oversight

Credit Finance Corp., Dallas, TX

Published by the Department of Housing and Urban Development, Office of Inspector General on 1996-08-19.

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

                                                                                       Issue Date

                                                                                            August 19, 1996
                                                                                       Audit Case Number

                                                                                            96-FW-214-1002




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


We completed a limited review of Credit Finance Corporation's (CFC's) payments for boiler and
machinery insurance. The purpose of the limited review was to determine if boiler an d
machinery insurance expenses paid for with project funds were reasonable and in accordanc e
with Regulatory Agreement and HUD requirements. The review resulted from a separat e
examination of work papers of CFC's Independent Auditor 1. The Independent Auditor's work
papers disclosed problem indicators relating to boiler and machinery insurance payments.

We: (1) examined the Independent Auditor's work papers for three selected projects managed
by CFC (Highland Hills, Park Creek Manor, and Rolling Meadows); (2) reviewed checks an d
supporting documentation provided by CFC's president; (3) interviewed officials of th e
Independent Auditor, CFC, the Texas Department of Insurance, and HUD Offic es of Housing and
Counsel.

We conducted the review in accordance with generally accepted government auditing standards.
We performed the review in December 1995 and February 1996. The review covered the period
August 1993 through December 1994.




       1
          We recently audited CFC's activities and issued a report on October 16, 1995 (report no. 96-FW-214-1001).
  During the audit, nothing came to our attention that indicated problems with boiler and machinery insurance
payments.
Management Memorandum



                                         SUMMARY

Based on problem indicators found during an examination of the Independent Auditor wor k
papers, we performed a limited review of Credit Finance Corporation (CFC) payments for boiler
and machinery insurance. The review found that CFC disburse d at least $87,700 in project funds
for invalid boiler and machinery insurance. The "insurer" and CFC's president lacked lega l
authority to sell insurance to the projects. Consequently, nine HUD projects, including thre e
projects in default, paid for services they never received. This occurred because CFC's president
ignored or did not adequately consider applicable State insurance laws and the impact of HUD
requirements. We are recommending you require the owners and CFC to repay the projects for
the unallowable insurance payments and obtain valid boiler and machinery insurance as needed.


                                  INTERNAL CONTROLS

An assessment of internal controls was not necessary to satisfy the review objectives. As such,
we did not perform a review of internal controls.

                                          *   *   *    *

Within 60 days please give us, for each recommendation made in the report, a status on: (1 )
corrective action taken; (2) the proposed corrective action and the data to be completed; or (3)
why action is not considered necessary. Also, please furnish us copies of any correspondence
or directives issued related the audit.

If you have any questions, please contact me or Frank Baca, Assistant District Inspector General
for Audit, at (817) 885-5551.


Appendices
  Appendix A     Audit Finding and Recommendations                 Page 3
  Appendix B     Schedule of Ineligible Costs                      Page 6
  Appendix C     Payments for Boiler and Machinery Insurance       Page 7
  Appendix D     Auditee Comments                                  Page 8




96-FW-214-1002                                Page 2
                                                                                     Appendix A

AUDIT FINDING AND RECOMMENDATIONS
          FINDING - Projects Paid for Invalid Boiler and Machinery Insurance

Credit Finance Corporation (CFC) disbursed at least $87,700 in project funds for invalid boiler
and machinery insurance. The "insurer" and CFC's president lacked legal authority to sel l
insurance to the projects. Consequently, nine HUD projects, including three projects in default,
paid for services they never received. This occurred because CFC's president ignored or did not
adequately consider applicable State insurance laws and the impact of HUD requirements.


Regulatory Agreement and HUD requirements. The Regulatory Agreement for multifamily
projects states 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 necessar y
repairs.

Deeds of Trust require mortgagors to maintain insurance as HUD directs. HUD Handboo k
4350.1 REV-1 (paragraph 21-4.C) requires the mortgagor maintain boiler and machiner y
insurance if the project has steam boilers. Also, HUD requires a standard form of boiler an d
machinery insurance policy (or policies) to evidence the insurance (Form FHA-2447, HU D
Property Insurance Requirements, paragraph 5(d)).

State laws govern reciprocal insurance exchanges. Texas' Revised Civil Statutes, Article 19,
allows entities to exchange reciprocal or inter-insurance contracts to ensure one another. Before
beginning to operate, the exchange must file a declaration with the State's Department o f
Insurance with information required by statute. Also, the exchange's attorney-in-fact mus t
provide information, meet fidelity bonding requirements, and obtain a Certificate of Authority
to act on the exchange's behalf.

Independent Auditor work papers indicate CFC misdirected project assets. Subsequent to the
CFC audit, OIG staff performed a review of work papers of CFC's Independent Auditor fo r
selected projects. The review found indicators of other statutory and regulatory violations in the
agent's operations relating to boiler and machinery insurance. The Independent Auditor's Boiler
& Machinery Coverage work paper stated:

    "The B&M policy with Kingsport was cancelled 7/28/93. A bid was obtained wit h
    Kemper but was rejected.... Ten projects contribute to a fund set up by CFC to cover
    repair needs in this area. Contributions to this fund began in August 1993."

Nine of the ten projects the work paper referred to are HUD insured properties. The Independent
Auditor provided a copy of a Travelers boiler insurance policy, which indicated a July 31, 1995
effective date. However, as of December 1995 CFC's president said the Traveler's policy hasn't


                                              Page 3                                  96-FW-214-1002
Appendix A



gone into effect yet. The projects still have insurance through a reciprocal insurance exchange.

Projects lack bona fide insurance coverage. CFC contends the projects had insurance, but could
not provide a bona fide insurance policy as proof of coverage for amounts the projects paid for
boiler insurance. The CFC president provided a reciprocal insurance exchange policy, which he
signed as "Authorized Representative." Texas Department of Insurance officials said they have
no record the reciprocal insurance exchange has authority to opera te in Texas. Further, the Texas
Department of Insurance officials examined the policy and stated the policy was incomplete. It
did not identify the insurance company or have a policy number and contained a form (Energy
Express Coverage) that was not standard or State-approved. CFC's president said he and th e
projects formed a reciprocal insurance exchange. The CFC president was its agent, the exchange
issued the policy, and the policy had a policy number.

CFC sold insurance policies violating state insurance laws. The HUD Office of Counsel in Fort
Worth confirmed that CFC violated Texas insurance laws. HUD's attorney said Texas la w
requires reciprocal insurance exchanges (and their attorneys-in-fact) to meet statutory filing ,
bonding and certification requirements before selling insurance. Yet, the Texas Department of
Insurance has no record CFC, its president, or the Boiler & Machinery Insurance Reciproca l
Insurance Exchange met the requirements. The exchange issued the policy without authority .
And, CFC's president appeared to act as the exchange's attorney- in-fact without meeting statutory
requirements to represent the exchange. Also, HUD's attorney suggested project file reviews be
made to determine whether the projects need the boiler and machinery insurance.

Projects paid at least $87,700 for invalid boiler insurance. CFC provided checks and other
records identifying $87,700 in payments the nine projects made for boiler insurance from August
1993 through December 1994 (see Appendix C). Three of the nine project s (Highland Hills, Park
Creek Manor, and Woodland City) were in default during this per iod. Further, based on a review
of the Independent Auditor's work papers for two projects, the projects likely paid more than the
$87,700 for the period. CFC records showed Highland Hills and Rolling Meadows as making
8 and 11 monthly payments, respectively, during 1994. However, the Independent Auditor' s
1994 work papers show Highland Hills made 10 payments and Rolling Meadows made 1 2
payments.


Auditee Comments

CFC's president declined an exit conference. He sent a written r esponse dated June 18, 1996 (see
Appendix D). The written response expressed disagreement with the finding but did not provide
details. The response stated CFC would have their insurance consultant provide an independent
response after issuance of this report.




96-FW-214-1002                                Page 4
                                                                                  Appendix A




Recommendations

We recommend the Fort Worth Office:

1A. Except for Park Creek Manor, require the owners and CFC to reimbu rse the projects $83,700
      for identified improper boiler and machinery insurance payments made from project funds
      from August 1993 to December 1994.

1B.   Require the owners and CFC to reimburse HUD $4,000 for improper boil er and machinery
      payments relating to Park Creek Manor.

1C. Obtain and review project accounting records to identify any other improper boiler an d
     machinery insurance payments made in 1993 and 1994, as well as improper payment s
     made since 1994, and require the owners and CFC to reimburse the projects.

1D. Review HUD files and, if necessary, inspect the eight projects CFC still manages t o
      determine whether the projects need boiler and machinery insurance.

1E.   For projects identified as needing boiler and machinery insurance, require the owners and
      CFC to obtain valid boiler insurance and provide documentation to the Field Office.

1F.   Impose appropriate administrative sanctions and civil actions against the owners and CFC
      for violating the Regulatory Agreements and HUD guidelines if the owners and CFC do
      not make required repayments and take necessary corrective action.




                                            Page 5                                 96-FW-214-1002
                                                                                                  Appendix B

Schedule of Ineligible Costs

                    Recommendation
                      Number                                           Ineligible 2

                              1A                                        $83,700

                              1B                                            4,000

                              TOTAL                                $87,700




  2
      Costs clearly not allowed by law, contract, HUD, or local agency policies or regulations.



96-FW-214-1002                                                Page 6
                                                                                                        Appendix C



                                                     Credit
                                                    Finance
                                                  Corporatio
                                                       n
                                                  Payments
                                                   for Boiler
                                                       &
                                                  Machinery
                                                  Insurance
                                                                                   Park    Prairie
 Check                           El      Euless   Highland        Leigh    Oak     Creek   Creek     Rolling   Woodland
 Date      Number              Capitan   Square      Hills        Ann     Hollow   Manor   Manor     Meadows     City


08/20/93    13194                 800       800       1,000         600     500      500      800        800       700
09/20/93    13255                 800       800       1,000         600     500      500      800        800       700
10/20/93    13328                 800       800       1,000         600     500      500      800        800       700
11/20/93    13387                 800       800       1,000         600     500      500      800        800       700
12/20/93    13510                 800       800       1,000         600     500      500      800        800       700
01/20/94    13570 ck missing      800       800       1,000         600     500      500      800        800       700
02/20/94    13591                 800       800       1,000         600     500      500      800        800       700
03/20/94    13614 ck missing      800       800       1,000         600     500      500      800        800       700
04/20/94     1148                           800
04/20/94     1167                                                                             800
04/20/94     1191                                                                                        800
04/20/94     1223                 800
04/20/94     1227                                     1,000
04/20/94     1308                                                   600
07/05/94     1259                         1,600
07/05/94     1294                                                                           1,600
07/05/94     1303               1,600
07/05/94     1344                                                                                      1,600
07/05/94     1382                                     2,000
07/06/94     1236                                                                                                 1,400
07/06/94     1239                                                          1,000
07/27/94     1491                                                   600
08/23/94     1303                                                           500
08/23/94     1360                                                                             800
08/23/94     1454                                                                                        800
08/23/94     1561                                                   600
10/04/94     1351                                                                                                  700
10/04/94     1372                                                           500
10/04/94     1420                                                                             800
10/04/94     1461                 800
10/04/94     1526                                                                                        800
10/04/94     1633                                                   600
10/18/94     1671                                                   600
11/04/94     1414                           800




                                                         Page 7                                          96-FW-214-1002
Appendix C



11/04/94     1476                                                                  800
11/04/94     1515      800
11/04/94     1587                                                                            800
11/14/94     1434                800
11/14/94     1490                                                                  800
11/14/94     1623                                                                            800
11/14/94     1710                                      600
12/09/94     1457                800
12/09/94     1546                                                                  800
12/09/94     1569      800
12/09/94     1629                         1,000
12/09/94     1630                         1,000
12/09/94     1670                                                                            800
12/09/94     1764                                      600


           TOTAL    $11,200   $11,200   $13,000      $9,000   $6,000   $4,000   $12,800   $12,800   $7,700




96-FW-214-1002                              Page 8
                            Appendix D

Auditee Comments




96-FW-214-1002     Page 9