oversight

Chicanos Por La Causa, Inc., Did Not Always Administer its Neighborhood Stabilization Program 2 Grant as Required

Published by the Department of Housing and Urban Development, Office of Inspector General on 2011-07-22.

Below is a raw (and likely hideous) rendition of the original report. (PDF)

                                                                                Issue Date
                                                                                         July 22, 2011
                                                                                Audit Report Number
                                                                                             2011-LA-1015




TO:               Yolanda Chavez, Deputy Assistant Secretary for Grant Programs, DG




                  Tanya E. Schulze, Regional Inspector General for Audit, Region IX, 9DGA
FROM:

SUBJECT: Chicanos Por La Causa, Inc., Phoenix, AZ, Did Not Always Administer Its
         Neighborhood Stabilization Program 2 Grant In Accordance With HUD
         Requirements

                                             HIGHLIGHTS

    What We Audited and Why

                   We audited Chicanos Por La Causa, Inc.’s (grantee) Neighborhood Stabilization
                   Program 2 (NSP2) grant. 1 We conducted the audit as part of the U.S.
                   Department of Housing and Urban Development (HUD), Office of Inspector
                   General’s (OIG) fiscal year 2011 annual audit plan and to support HUD OIG’s
                   fiscal year 2011 strategic goal to contribute to the oversight objectives of the
                   American Recovery and Reinvestment Act of 2009. HUD awarded the grantee
                   $137 million and was 1 of 56 organizations 2 nationwide that received program
                   funds.

                   Our objective was to determine whether the grantee administered its NSP2 grant
                   in accordance with HUD’s program requirements. Specifically our review
                   focused on whether the acquisition and administrative expenses paid to date from
                   the grant funds were for properly supported and eligible expenditures.




1
    NSP2 grant B-09-CN-AZ-0001
2
    The program funds were awarded to consortiums, local governments, nonprofits, and one State.
What We Found


           The grantee did not always administer its NSP2 grant in accordance with HUD’s
           program requirements. Specifically, the grantee expended NSP2 funds for
           improper procurements, ineligible and unsupported expenditures, and
           inadequately secured program income. Generally, these issues occurred because
           the grantee and its consortium members incorrectly applied Federal requirements
           in certain instances. Nevertheless, our review did not attribute these findings to
           significant internal control deficiencies. As a result of the improper
           expenditures, $754,000 in NSP2 funds was potentially unavailable for eligible
           activities.

What We Recommend


           We recommend that the HUD Deputy Assistant Secretary for Grant Programs
           require the grantee to (1) provide HUD with supporting documents for the
           $366,000 in NSP2 funds paid to improperly procured contractors or reimburse
           the unsupported costs to its NSP2 account from non-Federal funds; (2) reimburse
           its NSP2 account from non-Federal funds $209,947 for ineligible and
           unsupported expenditures; and (3) discontinue future payments on the
           developers’ fees to subrecipients totaling $178,451. Additionally we recommend
           that the HUD Assistant Secretary for Grant Programs require the grantee to
           update its NSP2 policies and procedures to include obtaining and reviewing all
           consortium member contracts.

           For each recommendation without a management decision, please respond and
           provide status reports in accordance with HUD Handbook 2000.06, REV-3.
           Please furnish us copies of any correspondence or directives issued because of
           the audit.

Auditee’s Response


           We provided the grantee a discussion draft report on July 8, 2011, and held an
           exit conference with grantee officials on July 11, 2011. The grantee provided
           written comments on July 15, 2011. It generally disagreed with the report.

           The complete text of the grantee’s response, along with our evaluation of that
           response, can be found in appendix B of this report. Attachments to the
           grantee’s comments were not included in the report, but are available for review
           upon request.




                                            2
                           TABLE OF CONTENTS

Background and Objective                                                          4

Results of Audit
Finding 1: The Grantee Used NSP2 Funds for Improperly Procured Consulting Services 6
Finding 2: The Grantee Used Program Funds for Ineligible and Unsupported           9
           Expenditures
Finding 3: NSP2 Program Income was Inadequately Secured                            12

Scope and Methodology                                                             14

Internal Controls                                                                 16

Appendixes

       A. Schedule of Questioned Costs and Funds To Be Put to Better Use          17
       B. Auditee Comments and OIG’s Evaluation                                   18




                                            3
                          BACKGROUND AND OBJECTIVE

The Neighborhood Stabilization Program 2 (NSP2) was authorized under Title XII of Division
A of the American Recovery and Reinvestment Act of 2009 and provided 56 grants nationwide
on a competitive basis totaling $1.93 billion. The grants went to one State, local governments,
nonprofits, and consortiums of public or private nonprofit entities. This program was
established to stabilize neighborhoods, the viability of which had been damaged by the
economic effects of properties that were foreclosed upon or abandoned.

The U.S. Department of Housing and Urban Development (HUD) executed the Chicanos Por La
Causa, Inc. (grantee), grant agreement on April 6, 2010, awarding the consortium $137 million
in NSP2 funds. According to the grantee’s approved action plan, the anticipated outcomes
using the awarded NSP2 funds included acquiring 1,998 affordable housing units, 3 demolishing
165 blighted properties, and land banking 203 foreclosed-upon homes.

The grantee has been a community development corporation in Arizona for the past 40 years.
Throughout the organization’s history, it has evolved and grown to adapt to the changing needs
of its clients, offering programs in the areas of education, economic development, health and
human services, and housing. 4

The grantee’s consortium agreement included 12 additional organizations and targeted activities
for areas in Arizona, California, Colorado, the District of Columbia, Illinois, Maryland, New
Mexico, Pennsylvania, and Texas. The table below identifies the consortium member
organizations and their respective program target area(s).




3
 707 home-ownership units, 917 rental units, 325 lease-to-purchase units, and 49 cooperative units.
4
 This information was taken from the grantee’s 2009 annual report
(http://www.cplc.org/Common/Files/Annual%20Report/CPLC%20Annual%20Report2009.pdf).

                                                        4
Consortium member organization                       Program target area
Chicanos Por La Causa (grantee/lead member)          Maricopa and Santa Cruz County, AZ
Affordable Homes of South Texas                      Hidalgo County/McAllen, TX
Community Development Corporation of Brownsville     Cameron County/Brownsville, TX
El Paso Affordable Housing Credit Union Service      El Paso, TX, and Las Cruces, NM
Organization
Tierra del Sol Housing Development Corporation       El Paso, TX, and Las Cruces, NM
YES Housing, Inc.                                    Albuquerque, NM
Community Housing Improvement Systems and Planning   The California cities of Salinas, Gonzales, Soledad,
Association, Inc.                                    Greenfield, King City, and Hollister
NEW Economics for Women                              Areas of Los Angeles and San Fernando, CA (San Fernando
                                                     Valley)
Colorado Rural Housing Development Corporation       Thornton, Westminster, Conejos County, Costilla County,
                                                     Alamosa, Saguache, Hayden, Walsenburg, Monte Vista, and
                                                     Del Norte in Southern Colorado
Del Norte                                            Areas of Denver, CO
Mi Casa, Inc.                                        Johnston Square in Baltimore, MD, and Eckington and
                                                     Brightwood Park in Washington, DC
Norris Square Civic Association                      North Philadelphia, PA
The Resurrection Project                             New City Neighborhood in Chicago, IL

    Our objective was to determine whether the grantee administered its NSP2 grant in accordance
    with HUD’s program requirements. Our review focused on whether the acquisition and
    administrative expenses paid to date from the grant funds were for properly supported and
    eligible expenditures.




                                                     5
                                     RESULTS OF AUDIT

Finding 1: The Grantee Used NSP2 Funds for Improperly Procured
           Consulting Services
The grantee used NSP2 funds to pay for improperly procured consulting service contracts. For
two improperly procured contracts consortium members did not believe it was necessary to
obtain competitive bids for consulting services. This condition occurred because the consultants
already had knowledge of the members’ operations. As a result of the improperly procured
contracts, payments totaling $366,000 for consulting services were potentially unavailable for
eligible activities because, without the competitive bidding, the entities risked paying more than
necessary for services.


    The Grantee Improperly
    Procured a Contract With the
    Association


                 The grantee had a memorandum of understanding with the National Association
                 for Latino Community Asset Builders to pay $810,000 over the 36-month grant
                 period; however, the agreement was not the result of free and open competition
                 as required by 24 CFR (Code of Federal Regulations) 84.43. 5 Grantee officials
                 stated that they did not go through a competitive bidding process because the
                 NSP2 consortium was the Association’s idea and the NSP2 grant application
                 included the anticipated use of the Association. Therefore, grantee officials
                 thought the procurement requirements did not apply.

                 The grantee had paid $315,000 to the Association, and the supporting documents
                 provided during the audit were limited to the contract and the payment
                 documents, which included the statement, “Services provided for NSP2 National
                 Grant Agreement per CPLC/NALCAB [grantee/Association] services MOU
                 [memorandum of understanding] 36 monthly payments of $22,500 beginning
                 3/1/2010 ending 2/28/2013.” This support was inadequate because the grantee
                 provided no reasonable basis for the amounts charged as required under Office of
                 Management and Budget Circular A-122 6 and the contract procurement file did
                 not contain some form of cost or price analysis as required under 24 CFR 84.45. 7


5
  “All procurement transactions shall be conducted in a manner to provide, to the maximum extent practical, open
and free competition.”
6
  Office of Management and Budget Circular A-122, attachment A, General Principles, A.2., states that “to be
allowable under an award, costs must be …reasonable and …adequately documented.”
7
  Regulations at 24 CFR 84.45 state, “Some form of cost or price analysis shall be made and documented in the
procurement files in connection with every procurement action.”

                                                        6
             Although the contract was improperly procured, the grantee benefited from the
             Association’s services such as evaluating consortium member processes to
             identify best practices and problems. HUD officials stated that they planned to
             consider whether the Association could be reclassified as a subrecipient and the
             costs could be supported by appropriate source documentation. As a result of
             this audit, the grantee reclassified the Association as a subrecipient and obtained
             a summary of the Association’s purported actual costs. However, the $315,000
             in fees already paid were not supported as actual costs at the time of the audit
             review. If the grantee does not obtain supporting documentation for amounts
             already paid, the costs will become ineligible. In addition, the $495,000
             remaining on the contract would be reimbursed based on actual cost
             documentation.

The Grantee Paid on an
Improperly Procured Contract
With Avalon Residential

             New Economics for Women used a consultant, Avalon Residential, from a
             preexisting contract between the consultant and a NEW Economics affiliate
             without regard for Federal procurement requirements set forth in 24 CFR 84.43.
             The preexisting contract included a retainer of $10,000 per month to the
             consultant. Grantee officials explained that Avalon Residential was used for
             consulting services because of its familiarity with NEW Economics. Therefore,
             NEW Economics did not obtain the consulting services through free and open
             competition.

             The Grantee paid the $51,000 from NSP2 funds for Avalon Residential’s
             assistance with program administration from February 2010 to September 2010.
             On October 1, 2010, NEW Economics officials hired the owner of Avalon
             Residential as a director because of the amount of work being dedicated to the
             program. Once the consultant became an employee, NEW Economics ceased
             paying for Avalon Residential’s consulting services. However, the failure to
             properly procure the services provided under the consulting contract after the
             grant award resulted in $51,000 in NSP2 funds that were no longer available for
             eligible activities.

Conclusion

             The payments on the two improperly procured contracts totaled $366,000. These
             contracts potentially reduced funds available for eligible program activities
             because, without procuring the contracts through free and open competition, the
             entities risked paying more for services than was necessary. However, because
             the Association was reclassified as a subrecipient, its consulting expenses may be
             allowable if properly documented and reasonable.



                                              7
Recommendations

          We recommend that the HUD Deputy Assistant Secretary for Grant Programs
          require the grantee to

          1A.     Continue to provide procurement training to the consortium members.

          1B.     Provide HUD with supporting documents for the $315,000 in prior
                  payments to the Association and reimburse the grantee’s NSP2 account
                  from non-Federal funds for any costs HUD determines are unsupported.

          1C.     Reimburse the grantee’s NSP2 account from non-Federal funds for the
                  $51,000 paid on the Avalon Residential contract or provide support that
                  the amount paid was reasonable.

          1D.     Obtain support for all future Association NSP2 payment requests.




                                          8
Finding 2: The Grantee Used Program Funds for Ineligible and
           Unsupported Expenditures
The grantee used program grant funds for ineligible and unsupported expenditures including
developers’ fees to subrecipients, vehicle purchases, and real estate commissions. Generally,
the ineligible and unsupported fees occurred because the consortium members incorrectly
applied the Federal requirements in these instances. As a result, $388,000 in NSP2 grant funds
was not available for eligible activities.



    Ineligible Developers’ Fees
    Were Paid to Subrecipients

                 The grantee paid Del Norte for the developers’ fees totaling $89,226 to
                 subrecipients NEWSED and North East Denver Housing contrary to the
                 requirements of Office of Management and Budget Circular A-122, attachment
                 B, part 8(m)(1). 8 Further, HUD’s answer to the NSP frequently asked question,
                 “NSP FAQ ID: 282,” 9 specified that costs are limited to actual costs incurred by
                 the subrecipient. According to the executed consortium member agreements,
                 these entities were subrecipients to the consortium member Del Norte and, thus,
                 were prohibited from collecting developers’ fees. The grantee believed that
                 because termination agreements were later executed between NEWSED and Del
                 Norte and North East Denver Housing and Del Norte, the entities had changed
                 their status from subrecipients to developers. However, the NSP2 consortium
                 agreement was signed with the entities listed as consortium members under Del
                 Norte and was included as an exhibit to the consortium member funding
                 agreement signed by the grantee and Del Norte. The consortium member
                 funding agreement contained a provision that changes could not be made without
                 HUD’s approval.

                 In addition, an estimated $178,451 10 in developers’ fees was payable upon lease
                 or sale of the acquired properties. As a result, the subrecipients NEWSED and



8
  “Charges to awards for salaries and wages, whether treated as direct costs or indirect costs, will be based on
documented payrolls approved by a responsible official(s) of the organization. The distribution of salaries and
wages to awards must be supported by personnel activity reports, as prescribed in subparagraph (2), except when a
substitute system has been approved in writing by the cognizant agency.”
9
  “To be reimbursed, a subrecipient must provide proper documentation that demonstrates the costs are actual costs
incurred by the subrecipient.”
10
   One-third of the developers’ fees, $89,226, were paid at the time of acquisition. According to the developers’
agreements, the remaining two-thirds of the developers’ fees will be payable by the time the lease or sale of the
property is completed. Therefore, the estimated developers’ fees payable were $178,451 ($89,225.51 multiplied by
2).

                                                        9
                  North East Denver Housing received ineligible developers’ fees totaling $89,226
                  and might be due an additional $178,451 in future developers’ fees, thereby
                  reducing the available program funds for eligible activities by a total of
                  $267,677.

     The Grantee Paid for
     Unapproved Vehicles



                  The grantee paid $57,223 from NSP2 funds for NEW Economics to purchase
                  two vehicles without the approval of HUD as required by Office of Management
                  and Budget Circular A-122, attachment B, part 15(a). 11 However, NEW
                  Economics maintained vehicle mileage logs along with staff requests for vehicle
                  use, which helped ensure that the vehicles were used only for program purposes.
                  The grantee misunderstood the Federal requirements for vehicle purchases.
                  Specifically, it interpreted the Federal requirements to mean that as the lead
                  consortium member, its advance approval for the vehicle purchase was
                  sufficient. Therefore, NEW Economics did not request HUD’s approval to
                  purchase the two vehicles as required. As a result, $57,223 in program funds
                  was not available for eligible program activities.

     The Grantee Paid Uncustomary
     Real Estate Agent Commissions



                  The grantee approved acquisition expenditures that included uncustomary real
                  estate agency commissions for NEW Economics single-family acquisition
                  transactions totaling $63,498 for eight properties. These payments were contrary
                  to provisions of Office of Management and Budget Circular A-122, attachment
                  A, part 2(a), 12 which require costs to be reasonable for the performance of the
                  award. NEW Economics officials claimed that buying properties from the open
                  market sometimes required the buyer to pay part of the real estate commission if
                  the seller refused to pay and, further, the seller’s decision to pay the commissions
                  was a matter of preference. However, our review of other consortium member
                  acquisition transactions indicated that none of their acquisitions included any
                  type of commission paid by the buyer to the real estate agency. Additionally, we
                  contacted an official at the California Department of Real Estate and were


11
   “Capital expenditures for general purpose equipment, buildings, and land are unallowable as direct charges,
except where approved in advance by the awarding agency.”
12
   “2. Factors affecting allowability of costs. To be allowable under an award, costs must meet the following
general criteria: a. Be reasonable for the performance of the award and be allocable thereto under these principles.”
Office of Management and Budget Circular A-122, attachment A, part 3, describes reasonable costs as “[a] cost is
reasonable if, in its nature or amount, it does not exceed that which would be incurred by a prudent person under
the circumstances prevailing at the time the decision was made to incur the costs….”

                                                         10
             informed that in the 2010 and 2011 housing market in California (where the
             properties were purchased), all real estate commissions, including the seller’s
             real estate agent commissions, were ordinarily paid by the seller. According to
             this official, it was even more likely for this to be the case when the seller was a
             lender selling foreclosures. As a result of the unsupported commissions, $63,498
             in NSP2 funds was no longer available for eligible program activities.

Conclusion



             The grantee’s and consortium members’ ineligible and unsupported expenditures
             included a total of $209,947 in payments from NSP2 funds and an anticipated
             $178,451in future developers’ fees remaining on acquired single-family
             properties. These ineligible expenditures reduced the amount of grant funds
             available to provide NSP2 benefits through eligible activities.

Recommendation



             We recommend that the HUD Deputy Assistant Secretary for Grant Programs
             require the grantee to

             2A.    Continue to provide Office of Management and Budget Circular A-122
                    training to the consortium members.

             2B.    Reimburse the NSP2 account in the amount of $146,449 from non-
                    Federal funds for the ineligible expenses.

             2C.    Provide support that buyer paid real estate agent or broker commissions
                    were reasonable and customary or reimburse the NSP2 account in the
                    amount of $63,498 from non-Federal funds for the unsupported expenses.

             2D.    Discontinue payments from NSP2 funds to the subrecipients NEWSED
                    and North East Denver Housing for developers’ fees, including the
                    remaining $178,451 in developers’ fees due upon completion of the
                    rehabilitation and sale or lease of the properties.




                                              11
Finding 3: NSP2 Program Income was Inadequately Secured
The grantee allowed NEW Economic’s affiliate to acquire 16 properties without adequately
securing future program income. This deficiency occurred because the grantee misunderstood
the arrangement between NEW Economics and McB, LLC, which included an independent
contractor agreement that did not contain language for the protection of program income. If the
consortium member does not protect its rights to future income, that income may not be
available for future approved program activities.



     The Contract with NEW
     Economics Did Not Address
     Future Program Income


                 The grantee approved NEW Economics draws for the direct payment to title
                 companies and conveyance of 16 property titles to a contractor without
                 restricting future program income. The agreement between NEW Economics
                 and the contractor, McB, LLC (a wholly owned subsidiary of New Economics),
                 did not provide for use of future income from the sale of the properties. NSP2
                 requirements in 74 Federal Register 29223/29224 (June 19, 2009) 13 specify that
                 grantees are encouraged to include language in agreements with nonsubrecipients
                 that provides for the grantee to share in the program income.

                 It was unclear whether the concurrent status of McB, LLC, as a wholly owned
                 limited liability company was sufficient to acquire rights to use the program
                 income for future eligible activities. The grantee approved the acquisition
                 payments and corresponding title conveyances to McB, LLC, because it was
                 unaware that the executed agreement between NEW Economics and McB, LLC
                 made McB, LLC an independent contractor. 14 The grantee thought NEW
                 Economics made arrangements for McB, LLC to be held to the NSP2
                 requirements. As a result of this audit, the grantee had NEW Economics amend
                 its contract with McB, LLC to include the applicability of NSP2 requirements,



13
   “grantees are strongly encouraged to avoid the undue enrichment of entities that are not subrecipients. For
example, grantees are encouraged to structure assistance to developers that undertake acquisition and/or
rehabilitation as loans rather than grants. Grantees are also encouraged to include language in agreements with
entities that are not subrecipients that provides for grantees to share in any excess cash flow generated by the
assisted project to the extent practicable.”
14
   When the issue was discussed with grantee officials, they believed that without the contract, the wholly owned
company would have the same restrictions as NEW Economics under the program agreements, which included the
protection of program income.


                                                       12
         which include program income provisions. Without this amendment there would
         be less funds available to the grantee for NSP2 activities.

Recommendation


         We recommend that the HUD Deputy Assistant Secretary for Grant Programs
         require the grantee to

         3A.     To update its NSP2 policies and procedures to include obtaining and
                 reviewing all consortium member contracts.




                                        13
                                SCOPE AND METHODOLOGY

We performed an audit of the grantee’s NSP2 funds limited to administrative and acquisition
expenditures. Our audit period covered NSP2 expenditures between February 2010 and April
2011. We conducted our fieldwork at the grantee’s office located at 6741 North 7th Street,
Phoenix, AZ; New Economics’ office located at 303 Loma Drive, Los Angeles, CA; and our
Phoenix office from February through May 2011.

To accomplish our objective, we reviewed HUD and Federal program requirements.
Additionally, we interviewed appropriate HUD staff, consortium member officials, and
contractors. We analyzed the grantee’s action plan approved by HUD and determined that
$13.7 million was budgeted for administrative activities and $38.6 million was budgeted for
acquisition activities. 15

 We reviewed a nonstatistical selection of the grantee’s and consortium members’
administrative and acquisition expenditures and evaluated the corresponding supporting
documentation to determine whether the expenditures were eligible and supported. We used
computer processed data to select the nonstatistical audit sample and, through our testing,
determined the computer processed data was adequate for our purposes. Below is a table that
shows the dollar value of the consortium member administrative and acquisition expenditures
reviewed during the audit.

     Consortium member organization                                         Acquisition           Administrative
                                                                           expenditures            expenditures
                                                                             reviewed                reviewed
     Chicanos Por La Causa (grantee/lead member)                                 $501,798               $ 939,514 16
     Affordable Homes of South Texas                                             $136,977                   $9,334
     Community Development Corporation of Brownsville                            $153,081                       $0
     El Paso Affordable Housing Credit Union Service                                    $0                 $13,059
     Organization
     Tierra del Sol Housing Development Corporation                               $348,087                       $0
     YES Housing, Inc.                                                                  $0                       $0
     Community Housing Improvement Systems and Planning                           $584,745                  $13,251
     Association, Inc.
     NEW Economics for Women                                                    $4,433,944                 $ 220,833
     Colorado Rural Housing Development Corporation                               $469,262                        $0
     Del Norte                                                                  $1,759,166                        $0
     Mi Casa, Inc.                                                                      $0                        $0
     Norris Square Civic Association                                                    $0                   $11,602
     The Resurrection Project                                                           $0                   $36,616
     Totals                                                                     $8,387,060               $ 1,244,209


15
      The grantee later revised the action plan to combine the acquisition and rehabilitation budgets.
16
      This amount includes the review of the $315,000 paid to the Association.

                                                           14
We conducted the 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 objective.




                                              15
                              INTERNAL CONTROLS

Internal control is a process adopted by those charged with governance and management,
designed to provide reasonable assurance about the 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
               objective:

                  •   Effectiveness and efficiency of operations and
                  •   Compliance with applicable 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 or efficiency of operations, (2) misstatements in
               financial or performance information, or (3) violations of laws and regulations on a
               timely basis.


 Significant Deficiencies


               We evaluated internal controls related to the audit objective in accordance with
               generally accepted government auditing standards. Our evaluation of internal
               controls was not designed to provide assurance on the effectiveness of the internal
               control structure as a whole. Accordingly, we do not express an opinion on the
               effectiveness of the grantee’s internal control.


                                                16
                                     APPENDIXES

Appendix A

     SCHEDULE OF QUESTIONED COSTS AND FUNDS TO BE
                  PUT TO BETTER USE

       Recommendation            Ineligible 1/        Unsupported 2/     Funds to be put to
              number                                                          better use 3/
                     1B                                    $315,000
                     1C                                      51,000
                     2B             $146,449
                     2C                                       63,498
                     2D                                                           $178,451
                  Totals            $146,449               $429,498               $178,451


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 policies or regulations. In this case, the ineligible costs are expenditures related to
      developers’ fees and unapproved vehicle purchases.

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. In this case, the $315,000 paid to the
      Association would be allowable as the entity was reclassified as a subrecipient, but the
      expenses must be properly documented and reasonable. Additional unsupported costs
      included the improperly procured Avalon Residential contract payments of $51,000 and
      the unsupported real estate commission payments of $63,498.

3/    Recommendations that funds be put to better use are estimates of amounts that could be
      used more efficiently if an Office of Inspector General (OIG) recommendation is
      implemented. These amounts include reductions in outlays, deobligation of funds,
      withdrawal of interest, costs not incurred by implementing recommended improvements,
      avoidance of unnecessary expenditures noted in preaward reviews, and any other
      savings that are specifically identified. In this case, the $178,451 in future developers’
      fees to NEWSED and North East Denver Housing would either be rebudgeted for an
      eligible activity or become an eligible use if the entities were appropriately reclassified
      to allow the fees and they can provide documentation supporting the costs.




                                                 17
Appendix B

        AUDITEE COMMENTS AND OIG’S EVALUATION


Ref to OIG Evaluation   Auditee Comments




                         18
Comment 1




Comment 2




Comment 3




            19
Comment 4




Comment 5




            20
Comment 6

Comment 7
Comment 8

Comment 9
Comment 10
Comment 11

Comment 12

Comment 13

Comment 14



Comment 15



Comment 16

Comment 17




             21
Comment 18


Comment 19


Comment 20




             22
                               OIG Evaluation of Auditee Comments

Comment 1         The Scope and Methodology section of the audit report presented specific
                  information regarding the scope of the administrative and acquisition
                  transactions reviewed for the audit.

                  We agree with the auditee that the audit report should reflect that we did not
                  attribute the findings to significant internal control deficiencies. This
                  information was presented in the report under Internal Controls; however, we
                  added a statement in the Highlights section acknowledging that the OIG did not
                  attribute the findings to significant internal control deficiencies. We agree that
                  the lack of significant internal control deficiencies associated with the findings
                  was a positive result for the scope of the review.

Comment 2         We acknowledge that the auditee provided the OIG with an executed
                  subrecipient agreement with the Association. However, because the subrecipient
                  agreement resulted from the audit, the questioned cost remained under finding 1
                  of the report. We also acknowledge receipt of the summary of the Association’s
                  expenditures and modified recommendation 1B to ask HUD to determine
                  whether the $315,000 in Association expenditures were adequately supported.

Comment 3         We agree with the auditee that some pre-award costs were allowable under the
                  NSP2 Notice of Availability of Funds, appendix 1C 17. Upon further review, we
                  determined that $11,000 of the $62,000 in Avalon Residential expenses
                  questioned were for pre-award costs. However, the remaining expenditures of
                  $51,000 were for NSP2 program administration services after the effective date,
                  January 14, 2010, of the grantee award and, therefore, were not pre-award costs
                  (see the table below). We revised the report to reflect the change from $62,000
                  in unsupported expenditures to $51,000. The recommendation for the
                  reimbursement or support of these payments will remain in the audit report
                  because the $51,000 paid to Avalon Residential was for expenditures outside of
                  pre-award costs and the consulting services were not properly procured.

                  Description                                       Invoice month      Amount
                  “NSP II Program Administration – 30%”             February 2010      $3,000
                  “NSP II Program Administration – 45%”             March 2010         $4,500
                  “NSP II Program Administration – 75%”             April 2010         $7,500
                  “NSP II Program Administration – 75%”             May 2010           $7,500
                  “NSP II Program Administration – 45%”             June 2010          $4,500
                  “NSP II Program Administration – 50%”             July 2010          $5,000
                  “NSP II Program Administration – 95%”             August 2010        $9,500
                  “NSP II Program Administration – 95%”             September 2010     $9,500
                  Total                                                                $51,000



17
     Docket number FR-5231-N-01.

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Comment 4            We acknowledge that NEWSED and North East Denver Housing both signed
                     termination agreements to terminate their participation in the consortium.
                     However, we disagree with the auditee’s interpretation that the entities were
                     developers rather than subrecipients. The timeline presented in the auditee’s
                     response is consistent with the following report statement,

                              the NSP2 consortium agreement was signed with the entities listed as
                              consortium members under Del Norte [making them in effect
                              subrecipients] and was included as an exhibit to the consortium member
                              funding agreement signed by the grantee and Del Norte. The consortium
                              member funding agreement contained a provision that changes could not
                              be made without HUD’s approval.

                     Therefore, the termination of the subrecipient status was not effective under the
                     HUD program because HUD had not approved the change as required. As a
                     result, this part of audit report finding 2 remains unchanged.

Comment 5            We acknowledge that consortium member NEW Economics provided a cost
                     benefit analysis comparing the reimbursement of employee personally owned
                     vehicle mileage 18 to the purchase of the vehicles. We also acknowledge that the
                     auditee, as a result of the audit, has requested HUD approval for the vehicles
                     purchased in December 2010. However, the purchase remains under finding 2
                     because HUD’s approval would be obtained as a result of our audit.

Comment 6            The auditee asserted that the buyer-broker service was reasonable and customary.
                     The audit report did not evaluate whether the service was reasonable and
                     customary, rather it considered whether the buyer’s payment of the fee was
                     reasonable and customary.

Comment 7            The auditee asserted that the banks (sellers) restricted amounts for closing costs
                     and refused to pay the reasonable and customary real estate commissions.
                     However, the auditee did not provide evidence to support this claim. We revised
                     the audit report to reflect the real estate commissions paid as unsupported rather
                     than ineligible.

Comment 8            The auditee asserted that it is reasonable and customary to have two real estate
                     brokers or agents. The audit report did not evaluate whether the number of
                     commissioned real estate brokers or agents was reasonable and customary, rather
                     it considered whether the buyer paying the fee was reasonable and customary.

Comment 9            The auditee asserted that the real estate commission amounts were reasonable
                     and customary. The audit report did not evaluate whether the amount of the
                     commission paid was reasonable and customary, rather it considered whether the
                     buyer’s payment of the fee was reasonable and customary.


18
     In the grantee’s response it states, “comparing renting to purchases.”

                                                            24
Comment 10 We acknowledge that the real estate commission fees were part of the closing
           costs and not the sales price.

Comment 11 The auditee asserted that the banks (sellers) “had substantial losses and little
           negotiating flexibility and declined to pay the buyer’s broker.” However, the
           auditee did not provide evidence to support this claim.

Comment 12 We acknowledge that the California Civil Code 2079.19 states, “[t]he payment
           of compensation or the obligation to pay compensation to an agent by the seller
           or buyer is not necessarily determinative of a particular agency relationship
           between an agent and the seller or buyer.” Furthermore, we acknowledge that
           under California law the payment of real estate commissions are permissible;
           however, the audit report considered whether the buyer paying the fee was
           reasonable and customary.

Comment 13 The auditee also asserted that the real estate commissions were “customary fees
           that either a seller or buyer pays for.” However, the auditee did not provide
           sufficient evidence to support this claim. We acknowledge the “National
           Association of Realtor’s Auction Glossary” defined the term for the buyer’s
           broker. However, it appears that the organization is national and not specific to
           the California housing market. The OIG review showed that not all of the NEW
           Economics transactions included buyer paid real estate commissions and our
           discussion with an official at the California Department of Real Estate, as noted
           in the audit report, informed us that in the 2010 and 2011 housing market in
           California (where the properties were purchased), all real estate commissions,
           were ordinarily paid by the seller. According to this official, it was more likely
           for this to be the case when the seller was a lender selling foreclosures.

Comment 14 The auditee asserted that the consortium member experience with the payment
           of real estate commissions was that the seller did not make the payment in
           foreclosure transactions. However, the auditee did not provide evidence to
           support this claim. Also see OIG response to comment 11.

Comment 15 The auditee asserted that the National Community Stabilization Trust policy not
           to pay the buyer’s broker or agent was applied nationwide and therefore the
           buyer payment of the commission was reasonable. However, the auditee did
           not provide evidence to support this claim.

Comment 16 See OIG response to comment 9.

Comment 17 See OIG response to comment 10.

Comment 18 We acknowledge that the auditee has provided multiple training conferences for
           the consortium members. We have revised recommendations 1A and 2A to
           reflect the recommendation for continued training.



                                             25
Comment 19 We did not remove the recommendation for the grantee to reimburse the
           $209,947 as requested by the auditee (see OIG response to comments 4, 5, and
           7). Additionally, we did not remove the recommendation for the grantee to
           discontinue developer fee payments to NEWSED and North East Denver
           Housing as requested by the auditee (see OIG response to comment 4).

Comment 20 We acknowledge that NEW Economics and McB, LLC executed an amendment
           to their agreement that more clearly incorporates the NSP2 requirements. This
           change was made as a result of the audit and therefore the issue regarding
           improperly secured future income remained under finding 3 of the audit report.




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