oversight

The Michigan State Housing Development Authority, Lansing, MI, Did Not Follow HUD's Requirements Regarding the Administration of Its Program

Published by the Department of Housing and Urban Development, Office of Inspector General on 2013-09-30.

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

OFFICE OF AUDIT
REGION 5
CHICAGO, IL




    Michigan State Housing Development Authority
                    Lansing, MI

     Multifamily Project-Based Section 8 Program




2013-CH-1011                            SEPTEMBER 30, 2013
                                                        Issue Date: September 30, 2013

                                                        Audit Report Number: 2013-CH-1011




TO:            Barbara Chiapella, Director of Multifamily Housing Hub, 5FHMLA

               //signed//
FROM:          Kelly Anderson, Regional Inspector General for Audit, 5AGA

SUBJECT:       The Michigan State Housing Development Authority, Lansing, MI, Did Not
               Follow HUD’s Requirements Regarding the Administration of Its Program


    Attached is the U.S. Department of Housing and Urban Development (HUD), Office of
Inspector General (OIG), final audit report of our audit of the Michigan State Housing
Development Authority’s multifamily project-based Section 8 program for new-regulation
projects.

    HUD Handbook 2000.06, REV-4, sets specific timeframes for management decisions on
recommended corrective actions. For each recommendation without a management decision,
please respond and provide status reports in accordance with the HUD Handbook. Please furnish
us copies of any correspondence or directives issued because of the audit.

    The Inspector General Act, Title 5 United States Code, section 8M, requires that OIG post its
publicly available reports on the OIG Web site. Accordingly, this report will be posted at
http://www.hudoig.gov.

   If you have any questions or comments about this report, please do not hesitate to call me at
(312) 353-7832.




                                                 
                                            September 30, 2013
                                            The Michigan State Housing Development Authority,
                                            Lansing, MI, Did Not Follow HUD’s Requirements
                                            Regarding the Administration of Its Program



Highlights
Audit Report 2013-CH-1011


 What We Audited and Why                     What We Found

We audited the Michigan State Housing       The Authority did not comply with HUD’s
Development Authority’s multifamily         requirements regarding the administration of its
project-based Section 8 program for         multifamily project-based Section 8 program for new-
new-regulation projects as part of the      regulation projects. Specifically, it failed to use
activities in our fiscal year 2013 annual   program residual receipts to reduce or offset housing
audit plan. We selected the Authority       assistance payments for new-regulation projects. As a
based on a referral from U.S.               result, nearly $31.6 million in unused or excess project
Department of Housing and Urban             funds was not available for HUD to offset future
Development (HUD) management. Our           subsidy expenditures.
objective was to determine whether the
Authority administered its program in       The Authority did not remit unused or excess funds
accordance with HUD’s requirements.         upon termination of the housing assistance payments
                                            contracts for three new-regulation projects. As a
 What We Recommend                          result, more than $1.2 million in unused or excess
                                            project funds was not available for HUD to achieve
                                            program savings.
We recommend that the Director of
HUD’s Detroit Office of Multifamily         The Authority inappropriately disbursed replacement
Housing Programs require the Authority      reserves for four projects. As a result, more than
to (1) ensure that program residual         $290,000 was not available to benefit its multifamily
receipts of nearly $31.6 million are used   projects. Further, its projects lost more than $175,000
instead of seeking unnecessary housing      in interest income.
subsidies; (2) reimburse HUD and the
U.S. Treasury more than $1.2 million
for the projects with terminated
program contracts; (3) reimburse its
project’s escrow accounts more than
$465,000 for the inappropriate
disbursements of replacement reserves;
and (4) implement adequate controls to
address the findings cited in this audit
report.




                                                   
                           TABLE OF CONTENTS

Background and Objective                                                            3

Results of Audit

      Finding 1: The Authority Did Not Use Residual Receipts To Reduce or Offset
                 Housing Assistance Payments                                       5

      Finding 2: The Authority Did Not Remit Excess Project Funds to HUD            9

      Finding 3: The Authority Inappropriately Disbursed Replacement
                 Reserves                                                          12

Scope and Methodology                                                              14

Internal Controls                                                                  17

Appendixes
A.    Schedule of Questioned Costs and Funds To Be Put to Better Use               19
B.    Auditee Comments and OIG’s Evaluation                                        20
C.    Federal and the Authority’s Requirements                                     44
D.    Program Residual Receipts Available for Reduction or
      Offset of Housing Assistance Payments as of May 31, 2013                     47




                                            2
                           BACKGROUND AND OBJECTIVE

The Michigan State Housing Development Authority was established in 1966 under the laws of
the State of Michigan to provide decent, safe, and sanitary housing. The Authority is governed
by an eight-member board consisting of the State’s treasurer, the director of the State’s
Department of Human Services, and the director of the State’s Department of Transportation.
The board includes five other members appointed to 4-year terms by the State’s governor and
confirmed by the State senate. The board’s responsibilities include overseeing the administration
of the Authority and approving policies. The board appoints the Authority’s executive director.
The executive director is responsible for ensuring that policies are followed and providing
oversight of the Authority’s programs.

The Authority is the housing finance agency for the State of Michigan, acting as the contract
administrator for 541 properties. The Authority administered 402 contracts as performance-based
contract administrator and 139 contracts as traditional contract administrator. As the contract
administrator, the Authority acts under an annual contributions contract with the U.S. Department of
Housing and Urban Development (HUD) to administer Section 8 funding to assisted project owners
to ensure that Section 8 subsidies fund only necessary and reasonable project operating expenses
and otherwise comply with applicable program requirements.

Under its traditional contract administrator portfolio, the Authority administered contracts for 139
projects, of which 41 were subject to the multifamily project-based Section 8 program’s new
regulations, effective February 29, 1980. Under HUD’s Part 883 requirements, the Authority issued
mortgage loans for new construction multifamily projects, as a housing finance agency. Generally,
mortgages issued in the 1970s and 1980s carried a term of 30 years. As of May 31, 2013, of the 41
new-regulation contracts, 1 contract had been split into 2 new-regulation contracts, and 3 contracts
had been terminated. Therefore, 371 (41 – 1 – 3) contracts remained current as of May 31, 2013.

During the period January 1, 2010, through December 31, 2012, the Authority received more than
$106 million in housing assistance payments for the new-regulation projects2 in its housing finance
agency and traditional contract administrator portfolio.

The program’s new regulations, effective February 29, 1980, require that project funds be used
for the benefit of the project, to make mortgage payments, to pay operating expenses, to make
required deposits to the replacement reserve, and to provide limited distribution income to the
owner. As determined by the Authority, any remaining funds must be deposited with the
Authority, other lender, or other Authority-approved depository in an interest-bearing account.
This account is generally known as the residual receipt escrow. The Authority, however, refers

1
  To avoid double counting, we removed the original contract from our count.
2
  HUD identifies projects that entered into housing assistance payments contract, version 8-80 on or after February
29, 1980, as new-regulation projects. For new-regulation projects, HUD requires that excess project funds be used
to reduce or offset housing assistance payments. Projects that entered into housing assistance payments contract,
version 11-75, or were effective before February 29, 1980 are identified as old-regulation projects. HUD’s
requirement for the reduction or offsetting of housing assistance payments does not apply to old-regulation projects.

                                                          3
to it as operating reserve cash. In other words, program residual receipts are generated as a result
of projects having excess project funds under the program’s new regulations. Further, upon
termination of the program housing assistance payments contracts, excess project funds must be
remitted to HUD.

On August 3, 2012, HUD issued Housing Notice H-2012-14. The notice required that the
program residual receipts of new-regulation projects in excess of $250 per revenue-generating3
unit be applied monthly to reduce or offset housing assistance payments up to the full amount of
the monthly subsidy request, depending upon the amount of residual receipts available. The
notice applied to all multifamily project-based Section 8 projects subject to the program’s new
regulations, which included all of the 41 projects administered by the Authority under its housing
finance agency and traditional contract administrator portfolio.

Our objective was to determine whether the Authority administered its program for new-
regulation projects in accordance with HUD’s requirements. Specifically, we wanted to
determine whether the Authority (1) applied program residual receipts to reduce or offset
housing assistance payments for new-regulation projects, (2) remitted excess or unused project
funds to HUD upon termination of new-regulation contracts, and (3) appropriately maintained
escrows for new-regulation projects.




3
  HUD’s clarifications of Housing Notice H-2012-14, dated October 2, 2012, clarified the number of units included
in the notice as revenue-generating units.
                                                        4


                                                          
                                       RESULTS OF AUDIT


Finding 1: The Authority Did Not Use Residual Receipts To Reduce or
Offset Housing Assistance Payments
The Authority did not use more than $31.1 million in residual receipts to reduce or offset
housing assistance for new-regulation projects. It also inappropriately disbursed residual receipts
totaling nearly $429,000 to six project owners. These weaknesses occurred because the
Authority failed to comply with HUD’s requirements due to its lack of understanding of Federal
requirements regarding its role in administering the program. As a result, nearly $31.6 million in
unused or excess project funds was not available for HUD to offset future subsidy payments.


    Residual Receipts Were Not
    Used To Reduce or Offset
    Housing Assistance Payments

                   During the period November 2012 through May 2013, 17 of the 37 new-
                   regulation projects maintained an average balance of more than $31 million in
                   residual receipts. However, contrary to HUD’s requirements,4 the Authority
                   inappropriately received more than $4.6 million in housing assistance for the
                   projects instead of using the residual receipts that were available to reduce or
                   offset housing assistance payments (see appendix D).

                   Further, contrary to HUD’s requirements,5 the Authority inappropriately
                   disbursed $428,804 of residual receipts, in excess of the required retained balance
                   of $250 per revenue-generating unit, to six new-regulation projects instead of
                   reducing or offsetting housing assistance (see appendix D). Therefore, had the
                   Authority complied with HUD’s requirements, these residual receipts would not
                   have been available for disbursement.

    The Authority Lacked an
    Understanding of Federal
    Requirements

                   The Authority did not apply residual receipts to reduce or offset housing
                   assistance payments for new-regulation projects because it lacked an
                   understanding of HUD’s requirements regarding its role as the program


4
    Housing Notice H-2012-14, section V.C.
5
    Housing Notice H-2012-14, sections V.C. and V.A.
                                                       5


                                                        
                  administrator. According to the Authority, HUD’s requirements6 did not apply
                  because the Authority is a housing finance agency. Therefore, in accordance with
                  24 CFR (Code of Federal Regulations) 883.306(e), the Authority, not HUD,
                  determines whether surplus project funds (residual receipts) may be used to (1)
                  reduce or offset housing assistance payments or (2) for other project purposes.

                  On October 23, 2012, HUD issued a letter to the Authority regarding its notice.
                  The letter stated that the Authority’s interpretation that it had the ability to
                  determine whether funds should be offset lacked merit. Further, the letter stated
                  that while HUD’s requirements7 provided the Authority with some degree of
                  control over the residual receipts account by allowing it to (1) determine that
                  surplus project funds exist, (2) require that such excess funds be deposited in a
                  separate account, and (3) make withdrawals subject to the Authority’s approval,
                  both regulatory and contract provisions were clear that these funds must
                  ultimately be remitted to HUD. That is, the funds belong neither to the Authority
                  nor the project owner but, rather, to HUD. HUD acknowledged that neither the
                  regulatory provision nor the corresponding contract provision explicitly state that
                  the determination to use residual receipts to reduce housing assistance payments
                  rests with HUD, as opposed to the Authority.

                  However, any such determination is by nature a decision that is related to the
                  funding of the rental assistance payments that flow from HUD through the
                  contract to the Authority, as the contract administrator, and ultimately to the
                  owner. Therefore, HUD is entitled to determine that residual receipts must be
                  used to reduce or offset housing assistance payments.

                  In December 2012, the Authority completed a cash-flow analysis for 15 projects
                  with available residual receipts. According to its analysis, the residual receipts for
                  seven projects should have been used to reduce or offset housing assistance.
                  However, for the remaining nine8 projects, it projected a cash-flow shortage
                  generally due to an allowance for future owners’ limited distribution income.
                  According to HUD’s requirements,9 owner’s limited distribution is calculated
                  annually based on project operations after all project expenses and replacement
                  reserves have been paid. Therefore, the Authority could not retain current
                  residual receipts to provide future income to project owners.

                  As a result of our audit, in June 2013, the Authority revised its cash-flow analysis
                  and schedule of available residual receipts. However, in reviewing the
                  documentation, we determined that the Authority’s analysis still contained errors.
                  For example, the revised schedule projected a cash-flow shortage for four projects

6
  Housing Notice H-2012-14, section V.C.
7
  24 CFR 883.306(e) and section 2.6(c)(1) of the contract, form HUD-52645A (8-80)
8
  One project is listed on the Authority’s analysis as having a cash flow shortage and as having funds available to
offset.
9
  24 CFR (Code of Federal Regulations) 883.306(b)
                                                          6


                                                            
                  due to accumulated unpaid owners’ income. However, based on our review, only
                  two of the four project owners did not receive income due to a shortage in the
                  projects’ cash flows. For the remaining two projects, although the projects had
                  surplus cash, the owners chose not to receive income. According to HUD’s
                  regulations,10 residual receipts may be used to pay unpaid owners’ income that
                  resulted from a cash-flow shortage. Therefore, the Authority could not use
                  residual receipts to provide for cumulative unpaid owners’ income for these three
                  projects.

                  In June 2013, although the Authority disagreed with HUD’s interpretation of the
                  notice, it began to reduce or offset housing assistance payments for 5 projects,
                  which it determined had surplus project funds. Further, the Authority requested to
                  use the residual receipts of two projects (contract numbers MI33H150039 and
                  MI28H150181) to pay refinancing costs and reestablish the escrow accounts.
                  However, in a letter, dated February 21, 2013, HUD denied the Authority’s
                  request to use project funds, including residual receipts, to refinance the
                  Authority-held mortgages because it was not an eligible use of the residual
                  receipts.

     Conclusion

                  The Authority did not comply with HUD’s regulations for reducing or offsetting
                  housing assistance payments because it lacked an understanding of Federal
                  requirements regarding its role in administering the program. The Authority
                  entered into an annual contributions contract with HUD for all new-regulation
                  projects and agreed to all of the contract terms, including the requirement to
                  ensure that all of HUD’s requirements would be followed. Therefore, HUD’s
                  regulations11 requiring the reduction or offset of housing assistance payments
                  beginning in November 2012 would be applicable. Based on our review, as of
                  May 31, 2013, 15 of the 1712 new-regulation projects had program residual
                  receipts totaling more than $31.1 million available to reduce or offset housing
                  payments. As a result, unused or excess project funds were not available for
                  HUD to offset future subsidy payments.

                  Appendix D of this report details the program residual receipts available for
                  reduction or offset of housing assistance payments as of May 31, 2013, for the 15
                  new-regulation projects.

     Recommendations

10
   24 CFR 883.306(d)
11
   Housing Notice H-2012-14
12
   During our review, 17 projects had residual receipts balances available for offsetting. However, the Authority
released residual receipts for two projects (contract numbers MI28H150202 and MI28H150206); therefore, as of
May 31, 2013, only 15 projects had residual receipts available to reduce or offset housing assistance payments.
                                                         7


                                                           
We recommend that the Director of HUD’s Detroit Office of Multifamily
Housing Programs require the Authority to

 1A. Ensure that $31,148,477 in residual receipts for the 15 projects as of May
     31, 2013, is used to reduce or offset housing assistance payments in
     accordance with HUD’s requirements.

 1B. Reimburse the appropriate escrow accounts from non-Federal funds
     $428,804 in residual receipts, above the required retained balances,
     disbursed to the six projects, or support that these funds were not required
     to reduce or offset housing assistance payments.

 1C. Implement adequate written policies, procedures, and controls to ensure
     that residual receipts for new-regulation projects are treated in accordance
     with HUD’s requirements. Such procedures and controls should include
     but not be limited to (1) providing training to its staff and (2) periodically
     monitoring the projects’ residual receipts accounts to ensure that
     unnecessary housing assistance payments are not received.

 We recommend that the Director of HUD’s Detroit Office of Multifamily
      Housing Programs to

 1D. Review the Authority’s methodology for determining surplus project
     funds to ensure compliance with HUD’s requirements.




                                 8


                                  
Finding 2: The Authority Did Not Remit Excess Project Funds to HUD
The Authority did not remit unused or excess project funds to HUD for three new-regulation
projects with terminated program contracts. This weakness occurred because the Authority (1)
lacked adequate procedures and controls and (2) its staff lacked a sufficient understanding of
HUD’s requirements. As a result, more than $1.2 million in unused or excess project funds was
not available to HUD to achieve program savings. In addition, the Authority’s failure to remit
unused or excess project funds caused the U.S. Treasury to lose nearly $13,000 in interest.


     The Authority Did Not Remit
     Excess Project Funds to HUD

                    According to HUD’s regulations,13 upon termination of the program contract, any
                    unused or excess project funds must be remitted to HUD. However, based on our
                    review of the three projects, the Authority did not ensure that unused or excess
                    funds totaling more than $1.2 million were remitted to HUD.

                    Project Funds Transferred to Preservation Fund

                    For contract number MI28H150160, the project had unused or excess project
                    funds totaling $114,164 when its program contract terminated on August 31,
                    2007. The Authority paid project expenses totaling $35,155, and the project
                    earned $4,313 in interest between September 2007 and July 2008, thus reducing
                    the amount of excess project funds to $83,322 ($114,164 – $35,155 + $4,313).
                    Instead of remitting the funds to HUD, the Authority inappropriately transferred
                    $77,830 to its preservation fund 14 and maintained $5,492 ($83,322 – $77,830) in
                    the project’s residual receipts account. According to a letter from HUD, dated
                    December 11, 2008, the Authority was required to remit all excess project funds
                    to HUD in accordance with its housing assistance payments contract. In
                    November 2010, in response to HUD’s request, the Authority remitted residual
                    receipts totaling $6,465 ($5,492 from residual receipts + $973 interest earned),
                    however, the Authority excluded $26 in interest earned during November 2010.
                    Therefore, as of August 31, 2013, the Authority had failed to remit the project
                    funds totaling $77,856 ($77,830 that was transferred to the preservation fund +
                    $26 that was transferred to the interest account).

                    Project Funds Maintained in Escrow

                             For terminated contract numbers MI33H150050 and MI28H150191, the
                              projects had unused or excess funds totaling $436,759 and $698,671,

13
     24 CFR 883.306(e)
14
     An internally created fund that is not associated with the program.
                                                             9


                                                              
                         respectively. However, the Authority failed to remit the funds to HUD as
                         required. 15 For example, the project associated with contract number
                         MI28H150191 went into foreclosure in January 2012, and the Authority
                         terminated its program contract on December 31, 2012. However, the
                         Authority had failed to remit $698,671 ($604,949 in replacement reserves
                         + $93,722 in unused or excess funds) in its escrow accounts as of May 31,
                         2013. According to the Authority, its loan agreement with the owner
                         allowed the replacement reserves to be applied to the defaulted mortgage.
                         However, HUD did not waive the requirement for the Authority to remit
                         unused or excess project funds.

                  The following table shows the contract numbers, contract termination dates, funds
                  remitted and not remitted to HUD for the three new-regulation projects with
                  terminated program contracts, and lost interest.

                                                          Funds           Funds not    Amount of
                       Contract            Contract       remitted       remitted to    interest
                       number          termination date   to HUD              HUD16      lost17
                      MI28H150160       August 31, 2007   $6,465             $77,856       $7,774
                      MI33H150050      February 28, 2013       0             436,759        1,391
                      MI28H150191      December 31, 2012       0             698,671        3,665
                                                   Totals $6,465          $1,213,286      $12,830


     The Authority Lacked
     Adequate Procedures and
     Controls

                  The Authority did not remit excess or unused project funds to HUD for
                  terminated program contracts because (1) it lacked adequate procedures and
                  controls and (2) its staff lacked a sufficient understanding of HUD’s requirements.
                  For instance, for contract number MI28H150160, the Authority believed that
                  since it had remitted the project’s residual receipts as of November 2010, the
                  funds that were previously transferred to the preservation fund were not required
                  to be remitted to HUD. Additionally the Authority’s loan agreements for new-
                  regulation projects allowed for the absorption of the replacement reserves upon
                  mortgage default. Therefore, the Authority believed that it did not have to remit
                  the funds to HUD for contract number MI28H150191.



     Conclusion

15
   24 CFR 883.306(e)
16
   As of May 31, 2013
17
   See scope and methodology
                                                  10


                                                    
          The Authority did not remit excess or unused project funds to HUD for
          terminated program contracts because (1) it lacked adequate procedures and
          controls and (2) its staff lacked a sufficient understanding of HUD’s requirements.
          As a result, more than $1.2 million in unused or excess project funds was not
          available to HUD to achieve program savings. In addition, the Authority’s failure
          to remit unused or excess project funds caused the U.S. Treasury to lose nearly
          $13,000 in interest as of May 31, 2013.

Recommendations

          We recommend that the Director of HUD’s Detroit Office of Multifamily
          Housing Programs require the Authority to

           2A. Reimburse the U.S. Treasury $608,337 ($77,856+ 436,759 + $93,722) for
               the three projects with terminated program contracts.

           2B. Obtain approval from HUD to apply the project’s replacement reserves to
               the defaulted mortgage for contract number MI28H150191 or reimburse
               the U.S. Treasury $604,949.

           2C. Reimburse the U.S. Treasury $12,830 from non-Federal funds for the lost
               interest.

           2D. Implement adequate procedures and controls, including but not limited to
               providing training to staff, to ensure that unused or excess project funds
               are remitted to HUD when the contracts for new-regulation projects
               terminate.

           2E. Ensure that loan agreements for new-regulation projects comply with
               HUD’s regulations.




                                          11


                                            
Finding 3: The Authority Inappropriately Disbursed Replacement
Reserves
The Authority inappropriately disbursed replacement reserves for project owners’ limited
distribution income after maturity of the Authority-held mortgages. This condition occurred
because the Authority lacked adequate procedures and controls to ensure that it complied with
HUD’s and its own requirements regarding the maintenance of project funds. As a result, HUD
lacked assurance that funds totaling more than $290,000 were available to benefit the projects,
and the projects lost more than $175,000 in interest.


     The Authority Inappropriately
     Disbursed Replacement Reserves

                   The Authority inappropriately disbursed $290,437 of replacement reserves18 for 4
                   of the 22 (18 percent) projects under program contracts as owners’ income or due
                   to changes in ownership. According to HUD’s and the Authority’s
                   requirements,19 replacement reserves must be maintained to fund extraordinary
                   maintenance and repair and replace capital items. Further, according to HUD’s
                   regulations,20 upon termination of the program contract, any excess project funds
                   must be remitted to HUD. We reviewed the Authority’s capital needs
                   assessments for the four projects and determined that the balance in each project’s
                   replacement reserve was not sufficient to meet the Authority’s requirements.
                   Therefore, the reserves should not have been disbursed to the projects’ owners.

                   The Authority’s noncompliance occurred because it lacked adequate procedures
                   and controls to ensure that it complied with HUD’s and its own requirements
                   regarding the maintenance of project funds. The table below identifies the
                   contract numbers, mortgage payoff dates, amount of replacement reserves
                   required by the Authority’s capital needs assessment, the balance in replacement
                   reserves that was inappropriately disbursed to owners, and lost interest.




18
   Replacement reserves are required to be established by the program contract to defray the cost of the replacement of major
depreciable items.
19
   24 CFR 880.602(a) and Authority's reserve for replacement policy revised April 2013.
20
   24 CFR 883.306(e)
                                                               12


                                                                 
                                                                    Replacement
                                                   Replacement        reserves       Amount of
             Contract        Mortgage payoff         reserves     inappropriately     interest
             number                date             required         disbursed         lost21
           MI33H150072            June 19, 2003        $189,284           $154,589     $121,553
           MI28H150209       November 30, 2006          494,318             89,427       30,747
           MI33H150074         January 18, 2006         158,593             43,917        22,353
           MI33H150080             April 1, 2006        177,569              2,504           781
                                          Totals     $1,019,764           $290,437     $175,434


     Recommendations

                   We recommend that the Director of HUD’s Detroit Office of Multifamily
                   Housing Programs require the Authority to

                     3A. Reimburse $290,437 to the appropriate project escrows from non-Federal
                         funds for the inappropriate disbursement of replacement reserves.

                     3B. Reimburse appropriate escrow accounts $175,434 from non-Federal funds
                         for the lost interest cited in this finding.

                     3C. Implement adequate quality control procedures to ensure that escrow
                         accounts are maintained appropriately upon maturity of the Authority-held
                         mortgages for new-regulation projects.

                   We recommend that the Director of HUD’s Detroit Office of Multifamily
                   Housing Programs

                     3D. Review the Authority’s escrow maintenance to ensure that escrow funds
                         were not disbursed inappropriately for the remaining 6 (28 – 22) new-
                         regulation projects with matured Authority-held mortgages between
                         October 2002 and December 2012. If deficiencies are noted, HUD should
                         ensure that the Authority appropriately reimburses the deficient project
                         escrows from non-Federal funds.




21
     See scope and methodology
                                                     13


                                                       
                         SCOPE AND METHODOLOGY

We performed onsite audit work between November 2012 and June 2013 at the Authority’s
offices located at 735 East Michigan Avenue, Lansing, MI. The audit covered the period
January 1, 2010, through September 30, 2012, but was adjusted as determined necessary.

To accomplish our objective, we reviewed

               Applicable laws; regulations; HUD’s program requirements at 24 CFR Parts 880
                and 883; Housing Notice H-2012-14; HUD Handbook 4350.1, REV-1; HUD
                Handbook 4370.2, REV-1; and legal opinions issued by HUD’s and the HUD Office
                of Inspector General’s (OIG) Offices of General Counsel.

               The Authority’s accounting records; annual audited financial statements for 2009,
                2010, and 2011; computerized databases; policies and procedures; board meeting
                minutes for January 2010 through September 2012; organizational chart; annual
                audited financial statements for new-regulation projects; capital needs assessment
                for new-regulation projects; and program assistance payments contracts and
                annual contributions contracts for all new-regulation projects.

               HUD’s files for the Authority, program assistance payments contracts, and annual
                contributions contracts for all new-regulation projects.

We also interviewed the Authority’s employees, property managers, and HUD staff.

Our review was limited to the information such as activity statements provided by (1) the
Authority and (2) housing payments and project records maintained in the following HUD
systems:

      Tenant Rental Assistance Certification,
      Integrated Real Estate Management, and
      Line of Credit Control System.

Finding 1

We reviewed the Authority’s vouchering and receipt of housing assistance payments for all 37
projects under a current new-regulation contract for the period November 2012 through May
2013.

We also reviewed the Authority’s treatment of program residual receipts for the period
November 2012 through May 2013 for all 37 projects under a current new-regulation contract.



                                                14


                                                  
The purpose of our review was to determine whether the Authority applied the program residual
receipts for all new-regulation projects in accordance with HUD’s requirements.22

Finding 2

We also reviewed all of the 41 new-regulation projects administered by the Authority and
determined that one project’s contract had been split into two new-regulation contracts and three
projects’ new-regulation contracts had been terminated as of May 31, 2013. We reviewed the
activity statements for all three projects to determine whether funds were appropriately remitted
to HUD upon the termination of the projects’ program contracts.

We reviewed the Authority’s management of escrow funds for the three projects with terminated
program contracts as of May 31, 2013.

We calculated interest using the U.S. Treasury’s 10 –year interest rate, compounded daily, from
the date the inappropriately maintained escrow funds should have been remitted to HUD through
May 31, 2013.

Finding 3

We also reviewed all of the 41 new-regulation projects administered by the Authority and
determined that one project’s contract had been split into two new-regulation contracts and three
projects’ new-regulation contracts had been terminated as of May 31, 2013. We determined that
37 (41 – 1 – 3) projects’ contracts were current as of May 31, 2013. Of the 37 projects having a
current contract, 28 project owners had paid off their initial Authority-held mortgage loan
between October 2002 and December 2012. We judgmentally selected 22 of the 28 (79 percent)
projects to review the Authority’s management of project escrow funds.

We calculated interest, using the rate (compounded daily) provided by the Authority, that each
individual project should have earned from the date of the inappropriate disbursement from
replacement reserves through May 31, 2013.

We relied in part on data maintained by the Authority in its systems. Although we did not
perform a detailed assessment of the reliability of the data, we performed a minimal level of
testing and found the data to be adequately reliable for our purposes. Specifically, we confirmed
that the monthly loan statements provided by the Authority matched the monthly loan statements
we independently obtained from three projects. In addition, we independently determined the
number of new-regulation projects administered by the Authority using HUD’s system and the
original housing assistance payments contracts. We provided our review results and supporting
schedules to the Director of HUD’s Detroit Office of Multifamily Housing Programs and the
Authority’s executive director during the audit.



22
     Housing Notice H-2012-14, section V.C.
                                               15


                                                 
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.




                                              16


                                                
                              INTERNAL CONTROLS

Internal control is a process adopted by those charged with governance and management,
designed to provide reasonable assurance about the achievement of the organization’s mission,
goals, and objectives with regard to

      Effectiveness and efficiency of operations,
      Reliability of financial reporting, and
      Compliance with applicable laws and regulations.

Internal controls comprise the plans, policies, methods, and procedures used to meet the
organization’s mission, goals, and objectives. Internal controls include the processes and
procedures for planning, organizing, directing, and controlling program operations as well as the
systems for measuring, reporting, and monitoring program performance.


 Relevant Internal Controls

               We determined that the following internal controls were relevant to our audit
               objective:

                     Effectiveness and efficiency of operations – Policies and procedures that
                      management has implemented to reasonably ensure that a program meets
                      its objectives.

                     Reliability of financial reporting – Policies and procedures that
                      management has implemented to reasonably ensure that valid and reliable
                      data are obtained, maintained, and fairly disclosed in reports.

                     Compliance with applicable laws and regulations – Policies and
                      procedures that management has implemented to reasonably ensure that
                      resource use is consistent with laws and regulations.

               We assessed the relevant controls identified above.

               A deficiency in internal control exists when the design or operation of a control does
               not allow management or employees, in the normal course of performing their
               assigned functions, the reasonable opportunity to prevent, detect, or correct (1)
               impairments to effectiveness or efficiency of operations, (2) misstatements in
               financial or performance information, or (3) violations of laws and regulations on a
               timely basis.


                                                 17


                                                   
Significant Deficiency

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

                   The Authority lacked an understanding of Federal requirements and
                    sufficient quality control procedures to ensure compliance with HUD’s
                    requirements regarding the (1) use of program residual receipts, (2)
                    remittance of excess project funds to HUD, and (3) appropriate maintenance
                    of escrow funds (see findings 1, 2, and 3).




                                             18


                                                
                                    APPENDIXES

Appendix A

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


          Recommendation         Ineligible 1/       Unsupported 2/   Funds to be put
                 number                                                to better use 3/
                         1A                                              $31,148,477
                         1B                               $428,804
                         2A          608,337
                         2B                               $604,949
                         2C           12,830
                         3A          290,437
                         3B          175,434
                       Total      $1,087,038            $1,033,753       $31,148,477

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/   Unsupported costs are those costs charged to a HUD-financed or HUD-insured program
     or activity when we cannot determine eligibility at the time of the audit. Unsupported
     costs require a decision by HUD program officials. This decision, in addition to
     obtaining supporting documentation, might involve a legal interpretation or clarification
     of departmental policies and procedures.

3/   Recommendations that funds be put to better use are estimates of amounts that could be
     used more efficiently if an 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 Authority implements our recommendations, excess project funds will be
     used to reduce or offset Section 8 housing assistance payments.




                                             19


                                                  
      Appendix B

        AUDITEE COMMENTS AND OIG’S EVALUATION


Ref to OIG Evaluation   Auditee Comments




                         20


                           
Ref to OIG Evaluation   Auditee Comments




Comment 1




                         21


                           
Ref to OIG Evaluation   Auditee Comments




Comment 2




Comment 3



Comment 4




                         22


                           
Ref to OIG Evaluation   Auditee Comments




Comment 4




Comment 4



Comment 5




Comment 6




                         23


                           
Ref to OIG Evaluation   Auditee Comments




Comment 6


Comment 7




Comments 2
and 4




                         24


                           
Ref to OIG Evaluation   Auditee Comments




Comment 8




Comment 8


Comment 9




Comments 9
and 10




                         25


                           
Ref to OIG Evaluation   Auditee Comments




Comment 11


Comment 12



Comments 1,
3, 4, and 6




Comment 13




                         26


                           
Ref to OIG Evaluation   Auditee Comments




Comments 1,
3, 4, and 6



Comment 14



Comment 15




Comment 16




                         27


                           
Ref to OIG Evaluation   Auditee Comments




Comment 16



Comment 17




Comment 18


Comment 19




                         28


                           
Ref to OIG Evaluation   Auditee Comments




Comment 20




Comment 21




                         29


                           
Ref to OIG Evaluation   Auditee Comments




Comment 21




Comment 17

Comment 22




Comment 23




                         30


                           
Ref to OIG Evaluation   Auditee Comments




Comment 22




Comments 22
and 24




Comment 25




                         31


                           
Ref to OIG Evaluation   Auditee Comments




Comment 26




                         32


                           
Ref to OIG Evaluation   Auditee Comments




Comment 26




Comment 26




                         33


                           
Ref to OIG Evaluation   Auditee Comments




Comment 25




Comment 27




Comment 28




Comments 6
and 15




                         34


                           
Ref to OIG Evaluation   Auditee Comments




Comment 6
and 15




Comment 29




                         35


                           
                         OIG’s Evaluation of Auditee Comments

Comment 1   We acknowledge that HUD’s regulations at 24 CFR 883.306(e) effective
            February 29, 1980, permits the housing finance agency to assume responsibility
            for (1) project development, (2) supervision of the development, and (3) the
            management and maintenance functions of owners subject to HUD periodic
            review and monitoring by HUD. The Authority is entitled to a reasonable fee,
            determined by HUD, for administering a contract. In regards to the use of surplus
            funds, we also acknowledge that the regulation stated that if the Authority
            determines at any time that surplus project funds are more than the amount
            needed for project operations, reserve requirements, and permitted distributions,
            the Authority may require the excess to be placed in a separate account to be used
            to reduce housing assistance payments or for other project purposes.

            However, upon termination of the contract, any excess project funds must be
            remitted to HUD. The executed housing assistance payments contract further
            expounds on this requirement stating that surplus project funds must be deposited
            with the agency, mortgagee, or other agency approved depository in an interest
            bearing account. Withdrawals from the account will be made only with the
            approval of the Authority for project purposes, including the reduction of housing
            assistance payments. Therefore, the agency does not have exclusive control of
            surplus funds since HUD is limiting the use of the surplus funds to project related
            purposes and stating that the funds ultimately belong to HUD.

Comment 2   As a result of our audit, the Authority conducted an analysis of its program
            projects escrow accounts to determine whether surplus funds were available.
            However as stated in finding 1 of this report, we determined that the Authority’s
            analysis contained errors. In May 2013, the Authority began implementing the
            offsets for the June 2013 housing assistance payments. However, the Authority
            started offsetting housing assistance payments using its flawed analysis.

Comment 3   As stated in the report, the Authority lacked an understanding of HUD’s
            requirements regarding its role in administering the program. The Authority
            believed that the notice did not apply to it. However, the Notice specifically
            stated that it applied to all projects that are subject to a new regulation project-
            based Section 8 housing assistance payments contract, including 883 properties.
            According to the Notice, the regulatory schemes codified in 24 CFR 880.104(a),
            881.104(a), and 883.105(a) establishes the universe of projects to which the
            applicable new regulation applies. The Notice did not exclude properties in
            which State agencies were the contract administrators. Therefore, the Notice
            applied to both HUD-insured and non-insured properties. Further, the Authority
            entered into an annual contributions contract with HUD for all new-regulation
            projects and agreed to all of the contract terms, including the requirement to
            ensure that all of HUD’s requirements would be followed. Further, the Authority
            entered into an annual contributions contract with HUD for all new-regulation
                                             36


                                               
            projects and agreed to all of the contract terms, including the requirement to
            ensure that all of HUD’s requirements would be followed.

Comment 4   We acknowledge that according to 24 CFR 883, the Authority determines whether
            a project has surplus project funds. However, the executed housing assistance
            payments contract requires that surplus project funds be deposited with the
            agency, mortgagee, or other agency approved depository in an interest bearing
            account. Further, the Authority has not provided the audit guidelines it uses to
            determine excess funds. As mentioned in comment 2, we determined that the
            Authority’s analysis for determining surplus funds contained significant
            deficiencies. In addition, according to the Notice, the regulatory schemes codified
            in 24 CFR 880.104(a), 881.104(a), and 883.105(a) establishes the universe of
            projects to which the applicable new regulation applies. The Notice did not
            exclude properties in which State agencies were the contract
            administrators. Therefore, the Notice applied to HUD-insured and non-insured
            properties. Under part 883, the Authority is responsible for project development
            and for supervision of the development, management and maintenance functions
            of owners. However, the Authority’s actions are subject to audit and review by
            HUD to assure compliance with Federal requirements and HUD’s objectives.

            In a letter from the Authority to HUD dated January 29, 2010, the Authority
            stated that funds remaining in the operating cash reserve constitute what are
            commonly called residual receipts. In addition, the Authority was not
            consistently following the policies as stated in its own comments. For instance,
            the owners of Program project numbers MI28H150193, MI33H150063, and
            MI28H150177, all received limited distribution payments before making deposits
            to their operating cash reserve. Further, the Authority’s own regulatory
            agreements for the Program projects state that residual receipts should include all
            funds received by the mortgagor in connection with the operation of the project
            after (1) the mortgage note is paid, (2) all amount required are deposited into the
            replacement reserve, and (3) after all other project expenses have been paid. The
            Authority’s definition of residual receipts in its regulatory agreements is
            consistent with HUD’s definition of residual receipts.

Comment 5   HUD Handbook 4350.1, REV-1, chapter 1, section 1-3 states that in carrying out
            its mission, HUD monitors and works with mortgagors, managing agents,
            mortgagees, subsidy contract administrators, and other clients to ensure
            compliance with the requirements of HUD's programs. Further, chapter 1
            section1-4, of the handbook also states that the Office of Multifamily Housing
            Management exercise responsibility toward the taxpayer as applicable by:
            C. Maximizing collections of all funds due HUD,
            D. Enforcing statutes and regulations, and
            E. Allocating, administering, and monitoring subsidy-based programs in a cost-
            effective manner.

                                             37


                                               
            The handbook further states that generally, all projects owned by non-profit
            mortgagors and all Section 236 and 221(d)(3) projects owned by limited
            distribution mortgagors as well as Section 8 new construction and substantial
            rehabilitation projects subject to the 1979 - 80 revised Section 8 regulations are
            required to establish a residual receipts account. The requirement for a residual
            receipts account is established by a regulatory agreement or a project-based
            subsidy contract such as Section 8 housing assistance payments.

Comment 6   The audit report included statements made by HUD, which show agreement with
            our conclusions. However, these statements were not used to support the audit
            report. Therefore, we relied on HUD’s regulations, Notices, Handbooks,
            Guidebooks, and other criteria related to the program in addition to the legally
            executed documents (between HUD and the Authority) to support our audit
            report. HUD regulations at 24 CFR 883, states that upon termination of the
            contracts, any excess project funds should be remitted to HUD. Therefore, the
            regulation clearly implies that HUD has ownership of excess or surplus project
            funds. The Notice states that the Department is setting forth the policy and
            procedures for the Department’s use of new regulation residual receipts to offset
            housing assistance payments for projects subject to a new regulation project-based
            Section 8 program contract. The Notice applied to all projects that are subject to a
            new regulation project-based Section 8 program contracts that are subject to 24
            CFR 880.205, 881.205, or 883.306. It did not exclude 883 properties managed
            for State agencies.

            Instead, the Notice specifically stated that for projects subject to 24 CFR 883, in
            effect as of February 29, 1980, the State agency, rather than HUD, is entitled to
            make the determination that project funds are more than the amount needed and to
            require that the excess be deposited into an interest-bearing account to be used for
            project purposes, including the offset of housing assistance. Although the Notice
            permits the State agency to make the determination, the requirement that excess
            funds to be used to offset housing assistance is the purpose of the Notice. Further,
            the Authority entered into an annual contributions contract with HUD for all new-
            regulation projects and agreed to all of the contract terms, including the
            requirement to ensure that all of HUD’s requirements would be followed.

            HUD Handbook 4350.3 REV-1, chapter 1, section 4, states that subsidy contract
            administration involves a broad range of responsibilities, including program
            compliance functions to ensure that HUD-subsidized properties are serving
            eligible families at the correct level of assistance, and asset management functions
            to ensure the physical and financial health of HUD properties. HUD has primary
            responsibility for contract administration but has assigned portions of these
            responsibilities to other organizations that act as contract administrators for HUD.
            These contract administrators are generally housing agencies, such as State
            housing finance agencies or local housing authorities. Traditional contract
            administrators have been used for over 20 years and have annual contributions
                                             38


                                               
            contracts with HUD. Under their contracts, traditional contract administrators are
            responsible for asset management functions and housing assistance payments
            contract compliance and monitoring functions. They are paid a fee by HUD for
            their services. Further, HUD Handbook 4350.3 REV-1, chapter 25, section 1
            states that generally, all projects owned by non-profit mortgagors and all Section
            236 and 221(d)(3) projects owned by limited distribution mortgagors as well as
            Section 8 New Construction or Substantial Rehabilitation projects subject to
            the revised Section 8 regulations are required to establish a residual receipts
            account. The requirement for a residual receipts account is established by a
            regulatory agreement or a project-based subsidy contract such as Section 8
            Housing Assistance Payments contract.

Comment 7   The letter from HUD dated March 27, 2013, references a meeting between HUD
            and the Authority which occurred on January 20, 2013. The Authority presented
            its cash flows analysis to HUD and requested that HUD allow its alternate method
            of calculating residual receipts and not to hold the owners to the required retained
            balance of $250 per unit. On February 21, 2013, HUD responded to the
            Authority’s request stating that the Authority’s proposed alternative method did
            not comply with the Notice and was therefore not approved. Further, the letter
            gave the Authority until March 7, 2013, to respond to allow the reduction of
            housing assistance payments to begin on April 1, 2013. The Authority failed to
            meet the April 1, 2013, date, therefore HUD stated it would start sending out
            recapture letters to owners for the May 2013 voucher submissions applicable to
            the June 2013 subsidy payments. The Authority failed to comply with the Notice
            until HUD sent out the recapture letters to the owners.

Comment 8   The Authority asserts that of the $31 million in surplus funds, more than $6.8
            million is not available to offset housing assistance payments. As stated in
            finding 1, the Authority requested to use more than $6.4 million of residual
            receipts of two projects (contract numbers MI33H150039 and MI28H150181) to
            pay refinancing costs and reestablish the escrow accounts. However, in a letter,
            dated February 21, 2013, HUD denied the Authority’s request to use project
            funds, including residual receipts, to refinance the Authority-held mortgages
            because it was not an eligible use of the residual receipts. For the remaining more
            than $350,000, the agency projected negative operations. However, as mentioned
            in the audit report and comment 2, the agency’s projected analysis contained
            significant errors. Therefore, the Authority should obtain HUD’s approval for its
            revised analysis.

Comment 9   HUD’s memorandum, dated October 2, 2012, in response to question number 3
            regarding the retained balance, states that if HUD has approved requests for the
            use of residual receipts accounts before the Notice was issued, the approval
            remains in place. Any requests made after the Notice must be denied. In
            addition, in response to question number 7 regarding the use of residual receipts,
            for a poorly scored Real Estate Assessment Center review, the owner must
                                             39


                                               
              receive written approval from the HUD field office before considering the use of
              monies in the residual receipts account. Therefore, we have determined that HUD
              approval would be needed for the disbursements of residual receipts that occurred
              after the Notice.

Comment 10 HUD Handbook 4350.3 REV-1 CHG-3, chapter 1 section 5 states that Federal
           statutory program eligibility requirements cannot be overruled by State or local
           law. Further, the Authority did not provide documentation to support its
           assertions that the disbursements for the four projects were permitted, approved
           by HUD, or that the court order overruled the Federal statutory requirements.

Comment 11 The Authority did not provide documentation to support that the funds were
           transferred from the replacement reserve account to the operating cash reserve
           (residual receipts) account.

Comment 12 We amended the wording in our recommendation to request that repayment be
           from non-Federal funds to the appropriate escrow account, not to HUD.

Comment 13 HUD’s memorandum, dated October 2, 2012, states that items that have accrued
           must be paid from the retained balance. The Authority disbursed an accrued
           limited distribution to contract number MI33H150193. The portion of the limited
           distribution that exceeded contract number MI33H150193’s retained balance was
           considered an inappropriate residual receipts disbursement.

Comment 14 In section 2.1 of the contract, the term obligation is not referring to rights of
           parties. Instead, it is stating that neither HUD nor the housing finance agency
           must assume any (monetary) obligations beyond that provided in the HUD
           approved agreement and contract. Further the Authority’s master agreement
           executed with HUD on September 30, 1980, section 0.4 states that the Authority
           agrees to comply, and to require owners to comply with the U. S. Housing Act of
           1937 and all applicable regulations and requirements.

Comment 15 The Inspector General Act of 1978, as amended, creates independent and
           investigative units, called Offices of Inspector General. The mission of the OIG,
           as spelled out in the Act, is to: (1) conduct and supervise independent and
           objective audits and investigations relating to agency programs and operations (2)
           promote economy, effectiveness, and efficiency with in the agency, (3) prevent
           and detect fraud waste and abuse in agency programs, (4) review and make
           recommendation regarding existing and proposed legislation and regulations
           relating to agency programs and operations, and (5) to keep the agency and
           Congress fully and currently informed of problems in the agency programs and
           operations. As stated in the audit report, our objective was to determine whether
           the Authority administered its program for new-regulation projects in accordance
           with HUD’s requirements. Specifically, we wanted to determine whether the
           Authority (1) applied program residual receipts to reduce or offset housing
                                             40


                                                
              assistance payments for new-regulation projects, (2) remitted excess or unused
              project funds to HUD upon termination of new-regulation contracts, and (3)
              appropriately maintained escrows for new-regulation projects.

               In addition, 24 CFR 883.106 (c)(2) states that HUD will periodically monitor the
              activities of housing finance agencies participating under this part only with
              respect to Section 8 or other HUD programs. This monitoring is intended
              primarily to ensure that certifications submitted and projects operated under this
              part reflect appropriate compliance with Federal law and other requirements.

Comment 16 As mentioned in the audit report, the Authority did not provide adequate
           documentation to support its determination of excess project funds. It also did not
           provide documentation to support its assertions that limiting project funds to $250
           per unit would be a detriment to its projects. Additionally, the projects’ excess
           funds would be used to offset housing assistance over a period of time.
           Therefore, the Authority’s assertions that the projects would be in default or have
           their utilities shut off are unfound. Further, the recommendation in the report
           does not state that funds should be reimbursed to HUD, but used to offset future
           housing assistance. We contacted seven different HUD field offices and
           determined that seven different state housing agencies were complying with the
           Notice and using the $250-per unit as the retained balance in offsetting residual
           receipts for new-regulation projects.

Comment 17 As recommended in the audit report, the Authority should work with HUD to
           ensure the recommendations are addressed appropriately.

Comment 18 HUD’s regulations at 24 CFR 883.306(e) effective February 29, 1980, state that
           upon termination of the contract, any excess project funds must be remitted to
           HUD.

Comment 19 We agree with the Authority’s calculation of excess funds for the project number
           MI28H150160. We have updated the report and recommendation to reflect the
           corrected amount. However, the Authority did not provide a copy of the wire
           transfer to the United States Treasury.

Comment 20 The Authority did not provide documentation to support its calculation of surplus
           funds for the MI33H150050 project, nor did it provide a copy of the wire transfer
           to the United States Treasury.

Comment 21 As stated in the audit report, according to the Authority, its loan agreement with
           the owner allowed the replacement reserves to be applied to the defaulted
           mortgage. However, HUD did not waive the requirement for the Authority to
           remit unused or excess project funds. Further, the Authority’s attachments
           contained a response from HUD stating that HUD required additional information
           from the Authority.
                                              41


                                                
Comment 22 HUD requires the excess project funds to be remitted on the contract termination
           date, not the OIG. In a letter to the Authority dated May 25, 2010, HUD stated
           that funds remaining in the operating reserve cash (residual receipts) account on
           the contract termination date, excluding funds that HUD has determined are not
           excess project funds, as can be clearly demonstrated as such by the Authority,
           shall be remitted to HUD on the contract termination date. Further, HUD’s
           regulations at 24 CFR 883.306(e) effective February 29, 1980, state that upon
           termination of the Contract, any excess project funds must be remitted to HUD.  

Comment 23 As recommended in this report, HUD will ensure that the Authority’s agreements
           for new-regulation projects comply with HUD’s regulations.

Comment 24 For project number MI28H150160, the Authority failed to remit the excess
           project funds after the contract termination for more than 2,192 days.

Comment 25 As stated in the audit report, the Authority inappropriately disbursed replacement
           reserves. The replacement reserve is required to be established by the program
           contract, to defray the cost of the replacement of major depreciable items. The
           contract between the Authority and the owner requires the establishment of the
           replacement reserve. Also, according to section 2.6(d)(1) of the Authority’s
           contract with the owner, the owner is required to establish and maintain the
           reserve account, at the direction of the Authority to aid in funding extraordinary
           maintenance and repair and replacement of capital items. Section 2.6 (c) (1)
           states that project funds must be used for the benefit of the project, to make
           mortgage payments, make required deposits to the replacement reserve, and to
           provide limited distributions to the owner. The contract does not state that funds
           accumulated for the extraordinary maintenance and repair and replacement of
           capital items can be used for paying owner income. Further, the section 2.6 (d)
           (1) (ii) states that if the replacement reserve achieves a level sufficient to meet the
           projected requirements, the rate of deposit to the reserve may be reduced with the
           Authority’s approval.

Comment 26 The Authority did not provide documentation to support that all of the projects’
           replacement reserves needs were addressed, that new replacement reserves were
           established, or that the replacement reserves distributed to owners were excess
           project funds.

Comment 27 HUD will determine whether the Authority’s updated procedures meet HUD’s
           requirements.

Comment 28 We disagree with the Authority’s interpretation that HUD OIG was sent out to
           audit as a response to the Authority’s correspondence with HUD expressing its
           disagreement with the Notice. HUD and the Authority have been in constant
           discussions regarding the ownership of program escrows from 2008 forward.

                                                42


                                                  
             OIG was asked by HUD management to audit the Authority to ensure compliance
             with the Notice.

Comment 29 We commend the Authority for its willingness to cooperate with HUD in the
           administration of its programs.




                                           43


                                             
Appendix C

      FEDERAL AND THE AUTHORITY’S REQUIREMENTS


Finding 1
Section 8(z)(1)of the United States Housing Act of 1937, as amended, states that HUD’s
Secretary may reuse any budget authority, in whole or part, that is recaptured on account of
termination of a housing assistance payments contract.

HUD’s regulations at 24 CFR 880.601(e) state that project funds must be used for the benefit of
the project, to make required deposits to the replacement reserve, and to provide distributions to
the owner in accordance with HUD’s regulations. Any remaining project funds must be
deposited with the Authority, other lender, or other Authority-approved depository in an interest-
bearing account.

HUD’s regulations at 24 CFR 883.306(b) state that for the life of the contract, project funds may
be distributed only to profit-motivated owners at the end of each fiscal year of project operation
following the effective date of the contract and after all project expenses have been paid or funds
have been set aside for payment and all reserve requirements have been met.

HUD’s regulations at 24 CFR 883.306(d) state that any shortfall in return may be made up from
surplus project funds in future years.

HUD’s regulations at 24 CFR 883.306(e) state that if the Authority determines at any time that
surplus project funds are more than the amount needed for project operations, reserve
requirements, and permitted distributions, the Authority may require the excess to be placed in a
separate account to be used to reduce housing assistance payments or for other project purposes.

Part I, section 1.2, of the annual contributions contract for all new-regulation projects, form
HUD-52643B, version 8-80, states, “The Authority is authorized to (a) enter into an Agreement,
(b) enter into Contract, (c) make housing assistance payments on behalf of Families, and (d) take
other necessary actions, all in accordance with the forms, conditions, regulations, and
requirements prescribed or approved by HUD.”

Part II, paragraph 2.6(c)(1), of the new-regulation contract, version 8-80, states that to the extent
the Authority determines that project funds are more than needed for making mortgage
payments, paying operating expenses, making required deposits to the replacement reserve in
accordance with HUD’s regulations, and providing distributions to the owner as provided in
HUD’s regulations, the surplus project funds must be deposited with the Authority, lender, or
other Authority-approved depository in an interest-bearing account.


                                                 44


                                                    
Housing Notice H-2012-14, section V.A., states that to the extent that Residual Receipts are
available at a new regulation project, Owners are allowed an initial reserve (“Retained Balance”)
in an amount equivalent to $250 per unit to use for project purposes. HUD will consider
approving requests for releases from the account in accordance with the outstanding procedures
found in HUD Handbook 4350.1, Multifamily Asset Management and Project Servicing, Chapter
25, “Residual Receipts,” paragraph 25-9.

Housing Notice H-2012-14, section V.C., states that residual receipts account balances in excess
of $250 per revenue-generating unit must be applied monthly to offset Section 8 housing
assistance payments up to the full amount of the monthly subsidy request, depending upon the
amount of residual receipts available for the offset.

HUD’s memorandum, dated October 2, 2012, in answer to question number 4 under the section,
Calculating the Balance of Residual Receipts Account, states that the $250 per unit of retained
balance applied to the number of units is the number of revenue-producing units in the project,
regardless of units under the Section 8 contract or the total number of units in the project.

Finding 2
HUD’s regulations at 24 CFR 883.306(e) state that upon termination of the housing assistance
payments contract, any excess project funds must be remitted to HUD.

Part II, section 2.6(c)(1), of the new-regulation contract, version 8-80, states that upon
termination of the housing assistance payments contract, any excess funds must be remitted to
HUD.

Finding 3
HUD’s regulations at 24 CFR 883.306(e) state that upon termination of the housing assistance
payments contract, any excess project funds must be remitted to HUD.

HUD’s regulations at 24 CFR 880.602(a) state that a replacement reserve must be established
and maintained in an interest-bearing account to aid in funding extraordinary maintenance and
repair and replacement of capital items.

Part II, section 2.6(c)(1), of the new-regulation contract, version 8-80, states that upon
termination of the housing assistance payments contract, any excess funds must be remitted to
HUD.

Part II, section 2.6(d)(1), of the new-regulation contract, version 8-80, states that the project
owner must establish and maintain, at the direction of the Authority, a replacement reserve in an
interest-bearing account to aid in funding extraordinary maintenance and repair and replacement
of capital items.


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The Authority’s reserve for replacement policy, revised April 2013, states that the Authority’s
loan agreements between projects and the Authority require the establishment and maintenance
of the Authority’s held replacement reserve fund. The replacement reserve fund is primarily
designed to defray the cost of the replacement of major depreciable items provided for in the
original mortgage. Further, upon payment in full of the mortgage loan, the disbursement of
excess funds is governed by the legal documents and applicable law. The projects with
replacement reserve needs amounts must resolve the need amount before owner’s income can be
disbursed.




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Appendix D

   PROGRAM RESIDUAL RECEIPTS AVAILABLE FOR
   REDUCTION OR OFFSET OF HOUSING ASSISTANCE
          PAYMENTS AS OF MAY 31, 2013


                               Available    Disbursements    Unnecessary
                   Contract     residual    above retained      subsidy
        Number      number      receipts       balance         received
          1     MI28H150189   $16,652,079         $0           $681,447
           2    MI28H150183    5,853,755       318,063         766,024
           3    MI28H150181    5,365,492           0           755,983
           4    MI33H150039    1,213,614           0           758,347
           5    MI28H150177     619,355            0           396,913
           6    MI33H150065     457,294            0           257,116
           7    MI28H150223     319,212         19,703         333,508
           8    MI33H150056     281,046            0           239,243
           9    MI28H150190     190,107            0           127,552
          10    MI28H150204      88,093         65,510         211,993
          11    MI33H150080      48,052            0             22,318
          12    MI33H150079      39,782            0             26,624
          13    MI33H150051      19,142            0             16,137
          14    MI28H150080      1,325          2,623            4,308
          15    MI33H150076       129           21,716           1,794
          16    MI28H150193         0           1,189               0
          17    MI28H150202         0              0             21,916
          18    MI28H150206         0              0             8,936
               Totals         $31,148,477      $428,804       $4,630,159




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