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).
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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)