Issue Date December 27, 2010 Audit Report Number 2011-CH-1003 TO: Jorgelle Lawson, Director of Community Planning and Development, 5ED FROM: Ronald Farrell, Acting Regional Inspector General for Audit, 5AGA SUBJECT: The City of Cleveland, OH, Lacked Adequate Controls Over Its HOME Investment Partnerships Program and American Dream Downpayment Initiative-Funded Afford-A-Home Program HIGHLIGHTS What We Audited and Why We audited the City of Cleveland’s (City) HOME Investment Partnerships Program (Program). The audit was part of the activities in our fiscal year 2010 annual audit plan. We selected the City based upon our analysis of risk factors related to Program grantees in Region V’s jurisdiction, recent media coverage regarding the City’s Program, and a request from the U.S. Department of Housing and Urban Development’s (HUD) Columbus Office of Community Planning and Development. Our objectives were to determine whether the City complied with HUD’s requirements in its use of Program and American Dream Downpayment Initiative (Initiative) funds to provide interest-free second mortgage loans to home buyers through its Afford-A-Home program and its use of recapture provisions for Afford-A-Home program activities (activity). What We Found The City did not comply with HUD’s requirements in its use of Program and Initiative funds to provide interest-free second mortgage loans to home buyers through its Afford-A-Home program and its use of recapture provisions for activities. It (1) provided assistance for ineligible activities; (2) lacked sufficient documentation to support that activities were eligible; (3) included inappropriate recapture provisions in its action plans for program years 2007 to 2008, 2008 to 2009, and 2009 to 2010; (4) did not implement appropriate recapture provisions for all of the activities reviewed; and (5) did not ensure that its Program was reimbursed for Program funds used to assist home buyers in purchasing homes that were later sold through a sheriff’s sale and ownership of the homes had been transferred. As a result, it inappropriately provided $20,000 in Program funds to assist two households that were not income eligible and was unable to support its use of $760,000 in Program and/or Initiative funds. Further, its Program was not reimbursed for $30,000 in Program funds used for three homes that were sold through a sheriff’s sale and ownership of the homes had been transferred. In addition, the City is at risk of being required to reimburse its Program additional non-Federal funds if the ownership of additional homes acquired under its Afford- A-Home program is transferred through foreclosure. What We Recommend We recommend that the Director of HUD’s Columbus Office of Community Planning and Development require the City to (1) reimburse its Program from non-Federal funds for the $20,000 in Program funds inappropriately used to assist two activities, (2) provide supporting documentation or reimburse its Program $760,000 from non-Federal funds, (3) reimburse its Program $30,000 from non- Federal funds for the three homes that had been sold through a sheriff’s sale and ownership of the homes had been transferred, and (4) implement adequate procedures and controls to address the findings cited in this audit report. These procedures and controls should help ensure that over the next year the City appropriately recaptures Program and/or Initiative funds and/or reimburses its Program from non-Federal funds for at least $90,000 in Program and/or Initiative funds used for homes acquired under its Afford-A-Home program in which ownership would be transferred due to foreclosures. 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 our discussion draft audit report and/or supporting schedules to the director of the City’s Department of Community Development, the City’s mayor, and/or HUD’s staff during the audit. We held an exit conference with the City’s director on November 18, 2010. We asked the City’s director to provide comments on our discussion draft audit report by December 3, 2010. The director provided written comments, dated 2 December 3, 2010. The director disagreed with our findings, but partially agreed with our recommendations. The complete text of the written comments, except for the nine appendixes of documentation that were not necessary for understanding the director’s comments, along with our evaluation of that response, can be found in appendix B of this report. We provided the Director of HUD’s Columbus Office of Community Planning and Development with a complete copy of the City’s written comments plus the nine appendixes of documentation. 3 TABLE OF CONTENTS Background and Objectives 5 Results of Audit Finding 1: The City Lacked Adequate Controls Over Its Afford-A-Home Program To Ensure That Activities Were Eligible for Assistance 7 Finding 2: The City Lacked Adequate Controls Over Its Afford-A-Home Program To Ensure That Appropriate Recapture Provisions Were Used for Activities 12 Scope and Methodology 17 Internal Controls 20 Appendixes A. Schedule of Questioned Costs and Funds To Be Put to Better Use 22 B. Auditee Comments and OIG’s Evaluation 23 C. HUD’s Requirements 48 D. Schedule of Activities With Insufficient Documentation 52 4 BACKGROUND AND OBJECTIVES The Program. Authorized under Title II of the Cranston-Gonzalez National Affordable Housing Act, as amended, the HOME Investment Partnerships Program (Program) is funded for the purpose of increasing the supply of affordable standard rental housing; improving substandard housing for existing homeowners; assisting new home buyers through acquisition, construction, and rehabilitation of housing; and providing tenant-based rental assistance. The American Dream Downpayment Assistance Act established a separate funding formula for the American Dream Downpayment Initiative (Initiative) under the Program to provide downpayment assistance, closing costs, and rehabilitation assistance to eligible first-time home buyers. The City. Organized under the laws of the State of Ohio, the City of Cleveland (City) is governed by a mayor and a 19-member council, elected to 4-year terms. The City’s Department of Community Development (Department) is responsible for planning, administering, and evaluating the City’s U.S. Department of Housing and Urban Development (HUD) programs. The Department’s Division of Neighborhood Services (Division) administers the City’s Program- and Initiative-funded Afford-A-Home program, which helps home buyers purchase homes by offering interest-free second mortgage loans. The overall mission of the Department is to improve the quality of life in the City by strengthening neighborhoods through successful housing and commercial rehabilitation efforts, new housing construction, homeownership, and community-focused human services. The City’s Program and Initiative records are located at 601 Lakeside Avenue, Cleveland, OH. The following table shows the amount of Program and Initiative funds HUD awarded the City for fiscal years 2006 through 2010. Fiscal Program Initiative year funds funds 2006 $6,323,744 $87,056 2007 6,268,729 87,056 2008 6,081,589 35,174 2009 6,763,777 2010 6,743,584 Totals $32,181,423 $209,286 * Fiscal year 2008 was the last year HUD awarded Initiative funds to the City. The City’s preliminary report on the Department. On January 22, 2010, staff from the City’s Office of the Mayor began a 45-day internal review of the Department’s organizational structure, staff assignments, and management systems. In a memorandum, dated March 29, 2010, the chief of regional development for the City’s Office of the Mayor made a preliminary recommendation for the Department to implement revised procedures and administrative reforms for its Afford-A- Home program. The new procedures included but were not limited to the establishment of (1) a loan committee responsible for reviewing and approving every property to be purchased and home buyer seeking an interest-free second mortgage loan; (2) rigorous policies related to the 5 affordability and creditworthiness of home buyers; (3) revised mortgage, promissory note, and commitment documents; (4) standard file documentation; and (5) a rule limiting bank participation to federally regulated institutions. As of October 6, 2010, the Office of the Mayor had not finalized its internal review. HUD’s monitoring review. HUD’s Columbus Office of Community Planning and Development (Office) assessed the City’s Afford-A-Home program through a February 2010 monitoring review. The monitoring review covered the City’s compliance with Community Development Block Grant (Block Grant) and Program requirements in the administration of its Afford-A- Home program. HUD’s Office identified four findings and one concern. Our objectives were to determine whether the City complied with HUD’s requirements in its use of Program and Initiative funds to provide interest-free second mortgage loans to home buyers through its Afford-A-Home program and its use of recapture provisions for Afford-A-Home program activities (activity). 6 RESULTS OF AUDIT Finding 1: The City Lacked Adequate Controls Over Its Afford-A- Home Program To Ensure That Activities Were Eligible for Assistance The City did not comply with HUD’s requirements in its use of Program and Initiative funds to provide interest-free second mortgage loans to home buyers through its Afford-A-Home program. It provided assistance for ineligible activities and lacked sufficient documentation to support that activities were eligible. These weaknesses occurred because the City lacked adequate procedures and controls regarding its Afford-A-Home program to ensure that it appropriately followed HUD’s requirements. As a result, it inappropriately provided $20,000 in Program funds to assist two households that were not income eligible and was unable to support its use of $760,000 in Program and/or Initiative funds. The City Provided $20,000 in Program Funds for Two Ineligible Activities We reviewed 71 of the 202 activities the City completed from January 1, 2008, through March 31, 2010. The City used $880,000 in Program and/or Initiative funds for the 71 activities. HUD’s regulations at 24 CFR (Code of Federal Regulations) 92.2 define a low- income household as a household with an annual income that does not exceed 80 percent of the median income for the area as determined by HUD. HUD’s regulations at 24 CFR 92.217 state that a participating jurisdiction must invest Program funds made available during a fiscal year so that with respect to home ownership assistance, 100 percent of these funds are invested in dwelling units that are occupied by households that qualify as low-income households. Contrary to HUD’s regulations, the City drew down $20,000 in Program funds from October 14, 2008, through April 6, 2009, to assist two households that were not income eligible. The Program funds were used to provide interest-free second mortgage loans to the home buyers for activity numbers 10372 and 10793. The household income exceeded HUD’s income guidelines by $9,406 (27 percent) for activity number 10793. The City could not provide sufficient income documentation for activity number 10372. However, it stated that the household was not income eligible. 7 The City Lacked Sufficient Documentation To Support Its Use of $760,000 in Program and/or Initiative Funds The City lacked sufficient documentation for 60 of the 71 activities reviewed to support that it used $760,000 in Program and/or Initiative funds for eligible households and/or activities. HUD’s regulations at 24 CFR 92.203(d)(1) state that a participating jurisdiction must calculate a household’s annual income by projecting the prevailing rate of the household’s income at the time the participating jurisdiction determines the household to be income eligible. HUD’s regulations at 24 CFR 92.251(a)(2) state that housing acquired with Program funds must meet all applicable State and local housing quality standards and code requirements. HUD’s regulations at 24 CFR 92.508(a) state that a participating jurisdiction must establish and maintain sufficient records to demonstrate that each household that receives Program funds is income eligible in accordance with 24 CFR 92.203 and meets the property standards of 24 CFR 92.251. HUD’s regulations at 24 CFR 92.610(c) state that the income determination requirements in 24 CFR 92.203 apply to Initiative funds. HUD’s regulations at 24 CFR 92.612(b) state that housing assisted with Initiative funds must meet the property standards in 24 CFR 92.251. HUD’s regulations at 24 CFR 92.616(i) state that the record-keeping requirements in 24 CFR 92.508 apply to activities assisted with Initiative funds. HUD’s “Building HOME: A Program Primer,” states that all housing quality standards and code requirements must be met at the time of occupancy. Contrary to HUD’s requirements, the City lacked sufficient documentation to support that the households for 58 of the 71 activities reviewed were income eligible. The City also lacked sufficient documentation to support that nine homes acquired with Program or Initiative funds met HUD’s property standards requirements at the time of occupancy. The closing dates for the nine homes occurred from January 31, 2008, through April 28, 2009. The City had certificates of occupancy stating that the nine homes met the City’s building and zoning codes. However, the certificates of occupancy were dated from 193 to 1,036 days (at least 6 months) before the properties were purchased by the home buyers. We did not inspect the homes since the homes were purchased nearly 1 year before the start of our audit and we would not be able to reasonably determine whether the homes met HUD’s property standards requirements at the time of occupancy. The table in appendix D of this report shows the 60 activities for which the City did not have sufficient income documentation to demonstrate that households were income eligible and/or final inspection reports or certifications supporting that activities met HUD’s property standards requirements at the time of occupancy. 8 The City did not ensure that it properly projected households’ annual income for at least 65 of the 71 activities reviewed. The City used gross year-to-date income in its calculation of projected annual income rather than using current circumstances to project future income. The City also lacked documentation to support its calculation of a household’s annual income or that it calculated a household’s annual income for two additional activities. HUD’s February 2010 monitoring review identified that the City lacked sufficient documentation to support that households were income eligible and its calculations of households’ annual income for activities. HUD requested that the City submit the required documentation and assure, in writing, that it would begin to maintain the required documentation in its activity files. The City Lacked Adequate Procedures and Controls The weaknesses regarding the City’s providing Program and/or Initiative funds to assist a household that was overincome and lacking sufficient documentation to support that activities were appropriate occurred because the City lacked adequate procedures and controls regarding its Afford-A-Home program to ensure that it appropriately followed HUD’s requirements. The assistant director of the City’s Department stated that due to a staff error, Program funds were used to assist the household that was overincome. According to the City’s Afford-A-Home policy at the time of payment, it should have assisted the household with Block Grant funds rather than Program funds. However, it would have also been contrary to HUD’s regulations if the City had used Block Grant funds to provide an interest-free second mortgage loan to the home buyer for activity number 10793. The City’s internal procedures for its Afford-A-Home program only required two pay statements to be maintained for all income-producing members of a household. The commissioner of the City’s Division stated that the City was not aware that HUD’s requirements specified that participating jurisdictions were required to maintain 3 consecutive months’ worth of income documentation on which to base a household’s projected income calculation. However, the commissioner believed that the City was generally in compliance with the 3- month requirement since the majority of the activity files contained at least 3 months’ worth of income documentation through a combination of year-to-date pay statement information, Internal Revenue Service form W-2 wage and tax statements, tax returns, Social Security information, and other items that were used to verify and substantiate households’ income. The assistant director of the City’s Department stated that staff from the City’s Division conducted closeout inspections of and completed closeout inspection 9 forms for the homes. The purpose of the closeout inspections was to verify that all of the work in the rehabilitation specifications for the homes had been finished before the properties were purchased by the home buyers. Therefore, the staff’s indication of final approval on the closeout inspection forms supported that the homes met HUD’s property standards requirements at the time of occupancy. However, although the closeout inspection forms were dated within 6 months of the properties’ being purchased by the home buyers, they did not state that the homes met the City’s building and zoning codes. Further, the City did not have documentation to support that the homes would meet the City’s building and zoning codes when all of the work described in the rehabilitation specifications was finished. Conclusion As previously mentioned, the City lacked adequate procedures and controls regarding its Afford-A-Home program to ensure that it appropriately followed HUD’s requirements. It inappropriately provided $20,000 in Program funds to assist two households that were not income eligible and was unable to support its use of $760,000 in Program and/or Initiative funds for the 60 activities without sufficient documentation supporting eligibility. Recommendations We recommend that the Director of HUD’s Columbus Office of Community Planning and Development require the City to 1A. Reimburse its Program from non-Federal funds for the $20,000 in Program funds inappropriately used to assist activity numbers 10372 and 10793. 1B. Provide supporting documentation or reimburse its Program from non- Federal funds, as appropriate, for the $760,000 in Program and/or Initiative funds used for the 60 households and/or activities for which the City did not have sufficient income documentation to demonstrate that households were income eligible and/or final inspection reports or certifications supporting that activities met HUD’s property standards requirements at the time of occupancy. 1C. Implement adequate procedures and controls to ensure that Program and Initiative funds are only used for eligible households and that it maintains documentation to sufficiently support the eligibility of households and activities in accordance with HUD’s requirements. 10 1D. Review the remaining 131 (202 minus 71) activities to determine whether the households were income eligible and/or homes met HUD’s property standards requirements at the time of occupancy. For the activities that received improper assistance, the City should reimburse its Program the applicable amount from non-Federal funds. 11 Finding 2: The City Lacked Adequate Controls Over Its Afford-A- Home Program To Ensure That Appropriate Recapture Provisions Were Used for Activities The City did not comply with HUD’s requirements in its use of recapture provisions for activities. It (1) included inappropriate recapture provisions in its action plans for program years 2007 to 2008, 2008 to 2009, and 2009 to 2010; (2) did not implement appropriate recapture provisions for all 71 of the activities reviewed; and (3) did not ensure that its Program was reimbursed for Program funds used to assist home buyers in purchasing homes that were later sold through a sheriff’s sale and ownership of the homes had been transferred. These weaknesses occurred because the City lacked adequate procedures and controls regarding its Afford-A-Home program to ensure that it appropriately followed HUD’s requirements. As a result, its Program was not reimbursed for $30,000 in Program funds used for three homes that were sold through a sheriff’s sale and ownership of the homes had been transferred. Further, the City is at risk of being required to reimburse its Program additional non-Federal funds if the ownership of additional homes acquired under its Afford-A-Home program is transferred through foreclosure. Based on our sample, we estimate that over the next year, the City will not recapture Program and/or Initiative funds and/or reimburse its Program from non-Federal funds for at least $90,000 in Program and/or Initiative funds used for homes acquired under its Afford- A-Home program in which ownership would be transferred due to foreclosures. The City Did Not Include Appropriate Recapture Provisions in Its Action Plans HUD’s regulations at 24 CFR 91.220 state that if a participating jurisdiction intends to use Program funds for home buyers, it must state the guidelines for resale or recapture, as required in 24 CFR 92.254, in its action plan. HUD’s regulations at 24 CFR 92.254(a)(4) state that Program-assisted housing must meet HUD’s affordability requirements. Section 92.254(a)(5) states that to ensure affordability, a participating jurisdiction must impose either resale or recapture provisions that comply with the standards of section 92.254(a)(5) and include those provisions in its consolidated plan. Section 92.254(a)(5)(ii) states that in establishing its recapture provisions, the participating jurisdiction is subject to the limitation that when the recapture provision is triggered by a voluntary or involuntary sale of the housing unit and there are no net proceeds or the net proceeds are insufficient to repay the Program investment due, the participating jurisdiction can only recapture the net proceeds, if any. The recaptured funds must be used to carry out Program-eligible activities in accordance with the requirements of 24 CFR Part 92. HUD’s regulations at 24 CFR 92.502(c)(3) state that a participating jurisdiction must disburse Program funds, including recaptured Program funds, in its HOME investment trust fund local account (local account) 12 before requesting Program funds from its HOME investment trust fund treasury account (treasury account). The City did not ensure that it included appropriate recapture provisions in its action plans for program years 2007 to 2008, 2008 to 2009, and 2009 to 2010. The action plans stated that if the owner resold the property or ceased to use it as a primary residence during the Program compliance period, the amount of the loan would be due and payable in full. If a property went into foreclosure, the recapture amount would be the net proceeds from the foreclosure sale in an amount not to exceed the original Program investment. However, the City did not limit the amount of Program funds that could be recaptured from a nonforeclosure sale to the net proceeds from the sale of the property. The City also included recapture provisions in its action plans which inappropriately stated that Program funds recaptured would be used to make additional loans to low-income home buyers. The City Did Not Implement Appropriate Recapture Provisions for Its Activities and Did Not Reimburse Its Program $30,000 From Non-Federal Funds We statistically selected 71 of the 202 Program- and/or Initiative-funded activities the City completed from January 1, 2008, through March 31, 2010. The 71 activities totaled $880,000 in Program and/or Initiative funds. HUD’s regulations at 24 CFR 92.612(c) state that housing assisted with Initiative funds must meet the affordability requirements in 24 CFR 92.254(a). HUD’s HOMEfires, volume 5, number 2, states that for Program-assisted home-buyer projects with recapture provisions, the amount of Program funds required to be repaid in the event of foreclosure is the amount that would be subject to recapture under the terms of the written agreement with the home buyer. If the recapture provisions require the entire amount of the Program investment from the home buyer or an amount reduced prorata based on the time the home buyer has owned and occupied the home measured against the affordability period, the amount required by the recapture provisions is the amount that must be recaptured by the participating jurisdiction for the Program. If the participating jurisdiction is unable to recapture the funds from the household, it must reimburse its Program in the amount due pursuant to the recapture provisions in the written agreement with the home buyer. Contrary to HUD’s requirements, the City did not ensure that it implemented appropriate recapture provisions for all 71 of the activities reviewed. Although the mortgages and promissory notes between the City and the home buyers 13 included affordability requirements, neither the mortgages nor the promissory notes contained language that limited the amount of Program and/or Initiative funds the City could recapture to the net proceeds from the sale of a home. The mortgages and promissory notes required repayment of the full amount of the loan upon sale, lease, refinance, or transfer. An additional amount equal to the interest which would have accrued on the second mortgage loan if it had been made at the same interest rate as the first mortgage loan was also due and payable in the event that the borrower sold, leased, refinanced, or transferred the property within the initial 5 years of the execution of the mortgage and promissory note. As previously stated, the mortgages and promissory notes required repayment of the entire amount of the Program investment upon sale. As of September 30, 2010, the City received foreclosure notices for the homes of 31 of the 202 activities completed from January 1, 2008, through March 31, 2010. Therefore, we reviewed the 31 activities to determine whether the homes had been sold and ownership of the homes had been transferred. Three of the homes had been sold through a sheriff’s sale, and ownership of the homes had been transferred as of October 29, 2010. The City did not receive any net proceeds from the sale of the three homes or reimburse its Program for the $30,000 in Program funds used for the three homes. The following table includes the activity number, the date of closing, the date Program funds were drawn down for the activity in HUD’s Integrated Disbursement and Information System (System), the date the home was sold through a sheriff’s sale, the date ownership was transferred, and the amount of assistance provided for the three homes. Date of Activity Date of Date of Date of ownership Amount of number closing drawdown sheriff’s sale transfer assistance 10093 Feb. 8, 2008 Feb. 29, 2008 Aug. 24, 2009 Oct. 8, 2009 $10,000 10368 Aug. 28, 2008 Oct. 14, 2008 Sept. 21, 2009 Dec. 4, 2009 10,000 10396 Oct. 2, 2008 Oct. 14, 2008 Apr. 12, 2010 Oct. 15, 2010 10,000 Total $30,000 HUD’s February 2010 monitoring review identified that the City’s mortgages and promissory notes with home buyers did not include language that limited the amount of Program funds the City could recapture to the net proceeds from the sale of a home and indicated that the City was not receiving any net proceeds from the sale of homes or reimbursing its Program from non-Federal funds for the Program funds used for homes that were sold through a sheriff’s sale. HUD requested that the City determine the number of homes that had been sold through a sheriff’s sale as of January 1, 2007, and reimburse its Program from non-Federal funds for the Program funds used for the homes. 14 The City Lacked Adequate Procedures and Controls The weaknesses regarding the City (including (1) inappropriate recapture provisions in its action plans, (2) not implementing appropriate recapture provisions for its activities, and (3) not ensuring that its Program was reimbursed for Program funds used to assist home buyers in purchasing homes that were later sold through a sheriff’s sale and ownership of the homes had been transferred) occurred because the City lacked adequate procedures and controls regarding its Afford-A-Home program to ensure that it appropriately followed HUD’s requirements. The assistant director of the City’s Department stated that until HUD’s February 2010 monitoring review, the City was not aware that it was required to include language in its mortgages and promissory notes that limited recapture to the net proceeds from the sale of homes and by excluding such language, it created a potential financial burden on itself. Further, the assistant director stated that although the City was not aware that it had created the additional financial burden on itself, it complied with HUD’s requirements and State law regarding foreclosure sales and did not recapture more than the net proceeds from the sale of homes. The City included appropriate recapture provisions in its action plan for program years 2010 to 2011. In addition, it developed a revised mortgage and promissory note for its activities and began using them on April 9, 2010. The revised mortgage and promissory note included appropriate recapture provisions. Specifically, the documents contained language that limited the amount of Program and/or Initiative funds the City could recapture to the net proceeds from the sale of a home. Conclusion As previously mentioned, the City lacked adequate procedures and controls regarding its Afford-A-Home program to ensure that it appropriately followed HUD’s requirements. It (1) included inappropriate recapture provisions in its action plans for program years 2007 to 2008, 2008 to 2009, and 2009 to 2010; (2) did not implement appropriate recapture provisions for all 71 of the activities reviewed; and (3) did not ensure that its Program was reimbursed for the $30,000 in Program funds used for the three homes that were later sold through a sheriff’s sale and ownership of the homes had been transferred. Further, the City is at risk of being required to reimburse its Program additional non-Federal funds if the ownership of additional homes acquired under its Afford-A-Home program is transferred through foreclosure. If the City implements adequate procedures and controls over its Afford-A-Home program to ensure compliance with HUD’s 15 requirements regarding homes acquired under the Afford-A-Home program in which ownership is transferred due to foreclosures, we estimate that over the next year, the City will appropriately recapture Program and/or Initiative funds and/or reimburse its Program from non-Federal funds totaling at least $90,000. Our methodology for this estimate is explained in the Scope and Methodology section of this audit report. Recommendations We recommend that the Director of HUD’s Columbus Office of Community Planning and Development require the City to 2A. Reimburse its Program $30,000 from non-Federal funds for the three homes that had been sold through a sheriff’s sale and ownership of the homes had been transferred. 2B. Implement adequate procedures and controls to ensure that if the ownership of additional homes acquired under its Afford-A-Home program is transferred through foreclosures, the City recaptures the entire amount of the Program and/or Initiative funds through the receipt of net proceeds from the sales of the homes and/or reimburses its Program from non-Federal funds for the Program and/or Initiative funds provided to the home buyers, as appropriate. This will ensure that over the next 12 months the City appropriately recaptures Program and/or Initiative funds and/or reimburses its Program from non-Federal funds totaling at least $90,000. 16 SCOPE AND METHODOLOGY To accomplish our objectives, we reviewed Applicable laws; HUD’s regulations at 24 CFR Parts 35 and 92; HUD’s “Building HOME: A Program Primer”; HUD’s HOMEfires, volume 5, numbers 2 and 5; HUD’s Technical Guide for Determining Income and Allowances for the Program; and HUD’s guidebook “Fitting the Pieces Together.” The City’s accounting records; audited financial statements and single audit reports for the years ending December 31, 2006, 2007, and 2008; data from HUD’s System; Program and Initiative activity files; policies and procedures; organizational chart; consolidated plan for 2005 through 2010; action plans for program years 2007 to 2008, 2008 to 2009, and 2009 to 2010; and consolidated annual performance and evaluation reports for program years 2007 and 2008. HUD’s files for the City. In addition, we interviewed the City’s employees, Program participants, and HUD’s staff. Finding 1 We statistically selected 71 of the 202 Program- and/or Initiative-funded activities the City completed from January 1, 2008, through March 31, 2010, to determine whether the City used Program and Initiative funds for eligible activities. The 71 activities totaled $880,000 in Program and/or Initiative funds. Our sampling criteria used a 90 percent confidence level, 20 percent error rate, and precision of plus or minus 10 percent. Finding 2 We statistically selected 71 of the 202 Program and/or Initiative-funded activities the City completed from January 1, 2008, through March 31, 2010, to determine whether the City implemented appropriate recapture provisions for its activities. The 71 activities totaled $880,000 in Program and/or Initiative funds. Our sampling criteria used a 90 percent confidence level, 20 percent error rate, and precision of plus or minus 10 percent. As previously stated, the mortgages and promissory notes required repayment of the entire amount of the Program investment upon sale. As of September 30, 2010, the City received foreclosure notices for the homes of 31 of the 202 activities completed from January 1, 2008, through March 31, 2010. Therefore, we reviewed the 31 activities to determine whether the homes had been sold and ownership of the homes had been transferred. Three of the homes had been sold through a sheriff’s sale and ownership of the homes had been transferred as of October 29, 2010. The City did not receive any net proceeds from the sale of the three homes or reimburse its Program for the $30,000 in Program funds used for the three homes. Further, the homes for two of the activities were no longer in foreclosure as of October 29, 2010. In addition, four of the homes involved conventional mortgages that were not Federal Housing Administration (FHA)-insured. 17 To estimate the number of homes in foreclosures that would result in a sale and transfer of ownership within the next year, we modeled the rates of conversion for homes in foreclosure to sale and transfer of ownership within the state of Ohio. Loans for the homes in foreclosure were grouped and modeled by the year of origination as the year of origination has been shown to affect the length of time in foreclosure before a resale and transfer of ownership. Sale and transfer of ownership patterns for homes in foreclosure from 2008 were used to model 2009 loans for the homes in foreclosure as these two years showed the same probability distribution and the data for 2008 was more complete. To model the rates of conversion to sale and transfer of ownership, we used histories from 1,422 foreclosed Ohio loans from HUD’s FHA databases to create a declining probability distribution (i.e. a survival curve) for the state of Ohio. This curve modeled the percentage of homes in foreclosure ( which remained unsold at a given number of months after going into foreclosure. Using this information, we estimated for each of the City’s 22 homes with FHA-insured mortgages in foreclosure as of October 29, 2010, a home’s likelihood of surviving foreclosure to a certain point in time without going to sale and transfer of ownership. The probability of going to sale and transfer of ownership was then summed for the 22 homes to estimate the total number of homes in foreclosure that would be sold and transferred to new owners within the next year. To estimate the probability that an individual home would go to sale and ownership would be transferred, the survival at the time of observation (S ) was compared with the survival probability one year from October 29, 2010 (S ), and the likelihood of sale and transfer of ownership (P ) was computed as follows: S P 1 S Based on our modeling, we estimated that at least nine of the City’s 22 homes with FHA-insured mortgages in foreclosure as of October 29, 2010, would be sold and ownership would be transferred within the next year. Making the conservative assumption that each loan would involve at least $10,000 in Program and/or American Dream Downpayment Initiative (Initiative) funds, we estimated that over the next year, the City will not recapture Program and/or Initiative funds and/or reimburse its Program from non-Federal funds for at least $90,000 in Program and/or Initiative funds used for at least nine homes acquired under its Afford-A-Home program in which ownership would be transferred due to foreclosures. This estimate is presented solely to demonstrate the amount of Program and/or Initiative funds that could be put to better use over the next year on eligible activities if the City implements our recommendation. In addition, we relied in part on data maintained by the City for its Afford-A-Home program, data in HUD’s System, and selected data from HUD’s Single Family Data Warehouse. Although we did not perform detailed assessments of the reliability of the data, we performed minimal levels of testing and found the data to be adequately reliable for our purposes. We performed our onsite audit work from April through August 2010 at the City’s offices located at 601 Lakeside Avenue, Cleveland, OH. The audit covered the period January 2008 through March 2010 and was expanded as determined necessary. 18 We performed our audit in accordance with generally accepted government auditing standards. Those standards require that we plan and perform the audit to obtain sufficient, appropriate evidence to provide a reasonable basis for our findings and conclusions based on our audit objectives. We believe that the evidence obtained provides a reasonable basis for our findings and conclusions based on our audit objectives. 19 INTERNAL CONTROLS Internal control is a process adopted by those charged with governance and management, designed to provide reasonable assurance about 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: Effectiveness and efficiency of operations – Policies and procedures that management has implemented to reasonably ensure that a program meets its objectives. Reliability of financial reporting – 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 applicable 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 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 and efficiency of operations, (2) misstatements in financial or performance information, or (3) violations of laws or regulations on a timely basis. 20 Significant Deficiency Based on our review, we believe that the following item is a significant deficiency: The City lacked adequate procedures and controls to ensure that (1) it used Program and/or Initiative funds for activities in accordance with HUD’s requirements; (2) it included appropriate recapture provisions in its action plans for program years 2007 to 2008, 2008 to 2009, and 2009 to 2010; (3) it implemented appropriate recapture provisions for activities; and (4) its Program was reimbursed for Program funds used to assist home buyers in purchasing homes that were later sold through a sheriff’s sale and ownership of the homes had been transferred (see findings 1 and 2). 21 APPENDIXES Appendix A SCHEDULE OF QUESTIONED COSTS AND FUNDS TO BE PUT TO BETTER USE Recommendation Funds to be put number Ineligible 1/ Unsupported 2/ to better use 3/ 1A $20,000 1B $760,000 2A 30,000 2B $90,000 Totals $50,000 $760,000 $90,000 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 polices 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 (OIG) recommendation is implemented. This includes reduction 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. In this instance, if the City implements our recommendation it will appropriately recapture Program and/or Initiative funds and/or reimburse its Program from non-Federal funds. 22 Appendix B AUDITEE COMMENTS AND OIG’s EVALUATION Ref to OIG Evaluation Auditee Comments 23 Ref to OIG Evaluation Auditee Comments Comments 1 and 2 Comment 3 Comment 4 Comment 1 24 Ref to OIG Evaluation Auditee Comments Comment 5 Comments 4, 5, and 6 Comments 5 and 7 Comments 5 and 8 Comments 5, 9 and 10 Comment 1 Comments 11 25 Ref to OIG Evaluation Auditee Comments Comment 3 Comment 12 Comment 12 Comment 13 Comment 13 Comments 1 and 2 26 Ref to OIG Evaluation Auditee Comments Comment 4 Comment 5 Comments 4, 5, and 6 27 Ref to OIG Evaluation Auditee Comments Comments 4, 5, and 6 28 Ref to OIG Evaluation Auditee Comments Comments 5 and 7 Comments 5 and 8 29 Ref to OIG Evaluation Auditee Comments Comments 5 and 8 Comments 5, 9, and 10 30 Ref to OIG Evaluation Auditee Comments Comment 14 Comment 11 31 Ref to OIG Evaluation Auditee Comments Comment 13 Comments 5 and 9 Comment 1 32 Ref to OIG Evaluation Auditee Comments Comment 15 Comment 15 Comment 16 Comment 17 Comment 18 33 Ref to OIG Evaluation Auditee Comments Comment 18 Comment 19 34 Ref to OIG Evaluation Auditee Comments Comment 20 Comment 20 Comment 20 35 Ref to OIG Evaluation Auditee Comments 36 Ref to OIG Evaluation Auditee Comments Comment 21 37 Ref to OIG Evaluation Auditee Comments Comments 22 and 23 38 Ref to OIG Evaluation Auditee Comments Comment 22 Comment 22 Comment 22 Comment 22 39 Ref to OIG Evaluation Auditee Comments Comments 22 and 23 40 Ref to OIG Evaluation Auditee Comments Comment 22 41 Ref to OIG Evaluation Auditee Comments 42 OIG’s Evaluation of Auditee Comments Comment 1 The City did not provide documentation to support that HUD found the City’s method of calculating income eligibility for its Afford-A-Home program to be sufficient. The City’s method of calculating income eligibility for its Afford-A- Home program was not reviewed as part of HUD’s Office’s 2006, 2007, or 2008 monitoring reviews of the City. Further, just because HUD’s Office’s 2006, 2007, and 2008 monitoring reviews of the City did not result in any findings or concerns regarding the City’s calculations used to determine income eligibility, does not mean that HUD approved the City’s calculations used to determine income eligibility. Comment 2 Further, HUD’s Office’s February 2010 monitoring review identified that the City lacked sufficient documentation to support that households were income eligible and its calculations of households’ annual income for activities. In addition, HUD’s Office requested that we conduct an audit of the City’s Afford-A-Home program due to the issues uncovered during its monitoring review. Comment 3 The City did not provide documentation to support that it reimbursed its Program from non-Federal funds for the $10,000 in Program funds inappropriately used to assist activity number 10793 and removed activity number 10793 from HUD’s System. Comment 4 We revised the report to state the following: The City lacked sufficient documentation for 60 of the 71 activities reviewed to support that it used $760,000 in Program and/or Initiative funds for eligible households and/or activities. Contrary to HUD’s requirements, the City lacked sufficient documentation to support that the households for 58 of the 71 activities reviewed were income eligible. The table in appendix D of this report shows the 60 activities for which the City did not have sufficient income documentation to demonstrate that households were income eligible and/or final inspection reports or certifications supporting that activities met HUD’s property standards requirements at the time of occupancy. The City also lacked documentation to support its calculation of a household’s annual income or that it calculated a household’s annual income for two additional activities. We also amended recommendation 1B to reflect these revisions. 43 In addition, we revised the table in Appendix D of this report by removing that the City had insufficient income documentation for activity numbers 10299, 10458, 10631, 10690, 10867, 10994, and 11087. Comment 5 Chapter two of HUD’s Technical Guide for Determining Income and Allowances for the Program, dated January 2005, states that a participating jurisdiction must project a household’s future income by using the household’s current income circumstances. The year-to-date pay statement, Internal Revenue Service form W-2 wage and tax statement, and/or tax return information may not reflect the household’s current income circumstances. Comment 6 Contrary to HUD’s requirements, the City lacked sufficient documentation to support that the households for 32 of the 38 activities were income eligible. Comment 7 Contrary to HUD’s requirements, the City lacked sufficient documentation to support that the households for the 8 activities were income eligible. Comment 8 Contrary to HUD’s requirements, the City lacked sufficient documentation to support that the households for the 4 activities were income eligible. Comment 9 Chapter two of HUD’s Technical Guide for Determining Income and Allowances for the Program, dated January 2005, states that appropriate income documentation includes certified copies of tax returns. The tax returns provided by the City were not certified. Comment 10 Contrary to HUD’s requirements, the City lacked sufficient documentation to support that the households for the 2 activities were income eligible. Comment 11 We revised the report to state the following: Contrary to HUD’s regulations, the City drew down $20,000 in Program funds from October 14, 2008, through April 6, 2009, to assist two households that were not income eligible. The Program funds were used to provide interest-free second mortgage loans to the home buyers for activity numbers 10372 and 10793. The household income exceeded HUD’s income guidelines by $9,406 (27 percent) for activity number 10793. The City could not provide sufficient income documentation for activity number 10372. However, it stated that the household was not income eligible. We also amended recommendation 1A to reflect these revisions. In addition, we revised the table in Appendix D of this report by removing that the City had insufficient income documentation for activity number 10372. Comment 12 The City provided assistance for ineligible activities and lacked sufficient documentation to support that activities were eligible. As a result, it 44 inappropriately provided $20,000 in Program funds to assist two households that were not income eligible and was unable to support its use of $760,000 in Program and/or Initiative funds. Comment 13 Chapter two of HUD’s Technical Guide for Determining Income and Allowances for the Program, dated January 2005, also states that a participating jurisdiction must project a household’s future income by using the household’s current income circumstances. Exhibit 2.1 states that a participating jurisdiction must include hourly wage figures, overtime figures, bonuses, anticipated raises, cost- of-living adjustments, or other anticipated changes in income in an applicant household’s projected income calculation. For households with jobs providing steady employment, it can be assumed that there will only be slight variations in the amount of income earned. Therefore, 3 consecutive months’ worth of income documentation is an appropriate amount upon which to base a household’s projected income calculation for the following 12-month period. For those households with jobs providing employment that is less stable or does not conform to a 12-month schedule (e.g. seasonal laborers), income documentation that covers the entire previous 12-month period should be examined. In addition to hourly earnings, participating jurisdictions must account for all earned income. This income will include annual cost of living adjustments, bonuses, raises, and overtime pay in addition to base salary. In the case of overtime, it is important to determine whether overtime is sporadic or predictable. If a participating jurisdiction determines that a household will continue to earn overtime pay on a regular basis, it should calculate the average amount of overtime pay earned by the household over the past 3 months. This average should then be added to the total amount of projected earned income for the following 12-month period. Appropriate income documentation includes pay statements, third-party verification, bank statements, or certified copies of tax returns. Comment 14 Contrary to HUD’s requirements, the City lacked sufficient documentation to support that the households for the 12 activities were income eligible. Comment 15 The City did not provide any policies or procedures that stated that developers provide specifications that show homes will meet or exceed local code standards upon completion of rehabilitation work or that closeout inspections verify that homes were in the same condition as they were in when the certificates of occupancy were signed. Comment 16 The closeout inspection forms did not state that homes were in the same condition as they were in when the certificates of occupancy were signed. Comment 17 The City’s general specifications manual that it provided did not state that the specifications for rehabilitation work to be conducted on homes assisted with Program funds must cover all items needed for the homes to meet local codes. 45 Comment 18 HUD’s regulations at 24 CFR 92.251(a)(2) state that housing acquired with Program funds must meet all applicable State and local housing quality standards and code requirements. HUD’s regulations at 24 CFR 92.612(b) state that housing assisted with Initiative funds must meet the property standards in 24 CFR 92.251. Chapter five, part I, of HUD’s “Building HOME: A Program Primer,” dated March 2008, states that all housing quality standards and code requirements must be met at the time of occupancy. The City had certificates of occupancy stating that the nine homes met the City’s building and zoning codes. However, the certificates of occupancy were dated from 193 to 1,036 days (at least 6 months) before the properties were purchased by the home buyers. Although the City had closeout inspection forms dated within 6 months of the properties’ being purchased by the home buyers, the closeout inspection forms did not state that the homes met the City’s building and zoning codes. Further, the City did not have documentation to support that the homes would meet the City’s building and zoning codes when all of the work described in the rehabilitation specifications was finished. Therefore, the City lacked sufficient documentation to support that nine homes acquired with Program or Initiative funds met HUD’s property standards requirements at the time of occupancy. Comment 19 The City’s revised final inspection form does not state that the home meets all applicable State and local housing quality standards and code requirements. Comment 20 The City’s commitment to new procedures and controls, if fully implemented, should improve the City’s management of its Program. Comment 21 The City’s commitment to reviewing the remaining 131 activities to determine whether the households were income eligible and/or homes met HUD’s property standards requirements at the time of occupancy, if fully implemented, should ensure that the City’s Program is reimbursed from non-Federal funds for Program funds used for ineligible activities. Comment 22 HUD’s HOMEfires, volume 5, number 2, which has been in effect since June 2003, states that for Program-assisted home-buyer projects with recapture provisions, the amount of Program funds required to be repaid in the event of foreclosure is the amount that would be subject to recapture under the terms of the written agreement with the home buyer. If the recapture provisions require the entire amount of the Program investment from the home buyer, the amount required by the recapture provisions is the amount that must be recaptured by the participating jurisdiction for the Program. If the participating jurisdiction is unable to recapture the funds from the household, it must reimburse its Program in the amount due pursuant to the recapture provisions in the written agreement with the home buyer. Comment 23 The City did not comply with HUD’s requirements in its use of recapture provisions for activities. Neither the mortgages nor promissory notes between the City and the home buyers contained language that limited the amount of Program 46 and/or Initiative funds the City could recapture to the net proceeds from the sale of a home. The mortgages and promissory notes required repayment of the full amount of the loan upon sale, lease, refinance, or transfer. The City did not implement appropriate recapture provisions for all 71 of the activities reviewed and did not ensure that its Program was reimbursed for Program funds used to assist home buyers in purchasing homes that were later sold through a sheriff’s sale and ownership of the homes had been transferred. As a result, its Program was not reimbursed for $30,000 in Program funds used for three homes that were sold through a sheriff’s sale and ownership of the homes had been transferred. Further, the City is at risk of being required to reimburse its Program additional non-Federal funds if the ownership of additional homes acquired under its Afford- A-Home program is transferred through foreclosure. 47 Appendix C HUD’S REQUIREMENTS Finding 1 HUD’s regulations at 24 CFR 92.2 define a low-income household as a household with an annual income that does not exceed 80 percent of the median income for the area as determined by HUD. HUD’s regulations at 24 CFR 92.203(a) state that a participating jurisdiction must determine whether each household is income eligible by determining the household’s annual income. Section 92.203(a)(2) states that a participating jurisdiction must determine households’ annual income by examining source documentation evidencing households’ annual income. Section 92.203(d)(1) states a participating jurisdiction must calculate a household’s annual income by projecting the prevailing rate of the household’s income at the time the participating jurisdiction determines the household to be income eligible. Annual income shall include income from all household members. HUD’s regulations at 24 CFR 92.217 state that a participating jurisdiction must invest Program funds made available during a fiscal year so that with respect to home ownership assistance, 100 percent of these funds are invested in dwelling units that are occupied by households that qualify as low-income households. HUD’s regulations at 24 CFR 92.251(a)(2) state that housing acquired with Program funds must meet all applicable State and local housing quality standards and code requirements. If there are no such housing quality standards or code requirements, the housing must meet HUD’s housing quality standards. HUD’s regulations at 24 CFR 92.508(a) state that a participating jurisdiction must establish and maintain sufficient records to enable HUD to determine whether it has met the requirements of 24 CFR Part 92. The participating jurisdiction must maintain records demonstrating the following: Each household is income eligible in accordance with 24 CFR 92.203. Each activity meets the property standards of 24 CFR 92.251. HUD’s regulations at 24 CFR 92.602(a)(1) state that Initiative funds may only be used for downpayment assistance toward the purchase of single-family housing by low-income households that are first-time home buyers. HUD’s regulations at 24 CFR 92.610(c) state that the income determination requirements in 24 CFR 92.203 apply to Initiative funds. 48 HUD’s regulations at 24 CFR 92.612(b) state that housing assisted with Initiative funds must meet the property standards in 24 CFR 92.251. HUD’s regulations at 24 CFR 92.616(i) state that the record-keeping requirements in 24 CFR 92.508 apply to activities assisted with Initiative funds. Chapter two, part I, of HUD’s “Building HOME: A Program Primer,” dated March 2008, states that income eligibility is based on anticipated income. Therefore, the previous year’s tax return does not establish anticipated income and is not adequate source documentation. Chapter five, part I, states that all housing quality standards and code requirements must be met at the time of occupancy. Chapter two of HUD’s Technical Guide for Determining Income and Allowances for the Program, dated January 2005, states that a participating jurisdiction may develop its own income verification procedures provided that it collects source documentation and that this documentation is sufficient to enable HUD to monitor Program compliance. A participating jurisdiction must project a household’s future income by using the household’s current income circumstances. Exhibit 2.1 states that a participating jurisdiction must include hourly wage figures, overtime figures, bonuses, anticipated raises, cost-of-living adjustments, or other anticipated changes in income in an applicant household’s projected income calculation. For households with jobs providing steady employment, it can be assumed that there will only be slight variations in the amount of income earned. Therefore, 3 consecutive months’ worth of income documentation is an appropriate amount upon which to base a household’s projected income calculation for the following 12-month period. For those households with jobs providing employment that is less stable or does not conform to a 12-month schedule (e.g. seasonal laborers), income documentation that covers the entire previous 12-month period should be examined. In addition to hourly earnings, participating jurisdictions must account for all earned income. This income will include annual cost of living adjustments, bonuses, raises, and overtime pay in addition to base salary. In the case of overtime, it is important to determine whether overtime is sporadic or predictable. If a participating jurisdiction determines that a household will continue to earn overtime pay on a regular basis, it should calculate the average amount of overtime pay earned by the household over the past 3 months. This average should then be added to the total amount of projected earned income for the following 12-month period. Appropriate income documentation includes pay statements, third-party verification, bank statements, or certified copies of tax returns. Finding 2 Section 215(b) of Title II of the Cranston-Gonzalez National Affordable Housing Act, as amended, states that housing that is for home ownership shall qualify as affordable housing under Title II of the Act only if the housing is subject to resale restrictions that are established by the participating jurisdiction and determined by HUD’s Secretary to be appropriate to (1) allow for the later purchase of the property only by a low-income household at a price which will provide the owner a fair return on investment and ensure that the housing will remain affordable to a reasonable range of low-income home buyers or (2) recapture the Program investment to assist other persons in accordance with the requirements of Title II of the Act, except when there 49 are no net proceeds or when the net proceeds are insufficient to repay the full amount of the assistance. HUD’s regulations at 24 CFR 91.200(a) state that a complete consolidated plan consists of the information required in 24 CFR 91.220. HUD’s regulations at 24 CFR 91.220(1)(2)(ii) state that the action plan must include the guidelines for resale or recapture, as required in 24 CFR 92.254, if a participating jurisdiction intends to use Program funds for home buyers. HUD’s regulations at 24 CFR 92.254(a)(4) state that Program-assisted housing must meet the affordability requirements for not less than the applicable period beginning after activity completion. Home ownership activities that receive less than $15,000 in Program assistance must remain affordable for at least 5 years. Section 92.254(a)(5) states that to ensure affordability, a participating jurisdiction must impose either resale or recapture provisions that comply with the standards of section 92.254(a)(5) and include the provisions in its consolidated plan. Section 92.254(a)(5)(ii) states that a participating jurisdiction’s recapture provisions must ensure that the participating jurisdiction recoups all or a portion of the Program assistance to the home buyers if the housing does not continue to be the principal residence of the household for the duration of the period of affordability. In establishing its recapture provisions, the participating jurisdiction is subject to the limitation that when the recapture provision is triggered by a voluntary or involuntary sale of the housing unit and there are no net proceeds or the net proceeds are insufficient to repay the Program investment due, the participating jurisdiction can only recapture the net proceeds, if any. The recaptured funds must be used to carry out Program- eligible activities in accordance with the requirements of 24 CFR Part 92. HUD’s regulations at 24 CFR 92.502(c)(3) state that a participating jurisdiction must disburse Program funds, including Program income and recaptured Program funds, in its local account before requesting Program funds from its treasury account. Section 92.503(c) states that Program funds recaptured in accordance with 24 CFR 92.254(a)(5)(ii) must be deposited in the participating jurisdiction’s local account and used in accordance with the requirements of 24 CFR Part 92. HUD’s regulations at 24 CFR 92.612(c) state that housing assisted with Initiative funds must meet the affordability requirements in 24 CFR 92.254(a). HUD’s HOMEfires, volume 5, number 2, states that for Program-assisted home-buyer projects with recapture provisions, the amount of Program funds required to be repaid in the event of foreclosure is the amount that would be subject to recapture under the terms of the written agreement with the home buyer. If the recapture provisions provide for shared net proceeds, the amount subject to recapture is based on the amount of net proceeds, if any, from the foreclosure sale. If the recapture provisions require the entire amount of the Program investment from the home buyer or an amount reduced prorata based on the time the home buyer has owned and occupied the home measured against the affordability period, the amount required by the recapture provisions is the amount that must be recaptured by the participating jurisdiction for the Program. If the participating jurisdiction is unable to recapture the funds from the household, 50 the participating jurisdiction must reimburse its Program in the amount due pursuant to the recapture provisions in the written agreement with the home buyer. HUD’s HOMEfires, volume 5, number 5, requires a participating jurisdiction to select either resale or recapture provisions for its Program-assisted home-buyer projects. The participating jurisdiction may select resale or recapture provisions for all of its home-buyer projects or resale or recapture provisions on a case-by-case basis. However, the participating jurisdiction must select whether resale or recapture will be imposed for each home-buyer project at the time the assistance is provided. A participating jurisdiction may adopt any one of four options in designing its recapture provisions. All of the options the participating jurisdiction will employ must be identified in its consolidated plan and approved by HUD. 51 Appendix D SCHEDULE OF ACTIVITIES WITH INSUFFICIENT DOCUMENTATION Activity Income Final inspections Assistance number documentation or certifications amount 9852 X $10,000 10075 X 20,000 10079 X 10,000 10093 X 10,000 10096 X 10,000 10109 X 10,000 10157 X 10,000 10161 X 10,000 10162 X X 10,000 10163 X 10,000 10169 X 10,000 10171 X 10,000 10173 X X 10,000 10174 X X 10,000 10176 X 10,000 10229 X 10,000 10232 X X 10,000 10289 X 10,000 10291 X 10,000 10301 X 10,000 10359 X 10,000 10360 X 10,000 10361 X 10,000 10362 X 10,000 10367 X 10,000 10368 X 10,000 10396 X 10,000 10420 X X 10,000 10455 X 10,000 10457 X X 10,000 10458 X 10,000 10634 X 10,000 10638 X X 10,000 10686 X 10,000 10691 X 10,000 10769 X 20,000 52 SCHEDULE OF ACTIVITIES WITH INSUFFICIENT DOCUMENTATION (CONT.) Activity Income Final inspections Assistance number documentation or certifications amount 10771 X 20,000 10772 X 20,000 10773 X 20,000 10794 X 20,000 10796 X 10,000 10797 X 10,000 10802 X 10,000 10818 X 20,000 10821 X 10,000 10824 X 20,000 10846 X 10,000 10865 X 10,000 10866 X 20,000 10867 X 20,000 10868 X 10,000 10870 X 20,000 10888 X 20,000 10911 X 10,000 10961 X 20,000 10964 X 10,000 10991 X 10,000 10992 X 20,000 11073 X 20,000 11082 X 20,000 Totals 58 9 $760,000 53
The City of Cleveland, OH, Lacked Adequate Controls Over Its HOME Investment Partnerships Program and American Dream Downpayment Initiative-Funded Afford-A-Home Program
Published by the Department of Housing and Urban Development, Office of Inspector General on 2010-12-27.
Below is a raw (and likely hideous) rendition of the original report. (PDF)