oversight

Partners for Affordable Home Ownership Prog., Detroit, MI

Published by the Department of Housing and Urban Development, Office of Inspector General on 1996-05-31.

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

                                                                    Issue Date

                                                                         May 31, 1996
                                                                    Audit Case Number

                                                                         96-CH-229-1009




TO:            Robert J. Turner, Director of Housing, Michigan State Office


FROM:          Dale L. Chouteau, District Inspector General for Audit, Midwest

SUBJECT:       Partners For Affordable Home Ownership Program
               Single Family Housing Division, Real Estate Owned Branch
               Detroit, Michigan

We completed a review of the nine nonprofit organizations that bought properties at a 30 percent
discount under the Partners For Affordable Home Ownership Program. The review was done to
address the Michigan State Office's concern that some nonprofit agencies may have purchased
homes from HUD at a 30 percent discount to make unallowed profits. Our objectives were to:
assess the validity of HUD's concerns; and determine whether the nonprofit agencies complied
with HUD's program requirements.

We concluded that six of the nine nonprofit organizations complied with HUD's requirements.
Three nonprofit organizations, however, made unallowed profits and were not in compliance with
HUD's requirements. The three organizations sold homes purchased from HUD at a 30 percent
discount for amounts higher than allowed by HUD's program requirements. One of the three
nonprofit agencies also violated HUD's conflict of interest requirements; another nonprofit
agency did not have an adequate accounting system to capture property related costs and
revenues; and, the third agency did not have a source of funds to finance its participation in the
program. Officials for all three nonprofit agencies said they were not aware of HUD's program
requirements, although they signed an addendum containing the sales restrictions with the
purchase of each home. As a result, low and moderate income home buyers paid more for their
homes than HUD's program intended.

Within 60 days, please provide us, for each recommendation made in this report, a status report
on: (1) the corrective action taken; (2) the proposed corrective action and the date to be
completed; or (3) why action is considered unnecessary. Also please furnish us copies of any
correspondence or directives issued because of the audit.

Should your staff have any questions, please have them contact me at (312) 353-7832.
Management Memorandum




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96-CH-229-1009                   Page ii
Executive Summary
We completed a review of the nine nonprofit organizations that bought properties at a 30 percent
discount under the Partners For Affordable Home Ownership Program. The review was done to
address the Michigan State Office's concern that some nonprofit agencies may have purchased
homes from HUD at a 30 percent discount to make unallowed profits. Our objectives were to:
assess the validity of HUD's concerns; and determine whether the nonprofit organizations
complied with HUD's program requirements.

Under HUD's Partners For Affordable Home Ownership Program, nonprofit organizations are
allowed to purchase homes from HUD at a 30 percent discount from the HUD appraised value.
The intent of the program is to expand home ownership by providing the nonprofit agencies an
incentive to buy the homes, make needed repairs and resell the homes to qualified low-income
buyers. HUD restricts the sale price the nonprofit agencies can charge the home buyer to the net
development cost plus ten percent of the net development cost.

We concluded that six of the nine nonprofit organizations complied with HUD's requirements.
Three nonprofit organizations, however, made unallowed profits and were not in compliance with
HUD's requirements. The three nonprofit agencies sold HUD homes purchased at a 30 percent
discount for amounts higher than allowed by HUD. One of the three nonprofit agencies also
violated HUD's conflict of interest requirements; another nonprofit agency did not have an
adequate accounting system to capture property related costs and revenues; and, the third agency
did not have a source of funds to finance its participation in the program. Officials for all three
nonprofit agencies said they were not aware of HUD's program requirements, although they
signed an addendum containing the sales restrictions with the purchase of each home. As a
result, low and moderate income home buyers paid more for their homes than HUD's program
intended.



                                      Second Chapel Hill, a nonprofit organization: (1) sold five
 Second Chapel Hill Did
                                      homes it purchased from HUD for amounts higher than
 Not Comply With HUD's
                                      allowed; and (2) violated HUD's conflict of interest
 Requirements
                                      requirements. The Director of the organization said he was
                                      unaware of HUD's requirements. As a result, low and
                                      moderate income persons paid more for their properties
                                      than HUD's program intended, and Second Chapel Hill
                                      made unallowed profits of $80,488.

                                      The 40/40 Institute, a nonprofit organization, sold two
 The 40/40 Institute Did
                                      homes purchased from HUD at a 30 percent discount for
 Not Follow Requirements
                                      amounts higher than allowed by HUD's requirements. The
                                      40/40 Institute did not have an adequate accounting system
                                      to capture property related costs and revenues. The
                                      Institute's president said he was unaware of HUD's
                                      requirements. As a result low and moderate income


                                              Page iii                                 96-CH-229-1009
Executive Summary



                          persons may have paid more for properties than HUD's
                          program intended and the 40/40 Institute may have realized
                          excessive funds of $3,291.

                          The Detroit Non-Profit Housing Corporation sold two
 Detroit Non-Profit
                          homes purchased from HUD at a 30 percent discount for
 Housing Did Not Adhere
                          amounts higher than allowed by HUD. The Corporation
 To HUD's Requirements
                          did not have a source for funds needed to participate in the
                          program. The program administrator said she was not
                          aware of the HUD's requirements regarding sale price
                          restrictions. Consequently, low and moderate income
                          persons paid more than HUD's program intended and the
                          corporation received excess funds of $1,614 from the sales.

                          We recommend HUD require: the three nonprofit
                          organizations to provide documentation to support the
                          unsupported expenditures or prepay on the applicable
                          homeowners' mortgages the amount of expenses that cannot
                          be supported; the three nonprofit organizations to prepay on
                          the applicable homeowners' mortgages the amount of
                          ineligible expenses; Second Chapel Hill to eliminate the
                          conflict of interest; the 40/40 Institute to develop an
                          adequate accounting system; and, the Detroit Non-Profit
                          Housing Corporation obtain a source of funds for continued
                          participation in the program. We also recommend that the
                          nonprofit agencies be removed from the program and
                          administrative penalties be initiated if the nonprofit
                          agencies do not comply with all of HUD's requirements and
                          the recommendations in this report.

                          We presented our draft findings to the nonprofit
                          organizations and the HUD Michigan State Office. We
                          held an exit conference with the Director of Single Family
                          Housing, Michigan State Office on May 20, 1996. The
                          40\40 Institute and the Detroit Non-profit Housing
                          Corporation provided their written comments. Second Hill
                          Chapel did not provide a written response to the audit. We
                          included the written comments we received in their entirety
                          with each finding.




96-CH-229-1009                    Page iv
Table of Contents

Management Memorandum                                             i


Executive Summary                                                iii


Introduction                                                      1


Findings

    1    Second Chapel Hill Did Not Comply With
        HUD's Requirements                                        3

    2     The 40/40 Institute Did Not Follow HUD's
        Requirements                                              7

    3     Detroit Non-Profit Housing Did Not Adhere
        To HUD's Requirements                                   11


Internal Controls                                               15


Follow Up On Prior Audits                                       17



Appendices

    A      Schedule of Questioned Costs                         19

    B      Distribution                                         21




                              Page v                  96-CH-229-1009
Table of Contents




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96-CH-229-1009                      Page vi
Introduction
Under the Partners For Affordable Home Ownership program, HUD allows nonprofit
organizations to purchase homes from the HUD inventory at a 30 percent discount of HUD's
appraised value. The homes are located in HUD designated revitalization areas. The intent of
the program is to expand home ownership by providing the nonprofit agencies an incentive to
buy the homes, make needed repairs and resell the homes to qualified low-income buyers. HUD
restricts the sale price the nonprofit agencies can charge the home buyers to the net development
cost plus ten percent of the net development cost.

HUD expects the program to reduce the inventory of its acquired properties in a manner that
expands home ownership opportunities, strengthens neighborhoods and communities, and
ensures a maximum return to the mortgage insurance fund. Under the program in Detroit, nine
nonprofit organizations purchased 61 homes valued at $805,262 between November 1993 and
September 1995.



                                     Our objectives were to assess: the validity of HUD's
 Audit Objectives
                                     concern that some nonprofit agencies were acquiring homes
                                     at a 30 percent discount to make unallowed profits; and
                                     determine whether the nonprofit organizations complied
                                     with HUD's requirements.

                                     We interviewed HUD's staff to determine the reasons for
 Audit Scope And
                                     their concern. We interviewed the staff at the nonprofit
 Methodology
                                     organizations to determine how the agencies operated their
                                     housing activities and what information the local HUD
                                     office provided to assist the nonprofit agencies in
                                     complying with HUD's requirements. We reviewed HUD's
                                     property disposition files containing property settlement and
                                     closing documents and the nonprofit organizations' records
                                     related to: housing activity accomplishments; cash
                                     disbursements; advertising; and other marketing documents.
                                     We reviewed the documents to assess the agencies'
                                     compliance with HUD's requirements.

                                     The audit covered the period November 19, 1993 through
                                     September 30, 1995. We extended the period as necessary.
                                     Our field work was conducted between September 1995
                                     and April 1996. The audit period was longer than normal
                                     because of delays caused by the Government furloughs and
                                     a higher priority audit assignment. We conducted the audit
                                     in accordance with generally accepted government auditing
                                     standards. We provided a copy of this report to the Director
                                     of Housing, Michigan State Office.


                                              Page 1                                  96-CH-229-1009
Introduction




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96-CH-229-1009                   Page 2
                                                                                      Finding 1




    Second Chapel Hill Did Not Comply With
             HUD's Requirements
Second Chapel Hill, a nonprofit organization: (1) sold five homes it purchased from HUD for
amounts higher than allowed; and (2) violated HUD's conflict of interest requirements. The
Director of the organization said he was unaware of HUD's requirements. As a result, low and
moderate income persons paid more for the properties than HUD's program intended and Second
Chapel Hill made unallowed profits of $80,488.



                                   HUD Regulation 24 CFR 291 and HUD Notice H94-74
 HUD's Requirements
                                   allow nonprofit organizations to purchase HUD acquired
                                   properties at a 30 percent discount of the properties'
                                   appraised values provided the nonprofit organizations
                                   comply with HUD's requirements.

                                   HUD Notice H94-74 and the Model Land Use Restriction
                                   Addendum signed by the applicable nonprofit organizations
                                   and HUD say, unless an exception is granted in writing by
                                   HUD, the initial purchaser (nonprofit organization) of a
                                   property at a 30 percent discount shall not resell the
                                   property for an amount that exceeds the net development
                                   cost plus ten percent of the net development cost. Net
                                   development cost is the total cost of the project. It includes
                                   such items as acquisition cost, architectural fees, permits
                                   and survey expenses, insurance, and taxes, but excludes
                                   overhead and any developer's fees.

                                   HUD Regulation 24 CFR 291.435 (b) says each purchaser
                                   of property must comply with conflicts of interest
                                   requirements. These requirements say no person who is an
                                   employee, agent, consultant, officer, or elected or appointed
                                   official of the lessee or purchaser of property may obtain a
                                   personal or financial interest or benefit from the lease or
                                   purchase of the property.

                                   Between April and August 1995, Second Chapel Hill, a
 Homes Were Sold For
                                   nonprofit organization, purchased ten homes from HUD at
 Excessive Amounts
                                   a cost of 30 percent less than the HUD appraised value.
                                   The organization sold five of the ten homes and identified
                                   the costs and revenues for each home in its property

                                            Page 3                                   96-CH-229-1009
Finding 1



                              records. The records showed it sold four of the five homes
                              for amounts that exceeded HUD's program requirements.
                              Although Second Chapel Hill's records showed the fifth
                              home was not sold at an excess amount, we determined it
                              was. For all five houses, Chapel Hill did not have invoices
                              to support all reported rehabilitation work. Costs charged
                              to four of the five homes included advances to an investor
                              that were not allowable costs. As a result, the organization
                              sold all five homes for amounts that exceeded HUD's
                              program requirements. The excess amounts ranged from
                              $9,344 to $24,286 per house. The organization made
                              unallowed profits totalling $80,488 for the five homes.


                               8486          9560          13597         14559       8083
                               Brace       Plainview     Westwoo       Vaugha        Prest
                                                         d             n
                 Net Cost     $22,209       $24,233      $13,534       $33,841     $18,831
                 10 Percent
                 Fee           2,221             2,423     1,353        3,384       1,883
                 Total Cost
                 and Fee      24,430         26,656       14,887        37,225      20,714
                 Less Sales
                 Price        34,900         36,000       33,000        55,500      45,000
                 Unallowed
                 Profit       $10,470       $ 9,344      $18,113       $18,275     $24,286

                              Second Chapel Hill sold all of its properties based on the
                              property's market appraised value after rehabilitation rather
                              than based on Chapel Hill's net development costs plus the
                              10 percent fee. Our computation of the 10 percent fee in
                              the above table does not include the following ineligible
                              and unsupported rehabilitation costs that Chapel Hill
                              claimed:
                                                          Ineligible       Unsupported
                                 8486 Brace              $1,500           $ 8,487
                                 9560 Plainview            0              10,530
                                 13597 Westwood           4,500           10,512
                                 14559 Vaughan            1,500            9,542


96-CH-229-1009                          Page 4
                                                                           Finding 1




                          8083 Prest              1,500           17,983
                           Total                 $9,000           $57,054

                       If Second Chapel Hill could provide documentation to
                       support all of the unsupported costs, its excess profits
                       would be reduced to $23,434 ($80,488 - $57,054).

                       The Director of Second Chapel Hill said he was unaware of
                       the program requirements. However, the Director signed an
                       addendum, with the purchase of each home, that stated the
                       nonprofit organization could not resell the property for an
                       amount in excess of the net development cost plus ten
                       percent of the net development cost.

                       Second Chapel Hill contracted with an investor, Bralen, Inc.
Conflict of Interest
                       to finance the purchase, rehabilitation and marketing of the
Requirements Were
                       HUD homes. Bralen provided all the financing and Gannon
Violated
                       Real Estate, owned by Bralen acted as a broker to sell the
                       homes. The president of Bralen is Second Chapel Hill's
                       Treasurer. Therefore the Treasurer had a conflict of interest
                       as defined in HUD's Regulation 24 CFR 291.435.

                       Second Chapel Hill had a contract with Bralen, Inc. that
                       provided for Bralen to supply all acquisition and repair
                       funds. The contract called for Gannon to market the
                       properties, and Bralen and Second Chapel Hill to share all
                       surplus funds equally.

                       Gannon Real Estate received a total of $23,000 for
                       marketing and broker's fees for the sale of the five homes.
                       The fees were not based on a percentage of the sale price as
                       is the standard industry practice in the Detroit area. The
                       broker received a flat fee; $6,000 for three homes and
                       $2,500 for two homes. Gannon's fees for the five properties
                       exceeded the seven percent local industry standard by
                       $8,692. For example, Gannon received a flat broker's fee
                       of $6,000 for the sale of the property at 8486 Brace. By
                       local practice, the 7 percent broker's fee on a sales price of
                       $34,900 would have been $2,443. Gannon received $3,557
                       in excess of the industry standard.




                                Page 5                                   96-CH-229-1009
Finding 1



Auditee Comments   The Executive Director said Second Chapel Hill would not
                   provide written comments to the audit.




Recommendations    The Director, Office of Housing, Michigan State Office
                   should:

                   1A.   Require Second Chapel Hill to provide invoices to
                         support the unsupported expenditures of $57,054 or
                         prepay on the applicable mortgages the amount that
                         cannot be supported.

                   1B.   Require Second Chapel Hill to prepay the applicable
                         mortgages a total of $23,434 for ineligible expenses
                         claimed and excess profits taken.

                   1C.   Require Second Chapel Hill to prepay the applicable
                         mortgages a total of $8,692 for the excessive
                         broker's fees charged.

                   1D.   Require Second Chapel Hill to immediately
                         eliminate the conflict of interest.

                   1E.   If the above recommendations are not satisfactorily
                         resolved, remove Second Chapel Hill from
                         participation in the program and initiate
                         administrative penalties.




96-CH-229-1009             Page 6
                                                                                       Finding 2




    The 40/40 Institute Did Not Follow HUD's
                  Requirements
The 40/40 Institute, a nonprofit organization, sold two HUD homes purchased at a 30 percent
discount for amounts higher than allowed by HUD's requirements. The 40/40 Institute did not
have an adequate accounting system to capture property related costs and revenues. The
Institute's president said he was unaware of HUD's requirements. As a result, low and moderate
income persons may have paid more for properties than HUD's program intended and the 40/40
Institute may have realized unallowed profits of $3,291.



                                    HUD Regulation 24 CFR 291 and HUD Notice H94-74
 HUD's Requirements
                                    allow nonprofit organizations to purchase HUD acquired
                                    properties at a 30 percent discount of the properties'
                                    appraised values provided the nonprofit organizations
                                    comply with HUD's requirements.

                                    HUD Regulation 24 CFR 291.405(2)(i) requires a private
                                    nonprofit organization to have a functional accounting
                                    system that operates according to generally accepted
                                    accounting principles. A functional accounting system
                                    should be able to track property costs and revenues.

                                    HUD Notice H94-74 and the Model Land Use Restriction
                                    Addendum signed by applicable nonprofit organizations
                                    and HUD say, unless an exception is granted in writing by
                                    HUD, the initial purchaser (nonprofit organization) of a
                                    property at a 30 percent discount shall not resell the
                                    property for an amount that exceeds the net development
                                    cost plus ten percent of the net development cost. Net
                                    development cost is the total cost of the project. It includes
                                    such items as acquisition cost, architectural fees, permits
                                    and survey expenses, insurance, and taxes, but excludes
                                    overhead and any developer's fees.

                                    The 40/40 Institute sold two HUD homes acquired at a 30
 Homes Were Sold At
                                    percent discount for $3,291 more than the net development
 Amounts That Exceeded
                                    cost plus ten percent fee of the net development cost. The
 HUD's Guidelines
                                    Institute received excessive payments of $2,016 for the
                                    home at 15779 Heyden and $1,275 for the home at 19480
                                    Beaverland.

                                             Page 7                                   96-CH-229-1009
Finding 2



                 The Institute did not have an adequate accounting system to
                 track property related costs and revenues. The individual
                 property files contained support for the acquisition costs;
                 however, they did not contain any records to support the
                 costs for claimed repairs, holding costs, and management
                 fees.

                 As of December 1995, the Institute had sold four of 22
                 homes that it purchased from HUD between April 1994 and
                 December 1995. Five of the remaining 18 homes were
                 occupied by potential buyers, one had suffered a casualty
                 loss, and the others were vacant. The Institute could not
                 provide cost reports, cancelled checks, or signed contracts
                 to show how much had been spent to repair and market its
                 unsold properties. It also did not have rental/leasing records
                 for the occupied properties. As a result, two properties
                 were sold at amounts that may exceed HUD's guidelines,
                 and records are not available to support future sales.

                 For example, the Institute purchased the home at 15779
                 Heyden for $22,066 and sold it for $29,102. The Institute
                 claimed that its net development cost was $33,459: $22,066
                 for the acquisition cost; $6,910 for repairs, $2,758 for
                 interest, $1,100 for holding costs, and $625 for
                 management fees. The purchase was funded by a private
                 mortgage in the amount of $22,066. We estimated the
                 interest cost on the mortgage to be $2,558. The Institute did
                 not have sufficient documentation to support the repair
                 costs, holding costs or management fees. Since there is no
                 evidence to verify these costs, we calculated the net
                 development cost as $24,624 ($22,066 acquisition cost plus
                 $2,558 for interest). As a result, the Institute received
                 excess funds of $2,016 on the sale.


                  Net Development Cost per Institute              $33,459
                  Net Development Cost per Audit                   24,624
                  10 percent Allowable Fee                          2,462
                    Total Cost and Fee per Audit                   27,086
                  Sales Price                                      29,102
                    Profit                                        $ 2,016



96-CH-229-1009               Page 8
                                                                       Finding 2



                    The President of the Institute said he had recently acquired
                    competent accounting help to set up a proper accounting
                    system. Additionally, he said he was unaware of HUD's
                    program requirements. However, with the purchase of each
                    home, he signed an addendum that stated the nonprofit
                    organization could not resell the property for an amount in
                    excess of the net development cost plus ten percent of the
                    net development cost.



Auditee Comments    Written comments for the 40\40 institute were prepared by
                    the accountant the Institute retained to implement an
                    accounting system. The accountant said:

                    We were retained by the 40\40 Institute several weeks ago
                    to implement an accounting system pursuant to Generally
                    Accepted Accounting Principles. To that end, we have set
                    the Institute up on its computer with software that, if used
                    properly, would accomplish our objectives. Thus far, we
                    have gone through all of its records through 1994.
                    Presently, we are working on the data for 1995. We
                    anticipate having the records up-to-date by mid-June of this
                    year.

                    The inventory of houses except for two or possibly three
                    will be carried under the HUD Notice H94-74 and the
                    Model Land Use restriction addendum. When we are done,
                    the Institute will be able to track its inventory according to
                    HUD guidelines and/or programs under which the inventory
                    was purchased.

                    After discussing this matter with the Institute's President,
                    we feel confident that the new system with the attendant
                    procedures will serve the Institute well.


OIG Evaluation of   Although the Institute said it is in the process of
Auditee Comments    establishing an adequate accounting system, the response
                    by the Institute's accountant did not address the unsupported
                    expenditures that our recommendation said should be
                    prepaid on the applicable mortgages.




                             Page 9                                   96-CH-229-1009
Finding 2




Recommendations   The Director, Office of Housing, Michigan State Office
                  should:

                  2A.   Require the 40/40 Institute to provide
                        documentation that supports $3,291 in expenditures
                        claimed or prepay on the applicable mortgages the
                        amount that cannot be supported.

                  2B.   Verify that the Institute has established an
                        accounting system that will properly capture costs or
                        remove the Institute from the program.




96-CH-229-1009           Page 10
                                                                                       Finding 3




Detroit Non-Profit Housing Did Not Adhere to
            HUD's Requirements
The Detroit Non-Profit Housing Corporation sold two HUD purchased homes for amounts higher
than allowed by HUD. The Corporation did not have a source for funds needed for program
participation. The program administrator said she was not aware of the HUD requirement
regarding sale price restrictions. Consequently, low and moderate income persons paid more for
the properties than HUD's program intended and the corporation received excess funds of $1,612
from the sales.



                                    HUD Regulation 24 CFR 291 and HUD Notice H94-74
 HUD's Requirements
                                    allow nonprofit organizations to purchase HUD acquired
                                    properties at a 30 percent discount of the properties'
                                    appraised values provided the nonprofit organizations
                                    comply with HUD's requirements.

                                    HUD Notice H94-74 and the Model Land Use Restriction
                                    Addendum signed by applicable nonprofit organizations
                                    and HUD say, unless an exception is granted in writing by
                                    HUD, the initial purchaser (nonprofit organization) of a
                                    property at a 30 percent discount shall not resell the
                                    property for an amount that exceeds the net development
                                    cost plus ten percent of the net development cost. Net
                                    development cost is the total cost of the project. It includes
                                    items such as acquisition cost, architectural fees, permits
                                    and survey expenses, insurance, and taxes, but excludes
                                    overhead and any developer's fees.

                                    HUD Notice H94-74 requires nonprofit agencies to have
                                    financial resources to handle property related costs. HUD
                                    Regulation 24 CFR 291.410 (c)(5)(iii) requires nonprofit
                                    agencies to provide evidence of financial and other
                                    resources to meet the obligations of the property related
                                    costs.

                                    The Detroit Non-Profit Housing Corporation sold two HUD
 Homes Were Sold For
                                    homes it purchased at a 30 percent discount for amounts
 Excessive Amounts
                                    that exceeded the acceptable HUD guidelines. The funds
                                    were paid directly by the home buyers since the corporation
                                    did not have funds or credit available to purchase the homes

                                            Page 11                                   96-CH-229-1009
Finding 3



                      itself. According to program requirements, the Corporation
                      should have had its own source of funds. On the same day
                      that each property was purchased from HUD, the nonprofit
                      corporation immediately sold the property to the home
                      buyer. The corporation sold the homes at HUD's list price
                      rather than its purchase price plus the HUD allowable 10
                      percent development fee. As a result, the corporation
                      received excessive funds of $1,612 as follows:


                                              7145 Tuxedo      22430 Barbara
                   Net Development Cost         $3,396           $11,956
                   10 Percent Fee                340              1,196

                   Total Cost and Fee           3,735             13,151
                   Sales Price                  4,500            14,000
                   Excess Funds Realized        $ 764            $ 848

                      The Corporation's program administrator said she was not
                      aware of any written program requirements regarding
                      HUD's restrictions on the sale price. However, with the
                      purchase of each home, the president signed an addendum
                      that stated the nonprofit organization could not resell the
                      property for an amount in excess of the net development
                      cost plus ten percent of the net development cost.

                      The intent of selling a nonprofit agency property at a 30
                      percent discount is to allow the nonprofit to make
                      improvements to bring the properties to acceptable
                      standards for sale to low and moderate income persons.
                      The nonprofit agencies are allowed to recover their
                      development costs, plus a 10 percent fee to cover the
                      administrative expenses incurred during the process. We
                      believe buying and selling properties on the same day with
                      no improvements being made, is a violation of the intent of
                      the program and normally would not justify the 10 percent
                      fee for administrative costs.



Auditee Comments      The Executive Director for the Detroit Non-Profit Housing
                      Corporation provided the following comments:


96-CH-229-1009                   Page 12
                                                                      Finding 3



                    Detroit Non-Profit Housing Corporation has been operating
                    under a previous program and was not aware of the changes
                    that were referred to under regulation 24 CFR 290, HUD
                    Notice H94-74 and HUD Regulation 24 CFR 291.410
                    (c)(5)(iii). We were not notified of any meeting being
                    conducted by HUD nor did we receive any literature of the
                    above mentioned program changes.

                    Detroit Non-Profit Housing Corporation is acting in good
                    faith. We feel it would be unjust to be removed from the
                    program or to reimburse HUD, since all of our actions were
                    based on a prior program.

                    Detroit Non-Profit Housing Corporation recently received
                    the above mentioned HUD Regulations and HUD Notices.
                    Henceforth, Detroit Non-Profit Housing Corporation will
                    adhere to current regulations and notices. We have secured
                    financing through a lending institution for future purchases.



OIG Evaluation of   The Detroit Non-Profit Housing Corporation said it was not
Auditee Comments    aware of changes under Regulation 24 CFR 290, HUD
                    Notice H94-74 and HUD Regulation 24 CFR 291.410
                    (c)(5)(iii). Regulation 291.410 has not changed and was
                    also applicable to the previous program referred to by the
                    Housing Corporation. HUD Notice H94-74 is a new notice
                    applicable for the 30 percent discount program. Regulation
                    24 CFR 290 is not applicable to the 30 percent discount
                    program. Under the previous program mentioned by the
                    auditee, the same requirement existed for financial
                    resources. Additionally, with the purchase of each home,
                    the Housing Corporation signed an addendum that stated
                    the terms under which the nonprofit could sell the home.

                    The Housing Corporation said it has secured financing for
                    future purchases and has received necessary regulations, but
                    it believes it would be unjust to have to repay the excess
                    funds realized. The intention of the 30 percent discount
                    program is to allow homes to be purchased at a discount so
                    that nonprofit agencies can make improvements before
                    selling them to low and moderate income persons. We
                    believe it is unjust for the low and moderate income
                    families to be paying more for homes than intended by
                    HUD. The Housing Corporation should prepay on the


                            Page 13                                  96-CH-229-1009
Finding 3



                  applicable mortgages, the amount of excess funds it realized
                  on the sale of the homes.



Recommendations   The Director, Office of Housing, Michigan State Office
                  should:

                  3A.    Require the Detroit Non-Profit Housing Corporation
                         to prepay on the applicable mortgages a total of
                         $1,612 in excess funds received.

                  3B.    Require the Detroit Non-Profit Housing Corporation
                         to obtain financing for its participation in the
                         program, make improvements to properties
                         purchased or remove the Corporation from the
                         program.

                  3C.    If the above recommendations are not satisfactorily
                         resolved, initiate administrative penalties against the
                         Corporation.




96-CH-229-1009            Page 14
Internal Controls
In planning and performing our audit, we considered the internal controls of the management of
the nonprofit organizations in order to determine our auditing procedures and not to provide
assurance on internal controls. Internal controls consist of the plan of organization and methods
and procedures adopted by management to ensure that: resource use is consistent with laws,
regulations, and policies; resources are safeguarded against waste, loss, and misuse; and reliable
data are obtained, maintained, and fairly disclosed in reports.



                                     We determined that the following internal controls were
 Relevant Internal
                                     relevant to our audit objectives:
 Controls
                                     •   Accounting system

                                     We assessed the relevant controls identified above.

                                     It is a significant weakness if internal controls do not give
                                     reasonable assurance that resource use is consistent with
                                     laws, regulations, and policies; that resources are
                                     safeguarded against waste, loss, and misuse; and that
                                     reliable data are obtained, maintained, and fairly disclosed
                                     in reports.

                                     Based on our audit, the following item is a significant
 Significant Weaknesses
                                     weaknesses:

                                     Accounting system. One nonprofit organization did not
                                     have an adequate accounting system to capture property
                                     related costs and revenues (see Finding 2).




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Internal Controls




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96-CH-229-1009                      Page 16
Follow Up On Prior Audits
This was the first OIG audit of the nonprofit organizations. The last independent audit reports
issued on the nonprofit organizations did not contain any findings related to this report.




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Follow Up On Prior Audits




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96-CH-229-1009                      Page 18
                                                                                   Appendix A

Schedule of Ineligible and
Unsupported Costs

                Recommendation           Type of Questioned Costs
                  Number              Ineligible 1/     Unsupported 2/
                        1A                              $57,054
                        1B               $23,434
                        1C                 8,692
                        2A                                3,291
                        3A                                1,612
                      Totals             $32,126          $61,957


1/ Ineligible costs are costs charged to a HUD program or activity that the auditor believes are
   not allowable by law, contract, or Federal, State, or local policies or regulations.

2/ Unsupported costs are costs charged to a HUD-financed or insured program or activity
   whose eligibility cannot be determined at the time of the audit since such costs were not
   supported by adequate documentation or there is a need for a legal or administrative
   determination on the eligibility of the costs. The costs require a future decision by HUD
   program officials. The decision, besides obtaining supporting documentation, might involve
   a legal interpretation or clarification of Departmental policies and procedures.




                                             Page 19                                96-CH-229-1009
Schedule of Ineligible and Unsupported Costs




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96-CH-229-1009                            Page 20
                                                                          Appendix B

Distribution
Secretary's Representative, Midwest
Director, Office of Housing, Michigan State Office (2)
State Coordinator, Michigan State Office (2)
Assistant General Counsel, Midwest
Director, Accounting Division, Midwest
Field Comptroller, Midwest
Public Affairs Officer, Midwest
Assistant Deputy Secretary for Field Management, SC (Room 7106)
Acquisitions Librarian, Library, AS (Room 8141)
Chief Financial Officer, F (Room 10166) (2)
Deputy Chief Financial Officer for Operations, FO (Room 10166) (2)
Comptroller/ Audit Liaison Officer, Office of Housing, HF (Room 5132) (3)
Associate General Counsel, Office of Assisted Housing and Community Development, GC
(Room 8162)
Assistant Director in Charge, U.S. General Accounting Office,
  820 1st St. NE, Union Plaza, Bldg.2, Suite 150, Washington, DC




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