Issue Date
October 16, 1995
Audit Case Number
96-FW-214-1001
TO: James E. Hicks
Director, Office of Housing, 6AH
FROM: D. Michael Beard
District Inspector General for Audit, 6AGA
SUBJECT: Credit Finance Corporation
Multifamily Management Agent
Dallas, Texas
In response to a request from the Dallas HUD Office, we performed an audit
of the Credit Finance Corporation (CFC) for the period January 1, 1993,
through December 31, 1994. The purpose of the audit was to determine if
CFC properly accounted for cash receipts, made disbursements with project
income that were reasonable and necessary to the operations and maintenance
of the properties, and complied with the Regulatory Agreements and HUD
requirements.
Generally, CFC maintained good records and followed sound management
practices. However, the audit found that CFC: (1) made unauthorized
distributions and did not remit residual receipts to mortgagees;
(2) disbursed project funds for ineligible and unsupported costs; (3)
diverted operating funds from one project to the owner and overcharged
the project for bookkeeping services; (4) improperly implemented the
automated Tenant Rental Assistance Certification System (TRACS); and
(5) did not properly compute excess rental income for Section 236 projects.
Within 30 days please give us, for each recommendation made in the 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.
If you have any questions, please contact me or Frank Baca, Assistant
District Inspector General for Audit, at (817) 885-5551.
Executive Summary
We have completed an audit of Credit Finance Corporation's (CFC)
management of HUD-insured properties. The purpose of the audit was to
determine if CFC properly accounted for cash receipts, made disbursements
with project income that were reasonable and necessary to the operations
and maintenance of the properties, and complied with the Regulatory
Agreements and HUD requirements. The audit did not include any substantial
physical inspections of the CFC-managed properties.
In general, CFC maintained good records and followed sound management
practices. However, the audit found numerous instances of significant
CFC violations of the Regulatory Agreements and HUD requirements;
specifically CFC:
Made unauthorized distributions totaling $93,346 to the partners of
three HUD-insured projects. Also, CFC did not remit $260,350 in residual
receipts to the mortgagees of three projects.
Disbursed $78,439 in project funds for ineligible and
unsupported bookkeeping/accounting fees, legal fees,
prepaid management fees, professional dues, and
project employee vehicle repairs.
Diverted $57,528 in operating funds from Park Creek
Manor to the project owner, and overcharged the
project $21,085 for bookkeeping services.
Improperly implemented an automated Tenant Rental
Assistance Certification System (TRACS), resulting in
$64,896 in unreasonable expenses.
Did not properly compute excess rental income on the
Section 236 projects they manage.
The foregoing violations occurred because CFC ignored or
did not have adequate controls to ensure adherence to HUD
requirements. As a result, the financial and physical
security of the HUD-insured properties, and thus the
welfare and safety of the tenants, are at risk.
We are recommending that you require CFC to repay the
projects for deposits owed and for improper and
unreasonable withdrawals, disbursements, and diversions.
Further, you should require CFC to implement controls to
ensure future adherence to HUD requirements. Finally,
should CFC refuse to repay monies owed the projects or to
comply with HUD requirements, we recommend
administrative sanctions and civil action be taken against
the firm.
We sent a draft report to CFC on September 1, 1995, and
requested an exit conference and written response by
September 15th; however, CFC requested additional time.
In a September 22, 1995 letter, we informed CFC that we
needed a written response by September 28th and an exit
conference no later than October 4th to ensure their
comments would be included in the final report. The CFC
president, citing health problems, requested an extension to
November 1st, which we did not allow. However, we
informed the CFC president that he could submit a
response after report issuance, and HUD would give the
response full consideration. Where appropriate, we have
included in this report verbal comments made by CFC to
OIG staff during the audit.
Abbreviations
AHMA Assisted Housing Management Association
CFC Credit Finance Corporation
HUD U. S. Department of Housing and Urban Development
NAHMA National Assisted Housing Management Association
OIG Office of Inspector General
TRACS Tenant Rental Assistance Certification System
Introduction
Credit Finance Corporation (CFC), a management agent headquartered in
Dallas, Texas, manages 14 HUD-insured multifamily projects located in
the Dallas/Fort Worth, Abilene, and San Antonio areas. The Dallas HUD
Office services 11 of the 14 properties, the Fort Worth HUD Office
services two and the San Antonio HUD Office services one. The 14
projects have 2,606 dwelling units. Also, for part of our audit period
CFC managed another HUD-insured property serviced by the Dallas HUD
Office (see Appendix D for a schedule of CFC managed properties).
CFC also manages or owns other multifamily properties that are not
HUD-insured.
The purpose of our examination was to determine if CFC
properly accounted for cash receipts, made disbursements
with project income that were reasonable and necessary to
the operations and maintenance of the properties, and
complied with the Regulatory Agreements and HUD
requirements.
We began our audit at the request of the Dallas HUD
Office. The examination included a review of the
governing Regulations, HUD Handbooks, Regulatory
Agreements, and Management Agreements. We
interviewed HUD and CFC officials and staff. We also
interviewed various current and former project employees,
where appropriate.
Based on initial survey results, we concentrated our audit
efforts on selected areas. Our audit procedures included,
but were not limited to, a review of the following:
Cash disbursements/collections and payroll: We
reviewed 1994 financial records for ten projects:
Abilene North Oak Hollow
El Capitan Park Creek Manor
Euless Square Prairie Ridge
Garland Gardens Rolling Meadows
Highland Hills Drive Woodland City
CFC did not manage Park Creek Manor after February
1994. Therefore, we reviewed Park Creek Manor
records from January 1993 through February 1994.
Also, we incorporated into this report a previous OIG
review of Highland Hills, which included costs from
1991-1993.
For cash disbursements we reviewed all relevant
records supporting payments, including bank
statements, canceled checks, invoices, purchase orders,
general ledgers, and audited financial statements. For
cash collections, we traced amounts collected from the
projects' monthly rent rolls to bank deposits. For
project payroll we performed testing of two periods at
Park Creek Manor. We also reviewed employee
timesheets supporting payroll charges at other projects.
Surplus cash, distributions and residual receipts: We
reviewed computations for surplus cash, owner
distributions, and residual receipts contained in the
audited financial statements of Rolling Meadows,
Euless Square, Oak Hollow, and Highland Hills Drive
for 1988 through 1994. The review went back as far
as 1988 because of errors in the reports. We also
interviewed the CFC president and personnel from the
independent auditor firm responsible for the financial
statement audits.
Duties performed by Certified Occupancy Specialists
(Specialists): The review included examining the
Specialists' 1994 time sheets, and computing per unit
per month payroll costs to implement the Tenant Rental
Assistance Certification System (TRACS). To
determine whether these costs were reasonable, we
surveyed three independent contractors that provide
similar services. We also interviewed Specialists, and
current and former CFC employees and project
employees regarding their duties and responsibilities.
In addition, we performed limited reviews of selected
Section 8 vouchers CFC submitted to HUD.
Follow-up on a previous OIG survey of Highland Hills
Apartments: We updated and incorporated into this
report the results of a previous survey of Highland
Hills Apartments. The survey, performed in December
1993 and January 1994, covered the period January
1992 through November 1993, with testing expanded to
include 1991 legal expenses.
Excess income reporting on Section 236 projects: We
reviewed 1993 audited financial statements for findings
related to Excess Income Reports. Audit steps also
included a detailed analysis of the February 1995
Excess Income Report for Leigh Ann to determine if
CFC correctly computed excess income. Based on
these results, we reviewed 1994 Excess Income Reports
for 8 of the 11 Section 236 projects (including Leigh
Ann, Abilene North, El Capitan, Euless Square,
Garland Gardens, Oak Hollow, Rolling Meadows, and
Woodland City) to determine the accuracy of excess
income computations. In addition, we reviewed the
February 1995 Excess Income Reports for Abilene
North and Oak Hollow due to excessive carry-forward
balances.
We conducted the audit at CFC's office and the Dallas and
Fort Worth HUD Offices. CFC's office is at 1412 Main
Street, Dallas, Texas. Our principal contact for the audit
was Mr. Lawrence R. Burk, CFC's president.
The audit covered the period January 1, 1993, through
December 31, 1994, although the period was extended
when necessary. We performed field work at CFC from
March to June 1995, and conducted the audit in accordance
with generally accepted government auditing standards.
CFC Made Unauthorized Distributions and Did
Not Remit Residual Receipts
CFC did not remit $260,350 in residual receipts to the mortgagees of
three projects. Also, CFC made unauthorized distributions totaling
$93,346 to the partners of three HUD-insured projects. By failing
to remit residual receipts and making unauthorized distributions, CFC
violated the Regulatory Agreements and HUD requirements. Residual
receipts provide a source of funds for repairs or other HUD-approved
purposes. Also, HUD limits owner distributions to ensure projects
remain financially sound and well-maintained. This occurred
because CFC disregarded HUD requirements, and did not verify the
accuracy of information provided by the independent auditor. For two
projects, unauthorized owner distributions resulted from CFC's failure
to make required residual receipts deposits.
The Regulatory Agreements define:
surplus cash: as any cash remaining after: (1) the
mortgage payment; (2) the required deposits to the
reserve fund for replacements; (3) all payments for the
obligations of the project; and (4) any remittances due
HUD.
distributions: as the withdrawal of cash or any assets of
the project, including the segregation of cash or assets
for subsequent withdrawal, and excluding payment of
reasonable operating expenses. The Regulatory
Agreements limit distributions to: (The independent auditor is
responsible for performing the annual financial statement audits
of CFC's HUD project) 6 percent of the owners' initial equity
investment in the project and (2) surplus cash.
residual receipts: as any cash remaining at the end of
the fiscal period after deducting from surplus cash the
amount of all allowable distributions.
The Regulatory Agreements require:
Written HUD approval before paying out any funds
except reasonable operating expenses and necessary
repairs.
Written HUD approval to make any distribution of
assets or income of the project, except from surplus
cash.
Owners to establish and maintain a residual receipts
fund. Owners must deposit residual receipts with the
mortgagee within 60 days after the end of the fiscal
period. Also, disbursements from residual receipts
require HUD approval.
Paragraph 2-10.B. of HUD Handbook 4370.2 REV-1,
Financial Operations and Accounting Procedures for Insured
Multifamily Projects, states all distributions must be
computed as of the end of the fiscal period. Also, if the
owner elects to collect distributions semi-annually, then the
owner must compute surplus cash as of the end of each
semi-annual period. The Handbook further states these
calculations shall be audited and the form HUD-93486,
Computation of Surplus Cash, Distributions and Residual
Receipts, included in the annual report.
Between 1988 and 1994, CFC did not remit $260,350 in
residual receipts to the mortgagees of three projects. For
Rolling Meadows, Highland Hills Drive, and Euless Square,
CFC did not remit residual receipts of $74,741, $160,511,
and $25,098, respectively. These amounts result from re-computations
of surplus cash, distributions, and residual receipts on form HUD-93486
for the years 1988 through 1994. The review included recomputing
these amounts because neither CFC nor its independent auditor took into
account prior unauthorized distributions or residual receipts
owed to HUD when making the computations.
In failing to remit required residual receipts, CFC
disregarded Regulatory Agreement requirements in some
cases. In these instances, CFC did not make the required
deposits even though the independent auditor reported
residual receipts due the mortgagee on the form HUD-93486. In other cases
where residual receipts were due, the
independent auditor computed surplus cash and available
distribution amounts on the form HUD-93486, but left the
residual receipts amount line blank. Nevertheless, CFC had
responsibility for ensuring the accuracy of information the
independent auditor provided.
CFC made unauthorized distributions totaling $93,346 to the
partners of three projects. The partners of Rolling
Meadows, Highland Hills Drive, and Oak Hollow received
$67,771, $24,575, and $1,000, respectively, even though
these projects did not have the necessary surplus cash. For
Rolling Meadows and Highland Hills Drive, the
unauthorized distributions occurred because CFC did not
remit required residual receipts (i.e., if residual receipts had
been paid as required, these amounts would not have been
available for distribution). For Oak Hollow, CFC made the
unauthorized distributions in clear violation of regulatory
requirements.
The unauthorized distributions and unpaid residual receipts
affect the projects' ability to make future emergency repairs.
For Rolling Meadows and Highland Hills Drive, the funds
distributed to the partners should still be on deposit with the
respective mortgagee in the residual receipts accounts. The
Regulatory Agreements require residual receipts because
they act as a safety valve for making needed major repairs
as the projects get older. At December 31, 1994, the
residual receipts balances for Highland Hills Drive and
Euless Square were only $13,281 and $1,070, respectively.
Also, Rolling Meadows did not have residual receipts on
deposit with the mortgagee at December 31, 1994.
CFC's president stated the independent auditor computes
surplus cash and will respond to this item for CFC. CFC
attributed part of the problem to the process. A Washington
D.C. firm reviews audit reports for HUD, sends HUD the
results of their review, and HUD sends a letter. CFC just
received review results of 1993 audit reports. Funds may
be gone because of the delays. However, CFC will see
what it can do to get unauthorized distributions back from
partners. As stated previously, CFC had responsibility for
ensuring the accuracy of information the independent auditor
provided. Also, in the case of Oak Hollow, CFC made
unauthorized distributions when it clearly knew, or should
have known, the project was in a non-surplus cash position.
Recommendations
We recommend the Fort Worth Office:
1A. Require CFC to implement controls to ensure the proper
computation and payment of surplus cash, distributions, and
residual receipts in the future.
1B. Require CFC to repay unauthorized distributions totaling
$93,346 for Rolling Meadows, Highland Hills Drive, and
Oak Hollow ($67,771, $24,575, and $1,000, respectively);
1C. Require CFC to make required residual receipt deposits
totaling $260,350 for Rolling Meadows, Highland Hills
Drive, and Euless Square ($74,741, $160,511, and $25,098,
respectively); and
1D. Impose appropriate administrative sanctions and civil action
against CFC for violating the Regulatory Agreements and
HUD guidelines if CFC does not make the necessary
repayments.
CFC Improperly Disbursed Project Funds
CFC improperly disbursed $78,439 in project funds, including $71,334 in
ineligible and $7,105 in unsupported charges. This occurred because
CFC did not follow the requirements of the Regulatory Agreements and
other applicable HUD guidelines. The improper disbursements included
payments for bookkeeping/accounting fees, legal fees, prepaid
management fees, professional dues, and project employee vehicle repairs.
These questionable disbursements involved all the HUD-insured projects
that CFC managed, including two projects in default on their mortgage
payments.
The Regulatory Agreements for multifamily projects state
owners shall not, without the prior written approval of the
Secretary, pay out any funds, other than from surplus cash,
except for reasonable operating expenses and necessary
repairs.
HUD Handbook 4350.1 REV-1, Insured Project Servicing
Handbook, paragraph 10-17 states an owner may not use
project funds to pay an attorney, agents, or representatives
to develop a workout proposal for HUD to consider and/or
to advocate that HUD approve the plan.
Chapter 4 of HUD Handbook 4370.2 REV-1, Financial
Operations and Accounting Procedures for Insured
Multifamily Projects, provides the chart of accounts to be
used for HUD-insured projects. The chart of accounts
includes a series of accounts (the 7000 series) to record
expenses applicable to the mortgagor entity as distinguished
from expenses necessary and reasonable to the operation of
the project.
In an October 31, 1989 memorandum to management
agents, the Dallas HUD Office set the maximum allowable
fee paid by HUD projects for bookkeeping fees. The
memorandum, effective January 1, 1990, said the actual
prorated cost for each project could not exceed $4 per unit
per month. The memorandum also said any increase in the
fee must be approved by HUD.
CFC charges $4 per unit per month on every project they
manage for bookkeeping/accounting services, the maximum
allowable by HUD for these services. HUD must approve
any charges exceeding $4 per unit per month. However,
CFC disbursed $9,361 from nine projects for excessive
bookkeeping/accounting fees. The excessive fees
represented unapproved charges in addition to the maximum
amount that CFC already charged these projects. Invoices
supporting the additional fees showed the services provided
to be similar to the services included in CFC's $4 fee.
CFC paid $26,333 from five projects for ineligible legal
fees. In addition, CFC could not provide adequate support
for payments of $5,602 in legal fees for one project.
CFC charged Park Creek Manor $22,372 in 1993 for legal
fees that violated the Regulatory Agreement and HUD
Handbook guidelines. Over $15,000 went to a law firm for
work representing the project owner in workout negotiations
with HUD. In addition, CFC paid $7,000 to another firm
for legal fees involving the owner.
CFC's president said the $7,000 payment involved a lawsuit
brought by the owner of Park Creek Manor against the City
of Dallas. However, a HUD attorney familiar with the case
said the owner sued the City of Dallas in his name, not the
project's, and Park Creek Manor could not benefit from the
lawsuit. These improper payments for legal fees occurred
when Park Creek Manor was in serious default on its
mortgage payments. Park Creek Manor was $1.6 million in
default by the end of 1994.
In addition, an OIG review of Highland Hills performed in
December 1993 and January 1994 identified $3,961 in
improperly disbursed legal fees. Generally, the legal fees
paid involved partnership agreements for Highland Hills and
three other projects: Euless Square, Woodland City and
Highland Hills Drive. HUD guidelines do not consider
these fees a project expense. The review also identified
$5,602 in insupported legal fees.
The questionable legal expenses occurred in part because
CFC's accounting system does not include the required
general ledger accounts for expenses unrelated to property
operations (7000 series accounts). Account number 7120
specifically provides for recording legal expenses related
solely to the mortgagor entity.
CFC prepaid itself $33,440 in management and other fees
from four projects. These prepaid fees, outstanding at
December 31, 1994, were not necessary for the operation of
the projects. CFC's Management Agreement with each
project provides that management fees are only payable in
the month following the actual service. Rolling Meadows
had prepaid management and other fees to CFC over a 2-year period
totaling $18,860. According to CFC's president, one $10,000 payment
from Rolling Meadows to CFC was a mistake and would be repaid. The
president said any prepaid fees would be corrected.
CFC paid $2,200 to the National Assisted Housing
Management Association (NAHMA) for membership dues.
CFC reimbursed itself for these dues from the 15 HUD-insured projects.
The dues are not reasonable and necessary costs because each project
already paid membership dues to join the Assisted Housing Management
Association of North Texas (AHMA-NT). Dues paid by the projects to
AHMA-NT include membership in NAHMA. Therefore, CFC should repay the
15 projects for the unnecessary membership dues. CFC's president said
he believes the projects benefit from the NAHMA membership, but would
respond to this issue based on his counsel's advice.
CFC paid $1,504 from two projects for repairs to
employees' vehicles. The records did not support these
payments as reasonable and necessary expenses. According
to the management agent's president, CFC reimbursed the
employees because they had taken actions to fight drug
problems at the projects and as a result had sustained
damage from gangs. CFC should provide additional support
for these payments.
Recommendations
We recommend the Fort Worth Office:
2A. Require CFC to incorporate the 7000 series accounts
into its accounting system to record expenses
unrelated to project operations;
2B. Require CFC to repay the HUD projects $71,334 in
ineligible disbursements (Appendix B);
2C. Require CFC to provide support or justification for
$7,105 in questionable disbursements (Appendix B).
If CFC cannot adequately support or justify the
charges, require CFC to repay the HUD projects;
and
2D. Impose appropriate administrative sanctions and civil
action against CFC for violating the Regulatory
Agreements and HUD Regulations should CFC not
repay any improperly disbursed funds.
CFC Diverted Park Creek Manor Funds to
Owner and Overcharged for Bookkeeping
Services
CFC diverted $57,528 in operating funds from Park Creek Manor by
returning a portion of its management fee to the owner. Also, CFC
overcharged Park Creek Manor $21,085 for bookkeeping services. This
occurred because CFC did not follow the terms of the Regulatory
Agreement with HUD or its Management Agreement with the project. The
diversions and overcharges caused unnecessary harm to Park Creek Manor,
which CFC managed from June 1990 through February 1994. As of
March 1, 1994, when CFC stopped managing the project, Park Creek Manor
was in default by almost $1 million.
Park Creek Manor's Regulatory Agreement with HUD:
Limits the owner to using project funds only to pay
reasonable expenses necessary to the operation and
maintenance of the project (Section 3.b.(3)).
Requires the owner to obtain written approval before
undertaking self-management, contracting for
management services, or paying or incurring any
obligation to pay fees for management services (Section
11.c.).
CFC's Management Agreement with the owner, signed June
1, 1990, sets a limit on bookkeeping fees. Paragraph 5.a.
of the Management Agreement limits total bookkeeping
fees, including data processing, to $3.50 per occupied unit.
CFC diverted part of its management fee from Park Creek
Manor to the owner. CFC collected a monthly fee from
Park Creek Manor equal to 7 percent of the project's gross
income. Invoices supporting management fees show CFC
collected the 7 percent fee, but then paid 2 percent of gross
income back to the project owner each month. The
estimated diversions to the owner total $57,528 for the
period CFC managed the project. (The $57,528 consists of
$16,084 in actual charges for the period January 1993
through February 1994, and $41,444 in estimated charges
for the period June 1990 through December 1992).
A review of Park Creek Manor's records disclosed no
evidence that the owner provided management services, nor
did the owner obtain HUD approval to self-manage the
project as required. CFC, in effect, provided management
services to Park Creek Manor for a 5 percent fee. Park
Creek Manor did not benefit from the diversions, nor did
the diversions represent reasonable or necessary charges to
the project. HUD officials agreed with our conclusion.
CFC's President said this issue should be referred to Park
Creek Manor's owner.
CFC overcharged Park Creek Manor $21,085 for
bookkeeping services from January 1991 through February
1994. CFC did not adhere to its Management Agreement
with the project, which limited charges for bookkeeping
services to $3.50 per occupied unit. Instead, CFC charged
the project up to $4 per unit per month, including vacant
units. CFC should provide support that the overcharges
were reasonable and necessary for the operation of Park
Creek Manor, or return the overcharges to the project.
Park Creek Manor is in serious default on its HUD-held
mortgage. The delinquency at January 1, 1995, totaled
more than $1.6 million. The mortgage was current when
CFC started managing the project on June 1, 1990. On
January 1, 1991, Park Creek Manor defaulted on its
mortgage payments and on July 9, 1992, the mortgagee
assigned the mortgage to HUD. When CFC stopped
managing Park Creek Manor on March 1, 1994, the project
was delinquent by almost $1 million. For projects with
assigned mortgages, HUD requires all remaining net cash to
be remitted monthly to HUD, after the payment of
reasonable and necessary project operating expenses.
Therefore, the questionable charges CFC made to Park
Creek Manor contributed to the project's financial troubles
and adversely affected HUD.
Recommendations
We recommend the Fort Worth Office:
3A. Require CFC to repay Park Creek Manor $57,528
for ineligible management fees diverted to the
owner;
3B. Require CFC to provide support for $21,085 in
bookkeeping overcharges to Park Creek Manor, or
repay the project; and
3C. Impose appropriate administrative sanctions and civil
action against CFC for violating the Regulatory
Agreement and HUD requirements if CFC does
make the necessary repayments to Park Creek
Manor.
Projects Incurred Unreasonable Expenses for TRACS Automation
CFC's method of operating the automated Tenant Rental Assistance
Certification System (TRACS) caused 13 of its HUD-insured projects to
incur $64,896 in unreasonable expenses. CFC implemented an automated
TRACS in 1994 due to HUD requirements. However, the projects incurred
unreasonable costs because CFC did not structure its system to meet HUD
Regulations. CFC's system for TRACS: (1) caused questionable charges
for computer equipment; (2) included inefficient manual computations
and task duplication; and (3) did not provide adequate controls over
staff time charged to the projects. CFC appears to use its non-conforming
TRACS system largely as an excuse for charging property supervisors'
salaries, which should be paid from management fees, to the HUD-insured
projects. As a result, the projects paid unreasonable expenses for a
system that an independent contractor can provide at significantly
lower cost.
The Regulatory Agreements limit the use of project funds to
reasonable operating expenses, necessary repairs, mortgage
payments, and other purposes approved by HUD.
Title 24, Code of Federal Regulations, Part 208, requires
owners and agents of subsidized multifamily projects to
electronically transmit tenant certification, recertification,
and subsidy billing data. The electronic transmission of data
is to reduce the burden of manual forms, time consuming
calculations subject to error, and the retroactive adjustments
to subsidy billings due to the errors. The TRACS is HUD's
computer system to collect this data.
The Regulations implementing TRACS appeared in the
November 19, 1993 Federal Register. The summary and
Final Rule accompanying the Regulations stated that owners
and agents should immediately obtain information on the
cost to automate, and determine the feasibility of either
purchasing hardware and software, or contracting for the
services.
The Regulations allow three ways for owners and
management agents to implement the TRACS:
(1) Maintain computer hardware and software at each
project site;
(2) Maintain computer hardware and software at a central
location; or
(3) Contract for the services.
On May 16, 1994, HUD's Southwest District Director of
Housing established a range of $3.50 to $6 per unit per
month as a reasonable fee for both bookkeeping/data
processing and automation for TRACS. This effectively
limited CFC to a $2 per unit per month fee for TRACS
automation because CFC charged its projects $4 per unit per
month for bookkeeping/data processing. The memorandum
also stated that a survey identified the average cost of
TRACS automation as $1.32 per unit per month.
Subsequently, HUD changed its definition of reasonableness
of costs associated with TRACS automation. In a June 30,
1995 letter to owners and agents, the Southwest District
Director of Multifamily Housing said the cost of the service
cannot exceed the lessor of: (1) the prorated actual cost by
management for providing these services or (2) a reasonable
cost from an independent source. The letter also said both
limits must be documented, and the documentation available
for HUD's review.
CFC did not implement any of the three TRACS system
structures allowed by the Regulations: (1) project-based; (2)
central location; or (3) contract services. Instead, CFC's
system consists of three Certified Occupancy Specialists
(Specialists) who visit projects, automate tenant
certification/recertification data, transmit data to HUD, and
prepare monthly subsidy vouchers.
By not structuring its system as intended by HUD
Regulations, CFC has implemented a TRACS system where:
(1) computer equipment costs are questionable, and the
equipment cannot be identified as belonging to specific
projects; (2) on-site staff continue to make manual entries
that are then duplicated by the Specialists' computer entries;
and (3) there are inadequate controls over Specialists' time
charged to the projects.
The Specialists use portable computers, printers, and
software that CFC purchased for $10,464 and charged to the
projects. CFC purchased this equipment to implement the
automated TRACS system. Although HUD Regulations
allow for this cost, CFC did not use one of three methods
provided by the Regulations to carry out the TRACS. The
method used by CFC resulted in unreasonable charges to the
projects. CFC could have purchased the computer
equipment itself, and then charged the projects reasonable
fees to cover CFC's total cost of providing the TRACS
services.
The projects paid for the computer equipment; therefore, the
equipment should belong to the projects. However, CFC
did not purchase the equipment for specific sites, but instead
allocated the computer costs to 14 projects. As a result, the
equipment cannot be identified as belonging to specific
projects. Thus, some or all of the 14 projects risk losing
monies for equipment they never received.
HUD intended that TRACS reduce burdensome manual
computations prone to error. However, on-site staff at
CFC-managed projects continue to make manual
computations. The Specialists then enter data in portable
computers using complete, executed certification/
recertification forms and work sheets the on-site staff
manually prepared. The TRACS software automatically
computes tenant income, family contributions, and
assistance payments, making the on-site staff's manual
computations unnecessary.
CFC could not demonstrate the reasonableness and necessity
of the Specialists' salaries charged to the projects for
TRACS-related work. This occurred because CFC did not
have adequate controls for reporting time the Specialists
charged to projects. The Specialists completed timesheets;
however, the timesheets did not identify the types of work
performed at any project (i.e., TRACS, fill-in for managers
or assistant managers, etc.).
CFC had policies for on-site employees requiring that
managers certify the accuracy of timesheets, supervisors
approve overtime, and employees identify work performed
during overtime. Yet, CFC did not apply these controls or
document other controls as being in place for the Specialists.
One Specialist said they obtained verbal supervisory
approval to work overtime, but another Specialist said CFC
had no rules on their overtime and they needed no
supervisory approval. The latter appears more likely since
CFC arbitrarily allocated the Specialists' overtime, holidays,
vacations, and sick leave to the projects. Further, CFC was
not consistent in charging normal business hours and time
outside of normal business hours as regular pay or overtime.
The following examples illustrate CFC's arbitrary and
inconsistent salary charges for the Specialists:
Rolling Meadows. CFC charged 7 regular and 22
overtime hours for the 29 hours a Specialist's timesheet
indicated for work performed at this project. However,
the timesheet showed that 15 of these hours were during
normal business hours.
Abilene North. CFC charged the project 20 regular
hours; however, the Specialist's timesheet indicated 18
hours worked in 1 day, and 2-1/2 hours the next day.
Prairie Ridge. CFC charged the property 24 hours
vacation and 16 hours holiday time for a Specialist.
However, the Specialist had not charged any time to the
project for the pay period preceding the vacation and
holiday.
The Specialists appear to be CFC supervisors who should be
paid from management fees. (The management fee must pay for
salaries, fringe benefits, office expenses, fees and contract
costs incurred in supervising project personnel, monitoring
project operations, and analyzing and solving projoect problems
(HUD Handbook 4381.5 REV-1, Management Documents, Agents and Fees;
paragraph 2-14.A). In our opinion, CFC did not
devise a TRACS system to comply with HUD requirements.
Instead, it devised a system with additional duties for front-line
supervisors. TRACS provided CFC with an excuse for charging its
supervisory personnel to the projects.
In interviews the Specialists claimed to spend most of their
time doing entries on the automated TRACS and preparing
Section 8 vouchers. However, candid discussions could not
be conducted with the Specialists because the CFC president
insisted on being present at the interviews.
Despite CFC's contention that the Specialists perform front-line
functions and are not supervisors, the review disclosed strong
indications that the Specialists are primarily CFC supervisors:
A former employee who left CFC in July 1993 stated
she performed supervisory duties while at CFC. These
duties included approving purchase orders, auditing
project books, mediating problems between tenants and
project managers, and training on-site staff. She further
stated that before she left, HUD began questioning
supervisory expenses. At that time, the CFC vice
president repeatedly told her and the other supervisors
that they were Certified Occupancy Specialists, not
supervisors.
A former Specialist also viewed herself as a supervisor,
but was told by the CFC vice president to put Certified
Occupancy Specialist down when preparing her time
sheets. After leaving CFC in June 1994, the former
Specialist worked for another management company
where she performed similar supervisory duties.
Working at her new job, the former Specialist said she
was surprised that paychecks came from the agent
account instead of project accounts until the employer
told her the management fee was supposed to cover her
salary.
The former manager for Highland Hills Apartments
viewed the Specialists as supervisors even though they
lacked the title. They ran the properties, acted in a
supervisor's role, and seldom filled-in at the project or
assisted in certifying tenants.
One current Specialist signs on-site employee vacation
requests as the employee's supervisor. The Specialist
also approved and excused an on-site manager's absence
and recommended on-site employees for attending
AHMA conferences and seminars.
The Specialists' overtime, unusual hours, and salaries
are inconsistent with the claim that they spend most of
their time on TRACS and vouchers. The three
Specialists averaged 60, 53, and 45 hours per week,
including late nights and weekends. This seems to
reflect a situation where supervisors are handling
problems at projects rather than clerical staff making
data entries. One Specialist earns $14 per hour, another
$13.50, while the junior Specialist earns $10.25 per
hour. Overtime is paid at time and one-half.
The wide variance in Specialists' hours that CFC
allocates to the projects is inconsistent with the claim
that they work mostly on TRACS activities. For
example, the number of Specialists' hours during 1994
averaged .74 hours per unit for Walnut Manor, 3.01
hours per unit for Highland Hills Drive, and 6.02 hours
per unit for Prairie Ridge. These three projects are
about the same size and are 100 percent assisted.
HUD-insured projects have incurred unreasonable costs
because of CFC's method of automating TRACS. In 1994
CFC's projects paid over $98,000 for TRACS-related wages
and benefits, with the average TRACS expense ranging
between $1.25 and $9.64 per unit per month. The review
estimates that 13 of 14 projects paid $54,432 above the $2
per unit per month amount that HUD considered reasonable.
The excessive costs are especially important to defaulted
projects like Highland Hills and Woodland City. The
$54,432 only represents the cost of salaries and benefits -
computer related costs are discussed above.
A review of information obtained from three independent
contractors found that the projects could save almost
$77,000 annually by contracting out the TRACS. These
outside contractors provide the same or greater services than
those CFC provides. Unlike CFC's cost, the prices
associated with the outside contractors includes the cost of
computers, software, and related supplies.
Independent Contractors
A B C CFC
Average Per
Unit Per Month $1.02 $1.05 $1.39 $4.66
Annual Cost $21,846 $23,417 $29,480 $98,361
Recommendations
We recommend the Fort Worth Office:
4A. Require CFC to establish and maintain a Tenant
Rental Assistance Certification System that complies
with HUD regulations;
4B. Require CFC to provide documentation to show that
its Tenant Rental Assistance Certification System
costs do not exceed the lesser of: (1) the prorated
actual cost by management for providing these
services or (2) a reasonable cost from an independent
source;
4C. Require CFC to reimburse the projects $54,432 for
unreasonable payroll expenses due to its system of
operating the TRACS (Appendix C);
4D. Require CFC to determine the amount of
unreasonable expenses incurred by the projects in
1995 due to its system of operating the TRACS, and
reimburse the projects the appropriate amounts;
4E. Require CFC to reimburse the projects $10,464 for
unreasonable computer hardware and software costs
(Appendix C); and
4F. Impose appropriate administrative sanctions and civil
action against CFC for violating the Regulatory
Agreements and HUD guidelines if CFC does not
make the necessary repayments.
CFC Does Not Properly Compute Excess
Income on Section 236 Projects
CFC does not properly compute excess rental income on the Section 236
projects they manage. As a result HUD may not receive amounts due from
the projects. CFC's independent auditor reported the same problem
existed during 1993. The independent auditor reports included findings
that three projects underpaid excess income to HUD. The underpayments
totaled over $33,000. This occurred because CFC did not follow instructions
in preparing form HUD-93104, Monthly Report of Excess Income. CFC did not
correctly compute total basic rents or adjustments to basic rents. For
some projects, the incorrect computations resulted in significant
carry-forward balances. Carry-forward balances offset any excess income
due HUD in subsequent months. A recent OIG multi-district audit
reported similar errors in the computation of excess income at other
projects around the country. (Audit report number 95-SF-111-0001 issued
December 21, 1994). The report said the errors led to inflated
carry-forward balances that will continually offset any excess income
due HUD.
Paragraph 2-14.A. of HUD Handbook 4370.2 REV-1,
Financial Operations and Accounting Procedures for Insured
Multifamily Projects, defines excess rent on Section 236
projects as the amount by which the rent collected on a
dwelling unit exceeds the approved basic rent for that unit.
If the amount of rent collected is less than the approved
basic rent, that balance is carried forward to the next month.
The Regulatory Agreements for Section 236 projects state
owners shall remit excess rental income to HUD monthly.
The Regulatory Agreements also say the remittance shall be
accompanied by a report on a form approved by HUD.
HUD Handbook 4370.2 REV-1, paragraph 2-15.A.
provides that form HUD-93104, Monthly Report of Excess
Income, shall be used to calculate excess income. The
Handbook also states that form HUD-93104A, Schedule for
Calculating Excess Income, should be used to help with the
completion of form HUD-93104. The figures from a
correctly computed form HUD-93104A transfer directly to
the form HUD-93104. Both HUD forms contain explicit
instructions for their proper completion.
The instructions for form HUD-93104A require an
individual listing for each unit of basic rents, collections,
and adjustments to basic rents. An amount for basic rent
should only be entered for units occupied one or more days
in the month. Vacant and HUD-approved non-income
producing units should be zero. Adjustments to basic rents
only apply on units occupied a portion of the month. The
amount of adjustment entered is the basic rent divided by 30
days multiplied by the number of days the unit is vacant.
CFC's excess income reports are incorrect because they do
not follow the instructions for completing form HUD-93104
and form HUD-93104A. A review of reports for eight
projects for 1994 and three projects for 1995 disclosed
errors in all reports:
On form HUD-93104A, CFC enters only total figures
instead of listing unit amounts as required. For basic
rents, CFC uses the total basic rents for all units as
listed on the HUD-approved Rental Schedule. The form
HUD-93104A instructions require vacant and non-income
producing units to be excluded from basic rents.
For its adjustments to basic rents, CFC obtained vacancy
totals from monthly rent rolls. These vacancy totals
included units vacant the entire month or part of the
month. The form HUD-93104A instructions state that
adjustments should be on a unit-by-unit basis, and only
include units that were vacant part of the month.
The vacancy totals CFC obtained from the monthly rent
rolls did not include correctly calculated adjustments for
units occupied for part of the month. In addition, the
monthly rent roll reports used by CFC do not contain
move-in/move-out data needed to compute each month's
adjustments.
The review did not include recomputing the correct excess
rental income. However, HUD remains at risk of not
receiving excess income due because of the incorrect
computations.
The reports for two projects in the review, Abilene North
and Oak Hollow, contained significant carry-forward
balances as of February 1995. The balances totaled over
$92,000 for Abilene North and over $352,000 for Oak
Hollow. Carry-forward balances occur when a project does
not collect rent equal to the basic rent each month. For
these two projects, such a situation would have to exist for
many years. More likely it is that CFC's continual errors
in computations over a long period resulted in the overstated
carry-forward balances. Carry-forward balances offset
future excess rental income, and can therefore be
significant.
For 1993 the independent auditor reported excess income
findings on 5 of CFC's 11 Section 236 projects. The
findings said CFC's errors in calculating excess rental
income resulted in underpayment of over $33,000 to three
HUD-insured projects. These three projects are still
repaying HUD. The independent auditor also said the
errors resulted in carry-forward balances being overstated
by $28,941 for three of the projects.
Recommendations
We recommend the Fort Worth Office:
5A. Require CFC to follow the instructions for
completing form HUD-93104, Monthly Report of
Excess Income and form HUD-93104A, Schedule
for Calculating Excess Income;
5B. Monitor CFC reports, on a test basis at least, to
ensure excess income is being accurately reported;
and
5C. Require CFC to restate the carry-forward balances
for Abilene North and Oak Hollow to zero.
Internal Controls
In planning and performing our audit, we considered CFC's internal
controls in order to determine our auditing procedures and not to
provide assurance on the 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; that resources are safeguarded against
waste, loss, and misuse; and that reliable data are obtained,
maintained, and fairly disclosed in reports.
We determined that the following internal controls were
relevant to our audit objectives:
Accounting Controls: Cash receipts and disbursements
Administrative Controls: Regulatory Agreement Requirements and
HUD Handbook Requirements
We assessed all of 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 review, we believe the following
items are significant weaknesses:
CFC lacks internal administrative controls to ensure
project funds are disbursed in compliance with laws,
regulations and policies (Findings 2, 3, and 4). As
management agent, CFC has control over the payment
decision process for all its projects.
CFC lacks administrative controls to ensure the proper
computation and payment of surplus cash, distributions
and residual receipts, and the proper computation of
excess income on Section 236 projects (Findings 1 and 5).
Issues Needing Further Consideration
In addition to the findings, the audit identified issues needing
further consideration. Although important, we did not think these
issues warranted being reported as audit findings.
CFC maintains special escrow accounts at each of its 14
projects. The projects make monthly payments to these
accounts from their regular operating accounts. CFC uses
these funds to make additional project payroll payments that
occur more than twice each month. These accounts are
styled in the name of CFC and not the projects' names as
required by HUD. In addition, CFC does not include the
amounts in these accounts as part of the cash computations
in Monthly Accounting Reports sent to HUD. CFC should
restyle these accounts in the name of each project and
include the amounts as part of any Monthly Accounting
Reports requested by HUD.
Four projects had over $1 million in accrual balances for
unpaid management fees to CFC at December 31, 1994:
Project Unpaid Management Fee
Abilene North $ 236,805
Garland Gardens 273,787
Leigh Ann 330,413
Park Manor 203,190
-------------
Total $1,044,195
These accruals have increased for several years. These
large liabilities could seriously affect the financial stability
of the projects should CFC stop managing one of the
projects or decide to collect all or a significant amount of
the accruals. Also, five other projects had accrued
management fees at December 31, 1994, amounting to
$40,425 (Walnut Manor, Prairie Creek Manor, Prairie
Ridge, Euless Square, and El Capitan). We recommend
HUD work out an agreement with CFC to discontinue the
practice of accruing unpaid management fees and resolve
prior accruals.
Appendix A
Schedule of Questioned Costs
Recommendation
Number Ineligible(1) Unsupported(2)
1B $ 93,346 $ -
1C - 260,350
2B 71,334
2C - 7,105
3A 57,528 -
3B 21,085
4C 54,432 - 54,432
4E 10,464 -
--------- ---------- -
TOTALS $287,104 $288,540
(1) Costs clearly not allowed by law, contract, HUD, or local agency
policies or regulations.
(2) Costs not clearly eligible but which warrant being contested (e.g.
lack of satisfactory documentation to support the eligibility of the
cost, etc.).
Appendix B
Schedule of Ineligible and Questioned Disbursements Supporting Finding 2
Date Check No. Project Payee Amount Total
A. Ineligible Disbursements
1. Payments for NAHMA Executive Council Dues
02/17/94 All 15 Projects CFC $2,200.00 $ 2,200.00
2. Payments for Bookkeeping/Accounting Fees
03/16/94 1099 Prairie Ridge Ceridian 1,313.75
03/16/94 1266 G. Gardens Ceridian 38.97
03/16/94 1160 El Capitan Ceridian 85.70
04/21/94 1192 R. Meadows Ceridian 324.34
04/25/94 1198 R. Meadows Ceridian 348.09
04/25/94 1227 El Capitan Ceridian 183.74
04/28/94 1202 R. Meadows Ceridian 1,263.40
04/28/94 1203 R. Meadows Ceridian 495.34
04/28/94 1229 El Capitan Ceridian 1,206.38
05/06/94 1228 R. Meadows Ceridian 495.24
12/22/94 2271 H. Hills Dr. Bock & Bock 601.05
12/22/94 1701 R. Meadows Bock & Bock 601.05
12/22/94 4 Other Projects Bock & Bock 2,404.22
---------
9,361.27
3. Payments for Legal Fees
03/12/91 1751 H. Hills Strasburger 943.50
01/13/93 1671 Pk. Ck. Manor R. Albright 7,000.00
01/27/93 2102 H. Hills Strasburger 139.50
04/29/93 2283 H. Hills Strasburger 187.06
06/18/93 1944 Pk. Ck. Manor Coan & Lyons 516.00
07/19/93 2001 Pk. Ck. Manor Coan & Lyons 1,163.39
08/30/93 2075 Pk. Ck. Manor Coan & Lyons 4,682.90
09/27/93 2448 H. Hills Strasburger 451.83
09/30/93 2127 Pk. Ck. Manor Coan & Lyons 3,580.35
11/05/93 2202 Pk. Ck. Manor Coan & Lyons 4,259.35
12/31/93 1984 Euless Square H. Hills 778.39
Date Check No. Project Payee Amount
12/31/93 1098 H. Hills Dr. H. Hills 778.39
12/31/93 2831 Woodland City H. Hills 682.28
12/31/93 2276 Pk. Ck. Manor Coan & Lyons 748.86
04/12/94 1091 Pk. Ck. Manor Coan & Lyons 420.81
--------
26,332.61
4. Payments for Prepaid Management and Other Fees as of 12/31/94
El Capitan CFC 4,200.00
Oak Hollow CFC 4,087.00
Woodland City CFC 6,293.00
R. Meadows CFC 8,860.00
R. Meadows CFC 10,000.00 34,440.00
Total Ineligible Disbursements $71,333.88
B. Questioned Disbursements
1. Payments for Repairs to Employees Vehicles
02/08/94 1115 El Capitan B. Rodriquez 1,338.84
03/11/94 1082 Woodland City Auto Glass 165.00 1,503.84
2. Payments for Legal Fees
07/31/91 1440 H. Hills Strasburger 388.50
05/12/92 1811 H. Hills Winstead 500.00
09/23/92 1958 H. Hills Strasburger 893.00
12/31/92 2067 H. Hills Johnson 1,320.25
06/15/93 2333 H. Hills Winstead 2,500.00 5,601.75
Total Questioned Disbursements 7,105.59
Total Ineligible and Questioned Disbursements $78,439.47
Appendix C
Schedule of Ineligible Costs Supporting Finding 4
Unreasonable Expenses For Specialist's Salaries
(Based on 90% of the Specialists' salaries from April 1, 1994,
through December 31, 1994. The 90% estimate is based on
interviews with the Specialists. Also, the questioned amounts
are net of a $2 per unit per month allowance)
Abilene North $1,041
El Capitan 6,534
Euless Square 4,806
Garland Gardens 5,696
Highland Hills 3,803
Highland Hills Drive 2,565
Leigh Ann 1,267
Oak Hollow 144
Park Manor 4,170
Prairie Creek Manor 2,294
Prairie Ridge 6,876
Rolling Meadows 12,131
Woodland City 3,105
-------
Total $54,432
Unreasonable Expenses For Computer Equipment, Supplies and Software
El Capitan $1,358
Highland Hills Drive 1,251
Rolling Meadows 1,250
All Projects (14 x $471.83) 6,605
6,605
------
Total $10,464
Appendix D
Schedule of Projects Managed by Credit Finance Corporation
No. Project Project Section Total Sect 8 HUD Default
Name Number of Act Units Units Held
1 Abilene North 113-44036 236 130 101 No No
Abilene, TX
2 El Capitan 112-44015 236 150 75 No No
Dallas, TX
3 Euless Square 113-44029 236 150 52 No No
Euless, TX
4 Garland Gardens 112-44119 236 216 85 No No
Garland, TX
5 Highland Hills 112-44086 236 304 218 Yes Yes
Dallas, TX
6 Highland Hills Drive 112-35251 221 100 100 Yes No
Dallas, TX (d)(3)
7 Leigh Ann 112-44041 236 256 153 No No
Dallas, TX
8 Oak Hollow 112-44049 236 160 107 No No
Dallas, TX
9 Park Creek Manor 112-94008 223 321 0 Yes Yes
Dallas, TX (f)
(1)
10 Park Manor 112-35327 221 210 82 No No
Irving, TX (d)(4)
11 Prairie Creek Manor 112-44020 236 144 72 No No
Dallas, TX
12 Prairie Ridge 112-35243 221 100 100 No No
Grand Prairie, TX (d)(3)
13 Rolling Meadows 112-44001 236 288 77 No No
Dallas, TX
14 Walnut Manor 115-44169 236 98 38 No No
San Antonio, TX
15 Woodland City 112-44066 236 300 175 No Yes
(1) CFC did not manage Park Creek Manor after February 1994.
.
Credit Finance Corp., Dallas, TX
Published by the Department of Housing and Urban Development, Office of Inspector General on 1995-10-16.
Below is a raw (and likely hideous) rendition of the original report. (PDF)