oversight

The National Community Reinvestment Coalition, Washington, DC, Did Not Comply With Conflict-of-Interest Provisions in Its Fair Housing Initiative Program Agreement With HUD

Published by the Department of Housing and Urban Development, Office of Inspector General on 2011-11-14.

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

                                                                                  Issue Date
                                                                                        November 14, 2011
                                                                                  Audit Report Number
                                                                                        2012-PH-1002




TO:               Myron P. Newry, Director, Fair Housing Initiatives Program Division, Office
                  of Fair Housing and Equal Opportunity, EDPH


                  //signed//
FROM:             John P. Buck, Regional Inspector General for Audit, Philadelphia Region,
                   3AGA

SUBJECT:          The National Community Reinvestment Coalition, Washington, DC, Did Not
                   Comply With Conflict-of-Interest Provisions in Its Fair Housing Initiative
                   Program Agreement With HUD

                                              HIGHLIGHTS

    What We Audited and Why

                  We audited the National Community Reinvestment Coalition’s (grantee)
                  compliance with provisions in its Fair Housing Initiatives Program grant
                  agreement with the U. S. Department of Housing and Urban Development
                  (HUD). The audit was conducted based on a congressional request, which raised
                  questions regarding the grantee’s compliance with conflict-of-interest provisions
                  in its grant agreement with HUD. Our objective was to determine whether the
                  grantee complied with the terms and provisions of the grant agreement and HUD
                  requirements.

    What We Found

                  The grantee improperly accepted approximately $2.4 million in donations from 10
                  of 38 organizations (lenders) it tested1 under its grant within a year of the grant
1
  In 3 of the 10 cases, the donations were provided by the nonprofit arm (foundation) of the lender. However, we
refer to these foundations as lenders because the grantee’s testing of the related lenders within 1 year of accepting
donations from the foundations created apparent conflicts of interest that violate provisions in the grant agreement.
           testing period, thereby creating conflict-of-interest situations in violation of the
           grant agreement. The grantee generally completed administrative and program
           activities and tasks in accordance with its agreement; however, because it
           improperly accepted donations from lenders it tested, thereby creating conflict-of-
           interest situations, $59,800 of $230,000 in grant funds (26 percent) it spent was
           ineligible. Further, the grantee did not have procedures to verify the criminal
           records of individuals it hired to test lenders. As a result and contrary to
           requirements, it may potentially use testers with felony convictions or criminal
           records to perform program-funded activities.

What We Recommend


           We recommend that the Director of the Fair Housing Initiatives Program require
           the grantee to repay $59,800 in ineligible program grant funds expended and
           develop and implement controls to detect and avoid conflict-of-interest situations
           related to its administration of the program to prevent $338,483 in program funds
           from being used to test lenders with which it has conflicts-of-interest. The
           grantee should also implement procedures to verify and document that its testers
           are free from felony convictions and criminal records.

           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-4. Please furnish us copies of any correspondence or
           directives issued because of the audit.

Auditee’s Response


           We discussed the report with the grantee during the audit and at an exit
           conference on October 5, 2011. The grantee provided written comments to the
           draft report on October 21, 2011. The grantee generally disagreed with the audit
           findings. The complete text of the grantee’s response, along with our evaluation
           of the response, can be found in appendix B of this report.




                                            2
                            TABLE OF CONTENTS

Background and Objective                                                            4

Results of Audit
      Finding: The Grantee Did Not Comply With Conflict-of-Interest Provisions in   6
      Its Agreement With HUD

Scope and Methodology                                                               12

Internal Controls                                                                   14

Appendixes
   A. Schedule of Questioned Costs and Funds To Be Put to Better Use                15
   B. Auditee Comments and OIG’s Evaluation                                         16
   C. Exhibits Supporting Questioned Donations From Select Lenders                  51




                                            3
                      BACKGROUND AND OBJECTIVE

The U.S. Department of Housing and Urban Development’s (HUD) Fair Housing Initiatives
Program grant funds are competitively awarded to eligible organizations. Fair housing
organizations and other nonprofits that receive funding through the program assist people who
believe they have been victims of housing discrimination. Program organizations partner with
HUD to help people identify government agencies that handle complaints of housing
discrimination. They also conduct preliminary investigations of claims, including sending
“testers” to properties suspected of practicing housing discrimination. Testers are minorities and
whites with the same financial qualifications who evaluate whether housing providers treat
equally qualified people differently. The type of funding provided can include the Education and
Outreach Initiative (EOI) grant, which is for initiatives that explain to the general public and
housing providers what equal opportunity in housing means and what housing providers need to
do to comply with the Fair Housing Act. There is also the Private Enforcement Initiative (PEI)
grant, which provides funds to nonprofit fair housing organizations to carry out testing and
enforcement activities to prevent or eliminate discriminatory housing practices.

The National Community Reinvestment Coalition (grantee) is a nonprofit organization that was
incorporated in 1990 in Washington, DC. The purpose of the organization is to promote greater
access to credit by low-income, minority communities. The grantee is a national association of
more than 600 community-based organizations that promote access to basic banking services,
including credit and savings, to create and sustain affordable housing, job development, and
vibrant communities for America’s working families. The grantee is exempt from income taxes
under section 501(c)(3) of the Internal Revenue Code, and its sources of funding include
contributions, grants, and Federal awards. All contributions are considered to be available for
unrestricted use unless specifically restricted by the donor. Since 2007, the grantee has received
the following program grants:

               Fiscal year       Type of funding          Amount of grant
                  2007                EOI                   $ 100,000
                  2007                 PEI                     199,848
                  2008                 PEI                     230,000
                  2010                EOI                      232,707
                  2010                 PEI                     315,256
                  2010                 PEI                     486,601
                  2010                 PEI                     500,000
                  Total                                     $2,064,412

HUD has disbursed all of the funds related to the 2007 and 2008 program grants. Funds for the
fiscal year 2010 grants were awarded in April 2011. We reviewed the grantee’s compliance with
program grant terms and provisions and its use of funds for its most recently completed grant
period. The funds were from the 2008 PEI grant in the amount of $230,000. HUD awarded the
grant in December 2008. The grant agreement was effective on December 9, 2008, and the
period of performance was initially from February 1, 2009, through January 31, 2010. On

                                                4
August 1, 2009, the period of performance was changed to August 1, 2009, through July 31,
2010. The grantee submitted a final report to HUD in October 2010.

Our objective was to determine whether the grantee complied with the terms and provisions of
the grant agreement and HUD requirements.




                                              5
                                 RESULTS OF AUDIT

Finding: The Grantee Did Not Comply With Conflict-of-Interest
Provisions in Its Agreement With HUD
Contrary to the grant agreement, the grantee accepted approximately $2.4 million in donations
from 10 of 38 lenders it tested under its grant within a year of the grant testing period. The
grantee generally completed administrative and program activities and tasks in accordance with
its grant agreement. However, because it lacked written policies or procedures to ensure its
compliance with conflict-of-interest provisions in its grant agreement, it improperly accepted
donations from lenders it tested, thereby creating inappropriate conflict-of-interest situations. As
a result $59,800 of $230,000 (26 percent) in grant funds it spent was ineligible. Further, the
grantee did not have procedures to verify the criminal records of individuals it hired to test
lenders and may potentially use testers with felony convictions or criminal records to perform
program-funded activities. The grantee should develop and implement controls to detect and
avoid conflict-of-interest situations related to its administration of the program to prevent
$338,483 in program funds from being used to test lenders with which it has conflicts of interest.
The grantee should also implement procedures to verify and document that its testers are free
from felony convictions and criminal records.




 The Grantee Improperly
 Accepted About $2.4 Million in
 Donations

               The grantee violated conflict-of-interest provisions in its agreement because it
               improperly accepted approximately $2.4 million in donations from 10 of 38
               lenders it tested. In 3 of the 10 cases, the grantee solicited the donations from the
               lenders. Attachment B of the agreement required the grantee to certify that it
               would not solicit funds from or seek to provide fair housing, educational or other
               services or products for compensation, directly or indirectly, to any person or
               organization which had been the subject of program-funded testing by the grantee
               in the 12 months following the testing. Also, the agreement included an
               economic interests provision which stated the following:

                       “Grantee agrees that it and testers will not have an economic interest in the
                       outcome of any test, directly or indirectly, without prejudice to the right of
                       any person or entity to recover damages for any cognizable injury. The
                       Grantee nor any of its personnel, testers and the organizations conducting
                       tests, when different from the Grantee, may not (1) be a relative by
                       adoption, blood, or marriage of any party in a case, (2) have had any

                                                 6
                             employment or other affiliation, within one year before or after the test,
                             with the person or organization to be tested…”

                      In addition, the agreement required the grantee to certify to additional assurances
                      including compliance with regulations at 24 CFR (Code of Federal Regulations)
                      84.42 which prohibits participation in the selection, award, or administration of a
                      contract supported by Federal funds if a real or apparent conflict of interest would
                      be involved. Although the economic interests provision and the CFR
                      requirements were not specifically incorporated into the conflict-of-interest
                      provision, they are related to conflicts of interest because they require a separation
                      of interests between the tester and the entities tested.

                      The grant provisions and CFR requirements prohibited the grantee from soliciting
                      funds from lenders it had tested within a year after the testing; provided that the
                      grantee would not have any affiliation with lenders it tested within 1 year before
                      or after the test; and prohibited real or apparent conflicts of interest. The grantee
                      violated the requirements above because it solicited and/or accepted more than
                      $2.4 million in donations between 2009 and 2010 from 10 of 38 lenders it tested
                      within a year of the testing. The lenders were tested between January and July of
                      2010. In 3 of the 10 cases, the donations were provided by the nonprofit arm of
                      the lender. 2 The lenders generally provided the donations for the grantee’s
                      annual conferences and housing counseling grants. The lenders included
                      Citibank, JP Morgan Chase, Wells Fargo, HSBC, Regions Bank, PNC, BB&T,
                      Bank of America Foundation, Wachovia Foundation, and SunTrust Foundation.
                      We requested the grantee’s correspondence files for the 10 lenders, and the
                      grantee provided us some correspondence for 3 of the lenders (Regions Bank,
                      PNC, and BB&T). Our review of the correspondence and other records disclosed
                      that the grantee solicited donations from the lenders. The schedule below shows
                      the donations the grantee accepted from the 10 lenders between 2009 and 2010.
                      The lenders were tested between January and July of 2010.

                                    Lender or nonprofit arm             Donation
                                  Citibank                             $ 755,000
                                  Bank of America Foundation              450,000
                                  JP Morgan Chase                         400,000
                                  Wells Fargo                             400,000
                                  Wachovia Foundation                     125,000
                                  HSBC                                    100,000
                                  Regions Bank                            100,000
                                  SunTrust Foundation                      60,000
                                  PNC                                      50,000
                                  BB&T                                     20,000
                                  Total                                $2,460,000



2
    See footnote 1.
                                                        7
           The grantee’s improper acceptance of donations from the lenders above created
           conflict-of-interest situations or apparent conflicts of interest in the case of the
           nonprofit arms. Since the clear intent of the grant agreement conflict-of-interest
           provisions was to protect the integrity of the testing by requiring an arm’s length
           relationship between the grantee and the lenders it tests, its violation of the
           provisions calls into question the independence of its testing. The grantee failed
           to identify and prevent its violation of the conflict-of-interest provisions because
           it had no written policies or procedures to ensure its compliance with the
           provisions. During the audit, the grantee stated that it had a policy in place to
           address conflict-of-interest concerns and described its policies, but said that the
           policies were not in writing. Nevertheless, its policies clearly did not prevent the
           issues we identified. The grantee needs to implement policies and procedures to
           ensure that it detects and prevents conflict-of-interest situations related to its
           administration of program grants.

The Grantee Generally Met
Administrative and Program
Requirements but Incurred
$59,800 in Ineligible Costs


           The grantee generally met the administrative and program activities and tasks
           stipulated by the grant agreement and maintained adequate support for its
           program expenses. In accordance with the agreement, the grantee completed key
           tasks and activities including assigning key staff to administer the grant, drafting
           and submitting a job description for a program coordinator, preparing and
           submitting its procedures for analyzing regional housing markets, hiring and
           training testers, and performing audit or complaint-based tests in specific
           locations. The grantee also submitted a final report to HUD as required. The
           grantee’s records indicated that it incurred about $245,500 in program costs from
           August 2009 to November 2010 as follows:

                          Salaries and fringe benefits           $142,602
                          Overhead expenses                        46,583
                          Program expenses                         43,734
                          Miscellaneous expenses                   12,636
                          Total                                  $245,555

           The overhead expenses were a negotiated provisional amount. Program expenses
           included costs related to the training of testers and payments made to testers for
           testing activities. Miscellaneous expenses included costs for telephone, travel,
           printing, and consulting. We reviewed the entire amount of the salary and fringe
           benefit costs and about $3,475 in program expenses and found that the
           expenditures were adequately supported. Although the grantee generally
           completed administrative and program activities and tasks in accordance with its
           grant agreement, $59,800 of $230,000 (26 percent) in grant funds it spent was
                                             8
                 ineligible because it improperly accepted donations from 26 percent (10 of 38) of
                 the lenders it tested. As stated above, the grantee needs to implement policies and
                 procedures to ensure its compliance with conflict-of-interest provisions. By doing
                 so the grantee will prevent approximately $338,5003 in program funds from being
                 used to test lenders with which it has conflicts of interest.

    The Grantee Did Not Verify
    Testers’ Criminal Records


                 HUD regulations state that testers must not have prior felony convictions or
                 convictions of crimes involving fraud or perjury. However, the grantee did not
                 verify its testers’ criminal records. We reviewed files for 18 of 113 testers the
                 grantee trained and found that it did not have adequate documentation to show
                 that the testers did not have criminal records. Grantee staff said that prospective
                 testers completed a job application form on which they were asked whether they
                 had a criminal record and that the question was also asked during the interview
                 and training process. However, the grantee did not take other steps to verify the
                 applicants’ responses. We noted that the testers answered the question in all but 1
                 of the 18 cases reviewed. We checked the criminal records of the 18 testers and
                 found no evidence of felony or fraud- or perjury-related convictions. Although
                 we did not find evidence of inappropriate criminal backgrounds in relation to the
                 testers, the grantee needs to verify testers’ records so that it has reasonable
                 assurance that they are suitable for their job function. Grantee staff said that
                 taking steps to verify its testers’ criminal records would result in additional
                 program costs. Nevertheless, it is important for the grantee to implement
                 verification procedures to ensure that its testers are free of felony or fraud- or
                 perjury-related convictions.

    HUD Monitored the Grantee


                 HUD monitored the grantee; however, the monitoring reviews appeared to be
                 based on the administrative and program activities and tasks associated with the
                 grant agreement. We did not find any evidence that the monitoring included
                 reviews of donations to the grantee for potential conflicts of interest, individuals
                 or entities hired to perform program testing/investigations or the sufficiency of the
                 grantee’s tester background check policies. The grantee submitted quarterly
                 reports for HUD’s review. HUD also performed one onsite monitoring review
                 and did not identify or report any findings. In light of our audit findings, HUD’s
                 future monitoring of the grantee should include monitoring procedures to


3
 This amount represents 26 percent of $1,301,857 in fiscal year 2010 PEI grant funds awarded to the grantee in
April 2011.
                                                        9
             determine the grantee’s compliance with conflict-of-interest provisions and
             program regulations regarding testers’ suitability.

Conclusion


             The grantee did not comply with conflict-of-interest provisions in its grant
             agreement because it improperly accepted donations from 26 percent of the
             lenders it tested. As a result, although it generally completed administrative and
             program activities and tasks in accordance with its grant agreement, $59,800, or
             26 percent, of $230,000 in grant funds it spent was ineligible. The grantee also
             did not verify the criminal records of its testers. It needs to begin verifying
             prospective testers’ records to ensure that it does not hire unsuitable testers to
             perform program-funded activities. Finally, in accordance with the performance
             sanctions clause in the grant agreement, which provides that the grantee’s failure
             to comply with grant terms and conditions will make it liable for sanctions
             including but not limited to repayment of improperly used funds, the grantee
             should repay $59,800 in grant funds associated with its testing of lenders from
             which it improperly accepted donations. The grantee should also implement
             policies and procedures to ensure that it detects and prevents conflict-of-interest
             situations related to its administration of program grants to prevent approximately
             $338,500 in program funds from being used for ineligible purposes.

Recommendations



             We recommend that the Director of the Fair Housing Initiatives Program
             Division, Office of Fair Housing and Equal Opportunity, require the grantee to

             1A.    Repay $59,800 in grant funds it spent to test lenders from which it
                    improperly accepted donations.

             1B.    Develop and implement controls to detect and prevent conflict-of-interest
                    situations related to its administration of the program to prevent $338,483
                    in program funds from being used to test lenders with which the grantee
                    has conflicts of interest.

             1C.    Develop and implement controls to verify and document that its testers are
                    free from felony convictions and criminal records involving fraud or
                    perjury.

             We also recommend that the Director of the Fair Housing Initiatives Program



                                             10
1D.   Implement monitoring procedures to determine the grantee’s compliance
      with conflict-of-interest provisions and program regulations regarding
      testers’ suitability.




                             11
                         SCOPE AND METHODOLOGY

We conducted the audit from February through September 2011 at the grantee’s office located at
727 15th Street, NW, Washington, DC, and our office located in Philadelphia, PA. The audit
covered the period September 2007 through December 2010 but was expanded when necessary
to include other periods. We relied in part on computer-processed data in the grantee’s computer
system. Although we did not perform a detailed assessment of the reliability of the data, we did
perform a minimal level of testing and found the data to be adequate for our purposes. The
testing entailed verification of 18 expenses from the grantee’s computer-generated listing of
expense transactions.

To accomplish our objective, we reviewed

       Relevant background information.

       Applicable HUD rules, regulations, and guidance.

       The grant agreements between HUD and the grantee.

       Correspondence prepared by HUD, the grantee, and other related parties providing
       donations to the grantee.

       The grantee’s organization chart, employee listing, and personnel policies and
       procedures.

       The grantee’s quarterly reports.

       HUD monitoring reports.

       The grantee’s listing of lenders tested.

       The grantee’s listing of donations provided by various organizations from 2007 to 2010.

       The grantee’s listing of testers.

       Written policies and procedures for the testing of lenders.

       The grantee’s audited financial statements for the periods ending December 31, 2008, and
       2009.

We obtained a legal opinion from the Office of Inspector General’s (OIG) Office of General
Counsel regarding the grantee’s noncompliance with conflict-of-interest provisions in its grant
agreement. Counsel opined that the grantee engaged in conflicts of interest by accepting
donations from lenders it tested within a year of the testing and similarly allowed apparent
conflicts of interest to exist by accepting donations from the nonprofit arms of lenders it tested.
                                                  12
We reviewed records related to the three program grants the grantee received in 2007 and 2008
and conducted a detailed review of the $230,000 program grant it received in 2008. The detailed
review included the entire amount ($142,602) of the grantee’s salary and fringe benefit
expenditures allocated to the grant and about $3,475 in nonstatistically selected program
expenses. The review was to determine whether the costs were eligible and properly supported.
We also nonstatistically selected 18 of the grantee’s 113 testers by picking each fifth tester on its
listing and reviewed related files to determine whether the testers were trained and how the
grantee determined whether they had criminal records. In addition, we performed LexisNexis
database searches to research the testers’ criminal records. The LexisNexis database is an online
resource that provides information on legal and public records. We also nonstatistically selected
and reviewed a random sample of 21 of 105 test cases the grantee conducted to determine
whether it had adequate documentation to show that the tests were conducted.

We determined the ineligible costs by taking 26 percent of the grant amount ($230,000) because
most of the expenses charged to the grant were administrative or indirect (i.e. salaries, overhead,
phone, printing, consulting etc.). The 26 percent reflects the percentage of the lenders from
which the grantee improperly accepted donations. In that regard, we also determined the funds
to be put to better use by calculating 26 percent of $1,301,857 in fiscal year 2010 PEI grant funds
that were awarded to the grantee in April 2011.

We interviewed grantee staff and officials from HUD’s Office of Fair Housing and Equal
Opportunity in the Washington, DC, field office, Philadelphia Regional Office, and HUD
headquarters.

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




                                                 13
                              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, procedures, and other management controls implemented to ensure
                      that the grantee complied with grant agreement terms and administered its
                      program in accordance with HUD rules 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 Deficiency

               Based on our review, we believe that the following item is a significant deficiency:

                      The grantee lacked adequate policies and procedures to ensure its
                      compliance with conflict-of-interest provisions in its grant agreement.


                                                 14
                                   APPENDIXES

Appendix A

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


               Recommendation          Ineligible 1/      Funds to be put to
                   number                                   better use 2/
                     1A                  $59,800
                     1B                                       $338,483


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.

2/   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 instance, if the grantee implements our
     recommendation, it will prevent approximately $338,483 in program funds from being
     used to test lenders with which the grantee has conflicts of interest.




                                            15
Appendix B

        AUDITEE COMMENTS AND OIG’S EVALUATION


Ref to OIG Evaluation   Auditee Comments




Comment 1




Comment 2




                         16
Comment 3


Comments 4
and 5




Comment 6




Comment 6




             17
Comment 6




Comment 6




            18
Comment 6

Comment 6




Comment 7




            19
Comment 8




Comment 8



Comment 4



Comments 4,
9 and 10


Comment 11

Comment 2




              20
Comment 11




Comment 6



Comment 6




Comment 11




             21
Comment 11
Comment 2

Comments 4
and 11
Comment 12

Comment 11
Comment 2


Comments 2
and 13
Comment 8

Comments 2
and 11
Comments 13
and 14

Comments 4
and 9




              22
Comment 10

Comment 10




Comment 10




Comment 15




Comments 15
and 16




              23
Comment 17




             24
Comment 17


Comments 10
and 18



Comments 10
and 18

Comment 17




Comment 2
Comment 19

Comments 10
and 18




              25
Comment 19


Comments 4,
10 and 14

Comment 8




              26
27
Comment 7



Comment 11




             28
Comment 11




Comment 6




Comment 2




Comment 17




Comment 20




             29
Comments 4
and 5




             30
Comment 11




             31
32
Comment 6




            33
34
Comment 15




             35
36
37
Comment 15




             38
39
40
41
Comments 16
              and 16




               42
43
44
45
                                     OIG Evaluation of Auditee Comments

Comment 1           Our specific audit objective on this external audit was to determine whether the
                    grantee complied with the terms and provisions of the grant agreement and HUD
                    requirements. We did not audit the overall role the grantee played in the
                    mortgage lending work of the financial industry. The audit evidence showed that
                    the grantee engaged in conflicts of interest by accepting donations from lenders it
                    tested within a year of the grant testing period and similarly allowed potential
                    apparent conflicts of interest to exist by accepting donations from the nonprofit
                    arms or foundations of lenders it tested.

Comment 2           We did not audit HUD’s overall administration and monitoring of its Fair
                    Housing Initiative Program (FHIP) grants as this was not part of our specific audit
                    objective on this external audit. However, we found no evidence that the grantee
                    sought and obtained HUD approval for any policies and procedures4 to ensure its
                    compliance with the grant agreement provisions.

Comment 3           The grantee’s assertion that the audit concluded it was in full compliance with all
                    programmatic and administrative requirements of the grant agreement and
                    requirements of FHIP is incorrect. The audit concluded that the grantee generally
                    completed administrative and program activities and tasks in accordance with its
                    agreement.

Comment 4           We performed our audit work in accordance with generally accepted government
                    auditing standards, as well as our audit operations policy. The audit evidence
                    fully supports our conclusions and recommendations.

Comment 5           We conducted several interviews and requested relevant information and
                    documentation during the audit. We also considered feedback the grantee
                    provided during our October 5, 2011, exit conference, as well as its response and
                    accompanying attachments and determined that it has not provided any
                    information that changes our conclusions and recommendations. The grantee’s
                    response in its entirety along with the related attachments was incorporated into
                    the audit report.

Comment 6           As stated above, we did not audit the grantee’s overall role in the mortgage
                    lending work of the financial industry. Regardless of challenges it might have
                    had due to its administration of other Federal awards, the grantee was legally
                    required to comply with all terms and provisions of its FHIP grant agreement.

Comment 7           While we did initiate the audit in response to a congressional inquiry, the
                    grantee’s assumption or implication that the inquiry was solely related to its
                    investigations of approximately 50 financial institutions is incorrect and
                    unfounded. Its assertion that these investigations were the initial focus of our

4
    The grantee refers to such policies and procedures as it Firewall Policy.
                                                            46
              testing and that we shifted to a broader audit of its FHIP grants is also incorrect.
              As stated in our audit notification to the grantee, our audit objective was to
              determine whether it administered its grants in accordance with HUD rules and
              regulations.

Comment 8     In accordance with our audit operations policy, our reports on reviews of HUD
              grantees are addressed to the HUD officials that administer the applicable
              program(s). Accordingly, our recommendations are to those officials who in turn
              direct and work with grantees to implement the audit recommendations.

Comment 9     The factual analysis and legal interpretation of the grant’s conflict-of-interest
              provisions are valid based on the program requirements outlined in comment 10
              below. We have added additional language to the finding discussion in the report
              to further explain the grantee’s violation of the conflict-of-interest provisions in
              the grant agreement.

Comment 10 The grant agreement included a conflict-of-interest provision that required the
           grantee to certify that it would not solicit funds from any person or organization
           which had been the subject of FHIP-funded testing by the grantee in the 12
           months following the testing. Although the provision did not prohibit donations,
           the agreement included other conflict-of-interest related provisions that impact
           donations or contributions from organizations tested. The agreement included an
           economic interests clause which required that the grantee not have any
           employment or other affiliation, within 1 year before or after testing, with persons
           or organizations tested. In addition, the agreement required the grantee to certify
           to additional assurances including compliance with regulations at 24 CFR 84.42.
           Key language from those regulations states:

                      “No employee, officer, or agent shall participate in the selection, award, or
                      administration of a contract supported by Federal funds if a real or
                      apparent conflict of interest would be involved… The officer, employees,
                      and agents shall neither solicit, nor accept gratuities, favors, or anything of
                      monetary value from contractors, or parties to subagreements.”

              While the economic interests clause and the additional required certification were
              not directly incorporated into the conflict-of-interest provision, our legal opinion
              from the Counsel to the Inspector General indicated that they were related to
              conflicts of interest because they clearly require a separation of interests between
              the tester and the entities tested. Counsel opined that the clear intent of the
              requirements was to protect the integrity of testing by requiring an arm’s length
              relationship between the grantee and the lenders it tested. The grantee violated
              the requirements because it solicited and/or accepted more than $2.4 million in
              donations from the 10 lenders we identified within a year of the grant testing
              period, thereby creating inappropriate conflict-of-interest situations. The grantee
              engaged in conflicts of interest by accepting donations from seven lenders it
              tested within a year of the testing period, and similarly allowed apparent conflicts
                                                47
              of interest to exist by accepting donations from the nonprofit arms or foundations
              of three lenders it tested. We have made updates to the report as necessary to
              ensure consistent reporting of the basis for our conclusions.

Comment 11 The grantee refers to controls in relation to its administration of its FHIP grants as
           its Firewall Policy and asserts that the policy was implemented a decade ago.
           However, it provided no evidence to support this claim. At the beginning of the
           audit, in an attachment to the audit notification to the grantee, we asked that it
           provide its written policies or procedures to demonstrate its compliance with
           conflict-of-interest and economic interest provisions in its grant agreement with
           HUD. The grantee did not provide this information. In response to a May 24,
           2011, e-mail in which we asked the grantee whether it solicited monetary support
           from lenders it tested under its FHIP grants, it replied on June 10, 2011, stating
           that it did not request support of any kind from any person or entity that had been
           the subject of FHIP-funded testing for a period of 12 months after the testing, and
           that it had a firewall in place to ensure its compliance with FHIP requirements.
           However it did not provide a copy of its Firewall Policy. In a meeting with the
           grantee on September 20, 2011, it described policies it had implemented to ensure
           its compliance with FHIP requirements but stated that the policies were not in
           writing. Based on the grantee’s description of its policies, it appears that it
           erroneously believed it had sufficient controls to ensure its compliance mainly
           because it segregated duties between staff responsible for fundraising and those
           responsible for coordinating lender testing.

              Following our exit conference with the grantee on October 5, 2011, it provided us
              a copy of its Firewall Policy on October 12, 2011; therefore, it is unclear when the
              policy was established or in effect. Nevertheless we reviewed the policy and
              determined that the grantee violated its own policy, and that the policy as written
              will not fully address the issues we identified based on the criteria outlined in
              comment 10.

              Procedures 6 and 8 in the grantee’s Firewall Policy come closest to addressing the
              grantee’s violations of the requirements discussed above. Procedure 6 appears to
              be an attempt to address the conflict-of-interest provision in the grant agreement.
              However, it indicates that the grantee will only refrain from soliciting funds from
              legal entities with which it has no existing relationships within the confines of the
              12-month timeframe provided by the grant agreement. Therefore it does not
              adequately address the provision because the provision simply requires the
              grantee to refrain from soliciting any entities that it has tested for 12 months
              following the testing. Moreover, the grantee violated this procedure because it
              solicited and accepted donations from three lenders it tested within a year of the
              grant testing period. Procedure 8 appears to partially address the economic
              interests provision because it indicates that the grantee will not solicit funds from
              a legal entity until 12 months have passed following the resolution of a referral or
              complaint in relation to the entity. However, the policy will clearly not ensure a
              key requirement of the economic interests provision which is that the grantee
                                               48
              cannot have any affiliation within 1 year before or after testing with organizations
              tested. Also, neither procedure will correct the fact that the audit evidence
              showed that apparent conflicts of interest existed.

Comment 12 It is the grantee’s responsibility as a recipient of FHIP grant funds to implement
           adequate policies and procedures to ensure its compliance with grant agreement
           terms and provisions and all other applicable requirements.

Comment 13 Contrary to the grantee’s assertions, our findings are not a retroactive conclusion
           that HUD’s acceptance of the grantee’s policy for a 10-year period was incorrect.
           Rather, our conclusions are based on the grantee’s violation of provisions in its
           FHIP agreement relating to conflicts of interest as discussed in the report and
           further explained in comment 10. Also, as discussed in comment 11 the grantee’s
           policy as written will not fully address the issues we identified based on the
           relevant criteria.

Comment 14 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. Such costs must be repaid to HUD. The
           grantee must repay $59,800 or 26 percent of $230,000 in grant funds it spent
           because it improperly accepted donations from 26 percent (10 of 38) of the
           lenders it tested.

Comment 15 As discussed in the report, the grantee improperly accepted approximately $2.4
           million in donations from 10 of 38 lenders it tested under its grant within a year of
           the grant testing period. Our review of the grantee’s records disclosed that it
           solicited funds from 3 of the 10 lenders within a year after testing. The three
           lenders were Regions Bank, BB&T and PNC. The grantee tested Regions Bank
           on January 19 and 22, 2010. On February 17, 2010, it invoiced the lender for a
           contribution to its 2010 annual conference. Also, the grantee tested BB&T on
           January 19, 2010, and invoiced the lender for a contribution to its 2010 annual
           conference on January 20, 2010. In the case of PNC, the grantee invoiced the
           lender for a contribution on April 22, 2010, which fell within a year of the grant
           testing period. The grantee’s invoices constitute solicitations of the lenders
           because the invoices were basically requests for payment. The grantee asserts
           that the invoices were to establish or reflect an obligation to pay. However, based
           on the grant agreement provisions, the grantee should not have been seeking to
           establish any obligations for lenders to pay within a year of the test period related
           to the lenders.

Comment 16 Although the grantee stated that it attached documentation for PNC Foundation,
           Regions Bank and BB&T, it actually attached documentation for BB&T
           (attachment B), Regions Bank (attachment C) and SunTrust Foundation
           (attachment D). Therefore, we do not comment on attachment D in regard to the
           solicitation issue because we did not identify SunTrust Foundation as one of the
           lenders we considered to have been improperly solicited.
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Comment 17 We understand that foundations are separate legal entities, and that the grantee did
           not test the foundations. However, the grantee’s acceptance of donations or
           contributions from foundations of lenders it tested within a year of the grant
           testing period creates apparent conflict-of-interest situations which violate CFR
           requirements incorporated into the grant agreement. Our conclusion is supported
           by a legal opinion from OIG Counsel. Also, the legal opinion actually referred to
           the foundations as “nonprofit arms” therefore, we have updated the report to
           ensure consistency with the language from the legal opinion.

              Although the grantee asserts that the group of 10 lenders we identified includes 5
              foundations (BOA- Bank of America, JP Morgan Chase, PNC, SunTrust and
              Wachovia), we identified three foundations (Bank of America, SunTrust and
              Wachovia) based on the audit evidence. The audit documentation showed that
              donations from JP Morgan Chase and PNC were provided by the lenders and not
              the related foundations. We added appendix C to show the documentation we
              reviewed.

Comment 18 Our conclusion that the grantee violated conflict-of-interest provisions is based
           not only on its violation of the conflict-of-interest provision in the grant
           agreement but also on other related provisions as outlined in comment 10. We
           have updated the finding discussion in the report to explain how the other
           provisions relate to conflicts of interest.

Comment 19 We are encouraged that the grantee plans to budget for full background checks for
           its FHIP testers going forward.

Comment 20 The contribution referenced by the grantee is not included in the donations we
           questioned. As stated in comment 17, the donations we questioned in relation to
           JP Morgan Chase were provided by the lender and not the foundation (see
           appendix C).




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Appendix C

 EXHIBITS SUPPORTING QUESTIONED DONATIONS FROM
                 SELECT LENDERS




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