oversight

City of Charlottesville, CDBG Program Charlottesville, Virginia

Published by the Department of Housing and Urban Development, Office of Inspector General on 1996-10-18.

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

                                                                    Issue Date

                                                                         October 18, 1996
                                                                    Audit Case Number

                                                                         97-PH-241-1001




TO:            Joseph K. Aversano, Director, Community Planning
                and Development Division, Virginia State
                Office, 3FD


FROM:          Edward F. Momorella, District Inspector General
                for Audit, Mid-Atlantic, 3AGA

SUBJECT:       City of Charlottesville
               Community Development Block Grant Program
               Charlottesville, Virginia


We audited selected activities of the City of Charlottesville (Grantee) Community Development
Block Grant (CDBG) Program. The purpose of the audit was to determine whether the activities
were administered in accordance with applicable HUD regulations and requirements and Grantee
policies.

Based on our review, the Grantee needs to improve its management and oversight of the
Economic Development Loan Program.

Within 60 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 Irving I. Guss, Assistant District Inspector General for
Audit, at (215) 656-3401.
Management Memorandum




97-PH-241-1001          Page ii
Executive Summary
The purpose of the audit was to determine whether the City of Charlottesville administered
selected CDBG Program activities according to HUD regulations and requirements and Grantee
policies.



                                  The audit disclosed that the Grantee effectively
                                  administered the CDBG Program. However, a problem was
                                  identified requiring corrective action by the Grantee.

                                  The Grantee did not administer the Economic Development
 Grantee improperly
                                  Loan program properly as required by Federal regulations
 funded three loans
                                  and program guidelines. The Grantee did not provide the
                                  necessary management oversight by ignoring its own
                                  written guidelines. The Grantee failed to document that the
                                  appropriate analysis was done, national objective met,
                                  financial commitment obtained and loan expenditures were
                                  supported. As a result, the Grantee provided ineligible
                                  loans totaling $54,821 to three borrowers.

                                  We recommend the Grantee: (1) repay the program from
                                  non-Federal funds the loan principal totaling $54,821 and
                                  pay to HUD all interest earned on the loans, and (2)
                                  implement written procedures to ensure program
                                  regulations and requirements are followed.

                                  We discussed the draft finding with Grantee representatives
                                  during the audit and at an exit conference held on October
                                  10, 1996. The draft finding was provided to the Grantee
                                  and the response received was considered in our report.
                                  The Grantee response is included as Appendix C.




                                          Page iii                               97-PH-241-1001
Executive Summary




97-PH-241-1001      Page iv
Table of Contents

Management Memorandum                                           i


Executive Summary                                              iii


Introduction                                                    1


Finding

          The Grantee Needs to Improve the
          Management of the Economic Development
          Loan Program                                          3


Internal Controls                                             15


Follow Up On Prior Audits                                     17


Appendices

    A     Finding Loan Analyses - Borrowers A, B and C        19

    B     Schedule of Ineligible Costs                        25

    C     Auditee Comments                                    27

    D     Distribution                                        31




                              Page v                97-PH-241-1001
Table of Contents




Abbreviations
         CDBG       Community Development Block Grant
         CFR        Code of Federal Regulations
         HUD        Department of Housing and Urban Development
         OIG        Office of Inspector General




97-PH-241-1001                             Page vi
Introduction
The City of Charlottesville has received a total of $8,826,790 in CDBG entitlement funds since
1982. HUD provided CDBG entitlement funds to the Grantee for the following three recent
program years:

                      Program Years    Amount
                       1993         $697,000
                       1994         $758,000
                       1995         $735,000

The Grantee is governed by City Council and administers the CDBG program through the City
Manager and the Department of Community Development. Mr. Satyendra Singh Huja is the
Director of Planning and Community Development.

To administer the Economic Development Loan Program the Grantee established a Loan
Committee. The Committee is responsible to review and recommend projects to be funded with
an economic development loan. The Loan Committee consists of five members: a staff member
of the Department of Community Development, a member of the Charlottesville business
community, two loan officers of lending institutions located in Charlottesville and a resident of
a CDBG target neighborhood.

CDBG Program records are maintained at City Hall in Charlottesville, Virginia.



                                     The primary objective of the audit was to determine
 Audit Objective
                                     whether the Grantee administered its CDBG Program in
                                     accordance with HUD regulations and requirements, and
                                     local policies. Based on survey results the audit focused on
                                     selected program activities covering public improvements,
                                     property rehabilitation and the Economic Development
                                     Loan Program.

                                     We reviewed HUD, Grantee, and subrecipient records and
 Audit Scope
                                     interviewed staff responsible for program activities. We
                                     reviewed four economic development loans and
                                     interviewed accessible borrowers. We inspected four
                                     rehabilitated properties and interviewed owners. We
                                     conducted windshield inspections of 20 properties painted
                                     under the Free Paint Program.

                                     Our audit was performed between April 1996 and
 Audit Period
                                     September 1996, and covered the activities from July 1994



                                              Page 1                                 97-PH-241-1001
Introduction



     through March 1996. The audit period was expanded when appropriate.

                                  We conducted the audit in accordance with generally
                                  accepted government auditing standards.




97-PH-241-1001                            Page 2
                                                                                          Finding




      The Grantee Needs to Improve the
   Management of the Economic Development
               Loan Program
The Grantee did not administer the Economic Development Loan Program properly as required
by Federal regulations and program guidelines. The Grantee did not provide the necessary
oversight by ignoring its own written guidelines. The Grantee failed to document that the
appropriate analysis was done, national objective met, financial commitment obtained and loan
expenditures were supported. As a result, the Grantee provided CDBG assistance for ineligible
loans to borrowers.


                                   HUD requires that a CDBG Grantee must make an
 Eligibility and national
                                   eligibility determination and a national objective
 objective determinations
                                   determination before providing CDBG financial assistance
 not done as required
                                   to a for-profit business. Both determinations must be
                                   completed and documented before the Grantee executes an
                                   agreement to provide assistance.

                                   We reviewed the Grantee's entire portfolio consisting of 4
                                   loans with outstanding balances. For three of the four
                                   loans, the Grantee failed to meet the eligibility and national
                                   objective determinations as follows:


                     Loan        Inadequate             National      Financial
                    Amount       Appropriate            Objective   Commitment      Unsupported
   Borrower        Ineligible     Analysis              Not Met     Not Supported   Expenditures
      A             $25,000           X                    X             X               X
      B              12,321           X                    X
      C              17,500           X                    X             X               X
     Total          $54,821

                                   Inadequate appropriate analysis

                                   The Grantee did not maintain the required written analyses
                                   for the three loans. As a result, the Grantee could not show
                                   that the loans did not unduly enrich the borrowers and that
                                   the assistance is appropriate to carry out the project.



                                               Page 3                                 97-PH-241-1001
Finding



                             According to 24 CFR 570.203(b):

                             "...In order to ensure that any such assistance does not
                             unduly enrich the for-profit business, the recipient shall
                             conduct an analysis to determine that the amount of any
                             financial assistance to be provided is not excessive, taking
                             into account the actual needs of the business in making the
                             project financially feasible and the extent of public benefit
                             expected to be derived from the economic development
                             project. The recipient shall document the analysis as well
                             as any factors it considered in making its determination that
                             the assistance is necessary or appropriate to carry out the
                             project...."

                             The financial statements for borrower A indicated that there
                             was $135,000 in liquid assets which was more than
                             sufficient to cover the borrower's investment of $15,000
                             and the economic development loan of $25,000. In
                             addition, the borrower and her spouse had a net worth of
                             $672,866.

                             For the loans to borrowers B and C, the Grantee did      not
 Grantee failed to justify
                             document the appropriate analyses to determine that      the
 borrowers needed
                             assistance requested was (a) not excessive and met       the
 program financing
                             actual needs of the borrower, (b) necessary to make      the
                             activity financially feasible, and (c) not substituted   for
                             funding available from other sources.

                             We were advised by the Grantee that the loans to borrowers
                             A and C were made because they were minorities and the
                             location of the businesses.

                             The Grantee did not justify that the borrowers maximized
                             private financing prior to executing the agreements.
                             Therefore the Grantee had no assurance the borrowers
                             needed CDBG financing.

                             National objective not met

                             The Grantee did not support achievement of the national
                             objective for the three loans reviewed. The Grantee
                             accepted information which did not meet HUD regulations
                             and did not perform an on-site review to verify the
                             information. As a result, the Grantee could not ensure that


97-PH-241-1001                        Page 4
                                                                               Finding



                         CDBG assisted activities met the low and moderate income
                         benefit for the creation or retention of jobs.

                         According to 24 CFR 570.506:

                         "Each recipient shall establish and maintain sufficient
                         records to enable the Secretary to determine whether the
                         recipient has met the requirements of this part. At a
                         minimum, the following records are needed: ...(b)(5) For
                         each activity determined to benefit low and moderate
                         income persons based on the creation of jobs the recipient
                         shall provide the documentation described in either
                         paragraph (b)(5)(i) or (ii) of this section...:

                         According to 24 CFR 570.506(b)(5)(ii):

                         "Where the recipient chooses to document that at least 51
                         percent of the jobs will be held by low and moderate
                         income persons, documentation for each assisted business
                         shall include: ...(B) A listing by job title of the permanent
                         jobs filled and which jobs were initially held by low and
                         moderate income persons; and (C) For each such low and
                         moderate income person hired, the size and annual income
                         of the person's family prior to the person being hired for the
                         job."

                         For the loans awarded to borrowers A, B, and C, the
Family income not
                         Grantee did not maintain documentation that identified the
determined for persons
                         size and annual income of each family for the person
employed
                         benefitting from the employment. In addition, the Grantee
                         did not maintain information identifying the permanent jobs
                         by job title for borrower C.

                         Borrower B was not informed of the need to document the
                         size and annual income of the employee's family prior to
                         employment.

                         The Director of Planning and Community Development
                         stated that he was not aware that in order for an individual
                         to be considered low income, the size and income of the
                         entire family was to be considered.




                                  Page 5                                   97-PH-241-1001
Finding




                              Financial commitment not supported

                              The Grantee did not ensure that private funds identified by
 Grantee failed to validate
                              the borrowers to leverage the CDBG funds were committed,
 private funds provided
                              provided and expended for the activity. The loan files
                              identified private funding for the activity. The Grantee
                              guidelines require that they ascertain the source of private
                              funds is committed and the source has the capacity to
                              deliver the funds. However, the Grantee's commitment
                              letter did not require the borrower to support that the private
                              funds had been provided before disbursing the loan to the
                              borrower. As a result, the assisted project may have been
                              financially weakened and the borrower unduly enriched.

                              Borrower A determined that $110,000 was necessary to
                              make leasehold improvements, purchase equipment and
                              have     initial  working    capital  to    open    a
                              delicatessen/convenience market. The financing was to
                              come from the following sources:

                               Bank financing and     $ 70,000
                                letter of credit
                               Economic Development      25,000
                                Loan
                               Borrower equity         15,000
                                                  $110,000

                              We accounted for $80,357 of the funds provided. The
                              balance of $29,643 was not accounted for. There was no
                              evidence that the borrower provided the $15,000 for the
                              business.

                              The Grantee did not obtain adequate documentation to
                              support borrower C's fifty percent commitment for the loan.
                              The borrower determined her commitment to be $26,327.
                              She provided a letter stating that she had invested over
                              $25,000 of her own funds but provided a listing showing
                              only $15,044 of equipment purchased and renovations, of
                              which $8,862 was supported by invoices. The borrower did
                              not provide support for the remaining $17,465.




97-PH-241-1001                         Page 6
                                                                               Finding



                        Borrowers A and C have declared bankruptcy and have
                        gone out of business. By not requiring borrowers to
                        evidence that private funds were committed and provided
                        before disbursing the loan, the Grantee did not assure the
                        business had an opportunity to succeed.

                        Unsupported loan expenditures

                        For two loans, the Grantee did not maintain the required
                        documentation needed to support the eligibility of payments
                        made from loan proceeds. As a result, the Grantee is unable
                        to verify that the loan proceeds were spent for eligible
                        activity costs.

                        According to 24 CFR 85.20(b):

                        "The financial management systems of grantees and
                        subgrantees must meet the following standards: (1)
                        Financial reporting. Accurate, current, and complete
                        disclosure of the financial results of financially assisted
                        activities must be made in accordance with the financial
                        reporting requirements of the grant or subgrant. (2)
                        Accounting records. Grantees and subgrantees must
                        maintain records which adequately identify the source and
                        application of funds provided for financially assisted
                        activities.    These records must contain information
                        pertaining to grant or subgrantee awards and authorizations,
                        obligations, unobligated balances, assets, liabilities, outlays
                        or expenditures, and income."

                        For borrower A, the loan conditions required the borrower
Borrowers use of loan
                        submit copies of all invoices to the Grantee before
funds for activities
                        disbursement of loan proceeds. The loan approval letter
unsupported
                        stated that the borrower was to use the $25,000 loan
                        proceeds for leasehold improvements to the business. The
                        Grantee improperly disbursed the $25,000 without
                        obtaining full documentation to support the improvements.
                        Only $15,027 of the loan proceeds was supported by the
                        borrower.

                        Borrower C's loan documents did not require the borrower
                        to maintain necessary records for loan expenditures. The
                        borrower's loan application showed that $13,510 was to be
                        spent for leasehold improvements and $3,990 for


                                 Page 7                                    97-PH-241-1001
Finding



                   equipment. The $13,510 was documented by a contractor's
                   proposal but there was no evidence provided that the
                   leasehold improvements were done. No support was
                   obtained for the equipment purchases.

                   The Director of Planning and Community Development
                   stated that the economic loan program was a cost
                   reimbursable program and thought the costs were
                   supported.

                   Without complying with the financial management
                   standards, the Grantee cannot assure the CDBG funds were
                   used for eligible activities.

                                    *   *   *   *

                   The level of risk for a loan must be thoroughly evaluated to
                   avoid assisting a business which has no likelihood of
                   success regardless of the amount of assistance. In our
                   opinion the Grantee underwrote loans which were not likely
                   to succeed, as evidenced by borrowers A and C defaulting
                   on their loans within seven months of execution.

                   Because the Grantee did not make and maintain the
                   required written determinations and analyses, and support
                   that the assisted economic development activities met the
                   low and moderate income national objective, three loans
                   reviewed, totaling $54,821 were determined to be
                   ineligible.



Auditee Comments   Borrower A:

                   Inadequate appropriate analysis

                   The Grantee states that the loan granted to borrower A was
                   based solely upon the borrowers income and assets.
                   Spousal income and assets were not considered. The
                   Grantee states that the purpose of the program was
                   encouraging minority entrepreneurship and the hiring of
                   low and moderate income employees. The borrower was a
                   minority and a woman. The borrower, in addition to
                   Grantee financing, obtained financing from a bank and



97-PH-241-1001             Page 8
                                                      Finding



invested personal funds. This diversification made her
liability affordable.

National objective not met

The Grantee's former analyst stated that it was very difficult
and possibly illegal to request verification of income from
people applying for employment. She had discussed the
issue with the Richmond HUD office and had received
permission to give the income guidelines to the employers
and let the employers ask the employees if they met the
criteria in the guidelines. The employer would then report
the employee's income to the city if it was low or moderate.

Financial commitment not supported

The Grantee submitted documentation to support $52,978.
Additional leasehold improvements totaling $8,650 were
made. The city's guidelines state that a borrower is eligible
for up to $25,000 or 50% of the total cost of rehabilitation,
whichever is less.

Unsupported expenditures

The Grantee states that they have documentation showing
that the borrower spent approximately $61,628 on the
business which included approximately $16,868 spent on
leasehold improvements. The Grantee felt that the
borrower had paid more than half of the required
investment.

Borrower B:

Inadequate appropriate analysis

The Grantee states that the borrower was not a minority but
her business was located in a CDBG target neighborhood.
The loan was needed to move her to a more visible location
that was more accessible to her clientele which included
minorities and allows her to provide employment to low
and moderate income people.

The Grantee states that various estimates were received as
a basis for comparison to assure the assistance requested


         Page 9                                   97-PH-241-1001
Finding



                 was not excessive and met the needs of the borrower.
                 Representatives of the city visited the site and future site to
                 verify the needs of the borrower.

                 National objective not met

                 The Grantee obtained information from the borrower
                 concerning family size and other sources of income. The
                 documentation accompanied their response.

                 Borrower C:

                 Inadequate appropriate analysis

                 The Grantee states that the applicant was very enthusiastic
                 about fulfilling the public benefit requirement for the loan.
                 The Grantee states that they were eager to begin the
                 economic development loan program and to encourage
                 women and minorities to pursue business ownership in
                 CDBG target areas and on the Downtown Mall. The loan
                 allowed the borrower to expand her business and create
                 employment for low and moderate income people.

                 National objective not met

                 The Grantee repeated their response given to national
                 objective not met for borrower A.

                 Financial commitment not supported

                 The Grantee states that their guidelines show that a
                 borrower might be eligible for up to $25,000 or 50% of the
                 total cost of rehabilitation, whichever is less. The borrower
                 reduced her loan request from $25,000 to $17,500. The
                 Grantee states that the borrower met her obligations by
                 spending $15,044 on inventory and that they had records
                 from Building and Life Safety showing that another $3,050
                 was spent.

                 Unsupported expenditures

                 The Grantee states that it was their understanding from the
                 Richmond HUD office that they only had to verify the
                 expenditures that the Grantee paid for and that the


97-PH-241-1001           Page 10
                                                                          Finding



                    borrower's funds did not have to be verified. They also
                    state that they have invoices and records in their files
                    showing that the borrower spent $14,178 for leasehold
                    improvements and $4,301 on equipment.

                    In response to recommendation 1A the Grantee states
                    borrower B is currently repaying the loan with all principal
                    and interest being deposited in a CDBG account. $375 was
                    repaid by borrower C. $2,727 was repaid by borrower A
                    and $7,573 was recovered through enforcement of the
                    City's security interest in her inventory. All funds
                    recovered have been deposited in CDBG accounts, and
                    should be deducted from any amount alleged to be due
                    from the City.



OIG Evaluation of   Borrower A:
Auditee Comments
                    Inadequate appropriate analysis

                    The Grantee states that the loan was based solely upon the
                    borrower's income and assets. However, the Grantee file
                    documented only the joint or combined financial statements
                    of the borrower and spouse.

                    Based upon Grantee files documentation, the borrower had
                    access to liquid assets to fund the business rather than using
                    CDBG funds.

                    National objective not met

                    The Grantee did not provide documentation supporting the
                    achievement of the national objective by the borrower.
                    Providing the employer the income guidelines and asking
                    the employee if they met the guidelines does not comply
                    with the regulations. The employer was required to obtain
                    from the employee the family size and the annual income of
                    the family prior to being hired. The Grantee did not
                    provide the legal statue why obtaining this information was
                    illegal.

                    Financial commitment not supported




                            Page 11                                   97-PH-241-1001
Finding



                 The Grantee resubmitted receipts previously reviewed. The
                 documentation supplied did not change the amount of
                 financing found unsupported. The Grantee did not support
                 that the borrower provided her contribution of $15,000.


                 Unsupported expenditures

                 The Grantee did not support $9,973 of leasehold
                 improvement expenditures required by loan documents.

                 Borrower B:

                 Inadequate appropriate analysis

                 The Grantee did not provide documentation to verify the
                 appropriate analyses was performed. In addition, the
                 Grantee states that they had received various estimates and
                 had visited the site. However, the Grantee did not provide
                 documentation to support their statements. The borrower's
                 file contained no documentation to support that alternative
                 financing had been pursued.

                 National objective not met

                 Documentation provided by the Grantee did not document
                 income of the employee's family prior to the person being
                 hired for the job as required. The Grantee only required the
                 borrower to determine if the income received by the
                 employee was the only source of income. Family income
                 was not required.

                 Borrower C:

                 Inadequate appropriate analysis

                 Documentation was not provided by the Grantee showing
                 the appropriate analyses supporting their justification for
                 executing the loan. The borrower's files contained no
                 documentation to support that alternative financing had
                 been pursued.

                 National objective not met



97-PH-241-1001           Page 12
                                                                      Finding



                  Our response under borrower A applies.

                  Financial commitment not supported

                  The reduction of the loan amount does not change the
                  Grantee's failure to document and support the borrowers
                  commitment of $15,044 or the additional $3,050 recorded
                  on Building and Life Safety records.

                  Unsupported expenditures

                  The Grantee did not provide documentation to support
                  borrower expenditures.



Recommendations   We recommend the Grantee:

                  1A.   Repay the program loan proceeds repaid by the
                        borrower plus from non-Federal funds, principal
                        balances outstanding for the three loans cited in this
                        finding totaling $54,821. Pay to HUD all interest
                        earned on the loans.

                  1B.   Implement written procedures to ensure program
                        guidelines are followed and Grantee files include
                        documentation to support eligibility with Federal
                        regulations. The procedures must make it clear that
                        before CDBG financial assistance is provided,
                        eligibility and national objective determinations
                        shall be completed, documented, and included in the
                        loan file of the applicant. No agreement shall be
                        executed with a for-profit applicant unless these
                        conditions are met.




                         Page 13                                  97-PH-241-1001
Finding




97-PH-241-1001   Page 14
Internal Controls

In planning and performing our audit, we considered the internal control systems of the
management of the Grantee in order to determine our auditing procedures and not to provide
assurance on internal control.

Internal control is the process by which an entity obtains reasonable assurance as to achievement
of specified objectives. Internal control consists of interrelated components, including integrity,
ethical values, competence, and the control environment which includes establishing objectives,
risk assessment, information systems, control procedures, communication, managing change, and
monitoring.



                                      We determined that the following internal control
 Internal controls assessed
                                      categories were relevant to our objectives:

                                      •   Administrative controls over            the    Economic
                                          Development Loan Program

                                      •   Administrative controls over rehabilitation and public
                                          improvement activities

                                      •   Procurement

                                      •   Program Income

                                      A significant weakness exists if internal control does not
 Assessment Results
                                      give reasonable assurance that the entity's goals and
                                      objectives are met; 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 item is a significant
                                      weaknesses:

                                      •   Administrative controls over            the    Economic
                                          Development Loan Program

                                      This weakness is detailed in the finding in this report.




                                              Page 15                                   97-PH-241-1001
Internal Controls




97-PH-241-1001      Page 16
Follow Up On Prior Audits
This is the first audit of the Grantee's program by the OIG.




                                             Page 17           97-PH-241-1001
Follow Up On Prior Audits




97-PH-241-1001              Page 18
                                                                 Appendix A

Finding Loan Analyses

Borrower A
LOAN AMOUNT:    $25,000

LOAN TERMS:     Interest at 3% for 5 years. If promised employment not
                accomplished within the period of time specified, or ceases
                for a period of three consecutive months during the life of
                the loan, the interest rate will be increased to 3 points above
                the prevailing market rate of the bank.

CLOSING DATE:   June 10, 1994

PROPOSED USE
OF FUNDS:       To open a delicatessen/convenience market that will serve
                downtown Charlottesville.

PROPOSED
OBJECTIVE:      To create and fill the equivalent of 8 full time jobs. The
                applicant agreed to hire low to moderate income individuals
                for at least 51% of the jobs (equal to at least 5 full time
                positions). At least two of the low and moderate income
                individuals shall be hired during the first six months of
                operations with the remaining positions filled within two
                years of the opening of the business.

SUMMARY OF
ANALYSIS:       We consider the loan ineligible for the following reasons:

                   Inadequate appropriate analysis

                The Grantee did not document analysis justifying the
                financial need of CDBG funds for the business. Financial
                statements indicated that the borrower had $135,000 in
                liquid assets which were more than sufficient to cover the
                borrower's investment of $15,000 and the economic
                development loan of $25,000. In addition, the borrower
                and her spouse had a net worth of $672,866. Therefore,
                CDBG funds were substituted for the available private
                funds of the borrower.




                          Page 19                                 97-PH-241-1001
Appendix A



                    National objective not met

                 The borrower submitted reports which indicated that the
                 business hired low and moderate income individuals. No
                 documentation exists identifying the size and annual
                 income of the employee's family prior to the employee
                 being hired. The borrower last submitted a report in
                 September 1995 since then the business closed. The
                 Grantee did not verify any of the information on the reports.

                    Financial commitment not supported

                 The borrower promised to invest $15,000 into the business.
                 The borrower did not support financing of $29,643 and
                 related costs incurred for the business. Therefore, we have
                 no assurance that the borrower provided the $15,000 for the
                 business.

                    Unsupported expenditures

                 The loan conditions included that the borrower submit
                 copies of all invoices to the Grantee before loan proceeds
                 will be disbursed. The loan approval letter stated that the
                 borrower used the $25,000 loan proceeds for capital
                 improvements to the business. However, the Grantee could
                 support only $15,027 of the $25,000. The balance of
                 $9,973 was unsupported and is included in the $29,643
                 listed above.

LOAN STATUS:     Since the loan went into default in December 1994, the
                 borrower has made only three payments. The business is
                 presently closed.




97-PH-241-1001           Page 20
                                                                 Appendix A



Borrower B

LOAN AMOUNT:    $12,321

LOAN TERMS:     Interest at 3% for 3 years. If promised employment not
                accomplished within the period of time specified, or ceases
                for a period of three consecutive months during the life of
                the loan, the loan will be due, and payable in full at the time
                the Grantee determines that the required employment has
                not been accomplished.

CLOSING DATE:   August 11, 1995


PROPOSED USE
OF FUNDS:       To renovate a new facility for use as a full-service beauty
                salon that will allow more visibility by being on the street
                level.

PROPOSED
OBJECTIVE:      The borrower agrees to hire one stylist who is low-and-
                moderate income individual within 90-days from the start
                of the loan. In addition, the borrower will retain at least 4
                low-and-moderate income individuals during the life of the
                loan.

SUMMARY OF
ANALYSIS:       We consider the loan ineligible for the following reasons:

                   Inadequate appropriate analysis

                The Grantee did not document the appropriate analysis to
                determine that the requested assistance was needed.
                According to the Grantee, the borrower did not seek
                assistance from any other source.




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Appendix A



                    National objective not met

                 The borrower submitted a report created by the Grantee and
                 copies of the pay stub indicating that low and moderate
                 income individuals were employed but did not provide
                 information of the size and annual income of the person's
                 family prior to the person being hired for the job. The
                 Grantee did not verify any of the information on the report.

LOAN STATUS:     The loan is current.




97-PH-241-1001           Page 22
                                                               Appendix A



Borrower C

LOAN AMOUNT:    $17,500

LOAN TERMS:     Interest at 3% for 7 years. If promised employment is not
                accomplished within the period of time specified, the
                Grantee shall increase the loan interest rate to three (3)
                points above that of the prevailing market rate as
                announced periodically by the bank.

CLOSING DATE:   January 28, 1994

PROPOSED USE
OF FUNDS:       To enlarge an existing restaurant located in downtown
                Charlottesville.

PROPOSED
OBJECTIVE:      To hire two full-time low/moderate income individuals
                within the first six months of the loan, and two additional
                full-time low/moderate income individuals within three
                months thereafter.

SUMMARY OF
ANALYSIS:       We consider the loan ineligible for the following reasons:

                   Inadequate appropriate analysis

                The Grantee did not document analysis justifying the
                financial need of CDBG funds for the business. There was
                no evidence showing that the borrower had attempted to
                obtain financing from other sources.

                   National objective not met

                The borrower submitted a report indicating that low and
                moderate income individuals were hired. The report did not
                provide information identifying (1) the permanent jobs by
                job title and (2) the size and annual income of the person's
                family prior to the person being hired for the job. The
                borrower submitted the report on May 12, 1994, the month
                the business closed. The Grantee did not verify any of the
                information on the report.



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Appendix A



                    Financial commitment not supported

                 The borrower promised to commit half the cost of business
                 improvements totaling $26,327. The borrower supported
                 $8,862 of equipment owned. The borrower did not provide
                 support for the remaining investment of $17,465 to be
                 committed.

                    Unsupported expenditures

                 The Grantee's loan agreement did not require that the
                 borrower maintain required documentation for loan
                 expenditures. According to the economic development loan
                 application, the borrower was to spend $13,510 for
                 leasehold improvements and $3,990 for equipment. The
                 borrower did not provide evidence, cost documentation,
                 that the improvements were done and equipment purchased.

 LOAN STATUS:    The loan is in default, and the borrower has filed for
                 bankruptcy. The borrower made two payments before
                 default. The business is presently closed.




97-PH-241-1001           Page 24
                                                                   Appendix B

Schedule of Ineligible Costs
                               Ineligible 1/
               Finding             $54,821



1/ Ineligible costs are clearly not allowed by law, contract, or
  HUD policies or regulations.




                                               Page 25             97-PH-241-1001
                                                                          Appendix C



                                                                          Appendix D

Distribution
Director, Community Planning and Development Division,
 Virginia State Office, 3FD
Secretary's Representative, Mid-Atlantic, 3AS
Internal Control & Audit Resolution Staff, 3AFI
Manager, Virginia State Office, 3FS
Assistant to the Deputy Secretary for Field Management, SDF (Room 7106)
Audit Liaison Officer, CPD (Room 7228)
Acquisitions Librarian, Library, AS (Room 8141)
Chief Financial Officer, F (Room 10164)
Deputy Chief Financial Officer for Operations, FO (Room 10164)
Assistant Director in Charge, US GAO, 820 1st St. NE Union Plaza,
 Bldg 2, Suite 150, Washington, DC 20002

City Manager
P.O. Box 911
Charlottesville, VA 22902




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