oversight

HUD Did Not Adequately Administer Its Housing Counseling Program

Published by the Department of Housing and Urban Development, Office of Inspector General on 2018-09-24.

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

          Office of Housing Counseling,
                 Washington, DC
      HUD’s Administration of the Housing Counseling
                        Program




Office of Audit, Region 2      Audit Report Number: 2018-NY-0001
New York, NY                                   September 24, 2018
To:            Sarah S. Gerecke, Deputy Assistant Secretary for Housing Counseling, HC

               //SIGNED//
From:          Kimberly S. Dahl, Regional Inspector General for Audit, 2AGA
Subject:       HUD Did Not Adequately Administer Its Housing Counseling Program




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 administration of the Housing Counseling
Program.
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
(212) 264-4174.
                    Audit Report Number: 2018-NY-0001
                    Date: September 24, 2018

                    HUD Did Not Adequately Administer Its Housing Counseling Program




Highlights

What We Audited and Why
We performed a review of the U.S. Department of Housing and Urban Development’s (HUD)
Housing Counseling Program, located within the Office of Housing Counseling. We selected
this program based on an audit suggestion that was included in our annual audit plan to help
address HUD’s strategic goal to strengthen the housing market to bolster the economy and
protect consumers. Our objective was to determine whether HUD adequately administered its
program.

What We Found
HUD did not adequately administer its program in accordance with Federal regulations and its
requirements. Specifically, it (1) did not adequately perform its agency approval and
performance review processes, (2) approved grant vouchers without ensuring that agencies
provided sufficient supporting documentation to verify the related expenses, and (3) did not
ensure that termination and posttermination processes were adequately performed. These
conditions occurred because HUD did not have adequate controls over its program and due to
weaknesses in its Housing Counseling System. As a result, HUD did not have assurance that
(1) agencies classified as approved in its system were properly qualified to provide services,
(2) more than $1.3 million in grant funds disbursed to agencies was for eligible and supported
costs, and (3) unqualified agencies stopped advertising and providing services as HUD-approved
agencies in a timely manner.

What We Recommend
We recommend that HUD (1) identify housing counseling agencies that were classified as
reapproved without performance reviews being performed upon expiration of their approvals and
determine whether they were properly qualified to provide services; (2) obtain documentation for
seven housing counseling grants to show that more than $1.3 million in grant funds disbursed
was for eligible and supported costs; (3) develop and implement updated standard operating
procedures to ensure consistency and adequacy of the agency approval, performance review,
voucher approval, and termination and posttermination processes; and (4) ensure that the new
system being developed provides the ability to adequately oversee the work of its staff and track
important housing counseling agency milestones, including HUD approval expirations and
required terminations.
Table of Contents
Background and Objective......................................................................................3

Results of Audit ........................................................................................................4
         Finding: HUD Did Not Adequately Administer Its Housing Counseling Program... 4

Scope and Methodology .........................................................................................11

Internal Controls ....................................................................................................13

Appendixes ..............................................................................................................14
         A. Schedule of Questioned Costs .................................................................................. 14

         B. Auditee Comments and OIG’s Evaluation ............................................................. 15




                                                             2
Background and Objective
The U.S. Department of Housing and Urban Development’s (HUD) Housing Counseling Program
is authorized by Section 106 of the Housing and Urban Development Act of 1968, as amended, to
provide, make grants to, or contract with public or private organizations to provide a broad range of
housing counseling services to homeowners and tenants to assist them in improving their housing
conditions and in meeting the responsibilities of tenancy or home ownership. For example, the
program addresses homelessness through counseling and assists homeowners in need of foreclosure
assistance. It also helps those who want to or already do rent housing get the counseling they need
to make rent and be a responsible tenant. These housing counseling services are provided by HUD-
approved housing counseling agencies.

HUD’s Office of Housing Counseling is responsible for administering the program. The office was
created under the Dodd-Frank Wall Street Reform and Consumer Protection Act of January 5, 2010.
Prior to October 2011, the program was administered under HUD’s Office of Single Family
Housing.

HUD provides initial approvals to housing counseling agencies and regularly reviews the
performance of each agency to evaluate whether it can maintain its HUD-approved status. HUD-
approved housing counseling agencies are also eligible for HUD grants through a competitive
award process. HUD awarded nearly $43 million in Housing Counseling Program grants during
fiscal year 2016 and more than $49 million during fiscal year 2017.

Regulations at 24 CFR (Code of Federal Regulations) Part 214 establish procedures and
requirements for approved participation in the program. Additionally, agencies must comply with
HUD Handbook 7610.1, mortgagee letters, grant agreements, and other regulations governing
Federal grant recipients.

Our audit objective was to determine whether HUD adequately administered its program.




                                                  3
Results of Audit

Finding: HUD Did Not Adequately Administer Its Housing
Counseling Program
HUD did not adequately administer its Housing Counseling Program in accordance with Federal
regulations and its requirements. Specifically, it (1) did not adequately perform its agency
approval and performance review processes, (2) approved grant vouchers without ensuring that
agencies provided sufficient supporting documentation to verify the related expenses, and (3) did
not ensure that termination and posttermination processes were adequately performed. These
conditions occurred because HUD did not have adequate controls over its program and due to
weaknesses in its Housing Counseling System. As a result, HUD did not have assurance that
(1) agencies classified as approved in its system were properly qualified to provide services,
(2) more than $1.3 million in grant funds disbursed to agencies was for eligible and supported
costs, and (3) unqualified agencies stopped advertising and providing services as HUD-approved
agencies in a timely manner.

Agency Approval and Performance Review Processes Were Not Sufficient
HUD did not adequately perform its agency approval and performance review processes. Our
review of ten agencies listed as approved in HUD’s system found that HUD did not
(1) document eligibility before providing initial approval for one agency, (2) follow its
reapproval procedures for two agencies, and (3) adequately conduct and document performance
reviews for seven agencies.

   HUD did not adequately document eligibility before providing initial approval
   HUD did not adequately document that it had checked for ineligible participants before
   providing initial approval of an agency. When providing initial approval for agencies to
   participate in the program for up to 3 years, HUD is required to review application packages
   submitted and ensure that agencies meet the requirements in 24 CFR 214 and HUD
   Handbook 7610.1. Regulations at 24 CFR 214.103(c) and HUD Handbook 7610.1,
   paragraph 2-2(D), state that approved housing counseling agencies, including any of the
   agency’s directors, partners, officers, principals, or employees, must not be
   (1) suspended, debarred, or otherwise restricted under any Federal regulations or (2) indicted
   for or convicted of a criminal offense that reflects upon the responsibility, integrity, or ability
   of the agency to participate in housing counseling activities. HUD indicated that it had
   performed checks on individuals before providing initial approval for one new agency
   reviewed as part of our sample. However, it did not provide documentation showing which
   individuals it had performed checks on or that the checks had been completed. Further,
   while a statement about verifying applicants were not debarred or otherwise restricted was
   marked completed on an internal checklist, the statement about performing a criminal
   background check was marked as not completed. As a result, we could not confirm whether
   HUD verified that participants were not ineligible.



                                                  4
    HUD did not follow its reapproval procedures
    HUD did not complete performance reviews before reapproving two agencies or document
    when it provided extensions of previous approvals. HUD Handbook 7610.1, section 2-6,
    states that at the end of the approval period, and upon completion of a successful
    performance review, HUD will reapprove agencies. Paragraph 1.3(B)(12) of its standard
    operating procedures further states that it will conduct performance reviews every one, two,
    or three years if there are available staff and resources. However, two of the agencies
    reviewed were classified as reapproved in HUD’s system when performance reviews were
    not conducted. While section 2.3 of HUD’s standard operating procedures allowed its staff
    to cancel or postpone the reviews and to issue certificates with extended approval dates,
    HUD did not provide documentation showing that staff had adequately followed these
    procedures. HUD acknowledged that it previously tied the approval and performance review
    processes together, but stated that it was researching what the regulations required1 and
    deciding when to conduct performance reviews and how to perform and document
    reapprovals.

    HUD did not adequately conduct and document performance reviews
    HUD did not adequately conduct and document its performance reviews. While HUD had
    completed performance reviews for seven of the reapproved agencies sampled, it did not
    adequately conduct and document these reviews as shown below.
                                                             Deficiency
        Agency         Did not      Did not      Did not provide      Did not provide   Did not ensure
        sample        check for     conduct       documents to         documents to   that agency used an
          no.         ineligible     client      verify counselor       verify grant    approved client
                     participants   surveys        supervision             funds      management system
             2            X            X                 X                                       X
             3            X            X                 X                   X
             5            X            X                 X
             6            X            X                 X                   X
             7            X            X                 X
             8            X            X                 X                   X
             9            X            X                 X                   X
        Totals            7            7                 7                   4                    1

    The following bullets provide additional details on the applicable requirements and the
    deficiencies identified.
         •       For seven agencies, HUD did not ensure that participants were eligible. Regulations
                 at 24 CFR 214.103(c) and HUD Handbook 7610.1, paragraph 2-2(D), state that
                 approved housing counseling agencies, including any of the agency’s directors,

1
    Regulations at 24 CFR 214.203 state that at the end of the approval period, and upon completion of a successful
    performance review, if conducted, HUD will reapprove agencies. Section 2-6 of HUD’s handbook mirrors this
    language, but does not contain the phrase “if conducted.”




                                                          5
    partners, officers, principals, or employees, must not be (1) suspended, debarred, or
    otherwise restricted under any Federal regulations or (2) indicted for or convicted of a
    criminal offense that reflects upon the responsibility, integrity, or ability of the
    agency to participate in housing counseling activities. HUD stated that its practice is
    to perform checks for ineligible participants only during initial approval and not
    during reapproval. However, because the status of participants could change over
    time and there can be staff turnover at agencies, it should have a process in place to
    ensure that participants are eligible when conducting performance reviews.
•   For seven agencies, HUD did not conduct surveys of housing counseling clients.
    HUD Handbook 7610.1, paragraph 6-3(C), required HUD staff to randomly select
    clients to be surveyed during performance reviews to confirm that services were
    provided. HUD explained that it no longer conducted the surveys because they were
    inefficient and the response rate from clients was low. However, while its standard
    operating procedures did not require the client surveys, this practice did not align with
    its handbook requirement.
•   For seven agencies, HUD did not adequately document that it verified that the
    agencies provided adequate supervision of their housing counselors. Regulations at
    24 CFR 214.303(h) and HUD Handbook 7610.1, paragraph 6-1(K), required
    supervisors to monitor the work of housing counselors at their agencies. However,
    HUD could not provide documentation showing that it verified counselor monitoring
    during its performance reviews and before classifying agencies as reapproved.
•   For four agencies, HUD did not adequately document that it verified that grant funds
    disbursed were supported. HUD Handbook 7610.1, paragraph 6-3(A), required
    performance reviews to cover compliance with grant requirements when applicable.
    Further, HUD’s standard operating procedures required staff to verify grant costs
    using source documentation that agencies were required to maintain according to
    their grant agreements. For example, agencies were required to maintain source
    documentation of direct costs, such as invoices, receipts, canceled checks,
    documentation of personnel expenses, and indirect cost rate agreements. However,
    for four of the five counseling agencies in our sample that had received grant funds
    and had a performance review, HUD could not provide evidence showing that it had
    obtained all supporting documentation related to the grants and that the
    documentation received had been adequately reviewed. In total, as shown in the chart
    below, HUD could not show that it had verified $217,773 in grant funds disbursed to
    the four agencies.
                               Agency         Unsupported
                             sample no.       grant funds
                                 3               69,755
                                 6               69,200
                                 8               65,080
                                 9               13,738
                                Total           217,773




                                          6
         •   HUD did not ensure that one agency used an automated housing counseling client
             management system that satisfied certain requirements and interfaced with HUD’s
             databases as required by HUD Handbook 7610.1, paragraph 2-2(G). While HUD’s
             performance review cited the agency for not using an approved system, it did not
             ensure that the agency had resolved the issue before classifying the agency as
             reapproved.

These issues occurred because HUD did not have adequate controls over its agency approval and
performance review processes. It failed to ensure that its standard operating procedures were
complete and aligned with regulations and with its handbook, and it did not provide adequate
oversight of staff to ensure that agency reviews were performed properly and consistently.
Further, HUD did not have adequate controls to ensure that agency approvals and performance
reviews were adequately tracked. For example, the system did not show when performance
reviews were completed and was not built to show when approval dates had changed without a
corresponding performance review. Because HUD staff relied on these data to identify agencies
with expiring approvals, it was not aware2 that the two agencies identified during our audit were
overdue for performance reviews by 1 and 4 years.

As a result of the deficiencies identified, HUD did not have assurance that agencies classified as
approved in its system were properly qualified to provide services to consumers and that
$217,773 in grant funds disbursed to four agencies was used for eligible and supported costs.

The Voucher Approval Process Was Not Sufficient
HUD approved three housing counseling grant vouchers without ensuring that agencies provided
sufficient supporting documentation to verify the related expenses. Due to the volume of grant
drawdowns it processed and limited staff resources available, HUD stated that it performed only
a surface review3 during the voucher approval process to confirm that supporting source
documentation was provided by the agency. However, three of the five vouchers selected for
review did not contain sufficient documentation to support the full amount disbursed. For
example, vouchers did not contain itemized information for some expenses and support for
salaries and expenses that were classified as “other allowable expenses.” The chart below details
the grant amounts that were not supported for each voucher reviewed.
                                 Voucher                          Unsupported
                                                     Voucher #
                                sample no.                        grant funds
                                    1            066-00047474       $348,307
                                    2             066-046961         483,455
                                    3            066-00047391        261,184
                                             Total                  1,092,946


2
    After we requested documentation supporting the reapproval of these two agencies in HUD’s system, it
    determined that performance reviews had not been completed. While HUD later performed the reviews, we did
    not review the related documentation because they were completed outside our audit period.
3
    HUD performed more detailed reviews of grant funds only during performance reviews of the agencies. As
    noted in the prior section, we also identified issues with the detailed reviews.




                                                         7
These issues occurred because HUD did not have adequate controls over its voucher approval
process. HUD’s housing counseling handbook and written standard operating procedures did not
describe the process used for the surface reviews. Further, while staff used a checklist that
described what to look for during the reviews, HUD did not have adequate oversight to ensure
that voucher reviews were performed properly and consistently.

As a result of the deficiencies identified, HUD did not have assurance that more than $1 million
in grant funds disbursed to three agencies was for eligible and supported costs.

Termination and Posttermination Processes Were Not Sufficient
HUD did not adequately perform its termination and posttermination processes in accordance
with applicable requirements. Specifically, for the 10 agency terminations sampled,
   •   HUD did not classify eight agencies as terminated in its system in a timely manner.
       These agencies were listed as being approved for 161 to 1,292 days after they became
       ineligible. This issue is significant because consumers can access the list of approved
       systems using an online query or through HUD’s housing counseling hotline.
   •   HUD could not show that it had communicated terminations in writing for eight agencies
       as required by 24 CFR 214.201(c) and HUD Handbook 7610.1, section 6-8. HUD’s files
       did not contain copies of the letters with all required information and signatures. While
       HUD stated that termination letters were not required for seven of the eight agencies
       because they were not direct-approval agencies, this process did not align with the
       regulations and its handbook.
   •   HUD did not request or obtain approval certificates from two agencies as required by 24
       CFR 214.201(c) and HUD Handbook 7610.1, section 6-8.

These issues occurred because HUD did not have adequate controls over its termination and
posttermination processes. HUD did not have written standard operating procedures for these
processes and did not provide adequate oversight of staff to ensure that processes were
conducted properly and consistently.

As a result of these deficiencies, HUD did not have assurance that unqualified agencies stopped
advertising and providing services as HUD-approved housing counseling agencies in a timely
manner, and consumers did not have assurance that agencies listed as approved in HUD’s system
were qualified to provide housing counseling services.

Conclusion
HUD did not adequately administer its program due to weaknesses in its controls. Specifically,
HUD failed to ensure that its standard operating procedures for agency approvals and
performance reviews were complete and aligned with regulations and with its handbook, and did
not have adequate written procedures for its voucher approval and agency termination and
posttermination processes. We also identified weaknesses with HUD’s system for tracking
agency approvals, performance reviews, and terminations. As a result of the deficiencies
identified, HUD did not have assurance that (1) agencies classified as approved in its system
were properly qualified to provide services, (2) more than $1.3 million in grant funds disbursed


                                                8
to agencies was for eligible and supported costs, and (3) unqualified agencies stopped advertising
and providing services as HUD-approved agencies in a timely manner.

HUD stated that it planned to increase staffing,4 was researching what the regulations required,
and planned to update its handbook and standard operating procedures. Further, due to the issues
identified with its current system, it was developing a new system called the Housing Counseling
Agency Management System. HUD stated that the new system will not replace the existing
system, but will interface with it and allow staff to better use and analyze the data and increase
oversight of the program. If HUD makes significant improvements to its policies and procedures
and ensures that the new system allows it to adequately oversee the work of its staff and track
important housing counseling agency milestones, HUD can improve its overall administration of
its program.

Recommendations
We recommend that HUD’s Deputy Assistant Secretary for Housing Counseling

         1A.      Identify additional housing counseling agencies that were classified as reapproved
                  when it had not completed a performance review upon expiration of the approved
                  period and determine whether they are properly qualified to provide counseling
                  services to consumers.

         1B.      Obtain and provide documentation for the four housing counseling agency
                  reapprovals and the three housing counseling agency voucher approvals to show
                  that the $1,310,719 in Housing Counseling Grant funds5 disbursed was for
                  eligible and supported costs or repay from non-Federal funds any amount that
                  cannot be supported.

         1C.      Update its policies and procedures to ensure consistency and adequacy of the
                  agency approval, performance review, voucher approval, and termination and
                  posttermination processes. Specifically, the updates should ensure that the
                  deficiencies identified in this report are acknowledged and corrected going
                  forward, including (1) updating the Housing Counseling Program handbook and
                  developing or updating standard operating procedures for each of the key
                  processes and (2) implementing controls to ensure that staff perform work
                  properly and consistently, and maintain significant documentation provided by
                  agencies, along with any analysis performed during reviews.



4
    According to HUD, it can perform approximately 300 agency approval reviews per year with its current
    resources. Increasing staffing is significant because HUD’s system shows that 461 agencies will need to be
    reviewed for reapproval in fiscal year 2019. HUD will also need to provide staffing resources to identify
    additional agencies with expired certifications and determine whether they are properly qualified to provide
    counseling services to consumers.
5
    This includes $217,773 in unsupported costs for the four agency reapprovals and $1,092,946 in unsupported
    costs for the three agency voucher approvals.




                                                          9
1D.   Ensure that the new Housing Counseling Agency Management System provides
      HUD with the ability to adequately oversee the work of its staff and track
      important housing counseling agency milestones, including HUD approval
      expirations and required terminations.




                                    10
Scope and Methodology
We conducted our audit work from November 2017 through July 2018 at our Buffalo, NY, field
office. The audit covered the period October 1, 2015, through September 30, 2017.

To accomplish our audit objective, we interviewed HUD officials, performed site visits at
terminated housing counseling agencies, and reviewed
     •   relevant background information;
     •   applicable laws, regulations, HUD guidance, and grant agreements;
     •   data from HUD’s Line of Credit Control System (LOCCS)6 and Housing Counseling
         System; and
     •   housing counseling agency program files maintained by HUD and the agencies.

To conduct our audit work, we selected four samples as detailed below.

         Sample of Agency Approvals
         HUD provided a list of 3,795 active agency records from our audit period. After
         removing records related to agencies approved or reapproved outside our audit period, we
         identified records for 1,424 unique active agencies receiving approval during our audit
         period. From this universe of 1,424 agencies, we selected a nonstatistical sample of 10
         active agencies approved within our audit period using the random selection command in
         ACL Analytics. Our sample included nine reapprovals and one initial approval. We then
         reviewed HUD’s program files to ensure that HUD followed applicable requirements
         when providing initial approvals and reapprovals, and when conducting performance
         reviews. For example, we checked HUD’s program files for review checklists, proof of
         nonprofit status and financial audit reports, support for grant funds received, evidence of
         client surveys performed by HUD, employee monitoring performed by agencies, and
         ineligible participant checks performed by the agencies and HUD.

         Sample of Voucher Approvals
         HUD provided data for 472 housing counseling grants awarded to 256 approved housing
         counseling agencies during our audit period, with grants totaling almost $92 million.
         From the universe of 256 agencies, we selected the 5 agencies that had been awarded the
         largest amount of grant funds. In total, these five agencies were awarded more than $25
         million during our audit period. We then selected the largest payment voucher for each
         of the five agencies for review, with grant funds totaling approximately $6.1 million. We
         then reviewed HUD’s program files for checklists, itemized details, and supporting


6
    LOCCS is HUD’s primary grant disbursement system, handling disbursements for most HUD programs.




                                                     11
       documentation. We reviewed the sampled voucher payments compared to the surface
       review process described in the finding. We performed a more detailed review of grant
       funds for agencies that were part of our agency approval sample. (See the previous
       bullet.)

       Sample of Agency Terminations and Withdrawals
       HUD provided a list of 473 agencies that were terminated, inactive, or withdrawn during
       our audit period. From the universe of 473 agencies, we selected a nonstatistical sample
       of 10 agencies that were terminated, inactive, or withdrawn within our audit period using
       the random selection command in ACL Analytics. We then reviewed HUD’s program
       files to ensure that valid termination letters were prepared and delivered; termination
       statuses were entered into HUD’s system; approval certifications were returned; and any
       reinstatement, extension, or appeal documentation was present if applicable.

       Sample of Terminated Agencies for Inspection
       HUD provided a list of 473 agencies that were terminated, inactive, or withdrawn during
       our audit period. After removing inactive agencies, agencies that were terminated due to
       an office closure, and those that were terminated in error by HUD, we identified a
       universe of 285 terminated or withdrawn agencies. We selected the 30 agencies listed as
       most recently terminated that were within a 50-mile radius of a HUD Office of Inspector
       General (OIG) office. We then conducted site visits to determine whether these
       terminated agencies still represented themselves as HUD-approved agencies. For
       example, we checked for any signs or certificates referencing a HUD approval and spoke
       with staff, when available, regarding the agency’s current status as a HUD-approved
       agency. We did not identify evidence of the 30 terminated agencies continuing to
       identify themselves as HUD-approved agencies.

Although our sampling methods did not allow us to make projections to the universes from
which our samples were drawn, they were sufficient to meet our objective to evaluate HUD’s
administration of the program.

To achieve our objective, we relied in part on information maintained in LOCCS and HUD’s
Housing Counseling System. While we did not conduct a detailed assessment of the reliability
of the data, we did perform a minimal level of testing and found the data to be adequately
reliable for our purposes. The testing consisted of comparing data in the supporting program
files to information found in HUD’s systems. Although we identified weaknesses with HUD’s
system, we verified all information for our samples using the supporting program files
maintained by HUD.

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.




                                                12
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 in
    reports.
•   Compliance with laws and regulations – Policies and procedures that management has
    implemented to reasonably ensure that resource use is consistent with laws and regulations.
•   Safeguarding of resources – Policies and procedures that management has implemented to
    reasonably ensure that resources are safeguarded against waste, loss, and misuse.
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:

•   HUD did not have adequate controls to ensure that it adequately administered its Housing
    Counseling Program (finding).




                                                  13
Appendixes

Appendix A


                              Schedule of Questioned Costs
                           Recommendation
                                                   Unsupported 1/
                               number
                                   1B                $1,310,719


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.




                                              14
Appendix B
             Auditee Comments and OIG’s Evaluation



Ref to OIG    Auditee Comments
Evaluation




Comment 1




                               15
             Auditee Comments and OIG’s Evaluation




Ref to OIG    Auditee Comments
Evaluation




Comment 2




                               16
             Auditee Comments and OIG’s Evaluation




Ref to OIG    Auditee Comments
Evaluation




Comment 3




Comments 1
and 4




                               17
             Auditee Comments and OIG’s Evaluation




Ref to OIG    Auditee Comments
Evaluation




Comment 5




Comment 6




                               18
             Auditee Comments and OIG’s Evaluation




Ref to OIG    Auditee Comments
Evaluation




Comment 6




                               19
             Auditee Comments and OIG’s Evaluation




Ref to OIG    Auditee Comments
Evaluation




Comment 7




Comment 8




                               20
             Auditee Comments and OIG’s Evaluation




Ref to OIG    Auditee Comments
Evaluation




Comment 9




Comment 10




                               21
             Auditee Comments and OIG’s Evaluation




Ref to OIG    Auditee Comments
Evaluation




Comment 11




Comment 12




Comment 13




                               22
             Auditee Comments and OIG’s Evaluation




Ref to OIG    Auditee Comments
Evaluation




Comment 13




Comment 14




                               23
             Auditee Comments and OIG’s Evaluation




Ref to OIG    Auditee Comments
Evaluation




Comment 15




Comment 6




Comments
10 and 12


Comment 16




                               24
             Auditee Comments and OIG’s Evaluation




Ref to OIG    Auditee Comments
Evaluation




Comment 17




                               25
             Auditee Comments and OIG’s Evaluation




Ref to OIG    Auditee Comments
Evaluation




Comment 18




                               26
             Auditee Comments and OIG’s Evaluation




Ref to OIG    Auditee Comments
Evaluation




Comment 19




                               27
                         OIG Evaluation of Auditee Comments


Comment 1   HUD generally agreed with the audit finding, but noted that there were some
            areas of disagreement and some areas that need further research as outlined in its
            comments. HUD stated that it outlined the corrective actions it plans to take to
            address the finding, and noted that staffing and system constraints may affect its
            ability to implement these actions. We acknowledge HUD’s overall agreement
            and will make determinations on its proposed corrective actions as part of the
            normal audit resolution process.
Comment 2   HUD stated that in response to continuing challenges with staff capacity, it had
            (1) engaged an outside accounting firm to support its grant administration efforts,
            (2) identified opportunities to further streamline and automate existing processes,
            (3) identified rules and regulations essential to the program and eliminated
            unnecessary requirements, and (4) prevented noncompliance through training,
            technical assistance, and toolkits. We acknowledge HUD’s staffing challenges
            and that these actions are responsive to recommendation 1C. We will make a
            determination on its proposed corrective actions as part of the normal audit
            resolution process.
Comment 3   HUD agreed that its system has limitations and recognizes there is a need to
            replace it with a more modem database. HUD stated that it worked with a
            consultant to create a plan for a modernized business system, but had not received
            the funding to implement it. As a result, HUD decided to develop the new
            Housing Counseling Agency Management System application in an effort to
            better align its program oversight, grant scoring, grant management, and new
            applicant processing. It planned to use the new system to allow management to
            track, review, and approve staff work. We acknowledge HUD’s system issues
            and that HUD’s planned actions are responsive to recommendation 1D. We will
            make a determination on its proposed corrective actions as part of the normal
            audit resolution process.
Comment 4   HUD contended that the audit did not identify any actual instances of poor quality
            service to clients, agencies advertising HUD-approved status inaccurately,
            ineligible participants, or improper spending. Although we agree with this
            statement, our review was focused on gaining an understanding of the processes
            HUD had in place to determine if there were areas it could strengthen. For
            example, while we did not test for quality of service, we found that HUD no
            longer conducted client surveys and it did not have a similar control in place to
            evaluate the effectiveness of the services provided. Further, while we did not
            identify participation of ineligible participants, we found that HUD did not check
            for participant eligibility during performance reviews. In addition, because our
            review of program spending identified costs that were unsupported, we were
            unable to determine eligibility of these costs at the time of the audit.




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Comment 5   HUD contended that it completed and documented eligibility checks
            appropriately. HUD described the process used to complete eligibility checks and
            noted that it does not retain source documentation due to privacy concerns. Last,
            HUD stated that as part of the audit resolution process, it would research practices
            for documenting the completion of background checks. Based on the
            documentation provided during our review, we disagree that HUD appropriately
            documented background checks for the case reviewed. However, HUD’s planned
            action is responsive to recommendation 1C. We will make a determination on its
            proposed corrective actions as part of the normal audit resolution process.
Comment 6   HUD agreed in part that it did not follow reapproval procedures. It maintained
            that performance reviews were optional and not required as a condition of
            reapproval, but agreed that certain sections of the handbook may be read in a
            manner that is inconsistent with the regulations and stated that it intends to clarify
            its procedures. HUD contended that the issues identified in our report related to
            both system and staffing challenges, noted that the new system will help
            supervisors and staff identify where performance reviews are needed, and stated
            that it was in the process of identifying agencies that have not had a performance
            review since 2015 to address recommendation 1A. HUD further stated that it
            plans to work with the Office of Housing's Office of Risk Management and
            Regulatory Affairs to develop a strategy to incorporate outstanding performance
            reviews with those required in 2019, prioritize reviews for agencies that pose the
            greatest risk, and explore a streamlined process to provide reapprovals without a
            full performance review. We agree that the regulation implies that performance
            reviews are not required before reapproval, but that its handbook reads
            differently. Further, we acknowledge HUD’s planned action and its
            responsiveness to recommendations 1A and 1C. If HUD makes significant
            improvements to its policies and procedures and ensures that the new system
            allows it to adequately oversee the work of its staff and track important housing
            counseling agency milestones, HUD can improve its overall administration of its
            program.
Comment 7   HUD agreed in part that it did not ensure that participants were eligible. HUD
            stated that it confirmed organizations were not delinquent with Federal debt or on
            the debarred list if they applied for grants. However, its practice was to not
            perform checks for ineligible participants as part of performance reviews. HUD
            stated that it will research best practices for this concern going forward. We
            acknowledge that HUD’s planned action is responsive to recommendation 1C.
            However, we contend that regulations at 24 CFR 214.303(a) state that in order to
            maintain HUD-approved status, participating agencies must continue to comply
            with approval requirements listed in 24 CFR 214.103, which include requirements
            related to ineligible participants. Further, we note that regulations at 24 CFR
            214.307(b) state that performance reviews consist of a review of the participating
            agency's compliance with all program requirements.




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Comment 8     HUD contended that it did not conduct client surveys during performance reviews
              because it believed they were not required. HUD stated that it removed this
              requirement from its procedures in 2014 and was in the process of removing it
              from its handbook. We acknowledge that HUD’s plan to improve consistency
              between its procedures and handbook and to formally document the change in this
              process is responsive to recommendation 1C. However, we also contend that
              regulations at 24 CFR 214.307 state that performance reviews include a review of
              the agency’s level of success in delivering counseling services. Therefore, if
              HUD formalizes the removal of the client surveys from its performance reviews,
              it should ensure that it has steps to evaluate the counseling services delivered by
              agencies.
Comment 9     HUD contended that it adequately documented that it verified agencies provided
              adequate supervision of their housing counselors. HUD stated that the agencies
              self-certified that they monitored counselors’ work and that HUD reviewers verify
              this through a variety of methods including verbal descriptions. HUD
              acknowledged that while reviewers document findings when supervision is
              insufficient, they are not currently required to retain all source documentation and
              it is concerned that the benefit of retaining documentation would create undue
              burden and risk of disclosure of personally identifiable information. HUD stated
              that it will research methods to validate the reviewer's determination of adequate
              counselor supervision without unduly increasing risk or burden. HUD’s planned
              action is responsive to recommendation 1C, and we will make a determination on
              its proposed corrective actions as part of the normal audit resolution process.
Comment 10 HUD agreed that it did not adequately document that it verified grant funds
           disbursed were supported and indicated that it will gather 100 percent of the
           source documentation for the grants identified in the report and confirm all funds
           were used for allowable expenses. Further, HUD noted that it planned to seek a
           legal opinion and research best practices to determine the volume of source
           documentation and proof of reviewer analysis to document that funds were used
           appropriately. It will then modify its handbook, grant agreement, and standard
           operating procedures appropriately, and will provide training to staff and agencies
           regarding requirements. HUD’s planned actions are responsive to
           recommendations 1B and 1C, and we will make a determination on its proposed
           corrective actions as part of the normal audit resolution process.
Comment 11 HUD agreed that it did not ensure one agency used an automated client
           management system and noted that it had since confirmed that this agency is
           compliant with the requirement. HUD further stated that its new system will help
           track these issues going forward. HUD’s planned action is related to
           recommendation 1D. However, it should also ensure that its policies and
           procedures include sufficient steps to determine that issues identified during
           performance reviews are resolved.




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Comment 12 HUD agreed that the voucher approval process was not sufficient. HUD stated
           that it had established an internal quality control team to review voucher
           payments and to identify the need for additional training or clarity within its
           standard operating procedures, and that system upgrades will improve the process
           going forward. Further, HUD stated it will validate that the vouchers identified in
           the report were properly paid or recapture the funds. HUD’s planned actions are
           responsive to recommendations 1B and 1C.
Comment 13 HUD agreed that it did not classify eight agencies as terminated in its system in a
           timely manner. HUD stated that this appeared to be due to staff error and system
           limitations, and indicated that it would train staff on the proper procedures and
           planned to use its new system to help with eliminating this issue. HUD’s planned
           actions are related to recommendations 1C and 1D. However, it should also
           ensure that its policies and procedures include sufficient steps to detail how staff
           should handle the agency termination and post-termination processes.
Comment 14 HUD agreed that it could not show it communicated terminations in writing for
           eight agencies. HUD contended that an error was made with one agency and that
           for the remaining seven agencies, it did not send letters because they were
           branches or affiliates that did not have direct HUD approval. HUD stated it was
           in the process of modifying the regulations and handbook and that it would amend
           its standard operating procedures to align with any relevant revisions. HUD’s
           planned action is responsive to recommendation 1C. However, the current
           regulations, handbook, and standard operating procedures do not clearly
           differentiate between the processes for terminating a directly approved agency
           compared to a branch or affiliate. HUD should ensure that it adequately details
           the processes that staff should use, including any differences between processes
           when working with branch or affiliate agencies.
Comment 15 HUD agreed that it did not request or obtain approval certificates from two
           terminated agencies. HUD stated that it will train staff on current termination
           policy and update procedures with any changes to policy that may occur. As part
           of its response to recommendation 1C, HUD should implement controls to ensure
           that staff perform work properly and consistently.
Comment 16 HUD agreed to propose a plan to revise its standard operating procedures,
           handbook, and regulation; design its new system to address the issues identified
           by the audit; review staffing and workload; and research legal requirements and
           best practices regarding documentation retention. HUD’s planned actions are
           responsive to recommendation 1C. HUD should also implement controls to
           ensure that staff perform work properly and consistently.
Comment 17 HUD agreed with recommendation 1D contingent on approval from its Office of
           the Chief Information Officer and assigned staff resources. This is responsive to
           the recommendation, but we will make a determination on its proposed corrective
           actions as part of the normal audit resolution process.



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Comment 18 HUD noted that it had engaged a certified public accounting firm to support
           financial compliance and assist with monitoring housing counseling agencies, and
           described the work performed by the firm. As part of its response to
           recommendation 1C, HUD should ensure that its policies and procedures discuss
           each of the key processes, including the work performed by the accounting firm,
           and it should implement controls to ensure that work is performed properly and
           consistently, and is adequately documented.
Comment 19 HUD stated that it created teams to revise the regulation, handbook, and
           performance review process to focus on actual risk and remove unnecessary
           burden. HUD’s actions are related to recommendation 1C. As part of the normal
           audit resolution process, HUD will need to show that updates made to its policies
           and procedures help correct the deficiencies identified in this report. Further, it
           will need to implement controls to ensure that staff perform work properly and
           consistently, and maintain significant documentation provided by agencies, along
           with any analysis performed during reviews.




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