oversight

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)

                                                                                  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