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
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)