oversight

CPD Did Not Monitor NSP Grantees' Payments of Developer Fees to Developers

Published by the Department of Housing and Urban Development, Office of Inspector General on 2014-03-10.

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

OFFICE OF AUDIT
REGION 9
LOS ANGELES, CA




    Office of Community Planning and Development
                  Washington, DC

               Neighborhood Stabilization Program




2014-LA-0002                                    MARCH 10, 2014
                                                        Issue Date: March 10, 2014

                                                        Audit Report Number: 2014-LA-0002




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

               //SIGNED//
FROM:          Tanya E. Schulze, Regional Inspector General for Audit, Los Angeles Region 9,
               9DGA


SUBJECT:       CPD Did Not Monitor NSP Grantees’ Payments of Developer Fees to Developers


        Attached is the U.S. Department of Housing and Urban Development (HUD), Office of
Inspector General’s (OIG) final results of our review of the Office of Community Planning and
Development (CPD), Neighborhood Stabilization Program’s (NSP) monitoring of developer fees
paid to for-profit developers by NSP grantees to ensure compliance with HUD requirements.

    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
213-534-2471.
                                            March 10, 2014
                                            CPD Did Not Monitor NSP Grantees’ Payments of
                                            Developer Fees to Developers




Highlights
Audit Report 2014-LA-0002


    What We Audited and Why                 risk assessment purposes and added monitoring
                                            controls.
We reviewed the U.S. Department of
Housing and Urban Development,               What We Found
(HUD) Office of Community Planning
and Development’s (CPD) monitoring          CPD did not implement adequate program monitoring
of its Neighborhood Stabilization           procedures and controls to ensure that NSP grantees
Program (NSP) grantees’ incurred            paid developer fees in accordance with HUD
developer fees based on a prior external    requirements. While developers are permitted to
audit 1, which indicated that CPD field     charge a developer fee, some for-profit developers
offices may not have provided adequate      improperly claimed additional project management
oversight of NSP grantees to ensure that    costs that should have been paid through agreed-upon
for-profit developers did not incur         developer fees. CPD had issued policy alerts explicitly
questionable developer fees. Our            stating that these incurred fees were considered
objective was to determine whether          “double-dipping” and not allowed under NSP.
CPD adequately monitored its NSP
grantees to ensure that the developer
fees paid to for-profit developers met
HUD requirements.

    What We Recommend

We recommend that CPD revise its
NSP monitoring procedures and
controls to ensure that it addresses the
review of developer fees and considers
the potential higher level of risk
associated with grantees that use
developers to carry out NSP activities.
CPD should also require its CPD field
offices to maintain a list of NSP
grantees that, at a minimum, includes
each grantee’s developers and the
respective organizational structures for


1
    2012-LA-1003 issued December 22, 2011
                           TABLE OF CONTENTS

Background and Objective                                                         3

Results of Audit
      Finding: CPD Did Not Monitor NSP Grantees’ Payments of Developer Fees to
               Developers                                                        4

Scope and Methodology                                                            8

Internal Controls                                                                9

Appendixes
A.    Auditee Comments and OIG’s Evaluation                                      10
B.    Criteria                                                                   15




                                          2
                      BACKGROUND AND OBJECTIVE

Authorized under section 2301 of Title III of the Housing and Economic Recovery Act of 2008
as amended, Congress appropriated $4 billion for the Neighborhood Stabilization Program (NSP)
to provide grants to every State and certain local communities to purchase foreclosed-upon or
abandoned homes and to rehabilitate, resell, or redevelop these homes to stabilize neighborhoods
and stem the decline in value of neighboring homes. The Act states that amounts appropriated,
revenues generated, or amounts otherwise made available to States and units of general local
government under section 2301 must be treated as though such funds were Community
Development Block Grant funds under Title I of the Housing and Community Development Act
of 1974. The U.S. Department of Housing and Urban Development (HUD) allocated more than
$3.9 billion in NSP funds to more than 300 grantees.

Congress amended the NSP and increased its funding as part of the American Recovery and
Reinvestment Act of 2009 and Dodd-Frank Wall Street Reform and Consumer Protection Act of
2010. The Recovery Act provided HUD an additional $2 billion in NSP funds (NSP2) to
competitively award to States, local governments, nonprofit organizations, or consortia or
nonprofit organizations, which could submit proposals in partnership with for-profit
organizations. The Recovery Act also states that HUD’s Secretary may use up to 10 percent of
the funds for capacity building of and support for local communities receiving NSP funding
under the 2008 Act or the Recovery Act. Further, up to 1 percent of the funds must be available
to HUD for staffing, training, providing technical assistance, technology, monitoring, travel,
enforcement, research, and evaluation activities. In January 2010, HUD awarded more than $1.9
billion to 56 grantees. The Dodd-Frank Act provided HUD an additional $1 billion in NSP funds
(NSP3) to award to all States and select governments on a formula basis. The minimum grant
amount was $1 million for non-State grantees, and the basic allocation was adjusted to ensure
that every State received a minimum of $5 million. The net result was that these funds were
targeted for communities with the most severe neighborhood problems associated with the
foreclosure crisis. HUD awarded the formula-based grants to 270 States and selected local
governments.

Since Federal fiscal year 2009, HUD has awarded more than $6.8 billion in NSP funds
nationwide. HUD’s Office of Community Planning and Development (CPD) Office of Block
Grant Assistance is responsible for program oversight.

The objective of the review was to determine whether CPD adequately monitored its NSP
grantees to ensure that the developer fees paid to for-profit developers met HUD requirements.




                                               3
                                         RESULTS OF AUDIT


Finding: CPD Did Not Monitor NSP Grantees’ Payments of Developer
         Fees to Developers
CPD did not implement adequate program monitoring procedures and controls to ensure that the
developer fees paid to developers by NSP grantees met HUD requirements. While developers
are permitted to charge a developer fee, some for-profit developers 2 improperly claimed
additional project management costs that should have been paid through agreed-upon developer
fees. According to CPD, these deficiencies were attributed to a focus on NSP grantees’ overall
program progress and meeting the national objectives, without adequately considering the
potential risk of questioned costs, such as project management costs incurred by developers. In
addition, CPD did not ensure that its process for selecting grantees for monitoring identified
those grantees and activities that represented the greatest risk to the program for fraud and waste.
As a result, CPD did not ensure that it identified those NSP grantees with developers that may
have incurred questionable NSP project costs.


    Program Guidance Lacked
    Detailed Written Procedures
    and Consideration of Risk


                    Developers are permitted to charge a developer fee. However, CPD’s NSP Policy
                    Alert, dated August 27, 2010 (see appendix B), and updated on November 16,
                    2011, prohibited these entities from double-dipping, or collecting both a
                    developer fee and a project management fee for services provided to the grantees.
                    Project management costs incurred by for-profit developers are paid through
                    developer fees (see appendix B).

                    However, CPD’s NSP monitoring procedures and controls were insufficient to
                    meet HUD Handbook 1840.1, REV-3, section 1-2, requirements to protect against
                    fraud and waste (see appendix B). CPD’s Handbook 6509.2, Community
                    Planning and Development Monitoring Handbook, and risk analysis for
                    monitoring CPD grant programs did not provide field offices guidance to


2
    Throughout the audit report, there is a switch between the terms “developers” and “for-profit developers.” During
    discussions related to program monitoring procedures and controls, the term “developers” is mentioned since the
    procedures and controls pertained to all developers regardless of whether these entities are a for‐profit or private
    non‐profit. During discussions related to the results of the review of a sampled grantee and CPD field offices, the
    term “for-profit developers” is mentioned since a prior external audit (2012-LA-1003 issued December 22, 2011)
    indicated potential issues related to questionable developer fees paid to a for-profit developer. Therefore, the
    objective of this review was to determine whether CPD adequately monitored its NSP grantees to ensure that the
    developer fees paid to these entities had met HUD requirements.

                                                            4
           specifically address the review of developer fees and assign a higher level of risk
           to grantees that use developers to carry out NSP activities.

CPD’s Handbook Lacked
Detailed Written Procedures


           Chapter 8 of Handbook 6509.2, Community Planning and Development
           Monitoring Handbook, provided guidance for conducting comprehensive
           monitoring of grantees’ NSP projects. In addition, this chapter stated that it was
           important to note that the NSP exhibits attached to chapter 8 required the CPD
           reviewer to use the existing Community Development Block Grant exhibits in
           chapters 3 and 4 of the Handbook. However, these procedures and exhibits did
           not specifically discuss the monitoring of incurred developer fees. CPD Los
           Angeles field office staff explained that the area of developer fees was reviewed
           as part of its compliance monitoring of program underwriting and expenditures.
           A CPD headquarters official confirmed that local field offices reviewed developer
           fees as part of the review of the grantees’ underwriting. However, CPD’s fiscal
           year 2010 monitoring report of the County of San Bernardino’s NSP found no
           indications of the developer fees having been reviewed. The same headquarters
           official stated that available resources for sampled Region 4 (Jacksonville, FL)
           and Region 5 (Detroit, MI) CPD field offices did not permit “deep investigations”
           into such expenses during the respective monitoring reviews. As a result, these
           regions did not conduct in-depth reviews, which included assurance that NSP
           grantees paid developer fees to developers in accordance with HUD requirements.
           Instead, the focus of these field offices was to ensure that incurred costs and
           developer fees related to the grantees’ programs were reasonable and not used to
           unduly enrich for-profit developers.

Risk Analysis Guidance Lacked
Consideration of Risk


           According to several CPD notices, including CPD Notice CPD-09-04 (see
           appendix B), CPD’s risk analysis process provided information needed for CPD
           field offices to target resources to grantees that posed the greatest risk to the
           integrity of CPD programs. The Notice included the information related to the
           identification of the grantees to be monitored on site and remotely, the program
           areas to be covered, and the depth of the review. The risk analysis subfactor to
           assess programmatic risk based on the grantee’s use of subrecipients to carry out
           its programs did not take into consideration the potentially higher risk associated
           with using developers as opposed to subrecipients or public nonprofit entities.

           CPD Los Angeles field office staff agreed and stated that the use of any third
           parties, including subgrantees and developers, regardless of being a private
           nonprofit or for-profit, would result in the same risk score in that risk category. A
           CPD headquarters official stated that CPD’s foremost emphasis during its NSP
                                             5
                    monitoring reviews had been the grantees’ overall program progress and meeting
                    the national objectives of the program. CPD did not consider the issue of
                    developers incurring ineligible project management costs as a significant risk to
                    grantees’ programs.

                    We also noted that the CPD Los Angeles field office, as well as sampled Regions
                    4 and 5 field offices, did not keep a list of NSP grantees that used developers
                    since grantees were not required to provide information about designated
                    developers and subrecipients involved in the program. CPD should establish and
                    maintain a formal list to assist in identifying grantees that use developers. By
                    doing so, CPD can identify potential instances of program abuse.

    NSP Grantees Compensated
    Developers for Ineligible Costs

                    While developers are permitted to charge a developer fee, CPD’s NSP Policy
                    Alert, dated August 27, 2010 (see appendix B), and updated on November 16,
                    2011, prohibited these entities from double-dipping, or collecting both a
                    developer fee and a project management fee for services paid through the
                    developer fee (see appendix B).

                    County of San Bernardino
                    The County of San Bernardino and the Cities of Rialto and Victorville used
                    combined NSP funding to acquire and rehabilitate two multifamily properties. 3
                    One of the properties had many instances of project management costs being
                    claimed and received by the for-profit developer that the grantee should have paid
                    through an agreed-upon developer fee. Specifically, the County and City of
                    Rialto approved and reimbursed the for-profit developer for ineligible project
                    management services that should have been paid for through the developer fees it
                    had already received. 4 County staff explained that the for-profit developer’s
                    claims were related to the construction contractor’s profit and fees as these profits
                    and fees were billed separately from the costs of construction, which were billed
                    without a profit margin. However, the construction contractor’s invoices that
                    were part of the for-profit developer’s payments from the grantee showed that the
                    grantee paid the construction contractor’s profit and fees as part of each
                    construction claim. Consequently, County staff did not provide an explanation
                    for these payments.

                    City of Modesto
                    We previously conducted an external audit of the City of Modesto’s NSP2 (audit
                    report 2012-LA-1003, issued December 22, 2011) to determine whether the City
                    administered its NSP2 grant in accordance with HUD requirements. Specifically,

3
    The Cities of Rialto and Victorville were not part of our sample review.
4
    We will perform a separate review the County of San Bernardino’s NSP to address the questionable project
     management costs.

                                                          6
             the review focused on whether the City administered the program to ensure that
             developers used program funds for eligible program acquisition and rehabilitation
             costs. The City did not always use program funds for eligible costs to acquire and
             rehabilitate properties. It approved ineligible project management fees and
             unsupported expenditures during the rehabilitation of NSP-funded properties.
             Accordingly, the City had to adjust the loan amounts and developer contribution
             amounts for each of the properties affected by the ineligible project management
             fees.

Conclusion

             CPD did not implement adequate program monitoring procedures and controls to
             ensure that NSP grantees paid developer fees in accordance with HUD
             requirements. CPD attributed these deficiencies to a focus on the grantees’
             overall program progress and meeting the national objectives. This focused
             attention did not allow CPD to consider potential questioned costs, such as the
             double billing of project management costs by developers, as a significant risk.
             This weakness increased the risk that grantees may have made payments to
             developers that did not meet HUD requirements. Our previous external audit and
             a visit to additional grantees, as part of this internal review, identified
             questionable developer costs. The questionable developer costs identified may
             have been understated due to CPD’s limited records identifying grantees that used
             developers. Implementation of additional controls and procedures will help to
             ensure that CPD can identify such instances of potential program abuse.

Recommendations

             We recommend that the Deputy Assistant Secretary for Grant Programs

             1A. Revise its program monitoring procedures and controls to ensure that CPD
                 addresses the review of developer fees and considers the potential higher
                 level of risk of NSP grantees that use developers.

             1B. Require its CPD field offices to maintain a list of NSP grantees that, at a
                 minimum, includes grantees’ contracted developers to provide better
                 visibility and identification of potential high risk NSP grantees that use
                 developers with questionable developer fees.




                                              7
                        SCOPE AND METHODOLOGY

We conducted the audit work between July and December 2013 at our office in Los Angeles,
CA, with a site visit to the County of San Bernardino in San Bernardino, CA. The audit period
covered March 1, 2009, to June 30, 2013, but was expanded as necessary to accomplish our
objective.

To accomplish our objective, we

   •   Reviewed relevant background information, including prior Office of Inspector General
       (OIG) audit reports;

   •   Reviewed applicable HUD laws, regulations, and other HUD program requirements;

   •   Reviewed CPD’s controls and procedures as they related to our objectives;

   •   Interviewed CPD’s Office of Block Grant Assistance headquarters staff and CPD local
       field office staff; and

   •    Reviewed sampled NSP grantees’ files pertaining to project contracts and expenditures.

We nonstatistically selected as our sample two NSP grantees, Riverside County and the County
of San Bernardino, that used for-profit developers for performing respective program work.
HUD awarded more than $96 million in NSP funds to both grantees. As of July 29, 2013, the
grantees had cumulatively drawn 80 percent of NSP funds. The sample of NSP activities
consisted of 20 single-family and two multifamily properties related to the Counties of Riverside
and San Bernardino, respectively. We reviewed two additional CPD regions to determine
whether the potential issues identified in Region 9 existed in those regions. Specifically, we
included Regions 4 (Jacksonville, FL) and 5 (Detroit, MI) in the review since these regions
received the two largest allocations of NSP funding.

We considered data posted on HUD’s Web site to obtain our audit universe and select our
sample. We confirmed several grant amounts listed in HUD’s data to grant amounts stated in
executed NSP agreements. We determined that the data were reliable for our intended use in
addressing the audit objective.

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 finding and
conclusions based on our audit objective.




                                                8
                              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 Control

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

               •   Policies and procedures – Controls that CPD has implemented to confirm that
                   it adequately monitors NSP grantees to ensure that the developer fees paid to
                   developers meet HUD requirements.

               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:

               •   CPD did not implement adequate program monitoring procedures and controls
                   to ensure that NSP grantees paid developers developer fees in accordance with
                   HUD requirements (finding).




                                                 9
                        APPENDIXES

Appendix A

        AUDITEE COMMENTS AND OIG’S EVALUATION


Ref to OIG Evaluation      Auditee Comments




Comment 1



Comment 2




Comment 3




                            10
Comment 4


Comment 5




Comment 6




Comment 7




            11
                         OIG Evaluation of Auditee Comments

Comment 1   As part of its oversight, CPD is responsible to ensure that costs are allowable as
            required by OMB. Aside from ensuring that costs are necessary and reasonable,
            CPD is also responsible for ensuring that costs conform to the prohibitions set
            forth in CPD’s Policy Alerts dated August 27, 2010, and updated on November
            16, 2011. The aforementioned CPD Policy Alert specifically prohibits developers
            from double-dipping, or collecting both a developer fee and a project management
            fee for services provided to the grantee. Project management costs incurred by a
            developer are paid through developer fees. We agree that CPD has a risk analysis
            system that included the NSP, which CPD’s Monitoring Handbook 6509.2 and
            Notices were used to implement the risk assessments. However, this system did
            not provide field offices the necessary guidance to address the review of
            developer fees or reference to issued Policy Alerts that would have assisted
            reviewers in identifying prohibited NSP costs, such as project management fees.
            We cited CPD Notice CPD-09-04 in the report as this was the first notice CPD
            issued related to CPD’s risk analysis policies and procedures for monitoring
            grantees’ NSP programs that corresponded with our audit period. Furthermore,
            the fundamentals of the risk analysis’ sub-factor to assess programmatic risk cited
            in CPD Notice CPD-09-04 (for FYs 2010 and 2011) and CPD-12-02 (for FYs
            2012 and 2013) were the same and CPD Notice CPD-13-09 extended the
            provisions of CPD Notice CPD-12-02 for conducting risk analysis in FY 2014.
            Despite the cited CPD notice not being the most recent notice, the risk analysis’
            sub-factor to assess programmatic risk based on the grantee’s use of subrecipients
            or developers to carry out its NSP activities did not take into consideration the
            potential high risks associated with the use of developers.

Comment 2   We disagree with CPD’s risk analysis’ sub-factor that assessed programmatic risk
            based on the grantees’ use of subrecipients to carry out its’ NSP activities, as it
            did not take into consideration the higher risks of using developers that may incur
            questionable costs or not meet program objectives. In addition, we disagree with
            CPD’s assertion that it assessed developer fees and the issue of double-billings
            related to these fees. As noted in the report, CPD’s Monitoring Handbook 6509.2
            did not provide field offices the necessary guidance to address the review of
            developer fees or reference issued Policy Alerts that would have assisted
            reviewers in identifying prohibited costs, such as project management fees outside
            of agreed-upon developer fees. Furthermore, CPD headquarters officials stated
            that limited resources did not permit “deep investigations” into such expenses
            during monitoring reviews. As a result, CPD did not conduct in-depth reviews
            that included assurance that NSP grantees paid developer fees in accordance with
            OMB and HUD requirements including CPD Notices and Policy Alerts. We
            supported this issue by identifying CPD’s lack of detailed written procedures in
            its monitoring guidance and lack of consideration of such risks in its risk analysis
            guidance. Two OIG reviews identified instances in which grantees had
            compensated developers for ineligible project management costs that should have
            been paid through agreed-upon developer fees. We did not list the double-billed

                                             12
            amounts related to the County of San Bernardino’s NSP since we will be
            conducting a separate review to address the questionable project management
            costs. We mentioned this plan of action in a footnote on page 6 of this report.
            While the two examples were not representative of NSP as a whole, these
            instances do show that CPD’s NSP program monitoring procedures and controls
            were not adequate in ensuring that grantees paid developer fees in accordance
            with OMB and HUD requirements including CPD Notices and issued Policy
            Alerts. We believe that the implementation of the recommendations would assist
            CPD in improving its monitoring of NSP grantees.

Comment 3   CPD headquarters officials, on behalf of sampled Region 4 (Jacksonville, FL) and
            Region 5 (Detroit, MI) CPD field offices, stated that limited resources did not
            permit the field offices to conduct “deep investigations” into such NSP expenses
            during their monitoring reviews. As a result, CPD did not conduct in-depth
            reviews that assured grantees paid developer fees in accordance with OMB and
            HUD requirements including CPD Notices and Policy Alerts. Instead, the focus
            of these field offices’ reviews were to ensure that developer fees related to the
            grantees’ programs were reasonable and not used to unduly enrich for-profit
            developers. CPD is responsible for ensuring that costs are allowable as required
            by OMB and HUD.

Comment 4   We disagree with CPD’s statement that we did not provide justification for
            focusing on for-profit developers. We informed CPD of our justification during
            meetings conducted throughout the review. In addition, we included the
            justification for our review in the “What We Audited and Why” section of this
            report. Our review focused on for-profit developers since we identified these
            entities as concerns related to the grantees’ ability to meet program objectives.
            However, we believe that grantees may experience the same risks associated with
            doing business with either private non-profit developers or for-profit developers
            participating in NSP. CPD should have adequate guidance in place for its
            reviewers to use in monitoring both types of entities to ensure compliance with
            rules, requirements, notices, and policy alerts. We revised the report to note that
            grantees may have the same risks associated with doing business with either for-
            profit developers or private non-profit developers.

Comment 5   We agree that CPD’s broad requirements allow NSP grantees flexibility in
            meeting program objectives. However, CPD is responsible for ensuring that
            program costs were allowable and meet applicable rules and requirements. With
            HUD as the awarding agency and CPD the department responsible for monitoring
            these funds, CPD must ensure that grantees use these funds in accordance with
            OMB and HUD requirements, notices, and policy alerts.

Comment 6   CPD should revise its program monitoring procedures and controls to ensure that
            it addresses the review of developer fees and considers the potential higher level
            of risk of the grantees that use developers to accomplish its program objectives.
            CPD should also revise its program monitoring procedures and controls to

                                             13
            incorporate issued policy alerts that will assist reviewers in identifying potential
            unallowable costs.

Comment 7   At a minimum, CPD field offices should maintain a list of NSP grantees that
            includes grantees’ contracted developers. This effort is not redundant to the
            information in HUD’s Disaster Recovery Grant Reporting (DRGR) system.
            Specifically, the information in DRGR did not provide users clear and concise
            information about the identities of the entities used to complete the NSP projects
            on behalf of the grantees. Instead, this system provides the name of the
            responsible organization that will oversee the program activity and a narrative that
            may inform the user of developers selected to perform the activities. However,
            these narratives may not provide clear information about the developers.
            Developing the recommended lists would assist CPD in identifying NSP grantees
            that may be a higher risk because of using developers to carry out NSP activities.
            Specifically, the list would assist CPD in identifying those developers with a
            history of questionable costs or practices that may place the grantees’ NSP
            projects at risk of not meeting objectives, rules, and requirements.




                                              14
Appendix B

                                        CRITERIA
Community Planning and Development Notice CPD-09-04
The purpose of this Notice is to provide a consistent methodology for conducting risk analyses
for CPD formula and competitive grantees and establish monitoring priorities within available
resources. This risk analysis process has been incorporated into CPD’s Grants Management
Process (GMP) system, a computer-based information system used to provide a documented
record of conclusions and results.

This Notice is intended to augment departmental policy contained in Handbook 1840.1, REV-3,
Departmental Management Control Program Handbook, which requires the development of risk-
based rating systems for all programs, and is also incorporated into Handbook 6509.2, REV-5,
Community Planning and Development Monitoring Handbook. The major steps for
implementing risk-based monitoring include

       •   Developing risk-based rating systems for program grantees,
       •   Rating and selecting grantees for monitoring,
       •   Identifying program risks and setting monitoring objectives, and
       •   Documenting the process and recording the rationale for choosing grantees.

Each field office will perform the risk analysis using the methodology described in this Notice.
The Notice reflects a biannual assessment period and provides policy and guidance for fiscal
years 2010 and 2011. For fiscal year 2011, field offices will conduct an updated review of the
risk analysis results for fiscal year 2010. This updated review will be incorporated into GMP
under the “Risk Analysis” module for the respective grantee and grant program(s). Both CPD
managers and field staff are assigned distinct responsibilities to complete the risk analysis as
outlined further in this Notice.

HUD Handbook 1840.1, REV-3, Departmental Management Control Program, Chapter 1
Section 1-2. The Department [HUD] will establish and maintain a cost-effective system of
management controls to provide reasonable assurance that programs and activities are effectively
and efficiently managed and to protect against fraud, waste, abuse, and mismanagement.

Section 1-3. Management controls are policies and procedures adopted by managers to ensure
that program objectives are efficiently and effectively accomplished within planned timeframes,
within budgetary limitations and with the intended quality and quantity of output.

HUD Handbook 6509.2, Community Planning and Development Monitoring Handbook,
Chapter 8
This chapter includes guidance for monitoring the NSPs that were created under separate pieces
of legislation. Exhibits are included in the chapter to assist in the reviews of the programs.




                                               15
NSP Policy Alert: Guidance on Developers, Subrecipients, and Contractors – August 27,
2010
“…if a developer’s budget called for directly paying a project manager and also a developer fee
that would be double-dipping and would not be allowed. Direct costs or indirect costs of a
developer related to project management should be paid only through the fee.”

NSP Policy Alert: Guidance on Developers, Subrecipients, and Contractors – Updated
November 16, 2011
“…if a developer’s budget called for directly paying a project manager and also a developer fee
that would be double-dipping and would not be allowed. Direct costs or indirect costs of a
developer related to project management should be paid only through the fee.”




                                               16