Issue Date September 29, 2011 Audit Report Number 2011-CH-1014 TO: Jorgelle Lawson, Director of Community Planning and Development, 5ED FROM: Kelly Anderson, Regional Inspector General for Audit, 5AGA SUBJECT: The City of Cleveland, OH, Lacked Adequate Controls Over Its HOME Investment Partnerships Program-Funded Housing Trust Fund Program Home-Buyer Activities HIGHLIGHTS What We Audited and Why We audited the City of Cleveland’s HOME Investment Partnerships Program. The audit was part of the activities in our fiscal year 2011 annual audit plan. We selected the City based upon our analysis of risk factors related to Program grantees in Region V’s1 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 funds to provide interest-free second mortgage loans to home buyers through its Housing Trust Fund program and its use of recapture provisions for Housing Trust Fund program home-buyer activities. This is the second of three audit reports on the City’s Program. What We Found The City did not comply with HUD’s requirements in its use of Program funds to provide interest-free second mortgage loans to home buyers through its Housing Trust Fund program and its use of recapture provisions for activities. It (1) 1 Region V includes the States of Indiana, Illinois, Ohio, Michigan, Minnesota, and Wisconsin. provided assistance for an ineligible activity, (2) lacked sufficient documentation to support that activities were eligible, (3) did not implement appropriate recapture provisions for all of the activities reviewed, and (4) did not ensure that its Program was reimbursed for Program funds used to assist a home buyer in purchasing a home that was later sold through a sheriff’s sale and ownership of the home had been transferred. As a result, it inappropriately provided $20,000 in Program funds to assist a household that was not income eligible and was unable to support its use of $795,000 in Program funds. Further, its Program was not reimbursed for $20,000 in Program funds used for a home that was sold through a sheriff’s sale and ownership of the home 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 Housing Trust Fund program is transferred through foreclosures. We informed the Director of HUD’s Columbus Office of Community Planning and Development and the director of the City’s Department of Community Development of a minor deficiency through a memorandum dated September 29, 2011. 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 an activity, (2) provide supporting documentation or reimburse its Program $775,000 from non-Federal funds, (3) reimburse its Program $20,000 from non- Federal funds for the home that had been sold through a sheriff’s sale and ownership of the home had been transferred, and (4) implement adequate procedures and controls to address the findings cited in this audit report. For each recommendation in the body of the report 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 supporting schedules to the director of the City’s Department of Community Development and HUD’s staff and our discussion draft audit report to the City’s mayor during the audit. The City declined our offer to conduct an exit conference. 2 We asked the City’s director to provide comments on our discussion draft audit report by September 2, 2011. The director provided written comments, dated September 2, 2011. The director did not agree with the findings. The complete text of the written comments, except for the eight 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 eight appendixes of documentation. 3 TABLE OF CONTENTS Background and Objectives 5 Results of Audit Finding 1: The City Lacked Adequate Controls Over Its Activities To Ensure That Households and Homes Were Eligible for Assistance 6 Finding 2: The City Lacked Adequate Controls Over Its Housing Trust Fund Program To Ensure That Appropriate Recapture Provisions Were Used for Activities 10 Scope and Methodology 14 Internal Controls 15 Appendixes A. Schedule of Questioned Costs 17 B. Auditee Comments and OIG’s Evaluation 18 C. HUD’s Requirements 40 D. Schedule of Activities With Insufficient Documentation 43 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 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 City. Organized under the laws of the State of Ohio, the City of Cleveland is governed by a mayor and a 19-member council, elected to 4-year terms. The City’s Department of Community Development is responsible for planning, administering, and evaluating the City’s U.S. Department of Housing and Urban Development (HUD) programs. The Department of Community Development’s Housing Development Office administers the City’s Program- funded Housing Trust Fund program, which helps low-income 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, home ownership, and community-focused human services. The City’s Program records are located at 601 Lakeside Avenue, Cleveland, OH. The following table shows the amount of Program funds HUD awarded the City for fiscal years 2006 through 2010. HUD had not awarded the City Program funds for fiscal year 2011 as of August 2, 2011. Fiscal Program year funds 2006 $6,323,744 2007 6,268,729 2008 6,081,589 2009 6,763,777 2010 6,743,584 Totals $32,181,423 Our objectives were to determine whether the City complied with HUD’s requirements in its use of Program funds to provide interest-free second mortgage loans to home buyers through its Housing Trust Fund program and its use of recapture provisions for Housing Trust Fund program home-buyer activities. 5 RESULTS OF AUDIT Finding 1: The City Lacked Adequate Controls Over Its Activities To Ensure That Households and Homes Were Eligible for Assistance The City did not comply with HUD’s requirements in its use of Program funds to provide interest-free second mortgage loans to home buyers through its Housing Trust Fund program. It provided assistance for an ineligible household and lacked sufficient documentation to support that households and homes were eligible. These weaknesses occurred because the City lacked adequate procedures and controls regarding its Housing Trust Fund program home-buyer activities to ensure that it appropriately followed HUD’s requirements. As a result, it inappropriately provided $20,000 in Program funds to assist a household that was not income eligible and was unable to support its use of $795,000 in Program funds. The City Provided $20,000 in Program Funds for an Ineligible Household We reviewed all 44 households associated with the four Program-funded activities the City reported as complete in HUD’s Integrated Disbursement and Information System from January 1, 2009, through November 30, 2010. The City used $835,000 in Program funds for the 44 households. 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 on February 20, 2007, to assist a household that was not income eligible. The Program funds were used to provide an interest-free second mortgage loan to a home buyer for activity number (including the Office of Inspector General (OIG)-designated household number) 8917 (11). The City could not provide sufficient income documentation for activity number 8917 (11). However, it stated that the household was not income eligible. 6 The City Lacked Sufficient Documentation To Support Its Use of $795,000 in Program Funds The City lacked sufficient documentation for 42 of the 44 households and or homes reviewed to support that it used $795,000 in Program funds for eligible households and homes. 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 “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 42 of the 44 households were income eligible and 9 of the 44 homes acquired with Program funds met HUD’s property standards requirements at the time of occupancy. The closing dates for the nine homes occurred from June 16, 2006, through March 5, 2009. The City had certificates of occupancy for all nine homes stating that the homes met the City’s building and zoning codes. However, eight of the nine certificates of occupancy were dated from 286 to 787 days (at least 6 months) before the properties were purchased by the home buyers. Further, although the remaining certificate of occupancy was dated 271 days after the property was purchased by the home buyer, it was based on a final inspection that occurred 295 days (more than 6 months) before the property was purchased by the home buyer. We did not inspect the homes since they were purchased more than 21 months 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. Further, on August 30, 2011, and as a result of our audit, the City inspected three of the nine homes and provided affidavits for the three homes stating that the properties met all applicable State and local standards and code requirements. The table in appendix D of this report shows the activity number (including the OIG-designated household number) for the 42 households and homes for which the City did not have (1) sufficient income documentation to demonstrate that households were income eligible and or (2) final inspection reports or certifications supporting that homes met HUD’s property standards requirements at the time of occupancy. Further, the City did not ensure that it properly projected households’ annual income for at least 23 of the 44 households reviewed. For example, the City used gross year-to-date income in its calculation of projected annual income rather than using current circumstances to project future income for 10 of the 23 households. The City also lacked documentation to support its calculation of households’ 7 annual income or that it calculated households’ annual income for six additional households. The City Lacked Adequate Procedures and Controls The weaknesses regarding the City’s providing Program funds to assist a household that was overincome and lack of sufficient documentation to support that households and homes were appropriate occurred because the City lacked adequate procedures and controls regarding its activities to ensure that it appropriately followed HUD’s requirements. The City’s internal procedures for its activities only required two pay statements and an Internal Revenue Service Form W-2 wage and tax statement to be maintained for all income-producing members of a household. The manager of the Department of Community Development’s Housing Development Office said 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 director of the Department believed that the City generally complied with the 3-month requirement since the majority of the household files contained at least 3 months’ worth of income documentation through a combination of year-to-date pay statement information, W-2 statements, tax returns, Social Security information, employment verifications, and other items that were used to verify and substantiate households’ income. Further, the manager of the Housing Development Office said that she did not know why the certificates of occupancy for seven of the homes were dated more than 6 months before the properties were purchased and she believed that one of the certificates of occupancy was dated more than 6 months before the property was purchased because the home buyer had credit issues to resolve and was permitted to move in and lease the home until the issue was resolved. The director of the Department said that the certificate of occupancy for the remaining home was likely dated after the home buyer purchased the property because there was some work remaining to be done on the property. In some instances, a home buyer is permitted to move into a house with a temporary certificate of occupancy. This situation is typical if the home is completed during the winter but some exterior items cannot be completed due to inclement weather. Conclusion The City lacked adequate procedures and controls regarding its activities to ensure that it appropriately followed HUD’s requirements. It inappropriately provided $20,000 in Program funds to assist a household that was not income 8 eligible and was unable to support its use of $795,000 in Program funds for 42 households and or homes 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 number (including the OIG-designated household number) 8917 (11). 1B. Provide supporting documentation or reimburse its Program from non- Federal funds, as appropriate, for the $775,000 in Program funds used for the 41 households and homes for which the City did not have (1) sufficient income documentation to demonstrate that households were income eligible and or (2) final inspection reports or certifications supporting that homes met HUD’s property standards requirements at the time of occupancy. We did not include $20,000 in Program funds used for activity number 9706 (02) for which the City did not have sufficient income documentation to demonstrate that the household was income eligible since we included it in recommendation 2A of this report. 1C. Implement adequate procedures and controls to ensure that Program funds are only used for eligible households and that it maintains documentation to sufficiently support the eligibility of households and homes in accordance with HUD’s requirements. 9 Finding 2: The City Lacked Adequate Controls Over Its Housing Trust Fund 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 Housing Trust Fund program home-buyer activities. It did not (1) implement appropriate recapture provisions for all 44 of the households reviewed and (2) ensure that its Program was reimbursed for Program funds used to assist a home buyer in purchasing a home that was later sold through a sheriff’s sale and ownership of the home had been transferred. These weaknesses occurred because the City lacked adequate procedures and controls regarding its activities to ensure that it appropriately followed HUD’s requirements. As a result, its Program was not reimbursed for $20,000 in Program funds used for a home that was sold through a sheriff’s sale and ownership of the home 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 Housing Trust Fund program is transferred through foreclosures. The City Did Not Implement Appropriate Recapture Provisions for Its Activities and Did Not Reimburse Its Program $20,000 From Non-Federal Funds We reviewed all 44 households associated with the four Program-funded activities the City reported as complete in HUD’s Integrated Disbursement and Information System from January 1, 2009, through November 30, 2010. The City used $835,000 in Program funds for the 44 households. 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)(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 may only recapture the net proceeds, if any. 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 10 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 44 of the households reviewed. Although the mortgages and promissory notes between the City and the home buyers included affordability requirements, neither the mortgages nor the promissory notes contained language that limited the amount of Program 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 that 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 July 8, 2011, the City had received foreclosure notices for six homes associated with three of the activities completed from January 1, 2009, through November 30, 2010. Therefore, we reviewed the six households to determine whether the homes had been sold and ownership of the homes had been transferred. One of the homes had been sold through a sheriff’s sale, and ownership of the home had been transferred as of July 8, 2011. The City did not receive any net proceeds from the sale of the home, nor did it reimburse its Program for the $20,000 in Program funds used for the home. The following table includes the activity number (including the OIG-designated household number), the date of closing, the date Program funds were drawn down for the household in HUD’s system, the date the home was sold through a sheriff’s sale, and the date ownership was transferred for the home. Date of Activity Date of Date of Date of ownership number closing drawdown sheriff’s sale transfer 9706 (02) June 25, 2007 Nov. 13, 2007 Dec. 7, 2009 Feb. 2, 2010 The City Lacked Adequate Procedures and Controls The weaknesses regarding the City’s not (1) implementing appropriate recapture provisions for its activities and (2) ensuring that its Program was reimbursed for Program funds used to assist a home buyer in purchasing a home that was later sold through a sheriff’s sale and ownership of the home had been transferred 11 occurred because the City lacked adequate procedures and controls regarding its activities to ensure that it appropriately followed HUD’s requirements. The manager of the Department of Community Development’s Housing Development Office stated that until the former assistant director of the Department notified the Office in January 2011, the Office 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 the homes. Further, the director of the Department stated that although the City was not aware that it had created an 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 the homes. The City was developing a revised mortgage and promissory note for its activities to include language that would limit the amount of Program funds the City could recapture to the net proceeds from the sale of a home. Conclusion The City lacked adequate procedures and controls regarding its activities to ensure that it appropriately followed HUD’s requirements. It did not implement appropriate recapture provisions for all 44 of the households reviewed and ensure that its Program was reimbursed for the $20,000 in Program funds used for a home that was later sold through a sheriff’s sale and ownership of the home 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 Housing Trust Fund program is transferred through foreclosures. Recommendations We recommend that the Director of HUD’s Columbus Office of Community Planning and Development require the City to 2A. Reimburse its Program $20,000 from non-Federal funds for the home that had been sold through a sheriff’s sale and ownership of the home had been transferred. 2B. Implement adequate procedures and controls to ensure that if the ownership of additional homes acquired under its Housing Trust Fund program is transferred through foreclosures, the City recaptures the entire amount of the Program funds through the receipt of net proceeds from the sales of the homes or reimburses its Program from non-Federal funds for the Program funds provided to the home buyers as appropriate. 12 2C. Implement adequate procedures and controls to ensure that it includes appropriate recapture provisions in its written agreements with home buyers. 13 SCOPE AND METHODOLOGY To accomplish our objectives, we reviewed Applicable laws; HUD’s regulations at 24 CFR Part 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 for the years ending December 31, 2007, 2008, and 2009; data from HUD’s Integrated Disbursement and Information System; Program activity files; policies and procedures; organizational chart; consolidated plan for 2005 through 2010; action plans for program years 2008 to 2009, 2009 to 2010, and 2010 to 2011; and consolidated annual performance and evaluation reports for program years 2008 and 2009. HUD’s files for the City. In addition, we interviewed the City’s employees and HUD’s staff. Findings 1 and 2 We selected all 44 of the City’s households associated with the four Program-funded Housing Trust Fund program home-buyer activities the City reported as complete in HUD’s system from January 1, 2009, through November 30, 2010. The City used $835,000 in Program funds for the 44 households. In addition, we relied in part on data in HUD’s system. 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 January through June 2011 at the City’s offices located at 601 Lakeside Avenue, Cleveland, OH. The audit covered the period January 2009 through November 2010 and was expanded as determined necessary. 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. 14 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. 15 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 funds for Housing Trust Fund program home-buyer activities in accordance with HUD’s requirements, (2) it implemented appropriate recapture provisions for activities, and (3) its Program was reimbursed for Program funds used to assist a home buyer in purchasing a home that was later sold through a sheriff’s sale and ownership of the home had been transferred (see findings 1 and 2). 16 APPENDIXES Appendix A SCHEDULE OF QUESTIONED COSTS Recommendation number Ineligible 1/ Unsupported 2/ 1A $20,000 1B $775,000 2A $20,000 Totals $40,000 $775,000 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. 17 Appendix B AUDITEE COMMENTS AND OIG’s EVALUATION Ref to OIG Evaluation Auditee Comments 18 Ref to OIG Evaluation Auditee Comments Comment 1 Comments 2, 3, and 4 Comments 4 and 5 19 Ref to OIG Evaluation Auditee Comments Comments 6 and 7 Comment 8 Comments 8 and 9 Comments 3 and 4 Comment 10 Comment 10 Comment 11 20 Ref to OIG Evaluation Auditee Comments Comment 11 Comments 8 and 11 Comment 4 Comment 12 21 Ref to OIG Evaluation Auditee Comments Comment 8 Comments 8 and 9 Comments 5, 8, and 9 Comments 8 and 9 22 Ref to OIG Evaluation Auditee Comments Comments 8 and 9 Comment 13 Comment 14 23 Ref to OIG Evaluation Auditee Comments Comments 3 and 4 Comment 11 Comment 8 24 Ref to OIG Evaluation Auditee Comments Comment 8 Comment 7 Comment 15 25 Ref to OIG Evaluation Auditee Comments Comment 15 Comments 16 and 17 Comment 17 Comment 17 Comment 18 Comments 17 and 18 Comments 16, 17, and 18 26 Ref to OIG Evaluation Auditee Comments Comments 16 and 17 Comment 15 Comments 16 and 17 27 Ref to OIG Evaluation Auditee Comments Comment 15, 16, and 17 Comment 1, 8, and 11 Comment 19 Comment 19 Comment 19 28 Ref to OIG Evaluation Auditee Comments Comment 19 29 Ref to OIG Evaluation Auditee Comments Comment 19 Comment 20 30 Ref to OIG Evaluation Auditee Comments Comment 20 Comment 20 Comment 21 Comment 20 Comments 20 and 22 31 Ref to OIG Evaluation Auditee Comments Comments 20 and 22 Comment 20 Comment 21 32 Ref to OIG Evaluation Auditee Comments Comments 20 and 22 Comment 21 Comment 23 Comments 20 and 21 33 OIG’s Evaluation of Auditee Comments Comment 1 The City lacked adequate procedures and controls regarding its Housing Trust Fund program home-buyer activities to ensure that it appropriately followed HUD’s requirements. It provided assistance for an ineligible household and lacked sufficient documentation to support that households were income eligible. Further, it did not ensure that it properly projected households’ annual income. For example, the City used gross year-to-date income in its calculation of projected annual income rather than using current circumstances to project future income for households. It also lacked documentation to support its calculation of households’ annual income or that it calculated households’ annual income. Comment 2 We did not cite any households as being overincome in our discussion draft audit report. Comment 3 We added the following to the report: Contrary to HUD’s regulations, the City drew down $20,000 in Program funds on February 20, 2007, to assist a household that was not income eligible. The Program funds were used to provide an interest-free second mortgage loan to a home buyer for activity number (including the OIG-designated household number) 8917 (11). The City could not provide sufficient income documentation for activity number 8917 (11). However, it stated that the household was not income eligible. We also moved recommendations 1A and 1B to recommendations 1B and 1C, respectively, and added a new recommendation 1A to state the following: Reimburse its Program from non-Federal funds for the $20,000 in Program funds inappropriately used to assist activity number (including the OIG- designated household number) 8917 (11). Comment 4 We revised the report to state the following: The City lacked sufficient documentation for 42 of the 44 households and or homes reviewed to support that it used $795,000 in Program funds for eligible households and homes. Contrary to HUD’s requirements, the City lacked sufficient documentation to support that 42 of the 44 households were income eligible. The table in appendix D of this report shows the activity number (including the OIG-designated household number) for the 42 households and homes for which the City did not have (1) sufficient income documentation to demonstrate that households were income eligible and or (2) final inspection 34 reports or certifications supporting that homes met HUD’s property standards requirements at the time of occupancy. We also amended recommendation 1B to reflect these revisions. Further, we revised the table in appendix D of this report by removing entries showing that the City had insufficient income documentation for activity numbers (including the OIG-designated household number) 8917 (09) and 8917 (11). Comment 5 The City provided documentation to support that it calculated the households’ annual income for activity numbers (including the OIG-designated household number) 8917 (08) and 8917 (09). Therefore, we revised the report to state the following: The City also lacked documentation to support its calculation of households’ annual income or that it calculated households’ annual income for six additional households. Comment 6 The City did not provide documentation to support that HUD found the City’s method of calculating income eligibility for its Housing Trust Fund program to be sufficient. The City’s method of calculating income eligibility for its Housing Trust Fund program was not reviewed as part of HUD’s Columbus Office of Community Planning and Development’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 7 Further, HUD’s Columbus Office of Community Planning and Development’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 Program due to the issues uncovered during its monitoring review. Comment 8 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 tax return information may not reflect the household’s current income circumstances. Comment 9 Contrary to HUD’s requirements, the City lacked sufficient documentation to support that the 31 households were income eligible. 35 Comment 10 The City provided assistance for an ineligible activity and lacked sufficient documentation to support that activities were eligible. As a result, it inappropriately provided $20,000 in Program funds to assist a household that was not income eligible and was unable to support its use of $795,000 in Program funds. Comment 11 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 (such as 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 12 The activity number (including the OIG-designated household number) for the household that had a benefits-based income determination was 8917 (09) rather than 8917 (08). Comment 13 Contrary to HUD’s requirements, the City lacked sufficient documentation to support that the households for the 11 activities were income eligible. Comment 14 The City previously provided documentation to support that it properly projected the household’s annual income for activity number (including the OIG-designated household number) 8917 (21). Therefore, we revised the report to state the following: 36 Further, the City did not ensure that it properly projected households’ annual income for at least 23 of the 44 households reviewed. For example, the City used gross year-to-date income in its calculation of projected annual income rather than using current circumstances to project future income for 10 of the 23 households. Comment 15 We revised the report to state the following: Contrary to HUD’s requirements, the City lacked sufficient documentation to support that 9 of the 44 homes acquired with Program funds met HUD’s property standards requirements at the time of occupancy. The closing dates for the nine homes occurred from June 16, 2006, through March 5, 2009. The City had certificates of occupancy for all nine homes stating that the homes met the City’s building and zoning codes. However, eight of the nine certificates of occupancy were dated from 286 to 787 days (at least 6 months) before the properties were purchased by the home buyers. We added the following to the report: Further, on August 30, 2011, and as a result of our audit, the City inspected three of the nine homes and provided affidavits for the three homes stating that the properties met all applicable State and local standards and code requirements. We also removed the following from the report: The manager of the Housing Development Office stated that she believed that the City lacked certificates of occupancy for the four homes because the property developers did not pay the fee to obtain the certificates of occupancy. In addition, we revised the table in appendix D of this report by removing entries showing that the City had insufficient final inspection reports or certifications supporting that homes met HUD’s property standards requirements at the time of occupancy for activity numbers (including the OIG-designated household number) 7758 (02), 7758 (03), 8917 (06), 8917 (16), 8917 (17), and 8917 (23). The settlement statement date for activity number (including the OIG-designated household number) 8917 (06) is May 24, 2006, rather than May 24, 2007. Comment 16 Contrary to HUD’s requirements, the City lacked sufficient documentation to support that 9 of the 44 homes acquired with Program funds met HUD’s property standards requirements at the time of occupancy. Comment 17 Certificates of occupancy based on inspections that occurred more than 6 months before properties were purchased by home buyers do not support that homes met HUD’s property standards requirements at the time of occupancy. 37 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. 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. Comment 19 The City’s commitment to new procedures and controls, if fully implemented, should improve the City’s management of its Program. Comment 20 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 21 On July 19, 2011, the director of the City’s Department of Community Development stated that the City was developing a revised mortgage and promissory note for its activities to include language that would limit the amount of Program funds the City could recapture to the net proceeds from the sale of a home. The City did not provide documentation to support that it developed a revised mortgage and promissory note for its activities to include language that would limit the amount of Program funds the City could recapture to the net proceeds from the sale of a home through foreclosure. Comment 22 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 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 44 of the households reviewed and did not ensure that its Program was reimbursed for Program funds used to assist a home buyer in purchasing a home that was later sold through a sheriff’s sale and ownership of the home had been transferred. As a result, its Program was not reimbursed for $20,000 in Program funds used for the home that was sold through a sheriff’s sale and ownership of the home 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 Housing Trust Fund program is transferred through foreclosures. 38 Comment 23 The City lacked adequate procedures and controls to ensure that (1) it used Program funds for activities in accordance with HUD’s requirements, (2) it implemented appropriate recapture provisions for activities, and (3) its Program was reimbursed for Program funds used to assist a home buyer in purchasing a home that was later sold through a sheriff’s sale and ownership of the home had been transferred. 39 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 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. Annual income must 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. 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 40 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 (such as 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 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 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 41 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 may 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 HOME investment trust fund 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 into the participating jurisdiction’s local account and used in accordance with the requirements of 24 CFR Part 92. HUD’s regulations at 24 CFR 92.504(b) state that before disbursing any Program funds to any entity, a participating jurisdiction must enter into a written agreement with that entity. Section 92.504(c)(5)(i) states that when a participating jurisdiction provides assistance to a home buyer, the written agreement must conform to the requirements in 24 CFR 92.254(a) regarding resale or recapture provisions. 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, 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. 42 Appendix D SCHEDULE OF ACTIVITIES WITH INSUFFICIENT DOCUMENTATION Activity Income Final inspections Assistance number documentation or certifications amount 7758 (01) X $20,000 7758 (02) X 20,000 7758 (03) X 20,000 7758 (04) X 20,000 7758 (05) X X 20,000 8917 (01) X 20,000 8917 (02) X 20,000 8917 (03) X 20,000 8917 (04) X X 20,000 8917 (05) X 10,000 8917 (06) X 10,000 8917 (07) X 10,000 8917 (08) X 20,000 8917 (10) X X 15,000 8917 (12) X X 20,000 8917 (13) X 20,000 8917 (14) X 20,000 8917 (15) X 20,000 8917 (16) X 20,000 8917 (17) X 20,000 8917 (18) X 20,000 8917 (19) X 10,000 8917 (20) X 20,000 8917 (21) X 20,000 8917 (22) X 20,000 8917 (23) X 20,000 8917 (24) X 20,000 9706 (01) X X 20,000 9706 (02) X 20,000 9723 (01) X 20,000 9723 (02) X 20,000 9723 (03) X X 20,000 9723 (04) X 20,000 9723 (05) X 20,000 9723 (06) X 20,000 9723 (07) X 20,000 9723 (08) X 20,000 9723 (09) X 20,000 9723 (10) X 20,000 43 SCHEDULE OF ACTIVITIES WITH INSUFFICIENT DOCUMENTATION (CONT.) Activity Income Final inspections Assistance number documentation or certifications amount 9723 (11) X 20,000 9723 (12) X 20,000 9723 (13) X 20,000 Totals 42 6 $795,000 44
The City of Cleveland, OH, Lacked Adequate Controls Over Its HOME Investment Partnerships Program-Funded Housing Trust Fund Program Home-Buyer Activities
Published by the Department of Housing and Urban Development, Office of Inspector General on 2011-09-29.
Below is a raw (and likely hideous) rendition of the original report. (PDF)