oversight

HUD's Oversight of the Use of Community Development Block Grant (CDBG) Funds To Repay Section 108 Loans Was Adequate

Published by the Department of Housing and Urban Development, Office of Inspector General on 2018-09-26.

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

     Office of Community Planning and
                Development,
              Washington, DC
        HUD’s Oversight of the Use of Community
     Development Block Grant Funds To Repay Section
                       108 Loans



Office of Audit, Region 4     Audit Report Number: 2018-AT-0001
Atlanta, GA                                   September 26, 2018
To:            Stanley Gimont, Deputy Assistant Secretary for Grant Programs, DG

                    //Signed//
From:          Nikita Irons, Regional Inspector General for Audit, 4AGA
Subject:       HUD’s Oversight of the Use of Community Development Block Grant (CDBG)
               Funds To Repay Section 108 Loans Was Adequate


Attached is the U.S. Department of Housing and Urban Development (HUD), Office of Inspector
General’s (OIG) final results of our review of HUD’s oversight of CDBG funds used for Section
108 repayments.
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 website. 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
404-331-3369.
                   Audit Report Number: 2018-AT-0001
                   Date: September 26, 2018

                   HUD’s Oversight of the Use of Community Development Block Grant Funds
                   To Repay Section 108 Loans Was Adequate



Highlights

What We Audited and Why
We audited the U.S. Department of Housing and Urban Development’s (HUD) oversight of
Community Development Block Grant (CDBG) funds used for Section 108 repayments. This
audit was part of our annual audit plan. The objective of this audit was to determine whether
HUD effectively monitored the use of CDBG funds in repaying Section 108 loans and whether it
was feasible to enact a threshold or maximum amount of CDBG funds that grantees may use to
repay loans.

What We Found
HUD’s oversight of the use of CDBG allocations to repay Section 108 loans was adequate. In
addition, HUD’s information system tracked the extent to which communities and States used
CDBG allocations to repay Section 108 loans. Our review of the six recipients that had used
their CDBG allocations to repay Section 108 loans did not identify any adverse effect, which
would justify establishing thresholds to limit the amount of program funds that may be used to
repay loans.

What We Recommend
There are no recommendations.
Table of Contents
Background and Objective......................................................................................3

Results of Audit ........................................................................................................4
         Finding 1: HUD’s Oversight of the Use of Community Development Block Grant
         Funds To Repay Section 108 Loans Was Adequate ...................................................... 4

Scope and Methodology ...........................................................................................9

Internal Controls ....................................................................................................10

Appendix .................................................................................................................11
         A. Auditee Comments and OIG’s Evaluation ............................................................. 11




                                                             2
Background and Objective
The Community Development Block Grant (CDBG) program provides annual grants on a formula
basis to entitled cities, urban counties, and States to develop viable urban communities by providing
decent housing and a suitable living environment and by expanding economic opportunities,
principally for low- and moderate-income persons. Over a 1-, 2-, or 3-year period, as selected by
the grantee, not less than 70 percent of CDBG funds must be used for activities that benefit low- and
moderate-income persons. In addition, each activity must meet one of the following national
objectives for the program: benefit low- and moderate-income persons, prevent or eliminate slums
or blight, or address community development needs having a particular urgency because existing
conditions pose a serious and immediate threat to the health or welfare of the community for which
other funding is not available.

Grantees are allowed to use CDBG funds to repay Section 108 loans. The Section 108 Loan
Guarantees program is the loan guarantee provision of the CDBG program. Section 108 loans
provide grantees with a source of financing for economic development, housing rehabilitation,
public facilities, and large-scale physical development projects. The principal security for the loan
guarantees is a pledge by the grantee or the State regarding its use of current and future CDBG
funds. Section 108 obligations are financed through underwritten public offerings and may be for
terms of up to 20 years. An entitlement public entity may apply for up to five times the latest
approved CDBG amount.

The audit objective was to determine whether HUD effectively monitored the use of CDBG
funds to repay Section 108 loans and whether it was feasible to enact a threshold or maximum
amount of CDBG funds that grantees may use to repay loans.




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Results of Audit

Finding 1: HUD’s Oversight of the Use of Community Development
Block Grant Funds To Repay Section 108 Loans Was Adequate
HUD’s oversight of the use of Community Development Block Grant (CDBG) allocations to
repay Section 108 loans was adequate. In addition, HUD’s information system tracked the
extent to which communities and States used CDBG allocations to repay Section 108 loans. Our
review of six recipients 1 that had used their CDBG allocations for Section 108 loan repayments
did not identify any adverse effect, which would justify establishing thresholds to limit the
amount of program funds that may be used to repay loans.

HUD’s Oversight Was Adequate
HUD’s oversight of the Section 108 loan repayments was adequate. The Financial Management
Division, within the Office of Community Planning and Development, is responsible for the
oversight of Section 108 loan repayments. During the underwriting of the Section 108 loans,
HUD analyzed loan repayment amounts against the recipient’s CDBG allocation to ensure that
the loan did not constitute a burden to the grantee and increase HUD’s risk of a loan default.
HUD officials informed us that at the time of each quarterly Section 108 loan repayment, HUD
verified whether a grantee’s CDBG allocation was sufficient to cover the loan repayment
amount. In addition, HUD officials stated there had not been a situation in which the CDBG
allocation was not sufficient to cover the Section 108 loan debt.

In addition, HUD’s Integrated Disbursement and Information System 2 tracked the extent to
which communities and States used CDBG allocations to repay Section 108 loans. Grantees
assigned specific matrix codes in HUD’s information system to Section 108 loan repayments
funded with CDBG funds. The data were collected in HUD’s information system and made part
of national expenditure reports of CDBG-funded activities. However, HUD did not use these
data to identify possible trends or changes that could affect the CDBG program.

According to HUD’s information system, there had been about a 9 percent decline in the number
of recipients using CDBG allocations to repay Section 108 loans. From 217 recipients in
program year 3 2013, the number had declined to 197 during program year 2015 as shown in table
1.




1
    See the Scope and Methodology section of this report for details on how the recipients were selected.
2
    HUD’s Integrated Disbursement and Information System is the drawdown and reporting system for the Block
    Grant program and includes information regarding activities across the Nation, including funding and
    accomplishment data. HUD uses this information to report to Congress and to monitor grantees.
3
    Program year pertains to the fiscal period (12-month period) of each Block Grant recipient that captures all of
    the financial transactions during that period.



                                                           4
         Table 1: Number of recipeints using program funds to repay loans
            Program         CDBG          Recipients using program funds to
              year         recipients          repay Section 108 loans        Percentage
              2013           1,205                      217                      18
              2014           1,207                      209                      17
              2015           1,218                      197                      16

HUD’s information system also showed that during the 3-year period (program years 2013
through 2015), 1,224 recipients spent more than $9.9 billion of their CDBG allocations. Of the
1,224 recipients, 231 (19 percent) used more than $337 million (about 3.3 percent) for Section
108 loan repayments.

The recipients’ loan repayment expenditures showed a decline between program years 2013 and
2015 as shown in chart 1.




  Chart 1: The chart above shows that the percentage of their CDBG allocation that
  recipients used for Section 108 loan repayments had declined from 3.47 percent (2013) to
  3.32 percent (2015) when compared with total program expenditures for the same periods.




                                                5
HUD’s system also showed a decline in the amount of CDBG funds that recipients used for
Section 108 loan repayments as shown in chart 2.




  Chart 2: The chart above shows that the amount of CDBG funds that recipients used for
  Section 108 loan repayments had decreased from $130 million in 2010 to $97 million in
  2015.

Enacting a Threshold Was Not Necessary
HUD regulations at 24 CFR (Code of Federal Regulations) 570.705(c) allow the use of CDBG
funds to repay Section 108 loans. However, applicable regulations do not establish a limit on the
amount of CDBG funds that may be used for Section 108 repayments. HUD officials informed
us that grantees may determine the amount of CDBG funds they will allocate for Section 108
loan repayments. Grantees may use their full CDBG allocation for Section 108 if they wish. In
addition, HUD does not have a basis to conclude that the amount of CDBG funds allocated for
Section 108 loan repayment is too high for any particular grantee.

Of the 231 grantees with Section 108 loan payments, 34 spent more than 50 percent of their
CDBG funds on Section 108 loan repayments. Starting in program year 2014, HUD’s
information system showed that there had been a 12 percent decline in the number of grantees
using more than 50 percent of their CDBG funds for repayment of Section 108 loans (from 34 to
30) as shown in chart 3.




                                                6
  Chart 3: The chart above shows that the number of grantees and the amount of
  CDBG funds used to repay Section 108 loans declined between program year
  2013 and 2015.

We reviewed six grantees that in a 3-year period (program years 2013 through 2015) spent on
average more than 75 percent of their CDBG funds for Section 108 loan repayments as shown in
table 2.

    Table 2: Recipients that used more than 75 percent of their program funds to repay loans
                                           Program year                          3-year
                                                                              percentage
           Grantee                2013           2014             2015          average
     Bayamon, PR               $2,683,168      $2,762,205     $2,375,530          94
     Winchester, VA               303,139         202,598        202,914          90
     Monterey Park, CA            551,140         670,092        393,731          86
     Guaynabo, PR               1,042,105         987,222        212,522          79
     Montebello, CA               538,575         535,647        534,975          79
     Lenoir, NC                   115,854         116,540        116,901          78
            Totals              5,233,981       5,274,304      3,836,573

There were various reasons why each grantee assigned a significant portion of its CDBG funds
to repay the loans. For example, one grantee determined that repayment of the Section 108 loan
was a priority and decided to repay the 10-year term loan in 5 years. Another grantee took a 10-


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year loan instead of the 20-year maximum period. As a result, the above-mentioned grantee used
more than 75 percent of its CDBG funds to repay the loan. However, the amount each grantee
allocated to repay Section 108 loans was allowable and in accordance with HUD regulations at
24 CFR 570.705(c).

Although the above-mentioned recipients used a significant portion of their CDBG allocations
for Section 108 loan repayments, our review did not identify any adverse effect on the grantees’
delivery or execution of the program, which would justify establishing thresholds on the use of
program funds to repay Section 108 loans. The grantees pledged and used their future CDBG
allocation to undertake large-scale projects for the benefit of low- and moderate-income people.

Conclusion
HUD’s oversight of the use of CDBG allocations to repay Section 108 loans was adequate. In
addition, HUD’s information system tracked the extent to which communities and States used
CDBG allocations to repay Section 108 loans. Our review of the six recipients that spent more
than 75 percent of their CDBG funds for Section 108 loan repayments did not identify any
adverse effect on the program and its objectives.

Recommendations
There are no recommendations.




                                                8
Scope and Methodology
We conducted our audit field work from August 3, 2017, through July 31, 2018, at HUD’s
offices located in Washington, DC, and our offices located in San Juan, PR. The audit covered
the period January 1, 2013, through September 30, 2016.

To accomplish our objective, we

    •    Reviewed HUD’s regulations at 24 CFR Part 570 and HUD Handbook 6509.2, REV-7.
    •    Analyzed CDBG drawdown reports for the period January 1, 2013, through September
         30, 2016. 4
    •    Examined consolidated annual performance and evaluation reports for program years
         2013 through 2015.
    •    Interviewed HUD headquarters and field office officials.

HUD’s information system showed that between January 1, 2013, and September 30, 2016, 231
recipients spent more than $337 million of their CDBG allocations to repay Section 108 loans.
We selected for review the grantees that had used on average more than 75 percent (3-year
percentage average) of their CDBG allocations to repay loans. As a result, we selected six
grantees with Section 108 loan repayments totaling more than $14 million. The grantees were
reviewed to determine the reasons for their high debt service expenditure and whether it affected
the grantees’ delivery of the CDBG program and its objectives. We did not select 100 percent of
the universe because it was not feasible to review all 231 CDBG recipients due to time
limitations and because we were interested in grantees that used a significant amount of their
CDBG allocation for Section 108 loan repayments. The results of the audit apply only to items
selected for review and cannot be projected to the universe or population.

To achieve our audit objective, we relied in part on computer-processed data from HUD’s
information system to determine which grantees had Section 108 repayments and the percentage
of Section 108 repayments compared to total CDBG expenditures. 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 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.


4
    The data file used for this review was provided by HUD’s Office of Community Planning and Development
    through the HUD Office of Inspector General’s (OIG) Field Analytic Support Division in August 2017. The last
    full program year available for review was 2015 (period ending September 30, 2016).



                                                        9
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:

•   Federal regulations that contain the rules for grantees in carrying out the CDBG program.

•   Additional HUD policies and guidance for CDBG recipients.
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.

We evaluated the internal controls related to the audit objective in accordance with generally
accepted government auditing standards. Our evaluation of internal controls was not designed to
provide assurance regarding the effectiveness of the internal control structure as a whole.
Accordingly, we do not express an opinion on the effectiveness of HUD’s internal control.




                                                  10
Appendix

Appendix A
                        Auditee Comments and OIG’s Evaluation




HUD did not provide any comments to the report.




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