                        The Finance Authority then subtracted the maximum reserves allowed from the
                        participant’s actual reserves. Any amount exceeding the maximum reserves allowed
                        was subtracted from the total allowable closing cost grant assistance to determine the
                        amount of the closing cost grant award. However, 12 participants who received a
                        closing cost grant award either (1) received an overpayment because the allowable
                        closing cost grant assistance was not correctly reduced by the amount exceeding the
                        maximum reserves allowed or (2) did not qualify to receive the award because the
                        excess reserves exceeded the allowable closing cost grant assistance. In one
                        instance, a participant, who received the maximum $10,000 closing cost grant
                        award, had more than $60,000 in excess reserves and therefore, did not qualify to
                        receive the award.

                        Costs in disbursements were unsupported because files did not include required
                        documentation to support eligibility under the Program policies, such as
                        documentation to support5

                              The Program participants’ first-time home buyer status - Program
                               policies required that participants be first-time home buyers. To qualify as
                               a first-time home buyer, the participant had to either be an individual who
                               (1) had no ownership in a principal residence during the 3-year period
                               ending on the date of purchase of the property; (2) was a single parent who
                               owned with a former spouse while married; (3) was a displaced
                               homemaker and owned with a spouse; (4) owned a principal residence not
                               permanently affixed to a permanent foundation; or (5) owned a property
                               that was not in compliance with State, local, or model building codes and
                               could not be brought into compliance for less than the cost of constructing
                               a permanent structure. According to the Finance Authority, it used credit
                               reports to verify that participants had no ownership in a principal
                               residence during the 3-year period ending on the date of purchase of the
                               property. However, four files did not include a credit report or other
                               documentation supporting that the participants met the qualifying criteria.

                              The Program participants’ household income amount - Program
                               policies required that participants’ household income be at or below 120
                               percent of the area median income under HUD’s income limits. To verify
                               a participant’s household income and to determine income eligibility,
                               Program policies required documentation of the participant’s last 2 years’
                               tax returns and Internal Revenue Service forms W-2, a verification of
                               employment form, and the pay stubs for each pay period over the past 3
                               months. However, seven files did not include all of the required
                               documentation. In addition, documentation of the household size was
                               needed to determine the appropriate income limit applicable to the
                               participant. However, two files did not include sufficient documentation



5
    Some files had multiple issues which rendered the disbursement(s) unsupported.

                                                                        7
                                  to support the participants’ household size used in making the income
                                  eligibility determination.

                             That the participating property was within a designated disaster area
                              or sustained at least $5,200 in damages as a result of either Hurricane
                              Katrina or Rita - Program policies required that participating properties
                              be located in a designated disaster area or had sustained at least $5,200 in
                              hurricane damages. According to the Finance Authority, if a property was
                              not in a designated disaster area, it verified the dollar amount of property
                              damage using a damage assessment report, insurance claim, or property
                              repair receipts. Further, regarding the damage assessment reports, the
                              Finance Authority asserted that as long as the damage assessment report
                              indicated that the property damage was at least 10 percent, it considered
                              the property to have met the Program requirement of having sustained at
                              least $5,200 in hurricane damages. However, 136 files did not include
                              documentation to support the dollar amount or percentage of property
                              damage. In addition, the Program policies did not (1) state that the
                              percentage could be used in lieu of a dollar amount or (2) establish a set
                              percentage for determining whether the property damage met the Program
                              requirements.

                             The Program participants’ total debt ratio did not exceed the 45
                              percent established limit - Under HUD’s Federal Housing
                              Administration (FHA) requirements, the maximum total debt ratio allowed
                              to qualify for a mortgage loan is 43 percent. In certain circumstances,
                              HUD allows FHA lenders to consider compensating factors, such as
                              previous credit history, down payment, and assets, to allow applicants to
                              exceed the allowed percentage amount. The Program policies did not
                              follow these guidelines and established a maximum total debt ratio of 45
                              percent. However, using the participants’ monthly housing payment,
                              monthly income, and monthly debt, we determined that in six instances,
                              the participants’ total debt ratio exceeded the established Program limit by
                              2 to 15 percent. In addition, for the participants whose debt ratio exceeded
                              45 percent, it appeared that the Finance Authority adjusted either the
                              monthly income or monthly debt amounts to qualify participants at or
                              below the 45 percent limit.

                      As a result, of $2,302,609 in Program disbursements, the State spent $1,470,659 (63
                      percent) in questioned costs7. Despite minor documentation issues, the remaining
                      $831,950 in Program disbursements was eligible and supported. The State must
                      repay $268,415 and support or repay more than $1.2 million.



6
  18 files did not contain documentation to support the dollar amount of property damage. Of the 18, in addition to the lack of support for the
dollar amount of property damage, 13 did not include documentation to support the percentage of property damage either.
7
  This amount includes $268,415 in ineligible and more than $1.2 million in unsupported Program disbursements.

                                                                        8
Insufficient Program Controls


             Program policies and procedures were not effective until February 2010. By that
             time, more than $23 million in Program funds had been disbursed. Without
             adequate controls, the Finance Authority could not ensure consistency when
             processing files or that files were processed in accordance with Federal and Program
             requirements. In addition, once Program policies and procedures were established,
             they did not adequately address the Program requirements reflected in the
             agreement. For instance, the policies and procedures did not address how “need”
             should be determined, a Program requirement related to the closing cost grant
             assistance, nor did the policy detail the calculation for determining the closing cost
             grant assistance amount. Also, regarding the verification of household income, the
             policy required that the applicant provide pay stubs for each pay period over the past
             3 months but did not specify from what date, such as the application or closing date.
             Further, once the policies and procedures were implemented, the Finance Authority
             did not always follow them when determining the eligibility of participants or
             maintaining supporting documentation. Implementation of detailed Program
             policies and procedures before making Program disbursements could have aided in
             ensuring that Program disbursements were eligible and supported as required by
             Federal and Program requirements.

Participant Files Reviewed


             During the assignment, the State reviewed the files of some of our sampled
             Program participants and discussed with us its findings related to those files. In
             addition, during an update meeting, the State explained that it intended to review
             the files of our entire sample of Program participants. We acknowledge the
             State’s efforts in resolving the identified deficiencies.

Conclusion


             Disbursements to Program participants were not always eligible and supported in
             keeping with Federal and Program requirements. This deficiency occurred because
             the State did not ensure that the Finance Authority (1) implemented policies and
             procedures before making disbursements, (2) developed Program policies which
             adequately addressed Program requirements as outlined in the agreement, and (3)
             followed Program policies and procedures once they were implemented. As a result,
             the State disbursed $268,415 for ineligible Program costs and was unable to support
             more than $1.2 in Program costs.




                                               9
Recommendations


             We recommend that the Director of HUD’s Disaster Recovery and Special
             Issues Division require the State to

             1A. Repay its Program $268,415 in ineligible Program disbursements.

             1B. Support or repay its Program $1,202,244 in unsupported Program
                 disbursements.




                                        10
Finding 2: The State Paid More Than $1 Million in Unallowable
           Costs
The State reimbursed the Finance Authority on a fee per loan basis, which was unallowable
according to Federal regulations and the agreement. This deficiency occurred because the State
did not ensure that a budget amendment to the initial agreement complied with Federal
regulations or the agreement before disbursing funds to the Finance Authority. In addition, the
State did not ensure that the findings in its monitoring reviews were resolved before continuing
disbursements to the Finance Authority. As a result, the State paid more than $1.3 million in
unallowable costs and did not have assurance that costs were reasonable and necessary, as
required by OMB Circular A-87. In addition, the State did not have reasonable assurance that
the Finance Authority used every opportunity to leverage funds to (1) maximize the current
disaster funds and (2) increase the number of individual families that were served by the
Program as required by the agreement.


 $1.3 Million Disbursed for
 Unallowable Costs


               As of March 4, 2010, the State had reimbursed the Finance Authority more than $1.3
               million in Program administrative costs on a fee per loan basis, which violated 24
               CFR 85.22 and the agreement. Regulations at 24 CFR 85.22 prohibit the payment
               of a fee, profit, or other increment above allowable costs to a grantee or subgrantee.
               Payment of a fee or profit was allowed only to contractors. Since the Finance
               Authority was the State’s subgrantee, it did not qualify to receive a fee per loan.
               According to the State, initially there was some confusion with regard to whether the
               Finance Authority was considered a subgrantee or a contractor. Since the Finance
               Authority was not a contractor, it should not have been paid on a fee per loan basis.
               In addition, payment of the fee per loan violated the agreement, which did not allow
               for the reimbursement of this administrative type of fee.

               Although the fee per loan was unallowable, the agreement did allow for payment of
               eligible items and direct Program delivery costs actually incurred by the Finance
               Authority. However, because the State allowed the fee per loan, it did not require
               the Finance Authority to submit supporting documentation with its payment requests
               and, therefore, did not maintain documentation to support actual Program costs
               incurred by the Finance Authority as required in its agreement. Specifically, as of
               March 4, 2010, the State had reimbursed the Finance Authority $3,815 for each of
               the 353 grants closed through 15 payment requests. A review of the 15 payment
               requests determined that for all 15, the Finance Authority did not submit
               documentation that showed actual Program costs incurred. The only documentation
               included with the Finance Authority’s payment requests to the State was
               documentation to support the number of loans processed. The State then reimbursed
               the Finance Authority the set fee of $3,815 for each loan processed.

                                                11
             The State must support or repay its Program the $1,346,871 disbursed for
             the fee per loan.

Number of Families Served
Decreased by Amended Budget

             The initial budget for the agreement included 15 cost categories for
             Program costs, totaling $505,000, which were to be reimbursed based
             upon actual costs incurred. An amendment to the budget reflected an
             amount of $3,815 as a fee per loan for 365 loan closings. In addition, the
             amended budget added 16 new cost categories and increased the total
             Program costs to nearly $1.4 million as shown below.

                  Number of               Initial budget             Amended
                 Program cost                                         budget
                  categories
                      15                    $505,000                 $1,144,438
                      16                                                248,220
                    Totals                  $505,000                 $1,392,658

             Under the amended budget, costs increased by $639,438 for the 15 cost
             categories included in the initial budget and included 16 new cost
             categories totaling $248,220. The 16 new cost categories also included
             indirect costs, whereas the initial budget had none.

             Regarding the indirect costs added under the amended budget, the State
             did not have documentation reflecting the distribution of indirect costs
             among other programs administered by the Finance Authority as required
             by OMB Circular A-87. Further, although the amended budget included
             descriptions for all 31 cost categories, it did not include documentation or
             provide justification for inclusion of the additional 16 cost categories or
             the increases in amended amounts for the 15 cost categories included in
             the initial budget.

             In amending the budget for Program administrative costs, the funding
             available for assistance to Program participants was reduced by $887,658,
             which could have served at least 11 more families. Because the funding
             was taken away from Program assistance and budgeted as Program
             administrative costs without adequate documentation, the State did not
             have reasonable assurance that the Finance Authority used every
             opportunity to leverage funds to maximize the disaster funds and increase
             the number of individual families served by the Program as required by
             the agreement.




                                              12
Issues With Fee Per Loan
Identified


             The State conducted a monitoring visit on November 23, 2009. The results of the
             monitoring visit determined that the Finance Authority did not provide supporting
             documentation concerning the individual line item costs for its fee per loan.
             Although the State identified this issue with the fee per loan, it continued to
             reimburse the Finance Authority before resolving its monitoring review findings.
             The State should have ceased payments to the Finance Authority for the fee per
             loan until the Finance Authority resolved the findings. The State must cease
             payment of the fee per loan to the Finance Authority, thereby only reimbursing the
             Finance Authority for supported direct Program delivery costs actually incurred.


Action Taken


             During an update meeting, the State asserted that its compliance unit was
             reviewing all payment requests from the Finance Authority, including supporting
             documentation, as available. The State also asserted that it would recoup any
             unsupported or ineligible Program costs. We acknowledge the State’s efforts in
             validating the Program costs.

Conclusion


             The State did not ensure that it disbursed disaster funds to the Finance Authority
             in accordance with Federal regulations or the agreement. Specifically, although
             the agreement allowed for payment of costs actually incurred by the Finance
             Authority, the State reimbursed the Finance Authority on a fee per loan basis,
             which violated Federal regulations and the agreement. This deficiency occurred
             because the State did not ensure that a budget amendment to the initial agreement
             complied with the agreement or Federal regulations before disbursing funds to the
             Finance Authority. Additionally, the State did not ensure that the findings in its
             monitoring reviews related to those costs were resolved before continuing
             disbursements to the Finance Authority.

             As a result, the State paid more than $1.3 million in unallowable costs and did not
             have assurance that costs were reasonable or necessary, as required by Federal
             regulations. In addition, the State did not have reasonable assurance that the
             Finance Authority used every opportunity to leverage funds to (1) maximize the
             current disaster funds and (2) increase the number of individual families that were
             served by the Program as required by the agreement.


                                             13
Recommendations


       We recommend that the Director of HUD’s Disaster Recovery and Special Issues
       Division require the State to

          2A. Support or repay its Program the $1,346,871 disbursed for the fee per loan.

          2B. Cease payment of the fee per loan to the Finance Authority, thereby only
              reimbursing the Finance Authority for supported direct Program delivery costs
              actually incurred.




                                           14
                                    SCOPE AND METHODOLOGY

We conducted our audit at the State’s office in Baton Rouge, LA, and the Finance Authority and
HUD Office of Inspector General (OIG) office in New Orleans, LA. We performed our audit
between March and September 2010.

To accomplish our objective, we used disbursement data from Program inception through
February 28, 2010,8 which consisted of 353 Program participants who received disbursements
totaling more than $22.5 million.9 Through file reviews, we determined that the disbursement
data were generally reliable. We used a stratified sampling approach to select 36 of the 353
participants who received disbursements, totaling more than $2.3 million, for review. We chose
this method because it allowed selections to be made without bias from the audit population and
allowed conclusions to be reached about the population or activity being tested, based on
mathematically defensible projections from the sample. We reviewed files for the 36 Program
participants who received disbursements to determine whether the disbursements were eligible
and supported.

In addition to the disbursement file reviews, we

               Reviewed all payment requests and supporting documentation, as available, submitted
                by the Finance Authority to the State specifically for the fee per loan,

               Reviewed the HUD-approved action plan, HUD and State grant agreements, the State
                and Finance Authority cooperative endeavor agreement including the budget with
                amendments, Program policies and procedures, the Code of Federal Regulations, public
                laws, and other legal authorities relevant to the CDBG disaster recovery grant,

               Reviewed monitoring reports prepared by the State and the monthly reports prepared by
                the Finance Authority, and

               Interviewed key HUD, State, and Finance Authority staff.

Our audit period covered March 2008 through March 2010. We expanded our audit period as
necessary. 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.




8
  Closings were held within this timeframe; however, invoices submitted by the Finance Authority to the State were paid between March 2009
and March 2010.
9
  $22,577,877 = $19,656,529 (soft second loans) + $2,921,348 (closing cost grant awards)

                                                                     15
                              INTERNAL CONTROLS

Internal control is a process adopted by those charged with governance and management,
designed to provide reasonable assurance about the achievement of the organization’s mission,
goals, and objectives with regard to

      Effectiveness and efficiency of operations,
      Reliability of financial reporting, and
      Compliance with applicable laws and regulations.

Internal controls comprise the plans, policies, methods, and procedures used to meet the
organization’s mission, goals, and objectives. Internal controls 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:

                  Policies and procedures implemented and/or followed by the State to ensure
                   compliance with applicable laws and regulations when making disbursements
                   under the Program.

               We assessed the relevant controls identified above.

               A deficiency in internal control exists when the design or operation of a control does
               not allow management or employees, in the normal course of performing their
               assigned functions, the reasonable opportunity to prevent, detect, or correct (1)
               impairments to effectiveness or efficiency of operations, (2) misstatements in
               financial or performance information, or (3) violations of laws and regulations on a
               timely basis.

 Significant Deficiencies

               Based on our review, we believe that the following items are significant deficiencies:

                      The State did not ensure that controls were implemented before making
                       Program disbursements or that Program controls were adequate to ensure
                       that disbursements to participants were always eligible and supported (see
                       finding 1).




                                                 16
   The State’s controls were not adequately designed to ensure compliance
    with Federal regulations and its agreement when making disbursement to
    the Finance Authority (see finding 2).




                           17
                                     APPENDIXES
Appendix A
                   SCHEDULE OF QUESTIONED COSTS

     Recommendation               Ineligible 1/                Unsupported 2/
         number
          1A                        $268,415
          1B                                                     $1,202,244
          2A                        ________                     $1,346,871
         Totals                     $268,415                     $2,549,115

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.




                                                  18
Appendix B

       AUDITEE COMMENTS AND OIG’S EVALUATION

                    Auditee Comments




Comment 1




                           19
Comment 1




Comment 1




Comment 2




            20
Comment 2




            21
                         OIG Evaluation of Auditee Comments

Comment 1   The State asserted that it reviewed many of the files the OIG reviewed in
            conducting the audit and was in general agreement that disbursements to Program
            participants were not always eligible and supported as required by Federal
            regulations, the agreement, and Program policies. Further, the State agreed with
            the causes cited in the report and stated that it intended to address all concerns
            with the Finance Authority and pursue recovery of those disbursements that the
            Finance Authority could not provide documentation to support eligibility. The
            State plans to provide the results of its review to HUD.

            We acknowledge the State's efforts in pursing the validation and recovery of
            questioned costs. Since the State's review had not been finalized, questioned
            costs as identified in Appendix A will remain the same.

Comment 2   The State concurred that it reimbursed the Finance Authority on a fee per loan
            basis, which was unallowable according to Federal regulations and the agreement.
            The State commented that its compliance unit had worked with the Finance
            Authority in obtaining supporting documentation for actual Program costs eligible
            for reimbursement. The State believed that the reported $1.3 million in
            unallowable CDBG fund disbursements would be substantially reduced.
            However, the State agreed to seek recovery of unallowable costs from the Finance
            Authority. The State plans to provide the results of its review to HUD.

            In addition, the State indicated that it informed the Finance Authority that it will
            no longer reimburse funds on a fee per loan basis and that any further
            disbursements will only be for supported direct Program delivery costs actually
            incurred.

            We acknowledge the State's proposed actions in pursing the validation and
            recovery of questioned costs. The State should provide supporting documentation
            to HUD’s staff showing that it ceased payment of the fee per loan to the Finance
            Authority. HUD’s staff will then assist the State with resolving recommendation
            2B.




                                              22
Appendix C

                   RESULTS OF OIG SAMPLED FILES REVIEWED

         Sample              Total              OIG-identified eligible     OIG-identified      OIG-identified
                         disbursement                   costs               ineligible costs   unsupported costs
            1               $44,624                                              $1,312            $43,312
            2               $74,188                      $74,188
            3               $71,237                                              $269              $70,968
            4               $42,041                      $33,348                $8,693
            5               $75,000                                                                $75,000
            6               $75,000                                            $75,000
            7               $59,465                                                                $59,465
            8               $33,870                                                                $33,870
            9               $73,000                      $73,000
           10               $72,606                      $72,606
           11               $72,466                                             $7,466             $65,000
           12               $71,695                      $65,000                $6,695
           13               $58,294                      $58,294
           14               $52,048                                                                $52,048
           15               $63,000                                                                $63,000
           16               $69,009                      $69,009
           17               $71,282                                                                $71,282
           18               $63,522                      $63,522
           19               $64,320                                              $245              $64,075
           20               $61,019                      $61,019
           21               $64,083                                                                $64,083
           22               $64,240                      $64,240
           23               $29,614                      $29,614
           24               $33,017                      $33,017
           25               $65,522                                              $116              $65,406
           26               $67,070                                                                $67,070
           27              $65,00010                                                               $65,000
           28               $73,865                                              $279              $73,586
           29               $75,000                                                                $75,000
           30               $70,093                      $70,093
           31               $72,875                                             $72,875
           32               $75,000                                             $10,000            $65,000
           33               $75,000                                             $10,000            $65,000
           34              $65,00011                                            $65,000
           35               $66,077                                             $1,998             $64,079
           36               $73,467                     $65,000                 $8,467
          Totals          $2,302,609                    $831,950               $268,415           $1,202,244




10
     Program participant did not receive a closing cost grant award.
11
     Program participant did not receive a closing cost grant award.



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