oversight

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)

                                                                    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