oversight

The County of Beaver, Beaver Falls, PA, Did Not Always Administer Its HOME Program in Accordance With Applicable HUD and Federal Requirements

Published by the Department of Housing and Urban Development, Office of Inspector General on 2015-01-30.

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

    County of Beaver, Beaver Falls, PA
             HOME Investment Partnerships Program




Office of Audit, Region 3        Audit Report Number: 2015-PH-1001
Philadelphia, PA                                   January 30, 2015
To:            John E. Tolbert III, Director, Office of Community Planning and Development,
               Pittsburgh Field Office, 3ED
From:          David E. Kasperowicz, Regional Inspector General for Audit, Philadelphia
               Region, 3AGA
Subject:       The County of Beaver, Beaver Falls, PA, Did Not Always Administer Its HOME
               Program in Accordance With Applicable HUD and Federal Requirements




Attached is the U.S. Department of Housing and Urban Development (HUD), Office of Inspector
General’s (OIG) final results of our review of Beaver County’s administration and use of HOME
Investment Partnerships Program funds.
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
215-430-6730.
                    Audit Report Number: 2015-PH-1001
                    Date: January 30, 2015

                    The County of Beaver, Beaver Falls, PA, Did Not Always Administer Its
                    HOME Program in Accordance With Applicable HUD and Federal
                    Requirements



Highlights

What We Audited and Why
We audited the County of Beaver, Beaver Falls, PA’s administration of the U.S. Department of
Housing and Urban Development’s (HUD) HOME Investment Partnerships Program funds. We
audited the County because we received a complaint alleging misuse of Federal funds resulting
from a potential conflict of interest involving a County employee. Our audit objective was to
determine whether the County administered its HOME program in accordance with applicable
HUD and Federal requirements.

What We Found
The County did not always administer its HOME program in accordance with applicable HUD
and Federal requirements. The allegation in the complaint had merit. The County allowed an
apparent conflict of interest to exist. It also (1) did not commit program funds to the owner of an
assisted property, (2) did not adequately evaluate developers’ sources and uses of funds, (3) did
not execute and record a mortgage, (4) did not impose deed restrictions, (5) did not determine
whether its potential business partners were excluded or disqualified from participating in a
HOME-funded project, (6) made payments for expenses that were not supported with adequate
documentation, (7) did not ensure that program documentation was accurate and complete, and
(8) did not enforce the terms of its loan agreement. These deficiencies occurred because the
County did not establish and implement controls to ensure that it complied with applicable program
requirements. As a result, it could not adequately support disbursements totaling $519,284.

What We Recommend
We recommend that HUD direct the County to (1) execute and record a mortgage, (2) impose
and record deed restrictions, (3) provide documentation to support its use of $519,284 in
program funds or reimburse its program from non-Federal funds for any amount that it cannot
support, and (4) establish and implement controls to ensure that it complies with applicable
program requirements. We also recommend that HUD (1) evaluate the apparent conflict-of-
interest situation identified in this report, determine whether a conflict of interest existed, and
pursue administrative sanctions if warranted; and (2) provide technical assistance to the County
to ensure that it administers its HOME program in accordance with applicable HUD and Federal
requirements.
Table of Contents
Background and Objective......................................................................................3

Results of Audit ........................................................................................................5
         Finding: The County Did Not Always Administer Its HOME Program in
         Accordance With Applicable HUD and Federal Requirements ................................... 5

Scope and Methodology .........................................................................................10

Internal Controls ....................................................................................................12

Appendixes ..............................................................................................................13
         A. Schedule of Questioned Costs .................................................................................. 13

         B. Auditee Comments and OIG’s Evaluation ............................................................. 14




                                                             2
Background and Objective
The HOME Investment Partnerships Program was created under Title II of the Cranston-
Gonzalez National Affordable Housing Act, as amended, and is regulated by 24 CFR (Code of
Federal Regulations) Part 92. The program provides formula grants to States and localities that
communities use, often in partnership with local nonprofit groups, to fund a wide range of
activities that build, buy, or rehabilitate affordable housing for rent or home ownership or
provide direct rental assistance to low-income people. It is the largest Federal block grant
provided to State and local governments designed exclusively to create affordable housing for
low-income households.

Participating jurisdictions may choose among a broad range of eligible activities, using program
funds (1) to provide home purchase or rehabilitation financing assistance to eligible homeowners
and new home buyers; (2) to build or rehabilitate housing for rent or ownership; or (3) for other
reasonable and necessary expenses related to the development of non-luxury housing, including
site acquisition or improvement, demolition of dilapidated housing to make way for a program-
assisted development, and payment of relocation expenses. HOME funds cannot be committed
to a project unless the participating jurisdictions can reasonably expect construction or
rehabilitation to begin within 12 months. Participating jurisdictions are required to commit
HOME funds within 24 months and expend them within 5 years after the last day of the month in
which HUD notifies the participating jurisdiction of HUD’s execution of the HOME agreement.

The County of Beaver is a participating jurisdiction. It administers its HOME program through
its Community Development Program Office. The County primarily used its HOME funds on
rental housing acquisition and rehabilitation, home buyer assistance, and tenant-based rental
assistance activities. For program years 2010 and 2011, the County received HOME program
funds totaling about $1.6 million. The following chart provides details.


                          Program year      HOME funds received

                                2010               $ 847,268
                                2011                 749,385
                               Total               $1,596,653

As of September 2013, the County’s two largest open projects involved the acquisition and
rehabilitation of two properties as shown in the table below.




                                               3
                                        Program             Activity           Amount
              Activity                    year              amount            disbursed
    1760 (Connecticut Avenue)             2010               $455,000           $404,647
        1816 (Elm Street)                 2011                210,000            205,809
               Totals                                        $665,000           $610,456

For activity 1760, the County provided a developer a $455,000 forgivable loan to convert a
commercial structure located at 262 Connecticut Avenue, Rochester, PA, to 36 rental units, 6 of
which would be designated as HOME-assisted units with 3 units to be equipped for handicapped
persons. As of October 2014, the rehabilitation of the property had not been completed.

For activity 1816, the County provided a developer a $210,000 forgivable loan to convert a
school building located at 1135 Elm Street, Monaca, PA, to 11 rental units, 4 of which would be
designated as HOME-assisted units. As of January 2014, the rehabilitation had been completed,
and the units were occupied.

Our audit objective was to determine whether the County administered its HOME program in
accordance with applicable HUD and Federal requirements.




                                               4
Results of Audit

Finding: The County Did Not Always Administer Its HOME
Program in Accordance With Applicable HUD and Federal
Requirements
The allegation in the complaint had merit. The County allowed an apparent conflict of interest to
exist. It also (1) did not commit program funds to the owner of an assisted property, (2) did not
adequately evaluate developers’ sources and uses of funds, (3) did not execute and record a
mortgage, (4) did not impose deed restrictions, (5) did not determine whether its potential
business partners were excluded or disqualified from participating in a HOME-funded project,
(6) made payments for expenses that were not supported with adequate documentation, (7) did
not ensure that program documentation was accurate and complete, and (8) did not enforce the
terms of its loan agreement. These deficiencies occurred because the County did not establish
and implement controls to ensure that it complied with applicable program requirements. As a
result, it could not adequately support disbursements totaling $519,284.

The County Did Not Properly Administer Activities
According to regulations at 24 CFR 92.504(a), the County was responsible for managing the
day-to-day operations of its HOME program, ensuring that program funds were used in
accordance with program requirements and loan agreements and taking appropriate action when
problems arose. The County

        •    Allowed an apparent conflict of interest to exist for activity 1760 when it awarded
             program funds not to exceed $455,000 in June 2011 to a limited partnership
             developer 1 in which a County employee 2 was a limited partner. The duties and
             responsibilities of the County employee provided the employee the potential to gain
             inside information concerning the County’s HOME program. Regulations at 24 CFR
             92.356 prohibit any person who is in a position to participate in a decision-making
             process or gain inside information with regard to program activities from obtaining a
             financial interest or benefit from a HOME-assisted activity or having any interest in
             any contract, subcontract, or agreement during his or her tenure or for 1 year after. In
             this case, in November 2011, the general partner made two payments totaling $34,000
             to the employee from the HOME-assisted project’s bank account. One payment
             ($21,500) was made to pay the employee for legal services rendered that were related



1
  T. Rose Developers, LP, was the developer. The limited partnership entity consisted of Rosenberger Land
Company, Inc., as the general partner, and Greenville Development, LLC, of which the County employee was
president, as the limited partner.
2
  The County employee performed the duties of both a part-time district attorney and solicitor within the County
controller’s office.



                                                         5
            to the project. The other payment ($12,500) was made to the employee on behalf of
            the project’s demolition contractor for legal services to be provided that were not
            related to the project. The general partner did not submit the $21,500 for legal
            services to the County for reimbursement from HOME funds. However, the general
            partner submitted and was reimbursed from HOME funds for all of the demolition
            expenses related to the project, including the $12,500 that was paid to the County
            employee on behalf of the demolition contractor.

        •   Did not commit program funds to the owner of the property for activity 1760. The
            loan agreement, dated June 9, 2011, identified the owner as T. Rose Developers.
            However, the County’s real estate property database indicated that the property was
            owned by Rosenberger Land Company. 3 Regulations at 24 CFR 92.2(1) required that
            a commitment take place only when the County had met the requirements to commit
            to a specific local project and executed a written legally binding agreement with the
            owner. At the time of the award, the County was not aware that the loan agreement
            was inaccurate. When we brought this issue to the County’s attention, it executed an
            amendment to the loan agreement on March 13, 2014, 33 months later, with
            Rosenberger Land Company, the owner of the project.

        •   Did not adequately evaluate developers’ sources and uses of funds. For activity 1760,
            the County did not have documentation to show that it verified the owner’s equity of
            $300,000 and that the developer had a $1.1 million bank loan. Documentation in the
            County’s files showed that the developer had a $1.4 million line of credit loan and
            that $716,000 of that amount was going to be disbursed to a law firm. The $716,000
            was for unrelated properties, leaving only $646,000 of the loan for the assisted
            property. For activity 1816, the County did not have documentation to show that it
            verified the owner’s equity of $167,001 and that the developer had a $250,000 bank
            loan. Project recordkeeping requirements at 24 CFR 92.508(a)(3)(ii) required the
            County to maintain records regarding the source and use of funds for each project,
            including supporting documentation in accordance with 24 CFR 85.20. Specifically,
            regulations at 24 CFR 85.20(b)(2) required the County to maintain records which
            adequately identified the source and use of funds provided for assisted activities.
            Also, requirements at 24 CFR 92.250 required the County to evaluate the project in
            accordance with its adopted guidelines before committing funds to a project. The
            deficiency described above occurred because the County did not request
            documentation beyond the owner’s certification in the application for funds.

        •   Did not execute and record the mortgage as required. For activity 1760, the mortgage
            was recorded 12 months after the County initially signed the agreement with the
            developer and after the County had disbursed program funds. However, the mortgage



3
 Anthony T. Rosenberger was the general partner of T. Rose Developers, LP, and president of Rosenberger Land
Company.



                                                      6
    did not identify the assisted project since it contained incorrect parcel numbers.
    During the audit, the County provided the owner a revised modification of the
    mortgage, but as of September 2, 2014, the owner had not executed or recorded the
    document as required by Chapter 1, Section 1.3.F of HUD’s Compliance in HOME
    Rental Projects guidebook to protect HUD’s and the County’s interests. Until it is
    recorded, the mortgage is not effective or valid. Therefore, lenders, title search
    companies, and other mortgage industry professionals would not be aware of its
    existence.

•   Did not impose deed restrictions for activities 1760 and 1816 as required.
    Regulations at 24 CFR 92.252(e) and 92.504(c)(3)(vii) required the County to impose
    affordability requirements through a deed restriction, covenants running with the
    land, or other mechanisms approved by HUD. The deed restriction must be recorded
    to ensure that the property remains affordable for the minimum period of affordability
    prescribed in 24 CFR 92.252(e) regardless of transfer of ownership. Regulations at
    24 CFR 92.503(b) state that any HOME funds invested in housing that does not meet
    the affordability requirements for the period specified in 24 CFR 92.252 must be
    repaid. The County did not comply with any of these requirements because it
    believed that recording affordability requirements in the mortgage and placing a
    municipal lien on the property was sufficient to ensure that the affordability
    requirements were met.

•   Did not determine whether its potential business partners were excluded or
    disqualified from participating in a HOME-funded project as required by 2 CFR
    2424.300. Additionally, it did not ensure that developers made the same
    determination for their contractors and subcontractors as required by their agreements
    with the County. County officials stated that they were not aware of the requirement
    and believed it was the developer’s responsibility. Although none of the developers,
    contractors, or subcontractors associated with activities 1760 and 1816 were
    excluded, disqualified, or otherwise ineligible to participate in the program, the
    County should have screened its business partners.

•   Made payments for expenses that were not supported with adequate documentation.
    We reviewed project expenses of $404,647 for activity 1760 and $205,809 for
    activity 1816. The County did not have adequate documentation to support $391,500
    of the payments for activity 1760 and $127,784 for activity 1816. The County did not
    always have invoices or other documentation, such as contracts or timesheets, to
    demonstrate that the costs were reasonable and related to the project. Regulations at
    24 CFR 92.505(a) incorporate the cost allowability and reasonableness standards of
    24 CFR 85.20 into the HOME rule. Project recordkeeping requirements at 24 CFR
    92.508(a)(3)(ii) required the County to maintain records regarding the source and
    application of funds for each project, including supporting documentation in
    accordance with 24 CFR 85.20. Regulations at 24 CFR 85.20(b)(2) required the
    County to maintain records which adequately identified the source and application of
    funds provided for assisted activities and 24 CFR 85.20(b)(6) required accounting



                                        7
             records to be supported by source documentation such as paid bills, payrolls, time and
             attendance records, and contracts. The County reiterated these requirements in the
             loan agreement. The deficiencies described above occurred because the County did
             not enforce the terms of its loan agreement with the developer, as required by 24 CFR
             92.504(a), and obtain and review source documentation, such as contracts or other
             documentation, to ensure the reasonableness of individual costs and the overall cost
             of the project.

         •   Did not ensure that program documentation was accurate and complete. For activity
             1760, the application, rental mortgage, note, loan agreement, environmental review,
             and other program documents contained errors. For example, the mortgage did not
             identify the correct land parcel numbers of the assisted project. The executed loan
             agreement did not include required provisions for rent increases, a drug-free
             workplace, and 5-year record retention requirements. The environmental review had
             the incorrect address and land parcel number. As a result, the State Bureau for
             Historical Preservation provided an opinion on a property not associated with the
             project. 4 Section (I)(B) of HUD’s Office of Community Planning and Development
             (CPD) Notice CPD-01-11 required the environmental review process to be completed
             before physical action was taken on a site or a commitment or expenditure of HUD or
             non-HUD funds was made for property acquisition, rehabilitation, conversion, lease,
             repair, or construction activities. For activity 1816, the mortgage did not include the
             correct land parcel numbers and affordability covenants, and the loan agreement did
             not include program requirements governing record retention, rent increases, and a
             drug-free workplace. Also, contrary to regulations at 24 CFR 92.504 (c)(3)(1), the
             County’s loan agreements for activities 1760 and 1816 did not include a description
             of the use of the HOME funds, including the tasks to be performed. The regulations
             required these items to be in sufficient detail to provide a sound basis for the County
             to effectively monitor performance under the agreement. These errors occurred
             because the County did not carefully review its program documentation to ensure that
             it was accurate and complete.

         •   Did not enforce the terms of its loan agreement for activity 1760. Regulations at 24
             CFR 92.504(a) required the County to ensure that HOME funds were used in
             accordance with all program requirements and loan agreements. According to the
             agreement, the developer agreed to complete the project by June 2012. However, as
             of October 2014, the Borough of Rochester had not issued a certificate of occupancy
             for the project because the developer needed to provide additional documentation to
             ensure compliance with elevator, fire detection, and fire suppression systems.
             Although a certificate of occupancy had not been issued, tenants occupied the
             building, which was prohibited. Regulations at 24 CFR 92.251(a)(1) required the




4
  During the audit, the County contacted the Bureau for Historical Preservation and provided the correct address of
the property. The Bureau did not identify any concerns with the assisted property.



                                                         8
                County to ensure that the project met all applicable local codes, rehabilitation
                standards, and zoning ordinances at the time of completion to ensure that HOME-
                assisted housing was decent, safe, and sanitary.

Conclusion
The allegation in the complaint had merit. The County allowed an apparent conflict of interest to
exist and did not always administer its HOME program in accordance with applicable HUD and
Federal requirements. These conditions occurred because the County did not establish and
implement controls to ensure that it complied with applicable program requirements. As a result, it
could not adequately support disbursements totaling $519,284. 5
Recommendations
We recommend that the Director of HUD’s Pittsburgh Office of Community Planning and
Development require the County to

          1A.      Execute and record the mortgage for activity 1760.

          1B.      Impose and record deed restrictions for activities 1760 and 1816.

          1C.      Provide documentation to support its use of $519,284 in program funds for
                   activities 1760 and 1816 or reimburse its program from non-Federal funds for any
                   amount that it cannot support.

          1D.      Correct the errors in the project documentation identified by the audit.

          1E.      Establish and implement controls to ensure that it complies with applicable program
                   requirements.

We also recommend that the Director of HUD’s Pittsburgh Office of Community Planning and
Development

          1F.      Evaluate the apparent conflict-of-interest situation identified in this report,
                   determine whether a conflict of interest existed, and pursue administrative
                   sanctions if warranted.

          1G.      Provide technical assistance to the County to ensure that it administers its HOME
                   program in accordance with applicable HUD and Federal requirements.




5
    $391,500 + $127,784 = $519,284



                                                      9
Scope and Methodology
We performed our onsite audit work from August 2013 through February 2014 at the County’s
Community Development Program Office located at 1013 Eighth Avenue, Beaver Falls, PA.
The audit covered the period September 1, 2010, through August 31, 2012, but was expanded
when necessary.
To accomplish our objective, we reviewed

        •   HUD’s Integrated Disbursement and Information System 6 to identify the open
            activities that the County assisted with program funds. As of September 2013, the
            County had five open activities that were assisted with program funds totaling
            $814,232. We selected the two activities with the largest amount of program funds
            associated with them for review. Those activities were 1760 (Connecticut Avenue),
            with associated program funds totaling $455,000, and 1816 (Elm Street), with
            associated program funds totaling $210,000.

        •   Applicable HUD regulations at 24 CFR Parts 91, 92, and 85 and Federal regulations
            at 2 CFR Part 2424.

        •   Applicable guidance contained in HUD Notice CPD 98-1 and HUD’s Monitoring
            HOME guidebook, dated September 2010.

        •   HUD’s April 2012 report of its onsite monitoring review of the County’s program.

        •   The County’s program documents, including the 2010-2011consolidated plans, 2010-
            2011 consolidated annual performance and evaluation reports, board resolutions,
            program loan agreements, canceled checks, cash disbursement ledgers, project
            monitoring reports, correspondence, and other documentation.

        •   Project activity files and documentation, including the developers’ applications, loan
            applications, bank loan documentation, loan agreements, mortgages, notes, subsidy-
            layering analysis, deeds, environmental reviews, American Institute of Architects
            application and certification for payments, invoices, and other documentation.

        •   The lender’s security interest in the limited partnership agreement, correspondence,
            commercial security agreement, construction loan agreement, and other bank
            documentation related to activity 1760.



6
 HUD’s Integrated Disbursement and Information System provides program information and funding data for the
HOME program.



                                                     10
We visited the project sites related to activities 1760 and 1816 and interviewed County
employees, developers and HUD staff.

To achieve our audit objective, we relied in part on computer-processed data from the County’s
computer system and reports from HUD’s Integrated Disbursement and Information System.
Although we did not perform a detailed assessment of the reliability of the data, we did perform
a minimal level of testing and found the data to be adequate for our purposes.
We conducted the audit in accordance with generally accepted government auditing standards.
Those standards require that we plan and perform the audit to obtain sufficient, appropriate
evidence to provide a reasonable basis for our findings and conclusions based on our audit
objective(s). We believe that the evidence obtained provides a reasonable basis for our findings
and conclusions based on our audit objective.




                                               11
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:

•   Program operations – Policies and procedures that management has implemented to
    reasonably ensure that a program meets its objectives.

•   Validity and reliability of data – Policies and procedures that management has implemented
    to reasonably ensure that valid and reliable data are obtained, maintained, and fairly
    disclosed.

•   Compliance with laws and regulations – Policies and procedures that management has
    implemented to reasonably ensure that the use of resources 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.
Significant Deficiency
Based on our review, we believe that the following item is a significant deficiency:

•   The County did not establish and implement controls to ensure that it complied with applicable
    program requirements.




                                                  12
Appendixes

Appendix A


                             Schedule of Questioned Costs
                        Recommendation
                                             Unsupported 1/
                            number
                                1C                  $519,284


1/   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.




                                             13
Appendix B
             Auditee Comments and OIG’s Evaluation



Ref to OIG    Auditee Comments
Evaluation




                              14
Ref to OIG
Evaluation   Auditee Comments




Comment 1



Comment 2


Comment 3




Comment 4




                           15
Ref to OIG
Evaluation   Auditee Comments




Comment 5




Comment 6




                           16
Ref to OIG
Evaluation   Auditee Comments




Comment 7




Comment 8




                           17
Ref to OIG
Evaluation   Auditee Comments




Comment 9




                           18
Ref to OIG
Evaluation   Auditee Comments




Comment 10

Comment 11

Comment 12




Comment 13




                           19
Ref to OIG
Evaluation   Auditee Comments




Comment 14




                           20
                         OIG Evaluation of Auditee Comments

Comment 1   The County stated that the employee who was a part-time district attorney and
            solicitor for the County controller had no role in the decision-making process or
            inside knowledge of the HOME program. As stated in the audit report, the duties
            and responsibilities of the County employee provided the employee the potential
            to gain inside information concerning the County’s HOME program. Regulations
            at 24 CFR 92.356(b) prohibit any person who is in a position to gain inside
            information with regard to program activities from obtaining a financial interest
            or benefit from a HOME-assisted activity or having any interest in any contract,
            subcontract, or agreement during his or her tenure or for 1 year after. The
            regulations at 24 CFR 92.356(c) prohibit employees of the participating
            jurisdiction from having a financial interest in or receiving a financial benefit
            from a HOME-funded activity.

Comment 2   The County stated that upon receiving a complaint regarding the employee who
            was a part-time district attorney and solicitor for the County controller the director
            and program manager of the County’s HOME program immediately evaluated the
            facts, with the Solicitor’s office, to determine if such conflict existed and what
            steps would be required to remedy the situation. The County also stated that after
            careful review it was determined that no conflict of interest existed, apparent or
            otherwise. The County made reference to this determination during the audit.
            We requested the County to provide documentation supporting this determination
            however, the County did not provide any of the requested documentation.

            The regulations at 24 CFR 92.356(d) state that upon the written request of the
            participating jurisdiction, HUD may grant an exception to the provisions of 24
            CFR 92.356(b) on a case-by-case basis when it determines that the exception will
            serve to further the purposes of the HOME program and the effective and efficient
            administration of the participating jurisdiction's program or project. The County
            did not seek this exception. An exception may be considered only after the
            participating jurisdiction has provided a disclosure of the nature of the conflict,
            accompanied by an assurance that there has been public disclosure of the conflict
            and a description of how the public disclosure was made and an opinion of the
            participating jurisdiction's attorney that the interest for which the exception is
            sought would not violate State or local law.

Comment 3   The County provided a copy of an affidavit of the demolition contractor dated
            April 16, 2014, affirming that he directed the general partner to pay $12,500 to
            the employee who was a part-time district attorney and solicitor for the County
            controller. HUD should include this document in its evaluation of the apparent
            conflict-of-interest situation identified by the audit to determine whether a conflict
            of interest existed, and pursue administrative sanctions if warranted. Although
            the general partner owed the demolition contractor $12,500 for demolition work,
            he directed the general partner to pay the employee who was a part-time district



                                             21
            attorney and solicitor for the County controller because the employee was also
            the demolition contractor’s counsel and the employee was going to use the
            $12,500 to satisfy a personal obligation that he owed to a creditor. The County
            provided a copy of this affidavit during the audit and we requested that it provide
            documentation to support the statements made therein. However, the only
            document that the County provided was a copy of the demolition contractor’s
            application for a demolition permit dated August 2011.

Comment 4   The County stated that it was not aware that the developer provided incorrect
            ownership information. As we recommended, the County needs to establish and
            implement controls to ensure that it complies with applicable program requirements.
            According to regulations at 24 CFR 92.504(a), the County was responsible for
            managing the day-to-day operations of its HOME program and ensuring that
            program funds were used in accordance with program requirements, including the
            regulations at 24 CFR 92.2(1) that required a commitment take place only when
            the County had met the requirements to commit to a specific local project and
            executed a written legally binding agreement with the owner.

Comment 5   The County stated that it fulfilled its obligation in this area because it conducted
            an underwriting of the project in January 2011 that showed, with back-up
            documentation, that the project’s sources of funds equaled the uses of funds and
            that it could not have known what the developer would do with his own equity.
            However, as stated in the audit report, the County did not have documentation to
            show that it verified the owner’s equity of $300,000 and that the developer had a
            $1.1 million bank loan for activity 1760. In addition, it did not have
            documentation to show that it verified the owner’s equity of $167,001 and that the
            developer had a $250,000 bank loan for activity 1816. Project recordkeeping
            requirements at 24 CFR 92.508(a)(3)(ii) required the County to maintain records
            regarding the source and use of funds for each project, including supporting
            documentation in accordance with 24 CFR 85.20. Specifically, regulations at 24
            CFR 85.20(b)(2) required the County to maintain records which adequately
            identified the source and use of funds provided for assisted activities. Although
            we requested the required documentation during the audit, the County did not
            provide it during the audit or in its written response to the audit report.

Comment 6   The County stated that it placed a municipal lien against the property which
            protects HUD’s and the County’s interests. However, the municipal lien recorded
            against the property did not include any language requiring compliance with the
            HOME affordability requirements or other program regulations. Until it is
            recorded, the mortgage is not effective or valid. Therefore, lenders, title search
            companies, and other mortgage industry professionals would not be aware of its
            existence.

Comment 7   The County stated that it is impossible for it to provide a deed restriction or
            covenant running with the land for activity 1760 until the Borough of Rochester



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              issues a Certificate of Occupancy and an eligible HOME household moves into
              the units. At that time, the period of affordability will begin. The County also
              stated that when the Certificate of Occupancy is obtained it will record either a
              deed restriction or covenant running with the land that meets the requirements of
              24 CFR 92.252(e). We disagree with the County’s assertion. The HOME
              regulations do not require a specific time period for the deed restriction or
              covenant running with the land to be imposed. Although the period of
              affordability begins after project completion, the regulations do not prohibit the
              County from imposing a deed restriction before project completion. Moreover,
              for activity 1816, as of December 16, 2014, the County had not provided
              documentation to demonstrate that it had imposed a deed restriction or covenant
              running with the land although, as of January 2014, the project was completed
              and the units were occupied.

Comment 8     The County stated that it has begun revising its policies to incorporate the
              screening for eligibility in its Policies and Procedures Manual adopted July 2014.
              We have not reviewed any of the County’s revisions. As part of the normal audit
              resolution process, HUD will work with the County to ensure that its corrective
              actions meet the intent of our recommendations.

Comment 9     The County stated that it inadvertently included language referring to 24 CFR
              85.20 in its loan agreement to which developer agreements are not subject, as
              defined in 24 CFR 92.505. The County asserted that this error was more clerical
              in nature than consequential to the proper administration of the project activities.
              We disagree with the County’s assertion. If the requirements were in the loan
              agreement, they were applicable. Moreover, project recordkeeping requirements
              at 24 CFR 92.508(a)(3)(ii) required the County to maintain records regarding the
              source and application of funds for each project, including supporting
              documentation in accordance with 24 CFR 85.20. Regulations at 24 CFR
              85.20(b)(2) required the County to maintain records which adequately identified
              the source and application of funds provided for assisted activities and 24 CFR
              85.20(b)(6) required accounting records to be supported by source documentation
              such as paid bills, payrolls, time and attendance records, and contracts. During
              the audit, the County sent a certified letter to the developer requesting additional
              documentation such as invoices, contracts and other documentation to support the
              payments so that it could be in compliance with program regulations. However,
              although the loan agreement required the developer to make available to the
              County all records related to the project, the developer did not respond to the
              County’s request nor provide the requested documentation.

Comment 10 The County recognized that clerical errors were made in its administration of the
           activities that we audited and it opined that the errors were inconsequential to the
           execution and management of the activities. We disagree with the County’s
           characterization of the clerical errors as inconsequential. For example, as stated
           in the audit report, for activity 1760, the environmental review had the incorrect



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              address and land parcel number. As a result, the State Bureau for Historical
              Preservation provided an opinion on a property not associated with the project.

Comment 11 The County recognized the absence of rent increase language and drug-free
           workplace provisions in its loan agreement and stated that those requirements
           have been incorporated in the updated loan agreement template. We did not
           review the County’s updated loan agreement template. As part of the normal
           audit resolution process, HUD will work with the County to ensure that its
           corrective actions meet the intent of our recommendations.

Comment 12 The County stated that it was its determination that Section II of its loan
           agreement provided sufficient detail regarding the scope of work and a schedule
           of completion that meets the requirements of 24 CFR 92.504(c)(3)(i). However,
           as stated in the audit report, the County’s loan agreements for activities 1760 and
           1816 did not include a description of the use of the HOME funds, including the
           tasks to be performed, contrary to regulations at 24 CFR 92.504(c)(3)(i). The
           regulations required these items to be in sufficient detail to provide a sound basis
           for the County to effectively monitor performance under the agreement. Section
           II of the loan agreements for activities 1760 and 1816 did not include a
           description of the use of HOME funds including the tasks to be performed. The
           agreements lacked sufficient detail for the County to effectively monitor
           performance under the agreement.

Comment 13 The County stated that to the best of its knowledge, HOME funds were used in
           accordance with all program requirements, although it acknowledged that it was
           aware that the building was occupied without an occupancy permit. As stated in
           the audit report, regulations at 24 CFR 92.504(a) required the County to ensure
           that HOME funds were used in accordance with all program requirements and
           loan agreements. The developer agreed to complete the project by June 2012.
           However, as of October 2014, more than 2 years after the target completion date,
           the project was not completed. The Borough of Rochester had not issued a
           certificate of occupancy for the project because the developer failed to provide
           additional documentation to ensure compliance with elevator, fire detection, and
           fire suppression systems. Although a certificate of occupancy had not been
           issued, tenants occupied the building, which was prohibited because regulations at
           24 CFR 92.251(a)(1) required the County to ensure that the project met all
           applicable local codes, rehabilitation standards, and zoning ordinances at the time
           of completion to ensure that HOME-assisted housing was decent, safe, and
           sanitary. Regulations at 24 CFR 92.504(a) required the County to take
           appropriate action when performance problems arose. The loan agreement
           allowed the County to suspend or terminate the agreement, in whole or in part, if
           the developer materially failed to comply with any term of the agreement, or with
           any of the rules, regulations or provisions referred to therein. The County stated
           that it placed a lien on the property when it was evident that the developer did not
           comply with its orders. However, placing a lien on a property that should have



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              been completed more than 2 years ago is insufficient when a significant amount
              of HOME funds have been expended for a project that is not benefitting families
              in need of affordable housing.

Comment 14 The County stated that procedural controls were in place throughout the project
           and that it has corrected the clerical errors and certain document omissions,
           constructed new templates for HOME applications and loan agreements and
           created written policies and procedures that comply with program requirements.
           While the County had some written procedures and controls, it did not have
           controls to ensure that it complied with applicable program requirements
           discussed in the audit report. We did not review any of the County’s
           improvements to its controls because they were made at the end of the audit. As
           part of the normal audit resolution process, HUD will work with the County to
           ensure that its corrective actions meet the intent of our recommendations.




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