oversight

The Idaho Housing and Finance Association Did Not Always Comply With HOME Investment Partnerships Project and Cost Eligibility Regulations

Published by the Department of Housing and Urban Development, Office of Inspector General on 2011-09-23.

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

                                                               Issue Date
                                                                        September 23, 2011
                                                                
                                                               Audit Report Number
                                                                            2011-SE-1008




TO:        Doug Carlson, Director, Portland Office of Community Planning
             and Development, 0ED

           //signed//
FROM:      Ronald J. Hosking, Regional Inspector General for Audit, 0AGA


SUBJECT:   The Idaho Housing and Finance Association Did Not Always Comply With
             HOME Investment Partnerships Project and Cost Eligibility Regulations


                                 HIGHLIGHTS

 What We Audited and Why

           We audited the Idaho Housing and Finance Association’s HOME Investment
           Partnerships Program because the U.S. Department of Housing and Urban
           Development (HUD) had not performed a comprehensive monitoring review of
           Idaho Housing’s program since 2007 and it received approximately $6 million in
           HOME grants from HUD in each of the fiscal years 2008 through 2010.

           The objective of our review was to determine whether Idaho Housing complied
           with HOME project and cost eligibility requirements.

 What We Found


           Idaho Housing did not always comply with HOME project and cost eligibility
           requirements. Specifically, it (1) did not always inspect acquisition and
           acquisition and rehabilitation projects for compliance with property standards and
           (2) disbursed HOME funds to borrowers for ineligible and unsupported costs.
What We Recommend


           We recommend that HUD require Idaho Housing to perform or procure
           independent inspections for property standards requirements and require owners
           to make necessary repairs. If repairs are not made within a reasonable time, Idaho
           Housing should be required to reimburse its HOME trust fund from non-Federal
           funds for the more than $2.6 million expended on these projects. In addition,
           Idaho Housing should be required to reimburse its HOME trust fund from non-
           Federal funds for the $58,001 expended on ineligible costs, provide supporting
           documentation for any portion of the $399,327 which it cannot support as being
           eligible, implement effective policies and procedures, and receive technical
           assistance from HUD.

           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 the discussion draft to Idaho Housing on August 26, 2011, and
           requested a response by September 9, 2011. Idaho Housing provided a response
           on September 9, 2011. Idaho Housing agreed with our findings and
           recommendations. The complete text of the auditee’s response can be found in
           appendix B of this report.
                           TABLE OF CONTENTS

Background and Objective                                                          4

Results of Audit
      Finding 1: Idaho Housing Did Not Always Inspect Projects for Compliance     5
      With Property Standards
      Finding 2: Idaho Housing Disbursed HOME Funds to Borrowers for Ineligible   11
      and Unsupported Costs

Scope and Methodology                                                             14

Internal Controls                                                                 16

Appendixes
   A. Schedule of Questioned Costs                                                18
   B. Auditee Comments                                                            19
   C. Ineligible and Unsupported Costs by Recommendation and Project              21
   D. Projects Reviewed                                                           22
                     BACKGROUND AND OBJECTIVES

The National Affordable Housing Act of 1990 created the U.S. Department of Housing and
Urban Development’s (HUD) HOME Investment Partnerships Program. In January 1991, the
governor of Idaho designated the Idaho Housing and Finance Association as the appropriate
agency to act on behalf of the State of Idaho for all purposes under the Act. HUD has allocated
almost $18 million in HOME funds to Idaho over the past 3 grant years.

                                Grant year     Grant amount
                                   2008        $ 5,544,297
                                   2009           6,171,896
                                   2010           6,167,417
                                  Total         $17,883,610

The intent of Idaho Housing’s HOME program is to increase the availability of safe and decent
housing for low- and very low-income families, seniors, and individuals. Idaho Housing used
HOME funds for

      New construction of affordable rental housing;
      Acquisition or rehabilitation of affordable rental housing or both;
      Direct downpayment assistance to home buyers; and
      New construction, and acquisition and rehabilitation of home-buyer properties.

The objective of our review was to determine whether Idaho Housing complied with HOME
project and cost eligibility requirements.
                               RESULTS OF AUDIT

Finding 1: Idaho Housing Did Not Always Inspect Projects for
Compliance With Property Standards
Idaho Housing did not always inspect HOME projects for compliance with applicable property
standards. This condition occurred because Idaho Housing lacked the internal controls needed to
adequately manage compliance with property standards from project application through
completion. As a result, HUD and Idaho Housing lacked assurance that more than $2.6 million
in HOME funds was used for eligible HOME activities and that the intended program benefits
were realized.


Idaho Housing did not always inspect HOME acquisition and acquisition and rehabilitation
multifamily projects for compliance with applicable property standards.

 HOME Regulations Require
 Inspections


              The HOME regulations at 24 CFR (Code of Federal Regulations) 92.251(a) state
              that grantees must ensure compliance with property standards requirements at the
              time of project completion. Housing that is constructed or rehabilitated with
              HOME funds must meet minimum building code requirements before project
              completion. Idaho Housing defined these requirements in chapter 2 of its HOME
              administrative plan and exhibit C, Written Rehabilitation Standards.

              Housing that is acquired with HOME funds must meet all applicable State and
              local housing quality standards and code requirements, and if there are no such
              standards or code requirements, the housing must meet the HUD housing quality
              standards in 24 CFR 982.401, Section 8. Idaho Housing stated in chapter 2 of its
              administrative plan that acquisition projects must meet minimum property
              standards set forth in the Section 8 program housing quality standards.

 Rehabilitation Projects Were Not
 Inspected for Compliance With
 Minimum Code Requirements


              Idaho Housing did not determine whether three multifamily acquisition and
              rehabilitation projects met HOME minimum building code requirements at the
              time of project completion. It provided more than $1 million in HOME funds for
              the acquisition of these projects. U.S. Department of Agriculture Rural
              Development grant assistance and Low Income Housing Tax Credits provided
funds for their rehabilitation. However, Idaho Housing did not inspect them for
compliance with the minimum code requirements as established in its
rehabilitation standards.

These projects were rehabilitated between 2008 and 2010. While there was some
electrical work done on the projects, not all of the electrical systems were brought
up to rehabilitation standards effective in 2008. In the units we visited, there was
no evidence of any electrical inspection or permit since the 1970s.

Idaho Housing’s rehabilitation standards state that all units must have ground
fault circuit interrupter receptacles or protection for all exterior, bath, and kitchen
sink receptacles. During our site visit, we noted that many of the electrical outlets
did not have ground fault circuit interrupter (GFI) receptacles where required.




       Kitchen outlet no GFI                   Exterior outlet no GFI or cover

These standards also state that the heating system must be in sound condition and
not present a health or safety hazard, but we noted that some of the units had
electrical baseboard heaters that were rusted and corroded.




                              Rusted baseboard heater

In addition, the rehabilitation standards specify that wood that touches the earth
must be pressure treated. We noted that the exterior of one of the projects had
wood between the vinyl siding and the ground that was not in good repair as
required by the standards and was not pressure treated wood.
                                    Exterior wood not pressure treated

           The purpose of our visits was to determine whether there were obvious
           rehabilitation standards violations, not to conduct a full inspection of the projects.
           Therefore, other violations may exist.

Acquisition Projects Were Not
Inspected for Compliance With
HUD Housing Quality Standards


           Idaho Housing did not determine whether four multifamily acquisition projects
           met minimum housing quality standards at the time of project completion. It
           provided more than $1.5 million in HOME funds for the acquisition of these
           projects but did not inspect them for compliance with HUD's housing quality
           standards. According to Idaho Housing’s 2008 administrative plan, acquisition
           projects that are not going to be rehabilitated must meet HUD's Section 8 housing
           quality standards. These standards require that the property be decent, safe, and
           sanitary. The four “Village” multifamily projects were acquired with HOME
           funds during 2008 and 2009.

           Idaho Housing’s HOME administrative plan provided for a physical needs
           assessment to be performed and all critical items to be corrected. However, the
           physical needs assessment did not include all of the elements required in a
           housing quality standards inspection and did not require an inspection of all units
           for compliance with housing quality standards. In addition, the owners did not
           always correct items identified as critical.

           The physical needs assessment for Leisure Village II included replacement of all
           windows and exterior paint within the first 2 years. However, only some of the
           windows were replaced, and the exterior trim was not painted. Excess cash that
           had been withheld at closing for these activities went to the owner. During our
           site visit, we noted that the exterior trim paint was flaking off the wood and
           several beams were splitting. Although not mentioned in the physical needs
           assessment, we also noted that one unit’s sliding glass door was difficult to open
             and had not been replaced and the threshold wood was rotting, causing a potential
             safety hazard.




                              Rotten wood under sliding glass door threshold




                    Trim paint flaking                           Beam rotting

Idaho Housing Lacked Internal
Controls for Property
Standards.


             Idaho Housing lacked the internal controls needed to ensure compliance with
             property standards from project application through completion. Its
             administrative plan put the responsibility for compliance with property standards
             on the project owner, it did not have detailed procedures for project completion,
             and the administrative plan was not always used to develop procedures for
             monitoring compliance with property standards.

             Idaho Housing’s administrative plan put the responsibility for compliance with
             property standards on the project owner. However, Idaho Housing, as the
             participating jurisdiction, was ultimately responsible for ensuring that projects
             complied with applicable property standards, and the owners did not perform the
             required inspections.
          A 2007 Portland, OR, Office of Community Planning and Development
          monitoring report issued a finding on Idaho Housing for not ensuring compliance
          with property standards. The report stated that Idaho Housing “…is responsible
          for ensuring compliance with the property standard requirements of 92.251(a)(2)
          through its own inspections …”

          The administrative plan was not always used to develop procedures for
          monitoring compliance with property standards. Idaho Housing did not have
          written procedures other than the plan for monitoring compliance with property
          standards.

HUD and Idaho Housing Lacked
Assurance That Funds Were
Used for Eligible Activities

          HUD and Idaho Housing lacked assurance that more than $2.6 million in HOME
          funds was used for eligible HOME activities and that the intended program
          benefits were realized. The tenants lived in housing that was not durable and in
          which electrical hazards existed. In addition, the projects were not always safe
          and decent.

Recommendations

          We recommend that the Director of the HUD Portland Office of Community
          Planning and Development

          1A. Require Idaho Housing to perform or procure independent inspections for
              minimum building code requirements on the acquisition and rehabilitation
              properties that received HOME funding and require the owners to make any
              repairs necessary as a result of the inspections. If repairs are not made
              within a reasonable time, Idaho Housing should be required to reimburse its
              HOME trust fund from non-Federal funds for the $1,022,898 expended on
              ineligible projects.

          1B. Require Idaho Housing to perform or procure independent inspections for
              HUD housing quality standards on the acquisition-only properties that
              received HOME funding and require the owners to make any repairs
              necessary as a result of the inspections and identified in the earlier physical
              needs assessments. If repairs are not made within a reasonable time, Idaho
              Housing should be required to reimburse its HOME trust fund from non-
              Federal funds for the $1,591,620 expended on ineligible projects.

          1C. Ensure that Idaho Housing management and staff prepare and implement
              effective written policies and procedures for compliance with HOME
     property standards requirements from initial application through project
     completion.

1D. Provide technical assistance to Idaho Housing to ensure that its management
    and staff comply with HOME regulations.
Finding 2: Idaho Housing Disbursed HOME Funds to Borrowers for
Ineligible and Unsupported Costs
Idaho Housing disbursed HOME funds to borrowers for ineligible and unsupported costs. These
payments occurred because Idaho Housing did not fully implement its cost controls.
Consequently, it spent about $58,000 on ineligible activities that would otherwise have been
available to benefit low- and very low-income families, seniors, and individuals. In addition,
neither HUD nor Idaho Housing had assurance that more than $399,000 spent on unsupported
costs was used for eligible activities.


Idaho Housing disbursed HOME funds to borrowers for ineligible and unsupported costs.

 Idaho Housing Disbursed
 Funds for Ineligible Costs


              Idaho Housing disbursed HOME funds to one borrower for an ineligible asset
              management fee. This fee was a required fee under the Low Income Housing Tax
              Credit program, which was one of the funding sources for the project. Although
              the fee was required for the program, it did not qualify as an eligible fee under the
              HOME program since it did not meet any of the cost categories under the eligible
              project costs identified in 24 CFR 92.206 through 92.209. According to 24 CFR
              92.214(a)(9), Prohibited Activities, HOME funds may not be used to pay for any
              cost that is not eligible under 24 CFR 92.206 through 92.209.

              Contrary to 24 CFR 92.504(c)(1)(i), Idaho Housing executed a written agreement
              with the borrower without completing a budget specifying the tasks that were
              eligible for HOME funding. Specific requirements include the tasks to be
              performed, a schedule for completing the tasks, and a budget. These items must
              be in sufficient detail to provide a sound basis for Idaho Housing to effectively
              ensure that HOME funds were not used for ineligible activities.


 Idaho Housing Disbursed
 Funds for Unsupported Costs

              Idaho Housing disbursed HOME funds to five borrowers for unsupported general
              requirements costs. Although these costs might have been eligible costs, the
              borrowers did not have full documentation to substantiate what activities
              specifically were considered construction general requirements. According to
              Idaho Housing’s HOME program administrative plan, all disbursement requests
              to Idaho Housing must be evidenced by full documentation in the form of bills,
              invoices, or receipts. Because there was no supporting documentation, we were
              not able to substantiate the eligibility of the draw requests. Idaho Housing
           accepted this requirement as an industry standard for contractors to include as a
           part of the contractor’s construction progress payment.


Written Agreements Did Not
Define Eligible Costs

           Idaho Housing’s written agreement with project owners did not always define the
           eligible costs that were to be paid for with HOME funds. This oversight was
           brought to Idaho Housing management’s attention in 2004 and again in 2007
           HUD monitoring reviews. HUD cited Idaho Housing for not specifying how the
           HOME funds were to be used in its written agreements. Since HOME-funded
           rental housing projects usually include development costs that are ineligible for
           HOME funding, the specific use of HOME funds needs to be identified in the
           project agreement and is a required element of written agreements.

           In addition, Idaho Housing did not require contractors to submit full
           documentation of specific costs incurred. It paid what was submitted on the Idaho
           Housing form called “Request for HOME Draw” and the borrower’s form called
           “Owner’s Draw Request,” which listed only the summary project line item costs.
           Idaho Housing should have obtained documentation to support the items listed on
           the forms to determine the eligibility of the draw requests. Although Idaho
           Housing adopted the industry practice, the industry practice was not developed to
           further prudent HOME grant management.

Idaho Housing Inappropriately
Spent Costs


           Idaho Housing inappropriately spent about $58,000 on ineligible activities that
           would otherwise have been available to benefit low- and very low-income
           families, seniors, and individuals. In addition, neither HUD nor Idaho Housing
           had assurance that more than $399,000 spent on unsupported costs was used for
           eligible activities.


 Recommendations


           We recommend that the Director of the HUD Portland Office of Community
           Planning and Development to require Idaho Housing to

                  2A. Reimburse its HOME trust fund from non-Federal funds for the
                      $58,001 expended on ineligible costs.
2B. Provide supporting documentation for the $399,327 in unsupported
     costs or reimburse its HOME trust fund from non-Federal funds for
     any costs that remain unsupported.

2C. Implement its cost controls by requiring detailed eligible costs in its
     written agreements and comparing those costs to the drawdown
     requests for eligibility.
                         SCOPE AND METHODOLOGY

Idaho Housing spent more than $19.8 million in HOME funds on 553 activities, of the activity
types shown below, from April 2008 through February 2011. We obtained this information from
HUD’s Integrated Disbursement and Information System.

                                                                        Funds
             Type                       Activity                      expended
        Single family     Acquisition and new construction            $ 771,851
        Single family     Acquisition only                               6,328,265
        Single family     New construction                                 569,118
        Multifamily       Acquisition and new construction               1,075,115
        Multifamily       Acquisition and rehabilitation                 1,022,898
        Multifamily       Acquisition only                               1,974,372
        Multifamily       New construction                               5,504,610
                          Administration and other                       2,602,353
                                                         Total        $19,848,582

To achieve our objectives, we reviewed HUD and Idaho Housing criteria and contracts, met with
HUD and Idaho Housing staff, and reviewed HUD and Idaho Housing files and other records.

We initially reviewed a statistically sampled selection of vouchers to determine whether Idaho
Housing obtained sufficient documentation to support the eligibility of costs. Based on the
voucher review, we determined that a review by project would best meet our objectives. We
selected 22 projects for project eligibility, with HOME dollars committed ranging from $35,000
to nearly $1.4 million. These projects consisted of all new construction multifamily projects that
exceeded $140,000 and all multifamily acquisition and acquisition and rehabilitation projects. In
addition, we selected all single-family new construction projects that were built in Southeast
Idaho.

For cost eligibility, we reviewed all 11 HOME multifamily new construction projects. We did
not review the other multifamily projects’ costs since we questioned them entirely based on
noncompliance with property standards.

Our review of the single-family downpayment assistance program did not disclose any findings.
See appendix D for a listing of projects selected for review and total amount drawn through
February 2011.

We obtained and reviewed project files for pertinent documentation such as project applications,
loan and regulatory agreements, HOME fund drawdowns, project physical needs assessments,
HOME project monitoring performed by Idaho Housing, and project closeout documents. We
also made site visits to all projects reviewed.

We did not rely on automated data other than to select our initial sample, and we reviewed
hardcopy documents for our analysis.
Our audit covered the period April 2008 through February 2011. We expanded the period as
needed to evaluate historical and current information pertinent to our review. We performed our
audit work onsite at Idaho Housing, 565 West Myrtle, Boise, ID, and at various project sites
throughout the State from March through July 2011. We briefed Idaho Housing management
and HUD’s Portland Office of Community Planning and Development management throughout
the audit.

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
objective(s). We believe that the evidence obtained provides a reasonable basis for our findings
and conclusions based on our audit objective.
                              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:

                     Policies and procedures for determining compliance with applicable laws
                      and regulations.

               We assessed the relevant control 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


               Based on our review, we believe that the following items are significant deficiencies:

                     Idaho Housing did not have adequate controls in place to ensure that
                      inspections were performed on projects for compliance with property
                      standards (finding 1).
   Idaho Housing did not have adequate controls in place to ensure that
    HOME funds disbursed to borrowers complied with HOME requirements
    for eligibility and support of costs (finding 2).
                                    APPENDIXES

Appendix A

                 SCHEDULE OF QUESTIONED COSTS

 Recommendation             Ineligible     Unsupported
        number                      1/              2/
             1A                             $1,022,898
             1B                             $1,591,620
             2A               $58,001
             2B                                399,327
           Total              $58,001       $3,013,845


1/   Ineligible costs are costs charged to a HUD activity that the auditor believes are not
     allowable by law; contract; or Federal, State, or local policies or regulations.

2/   Unsupported costs are those costs charged to a HUD 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.
Appendix B

                       AUDITEE COMMENTS




                     OIG Evaluation of Auditee Comments

        Evaluate each comment (as concisely as possible) referenced in the first part of
        this appendix where the comments are presented.
Appendix C

              INELIGIBLE AND UNSUPPORTED COSTS
               BY RECOMMENDATION AND PROJECT


                  Integrated Disbursement and
Recommendation          Information System             Ineligible    Unsupported
    number             number and activity               costs          costs
      1A       5153 - Clover Creek I Apartments                           558,220
      1A       5154 - Clover Creek II Apartments                          302,710
      1A       5155 - Clover Creek III Apartments                         161,968
                                            Total 1A                   $1,022,898
      1B       5158 - Freedom Village                                     270,800
      1B       5159 - Leisure Village II                                  716,330
      1B       5160 - Leisure Village VIII                                296,700
      1B       5161 - Leisure Village X                                   307,790
                                            Total 1B                   $1,591,620
      2A       5184 - Cardona Senior Apartments            $58,001
                                            Total 2A       $58,001
      2B       5184 - Cardona Senior Apartments                         $ 60,682
      2B       5935 - Kathy Reed Senior Apartments                        117,154
      2B       4766 - Lakeview Family Apartments                            9,360
      2B       5574 - Lynn Peterson Disabled Apts                         170,931
      2B       5185 - Rosslare Senior Apartments                           41,200
                                            Total 2B                   $ 399,327
                                               Total       $58,001     $3,013,845
Appendix D

                              PROJECTS REVIEWED


   IDIS*                                                                              Costs
  number                IDIS activity                            Type               committed
    5184      Cardona Senior                         New construction               $ 1,074,849
    5153      Clover Creek I                         Acquisition & rehabilitation       558,220
    5154      Clover Creek II                        Acquisition & rehabilitation       302,710
    5155      Clover Creek III                       Acquisition & rehabilitation       161,968
    5158      Freedom Village                        Acquisition only                   270,800
    5406      Green Meadows Condos                   Acquisition only                    35,000
    5935      Kathy Reed - Neider House              New construction                 1,398,039
    4766      Lakeview Family Apartments             New construction                 1,057,490
    5159      Leisure Village II                     Acquisition only                   716,330
    5160      Leisure Village VIII–Willow Creek      Acquisition only                   296,700
    5161      Leisure Village X                      Acquisition only                   307,790
    5574      Lynn Peterson - Fruitland              New construction                 1,386,325
    4940      Market Lake                            Acquisition only                   392,752
    5955      Mill River Seniors                     New construction                   440,000
    5937      PNHS Homebuyer Infill 2009             New construction                   280,000
    5677      Ponderosa Family Apartments            New construction                   300,000
    5868      River Street Senior Apartments         New construction                   515,000
    6118      Riverstone West Family Apts            New construction                   517,500
    5058      Rose Park                              New construction                   800,000
    5185      Rosslare Senior                        New construction                   900,000
   Multiple   SEICAA Homebuyer                       New construction                   960,000
    5936      Tullamore Senior Apartments            New construction                   143,164
                                    Total reviewed                                  $12,814,637
* IDIS = HUD’s Integrated Disbursement and Information System