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
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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.
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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
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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
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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).
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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.
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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.
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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.
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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.
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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)
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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
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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.
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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
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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.
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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)