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. 49 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). 50 Appendix C EXHIBITS SUPPORTING QUESTIONED DONATIONS FROM SELECT LENDERS 51 52 53 54
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)